Falcon V, L.L.C.
MEMORANDUM OPINION
Falcon V, L.L.C., and its affiliated debtors1 (сollectively “Falcon V” or “Debtors“) engage in oil and gas exploration and development and operate and provide services
Argonaut Insurance Company (“Argonaut“) provided performance bonds to fulfil Debtors’ obligations under numerous oil and gas leases, carrying premiums Debtors obtained expedited permission to pay early in the reorganization.3 The jointly administered Debtors promptly proposed a plan that was confirmed, after amendments, in October 2019.4 Argonaut filed proofs of claim but did not object to confirmation of the plan; indeed, it did not make an appearance in the case until more than six months after confirmation.
Six months after confirmation, Argonаut demanded that reorganized Falcon V provide additional collateral to maintain the surety bonds Argonaut had posted prepetition.5 Falcon V refused, prompting Argonaut to move essentially for declaratory relief relating to the confirmed chapter 11 plan.6
Argonaut contends that the agreement instituting the surety bond program was an executory contract deemed assumed through the confirmed plan. Falcon V responds7 that the surety bond program was not an executory contract; and that even if it were, it was not assumable. It also argues that Argonaut‘s claims were discharged on confirmation and that its request for additional collateral violates the discharge injunction.
Neither party disputes the relevant material facts.
After an evidentiary hearing, the parties sought time to negotiate and later agreed to try to resolve their differences through mediation. When those efforts proved unsuccessful, they renewed their request for a ruling.
This memorandum opinion explains why Argonaut‘s motion fails.
FACTS
Before the May 2019 bankruptcy filing, Argonaut issued four bonds to secure Debtors’ obligations to mineral agreement counterparties that included governmental
Argonaut‘s proofs of claim recited that the surety bond program was a financial accommodation but reserved its rights with respect to the characterization of the program as executory contracts. Argonaut‘s proofs of claim provided:
It is [Argonaut]‘s position that any General Indemnity Agreement between [Argonaut] and any Debtor or non-Debtor affiliate may not be assumed and assigned, for among other rеasons, because such agreement constitutes a “financial accommodation” under
11 U.S.C. § 365(c)(2) . To the extent the Bonds or any indemnity agreement referred to herein are deemed to be executory contracts and are assumed in connection with the Debtors’ bankruptcy cases, all obligations thereunder will be payable as administrative expense priority claims, and [Argonaut] reserves all rights, claims and defenses with respect thereto, without limitation. [Argonaut] reserves all rights, claims and defenses with respect to characterization of the bonds or indemnity agreements as executory contracts and whether they may be assumed.16
Falcon V moved for authority to continue the surety bond program at the outset of its case,17 describing the program as a necessary cost of preserving the estate:
Often, statutes or ordinances require the Debtors to post surety bonds to secure such obligations. Failure to provide, maintain or timely replace its surety bonds may prevent the Debtors from undertaking essential functions related
to its operations.18
After an initial expedited hearing at which it granted the motion for an interim period, the court later granted it on a final basis.19
The debtors’ First Amended Disclosure Statement,20 later approved by the court,21 stated that “[t]he Argonaut Insurance Company claims are contingent and unliquidated and such claims will be dealt with in connection with Confirmation.”22 But the disclosure statement also included language likely to comfort, if not lull, the bonding company:
The Debtors are required to post certain bonds as per the Louisiana Department of Natural Resources, Office of Conservation (“LDNR“) requirements. Other performance bonds are posted on behalf of certain entities as required per the requirements under certain acquisition documents. The Debtors presently have a combination of bonds for LDNR, Chevron Corporation, and Hilcorp Energy I, L.P. in the amount of $10,575,000, all underwritten by Argonaut Insurance Company. The Reorganized Debtors shall maintain all bonding currently in place after the Effective Date. As discussed, Argonaut Insurance Company filed proofs of claim in each of the Debtors cases for the full amount of the performance bonds - $10,575,000. These Claims are contingent and unliquidated.23
That language did not suggest that Falcon V anticipated a different treatment of the surety bond program than its earlier motion portended, though it was not an unqualified commitment to continue the parties’ agreement.
