Rejecting an executory contract precludes the debtor from suing for a post-petition breach of the contract, according to District Judge Sim Lake of Houston.
Judge Lake’s Feb. 8 opinion also includes an insightful analysis of the Fifth Circuit’s continually evolving rules governing the specificity with which claims against third parties and creditors must be identified in plan documents to survive confirmation.
While in chapter 11, the debtor corporation rejected an executory contract with a supplier. Later, the company confirmed a chapter 11 plan, creating a creditors’ trust tasked with pursuing lawsuits, among other things. After confirmation, the trust sued the supplier, raising various claims including post-petition breach of contract and violation of the automatic stay. Judge Lake dismissed the suit on two theories of note.
The supplier argued that rejection of the contract divested the debtor of standing to sue for post-petition breach. Judge Lake agreed.
Citing authority on the rejection of executory contracts under Section 365(a), Judge Lake said that rejection of the pre-petition supply contract constituted a breach entitling the supplier to an unsecured, pre-petition claim and “relieved both the [debtor] and [the supplier] from post-petition performance.”
Judge Lake said that the trust was unable to cite authority for the proposition that a debtor’s estate or successor can “pursue claims for post-petition breaches of the rejected contract.” To the contrary, he said, rejection “not only relieved the estate of its post-petition performance obligations, but also relieved the estate of its ability to assert claims for post-petition breaches thereof.”
Judge Lake therefore held that rejection “means that [the trust] lacks standing to pursue the contract claim . . . for post-petition breaches.” He did not discuss whether the supplier’s post-petition breach nonetheless might offset the supplier’s contract-rejection claim. Absent an ability to offset, a creditor would have a pre-petition claim but would escape liability for its own post-petition breach occurring at a time when it was required to perform.
On the other hand, Judge Lake said, “Rejection did not cut off the right of [the debtor] or its successor-in-interest to pursue claims based on pre-petition breach of [contract].”
Judge Lake also dismissed the trust’s stay-violation claim on a different theory, based on the Fifth Circuit law laid out primarily in In re United Operating LLC, 540 F.3d 351 (5th Cir. 2008), and Spicer v. Laguna Madre Oil & Gas II LLC (In re Texas Wyoming Drilling Inc.), 647 F.3d 547 (5th Cir. 2011). Those cases, among others, require that a debtor’s claims against third parties or creditors be described specifically and unequivocally in the plan or disclosure statement to survive confirmation. Spicer ostensibly narrowed United Operating because the later case said that United Operating “never held that intended defendants must be named in the plan.”
Judge Lake said that the debtor successfully preserved avoidance actions and contract claims because both categories of claims were mentioned directly or by references in the plan and disclosure statement. Although the supplier was listed as a potential defendant, the judge said that the plan documents did not list stay-violation or Section 362 claims among the categories of actions to be preserved for prosecution after confirmation.
Because they were mentioned in neither the plan nor the disclosure statement, Judge Lake dismissed the stay-violation claims for lack of jurisdiction because the preservation provisions failed “to satisfy the ‘specific and unequivocal’ standards for preserving stay violation claims.”
Judge Lake’s opinion mentions but does not resolve an interesting choice of law issue regarding claim preservation. The trust contended that the law of the arguably more lenient Eighth Circuit applied because the plan was confirmed in that circuit. The supplier contended that Fifth Circuit law governed, as the law of the forum. Judge Lake avoided the question by saying that the two circuits’ laws were similar, although he primarily followed Fifth Circuit precedent.