2007 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-22-2007

In Re: Fleming Co

Precedential or Non-Precedential: Precedential

Docket No. 05-2365

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Recommended Citation

"In Re: Fleming Co " (2007). 2007 Decisions. Paper 496.

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*

 The Honorable Ronald L. Buckwalter, United States

District Judge for the Eastern District of Pennsylvania, sitting by

designation.

 PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_______________

No. 05-2365

_______________

IN RE: FLEMING COMPANIES, INC., ET AL.,

Debtors,

AWG ACQUISITION LLC; 

ASSOCIATED WHOLESALE GROCERS, INC., 

Appellants

____________________

On Appeal From the United States District Court 

for the District of Delaware

(No. 04-cv-00371)

District Judge: Honorable Sue L. Robinson, Chief Judge

Argued: December 12, 2006

Before: FISHER, CHAGARES, Circuit Judges, and 

BUCKWALTER,* Senior District Judge.

(Filed August 22, 2007)

__________________
2

Mark T. Benedict, Esq. (Argued)

Leonard L. Wagner, Esq.

Eric J. Howe, Esq.

Husch & Eppenberger, LLC

1200 Main Street, Suite 2300

Kansas City, MO 64105

Selinda A. Melnik, Esq.

Denise Kraft, Esq.

Edwards Angell Palmer & Dodge, LLP

919 North Market Street, 15th Floor

Wilmington, DE 19801

Counsel for Appellants

Richard A. Chesley, Esq. (Argued)

Daniel B. Prieto, Esq.

Michelle L. Dama, Esq.

Jones Day

77 West Wacker Drive, Suite 3500

Chicago, IL 60601

Daniel J. DeFranceschi, Esq.

Kimberly D. Newmarch, Esq.

Richards, Layton & Finger

One Rodney Square

P.O. Box 551

Wilmington, DE 19899

Counsel for Appellee

__________________

OPINION OF THE COURT

__________________

CHAGARES, Circuit Judge: 

This appeal arises out of a bankruptcy involving grocery

wholesalers and retailers in the Oklahoma marketplace. The
3

Bankruptcy Court denied a motion for assumption and assignment

of an executory contract in favor of Albertson’s, Inc. (Albertson’s),

the nondebtor contracting party. The Bankruptcy Court determined

that the proposed assignee, appellants AWG Acquisition LLC and

Associated Wholesale Grocers, Inc., (collectively, AWG), could

not provide adequate assurance of future performance of the

contract because an essential term of the contract could not be

fulfilled. The District Court affirmed.

We are called upon to decide the narrow question of

whether a term relating to the use of a specific facility is material

and economically significant to a contract and, if it is, whether

AWG’s undisputed inability to fulfill the term prevented the

assumption and assignment of that contract under § 365(f) of the

Bankruptcy Code, 11 U.S.C. § 365. We will affirm. 

I.

The debtor, Fleming Companies, Inc. (Fleming), is a

wholesale supplier of grocery products to supermarkets.

Albertson’s, a supermarket chain, operates more than 2,300 retail

grocery stores in the United States. In most cases, Albertson’s

stores are supplied by warehouse distribution centers that

Albertson’s owns and operates. In Oklahoma, for example,

Albertson’s constructed a large distribution facility (the “Tulsa

Facility”) to supply its stores throughout the Midwest, including

those in Oklahoma. After operating at only 60% capacity,

however, Albertson’s decided to sell the Tulsa Facility. In 2002,

Fleming purchased the Tulsa Facility as part of an integrated

transaction for approximately $78 million in cash. In return,

Fleming received the warehouse, the inventory in the warehouse,

and Albertson’s agreement to a long-term supply arrangement for

its Oklahoma and Nebraska stores. 

