Lead Opinion
Opinion by Judge KOZINSKI; Partial Concurrence and Partial Dissent by Judge THOMAS; Concurrence by Judge RYMER; Partial Concurrence and Partial Dissent by Judge FERNANDEZ.
Guided, or misguided, by Gill v. Easebe Enters. (In re Easebe Enters.),
I
Southmark, a Texas corporation, sold the Double Diamond Ranch in Nevada to the Double Diamond Ranch Limited Partnership, retaining an option to buy back part of the ranch. Southmark later filed for bankruptcy in the Northern District of Texas. As part of its chapter 11 reorganization plan it assumed various executory contracts by filing a Notice of Assumption; the plan provided that all executory contracts not listed were deemed rejected. See 11 U.S.C. § 1123(b)(2). The Notice didn’t list the option to buy back the ranch, so it would have been deemed rejected if it was an executory contract. No one, however, raised the question in the Texas bankruptcy proceeding and the bankruptcy court there apparently did not have occasion to rule on the matter.
Double Diamond then itself filed for bankruptcy in the District of Nevada. The Committee administering the Double Diamond bankruptcy decided to sell the ranch to South Meadows Properties Limited Partnership, a buyer apparently chosen because its name maximizes confusion with Southmark.
Southmark appealed to the Bankruptcy Appellate Panel, which reversed, holding that the option was not executory. The Committee appealed for Double Diamond. Our three-judge panel reversed the B.A.P.
II
First, however, we must dispose of several preliminary matters. South Meadows’ victory, now final, see n.2 supra, raises a mootness question. South Meadows owns the Double Diamond Ranch free and clear of the option. Should Southmark win here, what good would that do it? Although Southmark can no longer exercise the option, it can still seek damages from the Double Diamond estate. The bankruptcy court set aside $30,000 for adequate protection of Southmark’s interest in the ranch, see 11 U.S.C. § 363(e), and noted that Southmark could pursue a claim for damages against the sale proceeds as well. If the bankruptcy court on remand decides that the option was not executory, there are appropriate remedies it can impose to make Southmark whole.
Next, we must determine the effect of the confirmed Southmark plan of reorganization. A confirmed reorganization plan operates as a final judgment with res judicata effect. 8 Collier on Bankruptcy ¶ 1141.02[4] (15th ed.1997). If the plan treats the option as an unassumed executory contract, we must then deem it rejected. If the option is treated as an asset instead, then the reversion of property from the estate to the debt- or upon confirmation is subject to the provisions of the plan. Hillis Motors, Inc. v. Hawaii Auto. Dealers’ Ass’n,
We do not have the entire record of the Southmark bankruptcy before us. Although it appears that the reorganization plan says nothing about the option, we can’t determine with full confidence whether the plan explicitly
Finally, the option provides that it would terminate if Southmark files for bankruptcy.
Ill
An executory contract is one “on which performance remains due to some extent on both sides.” National Labor Relations Board v. Bildisco and Bildisco,
A paid-for but unexercised option presents a puzzle. Is it executory or isn’t it? Each side may have unperformed obligations, but they are contingent on the optionee’s
We joined the former camp in Easebe,
A better approach, suggested by the B.A.P. below, is to ask whether the option requires further performance from each party at the time the petition is filed. Typically the answer is no, and the option -is therefore not executory. The optionee need not exercise the option-if he does nothing, the option lapses without breach. The contingency which triggers potential obligations-exercis
Nor does Easebe serve the goals of bankruptcy law, particularly that of maximizing the estate’s value. Easebe forced the bankruptcy court here to treat Southmark’s option-a valuable asset-as rejected by the estate, giving the optionor an undeserved windfall. Debtors frequently fail to recognize that some assets, such as options, are executory contracts, and so fail to expressly assume them. This leads to a trap, as unas-sumed executory contracts may be deemed rejected, either under section 365(d)(1) in chapter 7,
Easebe’s troublesome policy implications have forced courts to fabricate some dubious distinctions. In our case, the B.A.P. limited Easebe to its facts, an option which was a financial accommodation. Other cases which stretched to sidestep Easebe include In re Crummie,
We therefore reject Easebe’s broad rule that all options are executory contracts. Instead, we look to outstanding obligations at the time the petition for relief is filed and ask whether both sides must still perform. Performance due only if the optionee chooses at his discretion to exercise the option doesn’t count unless he has chosen to exercise it. An option may on occasion be an executory contract, for instance, where the optionee has announced that he is exercising the option, but not yet followed through with the purchase at the option price.
