KeyBank National Association et al v. Franklin Advisers, Inc. et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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KEYBANK NATIONAL ASSOCIATION, 	:
:
Plaintiff, 	:
:
-against- 	: 	Adv. Pro. No. 19-01104
:
FRANKLIN ADVISERS, INC., et al., 	:
:
Defendants. 	:
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FIFTH THIRD BANK, 	:
:
Plaintiff, 	:
:
-against- 	: 	Adv. Pro. No. 19-01105
:
FRANKLIN ADVISERS, INC., et al., 	:
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Defendants. 	:
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DECISION ON DEFENDANTS’ MOTION TO DISMISS
A P P E A R A N C E S:
REED SMITH LLP
Attorneys for KeyBank National Association
By: 	Kurt F. Gwynne
Jonathan P. Gordon
Peter S. Clark
O’MELVENY & MYERS LLP
Attorneys for all Defendants
By: 	Abby F. Rudzin
Daniel S. Shamah
HONORABLE MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE
KeyBank National Association (“KeyBank”) was one of many lenders to Appvion, Inc.
both before and during Appvion’s chapter 11 bankruptcy case in Delaware. KeyBank claims
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that other lenders (the “Franklin Lenders”), together with Franklin Advisers, Inc. (“Franklin
Advisers”), took certain actions during Appvion’s bankruptcy case that violated KeyBank’s
contractual and other rights. KeyBank and another lender, Fifth Third Bank, sued the Franklin
Lenders and Franklin Advisers in the New York State Supreme Court. The defendants removed
the actions to the United States District Court for the Southern District of New York, which
denied motions to remand them to state court. The District Court also denied a motion to
transfer the actions to the District of Delaware, and then referred the actions to this Court.
Fifth Third Bank has since settled its claims. KeyBank has filed a First Amended
Complaint, and the defendants have moved to dismiss all claims asserted in the First Amended
Complaint pursuant to Fed. R. Civ. P. 12, which is made applicable by Fed. R. Bankr. P. 7012.
Jurisdiction, Venue and Power to Render a Final Decision
The District Court has held that jurisdiction and venue are proper in the Southern District
of New York. See Keybank Nat’l Ass’n v. Franklin Advisers, Inc., 600 B.R. 214, 224-36
(S.D.N.Y. 2019). The parties disagree as to whether the asserted claims are within this Court’s
“core” jurisdiction but each party has consented to the entry of a final decision by this Court. In
light of the parties’ consent this Court has the power to enter a final decision. See 28 U.S.C. §
157(d); Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015).
Applicable Pleading Standards
In reviewing a motion to dismiss a court must accept the factual allegations of the
complaint as true and draw all reasonable inferences in the plaintiff’s favor. Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007);
E.E.O.C. v. Staten Island Sav. Bank, 207 F.3d 144, 148 (2d Cir. 2000). However, the factual
allegations in a complaint must be supported by more than mere conclusory statements.
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Twombly, 550 U.S. at 555. The allegations must be sufficient “to raise a right to relief above the
speculative level” and provide more than a “formulaic recitation of the elements of a cause of
action.” Id. (citations omitted). “[O]nly a complaint that states a plausible claim for relief
survives a motion to dismiss.” Iqbal, 556 U.S. at 679 (citing Twombly, 550 U.S. at 556).
“A claim has facial plausibility when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Id. at 678 (citing Twombly, 550 U.S. at 556). The plausibility standard is not a “probability
requirement,” but it “asks for more than a sheer possibility that a defendant has acted
unlawfully.” Id. “[W]here the well-pleaded facts do not permit the court to infer more than the
mere possibility of misconduct,” a complaint is insufficient under Fed. R. Civ. P. 8(a) because it
has merely “alleged” but not “show[n] . . . that the pleader is entitled to relief.” Id. at 679; see
also id. at 682 (allegations are rejected where there is an “obvious alternative explanation” for
the conduct alleged that is more “likely”) (internal quotation marks and citations omitted).
Various agreements, orders and other documents were attached to the First Amended
Complaint and were referred to in the First Amended Complaint, and it is proper for the Court to
consider those documents in ruling on the motion to dismiss. See Grant v. Cnty. of Erie, 542 F.
App’x 21, 23 (2d Cir. 2013) (summary order) (in its review of a motion to dismiss “the court is
entitled to consider facts alleged in the complaint and documents attached to it or incorporated in
it by reference, documents ‘integral’ to the complaint and relied upon in it, and facts of which
judicial notice may properly be taken under Rule 201 of the Federal Rules of Evidence”);
Rothman v. Gregor, 220 F.3d 81, 88-89 (2d. Cir. 2000) (it is proper to consider documents that
are quoted in, attached to or incorporated by reference into a complaint, or that plaintiff relied
upon in bringing suit); I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., Inc., 936 F.2d
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759, 762 (2d Cir. 1991) (it is proper to consider a document upon which allegations are based,
whether or not it is attached to the complaint). If an allegation is belied by the terms of the
documents, the documents are controlling. Id.; see also Alexander v. Bd. of Educ. of City of New
York, 648 F. App’x 118 (2d Cir. 2016) (summary order) (dismissing complaint where documents
contradicted allegations).
Background
Appvion Inc. and its affiliates were parties to three secured financings that preceded their
October 1, 2017 bankruptcy filings. One financing (the “Prepetition First Lien Financing”)
was secured by first-priority liens and security interests in substantially all of the borrowers’
assets. KeyBank and the Franklin Lenders were among the 44 lenders who made loans under the
Prepetition First Lien Financing. KeyBank acted as the “documentation agent” for that
financing. See Am. Compl. ¶ 17 [ECF No. 22]. About $253.3 million of loans were outstanding
under the Prepetition First Lien Financing at the time of the bankruptcy filings. Id. ¶ 18.
A second financing (the “Prepetition Second Lien Financing”) was secured by liens
and security interests that with certain exceptions were junior only to the liens under the
Prepetition First Lien Financing. See Ex. A to Am. Compl. ¶ E.(viii). More than $257 million
was outstanding under the Prepetition Second Lien Financing at the time of the bankruptcy
filings. Id. ¶ E.(iv). A third financing (the “Prepetition Receivables Facility”) was secured by
various receivables. Id. ¶ E.(vi).
Appvion arranged debtor-in-possession financing (“DIP Financing”) to sustain its
operations during its bankruptcy case. The Delaware Bankruptcy Court entered an interim order
on October 3, 2017 that tentatively approved some terms of the DIP Financing. KeyBank alleges
that it was not involved in the discussions that led to the initial financing that was the subject of
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the interim order but that KeyBank participated in subsequent discussions, and those discussions
led to modifications that were incorporated into a credit agreement that governed the DIP
Financing (the “DIP Credit Agreement”). KeyBank also negotiated modifications to the form
of order that approved the DIP Financing and that was entered by the Delaware Bankruptcy
Court on October 31, 2017 (the “2017 DIP Order”). See Am. Compl. ¶¶ 19, 23 and Ex. A.
A. 	The Terms of the 2017 DIP Financing
The approved 2017 DIP Financing contained the following features.
1. 	Roll-Up of Prepetition First Lien Debts. The outstanding loans under the
Prepetition First Lien Financing were “rolled up” as part of the 2017 DIP Financing. The “roll-
up” meant that the pre-bankruptcy first-lien secured loans were converted into post-bankruptcy
loans, with the result that the pre-bankruptcy first-lien lenders became DIP lenders. Five million
dollars of letter of credit obligations under the Prepetition First Lien Financing were not included
in the “Roll-Up Loans” but instead were cash-collateralized. 2017 DIP Order ¶ 5(a). The
Prepetition Second Lien Financing and the Prepetition Receivables Facility were left in place.
The 2017 DIP Order approved the roll-up and provided that it would be effective no later
than October 31, 2017. The holders of the Roll-Up Loans were entitled to “all of the rights and
obligations of a Lender and Roll-Up Lender (each as defined in the DIP Facility Agreement)
under the DIP Facility Documents.” Id.
2. 	New Money DIP Loans. The new DIP Financing was $85 million larger than the
amount of the Roll-Up Loans and thereby made “new money” available for use by Appvion (the
“New Money Loans”). The pre-bankruptcy first-lien lenders had the option of participating in
the new money portion of the DIP financing but were not required to do so, and KeyBank elected
not to do so. Id. ¶¶ 19-22.
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3. 	DIP First-Priority Liens and Superpriority Claims. The DIP liens were senior
to other liens and subordinate only to the rights of certain professionals to obtain payment of
their fees under an agreed “carve-out” provision. The DIP Lenders were also granted
administrative “superpriority” claims, meaning that their claims to recover amounts owed would
be superior to any other administrative claims in the bankruptcy cases with the exception of the
agreed “carve-out” for professional fees. 2017 DIP Order ¶ 10.
4. 	Relative Priorities of the New Money Loans and Roll-Up Loans. Sections
2.17(d) and (e) of the DIP Credit Agreement provided generally that all of the DIP loans
(including the Roll-Up Loans) would be secured by first priority security interests and liens in
the Appvion Debtors’ assets. 2017 DIP Order, Ex. A § 2.17. These sections further provided
that the Roll-Up Loans and the New Money Loans would be entitled to the same priorities as to
such liens. As a general matter section 2.17 preserved that parity with respect to the “proceeds
of any sale, transfer or other disposition of Collateral.” Id. § 2.17. Section 2.13 of the DIP
Credit Agreement further provided that any DIP Lender who obtained a payment in excess of its
“ratable share” was required to so notify the Administrative Agent and to “make such
adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the
Lenders ratably . . .” Id. § 2.13. By its terms section 2.13 applied to any payment that a lender
received “by exercising any right of setoff or counterclaim or otherwise.” Id. (emphasis added).
Notwithstanding these general provisions, there were at least two circumstances under
which the New Money Loans were to have a payment priority over the Roll-Up Loans.
First, section 2.05(b)(ii) described certain “prepayments” of the DIP loans that were to be
mandatory if the borrowers received “Net Cash Proceeds” as the result of asset sales, the receipt
of insurance or condemnation awards, or the issuance of certain kinds of additional indebtedness.
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Any prepayments required by section 2.05(b)(ii) were to be applied first to the New Money
Loans and only then to the Roll-Up Loans. Id. § 2.05(b)(ii)-(iii).
Second, section 8.01 of the DIP Credit Agreement listed remedies that could be pursued
if an event of default occurred. Id. § 8.01. Section 8.02(a) stated that “[a]fter the exercise of
remedies” provided for in section 8.01, or after the Loans had “automatically become
immediately due and payable,” any amounts received would be used to repay the New Money
Loans before any repayment towards the Roll-Up Loans. Id. § 8.02(a). Section 8.02(b) specified
that the order of priorities specified in section 8.02(a) “shall not be binding in any exit facility
that refinances the Obligations.” Id. § 8.02(b).
