The CIT Group/Commercial Services, Inc. v. Constellation Energy Commodities Group, Inc. et al

Filing 20

MEMORANDUM OPINION AND ORDER: the Court AFFIRMS the Bankruptcy Courts opinion IN PART, REVERSES IN PART, and ISSUES A LIMITED REMAND for the reasons stated in this opinion. Signed by Judge Amul R. Thapar on 9/30/12.(MJY)cc: COR Modified document type on 10/2/2012 (RCB).

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
PIKEVILLE
THE CIT Group/COMMERCIAL
SERVICES, INC.,
Appellant,
v.
CONSTELLATION ENERGY
COMMODITIES GROUP,
and
CONSTELLATION ENERGY GROUP,
INC.,
Appellees.

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

Civil No. 12-16-ART

MEMORANDUM OPINION
& ORDER

*** *** *** ***
In 2008, Black Diamond, a coal company, was forced into bankruptcy. In an effort to
limit its losses, CIT Group, one of the companies that financed Black Diamond’s operations,
sued Commodities, a company that Black Diamond sold coal to and occasionally bought coal
from. Both parties moved for summary judgment before the bankruptcy court. The
bankruptcy court denied each of CIT Group’s claims against Commodities. CIT Group
appealed to this Court under 28 U.S.C. § 158(a). For the reasons explained below, the
bankruptcy court’s decision is affirmed in part, reversed in part, and remanded for further
proceedings consistent with this opinion.
BACKGROUND
Harold Sergent formed a coal company called Black Diamond Mining Company,
LLC, to buy promising but undeveloped coal assets in Floyd County, Kentucky, and turn a

profit. Sergent Dep., R. 117-1 at 29–30, Ex. 2 at 89–90.1 Black Diamond immediately started
searching for a way to finance this venture and customers to buy the coal. For financing, the
company turned to The CIT Group/Commercial Services, Inc., a financial-services company
(“CIT Group”).
While negotiating its financing agreement, Sergent began finding customers to buy
the coal. Franklin Dep., R. 117-2 at 4, Ex. 3 at 20; Sergent Dep., R. 117-1 at 29–30, Ex. 2 at
89–90; Nelson Dep., R. 117-3 at 44, Ex. 8 at 12–14. In May 2006, he negotiated a long-term
forward contract with Constellation Energy Commodities Group (“Commodities”)—an
agreement in which Black Diamond would sell predetermined quantities of coal to
Commodities each month at a fixed price per ton between July 1, 2006, and December 31,
2008 (“May 2006 Coal Supply Agreement”). R. 117-4 at 2, Ex. 9 at CIT0535. Commodities
is, unsurprisingly, a commodities trader, and it also manages the coal supply for its parent
company, Constellation Energy Group, Inc. (“Constellation”). Savage Dep., R. 117-1 at 4,
Ex. 1 at 6–8. Constellation, in turn, operates coal-fired power plants. Id. Constellation agreed
to guarantee Commodities’ obligations to Black Diamond under the May 2006 Coal Supply
Agreement (“Guaranty Agreement”). R. 117-5 Ex. 18.
As is typical with these sorts of transactions, Commodities and Black Diamond hired
the Bank of New York as a collateral agent (“Collateral Agent Agreement”). R. 117-5 at 15,
Ex. 17 at CIT0305. As a collateral agent, the Bank of New York served as an impartial
intermediary responsible for monitoring and protecting any collateral exchanged between
1

Citations to the Bankruptcy Court’s record are indicated by “R.” and citations to its opinion are indicated in the
following form: The CIT Grp./Comm. Servs., Inc. v. Constellation Energy Commodities Grp. (In re Black Diamond
Mining Co., LLC), No. 08-7017, 2011 WL 6202905, at *__ (Bankr. E.D. Ky. Dec. 13, 2011). Citations to this
Court’s record are indicated by a citation to this case, The CIT Grp./Comm. Servs, Inc. v. Constellation Energy
Commodities Grp., Inc. (In re Black Diamond Mining Co., LLC), No. 12-16-ART (E.D. Ky. 2012), followed by a
record citation.

2

Black Diamond and Commodities under the May 2006 Coal Supply Agreement. Id. at
CIT0305–0308; Franklin Dep., R. 117-2 at 26, Ex. 3 at 115–16.
Before Commodities and Black Diamond officially began their relationship, CIT
Group reviewed the May 2006 Coal Supply Agreement and found its terms acceptable.
Franklin Dep., R. 117-2 at 5–6, Ex. 3 at 23, 26; Hudgens Dep., R. 117-4 at 34, Ex. 10 at 40.
Black Diamond and Commodities then executed the May 2006 Coal Supply Agreement.
Two days later, Black Diamond and CIT Group also finalized their financing relationship. R.
117-4 at 66, Ex. 13 at CIT0292. Black Diamond agreed to sell to CIT Group any accounts
receivable2 generated by coal sales in the ordinary course of business in exchange for an
immediate payment from CIT Group—an arrangement called “factoring.” Id. at CIT0283 ¶
4.1. The Factoring Agreement, though, permitted CIT Group to factor only accounts
receivable generated by coal sales made in the ordinary course of Black Diamond’s business
(not accounts created through any coal sale). Thus, CIT Group ended up with a security
interest in the factored accounts receivable, including those arising from sales to
Commodities, but CIT Group did not have a general security interest in Black Diamond’s
coal inventory. See id. at CIT0287 ¶ 11.1 (listing types of security interests); see also
Franklin Dep., R. 117-2 at 11, Ex. 3 at 50–51. To complete its financing arrangements, Black
Diamond also entered into long-term “lending facilities”—financial jargon for certain kinds

2

An account receivable is simply a customer’s debt to a business for providing goods or services. Because an
account receivable represents a right to collect the customer’s debt in the future, it is an asset of the business.

3

of business loans—with CIT Capital USA, an affiliate of CIT Group.3 R. 117-4 Ex. 13;
Franklin Dep., R. 117-2 at 4, Ex. 3 at 20.
Of course, the Factoring Agreement came with strings. As the old saying goes, no
business expects to be profitable in its first year, and CIT Group’s expectations were no
different with respect to Black Diamond. As a result, the Factoring Agreement did not
require any minimum volume of factored accounts for the first year. And because CIT Group
recognized that most of Black Diamond’s coal sales in its first year would come from
Commodities under the May 2006 Coal Supply Agreement, the Factoring Agreement also
permitted Commodities’ invoices to comprise up to 50% of Black Diamond’s factored
invoices. R. 117-6 at 62–64, Ex. 28 § 6. Naturally, though, CIT Group had higher
expectations for Black Diamond’s second and subsequent years. So the Factoring Agreement
required Black Diamond to factor a “minimum annual volume” of $100 million with CIT
Group beginning May 11, 2007. R. 117-4 at 62–63, Ex. 13 § 15.1. CIT Group
correspondingly approved Black Diamond’s request to allow up to 70% of Commodities’
invoices to be factored. R. 117-6 at 62–64, Ex. 28 § 6.
Several months after signing the Factoring Agreement in May 2006, Black Diamond
started to find itself in trouble. It had breached its loan agreement with CIT Capital USA by
failing to (1) obtain key man life insurance on Sergent;4 (2) meet certain financial
performance requirements; and (3) produce the minimum amount of coal required. R. 117-6
at 68, Ex. 29 at CIT1189. And by breaching its agreement with CIT Capital USA, Black
3

According to CIT Group’s Vice President, CIT Group is a subsidiary of The CIT Group/Equipment Financing,
Inc., which is a subsidiary of CIT Group, Inc. CIT Capital is also a subsidiary of CIT Group, Inc., making CIT
Capital and CMS affiliated companies. Lew Decl., R. 162-1 ¶ 3.
4

Key man life insurance protects a business if a key employee dies or becomes disabled. The business pays for and
is the beneficiary of the policy.

