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Hearing Date and Time: July 16, 2020 at 11:00 am Objection Date and Time: July 9, 2020 at 4:00 p.m.
George R. Pitts (pro hac vice admission) BIRCH HORTON BITTNER & CHEROT, P.C. 1100 Connecticut Ave., N.W., Suite 825 Washington, D.C. 20036 T 202.862.8349 • F 202.659.1027 [email protected] Attorney for United Natural Foods, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------- In re:
FAIRWAY GROUP HOLDINGS CORP, et al., Debtors.
: : : : : : :
Chapter 11 Case No. 20-10161 (JLG) (Jointly Administered)
----------------------------------------------------------------
NOTICE OF MOTION OF UNITED NATURAL FOODS, INC. TO REQUIRE DEBTORS TO ASSUME OR REJECT CUSTOMER DISTRIBUTION AGREEMENT
PLEASE TAKE NOTICE that a hearing on the annexed motion (the “Motion”) of United
Natural Foods, Inc. (“UNFI”) for an order requiring the Debtors (as defined in such Motion) to
assume or reject that certain Customer Distribution Agreement dated as of June 13, 2016 by and
among such Debtors and UNFI no later than five (5) business days after entry of an order by the
Court requiring such assumption or rejection, all as more fully set forth in such Motion, will be
held telephonically before the Honorable James L. Garrity, Jr., United States Bankruptcy Judge,
United States Bankruptcy Court for the Southern District of New York, Courtroom 601, One
Bowling Green, New York, New York 10004 (the “Bankruptcy Court”) on July 16, 2020 at 11:00
am (Eastern Time), or as soon thereafter as counsel may be heard.
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PLEASE TAKE FURTHER NOTICE that all parties wishing to appear at, or participate
in, such telephonic hearing must refer to the Bankruptcy Court’s guidelines for telephonic
appearances and make arrangements with Court Solutions LLC at (646) 760-4600 or at
https://court-solutions.com/.
PLEASE TAKE FURTHER NOTICE that any responses or objections to the relief
sought in the Motion must be in writing, shall conform to the Federal Rules of Bankruptcy
Procedure and the Local Rules of the Bankruptcy Court and shall be filed with the Bankruptcy
Court (i) by attorneys practicing before the Bankruptcy Court (including attorneys admitted pro
hac vice) electronically in accordance with General Order M-399 (found at
www.nysb.uscourts.gov) and (ii) by all other parties on a CD-ROM, in text searchable portable
document format (“PDF”) with a paper copy delivered directly to chambers, in accordance with
the customary practices of the Bankruptcy Court and General Order M-399. Such responses or
objections shall, to the extent applicable, be served in accordance with that certain Order
Implementing Certain Notice and Case Management Procedures [ECF no. 201] so as to be filed
and received no later than July 9, 2020 at 4:00 p.m. (Eastern Time).
PLEASE TAKE FURTHER NOTICE that if no responses or objections are timely filed
and served, UNFI may, after July 9, 2020, submit to the Bankruptcy Court an order substantially
in the form of the order annexed to the Motion, which order may be entered by the Bankruptcy
court without further notice or opportunity to be heard.
PLEASE TAKE FURTHER NOTICE that objecting parties must attend the Hearing,
telephonically or in person, as the case may be, and failure to attend may result in relief being
granted against such objecting parties by default.
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Dated: June 23, 2020 Washington, District of Columbia
Respectfully submitted, /s/ George R. Pitts
George R. Pitts BIRCH HORTON BITTNER & CHEROT, P.C. 1100 Connecticut Ave., NW Suite 825 Washington, DC 20036 Telephone: (202) 659-5800 Email: [email protected] Counsel for United Natural Foods, Inc.
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Hearing Date and Time: July 16, 2020 at 11:00 am Objection Date and Time: July 9, 2020 at 4:00 p.m.
George R. Pitts (pro hac vice admission) BIRCH HORTON BITTNER & CHEROT, P.C. 1100 Connecticut Ave., N.W., Suite 825 Washington, D.C. 20036 T 202.862.8349 • F 202.659.1027 [email protected] Attorney for United Natural Foods, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------- In re:
FAIRWAY GROUP HOLDINGS CORP, et al., Debtors.
