In re: Svenhard's Swedish Bakery

FILED
AUG 29 2023
ORDERED PUBLISHED
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. EC-23-1001-GLB
SVENHARD’S SWEDISH BAKERY,
Debtor. Bk. No. 19-15277
SVENHARD’S SWEDISH BAKERY,
Appellant,
v. OPINION
UNITED STATES BAKERY; OFFICIAL
COMMITTEE OF UNSECURED
CREDITORS; CONFECTIONERY
UNION AND INDUSTRIAL PENSION
FUND,
Appellees.
Appeal from the United States Bankruptcy Court
for the Eastern District of California
Christopher M. Klein, Bankruptcy Judge, Presiding
APPEARANCES:
Derrick Talerico of Weintraub Zolkin Talerico & Selth, LLP argued for
appellant; Paul S. Jasper of Perkins Coie LLP argued for appellee Official
Committee of Unsecured Creditors; Joshua A. Segal of Bredhoff & Kaiser
P.L.L.C. argued for appellee Confectionery Union and Industrial Pension
Fund.
Before: GAN, LAFFERTY, and BRAND, Bankruptcy Judges.
GAN, Bankruptcy Judge:
INTRODUCTION
Chapter 111 debtor Svenhard’s Swedish Bakery (“Debtor”) appeals
the bankruptcy court’s order denying its motion to assume and assign,
pursuant to § 365, a purported executory contract. The contract in question
is a settlement agreement between Debtor and the Confectionery Union
and Industrial Pension Fund (the “Pension Fund”) which provides for the
release of approximately $46,000,000 of Debtor’s liability after payment of
reduced amounts on specified terms.
The bankruptcy court held that the settlement agreement is not an
executory contract because the Pension Fund’s only contractual
obligation—to release its claim upon full payment under the agreement—is
not due until after Debtor fully performs. Debtor has not demonstrated
reversible error; we AFFIRM.
FACTS 2
A. Prepetition events
Until 2019, Debtor operated a bakery producing Swedish pastries. In
2014, Debtor executed a series of transactions to sell its business to United
States Bakery (“USB”), and it commenced a five-year lease-back of its
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, and all “Rule” references are to the Federal
Rules of Bankruptcy Procedure.
2 We exercise our discretion to take judicial notice of documents electronically
filed in the bankruptcy case and related proceedings. See Atwood v. Chase Manhattan
Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
operations. In 2015, Debtor closed its bakery in Oakland, California and
relocated its operations to Exeter, California. As a result of closing the
Oakland facility and terminating its union workforce, Debtor effectively
withdrew from the Pension Fund.
The Pension Fund notified Debtor that it had incurred a withdrawal
liability of $50,150,0433 (“Withdrawal Liability”), and later informed
Debtor that it had failed to make pension contributions of $514,857.67
related to severance pay and accrued vacation (“Contribution Liability”).
Debtor did not make a timely request for review of the assessment of
Withdrawal Liability pursuant to 29 U.S.C. § 1399(b)(2), and consequently,
the amount was due and owing as demanded by the Pension Fund.
Debtor informed the Pension Fund that it could not pay the
Withdrawal Liability and offered to pay a reduced amount. Debtor
provided the Pension Fund with financial information, and after protracted
negotiations, the parties signed a settlement agreement (the “Settlement”)
in April 2019. Under the Settlement, Debtor agreed to pay the Pension
Fund $3,000,000, through 240 monthly installments of $12,500, in
satisfaction of the Withdrawal Liability. Debtor also agreed to pay the
Contribution Liability with interest at 5.25% through monthly installments
of $8,580.80.
3
According to Debtor, the provision of ERISA governing payment of withdrawal
liability provides that Debtor could be required only to pay $162,941 per month for 20
years, which totals $39,105,804.
3
The Settlement provides that upon Debtor’s full payment of the
agreed amounts, the Pension Fund will execute a release of its claim for
Withdrawal Liability and a separate release of its claim for the
Contribution Liability. The Settlement further provides that if Debtor fails
to make any payment, the Pension Fund can declare a default and, if
Debtor fails to cure the default, Debtor is liable for the full Withdrawal
Liability of $39,105,840, plus allowed interest, and the full unamortized
Contribution Liability, less actual payments made.
In November 2019, USB terminated the lease-back agreements and
Debtor ceased operations. Debtor missed the December 2019 payment
under the Settlement, and on December 13, 2019, the Pension Fund
declared a default. Debtor filed its chapter 11 petition on December 19,
2019.