4

Diamond automatically breached the Factoring Agreement with CIT Group. Franklin Dep.,
R. 117-2 at 22, Ex. 3 at 95. Both CIT Capital USA and CIT Group, though, generously
waived these defaults and continued their relationship. Id. at 96; Lew Dep., R. 117-5 at 6, Ex.
15 at 39.
Unfortunately, those defaults were only the start of Black Diamond’s problems. Black
Diamond’s cash flow was trickling instead of gushing. See Lew Dep., R. 117 -5 at 7, Ex. 15
at 43. So from October 2006 to August 2007, the company repeatedly turned to Commodities
in the hopes of restructuring the May 2006 Coal Supply Agreement to get more advance
financing. Commodities agreed to four such Amendments. Commodities paid an upfront
lump sum to Black Diamond for each Amendment, totaling $5.6 million across the four
Amendments. In return, Black Diamond (1) reduced the monthly per-ton price of coal paid
by Commodities, (2) reduced the minimum quantity of coal Commodities had to purchase, or
(3) changed the delivery method in Commodities’ favor. See Amend. No. 1, R. 117-7 Ex. 37;
Amend. No. 2, R. 117-7 at 93, Ex. 38 at Constellation-0003735; Amend. No. 3, R. 117-8 at
2, Ex. 39 at CIT00020; Amend. No. 4, R. 117-8 at 7, Ex. 40 at Constellation-0003748. Black
Diamond therefore did not factor any of these Amendments with CIT Group. See, e.g., Lew
Dep., R. 117-5 at 12 Ex. 15 at 139–40; Franklin Dep., R. 117-2 at 7–10, Ex. 3 at 35, 38, 43,
47; see also R. 117-7 Ex. 32 (omitting any mention of advances against the Amendments
from CIT Group’s internal accounting records).
Meanwhile, even the influx of cash from Commodities was not patching the leak in
Black Diamond’s cash flow fast enough. The company continued to have trouble producing
the minimum coal required by its loan agreement with CIT Capital USA, leading to further
defaults under that agreement and the Factoring Agreement with CIT Group. Franklin Dep.,
5

R. 117-2 at 29–30, Ex. 3 at 129–30. In November 2006, in exchange for waiving these latest
defaults and continuing to receive advance funds under the Factoring Agreement, Black
Diamond gave CIT Group an additional security interest in its entire coal inventory. Credit &
Inventory Security Agreement, R. 117-7 at 2, Ex. 30 at 1; see also Lew Dep., R. 117-5 at 7,
Ex. 15 at 42–43. Neither CIT Group nor Black Diamond forwarded this Credit and Inventory
Security Agreement to Commodities or told Commodities about its existence. Nelson Dep.,
R. 117-3 at 46, Ex. 8 at 43; Franklin Dep., R. 117-2 at 30, Ex. 3 at 133; Sergent Dep., R. 1171 at 39, Ex. 2 at 138. So of course, Commodities did not amend its Collateral Agent
Agreement with Black Diamond and the Bank of New York to reflect this new agreement.
Franklin Dep., R. 117-2 at 31–32, 35, Ex. 3 at 141–43, 157; P. Thompson Aff., R. 120 ¶ 11;
Sergent Dep., R. 117-1 at 39, Ex. 2 at 139.
Buoyed by CIT Group’s and Commodities’ accommodations, Black Diamond entered
into five more Coal Supply Agreements with Commodities during September and October
2007. See R. 117-5 at 46, Ex. 19 (listing agreements). Although these contracts contained
different price and quantity terms from the May 2006 Coal Supply Agreement, they had
nearly identical provisions relating to default, termination damages, liquidated damages for
missed deliveries, and payment rights. See R. 117-5 at 49, Ex. 20. The Netting Provisions
allowed Black Diamond and Commodities to net any payment obligations between them for
the same commodity that were due in the same month. R. 117-4 at 17, Ex. 9 at CIT0550 ¶
16. For example, if Black Diamond owed $100,000 and Commodities owed $200,000 in the
same month, then Commodities owed Black Diamond the net, or $100,000. Without the
Netting Provision, Black Diamond and Commodities would end up in the same place
(Commodities paying $100,000) but in a more inefficient manner (with each party actually
6

exchanging their respective payments). Black Diamond and Commodities specifically
preserved the parties’ netting rights under the May 2006 Coal Supply Agreement in their
Collateral Agent Agreement with the Bank of New York. R. 117-5 at 28, Ex. 17 at CIT0308.
That takes care of how Commodities would pay for the coal, but how would Black
Diamond deliver the coal? Under the May 2006 Coal Supply Agreement and the other Coal
Supply Agreements, Black Diamond agreed to deliver the coal to a train or truck chosen by
Commodities.5 Once Black Diamond placed the coal on the train or truck, Commodities took
title to the coal and assumed responsibility for transporting the coal to its final destination.
Accord R. 117-6 at 11–12, Ex. 23 art. 3.3(a) (explaining these standard delivery terms). If
Black Diamond missed any deliveries or did not deliver the minimum amount of coal each
month, then it owed Commodities liquidated damages based on the “positive difference”
between the fixed contractual price and the spot-market cost of coal. See, e.g., R. 117-4 at 16,
Ex. 9 at CIT0549 ¶ 13(a).
Naturally, these agreements contemplated the possibility of gloomier days. They
established more than thirteen Events of Default, including paying late and going bankrupt.
R. 117-4 at 13–14, Ex. 9 at CIT0546–47 ¶ 12(a)(viii). But an Event of Default did not
automatically end the contract. Instead, the non-defaulting party could choose to either keep
the agreement alive by suspending performance until the breach is cured or end the contract
early by choosing an early termination date. Id. at CIT0548 ¶ 12(b). The latter path meant
that the non-defaulting party would calculate a Termination Payment “representing the
‘single net amount’ due between the parties.” The CIT Grp./Comm. Servs., Inc. v.
5

This delivery method is designated in the agreements by the term “FOB [destination],” or “Freight on Board,”
which indicates the destination to which the seller is liable for delivering the goods. Here, the agreements contained
“FOB railcar” or “FOB truck” delivery terms. R. 117-4 at 3, Ex. 9 at CIT0536 ¶ 1.

