Century Indemnity Co. v. National Gypsum Co. Settlement Trust (In Re National Gypsum Co.)

REVISED APRIL 14, 2000
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 98-11116
In the Matter of NATIONAL GYPSUM COMPANY,
Debtor,
____________________
CENTURY INDEMNITY CO.; INSURANCE COMPANY OF NORTH AMERICA,
Appellees
V.
NGC SETTLEMENT TRUST; ASBESTOS CLAIMS MANAGEMENT CORPORATION,
Appellants,
__________________________________________________
Appeal from the United States District Court
For the Northern District of Texas
March 31, 2000
Before EMILIO M. GARZA and PARKER, Circuit Judges; and FITZWATER,
District Judge.1
1
District Judge for the Northern District of Texas, sitting
by designation.
ROBERT M. PARKER, Circuit Judge:
Appellants,2 a reorganized Chapter 11 Bankruptcy debtor, filed
suit seeking a declaratory judgment that appellee’s claim stemming
from an assumed contract was discharged in the debtor’s earlier
bankruptcy proceedings. At summary judgment, the bankruptcy court
determined that the claim was not discharged, but that the contract
was assumed with a binding $0 cure amount. Both parties appealed.
The district court, sitting as an appellate court, affirmed the
discharge ruling but reversed as to the binding nature of the cure
amount. The reorganized debtor appeals that ruling.3 We AFFIRM.
I. FACTS AND PROCEDURAL HISTORY
A. Background
1. The Wellington Agreement
2
Throughout this opinion, the court will refer to the
appellants collectively as National Gypsum Company (“National
Gypsum”). National Gypsum is a reorganized Chapter 11 debtor.
Under its plan of reorganization, most operating assets were
conveyed to the New NGC, which assumed the name “National Gypsum
Company,” and the debtor National Gypsum changed its name to
Asbestos Claims Management Corporation (“ACMC”). ACMC, which owns
the rights under National Gypsum’s insurance policies, became a
subsidiary of the NGC Settlement Trust, created under the plan to
provide payments to holders of asbestos-related claims against
National Gypsum. Accordingly, NGC Settlement Trust and Asbestos
Claims Management Corp. are the named appellants in this appeal.
3
In addition to Plaintiffs/Appellants’ substantive appeal, we
have before us a pending motion -- Defendant/Appellee’s Motion to
Determine Appellate Jurisdiction. Defendant/Appellee contends that
jurisdiction is proper; in their response, Plaintiffs/Appellants
concur. Upon due consideration of the parties’ filings, the record
of the proceedings below, and the applicable law, we agree.
JURISDICTION CONFIRMED.
2
National Gypsum Company (“National Gypsum”) was a manufacturer
of asbestos-containing products, while Insurance Company of North
America (“INA”) was one of its insurers, having issued liability
insurance policies to National Gypsum in the 1950s. Beginning in
the 1970s, National Gypsum was sued for bodily injury and property
damage claims arising from the asbestos-containing products it
sold. An insurance coverage dispute soon followed mirroring the
litigation taking place throughout the country between other former
asbestos manufacturers and their insurers.
A large part of this industry-wide litigation was ended when
a number of parties reached a negotiated settlement, commonly
referred to as the Wellington Agreement. This accord, signed in
1985 by numerous manufacturers and their insurers -- including
National Gypsum and INA -- resolved persistent contribution and
indemnity issues, thereby allowing for joint representation in
thousands of pending asbestos-related lawsuits. The Wellington
Agreement provided for the creation of the Asbestos Claims Facility
to analyze, defend, and settle pending and future asbestos-related
bodily injury claims referred to it by participating former
asbestos producers. Under the agreement, funding for the payment
of settlements, judgments, and legal expenses incurred in the
defense of asbestos-related bodily injury claims against the party-
producers was provided by the party-insurers.
But not all insurers signed the agreement, causing gaps in
3
coverage to arise where non-signatory insurer payments were called
for. Under the Wellington Agreement, party-insurers agreed to make
gap-filling payments to cover the non-signatory insurers’ share of
defense and indemnity costs. It was recognized that this would
cause the insurers to pay out their policy limits more quickly than
they would if the non-signatory insurers were participating. In
response, Section XX of the Wellington Agreement was designed to
compensate signatory insurers for these interim payments. Under
Section XX, producers are required to use their best efforts to
obtain coverage from non-signatory insurers. To encourage
producers to pursue non-signatory insurers, interest on gap-filler
payments begins to accrue two years after payment is made. The
producer must thereafter pay interest quarterly until the earlier
of (a) a settlement with or final judicial determination against
the non-signatory insurer, or (b) the date on which the signatory
insurer would have exhausted its policy limits if the non-signatory
insurer had been a participating party to the Wellington Agreement.
Some of National Gypsum’s insurers did not sign the Wellington
Agreement, thus INA’s successor in interest, Century Indemnity
Company (“Century”), allegedly made gap-filling payments on behalf
of National Gypsum for amounts owed by non-signatory insurers from
October 1987 through May 1990. According to Century, Section XX
interest accrued on the amount due to Century through March 1994,
and prejudgment interest continues to accrue. Century claims that
4
National Gypsum has never paid any portion of the now more than
five million dollars owed to Century.
2. The Reorganization of National Gypsum
National Gypsum filed a Chapter 11 bankruptcy petition
October 28, 1990. As a part of its reorganization plan, National
Gypsum sought to assume the Wellington Agreement, one of
approximately 250 executory contracts or unexpired leases to which
National Gypsum was a party. In accordance with Bankruptcy Code
requirements, the National Gypsum plan detailed the cost to “cure”
any existing defaults on these executory contracts or unexpired
leases. National Gypsum’s plan represented that the company was
not in default on any payments under the Wellington Agreement, and
therefore, the cost to cure all defaults was $0.
On March 9, 1993, the bankruptcy court entered its “Order
Confirming the First Amended and Restated Joint Plan of
Reorganization of National Gypsum Company and Aancor Holdings,
Inc.” confirming the National Gypsum plan of reorganization.