In any case, the Debtors’ confirmed chapter 11 plan24 provided that Debtors were deemed to have assumed any executory contract that was not –
- previously rejected;
- the subject of a pending motion to reject; or
-
listed in a schedule to the plan as an executory contract to be rejected.25
To avoid any doubt, the confirmed plan also specified that “[e]xcept for those executory contracts and unexpired leases set forth on a schedule to the Plan Supplement, none of the executory contracts and unexpired leаses to which the Debtors are a party shall be rejected under the Plan.”26 Argonaut‘s surety bond program does not appear on that schedule or in the Plan Supplement.27
Nothing in the record suggested that Argonaut had reason to suspect that Falcon V would jilt it after confirmation, and for nearly four months, the chapter 11 seemed an unqualified success from Argonaut‘s perspective. However, in February 2020, the reorganized Debtors made premium payments on only two of the four bonds: the U.S. and Louisiana Bonds.28 In response,
Argonaut demanded that the reorganized Debtors either 1) obtain release of the bonds, or 2) provide an additional $7,336,920.00 in collateral.29 Argonaut‘s letter demanded the combined penal sum of the bonds ($10,575,000) bеcause the Debtors’ “financial condition is deteriorating.”30 Its request was based on language in the general indemnity agreements (collectively “Indemnity Agreement“) which provide:
The Surety may, in its sole discretion, determine one or more of the following: (a) the Indemnitors financial condition has been or is believed to be deteriorating; or (b) there has been or is believed to be some other change that adversely impacts the Surety‘s risk under the Bond(s). In such an event, within thirty (30) days of receipt of the Surety‘s written demand, the Indemnitors shall procure the full and complete release of the Bond(s) by providing competent written evidence of release satisfactory to the Surety, in its sole discretion. If Indemnitors fail to provide the aforementioned
release Indemnitors shall, within an additional seven (7) days, provide the Surety with collateral in the amount of 100% of all unreleased liability under the Bond(s).31
The Debtors responded that Argonaut‘s demand for additional collateral violated the discharge injunction.32
ANALYSIS
I. The surety bond program is not an executory contract.
The plan provides that Debtors are deemed to have assumed any executory contract unless it was
- previously rejected;
- the subject of a pending motion to reject; or
- is listed in a schedule to the plan as an executory contract to be rejected.33
Argonaut argues that the surety bond program was deemed assumed by the confirmed plan because it was not rejected prior to confirmation, or the subject of a pending motion to reject, or listed as an executory contract to be rejected.
Debtors respond that the surety bond program is not an executory contract and so could not be assumed. Alternatively, they argue that if the court concludes that the bond program is an executory contract, it is a financial accommodation that Bankruptcy Code section 365(c)(2) prohibits assuming.
Bankruptcy Code section 365 empowers a trustee or debtor-in-possession to assume or reject executory contracts and unexpired leases. “This provides a way for ‘a trustee to relieve the bankruptcy estate of burdensome agreements which have not been completely performed.‘”34
Though the Bankruptcy Code does not define executory contract, legislative history gives insight into its meaning:
Though there is no precise dеfinition of what contracts are executory, it generally includes contracts on which performance remains due to some extent on both sides. A note is not usually an executory contract if the only performance that remains is repayment. Performance on one side of the contract would have been completed and the contract is no longer executory.35
In keeping with legislative history, the Fifth Circuit jurisprudence follows the “Countryman”36 definition of executory contract, holding that
a contract is executory if ‘performance remains due to some extent on both sides’ and 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.‘”37
The relationship among a surety, principal, and claimant is tripartite.38 Debtors contracted with Argonaut to issue performance bonds that would cover the claims of the obligees. In exchange, Debtors agreed to indemnify Argonaut for claims should it be required to satisfy them. Thus, the Indemnity Agreement and bond must be construed together.39
To determine whether the surety bond program is executory, the Countryman test requires a determination of whether any performance remains due by each party and whether failure to render that performance would constitute a material breach of the contract, excusing the cоunterparty from performance.
Falcon V maintains that the bond program is not an executory contract because Argonaut already has posted the bonds and owes Debtors no further performance, though Argonaut remains liable to the third party obligees on the bonds.
This dispute bears similarity to that in In re James River Coal Co.40 where the
represent one agreement, all must be construed together in an attempt to discern the intent of the parties, reconciling apparently conflicting provisions and attempting to give effect to all of them, if possible.”).
As in James River, Argonaut posted bonds prepetition and owes no further performance to Falcon V.43 Fifth Circuit jurisprudence applying the Countryman test supports the conclusion that because Argonaut owed no continuing performance to Falcon V, the surety bond program is not an executory contract.