7

Constellation Energy Commodities Grp. (In re Black Diamond), No. 08-7017, 2011 WL
6202905, at *4 (Bankr. E.D. Ky. Dec. 13, 2011).
Black Diamond also represented that the coal sold to Commodities would “be free
from all liens, encumbrances, and claims.” R. 117-4 at 11, Ex. 9 at CIT0544 ¶ 10. Not only
was this representation standard industry practice, see, e.g., Mullins Dep., R. 117-6 at 17, Ex.
24 at 17, but it was also especially important to Commodities. As part of reselling some of
the purchased coal to other buyers, Commodities promised those downstream buyers that the
coal was free of all liens. First P. Thompson Aff., R. 120 ¶ 7(d).
Although CIT Group was well aware of these agreements, it was particularly
concerned about the Netting Provisions. R. 117-6 at 2, 4, 6–7, Ex. 22 at CIT 1752, 1754,
1891–92. CIT Group had every right to be worried. The text of the coal supply agreements
gave Commodities a certain window after each monthly invoice to pay for the coal—ninety
days during the first year and sixty days after that. R. 117-4 at 7–8, Ex. 9 at CIT0540–41 ¶
8(b). When things ran smoothly, those invoices of coal sales would give CIT Group a
security interest in the account receivables generated by Commodities’ purchases. Yet if
Black Diamond breached any of the coal supply agreements during this window, Black
Diamond might owe Commodities a Termination Payment, and Commodities could net its
obligations to Black Diamond against that Termination Payment. Depending on the numbers,
that offset could wipe out Commodities’ obligation to (and thus, its account receivable with)
Black Diamond. In effect, Commodities’ broad netting rights could erase CIT Group’s
security interest in Commodities’ account. That would leave CIT Group in the hole, having
advanced funds to Black Diamond in exchange for a security interest that evaporated. With
Commodities representing fifty percent or more of Black Diamond’s factored accounts, CIT
8

Group’s hole could be very deep indeed. R. 117-6 at 2, 4, 6–7, Ex. 22 at CIT 1752, 1754,
1891–92; see also R. 117-4 at 58, Ex. 28 at CIT0284. Despite identifying this risk, though,
CIT Group did not object to the Netting Provisions. E.g., Hegger Dep., R. 117-4 at 45, Ex. 12
at 36–37.
With the song and dance out of the way, the main act could begin. Between
December 16, 2007, and February 4, 2008, Black Diamond delivered twenty-six invoiced
shipments of coal to Commodities, totaling $8,121,073.52.6 See R. 117-3 at 39, Ex. 7 at
Constellation-0005425. In addition, there were five uninvoiced deliveries of coal from Black
Diamond to Commodities, totaling $1,680,615.50.7 See id. at Constellation-0005426.
Consistent with the Factoring Agreement, Black Diamond submitted the invoices to CIT
Group for review. Lew Dep., R. 117-5 at 3–4, Ex. 15 at 27–30; Hegger Dep., R. 117-4 at 42–
43, Ex. 12 at 21–22, 39. CIT Group reviewed each invoice before advancing funds to Black
Diamond to ensure “that there were no other sales that were not in . . . the ordinary course of
business.” Lew Dep., R. 117-5 at 3, Ex. 15 at 29. After determining that each of the twentysix invoices involved a sale of coal made in the ordinary course of Black Diamond’s
business, CIT Group approved and advanced funds to Black Diamond under the Factoring
Agreement. Id.
This relationship between Commodities and Black Diamond, though, was not just a
one-way street. Commodities was not the company’s only customer. On three occasions in

6

A twenty-seventh invoice, No. 11-001108, involved a shipping charge and not a coal delivery. R. 117-6 at 29, Ex.
26 at Constellation-004827; Second Hoskins Aff., R. 156 ¶ 12. See The CMS/Comm. Servs., Inc., No. 08-7017, 2011
WL 6202905, at *9 for a chart detailing each of the invoiced deliveries, and see R. 117 Ex. 33 for invoices generated
through coal sales to Commodities.
7

See The CMS/Comm. Servs., Inc., No. 08-7017, 2011 WL 6202905, at *10 for a chart detailing each of the
uninvoiced deliveries.

9

January 2007 and January 2008, Black Diamond purchased coal from Commodities to meet
its delivery obligations to other purchasers. R. 117-5 Ex. 19. Unavoidably, Black Diamond
and Commodities sometimes had offsetting obligations to deliver coal to each other. Rather
than swapping coal—incurring needless shipping charges and risking an accident during
delivery—they “netted” their delivery obligations through an accounting practice called
“bookouts.”8 Lew Dep., R. 117-5 at 9–10, Ex. 15 at 115–21. For example, if Commodities
owed 100 tons of coal to Black Diamond and Black Diamond owed 50 tons to Commodities,
then Commodities would simply deliver the offset—50 tons—to Black Diamond. See Savage
Dep., R. 117-1 at 5–6, Ex. 1 at 24–33 (explaining bookouts). CIT Group agreed to factor
several bookout invoices for Black Diamond after confirming the bookout transactions with
Commodities. R. 117-7 at 77–78, Ex. 35 at CIT5811–12.
This labyrinth of relationships quickly collapsed under the weight of Black
Diamond’s obligations to Commodities. Even though the Amendments and the practice of
bookouts reduced the quantity of coal that Black Diamond had to deliver to Commodities
each month, Black Diamond still failed to deliver the minimum amount of coal to
Commodities in January 2008. R. 117-8 at 22, Ex. 43 at Constellation-0005420. This missed
delivery caused Commodities to incur $533,000 in liquidated damages under the Coal
Supply Agreements. R. 117-4 at 16, Ex. 9 at CIT0549; R. 117-8 at 21, Ex. 43 at
Constellation-005419. That speed bump turned into a brick wall the next month. Black
Diamond’s deliveries became sporadic throughout February with Black Diamond eventually
failing to deliver over 145,400 tons of coal to Commodities and resulting in $6,016,766.25 in
liquidated damages. R. 117-8 Ex. 42; R. 117-8 at 21-23, Ex. 43 at Constellation-0005419,
8

See R. 117 Ex. 34 for invoices generated by bookout transactions.