B. Procedural History
In October 1995, following attempts by Century to recover the
amounts allegedly due, National Gypsum brought suit in the
Bankruptcy Court for the Northern District of Texas seeking a
declaration that its contract obligations to Century were
discharged in the earlier Chapter 11 reorganization. Following
discovery, National Gypsum moved for summary judgment claiming that
5
any amounts previously due were discharged, pursuant to 11 U.S.C.
§ 1141(d) (1994), for $0 because Century failed to file timely
proof of its claim, despite having sufficient notice of the
pendency of the bankruptcy to protect its interests, and that the
bankruptcy court’s confirmation order precluded re-litigation of
this issue. After a hearing, the bankruptcy court granted summary
judgment in favor of National Gypsum finding that Century was
provided sufficient notice to be bound by the confirmation order
which discharged Century’s claims.
Century then moved the court to set aside the judgment and re-
examine both issues. Ultimately, the bankruptcy court determined
that confirmation of the plan did not discharge Century’s right to
payment under the Wellington Agreement, but that Century was
precluded by res judicata from asserting that any amount other than
$0 was due. The court reached this conclusion despite having found
that there was a factual dispute as to whether Century had received
the court-ordered notices that would have alerted it to the fact
that the Wellington Agreement was being assumed with a $0 cure
amount. In essence, the bankruptcy court determined that this
factual question was immaterial, because mere knowledge of the
pendency of the bankruptcy action was sufficient in and of itself
to bind Century.
Both parties appealed to the District Court for the Northern
District of Texas. The district court ruled in Century’s favor on
6
all three issues -- discharge of the claim, sufficiency of the
notice, and res judicata effect of the confirmation. The district
court affirmed the bankruptcy court’s holding that Century’s right
to payment was not discharged, reasoning that the discharge
provision of § 1141(d) could not be so inflated as to wipe out the
requirements of 11 U.S.C. § 365 (1994) (the section of the
Bankruptcy Code that governs executory contracts and unexpired
leases) that all executory contracts be brought current as a
condition of their assumption.
The district court reversed the bankruptcy court on the notice
issue, holding instead that the debtor had a responsibility to
assure that the non-debtor party was on notice of the debtor’s
specific intent to assume the contract. The court then
demonstrated that National Gypsum was unable to meet this standard
based on the summary judgment record for two reasons. First, there
existed a fact question whether Century was sent copies of crucial
notices and mailings that the bankruptcy court had ordered to be
sent to all affected parties. Specifically, did Century receive
either the plan or the notice enumerating which executory contracts
National Gypsum intended to assume, either one of which would have
alerted Century that the Wellington Agreement was being assumed
with a $0 cure amount? Second, the summary judgment proof
demonstrated only that a representative of Century knew of the
commencement of National Gypsum’s Chapter 11 reorganization, not of
7
the specific intent to assume. Consequently, the district court
found that Century’s due process rights had been violated.
Finally, the district court held that the confirmation order
was not res judicata as to the cure amount, because the bankruptcy
court “unambiguously anticipated disputes regarding cure amounts
and retained jurisdiction to hear them.” National Gypsum took an
appeal from the district court’s judgment, placing all three issues
before us today.
II. DISCUSSION
A. Standard of Review
Bankruptcy court rulings and decisions are reviewed by a court
of appeals under the same standards employed by the district court
hearing the appeal from bankruptcy court; conclusions of law are
reviewed de novo, findings of fact are reviewed for clear error,
and mixed questions of fact and law are reviewed de novo. See
Traina v. Whitney National Bank, 109 F.3d 244, 246 (5th Cir. 1997).
We review a grant of summary judgment de novo. See Exxon Corp v.
Baton Rouge Oil, 77 F.3d 850, 853 (5th Cir. 1996).
B. Century’s Claims Were Not Discharged
1. Contentions of the Parties
National Gypsum argues that Century is barred from recovery
because Century failed to take the necessary steps to protect its
claim prior to confirmation of National Gypsum’s reorganization
plan. Purportedly, Century possessed a provable claim, because it
8
was owed Section XX reimbursement payments prior to the
reorganization. Under this theory, Century erred by failing to
file a proof of its claim prior to the bar date, as a result, the
claim was discharged along with all other unproven pre-confirmation
debts by operation of the general discharge provision of
Bankruptcy Code § 1141(d). National Gypsum’s argument rests on a
belief that an amount due in default on an assumed executory
contract is subject to the claims discharge provisions of §
1141(d), and thereby removed from the cure provisions of § 365 that
require prompt compensation for any default. Both the bankruptcy
court and the district court were correct to reject this argument.
2. Bankruptcy Code Sections 1141(d) and 365
Section § 1141(d) binds some creditors to the terms of the
confirmed reorganization plan while discharging all others. See
11 U.S.C. § 1141(d)(1)(A) (1994) (“Except as otherwise provided for
in the plan or the order confirming the plan, the confirmation of
a plan . . . discharges the debtor from any debt that arose before
the date of such confirmation.”). Section 1141(d) also enumerates
different types of “claims” that are excepted from discharge. See
§ 1141(d) (the debtor is discharged from any debt “[e]xcept as
otherwise provided for in this subsection”). Although National
Gypsum correctly points out that the list of exceptions is
exclusive and makes no reference to § 365, it is incorrect to
extrapolate from this that a default amount owed on an executory
9
contract is always a “claim” within the ambit of § 1141(d).
