In Re: Fleming Co ( 2007 )

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
8-22-2007
In Re: Fleming Co
Precedential or Non-Precedential: Precedential
Docket No. 05-2365
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 05-2365
_______________
IN RE: FLEMING COMPANIES, INC., ET AL.,
Debtors,
AWG ACQUISITION LLC;
ASSOCIATED WHOLESALE GROCERS, INC.,
Appellants
____________________
On Appeal From the United States District Court
for the District of Delaware
(No. 04-cv-00371)
District Judge: Honorable Sue L. Robinson, Chief Judge
Argued: December 12, 2006
Before: FISHER, CHAGARES, Circuit Judges, and
BUCKWALTER,* Senior District Judge.
(Filed August 22, 2007)
__________________
*
The Honorable Ronald L. Buckwalter, United States
District Judge for the Eastern District of Pennsylvania, sitting by
designation.
Mark T. Benedict, Esq. (Argued)
Leonard L. Wagner, Esq.
Eric J. Howe, Esq.
Husch & Eppenberger, LLC
1200 Main Street, Suite 2300
Kansas City, MO 64105
Selinda A. Melnik, Esq.
Denise Kraft, Esq.
Edwards Angell Palmer & Dodge, LLP
919 North Market Street, 15th Floor
Wilmington, DE 19801
Counsel for Appellants
Richard A. Chesley, Esq. (Argued)
Daniel B. Prieto, Esq.
Michelle L. Dama, Esq.
Jones Day
77 West Wacker Drive, Suite 3500
Chicago, IL 60601
Daniel J. DeFranceschi, Esq.
Kimberly D. Newmarch, Esq.
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Counsel for Appellee
__________________
OPINION OF THE COURT
__________________
CHAGARES, Circuit Judge:
This appeal arises out of a bankruptcy involving grocery
wholesalers and retailers in the Oklahoma marketplace. The
2
Bankruptcy Court denied a motion for assumption and assignment
of an executory contract in favor of Albertson’s, Inc. (Albertson’s),
the nondebtor contracting party. The Bankruptcy Court determined
that the proposed assignee, appellants AWG Acquisition LLC and
Associated Wholesale Grocers, Inc., (collectively, AWG), could
not provide adequate assurance of future performance of the
contract because an essential term of the contract could not be
fulfilled. The District Court affirmed.
We are called upon to decide the narrow question of
whether a term relating to the use of a specific facility is material
and economically significant to a contract and, if it is, whether
AWG’s undisputed inability to fulfill the term prevented the
assumption and assignment of that contract under § 365(f) of the
Bankruptcy Code, 11 U.S.C. § 365. We will affirm.
I.
The debtor, Fleming Companies, Inc. (Fleming), is a
wholesale supplier of grocery products to supermarkets.
Albertson’s, a supermarket chain, operates more than 2,300 retail
grocery stores in the United States. In most cases, Albertson’s
stores are supplied by warehouse distribution centers that
Albertson’s owns and operates. In Oklahoma, for example,
Albertson’s constructed a large distribution facility (the “Tulsa
Facility”) to supply its stores throughout the Midwest, including
those in Oklahoma. After operating at only 60% capacity,
however, Albertson’s decided to sell the Tulsa Facility. In 2002,
Fleming purchased the Tulsa Facility as part of an integrated
transaction for approximately $78 million in cash. In return,
Fleming received the warehouse, the inventory in the warehouse,
and Albertson’s agreement to a long-term supply arrangement for
its Oklahoma and Nebraska stores.