10

0005421. Black Diamond could not afford to pay any of the liquidated damages owed to
Commodities. R. 117-8 Ex. 42.
No surprise, then, that Black Diamond was also unable to pay for the $2,758,268.51
in coal that it purchased from Commodities during January and February 2008. R. 117-7 at
56, Ex. 33 at Constellation-0005403; Hoskins Aff., R. 118 ¶¶ 7–9. Or for the $1,604,000 in
bookout invoices owed to Commodities during that same time. Hoskins Aff., R. 118 ¶¶ 11–
12; R. 117-3 at 41, Ex. 7 at Constellation-0005427. During these two months, Black
Diamond racked up a bill of $4,326,268.51 to Commodities. R. 117-3 at 41, Ex. 7 at
Constellation-0005427.
Black Diamond defaulted for a third time under the Factoring Agreement, causing
CIT Group to terminate that agreement on February 11, 2008. See R. 117-8 Ex. 44; see also
Franklin Dep., R. 117-2 at 24–25, Ex. 3 at 105–06. With its funding gone, Sergent told
Commodities that Black Diamond could not deliver any more coal to Commodities until it
secured another source of funding. P. Thompson Aff., R. 157 ¶ 31. That hope did not last
long: on February 19, CIT Group, CIT Capital USA, and Prudential (another lender) filed an
involuntary petition under Chapter 11 against Black Diamond. R. 117-8 Ex. 45. Less than a
month later, the United States Bankruptcy Court for the Eastern District of Kentucky entered
an order for relief
Black Diamond’s bankruptcy triggered a more serious problem. Under all of the coal
supply agreements with Commodities, Black Diamond’s bankruptcy was an Event of
Default. Seeing the company’s downward spiral, Commodities chose to terminate all of its
agreements with Black Diamond. Commodities immediately terminated the additional Coal
Supply Agreements, establishing March 13, 2008, as the Early Termination Date. R. 117-8 at
11

45–47, Ex. 47 at CIT0890–92. Commodities calculated the net Termination Payment owed
by Black Diamond for breaching those contracts—a whopping $82,771,818.57. R. 117-8 at
53, Ex. 47 at CIT0898. This payment included not only past-due amounts but also future
losses for the undelivered tons of coal that Black Diamond had promised to deliver during
the remainder of the contracts. Id. The net Termination Payment, as its name implies, also
included offsets of any amounts that Commodities owed Black Diamond. Id. at CIT0895.
And after the waiting period under the Collateral Agent Agreement expired, Commodities
also ended the May 2006 Coal Supply Agreement and claimed an additional $11,002,331 in
termination damages. Id. at CIT0900–08.
During the bankruptcy, Commodities filed a proof of claim to recover its total
termination damages.9 Id. at CIT0884. CIT Group, meanwhile, wanted to recoup its losses
from both companies. On August 15, 2008, CIT Group filed a proof of claim seeking
$14,109,49.55 for amounts owed by Black Diamond under the invoiced deliveries. Franklin
Dep., R. 117-2 at 36 Ex. 3 at 230–33; R. 117-9 Ex. 48. Although CIT Group knew it could
not recover from both Black Diamond’s estate and Commodities, see Franklin Dep., R. 1172 at 36, Ex. 3 at 233, CIT Group did not want to leave anything to chance. So about two
weeks later, CIT Group initiated an adversary proceeding against Commodities and its
parent, Constellation, eventually settling on six counts of relief. Second Am. Compl., R. 93.
Its six counts distill to four arguments for recovery:

9

Although Commodities’s termination damages total $93,215,149.58, see R. 117 Ex. 42, its proof of claim sought
$93,774,149.57. As the Bankrutpcy Court noted, this discrepancy appears to result from an accidental doublecounting of $559,000 for the February 2008 bookout. See The CMS/Comm. Servs., Inc., No. 08-7017, 2011 WL
6202905, at *16 n.22 (comparing R. 117 Ex. 42 to R. 117 Ex. 43 at Constellation-0005419).

12

(1)

Conversion claim. The Credit and Inventory Security Agreement gave
CIT Group a security interest in Black Diamond’s coal inventory, some
of which Commodities illegally converted by accepting delivery from
Black Diamond. Id. ¶¶ 57–61. CIT Group estimates the market value of
the converted coal at $20,000,000. Id.

(2)

Contract and quasi-contract claims. The Factoring Agreement gave
CIT Group a security interest in Black Diamond’s accounts receivable
generated by coal sales to Commodities, and Commodities owes CIT
Group $15,598,859.40 under these accounts. Id. ¶¶ 33–51.

(3)

Amendment claims. CIT Group’s security interest in Black Diamond’s
accounts receivable extends to the lump sums paid by Commodities to
Black Diamond under the four Amendments to the Coal Supply
Agreements. Id. ¶¶ 52–54. CIT Group claims that Commodities’
payments to Black Diamond under the Amendments did not discharge
Commodities’ obligation to pay CIT Group and Commodities therefore
owes CIT Group $5,600,000. Id. ¶ 55–56.

(4)

Claims against Constellation. Because Constellation guaranteed
Commodities’ payments to Black Diamond, Constellation is allegedly
on the hook for whatever Commodities owes on the Amendment and
contract claims.

Both sides moved for summary judgment on all claims. R. 114; R. 115. The
Bankruptcy Court granted summary judgment in favor of Commodities and
Constellation on all of CIT Group’s claims. The CIT Grp./Comm. Servs., Inc., No. 0813

7017, 2011 WL 6202905, at *17 (Bankr. E.D. Ky. Dec. 13, 2011). CIT Group
appealed. R. 209.
DISCUSSION
The bankruptcy court granted summary judgment. The standard for summary
judgment is the same in bankruptcy courts as it is in federal district courts. Summary
judgment is only appropriate if there is no genuine issue of material fact. See Fed. R. Bankr.
P. 7056 (cross-referencing Fed. R. Civ. P. 56); In re Howard Batie, 995 F.2d 85, 90 (1993).
The parties do not dispute that New York law governs this case. See R. 117-4 at 18, Exh. 9.
I.

Conversion Claim
CIT Group alleges that Commodities is liable for conversion under New York law.

Conversion occurs when a person voluntarily interferes with someone else’s superior
property interest by using or controlling that property. Thyroff v. Nationwide Mut. Ins. Co,
460 F.3d 400, 403–04 (2d Cir. 2006). The key question here is whether CIT Group had a
property interest at the time of the alleged conversion. CIT Group claims that it received a
certain kind of security interest in Black Diamond’s coal inventory—an inventory lien—in
exchange for advancing additional funds to Black Diamond under the Credit and Inventory
Security Agreement. Second Am. Compl., R. 93 ¶ 61.
According to CIT Group, this inventory lien still existed when Commodities
converted the coal delivered under the Coal Supply Agreements. Id. That is the default rule:
under the New York Uniform Commercial Code (“U.C.C.”), a security interest generally
“continues in collateral notwithstanding sale, exchange, or other disposition,” N.Y.U.C.C.
§ 9-315(a)(1), and “is effective . . . against purchasers of the collateral,” N.Y.U.C.C. § 9201(a), such as Commodities.
14

There are several exceptions, though, two of which the Bankruptcy Court relied upon
in holding that CIT Group’s inventory lien had been extinguished. The CIT Grp./Comm.
Servs., Inc., 2011 WL 6202905, at *17. First, a buyer who achieves a special status—called a
“[b]uyer in the ordinary course of business”—takes the property free of the secured party’s
interest. N.Y.U.C.C. § 9-320(a). The Bankruptcy Court held that Commodities was a buyer
in the ordinary course of business, allowing it to defeat CIT Group’s inventory lien. The CIT
Grp./Comm. Servs., Inc., 2011 WL 6202905, at *17. Second, a security interest is
extinguished if the “secured party authorized the [sale] free of the security interest.”
N.Y.U.C.C. § 9-315(a)(1). The Bankruptcy Court held that CIT Group implicitly authorized
the sales of Black Diamond’s coal to Commodities free of the inventory lien. The CIT
Grp./Comm. Servs., Inc., 2011 WL 6202905, at *28. Because the Bankruptcy Court correctly
granted summary judgment based on Commodities’ buyer-in-the-ordinary-course-ofbusiness status, the Court need not decide whether CIT Group also implicitly authorized the
sales free of its inventory lien.
A.