The supply arrangement was embodied in two independent

written contracts executed on June 28, 2002: the Lincoln Facility

Standby Agreement (Lincoln FSA) and the Tulsa Facility Standby

Agreement (Tulsa FSA). The FSAs set forth the terms and

conditions under which Albertson’s agreed to purchase groceries

and supermarket products from Fleming for its twenty-eight

Oklahoma and eleven Nebraska grocery stores. Although the two
4

agreements were nearly identical, Section 1 differed in one

important respect pertinent to this appeal. Section 1 of the Lincoln

FSA stated: 

Section 1: Fleming’s Commitment to Supply

Throughout the Term (as defined

below) of this Agreement, Fleming will

maintain capital, employees, inventory,

equipment, and facilities sufficient to supply

food, grocery, meat, perishables and other

related products, supplies and merchandise

(“Products”) as provided in the Special

Fleming FlexPro/FlexStar Marketing Plan

described below to Albertson’s in quantities

sufficient to allow Albertson’s to purchase

the Estimated Purchase Level described in

Section 3 of this Agreement. 

Appendix (App.) 806. In contrast, Section 1 of the Tulsa FSA

read: 

Section 1: Fleming’s Commitment to Supply

Throughout the Term (as defined

below) of this Agreement, Fleming will

maintain capital, employees, inventory,

equipment, and facilities sufficient to supply

food, grocery, meat, perishables and other

related products, supplies and merchandise

(“Products”) as provided in the Special

Fleming FlexPro/FlexStar Marketing Plan

described below to Albertson’s in quantities

sufficient to allow Albertson’s to purchase

the Estimated Purchase Level described in

Section 3 of this Agreement from the Tulsa

Facility. 

App. 836 (emphasis added.) 

According to Albertson’s, the Tulsa Facility was a key
5

element in the bargain between Albertson’s and Fleming. The

Tulsa FSA emphasized the importance of a supply of products

“from the Tulsa Facility” because the Tulsa Facility contained not

only many of its former employees but also the infrastructure

created by Albertson’s. This allowed Albertson’s to continue using

its electronic ordering systems and ordering codes for the products

supplied under the Tulsa Agreement. The electronic ordering

system in place at the Tulsa Facility permitted Albertson’s to

gather data which it then used to make marketing and pricing

decisions. At the time of the agreement, Albertson’s envisioned,

and the contract reflects, a seamless supply of products to

Albertson’s stores. In other words, the parties contracted to limit

the economic damage of any disruption in service, recognizing the

critical importance of consistency in the competitive grocery

industry. 

Fleming and Albertson’s operated under the FSAs for less

than one year before Fleming filed for bankruptcy on April 1, 2003.

Throughout that time, Fleming was unable to meet the required

service levels. The Tulsa FSA obligated Fleming to maintain a

service level of 96% on each category of product, or otherwise be

in material breach of the agreement. There were eight categories

of products: (1) warehouse grocery; (2) dairy; (3) frozen food

products; (4) produce; (5) meat; (6) bakery; (7) deli; and (8)

grocery, dairy and frozen warehouse supplies. Within these broad

categories, Fleming supplied more than 2,500 private label

products to Albertson’s stores. On Albertson’s part, the Tulsa FSA

required Albertson’s to pay Fleming a fixed weekly payment of

$210,113 to help Fleming defray the costs of running the Tulsa

Facility. 

By August 2003, Albertson’s stopped ordering grocery

products from Fleming and stopped paying the weekly charge.

Albertson’s switched its source of supply for the Oklahoma market

from the Tulsa Facility to its own warehouse in Fort Worth, Texas.

On August 15, 2003, the Bankruptcy Court entered an Order

approving the sale of Fleming’s assets to C&S Wholesale Grocers,

Inc. and C&S Acquisition LLC (collectively, C&S). The Order

authorized C&S to designate third-party purchasers for certain

assets, included among them the right to acquire Fleming’s
1

 Albertson’s filed a cure claim against Fleming as a result

of Fleming’s purported material breaches of the Tulsa and Lincoln

FSAs. However, at a hearing before the Bankruptcy Court on

December 4, 2003, Albertson’s voluntarily withdrew the cure claim

with prejudice and agreed to proceed solely on the issue of

whether, as a matter of law, the Tulsa and Lincoln FSAs could be

assumed and assigned. 

6

executory contracts with Albertson’s. C&S designated AWG.

AWG is a cooperative of independent grocery wholesalers

operating in the Midwest from distribution centers in Kansas City,

Missouri; Oklahoma City, Oklahoma; Springfield, Missouri; and

Ft. Scott, Kansas. In addition, AWG operates retail supermarkets

in Tulsa and Oklahoma City through a wholly-owned subsidiary

called Homeland Stores, Inc. (Homeland). In some places,

Homeland markets are located directly across the street from

Albertson’s stores. Homeland carries similar products. 

