OPINION2
(D.I. 1554, 2326).
KEVIN J. CAREY, Bankruptcy Judge.
BACKGROUND
The following matters are presented for decision: McKesson Corporation's Application for Allowance of Administrative Claim and Proof of Setoff Right (D.I. 1554) (the "Application,"), to which the Debtors have filed the Debtors' Preliminary Objection to McKesson Corporation's Application for Allowance of Administrative Claim and Proof of Setoff Right (D.I. 2326) (the "Objection"). A hearing was held on September 17, 2015, prior to which the parties agreed that the arguments presented would address only the threshold issue of liability.3 For the reasons stated herein, I find that the Customers (defined infra) are liable to McKesson for the payment that the Debtors failed to remit to McKesson.
Procedural Background
On September 9, 2014 (the "Petition Date"), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On February 6, 2015, McKesson Corporation ("McKesson") filed identical Proofs of Claim (collectively the "McKesson Proofs of Claim") against AL Liquidation, Inc., NK Liquidation, Inc., AW Liquidation, Inc., ADI Liquidation, Inc., and WR Liquidation, Inc. (D.I. 2668 Ex. B-F). On the same day, McKesson also filed the Application, which describes McKesson's reasoning for the allowance of its alleged administrative claims and setoff rights. The Debtors objected to the Application by filing its Objection.4 Thereafter, the parties submitted numerous briefs, attaching supplemental documents and declarations. An oral argument on the threshold issue of liability regarding the Objection was held, and I took this matter under advisement.5
FACTS
On March 14, 2014, McKesson and the Debtors entered into the Amended and Restated Supply Agreement (the "Supply Agreement").6 Under the Supply Agreement, McKesson delivered goods to certain third-party entities, six of which are involved here (the "Customer(s)").7 The Customers each entered into an agreement with McKesson (the "Participation Agreement(s)") whereby each Customer became a party to, and was bound by, the terms of the Supply Agreement. Pursuant to the Supply Agreement, McKesson delivered goods to the Customers.8 Amounts due to McKesson in connection with the delivered goods were billed centrally through AWI As such, AWI billed and received payment from the Customers. Payment to McKesson by AWI was remitted after deducting administrative fees.
McKesson and the Debtors (and by virtue of the Participation Agreements, the Customers) were parties to the Supply Agreement for the purposes of "(1) establishing a multi-year program for the supply of prescription drugs and other health and beauty care products by McKesson to Participating Pharmacies; and (2) having the billing associated with such program centrally billed through [the Debtors] for Equity Pharmacies."9 Under the terms of the Supply Agreement, each contract year, the Customers were expected to purchase a total of $20,000,000 of goods from McKesson in exchange for certain benefits including discounts and rebates.10
During the days before and after the Petition Date, McKesson delivered goods to the Customers consistent with the orders they placed. The Customers then forwarded payment to AWI for the goods. However, AWI failed to remit those payments to McKesson.
McKesson contends that the Customers are jointly and severally liable to McKesson for payment under the Supply Agreement. If the Customers are jointly and severally liable, McKesson argues that it may seek payment from the Customers, even though the Customers already paid AWI.11 McKesson further contends that the Customers would then have to pay for the goods twice, and would therefore have post-petition breach of contract claims against AWI based on AWI's failure to remit payment to McKesson.
McKesson ultimately entered into an Assignment Agreement Regarding Transfer of Claim (the "Assignment Agreement(s)") with each Customer, whereby each Customer transferred to McKesson any claim it possessed against AWI (the "Assigned Claims") in exchange for McKesson releasing each Customer of its obligations under the Supply Agreement (the "Release"). The Supply Agreement was rejected by the Debtors by Order dated December 16, 2014.12
STANDARD
Objection to a Proof of Claim
A claim that is properly filed under Rule 3001 and Bankruptcy Code § 501 is deemed allowed unless a party in interest objects.13 When a claim objection is filed in a bankruptcy case, the burden of proof as to the validity of the claim "rests on different parties at different times."14 The Court of Appeals for the Third Circuit described the burden shifting as follows:
Initially, the claimant must allege facts sufficient to support the claim. If the averments in his filed claim Meet this standard of sufficiency, it is "prima facie" valid. In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant's initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the objector must produce evidence equal in force to the prima facie case. In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence. . . . The burden of persuasion is always on the claimant.15
DISCUSSION
On February 6, 2015, McKesson filed its Application seeking, inter alia, allowance and payment of the Assigned Claims totaling $748,076.18 as administrative claims under Bankruptcy Code section 503(b)(1)(A). McKesson's main argument rests on the theory that the Debtors' post-petition failure to remit payment to McKesson gives rise to an administrative expense claim for the Customers under the terms of the Supply Agreement. This argument can be parsed into three separate inquiries: (1) are the Customers liable to McKesson for the payment of the delivered goods, despite having already paid AWI for the goods; (2) if so, did the Customers have a cognizable breach of contract claim against AWI; and (3) if both inquiries are answered in the affirmative, is the resulting claim a post-petition priority administrative claim?
