New York, N.Y. (January 26, 2024) - New York Partner Minyao Wang recently co-authored an article for the American Bankruptcy Institute Journal regarding a decision by the Ninth Circuit Bankruptcy Appellate Panel that addressed a recurring issue in Chapter 11 cases.
In the article, titled "BAP: A Settlement Agreement Is Not An Executory Contract," Mr. Wang and co-author Vincent J. Roldan of Mandelbaum Barrett PC explored the BAP's ruling in In re Svenhard's Swedish Bakery that a pre-petition settlement under which a creditor agreed to release the debtor in exchange for the completion of a series of payments did not qualify as an executory contract that could be assumed and assigned to a third party in a bankruptcy proceeding.
The article begins by opining that one of the "most potent weapons" that a debtor in possession has under the Bankruptcy Code is the "power under § 3651 to assume, reject and/or assign executory contracts and unexpired leases to which it is a party, even when contractual language states otherwise."
A critical inquiry that often arises is whether a given contract is executory, the article explains; in the absence of an applicable statutory definition of the term, most jurisdictions have adopted the "restrictive Countryman definition, under which a contract is executory only if the 'obligation [s] 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.'"
Mr. Wang and Mr. Roldan then conduct a deep dive into the facts surrounding the case. As the article details, Svenhard's Swedish Bakery had entered into a settlement agreement with a multiemployer pension fund that called for it to make $3 million in monthly payments to resolve nearly $50 million in withdrawal liability. But Svenhard's ceased making payments after only a few months, and the fund declared it in default and accelerated the full original balance.
Shortly thereafter, the article continues, Svenhard's filed for Chapter 11 bankruptcy. The pension fund filed a proof of claim for the entire $50 million, while also suing Svenhard's successor, United States Bakery, in federal court in an attempt to hold it jointly and severally liable for Svenhard's liability. Several years into the bankruptcy, Svenhard's and USB sought to limit the pension fund's recovery to $3 million, but their strategy depended on whether the pre-petition settlement agreement between Svenhard's and the fund constituted an executory contract that could be assumed and assigned, according to the article.
Mr. Wang and Mr. Roldan detail the judicial approaches to defining what constitutes an executory contract. The article then summarizes the BAP's holding that, under the Countryman test, the settlement agreement in question "could not be assumed and assigned pursuant to § 365 of the Bankruptcy Code," and therefore, "Svenhard's could neither limit the pension fund's proof of claim to $3 million, nor provide a defense to USB in the litigation brought against it by the pension fund."
The decision, the article emphasizes, is "important not only for multiemployer funds and employers, but for any creditor contemplating entering into a settlement agreement that requires discounted or deferred payments over a period of time from a counterparty."
"It remains to be seen how attorneys will craft their settlement agreements to address the possibility of a bankruptcy," Mr. Wang and Mr. Roldan write.
The co-authors further note that the BAP did not rule out that a "settlement agreement may be executory under some circumstances," and did "not analyze or reference cases in which settlement agreements are found to be executory."
"Thus, the court left open the possibility that future cases might be distinguishable," they conclude.
Mr. Wang is a partner in the New York City office of Lewis Brisbois and a member of the Complex Business & Commercial Litigation, Bankruptcy & Insolvency, and China Practices. He has 15 years of experience at both the trial and appellate levels. Mr. Wang has achieved high-stakes victories in bench and jury trials, as well as arbitrations. His clients have included Fortune 500 companies, hedge funds, institutional investors, insurance companies, start-ups and high net-worth families in the United States. He has recovered, on behalf of his clients, billions of dollars from some of the largest banks, financial institutions, and auditing firms in the world.
Read the full article here.
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