5. 	Adequate Protection to Prepetition Lenders and Agents. Pursuant to sections
361 and 364 of the Bankruptcy Code the DIP Financing provided “adequate protection” to the
pre-bankruptcy secured lenders to protect them from the possibility that a use of their collateral,
or the grant of another lien, or a stay against disposition of their collateral resulted in a decline in
the value of their interest in the collateral. The agents and lenders under the Prepetition First
Lien Financing were entitled to receive adequate protection in the form of replacement liens and
additional security interests in the DIP Collateral that were junior only to the DIP Liens, certain
permitted earlier liens, and the professional fee “carve-out.” See 2017 DIP Order ¶ 14.
However, as explained below the 2017 DIP Order also contemplated that the Prepetition First
Lien Obligations would be fully paid and therefore extinguished once the Roll-Up had been
completed and once a deadline had expired for the assertion of certain challenges to the
Prepetition First Lien Lenders’ claims and liens.
The Prepetition Second Lien agents and lenders also were entitled to receive adequate
protection against a diminution in the value of their collateral in the form of payments of their
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advisors’ expenses and in the form of additional liens. All of the various adequate protection
liens were to be junior to the liens of the DIP lenders. Id.
6. 	Challenge Period/Release of First Lien Agents and Claims. The Roll-Up
Loans were potentially subject to change in the event that a creditor filed a challenge to the
validity or perfection of the liens that secured the pre-bankruptcy loans. The Delaware
Bankruptcy Court set a December 17, 2017 deadline for such challenges (December 31, 2017 in
the case of the statutory unsecured creditors’ committee). Id. ¶¶ 34-35. The parties have not
identified any such challenge and so far as this Court is aware no such challenge was filed.
Paragraph 12 of the 2017 DIP Order provided that upon the indefeasible and irrevocable
payment of amounts due under the Prepetition First Lien Financing the liens and security
interests that supported that financing would be deemed to have been assigned to an agent acting
on behalf of the DIP Lenders. Upon that deemed assignment the agents for the prepetition first
lien lenders (including KeyBank as Prepetition Documentation Agent) were to be fully released
from their obligations and were to have no further obligations. Id. ¶ 12. It appears that the Roll-
Up of the Prepetition First Lien obligations became final and irrevocable once the challenge
period expired, and that the prepetition agents were to have no further obligations after that date.
7. 	Relevant Default Provisions. The Appvion borrowers agreed in section 7.03 of
the DIP Credit Agreement that with certain limited exceptions they would not “[c]reate, incur,
assume or suffer to exist” any further Lien on their properties. See DIP Credit Agreement § 7.03.
Section 8.01(t) of the agreement also provided that it would be a default if any “claim on
Collateral” were granted that was pari passu with or senior to the Prepetition First Liens or the
various adequate protection liens. Id. § 8.01(t). The Appvion borrowers also agreed in Section
7.25 of the DIP Credit Agreement that they would not “[i]ncur, create, assume, suffer to exist or
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permit” any Superpriority Claim that would be senior to, or pari passu with, any of the DIP
Lenders’ claims (with the exception of the agreed carve-out for professionals), and any grant of
such a pari passu or superior superpriority claim was to be a default under section 8.01(s) of the
DIP Credit Agreement. Id. §§ 7.25, 8.01(s).
In addition, section 8.01(o)(vii) of the DIP Credit Agreement provided that it would be an
Event of Default if the Debtors, “without the prior written consent of the Administrative Agent
and the Required Lenders,” were to seek an order authorizing a sale of all or substantially all
assets “unless such order contemplates payment in full in cash of the Obligations upon the
closing of such financing or consummation of such sale, whether pursuant to a plan of
reorganization or otherwise.” Id. § 8.01(o)(vii).
8. 	Modifications or Amendments. As a general matter the terms of the DIP Credit
Agreement could be modified or amended so long as the change was agreed to in writing by the
“Required Lenders,” which term was defined as lenders holding more than 50% of the aggregate
sum of the outstanding Roll-Up Loans and New Money Loans and the unused New Money
commitments, excluding any such amount held, or deemed held, by a defaulting lender. Id. §§
1.01, 11.01. However, certain provisions could not be waived or modified without the consent of
all affected lenders or, in some instances, with the consent of the Roll-Up Lenders. More
particularly:
 	Section 11.01(d) provided that there could be no principal reduction or waiver of
amounts owed except with the consent of each Lender entitled to such amounts;
 	Section 11.01(e)(i) stated that section 8.02 could not be modified “in a manner that
would alter the pro rata sharing of payments required thereby” without the consent of
each Lender;
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 	Section 11.01(e)(ii) stated that the order of application of a prepayment under section
2.05(b) could not be altered “in any manner that materially and adversely affects the
Lenders hereunder without the written consent of the Required Lenders;”
 	Section 11.01(f) prohibited any change to section 11.01, or any change to the
definition of “Required Lenders,” without the consent of each Lender;
 	Section 11.01(g) prohibited the release of “all or substantially all” of the Collateral
“in any transaction or series of related transactions” without the written consent of
each Lender; and
 	Section 11.01(i) prohibited any change to the terms of section 8.02(b) (the provision
stating that the payment priority for New Money Loans after a default would not
apply in connection with an Exit Financing) without the consent of each Roll-Up
Lender.
B. 	Other Relevant Terms of the 2017 DIP Order
The Debtors agreed to certain waivers that were incorporated in the 2017 DIP Order:
 	In paragraph 45(a)(i) the Debtors irrevocably waived the right to seek, and agreed not
to seek or to consent to (“directly or indirectly”), any amendments to the 2017 DIP
Order “without the prior written consent of the DIP Agent, at the direction or with the
consent of the Required Lenders, and the Prepetition First Lien Administrative
Agent.” 2017 DIP Order ¶ 45(a)(i).
 	In paragraph 45(b) the Debtors irrevocably waived the right to seek any further order
allowing the use of cash collateral or any lien on DIP Collateral with priority equal or
superior to the “Senior Adequate Protection Lien” (i.e., the adequate protection lien in
favor of the Prepetition First Lien Lenders) except with the written consent of various
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parties, including KeyBank as Prepetition Documentation Agent for the Prepetition
First Lien Financing. Id. ¶ 45(b).
 	The Debtors also agreed generally not to seek modifications to the 2017 DIP Order
without the prior written consents of the DIP Agent (acting at the direction or with the
consent of the Required Lenders), the Prepetition First Lien Agents (including
KeyBank as Prepetition Documentation Agent), and the Prepetition Second Lien
Trustee and the unsecured creditors’ committee, “as applicable,” and agreed that no
such consent would be implied. Id. ¶ 45.
In addition, paragraph 13(b) of the 2017 DIP Order stated generally that “[o]ther than as
set forth herein, the DIP Liens shall not be made subject to or pari passu with any lien or security
interest heretofore or hereafter granted” in the Appvion cases. Id. ¶ 13(b). Paragraph 29(a)
stated that, if the 2017 DIP Order were modified, amended or vacated by a subsequent order, that
modification, amendment or vacatur “shall not affect the validity and enforceability of” the DIP
Loans “or any lien, claim or priority authorized or created hereby.” Id. ¶ 29(a). Finally,
paragraph 49(a) of the 2017 DIP Order stated that “[e]xcept as expressly provided herein or in
the DIP Facility Documents, no claim or lien having a priority senior to or pari passu with that
granted by this Final Order to the DIP Secured Parties shall be granted while any portion of the
DIP Obligations remains outstanding, and the DIP Liens shall not be . . . subordinate to or made
pari passu with any other lien or security interest, whether under section 364(d) of the
Bankruptcy Code or otherwise. Id. ¶ 49(a).
C. 	The 2018 Modifications to the DIP Financing
On February 8, 2018, the Appvion Debtors filed a motion seeking approval of a sale
transaction. The motion outlined a transaction pursuant to which a new entity would be formed
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by the Franklin Lenders to acquire the Debtors’ assets. As part of the transaction the amount of
the New Money Loans would be increased by $15 million. When the sale was consummated the
buyer was to assume the obligations to repay all of the New Money Loans. The Roll-Up Loans,
however, were to be “credit bid” as part of the sale. As a result the Roll-Up Lenders would
receive equity interests in the buyer. Am. Compl. ¶ 41.
KeyBank and Fifth Third objected to the proposed sale terms. They argued that the
proposed transaction would constitute an event of default under section 8.01(o)(vii) of the DIP
Credit Agreement because the proposed sale would not result in a full repayment of all of the
DIP Loans. They also argued that the transaction would provide disparate treatment for different
DIP Lenders in that the New Money Loans would be assumed by the buyer while the Roll-Up
Loans would be converted to equity. See id. ¶ 43.
In response, the Franklin Lenders and Franklin Advisers proposed a modified two-step
structure that included a new debtor-in-possession loan as well as a sale transaction. Under the
revised proposal, a new debtor-in-possession loan was to be made in the amount of $100 million.
The new loan was to be a “priming” loan that would be backed by liens that would be superior to
those that secured the original DIP Loans. In addition, the $85 million of New Money Loans
would be “rolled up” into the new priming facility. As a result, the Appvion Debtors were to
receive $15 million of additional loans, while the former New Money Loans would be converted
into new obligations that under all circumstances would have higher lien priorities than the Roll-
Up Loans. The proposed sale transaction was also modified to provide that the new priming DIP
loans would be assumed by the buyer, while still providing that the Roll-Up Loans would be
credit bid and would be converted to equity. Id. ¶¶ 45-46.
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KeyBank and Fifth Third filed additional objections, arguing (among other things) that
the approval of a new “priming” facility would violate various provisions of the DIP Credit
Agreement and of the 2017 DIP Order. After a hearing on March 12, 2018, the Delaware
Bankruptcy Court issued its interim approval of the new priming DIP facility. Id. ¶ 47. The
Court stated, however, that its approval was without prejudice to claims that KeyBank might
have against Franklin Advisors and the Franklin Lenders:
I will say this, though, with respect to reservation of rights. The Court’s
concern here is whether the debtor has met its burden under 364 of the
Bankruptcy Code. To the extent the banks think that Franklin here has
breached the credit agreement, this order will be without prejudice for them
to assert those claims in an appropriate forum, whether it’s this or another
one. And I don’t think I need to get into it at this point because the Court’s
primary concern is in meeting the 364 requirements, which I think this record
adequately supports.
