Refunds from Prepaid Insurance Included in All Asset Sale, Despite Creative Contractual Arguments by Trustee

By Karl Johnson posted 09-17-2019 19:44

Karl Johnson, Briggs and Morgan, P.A.
Alexander J. Beeby, Larkin, Hoffman, Daly, & Lindgren Ltd.
Contributing Editor: James Brand, Fredrikson & Byron, P.A.

In Midwest Asphalt Service, LLC v. Stoebner, Adv. No. 18-04101, Judge Fisher determined that the purchaser of the bankruptcy estates’ assets was entitled to refunds due from the cancellation of the debtors’ prepaid insurance policies.  This resolved a dispute between the purchaser and a subsequently appointed chapter 7 trustee, who claimed that the refunds became property of the chapter 7 estates. 

The debtor Midwest Asphalt Corporation and two related entities filed chapter 11 cases and obtained an order authorizing the sale of “all assets of the Debtors, including but not limited to all real and personal property” to the debtors’ secured lender.  The debtors’ prepaid insurance policies were canceled effective 12:01 a.m. January 19, 2018, generating refunds totaling $133,027.43, and the sale closed later that same day. 

After the cases were converted to chapter 7, the trustee asserted that the refunds were property of the bankruptcy estates.  Both the purchaser and the trustee argued that the language of the Asset Purchase Agreement supported their position.  As is typically the case in an “all asset” sale, the Asset Purchase Agreement defined the “Purchased Assets” in broad terms, including prepaid expenses, advance payments, claims, and after acquired assets.  The purchaser argued that these provisions all supported its position.  The definition of Purchased Assets also excluded specific “Excluded Assets,” which, in turn, included all contracts other than specifically excluded contracts.  In other words, there was an exception to the exception.  The insurance policies were not specifically identified as Excluded Assets, but neither were they identified as contracts that were excluded from being Excluded Assets. 

Carefully parsing the Asset Purchase Agreement and the order approving the sale, Judge Fisher determined that the refunds were Purchased Assets.  He further determined that, if the Asset Purchase Agreement were found to be ambiguous, parole evidence supported the parties’ mutual intent to include the refunds in the sale.  As a result, the purchaser was entitled to the refunds.