Draft Objection

Date: 2024-08-13

Summary

A reservation of rights and limited objection filed by Hartford Fire Insurance Company and Hartford Insurance Company of the Midwest on August 13, 2024 as Doc 379 in the jointly administered chapter 11 cases of Vyaire Medical, Inc., et al., Case No. 24-11217-BLS, in the U.S. Bankruptcy Court for the District of Delaware. It is directed at any sale agreement or notice of successful bidder filed under the debtors' bidding procedures motion. It states that Hartford issued pharmaceutical and customs bonds totaling $700,000.00 on behalf of certain debtors under a General Indemnity Agreement, and argues that those bonds are financial accommodation contracts that 11 U.S.C. § 365(c)(2) bars from assumption or assignment without the surety's consent. It reserves recoupment and setoff rights under 11 U.S.C. § 553(a) and asks that sale documents require the winning bidder to replace the bonds.

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Case 24-11217-BLS Doc 379 Filed 08/13/24 Page 1 of 11

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

Chapter 11
In re:
Case No. 24-11217-BLS
VYAIRE MEDICAL, INC., et al.,
Jointly Administered
Debtors.1

HARTFORD FIRE INSURANCE COMPANY AND HARTFORD
INSURANCE COMPANY OF THE MIDWESTS’ RESERVATION OF
RIGHTS AND LIMITED OBJECTION TO THE DEBTORS’
SUCCESSFUL BIDDER NOTICE TO BE FILED PURSUANT TO THE
DEBTOR’S MOTION FOR ENTRY OF AN ORDER (I) APPROVING
BIDDING PROCEDURES IN CONNECTION WITH THE SALE OF
SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, (II)
AUTHORIZING THE DEBTORS TO ENTER INTO A STALKING
HORSE AGREEMENT AND PROVIDE BID PROTECTIONS, (III)
APPROVING THE FORM AND MANNER OF NOTICE THEREOF, (IV)
SCHEDULING AN AUCTION AND SALE HEARING, (V) APPROVING
PROCEDURES FOR THE ASSUMPTION AND ASSIGNMENT OF
CONTRACTS, (VI) APPROVING THE SALE OF THE DEBTORS’
ASSETS FREE AND CLEAR, AND (VII) GRANTING RELATED RELIEF

Hartford Fire Insurance Company and Hartford Insurance Company of the Midwest

(collectively, “Hartford” or the “Sureties”), by and through its undersigned counsel, hereby

submits this limited objection (the “Limited Objection”) to any sale agreement or Notice of

Successful Bidder to be filed by the Debtors pursuant to the 1) First Notice to Contract Parties of

Potentially Assumed and Assigned Executory Contracts and Unexpired Leases [Docket No. 256]

(the “Assumption Notice”); and 2) the Motion of Debtors for Entry of an Order (I) Approving

Bidding Procedures in Connection with the Sale Of Substantially All of the Debtors’ Assets, (II)

1
The last four digits of Debtor Vyaire Medical, Inc.’s federal tax identification number are 6495. A complete list of
each of the Debtors in these chapter 11 cases and each such Debtor’s federal tax identification number may be
obtained on the website of the Debtors’ proposed claims and noticing agent at
https://omniagentsolutions.com/Vyaire. The location of Debtor Vyaire Medical, Inc.’s principal place of business and
the Debtors’ service address in these chapter 11 cases is 26125 North Riverwoods Boulevard, Mettawa, Illinois,
USA 60045.

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Case 24-11217-BLS Doc 379 Filed 08/13/24 Page 2 of 11

Authorizing the Debtors to Enter Into a Stalking Horse Agreement and Provide Bid Protections,

(III) Approving the Form and Manner of Notice Thereof, (IV) Scheduling an Auction and Sale

Hearing, (V) Approving Procedures for the Assumption and Assignment of Contracts, (VI)

Approving the Sale of the Debtors’ Assets Free and Clear, and (VII) Granting Related Relief

[Docket No. 16] (the “Bid Procedures Motion”). In support of the Objection, Hartford respectfully

states the following:

1. On June 9, 2024 (the “Petition Date”), Vyaire Medical, Inc. and certain of its

affiliates (collectively, the “Debtors”) each filed a voluntary petition for bankruptcy relief under

chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States

Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).