The question thus becomes: At the time of filing, does each party have something it must do to avoid materially breaching the contract? Typically, the answer is no; the optionee commits no breach by doing nothing.
It appears likely that the option here wasn’t executory when Southmark filed its petition, but the record is not entirely clear. We therefore remand to the bankruptcy court with instructions to determine the effect of the confirmed Southmark reorganization plan. If the plan does not resolve the question, we instruct the bankruptcy court to apply the appropriate legal test (as described above)
REVERSED and REMANDED.
Notes
. At this point, the perceptive reader may well wonder why Double Diamond does not appear in the caption to this case. The Double Diamond partnership’s bankruptcy is being jointly administered with that of the Robert L. Helms Construction & Development Company, and the Unsecured Creditors' Committee of the Helms estate is making the decisions for the Double Diamond estate.
. The three-judge panel actually had two related cases before it. One, between the Committee and Southmark, addressed whether the option
. By "explicitly" we mean the bankruptcy court shall look to the terms of the court-approved reorganization plan. The plan needn’t mention this particular option; it could describe options in general, or option-like instruments, or give a definition of executory contracts that encompasses options. But the court may not look to extrinsic evidence of party intent in interpreting the res judicata effect of a court order.
. The bankruptcy court apparently proceeded on the understanding that the plan does not answer whether or not the option is an executory contract. It then turned to caselaw to determine that term’s definition. It found that Easebe answered that question, and we turn to that case in the next section.
.The relevant provisions are as follows:
2. Term of Option.
The option granted herein shall exist for a period of fifteen (15) years from the date of this Agreement, provided, however, that the option granted herein shall terminate in the event SOUTHMARK files for protection under Chapter 11 of the Bankruptcy Code....
3. Exercise of Option.
SOUTHMARK may exercise the option granted herein at any time during the term of this option by giving written notice of exercise to DDR at the address for notices provided in this Agreement, unless the option has been terminated as provided in paragraph 2. In the event SOUTHMARK exercises its option and files for bankruptcy protection as described in paragraph 2. prior to close of escrow, the option exercise shall be void and of no effect.
. Section 541(c)(1) provides that, with certain exceptions, "an interest of the debtor in property becomes property of the estate ... notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law ... that is conditioned on ... the commencement of a case under this title....”
. This is often referred to as the "Countryman" definition. See Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L.Rev. 439, 460 (1973).
. The optionee is the person with the right to exercise the option, here Southmark. The op-tionor is the person against whom the option may be exercised, here Double Diamond.
. The question also arises in contract cases outside the bankruptcy context. "The traditional view regards an option as a unilateral contract which binds the optionee to do nothing, but grants him the right to accept or reject the offer in accordance with its terms within the time and in the manner specified in the option.” 1 Williston on Contracts § 5:16 (4th ed.1990).
. If the trustee under chapter 7 does not assume or reject an executory contract within 60 days after the order for relief, the contract is deemed rejected. 11 U.S.C. § 365(d)(1).
. A plan may provide for the assumption, rejection or assignment of an executory contract not previously rejected. 11 U.S.C. § 1123(b)(2).
. By "as described above” we mean as described above. If the court-approved reorganization plan does not address whether the option was an executory contract or an asset of the estate, then the Code governs how a plan may treat executory contracts and estate assets and how those terms are defined. This opinion prescribes the Code’s application to this case, in particular whether an option is an executory contract.
.We must reverse the B.A.P., even though it was generally correct in its analysis, because it held that the option here was not executory as a matter of law. We hold that it is a factual question to be determined by the bankruptcy court.
Concurrence in Part
with whom MICHAEL DALY HAWKINS, Circuit Judge, joins, concurring in part and dissenting in part:
I concur in the majority’s holding that Gill v. Easebe Enters. (In re Easebe Enters.), 900
However, I join Judges Fernandez and Rymer in their concerns about the constraints placed on the bankruptcy court on remand. In addition to the issues identified by Judge Fernandez, the bankruptcy court should be allowed to examine any other issues presented by the parties or apparent to the court, such as the effect of Southmark’s failure to disclose the option in its bankruptcy,
There is, however, an additional aspect to the majority’s analysis which causes me to write separately. By imposing our view of how option contracts should be treated under 11 U.S.C. §§ 365 and 1123(b)(2) on a Fifth Circuit bankruptcy, the majority unnecessarily intrudes upon the law of another circuit.
