In re Chateaugay Corp.
| Decision Date | 13 September 1989 |
| Docket Number | No. 89 Civ. 3977 (RJW).,89 Civ. 3977 (RJW). |
| Citation | 104 BR 637 |
| Parties | In re CHATEAUGAY CORPORATION, Reomar, Inc., the LTV Corporation, et al., Debtors. DIAMOND GATEWAY COAL COMPANY, Appellant, v. The LTV CORPORATION and LTV Steel Company, Inc., Appellees. |
| Court | U.S. District Court — Southern District of New York |
Eckert Seamans Cherin & Mellott, Pittsburgh, Pa. (Richard W. Gladstone, II, Robert P. Simons, Brian M. Martin, of counsel), Haight, Gardner, Poor & Havens, New York City (Gary D. Sesser, of counsel), for appellant.
Levin & Weintraub & Crames, New York City (Herbert Stephen Edelman, Allen G. Kadish, of counsel), Reed Smith Shaw & McClay, Pittsburgh, Pa. (James H. McConomy, John C. Unkovic, Sean M. Coleman, of counsel), for appellees.
Diamond Gateway Coal Company ("Diamond Gateway") appeals from an order of the bankruptcy court expunging and disallowing its claim against The LTV Corporation ("LTV") and LTV Steel Company Inc. ("LTV Steel") (collectively, "Debtors"). After a hearing on Debtors' Objection to Claims of Diamond Gateway, the bankruptcy court ruled that Diamond Gateway, prior to the institution of the bankruptcy proceeding, had repudiated the contract upon which it based its claims against Debtors. The court therefore entered an order expunging and disallowing Diamond Gateway's claim, and this appeal followed. For the reasons set forth below, the order of the bankruptcy court is reversed and the case is remanded for further proceedings consistent with this opinion.
The facts underlying this appeal are not in dispute. On October 31, 1980, Diamond Gateway and the predecessor of LTV Steel entered into a fifteen year coal supply agreement (the "Agreement") pursuant to which Diamond Gateway was to sell coal to LTV Steel from a large underground mine located in Greene County, Pennsylvania (the "Gateway Mine"). Record on Appeal at 280 ("Record"). Under the Agreement, LTV is guarantor of LTV Steel's performance. Id. at 124. Clause 2 of the contract provides that LTV Steel purchase from Diamond Gateway, each year, an amount of clean coal "equivalent to the quantity produced by processing 450,000 tons of Raw Coal" from the Gateway Mine through a designated coal cleaning plant. Id. at 74.
Clause 15 of the Agreement, entitled "Liquidated Damages for Failure to Take Specified Quantities," provides:
If for any Coal Year Buyer fails to take delivery of Clean Coal pursuant to this Agreement in the quantities specified pursuant to Clause 2, Buyer shall pay Seller as liquidated damages an amount equal to the quantity not taken for such Coal Year (less the quantities used in computing Other Charges under Clause 8 and liquidated damages under Clause 18), multiplied by 50% of the Current Clean Coal Value at the end of the Coal Year. In addition, Buyer shall also pay Seller as liquidated damages certain additional costs.
Id. at 116. Clause 15 further provides that Buyer may, during the first quarter of the following Coal Year, make up any shortfall for which it has become obligated to pay under this provision, in an amount up to 25,000 tons of Clean Coal. Id. at 117—118.
Under the Agreement, in the event that LTV Steel in any Coal Year takes less than 75% of the quantity of coal specified in Clause 2 (), Diamond Gateway has the right, pursuant to Clause 17, to terminate the Agreement. The Agreement provides that, should Diamond Gateway choose to exercise this termination option, the liability of both parties extends only up until the point of termination of the Agreement. Id. at 119.
By letter dated May 24, 1985, LTV Steel notified Diamond Gateway that, beginning June 1, 1985, LTV Steel would "not accept shipments of Gateway coal until further notice." Id. at 198. The letter further stated that Id. (emphasis in original).
In response to this communication, Diamond Gateway took the position, in a letter dated August 12, 1985 (the "August 12 Letter"), that it did "not agree that Section 15 may be unilaterally invoked by LTV to avoid its obligation to take delivery of Clean Coal. . . ." Id. at 159. The letter informed LTV Steel that Diamond Gateway "must consider LTV's stated intent not to take delivery of Clean Coal on and after October 1, 1985 as a breach and repudiation of its obligations under the Coal Supply Agreement." Id. Based upon this interpretation of the Agreement, Diamond Gateway requested adequate assurance of performance by LTV Steel. Nonetheless, Diamond Gateway made it clear that it "was, and is, prepared to supply LTV on and after October 1, 1985 with Clean Coal as required under Section 2 of the Coal Supply Agreement." Id.
