In re It Group, Inc.

• Citation: 350 B.R. 166
• Decision Date: 21 September 2006
• Docket Number: Adversary No. 04-57971.,Bankruptcy No. 02-10118(MFW).
• Parties: In re The IT GROUP, INC., et al., Debtors. The Shaw Group, Inc. and Shaw Environmental, Inc., Plaintiffs, v. Bechtel Jacobs Company, LLC, Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

Page 166

350 B.R. 166

In re The IT GROUP, INC., et al., Debtors.

The Shaw Group, Inc. and Shaw Environmental, Inc., Plaintiffs, v. Bechtel Jacobs Company, LLC, Defendant.

Bankruptcy No. 02-10118(MFW).

Adversary No. 04-57971.

United States Bankruptcy Court, D. Delaware.

September 21, 2006.

COPYRIGHT MATERIAL OMITTED

Victoria Watson Counihan, Greenberg Traurig, LLP, Jamie Lynne Edmonson, Landis Rath & Cobb LLP, Gregg M. Galardi, Skadden, Arps, Slate, Meagher, Marion M. Quirk, Gary Adam Rubin, Skadden Arps Slate Meagher & Flom LLP, Eric Michael Sutty, The Bayard Firm, Rachel Lowy Werkheiser, Pachulski, Stang, Ziehl, Young & Jones, John C. Phillips, Jr., Phillips, Goldman & Spence, Wilmington, DE, for Debtors.

OPINION¹

MARY F. WALRATH, Bankruptcy Judge.

Before the Court are cross-motions for summary judgment in the above-captioned adversary proceeding. For the reasons set forth more fully below, the Court will grant the Plaintiffs' motion and deny the Defendant's motion.

I. BACKGROUND

Plaintiff, Shaw Environmental, Inc., is a wholly owned subsidiary of Plaintiff, The Shaw Group, Inc. (collectively, "Shaw"), a Louisiana corporation that provides professional engineering, construction, and consulting services. The Defendant, Bechtel Jacobs Company LLC ("Bechtel"), is the environmental management contractor for the United States Department of Energy's Oak Ridge Operations Office in Oak Ridge, Tennessee.

Prior to the commencement of these jointly administered bankruptcy cases, Bechtel, as general contractor, entered into four subcontracts with The IT Group, Inc. (the "Debtor"): (i) for the operation and maintenance of a Toxic Substance Control Act incinerator for mixed hazardous wastes in Oak Ridge, Tennessee (the "TSCA Contract"); (ii) for remediation work in an area containing hazardous materials (the "Burial Ground Contract"); (iii) for remediation work in an area where a storage tank had previously contained hazardous materials (the "Tank Contract"); and (iv) for remedial construction in Portsmouth, Ohio (the "Portsmouth Contract").

On January 16, 2002, the Debtor and its affiliates (collectively, the "Debtors") filed for relief under chapter 11 of the Bankruptcy Code. Shortly thereafter, the Debtors and Shaw entered into an Asset Purchase Agreement (the "APA"), whereby Shaw agreed to purchase substantially all the Debtors' assets for at least $262 million in cash, stock, and assumed liabilities. The primary assets to be transferred were the Debtors' rights under various project contracts, including three of the four Bechtel subcontracts.²

The Court entered an Order on April 25, 2002 (the "Sale Order") approving the APA. The parties consummated the sale on May 3, 2002 (the "Closing Date"). Pursuant to the APA, the Debtor assumed the TSCA, Tank, and Burial Ground Contracts (the "Assumed Contracts") and assigned them to Shaw.

On March 25, 2002, the Debtor filed a motion to reject the Portsmouth Contract. On May 10, 2002, the Court granted the rejection motion, effective as of March 25, 2002. Bechtel subsequently filed a proof of claim for rejection damages totaling $4,469,000.

Post-closing, the Debtors and Shaw agreed to memorialize the assignment of the TSCA, Tank, and Burial Ground Contracts by executing a Novation Agreement with Bechtel on May 3, 2002. This Novation Agreement was incorporated into Subcontract Modifications executed by Shaw and Bechtel on April 30 and May 1, 2003.

Subsequent to the Closing on the APA, Shaw and Bechtel both performed under the Assumed Contracts. Shaw submitted monthly invoices for its work, and Bechtel paid 90% of the invoiced amount, retaining 10% pursuant to the following clause in the subcontracts (the "Retention Provision"):

Within 30 days after the receipt of a correct invoice, CONTRACTOR will pay SUBCONTRACTOR 90% of the approved invoice amount, retaining the balance ("Retention") pending Final Acceptance of the Work or as otherwise specified below. Once the amount of Retention reaches $1,000,000, the CONTRACTOR will pay 100% of the approved invoice amount.

