Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
3-10-1995
In Re: Columbia Gas
Precedential or Non-Precedential:
Docket 93-7409
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 93-7409
___________
IN RE: COLUMBIA GAS SYSTEM INC.;
COLUMBIA GAS TRANSMISSION CORPORATION,
Debtors
ENTERPRISE ENERGY CORPORATION,
Appellant
v.
UNITED STATES OF AMERICA,
On behalf of the I.R.S.
THOMAS E. ROSS,
Trustee
_______________________________________________
On Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action No. 92-00258)
___________________
Argued January 19, 1994
Before: SLOVITER, Chief Judge,
SCIRICA and LEWIS, Circuit Judges
(Filed March 10, 1995)
ROBERT J. SIDMAN, ESQUIRE (ARGUED)
DUKE W. THOMAS, ESQUIRE
Vorys, Sater, Seymour & Pease
52 East Gay Street
Columbus, Ohio 43216
Attorneys for Appellant,
Enterprise Energy Corporation
ROBERT S. BRADY, ESQUIRE
Young, Conaway, Stargatt & Taylor
P.O. Box 391
Rodney Square North, 11th Floor
Wilmington, Delaware 19899-0391
Attorney for Appellees,
Columbia Gas System Inc. and
Columbia Gas Transmission Corporation
LINDA E. MOSAKOWSKI, ESQUIRE (ARGUED)
GARY R. ALLEN, ESQUIRE
DAVID E. CARMACK, ESQUIRE
United States Department of Justice
Tax Division
P.O. Box 502
Washington, D.C. 20044
Attorneys for Appellee,
United States of America,
On behalf of the I.R.S.
__________________
OPINION OF THE COURT
__________________
SCIRICA, Circuit Judge.
In this bankruptcy matter, we must decide whether
certain terms in a class action settlement agreement constitute
an executory contract under 11 U.S.C. § 365 (1988). The Internal
Revenue Service contended the settlement agreement was not an
executory contract. Both the bankruptcy court and the district
court1 agreed with the IRS, and the class members appealed. We
will affirm.
I.
The facts are undisputed. Columbia Gas System,
Incorporated, its subsidiary, Columbia Gas Transmission
Corporation (TCO), and their affiliates comprise a natural gas
system which explores, produces, purchases, stores, transmits,
and distributes natural gas. TCO is Columbia Gas System's
principal gas purchaser from producers in the Southwest,
Midcontinent, and Appalachia and operates extensive underground
storage facilities.
On July 26, 1985, Enterprise Energy Corporation and two
other companies filed a class action against TCO in the United
States District Court for the Southern District of Ohio. The
district court certified as a class2 the producers of natural gas
in the Appalachian region who were parties to gas purchase
contracts with TCO. The class comprised 2163 member producers
1
. The district court's opinion is published as Enterprise
Energy Corp. v. United States ex rel. IRS (In re Columbia Gas
System, Inc.), 146 B.R. 106 (D. Del. 1992).
2
. The class consists of "[a]ll owners, operators and producers
of natural gas producing wells in the Appalachian region (New
York, Pennsylvania, West Virginia, Kentucky, Maryland, Virginia
and Ohio) who are parties to gas purchase contracts with Columbia
Gas Transmission Corporation entitling them to receive the
maximum lawful price or a deregulated price under the NGPA . . .
and against whom Columbia has invoked a price reduction for
amounts due under the contracts." Enterprise Energy Corp. v.
Columbia Gas Transmission Corp., 137 F.R.D. 240, 243 (S.D. Ohio
1991).
who held 852 gas purchase contracts. TCO had invoked a price
reduction under a cost recovery clause which formed the basis of
their complaint.
The gas purchase contracts set the price for each unit
of natural gas delivered to TCO at the maximum price permitted
under the Natural Gas Policy Act of 1978 during the month of
delivery. The class members alleged that TCO breached their gas
purchase contracts by paying less than the maximum price after it
invoked the cost recovery clause.
For five years there was extensive discovery. As trial
loomed, the parties entered into a Stipulation of Proposed Class
Action Settlement ("settlement agreement"), which the district
court approved on June 18, 1991. Enterprise Energy Corp. v.
Columbia Gas Transmission Corp., 137 F.R.D. 240 (S.D. Ohio 1991).
Incidental to its approval under Federal Rule of Civil Procedure
23(e), id. at 248, the court issued an order stating in part:
f. Named plaintiffs, Class Members and
defendant [TCO] shall now consummate and be
bound by the Settlement.
g. Except for claims arising under the
Settlement on behalf of Class Members or
Columbia, and at such time as this Order of
the Court approving the Settlement as final
is non-appealable, named plaintiffs and all
Class Members . . . shall be deemed to
release and forever discharge the defendant
. . . from any and all claims of the type
asserted in this litigation relating to
defendant's exercise of the cost recovery
clause contained in the Class Members' gas
purchase contracts at any time during the
period commencing on or about July 10, 1985
and ending on or about July 10, 1991.
h. Jurisdiction is hereby retained as
to matters related to the interpretation,
administration and consummation of the
Settlement as approved in this Order.