On August 23, 2003, Fleming closed the Tulsa Facility and

the Lincoln Facility. At about the same time, Fleming rejected its

lease for the Tulsa Facility at the direction of AWG. The

Bankruptcy Court approved the rejection on September 17, 2003.

On September 3, 2003, Fleming filed a motion to assume

and assign the Lincoln FSA and the Tulsa FSA to AWG pursuant

to 11 U.S.C. § 365. AWG proposed to supply Albertson’s

Oklahoma stores from AWG’s Oklahoma City distribution center

and to supply Albertson’s Nebraska stores from AWG’s Kansas

City warehouse. Albertson’s opposed the motion for a variety of

reasons, among them that AWG’s electronic ordering, billing and

inventory systems were not compatible with Albertson’s and

switching to AWG’s system would have been costly and inefficient

for Albertson’s. According to Albertson’s, AWG’s deliberate

decision not to acquire the Tulsa Facility created a real and

cognizable economic detriment that contravened the essence of the

contract embodied in the term “supply . . . from the Tulsa Facility.”

The Bankruptcy Court conducted a hearing on the motion

for assumption and assignment.1

 At the hearing, AWG’s

representatives testified that it was capable of fully performing both
7

the Tulsa FSA and the Lincoln FSA: Albertson’s would be able to

purchase its products from AWG at the same price and on the same

terms that Albertson’s expected to receive from Fleming, pursuant

to the FSAs, including freight charges. 

The Bankruptcy Court granted Fleming’s assumption

motion as to the Lincoln FSA, but denied the motion as to the

Tulsa FSA. The decision regarding the Lincoln FSA is not the

subject of this appeal. As for the Tulsa FSA, the Bankruptcy Court

held that “fulfillment from the Tulsa Facility is an essential element

of the agreement.” App. 9. On motion for reconsideration, the

Bankruptcy Court reiterated “that shipment from the Tulsa Facility

was a material term of the Tulsa Agreement and that adequate

assurance of performance of that term had not been proven.” App.

18. Fleming and AWG appealed.

The District Court affirmed the decision to deny Fleming’s

motion for assumption and assignment of the Tulsa FSA. The

District Court found no error in the Bankruptcy Court’s conclusion

that “use of the Tulsa Facility was an essential provision of the

Tulsa FSA.” App. 47. The District Court also upheld the

Bankruptcy Court’s determination that “AWG, which had directed

the debtors to reject the Tulsa Facility lease, could not fulfill the

express requirements of the Tulsa FSA.” Id. Thus, the District

Court concluded that permitting “AWG to supply Albertson’s

through its own channels of supply would impermissibly modify

the terms of the Tulsa FSA.” App. 47-48.

This appeal followed. 

II.

The Bankruptcy Court exercised jurisdiction over the

underlying motion for assumption and assignment of the Tulsa

FSA pursuant to 28 U.S.C. § 157(a). The District Court had

subject matter jurisdiction over the appeal of the bankruptcy order

under 28 U.S.C. § 158(a). We have jurisdiction pursuant to 28

U.S.C. § 158(d). 

We review the Bankruptcy Court’s findings of fact for clear

error, and we exercise plenary review over its conclusions of law.
8

Cinicola v. Scharffenberger, 248 F.3d 110, 115 n.1 (3d Cir. 2001).

“Because the district court sits as an appellate court in bankruptcy

cases, our review of its decision is plenary.” Id. (citing In re Lan

Assocs. XI, L.P., 192 F.3d 109, 114 (3d Cir. 1999)). 

III.

A.

Section 365 of the Bankruptcy Code generally permits the

trustee to assume or reject any executory contract of the debtor. 11

U.S.C. § 365(a). This allows “‘the trustee to maximize the value

of the debtor’s estate by assuming executory contracts . . . that

benefit the estate and rejecting those that do not.’” Cinicola, 248

F.3d at 119 (quoting L.R.S.C. Co. v. Rickel Home Ctrs. (In re

Rickel Home Ctrs., Inc.), 209 F.3d 291, 298 (3d Cir. 2000)). Upon

assuming an executory contract, the trustee is likewise authorized

to assign the executory contract. Section 365 provides in pertinent

part:

(f)(1) Except as provided in

subsections (b) and (c) of this section,

notwithstanding a provision in an executory

contract or unexpired lease of the debtor, or

in applicable law, that prohibits, restricts, or

conditions the assignment of such contract or

lease, the trustee may assign such contract or

lease under paragraph (2) of this subsection.