(TSCA Contract Ex. B, SC-13; Tank Contract Ex. B, SC-10.)³

As of the Closing Date, Bechtel held $659,521.70 of Retention under the TSCA Contract and $215,339.25 under the Tank Contract for work performed by the Debtor. In the course of Shaw's performance after the Closing Date, the TSCA Retention grew to $1 million and the Tank Retention grew to $222,166.75.

On February 14, 2003, Shaw sent Bechtel an invoice for work done on the TSCA project, which it believed was due in full because it had reached the $1 million cap set forth in the Retention Provision in a letter dated June 23, 2003, Bechtel asserted a right of offset against the TSCA invoice for the Portsmouth Contract rejection damages and refused to pay the invoice. Thereafter, Bechtel paid only 90% of the amount of Shaw's monthly invoices, apparently on the theory that the TSCA Retention was depleted by the offset and, therefore, had not reached the $1 million cap.

Shaw subsequently completed the Burial Ground Contract, and on January 14, 2004, Bechtel paid Shaw the entire Retention held by it thereunder ($674,294.64).

The parties dispute whether Shaw subsequently completed the Tank Contract. They agree, however, that on June 4, 2004, Shaw submitted an invoice for payment of the Tank Retention. Bechtel responded to this invoice on July 28, 2004, by again asserting a right of offset for the Portsmouth Contract rejection damages.

Shaw commenced the instant adversary proceeding on December 17, 2004, seeking declaratory relief and damages for breach of contract and unjust enrichment. Both parties moved for summary judgment, and oral argument was held on November 16, 2005. At that time, the Court requested supplemental briefs, which have been filed. This matter is now ripe for decision.

II. JURISDICTION

The Court retained jurisdiction to "interpret, implement, and enforce the provisions of th[e] Sale Order." (Sale Order at ¶ 37.) This is a core proceeding over which the Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1334(b) & 157(b)(2)(A), (N) & (O).

III. DISCUSSION

A. Summary Judgment

Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c). The Court must review all of the evidence in the record and draw all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

Cross-motions for summary judgment can be difficult to resolve because "[i]nferences to which a party is entitled with respect to the opponent's motion may not be granted with respect to its own." Interbusiness Bank, N.A. v. First Nat'l Bank, 318 F.Supp.2d 230, 236 (M.D.Pa. 2004). "Because the motions essentially argue opposite sides of the same issues, however, separate examination of each motion would only lead to confusion and repetition. Thus, the court will set out the contentions made in each motion and the opposition thereto and will then discuss the pertinent arguments." United States v. Hall, 730 F.Supp. 646, 648 (M.D.Pa. 1990).

The parties' summary judgment motions are premised on different provisions of the Bankruptcy Code. In its motion, Shaw asserts that the Retentions were sold to it under section 363(f) free and clear of any rights that Bechtel may have to them. In its motion, Bechtel asserts the contracts were assumed and assigned cum onere pursuant to section 365 and that all terms of the contracts must be enforced, including its right to set off the Portsmouth rejection damages against the Retentions.

The Court concludes that under either section 363 or 365, Bechtel does not have the right to set off the Retentions from the Tank and TSCA Contracts assigned to Shaw against the rejection damages due by the Debtor under the Portsmouth Contract. The Court will, consequently, grant Shaw's summary judgment motion and deny Bechtel's summary judgment motion.

B. Section 363(f)

Bechtel contends that the TSCA and Tank Contracts were assumed and assigned under section 365, not sold under section 363, pursuant to the Sale Order. Bechtel argues, therefore, that its right of setoff under those Contracts cannot be affected by section 363 and must be determined under section 365.

Contrary to Bechtel's assertions, executory contract rights are a form of "property" that is salable "free and clear" of interests under section 363(f). In re Rickel Home Ctrs., Inc., 209 F.3d 291, 302 (3d Cir.2000) (concluding that assignment of leases and executory contracts are subject to sale under section 363, and particularly section 363(m), because "[b]oth executory contracts and unexpired leases ... are included in the definition of `property of the estate' contained in section 541."); Krebs Chrysler-Plymouth, Inc. v. Valley Motors, Inc., 141 F.3d 490, 498 (3d Cir. 1998) (holding that "section 363 governs the `sales' of [executory] contracts here. Section 365 provides some limitations and conditions to assignments; none of which negates the applicability of section 363 to the sale, at auction, of [an executory contract].").

In addition to complying with section 363, however, sales of executory contracts and leases also have to comply with the protections afforded the contract party under section 365 of the Bankruptcy Code. See, e.g., Cinicola v. Scharffenberger, 248 F.3d 110, 124 (3d Cir.2001) (concluding that "the sale of an executory contract triggers the protections afforded sales of bankruptcy estate property but also requires satisfaction of the requirements for assuming and/or assigning the same executory contract."); In re Access Beyond Techs., Inc., 237 B.R. 32, 47 (Bankr.D.Del. 1999) (concluding that a "debtor cannot avoid the requirements of section 365 by saying it is `selling' a lease or executory contract, rather than assuming and assigning it.")...