Argonaut Insurance v. Falcon V ( 2022 )

Case: 21-30668 Document: 00516429246 Page: 1 Date Filed: 08/11/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
August 11, 2022
No. 21-30668
Lyle W. Cayce
Clerk
In the Matter of Falcon V, L.L.C.,
Debtor,
Argonaut Insurance Company,
Appellant,
versus
Falcon V, L.L.C.,
Appellee.
Appeal from the United States District Court
for the Middle District of Louisiana
USDC No. 3:20-CV-702
Before Higginbotham, Higginson, and Oldham, Circuit Judges.
Stephen A. Higginson, Circuit Judge:
This appeal arises out of the bankruptcy of Falcon V, LLC and its
affiliates. After the bankruptcy court confirmed Falcon V’s reorganization
plan, Argonaut Insurance Company asked the court to interpret the plan,
arguing primarily that a $10.5 million suretyship agreement was an
“executory contract” and that the reorganized Falcon V had therefore
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No. 21-30668
assumed the agreement under the reorganization plan’s express terms. The
bankruptcy court concluded that Falcon V had not assumed the agreement
and disallowed Argonaut’s $7.3 million unsecured claim against Falcon V.
The district court affirmed the judgment of the bankruptcy court. We
AFFIRM.
I.
The relevant facts are uncontested. Appellee Falcon V, LLC and its
affiliates ORX Resources, LLC and Falcon V Holdings, LLC (collectively
“Falcon V”) engage in oil and gas exploration and development. Appellant
Argonaut Insurance Company (“Argonaut”) provides surety bonds. 1 Falcon
V and Argonaut entered into an arrangement that the parties refer to as the
“Surety Bond Program.” Under the Surety Bond Program, Argonaut posted
four irrevocable performance bonds (the “Bonds”) guaranteeing Falcon V’s
obligations to various third-party obligees. These obligations related
primarily to the plugging, abandonment, and restoration of oil and gas wells.
The largest bond was in favor of Hilcorp Energy I LP, in the amount of
$10,000,000. The other three bonds were in favor of Chevron Corporation,
the Louisiana Office of Conservation, and the United States, in the amounts
of $300,000, $250,000, and $25,000, respectively. The Bonds provide that
if Falcon V fails to perform its obligations, Argonaut must either pay the
obligee an amount equal to the obligation or perform the obligation itself, up
to the amount of the bond. The Bonds further provide that “regardless of the
payment or nonpayment by [Falcon V] of any premiums owing with respect
to this Bond, [Argonaut’s] obligations under this Bond are continuing
obligations and shall not be affected or discharged by any failure by [Falcon
1
“A surety bond creates a three-party relationship, in which the surety becomes
liable for the principal’s debt or duty to the third party obligee.” Ins. Co. of the W. v. United
States, 243 F.3d 1367, 1370 (Fed. Cir. 2001).
2
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V] to pay any such premiums.” In exchange, Falcon V agreed to pay
premiums to Argonaut and to indemnify Argonaut for any payments that
Argonaut makes under the Bonds (the “Indemnity Agreement”).
In May 2019, Falcon V filed for Chapter 11 bankruptcy. On Falcon V’s
motion, the bankruptcy court authorized (but did not require) Falcon V to
continue performing the obligations that it owed Argonaut as part of the
Surety Bond Program. 2 Argonaut subsequently filed a proof of claim against
Falcon V in the amount of $10,575,000 (the combined value of the Bonds).
Argonaut stated that $3.2 million of the claim was secured and the rest was
unsecured. Argonaut further stated its position that the Surety Bond
Program “may not be assumed and assigned, for among other reasons,
because such agreement constitutes a ‘financial accommodation,’” although
it reserved its rights in case the Bonds and Indemnity Agreement were
deemed “executory contracts.” On October 10, 2019, the bankruptcy court
confirmed Falcon V’s Second Amended Plan of Reorganization (the
“Plan”), which stated that, with certain exceptions not relevant here, each
reorganized Falcon V entity “shall be deemed to have assumed each
executory contract . . . to which it is a party.”