Did Commodities Take the Coal In Good Faith Without Knowledge That
Its Purchases Violated CIT Group’s Inventory Lien?

CIT Group and Commodities agree on the basics: a buyer in the ordinary course of
business is a person who buys goods in good faith without knowing that his purchase violates
a third party’s property interest in those goods. See N.Y.U.C.C. § 1-201(9). Consider an
example from everyday life. Jennifer goes to her favorite store to purchase a pair of Manolo
Blahniks. If the store had acquired those Manolo Blahniks on a loan and used the shoes to
secure that loan, then the store’s inability to repay the loan would mean that the financier
could repossess the shoes from Jennifer. Enter the idea of a buyer in the ordinary course of

15

business, a legal device that allows a purchaser like Jennifer to “safely buy from a merchant”
without “fear that the goods could be repossessed” by the merchant’s creditor. In other
words, this sacred status permits the buyer to take the goods free of the financier’s lien on
them. 1B Larry Lawrence, Anderson on the Uniform Commercial Code § 1-201:23 [Rev] (3d
ed. 2012). And the financier expects—indeed, hopes!—that the store will sell the Manolo
Blahniks. Otherwise, how will the store repay its loan? Id. The financier, though, is not left
out to dry: A buyer in the ordinary course of business provides “new value” for the goods—
either debt in the form of an account receivable or cash proceeds. And the financier receives
a substitute interest in that new value once its inventory lien disappears. See, e.g., Amarillo
Nat’l Bank v. Komatsu Zenoah Am., Inc., 991 F.2d 273, 277 (5th Cir. 1993).
In purchasing coal from Black Diamond, Commodities qualifies as a buyer in the
ordinary course of business. When it purchased the coal, Commodities did not know that its
coal purchases violated CIT Group’s inventory lien because neither CIT Group nor Black
Diamond ever forwarded the Credit & Inventory Security Agreement (which created CIT
Group’s inventory lien) to Commodities. Nelson Dep., R. 117-3 at 46, Ex. 8 at 43; Franklin
Dep., R. 3 at 133; Sergent Dep., R. 117-1 at 39, Ex. 2 at 138. All that Commodities knew
about was the Factoring Agreement, which created CIT Group’s lien in the accounts
receivable arising from Black Diamond’s coal sales to Commodities. As to good faith,
Commodities and Black Diamond were two sophisticated entities who entered the Coal
Supply Agreements at arm’s length. CIT Group does not dispute that Black Diamond was
actually in the business of mining and selling coal or that Commodities was buying coal for
its portfolio as well as to supply various energy providers, including its parent Constellation.
Moreover, this arrangement was not a sham: Black Diamond delivered coal to Commodities,
16

and Commodities faithfully paid nearly fifty-million dollars for its purchases until Black
Diamond’s bankruptcy. See The CIT Grp./Comm. Servs., Inc., 2011 WL 6202905, at *19 &
n.25. CIT Group does not point to any facts indicating that Commodities paid less than fairmarket value for the coal. Consequently, all signs point to Commodities’ good faith in
buying the coal.
CIT Group nonetheless insists otherwise. According to CIT Group, Commodities (1)
knew about CIT Group’s inventory lien when it entered into the Coal Supply Agreements,
and (2) lacked good faith because it intentionally structured its coal purchases to defeat CIT
Group’s inventory lien. Both of these arguments fall flat.
As to Commodities’ alleged knowledge of CIT Group’s inventory lien, CIT Group
points to only two pieces of evidence: CIT Group’s proposal of a financing arrangement with
Black Diamond and an unexecuted, draft version of the Credit Security and Inventory
Agreement. See Appellant’s Br. at 8–10. Yet these documents indicate only that CIT Group
intended to obtain an inventory lien in Black Diamond’s coal, not the actual existence of
such a lien. Commodities therefore could not have known that its purchases would violate
CIT Group’s inventory lien because Commodities never found out that CIT Group’s
inventory lien ever came into existence. What’s more, Commodities’ mere knowledge of CIT
Group’s inventory lien is not enough. Under New York law, CIT Group must show that
Commodities had actual knowledge that buying Black Diamond’s coal violated CIT Group’s
inventory lien—not just knowledge that the lien existed. See N.Y.U.C.C. § 9-320(a) (“[A]
buyer in the ordinary course of business . . . takes free of a security interest created by the
buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.”
(emphasis added)); N.Y.U.C.C. § 1-201(25)(c) (defining “knowledge” as “actual knowledge
17

of a fact”); N.Y.U.C.C. § 9-320 cmt. 3 (explaining that the buyer takes goods free of a lien
“if the buyer merely knows that the security interest covers the goods,” but takes goods
subject to the lien “if the buyer knows, in addition, that the sale violates a term in an
agreement with the secured party”); see also United States v. Handy & Harman, 750 F.2d
777, 781–82 (9th Cir. 1984) (same). Because Commodities did not know that the inventory
lien existed at the time of its purchases, there is no way that Commodities could have known
that its purchases actually violated the lien. It is entirely possible, for example, that CIT
Group and Black Diamond had not yet executed the Credit & Inventory Security Agreement
when the Coal Supply Agreements were finalized or even that CIT Group and Black
Diamond had decided not to move forward with their relationship at all. Indeed, in the Coal
Supply Agreements, Black Diamond specifically guaranteed that it “had good title” to the
coal, had “the right to sell” the coal to Commodities, and “that [the coal] shall be free from
all liens, encumbrances and claims.” R. 117-4 at 11–12 Ex. 9 § 10 (emphasis added).
Consequently, Commodities acquired the coal without knowledge that its purchases violated
CIT Group’s inventory lien.
CIT Group also argues that Commodities purchased the coal in bad faith because
Commodities specifically designed the Coal Supply Agreements to defeat CIT Group’s
inventory lien. CIT Group interprets the Commodities’ Coal Supply Agreements in two
parts: one that calls for regular purchases of coal from Black Diamond (the “Physical
Delivery Component”) and a more sinister part that contained “Hedging Obligations through
which Black Diamond and Commodities bet on the market price for coal futures.”
Appellant’s Br. at 29. This is confirmed by the Coal Supply Agreements themselves, CIT
Group argues, which represent that the agreements are “forward contract[s].” Id. at 29 n.19.
18