: : : : : : :
Chapter 11 Case No. 20-10161 (JLG) (Jointly Administered)
----------------------------------------------------------------
MOTION OF UNITED NATURAL FOODS, INC. TO REQUIRE DEBTORS TO ASSUME OR REJECT CUSTOMER DISTRIBUTION AGREEMENT
United Natural Foods, Inc. (“UNFI”) hereby moves the Court for an order requiring the
Debtors (as defined in paragraph 2, below) to determine whether to assume or reject that certain
Customer Distribution Agreement dated as of June 13, 2016 by and among such Debtors and
UNFI, and to file a motion seeking approval of such assumption or rejection, no later than five (5)
business days after entry of an order by the Court requiring such assumption or rejection. In
support of this motion, UNFI presents the following facts and arguments.
I. FACTUAL AND PROCEDURAL BACKGROUND
1. The debtors herein filed their petitions under Chapter 11 of the Bankruptcy Code on
January 23, 2020 (the “Petition Date”) and have continued to operate their businesses
as debtors in possession since that date. The bankruptcy cases of the various debtors
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are being jointly administered under Case No. 20-10161 (JLG), In re Fairway Group
Holdings Corp.
2. Under the terms of the Agreement, UNFI supplied groceries to debtor Fairway
Group Central Services LLC and various debtors listed in Schedule “A” to the
Agreement (collectively, for purposes of this motion, the “Debtors”) for the
operation of their supermarket businesses prior to the Petition Date. A true and
correct copy of the Agreement is attached hereto as Exhibit 1.
3. The Agreement states that UNFI shall be “Customer’s ‘Primary Supplier’ of organic
and natural food Products,” Agreement, Section 1, and “Customer” is defined by the
Agreement to mean Debtor Fairway Group Central Services LLC and the sixteen
(16) “Customer Stores” listed in Schedule “A” to the Agreement.
4. Effective March 10, 2020, UNFI and the Debtors entered into an Amendment to
Customer Distribution Agreement (“Amendment”) governing postpetition supply
arrangements between UNFI and the Debtors. A true and correct copy of the
Amendment is attached hereto as Exhibit 2. The Amendment preserves the right of
the Debtors to assume or reject the Agreement and terminates upon the occurrence
of various events, including without limitation, assumption or rejection of the
Agreement by the Debtors. Amendment, Sections 3, 4 and 5.
5. The Amendment further provides that UNFI may file a motion to require assumption
or rejection of the Agreement from and after the last date “for approval of the sale of
any Customer Store…” and that such motion, if filed, cannot be brought on for
hearing “prior to the closing of the last approved sale of a Customer Store.”
Amendment, Section 5.
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6. On or about April 20, 2020, the Court entered orders [ECF Nos. 445, 448 and 449]
approving the sale of eight (8) Customer Stores and a parking lot for one Customer
Store, as follows: (i) Fairway Broadway, Fairway Pelham, Fairway East 86th Street,
Fairway Kips Bay, Fairway Chelsea and the parking lot for Fairway Uptown to
Village Super Markets, Inc. (“Village”); (ii) Fairway Georgetowne to Seven Seas
Georgetowne LLC (“Seven Seas”); and (iii) Fairway Woodland Park and Fairway
Paramus to Amazon Retail LLC (“Amazon”). Neither Village, Key nor Amazon
sought to require assumption by the Debtors of the Agreement in connection with
these sales. Upon information and belief, each of these purchasers is making its own
supply arrangements with respect to the organic and natural food products covered
by the Agreement.
7. The last closing dates established in the Village, Seven Seas and Amazon purchase
contracts (attached as exhibits to the respective orders approving the sales) are May
6, 2020, June 30, 2020 and June 30, 2020, respectively. See, e.g., Village purchase
contract, Section 2.4; Seven Seas purchase contract, Section 8.1(b)(ii); and Amazon
purchase contracts, Section 2.4. It appears that the initial closing under the Village
purchase contract did occur on May 6, 2020. See ECF No. 500 at paragraph 5.