The threshold question in this ease is what happened to the option during the South-mark bankruptcy in Texas. Did the confirmed reorganization plan extinguish the option, or did the option survive? If the option did not survive, there is nothing for us to decide. If it survived the Texas bankruptcy as an asset, then we cannot declare the option to be an executory contract because the confirmed Texas bankruptcy plan is res judi-cata as to that issue. 11 U.S.C. § 1141(a); Eubanks,
The majority quite properly directs the bankruptcy court’s initial attention to the Southmark plan itself, as the plan may well resolve the issue on its face. The plan may also answer other relevant questions, such as whether undisclosed assets reverted to the debtor upon confirmation. However, if the plan is silent as to these important matters, as it may very well be, the majority directs the court to apply executory contract law as we have now declared it without reference to existing Fifth Circuit precedent. It is on this issue I must differ with the majority.
When parties to a reorganization plan use a legal term of art, they necessarily do so with reference to the legal authority which binds them. If, therefore, the Fifth Circuit has decided that options are to be considered executory contracts, Fifth Circuit bankruptcy practitioners have a right to rely upon that decision in constructing and voting upon a reorganization plan.
The issue arises here because of a Fifth Circuit decision, Rivercity v. Herpel (In re Jackson Brewing Co.),
The Ninth Circuit has a large geographic reach, but to date it has not included the State of Texas. The majority opinion would alter this, applying Ninth Circuit law to an ongoing Texas bankruptcy. In my view, the proper approach is to remand without precluding the court from considering applicable Fifth Circuit law, if the parties’ intent cannot be discerned. Comity and simple respect for our colleagues in another circuit demand no less.
Thus, although I endorse the majority’s analysis of option contracts, I respectfully dissent in part.
. Willful nondisclosure is, after all, a federal crime. 18 U.S.C. § 152; see also United States v. McCormick,
. As the Fifth Circuit has observed in another context: “In general, parties intending to be bound by a statute intend to be bound by the body of judicial decisions interpreting and applying the statute.” Shell Oil Co. v. M/T GILDA,
. See, e.g., United States v. Motor Vehicle Mfrs. Ass'n,
. A confirmed reorganization plan operates as a final judgment with res judicata effect. 8 Collier on Bankruptcy ¶ 1141.02[4] (15th ed.1997). A change in case law does not alter the res judicata effect of a prior judgment. See, e.g., Federated Dept. Stores, Inc. v. Moitie,
. Fifth Circuit law on executory contracts has evolved subsequent to confirmation of the South-mark plan. See, e.g., Phoenix Exploration, Inc. v. Yaquinto (In re Murexco Petroleum, Inc.),
Concurrence in Part
with whom MICHAEL DALY HAWKINS and THOMAS, Circuit Judges, join, concurring in part and dissenting in part:
I agree with most of what is written in the majority opinion. However, while it may seem unduly captious to focus upon a few words here or there, I feel compelled to do so because I believe that those words are exceedingly important.
As the majority emphasizes, the use of the word “explicitly” in the clause, “we can’t determine with full confidence whether the plan explicitly resolves the question whether the option was an executory contract,” at page 704 of the opinion means that the plan itself must either describe the Southmark option by name or indicate that it refers to options, or must contain a definition of execu-tory contracts which includes options. That is an overly restrictive direction to the bankruptcy court. That court should remain free to consider such issues as whether the plan simply rejected all executory contracts, and whether at the time and place of its execution and approval that reference should be read to include this option contract.
Also, as the majority emphasizes, the phrase “(as described above)” in the clause “if the plan does not resolve the question, we instruct the bankruptcy court to apply the appropriate legal test (as described above),”
In short, as I see it we should only be removing the impediment that the bankruptcy court encountered when it came upon Easebe. We need not and should not do more than that. To the extent that the majority does, I dissent.
Concurrence Opinion
with whom
FERNANDEZ, MICHAEL DALY HAWKINS and THOMAS, Circuit Judges, join, concurring:
The bankruptcy court felt it had only to decide the legal question of whether the option was an executory contract and believed (correctly, at the time) that it was bound by Easebe to conclude “yes.” In re Easebe Enters.,