2. On the Petition Date, the Debtors filed the Bid Procedures Motion seeking entry of

an order approving, inter alia, one or more proposed Sale Transaction(s) and procedures for the

assumption and assignment of contracts in connection therewith.

3. Prior to the Petition date, Hartford issued certain Pharmaceutical and Customs

bonds on behalf of certain Debtors.

4. In connection with Hartford’s execution and/or issuance of the Bonds, certain of

the Debtors and/or their non-debtor affiliates executed in favor of Hartford, a General Indemnity

Agreement (the “Indemnity Agreement”).

5. On June 10, 2024, the Debtors filed a Motion of Debtors for Entry of Interim and

Final Orders (I) Authorizing The Debtors to (A) Maintain Insurance and Surety Coverage Entered

into Prepetition and Pay Related Prepetition Obligations, and (B) Renew, Supplement, Modify or

Purchase Insurance and Surety Coverage, and (II) Granting Related Relief [ECF No. 9] (the

“Surety Motion”).

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Case 24-11217-BLS Doc 379 Filed 08/13/24 Page 3 of 11

6. The Surety Motion identifies the following bonds (the “Bonds”) issued on behalf

of the Debtors, by Hartford, as surety, totaling $700,000.00:

Principal Bond No. Obligee Nature of Bond Expiration Bond
Date Amount

Vyaire Medical, Inc. and
Vyaire Medical 211, Inc.
20BSBAA2688 California State Pharmaceutical 04/30/2025 $100,000
Board of Bond
Pharmacy

Vyaire Medical, Inc. and
Vyaire Medical 211, Inc.
20BSBIL8800 Nevada State Pharmaceutical 10/21/2024 $100,000
Board of Bond
Pharmacy

Vyaire Medical, Inc. Maryland Board Pharmaceutical
of Pharmacy Bond
20BSBAA2687 04/30/2025 $100,000

Vyaire Medical, Inc. Bureau of
Customs and
22C000T8M Custom Duty 06/07/2025 $400,000
Border Protection

7. On July 11, 2024, the Bankruptcy Court entered the Order (I) Approving Bidding

Procedures in Connection with the Sale of Substantially All of the Debtors’ Assets, (II) Authorizing

the Debtors to Enter into a Stalking Horse Agreement and Provide Bid Protections, (III) Approving

the Form and Manner of Notice Thereof, (IV) Scheduling an Auction and Sale Hearing, (V)

Approving Procedures for the Assumption and Assignment of Contracts, (VI) Approving the Sale

of the Debtors’ Assets Free and Clear, and (VII) Granting Related Relief [Docket No. 249] (the

“Bid Procedures Order”) granting the relief requested in the Bid Procedures Motion.

8. Pursuant to the Bid Procedures Order, on July 11, 2024, the Debtors filed the

Assumption Notice.

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9. On the Assumption Notice, the Debtors identify the following potentially assumed

and assigned contract that may be assumed and assigned to a Successful Bidder in connection with

a Sale Transaction and the proposed Cure Amount with respect to the same:

Row # Unique Vendor Name Debtor Entity Description Cure Amount

2946 Hartford Fire Insurance Vyaire Medical, Inc. Hartford Fire Insurance $0.00
Company Company 2019-04-15
NDA

10. On August 7, 2024, the Debtors filed a Third Notice of Extension of Certain Key

Dates and Deadlines [ECF No. 353] (the “Notice”) setting the deadline for the Debtors to file a

successful bidder notice on August 12, 2024 (or as soon as reasonably practicable). Further, the

Notice set the Deadline for any Post-Auction Objections for August 13, 2024.

11. As of the date of this Limited Objection, the Debtors have failed to file a successful

bidder notice.