The Bankruptcy Code provides special rules for the treatment
of executory contracts and unexpired leases during a Chapter 11
reorganization. See 11 U.S.C. § 365 (1994). In general, section
365 allows “the trustee, subject to the court's approval, [to]
assume or reject any executory contract or unexpired lease of the
debtor.” Id. Under § 365, a debtor may elect one of two options
when assessing how to treat an executory contract or unexpired
lease to which it is a party; the contract or lease may either be
rejected or assumed.4
"[T]he authority to reject an executory contract is vital to
the basic purpose of a Chapter 11 reorganization, because rejection
can release the debtor's estate from burdensome obligations that
can impede a successful reorganization." NLRB v. Bildisco &
Bildisco, 465 U.S. 513, 528 (1984). The Bankruptcy Code provides
that the effect of a rejection of an executory contract is a
breach, see 11 U.S.C. § 365(g) (1994), and the breach gives rise to
a claim for damages by the non-debtor party to the contract. See
Wainer v. A.J. Equities, Ltd., 984 F.2d 679, 684 (5th Cir. 1993);
see also Bildisco, 465 U.S. at 518. The “claim” created by the
rejection of the contract or lease is then afforded treatment
4
If an executory contract is neither assumed nor rejected,
it will “ride through” the proceedings and be binding on the debtor
even after a discharge is granted, thus allowing the non-debtor’s
claim to survive the bankruptcy. See Federal’s, Inc. v. Edmonton
Inv. Co., 555 F.2d 577, 579 (6th Cir. 1977).
10
similar to all other unsecured claims that are either provided for
in the plan or are discharged through § 1141(d). The non-debtor
whose lease or contract is rejected is then afforded the
opportunity, subsequent to the debtor’s decision on how to treat
the contract or lease, to protect its interests by filing a proof
of “claim” after which the non-debtor is treated as an unsecured
creditor. See In re Parkwood Realty Corp., 157 B.R. 687, 690 (W.D.
Wash. 1993).(“[The Code] clearly contemplate[s] that a party to an
executory contract will receive notice of rejection when it
receives a copy of the Disclosure Statement and Plan, giving it a
window in which to file a proof of claim for damages.”); see also
LAWRENCE P. KING, ET AL., COLLIER ON BANKRUPTCY § 365.09[1] (15th ed. 1999)
(hereinafter “COLLIER ON BANKRUPTCY”).5 The non-debtor, former
contractual partner only becomes an unsecured creditor after
rejection. Therefore, the non-debtor is not required to have filed
a proof of claim prior to the claims bar date, a date that in all
likelihood preceded the debtor’s decision to reject the contract or
5
The debtor may delay making a decision and simply provide
for assumption or rejection in the plan itself. “This is often a
useful means for the debtor to avoid binding itself to contracts or
leases before it has formulated a feasible business plan under
which it knows whether it will want the benefits and burdens of
each agreement.” COLLIER ON BANKRUPTCY § 365.04[2][a]. In sum, the
Bankruptcy Code sets forth a scheme in which the debtor maintains
almost exclusive control over the timing of its decision on
assumption or rejection to ensure that its decision contributes to
a workable plan of reorganization. In turn, the non-debtor party
is then afforded time to take steps to protect its interest after
the debtor has determined the status of the contract.
11
lease.6
Rather than reject the contract or lease, the debtor may
choose to assume it. An assumed lease or contract will remain in
effect through and then after the completion of the reorganization.
The non-debtor party to the agreement is not released from its
duties and must continue to perform; likewise, the debtor must
continue to perform or pay for the services or other costs that are
not discharged. “[T]he act of assumption must be grounded, at
least in part, in the conclusion that maintenance of the contract
is more beneficial to the estate than doing without the other
party’s services.” MMR Holding Corp. v. C&C Consultants, Inc. (In
re MMR Holding Corp.), 203 B.R. 605, 612 (Bankr. M.D. La. 1996);
see In re Eagle Bus Mfg., Inc., 148 B.R. 481, 483 (Bankr. S.D. Tex.
1992). Since not all contracts are zero-sum bargains, the contract
will not necessarily be a detriment to the other party.
6
It should be noted that adoption of National Gypsum’s
contrary analysis would have a perverse effect outside the scope of
this case, an effect that would be felt by non-debtor parties whose
contracts or leases are rejected. Contrary to the explicit
statements of the Code, the act of rejection would only create a
bona fide claim for damages if the non-debtor had already filed a
preemptive, conjectural proof of claim earlier in the bankruptcy
proceedings. The decision to assume or reject would cease to be
the determining factor as to whether the debtor had a claim;
instead it would be the non-debtor’s filing of a proof of claim
that would be dispositive. This scheme -- unappealing from a
policy perspective as it would result in a deluge of potentially
pointless preemptive proofs of claims -- is inconsistent with the
Bankruptcy Code’s more prudent approach, which is to simply permit
those non-debtors whose contracts or leases were rejected to react
to the debtor’s decision.
12
Nevertheless, it is the debtor who decides whether to maintain the
contract, and this authority vests the debtor with a considerable
amount of power:
Section 365 is intended to provide a means whereby a
debtor can force another party to an executory contract
to continue to perform under the contract if (1) the
debtor can provide adequate assurance that it, too, will
continue to perform, and if (2) the debtor can cure any
defaults in its past performance. The provision provides
a means whereby a debtor can force others to continue to
do business with it when the bankruptcy filing might
otherwise make them reluctant to do so. The section thus
serves the purpose of making the debtor's rehabilitation
more likely.
Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310
(5th Cir. 1985); see RICHARD I. AARON, BANKRUPTCY LAW FUNDAMENTALS, §
9.04[3] (1999) (“The power to reject unfavorable contracts is a
potent weapon in the arsenal of unique bankruptcy powers.”).
Not surprisingly, the Bankruptcy Code affords the non-debtor
a measure of protection, since it is possible that the contract is
not beneficial to the non-debtor, and the non-debtor lacks any
decision-making authority in the assumption process.7 Section 365
“allows a debtor to 'continue in a beneficial contract provided,
however, that the other party is made whole at the time of the
debtor’s assumption of said contract.’” Eagle Bus, 148 B.R. at 483
(quoting In re J.W. Mays, 30 B.R. 769, 772 (Bankr. S.D.N.Y. 1983)).