 (2) The trustee may assign an

executory contract or unexpired lease of the

debtor only if--

(A) the trustee assumes such

contract or lease in accordance with the

provisions of this section; and

(B) adequate assurance of

future performance by the assignee of such

contract or lease is provided, whether or not

there has been a default in such contract or

lease.

11 U.S.C. § 365(f) (emphasis added). The statutory requirement of
9

“adequate assurance of future performance by the assignee” affords

“needed protection to the non-debtor party because the assignment

relieves the trustee and the bankruptcy estate from liability for

breaches arising after the assignment.” Cinicola, 248 F.3d at 120;

11 U.S.C. § 365(k). While the bankruptcy court has discretion to

excise or waive a bargained-for element of a contract, “Congress

has suggested that the modification of a contracting party’s rights

is not to be taken lightly. Rather, a bankruptcy court . . . must be

sensitive to the rights of the non-debtor contracting party . . . and

the policy requiring that the non-debtor receive the full benefit of

his or her bargain.” In re Joshua Slocum Ltd., 922 F.2d 1081, 1091

(3d Cir. 1990).

The text of § 365(f)(2)(B) employs the phrase “adequate

assurance of future performance” of the contract, but that phrase is

not defined in the Bankruptcy Code. As we noted in Cinicola,

however, the Bankruptcy Code adopted the phrase “adequate

assurance of future performance” from Uniform Commercial Code

§ 2-609(1), which provides that “when reasonable grounds for

insecurity arise with respect to the performance of either party, the

other may in writing demand adequate assurance of future

performance . . . .” Cinicola, 248 F.3d at 120 n.10 (quoting UCC

§ 2-609(1)). 

It is clear that adequate assurances need not be given for

every term of an executory contract. Because the bankruptcy court

can excise or refuse enforcement of terms of a contract in order to

permit assignment, we must determine what standard applies to

evaluate whether excising “supply . . . from the Tulsa Facility”

would deny Albertson’s the full benefit of its bargain. In Joshua

Slocum, we applied a “material and economically significant”

standard to determine whether the Bankruptcy Court had the

authority to excise an “average sales” clause in a lease agreement,

and then assign the lease to the designated third-party assignee.

We concluded there that the clause was “a material and

economically significant clause in the leasehold at issue.” 922 F.2d

at 1092. We found that the Bankruptcy Court did not have

authority to excise the relevant provision because the “particular

clause [was] of financial import to the landlord in insuring

occupancy by high volume sales, viable businesses, thus increasing

the rent received under the percentage rent clause.” Id. As a result,
10

we held that the Bankruptcy Court erred in assigning the lease

without the “average sales” clause.

The “material and economically significant” standard we

employed in Joshua Slocum was derived from a review of case law

interpreting § 365 of the Bankruptcy Code which focused on

balancing twin concerns: preventing substantial economic

detriment to the nondebtor contracting party and permitting the

bankruptcy estate’s realization of the intrinsic value of its assets.

See id. (citing In re Mr. Grocer, Inc., 77 B.R. 349, 354 (Bankr.

D.N.H. 1987)); see also In re Carlisle Homes, Inc., 103 B.R. 524,

538 (Bankr. D.N.J. 1988) (recognizing §365's attempt “to strike a

balance between two sometimes competing interests, the right of

the contracting nondebtor to get the performance it bargained for

and the right of the debtor’s creditors to get the benefit of the

debtor’s bargain. Nowhere is the tension between these interests,

and the difficulty in striking the balance, more apparent than in

trying to determine whether there is the requisite adequate

assurance of future performance.”) (quotation marks and alterations

omitted). 

Neither AWG nor Albertson’s disputes the essence of the

“material and economically significant” standard or its applicability

in this context. Under AWG’s understanding of Joshua Slocum,

however, an assignee must only give adequate assurance of future

performance of the “economically material” terms of the contract.