In February 2020, Argonaut sent Falcon V a letter requesting that, in
accordance with section 12 of the Indemnity Agreement, Falcon V provide
Argonaut with an additional $7.3 million of collateral in order to fully secure
the Bonds. Falcon V refused, stating that Argonaut’s claims against it had
been discharged under the Plan. Argonaut then filed in the bankruptcy court
a Motion to Interpret and Affirm the Terms of the Confirmed Chapter 11
Plan, arguing that the reorganized Falcon V had assumed the Surety Bond
2
The bankruptcy court made clear that “nothing in this order or the Motion shall
be deemed to constitute post-petition assumption or adoption of any agreement.”
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Program under the provision in the Plan stating that Falcon V assumed the
executory contracts to which it was a party. Argonaut also argued that even
if the Surety Bond Program had not been assumed, it had “passed-through”
the bankruptcy.
The bankruptcy court issued an order concluding that the Surety
Bond Program was not assumed under the Plan. The court reasoned that
“because Argonaut owed no continuing performance to Falcon V, the surety
bond program is not an executory contract,” and it alternatively determined
that even “if the surety bond program were executory, it is a non-assumable
financial accommodation.” The court ultimately ordered that Argonaut’s
unsecured claim against Falcon V (totaling over $7.3 million) was disallowed
under 11 U.S.C. § 502(e)(1)(B), though it did note that Argonaut also held an
allowed secured claim for $3.2 million. The bankruptcy court did not
expressly address Argonaut’s argument that if the Surety Bond Program had
not been assumed it had nonetheless passed through the bankruptcy.
Argonaut appealed to the district court, which affirmed the
bankruptcy court’s judgment. The district court determined that “the
parties’ surety bond contracts are not executory contracts, and therefore
cannot be assumed or enforced against [Falcon V].” The district court
further stated that the bankruptcy court did not err by declining to expressly
address whether the Surety Bond Program passed through the bankruptcy,
explaining that “the pass-through (or ‘ride-through’) doctrine applies
exclusively to executory contracts that are ‘neither assumed nor rejected at
bankruptcy.’”
Argonaut then appealed to this court.
II.
“In reviewing a decision of the district court affirming the bankruptcy
court, we apply ‘the same standard of review to the bankruptcy court that the
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district court applied,’ reviewing [conclusions] of law de novo and findings of
fact for clear error.” In re Provider Meds, L.L.C., 907 F.3d 845, 850 (5th Cir.
2018). Argonaut raises two issues on appeal. Argonaut primarily argues that
the bankruptcy and district courts erred in determining that the Surety Bond
Program was not assumed under the Plan. Alternatively, Argonaut argues
that even if the Surety Bond Program were not assumed, the district court
erred by determining that the Surety Bond Program did not “pass through”
the bankruptcy.
A.
We first consider whether Falcon V “assumed” the Surety Bond
Program under the Plan. Subject to court approval, a debtor “may assume or
reject any executory contract,” 11 U.S.C. § 365(a); see also id. § 1107(a), and,
as explained above, Falcon V’s Second Amended Plan of Reorganization
states that, with certain exceptions not relevant here, each of the reorganized
Falcon V entities “shall be deemed to have assumed each executory
contract . . . to which it is a party.” Accordingly, the bankruptcy court
ordered that “all executory contracts . . . of [Falcon V] shall be deemed
assumed to the extent assumable under Bankruptcy Code section 365.”
