The United States Bankruptcy Court for the District of Connecticut has denied a $1.14 million claim by Coral Capital Solutions LLC in the ongoing bankruptcy proceedings of ServiCom LLC and its affiliated debtors, ruling that the creditor failed to establish that its pre-petition factoring agreement was properly terminated.
In a detailed 18-page ruling, Judge Ann M. Nevins determined that Coral Capital was not entitled to collect the substantial "Early Termination Fee" it had been seeking since the bankruptcy filing in 2018, as the specific procedures required for termination under the contract were never followed.
"Because no 'termination' of the Factoring Agreement occurred, Coral is not entitled to the Early Termination Fee," Judge Nevins wrote in her decision.
The dispute centered on a factoring agreement initially entered into on October 17, 2011, between Coral Capital and the debtors—ServiCom LLC, JNET Communications LLC, and Vitel Communications LLC. The agreement, which had been amended multiple times over the years, included provisions for an Early Termination Fee of $1,141,875 that would be triggered under specific circumstances.
The companies filed for Chapter 11 bankruptcy protection on October 19, 2018, and the case was later converted to Chapter 7 liquidation on January 16, 2019. Central to the dispute was whether the bankruptcy filing itself, or subsequent events, constituted a "termination" of the factoring agreement that would trigger the substantial fee.
Coral Capital argued that the factoring agreement was terminated either by the bankruptcy filing or by the court's approval of a new post-petition factoring arrangement during the Chapter 11 phase of the case. The company's Chief Operations Officer, James Bertie, claimed "the Factoring Agreement was terminated as a result of the bankruptcy, in addition to the new Factoring Agreement being approved by the [bankruptcy] court."
However, Judge Nevins rejected these arguments, noting that bankruptcy law explicitly prohibits "ipso facto" clauses that attempt to terminate contracts upon the filing of a bankruptcy petition. The court further clarified that while the agreement was eventually rejected by operation of law when the Chapter 7 trustee did not assume it within 60 days of conversion, rejection constitutes a breach of contract—not a termination.
"Although the Factoring Agreement was rejected and therefore breached, that is not the same as termination," the court explained, citing established precedent that distinguishes between these concepts.
The ruling hinged on the specific language of the factoring agreement, which required affirmative actions and notice for a termination to occur. The court found no evidence that either Coral Capital or the debtors had followed these procedures.
"Coral has not provided evidence of any notice of termination, whether pre- or post-termination," Judge Nevins wrote. "On this record, the Court cannot conclude there was a termination of the Factoring Agreement at all, let alone one triggering the Early Termination Fee."
The court also determined that the factoring relationship between Coral and the debtors was a "true sale" of receivables rather than a disguised lending relationship, which influenced the analysis of applicable bankruptcy code provisions.
The decision represents a significant victory for the Chapter 7 Trustee Barbara H. Katz, creditor VFI KR SPE I, LLC, and interested parties Eugene Caldwell and David Jefferson, all of whom had opposed Coral's claim to the Early Termination Fee.
The case is being jointly administered under Case No. 18-31722 in the United States Bankruptcy Court for the District of Connecticut, New Haven Division.
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