McKesson suggests that holding an evidentiary hearing is necessary before the Court can answer these questions. The first threshold issue of whether the Customers are liable to McKesson for the goods they received can be resolved as a matter of law. The two remaining issues, however, necessitate an evidentiary hearing. Specifically, the record is underdeveloped regarding (i) the timing of delivery of the goods giving rise to McKesson's asserted Administrative Claim; (ii) the timing of the Customers' payments to AWI in connection with the goods;16 and (iii) the amount each Customer paid to, and withheld from, AWI. As such, an evidentiary hearing will be scheduled to determine the remaining issues surrounding the allowance of the claims asserted in the Application filed by McKesson.
A. The Customers are Liable to McKesson for Payment under the Supply Agreement.
McKesson contends that the terms of the Supply Agreement and the Participation Agreement (collectively, the "Agreements") impose joint and several liability on the Customers for AWI's failure to remit its payments to McKesson. I must interpret the language of the Agreements in accordance with California law.17 A decision from the Court of Appeals of California described the rules governing contract interpretation as follows:
The rules governing the role of the court in interpreting a written instrument are well established. The interpretation of a contract is a judicial function.18 In engaging in this function, the trial court "give[s] effect to the mutual intention of the parties as it existed" at the time the contract was executed.19 Ordinarily, the objective intent of the contracting parties is a legal question determined solely by reference to the contract's terms.20 The court generally may not consider extrinsic evidence of any prior agreement or contemporaneous oral agreement to vary or contradict the clear and unambiguous terms of a written, integrated contract.21 Extrinsic evidence is admissible, however, to interpret an agreement when a material term is ambiguous.22
Therefore, I must determine the objective intention of the parties at the time that the contracts were executed based on the terms of the Agreements, and can do so without the aid of extrinsic evidence.23 As a preliminary matter, during the hearing held on September 17, 2015, the Debtors expressed the importance of distinguishing the manner in which Equity Pharmacies versus Non-equity Pharmacies are required to pay for goods pursuant to the terms of the Supply Agreement.24 Equity Pharmacies have a centrally billed system through AWI (discussed supra).25 However, Non-equity Pharmacies pay McKesson directly.26 Taken together, the Supply Agreement refers to both Equity Pharmacies and Non-equity Pharmacies as "Participating Pharmacies." In addition, each Customer referred to herein is an Equity Pharmacy.
In assessing the issue of the Customers' liability to McKesson, the following provision of the Supply Agreement provides some guidance:
AWI agrees to be fully responsible for the payment of all charges incurred by any and all Equity Pharmacies under the Agreement . . . AWI will bill and receive payment directly from such Equity Pharmacies for their purchases and related charges hereunder, and any failure by any such Equity Pharmacy to pay such amounts due and owing to AWI shall not affect AWI's obligation to timely pay McKesson for them. Nothing shall limit McKesson's rights and remedies to seek payment from Equity Pharmacies for amounts not paid when due by AWI.27
This language is clear and unambiguous. Based upon the terms of the Supply Agreement, as well as its purpose (defined supra), it is evident that the mutual intention of the parties as it existed at the time the contract was executed, was to provide for the following arrangement: (i) McKesson was to deliver goods to the Customers; (ii) AWI was to bill and receive payment from the Customers; and (iii) AWI was to remit payment to McKesson. In addition, the terms of the Supply Agreement indicate that McKesson could seek payment from the Customers if AWI failed to make payments to McKesson.28 Accordingly, I find that the Agreements impose liability on the Customers to pay McKesson for the price of the goods ordered, notwithstanding the fact that they may have already paid AWI for such goods.
CONCLUSION
For the reasons set forth herein, I conclude that the Customers were liable to McKesson. A status hearing will be held on July 10, 2017 at 11:00 a.m. to consider the remaining pre-trial needs of the parties; however, the parties should be prepared to engage in mediation before the Court fixes any evidentiary hearing. An appropriate order will follow.
