In re Old Summit Mfg., LLC

• Decision Date: 14 April 2008
• Docket Number: No. 06-3838.,06-3838.
• Citation: 523 F.3d 134
• Parties: In re OLD SUMMIT MANUFACTURING, LLC f/k/a Summit Manufacturing LLC, Debtor William G. Schwab, Esq. v. Pennsummit Tubular, LLC; New Summit Manufacturing, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

523 F.3d 134

In re OLD SUMMIT MANUFACTURING, LLC f/k/a Summit Manufacturing LLC, Debtor

William G. Schwab, Esq. v. Pennsummit Tubular, LLC; New Summit Manufacturing, Appellants.

No. 06-3838.

United States Court of Appeals, Third Circuit.

Argued September 25, 2007.

Opinion Filed: April 14, 2008.

Bruce A. Herald, Esquire Goldberg, Meanix & Muth, West Chester, PA, David J. Harris, Esquire (Argued), Wilkes-Barre, PA, for Appellant.

Jason Z. Christman, Esquire (Argued), William G. Schwab, Esquire, William G. Schwab & Associates, Lehighton, PA, for Appellee.

Before AMBRO, JORDAN and ROTH, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

This case stems from the sale of the assets of a steel products manufacturer in bankruptcy. We decide whether three checks that were received, but had not cleared, before the closing of the sale are included in the assets sold. We conclude that they are not, and thus affirm the decision of the District Court (which in turn affirmed that of the Bankruptcy Court).

I

Old Summit Manufacturing, LLC ("Old Summit"), a maker of tubular steel products filed for bankruptcy in July 2002.¹ Appellee William Schwab serves as its Chapter 7 bankruptcy trustee. In November 2003, he filed an avoidance action against appellants New Summit Manufacturing, LLC ("New Summit") and Penn-Summit Tubular, LLC ("Penn Summit") (collectively, "Purchasers") in the United States Bankruptcy Court for the Middle District of Pennsylvania. He alleged that Old Summit and New Summit, the parties to an agreement transferring Old Summit's assets (the "Agreement"), had interpreted it incorrectly, resulting in the incorrect transfer of $29,540.37 to Purchasers.²

The Agreement included in the sale "all accounts receivable of [Old Summit] related to the business," Agreement § 1.1(b), and "all other assets of [Old Summit] related to the Business wherever located, tangible or intangible," Agreement § 1.1(l). It excluded from the sale "all cash and cash equivalents of [Old Summit,] whether on hand, in transit or in banks or other financial institutions, security entitlements, security accounts, commodity contracts and commodity accounts; provided, however, if the Closing does not occur on or before September 4, 2002, [New Summit] shall be entitled to the Collected Receivables." Agreement § 1.2(a).³

The parties stipulated to the following facts before the Bankruptcy Court:

1. Subject to the terms of an Asset Purchase Agreement, dated, executed, and approved by an Order of [the Bankruptcy Court] on September 4, 2002, [Old Summit] sold substantially all its assets to New Summit, and pursuant to Paragraph 1.1(b), all its receivables. New Summit transferred to Penn Summit the assets that it acquired from [Old Summit]. . . .

2. On September 3, 2002, [Old Summit] received the following checks: $285.00 from T-Mobile U.S.A., $28,852.00 from Oakland Reserve, Ltd., and $403.37 from Triton PCS Operating Co., LLC d/b/a . . . Suncom, for a total of $29,540.37.

3. [Old Summit's] employee, Kathy E. Drasher, shipped the foregoing checks for deposit to IBJ Whitehall Bank and Trust Co. (the "Bank") by Federal Express on September 3, 2002.

4. The checks were then posted by the Bank on September 4, 2002.

5. The checks cleared the Bank on or subsequent to September 4, 2002.

Though not a stipulated fact, Old Summit transmitted $29,540.37 to New Summit on September 17, 2002. Complaint ¶ 12; Answer ¶ 12.⁴

Schwab argued before the Bankruptcy Court that the $29,540.37 sum no longer was an account receivable of Old Summit on September 4, 2002 (the date of closing), and thus should have been excluded from the transaction. Purchasers argued that a tendered check remains an account receivable until the moment it is honored and that a check does not become cash or a cash equivalent until it clears the drawee's bank (in this case, the banks of the three account debtors — T-Mobile, Oakland Reserve, and Triton). Purchasers thus contended that Old Summit was correct to transmit the $29,540.37 sum to New Summit.

