In re:Old Summit Mfg ( 2008 )

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
4-14-2008
In re:Old Summit Mfg
Precedential or Non-Precedential: Precedential
Docket No. 06-3838
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-3838
IN RE: OLD SUMMIT MANUFACTURING, LLC
f/k/a SUMMIT MANUFACTURING LLC,
Debtor
WILLIAM G. SCHWAB, ESQ.
v.
PENNSUMMIT TUBULAR, LLC;
NEW SUMMIT MANUFACTURING,
Appellants
Appeal from the United States District Court
for the Middle District of Pennslvania
(D.C. Civil Action No. 05-cv-00981)
District Judge: Honorable A. Richard Caputo
Argued September 25, 2007
Before: AMBRO, JORDAN and ROTH, Circuit Judges
(Opinion filed: April 14, 2008)
Bruce A. Herald, Esquire
Goldberg, Meanix & Muth
135 West Market Street
West Chester, PA 19382
David J. Harris, Esquire (Argued)
Suite 310
15 Public Square
Wilkes-Barre, PA 18701
Counsel for Appellant
Jason Z. Christman, Esquire (Argued)
William G. Schwab, Esquire
William G. Schwab & Associates
P.O. Box 56
811 Blakeslee Boulevard Drive East
Lehighton, PA 18235
Counsel for Appellee
OPINION OF THE COURT
AMBRO, Circuit Judge
2
This case stems from the sale of the assets of a steel
products manufacturer in bankruptcy. We decide whether three
checks that were received, but had not cleared, before the
closing of the sale are included in the assets sold. We conclude
that they are not, and thus affirm the decision of the District
Court (which in turn affirmed that of the Bankruptcy Court).
I
Old Summit Manufacturing, LLC (“Old Summit”), a
maker of tubular steel products, filed for bankruptcy in July
2002.1 Appellee William Schwab serves as its Chapter 7
bankruptcy trustee. In November 2003, he filed an avoidance
action against appellants New Summit Manufacturing, LLC
(“New Summit”) and PennSummit Tubular, LLC (“Penn
Summit”) (collectively, “Purchasers”) in the United States
Bankruptcy Court for the Middle District of Pennsylvania. He
alleged that Old Summit and New Summit, the parties to an
agreement transferring Old Summit’s assets (the “Agreement”),
had interpreted it incorrectly, resulting in the incorrect transfer
of $29,540.37 to Purchasers.2
1
Old Summit initially filed under Chapter 11 of the
Bankruptcy Code, but the case was converted to Chapter 7 in
February 2003.
2
Penn Summit was not party to the Agreement. New Summit
transferred Old Summit’s assets to Penn Summit after the
performance of the Agreement.
3
The Agreement included in the sale “all accounts
receivable of [Old Summit] related to the business,” Agreement
§ 1.1(b), and “all other assets of [Old Summit] related to the
Business wherever located, tangible or intangible,” Agreement
§1.1(l). It excluded from the sale “all cash and cash equivalents
of [Old Summit,] whether on hand, in transit or in banks or other
financial institutions, security entitlements, security accounts,
commodity contracts and commodity accounts; provided,
however, if the Closing does not occur on or before September
4, 2002, [New Summit] shall be entitled to the Collected
Receivables.” Agreement § 1.2(a).3
The parties stipulated to the following facts before the
Bankruptcy Court:
1. Subject to the terms of an Asset Purchase
Agreement, dated, executed, and approved
by an Order of [the Bankruptcy Court] on
September 4, 2002, [Old Summit] sold
substantially all its assets to New Summit,
and pursuant to Paragraph 1.1(b), all its
receivables. New Summit transferred to
3
Agreement § 1.1(k) defines as “Collected Receivables” (in
the event that the closing did not occur on or before September
4, 2002) “any payments made to [Old Summit] with respect to
any accounts receivable of [Old Summit] related to the Business
(other than with respect to intercompany accounts receivable .
. . ) on or after September 4, 2002 until the Closing.”
4
Penn Summit the assets that it acquired
from [Old Summit]. . . .
2. On September 3, 2002, [Old Summit]
received the following checks: $285.00
from T-Mobile U.S.A., $28,852.00 from
Oakland Reserve, Ltd., and $403.37 from
Triton PCS Operating Co., LLC d/b/a . . .
Suncom, for a total of $29,540.37.
3. [Old Summit’s] employee, Kathy E.
Drasher, shipped the foregoing checks for
deposit to IBJ Whitehall Bank and Trust
Co. (the “Bank”) by Federal Express on
September 3, 2002.
4. The checks were then posted by the Bank
on September 4, 2002.
5. The checks cleared the Bank on or
subsequent to September 4, 2002.
