Recently the Southern District of Georgia Bankruptcy Court, in In Re: Science Fitness, LLC held that the Bankruptcy Trustee was not entitled to summary judgment because the language of the Asset Purchase Agreement (“APA”) was not unambiguous and there is an issue of whether the assets in dispute belong to the debtor or the landlord. (Case No. 14-12297, Adversary Proceeding No. 16-01034)

Undisputed Facts

Science Fitness, LLC (“Debtor”) filed for Chapter 7 liquidation bankruptcy. The Trustee sought to sell substantially all of Debtor’s interest in its assets. (Science Fitness 2) The Trustee entered into an APA with Evans Fitness Club Express (“Express”) for the sale of Debtor’s right, title, and interest in the following:

[A]ll accounts, contract rights, membership agreements, personal training contracts, contracts and all accounts receivable through ABC Financial and ClubReady, furniture, furnishings, equipment, inventory, intellectual property required for the operation of the Debtor’s business, goods held for sale, supplies and other materials used or consumed in the Debtor’s business. A copy of the equipment list is attached and incorporated into this Agreement.” (Id. 3)

The “Excluded Assets” not included in the sale are defined, in pertinent part, in the APA as: “Any asset of the Debtor not defined in Acquired Assets[.]” (Id.)

Express began removing assets from the premises, including mirrors glued to the walls and lockers that were drilled into the walls. The landlord immediately informed the Trustee that Express was improperly removing fixtures from the premises that the Landlord claimed they owned and were not part of the sale. (Id. 5)

Trustee informed Express’ attorney that “the mirrors and lockers were not included in the sale and their removal was not authorized by the APA.” (Id.) Express continued to remove fixtures from the premises.

Trustee Filed Motion for Summary Judgment

The Trustee then filed an Adversary Proceeding with the Bankruptcy Court seeking “a declaratory judgment that the Disputed Items were not included in the sale and should be returned or replaced to the Landlord’s satisfaction.” (Id.)

Express responded to the Trustee’s summary judgment motion and attached an affidavit stating that the business manager of Express believed the Trustee’s offer included the disputed items and the value of these items was included in Express’s bid price. (Id. 6) The business manager further stated that “other items such as couches, chairs, benches, a pool table, and massaging chairs are not on the Equipment List and Express removed them without objection.” (Id.)

The question the Court addresses is whether the language of the APA and accompanying Exhibits unambiguously exclude the disputed items (mirrors, other fixtures) from the definition of “Acquired Assets.” As stated above, in the APA “Excluded Assets” from the sale include “Any asset of the Debtor not defined in Acquired Assets[.]” (Id.)

Bankruptcy Court’s Ruling

The Court stated: “After considering the matter, the Court disagrees with the Trustee’s argument that the Disputed Items were unambiguously excluded from the assets to be conveyed to Express.” (Id. 10) Accordingly, the Court denied the Trustee’s motion for summary judgment.

The Language of the Asset Purchase Agreement was not Unambiguous

The Court found the terms “ furniture”, “furnishings” and “materials used or consumed in Debtor’s business” are listed as separate and distinct categories from “ equipment” it is reasonable that the terms have separate and distinct meanings.” (Id. 10) Since each delineation is a separate and distinct category, the Trustee’s interpretation of “Acquired Assets” is too narrow.

Further, Express removed other items not expressly listed in the APA and accompanying Exhibits without objection by the Trustee. The Court found that the APA language does not provide that all the acquired property be exclusively listed. (Id. 11)

An Issue Exists As To Whether the Assets in Dispute Belong to the Landlord

Bankruptcy law empowers the Trustee to sell Debtor’s interest in property. The property conveyed could “only included “Debtor’s right, title, and interest in the assets.”” (Id. 12) The Court held that at this stage of the Adversary Proceeding it is unclear whether the Debtor had an interest in the disputed items at the time of sale or if the items belonged to the Landlord. (Id. 13)

Takeaway:

This is an interesting issue that affects a number of parties, including the Landlord, Express, and the Debtor’s creditors. Bankruptcy is a highly complex area of law. The Trustee’s Adversary Proceeding in Science Fitness, LLC demonstrates the importance of explicit and unambiguous Asset Purchase Agreements when Debtor’s assets are being seized and sold.

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