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Coal Supply Agreement Held Executory; Pre-petition Payments Thereunder Not Recoverable As Preferences

Pirinate Consulting Group, LLC v. Avoca Bement Corp. (In re Newpage Corp.), Adv. No. 13-52196 (KG), 2014 WL 4948215 (Bankr. D. Del. Oct. 1, 2014)

In this short Memorandum Opinion, Judge Gross was called upon to determine the executory nature of a pre-petition coal supply agreement (the “Coal Supply Agreement”) in order to decide whether certain pre-petition payments to the non-debtor contract counterparty were preferential.  In rendering its decision, the Court relied heavily upon the principles set forth by the Third Circuit in Sharon Steel Corp. v. Nat’l Fuel Gas Distrib. Corp., 872 F.2d 36, 39-40 (3d Cir. 1989) and by fellow Delaware Bankruptcy Court Judge Sontchi in In re Carolina Fluid Handling Intermediate Holding Corp., 467 B.R. 743, 754 (Bankr. D. Del. 2012).  In both of these cases, the courts determined that the supply agreements at issue were executory contracts because their terms evinced “ongoing, reciprocal obligations for supply and purchase.”

Here, Judge Gross determined that the Coal Supply Agreement, between debtor NewPage Wisconsin System, Inc. (the “Buyer”, together with all affiliated debtors, the “Debtors”) and Avoca Bement Corp. and Knight Hawk Coal, LLC (collectively, the “Sellers” or “Defendants”), was an executory contract.  Importantly, pursuant to the Coal Supply Agreement, the Sellers agreed to sell, and the Buyer agreed to buy, coal for a two-year term.  With respect to quantity, the parties agreed to an “[a]nnual volume of “approximately 105,000 tons” at “approximately 2,000 to 2,200 tons per week.”  Pirinate Consulting Group, LLC, as litigation trustee for the Debtors’ litigation trust (the “Trustee”), argued that such language did not set forth with specificity a minimum amount of coal to be purchased—an important distinction from the Carolina Fluid and Sharon Steel agreements.  Despite the Coal Supply Agreement’s less-than-clear language, Judge Gross disagreed, posturing that if the Buyer had only purchased 50,000 tons of coal, “it would certainly have been in breach of the Coal Supply Agreement as 50,000 tons is not approximately 105,000 tons.”

In light of the foregoing as well as the agreement’s additional terms (such as those regarding coal quality and price), the Court held that “the Coal Supply Agreement evidence[d] an ongoing, reciprocal obligation[] for supply and purchase[,]” the nonperformance of such obligations would constitute a material breach of contract.  Thus, in accordance with Third Circuit precedent, the Coal Supply Agreement was considered an executory contract.  Moreover, the agreement was determined by the Court to have been assumed under the terms of the Debtors’ joint plan of reorganization.  Accordingly, under the Kiwi decision, the Trustee was not permitted to recover any allegedly preferential transfers made to the Defendants under the agreement and the Defendants’ motions for summary judgment were granted.  See Kimmelman v. Port Auth. of New York & New Jersey (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311, 317-19 (3d Cir. 2003) (holding that pre-petition transfers made pursuant to an executory contract later assumed by a debtor are insulated from avoidance as preferential transfers).