The Bankruptcy Court decided the case in favor of Schwab, concluding that the accounts receivable had been reduced by the amount of the checks and that the checks were cash equivalents belonging to Old Summit. Purchasers appealed to the District Court.

The District Court affirmed the decision of the Bankruptcy Court, concluding that "at the time the Agreement closed, the obligation represented by the Checks was discharged and accordingly there was no longer a receivable to include in the transfer." Because they were honored retroactively on the date of receipt, the checks "were no longer checks in the conventional sense" and were "essentially converted to cash equivalents as of September 3, 2002 when the debt was suspended and subsequently discharged." Purchasers timely appealed to us.

II

We have jurisdiction pursuant to 28 U.S.C. §§ 158(d) & 1291. Our review is plenary. Sovereign Bank v. Schwab, 414 F.3d 450, 452 n. 3 (3d Cir.2005). On appeal from a District Court's decision in its bankruptcy appellate capacity, we exercise the same standard of review as the District Court; we review the Bankruptcy Court's legal determinations de novo and its factual determinations for clear error. Id.

III

A. Controlling Law

The Agreement provides that it "shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without reference to choice of law principles thereof." Agreement § 12.7. In Pennsylvania,

[c]ontract interpretation is a question of law that requires the court to ascertain and give effect to the intent of the contracting parties as embodied in the written agreement. Courts assume that a contract's language is chosen carefully and that the parties are mindful of the meaning of the language used. When a writing is clear and unequivocal, its meaning must be determined by its contents alone.

Dep't of Transp. v. Pa. Indus. for the Blind & Handicapped, 886 A.2d 706, 711 (Pa.Cmwlth.2005) (internal citations and quotation marks omitted).

A contract is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense. The court, as a matter of law, determines the existence of an ambiguity and interprets the contract whereas the resolution of conflicting parol evidence relevant to what the parties intended by the ambiguous provision is for the trier of fact.

Hutchison v. Sunbeam Coal Corp., 513 Pa. 192, 519 A.2d 385, 390 (1986) (internal citations omitted). However, "[a]n appellate court may draw its own inferences and arrive at its own conclusions when a finding of fact is simply a deduction from other facts and the ultimate fact in question is purely a result of reasoning." Id. at 391 n. 6. A court always may consider the course of performance as evidence of the intent of the parties. Atlantic Richfield Co. v. Razumic, 480 Pa. 366, 390 A.2d 736, 741 n. 6 (1978).

B. Accounts Receivable

Old Summit argues that the checks are not accounts receivable. Purchasers do not contest this assertion, which is correct under the Pennsylvania Uniform Commercial Code. Under Pennsylvania's UCC,

[u]nless otherwise agreed and except as provided in subsection (a) [relating to certified checks], if a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply:

(1) In the case of an uncertified check, suspension of the obligation continues until dishonor of the check or until it is paid or certified. Payment or certification of the check results in discharge of the obligation to the extent of the amount of the check.

13 Pa. Cons.Stat. § 3310(b). The Supreme Court of Pennsylvania recently explained the meaning of this section: "In plain words, payment is conditionally made when the creditor . . . accepts payment by a check from the debtor. . . . If the check is honored, the condition is removed and payment relates back to the date of acceptance (i.e., receipt)." Romaine v. Workers' Comp. Appeal Bd. (Bryn Mawr Chateau Nursing Home), 587 Pa. 471, 901 A.2d 477, 485 (Pa.2006).

The incorporation of Pennsylvania law into the Agreement, and the absence of any term providing for a departure from that law with respect to accounts receivable, mean that the rule noted above applies here. As a result, that portion of Old Summit's accounts receivable was satisfied conditionally upon receipt of the checks and satisfied unconditionally when the checks cleared (with satisfaction deemed backdated to the date of receipt). Accordingly, the amount of the three checks was no longer included in Old Summit's accounts receivable at the closing on September 4.

C. Cash Equivalents

Our conclusion that the checks were no longer accounts receivable at the time of the closing does not resolve fully the issue before us. Even if not accounts receivable, the checks, as a matter of contract, still might have been included in the transaction as among "all other assets of Sellers related to the Business[,] wherever located, tangible or intangible." Agreement § 1.1(l). We agree, however, with Old Summit that the checks were not part of the transaction by contract. This is because they were cash equivalents excluded within the meaning of Agreement § 1.2(a).

On the simplest level, it is not clear that the Agreement intended to recognize an asset class that was neither accounts receivable nor cash...