On February 13, 2015, the US Court of Appeals for the Sixth Circuit held, in In re Black Diamond Mining Company, LLC, that under New York law, an assigned payment was subject to a pre-assignment netting provision between the assignor a third party (No. 14-5232, (6th Cir. Feb. 13, 2015)).

In 2006, Constellation Energies Commodities Group executed a series of contracts to buy coal from Black Diamond Mining Company. The written agreements between the parties each contained a netting provision that allowed the parties to "net" mutual debts. Shortly after execution of the agreements, Black Diamond assigned to CIT Group (CIT) its right to receive payments for the coal it delivered to Constellation.

When Black Diamond went bankrupt in early 2008, Constellation had not paid CIT for roughly $10 million in coal that it had received. CIT demanded payment, but Constellation argued that it was not required to pay anything, because the netting provision allowed it to offset the $10 million debt against the roughly $90 million that Black Diamond owed it. CIT countered that Constellation could not rely on Black Diamond's debts as the basis for not paying CIT the $10 million owed for the coal deliveries.

The bankruptcy court granted Constellation's motion for summary judgment, holding that Constellation could rely on the netting provision as a defense against payment of the $10 million debt to CIT. The district court affirmed, and CIT appealed the decision to the Sixth Circuit.

The Sixth Circuit agreed that CIT, as Black Diamond's assignee, was not entitled to payment of the $10 million debt, because that debt was subject to the netting provision. The Court, relying on Second Circuit precedent in Septembertide Pub., B.V. v. Stein & Day, Inc. reasoned that, under New York law, an assignee stands in the shoes of its assignor and takes subject to the pre-assignment liabilities of its assignor (884 F.2d 675, 682 (2d Cir. 1989)).

The Court rejected CIT's argument that the provision did not apply to it as the assignee. Rather, following Second Circuit precedent in Riviera Fin. of Tex., Inc. v. Capgemini US, LLC the Court held that when CIT took assignment of Black Diamond's rights under the agreement, it did not take those rights free of the netting provision (511 F. App'x 92, 94 (2d Cir. 2013)). CIT simply stepped into Black Diamond's shoes as the payee, and its right to payment was subject to all of the defenses that Constellation might have asserted against Black Diamond under the existing agreement, including the netting provision. The Court reasoned that, if the law were otherwise, defenses like the one established by the netting provision would be worthless, since a contracting party could circumvent them by simply assigning its rights to a third party.

The Court noted that an assignee is not subject to setoff for every debt the assignor incurs, such as in cases where an assignor incurs a debt that bears no relationship to the right assigned. In this case however the right Black Diamond assigned to CIT was expressly limited by the netting provision when it was assigned.

CIT also asserted that the netting provision was unenforceable because New York law required that contractual provisions creating setoff rights more expansive than those established by common law or statute be drafted "with clarity and specificity." Citing Second Circuit precedent, the Court rejected this argument, holding that no New York cases established such a "clarity and specificity" requirement beyond the clarity required for all contracts (Reinfemet Int'l Co. v. Eastbourne N.V., 25 F.3d 105, 108 (2d Cir. 1994)).

The Court also rejected CIT's argument that Constellation should not be allowed to invoke the netting provision because Constellation allegedly breached the agreement before Black Diamond went into bankruptcy. The Court reasoned that nothing in the agreement between Black Diamond and Constellation prohibited a breaching party from invoking the netting provision.

The Sixth Circuit therefore held that, under New York law, Constellation could assert the netting defense against CIT, Black Diamond's assignee, just as it could have asserted the defense against Black Diamond absent an assignment.

This case serves as a reminder that courts will uphold contractual netting provisions, even where the contract has been assigned from another party.