United States: A Default Is A Default, No Matter The Size?

In an 11 page opinion issued January 30, 2015 in the TPOP bankruptcy (13-11831), Judge Shannon held that GM did not lose the ability to enforce its contracted right to repayment just because the default was "immaterial" according to the Debtor. The Opinion is available here.

Background

The Debtor, Metavation (the case name was later changed to TPOP), borrowed a significant sum of money from GM under a Sale Support Agreement ("SSA") that provided for GM to forego repayment of the loan if the Debtor complied with the obligations under the SSA. Opinion at *2.

As is clear from the issuance of this opinion, the Debtor defaulted and GM sued for payment of its loan, which was secured by valid properly perfected first priority liens on all of TPOP's assets and proceeds. Opinion at *4. The Debtor argued that it complied with all material obligations of the SSA, and because its defaults were minor and did not cause GM any damages, GM should not be entitled to repayment.

The Opinion

Judge Shannon cited to Rory v. Continental Ins. Co., 703 N.W.2d 23 (Mich. 2005) for the principle that "the judiciary is without authority to modify unambiguous contracts or rebalance the contractual equities struck by the contracting parties because fundamental principles of contract law preclude such subjective post hoc judicial determinations of 'reasonableness'..." Opinion at *5. Judge Shannon then inserted the entire disputed contract provision, holding that it was not ambiguous, and he was therefore unable to rule against GM on this issue.

After further analysis, Judge Shannon ruled that the SSA contained the condition precedent to loan forgiveness "that no event of default has occurred." Opinion at *10. Judge Shannon did, however, state in footnote 13 of the Opinion that a default as minor as a one-week variance from the DIP Budget, which was a default under the SSA, "would likely yield a result different from the Court's ruling today." Opinion at *10. However, as the Debtor's failure to meet certain milestones was much greater, the Court "need not reach this argument". Id.

While we can be certain the Court will enforce contracts and rely upon precedent in doing so, Judge Shannon's footnote comment creates an unnecessary measure of uncertainty as to how large a default is necessary to allow a counterparty to declare a default such that it will be supported in this Court. Unfortunately, no bright line rules as to this issue can be gleaned from this decision.

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