B. The bankruptcy and settlement with USB
The Pension Fund filed a proof of claim based on the Settlement, and
asserted it was owed $45,400,506.78 for the Withdrawal Liability and
$566,994.14 for the Contribution Liability.
After Debtor filed the bankruptcy case, the Pension Fund sued USB
in the United States District Court for the Eastern District of California
(“District Court”), asserting claims for the Withdrawal Liability and the
Contribution Liability under a theory of successor liability. Debtor also
filed an adversary complaint against USB, alleging various claims
including successor liability, breach of fiduciary duty, fraud, and violations
4
of California Business and Professions Code § 17200. USB successfully
moved to withdraw the adversary proceeding to the District Court, and
both cases were subsequently transferred to the United States District
Court for the District of Oregon.
USB sought to dismiss Debtor’s bankruptcy case. After the
bankruptcy court denied the motion and the District Court dismissed its
appeal, USB appealed to the Ninth Circuit. While the appeal was pending,
USB, Debtor, and the Committee of Unsecured Creditors (the
“Committee”) agreed to participate in the Ninth Circuit’s appellate
mediation program. 4
Debtor and USB reached a comprehensive agreement which
provided for USB to pay Debtor $3,000,000 and cure the default on the
Settlement, and for Debtor to assume and assign the Settlement to USB.
USB also agreed to withdraw its proof of claim and dismiss its pending
appeal, and Debtor agreed to dismiss its pending action against USB. The
agreement was conditioned on bankruptcy court approval of the
agreement and approval of Debtor’s motion to assume and assign the
Settlement as a valid and subsisting contract.
C. The motion to assume and assign and the court’s ruling
In November 2022, Debtor filed a motion to assume and assign the
Settlement under § 365 and a motion to approve the agreement with USB
4
Although the Pension Fund was a member of the Committee, at the request of
Debtor and USB, it did not participate in the mediation.
5
under Rule 9019. 5 Debtor asserted that the Settlement was an executory
contract because both parties had remaining material obligations: Debtor
was required to make monthly payments, and the Pension Fund was
required to execute releases of its claims. The Committee joined the motion,
and the Pension Fund objected.
The Pension Fund argued that the Settlement could not be assumed
and assigned because it was not an executory contract under Ninth Circuit
law. The Pension Fund maintained its obligation to execute the releases
was not due unless Debtor made all payments under the Settlement, and
thus, its obligation was contingent as of the petition date. The Pension
Fund further argued that it would be inappropriate for the court to
determine whether the Settlement was a “valid and subsisting contract” as
part of a summary proceeding under § 365.
After a hearing, the bankruptcy court held that the Settlement was
not executory because it lacked the requisite mutuality of obligation given
that the Pension Fund’s obligations to execute the releases were
conditioned on Debtor’s full performance. The court additionally held that
the Settlement was a financial accommodation to Debtor and thus, not
assumable under § 365(c)(2). Finally, the court declined to determine
whether the Settlement was a valid and subsisting contract, and cited
5 The bankruptcy court denied the Rule 9019 motion and we dismissed the
appeal from that order as interlocutory. This appeal involves only the bankruptcy
court’s order denying Debtor’s motion to assume and assign the Settlement under
§ 365(a).
6
Diatom, LLC v. Committee (In re Gentile Family Industries), BAP No. CC-13-
1563-KiTaD, 2014 WL 4091001, at *5 (9th Cir. BAP Aug. 19, 2014), for the
proposition that the “validity of a contract if disputed cannot be
determined in the context of a motion to assume or reject.”
The bankruptcy court entered a written decision and order denying
Debtor’s motion to assume and assign the Settlement, and Debtor timely
appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (O). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
Did the bankruptcy court err by denying Debtor’s motion to assume
and assign the Settlement under § 365(a)?
Did the bankruptcy court err by declining to decide whether the
Settlement was a valid and subsisting contract?
STANDARDS OF REVIEW
Whether a contract is “executory” for purposes of § 365 is a question
of fact, which we review for clear error. Carruth v. Eutsler (In re Eutsler), 585
B.R. 231, 234-35 (9th Cir. BAP 2017) (citing Unsecured Creditors’ Comm. v.
Southmark Corp. (In re Robert L. Helms Constr. & Dev. Co.), 139 F.3d 702, 706
n.13 (9th Cir. 1998) (hereinafter “In re Helms Constr.”) (en banc). Factual
findings are clearly erroneous if they are illogical, implausible, or without
7
support in the record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th
Cir. 2010).
