In re Technology for Energy Corp.

• Decision Date: 21 June 1988
• Docket Number: Bankruptcy No. 3-85-00455,Adv. No. 3-88-0006.
• Parties: In re TECHNOLOGY FOR ENERGY CORPORATION, Debtor. PUBLIC SERVICE ELECTRIC AND GAS COMPANY, and Bechtel Construction, Inc., As Agent for Public Service Electric and Gas Company, Plaintiffs, v. The AMERICAN INSURANCE COMPANY, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

88 B.R. 182 (1988)

In re TECHNOLOGY FOR ENERGY CORPORATION, Debtor PUBLIC SERVICE ELECTRIC AND GAS COMPANY, and Bechtel Construction, Inc., As Agent for Public Service Electric and Gas Company, Plaintiffs, v. The AMERICAN INSURANCE COMPANY, Defendant.

Bankruptcy No. 3-85-00455, Adv. No. 3-88-0006.

United States Bankruptcy Court, E.D. Tennessee.

June 21, 1988.

Hunton & Williams, John A. Lucas, Jeffrey S. Norwood, G. Mark Mamantov, Knoxville, Tenn., for plaintiffs.

Baker, Worthington, Crossley, Stansberry & Woolf, Richard T. Sowell, Nicholas A. Della Volpe, Knoxville, Tenn., for defendant.

MEMORANDUM ON DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

RICHARD S. STAIR, Jr., Bankruptcy Judge.

Defendant, The American Insurance Company (American), filed a motion for partial summary judgment on March 25, 1988.¹ By its motion American seeks dismissal of Counts II and IV of plaintiffs' complaint, each of which prays for a determination of liability against American pursuant to Tenn.Code Ann. § 56-7-105(a) (Supp.1987).² American asserts that Tenn. Code Ann. § 56-7-105(a) (Supp.1987) has no application since the parties contracted that New Jersey law governs their transaction. Alternatively, American contends that if the court should find Tennessee law does apply, the performance and payment bonds it executed as surety for the debtor do not fall within the scope of the statute. According to American, there is no genuine issue as to any material fact relative to Counts II and IV and it is thus entitled to a judgment dismissing these counts as a matter of law. Fed.R.Civ.P. 56, incorporated into Fed.R.Bankr.P. 7056.

This is a noncore proceeding. 28 U.S.C.A. § 157(c)(1) (West Supp.1988). The parties have consented to the entry of appropriate orders and judgments by the bankruptcy judge. 28 U.S.C.A. § 157(c)(2) (West Supp.1988).

I

Public Service Electric and Gas Company (PSE & G) owns and operates the Hope Creek Generating Station (Hope Creek), a nuclear-powered electric generating facility, located in New Jersey. Bechtel Construction, Inc. (Bechtel), assignee of Bechtel Power Corporation, was retained by PSE & G as its agent to oversee construction of Hope Creek.

During the construction of Hope Creek, PSE & G and Bechtel were required to install a radiological monitoring system (RMS). On July 30, 1982, Bechtel entered into two purchase orders with the debtor, No. 10855-J-361-AC (No. 361) and No. 10855-J-371(Q)-AC (No. 371), in the amounts of $3,067,962 and $805,709, respectively, to produce the RMS, including computers and computer software, for installation at Hope Creek. Each written purchase order is governed by a set of numbered "General Conditions," including the following:

1. COMPLETE AGREEMENT: This Purchase Order, as Buyer\'s offer to Seller, including all applicable terms, conditions and specifications, shall constitute the sole and exclusive agreement between the parties. This order supersedes all other writings and is expressly conditional upon Seller\'s agreement to the conditions hereof, and nothing shall be construed to be an acceptance of any terms of Seller.

. . . .

16. APPLICABLE LAW — DEFINITIONS: The definition of terms used, interpretation of this agreement and rights of all parties hereunder shall be construed under and governed by the laws of the State of New Jersey as first indicated in this agreement unless otherwise specified herein. . . .

Both purchase orders require the debtor to provide performance and payment bonds in the amount of the total price of each purchase order. On September 27, 1982, the debtor, as principal, and American, as surety, executed the requisite performance and payment bonds relative to the debtor's performance under each of the two purchase orders.³ Each performance and payment bond, consisting of a two-page written document, contains the following material provisions:

THE CONDITION of the obligation is such that, whereas the Seller has entered into a Purchase Order dated July 28/July 30, 1982 to perform the following work:

Job 10855 — Public Service Electric and Gas Company Hope Creek Generating Station Bid Request No. 361, No. 371

NOW, THEREFORE, if the Seller shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements of the Contract and any extensions thereof that may be granted by BECHTEL, and during the term of any warranty required under the Purchase Order and shall also well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements of any and all modifications, additions, or alterations of the Purchase Order that may hereafter be made, and shall also fully indemnify and hold harmless the OWNER and BECHTEL from all cost and damage which it may suffer by reason of failure so to do and shall fully reimburse and repay the OWNER and BECHTEL all outlay and expense which the OWNER and BECHTEL may incur in making good any such default, then this obligation shall be void; otherwise, to remain in full force and effect.

