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Delaware Bankruptcy Court Finds Debtor Did Not Properly Terminate Contract, Faces Significant Breach of Contract Damages

In re Outer Harbor Terminal, LLC, No. 16-10283 (LSS), 2017 WL 696676 (Bankr. D. Del. Feb. 21, 2017)

In the context of a claims objection, the Court adhered to unambiguous contract language in determining that the presence of a termination triggering event did not automatically terminate a contract, opening the door for potentially significant damages.  This matter will now proceed to the damages phase, where the non-debtor contract counterparty has alleged in its proof of claim an approximate $13.3 million in, among other things, breach of contract damages.

Outer Harbor Terminal, LLC (the “Debtor”) provided stevedoring services—docking and loading/unloading ships—to carriers at the Port of Oakland, California.  The Debtor and Kawasaki Kisen Kaisha, Ltd. (“‘K’ Line”) entered into an agreement whereby the Debtor would serve as “K” Line’s exclusive stevedoring provider.  The contract provided that either party could immediately terminate the agreement without notice to the other party if, among other things, the party “ceases to do business.”  Op. at 5.  Prior to filing bankruptcy on February 1, 2016, the Debtor sent “K” Line (and its other contract counterparties) a press release dated January 19, 2016, stating its intention to wind down its operations as well as an email confirmation of same.  In the email, the Debtor also granted “K” Line permission to use another service provider for one of its service lines.  Notwithstanding the foregoing, the Debtor continued to provide services to “K” Line through March 28, 2016 and did not cease business operations until at least April 22, 2016.  The Debtor set a bar date of April 7, 2016, and “K” Line timely filed a proof of claim alleging, among other things, breach of contract damages.  The Debtor filed a claims objection asserting that the contract was automatically terminated on January 19, 2016 pursuant to the terms of the contract when it announced its intention to cease doing business.

The Court quickly found that the parties’ contract is unambiguous—it allows for immediate termination of the agreement by either party without notice to the other, upon the happening of various events, including, the cessation of business.  Op. at 7.  However, the Debtor directed the Court to no document demonstrating that it terminated the agreement and neither the Debtor’s press release nor email confirmation stated that the Debtor terminated the agreement.  The Court determined that the earliest the Debtor could have terminated the agreement under its business cessation argument was April 22, 2016—the date the Debtor ceased doing business.  The contract did not provide that the Debtor could terminate the agreement at some future date; rather, only “immediately when” one of the stated conditions are met.  Although the Debtor “may have been laudably benevolent” by its actions to ease the wind down transition for its contract counterparties, the Court “cannot rewrite the Agreement to save the Debtor from any perceived penalty resulting from its choice to be a good corporate citizen.”  Op. at 10.  Therefore, the Court overruled the claims objection, and directed the parties to proceed to the damages phase.