Id. at 252. The order became final and unappealable on July 18,
1991.
The settlement agreement required TCO to deposit $30
million into an escrow account "in settlement of, and as a full
and complete discharge and release of TCO, for all of [the class
members'] claims arising on or before January 1991." Enterprise
Energy Corp. v. United States ex rel. IRS (In re Columbia Gas
System, Inc.), 146 B.R. 106, 109 (D. Del. 1992). TCO was to pay
$15 million into escrow by March 21, 1991, and the other $15
million by March 23, 1992. This schedule was apparently set for
TCO's convenience; TCO's duty to make the second payment was not
contingent on the class members' performance of any of their
obligations. TCO paid the first $15 million on time but then
filed for bankruptcy.
Under the settlement agreement, class members were
entitled to receive their share of the escrow monies only after
they executed a release of claims and a supplemental contract.
The settlement agreement stated "payments to individual Class
Members out of the escrowed amounts will be contingent upon
receipt by [TCO] of a duly executed release of all such Claims
and a duly executed contract supplement . . . ." J. App. at 57-
58. While each class member had to execute a release to get
payment from the escrow fund, the claims each held against TCO
were to be extinguished (and they in fact were, see supra,
district court order ¶ g) by the court order accepting the
settlement agreement.
The supplemental contracts were designed to implement
amendments and clarifications of pricing and other terms
concerning future gas deliveries to TCO. The settlement
agreement established the terms of these contracts, including
increasing the price TCO would pay to the class members. Because
many class members relied on TCO as the principal purchaser of
their gas, the supplemental contracts were important to them, a
point made in the following exchange at oral argument before the
district court:
The Court: So that . . . supplying the
supplemental agreements, contracts, was not
just an option that [the class members] had.
It was necessary for their continued
operation?
[Counsel for the Class]: Exactly, your honor.
Exactly.
Id. at 276.
By July 31, 1991, the class members involved in forty-
one of the purchase contracts had completed the execution of the
release and supplemental contracts and were entitled to their
share of the escrow monies. But on that day, thirteen days after
the settlement agreement had become final, TCO filed a voluntary
Chapter 11 petition in bankruptcy in Delaware. On February 20,
1992, the class members filed a motion to compel TCO to assume or
reject the settlement agreement under the Bankruptcy Code, 11
U.S.C. § 365.3 TCO and the class members had agreed that TCO
would assume the settlement agreement and jointly filed a
proposed order.
After notice of the proposed order was sent to the
proper parties, the United States filed an objection on behalf of
the Internal Revenue Service, one of TCO's creditors.4 Finding
the settlement agreement was not executory within the meaning of
11 U.S.C. § 365, the bankruptcy court upheld the objection and
denied the class members' motion.5
The class members appealed to the United States
District Court for the District of Delaware. The district court
held that the settlement agreement was a contract, but affirmed
the bankruptcy court on the grounds the contract was not
executory for purposes of § 365. In re Columbia Gas, 146 B.R. at
113-14. Therefore TCO did not have the option of assuming or
3
. Section 365 provides in part:
§ 365. Executory contracts and unexpired
leases
(a) Except as provided in sections 756 and 766 of
this title and in subsections (b), (c), and (d) of this
section, the trustee, subject to the court's approval,
may assume or reject any executory contract or
unexpired lease of the debtor.
4
. The record suggests that the IRS's claim is substantial,
apparently in the range of $500 million over the next five years.
J. App. at 287.
5
. The bankruptcy court also apparently held the settlement
agreement was not a contract, as it cited cases holding that
judicial orders cannot be considered executory contracts.
rejecting the settlement agreement. Id. at 114. This appeal
followed.
II.
We "exercise plenary review of the legal standard
applied by the district and bankruptcy courts, but review the
latter court's findings of fact on a clearly erroneous standard."
In re Abbotts Dairies, Inc., 788 F.2d 143, 147 (3d Cir. 1986)
(citations omitted). "Because in bankruptcy cases the district
court sits as an appellate court, our review of the district
court's decision is plenary." Brown v. Pennsylvania State
Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988); see also
Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101
(3d Cir. 1981).
Jurisdiction in the bankruptcy court was proper under
28 U.S.C. § 157(a) (1988). The district court had jurisdiction
over the appeal from the final order of the bankruptcy court, id.
§ 158(a), and we have jurisdiction over the appeal of the
district court's judgment under 28 U.S.C. § 158(d).
III.
