In re Fastrax, Inc.

• Decision Date: 17 May 1991
• Docket Number: Bankruptcy No. 90-9788-8P1.
• Citation: 129 BR 274
• Parties: In re FASTRAX, INC., Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Florida

129 B.R. 274 (1991)

In re FASTRAX, INC., Debtor.

Bankruptcy No. 90-9788-8P1.

United States Bankruptcy Court, M.D.Florida, Tampa Division.

May 17, 1991.

Richard C. Prosser, Tampa, Fla., for debtor.

Southwest Research Institute, Maria Luisa Holmgreen, San Antonio, Tex., for respondent.

ORDER ON MOTION TO ASSUME EXECUTORY CONTRACT

ALEXANDER L. PASKAY, Chief Judge.

THIS is a Chapter 11 reorganization case and the matter under consideration is a Motion filed by Fastrax, Inc. (Debtor), who seeks authority to assume an executory subcontract with Southwest Research Institute (Southwest), who vigorously opposes the Debtor's assumption of the executory subcontract involved in this controversy. The facts which are relevant as established at the final evidentiary hearing are basically without dispute and can be summarized as follows:

Prior to the commencement of this Chapter 11 case, the Debtor entered into a contract (Prime Contract) with the United States of America, Department of the Air Force (Air Force). This contract provided inter alia that the Debtor would install a material handling system for the Air Force at Hill Air Force Base, Ogden, Utah. In connection with its Prime Contract, the Debtor entered into a fixed price subcontract (Subcontract) with Southwest. Under this contract Southwest agreed to produce and install at Hill Air Force Base a storage, retrieval and distribution computer system to be used in connection with the material handling system, to be established by the Debtor pursuant to its Prime Contract with the Air Force. Although the actual Subcontract was not offered in evidence at the final evidentiary hearing, it is without dispute that the general terms of the Subcontract are set forth in a proposal titled, "Development of Storage, Retrieval and Distribution System (SRDS) Software" and "Development of SRDS to DMMS Interface" submitted by Southwest to the Debtor on December 13, 1989. (Debtor's Exh. No. 1). It is without dispute that the Subcontract was in fact executed and Southwest commenced to perform according to the terms of the Subcontract.

The Debtor ultimately defaulted on the Subcontract by failing to make certain progress payments when they became due. On October 5, 1990, the Debtor filed its voluntary Petition initiating this Chapter 11 case. It is undisputed that Southwest has completed 50%-60% of its obligations of its Subcontract with the Debtor. It is further undisputed that as of the date of the final evidentiary hearing, Southwest had incurred total costs and fees of $201,972.31. The total amount to be paid to Southwest under the Subcontract is $270,204.00, $171,659.68 of which has been billed by Southwest. $128,053.68 of the $171,695.68 invoice has been paid. Thus, approximately $43,606.00 has been invoiced but not yet paid.

It should be noted at the outset, that on April 3, 1991, this Court entered an Order authorizing the Debtor to assume the Prime Contract, i.e., the Debtor's contract with the Air Force. Since the commencement of this case, the Debtor has received payments under the Prime Contract from the Air Force which include $43,600.00 for payment of the outstanding prepetition indebtedness due to Southwest. These funds are currently on deposit with NCNB of Texas pursuant to a deposit agreement dated March 19, 1990, entered into between the Debtor and Southwest. In addition to payments yet to be received under the Prime Contract, the Debtor anticipates receiving approximately $647,000.00 in May of 1991 from contracts other than the Prime Contract. From the Prime Contract, the Debtor expects to receive a net total of $200,000 for work performed.

Inasmuch as Southwest's performance under the Subcontract is critical to the Debtor's performance under the Prime Contract, the debtor filed the Motion which is presently under consideration seeking to assume the Subcontract pursuant to 11 U.S.C. § 365. This section provides in pertinent part as follows:

§ 365. Executory contracts and unexpired leases.

(a) Except as provided in sections 765 and 766 of this title and in subsections (b), (c), and (d) of this section, the trustee, subject to the court\'s approval, may assume or reject any executory contract or unexpired lease of the debtor.

(b)(1) If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee—

(A) cures, or provides adequate assurance that the trustee will promptly cure such default;

(B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and

(C) provides adequate assurance of future performance under such contract or lease.

In opposition to the Debtor's Motion to Assume, Southwest relies on § 365(c), which provides in pertinent part as follows:

§ 365. Executory contracts and unexpired leases.

(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if—

(1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and

(B) such party does not consent to such assumption or assignment; . . .

Based on this, Southwest contends first that Fastrax, as the debtor-in-possession, is not the same party that Southwest contracted with to perform, therefore the Debtor has no cognizable interest in the contract sought to be assumed, and, consequently, the debtor-in-possession cannot assume this contract. While it is true that for certain purposes, the Debtor and debtor-in-possession are legally distinct entities, if this Court accepted the proposition urged by Southwest, § 365 would be rendered meaningless. Carrying this proposition to an extreme, no debtor could ever assume a contract, absent the contracting party's consent.

Next, Southwest contends that the Subcontract is a personal service contract which falls within the scope of § 365(c), and because § 365(c)(1)(A) & (B) provides that a debtor may not "assume or assign" this type of contract absent consent, the Debtor cannot assume the Subcontract because Southwest does not consent. Southwest relies on the literal reading of § 365(c)(1)(A) & (B) and contends that a debtor-in-possession may not assume an executory contract if applicable law excuses a party to the contract from accepting or rendering performance to an entity other than the debtor or the debtor-in-possession and if that party does not consent. Southwest contends this is so even if the debtor is able to comply with the prerequisites for assumption as set forth in § 365(b)(1)(A), (B) & (C). In support of this proposition Southwest cites In the Matter of West Electronics, 852 F.2d 79 (3d Cir.1988).

In the Matter of West Electronics, the 3rd Circuit Court of Appeals did in fact state that a debtor-in-possession is a separate and distinct entity from a debtor, who in that case had obtained a contract from the Government. In relying on Thompson v. Comm'r of Internal Revenue, 205 F.2d 73 (3d Cir.1953) the court in West Electronics stated that the anti-assignment statute 41 U.S.C. § 15 was meant to secure to the Government the personal attention and services of the contractor; to render him liable to punishment for fraud or neglect of duty; and to prevent parties from acquiring mere speculative interests in the contract in question. Based on this, the court in West Electronics concluded inasmuch as the Government could not be compelled to accept performance from an entity other than with whom it originally contracted, by virtue of 41 U.S.C. § 15, the debtor-in-possession could not assume the contract in question. While this holding might facially support the proposition urged by Southwest, the proposition does not bear close analysis, and Southwest's reliance on West Electronics is totally misplaced for the following reasons.

First, the debtor is not seeking to assume an executory contract with the Government, as was the case in West Electronics, thus, the anti-assignment statute does not come into play. Second, this Court disagrees with the interpretation that in the context of non-government contracts, assignability of a contract without consent is a condition precedent to the debtor-in-possession's right to assume an unexpired executory contract. Third, even though § 365(c) speaks in the disjunctive and provides that a debtor may not assume or assign an unexpired executory contract without consent, a sensible construction of this section permits but one conclusion — that this section was designed solely to govern the debtor-in-possession's ability to assign a contract which it already assumed. In fact, § 365(c)(1)(A) was amended in 1984 by substituting the phrase "an entity other than the debtor or the debtor-in-possession" for the words "the trustee." 11 U.S.C. § 365(c)(1)(A) (Supp. II 1985). The legislative history for this change provides:

This amendment makes it clear that the prohibition against a trustee\'s power to assume an executory contract does not apply where it is the debtor that is in possession and the

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