AWG argues that shipment “from the Tulsa Facility” is not such a

term given that AWG can supply groceries to Albertson’s at the

same price and on the same payment terms as had Fleming.

According to AWG, the Tulsa Facility is merely a warehouse with

nothing unique about it. Albertson’s bargained to buy $1.155

billion of groceries and supermarket products (of a type and

quality) for a certain price (including freight) to be timely delivered

to Albertson’s Oklahoma stores. As long as Albertson’s receives

groceries on those bargained-for terms, AWG contends, it does not

matter from where those groceries are supplied. Finally, AWG

argues that Albertson’s failed to provide any evidence that it would

suffer economic harm if supplied from AWG’s Oklahoma City

facility. Therefore, AWG argues that “supply . . . from the Tulsa

Facility” is not an economically material term, and AWG’s

performance from its Oklahoma City facility should not preclude
11

assignment of the Tulsa FSA to AWG. 

We disagree. AWG misconstrues the Joshua Slocum

standard. The resolution of this dispute does not depend on

whether a term is “economically material.” Rather, the focus is

rightly placed on the importance of the term within the overall

bargained-for exchange; that is, whether the term is integral to the

bargain struck between the parties (its materiality) and whether

performance of that term gives a party the full benefit of his

bargain (its economic significance). See Joshua Slocum, 922 F.2d

at 1092 (concluding that “average sales” provision of lease which

permits either landlord or tenant to terminate the lease after either

three or six years if annual sales are below a certain level is

“material in the sense that it goes to the very essence of the

contract, i.e., the bargained for exchange”); In re E-Z Convenience

Stores, Inc., 289 B.R. 45, 51-52 (Bankr. M.D.N.C. 2003) (holding

that right of first refusal is a material and bargained-for element of

the lease which is economically significant to nondebtor party to

lease); In re New Breed Realty Enter. Inc., 278 B.R. 314, 324-25

(Bankr. E.D.N.Y. 2002) (holding breached “time is of the essence”

clause is material aspect of agreement based upon agreement’s

unequivocal statement and state law); In re Southern Biotech, Inc.,

37 B.R. 311, 317 (Bankr. M.D. Fla. 1983) (barring assumption of

contract by trustee, involving sale of plasma from blood collected

by inmates, where contract required that collection be conducted in

accordance with “good and sound medical practice” and trustee

could not provide such adequate assurance). 

A “time is of the essence” clause is similar to “supply . . .

from the Tulsa Facility” in the sense that it is not inherently

material or obviously economic, but such a term can be integral to

a contract, and certainly, delay can cause economic detriment. See

New Breed, 278 B.R. at 322-25 (noting that a party’s failure to

perform by the date specified is a material breach of an agreement

where both parties agreed to include “time is of the essence”

provision in the contract). Likewise, “supply . . . from the Tulsa

Facility” does not have manifest material and economic

significance. However, because the Tulsa FSA arose from

Fleming’s acquisition of the Tulsa Facility, it is clear that the

parties considered supply from that facility to be “material” in the

sense that the express condition was an integral part of the
12

agreement. Moreover, not utilizing the Tulsa Facility would

burden Albertson’s in an “economically significant” way – that is,

Albertson’s would not reap the benefit of its bargain. Not only did

Albertson’s expect timely delivery of foodstuffs at agreed-upon

prices no matter where product was purchased or shipped, but it

also bargained for the benefits of expedience, of a trained staff, a

consistent supply of products, and a proven electronic system of

record-keeping which furthered Albertson’s marketing and pricing

plans, all of which were only available “from the Tulsa Facility.”

Our analysis does not end here. We must also consider the

rights of AWG and Fleming’s creditors to get the benefit of the

bargain Fleming struck with Albertson’s. See Joshua Slocum, 922

F.2d at 1092. “‘Adequate assurance of future performance’ are not

words of art; the legislative history of the [Bankruptcy] Code

shows that they were intended to be given a practical, pragmatic

construction. . . . What constitutes ‘adequate assurance of future

performance’ must be determined by consideration of the facts of

the proposed assumption.” Cinicola, 248 F.3d at 120 n.10

(quotation marks and alterations omitted). Here, the record reflects

and our review confirms that AWG could not provide the same

benefits to Albertson’s as were available from Fleming, due to the

fact that Fleming rejected the Tulsa Facility lease at AWG’s behest.

