A judge in the Delaware Bankruptcy Court yesterday blocked an attempt by Baha Mar Ltd. (BML) to force its payroll service provider, Strategic Outsourcing Incorporated (SOI), to meet the developer's payroll needs as it seeks access to its debtor-in-possession (DIP) financing facility.
U.S. Bankruptcy Judge Kevin Carey sided with SOI, stating that Northshore, the debtor, could not require SOI to fund the company's payroll before SOI received sufficient payment from Northshore to cover such payroll.
SOI provides payroll services for Northshore Mainland Services, the Delaware-incorporated company under which Baha mar filed for Chapter 11 bankruptcy protection earlier this month. However, SOI declared that it had no responsibility to fund Northshore's payroll until it provides sufficient funds to SOI to cover the payroll and provides SOI with assurances of Northshore's ability to live up to the terms of the service agreement. In the absence of those assurances, SOI asked for relief from the automatic stay to allow SOI to terminate its service agreement with Northshore.
Baha Mar attempted to force SOI to lend it the money needed to meet its payroll due on July 9. An e-mail from Northshore's counsel, Tyson M. Lomazow, dated July 7, claimed that SOI declined or threatened to decline to continue performing its obligations under the agreement, including, among other things, performing services and satisfying other responsibilities with respect to assigned employees, and assuming responsibility for the payment of wages for the work of assigned employees without regard to payment by Northshore. Northshore's counsel noted that SOI's refusal to perform its obligations "would be damaging for Northshore and its Chapter 11 estate, and would likely subject SOI to liability before the Bankruptcy Court".
SOI responded by filing an emergency motion for order clarifying Northshore's obligation to fund all payments of employee wages and benefits on July 9, slamming Northshore for expecting the payroll company to meet Northshore's payroll demands due that day. Northshore fired back, stating that the move was necessary given the debtor's assertion that its funding obligations were limited by the Bahamian Supreme Court's decision not to automatically grant Baha Mar access to the developer's DIP financing facility following U.S. bankruptcy court approval in Delaware. Section 4, subsection J of SOI's service agreement with Northshore outlines the company's actions in the event that Northshore becomes a debtor in a bankruptcy, stipulating that Northshore fulfilling its obligations to SOI is a necessary condition for providing any further performance under their agreement.
"Any pre-petition amounts that we have paid for assigned employees' wages or taxes/contributions/withholdings in relation to those wages, but for which we have not been paid for by you... should be given at least the same priority as if they were outstanding wage and tax obligations of yours and we stand in the shoes of the applicable assigned employees for this purpose (this does not imply that we are obligated to pay such amounts absent payment by you)," reads the service agreement.
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