Court Opinion

ID: 2982794
Source: CourtListenerOpinion
Date Created: 2015-09-22 20:36:11.159346+00
Date Added: 2024-06-11T18:00:56.161903
License: Public Domain

NOT RECOMMENDED FOR PUBLICATION
                                    File Name: 15a0132n.06

                                                  No. 14-5232

                              UNITED STATES COURTS OF APPEALS
                                   FOR THE SIXTH CIRCUIT

In re: BLACK DIAMOND MINING COMPANY,
LLC, et al.,                                                                        FILED
                                                                                 Feb 13, 2015
         Debtor.                                                             DEBORAH S. HUNT, Clerk
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THE CIT GROUP/COMMERCIAL SERVICES,                                 )
INC.,                                                              )
                                                                   )
         Appellant,                                                )
                                                                   )
                                                                       ON APPEAL FROM THE
v.                                                                 )
                                                                       UNITED STATES DISTRICT
                                                                   )
                                                                       COURT FOR THE EASTERN
CONSTELLATION ENERGY COMMODITIES                                   )
                                                                       DISTRICT OF KENTUCKY
GROUP, INC. and CONSTELLATION ENERGY                               )
GROUP, INC.,                                                       )
                                                                   )
         Appellees.

BEFORE:           NORRIS, ROGERS, and WHITE, Circuit Judges.

         ROGERS, Circuit Judge. Constellation Energy Commodities Group (“Commodities”)

and Black Diamond Mining Company agreed to buy and sell coal to and from one another. The

agreement allowed the parties to “net” offsetting obligations so as to avoid the hassle of making

redundant payments. Shortly after Commodities and Black Diamond executed the agreement,

Black Diamond assigned to The CIT Group its right to receive payments for coal it delivered to

Commodities. When Black Diamond went bankrupt a few years later, Commodities had not paid

CIT for roughly $10 million in coal Commodities had received. CIT demanded payment, but

Commodities contended that, under the netting provision, it could offset the $10 million debt
No. 14-5232, CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Inc. et al.

against the roughly $90 million Black Diamond owed it, meaning Commodities did not have to

pay CIT anything. CIT countered that Commodities could not rely on Black Diamond’s debts as

the basis for not paying CIT the $10 million.

       This case boils down to whether Commodities’ $10 million debt to CIT is subject to the

netting provision. It is. Under New York law, which governs this dispute, an assignee stands in

the shoes of its assignor and takes subject to those liabilities of its assignor that were in existence

prior to the assignment. CIT, as Black Diamond’s assignee, is not entitled to payment of the $10

million because, under the netting provision in place at the time of the assignment, Black

Diamond itself would not have been entitled to payment of the $10 million.

       In its order affirming the bankruptcy court’s grant of summary judgment, the district

court summarized the facts of this case as follows:

                In 2006, [Black Diamond] agreed to sell coal to [Commodities]. Shortly
       after executing its contract with Commodities, Black Diamond assigned its right
       to receive payments for the coal to [CIT]. So the basic scheme was simple: Black
       Diamond sold coal to Commodities, and Commodities paid CIT.
                Black Diamond and Commodities carried on their relationship through
       both written and unwritten contracts. Their written agreements each contained a
       so-called “netting” provision. That provision allowed the parties to “net” mutual
       debts to avoid redundant payments. So, if Black Diamond owed Commodities
       $200,000, and Commodities owed Black Diamond $100,000, then the contract
       required only a single $100,000 payment by Black Diamond. It is undisputed that
       the unwritten agreements included an identical netting provision.
                The wheels came off the wagon in early 2008. Black Diamond failed to
       fulfill its obligations to both Commodities and CIT, and CIT forced Black
       Diamond into bankruptcy. Black Diamond’s bankruptcy constituted a breach of
       its agreements with Commodities. That breach forced Commodities to buy coal
       at much less favorable prices than those contemplated by its contracts with Black
       Diamond, resulting in damages of around $90,000,000.
                This suit arises from one of the last transactions that preceded Black
       Diamond’s bankruptcy. In December 2007, Commodities purchased a shipment
       of coal from Black Diamond pursuant to an unwritten contract for roughly
       $10,000,000. Commodities never paid for the coal. The question presented here
       is whether Commodities may “net” that $10,000,000 against the $90,000,000 it
       lost as a result of Black Diamond’s declaration of bankruptcy. If so, then

                                                 -2-
No. 14-5232, CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Inc. et al.

        Commodities owes CIT nothing, as it can simply subtract that $10,000,000 from
        the $90,000,000 it is owed. If not, then Commodities must pay CIT.

The CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Inc. et al., No. 13-

88-ART, 2014 WL 345413, at *1 (E.D. Ky. Jan. 30, 2014).

        The bankruptcy court granted Commodities’ motion for summary judgment, holding that

Commodities could rely on the netting provision as a defense against payment of the $10 million.