We review de novo the bankruptcy court’s decision to decline to
decide whether a contract is “valid and subsisting” as part of its decision
on a motion under § 365(a). See Durkin v. Benedor Corp. (In re G.I. Indus.),
204 F.3d 1276, 1279 (9th Cir. 2000). Under de novo review, “we consider a
matter anew, as if no decision had been made previously.” Francis v.
Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
DISCUSSION
A. Assumption of executory contracts under § 365
Pursuant to § 365, a debtor in possession may assume or reject any
executory contract, subject to court approval, and assign the executory
contract upon adequate assurance of future performance by the assignee.
The term “executory contract” is not defined in the Bankruptcy Code,
but the Ninth Circuit has adopted the following definition, known as the
“Countryman test,” formulated by Professor Countryman: “[A] contract is
executory if ‘the obligations of both parties are so unperformed that the
failure of either party to complete performance would constitute a material
breach and thus excuse the performance of the other.’” In re Helms Constr.,
139 F.3d at 705 (quoting Griffel v. Murphy (In re Wegner), 839 F.2d 533, 536
(9th Cir. 1988)); see Vern Countryman, Executory Contracts in Bankruptcy:
Part I, 57 Minn. L. Rev. 439, 460 (1973).
8
To determine whether a contract is executory, we first determine
whether both parties have remaining material obligations. Com. Union Ins.
Co. v. Texscan Corp. (In re Texscan Corp.), 976 F.2d 1269, 1272 (9th Cir. 1992).
If either party has “substantially performed,” the contract is not executory.
Marcus & Millichap Inc. v. Munple, Ltd. (In re Munple, Ltd.), 868 F.2d 1129,
1130 (9th Cir. 1989). We then determine, as of the petition date, whether
failure to perform would give rise to a material breach and excuse
performance by the other party. In re Texcan Corp., 976 F.2d at 1272 (citing
Collingwood Grain, Inc. v. Coast Trading Co. (In re Coast Trading Co.), 744 F.2d
686, 692 (9th Cir. 1984) and In re Wegner, 839 F.2d at 536). “The materiality
of a remaining obligation and whether the failure to perform a remaining
obligation is a material breach of the contract is an issue of state law.” Id.(citation omitted).
Under Maryland law, which governs the Settlement, “any breach of
contract may give rise to a cause of action for damages, [but] only a
material breach discharges the non-breaching party of its duty to perform.”
Jay Dee/Mole Joint Venture v. Mayor and City Council of Baltimore, 725
F.Supp.2d 513, 526 (D. Md. 2010). A breach is material “if it affects the
purpose of the contract in an important or vital way.” In re Cho, 581 B.R.
452, 462 (Bankr. D. Md. 2018) (cleaned up).
9
B. The bankruptcy court did not err by determining the Settlement is
not executory.
Debtor does not demonstrate, nor do we discern, error in the
bankruptcy court’s ruling that the Settlement is not an executory contract.
The Settlement plainly provides for the Pension Fund to release claims
upon full payment by Debtor. Thus, the failure of the Pension Fund to
execute the releases would not constitute a material breach sufficient to
excuse Debtor’s performance.
The express requirement for the Pension Fund to execute releases
“[u]pon full payment” creates a performance condition under Maryland
law. See Chirichella v. Erwin, 310 A.2d 555, 557 (Md. 1973) (stating that
phrases such as “if,” “provided that,” “when,” “after,” “as soon as,” or
“subject to” are sufficient to create express conditions). “Generally, when a
condition precedent is unsatisfied, the corresponding contractual duty of
the party whose performance was conditioned on it does not arise.” B & P
Enters. v. Overland Equip. Co., 758 A.2d 1026, 1038 (Md. Ct. Spec. App.
2000).
Thus, the Pension Fund could not breach the Settlement by refusing
to execute the releases unless Debtor had fully performed by making all
payments. See NSC Contractors, Inc. v. Borders, 564 A.2d 408, 413 (Md. 1989)
(“It is fundamental that where a contractual duty is subject to a condition
precedent . . . there is no duty of performance and there can be no breach
by nonperformance until the condition precedent is either performed or
10
excused.”) (quoting Laurel Race Course v. Regal Constr. Co., 333 A.2d 319, 327
(Md. 1975)); Restatement (Second) of Contracts § 235, cmt. b (“Non-
performance is not a breach unless performance is due. Performance may
not be due because . . . a condition has not occurred.”). Because the Pension
Fund's contractual obligations are due only after Debtor fully performs by
making all required payments, a breach by the Pension Fund could not
logically excuse Debtor's performance of its duty to make payments.
