Opinion
Chapter 11, Case No. 01-16034 (AJG), Jointly Administered
September 11, 2002
ORDER REGARDING MOTION BY MASSACHUSETTS HIGH TECHNOLOGY COUNCIL, INC., TO REQUIRE DEBTOR TO REMIT CERTAIN FEES
Before the Court is the motion of the Massachusetts High Technology Council, Inc., ("MHTC") and certain of its members dated January 18, 2002 (the "Motion") seeking alternate forms of relief against Enron Energy Marketing Corp. ("EEMC" or "Debtor"). In addition to the Motion, MHTC submitted a Memorandum of Law dated January 18, 2002. On February 28, 2002, EEMC submitted a limited objection to the Motion.
The Motion requested alternate forms of relief including, determining that certain agreements are "forward contracts" under the Code; determining that cause exists to modify the automatic stay; determining that certain agreements be deemed rejected under section 365; and requiring Debtor to remit certain fees (pre and postpetition). Those issues, except for the fees attributable to the prepetition period, have been resolved between the parties in a Corrected Stipulated Order entered by this Court on April 5, 2002. The sole remaining issue before the Court is whether the prepetition fees ("MHTC Fees") collected by EEMC are property of the bankruptcy estate and hence whether MHTC has a claim against the bankruptcy estate or whether such fees are property of MHTC and must be returned to MHTC. In support of its position, MHTC contends that Debtor was its agent, or alternatively trustee, for the collection and remittance of the MHTC Fees. However, Debtor contends that the MHTC Fees are property of the estate because the MHTC Fees were held in Debtor's commingled bank accounts without any restriction as to the use of such monies.
A hearing on the issue of the MHTC Fees was held before this Court on April 4, 2002. In connection with that hearing, MHTC submitted a Reply Memorandum of Law to Debtor's limited objection dated April 2, 2002. In addition to the Reply Memorandum of Law, MHTC submitted an Affidavit of Christopher R. Anderson dated April 2, 2002 (hereinafter "Anderson Aff.").
I. Jurisdiction
This Court has jurisdiction to consider this Motion pursuant to 28 U.S.C. § 157 and 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. § 1408 and 1409.
II. Facts
The relevant background to this motion is alleged as follows. The MHTC is a non-profit Massachusetts corporation whose membership is comprised of over 180 high technology and high value-added service companies ("Council Members") located in Massachusetts. (Anderson Aff at ¶ 1.) The MHTC provides various business services to and for its Members, including the opportunity to purchase electricity at discounted rates. (Anderson Aff. at ¶ 1.)
The Power Sales Agreements ("Agreement(s)") relevant to the issue were an outgrowth of a Pilot Program conceived by the MHTC in 1996. (Anderson Aff. at ¶ 2.) The objective of the program was to enable Council Members to reduce their energy costs by aggregating their purchase of electricity through MHTC. (Anderson Aff. at ¶ 2.)
Before an energy provider had been identified to MHTC Members, MHTC and its Members had discussions and negotiations leading to the agreement of the Members to compensate MHTC for its efforts in structuring the program by payment of a fee calculated as a percentage of the "Shared Savings" (the "MHTC Fee(s)"). (Anderson Aff. at ¶ 3.) The MHTC Fees, ultimately set at seventeen percent (17%) in Paragraph 7.2 of the Agreement, were negotiated directly between MHTC and the Members, and the energy provider played no role in setting or establishing the amount or formula for calculating the MHTC Fees. (Anderson Aff. at ¶ 3.)
In or about July, 1998, MHTC entered into a letter of intent or Memorandum of Understanding ("MOU") with PGE for the supply of electricity to the Members. (Anderson Aff. at ¶ 5.) In Paragraph 2 of the MOU, PGE agreed to collect the MHTC fees on behalf of MHTC, but did not accept the responsibility for payment to MHTC in the event of the non-payment or default by MHTC Members. (Anderson Aff. at ¶ 5.)
