United States Court of Appeals,
Fifth Circuit.
No. 93-1636
Summary Calendar.
In the Matter of MUREXCO PETROLEUM, INC., Debtor.
PHOENIX EXPLORATION, INC., Appellants,
v.
Robert YAQUINTO, Jr., Trustee for Murexco Petroleum, Inc.,
Appellee.
Feb. 28, 1994.
Appeal from the United States District Court for the Northern
District of Texas.
Before JOLLY, WIENER, and EMILIO M. GARZA, Circuit Judges.
PER CURIAM:
Appellant Robert Yaquinto, Jr., Trustee for Murexco Petroleum,
Inc., appeals a decision of the district court reversing a
bankruptcy court judgment which held that a contract between
Murexco and Appellees Phoenix Exploration, Inc., Phoenix Operating
Co., and Renown Petroleum, Inc. (Phoenix) was executory when
Murexco filed its Chapter 11 petition. As we agree with the
district court's conclusion that the bankruptcy court erred in
holding that the contract was executory, we affirm the judgment of
the district court.
I
FACTS AND PROCEEDINGS
Murexco and the predecessor of Phoenix, HarCor Property
1
Management, Inc.,1 entered into an Asset Purchase Agreement (the
APA) on February 29, 1988. Under the APA, Murexco agreed to sell
many of its assets in two independent stages: At the first
closing, all of Murexco's proven undeveloped reserves and possible
reserves, along with certain other assets—including Murexco's
operating rights under all of its oil and gas well operating
agreements—would be sold to HarCor. At the second closing, all of
Murexco's proven developed, producing, and behind the pipe reserves
would be sold to HarCor.
The first closing was completed as scheduled on February 29,
1988. Murexco received $500,000 for the sale, of which $289,419.61
was allocated to HarCor's acquisition of Murexco's oil and gas well
operating rights. The Letter Agreement accompanying the APA
(Exhibit 11 to the APA) provided that HarCor would be the contract
operator for Murexco "until such time as HarCor becomes the
operator of record." Murexco was the operator of record on wells
in Louisiana, Texas, and Oklahoma. Although it is clear that
HarCor became the "contract operator," the parties dispute whether
HarCor, or its successor, Phoenix, ever became the "operator of
record."
The second closing never occurred because disputes erupted
between the parties as to Murexco's ability to convey clear title
to the developed reserves that it was supposed to deliver at the
1
HarCor Property Management, Inc. became HarCor Exploration,
Inc. HarCor Energy, Inc. succeeded to the rights of HarCor
Exploration, Inc. For our purposes, we will refer to any or all
of these entities as HarCor.
2
second closing. By letter agreement dated August 30, 1988, HarCor
agreed to pay Murexco approximately $180,000 as liquidated damages
for failure of the second phase to close. Thus no performance
remained due between the parties as to the second closing.
Murexco filed for Chapter 11 bankruptcy on May 4, 1992, and
filed a "Motion of Debtor to Reject Executory Contract." The
purpose of the motion was to enable the trustee to reject the
Letter Agreement, which is considered a severable portion of the
APA. Phoenix contested the motion, arguing that the APA was not
executory and thus the severable Letter Agreement—and the sale of
Murexco's operating rights—could not be rejected by the Trustee.
At the trial on the motion, Murexco's president testified that
Murexco still had a duty—but only one duty—to perform under the
APA: to obtain consents of nonoperating working interest owners in
the affected wells to Murexco's sale of its operating rights.
Murexco relies on the Joint Operating Agreements (JOAs) to supply
this duty. Without those consents, Murexco argued, HarCor could
not become the operator of record.2
The bankruptcy court construed the Letter Agreement and the
APA. That court concluded that the provisions of the APA that set
up the contract operatorship were executory, and held that the
contract operating agreement was executory.3 Phoenix appealed.
2
Under the APA and Letter Agreement, however, Murexco's duty
was to use its "best efforts" to have HarCor named the operator
of record, not to name HarCor the operator of record.
3
Although both parties state that the APA was found to be
executory and was rejected, in reality the bankruptcy court held
that the "portion of the [APA] that created a contract operator
3
The district court reversed, holding that the contract was not
executory, as failure to have HarCor named the operator of record
would not result in a material breach of the APA. The trustee
appeals the ruling of the district court.
II
ANALYSIS
A. Standard of Review
Although this case has already been reviewed on appeal by the
district court, we review the bankruptcy court's findings as if
this were an appeal from a trial in the district court.4 The
bankruptcy court's findings of fact are reviewed for clear error;
its conclusions of law are reviewed de novo.5
B. Executory Agreement?
To dispose of this appeal, we need only review the conclusion
that the APA or the Letter Agreement was executory at the time the
bankruptcy petition was filed.
Section 365 of the Bankruptcy Code provides that "the
trustee, subject to the court's approval, may assume or reject any
executory contract or unexpired lease of the debtor."6 This
provision allows a trustee to relieve the bankruptcy estate of
burdensome agreements which have not been completely performed.
rights [sic] is determined to be an executory contract, and is
hereby rejected. Murexco ... retains its rights as the operator
under the Joint Operating Agreement."