In this appeal, we must decide whether the settlement
agreement was a contract, and if so, whether it was executory so
that TCO could elect to assume or reject it under § 365 of the
Bankruptcy Code.
The IRS argues the settlement agreement is not a
contract but a judgment of the court.6 It maintains "[s]ince the
6
. The class members contend the IRS did not properly preserve
this point for appeal because it did not cross-appeal from the
Settlement Agreement was merged into the court's judgment, it
cannot be an executory contract within the meaning of Bankruptcy
Code Section 365." Appellee's Br. at 32. The bankruptcy court
apparently agreed, observing "there is authority to the effect
that the phrase 'executory contract' should not normally be
applied to a judicial order." J. App. at 178. While the
bankruptcy court did not explicitly hold the agreement was a
judgment, the cases it cited7 hold that where contracts have been
reduced to judgment there is no "contract" remaining for purposes
of § 365. The district court, however, distinguished those
cases, holding "[f]or bankruptcy purposes . . . it is appropriate
to treat the judicially approved settlement agreement in this
case as a contract." In re Columbia Gas, 146 B.R. at 113.
At the outset, we should ask whether this settlement
agreement would be considered a contract had there been no
bankruptcy. Generally, application of the Bankruptcy Code does
not change the attributes of a given legal relationship. Butner
(..continued)
district court's judgment which held the settlement agreement is
a contract. We disagree because "it is . . . settled that the
appellee may, without taking a cross-appeal, urge in support of a
decree any matter appearing in the record, although his argument
may involve an attack upon the reasoning of the lower court or an
insistence upon a matter overlooked or ignored by it." Dalle
Tezze v. Director, Office of Workers' Compensation Programs,
United States Dep't of Labor, 814 F.2d 129, 132 (3d Cir. 1987)
(quoting United States v. American Ry. Express Co., 265 U.S. 425,
435 (1924)).
7
. Roxse Homes, Inc. v. Roxse Homes Ltd. Partnership, 83 B.R.
185 (D. Mass.), aff'd without op., 860 F.2d 1072 (1st Cir. 1988);
In re Jolly, 574 F.2d 349 (6th Cir.), cert. denied, 439 U.S. 929
(1978).
v. United States, 440 U.S. 48 (1979). Thus, if the settlement
agreement should be considered a contract under relevant
nonbankruptcy law, it will be a contract in bankruptcy "[u]nless
some federal interest requires a different result . . . ." Id.
at 55.
Although settlement agreements may be judicially
approved, they share many characteristics of voluntary contracts
and are construed according to traditional precepts of contract
construction. cf. Fox v. United States Dep't of Housing & Urban
Dev., 680 F.2d 315, 319 (3d Cir. 1982) (observing this point for
consent decrees). In a nonbankruptcy context, we have treated a
settlement agreement as a contract. See Halderman v. Pennhurst
State Sch. & Hosp., 901 F.2d 311, 318 (3d Cir.), cert. denied,
498 U.S. 850 (1990).
We see nothing special in this bankruptcy that counsels
a different approach. The core of this settlement agreement was
consensual obligations. The parties crafted the agreement and
the court approved it. There is no judgment on the merits, a
factor that distinguishes cases cited by the bankruptcy court.
Furthermore, the rights and obligations of the parties do not
derive solely from the court's judgment, but depend at least in
part on the performance of the other party. What is especially
significant in this case is that there remains an agreement that
the debtor can breach which could give rise to a claim against
it. Although we recognize that not all settlement agreements
should be considered contracts, we believe the factors already
enumerated are sufficient to consider this settlement agreement
as a contract for purposes of § 365. In this respect, we agree
with the district court.
IV.
The heart of this dispute is whether the settlement
agreement was executory on July 31, 1991, when TCO filed its
bankruptcy petition. The term "executory contract" is not
defined in the Bankruptcy Code, and the phrase does not indicate
its intended scope.
The legislative history of § 365 suggests a broad
reading of "executory." Congressional reports stated "[t]hough
there is no precise definition of what contracts are executory,
it generally includes contracts on which performance remains due
to some extent on both sides." H.R. Rep. No. 595, 95th Cong.,
1st Sess. 347 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6303;
S. Rep. No. 989, 95th Cong., 2d Sess. 58 (1978), reprinted in
1978 U.S.C.C.A.N. 5787, 5844.
Most courts have agreed that the definition suggested
by the legislative history would cut too broadly, "since it is
the rare agreement that does not involve unperformed obligations
on either side." Mitchell v. Streets (In re Streets & Beard Farm
Partnership), 882 F.2d 233, 235 (7th Cir. 1989). As one
commentator observed, "[a]ll contracts to a greater or less
extent are executory. When they cease to be so, they cease to be
contracts." Vern Countryman, Executory Contracts in Bankruptcy:
Part I, 57 Minn. L. Rev. 439, 450 (1973) (citation omitted).