7
The non-debtor may by motion to the court seek to have a
deadline imposed on the debtor’s assumption decision, but other
than this limited ability to prompt a decision, the non-debtor is
without power over the assumption process. See § 365(d)(2);
COLLIER ON BANKRUPTCY § 365.04[2][b].
13
This cure requirement is set forth in § 365(b)(1):
If there has been a default in an executory contract or
unexpired lease of the debtor, the trustee may not assume
such contract or lease unless, at the time of assumption
of such contract or lease, the trustee–
(A) cures, or provides adequate assurance that the
trustee will promptly cure, such default;
(B) compensates, or provides adequate assurance that
the trustee will promptly compensate, a party other than
the debtor to such contract or lease, for any actual
pecuniary loss to such party resulting from such default;
and
(C) provides adequate assurance of future performance
under such contract or lease.
11 U.S.C. § 365.
Thus, the debtor party must take full account of the cost to cure
all existing defaults owed to the non-debtor party when assessing
whether the contract is beneficial to the estate. See Three
Sisters Partners, L.L.C. v. Harden (In re Shangra La, Inc.), 167
F.3d 843, 849 (4th Cir. 1999); MMR Holding, 203 B.R. at 613
(“Assumption presumes curing all prepetition default . . . .”).
A non-debtor is further protected by the requirement that an
executory contract may not be assumed in part and rejected in part.
See COLLIER ON BANKRUPTCY § 365.03[1]. Where the debtor assumes an
executory contract, it must assume the entire contract, cum onere
– the debtor accepts both the obligations and the benefits of the
executory contract. See Bildisco, 465 U.S. at 531. Although this
rule can have broader application, in the instant case this
condition serves only to reinforce the cure requirement of §
365(b)(1). See Adventure Resources, Inc. v. Holland, 137 F.3d 786,
798 (4th Cir. 1998) (“That the obligations of an executory contract
14
be accepted along with its benefits is made plain by the Bankruptcy
Code's requirement that, as conditions of the contract's
assumption, the debtor cure any existing default and compensate all
non-debtor parties for actual pecuniary losses that have resulted
therefrom.”).
National Gypsum asks us to find that § 1141(d)(1) can be read
to provide for discharge of amounts in default under assumed
executory contracts, thereby nullifying the cure requirement of
section 365(b)(1). The bankruptcy and district courts, citing our
opinion in Wainer v. A.J. Equities, Ltd., 984 F.2d 679 (5th Cir.
19993), held that the discharge power of § 1141(d) does not reach
out to extinguish the need to cure existing default on executory
contracts that are assumed by the reorganized debtor. We agree.
3. The Wainer Decision
In Wainer, the lessor consented to release an existing tenant
and allow the assumption and assignment of the lease to a new
tenant. Subsequently, the lessor filed suit against the debtor's
guarantor after the lease assignee filed bankruptcy and rejected
the lease. We ruled that the lessor had novated the lease by
consenting to the assumption and assignment, thereby waiving its
right to require a guarantee of the assignee's obligations. 984
F.2d at 685. Thus, a landlord, who would otherwise be free to
pursue a guarantor if the lease is rejected, cannot pursue a
guarantor if the lease is assumed. This stems from the fact that,
15
in accordance with § 365(b), the lease is brought back into
compliance with its terms, and the other party to the lease is
compensated for any interim pecuniary loss. See COLLIER ON BANKRUPTCY
§ 365.05[3]. The end result is that there is no default to prompt
liability against the guarantor.
Although our analysis in Wainer continued on from this point
to determine the validity of the novation, it is only the Court’s
treatment of § 365 that is of relevance to the case at bar. In
this key portion of our discussion, we noted the only instance in
which the Bankruptcy Code speaks of a claim arising from an
unexpired lease or executory contract -- when the contract or lease
has been rejected:
A claim arising from the rejection, under section 365 of
this title ... of an executory contract or unexpired
lease of the debtor that has not been assumed shall be
determined, and shall be allowed under subsection (a),
(b) or (c) of this section or disallowed under subsection
(d) or (e) of this section....
Wainer, 984 F.2d at 684 (quoting 11 U.S.C. § 502(g) (1994)
(discussing post-petition debts))(emphasis added.). In addition,
we noted that section 365(g) explains that the rejection of an
unexpired lease constitutes a breach of the lease, giving rise to
a claim. See 11 U.S.C. § 365(g) (1994).
In light of the absence of any reference to a claim arising
from the assumption of a contract and the express cure provisions
for dealing with existing defaults, we concluded that “under the
16
Bankruptcy Code, a lease that has been assumed under a plan or
pursuant to section 365 does not give rise to a claim.” Wainer,
984 F.2d at 684 (emphasis in original). The fact that the lease in
question was both assumed and assigned was not dispositive to our
conclusion on the discharge issue. See id. at 684-85 (“[the
debtor] did not reject the Lease and, thus, no claim arose in its
bankruptcy proceedings to bring about a debt which may have been
discharged.”).
Despite these plain statements, National Gypsum points to a
single sentence in which we stated “[w]hen a lease is assumed and
assigned to a third party pursuant to section 365 . . . it does not
discharge a debt.” Id. at 684. This is a correct statement of our
conclusion in that case in which the lease at issue was assumed and
assigned. There was no emphasis placed on “assigned” in this lone
sentence from which to conclude that the assignment was critical to
the “no discharge” conclusion. In sum, the court affirmed that a
claim arises only from the rejection of an unexpired lease or
executory contract, not from the assumption of such a lease or
contract.8
8
This determination is not a new one to this court as we
discussed the issue tangentially in the context of a discussion on
voting rights under Chapter 11. See Phoenix Mut. Life Ins. Co. v.
Greystone III Joint Venture (In re Greystone III Joint Venture),
995 F.2d 1274, 1281 (5th Cir. 1991) (“A party to a lease is
considered a 'creditor’ . . . only when the party has a claim
against the estate that arises from rejection of a lease. If,
however, the debtor expressly assumes a lease, the lessee has no
'claim’ against the debtor. . . .”).
