Restructuring

Contributed by Cristine Pirro
In an opinion that adds a new layer of complexity to the question of how to value claims in a bankruptcy case, the bankruptcy court for the District of Massachusetts found that a claim for future damage payments should not be discounted to present value as of the petition date.
The Gretag debtor manufactured photofinishing minilabs to process photos at supermarkets and drugstores.  American Stores, which owned a nationwide set of drugstores, leased minilabs from Gretag.  After new photofinishing technology developed that resulted in a need to replace older, outdated mini labs or to retrofit them with new technology, Gretag offered its customers a $200 per month rebate for each Gretag-made minilab with the older technology.  Gretag made several of these payments, but eventually ceased making payments and, a few months later, filed for chapter 7 bankruptcy protection. 
Supervalu (the successor to American Stores) filed a proof of claim against Gretag’s estate in the amount of $5,540,400, which represented the undiscounted amount of unpaid rebates over the remaining life of the minilab lease.  Gretag’s chapter 7 trustee objected to Supervalu’s claim on several grounds, including on the basis that the claim was not discounted to present value.  Section 502(b) of the Bankruptcy Code provides that the court must “determine the amount of [a] claim . . . as of the date of the filing of the petition.”  Because the value of a claim as of the petition date is lower than the value of that claim in the future, many courts reduce present claims for future payment to present value to reflect a discount for the time value of money.
Supervalu argued that discounting its claim by present valuing payments that would have been due postpetition would be inappropriate, citing to In re Oakwood Homes, Corp.  In Oakwood, the Third Circuit held that the bankruptcy court erred by double-discounting claims for a guarantee of payment on certain certificates when it discounted the principal amount of the claims after also having disallowed the claims for unmatured postpetition interest.  The Third Circuit concluded that section 502(b) of the Bankruptcy Code uses the term “amount” of the claim “as of” the petition date, while other sections of the Bankruptcy Code use the term “value, as of” to signify discounting to present value.  Because value and amount are not synonymous, the Third Circuit found that section 502(b) of the Bankruptcy Code does not unambiguously require discounting to present value in all situations.  The bankruptcy court in Gretag considered Oakwood’s reasoning and conducted its own analysis of section 502(b), noting that that section 502(b) excludes certain things from allowance (such as claims for unmatured interest), a specification that would be unnecessary if all claims were required to be discounted to present value. 
The bankruptcy court then valued Supervalu’s claim.  One issue the bankruptcy court considered was that, had Supervalu sued Gretag for Gretag’s breach prior to Gretag’s bankruptcy filing, Supervalu could have sought a judgment for the entire stream of payments contemplated under the lease, not just the payments missed up until the date of the suit.  Supervalu could then have used that judgment as the basis for a claim in bankruptcy for the full value of the judgment – including future payments in full due under the lease.  The bankruptcy court found that it was inappropriate to discount the claim to present value simply because Supervalu did not sue Gretag prepetition. Arguably, however, the prepetition default enabled Supervalu to receive more than it bargained for at the expense of other creditors.
While Oakwood indeed made clear that section 502(b) of the Bankruptcy Code does not mandate present valuing Supervalu’s claim, other courts (including Oakwood) generally agree that future liabilities must be reduced to account for the time value of money.  As the bankruptcy court in Delaware noted in one decision that pre-dated Oakwood, “[p]lainly, the promise of a dollar payable in several years is not worth 100 cents today.”  Although Oakwood explicitly stated that its ruling was on the narrow issue of whether further reduction of the claims in addition to disallowance of postpetition interest was appropriate and emphasized that “future liabilities must be reduced in some way to reflect the time value of money,” the decision created uncertainty about how it would be applied in other contexts.
While the decision in Gretag seems driven to some extent by the breach having occurred several months before the filing, that seems to be a difficult and perhaps arbitrary distinction for courts to make in applying section 502(b) of the Bankruptcy Code.  Gretag, if followed by other courts, may complicate how bankruptcy courts should value claims to ensure equal treatment for similarly situated creditors and prevent creditors from reaping potential windfalls in a bankruptcy case.