Argonaut argues that the Surety Bond Program qualifies as an executory
contract under Section 365 and that the bankruptcy and district courts
therefore erred in determining that the Program was not assumed under the
Plan. 3
3
Argonaut further argues that the bankruptcy court erred in concluding that even
if the Surety Bond Program were an executory contract, it is unassumable because it is a
financial accommodation. See 11 U.S.C. § 365(c)(2) (“The trustee may not assume or
assign any executory contract . . . of the debtor . . . if . . . such contract is a contract to make
a loan[] or extend other debt financing or financial accommodations.”). Argonaut
maintains that financial accommodations are assumable with the consent of the party
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“The Bankruptcy Code does not define the term ‘executory
contract,’ but we have concluded 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.’” In re Provider Meds, 907 F.3d at 851(citations omitted). In other words, “the test for an executory contract is
whether, under the relevant state law governing the contract, each side has
at least one material unperformed obligation as of the bankruptcy petition
date.” In re Weinstein Co. Holdings LLC, 997 F.3d 497, 504 (3d Cir. 2021).
This definition of executory contracts was first proposed by Professor Vern
Countryman and is known as the “Countryman test.” Id.; see Vern
Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev.
439, 460 (1973). 4
extending the accommodation. Because we ultimately hold that the Surety Bond Program
is not an executory contract, we do not address this issue.
4
The vast majority of circuits have adopted the Countryman test. See Gallivan v.
Springfield Post Rd. Corp., 110 F.3d 848, 851 (1st Cir. 1997); Sharon Steel Corp. v. Nat’l Fuel
Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989); Lubrizol Enters., Inc. v. Richmond Metal
Finishers, Inc., 756 F.2d 1043, 1045 (4th Cir. 1985); In re Chi., Rock Island & Pac. R.R. Co.,
604 F.2d 1002, 1004 (7th Cir. 1979); In re Interstate Bakeries Corp., 751 F.3d 955, 962 (8th
Cir. 2014); In re Pac. Express, Inc., 780 F.2d 1482, 1487 (9th Cir. 1986); In re Baird, 567 F.3d
1207, 1211 (10th Cir. 2009). However, both the Sixth and Eleventh Circuits have endorsed
the “functional approach,” under which “the question of whether a contract is executory
is determined by the benefits that assumption or rejection would produce for the estate.”
In re Gen. Dev. Corp., 84 F.3d 1364, 1375 (11th Cir. 1996) (quoting In re Gen. Dev. Corp., 177
B.R. 1000, 1012 (S.D. Fla. 1995)); see also Thompkins v. Lil’ Joe Recs., Inc., 476 F.3d 1294,
1305 n.13 (11th Cir. 2007); In re Jolly, 574 F.2d 349, 351 (6th Cir. 1978). See generally 3
Collier on Bankruptcy ¶ 365.02 (16th ed. 2020) (discussing the Countryman test
and the functional approach); 2 Norton Bankruptcy Law & Practice 3d
§§ 46:6, 46:7 (same).
6
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The Third Circuit has explained the logic behind the Countryman test
as follows:
To facilitate the debtor’s rehabilitation, the Countryman test
attempts to foolproof the debtor’s choice to assume or reject
contracts; thus, the debtor only has that flexibility for
executory contracts—those contracts where there could be
uncertainty about whether they are valuable or burdensome. A
helpful perspective is to view executory contracts 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. Under this framework, a contract where the debtor
fully performed all material obligations, but the nonbankrupt
counterparty has not, cannot be executory; that contract can be
viewed as just an asset of the estate with no liability. Treating
it as an executory contract risks inadvertent rejection because
the debtor would in effect be giving up an asset by rejecting it.
On the other extreme, where the counterparty performed but
the debtor has not, the contract is also not executory because it
is only a liability for the estate. Treating it as an executory
contract risks inadvertent assumption, for the debtor would
effectively be agreeing to pay the liability in full when the
counterparty should instead pursue the claim against the estate
like other (typically unsecured) creditors. . . . Only where a
contract has at least one material unperformed obligation on
each side—that is, where there can be uncertainty if the
contract is a net asset or liability for the debtor—do we invite
the debtor’s business judgment on whether the contract should
be assumed or rejected.
In re Weinstein Co. Holdings, 997 F.3d at 504–05 (cleaned up).
