CIT Group/Commercial Services, Inc. v. Constellation Energy Commodities Group, Inc. (In Re Black Diamond Mining Co.)

NOT RECOMMENDED FOR PUBLICATION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
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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
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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.
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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
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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
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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,
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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.
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