The language and legislative history of § 365 having
proved unavailing, courts and commentators sought to analyze the
purpose of § 365 in order to formulate a definition of "executory
contract." Executory contracts in bankruptcy are best recognized
as a combination of assets and liabilities to the bankruptcy
estate; the performance the nonbankrupt owes the debtor
constitutes an asset, and the performance the debtor owes the
nonbankrupt is a liability. See Thomas H. Jackson, The Logic and
Limits of Bankruptcy Law 106-07 (1986). The debtor (or trustee
that has stepped into the debtor's shoes) may elect to assume an
executory contract, in which case § 365 mandates that the debtor
accept the liability with the asset and fully perform his end of
the bargain. 11 U.S.C. § 365(b).
The debtor will assume an executory contract when the
package of assets and liabilities is a net asset to the estate.
When it is not the debtor will (or ought to) reject the contract.
11 U.S.C. § 365(a). Because assumption acts as a renewed
acceptance of the terms of the executory bargain, the Bankruptcy
Code provides that the cost of performing the debtor's
obligations is an administrative expense of the estate, which
will be paid first out of the assets of the estate.8 11 U.S.C. §
8
. In In re Taylor, 913 F.2d 102, 106-07 (3d Cir. 1990), we
stated:
[T]he "assume or reject" dichotomy means
simply that if the trustee wishes to obtain
for the estate the future benefits of the
executory portion of the contract, the
trustee must also assume the burdens of that
contract, as an expense of bankruptcy
administration (i.e., having priority over
all pre-bankruptcy claims of creditors).
507(a)(1) (1988); University Medical Ctr. v. Sullivan (In re
University Medical Ctr.), 973 F.2d 1065, 1078 (3d Cir. 1992).
In cases where the nonbankrupt party has fully
performed, it makes no sense to talk about assumption or
rejection. At that point only a liability exists for the
debtor--a simple claim held by the nonbankrupt against the
estate, Jackson, supra, at 106--and "[t]he estate has whatever
benefit it can obtain from the other party's performance and the
trustee's rejection would neither add to nor detract from the
creditor's claim or the estate's liability." Countryman, supra,
at 451. Rejection is meaningless in this context, and assumption
would be of no benefit to the estate, serving only to convert the
nonbankrupt's claim into a first priority expense of the estate
at the expense of the other creditors.9 Id. at 452.
(..continued)
Through the mechanism of assumption, § 365 allows the debtor to
continue doing business with others who might otherwise be
reluctant to do so because of the bankruptcy filing. Richmond
Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir.
1985).
Rejection, which is appropriate when a contract is a
liability to the bankrupt, is equivalent to a nonbankruptcy
breach. 11 U.S.C. § 365(g). Rejection leaves the nonbankrupt
with a claim against the estate just as would a breach in the
nonbankruptcy context, and unless the nonbankrupt's claim is
somehow secured, he will be a general unsecured creditor of the
estate. Accordingly, if the debtor is insolvent, the
nonbankrupt's claim for breach will not be paid in full. An
appropriate rejection in bankruptcy will thus benefit the
creditors as a whole at the expense of the nonbankrupt. See
Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 108
(1986).
9
. In this circumstance, elevating the nonbankrupt's claim to
administrative expense priority by "assuming" it would offend
"the general policy of the bankruptcy laws [which] is equality of
distribution among all creditors . . . ." H.R. Rep. No. 595,
Likewise, if the debtor has fully performed, the
performance owed by the nonbankrupt is an asset of the bankruptcy
estate and should be analyzed as such, not as an executory
contract. Jackson, supra, at 107. Rejection of the contract at
this point is no different from abandonment of property of the
estate, an action taken only when the property is "burdensome to
the estate or . . . is of inconsequential value and benefit to
the estate." 11 U.S.C. § 554(a) (1988).
These considerations led us to adopt, as have many
courts of appeals, the following definition of executory contract
for purposes of § 365: "[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." Sharon Steel Corp. v.
National Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989)
(citing cases).
Thus, unless both parties have unperformed obligations
that would constitute a material breach if not performed, the
contract is not executory under § 365. When it is the
nonbankrupt party who has substantially performed so that its
failure to complete performance would not constitute a material
breach excusing performance of the debtor,10 the nonbankrupt
(..continued)
95th Cong., 1st Sess. 186 (1977), reprinted in 1978 U.S.C.C.A.N.
5963, 6147.
