IN RE: RESOURCE TECHNOLOGY CORP. (October 1, 2010)
Resource Technology Corporation (RTC) used to be in the business of converting gas emissions from garbage landfills to electricity. It had exclusive gas conversion rights at several Illinois landfills. The business failed and RTC entered bankruptcy. The bankruptcy trustee entered into a settlement agreement with Chiplease and Scattered, two creditors founded by former RTC officers and directors. Among other things, the agreement provided: a) the trustee agreed to assume several of the landfill contracts and assign them to Chiplease and Scattered, b) Chiplease agreed to pay RTC's operating expenses during the bankruptcy, and c) Chiplease agreed to place $500,000 in escrow as security for the operating expense agreement. The bankruptcy court approved the settlement. The landfill owners objected to the assignment, arguing that § 365's "adequate assurance of future performance" requirement was not met. The principals of Chiplease and Scattered testified that the two companies would lend the requisite $3 million to the trust that had been set up to run the business. Nevertheless, the bankruptcy court rejected the assignment. It concluded that the trust was not capable of performing, that the trust could not require Chiplease and Scattered to lend the money, and that the two companies had financial problems of their own. Judge Kennelly (N.D. Ill.) affirmed. The trust appeals.
Meanwhile, Chiplease never established the $500,000 escrow as required by the agreement. Acting on a complaint by administrative claimants, the bankruptcy court rejected Chiplease's argument that it should be excused because it had already actually paid over $1 million in expenses and ordered it to establish the escrow. Judge Kennelly again affirmed. He also ordered Chiplease to establish the escrow and found it in contempt when it failed to do so. Chiplease appeals.
In their opinion, Judges Ripple, Rovner, and Sykes affirmed on the consolidated appeals. First, with respect to the assignment of the contracts, the Court recited the factors relevant to "adequate assurance”: financial ability, economic climate, whether a guarantee exists, the reputation of the party, and any past history. The bankruptcy court applied the correct standard -- a "more likely than not" requirement. The record showed that performance would require $3 million, that financing was essential, that the trust had no enforceable right to financing, and that the trust was controlled by the same people who controlled RTC when it entered bankruptcy. In addition, the record was practically silent with respect to how Chiplease and Scattered were going to raise the necessary funds. The bankruptcy court acted within its discretion in concluding that the trust failed to carry its burden. With respect to the escrow appeal, the Court concluded that the bankruptcy court did not abuse its discretion in requiring Chiplease to comply with the clear and unambiguous terms of the order. The bankruptcy court was interpreting its own order and is entitled to substantial deference. Finally, with respect to the contempt appeal, the Court concluded that the district court did not abuse its discretion. There was actually no dispute that Chiplease failed to comply with the court's order. Its only response was an “inability to pay” defense. Particularly in light of evidence that Chiplease presented in support of the landfill contract assumption that it had millions of dollars in assets, Chiplease did not meet its burden of proving that inability.