In applying the Countryman test to this case, the bankruptcy and
district courts focused on the obligations that Falcon V and Argonaut owed
each other. They both concluded that even though Falcon V has a continuing
obligation to pay premiums to Argonaut and to indemnify Argonaut for any
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payments that Argonaut makes under the Bonds, the Surety Bond Program
nonetheless does not satisfy the Countryman test’s first prong because
Argonaut has already posted the Bonds and does not owe further
performance to Falcon V. As the bankruptcy court reasoned, “Argonaut
posted bonds prepetition and owes no further performance to Falcon V. . . .
[B]ecause Argonaut owed no continuing performance to Falcon V, the surety
bond program is not an executory contract.” Similarly, the district court
stated that “as between [Falcon V] and Argonaut, the parties’ obligations
under the Surety Bond Program flow in one direction, from [Falcon V] to
Argonaut. The Countryman test requires more for an executory contract:
performance must remain due on both sides.” 5
Argonaut argues that the bankruptcy and district courts’ application
of the Countryman test “gives no practical effect to Argonaut’s (and [Falcon
V’s]) unperformed duties to the obligees under the Bonds,” and it urges us
to “apply the Countryman framework in a manner that accounts for all
obligations in a multiparty arrangement.” At oral argument, Argonaut
proposed that the Countryman test should be modified as follows for surety
contracts: “Where the surety and the principal continue to owe obligations
to the obligee, and the principal has not fulfilled its indemnity obligations to
the surety, that is an executory contract.” In the Surety Bond Program,
Argonaut is the surety and Falcon V is the principal,6 and Argonaut maintains
5
While the bankruptcy court resolved this issue based solely on the Countryman
test’s first prong, the district court further determined that because “Argonaut’s bonds are
irrevocable,” Falcon V’s failure to perform would “not create a material breach that
excuses Argonaut’s performance, as required by the second prong of the Countryman
test.”
6
See Balboa Ins. Co. v. United States, 775 F.2d 1158, 1160 (Fed. Cir. 1985) (“A
suretyship is the result of a three-party agreement, whereby one party (the surety) becomes
liable for the principal’s or obligor’s debt or duty to the third party obligee.”); supra Part I
(describing the structure of the Surety Bond Program).
8
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that because (1) both it and Falcon V remain obliged to the various third-party
obligees and (2) Falcon V has not fulfilled its indemnity obligations to
Argonaut, the Surety Bond Program qualifies as executory under this
modified test.
We decline to adopt Argonaut’s proposed modification to the
Countryman test. Argonaut offers no authority in support of the
modification, and it makes no attempt to explain how the modification would
further the test’s goal of “facilitat[ing] the debtor’s rehabilitation” by giving
debtors discretion to assume or reject those contracts “where there can be
uncertainty if the contract is a net asset or liability for the debtor.” In re
Weinstein Co. Holdings, 997 F.3d at 504–05. Rather, Argonaut’s proposed
test seems designed simply to elevate the rights of sureties above those of
other creditors.
However, we do agree with Argonaut that courts should apply the
Countryman test to multiparty contracts in a flexible manner that accounts
for the various obligations owed to all of the parties, rather than focusing
exclusively on the flow of obligations between the debtor and the creditor.
We can imagine cases in which, for example, a debtor might wish to assume
a tripartite agreement under which it owes performance to a creditor, the
creditor owes performance to a third party, and the third party owes
performance to the debtor. Accordingly, when applying the Countryman test
to this case, we consider not just the obligations that Falcon V and Argonaut
owe to each other but also their respective obligations to the third-party
obligees.
Recall that the Countryman test has two prongs. First, a contract is
executory only “if ‘performance remains due to some extent on both sides.’”
In re Provider Meds, 907 F.3d at 851 (quoting In re Murexco Petroleum, Inc., 15
F.3d 60, 62 (5th Cir. 1994)). Falcon V has a continuing obligation to pay
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premiums to Argonaut and to indemnify Argonaut for any payments that
Argonaut makes under the Bonds, and although Argonaut does not owe any
further performance to Falcon V, since it has already posted the Bonds,
Argonaut does have obligations to the various third-party obligees under the
Bonds. 7
Assuming that the Surety Bond Program satisfies the first
Countryman requirement, the Program does not satisfy the second
requirement: that “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.” In re Provider
Meds, 907 F.3d at 851 (quoting In re Murexco Petroleum, 15 F.3d at 62–63).
