Buyer of Debtor's Assets Did Not Purchase Receivables Related to Unassumed and Unassigned Contract
Integrated Water Res., Inc. v. Shaw Envtl., Inc. (In re IT Group, Inc.), 377 B.R. 471 (Bankr. D. Del. 2007) (Judge Mary F. Walrath)
Shaw Environmental, Inc. purchased in bankruptcy substantially all the assets of debtor IT Group, Inc. However, among the debtor’s executory contracts that were not assumed and assigned to Shaw was a sub-subcontract with Integrated Water Resource. Pursuant to the sub-subcontract, the debtor provided environmental remediation work in Cape Canaveral, Florida. When Shaw filed suit in California Superior Court to collect from Integrated an account receivable that Integrated allegedly owed under the sub-subcontact, Integrated commenced an adversary proceeding in the United States Bankruptcy Court for the District of Delaware to enjoin the California action. In this opinion, the Court granted summary judgment in favor of Integrated, finding that the sub-subcontract and any receivables associated with it were expressly excluded from the asset purchase agreement between Shaw and the IT Group.
Integrated Water Resources was a subcontractor to a prime contractor to the United States. Pre-petition, Integrated retained the debtor, IT Group, Inc., as a sub-subcontractor to perform environmental remediation work in Cape Canaveral, Florida. Three months after the parties entered into the contract, IT Group commenced its bankruptcy case in the United States Bankruptcy Court for the District of Delaware. The following week, the debtor entered into an Asset Purchase Agreement with Shaw Environmental, Inc., wherein Shaw agreed to purchase substantially all the debtor’s assets. In connection with the sale, the debtor filed a notice of cure amounts. Integrated objected to the assumption and assignment of the sub-subcontract. The debtors then served a revised notice stating that the Integrated contract was not going to be assumed and assigned.
The Court thereafter approved the APA. The sale order excluded from assumption and assignment any executory contract to which an “Objector” was a party. “Objector” was a defined term that included Integrated. Seven months after the sale closed, Shaw sent Integrated a demand for payment of an account receivable of $387,345 arising under the contract. Integrated responded to Shaw that the contract was excluded from the sale, and that, accordingly, the receivable in connection with the contract was not assigned to Shaw.
Pursuant to the debtor’s plan of reorganization, the IT Trust was created to liquidate the estate’s remaining assets. Acting on this authority, the IT Trust and Integrated entered into a settlement of Integrated’s $1 million proof of claim for the debtor’s alleged breach of a joint marketing agreement between the parties. This settlement stipulation, which the Court approved, contained mutual general releases.
Thereafter, Shaw filed a complaint in California Superior Court seeking the $387,345 payment that Shaw alleged Integrated owed under the contract. Integrated commenced an adversary proceeding in the Bankruptcy Court to enjoin the California action, contending that Shaw had no claims against Integrated. The Court also granted a preliminary injunction staying the California action. Shaw filed an answer to the complaint in the Bankruptcy Court, as well as a counterclaim for a determination that the receivable under the contract was assigned to Shaw. Integrated filed a motion for summary judgment, which Shaw opposed.
Integrated asserted that it had no debt to Shaw because the contract was excluded from the sale order. It also contended the settlement agreement released all claims that the IT Trust or the debtor had against Integrated, including any claims in connection with the contract. Shaw argued that the debtor’s obligations under the contract were complete at the time of the sale order, and therefore the receivable was a “Completed Contract Receivable” that was transferred to Shaw as an “Asset” under the Sale Order. Shaw argued, in the alterative, that (1) even if the contract was not completed, the receivable was transferred to Shaw; and (2) the IT Trust was unable to release Integrated from an obligation that was transferred to Shaw under the sale order.
The Court disagreed with Shaw’s argument that the contract was completed, noting that the debtor’s cure notices characterized the contract as executory. Also, the sale order characterized the contract as executory. Although Shaw could have objected to this characterization, it did not.
The Court also held that, even if the contract was completed, it was not assigned to Shaw, according to the express terms of the Sale Order. The Court noted that the sale order expressly provided that if the terms of the APA and the sale order conflicted, the sale order governed. Nonetheless, the Court stated that even in the absence of such a provision, the sale order would control because it contained a specific provision that wins out over a general one.
The Court rejected Shaw’s argument that, even if the contract was excluded under the sale order, the receivables associated with the contract were nonetheless conveyed to Shaw in the sale. The Court found that when the sale order excluded the contract, it excluded the contract in its entirety. Moreover, the debtor did not send any notice to Integrated that it intended to sell Integrated’s receivable to Shaw under the sale order.
Also, while Shaw contended that the term “Assets” in the APA should be defined broadly, the Court pointed to the defined term “Excluded Assets,” which included “Excluded Contracts,” of which the contract was one. According to the express terms of the APA, all accounts receivable related to “Excluded Contracts” were not part of the sale.
Finally, having decided that the contract and its associated receivable were excluded from the sale order, the Court found that it was proper for the IT Trust and Integrated to enter into a settlement to resolve their issues and claims.
Accordingly, the Court granted Integrated’s motion for summary judgment.