The supply arrangement was embodied in two independent
written contracts executed on June 28, 2002: the Lincoln Facility
Standby Agreement (Lincoln FSA) and the Tulsa Facility Standby
Agreement (Tulsa FSA). The FSAs set forth the terms and
conditions under which Albertson’s agreed to purchase groceries
and supermarket products from Fleming for its twenty-eight
Oklahoma and eleven Nebraska grocery stores. Although the two
3
agreements were nearly identical, Section 1 differed in one
important respect pertinent to this appeal. Section 1 of the Lincoln
FSA stated:
Section 1: Fleming’s Commitment to Supply
Throughout the Term (as defined
below) of this Agreement, Fleming will
maintain capital, employees, inventory,
equipment, and facilities sufficient to supply
food, grocery, meat, perishables and other
related products, supplies and merchandise
(“Products”) as provided in the Special
Fleming FlexPro/FlexStar Marketing Plan
described below to Albertson’s in quantities
sufficient to allow Albertson’s to purchase
the Estimated Purchase Level described in
Section 3 of this Agreement.
Appendix (App.) 806. In contrast, Section 1 of the Tulsa FSA
read:
Section 1: Fleming’s Commitment to Supply
Throughout the Term (as defined
below) of this Agreement, Fleming will
maintain capital, employees, inventory,
equipment, and facilities sufficient to supply
food, grocery, meat, perishables and other
related products, supplies and merchandise
(“Products”) as provided in the Special
Fleming FlexPro/FlexStar Marketing Plan
described below to Albertson’s in quantities
sufficient to allow Albertson’s to purchase
the Estimated Purchase Level described in
Section 3 of this Agreement from the Tulsa
Facility.
App. 836 (emphasis added.)
According to Albertson’s, the Tulsa Facility was a key
4
element in the bargain between Albertson’s and Fleming. 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. This allowed Albertson’s to continue using
its electronic ordering systems and ordering codes for the products
supplied under the Tulsa Agreement. The electronic ordering
system in place at the Tulsa Facility permitted Albertson’s to
gather data which it then used to make marketing and pricing
decisions. At the time of the agreement, Albertson’s envisioned,
and the contract reflects, a seamless supply of products to
Albertson’s stores. In other words, the parties contracted to limit
the economic damage of any disruption in service, recognizing the
critical importance of consistency in the competitive grocery
industry.
Fleming and Albertson’s operated under the FSAs for less
than one year before Fleming filed for bankruptcy on April 1, 2003.
Throughout that time, Fleming was unable to meet the required
service levels. The Tulsa FSA obligated Fleming to maintain a
service level of 96% on each category of product, or otherwise be
in material breach of the agreement. There were eight categories
of products: (1) warehouse grocery; (2) dairy; (3) frozen food
products; (4) produce; (5) meat; (6) bakery; (7) deli; and (8)
grocery, dairy and frozen warehouse supplies. Within these broad
categories, Fleming supplied more than 2,500 private label
products to Albertson’s stores. On Albertson’s part, the Tulsa FSA
required Albertson’s to pay Fleming a fixed weekly payment of
$210,113 to help Fleming defray the costs of running the Tulsa
Facility.
By August 2003, Albertson’s stopped ordering grocery
products from Fleming and stopped paying the weekly charge.
Albertson’s switched its source of supply for the Oklahoma market
from the Tulsa Facility to its own warehouse in Fort Worth, Texas.
On August 15, 2003, the Bankruptcy Court entered an Order
approving the sale of Fleming’s assets to C&S Wholesale Grocers,
Inc. and C&S Acquisition LLC (collectively, C&S). The Order
authorized C&S to designate third-party purchasers for certain
assets, included among them the right to acquire Fleming’s
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executory contracts with Albertson’s. C&S designated AWG.
AWG is a cooperative of independent grocery wholesalers
operating in the Midwest from distribution centers in Kansas City,
Missouri; Oklahoma City, Oklahoma; Springfield, Missouri; and
Ft. Scott, Kansas. In addition, AWG operates retail supermarkets
in Tulsa and Oklahoma City through a wholly-owned subsidiary
called Homeland Stores, Inc. (Homeland). In some places,
Homeland markets are located directly across the street from
Albertson’s stores. Homeland carries similar products.
On August 23, 2003, Fleming closed the Tulsa Facility and
the Lincoln Facility. At about the same time, Fleming rejected its
lease for the Tulsa Facility at the direction of AWG. The
Bankruptcy Court approved the rejection on September 17, 2003.
