Once Repudiated, a Contract Is No Longer Executory

Once repudiated, a contract is no longer executory, according to Bankruptcy Judge Marvin Isgur of Houston.

Repudiation has two significant implications: (1) There is nothing for the debtor to assume, and (2), as Judge Isgur ruled, repudiation requires the creditor to file a proof of claim by the general bar date, not by the rejection bar date, if it’s later.

The debtor was under contract to purchase component parts from the creditor. Claiming that a shipment of parts was defective, the debtor wrote to the creditor six months before bankruptcy and said it was considering open purchase orders to be “cancelled.” The creditor objected, contending that the shipment was not defective and calling on the debtor to perform the remainder of the contract.

The creditor did not file a proof of claim by the general bar date before confirmation of the debtor’s chapter 11 plan. The bar date for claims arising from the rejection of executory contracts was after confirmation.

The creditor filed a proof of claim after confirmation and after the general bar date but before the bar date for rejected contracts.

The plan said that claims filed after the bar dates would be deemed disallowed. When the creditor did not receive a dividend as an unsecured creditor with a rejected contract, the creditor filed a motion to compel payment of the claim.

Judge Isgur denied the motion in an opinion on April 27.

Judge Isgur defined an executory contract as one with material, unperformed obligations. He cited the Seventh Circuit for holding that “the non-repudiating party is no longer under an obligation to perform” when there has been “clear evidence of an intent to repudiate.” In re C&S Grain Co., 47 F.3d 233, 237 (7th Cir. 1995).

Although some courts disagree with C&S, Judge Isgur said they “typically have done so out of a concern that pre-petition repudiations should not limit a debtor’s ability to assume executory contracts.” The case at hand, he said, “presents the opposite scenario.”

Judge Isgur made fact findings that were central to his legal conclusion. For instance, he said that the “debtor made clear, long before bankruptcy, that it no longer intended to perform and that it did not seek reciprocal performance.” Similarly, he said that the creditor “had no reasonable basis to believe that [the debtor] still sought performance of the contract” or that the debtor would pay outstanding invoices.

Judge Isgur said he was not deciding who was at fault for breaching the contract. Rather, he held that the “contract was not executory on the petition date.”

Judge Isgur denied the motion to compel payment of the claim because the creditor “was not justified in its belief that it only needed to file by the rejection bar date.”