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Cit Group/Commercial Services, Inc. v. Constellation Energy Commodities Group, Inc.

United States District Court, E.D. Kentucky, Southern Division, Pikeville

January 30, 2014

THE CIT GROUP/COMMERCIAL SERVICES, INC., Appellant,
v.
CONSTELLATION ENERGY COMMODITIES GROUP, INC., et al., Appellees.

MEMORANDUM OPINION & ORDER

AMUL R. THAPAR, District Judge.

This case arises from a tangled web of commercial agreements. Three sophisticated parties executed and breached a series of written and unwritten contracts, leaving one party bankrupt and the other two fighting over its corpse in bankruptcy. Although the contractual background is complicated, this appeal from the bankruptcy court raises a straightforward legal question: when a contract vests a party with a defense, may that party assert its defense against its contractual partner's assignee? Under New York law, the answer is a resounding "yes."

BACKGROUND

The Court rehearsed this case's history in detail in its prior opinion. See The CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Civil No. 12-16-ART, 2012 WL 4603049, at *1-7 (E.D. Ky. Sept. 30, 2012) (" CIT I "). For present purposes, a brief summary will suffice. In 2006, Black Diamond, Inc., ("Black Diamond") agreed to sell coal to Constellation Energy Commodities Group, Inc. ("Commodities"). Id. at *1. Shortly after executing its contract with Commodities, Black Diamond assigned its right to receive payments for the coal to The CIT Group ("CIT"). Id. So the basic scheme was simple: Black Diamond sold coal to Commodities, and Commodities paid CIT.

Black Diamond and Commodities carried on their relationship through both written and unwritten contracts. See id. at *13. Their written agreements each contained a so-called "netting" provision. See, e.g., B.R. 119-6 at 16.[1] That provision allowed the parties to "net" mutual debts to avoid redundant payments. See id. ("All amounts owed by each Party[] to the other Party... shall be netted so that only the net difference between such amounts shall be payable by the Party who owes the greater amount."). So, if Black Diamond owed Commodities $200, 000, and Commodities owed Black Diamond $100, 000, then the contract required only a single $100, 000 payment by Black Diamond. See id. ("[O]nly the net difference between such amounts... shall be payable"). It is undisputed that the unwritten agreements included an identical netting provision. See B.R. 240 at 27.

The wheels came off the wagon in early 2008. Black Diamond failed to fulfill its obligations to both Commodities and CIT, and CIT forced Black Diamond into bankruptcy. CIT I at *6. Black Diamond's bankruptcy constituted a breach of its agreements with Commodities. B.R. 119-6 at 13. That breach forced Commodities to buy coal at much less favorable prices than those contemplated by its contracts with Black Diamond, resulting in damages of around $90, 000, 000. CIT I at *6 & n.9.

This suit arises from one of the last transactions that preceded Black Diamond's bankruptcy. In December 2007, Commodities purchased a shipment of coal from Black Diamond pursuant to an unwritten contract for roughly $10, 000, 000. Id. at *12-13. Commodities never paid for the coal. The question presented here is whether Commodities may "net" that $10, 000, 000 against the $90, 000, 000 it lost as a result of Black Diamond's declaration of bankruptcy. If so, then Commodities owes CIT nothing, as it can simply subtract that $10, 000, 000 dollars from the $90, 000, 000 it is owed. If not, then Commodities must pay CIT.

The Bankruptcy Court granted summary judgment to Commodities, and CIT appealed. See R. 1; R. 1-2 at 18. This Court reviews the Bankruptcy Court's award of summary judgment de novo. In re National Century Financial Enterprises, Inc., 377 F.Appx. 531, 535 (6th Cir. 2010). Summary judgment is appropriate where no genuine issue of material fact remains for trial, such that one party is entitled to judgment as a matter of law. Id. ("Federal Rule of Civil Procedure 56 applies to motions for summary judgment in adversary proceedings in bankruptcy court."); Fed.R.Bankr.P. 7056. Id. For the reasons explained below, the Bankruptcy Court's judgment is affirmed.

DISCUSSION

An assignee stands in the shoes of his assignor. This is true as a matter of logical necessity: an assignor can give away no more than he has, so he cannot improve the terms of his contract by assigning it to a third party.[2] See e.g., Septembertide Publ'g B.V., v. Stein and Day, Inc., 884 F.2d 675, 682 (2d Cir. 1989) ("It is elementary ancient law that an assignee never stands in any better position than his assignor. He is subject to all the equities and burdens which attach to the property assigned because he receives no more... than his assignor.") (quoting Int'l Ribbon Mills, Ltd. v. Arjan Ribbons, Inc., 36 N.Y.2d 121, 126 (1975)); see also Commerce Bank, N.A. v. Chrysler Realty Corp, 244 F.3d 777, 783 (10th Cir. 2001) (explaining that "a transferee's rights are no better than those held by his transferor, " so an assignee's right to receive funds is contingent on its assignor's right to be paid). The rule is not only ancient but also eminently sensible: if a party could nullify contractual defenses by assigning away its contractual rights, then such defenses would be worthless. See, e.g., Banque de Paris et des Pays-Bas v. Amoco Oil Co., 573 F.Supp. 1464, 1470 (S.D.N.Y. 1983).

Unsurprisingly, that principle is reflected in New York's Uniform Commercial Code: "[T]he rights of an assignee are subject to... all terms of the agreement between the account debtor and the assignor...." N.Y.U.C.C. § 9-404(a); see General Elec. Credit Corp. v. Xerox Corp., 112 A.D.2d 30, 31 (N.Y.App.Div. 1985) (interpreting the predecessor provision of the U.C.C. and holding that "the rights of an assignee are subject to any defenses or claims arising out of the contract between the account debtor and the assignor ") (emphasis added). Therefore, an assignor's original contractual partner may assert against an assignee any contractual defenses he has against the assignor. See N.Y.U.C.C. § 9-404(a)(1); Xerox Corp., 112 A.D.2d at 31; see also Restatement (Second) of Contracts § 336 cmt. b ("The assignee's right... is subject to limitations imposed by the terms of [the] contract and to defenses which would have been available had there been no assignment. ") (emphasis added).

That legal background makes this an easy case because the parties agree that the unwritten contract governing the December 2007 coal shipments included the netting provision. See B.R. 240 at 27. If Black Diamond had never assigned its right to payment, then Commodities could have netted its $10, 000, 000 debt against Black Diamond's $90, 000, 000 breach. See B.R. 119-6 at 16 ("All amounts owed by each Party to the other Party... shall be netted so that only the net difference between such amounts shall be payable by the Party who owes the greater amount...."). So, under the terms of the agreement, the only amount "payable" at the time Black Diamond entered bankruptcy was Black Diamond's remaining $80, 000, 000 debt to Commodities. That Black Diamond assigned its right to payment under the contract changes nothing. As the authorities cited above demonstrate, CIT's right to payment is contingent upon the assignor's right to be paid, because Commodities may assert against CIT (the assignee) all contractual defenses contained in the "terms of [its] agreement" with Black Diamond (the assignor). N.Y.U.C.C. § 9-404(a). Here, that means Commodities may assert $90, 000, 000 worth of contractual defenses against CIT's $10, 000, 000 claim.

CIT offers two arguments against this straightforward resolution of the case: (1) that the netting provision applies only to debts owed by Black Diamond and Commodities to each other, so that it has no effect on the rights of an assignee, R. 12 at 36-37; R. 25 at 7 n.6, and (2) that Commodities forfeited its right to invoke the netting provision by ...


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