Opinion ID: 176367
Heading Depth: 3
Heading Rank: 2

Heading: Adequate Assurance of Future Performance

Text: The Investment Trust argues that the bankruptcy court erred in rejecting its assumption-and-assignment proposal under § 365(f)(2)(B). As we have noted, § 365 of the Bankruptcy Code allows the bankruptcy trustee to assume and assign a contract of the debtor to another party, but only if adequate assurance of future performance by the assignee of such contract... is provided. 11 U.S.C. § 365(f)(2)(B). Adequate assurance of future performance is interpreted by reference to section 2-609 of the Uniform Commercial Code. Cinicola v. Scharffenberger, 248 F.3d 110, 120 n. 10 (3d Cir. 2001); Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 1985); see also REPORT OF THE COMMISSION ON BANKRUPTCY LAWS OF THE UNITED STATES, H.R. Doc. No. 93-137, pt. 2, at 156-57 (1973) (observing that the phrase adequate assurance of future performance is adopted from Uniform Commercial Code § 2-609(1)). Several factors are relevant to the determination: the financial ability to perform the contract; the general economic climate; the existence of a guarantee; the reputation of the party seeking to assume responsibility for the contract; and past dealings between the parties. See, e.g., Richmond Leasing Co., 762 F.2d at 1310 (identifying the first three factors); U.C.C. § 2-609 cmt. 4 (discussing the last two factors). We review the bankruptcy court's determination for clear error. In re Liljeberg Enters., Inc., 304 F.3d 410, 439 (5th Cir.2002). The Investment Trust argues first that the bankruptcy court applied the incorrect legal standard by essentially requiring an absolute guarantee of performance. See In re Carlisle Homes, Inc., 103 B.R. 524, 538 (Bankr.D.N.J.1988) (observing that the required assurance will fall considerably short of an absolute guarantee of performance (citation omitted)). As used in § 365(f)(2)(B), adequate is a term of art and simply means assurances that are commercially reasonable under the particular circumstances of the case. This is a commonsense, case-specific inquiry, and § 365(f)(2)(B) is given a practical, pragmatic construction, Richmond Leasing Co., 762 F.2d at 1309. Our review of the record convinces us that the bankruptcy court applied the correct standard. The judge focused his inquiry on whether the Investment Trust could show by a preponderance of the evidence that future performance is likely. Contrary to the Trust's argument, this statement does not suggest that the court required an absolute guarantee of performance. Instead, the court required the Trust to show it was more likely than not to perform the obligations of the contract. This is the standard commonly applied to evaluate the adequacy of the future-performance assurances for purposes of § 365(f)(2)(B). See In re Prime Motor Inns, Inc., 166 B.R. 993, 997 (Bankr. S.D.Fla.1994) (citing cases and explaining that an adequate assurance means that performance should be more probable than not). As the party seeking to become the assignee, the Trust had the burden of proving it met the requirements of § 365(f). See In re Tex. Health Enters., Inc., 246 B.R. 832, 835 (Bankr.E.D.Tex. 2000). To understand the bankruptcy judge's decision, it is important to place the proposed assumption-and-assignment transaction in context. The Trust was created under Illinois law as an investment vehicle but was long dormant; Scattered and Chiplease were named as its beneficiaries while the RTC bankruptcy was ongoing and RTC's principals decided to use the Trust to hold and manage the four RTC contracts they wanted to assume. The parties agreed that it would take about $3 million to perform RTC's obligations under these contracts. Thus, the Investment Trust's ability to obtain $3 million in financing was, to use the bankruptcy judge's words, absolutely essential to the Trust's ability to perform; the Trust had no independent assets or revenue stream and was entirely dependent on other entities for capital. Although Scattered and Chiplease intended to loan the Investment Trust the $3 million it needed to perform the four landfill gas-collection agreements, the Trust had no enforceable right to demand this financing, as the bankruptcy judge noted. The judge was understandably skeptical that the Investment Trust would sue Scattered or Chiplease if they decided not to provide the funds. Indeed, Connolly acknowledged in his testimony that he would be unlikely to sue Scattered or Chiplease to obtain the promised financing; and even if he did, Scattered and Chipleasein their role as beneficiaries of the Trustcould have him replaced as trustee. The bankruptcy judge also doubted that Chiplease or Scattered had the financial wherewithal to lend the Investment Trust the $3 million everyone agreed was required to fulfill the obligations of the assigned contracts. The Trust did not submit any financial statements at trial, and according to the witnesses' testimony, most of the assets of the two companies were illiquid. There is very little in the record explaining exactly how Chiplease and Scattered expected to come up with a $3 million capital infusion for the Investment Trust; indeed, the testimony established that Scattered did not have the funds necessary to contribute to this sum. [2] Finally, the bankruptcy court properly considered the fact that the Trust was controlled by the same managers who were at the helm of RTC when it was forced into bankruptcy. Given RTC's difficulties in performing its contracts before the involuntary Chapter 7 petition was filed, the bankruptcy court was within its discretion to require more convincing evidence of the Investment Trust's ability to perform. See U.C.C. § 2-609 cmt. 4 (noting that a promise of performance alone might be adequate when it is made by a seller of good repute but not when it is made by a known corner-cutter). The Trust claims that the bankruptcy judge improperly demanded an escrow account as a condition for approving the assignment. The record does not support this assertion. When the judge announced his decision, he suggested that he would have approved the proposed assignment if the Investment Trust could have shown it had the necessary $3 million in an escrow account. This comment is no more than an observation that the absence of such a fund further undermined the Trust's effort to carry its burden of establishing adequate assurance of performance. Under the fact-intensive, commercial-reasonableness inquiry contemplated by § 365(f)(2)(B), the judge's observation was entirely appropriate. As a final matter, the Trust claims the bankruptcy court gave insufficient weight to the testimony of Connolly (president of RTC and the trustee of the Investment Trust), Greenblatt (owner and director of both Scattered and Chiplease), and Jahelka (co-owner and director of Scattered). These witnesses testified about the financial health of the Investment Trust, Chiplease, and Scattered, and explained that Scattered and Chiplease intended to loan $3 million to the Trust. But the cross-examination of these witnesses identified many weaknesses in their testimony, and it was the Trust's burden to introduce enough evidence to demonstrate adequate assurance of future performance. See Texas Health Enters., 246 B.R. at 835. The bankruptcy judge was well within his discretion to conclude that the testimony of the Trust's witnesses was insufficient to meets its burden of proof under § 365(f)(2)(B). See United States v. Irby, 558 F.3d 651, 654 n. 3 (7th Cir.2009). In sum, the bankruptcy court weighed all the evidence and made a reasoned, well-supported decision that the Investment Trust had failed to provide adequate assurance of future performance under § 365(f)(2)(B). We have considered the Trust's other arguments and find them without merit. Accordingly, we reject the Investment Trust's challenge to the bankruptcy court's order declining to approve the assignment of the four Allied and Peoria landfill contracts to the Trust.