4
Matter of Killebrew, 888 F.2d 1516, 1519 (5th Cir.1989).
5
Id.
6
11 U.S.C. § 365(a).
4
The Code does not define "executory contract," but both parties
agree that the relevant inquiry is whether performance remains due
to some extent on both sides.7 Courts applying § 365(a) have
indicated that an agreement is executory if at the time of the
bankruptcy filing, the failure of either party to complete
performance would constitute a material breach of the contract,
thereby excusing the performance of the other party.8
Harcor has the continuing duty to perform under the Letter
Agreement as the contract operator. The issue, then, is whether
Murexco has any duties the nonperformance of which would constitute
a material breach of the letter agreement. We think not.
First, the Letter Agreement obligates Murexco to make HarCor
the contract operator of the wells in question. Neither disputes
that HarCor is the contract operator of the wells.9 Second, the
Letter Agreement requires Murexco to use its "best efforts to cause
7
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n. 6, 104
S.Ct. 1188, 1194 n. 6, 79 L.Ed.2d 482 (1984) (quoting H.R.Rep.
No. 95-595, 95th Cong., 1st Sess. 347 (1977)).
8
See, e.g., In re Child World, Inc., 147 B.R. 847
(Bankr.S.D.N.Y.1992); In re Flexible Automation Systems, Inc.,
100 B.R. 986 (N.D.Ill.1989); In re Placid Oil Co., 72 B.R. 135,
137 (Bankr.N.D.Tex.1987). The source of this definition is a
two-part article by Professor Vern Countryman, Executory
Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 458-62
(1973), and Executory Contracts in Bankruptcy: Part II, 57
Minn.L.Rev. 479 (1974).
9
Although the Letter Agreement anticipated the negotiation
of a "definitive contract operating agreement," Murexco does not
urge this as a possible ground to conclude that the Letter
Agreement is still "executory."
5
HarCor to become the operator of record."10 Whether this condition
has been met is not necessarily decisive of the executory or
non-executory status of the Letter Agreement: the issue is whether
Murexco's failure to perform this obligation would constitute a
material breach of the Letter Agreement. We agree with the
district court's conclusion that nonperformance of Murexco's duty
to use its "best efforts" would not constitute a material breach.
We rely on the APA itself to reach this conclusion.
The parties agreed that "best efforts" means "a good faith
attempt by each party to cause the designated actions to occur";
provided that "if one or more of such actions do not occur, the
validity of the Agreement, and the actions otherwise required to be
taken by the Parties, shall not be affected." Thus as a matter of
law, the failure of Murexco to complete performance would not
constitute a material breach of the contract—it would not excuse
HarCor's performance. The parties' clearly intended that if
Murexco did not succeed in having HarCor named the operator of
record, the remainder of the APA—including HarCor's duty to perform
as the contract operator of the wells—would be unaffected by such
failure. Clearly, then, Murexco's failure to perform any duty
subject to the "best efforts" clause would not constitute a
10
Although Murexco argues that its duty was to obtain
consents of the nonoperating working interest owners, that
"duty," if it is one, is one arising under the JOAs, not under
the APA. Such consents were allegedly required so that Phoenix
could be named the operator of record. But Murexco was not
obligated to name HarCor the operator of record; rather, Murexco
was obligated to use its best efforts to have HarCor named the
operator of record.
6
material breach excusing performance by HarCor.
Nevertheless, Murexco argues that HarCor's "acquisition" of
consents of the working interest owners or gaining operator of
record status was a condition precedent to the first closing under
Article VIII of the APA. But Article VIII of the APA specifically
states that "[a]ll conditions precedent shall be deemed to have
been satisfied upon the occurrence of the First Closing." As the
first closing did occur, the "outstanding duty"—that Murexco
insists is a condition precedent—was deemed satisfied by the plain
wording of the APA. As that duty is thus deemed performed by
agreement of the parties, Murexco cannot now argue that it has an
outstanding, unperformed duty under the APA. It follows, then,
that as neither the APA nor the severable Letter Agreement is
executory, neither may be rejected by the trustee under 11 U.S.C.
§ 365(a).
III
CONCLUSION
For the foregoing reasons, we find that at the time Murexco's
Chapter 11 petition was filed, neither the APA nor Exhibit 11 to
the APA was not executory. We therefore affirm the district
court's reversal of the bankruptcy court's judgment.11
AFFIRMED.
11
As the bankruptcy court judgment has been reversed, it is
void. Atlantic Coast Line Railroad Co. v. St. Joe Paper Co., 216
F.2d 832, 833 (5th Cir.), cert. denied, 348 U.S. 963, 75 S.Ct.
522, 99 L.Ed.2d 750 (1954). The findings and conclusions in
support of that reversed judgment are thus void.
7