Assignee barred from “blowing hot and cold” in receiving benefits without adopting the burdens of an executory contract assigned to it.

The Third Circuit Court of Appeals recently considered the question as to whether a supply contract (benefitting Albertson’s) could be transferred to a third party who refused to comply with the contract’s specific terms. The Third Circuit held: No. The contract could be transferred (assumed and assigned) but only to a party who could and would comply with all of the contract’s material terms.

Albertson’s, a supermarket chain, and Fleming Companies, Inc. (“Fleming”), a wholesale supplier of grocery products, entered into two separate contracts through a facility standby agreement (“FSA”), which set forth the conditions under which Fleming would supply Albertson’s. The agreement for the Tulsa facility (“Tulsa FSA”) arose in 2002 after Albertson’s sold one of its primary distribution plants in Tulsa, OK to Fleming. It contained the condition that Fleming would take over the supplying operations for Albertson’s in Oklahoma out of that warehouse. “The Tulsa FSA emphasized the importance of a supply of products ‘from the Tulsa Facility’ because the Tulsa Facility contained not only many of its former employees but also the infrastructure created by Albertson’s,” including Albertson’s standardized electronic ordering systems and product ordering codes. In reciprocation, Albertson’s paid Fleming a fixed weekly payment of $210,113.

After a year of supplying grocery products for Albertson’s Oklahoma stores, Fleming filed for Chapter 11 relief. In 2003, the bankruptcy court approved the sale of Fleming’s assets including the Tulsa FSA. The buyer designated the Tulsa FSA to go to Associated Wholesale Grocers, Inc. (“AWG”).

Fleming however, filed a motion to assume and assign the Tulsa FSA to AWG pursuant to 11 U.S.C. § 365. AWG proposed to supply Albertson’s Oklahoma Stores from its distribution warehouse in Oklahoma City. Albertson’s opposed the motion for a variety of reasons. The bankruptcy court denied the motion to assign the Tulsa FSA to AWG, and this appeal followed.

The appellate court was tasked to determine if excising the “supply…from the Tulsa Facility” from the assumed contract would deny Albertson’s the full benefit of its bargain. In doing so, the appellate court applied a “material and economically significant” standard. AWG argues that the shipment “from the Tulsa Facility” is not materially and economically significant. AWG stated that the Tulsa Facility is merely a warehouse with nothing unique about it. “While the bankruptcy court has the discretion to excise or waive a bargained-for element of a contract, Congress has suggested that the modification of a contracting party’s rights is not to be taken lightly. Rather, a bankruptcy court…must be sensitive to the rights of the non-debtor contracting party…and the policy requiring that the non-debtor receive the full benefit of his or her bargain.” AWG further argued that designating “supply…from the Tulsa Facility” as a “material” term effectively transforms that term into a de facto anti-assignment provision, and therefore would be unenforceable 11 U.S.C. § 365(f)(1).

The appellate court disagreed with both of AWG’s arguments, stating that “the resolution of this dispute does not depend on whether a term is ‘economically material’. Rather, the focus is rightly placed on the importance of the term within the overall bargained-for exchange.” It was clear to the court that both parties considered supply from the Tulsa Facility to be integral to the agreement and therefore “material.” In response to AWG’s assertion that this would constitute a de facto anti-assignment provision, the appellate court reasoned that because of the fact that AWG refused to take on the necessary burden of taking over the Tulsa Facility it shall not receive the benefits of the contract. Section 365(f) requires a debtor to assume a contract subject to the benefits and the burdens thereunder. “The Debtor…may not blow hot and cold. If he accepts the contract he accepts it cum onere. If he receives the benefits he must adopt the burdens. He cannot accept one and reject the other.” The cum onere rule ‘prevents’ the bankruptcy estate from avoiding obligations that are an integral part of an assumed agreement.” Thus, the contract could not be assigned to AWG since it refused to use the Tulsa Facility.

http://www.ca3.uscourts.gov/opinarch/052365p.pdf

Mike and Hunter