The buyer of a Chapter 11 debtor's coal supply contract was not liable for the seller's obligations to the sales agent who secured the contract for the debtor-seller, according to a recent decision by the U.S. Court of Appeals for the Sixth Circuit. Al Perry Enterprises, Inc. v. Appalachian Fuels, LLC, 2007 U.S. App. LEXIS 22808 (6th Cir. Sept. 27, 2007). As the court explained, the buyer could not be liable to the sales agent "absent an express assumption of the [debtor's prior] obligations." Id. at *17.


Before the debtor, Bowie Resources Limited ("Bowie"), a coal mine operator, filed for Chapter 11 protection, it contracted with sales agent Perry Enterprises, Inc. ("Perry") to secure coal supply contracts. Bowie paid Perry a commission on coal sales made by Bowie under these supply contracts, including one with the Tennessee Valley Authority (the "TVA"). Perry sued Bowie after a dispute arose over Bowie's obligations to pay Perry for sales under the TVA contract. The matter was resolved by an agreed judgment requiring that (i) Bowie continue paying Perry sales commissions under the TVA contract, and (ii) if Bowie ever seeks Chapter 11 reorganization relief, that Bowie assume, with bankruptcy court approval, its contractual obligations to Perry under the agreed judgment. Id. at *3–4.

The First Unsuccessful Sale

Bowie later filed a Chapter 11 petition, continuing its operations as a debtor in possession. It paid Perry commissions until July, 2003, but, in September 2003, Bowie sought court approval to sell the TVA contract, with the contract to be assigned to and assumed by a particular buyer. Id. at *4. As part of the sale process, Bowie filed a notice of cure amounts stating that the cure amount for the TVA contract was zero. Perry objected to the cure amount, arguing that, under the agreed judgment relating to the TVA contract, it was entitled to past and future commissions. It also objected to the proposed sale because the proposed buyer asserted that the TVA contract could be assumed and assigned without paying Perry commissions. No sale was consummated to the proposed buyer, however, and Perry took no further action.

The Sale

Bowie later proposed to sell the TVA contract to Appalachian Fuels (the "Buyer"). Perry received notice of the proposed sale and the draft purchase agreement. Like the earlier proposed sale agreement, the TVA contract would be sold, and all assets would be delivered, "free and clear of all Liens except Permitted Liens, pursuant to section[s] 363 and 365 of the Bankruptcy Code." Id. at *6. Among the liabilities to be assumed by the Buyer were "all Liabilities for and obligations of the Seller relating to the Purchased Assets … arising after the Closing Date, including all Liabilities and obligations arising in connection with the Executory Contracts." Id. at *5.

Perry did not object, and the bankruptcy court approved the sale of the TVA contract "free and clear of all liens, claims and encumbrances" other than designated permitted liens. Id. at *6. Perry received no furthercommission payments and sued the Buyer, arguing that, pursuant to the agreed judgment, the Buyer assumed Bowie's sales commission obligations under the TVA contract. The parties cross-moved for summary judgment. The bankruptcy court and the district court held that the Buyer had not assumed the debtor's obligation to pay commissions to Perry. Id. at *7–8.


The Court of Appeals affirmed, holding that an assumption of Bowie's obligations to Perry was "not explicitly mentioned anywhere in the purchase agreement or [in] the bankruptcy court order approving the sale." Id. at 15. Moreover, reasoned the court, Bowie's obligations to pay commissions to Perry were not "related to" and had not arisen "in connection with" the TVA contract. *5. These obligations were, therefore, not "assumed liabilities" under the terms of the purchase agreement. Id. at *5. Rather, the debtor-seller's obligation to pay sales commissions was "'related to' and 'arising in connection with' the separate contract between Bowie and Perry," but not with the TVA contract itself. Id.

The Buyer "clearly assumed Bowie's obligations under the terms of the TVA contract, … [but] no language … in the purchase agreement constitutes an assumption of the obligation of Bowie 'relating to' and 'arising in connection with' a totally separate contract on a totally different subject matter" (i.e., Bowie's contract with Perry). Id. at *16. Finding otherwise would "result in the assumption of a myriad of obligations by the buyer of an executory contract even though those obligations were not created by the executory contract and were not expressly referred to in an asset purchase agreement or [court] order." Id.

Perry's argument was also found inconsistent with its own objection to the earlier proposed sale which, the court noted, was virtually identical to the purchase agreement with the Buyer. Id. at *13, n.4. Whereas Perry had objected to the earlier proposed buyer's assertion "that the TVA contract may be assumed and assigned without paying [the] commissions," in the later sale, even though "Perry had notice that its right to receive commissions was about to be extinguished by virtue of the asset purchase … and had knowledge that the sale would be free and clear of all liens and claims except for those expressly assumed by the purchaser of Bowie's assets, … [it] chose not to file an objection to the sale of the assets." Id. at *12. To the extent that Perry believed its interest in the commissions was protected by the asset purchase agreement language, "[i]t [did so] at its peril." Id. at *13.

Practice Pointers

  • A buyer of assets at a bankruptcy court-ordered sale should diligently negotiate the "assumed liabilities" terms of the asset purchase agreement and any court order approving the sale. Certainty regarding assumed obligations is essential.
  • A non-debtor party to an executory contract being assumed and assigned under an asset purchase agreement should review the agreement and proposed sale order carefully to determine whether the buyer is assuming all of the seller's obligations related to, arising under or in connection with the executory contract.
  • If a seller and purchaser agree that the purchaser will assume an arguably related obligation of the seller, the parties should ensure that the purchaser's assumption of the obligation is explicitly set forth in either the asset purchase agreement or the sale approval order.

“U.S. Treasury Circular 230 Notice: Any U.S. federal tax advice included in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal tax penalties.”