MHTC Members then entered into a series of substantially similar Agreements with PGE, beginning in or around October, 1998. (Anderson Aff. at ¶ 6.) Each Agreement was a 60-month electricity supply contract with all of the Agreements containing the same language in Paragraph 7.2. (Anderson Aff. at ¶ 6.) Pursuant to the Agreements, electricity was supplied to the Members at specified delivery points by a third-party utility distributor (referred to as LDCs) and the Members in turn paid PGE a generation charge and a distribution charge for the cost of electricity distributed by the LDC. (Anderson Aff. at ¶ 6.) The price per kilowatt-hour that each Member paid pursuant to the Agreement was based on a formula contained within a transaction schedule attached to each Agreement. (Anderson Aff. at ¶ 6.)
Pursuant to the Agreements, PGE was designated the billing agent for each Member. (Anderson Aff. at ¶ 7.) The Agreements were assigned to EEMC effective on or about June 27, 2000. (Anderson Aff. at ¶ 7.) In assigning the Agreements, there is no evidence that EEMC adopted the terms of the MOU other than a general recital in the Agreement that MHTC has signed a letter of intent with the Seller. At the hearing, MHTC argued that Debtor succeeded to the MOU. Debtor refutes this contention by highlighting the lack of evidence on this point.
Pursuant to the Agreements, the LDCs submitted invoices to the Debtor for the distribution charges incurred by each Member. (Anderson Aff. at ¶ 8.) The Debtor through its designated agent, Computer Sciences Corporation ("CSC"), then billed the Members approximately every thirty (30) days in arrears for the amounts due to it and to the LDCs. (Anderson Aff. at ¶ 8.)
Additionally, pursuant to the Agreements, the Debtor was required to calculate the difference between the amount owed by each Member under the Agreement and the amount that the Member would have paid had the Member purchased electricity at a non-discounted market rate (defined as the "Savings"). (Anderson Aff. at ¶ 9.) Each bill sent by CSC to Members contained a separate line item charge equal to 17% (except as otherwise agreed by MHTC with individual Members) of the Savings (designated as the Mass. High Technology Program Fee). (Anderson Aff. at ¶ 9.) The MHTC Fee is owed by each Member to the MHTC and is "passed through by [the Debtor] to the MHTC." (Anderson Aff. at ¶ 9; Anderson Aff. Ex. A at ¶ 7.2.)
The parties do not dispute that the MHTC was not a signatory to any of the Agreements. In addition, there is no dispute that the Debtor has failed to make certain prepetition payments contemplated under the Agreements to MHTC.
III. Discussion
Section 541 of the Bankruptcy Code provides that a bankruptcy case creates an estate of property comprised of all legal or equitable interests of the debtor as of the commencement of the case. See 11 U.S.C. § 541(a)(1). Congress intended that property of the estate be interpreted broadly. See Official Committee of Unsecured Creditors v. PSS Steamship Co., Inc. (In re Prudential Lines, Inc.), 928 F.2d 565, 569 (2d Cir.), cert. denied, 502 U.S. 821, 112 S.Ct. 82, 116 L.Ed.2d 55 (1991). Notwithstanding the breadth of section 541, not all property in which the debtor holds an interest should be included. In re Hooker Investments, Inc., 155 B.R. 332, 338 (Bankr.S.D.N.Y. 1993). "[T]he [Supreme] Court in Whiting Pools noted that Congress, in enacting the Code, `intended to exclude from the estate property of others in which the debtor had some minor interest such as a lien or bare legal title.'" Id. (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204 n. 8 (1983)).
As a general rule, property that is in the hands of a debtor as agent is not property of the bankruptcy estate. Rine Rine Auctioneers, Inc. v. Douglas County Bank Trust Co., (In re Rine Rine Auctioneers, Inc.), 74 F.3d 854, 857 (8th Cir. 1996). It has been settled under the Code and prior law that if property was in a debtor's hands as agent, the debtor's estate holds only the same interest, and the principal could recover the property or its proceeds. 5 Lawrence P. King et al., COLLIER ON BANKRUPTCY ¶ 541.06[1][b] (15th ed. rev. 1999).