Hr’g Tr. 83:14 – 83:23, Mar. 12, 2018 [Case No. 17-12082 (KJC) ECF No. 571]. The Delaware
Bankruptcy Court entered an order that approved the new priming DIP facility on an interim
basis but that also stated that “[n]otwithstanding anything herein to the contrary, the Interim
Order is subject to the terms stated by the Court at the Interim Hearing, the transcript of which is
incorporated herein by reference.” See Am. Compl. ¶ 48; [Case No. 17-12082 (KJC) ECF No.
564, Rider B].
Subsequently, the Franklin Lenders and the Appvion Debtors negotiated and submitted a
proposed credit agreement for the new priming DIP facility. The Franklin Lenders and Franklin
Advisors, acting as the “Required Lenders,” executed a “Waiver, Consent and Fourth
Amendment to DIP Credit Agreement” under which they waived certain rights under the original
DIP Credit Agreement and permitted the priming of the DIP Liens by the new proposed priming
DIP facility. Id. ¶ 50. The “Required Lenders” also waived the provisions of section 2.05 to the
extent that section 2.05 would have required a “mandatory prepayment” to anyone other than the
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holders of the New Money Loans. See Ex. B to Am. Compl., Ex. B (“Limited Waiver”) § 2.1.
The waivers had the effect of leaving the mandatory prepayment provision in place as to a
portion of the new DIP financing equal to the New Money Loans (hence the “roll-up” of those
New Money Loans), but not as to the Roll-Up Loans.
The Bankruptcy Court gave its final approval to the priming DIP facility in an order
entered April 4, 2018 (the “2018 DIP Order”), a copy of which was submitted to the Court as
Exhibit 11 to the Declaration of Daniel S. Shamah in Support of the Defendants’ Motion to
Dismiss. [ECF No. 31-11]. Prior to that date KeyBank and Fifth Third had filed their lawsuits
against the Franklin Defendants in the New York State court, and the Delaware Bankruptcy
Court’s order stated that it was without prejudice to the claims asserted in those lawsuits:
Notwithstanding anything herein to the contrary, this Final Order and the
findings at the Final Hearing are without prejudice to the claims and causes
of action asserted or that may be asserted in the Supreme Court of New York
for the County of New York in a civil action captioned (a) KeyBank National
Association vs. Franklin Advisors Inc., et al., Index No. 651517/2018 and (b)
Fifth Third Bank vs. Franklin Advisors, Inc., et al., Index No. 651518/2018
(as may be amended, the “Litigations”), and any related defenses or
counterclaims thereto; provided, however, that the plaintiffs in the Litigations
agree that no claim or cause of action in the Litigations shall constitute a
collateral attack on approval of the Senior DIP Facility, the Existing DIP
Facility Documents, the Senior DIP Facility Documents, and the Final
Existing DIP Order, all as amended.
See 2018 DIP Order ¶ 14.
D. 	Subsequent Events
The transactions that were approved by the Delaware Bankruptcy Court entitled the Roll-
Up Lenders to receive shares of equity in the entity that acquired the Appvion assets. KeyBank
alleges, however, that Franklin Advisers and the Franklin Lenders have used their control of the
buyer to prevent the issuance of stock to KeyBank unless and until KeyBank executes a
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shareholder agreement that, among other things, includes a release of all claims that KeyBank
has against the Franklin entities. Am. Compl. ¶¶ 71-91.
The Asserted Claims and the Motion to Dismiss
KeyBank alleges that the defendants breached contracts to which KeyBank was a party
and/or breached implied contractual covenants of good faith and fair dealing when the
defendants arranged the modified DIP Financing and the modifications to the 2017 DIP Order.
KeyBank further contends that the defendants’ use of their control of the Appvion buyer to
condition the delivery of stock to KeyBank upon a release of KeyBank’s claims constitutes a
breach of a covenant of good faith and fair dealing and a breach of fiduciary duty. In addition,
KeyBank alleges that the defendants tortiously interfered with the Debtors’ contracts with
KeyBank. Finally, KeyBank seeks a declaratory judgment as to its rights to share in recoveries
that the Franklin Lenders received on the New Money portions of their DIP Loans.
Defendants argue that KeyBank’s claims are barred by the Delaware Bankruptcy Court’s
prior orders and that KeyBank has failed to state a claim upon which relief may be granted.
Discussion
I. 	Defendants’ Collateral Estoppel and Res Judicata Arguments
The defendants argue that the Delaware Bankruptcy Court could not have approved the
Senior DIP Facility, or the terms of the sale transactions, without also deciding that those
transactions did not violate KeyBank’s contractual rights. Defendants therefore contend that the
Delaware Bankruptcy Court’s approval of the transactions necessarily means that the Debtors
and the Franklin Lenders did not breach any contract obligations. These arguments are contrary
to the plain terms of the Delaware Bankruptcy Court’s orders. They also are based on
misconceptions about a bankruptcy court’s role when it approves a financing or a sale.
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A. 	What A Bankruptcy Court Does When It Approves A Transaction
When it approves a financing or a sale, a bankruptcy court must determine whether the
transaction complies with relevant statutory requirements, including any creditor rights and
protections that are expressed in the Bankruptcy Code itself. The bankruptcy court must also
determine whether the debtor has made a reasonable exercise of business judgment in deciding to
pursue the financing or other transaction. See, e.g., U.S. Bank Trust Nat’l Assoc. v. Am. Airlines,
Inc. (In re AMR Corp.), 485 B.R. 279, 287 (Bankr. S.D.N.Y. 2013), aff’d, 730 F.3d 88 (2d Cir.
2013) (“[i]n determining whether to approve a debtor’s request under Section 364, a Court must
examine whether the relief requested is an appropriate exercise of the debtor’s business
judgment.”) However, transactions that are presented for approval are not barred just because
they may breach contracts.
Contracts impose legal obligations and breaches of contracts have legal consequences,
and contracts therefore should be taken seriously by persons who are parties to them. The
consequences of a breach of contract may be important in deciding whether a transaction should
be approved and whether a reasonable business judgment has been exercised. However, there
are times when breaching a contract is in the reasonable commercial interests of one of the
contracting parties. Such a breach of contract is not something that the Bankruptcy Code
prohibits. In fact, the Bankruptcy Code expressly contemplates that certain pre-bankruptcy
contracts may be “rejected” (an event that expressly constitutes a breach) when doing so is in the
better interests of the bankruptcy estate. See 11 U.S.C. § 365.
Nor is a breach of contract an illegal act under state law. See People v. Patterson, 135
A.D.2d 883, 883–84, 522 N.Y.S.2d 281, 282 (N.Y. App. Div. 1987) (attributing the higher
standard of proof required for larceny to the fact that, as a crime, larceny should not be confused
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with actions that merely constitute a breach of contract); People v. Alaboda, 198 A.D. 41 (N.Y.
App. Div. 1921) (“[c]rime is not involved in a mere breach of contract, unless the Legislature has
clearly and unmistakably decreed that this shall be the result.”) As a general matter, a breach of
contract gives rise only to a right to collect damages, and not a right to an injunction against the
breach. See Express Shipping, Ltd. v. Gold, 63 A.D.3d 669 (2d Dept. 2009) (specific
performance is not available where money damages would suffice); Restatement (2d) of
Contracts, § 359 (1981) (damages, and not specific performance or an injunction, are the usual
remedy). If a court has refused to block a transaction in the face of a contention that a breach of
contract is about to occur, that does not mean (as defendants argue) that the court has necessarily
decided that there is no merit to the breach of contract claim. That is particularly true when (as
here) the court has explicitly ruled that a damages claim may proceed. The denial of an
injunction in such a case just means that the complaining party has been left to other remedies.
In these cases, the Delaware Bankruptcy Court’s job in approving the transactions that
were presented to it was to consider whether the transactions complied with sections 363 and 364
of the Bankruptcy Code and whether they represented reasonable business judgments of the
Debtors -- even if that meant that the Debtors (or other parties) might be breaching other
contracts in the process. I have read the transcripts that the parties have submitted and it is quite
clear that this is how the Delaware Bankruptcy Court perceived the issues before it. The
Delaware Bankruptcy Judge approved the transactions as being in the interests of the Debtors
and in compliance with the requirements of the Bankruptcy Code, but at the same time stated
that he did not find it necessary to consider whether the transactions violated KeyBank’s rights
against other lenders under the DIP Credit Agreement and/or the 2017 DIP Order. That is why
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his orders approved the transactions but stated that they were without prejudice to KeyBank’s
claims against the Franklin Lenders and Franklin Advisers.
If I were to infer from the Delaware Bankruptcy Court’s orders that the approvals of the
transactions necessarily included a determination by that court that KeyBank’s contractual rights
were not violated, I would be acting contrary to the explicit terms of that Court’s orders. I would
also be implying that the Delaware Bankruptcy Court made determinations that were not
required by the motions that were before it, even though the Court said in the clearest possible
terms that it was not doing so.
B. 	The Delaware Bankruptcy Court’s Orders
Defendants point to various provisions of the Delaware Bankruptcy Court’s orders in an
effort to justify their contention that those orders foreclose KeyBank’s claims, but the cited
provisions are taken mostly out of context.
1. 	The 2018 DIP Order. Defendants first have cited to paragraph 2 of the Order
that approved the Senior DIP Facility, which stated that “[s]ubject to the terms herein, all
objections to and reservations of right with respect to the Motion and to the entry of this Final
Order to the extent not withdrawn or resolved are hereby overruled on the merits in their
entirety.” See 2018 DIP Order ¶ 2; Defs.’ Mem. at 13 [ECF No. 30]. However, one of the other
paragraphs in that same order – to which paragraph 2 was thereby “subject” – was the explicit
statement in paragraph 14 that “[n]otwithstanding anything herein to the contrary, this Final
Order and the findings at the Final Hearing are without prejudice to the claims and causes of
action asserted or that may be asserted” by KeyBank in the New York state court action. See
2018 DIP Order ¶ 14. Defendants’ contention that paragraph 2 of the 2018 DIP Order bars
KeyBank’s claims, notwithstanding paragraph 14 of that same Order, is absurd.
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2. 	The 2018 Bidding Procedures Order. Defendants have also cited to a Bidding
Procedures Order that the Delaware Bankruptcy Court entered in March 2018, which stated that
all objections to the relief sought in a Bidding Procedures Motion were overruled “except as
reflected in the provisions of this Order.” See Decl. of Daniel Shamah, Ex. 8 ¶ 2 (the “Bidding
Procedures Order”) [ECF No. 31-8]; Defs.’ Mem. at 13. However, the very next sentence in
that same paragraph ordered that all rights with respect to the proposed asset sale were preserved
“except those specifically related to the validity and structure of the Stalking Horse Purchase
Agreement.” Bidding Procedures Order ¶ 2. In context, then, the objections that actually were
“overruled” by the Bidding Procedures Order were narrowly limited and did not encompass
KeyBank’s claims about the defendants’ violations of the DIP Credit Agreement.