Debtor suggests that payments under the Settlement would result in
satisfaction of the Contribution Liability several years prior to satisfaction
of the Withdrawal Liability, and therefore if the Pension Fund refused to
execute the Contribution Liability release, such breach would excuse
Debtor’s remaining payment obligation. But this argument conflates the
two separate exchanges involved in the Settlement. Debtor is required to
make two sets of monthly payments: (1) $8,580.80 to satisfy the
Contribution Liability with interest at 5.25%, in exchange for the Pension
Fund’s release of its claim; and (2) $12,500 for 240 months, in exchange for
the Pension Fund’s release of the Withdrawal Liability. The Pension Fund’s
failure to release the Contribution Liability would not excuse Debtor from
making payments related to the Withdrawal Liability.
Additionally, we question whether the Pension Fund’s obligation to
execute the releases is “material.” Debtor argues that the releases are
essential to the Settlement and vitally affect its purpose. The purpose of the
Settlement is to mutually resolve the claims. If the Pension Fund refused to
11
execute the releases after full payment by Debtor, the Settlement and proof
of payment would operate as a complete defense to a collection action in
the same manner as a signed release. Given the nature of the Settlement,
the releases are likely ministerial and not sufficient to render the Settlement
executory. See Enter. Energy Corp. v. United States (In re Columbia Gas Sys.
Inc., 50 F.3d 233, 243 (3d Cir. 1995) (describing “execution of the release to
be found in the settlement of any case” as a ministerial act); Mitchell v.
Streets (In re Streets & Beard Farm P’ship), 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., Inc., 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 the contract
executory).
Debtor suggests the bankruptcy court misconstrued Helms, which
dealt only with an unexercised option, and argues that the bankruptcy
court’s ruling creates new precedent that bars debtors from assuming or
rejecting all contracts where both parties do not have immediate and
concurrent performance obligations. Debtor contends that virtually all
settlement agreements which require payment in exchange for a release of
liability should be deemed executory. We disagree.
12
The bankruptcy court found support for its decision in Helms, but its
decision was grounded in long-standing precedent and application of the
Countryman test. It is conceivable that some contracts with sequential
performance may be executory, but not all settlement agreements will
satisfy the Countryman test. The Countryman test requires bankruptcy
courts to “test” the factual circumstances of each purported executory
contract and evaluate whether both parties have sufficient remaining
obligations such that failure to perform would constitute a material breach
and excuse performance by the other.
The purpose of the test is to permit a debtor in possession to evaluate
substantially underperformed contracts and use its business judgment to
assume those with positive net value to the estate while rejecting those
which result in a loss. Central to this purpose is the requirement that the
estate have remaining performance obligations which might outweigh the
expected benefit of the remaining performance to be received. In other
words, an executory contract is one where both parties have something at
risk.
Here, the Settlement requires nothing of the Pension Fund but the
ministerial act of executing releases upon full payment. Failure to do so
would not be a material breach, and because the releases are not required
until after full payment by Debtor, it is not possible for the Pension Fund to
materially breach the Settlement and excuse Debtor’s performance.
13
The bankruptcy court did not err by determining that the Settlement
is not an executory contract. Thus, we need not reach the court’s alternative
holding that the Settlement is unassumable as a contract for financial
accommodations to Debtor.
C. The bankruptcy court properly declined to determine whether the
Settlement was a valid and subsisting contract.
Debtor argues that the court erred by refusing to rule that the
Settlement is a valid and subsisting contract because no party disputed its
validity. But Debtor fails to articulate why the court was required to
determine the validity of the Settlement in the context of a summary
§ 365(a) proceeding. The bankruptcy court properly declined to enter an
order regarding the validity of the Settlement, regardless of whether it was
in dispute. See In re G.I. Indus., 204 F.3d at 1282 (“A bankruptcy court’s
hearing on a [§ 365 motion] is a summary proceeding that involves only a
cursory review of a trustee’s decision . . . .”); Orion Pictures Corp. v.
Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir.
1993) (“At heart, a motion to assume should be considered a summary
proceeding, intended to efficiently review the trustee’s or debtor’s decision
to adhere to or reject a particular contract . . . .”). Moreover, Debtor does
not explain why such an order is necessary if the validity of the Settlement
is uncontested.
14
CONCLUSION
Based on the foregoing, we AFFIRM the bankruptcy court’s order
denying Debtor’s motion to assume and assign the Settlement.
15