AWG has not pointed to any evidence on appeal that would lead to

an opposite conclusion. On balance, considering the right of

Albertson’s to expect their foodstuffs to be “suppl[ied] . . . from the

Tulsa Facility” and the rights of AWG and Fleming’s creditors to

get the benefit of a supply contract, we conclude that the scale tips

in favor of Albertson’s. 

Accordingly, we hold that “supply . . . from the Tulsa

Facility” is both a material and an economically significant term of

the contract, and AWG, by its own actions, cannot give adequate

assurance of performance.

B.

AWG further argues that designating “from the Tulsa

Facility” as a material term effectively transforms the term into a

de facto anti-assignment provision. The Bankruptcy Code

expressly permits assignment of executory contracts even when

contracts prohibit such assignment. 11 U.S.C. § 365(f)(1). Section
13

365(f)(1) is not limited to explicit anti-assignment provisions.

Provisions which are so restrictive that they constitute de facto

anti-assignment provisions are also rendered unenforceable. See

In re Rickel Home Ctrs., Inc., 240 B.R. 826, 831-32 (D. Del. 1999)

(citing Joshua Slocum, 922 F.2d at 1090). Neither Albertson’s nor

Fleming could operate the Tulsa Facility profitably. According to

AWG, reading the Tulsa FSA to require a buyer to acquire the

Tulsa Facility limits the scope of potential buyers in that sale to

either an existing wholesaler in the region who does not have its

own distribution center or to a new entrant into the marketplace

seeking to acquire both the Tulsa FSA and the distribution center.

C&S, the high bidder on Fleming’s assets, was unwilling to

commit to taking the Tulsa Facility, in part because both

Albertson’s and Fleming were unable to operate the facility

successfully. Therefore, AWG contends that to require shipment

from the Tulsa Facility is to burden an assignee with a heavy

economic obligation, thus constituting a de facto anti-assignment

provision.

Section 365(f) requires a debtor to assume a contract subject

to the benefits and burdens thereunder. In re ANC Rental Corp.,

277 B.R. 226, 238 (Bankr. D. Del. 2002). “The [debtor] . . . may

not blow hot and cold. If he accepts the contract he accepts it cum

onere. If he receives the benefits he must adopt the burdens. He

cannot accept one and reject the other.” In re Italian Cook Corp.,

190 F.2d 994, 997 (3d Cir. 1951). The cum onere rule “prevents

the [bankruptcy] estate from avoiding obligations that are an

integral part of an assumed agreement.” United Air Lines, Inc v.

U.S. Bank Trust Nat’l Ass’n (In re UAL Corp.), 346 B.R. 456, 468

n.11 (Bankr. N. D. Ill. 2006). 

Applying this precept to our determination above that

“supply . . . from the Tulsa Facility” is a material term of the

contract, we reject AWG’s argument that the term operates as a de

facto anti-assignment provision. We recognize that a fine line

exists between reading a contractual term as a burdensome

obligation or as a de facto restriction on assignment. However, we

draw the line where a party refuses to accept part of the contract’s

obligations, and as a result it cannot perform a material bargainedfor term of the contract. Here, AWG rejected the Tulsa Facility

lease, and now complains that it is impossible to comply with an
14

integral term of the contract. This term could have been

performed by some party. It is not now an anti-assignment

provision simply because AWG made the decision not to take on

a necessary burden. As we have previously expressed, “[a]n

assignment is intended to change only who performs an obligation,

not the obligation to be performed.” Medtronic Ave., Inc. v.

Advanced Cardiovascular Sys., Inc., 247 F.3d 44, 60 (3d Cir. 2001)

(quotation marks omitted). 

IV.

We conclude that “supply . . . from the Tulsa Facility” is a

material and economically significant term which AWG cannot

perform because it has rejected the lease for the Tulsa Facility. The

inability to perform this aspect of the agreement precludes the

assignment of the Tulsa FSA to AWG. Accordingly, we will

affirm the District Court’s judgment.