8. Upon information and belief, Customer Stores Fairway Nanuet and Fairway Lake
Grove ceased operations on or prior to the Petition Date and are not debtors in these
bankruptcy proceedings.
9. After giving effect to the foregoing closings and sales, the remaining Customer
Stores receiving services from UNFI under the Amendment are: Fairway Uptown,
Fairway Group Plainview, Fairway Red Hook, Fairway Stamford, Fairway
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Douglaston and Fairway Westbury – six (6) of the original sixteen (16) Customer
Stores (“Remaining Customer Stores”).
10. On or about May 21, 2020, the debtors in these bankruptcy cases filed a motion
[ECF No. 488] seeking approval of their retention of a “liquidation consultant,” such
approval to be nunc pro tunc to May 12, 2020, for the purpose of managing going
out of business sales for the Remaining Customer Stores. This motion was
subsequently granted by the Court [ECF No. 518]. The contract with the liquidation
consultant contemplates that the liquidation sales in the Remaining Customer Stores
will be completed on or about June 30, 2020. ECF No. 488, Exhibit A at Section 3.
11. Thus, of the original sixteen (16) Customer Stores under the Agreement, two (2)
were out of business by the Petition Date, eight (8), plus the parking lot for another,
are subject to contracts of sale approved by the Court and closing, at the latest, by
June 30, 2020 and the remaining six (6) are to be supervised by a liquidation
consultant who will be running liquidation sales that will be completed by June 30,
2020. There is hence no prospect that the Debtors can assume the Agreement and
there is no reason to delay the decision on assumption or rejection any further.
II. ARGUMENT
12. This Court has jurisdiction over the matters raised in this motion under 28 U.S.C.
Sections 157 and 1334, and this is a core proceeding as defined in 28 U.S.C. Section
157(b). Venue is proper in this district and division pursuant to 29 U.S.C. Sections
1408 and 1409.
13. It is not disputed between UNFI and the Debtors that the Agreement is an executory
contract, subject to assumption or rejection under Section 365 of the Bankruptcy
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Code, as suggested, if not confirmed, by the provisions of the Amendment. Under
the facts and circumstances described above, the Debtors should be required to
assume or reject the Agreement earlier than time that would otherwise be allowed
under Section 365(d)(2) because (i) forcing early assumption or rejection under the
circumstances of this case is consistent with the factors identified in In re Dana
Corporation, 350 B.R. 144, 147 (Bankr. S.D.N.Y. 2006) and (ii) as a result of
decisions made by the Debtors themselves, the Agreement cannot be assumed and
there is hence no reason to delay the decision to reject any further. In what follows,
each of these arguments will be considered individually.
14. In its decision in In re Dana Corporation, this Court identified a list of factors to be
considered in evaluating whether to shorten the time a debtor has to decide whether
to assume or reject an executory contract. Those factors are: (i) the importance of
the contract in question to the debtor’s business and reorganization; (ii) the debtor’s
failure or ability to satisfy postpetition obligations; (iii) the nature of the interests at
stake; (iv) the balance of harm to the parties; (v) whether the debtor has had
sufficient time to assess its financial situation and make decisions concerning the
potential value of its assets in connection with a plan; (vi) the safeguards afforded to
the parties; (vii) any damage to the non-debtor contract party; (viii) whether there is
a dispute as to whether the contract is in fact executory; (ix) whether exclusivity has
been terminated; (x) whether the proposed action is in derogation of the provisions
of the Bankruptcy Code; and (xi) the purposes of Chapter 11. Id.
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15. Certain of these factors can be dealt with summarily because they are not significant
in this case. There is no dispute that the Agreement is an executory contract (factor
viii) and exclusivity has not been terminated in these bankruptcy cases (factor ix).
16. When the remainder of the Dana factors are reviewed, they favor granting UNFI’s
motion. First, as a result of the actions taken by the Debtors in these bankruptcy
cases, the Agreement at most affects a limited number of stores that will be closed
by June 30, 2020 and thus is not an important executory contract for the Fairway
debtors, given the current posture of these bankruptcy cases (factor i). Second, while
the Debtors have thus far made the payments required of them under the
Amendment, the Debtors cannot meet the requirements for assumption of the
Agreement without continuing operating businesses, nor would it be in their
economic interests to assume the Agreement under those circumstances (factor ii).