17
If the language we employed in Wainer was inexact, even a
cursory examination of the supporting case citations and subsequent
case law dispels any confusion over the issue. In Wainer, we made
favorable reference to Federal’s, Inc. v. Edmonton Inv. Co., 555
F.2d 577, 581 (6th Cir. 1977). In Edmonton, also a case dealing
with an assumption and assignment scenario, our sister court
explained that a default does not give rise to a dischargeable
claim:
[There are] two specific events that may give rise to a
provable claim under the lease, even though the lease was
not rejected. These events are an automatic termination
of the lease or an actual breach and subsequent
termination by the landlord, occurring either
contemporaneously with or prior to the commencement of
the proceedings. Neither of those events occurred in the
present case. Thus, the default of the assignee alone did
not give Edmonton a provable claim against Federal's, and
such default failed to alter the character of the
executory contract between Edmonton and Federal's.
555 F.2d at 581 (emphasis added)(footnote omitted).
Similarly in In re Marble Publ’g Co., 20 B.R. 933, 935 (Bankr.
E.D. Pa. 1982), the bankruptcy court denied a complaint seeking an
order compelling the debtor to cure an existing default on a lease
by payment of pre-petition rent. In explaining the effects of
assumption under § 365, the Court explained:
. . . if an unexpired lease is assumed by a debtor in
possession under the Code, and such action is approved by
the court, such assumption creates a new administrative
obligation of the estate which is payable as a first
18
priority . . . . Equally important is the fact that such
assumed obligation is a postpetition debt that is not
discharged by a confirmation of a chapter 11 case, and it
therefore continues to be an obligation of the
reorganized debtor.
Marble Publ’g, 20 B.R. at 934 (emphasis added)(footnote omitted).
National Gypsum’s argument that the “no discharge” conclusion
in Wainer hinged upon the assignment of the lease is unpersuasive;
it is unsupported by the plain language of the Bankruptcy Code and
circuit precedent. In addition, National Gypsum’s position is
contrary to other supporting authority not cited in our earlier
opinion. Specifically, our conclusion today is in accord with that
reached by the Fourth Circuit. In the seminal case Consolidated
Gas Elec. Light & Power Co. v. United Ry. & Elec. Co., 85 F.2d 799
(4th Cir. 1936), our sister court addressed the issue of whether an
executory contract, neither assumed nor rejected, remains
enforceable. The Fourth Circuit rebuffed the argument that a party
to an un-rejected executory contract had a definite interest and,
consequently, had a claim against the debtor, occupying the role of
a creditor with all its attendant duties. See Consolidated Gas, 85
F.2d at 804. Instead, the court held that a claim under an
executory contract does not arise within the meaning of the
Bankruptcy Act until the contract has been rejected. See id. The
court reasoned:
The party to an executory contract would find it
difficult to state a claim under the contract before it
19
had been broken; and certainly neither the debtor nor
the trustee could set out the amount of such a claim as
required by an order of court directing the filing of
schedules ... and the holder of a contract would have a
like difficulty in complying with the customary order of
the judge with reference to the filing of claims by
creditors[.]
Consolidated Gas, 85 F.2d at 805; see also Hotz v. Fed. Reserve
Bank of Kansas City, 108 F.2d 216, 219 (8th Cir. 1939); In re
DeVlieg, Inc., No. 93-C-20104, 1993 WL 248205, at *2 (N.D. Ill.
July 6, 1993).
Finally, it should be noted that implementation of National
Gypsum’s theory would strip § 365(g) of any operational effect by
eviscerating the protections it offers non-debtor parties. In this
case, National Gypsum attempts to turn what is a shield for the
non-debtor party into a sword for the debtor. This is not the
intent of the Bankruptcy Code. The contention that a pre-
confirmation claim, subject to discharge, was created by arrearage
on the contract is incompatible with the language of § 365 which
specifically contemplates such instances when it requires the
debtor to cure any default. Section 365(b)(1) provides a guarantee
to the non-debtor party, who may be forced to continue a
relationship it would rather terminate, that as condition to the
forced continuation of the contractual relationship, any losses or
defaults existing at the time will be satisfied either through a
timely cure or through reasonable assurances of future payment.
20
National Gypsum would undermine this protection by imposing an
extra-statutory requirement: that the right to cure must be
preemptively protected by the filing of a proof of claim. Failure
to make a timely filing of this theoretical claim would preclude
the non-debtor from recovery on the amounts owed. In effect,
contracts that would otherwise not be beneficial to the estate
could become beneficial once the detrimental side of the ledger was
wiped clean. This runs contrary to the Code’s treatment of non-
debtor parties to assumed contracts in which it acknowledges their
unusual predicament and accordingly provides protections not
offered to ordinary creditors subject to § 1141(d) discharge.9
The powers of the debtor in the assumption of contract arena
9
National Gypsum also argues that the rejection of inquiry
notice standard will prompt non-debtor parties to executory
contracts to sit on their rights and wait to come forward only
after the contract has been assumed. Purportedly, this “lie in
wait” strategy would allow the non-debtor to avoid receiving only
“the normal 'cents-on-the-dollar’ distribution accorded to other
creditors.” The non-debtor would come forward post-confirmation
and assert a claim for the full cure amount.
In the context of assumption of executory contracts, there is
far less to fear in the way of non-debtors waiting out the process,
than there is of creditors waiting out the discharge of unsecured
debts. Non-debtor parties to executory contracts must be made
whole as part of the assumption; there is no point in waiting
because there will be no “cents-on-the-dollar” distribution.
Actually, the risk runs in the opposite direction: it is far more
likely that a reduced standard of notice would encourage debtors to
be careless in determining, or to intentionally understate, cure
amounts, then fail to provide ordered adequate formal notice in
order to avoid payment on contractual sums owed. According to
Century, this is exactly what occurred in this case, where little
internal scrutiny was given to the setting of the cure amount by
National Gypsum.
