Opinion ID: 3027002
Heading Depth: 3
Heading Rank: 1

Heading: The Supply and Requirements Agreement

Text: 1 Although there is apparently an inconsistency in the record as to the specific dates of the note and supply agreement, the Tax Court stated that it is clear from the record that they “were entered into around the same time and were interdependent.” Karns Prime & Fancy Food, Ltd. v. Comm’r, 90 T.C.M. (CCH) 357, 360 n.9 (2005). 3 The Supply Agreement provided that Super Rite would be the principal wholesaler for all of Karns’ purchased products in the Harrisburg geographical area. Karns agreed to purchase $16 million worth of product annually from Super Rite. In addition, Karns agreed to Super Rite’s general policies and practices in effect, with respect to, for instance, product pricing (Karns paid a 2.5% markup for grocery products, 3% for dairy products, and 3.5% for frozen products), billing and payment terms, and returns and credits for purchased products. Under the terms of the Agreement, Karns was given seven days to make payment for its product purchases. Failure to do so constituted default, and Super Rite had the right to suspend shipments during the term of default. Any default under the Supply Agreement also constituted a default under the note, thus requiring the balance under the note to become due immediately. Under the terms of the Supply Agreement, Super Rite could cancel the Agreement if Karns filed for bankruptcy, failed to pay in accordance with the agreement, or was in default of any “material contract, instrument or agreement, including, without limitation, any lease of real property, any material lease of personal property or any promissory note, instrument or agreement evidencing or in respect of any indebtedness for borrowed money or any security therefor . . . .” App. at 52. Karns had the right to cancel the Agreement in the event that Super Rite filed for bankruptcy protection. Karns granted Super Rite a security interest in its assets, including inventory, accounts, equipment, and proceeds. Karns agreed to make its internal financial statements available within ninety days of each fiscal quarter and a financial statement prepared by its independent accountant every six months. Finally, Karns gave Super Rite a right of first refusal if Karns’ shareholders sold either the corporation or its assets to a third party.