The district court affirmed, explaining that, “as a matter of logical necessity,” CIT, as Black

Diamond’s assignee, could not take better rights to payment than Black Diamond had to give,

and that since Black Diamond’s right to payment from Commodities was subject to the netting

provision, CIT’s right to payment was similarly circumscribed. Id. at *2. CIT now appeals the

district court’s decision.

        Here is the full text of the netting provision:

        The Parties hereby agree that they shall discharge mutual debts and payment
        obligations due and owing to each other on the same date or in the same month in
        respect of this Agreement and any other transaction between the Parties in the
        same Commodity through netting. All amounts owed by each Party to the other
        Party, including any related liquidated damages, interest or other amounts, shall
        be netted so that only the net difference between such amounts shall be payable
        by the Party who owes the greater amount. Each party reserves to itself all rights,
        setoffs, counterclaims, combination of accounts, liens and other remedies and
        defenses which such Party has or may be entitled to (whether by operation of law
        or otherwise). All payment obligations hereunder and under any transaction
        between the Parties in the same Commodity may be offset against each other, set
        off or recouped.
BR doc. #1-2, at 16. The second sentence is of particular significance to this case. The phrase

“All amounts owed by each Party to the other Party, including any related liquidated damages,

interest or other amounts” undeniably encompasses both the $90 million Black Diamond owed

Commodities and the $10 million Commodities owed Black Diamond’s assignee, CIT. The

second half of the sentence not only allows, but affirmatively requires that such debts “be netted

so that only the net difference between such claims shall be payable by the Party who owes the

                                                  -3-
No. 14-5232, CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Inc. et al.

greater amount.” There is no ambiguity about how netting works under the agreement: it applies

to “All amounts owed” between the parties at all times. CIT appeared to concede as much

below; its arguments were not addressed to the operation of the netting provision, but, rather, to

whether the provision applies to CIT as the assignee. The CIT Grp./Comm. Servs., Inc. v.

Constellation Energy Commodities Grp., Inc. et al., No. 7:13-cv-88-ART, doc. # 22, PageID

247–49.

        When CIT took assignment of Black Diamond’s rights under the agreement, it did not

take those rights free of the netting provision—although nothing kept it from negotiating such an

agreement with Commodities. Instead, CIT simply stepped into Black Diamond’s shoes as

payee, its right to payments subject to all of the defenses that Commodities might have asserted

against Black Diamond under the existing agreement, including the netting provision. That is so

because, “It has always been the law in New York that an assignee stands in the shoes of its

assignor and takes subject to those liabilities of its assignor that were in existence prior to the

assignment.” Septembertide Pub., B.V. v. Stein & Day, Inc., 884 F.2d 675, 682 (2d Cir. 1989)

(internal citation omitted). New York’s Uniform Commercial Code codifies that very principle,

providing that “the rights of an assignee are subject to . . . all terms of the agreement between the

account debtor and the assignor.” N.Y.U.C.C. § 9-404(a)(1). The upshot is that, where an

account debtor could assert a defense against an assignor, it may generally assert that defense

against an assignee. See Riviera Fin. of Tex., Inc. v. Capgemini US, LLC, 511 F. App’x 92, 94

(2d Cir. 2013) (citing Gen. Elec. Credit Corp. v. Xerox Corp., 112 A.D.2d 30, 31 (N.Y. 4th

Dep’t 1985)). If it were otherwise, defenses like the one established by the netting provision

would be worthless, since a contracting party could circumvent them by simply assigning its

rights to a third party.

                                                -4-
No. 14-5232, CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Inc. et al.

       Of course, an assignee is not subject to setoff for every debt the assignor incurs. If, for

instance, an assignor incurs a debt that bears no relationship to the right assigned, that debt does

not diminish the assignee’s rights under the assignment. But that is not the case here. The right

Black Diamond assigned to CIT was expressly limited by the netting provision when it was

assigned. The netting provision was built into the right assigned. It does not matter that it was

only after the assignment that Black Diamond became a net debtor to Commodities, since, by its

terms, the netting provision ensured that netting would apply not just to already-incurred debts,

but also to future debts.

       Under New York law, then, Commodities could assert the netting defense against CIT,

Black Diamond’s assignee, just as it could assert the defense against Black Diamond. CIT’s

attempts to muddy this straightforward conclusion are unavailing. CIT asserts, for example, that

the netting provision is unenforceable because New York law requires that contractual provisions

creating setoff rights more expansive than those established by common law or statute be drafted

“with clarity and specificity.” But no New York cases establish such a requirement—at least not

beyond the requirement for clarity that applies to all contracts. See Reinfemet Int’l Co. v.