21
should not be so needlessly aggrandized. Accordingly, we hold that
§ 1141(d) cannot be read to provide for discharge of amounts in
default under assumed contracts in a manner that would nullify the
cure requirement of section 365(b)(1).
B. Notice
1. The Contentions of the Parties
Our “no discharge” conclusion necessitates consideration of
the lower courts’ split on the issue of notice. The question
remains whether, due to inadequate notice, Century was deprived of
its ability to take reasonable measures to protect itself from
having the executory contract to which it was a party assumed with
a $0 cure amount.
The bankruptcy court recognized that there was a fact question
as to the formal notice received by Century. The court reasoned
that the same standard of notice applicable to unsecured creditors
-- mere knowledge of the pendency of the reorganization -- applied
with equal force to non-debtor parties to executory contracts.
Accordingly, the insufficiency of formal (or sufficiently
particularized actual) notice was not thought to be dispositive in
this case, because the summary judgment record reflected that a
representative of Century was aware of the commencement of the
National Gypsum reorganization. The district court reversed,
concluding that formal notice was necessary, and that the fact
22
question as to formal notice would have to be resolved by the
bankruptcy court on remand. In essence, the lower courts agreed
that unsecured creditors and non-debtor parties to executory
contracts in default are treated differently under the substantive
Code sections governing discharge and assumption, but the courts
disagreed as to whether the distinction was carried over into the
procedural Code sections governing discharge and assumption.
National Gypsum contends that the bankruptcy court was correct
to dispose of this issue on constitutional due process grounds
pursuant to Sequa Corp. v. Christopher (Matter of Christopher), 28
F.3d 512 (5th Cir. 1994), rather than on statutory grounds pursuant
to § 365 and Bankruptcy Rule 6006. Based on this analysis,
National Gypsum concludes that Century is barred from recovery even
though a fact question remains concerning whether Century received
the formal notice ordered by the court. We conclude that the
district court correctly rejected this analysis, because the result
is controlled by the Bankruptcy Code and Rules, obviating the need
to ascertain how constitutional due process considerations would
fill the perceived statutory lacuna. Even if there was a gap to
fill, the constitutional due process standard set forth in
Christopher has never been extended to apply to assumption of
executory contracts.10
10
In Christopher, the debtor filed suit seeking a declaratory
judgment that post-petition claims made against him were discharged
through confirmation of his plan of reorganization. 28 F.3d at
23
 2. The Governing Statutory and Rule Provisions
“As a general matter, a party seeking relief in bankruptcy
court is not entitled to achieve a fait accompli with respect to
the protectable interests of parties who did not receive notice
prior to any loss with respect to their interest.” 7 COLLIER ON
BANKRUPTCY § 1109.06[2]. In furtherance of this end, the Bankruptcy
Code is replete with provisions requiring proper notice to all
514. The creditors’ claims arose out of the debtor’s breach of
contract for the acquisition of a subsidiary corporation. During
the negotiations of the deal, the creditors were “made aware” of
the debtor’s prior petition for Chapter 11 relief. Id. at 513-14.
Since the claims arose post-petition, the creditors were not
required to be listed. They were not listed as creditors and did
not participate in any of the bankruptcy proceedings.
The bankruptcy court concluded that the creditors were
deprived of due process with respect to their unsecured claims, and
therefore, they were not bound by the terms of the confirmed
reorganization plan. On appeal, we determined first that the
matter was not controlled by the statutory provisions of the Code.
Second, we addressed the constitutional requirements of due
process, in the context of unsecured creditors’ claims, expanding
on our earlier holding in Grossie v. Sam (Matter of Sam), 894 F.2d
778 (5th Cir. 1990). In Sam, we held that “all constitutional due
process requires ... is that [the creditor] have 'notice reasonably
calculated, under all the circumstances, to apprise [him] of the
pendency of the action and afford [him] an opportunity to present
[his] objections.’" Id. at 781 (quoting Mullane v. Central
Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950)). Applying the
standard from Sam, the Christopher panel concluded that "it does
not offend due process to view actual notice of a debtor's
bankruptcy to a [prepetition] creditor as placing a burden on the
creditor to come forward with his claim." Matter of Christopher, 28
F.3d at 517 (stating that as to claims "due process requires only
notice that is both adequate to apprise a party of the pendency of
an action affecting its rights and timely enough to allow the party
to present its objections."). No Fifth Circuit case subsequent to
Christopher and Sam has extended the due process standard from the
discharge of debts to cure amounts of assumed contracts.
24
parties affected by the proceedings. See, e.g., B ANKR. RULE 6006.
The notice question presented by this case arises, in part, because
of the peculiar wording of Rule 6006.
The district court based its conclusion on notice largely upon
the closely analogous case of Republic Health Corp. v. Coral
Gables, Ltd. (In re REPH Acquisition Co.), 134 B.R. 194 (N.D. Tex.
1991). In REPH, the district court decided a bankruptcy appeal
involving an order denying a motion to assume an unexpired lease.
134 B.R. at 195. The court affirmed the denial of the motion to
assume. Id. at 202. In so doing, the court rejected the Chapter
11 debtor's assertion that general notice of the existence of a
plan of reorganization provided sufficient notice of the debtor's
intent to assume the unexpired lease as part of the plan. Id. at
199. Instead, the court held that the debtor had responsibility to
assure that the lessee was on notice of the debtor's specific
intent to assume the lease. See id. The court based its
conclusion upon its reading of Bankruptcy Rule 6006 which provides:
Assumption, Rejection or Assignment of an Executory
Contract or Unexpired Lease
(a) Proceeding to assume, reject, or assign
A proceeding to assume, reject, or assign an executory
contract or unexpired lease, other than as part of a
plan, is governed by Rule 9014.
* * *
(c) Notice
Notice of a motion made pursuant to subdivision (a) or
(b) of this rule shall be given to the other party to the
contract or lease, to other parties in interest as the
court may direct, and, . . . to the United States
trustee.
BANKR. RULE 6006.
