Settlement Agreement Not An Executory Contract Bankruptcy allows a debtor to assume those “executory” contracts that

Settlement Agreement Not An Executory Contract Bankruptcy allows a debtor to assume those “executory” contracts that

are beneficial and reject those that may hinder its recovery. The bankruptcy code does not define what is an executory contract. Most federal courts follow the “Countryman” definition, which provides that an executory contract is “a contract under which the obligations of both [parties] are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” As explained by Judge Lamoutte, citing the Collier treatise, “[a]lthough the Countryman definition may be easy to state, the myriad differences in particular contracts have made it difficult to apply.

Courts typically struggle with trying to find whether there are any unperformed obligations on either side and whether breach of those obligations would excuse the other party from performance." In a recent case, the 9th Circuit BAP had to decide whether a settlement agreement met the Countryman definition. Specifically, the issue was whether the bankruptcy court erred in denying a debtor’s request to assume a settlement agreement, based on the court’s conclusion that the settlement agreement was not an executory contract (which the BAP saw as a factual determination subject to clear error review).

In general terms, the agreement required that the debtor pay a sum through monthly installments in satisfaction of a debt owed to the counterparty. Upon the debtor’s full payment, the counterparty would then execute a release of its claims against the debtor.

The BAP affirmed. It reasoned that, because the counterparty’s contractual obligations were due only after the debtor fully performed by making all required payments, a breach by the counterparty could not logically excuse the debtor's performance of its duty to make payments.

Stated differently, on the petition date, the counterparty did not yet owe any material obligations to the debtor. Additionally, the BAP questioned whether the counterparty’s obligation to execute the release was material. It noted that if the counterparty refused to execute the release after full payment by the debtor, the Settlement and proof of payment would operate as a complete defense to a collection action in the same manner as a signed release.

As a result, given the nature of the Settlement, the release was likely ministerial and not sufficient to render the Settlement executory.

The BAP did not reach the bankruptcy court’s alternate conclusion that, even if the settlement agreement was executory, it could not be assumed under 11 U.S.C. § 365(c)(2) (a debtor “may not assume or assign any executory contract or unexpired lease if […] such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor[.]”). #bankruptcy #executorycontracts #settlements