10
. In order to determine whether failure to perform the
remaining obligations would constitute a material breach, we need
to consider contract principles under the relevant nonbankruptcy
party is "relegated to the position of a general creditor of the
bankrupt estate." Marcus & Millichap Inc. v. Munple, Ltd. (In re
(..continued)
law. In Hall v. Perry (In re Cochise College Park, Inc.), 703
F.2d 1339, 1348 n.4 (9th Cir. 1983), the court noted "a
bankruptcy court should determine whether one of the parties'
failure to perform its remaining obligations would give rise to a
'material breach' excusing performance by [the] other party under
the contract law applicable to the contract . . . ." See also
Terrell v. Albaugh (In re Terrell), 892 F.2d 469, 472 (6th Cir.
1989) (citing In re Cochise); Mitchell v. Streets (In re Streets
& Beard Farm Partnership), 882 F.2d 233, 235 (7th Cir. 1989)
(looking to relevant state law).
In this case, the settlement agreement was created by
the parties in a federal court in Ohio, and Ohio law would
therefore normally apply. Klaxon Co. v. Stentor Co., 313 U.S.
487, 496 (1941). However, the parties do not indicate any
particular law as governing either the issue of material breach
or the construction of the settlement agreement. Where, as here,
"the parties do not make an issue of choice of law, we have no
obligation to make an independent determination of what rule
would apply if they had made an issue of the matter." In re
Stoecker, 5 F.3d 1022, 1029 (7th Cir. 1993). Accordingly, like
the parties and the district court, we will construe the issue of
what would constitute a material breach under general contract
principles. See Schiavone Constr. Co. v. Time, Inc., 847 F.2d
1069, 1076 n.3 (3d Cir. 1988) (allowing consensus of parties and
lower courts as to choice of law to control when no reason to
unsettle that agreement is present).
Finally, we believe application of Ohio law would
result in a similar analysis of the general contract principles
upon which we rely. See Rhodes v. Rhodes Indus., Inc., 595
N.E.2d 441, 447 (Ohio Ct. App. 1991) (adopting Restatement of
Contracts (Second) approach to materiality of breach); see also
Kichler's, Inc. v. Persinger, 265 N.E.2d 319, 321 (Ohio Ct. App.
1970); Blenheim Homes, Inc. v. Mathews, 196 N.E.2d 612, 614 (Ohio
Ct. App. 1963); Boehl v. Maidens, 139 N.E.2d 645, 649 (Ohio Ct.
App. 1956). Thus, there is no need for us to examine further the
issue of which substantive law to apply, as the result does not
depend on our choice. Weekes v. Michigan Chrome & Chem. Co., 352
F.2d 603, 606 (6th Cir. 1965); cf. Benevides v. Alexander (In re
Alexander), 670 F.2d 885, 888 (9th Cir. 1982) (holding no need to
look at state law for whether contract is an executory contract,
but even if examined under state law there would be no change in
the outcome).
Munple, Ltd.), 868 F.2d 1129, 1130 (9th Cir. 1989). The time for
testing whether there are material unperformed obligations on
both sides is when the bankruptcy petition is filed. Collingwood
Grain, Inc. v. Coast Trading Co. (In re Coast Trading Co.), 744
F.2d 686, 692 (9th Cir. 1984) (holding contracts executory at
time of petition can be assumed); Carlson v. Farmers Home Admin.
(In re Newcomb), 744 F.2d 621, 624 (8th Cir. 1984) (stating
critical time to be when the petition was filed).
As we have noted, at stake is the relative priority11
of the claims of the IRS and the class members to TCO's assets in
bankruptcy. If the contract is executory, TCO would assume it,
and the $15 million TCO still owes would become an administrative
expense of the estate. As an administrative expense, the class
members' claims would fall into the category afforded highest
payment priority. 11 U.S.C. § 507(a)(1); University Medical
Ctr., 973 F.2d at 1078. If the contract is not executory, the
class members would have a general unsecured claim and would have
lowest payment priority, and would be paid after the IRS's claim,
which is seventh in priority regardless of the outcome of this
dispute. 11 U.S.C. § 507(a)(7) (1988).12
11
. The priority of the claims determines whether and how much
of the claims are paid, regardless of whether the debtor
liquidates or reorganizes. See 11 U.S.C. § 726(a)(1) (1988)
(specifying liquidation scheme with first priority claims paid
before seventh priority claims, which are paid before unsecured
claims); id. § 1129(a)(8), (9) (requiring administrative expenses
to be paid in full in cash on effective date of a
reorganization).
12
. We note the IRS's claim would have eighth priority in cases
commenced after October 22, 1994. See Bankruptcy Reform Act of
A.
The contract was clearly executory on TCO's side when
it filed for bankruptcy, a point both parties appear to accept.
It had not paid the second $15 million into escrow, nor had it
completed the administrative work necessary to authorize
distribution of the escrow monies to those class members who had
signed and executed releases and supplemental contracts. While
the administrative details TCO still had to perform are arguably
non-material (an issue we need not reach), the $15 million
payment is unquestionably a material obligation,13 and TCO's
failure to make the second payment certainly would constitute a
material breach.