Here, the primary issue is whether the MHTC Fees are property of the bankruptcy estate. The MHTC contends, among other things, that EEMC received the MHTC Fees as the agent of MHTC for the purpose of collecting and transmitting the MHTC Fees. To support this conclusion MHTC relies upon, among other things, the express terms of the Agreements; the MOU; and the history of the structure contemplated in the Agreements. In essence, MHTC has presented an issue of contract interpretation that requires the Court to harmonize these documents with the purpose of the contract. Pursuant to section 13.3 of the Agreement, Massachusetts supplies the governing law. See, e.g., Hooker Investments, Inc., 155 B.R. at 338 (stating that debtor's interest in property is determined by reference to non-bankruptcy, usually state, law).
It is well settled under Massachusetts law that contract interpretation is generally a question of law. Allstate Ins. Co. v. Bearce, 412 Mass. 442, 446-47, 589 N.E.2d 1235 (1992). See Edmonds v. United States, 642 F.2d 877, 881 (1st Cir. 1981). Where the wording of a contract is unambiguous, the contract must be enforced according to its terms. Freelander v. G. K. Reality Corp., 357 Mass. 512, 516, 258 N.E.2d 786 (1970). An ambiguous contract, however, may raise a question of fact for a jury, Trafton v. Custeau, 338 Mass. 305, 307-08, 155 N.E.2d 159 (1959). See also, Gillentine v. McKeand, 426 F.2d 717, 712 (1st Cir. 1970). However, the determination whether a contract is ambiguous is a question of law. Allen v. Adage, Inc., 426 F.2d 717, 698 (1st Cir. 1992). In interpreting a contract, the court must give effect to the parties' intentions and construe the language to give it reasonable meaning wherever possible. Shea v. Bay State Gas Co., 383 Mass. 218, 224, 418 N.E.2d 597 (1981). A contract must also be interpreted as a whole and effect must be given to all of its parts in order to effectuate its overall purpose. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 795, 494 N.E.2d 374 (1986).
Carroll v. Barberry Homes, Inc., No. 976418, 1999 WL 1204020, at *2 (Mass.Super.Ct. Oct. 22, 1999).
Where an agreement is ambiguous, parol evidence is admissible to show the intention of the parties. Cullinet Software, Inc. v. McCormack Dodge Corp., 400 Mass. 775, 776, 511 N.E.2d 1101 (1987). It has been recognized in Massachusetts that where a recital clause is inconsistent with other express terms of a contract, a contract can be rendered ambiguous. See Cullinet Software, Inc. v. McCormack Dodge Corp., 23 Mass. App. Ct. 231, 236, 500 N.E.2d 831 (1986) (reasoning that a trial judge erred in concluding that a contract was clear and unambiguous where language in a recital compared to text in the contract was subject to reasonable interpretation in favor of either party), rev'd on other grounds, Cullinet Software, Inc. v. McCormack Dodge Corp., 400 Mass. 775, 511 N.E.2d 1101 (1987) (affirming trial court judgment and disagreeing with appellate court order reversing and remanding for new trial).
Here, the recital to the Agreements express that the Seller, and by definition EEMC, has entered a letter of intent or MOU with the MHTC. As the MHTC argued at the hearing, reading the Agreement as a whole in conjunction with the MOU could lead this Court to the reasonable interpretation that Debtor is the MHTC's agent for the collection of the MHTC Fees. In contrast, Debtor has argued, among other things, that the MHTC is not a party to the contract and that the assigned Agreements to EEMC supercede the MOU. The Court understands Debtor's argument to mean that a reasonable interpretation of the Agreement does not include any duty flowing to the MHTC, where the Agreement itself is devoid of any clear expression of such intent. Hence, according to Debtor it is equally reasonable to interpret the Agreements without an agency relation between Debtor and MHTC, where that relation is a product of an MOU executed between PGE and MHTC and not Debtor. Although the parties have not briefed this issue, it appears that under Massachusetts law that the Agreements could be ambiguous as a matter of law.