After all, the Bonds are irrevocable, 8 meaning that even if Falcon V failed to
perform its obligations under the Surety Bond Program, Argonaut would not
be excused from its performance obligations to the obligees. And because
Falcon V’s failure to perform would not excuse Argonaut from performing,
the Surety Bond Program fails the Countryman test, even when applied in
this flexible manner. 9
7
The Surety and Fidelity Association of America argues in an amicus brief that
Argonaut does in fact have a continuing obligation to Falcon V, namely “the obligation to
maintain its license and other statutory and regulatory capital, surplus, and reserve
requirements.” However, Argonaut’s obligation to comply with surety law is owed to
Texas (whose laws govern the Surety Bond Program), not Falcon V. See In re Coal
Stripping, Inc., 215 B.R. 500, 502 (Bankr. W.D. Pa. 1997) (rejecting a similar argument on
the ground that the sureties “owe their obligations to comply with West Virginia surety law
to West Virginia, not to Debtor”).
8
As explained in supra Part I, the Bonds provide that “regardless of the payment
or nonpayment by [Falcon V] of any premiums owing with respect to the Bond,
[Argonaut’s] obligations under this Bond are continuing obligations and shall not be
affected or discharged by any failure by [Falcon V] to pay any such premiums.”
9
While the existing Countryman test, flexibly applied, is sufficient to resolve the
question of whether the Surety Bond Program is an executory contract, we recognize that
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The Surety Bond Program does not satisfy the Countryman test’s
second requirement. Accordingly, it is not an executory contract, 10 and the
bankruptcy and district courts correctly determined that it was not assumed
under the Plan.
B.
Argonaut alternatively argues that even if Falcon V did not assume the
Surety Bond Program, the Program is enforceable against them because it
passed through the bankruptcy unaffected under the “pass-through” or
“ride-through” doctrine. This argument might have merit if the Surety Bond
Program were an executory contract that had been neither assumed nor
rejected. See ASARCO, L.L.C. v. Mont. Res., Inc., 858 F.3d 949, 959 (5th Cir.
2017) (“Executory contracts that are not assumed or rejected ‘ride through’
the bankruptcy ‘unaffected by the bankruptcy proceedings.’” (quoting In re
O’Connor, 258 F.3d 392, 405 (5th Cir. 2001))). However, “nonexecutory
contracts . . . are not subject to assumption, rejection, or the ride-through
doctrine.” Id. Because, as explained above, the Surety Bond Program is not
an executory contract, Argonaut’s alternative argument is unavailing.
in future multiparty contracts cases, it may make sense for courts to modify the test, and
we note that because neither party asked us to apply the “functional approach,” see supra
note 4, to this case, future courts should not consider foreclosed the possibility that the
functional approach should be adopted for multiparty contract cases.
10
At least one district and three bankruptcy courts have also concluded that surety
agreements similar to the Surety Bond Program do not qualify as executory contracts,
although not necessarily under the same reasoning as ours. See In re James River Coal Co.,
No. 306-0411, 2006 WL 2548456, at *4 (M.D. Tenn. Aug. 31, 2006); In re All Phase Elec.
Contracting, Inc., 409 B.R. 272, 275 (Bankr. D. Conn. 2009); In re Maxon Eng’g Servs., Inc.,
324 B.R. 429, 432 (Bankr. D.P.R. 2005); In re Coal Stripping, Inc., 215 B.R. at 502–03
(Bankr. W.D. Pa. 1997). But see In re Evans Prods. Co., 91 B.R. 1003, 1005–06 (Bankr. S.D.
Fla. 1988) (concluding without analysis that a surety agreement was “clearly executory”).
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III.
For the foregoing reasons, the district court’s judgment is
AFFIRMED.
12