When Commodities eventually won these bets, the Coal Supply Agreements required Black
Diamond to pay Commodities its winnings (the “Hedging Bet Offsets”).
This is a curious argument: why would Commodities have tried to avoid an inventory
lien that it did not know about? Putting that existentialist problem aside, CIT Group’s
interpretation of the Coal Supply Agreements does not match reality. The Coal Supply
Agreements do not mention “hedging,” “futures trading,” or anything of the sort. And CIT
Group’s reliance on the agreements’ nature as “forward contract[s]” is mistaken. Negotiated
on a futures exchange, a futures contract is a standardized agreement frequently used by
speculators gambling on whether an assets price will increase or decrease by some specified
future date. CFTC v. Erskine, 512 F.3d 309, 323–24 (6th Cir. 2008); see also Sprague
Energy Corp. v. Levco Tech, Inc., No. 3:09-CV-29-RNC, 2009 WL 1374593, at *9 (D. Conn.
May 11, 2009). But a futures contract “does not involve a sale of the commodity at all. It
involves a sale of the contract.” CFTC v. Zelener, 373 F.3d 861, 865 (6th Cir. 2004);
Erksine, 512 F.3d at 324–25 (approving of this distinction). In other words, in “organized
futures markets, people buy and sell contracts, not commodities.” Zelener, 373 F.3d at 865.
By contrast, a forward contract is a customized and private agreement “to buy or sell some
agreed-upon quantity of some commodity at some agreed-upon price at an agreed-upon time
in the future.” Sprague Energy Corp., No. 3:09-CV-29-RNC, 2009 WL 1374593, at *9
(emphasis added); Erskine, 512 F.3d at 324–25. Contrary to CIT Group’s suggestion
otherwise, the text of the Coal Supply Agreements do not indicate that Commodities traded
coal futures with Black Diamond.
So where in the agreements did Commodities hide the alleged “Hedging Bet
Offsets”? According to CIT Group, the “Hedging Bet Offsets” were nothing more than the
19

agreements’ terms addressing “default, acceleration of performance[,] and imposition of
termination and liquidation damages.” Appellant’s Br. at 31. CIT Group does not explain
why these standard commercial features, found in most contracts, were transformed into
something more sinister in this case.
B.

Did Commodities Acquire the Coal As Security for a Debt?

To defeat Commodities’ buyer-in-the-ordinary-course-of-business status, CIT Group
makes a more fundamental argument: that Commodities acquired the coal “as security for” a
debt (and thus did not “buy” the coal). Under New York law, a person does not qualify as a
buyer in the ordinary course of business when he “acquires goods . . . as security for or in
total or partial satisfaction of a money debt.” Rightfully so—in those circumstances, the
person is a creditor, not a buyer, who is taking the goods as collateral for a loan. See 1
Lawrence, Anderson on the Uniform Commercial Code § 1-201:136. Suppose Claire decides
to buy a car. Lacking the cash to do so, she gets a loan from Fifth Third Bank, putting her
soon-to-be car up as collateral for the loan. She speeds off into the sunset on a six-month
road trip, tragically forgetting to make her monthly payments on the loan. When she returns
home, Fifth Third Bank repossesses her car. That repossession, of course, does not make
Fifth Third Bank a buyer in the ordinary course of business because it took the car to satisfy
Claire’s outstanding loan.
CIT Group argues that, like Fifth Third Bank, Commodities took the coal as security
for a debt. According to CIT Group, Commodities took the coal subject to the Netting
Provisions, which gave Commodities the right to offset its debt for purchasing the coal
against future mutual debts owed by Black Diamond.

20

CIT Group’s argument is too clever by half. There is no evidence that Commodities
took the coal as security for any debt. At the time Commodities acquired the coal, Black
Diamond had not incurred any debt to Commodities; its debt (the Liquidation and
Termination Damages) did not arise weeks later until Black Diamond’s bankruptcy. As a
result, Commodities did not acquire the coal to secure any existing debt.
To the extent that CIT Group argues that Commodities acquired the coal as security
for Black Diamond’s future debt, that argument is unpersuasive. Of course, the U.C.C. does
not define when to measure buyer-in-the-ordinary-course-of-business status. And although
courts disagree about when a buyer in the ordinary course of business “acquires” goods, only
two events “have received serious consideration”: when the goods are identified for purchase
and when title is transferred to the buyer. Havens Steel Co. v. Commerce Bank, N.A., 317
B.R. 75, 82 (W.D. Mo. 2004). Under even the later of the possibilities—transfer of title—
Commodities’ status as a buyer in the ordinary course of business attached when the coal
was loaded onto its railcars or trucks, a time when Black Diamond did not owe any debt to
Commodities.
CIT Group cries foul, claiming that the language of the statute is not limited to goods
acquired as security for pre-existing debts. According to CIT Group, the U.C.C. excludes a
person who “acquires goods as security for or in total satisfaction of a money debt,”
regardless of whether that money debt arises before or after the acquisition of the goods. CIT
Group, though, does not cite a single case in support of its interpretation. Indeed, cases
across the country have applied this language only to purchasers who acquired goods to

21

offset the seller’s pre-existing or antecedent debt.10 The text of § 1-201(9) does not support
CIT Group’s reading. A person “acquires goods . . . as security for . . . a money debt,” when
the goods are acquired at a time when the debt exists but has not accrued. A person “acquires
goods . . . in total or in partial satisfaction of a money debt” when the goods are acquired at a
time when the debt has accrued.
Put differently, a person who takes goods “as security for” a debt is excluded from
being a buyer in the ordinary course of business because he does not give any new
consideration for the goods. See, e.g., Handy & Harman, 750 F.2d at 781. And without new
consideration, the financier’s security interest in the inventory is simply extinguished, unable
to attach any new value. Id. The U.C.C. thus recognizes that a creditor, who does not provide
new value for the goods, should not be able to escape the financier’s inventory lien because
the financier would be left without any security interest. Id.
But CIT Group was not left so high and dry once Commodities acquired Black
Diamond’s coal. Instead, Commodities provided new value: its debt to Black Diamond in the
form an account receivable. And under the Factoring Agreement and Collateral Agent
Agreement, CIT Group’s security interest in the coal transferred to that account receivable
when Commodities purchased the coal.
CIT Group’s real concern is that the account receivable became uncollectable when
Black Diamond entered bankruptcy. In doing so, Black Diamond breached the Coal Supply
Agreements, triggered the termination and liquidation damages, and allowed Commodities

10

See, e.g., Fleet Capital Corp. v. Yamaha Motor Corp., 2002 WL 31174470, at *17 (S.D.N.Y. 2002); Permian
Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 649 (5th Cir. 1991); United States v. Handy & Harman, 750
F.2d 777, 782 (9th Cir. 1984).

22

the chance to argue it could offset its debt to Black Diamond with those damages. But CIT
Group explicitly assumed that risk, see supra at page 8, and its efforts to mitigate that risk
after the fact are in vain. The bankruptcy court correctly granted Commodities summary
judgment and denied CIT Group summary judgment on the conversion claim.
II.