The transcript of the proceedings before the Delaware Bankruptcy Court also makes it
clear that the Bidding Procedures Order did not resolve KeyBank’s claims on the merits. The
proposed bidding procedures and the initial objections to the proposed Senior DIP Facility were
heard the same day. The Delaware Bankruptcy Court noted that the objections to the manner in
which the proceeds of a sale would be allocated were matters to be resolved at a later sale
hearing and not at the hearing on bidding procedures, and also noted that it did not need to
decide whether the proposed new financing violated KeyBank’s contract rights. See Hr’g Tr. 82,
March 12, 2018, Decl. of Daniel Shamah, Ex. 5 [ECF No. 31-5]. The Court stated:
Allocation issues can be dealt with at the sale hearing. I will say this, though,
with respect to reservation of rights. The Court’s concern here is whether the
debtor has met its burden under 364 of the Bankruptcy Code. To the extent
the banks think that Franklin here has breached the credit agreement, this
order will be without prejudice for them to assert those claims in an
appropriate forum, whether it’s this or another one. And I don’t think I need
to get into it at this point because the Court’s primary concern is in meeting
the 364 requirements, which I think this record adequately supports.
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Id. The Delaware Bankruptcy Court then entered two separate orders that same day, one of
which was the Bidding Procedures Order cited by defendants, and the other of which was the
order granting interim approval to the Senior DIP Facility. The order that granted interim
approval to the Senior DIP Facility stated that “[n]otwithstanding anything herein to the contrary,
the Interim Order is subject to the terms stated by the Court at the Interim Hearing, the transcript
of which is incorporated herein by reference.” See Am. Compl. ¶ 48; [Case No. 17-12082 (KJC)
ECF No. 564, Rider B].
In context, the contention that the Bidding Procedures Order foreclosed the claims that
KeyBank is asserting in this action is without merit. The issues that were actually decided at the
time the Bidding Procedures Order was entered were different issues. Issues that related to
alleged breaches of the DIP Credit Agreement and the 2017 DIP Order were argued that same
day and in the same hearing, and KeyBank’s rights to pursue those claims were expressly
reserved, both through the court’s comments at the hearing and by the express language of the
interim order that approved the Senior DIP Facility. The suggestion that the Delaware
Bankruptcy Court somehow intended (through the Bidding Procedures Order) to extinguish
claims about the DIP Facility that he had expressly reserved during the hearing, and that he
expressly reserved in the separate interim order he entered that same day with respect to the
proposed Senior DIP Facility, is not reasonable.
3. 	The 2018 Sale Approval Order. Defendants also argue that the Delaware
Bankruptcy Court held, in a later order that approved the sale, that the refinancing of the Senior
DIP Obligations was “permitted under the terms of the DIP Credit Agreements and Loan
Documents.” See Decl. of Daniel Shamah, Ex. 13 ¶ X.B (the “May 14, 2018 Sale Order”)
[ECF No. 31-13]; Defs.’ Mem. at 8. However, paragraph 39 of the same order stated as follows:
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Notwithstanding anything in this Sale Order to the contrary, this Sale Order
and the findings at the hearing are without prejudice to the claims and causes
of action asserted or that may be asserted (including claims that may be
asserted against additional parties) in the Supreme Court of New York for the
County of New York in a civil action captioned (a) KeyBank National
Association vs. Franklin Advisors, Inc., et al., Index No. 651517/2018 and (b)
Fifth Third Bank vs. Franklin Advisors, Inc., et al., Index No. 651518/2018,
along with (c) any successor or related action(s) and as or such litigation(s)
may be transferred or removed (as and if applicable) under applicable law,
(as may be amended, the “Litigations”), and any related claims, rights,
defenses or counterclaims thereto; provided, however, that the plaintiffs in
the Litigations agree that no claim or cause of action in the Litigations shall
constitute a collateral attack on any order of this Court (including, but not
limited to, this Sale Order, the Initial DIP Order, the Senior DIP Order), the
DIP Facility Documents (as defined in the Initial DIP Credit Agreement), or
the Senior DIP Facility Documents (as defined in the Senior DIP Credit
Agreement).
May 14, 2018 Sale Order ¶ 39 (emphasis added). Defendants’ contention that paragraph X.B of
the Sale Order bars KeyBank’s claims is without merit in light of the plain language of paragraph
39 of the same order.
4. 	Comments About Adequate Protection Rights. Finally, defendants point to
comments by the Delaware Bankruptcy Court to the effect that KeyBank’s “adequate protection”
rights were not violated by the revised financing. See Hr’g Tr. 81:17-82:12, March 12, 2018;
Defs.’ Mem. at 6. However, “adequate protection” rights are statutory rights (not contract
rights), and they attached to KeyBank’s claims as a pre-bankruptcy lender (not its rights as a DIP
Lender). Findings about the “adequate protection” of prepetition secured claims have nothing to
do with the issue of whether KeyBank’s rights as a DIP Lender were violated. In any event,
stray comments about collateral values and adequate protection did not constitute rulings on the
merits of KeyBank’s contract claims, as the Delaware Bankruptcy Court emphasized repeatedly
that it was leaving those claims in place and was not ruling on their merits.
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C. 	The Preservation of Defenses
At the hearing on the motion to dismiss in this Court the defendants argued that the
Delaware Bankruptcy Court’s orders also stated that they were without prejudice to any defenses
that the defendants might assert against KeyBank. In the defendants’ view, this means that the
orders were without prejudice to defendants’ contention that KeyBank’s claims are barred on res
judicata and collateral estoppel grounds. Accordingly, in their view, this Court should hold that
KeyBank’s claims are in fact barred.
Defendants’ reading cannot possibly be right. The gist of what defendants contend is that
the Delaware Bankruptcy Court’s orders actually were “with prejudice” to KeyBank’s claims,
even though that is the exact opposite of what the Delaware Bankruptcy Court repeatedly and
clearly said. I cannot interpret a general reservation of “defenses” as nullifying the many clear
statements that the orders were without prejudice to KeyBank’s claims.
D. 	Whether KeyBank’s Contract Claims Are Barred As Collateral Attacks
The Delaware Bankruptcy Court did say, in the 2018 DIP Order, that the reservation of
KeyBank’s claims would not permit a “collateral attack” on the following matters:
(i) 	the Delaware Bankruptcy Court’s “approval” of the revised DIP Facility;
(ii) 	the Delaware Bankruptcy Court’s prior “approval” of the initial DIP Facility;
(iii) 	the Delaware Bankruptcy Court’s “approval” of the revised DIP documents; or
(iv) 	the terms of the 2017 DIP Order.
2018 DIP Order ¶ 14. It is important that the foregoing statements be kept in mind in evaluating
KeyBank’s individual claims. It is plain, however, that the Delaware Bankruptcy Court did not
believe that all of KeyBank’s claims constituted impermissible “collateral attacks” of the kinds
listed in the 2018 DIP Order. If that is what the Delaware Bankruptcy Court believed, then there
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would have been no reason to say that the Orders were “without prejudice” to KeyBank’s claims
in the first place.
A “collateral attack” is an attack on an order that is made in a proceeding (other than a
direct appeal) that is different from the proceeding in which the order was entered and that seeks
to undo or nullify the order itself. See Black’s Law Dictionary (11th ed. 2019). Here, KeyBank
is not seeking to undo or to change the relevant orders. The claims it asserts merely seek
damages from non-debtor parties. A judgment in KeyBank’s favor in this proceeding would
affect neither the Delaware Bankruptcy Court’s orders nor the Debtors’ transactions. In that
context the present claims are not a “collateral attack” of the kind that the 2018 DIP Order
prohibits.
Defendants acknowledged at oral argument that KeyBank’s claims do not seek to undo
the orders themselves, but they argued that KeyBank’s claims would “reroute” the consideration
that was exchanged as part of the transactions, and that such a “rerouting” would itself constitute
collateral attacks on the approved transactions. Hr’g Tr. 9, Aug. 15, 2019 [ECF No. 38]. But the
only “collateral attacks” that the Delaware Bankruptcy Court foreclosed were collateral attacks
on the “approval” of the revised DIP Facility, or on the prior “approval” of the initial DIP
Facility, or on the Delaware Bankruptcy Court’s “approval” of the revised DIP documents, or on
the terms of the 2017 DIP Order. There is nothing in the Delaware Bankruptcy Court’s order
that purported to forbid a “rerouting” of sale consideration. In fact, a “rerouting” of sale
consideration was plainly one of the things that KeyBank sought to accomplish in its state court
complaint, and the Delaware Bankruptcy Court stated explicitly that those claims could proceed.
Furthermore, as explained above, the “approvals” that the parties sought from the
Delaware Bankruptcy Court, and that the court provided in its orders, related to the Debtors’
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participation in the transactions. Debtors require court approval to engage in certain
transactions, but no Bankruptcy Court approval was needed as to other parties’ participation in
the transactions. Seeking damages from non-debtors, or “rerouting consideration” among non-
debtor parties, is not a collateral attack on the Bankruptcy Court’s orders or on the particular
“approvals” – namely, approvals of the Debtors’ participation in the transactions – that the
parties sought and that the Delaware Bankruptcy Court actually provided.
If the Delaware Bankruptcy Court’s references to “collateral attacks” were interpreted to
mean that KeyBank could not sue the defendants for damages – because that would alter the
payments that the defendants received as part of the prior transactions – that would entirely
nullify the preservation of KeyBank’s claims, and would render meaningless all of the many
statements by the Delaware Bankruptcy Court that KeyBank’s rights were being preserved.
E. 	Whether the Tortious Interference Claims Are Collateral Attacks
KeyBank’s tortious interference with contract claims cannot succeed without a finding
that the Appvion Debtors violated their own contractual obligations to KeyBank. See NBT
Bancorp Inc. v. Fleet/Norstar Fin. Grp., 87 N.Y.2d 614, 621, 664 N.E.2d 492, 496, 641
N.Y.S.2d 581, 585 (N.Y. 1996). Again, however, I do not see that those claims (or that such a
finding) would constitute a collateral attack on the Delaware Bankruptcy Court’s “approval” of
the revised DIP Facility, or on its prior “approval” of the initial DIP Facility, or on the Delaware
Bankruptcy Court’s “approval” of the revised DIP documents, or on the terms of the 2017 DIP
Order – which are the only items that are subject to the “collateral attack” prohibition.