Third, because the Debtors are not in a position to assume the Agreement, the
question becomes how long can UNFI be reasonably forced to continue performing
when facing an inevitable rejection of the contract under which performance is being
required. For as long as UNFI is extending credit under the Amendment there is a
risk that payments will not be made, adding to the substantial amount of payments --
$2,305,047 -- that the Debtors decided (even while able to do so) not to make before
filing their bankruptcy cases. On the other hand, the risk to the Debtors is non-
existent if their liquidation sales are completed within the period they themselves
have identified – that is, by June 30 – because the rejection decision will not need to
be made until after that date. Balancing the interests at stake therefore favors
shortening the time to reject (factors iii, iv, vi and vii). Fourth, the Debtors have had
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ample time, within the schedule set by themselves and their secured lenders, to
decide whether to assume or reject the Agreement, and have now effectively and
already decided to reject it (factor v). Fifth, the schedule of events in these Chapter
11 cases has been dictated by the Debtors, in accordance with plans worked out with
their secured lenders before the filing of these cases. The actions taken by the
Debtors – the sale of some stores and the liquidation of others – have been taken by
the Debtors in the exercise of their business judgment, as affected by the
circumstances of these cases. The result of those decisions has been to place the
Debtors in a position where assuming the Agreement simply makes no sense because
their operating stores have been sold to others and their only remaining stores are
being liquidated and closed. It is therefore entirely consistent with the provisions of
the Bankruptcy Code to shorten the time within which the Debtors may assume or
reject the Agreement and there is no reason to wait for presentation and
consideration of the inevitable liquidating plan that will provide for rejection of the
Agreement (factors x and xi).
17. Thus, when the relevant Dana factors are considered, they favor shortening the time
to assume or reject the Agreement.
18. While analysis of the Dana factors should be dispositive of the matters raised in
UNFI’s motion, there is a second reason that it should be granted: by their actions in
these bankruptcy cases, the Debtors have made assumption of the Agreement
impossible and because the conditions that make assumption impossible are not
excused by Section 365(b)(2) of the Bankruptcy Code, it is appropriate to shorten the
time for the Debtors to assume or reject the Agreement.
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19. The Agreement provides that UNFI “shall be Customer’s ‘Primary Supplier’ of
organic and natural food…” and Customer is defined in the Agreement to mean
Fairway Group Central Services LLC and the sixteen (16) “Customer Stores” listed
in Schedule A to the Agreement – that is, UNFI’s undertakings in the Agreement are
predicated upon its supplying 16 stores, and thereby achieving the sales volumes,
associated with 16 stores, not fewer than 16, and certainly not zero. Satisfaction of
this condition represents a non-monetary obligation of the Debtors under the
Agreement that cannot be cured by the Debtors because all of the stores supplied
under the Agreement have either been closed, sold or are in the process of being
closed. While Section 365(b)(2) excuses non-compliance with monetary penalties
associated with non-monetary obligations under an executory contract, it does not
excuse compliance with the non-monetary obligations themselves. Section
365(b)(2)(D); In re Empire Equities Capital Corp., 405 B.R. 687, 690-91 (Bankr.
S.D.N.Y. 2009). Thus, in order to assume the Agreement, the Debtors must cure not
only the substantial monetary defaults thereunder, but also the non-monetary
obligation with respect to the number of their stores. Empire Equities, 405 B.R. at
691.
20. Empire Equities involved a failure to satisfy a “time is of the essence” obligation to
tender an additional down payment under a purchase option. Citing New York law
to the effect that failure to timely satisfy “time is of the essence” conditions was a
material default the court did find that the default was “curable” through the
extension of time provided by Section 108(b) of the Bankruptcy Code, thereby
vindicating the strategy of the debtor in filing the bankruptcy case. Empire Equities,
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405 B.R. at 691-93. However, it is clear from the decision in Empire Equities that,
had the extension of time provided by Section 108(b) not been involved, the default
would have been both material and incurable. Id. at 691.