B.
The materiality of the class members' unperformed
obligations is a closer question. As we have noted, the
obligations on both sides must be so far unperformed so that
failure of either to complete performance would constitute a
material breach excusing performance of the other. The class
members had unperformed duties under the settlement agreement.
Only 41 of the 852 contracts had been processed when TCO filed
for bankruptcy, and the class members responsible for the
remaining 811 contracts still had to execute releases and
(..continued)
1994, Pub. L. No. 103-394, §§ 304(c), 702, 108 Stat. 4106, 4132
(1994).
13
. While the district court suggests TCO's completed
performance was substantial, it stops short of stating TCO's
remaining obligations were not material. In re Columbia Gas, 146
B.R. at 114.
supplemental contracts in order to receive their shares of the
escrow fund. It must be the contention of the class members that
these obligations are sufficiently material that failure to
perform would constitute a material breach of the agreement by
the class members.14
In order to determine the materiality of the class
members' obligations, we turn first to basic contract principles.
There is a distinction in the law between failure of a
condition15 and a breach of a duty: "Non-occurrence of a
condition is not a breach by a party unless he is under a duty
that the condition occur." Restatement (Second) of Contracts §
225(3) (1981).16 This distinction between a condition and a duty
14
. The class members also argue the settlement agreement
represents an accord, which, if not satisfied, would allow the
members to revive their original claims against TCO. They cite
In re Miller, 54 B.R. 710, 712 (Bankr. D.N.D. 1985), which
distinguishes novation, an agreement to extinguish one duty and
replace it with another, from an accord, by which a party agrees
to accept a substitute performance for a pre-existing duty,
although the original duty is not extinguished until the accord
is performed. While the court stated that novation is never
presumed in an ambiguous situation, id. at 713, we believe this
situation is not ambiguous. Unlike the parties in In re Miller,
who had specifically allowed for reinstatement of the original
claim upon failure of the settlement, id., the parties here have
an explicit court order which extinguishes the old claims and
replaces them with the Settlement Agreement. See supra part I
for the text of the district court's order. As the district
court noted, "[T]he order approving the settlement agreement
suggests that there could only be an action for breach of
contract." In re Columbia Gas, 146 B.R. at 113 n.3. We agree.
15
. The Restatement has dropped the term "condition precedent"
in favor of simply stating it as "condition." E. Allen
Farnsworth, 2 Farnsworth on Contracts § 8.2, at 349 (1990). We
will follow that convention here.
16
. See Restatement (Second) of Contracts § 225 cmt. d, which
provides:
(or promise) is important here. The Restatement makes clear that
while "a contracting party's failure to fulfill a condition
excuses performance by the other party whose performance is so
conditioned, it is not, without an independent promise to perform
the condition, a breach of contract subjecting the nonfulfilling
party to liability for damages." Merritt Hill Vineyards, Inc. v.
Windy Heights Vineyard, Inc., 460 N.E.2d 1077, 1081-82 (N.Y.
1984) (citing Restatement (Second) of Contracts § 225). In this
case, if the remaining obligations in the contract are mere
conditions, not duties, then the contract cannot be executory for
purposes of § 365 because no material breach could occur.
The determination whether a contract term is a promise
or condition is a problem of interpretation, so that "each case
turns on its own facts . . . ." E. Allen Farnsworth, 2
Farnsworth on Contracts § 8.4, at 366 (1990). We are mindful
that:
Interpreting a settlement agreement presents
a question of contract law, in which [t]he
primary object . . . is to give effect to the
intention of the parties. Absent clear
language in the settlement agreement to
resolve a dispute over the proper
construction of a contract, a court may go
outside the four corners of the contract and
consider extrinsic and parol evidence
(..continued)
[A] term making an event a condition of an
obligor's duty does not of itself impose a
duty on the obligee and the non-occurrence of
the event is not of itself a breach by the
obligee. Unless the obligee is under such a
duty, the non-occurrence of the event gives
rise to no claim against him.
presented by the parties. This requires the
district court to then conduct fact-finding
so that it may resolve the ambiguities
inherent in the contract. . . . [But i]f the
court finds that a contract is ambiguous and
that extrinsic evidence is undisputed, then
the interpretation of the contract remains a
question of law for the court to decide.
Lumpkin v. Envirodyne Industries, Inc., 933 F.2d 449, 455-56 (7th
Cir.), cert. denied, 502 U.S. 939 (1991) (citations omitted).
1.
With these principles in mind, we turn first to an
analysis of the releases and then to the contract supplements.
If a class member declined to execute a release, the settlement
agreement provides that TCO retains that class member's portion
of the $30 million. But the class member's cause of action
against TCO on the gas purchase contract would not be revived.