12. Based on the Assumption Notice, the only contract listed involving Hartford is an

NDA. Therefore, the Debtors do not appear to contemplate a potential sale or other transfer of at

least a portion of the Bonds in connection with the proposed Sale Transaction(s). Hartford,

therefore, as a precaution object to any Sale Transaction to the extent that the Debtors seek to

assume and assign or otherwise transfer any portion of the Bonds and/or any of the rights, benefits,

interests, and/or proceeds thereunder.

13. Further, Hartford files this Limited objection as a precaution until the Debtors file

a successful bidder notice. Hartford reserves its right to amend this limited objection once the

Debtors file a successful bidder notice and sale agreement.

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OBJECTION

14. By way of this Limited Objection, Hartford does not object to the concept of the

proposed sale of Debtors’ assets or the concept of bidding procedures being approved, as

contemplated in the Bidding Procedures Motion. However, Hartford hereby objects and puts all

parties on notice that, inter alia, the Indemnity Agreement and Bonds cannot be sold, transferred

and/or assumed and assigned without the consent of Hartford, which consent is currently not

granted by Hartford, but which may or may not be granted by Hartford, after Hartford has more

information concerning a proposed sale.

15. With respect to the Debtors’ request seeking to have the Bankruptcy Court authorize

assumption and assignment of executory contracts, to the extent that the Debtors seek to assume

and assign any of the Bonds or the Indemnity Agreement, such assumption and assignment is not

allowed pursuant to 11 U.S.C. § 365(c)(2) (absent the Surety’s consent). The Indemnity Agreement

is a “financial accommodation” contract through which the Bonds, among other things, are

executed, issued and/or controlled, and thus all of these and related assets of the Surety may not

be assumed or assigned without prior consent of the Surety.

16. Specifically, the ability of a debtor to assume and assign a contract is not unlimited.

The Bankruptcy Code specifically prohibits debtors from assuming certain contracts. Section 365

(c)(2) provides the following in pertinent part:

(c) The trustee may not assume or assign any executory contract or
unexpired lease of the debtor, whether or not such contract or lease
prohibits or restricts assignment of rights or delegation of duties,
if— …

(2) such contract is a contract to make a loan, or extend other
debt financing or financial accommodations, to or for the
benefit of the debtor, or to issue a security of the debtor….

(emphasis added).

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17. The Bankruptcy Code does not define the term “financial accommodation.” See

e.g. In re Adana Mortg. Bankers, Inc., 12 B.R. 977, 986 (Bankr. N.D. Ga. 1980) (regarding

“financial accommodations” as used in Section 365(e)(2)(B)).

18. However, in In re Adana, the Court found the following regarding guaranty

agreements:

The debtor contends that the Guaranty Agreements do not constitute
contracts to make financial accommodations to or for the benefit of
debtor. To the contrary, the facts show that the Guaranty Agreements
are contracts to make financial accommodations to or for the benefit
of debtor. First, the debtor asserts that the securities constitute a type
of liability of the debtor. Second, GNMA is obligated to pay the
securities holders if the debtor fails to do so. In other words, GNMA
is required by the Guaranty Agreements to make payments promptly
on liabilities of the debtor, should the debtor fail to make them. The
obligation to pay money on the obligation of another is a financial
accommodation.

Id. at 987.

19. Surety bonds are considered “financial accommodations” because they represent

obligations to pay money based on the obligations of another. In re Wegner Farms Co., 49 B.R.

440 (Bankr. N.D. Iowa 1985). The Wegner Farms Court explained that:

Certainly a surety bond does not fit neatly within the framework of
traditional debt financing. Nonetheless, as noted by the court in In
re Adana Mortgage Bankers Inc., 12 B.R. 977, 987
(Bkrtcy.N.D.Ga.1980) (Adana I), even giving the term financial
accommodation a narrow construction, “[t]he obligation to pay
money on the obligation of another is a financial accommodation”
within the meaning of section 365(c) and (e).

Id. at 444. Further, as set forth in Matter of Edwards Mobile Home Sales, Inc., 119 B.R. 857, 859

(Bankr. M.D. Fla. 1990):

This Court agrees with the finding in Wegner and Adana I that an
obligation to pay the debts of another is a “financial
accommodation” and as such is encompassed by Section 365(c)(2).
Accordingly, the Court finds the Ohio Casualty surety bond to be a

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Case 24-11217-BLS Doc 379 Filed 08/13/24 Page 7 of 11

financial accommodation which cannot be assumed pursuant to
Section 365(c)(2).

