In Re Fleming Companies, Inc.
OPINION OF THE COURT
This appeal arises out of a bankruptcy involving grocery wholesalers and retailers in the Oklahoma marketplace. The Bankruptcy Court denied a motion for assumption and assignment of an executory contract in favor of Albertson’s, Inc. (Al-bertson’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
I.
The debtor, Fleming Companies, Inc. (Fleming), is a wholesale supplier of grocery products to supermarkets. Albert-son’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, Al-bertson’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 Albert-son’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 Albert-son’s agreed to purchase groceries and supermarket products from Fleming for its twenty-eight Oklahoma and eleven Nebraska grocery stores. Although the two 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 Al-bertson’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 Al-bertson’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 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 Albert-son’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
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 Albert-son’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. Al-bertson’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 execu-tory 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. Al-bertson’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 Albert-son’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
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 imper-missibly 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.
Cinicola v. Scharffenberger,
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,
(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 debt- or, 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 execu-tory 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 “adequate assurance of future performance by the assign-ee” 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,
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,
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.”
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 con
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. Al-bertson’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 assignment of the Tulsa FSAtoAWG.
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.,
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 Albert-son’s.
See Joshua Slocum,
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 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.,
Section 365(f) requires a debtor to assume a contract subject to the benefits and burdens thereunder.
In re ANC Rental Corp.,
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 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.,
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.
Notes
. 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.