21. In re New Breed Realty Enterprises, Inc., 278 B.R. 314 (Bankr. E.D.N.Y. 2002),
cited with approval in Empire Equities, confirms that, without the benefit of Section
108(b), the situation in Empire Equities would result in an incurable default that
would preclude assumption of the applicable contract. New Breed Realty, 278 B.R.
at 320-323 (discussing cases). In this case, the number of stores to which UNFI was
to be the primary supplier is material to the contract and, certainly, and more
generally, having operating stores as opposed to stores that are in the process of
closing would be material to any contract to supply those stores. Under the
circumstances of this case, then, the Debtors cannot cure a material non-monetary
obligation under the Agreement and there is hence no reason to postpone assumption
or rejection of the Agreement until the plan confirmation process in these cases.
22. UNFI does not seek to disrupt the Debtors’ liquidation sales and therefore seeks a
decision on assumption/rejection after the Debtors have indicated those sales should
have been completed (June 30, 2020) and after any remaining store sales should
have closed (also June 30, 2020). A form of order granting the relief requested
herein is attached hereto as Exhibit 3
WHEREFORE, UNFI prays that the Court enter an order (i) requiring the Debtors to
determine whether to assume or reject the Agreement, and to file a motion seeking approval of
such decision, within five (5) business days of entry of the Court’s order granting this motion and
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(ii) awarding it such other and further relief in consideration of this Motion as may be appropriate
under the circumstances of this case.
Dated: June 23, 2020 Washington, District of Columbia
Respectfully submitted, /s/ George R. Pitts
George R. Pitts BIRCH HORTON BITTNER & CHEROT, P.C. 1100 Connecticut Ave., NW Suite 825 Washington, DC 20036 Telephone: (202) 659-5800 Email: [email protected] Counsel for United Natural Foods, Inc.
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EXHIBIT 1
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EXHIBIT 2
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EXHIBIT 3
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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------- In re:
FAIRWAY GROUP HOLDINGS CORP, et al., Debtors.
: : : : : : :
Chapter 11 Case No. 20-10161 (JLG) (Jointly Administered)
----------------------------------------------------------------
ORDER PURSUANT TO SECTION 365(d)(2) OF THE BANKRUPTCY CODE REQUIRING DEBTORS TO ASSUME OR REJECT CUSTOMER DISTRIBUTION
AGREEMENT
This matter came before the Court on the Motion (“Motion”) [ECF No. ___] of United
Natural Foods, Inc. (“UNFI”) for an order requiring the Debtors, as defined in the Motion, to
determine whether to assume or reject that certain Customer Distribution Agreement dated as of
June 13, 2016, between the Debtors and UNFI (the “Agreement”), and file a motion seeking
approval of such assumption or rejection, within five (5) business days of the entry of this Order,
all as more fully set forth in the Motion.
IT APPEARING to the Court that it has jurisdiction to consider the Motion under 28
U.S.C. Sections 157 and 1334; that the Motion is a core proceeding as defined in 28 U.S.C.
Section 157(b); that proper notice of the Motion was provided in accordance with the Court’s
Case Management Order [ECF No. 201]; that such notice was adequate and appropriate under
the circumstances of this case and that no further notice need therefore be provided;
AND IT FURTHER APPEARING, after review of the Motion and a hearing conducted
on July 16, 2020 to consider the relief requested in the Motion, that the Motion should be
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2
granted, based upon the record, and for the reasons stated by the Court, at such hearing; and good
cause appearing therefor,
IT IS ORDERED THAT
1. The Motion is granted.
2. The Debtors, as defined in the Motion, shall, no later than five (5) business days after
entry of this Order, (i) determine whether to assume or reject the Agreement and (ii) file a
motion seeking approval of that decision with the Court.
3. The Court retains jurisdiction to consider all matters relating to the interpretation,
implementation or enforcement of this Order.
Dated: July __, 2020 New York, New York __________________________ Hon. James L. Garrity, Jr. United States Bankruptcy Judge
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