Because the surety bond program is not an executory contract, discussion of Debtors’ alternative arguments is unnecessary.44 However, even if the surety bond program were an executory contract,
a. Even if the surety bond program were executory, it is a non-assumable financial accommodation.
Debtors alternatively argue that the surety bond program is not capable of assumption because it is a financial accommodation within the meaning of Bankruptcy Code section 365(c)(2). That Code provision bars assumption of an executory contract 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 security of the debtor.” The surety bond program is indeed a financial accommodation within the meaning of that section, as Argonaut‘s proofs of claim contend.
The Senate Report accompanying
The purpose of this subsection is to make it clear that a party to a transaction which is based upon the financial strength of a debtor should not be required to extend new credit to the debtor in the form of loans, lease financing, or the purchase or discount of notes.45
Citing the legislative history quoted above and this passage from Collier on Bankruptcy, these courts uniformly conclude that § 365(c)(2) does not apply to all contracts that involve the extension of credit; rather, it applies to “contracts to make loans and other traditional kinds of debt financing arrangements.” Thus, courts define the term “financial accommodations” narrowly, as “the extension of money or credit to accommodate another.” Courts also distinguish between contracts for which the extension of credit is the primary purpose, that is, a primary contractual obligation, and contracts in which the extension of credit is only incidental to or a part of a larger arrangement involving the debtor; the former constitute contracts to extend financial accommodations while the latter do not.46
Although the Fifth Circuit has not yet addressed the application of
were an executory contract, it is a financial accommodation that cannot be assumed under
b. Consent is not an exception to section 365(c)(2)‘s bar on assumption of an executory contract that is a financial accommodation.
Undaunted by the lack of legal support for its position and despite reciting in its proofs of claim that the Falcon V surety bond program constitutes a financial accommodation barring assumption and assignment, Argonaut next argues that an executory contract comprising a financial accommodation can be assumed with the nondebtor counterparty‘s consent.50 The text of the statute provides otherwise.
Bankruptcy Code section 365(c)(2), in part:
(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts
assignment of rights or delegation of duties, if— … (2) 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; …
Argonaut argues that because legislative history provides that the purpose is to protect the party extending credit, that party may consent to assumption. But in analyzing
The first step “is to determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case.” Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997) (citing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)). The inquiry ceases “if the statutory language is
unambiguous and ‘the statutory scheme is coherent and consistent.’” 519 U.S., at 340, 117 S.Ct. 843.52
[W]hen “Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”53
Even if Argonaut had offered explicit evidence of its consent pre-confirmation to assumption, the surety bond program was not assumed because consent is not an exception to
II. Where does that leave Argonaut?
a. Though the bond program was not assumed as an executory contract, Argonaut‘s claim was treated in the plan and under section 502(e)(1)(B) .
Argonaut argues that Debtors are bound by the disclosure statement‘s recital that the bond program was essential.54 But the disclosure statement language it points to is merely a summary
of Debtors’ “first day motions,” not proposed treatment of claims.55 Argonaut ignores the language in Debtors’ First Amended Disclosure Statement,56 later approved by the court,57 that
Argonaut is a sophisticated creditor who had notice of the order approving the disclosure statement and setting confirmation hearing and related deadlines59 and of the confirmation order.60 Yet it did not object to confirmation, challenge or clarify the plan‘s provisions for its claims, move for new trial or appeal the order confirming the plan. Nor did it seek to have its claim estimated under
Debtors contend that the plan treats Argonaut‘s secured claim as an “Other Secured Claim” that was unimpaired and reinstated.62
