Judge Rules for Paper-maker Abitibi in Augusta Newsprint Buyout/Sale

By: E&P Staff A U.S. bankruptcy court judge has allowed Montreal-based paper-maker AbitibiBowater Inc. to cancel an agreement with Woodbridge Co. that might have required it either to buy out its partner's share in the Augusta Newsprint Co. or allow Woodbridge to sell the joint venture.

In Wilmington, Del., Judge Kevin J. Carey ruled in favor of the North American newsprint giant, which sought Chapter 11 bankruptcy protection in spring.

The forest products company formed Augusta Newsprint in 1981 with Canada's Thomson Corp., which exited the newspaper business 20 years later (and since has merged with Reuters). At the same time, Thomson's largest shareholder, Toronto-based Woodbridge, bought Thomson's half interest in Augusta Newsprint for $190 million, and AbitibiBowater entered into the agreement with Woodbridge.

Woodbridge argued that the "call agreement" by itself could not be rejected "because it is an integral part of a bargain that included an amendment to a partnership agreement and, therefore, both the Call Agreement and the partnership agreement are a single, integrated agreement" that would have to be rejected together under bankruptcy code. It also argued that the call agreement was not executory because neither it nor Abitibi-Consolidated Sales Corp. had exercised its options, and therefore neither "had any material obligations as of the date of the bankruptcy filing."

Because the option price that Abitibi-Consolidated Sales Corp. would pay in executing the call option exceeded Augusta Newsprint's value, AbitibiBowater probably would receive nothing from its sale, according to uncontested facts listed in the ruling.

Judge Carey concluded that the call and partnership agreements are separate and that the call agreement is an executory contract, which AbitibiBowater may reject. For purposes of the relevant section of the bankruptcy code, the U.S. Third Circuit Court of Appeals defines an executory contract a one under which obligations of both parties "are so far underperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other."

Carey added that from "the undisputed facts regarding the value of the Partnership ... the Debtors properly exercised their business judgment in rejecting the Call Agreement."