On September 3, 2003, Fleming filed a motion to assume
and assign the Lincoln FSA and the Tulsa FSA to AWG pursuant
to 11 U.S.C. § 365. AWG proposed to supply Albertson’s
Oklahoma stores from AWG’s Oklahoma City distribution center
and to supply Albertson’s Nebraska stores from AWG’s Kansas
City warehouse. Albertson’s opposed the motion for a variety of
reasons, among them that AWG’s electronic ordering, billing and
inventory systems were not compatible with Albertson’s and
switching to AWG’s system would have been costly and inefficient
for Albertson’s. According to Albertson’s, AWG’s deliberate
decision not to acquire the Tulsa Facility created a real and
cognizable economic detriment that contravened the essence of the
contract embodied in the term “supply . . . from the Tulsa Facility.”
The Bankruptcy Court conducted a hearing on the motion
for assumption and assignment.1 At the hearing, AWG’s
representatives testified that it was capable of fully performing both
1
Albertson’s filed a cure claim against Fleming as a result
of Fleming’s purported material breaches of the Tulsa and Lincoln
FSAs. However, at a hearing before the Bankruptcy Court on
December 4, 2003, Albertson’s voluntarily withdrew the cure claim
with prejudice and agreed to proceed solely on the issue of
whether, as a matter of law, the Tulsa and Lincoln FSAs could be
assumed and assigned.
6
the Tulsa FSA and the Lincoln FSA: Albertson’s would be able to
purchase its products from AWG at the same price and on the same
terms that Albertson’s expected to receive from Fleming, pursuant
to the FSAs, including freight charges.
The Bankruptcy Court granted Fleming’s assumption
motion as to the Lincoln FSA, but denied the motion as to the
Tulsa FSA. The decision regarding the Lincoln FSA is not the
subject of this appeal. As for the Tulsa FSA, the Bankruptcy Court
held that “fulfillment from the Tulsa Facility is an essential element
of the agreement.” App. 9. On motion for reconsideration, the
Bankruptcy Court reiterated “that shipment from the Tulsa Facility
was a material term of the Tulsa Agreement and that adequate
assurance of performance of that term had not been proven.” App.
18. Fleming and AWG appealed.
The District Court affirmed the decision to deny Fleming’s
motion for assumption and assignment of the Tulsa FSA. The
District Court found no error in the Bankruptcy Court’s conclusion
that “use of the Tulsa Facility was an essential provision of the
Tulsa FSA.” App. 47. The District Court also upheld the
Bankruptcy Court’s determination that “AWG, which had directed
the debtors to reject the Tulsa Facility lease, could not fulfill the
express requirements of the Tulsa FSA.” Id. Thus, the District
Court concluded that permitting “AWG to supply Albertson’s
through its own channels of supply would impermissibly modify
the terms of the Tulsa FSA.” App. 47-48.
This appeal followed.
II.
The Bankruptcy Court exercised jurisdiction over the
underlying motion for assumption and assignment of the Tulsa
FSA pursuant to 28 U.S.C. § 157(a). The District Court had
subject matter jurisdiction over the appeal of the bankruptcy order
under 28 U.S.C. § 158(a). We have jurisdiction pursuant to 28
U.S.C. § 158(d).
We review the Bankruptcy Court’s findings of fact for clear
error, and we exercise plenary review over its conclusions of law.
7
Cinicola v. Scharffenberger, 248 F.3d 110, 115 n.1 (3d Cir. 2001).
“Because the district court sits as an appellate court in bankruptcy
cases, our review of its decision is plenary.” Id. (citing In re Lan
Assocs. XI, L.P., 192 F.3d 109, 114 (3d Cir. 1999)).
III.
A.