As stated at the outset of this section, the matters presented to the Delaware Bankruptcy
Court required it to decide whether certain transactions were in the interests of the Debtors. The
principle guiding the Court in contemplating the 2018 DIP transactions, therefore, was whether
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they served the interests of the Debtors, not whether they violated the terms of the parties’
preexisting contracts. Because nothing prevented the alleged contractual violations from
coexisting with the new financing, KeyBank’s tortious interference claims (and its contentions
that the Debtors violated contracts) would not constitute a collateral attack on the Delaware
Bankruptcy Court’s orders themselves. KeyBank seeks relief only against the Franklin Lenders
and Franklin Advisors and does not seek (on any grounds) to undo any of the Delaware
Bankruptcy Court’s orders or to force the Appvion Debtors to give up any consideration they
received in the transactions that the Delaware Bankruptcy Court approved. Furthermore, the
tortious interference claims were included in the initial New York State complaints and the
Delaware Bankruptcy Court was aware of them when it issued the 2018 DIP Order. If the
Delaware Bankruptcy Court believed that the tortious interference claim constituted an
impermissible “collateral attack,” then the Court could and would have said so at the time. It did
not do so.
F. 	Whether Alleged Violations of the 2017 DIP Order Are Collateral Attacks
KeyBank alleges that the portions of the 2017 DIP Order that barred senior liens and
senior superpriority claims were contractually binding on the other DIP Lenders and were
breached when the DIP Financing terms were altered in 2018. Am. Compl. ¶¶ 28-29, 56-58.
Defendants argue that these claims are collateral attacks on the 2017 DIP Order and/or on the
2018 DIP Order. Defs.’ Mem. at 12-15.
If KeyBank were not merely making contractual arguments – if, for example, KeyBank
were to argue that the relevant parts of the 2017 DIP Order constituted an absolute prohibition
against superior liens that could neither be waived by the parties nor modified by the Delaware
Bankruptcy Court itself in a later order – then that particular contention would constitute an
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impermissible collateral attack on the 2018 DIP Order, because the premise of the argument
would be that the Delaware Bankruptcy Court lacked the power to approve priming liens in the
2018 DIP Order. 	But that is not what KeyBank is contending.
KeyBank has argued in this case that the relevant portions of the 2017 DIP Order
imposed contractual obligations in the Debtors and the DIP Lenders, and that the defendants
either breached their own obligations or caused the Debtors to breach their obligations. The
questions of whether the 2017 DIP Order imposed contract obligations at all, and if so who the
contracting parties were, will require further consideration. However, the power of the Delaware
Bankruptcy Court to approve the modified DIP Facility in 2018, and its power to amend its own
prior order, are not being challenged here. KeyBank’s contention that contract obligations were
breached by the other DIP Lenders is not a request that the Delaware Bankruptcy Court’s orders
be negated and it is not a collateral attack on those orders. In fact, these particular contractual
claims were asserted in the original complaint in the New York State Court, and the Delaware
Bankruptcy Court ruled that they could be pursued.
* 	* 	* 	*
For the foregoing reasons, defendants’ contentions that KeyBank’s claims are barred by
the Delaware Bankruptcy Court’s prior orders is without merit.
II. 	The Breach of Contract Claims
KeyBank argues that the modified DIP Financing breached express contract terms in the
DIP Credit Agreement and the 2017 DIP Order. It also alleges that the defendants breached
implied covenants of good faith and fair dealing by engineering a sham transaction that
artificially treated a new $15 million priming DIP loan as though it were actually a new $100
million priming DIP loan. KeyBank argues that the extra $85 million of priming loans, and the
purported repayment of the New Money Loans, had no real economic substance or purpose and
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were just an effort to negate the Roll-Up Lenders’ rights to equal treatment in connection with a
plan of reorganization.
KeyBank’s contract claims are at times elusive, as the arguments in its papers often rely
on characterizations of groups of contract provisions and are sometimes difficult to match up
with specific contract terms. During oral argument it was also sometimes difficult to separate the
express breach of contract arguments from the “good faith” arguments. For purposes of ruling
on the motion to dismiss I have attempted to address each of the arguments separately below.
A. 	Whether the 2017 DIP Order Imposed Contract Obligations
Many of KeyBank’s contract claims are based on contentions that other parties violated
provisions in the 2017 DIP Order as well as provisions in the DIP Credit Agreement. KeyBank
argued that the parties negotiated the terms of the 2017 DIP Order and that the order was entered
upon consent. KeyBank also cited to cases involving the interpretation of “consent orders”
generally (Pl’s. Mem. in Opposition at 22), in which courts have held that since negotiated
consent orders “have many of the attributes of ordinary contracts, they should be construed
basically as contracts, without reference to the legislation the Government originally sought to
enforce but never proved applicable through litigation.” United States v. ITT Continental
Banking Co., 420 U.S. 223, 237 (1975); United States v. Armour & Co., 402 U.S. 673, 682
(1971) (holding that the commands of a consent order must be found “within its four corners”
and not from the alleged “purposes” of the parties). On that basis, KeyBank contends that the
2017 DIP Order itself should be treated as a “contract,” such that any violation of its terms gave
rise to a contractual claim by KeyBank against the Franklin Lenders.
Defendants did not generally challenge KeyBank’s allegation that the 2017 DIP Order
was a “contract” in their motion to dismiss, though they did argue that certain obligations were
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only obligations belonging to the Appvion borrowers and not to the other DIP Lenders. The
Court nevertheless asked for further information about the parties’ positions at oral argument. At
that time, KeyBank’s counsel agreed that an order does not give rise to a contract just because
parties have agreed to its terms. However, KeyBank argued that in the case of DIP orders
generally (and in the case of the 2017 DIP Order in particular) the orders are intended to modify
underlying contracts and that the orders themselves should be treated as contracts. Hr’g Tr. 19,
Aug. 15, 2019.
Defendants’ position on the issue was less clear. Defendants’ counsel agreed at oral
argument that the Appvion Debtors took on unspecified contractual obligations in the 2017 DIP
Order, but was equivocal as to whether DIP Lenders took on contractual obligations to each
other. See id. at 11, 37.
Paragraph 36 of the 2017 DIP Order states that “[e]xcept as explicitly provided for
herein, this Final Order does not create any rights for the benefit of any third party, creditor,
equity holder or any direct, indirect or incidental beneficiary.” See 2017 DIP Order ¶ 36. There
are no explicit statements in the 2017 DIP Order that any of its terms are to be enforceable as
contract obligations that one lender may enforce against other lenders. On the other hand, at
least three provisions of the 2017 DIP Order indicate that the terms of the DIP Credit Agreement
and/or the prepetition loan agreements may have been modified by the 2017 DIP Order – though
none of those paragraphs identifies any specific terms that were so modified. See 2017 DIP
Order ¶¶ 2, 14(b), 47. The 2017 DIP Order also states generally that “[i]n the event of any
inconsistency between the terms and conditions of the DIP Facility Documents or this Final
Order, the provisions of this Final Order shall govern and control.” Id. ¶ 46.
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Since the defendants did not argue generally that the terms of the 2017 DIP Order could
not be considered to be a “contract” it is not necessary or proper to rule on that issue in
connection with the motion to dismiss, though I will consider defendants’ arguments as to
whether particular terms of the DIP Order (even if they are contractual) can properly be
construed in the manner alleged by KeyBank.
B. 	Whether Priming Liens Were Contractually Prohibited
KeyBank’s first contract argument is that any agreement to permit priming liens – or at
least, any agreement to do so without KeyBank’s consent – was a violation of KeyBank’s
contract rights. The only provisions in the DIP Credit Agreement that were cited in support of
this argument are the covenants by the Appvion Debtors that that they would not incur, create,
assume, suffer to exist or permit any lien or any Superpriority Claim that would be senior to, or
pari passu with, any of the DIP Lenders’ liens and claims (with the exception of the agreed
carve-out for professionals). See DIP Credit Agreement § 7.25. This contractual commitment
plainly was a promise that was made only by the Appvion Debtors in favor of the DIP Lenders as
a whole. It was not a promise that the individual DIP Lenders made to each other, and cannot
fairly be construed in that manner. The Court will separately consider whether the Debtors’
alleged breach of this covenant supports a claim of tortious interference, but the covenant in
section 7.25 does not impose contractual obligations on the other DIP Lenders and cannot
support a breach of contract claim by one DIP Lender against other DIP Lenders.
KeyBank also cited to various provisions in the 2017 DIP Order (including paragraph 45)
under which the Debtors agreed that they would not seek “priming” liens and would not seek
material modifications to the DIP Financing. At oral argument, however, KeyBank’s counsel
acknowledged that these provisions only imposed contract obligations on the Debtors, and not on
other lenders. Hr’g Tr. 21:6, Aug. 19, 2019. Again, these items may be relevant to KeyBank’s
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tortious interference with contract claims, but they do not support contentions that the defendants
breached contract obligations of their own.
KeyBank’s remaining contract claims about priming liens are based on the following
three provisions in the 2017 DIP Order:
 	Paragraph 13(b), which states that “[o]ther than as set forth herein, the DIP Liens
shall not be made subject to or pari passu with any lien or security interest heretofore
or hereafter granted” in the cases;
 	Paragraph 29(a), which states that if the 2017 DIP Order is modified, amended or
vacated by a subsequent order, that modification, amendment or vacatur “shall not
affect the validity and enforceability of” the DIP Loans “or any lien, claim or priority
authorized or created hereby;” and
 	Paragraph 49(a), which states that “[e]xcept as expressly provided herein or in the
DIP Facility Documents, no claim or lien having a priority senior to or pari passu
with that granted by this Final Order to the DIP Secured Parties shall be granted while
any portion of the DIP Obligations remains outstanding, and the DIP Liens shall not
be . . . subordinate to or made pari passu with any other lien or security interest,
whether under section 364(d) of the Bankruptcy Code or otherwise.”
See 2017 DIP Order ¶¶ 13(b), 29(a), 49(a). For the reasons stated above, KeyBank is foreclosed
from arguing that these provisions constituted a general prohibition on priming liens that the
parties could not waive and that the Delaware Bankruptcy Court itself could not alter, because
such an argument would constitute a collateral attack on the 2018 DIP Order itself. However,
that leaves open KeyBank’s contentions that these provisions in the 2017 DIP Order imposed
contract obligations that other DIP Lenders violated when they agreed to allow priming liens.
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The main problem with KeyBank’s contract arguments is that the various “no priming
lien” provisions of the 2017 DIP Order protected the DIP Lenders as a whole. Contract rights
are waivable, and the issue of whether the DIP Lenders as a whole possessed certain contract
rights (here, a right to block priming liens) is different from the question of who had authority,
among the DIP Lenders, to waive such contract rights. Section 11.01 of the DIP Credit
Agreement states that the “Required Lenders” may modify or waive terms of any of the “Loan
Documents” on behalf of all of the DIP Lenders, and the definition of “Loan Documents”
explicitly includes the 2017 DIP Order itself. See DIP Credit Agreement §§ 1.01, 11.01. The
plain language of the DIP Credit Agreement therefore gives the Required Lenders the right to
waive or to agree to modify the terms of the 2017 DIP Order on behalf of the DIP Lenders as a
group. Section 11.01 of the DIP Credit Agreement lists some matters that require individual
consents and that cannot be done just with the approval of the Required Lenders, but there is no
provision in section 11.01, or elsewhere in the DIP Credit Agreement itself, that purports to
prevent the Required Lenders from agreeing to the allowance of priming liens.
