September 20, 2021

Volume XI, Number 263

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September 20, 2021

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September 17, 2021

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To Estimate or Not to Estimate, that is the Question

Is there any downside to a debtor filing a motion to estimate a claim?  Or, is an estimation motion simply procedural in nature?  As the debtors recently discovered in In re SC SJ Holdings LLC, a motion to estimate a claim before a bankruptcy court may not always lead to a significantly reduced claim and may impact plan confirmation.

The Facts

The Debtors in SC SJ Holdings, LLC operate an 805-room luxury convention/group-style hotel located in San Jose, California that was formerly known as the San Jose Fairmont.  The hotel was previously managed by Accor Management US (“Accor”) pursuant to a hotel management agreement (the “HMA”).  As part of its out-of-court restructuring efforts, the Debtors sought to terminate the HMA, which termination was opposed by Accor.

On March 5, 2021, and March 10, 2021, the Debtors filed for chapter 11 protection in Delaware with the intent to reorganize their business under a new hotel brand.  However, roughly twelve hours before the first bankruptcy filing, Accor asserted a $30 million arbitration claim against the Debtors, alleging that the Debtors had breached the HMA.   Ostensibly, in order to sidestep the arbitration, the Debtors filed a motion requesting that Accor’s claim against the Debtors be estimated in the maximum amount of $2,004,408 for all purposes, including plan confirmation and final valuation  (the “Estimation Motion”).  Such dual relief would effectively eliminate the need for the arbitration.  The Debtors argued that the $2 million claim was Accor’s sole remedy in accordance with the HMA’s liquidated damages clause and related provisions and governing California law.  The Debtors also asserted that the arbitration would cause undue delay in the chapter 11 cases and that the bankruptcy court was the proper forum to timely resolve the dispute.

In response, Accor argued that the Estimation Motion was premature and an unnecessarily hastened attempt to estimate an unfiled contract rejection damages claim and circumvent the agreed-to arbitration provision in the HMA.  Accor framed the issue as a state law contract dispute that was being resolved by an expedited arbitration proceeding that would not cause any undue delay to the ongoing reorganization efforts of the Debtors.

Shortly after the Debtor filed the Estimation Motion, Accor sought, and was granted, relief from the automatic stay to pursue arbitration of its claims against the Debtor under the HMA.  Notably, the HMA required arbitration for the purposes of determining the scope of damages suffered as a result of breach thereof. Accordingly, while potentially mutually exclusive, the court determined to allow the arbitration proceeding and the claims estimation process to run in parallel.

At an initial hearing on the Estimation Motion, the court declined to decide the threshold issue of whether the claims estimation process under section 502(c) of the Bankruptcy Code allows for the valuation of the claim for all purposes, including for setting the actual value of the claim, rather than solely for determining the amount of the disputed claims reserve in the context of a plan.  The court then set an evidentiary hearing on the Estimation Motion for a date after which Accor stated the arbitration would conclude.  The court noted that if the arbitration was not concluded by that time, it was “highly likely” that the estimation would be for all purposes, thus eliminating the need for the arbitration and its resulting delay on the administration of the bankruptcy estates.

Claims Estimation Under the Bankruptcy Code

The purpose of estimation under section 502(c) is to prevent any undue delay in administering the estate by avoiding the need to delay the case while liability and damage issues in other forums are resolved.  In addition, claim estimation is a procedural device that can assist parties with formulating chapter 11 plans by quickly establishing the amount of liability for potentially large, undetermined claims.

Courts have wide latitude to determine what procedures to use for estimating a claim, subject only to the legal rules that may govern a claim’s ultimate value.  Thus, claims must be appraised on the basis of what would have been a fair resolution of the claims in the absence of bankruptcy, and the court can use whatever method is best suited to the circumstances. Various methods used by courts to estimate claims include summary trials, evidentiary hearings, and simple review of the pleadings and oral argument. Courts can exercise their discretion to estimate a claim for only plan confirmation purposes, or may also estimate a claim to establish the ultimate amount allowed.

The Court’s Holding

After taking the Estimation Motion and related pleadings under advisement, the court entered an order estimating Accor’s claim in the amount of $22.24 million, but only for the purpose of determining plan feasibility, thus denying the Debtors’ request that it be valued for all purposes under the Bankruptcy Code. The court reasoned that the $22.24 million figure was appropriate because Accor’s claim was only being estimated for plan purposes and that such amount represented the “highest value [Accor] could reasonably receive to ensure that there will be funds necessary [under the plan] if Accor’s is ultimately successful on its claim.”

While there was insufficient evidence for a determination of value for all purposes, the court concluded that cause existed to estimate Accor’s claim solely for the purpose of determining plan feasibility.  Because the scope of estimation was limited to such, it did not eliminate the need for further liquidation in the arbitration proceeding.  The court noted that its ruling should not be binding on the arbitration proceeding to liquidate Accor’s claim, thus allowing the arbitration to proceed to conclusion.

Takeaways

As the Debtors discovered in SC SJ Holdings, LLC, an estimation motion may not always result in a forum-selected favorable ruling, nor will it always be the exclusive forum for litigating a creditor’s contingent claim.  Indeed, in the SC SJ Holdings, LLC case, it did neither.  Not only were the Debtors handed an estimated claim that was over ten times larger than they argued for, the Debtors still had to contend with the arbitration proceeding in parallel with the estimation process.  The results are ominous in that Accor’s $22.4 million estimated claim is impaired under the Debtors’ plan of reorganization and the amount of the claim will likely make it more difficult for the Debtors to confirm their plan in the event Accor votes to reject the plan; not to mention what the ultimate amount may be from the arbitration. As SC SJ Holdings, LLC demonstrates, claims estimation is not always an efficient and beneficial procedure for debtors to employ, as it may not preclude liquidation in another forum and may result in a higher estimation for plan feasibility purposes to preserve the creditor’s rights at confirmation.

© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 217
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About this Author

Kyle F. Arendsen Restructuring & Insolvency Attorney Squire Patton Boggs Cincinnati, OH
Associate

Kyle Arendsen is a member of the firm’s Restructuring & Insolvency Practice Group and is involved in all aspects of corporate restructuring, bankruptcy and insolvency proceedings. Kyle has extensive experience representing debtors and creditors throughout the restructuring process. His restructuring matters encompass a wide variety of industries, including oil and natural gas, gaming, retail and banking.

Prior to joining Squire Patton Boggs, Kyle worked for an international law firm and focused his practice on representing debtors to successfully prepare for...

513-361-1292
Christoper Giaimo Restructuring & Insolvency Attorney Squire Patton Boggs Washington DC
Partner

Christopher Giaimo is a partner in our Washington DC office and our Restructuring & Insolvency Practice Group. Chris concentrates his practice in the areas of bankruptcy and creditors’ rights, as well as litigation, representing secured and unsecured creditors, vendors and committees. His clients benefit from his extensive industry experience in the enforcement of a broad spectrum of creditors’ rights. Chris also represents investors seeking to acquire distressed debt and assets of bankrupt and insolvent businesses, as well as the contractual interest of publicly and privately held...

202-457-6461
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