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Assumption and Assignment of Executory Contract Prevents Recovery of Preferential Payments

On March 14, 2012, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware (the “Court”) granted a preference defendant’s motion for summary judgment in the adversary proceeding Alfred Guiliano, Chapter 7 Trustee v. Almond Investment Company d/b/a Almond Corporation (Adv. Pro. No. 11-50393) because the supply agreement between the Debtors and the defendant was an executory contract that had been assumed and assigned by the Debtors, preventing recovery of preferential payments.

Fluid Routing Solutions, Inc. (together with affiliate debtors, the “Debtors”) and Almond Products, Inc. (“Almond”) were parties to a pre-petition supply agreement (the “Supply Agreement”). Following the Debtors’ bankruptcy filing, after one month of negotiations, the Supply Agreement was amended by the Debtors and Almond to establish a cure amount and then added to the list of “Assumed Contracts” included in a proposed asset purchase agreement. The asset purchase agreement was approved in the Court’s order approving the sale of the Debtors’ fuel systems business (the “Sale Order”). The Sale Order included language authorizing the assumption and assignment of all “Assumed Contracts” to the purchaser. Following conversion of the Debtors’ bankruptcy cases to chapter 7, the chapter 7 trustee (the “Trustee”) sued Almond for recovery of $1,445,659.77, as preferential payments.

Almond argued it was entitled to summary judgment because the allegedly preferential payments were made pursuant to an executory contract that had been assumed and assigned by the Debtors. The Trustee argued that the Supply Agreement was not assumed and assigned because inclusion of the Supply Agreement in a cure amount notice filed the night before the sale hearing was procedurally improper. Additionally, the Trustee argued that the Supply Agreement was not an executory contract. In any event, the Trustee argued that resolution of the motion should be adjourned to allow the Trustee to conduct discovery to investigate the executory nature of the Supply Agreement and the circumstances surrounding the post-petition amendment to the Supply Agreement.

The Court rejected all of the Trustee’s arguments. The Court found that while the Supply Agreement was not listed in the initial list of contracts to be assumed, it was listed in a later cure notice, the amendment to the Supply Agreement was attached to the sale order and it was specifically listed in the list of contracts to be assumed and assigned pursuant to the asset purchase agreement. The Court also held that the Trustee was estopped from arguing the Supply Agreement was non-executory because it had been assumed and assigned by the Debtors. The Trustee’s alternative relief seeking discovery was denied as procedurally improper because the Trustee first failed to move to amend or rescind the Sale Order.

A copy of the Court’s opinion can be found here.

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