Section 365 of the Bankruptcy Code generally permits the
trustee to assume or reject any executory contract of the debtor. 11
U.S.C. § 365(a). This allows “‘the trustee to maximize the value
of the debtor’s estate by assuming executory contracts . . . that
benefit the estate and rejecting those that do not.’” Cinicola, 248
F.3d at 119 (quoting L.R.S.C. Co. v. Rickel Home Ctrs. (In re
Rickel Home Ctrs., Inc.), 209 F.3d 291, 298 (3d Cir. 2000)). Upon
assuming an executory contract, the trustee is likewise authorized
to assign the executory contract. Section 365 provides in pertinent
part:
(f)(1) Except as provided in
subsections (b) and (c) of this section,
notwithstanding a provision in an executory
contract or unexpired lease of the debtor, or
in applicable law, that prohibits, restricts, or
conditions the assignment of such contract or
lease, the trustee may assign such contract or
lease under paragraph (2) of this subsection.
(2) The trustee may assign an
executory contract or unexpired lease of the
debtor only if--
(A) the trustee assumes such
contract or lease in accordance with the
provisions of this section; and
(B) adequate assurance of
future performance by the assignee of such
contract or lease is provided, whether or not
there has been a default in such contract or
lease.
11 U.S.C. § 365(f) (emphasis added). The statutory requirement of
8
“adequate assurance of future performance by the assignee” affords
“needed protection to the non-debtor party because the assignment
relieves the trustee and the bankruptcy estate from liability for
breaches arising after the assignment.” Cinicola, 248 F.3d at 120;
11 U.S.C. § 365(k). While the bankruptcy court has 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.” In re Joshua Slocum Ltd., 922 F.2d 1081, 1091
(3d Cir. 1990).
The text of § 365(f)(2)(B) employs the phrase “adequate
assurance of future performance” of the contract, but that phrase is
not defined in the Bankruptcy Code. As we noted in Cinicola,
however, the Bankruptcy Code adopted the phrase “adequate
assurance of future performance” from Uniform Commercial Code
§ 2-609(1), which provides that “when reasonable grounds for
insecurity arise with respect to the performance of either party, the
other may in writing demand adequate assurance of future
performance . . . .” Cinicola, 248 F.3d at 120 n.10 (quoting UCC
§ 2-609(1)).
It is clear that adequate assurances need not be given for
every term of an executory contract. Because the bankruptcy court
can excise or refuse enforcement of terms of a contract in order to
permit assignment, we must determine what standard applies to
evaluate whether excising “supply . . . from the Tulsa Facility”
would deny Albertson’s the full benefit of its bargain. In Joshua
Slocum, we applied a “material and economically significant”
standard to determine whether the Bankruptcy Court had the
authority to excise an “average sales” clause in a lease agreement,
and then assign the lease to the designated third-party assignee.
We concluded there that the clause was “a material and
economically significant clause in the leasehold at issue.” 922 F.2d
at 1092. We found that the Bankruptcy Court did not have
authority to excise the relevant provision because the “particular
clause [was] of financial import to the landlord in insuring
occupancy by high volume sales, viable businesses, thus increasing
the rent received under the percentage rent clause.” Id. As a result,
9
we held that the Bankruptcy Court erred in assigning the lease
without the “average sales” clause.
The “material and economically significant” standard we
employed in Joshua Slocum was derived from a review of case law
interpreting § 365 of the Bankruptcy Code which focused on
balancing twin concerns: preventing substantial economic
detriment to the nondebtor contracting party and permitting the
bankruptcy estate’s realization of the intrinsic value of its assets.
See id. (citing In re Mr. Grocer, Inc., 77 B.R. 349, 354 (Bankr.
D.N.H. 1987)); see also In re Carlisle Homes, Inc., 103 B.R. 524,
538 (Bankr. D.N.J. 1988) (recognizing §365's attempt “to strike a
balance between two sometimes competing interests, the right of
the contracting nondebtor to get the performance it bargained for
and the right of the debtor’s creditors to get the benefit of the
debtor’s bargain. Nowhere is the tension between these interests,
and the difficulty in striking the balance, more apparent than in
trying to determine whether there is the requisite adequate
assurance of future performance.”) (quotation marks and alterations
omitted).
Neither AWG nor Albertson’s disputes the essence of the
“material and economically significant” standard or its applicability
in this context. Under AWG’s understanding of Joshua Slocum,
however, an assignee must only give adequate assurance of future
performance of the “economically material” terms of the contract.
