Bill Rochelle is on vacation. Please enjoy this piece written by Guest Writers Patricia A. Redmond, a Bankruptcy and Creditors’ Rights shareholder with Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. in Miami, and Ashley D. Champion, an associate with Polsinelli in Atlanta.
A three-judge panel for the Ninth Circuit BAP just affirmed Judge Christopher M. Klein’s decision holding that a discounted settlement agreement was not an executory contract that may be assumed in a subsequent chapter 11 case. Read our previous analysis of Judge Klein’s opinion here.
The Discounted Payment Agreement and Opinion Below
To simplify complex underlying facts, as previously detailed in the report on the bankruptcy court decision by Judge Klein, the debtor incurred about $43 million in union pension fund withdrawal liability after closing down a bakery. To settle the claim, the debtor agreed to pay the pension fund $3 million over 20 years. Once paid in full, the entire $43 million would be expunged.
After making payments for six months, the debtor defaulted and then filed a chapter 11 petition during the cure period. Over the next three years the debtor managed to pay the remainder of the $3 million, after which it filed a motion to assume the agreement with the pension fund as an executory contract under Section 365.
Judge Klein denied the motion, which the pension fund opposed, concluding that the settlement agreement lacked the requisite mutuality of obligation to render it executory because, as of the petition date, the pension fund “need not have done anything to avoid a material breach.”
The debtor appealed to the BAP.
The BAP Decision
Because the question of whether a contract is executory is one of fact, the standard of review was clear error, and the court concluded that it could discern no clear error in the bankruptcy court’s finding that the discounted settlement agreement was not executory.
First, the plain language of the settlement agreement provided for the release of the pension fund’s claims only upon full payment by the debtor. As a result, the pension fund’s failure to execute the releases would not constitute a material breach excusing performance by the debtor.
Next, under Maryland law, the express requirement of release “upon full payment” created a performance condition, meaning that the corresponding contractual duty of the pension fund did not arise because the condition precedent — full payment — was unsatisfied. Thus, “[b]ecause the pension fund’s contractual obligations [were] due only after Debtor fully perform[ed] by making all required payments, a breach by the Pension Fund could not logically excuse Debtor’s performance of its duty to make payments.”
Last, the court also cast doubt as to whether the pension fund’s release obligation was “material,” observing that the settlement agreement and proof of payment “would operate as a complete defense to a collection action in the same manner as a signed release.” Because of this, “the releases are likely ministerial and not sufficient to render the [s]ettlement executory.”
The implications of this case may cause the Appellant to seek review by the Ninth Circuit Court of Appeals. In addition, because the decision rests on an interpretation of state law and the applicable standard for the treatment of executing contracts, the results may be different from jurisdiction to jurisdiction.
Bill Rochelle is on vacation. Please enjoy this piece written by Guest Writers Patricia A. Redmond, a Bankruptcy and Creditors’ Rights shareholder with Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. in Miami, and Ashley D. Champion, an associate with Polsinelli in Atlanta.
A three-judge panel for the Ninth Circuit BAP just affirmed Judge Christopher M. Klein’s decision holding that a discounted settlement agreement was not an executory contract that may be assumed in a subsequent chapter 11 case.