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In re Sycom Enterprises, L.P.

310 B.R. 669 (D. N.J. 2004)

ACCOUNTS; ASSIGNMENT; UCC—Absent a contractual agreement to the contrary, under the UCC, an account debtor or an assignor may modify a contract to the detriment of its assignee so long as the modification is made in good faith and the right to payment has not been fully earned.

An energy saving conservation company entered into an agreement with a local Sewerage Commission. The company was to establish a baseline for measuring the Commission’s energy savings. Once implemented, the company would monitor certain supplied equipment and verify the anticipated savings. The company guaranteed that the Commission would receive rebates from the local electric company for the energy savings. The company and the Commission then entered into several sub-agreements known as “Technical Terms.” Technical Terms #1 provided that the company would install measurement equipment to measure the energy savings from the Commission’s oxygenation mixers facility. At the same time, the company entered into numerous contracts with the local electric company under which the conservation company agreed to structure and implement programs to reduce power consumption at one of the Commission’s other facilities.

A separate contractor was also a party to some of these agreements. In addition, this contractor and a heating and cooling company entered into two subcontracts where the heating and cooling company agreed to perform mechanical work on behalf of the contractor. As security for the contractor’s performance under these two subcontracts, it assigned part of its contract revenues from Technical Terms #1 to the heating and cooling company. About the same time, the energy savings conservation company assigned, to the contractor, all of its right, title and interest in and to the same amount of fee-only receivables that might be paid by the Commission under their agreement. This meant that the energy savings conservation company assigned part of its rights to accounts receivable under the Technical Terms #1 contract to the contractor, who in turn assigned the same receivable to the heating and cooling company as security. The heating and cooling company then notified the Commission of its interest in any payments that might be owed by the Commission under Technical Terms #1 and requested that the Commission direct any such payments to the heating and cooling company.

The energy savings conservation company then filed for Chapter 11 relief. Its case was converted to a liquidation proceeding under Chapter 7 and a trustee was appointed. The company’s insolvency resulted in the various parties alleging breach of contract claims against one another. The Commission filed a proof of claim in the company’s bankruptcy case. Because the company’s assets consisted mostly of executory customer agreements and utility agreements, the trustee marketed then for sale. The trustee could find no purchasers for the contract because of the Commission’s breach of contract claims. Consequently, the parties entered into a global settlement. Under the settlement, the trustee agreed to assume the contracts and then assign them back to the Commission. As a condition of the assignment, the Commission was to release its claims against the estate.

The trustee sought a Bankruptcy Court order authorizing assumption and assignment of the contracts to the Commission free and clear of liens and claims and for approval of the global settlement. The heating and cooling company opposed the motion. Because the trustee, the Commission, and the contractor had the right to modify Technical Terms #1 and because the modification would have been effective against the heating and cooling company, the Bankruptcy Court granted the requested order. Further, the Bankruptcy Court found that, under the global settlement, the trustee had released the Commission from any future payment obligation. The heating and cooling company objected, arguing that, as a secured creditor with a lien on payments from the Commission, its rights could not be altered without its consent. The Commission and the trustee contended that the parties to a contract can modify it without the assignee’s consent.

The heating and cooling company alleged that the Commission had not acted in good faith because it previously had notified the Commission of its lien. It also asserted that the Commission, in bad faith, had excluded the company from negotiations of the global settlement. The Court rejected those contentions, concluding that the heating and cooling company did not have a right to participate in negotiations and that the Commission’s actions did not constitute bad faith.

N.J.S.A. 12A:9-405 of the Uniform Commercial Code provides that an account debtor or an assignor may modify a contract to the detriment of the assignee as long as the modification is made in good faith and the right to payment has not been fully earned. Here, the Court found that the global settlement was reached in good faith and demonstrated sound business judgment, and that the bankrupt estate’s creditors would be well served by the global settlement because it reduced the estate’s liability and also increased its assets.


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