AWG argues that shipment “from the Tulsa Facility” is not such a
term given that AWG can supply groceries to Albertson’s at the
same price and on the same payment terms as had Fleming.
According to AWG, the Tulsa Facility is merely a warehouse with
nothing unique about it. Albertson’s bargained to buy $1.155
billion of groceries and supermarket products (of a type and
quality) for a certain price (including freight) to be timely delivered
to Albertson’s Oklahoma stores. As long as Albertson’s receives
groceries on those bargained-for terms, AWG contends, it does not
matter from where those groceries are supplied. Finally, AWG
argues that Albertson’s failed to provide any evidence that it would
suffer economic harm if supplied from AWG’s Oklahoma City
facility. Therefore, AWG argues that “supply . . . from the Tulsa
Facility” is not an economically material term, and AWG’s
performance from its Oklahoma City facility should not preclude
10
assignment of the Tulsa FSA to AWG.
We disagree. AWG misconstrues the Joshua Slocum
standard. 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; that is, whether the term is integral to the
bargain struck between the parties (its materiality) and whether
performance of that term gives a party the full benefit of his
bargain (its economic significance). See Joshua Slocum, 922 F.2d
at 1092 (concluding that “average sales” provision of lease which
permits either landlord or tenant to terminate the lease after either
three or six years if annual sales are below a certain level is
“material in the sense that it goes to the very essence of the
contract, i.e., the bargained for exchange”); In re E-Z Convenience
Stores, Inc., 289 B.R. 45, 51-52 (Bankr. M.D.N.C. 2003) (holding
that right of first refusal is a material and bargained-for element of
the lease which is economically significant to nondebtor party to
lease); In re New Breed Realty Enter. Inc., 278 B.R. 314, 324-25
(Bankr. E.D.N.Y. 2002) (holding breached “time is of the essence”
clause is material aspect of agreement based upon agreement’s
unequivocal statement and state law); In re Southern Biotech, Inc.,
37 B.R. 311, 317 (Bankr. M.D. Fla. 1983) (barring assumption of
contract by trustee, involving sale of plasma from blood collected
by inmates, where contract required that collection be conducted in
accordance with “good and sound medical practice” and trustee
could not provide such adequate assurance).
A “time is of the essence” clause is similar to “supply . . .
from the Tulsa Facility” in the sense that it is not inherently
material or obviously economic, but such a term can be integral to
a contract, and certainly, delay can cause economic detriment. See
New Breed, 278 B.R. at 322-25 (noting that a party’s failure to
perform by the date specified is a material breach of an agreement
where both parties agreed to include “time is of the essence”
provision in the contract). Likewise, “supply . . . from the Tulsa
Facility” does not have manifest material and economic
significance. However, because the Tulsa FSA arose from
Fleming’s acquisition of the Tulsa Facility, it is clear that the
parties considered supply from that facility to be “material” in the
sense that the express condition was an integral part of the
11
agreement. Moreover, not utilizing the Tulsa Facility would
burden Albertson’s in an “economically significant” way – that is,
Albertson’s would not reap the benefit of its bargain. Not only did
Albertson’s expect timely delivery of foodstuffs at agreed-upon
prices no matter where product was purchased or shipped, but it
also bargained for the benefits of expedience, of a trained staff, a
consistent supply of products, and a proven electronic system of
record-keeping which furthered Albertson’s marketing and pricing
plans, all of which were only available “from the Tulsa Facility.”
Our analysis does not end here. We must also consider the
rights of AWG and Fleming’s creditors to get the benefit of the
bargain Fleming struck with Albertson’s. See Joshua Slocum, 922
F.2d at 1092. “‘Adequate assurance of future performance’ are not
words of art; the legislative history of the [Bankruptcy] Code
shows that they were intended to be given a practical, pragmatic
construction. . . . What constitutes ‘adequate assurance of future
performance’ must be determined by consideration of the facts of
the proposed assumption.” Cinicola, 248 F.3d at 120 n.10
(quotation marks and alterations omitted). Here, the record reflects
and our review confirms that AWG could not provide the same
benefits to Albertson’s as were available from Fleming, due to the
fact that Fleming rejected the Tulsa Facility lease at AWG’s behest.