Though not a stipulated fact, Old Summit transmitted
$29,540.37 to New Summit on September 17, 2002. Complaint
¶ 12; Answer ¶ 12.4
4
Old Summit describes the transmittal as a “transfer[].”
Complaint ¶ 12. New Summit calls it a payment “representing
5
Schwab argued before the Bankruptcy Court that the
$29,540.37 sum no longer was an account receivable of Old
Summit on September 4, 2002 (the date of closing), and thus
should have been excluded from the transaction. Purchasers
argued that a tendered check remains an account receivable until
the moment it is honored and that a check does not become cash
or a cash equivalent until it clears the drawee’s bank (in this
case, the banks of the three account debtors — T-Mobile,
Oakland Reserve, and Triton). Purchasers thus contended that
Old Summit was correct to transmit the $29,540.37 sum to New
Summit.
The Bankruptcy Court decided the case in favor of
Schwab, concluding that the accounts receivable had been
reduced by the amount of the checks and that the checks were
cash equivalents belonging to Old Summit. Purchasers appealed
to the District Court.
The District Court affirmed the decision of the
Bankruptcy Court, concluding that “at the time the Agreement
closed, the obligation represented by the Checks was discharged
and accordingly there was no longer a receivable to include in
the transfer.” Because they were honored retroactively on the
date of receipt, the checks “were no longer checks in the
conventional sense” and were “essentially converted to cash
the proceeds from one of the accounts receivable purchased by
New Summit.” Answer ¶ 12.
6
equivalents as of September 3, 2002 when the debt was
suspended and subsequently discharged.” Purchasers timely
appealed to us.
II
We have jurisdiction pursuant to 28 U.S.C. §§ 158(d) &
1291. Our review is plenary. Sovereign Bank v. Schwab, 414
F.3d 450, 452 n.3 (3d Cir. 2005). On appeal from a District
Court’s decision in its bankruptcy appellate capacity, we
exercise the same standard of review as the District Court; we
review the Bankruptcy Court’s legal determinations de novo and
its factual determinations for clear error. Id.
III
A. Controlling Law
The Agreement provides that it “shall be governed by and
construed in accordance with the laws of the Commonwealth of
Pennsylvania without reference to choice of law principles
thereof.” Agreement § 12.7. In Pennsylvania,
[c]ontract interpretation is a question of law that
requires the court to ascertain and give effect to
the intent of the contracting parties as embodied
in the written agreement. Courts assume that a
contract’s language is chosen carefully and that
7
the parties are mindful of the meaning of the
language used. When a writing is clear and
unequivocal, its meaning must be determined by
its contents alone.
Dep’t of Transp. v. Pa. Indus. for the Blind & Handicapped, 886
A.2d 706, 711 (Pa. Cmwlth. 2005) (internal citations and
quotation marks omitted).
A contract is ambiguous if it is reasonably
susceptible of different constructions and capable
of being understood in more than one sense. The
court, as a matter of law, determines the existence
of an ambiguity and interprets the contract
whereas the resolution of conflicting parol
evidence relevant to what the parties intended by
the ambiguous provision is for the trier of fact.
Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 390 (Pa.
1986) (internal citations omitted). However, “[a]n appellate
court may draw its own inferences and arrive at its own
conclusions when a finding of fact is simply a deduction from
other facts and the ultimate fact in question is purely a result of
reasoning.” Id. at 391 n.6. A court always may consider the
course of performance as evidence of the intent of the parties.
Atlantic Richfield Co. v. Razumic, 390 A.2d 736, 741 n.6 (Pa.
1978).
8
B. Accounts Receivable
Old Summit argues that the checks are not accounts
receivable. Purchasers do not contest this assertion, which is
correct under the Pennsylvania Uniform Commercial Code.
Under Pennsylvania’s UCC,
[u]nless otherwise agreed and except as provided
in subsection (a) [relating to certified checks], if
a note or an uncertified check is taken for an
obligation, the obligation is suspended to the
same extent the obligation would be discharged if
an amount of money equal to the amount of the
instrument were taken, and the following rules
apply:
(1) In the case of an uncertified check,
suspension of the obligation continues
until dishonor of the check or until it is
paid or certified. Payment or certification
of the check results in discharge of the
obligation to the extent of the amount of
the check.
13 Pa. Cons. Stat. § 3310(b). The Supreme Court of
Pennsylvania recently explained the meaning of this section: “In
plain words, payment is conditionally made when the creditor .
. . accepts payment by a check from the debtor . . . . If the check
9
is honored, the condition is removed and payment relates back
to the date of acceptance (i.e., receipt).” Romaine v. Workers’
Comp. Appeal Bd. (Bryn Mawr Chateau Nursing Home), 901
A.2d 477, 485 (Pa. 2006).