All such claims were extinguished when the district court's order
became final on July 18, 1991.17
17
. The settlement agreement here is much like the insurance
contract in Commercial Union Insurance Co. v. Texscan Corp. (In
re Texscan Corp.), 976 F.2d 1269, 1273 (9th Cir. 1992), where the
court held that because of a statute, the bankrupt's failure to
pay insurance premiums could not relieve the nonbankrupt insurer
from its obligation to provide insurance coverage. Even if the
failure to pay premiums might be a material breach absent the
statute, the court held, the statute meant the insurer's
performance was not excused and therefore the definition of
"executory" in the Bankruptcy Code was not met. Id. Here, even
if the failure to execute the releases and supplemental contracts
were a breach of part of the settlement agreement (which we hold
it is not), the operation of the court order would prevent that
breach from operating to excuse performance by either the class
members or TCO. Thus, on this basis as well, the remaining
obligations do not suffice to make the contract executory.
The language of the settlement agreement makes clear
the parties intended to make execution of the releases a
condition of payment rather than a duty: "[P]ayments to
individual Class Members out of the escrowed amounts will be
contingent upon receipt by [TCO] of a duly executed release
. . . . If the amount allocated to a particular contract by
Class Counsel . . . is not finally distributed to that particular
contract, then such Distributable Amount . . . shall be returned
to [TCO] . . . ." J. App. at 57-58, 64-65.18 The parties
specified that the class members' claims would be extinguished
(as they in fact were) by the court order accepting the
settlement agreement. Thus, the releases served no more than the
administrative purpose of a condition to the class members'
ability to get payment from the escrow fund.
The numerous references in the agreement stating a
given clause as "Subject to final Court approval of the
Settlement," or the equivalent, see ¶¶ 1, 2, 4, 5, 6, 7, 8, 9,
11, 12, 14, J. App. at 57-66, also demonstrate how the parties
intended to allocate rights and duties in the contract. The
"subject to" phrase was used largely to qualify TCO's duty to pay
money, demonstrating that "final Court approval" was the linchpin
of the contract for TCO because the heart of the exchange was
extinguishing the class members' claims in exchange for money.
18
. The class members also argue that TCO's recovery of unused
money in substance excuses TCO's performance of payment,
therefore making the contract executory under the definition in
Sharon Steel Corp. v. National Fuel Gas Distribution Corp., 872
F.2d 36, 39 (1989). We do not agree.
The claims were extinguished upon final court approval and the
parties made that event, not execution of the releases, key to
the agreement.
The consequence of a class member's failure to execute
a release supports this textual analysis. A class member who
failed to execute a release would not get its share of the
settlement fund, but TCO would still get the benefit of the class
member's inability to sustain a cause of action. As the district
court observed, "the parties seem to agree that if this case
involved a simple exchange of money for execution of a release of
all claims, there would be no question that the contract would
not be executory." In re Columbia Gas, 146 B.R. at 114. Nor
would any class member's failure absolve TCO from its duty to
place the second $15 million into escrow, a duty which was to
ripen on March 23, 1992, without regard to the actions of any
class member. No failure on the part of the class members to
execute a release under the settlement agreement could have
created a material breach of the contract. Rather, the releases
were a condition for each member to get its share of the
settlement money.
2.
The settlement agreement also required each class
member to complete a supplemental contract for future gas sales
to TCO. The question is whether that obligation is sufficient to
constitute a "duty" as expressed in the Restatement section 225.
There is no indication that the supplemental contracts
were designed to do more than take the terms of the global
settlement agreement created by the class and TCO and apply them
specifically to each class member. As such they were
functionally ministerial duties; they did not, nor were they
supposed to, alter the relationship forged by the settlement
agreement. The terms of the supplemental contracts were
expressly stated in the settlement agreement itself and were
designed to be implemented with it. This demonstrates the
supplemental contracts were intended to confirm, not to create,
the new purchasing arrangement between TCO and the class members.
We agree with the district court that "executing the
contract supplements will be little more than a perfunctory act
utilizing preapproved terms and conditions. Obviously these
ministerial acts are analogous to the execution of the release to
be found in the settlement of any case." In re Columbia Gas, 146
B.R. at 114; see also Mitchell v. Streets (In re Streets & Beard
Farm Partnership), 882 F.2d 233, 235 (7th Cir. 1989) (holding
unperformed delivery of legal title to be a formality rather than
"the kind of significant legal obligation that would render the
contract executory"); In re GEC Indus., 107 B.R. 491, 492 (Bankr.
