In re Noranda Aluminum, Inc.
549 B.R. 725, 2016 WL 1417923 (2016)
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Rule of Law:
The 'business judgment' test governs a debtor's motion to reject an executory contract under § 365 of the Bankruptcy Code. This standard does not require the court to balance the equities or consider the harm to the counterparty, even if that counterparty is also a debtor in bankruptcy and faces liquidation as a result of the rejection.
Facts:
- Noranda Bauxite Ltd. (NBL) is a company that mines and sells bauxite from Jamaica.
- Sherwin Alumina Co., LLC (Sherwin) is a company that refines bauxite at a Texas facility.
- In 2012, NBL and Sherwin entered into a long-term bauxite sales agreement (the Sherwin Contract), scheduled to expire at the end of 2018.
- The Sherwin Contract represented practically all of NBL’s third-party sales of bauxite.
- Both NBL and Sherwin experienced significant financial distress.
- NBL determined that under the terms of the Sherwin Contract, it was losing money on every ton of bauxite it shipped, projecting a loss of approximately $16.5 million in 2016 alone.
- Sherwin asserted that if the contract were terminated, it might be forced out of business, leading to the unemployment of 575 workers.
Procedural Posture:
- Sherwin Alumina Co., LLC filed a Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of Texas.
- As a first-day motion in its bankruptcy case, Sherwin moved to assume the Sherwin Contract.
- Noranda Bauxite Ltd. (NBL) subsequently filed a Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Eastern District of Missouri.
- On the first day of its bankruptcy proceeding, NBL filed a motion seeking authorization to reject the same Sherwin Contract.
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Issue:
Does the 'business judgment' test, which focuses on the benefit to the debtor's estate, apply to a motion to reject an executory contract when the counterparty is also a debtor in bankruptcy who will suffer severe economic harm from the rejection?
Opinions:
Majority - Barry S. Schermer
Yes. The 'business judgment' test applies to a debtor's motion to reject an executory contract, and this standard does not change even when the counterparty is also a debtor that will suffer severe harm. The Eighth Circuit uses a two-part business judgment test: 1) the debtor must show the decision is an exercise of sound business judgment that benefits the estate, and 2) the court should not interfere absent a finding of bad faith or gross abuse of discretion. The court rejected Sherwin's argument for a 'balancing of the equities' test, noting that harm to the counterparty is legally irrelevant under the business judgment standard. A heightened standard is reserved only for cases implicating other federal regulatory schemes or a significant public interest, neither of which was present here. NBL provided credible evidence that rejecting the unprofitable contract would reduce its significant financial losses, which is a valid business judgment benefiting its estate.
Analysis:
This decision strongly reinforces the primacy of the business judgment standard in the context of contract rejection under § 365 of the Bankruptcy Code. It clarifies that the standard remains the same even in the extraordinary circumstance where both contracting parties are debtors in bankruptcy. The court's refusal to 'balance the equities' or consider the catastrophic harm to Sherwin establishes that a debtor's duty is to its own estate and creditors, not to its contractual partners. This precedent provides certainty for future debtors, allowing them to reject unprofitable contracts with confidence that the court's inquiry will be limited to the benefit to their estate and their good faith, rather than the collateral damage inflicted on others.