KeyBank contends that the intent of the cited provisions in the 2017 DIP Order was to
override the provisions in the DIP Credit Agreement as to what the “Required Lenders” could
do, and thereby to require unanimous consent of all Lenders (not just action by the Required
Lenders) before priming liens could be approved. Hr’g Tr. 23:22, Aug. 15, 2019. But if that is
what the parties had really intended, they would have said so explicitly. There is nothing in the
2017 DIP Order that purports to require the unanimous consent of all DIP Lenders before a
restriction on priming liens could be waived, or that purports to override the provisions of section
11.01 of the DIP Credit Agreement regarding the manner in which modifications or waivers
generally may be approved. I note that there is a reference to potential modifications or
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amendments to the 2017 DIP Order in paragraph 45 of that order, and it states that the Appvion
Debtors waived their rights to seek any material amendment, modification or extension without
the prior written consent of various parties, including “the DIP Agent, at the direction or with the
consent of the Required Lenders.” 2017 DIP Order ¶ 45. The plain import of this language,
insofar as the DIP Lenders are concerned, is that the “Required Lenders” continued to have the
right to make determinations on behalf of the DIP Lenders as a whole.
KeyBank’s argument that the defendants (and the Required Lenders) did not act in good
faith in the manner in which they purported to exercise contractual rights is a matter that is to be
considered separately below. But KeyBank’s contention that the Required Lenders were
contractually forbidden from agreeing to any priming liens under any circumstances except with
the unanimous consent of all of the DIP Lenders is without merit. There is no provision in the
parties’ contracts or in the 2017 DIP Order that purports to require such unanimous consent.
C. 	Alleged Breach of Priming Lien Consent Rights
In paragraph 45(b) of the 2017 DIP Order, the Debtors irrevocably waived the right to
seek any further order allowing the use of cash collateral or any lien on DIP Collateral with
priority equal or superior to the “Senior Adequate Protection Lien” (i.e., the adequate protection
lien in favor of the Prepetition First Lien Lenders) except with the written consent of various
parties, including KeyBank as Prepetition Documentation Agent for the Prepetition First Lien
Financing. Id. ¶ 45(b). KeyBank contends that this provision of the DIP Order required
KeyBank’s consent before any priming liens of any kind could be granted.
By its terms, however, paragraph 45(b) of the 2017 DIP Order is only a covenant made
on behalf of the Debtors themselves. KeyBank’s counsel acknowledged during oral argument
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that this paragraph does not impose contractual obligations on other DIP Lenders. Hr’g Tr. 21:6,
Aug. 15, 2019.
Even without KeyBank’s concession the claim would be fatally flawed. The provision
cited by KeyBank in the First Amended Complaint is a provision that addresses the adequate
protection rights of the Prepetition First Lien Lenders, not the rights of KeyBank as a DIP
Lender. As noted above, the DIP Financing and the 2017 DIP Order contemplated that the
obligations owed to the Prepetition First Lien Lenders would be repaid in full as part of the DIP
Financing. They also contemplated that the repayment would be irrevocable and complete once
the “Challenge Period” expired, at which point all liens of the Prepetition First Lien Lenders
would be deemed to have been assigned to the DIP Lenders and the obligations of the Prepetition
Agents (including KeyBank as Prepetition Documentation Agent) would terminate. The
Challenge Period expired before the proposed modifications to the DIP Financing, and so the
prepetition liens and adequate protection liens of the First Lien Lenders had been extinguished.
No consent to a priming of the First Lien Lenders’ adequate protection liens was needed because
the Prepetition First Lien Lenders no longer possessed any such liens or any rights to adequate
protection, and so KeyBank’s “consent” to such a hypothetical priming was not needed.
To the extent that KeyBank sought (in its First Amended Complaint) to treat the relevant
provision in the 2017 DIP Order as giving KeyBank an individual veto (as a DIP Lender) over
any priming of the DIP Lenders’ liens, that argument is inconsistent with the plain wording of
the relevant provision. KeyBank is not pursuing claims here in its capacity as a documentation
agent for other First Lien Lenders. It is pursuing claims in a different capacity (as a Roll-Up DIP
Lender), and nothing in the DIP Credit Agreement or the 2017 DIP Order purports to require
KeyBank’s individual consent (as a Roll-Up Lender) to priming liens.
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D. 	Alleged Breach of “Material Modification Consent Rights”
The last sentence of paragraph 45 of the 2017 DIP Order stated that the Debtors agreed
not to seek modifications to the 2017 DIP Order without the prior written consents of the DIP
Agent (acting at the direction or with the consent of the Required Lenders), the Prepetition First
Lien Agents (including KeyBank as Prepetition Documentation Agent), and the Prepetition
Second Lien Trustee and the unsecured creditors’ committee, “as applicable.” 2017 DIP Order ¶
45. KeyBank alleged in its First Amended Complaint that defendants had breached this
provision, but at oral argument KeyBank’s counsel agreed that the provision only imposed
contractual obligations on the Debtors and not on the other DIP Lenders. This provision
therefore cannot form the basis of a breach of contract claim by KeyBank against the other DIP
Lenders.
Even without KeyBank’s concession, however, this claim would also be flawed. The
cited provision only set forth rights that KeyBank might have in its capacity as “Prepetition
Documentation Agent,” and even then only to the extent “applicable” in a particular situation.
The Prepetition First Lien financing was paid off long prior to the 2018 DIP Financing, and
KeyBank’s obligations as Documentation Agent terminated at that time. KeyBank cannot
reasonably interpret the last sentence of paragraph 45 as giving KeyBank an individual right in a
different capacity (as a Roll-Up DIP Lender) to consent to material modifications of the DIP
facility.
E. 	Alleged Violations of Rights to a Pro Rata Sharing of Loan Proceeds
The transaction challenged by KeyBank includes a purported $100 million “new”
financing. As noted above, KeyBank contends that the financing was in reality just a $15 million
financing and the rest was a sham that was designed to evade various provisions of the DIP
Credit Agreement and the 2017 DIP Order. KeyBank also argues, however, that even if the
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financing were legitimate the defendants violated KeyBank’s rights to a pro rata sharing of loan
proceeds.
Section 2.05(b) of the DIP Credit Agreement states that in the event of a new financing
the Debtors were required to use all of the “Net Cash Proceeds” to repay the DIP Loans. In that
case, however, the New Money Loans were to be paid first, and any balance was to be applied to
the payment of the Roll-Up Loans. In the 2018 transactions the Required Lenders agreed that
the $85 million of New Money Loans would be deemed to have been repaid by virtue of being
rolled up into the “new” financing, but they also waived any requirement that the $15 million of
extra proceeds be applied to the repayment of the Roll-Up Loans. See Limited Waiver § 2.1.
KeyBank argues that the new DIP financing, when combined with the later sale and the
terms of the later plan of reorganization, had the effect of making different distributions to the
New Money Lenders and the Roll-Up Lenders. See Am. Compl. ¶¶ 61-63. It contends that
section 2.05 of the DIP Credit Agreement applied only to the extent there were actual “Net Cash
Proceeds” from the 2018 financing. The DIP Credit Agreement defines “Net Cash Proceeds” as
“cash and Cash Equivalents received in connection with” a financing or other transaction in
excess of taxes, fees, expenses and principal amount of indebtedness incurred as a result of the
transaction. KeyBank argues that in fact the only cash proceeds from the financing were the $15
million of new money that was made available to the Debtors and that the Lenders agreed that
the Debtors could retain. The remaining $85 million of “deemed” payments under the 2018 DIP
Financing, according to KeyBank, were not real payments of “cash” at all, but instead were just
thinly-disguised ruses upon which to give a new set of priority liens to the existing New Money
Lenders. KeyBank’s contention is asserted both as a breach of contract claim and as part of
KeyBank’s arguments that defendants violated contractual duties of good faith and fair dealing.
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I cannot tell from the record before me whether there were actual “Net Cash Proceeds”
from the 2018 DIP Financing to which the New Money Lenders had priority rights. KeyBank
contends that in the absence of “Net Cash Proceeds” any roll-up of DIP Loans into the new
priming facility in 2018 had to be applied ratably to all DIP Lenders and not just reserved for the
New Money Lenders. I find that this particular contention states a claim for breach of express
contract, without making any ruling as to the merits of such a claim.
KeyBank also contends that the priming DIP facility was in reality an “exit financing.” It
contends that all of the transactions that were accomplished in 2018 were interrelated and that it
was intended and expected from the outset that the priming obligations under the 2018 DIP
would be assumed in the exit financing, while other obligations were left behind. KeyBank
contends that this outcome breached section 8.02(b) of the DIP Credit Agreement, which made
clear that the payment priorities in favor of the New Money Lenders would not be applicable in
the case of an exit financing. This contention also states a valid claim for relief that cannot be
dismissed at the pleading stage.
Defendants argue that section 2.13 of the DIP Credit Agreement (which obligates
individual lenders to share, with other lenders, any disproportionate payments that they receive)
only applies to situations in which individual Lenders have exercised setoff rights or asserted
individual counterclaims. Defs.’ Mem. at 20. However, section 2.13 by its terms provides that
lenders must share disproportionate recoveries that they obtain by exercising any right of setoff
or counterclaim “or otherwise.” DIP Credit Agreement § 2.13. There is therefore no merit to
defendants’ contention that section 2.13 is limited to setoffs and counterclaims. If KeyBank
prevails on contract claims that survive a motion to dismiss, then its contention that section 2.13
requires a sharing with other Lenders also survives a motion to dismiss.
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In their papers the defendants asserted that the Debtors were in default under the DIP
Credit Agreement and that under section 8.02(a) of the DIP Credit Agreement the New Money
Lenders were entitled to a payment priority by the time the 2018 DIP amendments were
approved. Defs.’ Mem. at 18. However, section 8.02(a) only applied after a declaration of
default and after an exercise of remedies. Here, there admittedly was no declaration of default
and no exercise of remedies. To the contrary: defendants’ counsel acknowledged that in fact any
existing defaults were waived. The provisions of section 8.02(a) therefore are not relevant to this
issue.
Finally, defendants argued that the Sale of all of the Debtors’ assets accelerated the
amounts due under the DIP Credit Agreement and triggered a priority payment waterfall in favor
of the New Money Lenders under sections 2.05(b)(iii) and 8.02(a) of the DIP Credit Agreement.