Notwithstanding the foregoing, upon review of the record as presented at this early juncture, the Court is of the view that the MHTC has alleged sufficient information for the Court to conclude, subject to further discovery between the parties, that EEMC was as an agent under the Agreements for the Council Members. Although the exact parameters of the agency cannot be ascertained on the current record and the exact parameters of the Debtor's duties are equally indistinct, there is a possibility that Debtor has breached its contract to serve as collection and transmission agent for the Council Members concerning the MHTC Fees. In this regard, if it can be ascertained that it was indeed contemplated that Debtor was the Council Members' agent for those purposes, breach of those duties may give rise to an equitable remedy, like a constructive trust, in lieu of contract damages. Notably, the Reply Memorandum of Law was submitted only on behalf of the MHTC and not Council Members.
That being said, the Court cannot conclude without a more complete record that EEMC was MHTC's agent for the same purpose because of the apparent ambiguity concerning the MOU. See RESTATEMENT (SECOND) OF AGENCY § 14L(2) (1958) ("Unless otherwise agreed, one who has received money or other property from another to be paid or transferred to a creditor of the other is the agent of the other and not of the creditor."); see also Canney v. City of Chelsea, 925 F. Supp. 58, 64 (D.Mass. 1996) (stating that portions of the RESTATEMENT (SECOND) OF AGENCY have been adopted by Massachusetts law) (citing RESTATEMENT (SECOND) OF AGENCY §§ 12-14 as cited in Sabel v. Mead Johnson Co., 737 F. Supp. 135, 138 (D.Mass. 1990))). For this reason the Court will order that the parties conduct discovery on this issue, and on the issue of tracing funds should this Court ever reach the point where a constructive trust is the requested remedy. See Cullinet Software, Inc. v. McCormack Dodge Corp., 400 Mass. 775, 777, 511 N.E.2d 1101 (1987) (stating that a trial judge properly heard evidence to aid in the construction of a contract even before it was decided that the contract was ambiguous).
On a different issue, Debtor's reliance on this Court's ruling in LFD Operating, Inc. v. Ames Department Stores, Inc. (In re Ames Department Stores, Inc.), 274 B.R. 600 (Bankr.S.D.N.Y. 2002), seems to be misplaced. At oral argument, Debtor suggests that Ames is dispositive of the MHTC's contentions because EEMC was not in the MHTC's control concerning the disposition of the MHTC Fees. Ames can be distinguished, however, on the facts presented therein. For example in Ames, the underlying transaction was subject to an extended course of dealings between the parties where agency issues would have been resolved during an intervening bankruptcy had the parties actually created an agency relation. Additionally, the Court's ruling in Ames was based on Second Circuit authority that required the Court to consider a number of elements that were ultimately used to conclude that the facts refuted the existence of a fiduciary relation between an alleged agent and principal. For these, as well as other, reasons it does not appear that Ames is dispositive of all the issues raised by the MHTC herein.
One final note, the Court believes that the procedural posture of this matter is quite unusual. The Court notes that it is typical, if not actually required under Rule 7001 of the Federal Rules of Bankruptcy Procedure, to proceed with litigation that entails a ruling concerning the respective rights, duties and legal relationship between parties under a declaratory judgment adversary proceeding. See F.R.Bankr.P. 7001. The Court appreciates that the issue presented here is the final issue in a motion that was properly initiated using motion practice. The Court will, however, order that all adversary proceeding rules apply to any future matter concerning the issues raised herein.
IV. Conclusion
The parties are to appear before this Court on October 3, 2002 at 10:00 a.m. in room 523 to address issues germane to this litigation including, discovery, scheduling and all other issues bearing on the outcome of the requested relief.
SO ORDERED.