25
As other courts have noted, the setting of cure amounts is
"not otherwise governed by" the Bankruptcy Rules, and thus falls
under the auspices of Rule 9014. See, e.g., O’Brien Envtl. Energy,
Inc. v. NRG, 188 F.3d 116, 123 (3rd Cir. 1999). Bankruptcy Rule
9014 states, in pertinent part:
In a contested matter in a case under the Code not
otherwise governed by these rules, relief shall be
requested by motion, and reasonable notice and
opportunity for hearing shall be afforded the party
against whom relief is sought.
BANKR. RULE 9014.
National Gypsum takes the position that the “other than as
part of a plan” language absolves the reorganizing debtor of
responsibility to provide notice of its intent to either reject or
assume the contract or lease. Once the non-debtor party to the
contract or lease can be deemed aware that the reorganization has
been filed, the onus is on the non-debtor contractual partner to
follow the progress of the bankruptcy proceedings. The REPH court
determined that Congress in fact adopted the contrary approach.
Rule 6006(a) excuses the procedure that applies in
contested matters when a proceeding to assume an
unexpired lease is "part of a plan." Fairly interpreted,
Rule 6006(a) does not eliminate the notice requirements
applicable to a contested matter. Rule 9014, which
governs contested matters not otherwise covered by the
Bankruptcy Rules, requires that relief be requested on
reasonable notice to the party against whom the relief is
sought. The court holds that Rule 6006(a) implies a
similar obligation upon a debtor who seeks to assume an
unexpired nonresidential lease by means of its proposed
reorganization plan. This means that although the plan
itself constitutes the act of assumption contemplated by
§ 365(d)(4), the lessor, as the party against whom the
26
relief is sought, must be given reasonable notice of the
debtor's intent. Even if Rule 6006(a) cannot be read to
incorporate the notice requirement of Rule 9014, §
1125(b) of the Code plainly requires that the contents of
a proposed reorganization plan be adequately disclosed
REPH, 134 B.R. at 199 (emphasis added)(footnote omitted). In sum,
the phrase “other than as part of a plan” was intended only to
obviate the need to file a separate motion expressing the intent to
assume or reject. Rule 6006 was not intended to establish a two-
tier standard of notice in which formal notice is required if the
assumption is to be by motion, but if assumption is to be by plan,
the responsibilities of the debtor are radically diminished.
The vast majority of the cases addressing the level of notice
required involve situations in which the debtor expressed its
intent to assume by motion to the court. There is a paucity of
cases in which sufficiency of notice is considered when the debtor
expressed its intent to assume only in its proposed plan of
reorganization. In cases where intent to assume is revealed by
motion, courts require strict adherence to the requirements of §
365 and Rules 6006 and 9014 out of “concern with protecting
unknowing [contractual partners] from the consequences of an
assumption of which they had no notice and which [they] had no
opportunity to contest.” Elliot v. Four Seasons Properties (In re
Frontier Properties, Inc.), 979 F.2d 1358, 1365 (9th Cir. 1992);
see also South Street Seaport Ltd. Partnership v. Burger Boys, Inc.
(In re Burger Boys, Inc.), 94 F.3d 755, 763 (2d Cir. 1996)(vacating
27
district court’s decision to allow assumption when lessee was not
provided formal notice and was deprived of an opportunity to
contest the matter); In re Typocraft Co., 229 B.R. 685, 689 (Bankr.
E.D. Mich. 1999) (disallowing “assumption by an informal, default
method without the affirmative filing of a motion with notice to
interested parties”).
Strict adherence to the Code provisions governing assumption
of contracts “might appear overly simplistic, [but] it is important
in that it allows a debtor in possession the flexibility intended
by the Bankruptcy Code in deciding whether or not to assume or
reject contracts or leases.” Walat Farms, Inc. v. United States
(In re Walat Farms, Inc.), 69 B.R. 529, 534 (Bankr. E.D. Mich.
1987). Also, the requirements of court approval and a hearing
after notice to interested parties provide necessary safeguards to
parties forced to maintain contractual relations with a
reorganizing debtor. See id. “It is extremely important that
interested parties be notified and have an opportunity to appear
with regard to whether or not a debtor is going to assume. . . .”
Typocraft, 229 B.R. at 689 (dealing with the assumption of a
collective bargaining agreement); see Sea Harvest Corp. v. Riviera
Land Co., 868 F.2d 1077, 1079 (9th Cir. 1989)(“Thus, these rules
plainly specify that a debtor in possession must file a formal
motion and provide reasonable notice and an opportunity for a
hearing to the opposing party.”).
28
The theoretical underpinnings of these cases cannot logically
be restricted to those instances involving assumption by motion.
Notice as a procedural safeguard cannot expand or contract based
solely upon the procedural choice of the debtor when the
ramifications to the non-debtor party are no less severe. Not
surprisingly, the limited number of courts that have explicitly
addressed this issue adopt the same approach taken by the district
court in REPH.
In In re Flugel, 197 B.R. 92 (Bankr. S.D. Cal. 1996), chapter
13 debtors provided for the assumption of a non-residential real
estate lease in a special provision attached to their plan. See
197 B.R. at 94. Under this provision, debtors sought to assume the
unexpired lease, cure the existing pre-petition default, and
provide adequate assurance of future performance. See id. The
Flugel court faced the question of whether the special assumption
provision in the plan was adequate to satisfy the Bankruptcy Code’s
notice requirements. Discussing favorably the analysis of § 365
and Rule 6006 employed in REPH, the court held that notice was
sufficient because the non-debtor party was served with a mailing
“which included specific notice that the Debtors intended to assume
the lease.” Id. at 94-95. Once the non-debtor was served with the
notice, it had an opportunity to determine whether it needed to
contest the proposed cure provisions of the plan.
The Flugel court noted that the same analysis had also been
29
applied in Riddle v. Aneiro (In re Aneiro), 72 B.R. 424 (Bankr.