None of the performance or payment bonds contain a choice of law provision; each is executed by the debtor and American, presumably in Knoxville, Tennessee.⁴ Plaintiffs are not signatories to any bond; American is not a signatory to either of the two purchase orders.

The debtor did not complete performance on the purchase orders and American refused payment on the performance and payment bonds. The debtor filed its voluntary petition under Chapter 11 of title 11 of the United States Code on March 29, 1985. Plaintiffs thereafter commenced this proceeding seeking damages against American in Counts I and III for breach of contract.

II

American contends that General Condition No. 16 to the purchase orders, quoted in material part supra, designating New Jersey law as governing the rights of plaintiffs and the debtor, also governs its rights under the performance and payment bonds at issue. American reasons that as each purchase order expressly required the debtor to procure the performance and payment bonds requisite to its performance, and whereas its obligations under each bond were expressly conditioned on the debtor's performance of "all the undertakings, covenants, terms, conditions and agreements of the purchase orders," New Jersey law necessarily governs the interpretation and enforcement of the bonds. The court agrees.

Plaintiffs and defendant concur upon application of Tennessee choice of law principles to the issues raised in American's motion. Those principles are enunciated by the United States District Court for the Middle District of Tennessee as follows:

Tennessee follows the general rule that the validity of a contract and the substantive rights of the parties to it are to be governed by the law which the parties intended. In the absence of a manifestation of contrary intention, the parties are presumed to have contracted pursuant to the laws of the state in which the contract was entered into. Deaton v. Vise, 186 Tenn. 364, 210 S.W.2d 665 (1948).

Moody v. Kirkpatrick, 234 F.Supp. 537, 540 (M.D.Tenn.1964). See also Agricultural Serv. Ass'n, Inc. v. Ferry-Morse Seed Co., Inc., 551 F.2d 1057, 1063 (6th Cir.1977); Boatland, Inc. v. Brunswick Corp., 558 F.2d 818, 821 (6th Cir.1977); Hamilton Nat'l Bank of Chattanooga v. Hutcheson, 357 F.Supp. 114, 117 (E.D. Tenn.1973), aff'd without published opinion at 492 F.2d 1243 (6th Cir.1974); Moody v. Bass, 357 F.2d 730, 732 (6th Cir.1966); American Training Serv., Inc. v. Commerce Union Bank, 415 F.Supp. 1101, 1104 n. 3 (M.D.Tenn.1976); and Sloan v. Jones, 192 Tenn. 400, 241 S.W.2d 506 (1951).

In a subsequent opinion out of the Middle District of Tennessee, the Court added:

Indeed, Moak v. Continental Casualty Co., 4 Tenn.App. 287, 292 (1927) states, "The lex loci contractus becomes as much a part of the contract as if specifically incorporated therein, and, in the absence of evidence of contrary intention, the parties must be held to have contemplated the application of that law to the terms of their agreement."

Koehler v. Cummings, 380 F.Supp. 1294, 1303 (M.D.Tenn.1974).

More recently Judge Wiseman synopsized the Tennessee choice of law rule relative to contracts in the following terms:

The Tennessee approach to the choice of law applicable to contracts, however, dictates not a strict lex loci contractus approach but rather an inquiry into the intention of the parties. Thus, rights and obligations of parties to a contract "are governed by the law of that state with the view to which it is made." The parties\' intentions in this respect are "to be gathered from the terms of the instruments and all of the attending circumstances." Ohio Casualty Insurance Co. v. Travelers Indemnity Co., 493 S.W.2d 465, 467 (Tenn.1973) (quoting First American National Bank v. Automobile Insurance Co., 252 F.2d 62, 64 (6th Cir.1958)).

Mackey v. Judy's Foods, Inc., 654 F.Supp. 1465, 1470 (M.D.Tenn.1987) (footnote omitted).

Footnote nine to Judge Wiseman's opinion in Mackey is noteworthy:

Tennessee courts have said that a contract is "presumed to be made with reference to the law of the place where it was entered into." Deaton v. Vise, 186 Tenn. 364, 210 S.W.2d 665, 668 (1948); see also Boatland, Inc. v. Brunswick Corp., 558 F.2d 818, 821 (6th Cir.1977). This presumption, however, always is subject to qualification by a contrary intention of the parties. See Deaton v. Vise, supra, 210 S.W.2d at 668. That intention may be manifest by the terms of the contract or other attending circumstances. Ohio Casualty Insurance Co. v. Travelers Indemnity Co., 493 S.W.2d 465, 467 (Tenn. 1973). The presumption of lex loci contractus, thus, is not an inflexible rule but rather

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