Contract and Quasi-Contract Claims
CIT Group seeks $9,998,859.40 from Commodities for coal that Black Diamond

delivered to Commodities and Commodities did not pay for. The deliveries include twentyseven invoiced deliveries as well as almost 45,000 tons of coal delivered without invoices
between November 2007 and February 2008. Second Am. Compl., R. 93 at ¶¶ 31–32, 39–51.
CIT Group also seeks $15,598,859.40 in damages for breach of the 2006 Coal Supply
Agreement. Id. at ¶¶ 33–38.
The bankruptcy court found that CIT Group did not have standing to raise a breach of
contract claim against Commodities because it was not a party to the contract between
Commodities and Black Diamond. None of the cases relied on by the bankruptcy court
support its conclusion. Those cases hold only that third parties cannot assert breach of
contract claims on behalf of a party to a contract. Here, CIT Group is an assignee. The
assignment granted CIT Group the right to assert all claims Black Diamond could have
raised against Commodities. CIT Group is also subject to all of the defenses and claims of
recoupment Commodities could have raised against Black Diamond. See N.Y.U.C.C. § 9404(a); Septembertide Pub., B.V. v. Stein and Day, Inc., 884 F.2d 675, 682 (2d Cir. 1989)
(“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.”).
23

Black Diamond delivered coal to Commodities on December 22, 2007. Commodities
did not pay the invoice. On February 19, 2008, Black Diamond was forced into bankruptcy.
CIT Group argues Commodities breached the 2006 Coal Supply Agreement by failing to pay
the invoice on time. CIT Group believes the deadline was January 21, 2008. Commodities
believes the deadline was February 22, 2008. The difference matters because if the deadline
was after the date of bankruptcy, then Black Diamond defaulted on the 2006 Agreement first.
If Black Diamond breached first, Commodities has a right to the termination payment and
liquidated damages. If the deadline was before the date of the bankruptcy, then Commodities
might have breached first and might lose its rights under the contract. The bankruptcy court
determined that the deadline was February 22, 2008, meaning Commodities did not breach
the 2006 Coal Supply Agreement. It therefore went on to find that Commodities could use its
right to the termination payment and liquidated damages under the 2006 Coal Supply
Agreement to offset the amount it owes CIT Group for the outstanding deliveries.
The December 22 delivery was not subject to a written contract. See The CIT
Grp./Comm. Servs, Inc. v. Constellation Energy Commodities Grp., Inc. (In re Black
Diamond Mining Co., LLC), No. 12-16-ART (E.D. Ky. 2012), R. 16 at 30. There are six
pieces of evidence related to the deadline.
(1)

On February 5, 2008, David Hegger, the Black Diamond CFO, asked Brigit
Schaffer, a Commodities employee, when Commodities would pay for certain
deliveries. On February 6, 2008, Schaffer replied that payment for “the
December invoices” would be on February 22, 2008. On February 8, 2008,
Hegger replied and did not confirm or object to that deadline, but instead
asked about the status of a separate payment. See R. 163-1 at 3–4, Exh. 1.
24

(2)

In a January 14, 2008, e-mail to Donna Lewis in the Audit Department of CIT
Group, Schaffer listed invoices and due dates. The December shipments are
listed with a January 21, 2008, due date. See R. 119-10 at 29–31, Ex. 22.

(3)

In a March 11, 2008, e-mail Joe Funk of Black Diamond states that the
December shipments were on a thirty-day payment schedule, which
corresponded to a January 21, 2008, due date.

(4)

The prior coal supply agreements between the parties used a sixty-day
payment schedule. R. 117 at 7–8, Ex. 9.

(5)

An affidavit from Phillip Hoskins stated that the terms of the oral agreement
governing the December shipments were the same as all the written contracts;
that is, the deadline was February 22, 2008, sixty-days after delivery. R. 156 at
¶¶ 8–9.

(6)

The December invoices state that the deadline for payment is January 21,
2008. R. 119-8 at 1, Ex. 15.

The bankruptcy court seemed to settle on a February 22, 2008 deadline. It did so
citing only pieces of evidence (1), (4), and (5). Before the bankruptcy court, and again before
this Court, CIT Group argued that the Schaffer-Hegger e-mail exchange was hearsay. See R.
171 at 10, CIT Reply Br. (noting Commodities did not authenticate the e-mail exchange or
question Hegger about the contents); The CIT Grp./Comm. Servs, Inc. v. Constellation
Energy Commodities Grp., Inc. (In re Black Diamond Mining Co., LLC), No. 12-16-ART
(E.D. Ky. 2012), R. 16 at 75. Commodities did not respond to the hearsay claim below.
Commodities also did not respond before this Court. The bankruptcy court did not address
the argument. Hearsay evidence is inadmissible on summary judgment. See Carter v.
25

University of Toledo, 349 F.3d 269, 274 (6th Cir. 2003). However, this Court cannot
determine whether the e-mail is inadmissible hearsay. It is possible that the e-mail falls
within the “business records” exception in Federal Rule of Evidence 803(6), but because
Commodities did not respond, it is not clear whether there is a foundation for the exception.
For example, it is not clear from the evidence whether (1) “the record was kept in the course
of a regularly conducted activity of a business,” (2) “making the record was a regular
practice of that activity,” or (3) “neither the source of information nor the method or
circumstances of preparation indicate a lack of trustworthiness.” Fed. R. Evid. 803(6). A
limited remand is in order for the bankruptcy court to address the hearsay issue.
On remand, the bankruptcy court should address the consequences of the hearsay
determination. If the Schaffer-Hegger e-mail exchange is inadmissible, is there a genuine
issue of material fact with respect to deadline for payment on the December 22 shipments?
The question will be whether the Hoskins affidavit stands up against the remaining four
pieces of evidence. And if the Schaffer-Hegger e-mail exchange is admissible, the
bankruptcy court should address pieces of evidence (2), (3), and (6) when determining
whether there is a genuine issue of material fact with respect to the December 22 shipment
due date. It did not address those pieces of evidence in the opinion below. Finally, if the due
date was January 21 2008, and Commodities did breach the 2006 Coal Supply Agreement,
the bankruptcy court should re-assess its decision on the breach of contract and outstanding
invoice claims. It will need to determine whether, as a matter of New York law, Black
Diamond waived the breach. If not, the bankruptcy court will need to determine what effect
that has on Commodities’ ability to claim that the termination payment and liquidated

26

damages under the 2006 Coal Supply Agreement offset its obligations to CIT Group on the
outstanding deliveries.
Finally, CIT Group argues Commodities breached the 2006 Coal Supply Agreement
when it failed to provide an amended guaranty for each of the subsequent Coal Supply
Agreements. R. 117-4 at 11, Ex. 9 at CIT0544. The bankruptcy court correctly determined
that CIT Group’s claim fails as a matter of law because Black Diamond waived any breach
by Commodities. Under New York law, waiver requires a “voluntary and intentional
abandonment of a known right.” Gen. Motors Acceptance Corp. v. Clifton-Fine Cent. School
Dist., 647 N.E.2d 1329, 1331 (N.Y. 1995). Waiver can be established “affirmative conduct
by failure to act so as to evince an intent not to claim a purported advantage.” Id. As the
bankruptcy court noted, Black Diamond never stated that Commodities was in breach, never
suspended performance due to breach, and never issued a notice of termination or default
under the 2006 Coal Supply Agreement. The CIT Grp./Comm. Servs., Inc., 2011 WL
6202905, at *33. CIT Group argues that the lack of any evidence that Black Diamond did not
waive the breach does not matter because the 2006 Coal Supply Agreement actually
prohibits waiver. But there is no such prohibition. The provision CIT Group points to says
only that waiver of any one breach cannot be construed as waiver of any other breach. R.
119-11 at 17, Ex. 26 at CONSTELLATION-3582. But here, every alleged breach was
waived. The last Coal Supply Agreement was dated October 1, 2007. R. 117-5 at 46, Ex. 19.
There is no evidence that Black Diamond ever intended to assert its right to claim
Commodities breached. CIT Group raised the issue of breach for the first time before the
bankruptcy court.