Id. But the “Sale” post-dated the DIP Financing by several months. At the time of the 2018 DIP
Financing (and the purported “repayment” of the New Money Loans) no Sale had occurred and
no “Net Cash Proceeds” of a Sale were being distributed. These provisions therefore are not
relevant to KeyBank’s claims or to the motion to dismiss.
F. 	Alleged Breach of “Principal and Payment Reduction Bar”
Section 11.01(d) of the DIP Credit Agreement states that the Required Lenders could not
agree to reduce principal or interest or amounts payable without written consent of each Lender
entitled to such amount, except that Required Lenders could change or waive interest rate
obligations under 2.08(b). See DIP Credit Agreement § 11.01(d). KeyBank contends that this
provision was breached when other DIP Lenders purported to agree, without KeyBank’s consent,
to segregate the Roll-Up DIP loans from the 2018 DIP and subsequently convert those
obligations to equity. See Am. Compl. ¶¶ 64-66; Pl’s. Mem. in Opposition at 22.
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Defendants’ sole response is that the new priming DIP facility did not itself result in a
release of payment obligations owed to KeyBank. Defs.’ Mem. at 20-21. But KeyBank’s
contention is that the priming DIP facility, the later Sale, and the termination of the Debtors’
payment obligations with respect to the Roll-Up DIP Lenders were all part of a series of
integrated transactions that were conditioned on each other and that should be considered
together in deciding whether contractual obligations were breached. KeyBank’s contentions
state a plausible claim and cannot be dismissed at this stage.
G. 	Alleged Breach of Collateral Release Provisions
KeyBank alleges that the defendants breached contractual obligations by agreeing to
release liens and security interests that secured the claims of KeyBank and other Roll-Up
Lenders. Am. Compl. ¶¶ 67-69. KeyBank relies on section 11.01(g) of the DIP Credit
Agreement, which states that the Required Lenders could not agree to “release all or
substantially all of the Collateral in any transaction or series of related transactions, without
written consent of each Lender.” Id. ¶ 34; DIP Credit Agreement § 11.01(g). KeyBank alleges
that the Sale of the Appvion Debtors’ assets and the modification of the DIP in 2018 were a
“series of related transactions” that had the effect of causing the DIP Collateral to be released
from the Roll-Up Lenders’ liens and security interests even though the Roll-Up Loans were not
being paid in full and even though not all Lenders consented to this outcome. Am. Compl. ¶ 67
Defendants argue that the new priming DIP facility in 2018 did not itself result in a
release of the DIP Lenders’ liens on Collateral. Defs.’ Mem. at 20-21. But section 11.01(g) of
the DIP Credit Agreement requires consideration of whether Collateral was released “in any
transaction or series of transactions” without the consent of each Lender. KeyBank has properly
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alleged that liens on the Collateral were released without the consent of KeyBank, and that
contention states a valid claim that survives a motion to dismiss.
During oral argument the defendants argued also that the “collateral release” provision
only prohibited transfers by the Appvion Debtors of the property that constituted collateral,
rather than releases of the Lenders’ liens on such collateral. Hr’g Tr. 70-71, Aug. 15, 2019.
Frankly, this argument makes no sense. The Lenders did not own the property and did not have
power to transfer it. A provision in a loan agreement that applies to “releases of collateral” by
the Lenders can only reasonably be interpreted as a provision relating to the release of such
collateral from the Lenders’ liens and security interests. Furthermore, the series of transactions
that KeyBank has challenged did result in a transfer of collateral from the Debtors to the buyer
that the Franklin Entities had set up, and the collateral was freed of the Roll-Up Lenders’ liens
and security interests in connection with that transfer.
Defendants have contended that the Roll-Up Lenders received the equity in the buyer and
this was somehow the equivalent of their prior security interests and liens. Id. at 71. One may
question, if that were true, just why the defendants have fought so hard to differentiate between
the treatment that was afforded to the New Money Lenders and the Roll-Up Lenders. In any
event, no one – particularly anyone who is experienced in bankruptcy practice – can reasonably
argue that having an equity ownership in an entity, which by definition is junior to the claims of
all creditors, is necessarily the same as having a perfected first-priority security interest in the
entity’s properties. If defendants wish to contest the amount of damages that would be
associated with this particular claim, that is an issue for trial and not a ground for dismissal.
III. 	KeyBank’s Claims of Breach of Implied Covenants of Good Faith and Fair Dealing
New York endorses the general rule that every contract includes an implied covenant of
good faith and fair dealing. See New York Univ. v. Cont’l Ins. Co., 87 N.Y.2d 308, 318, 662
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N.E.2d 763 (1995); Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389, 663 N.E.2d 289 (1995).
Sometimes that general rule is misinterpreted, as though it forbids anything that one contracting
party might do that is mean-spirited or that is contrary to the economic interests of an opposing
party. The implied covenant of good faith and fair dealing actually has a narrower scope. It
requires that “neither party will do anything which will have the effect of destroying or injuring
the right of the other party to receive the fruits of the contract, that one party will not
intentionally and purposely do anything to prevent the other party from carrying out the
agreement on that party’s part, and that an innocent party will be protected from overreaching
adversaries.” 22A N.Y. Jur. Contracts § 423.
The implied covenant of good faith and fair dealing is breached where “a party to a
contract acts in a manner that, although not expressly forbidden by any contractual provision,
would deprive the other party of the right to receive the benefits under their agreement.” Jaffe v.
Paramount Commc’ns, 222 A.D.2d 17, 22–23, 644 N.Y.S.2d 43 (1st Dept. 1996). “Good faith
performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose
and consistency with the justified expectations of the other party . . .” Restatement (Second) of
Contracts § 205, cmt. a (1981).
“Subterfuges and evasions violate the obligation of good faith in performance even
though the actor believes his conduct to be justified.” Id., cmt. (d). Transactions that lack
economic substance or that elevate form over substance, and that merely represent efforts to
undermine another party’s contract rights, are prime examples of matters that may constitute
breaches of the implied covenant of good faith and fair dealing. See Fleet Capital Corp. v.
Yamaha Motor Corp., No. 01 Civ. 1047 (AJP), 2002 U.S. Dist. LEXIS 18115, 2002 WL
31174470 (S.D.N.Y. Sept. 25, 2002) (direct payment of proceeds to debtor’s vendor, in effort to
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defeat lender’s superior rights to proceeds received by the debtor, violated the implied covenant
of good faith and fair dealing in an intercreditor agreement); N. Hill Funding of N.Y., LLC v.
Amincor Other Assets, Inc., Index No. 653092/14, 2016 N.Y. Misc. LEXIS 4922 (Sup. Ct.
Jan.17, 2016) (looking to the “economic substance” of transactions and finding that an
assignment of assets was improperly designed to frustrate the priority rights of another creditor);
Vista Outdoor Inc. v. Reeves Family Trust, 234 F. Supp. 3d 558, 567 (S.D.N.Y. 2017),
reconsideration denied, 16 Civ. 5766, 2017 WL 1094568 (S.D.N.Y. Mar 10, 2017), aff’d, 725 F.
App’x 17 (2d Cir. 2018) (sellers of interests in corporation breached implied covenant of good
faith and fair dealing to purchaser where final sale price was tied to an earn-out based on
corporation’s post-sale profits, and defendants purchased goods from the corporation for the
purpose of artificially inflating profits); Empresas Cablevision, S.A.B. de C.V. v. JPMorgan
Chase Bank, N.A., 680 F. Supp. 2d 625, 631–32 (S.D.N.Y. 2010), aff’d and remanded, 381 F.
App’x 117 (2d Cir. 2010) (summary order) (plaintiff pleaded a valid claim for breach of good
faith and fair dealing where lender who could not assign a loan without the borrower’s consent
instead assigned a 90% participation interest in loan payments, giving the assignee “much of the
substance of the [otherwise] forbidden assignment.”)
Here, KeyBank asserts breaches of the implied covenant of good faith and fair dealing in
two different respects.
First, KeyBank contends that the 2018 modifications to the DIP Facility only provided
$15 million of new financing and that the purported $100 million loan was just a ruse pursuant to
which the priority rights of the New Money Lenders were elevated above those of the Roll-Up
Lenders. Defendants’ only response is that this claim allegedly is duplicative of the claims that
assert breaches of express contract obligations. I do not agree. The gist of KeyBank’s
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contention is that the defendants engineered a scheme that had no economic substance, under
which they pretended to invoke existing contract rights (the priority rights of the New Money
Lenders in the event of a new financing) when in reality their aim was to deprive the Roll-Up
Lenders of their contractual rights to equal treatment in connection with other transactions that
were planned. The claim is based on allegations that differ from those that underly the claims for
express breach of contract. The most closely-related express breach of contract claim is based on
KeyBank’s allegations that there were no actual “Net Cash Proceeds” from the new financing;
that claim will succeed or fail regardless of the motives behind the transaction. The alleged
breach of the implied covenant of good faith and fair dealing, by contrast, is based on the
allegation that the defendants orchestrated a refinancing in the purported amount of $100 million
as a subterfuge and for the sole purpose of trying to evade the Roll-Up Lenders’ rights to equal
treatment. Proof of that allegation requires proof as to the defendants’ motives and purposes.
See, e.g., Aventine Inv. Mgmt., Inc. v. Can. Imperial Bank of Commerce, 265 A.D.2d 513, 697
N.Y.S.2d 128, 130 (2d Dept. 1999) (holding that a claim for breach of the covenant of good faith
and fair dealing must allege facts tending to show that “defendant sought to prevent performance
of the contract or to withhold its benefits from the plaintiff.”)
If KeyBank’s allegations on those points are proved it will have established a breach of
the implied covenant of good faith and fair dealing. Since proof of the implied covenant claim
would require proof of matters that are distinct from the breach of contract claim, the two claims
are not duplicative of each other. See Fillmore E. BS Fin. Subsidiary LLC v. Capmark Bank, 552
F. App’x 13, 16 (2d Cir. 2014); Ret. Bd. of the Policemen’s Annuity & Benefit Fund v. Bank of
N.Y. Mellon, No. 11 Civ. 5459 WHP, 2014 WL 3858469 at *3 (S.D.N.Y. July 30, 2014).
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Second, KeyBank argues, in Count III of the First Amended Complaint, that defendants
breached an implied covenant of good faith and fair dealing by withholding stock to which
KeyBank is entitled and by requiring that KeyBank release its claims against the other Lenders
as a condition to receiving stock. The underlying contract that defendants allegedly are
attempting to evade is the DIP Credit Agreement. KeyBank contends that the defendants have
used their control over the buyer to deny KeyBank rights to which it is entitled as a DIP Lender
(namely, an equal share of any recoveries, including stock) and to impose self-interested
conditions (a release of claims against the defendants) as an unjustified condition to the
defendants’ performance of their contractual obligations under the DIP Credit Agreement.