Eastbourne N.V., 25 F.3d 105, 108 (2d Cir. 1994) (citing W.W.W. Assocs., Inc. v. Giancontieri,

566 N.E.2d 639, 642 (N.Y. 1990)). Neither of the New York cases CIT cites in support of its

position, N. Am. Mortg. Investors, Inc. v. FAS, No. 02-8789, 2004 WL 1885961 (S.D.N.Y. Aug.

23, 2004), or Bank of New York v. Meridian BIAO Bank Tanzania Ltd., No. 95 CIV 4856, 1997
WL 53172 (S.D.N.Y. Feb. 10, 1997), requires a different conclusion. In FAS, for example, the

issue was whether the meaning of an offset provision was sufficiently ambiguous as to preclude

summary judgment. N. Am. Mortg. Investors, Inc., 2004 WL 1885961, at *1. The scope of the

provision at issue depended on whether one party’s anticipation of possible liability on certain

                                                -5-
No. 14-5232, CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Inc. et al.

claims was “reasonable.” Id. at *4. Because the meaning of “reasonable” in that context was not

clear, the district court found that summary judgment was not appropriate. The netting provision

here, by contrast, does not have any similarly ambiguous language, so that enforcing it requires

only a straightforward reading of its terms. The challenged offset provision in FAS was further

rendered ambiguous because the documents in the record in that case supported competing

interpretations of its terms. Id. at *3. Nothing in the record here, by contrast, creates any

ambiguity in the netting provision. Given these material differences between the provision at

issue in FAS and the netting provision, the holding in FAS is inapposite.

        Bank of New York is even less helpful to CIT. In that case, the district court held that a

setoff provision defining “obligations” to include all “present and future obligations and

liabilities of whatever nature (whether matured or unmatured, absolute or contingent)” was

enforceable. Bank of New York, 1997 WL 53172, at *2. In its briefs and at oral argument, CIT

painted Bank of New York as establishing the lower bound of the type of language that is

sufficiently clear to merit enforcement of a setoff. Nothing in Bank of New York supports that

reading. The Bank of New York court merely noted that the language at issue in that case was

acceptably clear, not that a less explicit setoff provision would be per se unenforceable for

failing to meet some undefined standard of clarity. Bank of New York does not support the rule

that CIT attributes to it.

        CIT also argues that the netting provision preserved only common-law setoff rights, but

its argument is undermined by language in the netting provision. For one thing, the netting

provision expressly reserves to the parties the right to setoff “by operation of law or otherwise.”

BR doc. #1-2, at 16. If, as CIT contends, the netting provision preserves only common-law

setoff rights, the “or otherwise” language would be superfluous, a result disfavored by New York

                                                -6-
No. 14-5232, CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Inc. et al.

law. See Rhodes v. Newhall, 126 N.Y. 574, 578 (N.Y. 1891). Furthermore, the netting provision

expressly provides for netting of “All amounts owed by each Party to the other Party, including

any related liquidated damages, interest or other amounts,” and that “All payment obligations

hereunder and under any transaction between the Parties in the same Commodity may be offset

against each other, set off or recouped.” BR doc. #1-2, at 16. Allowance of such broad netting

rights goes beyond the narrower rights preserved by New York’s common-law setoff rules. See,

e.g., In re Westchester Structures, Inc., 181 B.R. 730, 740 (S.D.N.Y. 1995) (explaining some

limitations on common-law setoff). It is entirely consistent, however, with the commonsense

rule that “parties are free to create contractual setoff rights that differ from those provided by

common law or statute.” In re Lehman Bros. Inc., 458 B.R. 134, 139 (S.D.N.Y. Bankr. 2011).

The language of the netting provision makes clear that the parties intended to protect more than

just common-law setoff rights.

       Finally, CIT argues that Commodities should not be allowed to invoke the netting

provision because Commodities allegedly breached the agreement before Black Diamond went

into bankruptcy. Nothing in the agreement between Black Diamond and Commodities, however,

prohibits a breaching party from invoking the netting provision. To be sure, there is language in

the agreement establishing that, notwithstanding the netting provision, a “non-Defaulting party

may withhold any payment otherwise owed to the Defaulting party hereunder, until . . . all

amounts due and payable as of the Early Termination Date by the Defaulting Party . . . have been

fully and finally paid.” BR doc. #1-2, at 14. But that language expressly applies only where the

“non-Defaulting party”—Black Diamond, in CIT’s telling—has established an “Early

Termination Date,” and it is undisputed that Black Diamond never complied (or even tried to

comply) with the agreement’s procedures for establishing an Early Termination Date. Thus,

                                               -7-
No. 14-5232, CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp., Inc. et al.

nothing in the language CIT cites bars Commodities from recovering—so far as it can—the debts

that Black Diamond owes it, including by means of the netting provision.

       Because Commodities is entitled to assert its rights under the netting provision against

CIT, and because that decision suffices to decide this appeal in Commodities’ favor, there is no

need for us to address the other defenses Commodities raises. The judgment of the district court

is AFFIRMED.

                                              -8-