Nutritional Sourcing plan confirmation denied amid dispute over trade creditor definition

By Caroline Salls

Pittsburgh, Dec. 24 - Confirmation of Nutritional Sourcing Corp.'s plan of liquidation was denied Tuesday by judge Peter J. Walsh of the U.S. Bankruptcy Court for the District of Delaware.

According to the ruling, the objections to plan confirmation stemmed from disputes surrounding the definition of trade creditors included in the company's mirror note, which was to be used to make payments on its senior secured notes.

Specifically, Walsh said the mirror loan note cannot be paid until all claims of any trade creditor of Nutritional Sourcing's Pueblo International, LLC debtor are paid in full.

However, neither the mirror loan note nor the senior secured notes indenture originally defined what the company considered a trade creditor.

Walsh said Nutritional Sourcing's plan exacerbates this issue because it divides Pueblo's general unsecured creditors into a trade claims class and a general unsecured claims class.

The definition of trade creditor was eventually described by Nutritional Sourcing as "providers of grocery products and other merchandise for resale and providers of services related to those products that have direct contact with the products or merchandise for resale," the ruling said.

However, Walsh said he believes the company had been using a more generally accepted meaning of trade creditor that covers all producers of goods and services.

"Despite their arguments to the contrary, I think it is clear that debtors adopted this commonplace meaning of trade creditor as well up until their proposal of the plan, including when executing the mirror loan note," Walsh said in his ruling.

If the company intended to use the more narrow definition of trade creditor, Walsh said it should have said so in Securities and Exchange Commission disclosure documents.

In addition, Walsh said the relevant objections to the plan come from creditors who were left out of the Pueblo trade claims class, arguing that either that plan incorrectly classifies their claims or that the plan unfairly discriminates against some unsecured creditors and should not be confirmed.

The judge agreed, saying in his ruling that "the compromise that is the definition of Pueblo trade claim severely adversely impacts non-goods trade creditors who were not at the negotiating table and who were not adequately represented in their absence."

Nutritional Sourcing operates a supermarket chain and a video rental store chain in Puerto Rico and the U.S. Virgin Islands. The company filed for bankruptcy on Aug. 3, 2007. Its Chapter 11 case number is 07-11038.

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