D. Del. 1989) (holding seller's unperformed warranty obligations
insufficient to make contract executory; buyer's administrative
steps to submit claims for breach of warranty are merely
procedural and do not make contract executory). An individual
class member's failure to execute the supplemental contract would
not constitute a material breach of the settlement agreement but
rather would be the failure of a condition that would relieve
TCO's obligation to pay that member its portion of the escrow
monies.19
Further, TCO cannot really be concerned with whether a
given class member executes a supplemental contract, as the main
terms governing the future purchases were embodied in the
settlement agreement itself. The supplemental contracts were
more important to the class members (the obligors) than to TCO
(the obligee). Class counsel made clear before the district
court that the supplemental contracts were important to the class
members. The supplemental contracts required TCO to pay higher
19
. Although in a different context, we believe In re Sudbury,
Inc., 153 B.R. 776 (Bankr. N.D. Ohio 1993), is instructive. The
debtor claimed its insurance policies and related retrospective
premium payments were not executory contracts. Id. at 776. The
insurers argued the policies were executory and that the premium
claims should get administrative expense priority. Id. at 776-
77. Bankruptcy did not relieve the insurers' obligation to
provide coverage, and the payments the debtor owed did not alone
make the policies executory. Id. at 778.
The insurers argued the debtor had obligations to
fulfill under cooperation clauses in the event it filed a claim.
Id. at 779. The court held these obligations were not enough to
make the policies executory. The court observed the debtor's
failure to fulfill these obligations on a particular claim would
only provide an insurer with a defense to that claim, but would
not void the insurers' general obligations under the policies.
Id. The court also noted that the insurers' concern was gaining
administrative expense priority, not having the debtor perform
the cooperation clauses. Id. at 780-81.
The supplemental contracts here are analogous to the
obligations under the cooperation clauses. The analogy is
inexact but it illustrates the function of the supplemental
contracts. The debtor's failure to cooperate on a given claim,
like a class member's failure to execute a supplemental contract,
would relieve the other party (TCO/the insurers) from paying that
one claim but not from the more general obligations embodied in
the settlement agreement/insurance policies as a whole.
prices than under the old contracts and thus benefitted the
class, and the class even concedes the primary benefit of the
contract supplements inured to the class members. Without more,
it was unlikely that the parties intended that failure to execute
them would be a breach by the class members.
Although, as the class members point out, the
supplements were also designed to prevent future disputes and as
such they presumably benefit TCO, we are convinced that on
balance the obligation to execute the supplemental contracts is
not sufficient to make the settlement agreement executory. Like
the releases, the contract supplements were conditions to the
class members' receipt of their portion of the settlement fund.
Any class member's failure to execute the supplement would not
constitute a breach of the settlement agreement.20
20
. The facts here are readily distinguishable from those in
Sharon Steel, in which we found an executory contract existed and
observed: "The agreement is characterized by reciprocal
obligations continuing into the future: National Fuel has
promised to provide natural gas to Sharon, and Sharon has
promised to purchase the gas at a certain price . . . ." 872
F.2d at 39. This met the bankruptcy definition of executory
contract because either side's failure to perform would clearly
have been a material breach. Here, the class members'
obligations were merely conditions. TCO promised to pay an
additional $15 million into the escrow account, and the class
members' entitlement to those monies was contingent on completion
of the releases and supplemental contracts.
The difference between the agreement in Sharon Steel
and the agreement here illustrates the importance of the
definition of executory contracts for purposes of the Bankruptcy
Code. Absent the limits imposed by Sharon Steel's definition of
executory contract, the agreement here might appear executory.
But the factual differences between this case and Sharon Steel
point out that not every contract that appears executory because
it has not been completely performed is executory for purposes of
§ 365. See Countryman, supra, at 450 ("All contracts to a
C.
An examination of the purpose of § 365 leads to the
same result. The only functional difference between assumption
and rejection in this case, were the contract to be considered
executory, is that assumption would give the class a higher
priority to the unpaid $15 million. In return TCO would gain
nothing of value: the releases add no rights to the estate not
already given by the district court's order, and the supplements
provide only a marginal benefit to TCO. The Ohio District
Court's order bound the class as a whole. Once the order became
final and unappealable, all the class members were bound by it.
Accordingly, the class members' failure to complete the tasks
required for them to receive their money could not breach the
agreement between the class and TCO, but could only serve as the
failure of conditions precedent to their right to settlement
monies. Assumption would not add assets to the bankruptcy
estate. See In re Sudbury, Inc., 153 B.R. at 778-81 (holder
unjustified in seeking first priority through executory contract
provisions when pre-petition claim was not entitled to priority
as administrative expense pursuant to 11 U.S.C. § 503). The
agreement is not an executory contract for purposes of § 365.
V.
(..continued)
greater or less extent are executory. When they cease to be so,
they cease to be contracts. But that expansive meaning can
hardly be given to the term as used in the Bankruptcy Act
. . . ." (citation omitted)).
For the reasons set forth, we will affirm the judgment
of the district court.