S.D. Cal. 1987). In that case, the court arrived at the same
conclusion as the REPH and Flugel courts -- the debtor had a
responsibility to assure that the non-debtor party to the contract
or lease was on notice of the debtor's specific intent to assume
the lease so as to be able to evaluate whether the assumption
criteria were satisfactory. See Aneiro, 72 B.R. at 427. In
Aneiro, the non-debtor received a copy of the chapter 13 debtor’s
plan which contained a provision explaining the assumption. In
both Aneiro and Flugel, the courts were in part attempting to
decide whether an assumption under a plan still required the filing
of a motion. Clearly neither court would have been satisfied with
mere “pendency of the action” notice since both contemplated that
at a minimum the non-debtor would receive either the proposed plan
or some form of notice setting forth the debtor’s intent to assume.
Ultimately, the Aneiro court held that the motion to assume was
"made" when the non-debtor party to the lease was served notice of
the plan's filing. See 72 B.R. at 428. The identical approach has
been applied by other courts. See, e.g., In re Hall, 202 B.R. 929,
932-33 (Bankr. W.D. Tenn. 1996)(notice requirements satisfied by
delivery of notice with plan attached).
This result is the only course that is consistent with the
notice analysis in cases involving rejection of a contract, in
which a claim arises stemming from the rejection and the non-debtor
30
is then allowed to assert an unsecured claim for damages. See,
e.g., In re Parkwood Realty Corp., 157 B.R. 687 (W.D. Wash. 1993).
In Parkwood, the court explained:
These provisions read together clearly contemplate that
a party to an executory contract will receive notice of
rejection when it receives a copy of the Disclosure
Statement and Plan, giving it a window in which to file
a proof of claim for damages. A party which has not even
had notice of the plan, let alone the debtor's intention
to reject, is given no opportunity to file a claim. To
hold that a claim has been discharged under these
circumstances would clearly violate due process.
In re Parkwood, 157 B.R. at 690.
Accordingly, we hold that the debtor had responsibility to
assure that the non-debtor party was on notice of the debtor's
specific intent to assume the contract. Unless there is a showing
that the non-debtor possessed actual knowledge of a sufficiently
refined degree, the debtor must demonstrate delivery of the
proposed plan of reorganization or some other court-ordered notice
that set forth National Gypsum’s intent to assume the Wellington
Agreement with a $0 cure amount. With the proper standard now in
mind, we turn to the facts of this case.
3. A Fact Question Exists as to Formal Notice
National Gypsum asserts that Century received adequate formal
notice because, as the summary judgement record shows, a number of
notices were sent over the course of almost a year to attorney Lynn
Bregman. Ms. Bregman, who represented Century in a separate
insurance case involving National Gypsum that took place in the
Southern District of New York and was settled by June 1989, asserts
31
that neither she nor any other attorney at Wilmer, Cutler &
Pickering was ever retained to represent Century in the National
Gypsum bankruptcy proceedings. Bregman further states that a
search of the firm’s files failed to uncover any of the following
notices or documents: (1) the Notice of Assumption and Assignment
of Certain Executory Contracts and Unexpired Leases and Amount of
Cure Payment, If Any, (2) the solicitation package (consisting of
the solicitation letter, the Court’s Order Approving Debtor’s
Disclosure Statement, a ballot and ballot instructions for the
Debtor’s Plan, and the statement of position regarding the Debtor’s
Plan, nor (3) a copy of the Plan itself. The import of these
particular notices and documents is that they are the few crucial
documents that set forth the requisite information concerning the
assumption and cure amount that would have alerted Century of
alleged error in cure amount. On the other hand, none of the
numerous peripheral mailings whose receipt is not contested
contained any material related to the assumption of the executory
contract with a $0 cure amount.11 Therefore, the bankruptcy court
correctly recognized the existence of a fact issue regarding
11
Neither of the lower courts truly ventured into the battle
over whether Ms. Bregman was a proper representative upon which to
serve notice in this litigation. Since Ms. Bregman’s connection to
this litigation was not central to the bankruptcy court’s analysis,
the record is somewhat deficient in that regard and therefore
precludes a definitive ruling here. The record can be further
developed on remand if it is determined that the critical notices
were in fact sent to Century.
32
Century's receipt of pre-confirmation notice of National Gypsum's
intent to assume the Wellington Agreement with a $0 cure amount.
National Gypsum also argues that Century had sufficient actual
knowledge. The summary judgment proof does establish that Joseph
Proko, Century’s vice-president in charge of special asbestos
matters, was aware that the National Gypsum reorganization had
commenced in 1990. Through his work as Century’s representative to
the Asbestos Claims Facility, Proko received status reports on the
Facility’s activities which often reference ongoing developments in
asbestos litigation. National Gypsum’s summary judgment proof
contains a group of status reports dated throughout 1991 that made
brief mention of a dispute over whether the bankruptcy court would
approve National Gypsum’s continued participation in the Facility.
The reports do not discuss any other aspect of the National Gypsum
reorganization; specifically, there was no mention of bar dates,
assumption of the Wellington Agreement, default status on interest,
deadlines for objections, discussion of the solicitation package,
or the plan. Accordingly, the summary judgment record does not
reflect that Century was sufficiently aware of National Gypsum’s
intent to assume with a $0 cure.
In conclusion, the bankruptcy court ordered National Gypsum to
provide notice, pursuant to the requirements of the Bankruptcy Code
and Bankruptcy Rules, of its specific intent to assume the
Wellington Agreement. If such notice was not given, then the
33
bankruptcy court erred in permitting National Gypsum to assume the
Wellington Agreement with a $0 cure amount.
Our holding on the notice issue obviates the need to resolve
the disagreement below concerning the proper interpretation of the
bankruptcy court’s retention of jurisdiction language. Since res
judicata can not operate to bar Century’s claim if notice was
inadequate, summary judgment in favor of National Gypsum was
inappropriate.
III. CONCLUSION
For the reasons set forth above, We AFFIRM the district
court’s decision.
34