The opinion of the court was delivered by: John Martin, District Judge
Wartsila NSD Power Development, Inc. brings this action to collect monies allegedly due on a promissory note from La Compania De Electricidad De Puerto Plata, S.A. ("CEPP")
While the underlying corporate transaction giving rise to the note at issue in this case is rather complex, for purposes of this motion it is enough to note that CEPP sells electric power to La Corporacion Dominicana de Electricidad (CDE). As part of a corporate transaction in which affiliates of Wartsila released their interest in CEPP, Wartsila obtained a promissory note from CEPP for the estimated value of accounts receivable then due from CDE, which apparently was notoriously slow in paying its bills. The agreement provided, in effect, that Wartsila would be paid any money collected by CEPP on the pre-closing accounts receivable due from CDE. However, CEPP was entitled to apply any money received from CDE to pay off post-closing receivables before CEPP would pay any money to Wartsila.
The specific language of the agreement at issue provides:
For purposes of calculating payments due on the Note,
all payments with respect to accounts receivable of
CEPP received from CDE or its successor shall first be
applied to accounts receivable from CDE arising from
and after the Closing Date (the "Post-Closing Accounts
Receivable") until such Post-Closing Accounts
Receivable and interest thereon shall have been paid in
full by CDE. If any amounts are paid by CDE in any
month which exceed the balance of all Post-Closing
Accounts Receivable, then such sums shall be applied to
the reduction of CEPP's accounts receivable arising
prior to the Closing Date (the "Pre-Closing Accounts
Acquisition Agreement, § 14.8.
Wartsila alleges in its Complaint that CEPP has, at various times, collected from CDL more than was due on post-closing receivables and, therefore, Wartsila should have been paid that excess by CEPP. CEPP contends, however, that the post-closing receivables balance due from CDE has always been greater than any payments it received from CDE.
CEPP has moved for summary judgment dismissing the Complaint on the ground that Wartsila's claim rests upon the erroneous assumption that Generally Accepted Accounting Principles required CEPP to set up a bad debt reserve against the CDL receivables, and that the post-closing CDE receivables account should have been reduced by such a reserve. CEPP asserts that it is only if such a reserve were applied that the balance in the post-closing CDE receivables account would ever have been less than the amount received by CEPP from CDE. Alternatively, CEPP seeks an in limine ruling that the post-closing accounts receivable did not have to be reduced by a bad debt allowance.
Wartsila does not dispute that its claim rests, at least in part, on the proposition that CEPP was required to set up a bad debt reserve with respect to the post-closing accounts receivable from CDE. It offers an affidavit from a certified public accountant to the effect that Generally Accepted Accounting Principles require such a reserve, and it relies upon a provision in the Acquisition Agreement that gave rise to the note which states:
All accounting and financial terms used in this
agreement and the compliance with each covenant
contained in this Agreement relate (sic) to financial
matters to be determined in accordance with GAAP,
except to the extent that a deviation therefrom is
expressly stated in this Agreement.
Acquisition Agreement, § 1.2.
The problem with Wartsila's argument is that it ignores the plain language of the provision concerning post-closing receivables, which states that all payments received from CDE are to be applied to the post-closing receivables until "such Post-Closing Account Receivables and interest thereon shall have been paid in full by CDE."(emphasis added.) This language is totally at odds with Wartsila's argument that CEPP was not entitled to be paid in full on its receivables, but was entitled only to payment of the amount of the receivables less an allowance for doubtful accounts. While it may be that Generally Accepted Accounting Principles require a company to set up a reserve for bad debts with respect to its accounts receivable, no company would consider that it had been "paid in full" if its creditor tendered a check for the amount of its debt less the reserve for doubtful accounts that the company had accrued on its books. The debtor certainly could not defend against an action to collect a debt it owed by arguing that Generally Accepted Accounting Principles required its creditor to reduce the debt by establishing a reserve for doubtful accounts.
Thus, CEPP is entitled to an in limine ruling that it was not required to reduce the CDE post-closing receivables by an allowance for doubtful accounts in determining whether the post-closing receivables had been "paid in full" in any given month.
The question that remains is whether that ruling justifies granting summary judgment in favor of CEPP. Wartsila argues that, even if CEPP was not required to reduce the amount of the post-closing receivables by an allowance for doubtful accounts, the record shows that CEPP failed to write off amounts that were clearly uncollectible and that the post-closing accounts receivable included amounts that were improperly billed to CDE.
Wartsila's argument that CEPP was required to write off amounts that were clearly uncollectible is inconsistent with the provision that CEPP was entitled to be "paid in full." Further, although Wartsila has raised a factual issue relating to an adjustment to the post-closing receivables allegedly necessitated by CEPP's agreement with CDE to forgive $5.1 million*fn1 of CDE's debt in exchange for an agreement to pay remaining amounts due, that adjustment would not have reduced the post-closing receivables to zero.
With the exception of the above amounts, Wartsila has not made any showing that any other of the accounts receivable from CDE carried on CEPP'S books were not accrued in good faith. While Wartsila points to certain CEPP internal documents suggesting that CDE might have had a reasonable argument that certain amounts at issue should not have been charged, these documents do not cast doubt on the ...