WHAT IS AN EXECUTORY CONTRACT?
An executory contract is easily defined as one in which both parties have unfinished duties to perform toward the each other. In bankruptcy: an executory contract is a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.
- In dealing with executory contracts in bankruptcy there are three terms: Assume, reject, and reaffirm. They each involve their own issues.
- The second issue is, are we talking about the debtor, or the trustee? The effect of failure to reject a contract may differ as between the estate and the debtor personally.
Bell v. Herrera (In re Bell) (Bankr. M.D. Pa. 2019) HELD: REJECTION OF AN EXECUTORY CONTRACT DOES NOT NECESSARILY INVALIDATE IT
“Respondents, and others entered into an Agreement of Settlement and Mutual Release as to licensing rights regarding a band known as Fear Factory. The Agreement resolved a litigation pending in the United States District Court for the Central District of California (pre-bankruptcy litigation).
“Three months later, on July 12, 2011, Bell, along with the joint Movant, Amy L. Johnson, filed a Chapter 7 bankruptcy in this Court. They obtained a discharge on November 14, 2011. Chapter 7 Trustee never assumed or rejected the Agreement.
NOTE: the point in Bell and similar opinions is that in a chapter 7, the trustee representing the estate has an opportunity to assume or reject the agreement as to the estate. But the trustee’s failure to assume it, which automatically results in rejection per 11 U.S.C. § 365, affects only the estate, not necessarily the debtor personally. As to the debtor the contract is not automatically terminated.
HELD: DEBTOR DID NOT REAFFIRM PRE-PETITION CONTRACT – HENCE CONTRACT IS VOID
Behrens v. Woodhaven Ass’n, 87 BR 971 (Bankr. N.D. Ill., 1988)
“Woodhaven would like to enforce this contract obligation against the Debtors because, in its view, they failed to wriggle out from under the obligations of the contract after bankruptcy. The problem with this analysis is that it is contrary to the scheme of the Bankruptcy Code.
“The only method … by which the Debtors’ obligation on the contract could have survived bankruptcy was a reaffirmation. In this 1983 case, that reaffirmation would have had to be signed by the Debtors before discharge and not have been rescinded by them within 30 days after it became effective. 11 U.S.C. § 524(c) (1983). [cites] Of course, no such reaffirmation was obtained here.
“The scheme set up by 11 U.S.C. §§ 524(c) & (d) is exclusive. The legislative history makes it clear that no other method of reaffirming a dischargeable debt can cause a debtor’s obligation on a prepetition contract to be enforceable after the debtor is discharged in a Chapter 7 case.
In re Nguyen (Bankr. S.D. Tex., 2013)
“The movants argue that Nguyen’s failure to terminate the contract with Reliant meant that they were entitled to continue postpetition to supply electricity and continue to charge Nguyen until he actively terminated the contract.
“For two reasons, this argument fails. First, this statement implies that Reliant’s contract with Nguyen was not an executory contract automatically rejected under § 365(d)(1) after it was not assumed within 60 days of the order for relief.
“Second, any assumption would have been by the Estate, not by Nguyen. Perhaps Reliant is confusing Nguyen’s ability to reaffirm debt with the Estate’s ability to assume the contract.
“In any event, the contract was not reaffirmed and Nguyen has no liability under the contract. The absence of liability under the contract would not allow Nguyen to use Reliant’s postdischarge electricity for free, but the obligation would not arise under the discharged contract.”
Carruth v. Eutsler (In re Eutsler) 2017 WL 6607196 (9th Cir BAP 2017) The Ninth Circuit defines executory contracts as agreements under which the obligations of both the debtor and other party are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other. Materiality, in turn, depends on whether, under applicable state law, one party’s nonperformance would excuse the other party’s obligation to perform. Courts will look at the outstanding obligations as of the petition date and ask whether both sides still have unperformed obligations.