AWG has not pointed to any evidence on appeal that would lead to
an opposite conclusion. On balance, considering the right of
Albertson’s to expect their foodstuffs to be “suppl[ied] . . . from the
Tulsa Facility” and the rights of AWG and Fleming’s creditors to
get the benefit of a supply contract, we conclude that the scale tips
in favor of Albertson’s.
Accordingly, we hold that “supply . . . from the Tulsa
Facility” is both a material and an economically significant term of
the contract, and AWG, by its own actions, cannot give adequate
assurance of performance.
B.
AWG further argues that designating “from the Tulsa
Facility” as a material term effectively transforms the term into a
de facto anti-assignment provision. The Bankruptcy Code
expressly permits assignment of executory contracts even when
contracts prohibit such assignment. 11 U.S.C. § 365(f)(1). Section
12
365(f)(1) is not limited to explicit anti-assignment provisions.
Provisions which are so restrictive that they constitute de facto
anti-assignment provisions are also rendered unenforceable. See
In re Rickel Home Ctrs., Inc., 240 B.R. 826, 831-32 (D. Del. 1999)
(citing Joshua Slocum, 922 F.2d at 1090). Neither Albertson’s nor
Fleming could operate the Tulsa Facility profitably. According to
AWG, reading the Tulsa FSA to require a buyer to acquire the
Tulsa Facility limits the scope of potential buyers in that sale to
either an existing wholesaler in the region who does not have its
own distribution center or to a new entrant into the marketplace
seeking to acquire both the Tulsa FSA and the distribution center.
C&S, the high bidder on Fleming’s assets, was unwilling to
commit to taking the Tulsa Facility, in part because both
Albertson’s and Fleming were unable to operate the facility
successfully. Therefore, AWG contends that to require shipment
from the Tulsa Facility is to burden an assignee with a heavy
economic obligation, thus constituting a de facto anti-assignment
provision.
Section 365(f) requires a debtor to assume a contract subject
to the benefits and burdens thereunder. In re ANC Rental Corp.,
277 B.R. 226, 238 (Bankr. D. Del. 2002). “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.” In re Italian Cook Corp.,
190 F.2d 994, 997 (3d Cir. 1951). The cum onere rule “prevents
the [bankruptcy] estate from avoiding obligations that are an
integral part of an assumed agreement.” United Air Lines, Inc v.
U.S. Bank Trust Nat’l Ass’n (In re UAL Corp.), 346 B.R. 456, 468
n.11 (Bankr. N. D. Ill. 2006).
Applying this precept to our determination above that
“supply . . . from the Tulsa Facility” is a material term of the
contract, we reject AWG’s argument that the term operates as a de
facto anti-assignment provision. We recognize that a fine line
exists between reading a contractual term as a burdensome
obligation or as a de facto restriction on assignment. However, we
draw the line where a party refuses to accept part of the contract’s
obligations, and as a result it cannot perform a material bargained-
for term of the contract. Here, AWG rejected the Tulsa Facility
lease, and now complains that it is impossible to comply with an
13
integral term of the contract. This term could have been
performed by some party. It is not now an anti-assignment
provision simply because AWG made the decision not to take on
a necessary burden. As we have previously expressed, “[a]n
assignment is intended to change only who performs an obligation,
not the obligation to be performed.” Medtronic Ave., Inc. v.
Advanced Cardiovascular Sys., Inc., 247 F.3d 44, 60 (3d Cir. 2001)
(quotation marks omitted).
IV.
We conclude that “supply . . . from the Tulsa Facility” is a
material and economically significant term which AWG cannot
perform because it has rejected the lease for the Tulsa Facility. The
inability to perform this aspect of the agreement precludes the
assignment of the Tulsa FSA to AWG. Accordingly, we will
affirm the District Court’s judgment.
14