In re Fleming Companies, Inc., 05-2365.
| Decision Date | 22 August 2007 |
| Docket Number | No. 05-2365.,05-2365. |
| Citation | 499 F.3d 300 |
| Parties | IN RE: FLEMING COMPANIES, INC., et al., Debtors, AWG Acquisition LLC; Associated Wholesale Grocers, Inc., Appellants. |
| Court | U.S. Court of Appeals — Third Circuit |
Mark T. Benedict, Esq. (Argued), Leonard L. Wagner, Esq., Eric J. Howe, Esq., Husch & Eppenberger, LLC, Kansas City, MO, Selinda A. Melnik, Esq., Denise Kraft, Esq., Edwards Angell Palmer & Dodge, LLP, Wilmington, DE, Counsel for Appellants.
Richard A. Chesley, Esq. (Argued), Paul, Hastings, Janofsky & Walker LLP, Chicago, IL, Daniel B. Prieto, Esq., Michelle L. Dama, Esq., Jones Day, Chicago, IL, Daniel J. DeFranceschi, Esq., Kimberly D. Newmarch, Esq., Richards, Layton & Finger, Wilmington, DE, Counsel for Appellee.
Before: FISHER, CHAGARES, Circuit Judges, and BUCKWALTER,* Senior District Judge.
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. (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.
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 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 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 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 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...
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