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Bankruptcy

Bankrupt Poultry Processor's Motion to Reject Growers' Contracts Granted

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Pilgrim's Pride Corp., 403 B.R. 413, 2009 WL 1080162 (Bankr. N.D. Tex. 2009), the United States Bankruptcy Court for the Northern District of Texas held that the business judgment rule was applicable to the motion of Chapter 11 debtor Pilgrim's Pride to reject certain executory contracts with its poultry growers, and granted the motion after determining that Pilgrim's Pride had no better or equal options available and that it had a rational basis for selecting which contracts to reject.

Background

Pilgrim's Pride, as Chapter 11 bankruptcy debtor, moved to reject certain executory contracts for the delivery of chickens in order to decrease the flow of poultry to its processing plant, thereby eliminating one shift to reduce costs. Id. at *1. The growers objected to the motion and opposed application of the business judgment rule to the decision to reject the contracts. Id.

Arguments

The growers argued that rather than applying the traditional business judgment rule, the motion should be denied as a matter of public policy, because their local economy would suffer if the contracts were rejected. Id. at *2-3. They also argued that Pilgrim's Pride had targeted them in retaliation for bringing a discrimination suit against Pilgrim's Pride in the district court, and asserted that Pilgrim's Pride had disproportionately selected Hispanic growers' contracts for rejection. Id.

Pilgrim's Pride argued that it based the selection of which contracts to reject solely on production and performance. Id. at *3. It further argued that public policy should only be considered "in areas where federal law provides a regulatory framework intended to serve a public policy." Id. at *4.

Analysis and Holdings

The court noted that Pilgrim's Pride had presented uncontested evidence showing that it used essentially the same system used for calculating payment of growers to identify the least efficient growers in the area, and that the method used was "standard in the industry for determining relative grower efficiency." Id. at *3. Regarding which standard should be used in deciding the motion, the court explained that "[t]he general rule is that the decision to reject a given contract should be left to the trustee's (or debtor in possession's) sound business judgment." Id. at *4 (citing Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309 (5th Cir. 1985)). However, the United States Supreme Court and the Fifth Circuit have held that "certain executory contracts are so significant in terms of public policy that a court, in determining whether a chapter 11 debtor should be permitted to reject such a contract pursuant to section 365(a) of the Bankruptcy Code, must take that policy into account." Id. at *3, *5 (citing Nat'l Labor Relations Bd. v. Bildisco & Bildisco, 465 U.S. 513 (1984), and Mirant Corp. v. Potomac Electric Power Co., 378 F.3d 511 (5th Cir. 2004). The court distinguished those holdings from the situation at hand, explaining that the issues presented in this case did not implicate federal or Congressional concerns, and rejection of the contracts did not threaten the health and safety of the public. Id. at *6. Applying the business judgment rule to the rejection of the contracts, the court held that the growers had failed to show that Pilgrim's Pride had equal or better options available or that their contracts were selected for rejection on an irrational basis. Id. at *10-12. Therefore, the court granted Pilgrim's Pride's motion to reject the contracts. Id. at *13.

The case was decided on April 22, 2009.