Defendants argue in response that the DIP Credit Agreement did not give KeyBank any
contract rights with respect to either the equity interests in the buyer or the terms of the
Stockholder Agreement that the defendants wish to impose. See Defs.’ Mem. at 22. But the DIP
Credit Agreement does plainly entitle all Roll-Up Lenders to their equal and pro-rata shares of
any recoveries. It is true that the DIP Credit Agreement is silent regarding the terms of possible
shareholder agreements that might be executed in the event that the DIP Lenders receive stock in
another entity. But the absence of such provisions in the DIP Credit Agreement would not defeat
a claim for breach of the implied covenant of good faith and fair dealing if the effect of the
Stockholder Agreement was to deprive KeyBank of its right to receive the benefit to which it is
entitled under the DIP Credit Agreement. KeyBank’s arguments that the proposed release
requirements, and the withholding of KeyBank’s stock distribution, are really just bad faith
efforts to deny KeyBank’s rights under the DIP Credit Agreement (and to add conditions on
KeyBank’s recoveries that are not set forth in the DIP Credit Agreement) state a valid claim for
breach of the implied covenant of good faith and fair dealing.
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Accordingly, the motion to dismiss the claims based on implied covenants of good faith
and fair dealing is denied.
IV. 	KeyBank’s Claims of Tortious Interference with Contract
The parties have cited to New York case law and appear to have agreed that New York
law governs KeyBank’s claim of tortious interference with contract (or at least that New York
law is the same as the law that does govern). Under New York law a claim alleging tortious
interference with contract must plead (i) the existence of a valid contract between plaintiff and a
third party, (ii) defendant’s knowledge of the contract, (iii) defendant’s intentional procurement
of a breach of the contract by the third party without justification, (iv) actual breach of the
contract, and (v) damages resulting therefrom. IMB Fragrance Brands, LLC v. Houbigant, Inc.,
679 F. Supp. 2d 395, 405 (S.D.N.Y. 2009). If the defendants have an economic interest in a
matter, the plaintiff must allege that the defendant acted maliciously, fraudulently or illegally.
Id. at 406.
Defendants argue that they were parties to the DIP Credit Agreement and that one party
to a contract cannot be accused of interfering with its own contract or of inducing a breach by
another party. Defs.’ Mem. at 23. But at least one defendant (Franklin Advisors) was not a party
to the DIP Credit Agreement. Furthermore, where contracts involve at least three parties it is
permissible for a claim of tortious interference to be made against a tortfeasor who is a party to
the contract. See Rosecliff v. C3, Inc., 94 Civ. 9104 (JFK), 1995 U.S. Dist. LEXIS 6281 at *9,
1995 WL 276156 (S.D.N.Y. May 9, 1995). Defendants argue that this rule only applies if the
tortfeasor is a stranger to the contract, but Rosecliff did not impose such a requirement, and
neither did the decision on which Rosecliff relied. See Aljassim v. S.S. S. Star, 323 F. Supp. 918,
925-26 (S.D.N.Y. 1971) (holding that “the fact that one may derive rights under the same
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agreement as two other contracting parties does not excuse tortious interference with their
contractual rights”).
Defendants also argue that KeyBank’s allegations of “malice” are impermissibly
conclusory, but that is not the case. Defs.’ Mem at 23-24. The First Amended Complaint is
quite detailed in describing the objectives that the defendants sought to accomplish, the ways that
they accomplished those objectives, and their motivating purposes, i.e., to defeat KeyBank’s
contract rights. The mere fact that defendants hoped to profit from their actions does not mean
that their actions were “justified” as a matter of law and is not enough, at the pleading stage, to
overcome well-pleaded allegations of malice and improper intent.
On the other hand, there are far more teeth in defendants’ argument that a claim for
tortious interference cannot be sustained because there was no breach of contract by the Debtors
themselves. Agreeing to a change in contract terms is not a breach of contract terms. I have
explained above that the Debtors’ promises not to seek priming liens, in the DIP Credit
Agreement and the 2017 DIP Order, were for the benefit of the DIP Lenders as a whole, and that
the “Required Lenders” had the contractual right to waive such promises and to agree to
modifications on behalf of all of the DIP Lenders. To the extent that the Debtors and the
Required Lenders agreed to modifications to which they had the power to agree under the terms
of the parties’ contracts, those actions cannot properly form the basis of a tortious interference
with contract claim.
The same is true of the Debtors’ commitment not to seek “material modifications”
without the consent of the “Required Lenders” and, if “applicable,” the consent of the Prepetition
Documentation Agent. Acting with the consent the Required Lenders is not a breach of such a
promise, and for the reasons set forth above KeyBank’s purported rights as Prepetition
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Documentation Agent were terminated and in any event are not relevant to its claims as a Roll-
Up DIP Lender.
The relevant portion of KeyBank’s First Amended Complaint does not allege any other
particular contractual promises that the Debtors allegedly violated. The actions of the Debtors
that are challenged (the grant of new priming liens) involved matters about which (contractually)
the Required Lenders were empowered to consent, and did consent.
Also troubling is the absence of any contention in the First Amended Complaint that
alleged breaches of contract by the Debtors were induced by, or arranged by, or “procured” by
the defendants, as opposed to being matters that originated with the Debtors themselves. The
First Amended Complaint merely alleges that the defendants were aware of the Debtors’ contract
obligations and that by agreeing to the new priming DIP Facility the defendants “interfered” with
KeyBank’s contract rights. A tort claim requires an allegation that the defendants did something,
without justification, that actually brought about the alleged breach of contract. No such
allegation appears in the First Amended Complaint.
Accordingly, the claim alleging tortious interference with contract will be dismissed.
V. 	Alleged Breaches of Fiduciary Duty
KeyBank contends that the defendants, as shareholders in the entity that bought the
Appvion assets, have violated fiduciary duties by refusing to distribute the stock to which
KeyBank is entitled unless KeyBank first agrees to release the claims that it has asserted in this
case. Am. Compl. ¶ 133. It has also alleged that Franklin Advisors has aided and abetted this
breach of fiduciary duty. Id. ¶ 148.
Defendants argue that KeyBank is not presently a shareholder of the entity that bought
the Appvion assets and therefore that no fiduciary duties are owed to it. But KeyBank has
properly alleged that it has a present legal entitlement to the stock certificates. That right is
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attributable to its status as a DIP Lender. This is not a situation in which a stockholder is
attempting to file suit based on actions that took place at a time when the stockholder had neither
actual nor beneficial ownership of any shares, which is the situation that the Delaware Court of
Chancery addressed in the decision cited by defendants. See In re Transkaryotic Therapies, Inc.,
954 A.2d 346, 371 n. 112 (Del. Ch. 2008) (noting that a shareholder cannot challenge actions
that took place when it held no shareholder rights, but not addressing the “beneficial” ownership
issue that arises in this case). KeyBank alleges that it had an entitlement to the receipt of the
stock and that defendants breached fiduciary duties after this entitlement arose, not before.
If (as alleged) the defendants have unilaterally elected to confiscate the shares and to
refuse to deliver them to KeyBank notwithstanding KeyBank’s entitlement to them, that hardly
means that KeyBank lacks a beneficial interest in the shares. See Law v. Alexander Smith &
Sons Carpet Co., 68 N.Y.S.2d 143, 144–45 (1st Dept. 1947) (per curiam) (holding that
settlement agreement between widow and executor of husband’s estate, which entitled widow to
stock of deceased husband’s company, conferred equitable and beneficial ownership of the stock
on the widow). Furthermore, KeyBank has properly alleged that the defendants have
acknowledged KeyBank’s beneficial ownership of the relevant stock. See Am. Compl. ¶ 84-85
(“Franklin sent a letter to KeyBank reiterating that . . . [i]f Fifth Third and KeyBank choose not
to execute the Stockholder Agreement, their equity interests will be preserved for their benefit
pending resolution of whatever open issues remain among the parties.”) (emphasis added). The
First Amended Complaint therefore sufficiently alleges that KeyBank is the beneficial and
rightful owner of the shares and that fiduciary duties are owed to it.
Defendants also argue that the demand for a release was not a breach of fiduciary duty
because there is no merit to KeyBank’s underlying claims. I have held for the reasons stated
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above that some of KeyBank’s claims have been properly pleaded and survive a motion to
dismiss. Even if that were not the case, however, the First Amended Complaint properly alleges
that the refusal to deliver stock to which KeyBank was entitled – based on the defendants’ self-
interested insistence that they be released from KeyBank’s claims – was an abuse of defendants’
control of the buyer that had nothing to do with the buyer’s legitimate business interests and that
instead served only the self-interests of the defendants themselves.
Accordingly, the motion to dismiss the claims based on breaches of fiduciary duty is
denied.
VI. 	The Declaratory Judgment Claim
Finally, KeyBank seeks a declaratory judgment of its rights under the various contracts
and as to the amounts to which it is entitled to a ratable share under the various agreements.
Defendants argue that all of these matters will be resolved in connection with KeyBank’s other
claims and therefore that the request for a declaratory judgment is surplus and unnecessary. That
may turn out to be true and if so the request for a declaratory judgment may be dismissed in the
future. I cannot at this early stage conclude with complete certainty, however, that the
declaratory judgment request serves no possible separate purpose. The continued presence of the
claim is not prejudicial to any party and so the motion to dismiss it at this stage is denied.
Conclusion
For the reasons stated above:
1. 	KeyBank’s claims will be dismissed to the extent that they allege (a) that the
Required Lenders did not have power (no matter what the circumstances) to agree to priming
liens, (b) that priming liens could not be granted without the consent of KeyBank, or (c) that
material modifications could not be agreed upon without the consent of KeyBank.
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2. 	The motion to dismiss will be denied as to the remainder of KeyBank’s breach of
contract claims.
3. 	The motion to dismiss will be denied as to all of KeyBank’s claims alleging
breach of implied covenants of good faith and fair dealing.
4. 	KeyBank’s claim alleging tortious interference with contract will be dismissed.
5. 	The motion to dismiss will be denied as to KeyBank’s claims alleging breach of
fiduciary duty and aiding and abetting breaches of fiduciary duty.
6. 	The motion to dismiss will be denied as to KeyBank’s request for a declaratory
judgment.
A separate Order will be entered to the foregoing effect, and the parties will be directed
to confer and to submit an appropriate scheduling order governing further proceedings.
Dated: New York, New York
May 4, 2020
s/Michael E. Wiles
HONORABLE MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE
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