20. Here, the Surety issued Bonds on behalf of certain of the Debtors and/or their

nondebtor affiliates by virtue of, among other things, the Indemnity Agreement. The Bonds and

the Indemnity Agreement, without limitation, are financial accommodation contracts and

therefore, they are not assignable by the Debtors at this time.

21. The Surety also objects to any assumption or assignment of either of the Bonds, as

they are not property of the Debtor or its estate and therefore cannot be assigned. “[T]he

‘overwhelming weight of authority,’ under both the Bankruptcy Act and Code holds that a

contractor [principal] has no property interest in a surety bond issued by a third-party [surety] to

guarantee the contractor’s performance on its commercial or personal services contracts.”

O’Malley Lumber Co. v. Lockard (In re Lockard), 884 F.2d 1171, 1177 (9th Cir. 1989). Moreover,

because the Debtor has no property rights in the Bonds, the Debtor cannot simply transfer the

Bonds to a winning bidder. The Bonds do not assure performance of any party other than the

named principal. In fact, the law of suretyship is clear that a surety is discharged from liability

under its bond if there is an involuntary substitution of the principal under the bond, since such a

change is a material modification to the underlying bonded contract that is prejudicial to the surety.

See, e.g., Becker v. Faber, 19 N.E.2d 997, 999 (N.Y. 1939). Accordingly, the Bonds and surety’s

obligations thereunder are not assignable to a new principal without the surety’s consent.

22. The auction, if any, was to take place on August 12, 2024, the day before any

objections to the Sale Agreement would be due. The winning bidder is not yet known, and the

Surety does not know the form of proposed asset purchase agreement, sale order and/or other

documents related to any final sale.

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23. Language should be added in the Sale Agreement, if not already in the Sale

Agreement, in which the Winning Bidder is required to replace the Bonds such that they are fully

released and discharged, and that the Winning Bidder indemnify the Surety from losses, costs and

expenses incurred by the Surety to the extent, if any, the Surety is exposed to same under a formal

or informal transition agreement (and language should be added to the Sale Order consistent with

this paragraph).

24. Further, Beneficiaries/obligees on the Bonds may have recoupment or setoff rights,

by which the Surety may be subrogated to if it makes payment of a claim under any of the Bonds.

Recoupment is a creditor’s right, long recognized in bankruptcy proceedings that is not in the

nature of a mere lien, but is a defense to a claim for payment. Lee v. Schweiker, 739 F. 2d 870,

875 (3d Cir. 1984) (“[W]here the creditor’s claim against the debtor arises from the same

transaction as the debtor’s claim, it is essentially a defense to the debtor’s claim . . . .”). In other

words, the recoupment is used to determine the proper liability on amounts owed. Reiter v.

Cooper, 507 U.S. 258, 265 n.2 (1993).

25. Setoff “gives a creditor the right ‘to offset a mutual debt owing by such creditor to

the debtor,’ provided that both debts arose before commencement of the bankruptcy action and are

in fact mutual.” In re University Medical Center, 973 F.2d 1065, 1079 (3d Cir. 1992) (quoting in

re Davidovich, 901 F.2d 1533, 1537 (10th Cir. 1990). While setoff rights are defined and

delineated by applicable non-bankruptcy law, the Bankruptcy Code recognizes and preserves these

rights: “11 U.S.C. § 553(a) provides that with certain exceptions, whatever right of setoff

otherwise exists is preserved in bankruptcy.” Citizens Bank of Maryland v. Strumpf, 516 U.S. 16,

18 (1995); see also In re Luongo, 259 F.3d 323, 333 (5th Cir. 2001) (“It is impossible for us to

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ignore the clear statement of § 553 that ‘this title . . . does not affect any right of a creditor to offset

. . . .’”) (internal quotation source omitted).

26. Setoff “gives a creditor the right ‘to offset a mutual debt owing by such creditor to