The incorporation of Pennsylvania law into the
Agreement, and the absence of any term providing for a
departure from that law with respect to accounts receivable,
mean that the rule noted above applies here. As a result, that
portion of Old Summit’s accounts receivable was satisfied
conditionally upon receipt of the checks and satisfied
unconditionally when the checks cleared (with satisfaction
deemed backdated to the date of receipt). Accordingly, the
amount of the three checks was no longer included in Old
Summit’s accounts receivable at the closing on September 4.
C. Cash Equivalents
Our conclusion that the checks were no longer accounts
receivable at the time of the closing does not resolve fully the
issue before us. Even if not accounts receivable, the checks, as
a matter of contract, still might have been included in the
transaction as among “all other assets of Sellers related to the
Business[,] wherever located, tangible or intangible.”
Agreement §1.1(l). We agree, however, with Old Summit that
the checks were not part of the transaction by contract. This is
because they were cash equivalents excluded within the
10
meaning of Agreement § 1.2(a).
On the simplest level, it is not clear that the Agreement
intended to recognize an asset class that was neither accounts
receivable nor cash equivalents. Article 9 of the Uniform
Commercial Code, which governs secured transactions,
indicates that the checks here should be regarded as cash
equivalents. That Article, while not directly applicable here,
explains that the term “cash proceeds” means “proceeds that are
money, checks, deposit accounts, or the like.” 9 U.C.C. §
102(a)(9); codified as 13 Pa. Cons. Stat. § 9102(a). “[O]r the
like” means cash equivalents. This is in accord with Black’s
Law Dictionary, which defines cash as, inter alia, “[m]oney or
its equivalent” or “negotiable checks.” Black’s Law Dictionary
229 (8th ed. 2004).5
The terms of the Agreement also lead to this conclusion.
It covers cash or cash equivalents “in transit.” This phrase
accurately describes the checks (and underlying funds) at issue
here. They had been received, and their deposit at Old
5
Purchasers argue that we should look to federal regulations
defining cash and cash equivalents. This argument is
unpersuasive, as we conclude that the UCC, which has been
incorporated into Pennsylvania law (which, in turn, governs the
Agreement), provides more useful guidance than federal law.
Moreover, as discussed below, we conclude that the terms of the
Agreement support the view that the checks in question should
be treated as cash equivalents.
11
Summit’s bank began the transit process from the banks of the
three customers to Old Summit’s bank account. Thus the
Agreement would appear to consider the types of checks
received by Old Summit on September 3 to be cash equivalents.
In addition, the Agreement exacts a penalty of Old
Summit in the case of failure to close by September 4, 2002. In
that event, any payments made to Old Summit with respect to
accounts receivable (which would include checks) received after
September 4 would be included among the assets sold. “[I]f the
Closing does not occur on or before September 4, 2002,” the
sold assets include “any payments made to [Old Summit] with
respect to any accounts receivable of [Old Summit] related to
the business . . . on or after September 4, 2002 until the
Closing.” Agreement § 1.1(k). The negative implication is that
the accounts receivable of Old Summit paid by checks of its
account debtors prior to September 4 were excluded assets. This
suggests that the parties assume that payments clear and become
cash equivalents instantaneously. They do not anticipate any
delay in the clearance of payments, suggesting that receipt of a
payment is sufficient to render it a cash equivalent within the
meaning of the Agreement.
Finally, the Agreement sets a range of locations of cash
or cash equivalents that suggests a broad definition of “cash
equivalents.” It lists cash or cash equivalents “whether on hand,
in transit or in banks or other financial institutions, security
entitlements, securities accounts, commodity contracts and
12
commodity accounts.” Agreement § 1.2(a). The Agreement
does not make clear what it means by the last four items in this
list, but these terms imply a definition of cash equivalents that
incorporates assets that may not be immediately liquid. This
supports an expansive reading of “cash equivalents” that would
incorporate the checks received on September 3.
* * * * *
In light of these considerations, we conclude that the
three checks received by Old Summit before the September 4,
2002 closing, but not cleared until after the closing, remain
assets of Old Summit excluded from the sale.6 We thus affirm.
6
New Summit argues that the subsequent performance of the
parties – by the post-closing transmittal to New Summit of the
$29,540.37 – demonstrates that the checks are not cash
equivalents. It contends that because Old Summit, in
performing the Agreement, transmitted the value of the checks
to New Summit post-closing, the Agreement must have
contemplated those checks being included in the sale to New
Summit. However, that mistaken act does not require a contrary
result, as it is a poorer indicator of the parties’ intent than the
terms of the Agreement. This is particularly true given that the
Agreement was approved by the Bankruptcy Court. It did not
have the benefit of subsequent performance in approving the
Agreement, so this could not have informed its understanding of
that document.
13