Because Black Diamond waived any rights it had stemming from

27

Commodities’ breach, the bankruptcy court correctly determined this breach did not affect
Commodities’ right to the termination payment and liquidated damages.
III.

Amendment Claims
Commodities payments to Black Diamond for the four Amendments to the 2006 Coal

Supply Agreement were $5.6 million (“the Amendment Payments”). CIT Group argues that
Commodities should not have paid Black Diamond, but should have instead paid CIT Group.
Second Am. Compl., R. 93 at ¶¶ 52–56. The Factoring Agreement between CIT Group and
Black Diamond did not grant CIT Group an interest in the payments for the Amendments, so
CIT Group’s claim fails.
The Factoring Agreement assigns CIT Group “all accounts arising from [Black
Diamond’s] sales of coal inventory.” R. 117-4 at 56, Exh. 13 at CIT0282. In order for CIT
Group to have a right to the Amendment Payments, those payments would have to be
“accounts” and “aris[e] from” the sale of coal. The Amendment Payments do not meet either
condition.
First, Commodity made the payments as consideration for a modification of the 2006
Coal Supply Agreement. The Factoring Agreement does not define the term “account.”
N.Y.U.C.C. § 9-102(a)(2) defines “account” as a right to payment for property, services,
insurance, a secondary obligation, energy, credit card charges, and lottery winnings. A
contract modification does not fall within the terms on that list. Furthermore, Section 4.2 of
the Factoring Agreement required Black Diamond to represent and warrant that “each
Account is based on a bona fide sale and delivery of coal inventory.” R. 117-4, Exh. 13. This
provision supports a narrower interpretation of “account.” Each “account” (singular) must be
based on “a” (singular) sale and delivery of coal. If “account” is given its most natural
28

meaning here, as a sale or delivery of coal, this requirement makes sense. If “account” means
something broader, and includes the Amendment Payments, then the representation and
warranty requirement ceases to make sense. Black Diamond could not have represented and
warrantied that the Amendment Payments were “based on” one sale and delivery because it
did not deliver any coal to Commodities in exchange for the Amendment payments.
Even if the Amendment Payments were “accounts,” they do not arise from the sale of
coal. If Black Diamond delivered coal to Commodities in exchange for the Amendments,
there would be invoices. There are no invoices. R. 117-8, Ex. 37–38; R. 117-9, Ex. 39–40.
The payments were for the modifications—fewer deliveries, lower prices, and different
shipping methods—rather than the sale of coal. CIT Group argues that the payments arose
from the sale of coal because the 2006 Coal Supply Agreement governed the sale of coal and
the Amendment Payments were consideration for a modification of that Agreement. “Arising
from” simply has a narrower meaning than CIT Group wishes to give it. See, e.g., Golden
Pacific Bancorp v. Fed. Deposit Ins. Co., 273 F.3d 509, 516 (2d Cir. 2001) (narrowly
interpreting contract under New York law on diversity jurisdiction); Black’s Law Dictionary
(9th ed. 2009) (defining arise as “to originate; to stem from”). Black Diamond was in the
coal selling business. Under CIT Group’s interpretation, every transaction Black Diamond
entered into and received payment for would “arise from” the sale of coal.
The contract terms unambiguously do not cover the Amendment Payments because
they did not “arise from” the sale of coal. This explains why Commodities paid the
Amendment Payments directly to Black Diamond. Unlike the coal invoices, which required
Commodities to pay CIT Group directly, Black Diamond specifically told Commodities to
make payments into Black Diamond’s accounts. See R. 157, Second P. Thompson Aff. at ¶¶
29

27–30; R. 117-5 at 28–29, Ex. 17 at CIT0308–09. Commodities did so. See R. 117-7 at 94,
Ex. 38 at Constellation-0003736; R. 117-8 at 3, Ex. 39 at CIT-00021; R.117-8 at 8, Ex. 40 at
Constellation-0003749. The bankruptcy court capably summarized the other evidence in the
record that shows the parties’ actions contradict CIT Group’s claim that the Factoring
Agreement covered the Amendment Payments. See The CIT Grp./Comm. Servs., Inc., 2011
WL 6202905, at *38–40. CIT Group maintains that the Amendment Payments are “general
intangibles,” which it has a security interest in under Section 11.1 of the Factoring
Agreement. Section 11.1 states that CIT Group gains a security interest in certain listed items
only if “the transactions contemplated hereby are recharacterized as a secured loan.” R. 1174 at 61, Exh. 13 at CIT0287. CIT Group does not offer any evidence to show that condition
was met. Because the terms of the Factoring Agreement did not grant CIT Group an interest
in the Amendment Payments, CIT Group cannot claim that Commodities must pay it $5.6
million.
IV.

Claims Against Constellation
As explained above, Constellation guaranteed Commodities’ payment obligations,

such as Commodities’ liability for breach of contract, under the 2006 Coal Supply
Agreement. See id. at ¶¶ 18–19. The bankruptcy court determined that because all of CIT
Group’s claims failed as a matter of law, Constellation had no liability for any of CIT
Group’s claims. Commodities’ liability for breach of contract will turn on the outcome of the
remand. This means that as Commodities’ guarantor, Constellation’s liability will also turn
on the outcome of the remand. Therefore, the bankruptcy court’s determination on this issue
must also be remanded.

30

The bankruptcy court correctly determined that with respect to CIT Group’s other
claims—for payment on the outstanding invoices and for the Amendment Payments—
Constellation has no liability to CIT Group. CIT Group concedes that Constellation did not
guarantee Commodities’ payments for the coal that was delivered by Black Diamond but
never paid for by Commodities. Thus, Constellation cannot be liable for those payments. See
Second Am. Compl., R. 93 at ¶ 31. Finally, Commodities was not required to send the
Amendment Payments to CIT Group. Because CIT Group’s underlying claim against
Commodities for the Amendment Payments fails, its claim against Constellation as
Commodities’ guarantor fails as well.
CONCLUSION
Accordingly, the Court AFFIRMS the Bankruptcy Court’s opinion IN PART,
REVERSES IN PART, and ISSUES A LIMITED REMAND for the reasons stated in this
opinion.
This the 30th day of September 2012.

31