LTV Steel responded in a letter dated September 11, 1985 clarifying its position with regard to future coal deliveries. LTV Steel informed Diamond Gateway that it had "not determined never to take Clean Coal under the Coal Supply Agreement," but only that it would not take any coal during October 1985, and that Diamond Gateway would be kept advised of its plans for subsequent months. LTV Steel disputed Diamond Gateway's right to request assurance that LTV Steel would always take delivery of coal rather than electing to pay liquidated damages under Clause 15 of the Agreement, but assured Diamond Gateway that it would continue to perform under the Agreement. Id. at 161.
Subsequently, LTV Steel informed Diamond Gateway that it wished to take delivery of Clean Coal under the Agreement for the month of November 1985. Id. at 304. By letter dated October 15, 1985, LTV Steel stated that it would "look upon any failure of delivery as a significant and substantial breach by Diamond Gateway of its obligations under the Coal Supply Agreement." Id.
In response to this demand for Clean Coal, Diamond Gateway, in a letter dated October 25, 1985 (the "October 25 Letter"), reiterated its belief that it had the right to request adequate assurance of performance under Section 2-609 of the Uniform Commercial Code.1 Despite this position, Diamond Gateway attempted to accommodate LTV Steel by reaffirming its intention to perform under the Agreement pending a resolution of the parties' dispute. The letter stated, in part:
First, Diamond Gateway will deliver to LTV Steel Clean Coal as requested in your letter of October 15, 1985, under, and in accordance with, the price, quantity, and other terms of the Coal Supply Agreement. Second, Diamond Gateway is willing to deliver Clean Coal under the Coal Supply Agreement with our commitment that any Clean Coal taken and paid for by LTV Steel would not be the subject of any lawsuit or other action by Diamond Gateway. Third, Diamond Gateway will continue to make deliveries of Clean Coal under the Coal Supply Agreement, as LTV Steel interprets the Agreement; provided, however, that Diamond Gateway will not forfeit either its right to obtain a determination of the issues in dispute or any rights that may flow therefrom.
Record at 163 (emphasis added). In a subsequent letter dated October 29, 1985 (the "October 29 Letter"), Diamond Gateway reaffirmed its opinion that the failure of LTV Steel to provide adequate assurance of performance would constitute a repudiation by LTV Steel of the Agreement, but stated that Diamond Gateway remained "ready, willing and able to deliver Clean Coal for November and thereafter under and pursuant to the Coal Supply Agreement pending a determination of the issues" in dispute between the parties. Id. at 164.
LTV Steel responded to this communication, in a letter dated October 30, 1985, by asserting that "Diamond Gateway is in breach of its obligations under the Coal Supply Agreement," and that LTV Steel saw "no need for further communications on this subject at this time." Id. at 166.
In November 1985, Diamond Gateway filed "two lawsuits seeking a declaration of the parties' respective rights under the Coal Supply Agreement."2 Record at 3 (). In each suit, Diamond Gateway sought a declaration of the parties' rights and obligations under the Agreement and, in the event Diamond Gateway's interpretation of the Agreement prevailed, damages for breach of the Agreement by Debtors.
Also in November, Diamond Gateway sent to LTV Steel an invoice, pursuant to Clause 15 of the Agreement, for liquidated damages for Coal Year 1985. LTV Steel responded to this invoice, in part, with the proviso: "We consider your invoice to be an acknowledgment that the Gateway Coal Supply Agreement is in effect." Record at 18.
On December 13, 1985, LTV Steel stated by letter to Diamond Gateway that it would "resume taking delivery of Clean Coal under the Coal Supply Agreement (Gateway) in January, 1986." Id. at 202. In reply, Diamond Gateway stated in a letter dated December 17, 1985 ("the December 17 Letter"):
Pursuant to your request of December 13, 1985, Diamond Gateway Coal Company will, for the month of January, 1986, deliver Clean Coal to LTV Steel Company, Inc., pursuant to the Coal Supply Agreement.
Id. at 203. Because LTV Steel had informed Diamond Gateway that this request for Clean Coal did not imply any commitment on the part of LTV Steel to take delivery, rather than pay damages under Clause 15 of the Agreement, for any subsequent month, the December 17 Letter made clear that the January deliveries would "be made without prejudice to, and under a reservation of, Diamond Gateway's rights as more particularly set forth in the federal and state lawsuits." Id.
In order to comply with LTV Steel's request for Clean Coal under the Agreement for the month of January 1986, Diamond Gateway was obligated to reopen the Gateway Mine, which had been closed since July 1985. Id. at 284. During January...
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