Other Secured Claims. Except to the extent a Holder of an Allowed Other Secured Claim agrees to less favorable treatment, on the latest of (x) the Effective Date, (y) the date on which аn Other Secured Claim becomes an Allowed Other Secured Claim, and (z) such other date as may be ordered by the Bankruptcy Court, or, in each case, as soon as reasonably practicable thereafter, each Allowed Other Secured Claim shall be, at the election of the Debtors: (i) Reinstated, (ii) paid in Cash, in full satisfaction, settlement, release and discharge of such Allowed Other Secured Claim, (iii) satisfied by the Debtors’ surrender of the collateral securing such Allowed Other Secured Claim, or (iv) offset against, and to the extent of, the Debtors’ claims against the Holder of such Allowed Other Secured Claim. Each Holder of an Other Secured Claim is Unimpaired, not entitled to vote, and conclusively presumed to have accepted the Plan and is not entitled to vote to accept or reject the Plan.63
Argonaut filed a $3,213,720.55 secured claim. The terms of the confirmed plan reinstated its secured claim of $3,213,720.55 on the plan‘s effective date,
Debtors also argue that the unsecured portion of Argonaut‘s claim, $7,361,279.45, was disallowed by Bankruptcy Code section 502(e) because it was fully contingent and unliquidated on the petition date.64
Notwithstanding subsections (a), (b), and (c) of this section and paragraph (2) of this subsection, the court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on оr has secured the claim of a creditor, to the extent that– …
(B) such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or contribution; …
Thus, section 502(e)(1)(B) is applicable to a debt owed by the debtor to a creditor which has been guaranteed by a third party. If the primary obligee seeks payment from its guarantor, the guarantor may seek reimbursement or contribution from the debtor. Both the primary obligee and the guarantor have a claim against the debtor that arises from the same debt; the primary obligee has a right to payment from the debtor, and the guarantor has a contingent right to reimbursement or contribution from the debtor which may become noncontingent in the event that it fully satisfies the primary obligee’s claim. By disallowing the guarantor’s contingent claim for reimbursement or contribution, section 502(e)(1)(B) ensures that the estate will not at the same time be liable to the primary obligor and the guarantor for the same debt.66
To disallow a claim under
Argonaut‘s unsecured claim meets these criteria.68 First, it is undisputed that the Argonaut‘s unsecured claim is fully contingent because no claims have been made against the
bonds.69 Second, Argonaut has a contingent claim for indemnification, and “[c]ourts have consistently held
Thus,
b. Argonaut violated the discharge injunction by seeking additional collateral, but its violation was not contumacious.
Argonaut‘s motion to interpret the plan was precipitated by Debtors’ letter72 responding to Argonaut‘s letter demanding additional collateral for the bond. Falcon V argues that the demand letter violated the discharge injunction.
A discharge operates as an injunction against any action to recover discharged debts.73 The Supreme Court held in Taggert v. Lorenzen74:
[A] court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor‘s conduct. In other words, civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor‘s conduct might be lawful.75
Debtors’ disclosure statement recited that they intended to maintain the Argonaut bond,76 though the confirmed plan did not do so. In light of the inconsistency between the disclosure statement and Debtors’ confirmed plan, Argonaut‘s uncertainty about its treatment was reasonable, and it will not be held in contempt.
CONCLUSION
The surety bond program is not an executory contract; and even if it were executory, as a financial accommodation it cannot be assumed, whether or not Argonaut consented.
Argonaut holds an allowed secured claim for $3,213,720.55. Argonaut‘s unsecured claim is disallowed under
Counsel for the parties shall submit an agreed form of order on the motion within five days.
Baton Rouge, Louisiana, September 22, 2020.
s/ Douglas D. Dodd
DOUGLAS D. DODD
UNITED STATES BANKRUPTCY JUDGE
Notes
| Chevron Bond - | $ 300,000.00 |
| Hilcorp Bond - | $10,000,000.00 |
| Louisiana Bond - | $ 250,000.00 |
| U.S. Bond - | $ 25,000.00 |
| Total | $10,575,000.00 |
This court has repeatedly found that when agreements are interdependent and exist to further a single goal, an arbitration clause in one of the agreements “reach[es] all aspects of the parties’ relationship,” including disputes that might arise out of the other agreement. Neal [v. Hardee‘s Food Systems, Inc.], 918 F.2d [34,] 37–38 [5th Cir. 1990]; see also [Personal Sec. & Safety Systems Inc. v.] Motorola [Inc.], 297 F.3d [388,] 392–95 [5th Cir. 2002]. In determining whether two agreements are related, “it is well-settled law that several writings executed by the same parties substantially at the same time and relating to the same subject-matter may be read together as forming parts of one transaction.” Bailey v. Hannibal & St. J. R.R. Co., 84 U.S. (17 Wall.) 96, 108, 21 L.Ed. 611 (1872); see also Neal, 918 F.2d at 37 (“[u]nder general principles of contract law, separate agreements executed contemporaneously by the same pаrties, for the same purposes, and part of the same transaction, are to be construed together.”); Richland Plantation Co. v. Justiss–Mears Oil Co., Inc., 671 F.2d 154, 156 (5th Cir.1982) (“When several documents