1 United States Court of Appeals,

Fifth Circuit.

No. 93-1636

Summary Calendar.

In the Matter of MUREXCO PETROLEUM, INC., Debtor.

PHOENIX EXPLORATION, INC., Appellants,

v.

Robert YAQUINTO, Jr., Trustee for Murexco Petroleum, Inc.,

Appellee.

Feb. 28, 1994.

A ppeal from the United States District Court for the North ern

District of Texas.

Before JOLLY, WIENER, and EMILIO M. GARZA, Circuit Judges.

PER CURIAM:

Appellant Robert Yaquinto, Jr., Trustee for Murexco Petroleum,

Inc ., appeals a decision of the district court reversing a

bankruptcy court judgment which h eld that a contract between

Murexco and Appellees Phoenix Exploration, Inc., Phoenix Operating

Co., and Renown Petroleum, Inc. (Phoenix) was executo ry when

Murexco filed its Chapter 11 peti tion. As we agree with the

district court's conclusion that the bankruptcy court erred in

holding that the contract was executory, we affirm the judgment of

the district court.

I

FACTS AND PROCEEDINGS

Murexco and the predecessor of Phoenix, HarCor Property1 HarCor Property Management, Inc. became HarCor Exploration,

Inc. HarCor Energy, Inc. succeeded to the rights of HarCor

Exploration, Inc. For our purposes, we will refer to any or all

of these entities as HarCor.

2 Management, Inc., 1 entered into an Asset Purchase Agreeme nt (the

APA) on February 29, 1988. Under the APA, Murexco agreed to sell

many of its assets in two independent stages: At the first

closing, all of Murexco's proven undeveloped reserves and possible

reserves, along with certain other assets—including Murexco's

operating rights under all of its oil and gas well operating

agreements—would be sold to HarCor. At the second closing, all of

Murexco's proven developed, producing, and behind the pipe reserves

would be sold to HarCor.

The first closing was completed as scheduled on February 29,

1988. Murexco received $500,000 for the sale, of which $289,419.61

was allocated to HarCor's acquisition of Murexco's oil and gas well

operating rights. The Letter Agreement accompanying the APA

(Exhibit 11 to the APA) provided that HarCor would be the contract

operator for Murexco "until such time as HarCor becomes the

operator of record." Murexco was the operator of record on wells

in Louisiana, Texas, and Oklahoma. Although it is clear that

HarCor became the "contract operator," the parties dispute whether

HarCor, or its successor, Phoenix, ever became the "operator of

record."

The second closing neve r occurred because disputes erupted

between the parties as to Murexco's ability to convey clear title

to the developed reserves that it was supposed to deliver at the2 Under the APA and Letter Agreement, however, Murexco's duty

was to use its "best efforts" to have HarCor named the operator

of record, not to name HarCor the operator of record.

3 Although both parties state that the APA was found to be

executory and was rejected, in reality the bankruptcy court held

that the "portion of the [APA] that created a contract operator

3 second closing. By letter agreement dated August 30, 1988, HarCor

agreed to pay Murexco approximately $180,000 as liquidated damages

for failure of the second p hase to close. Thus no performance

remained due between the parties as to the second closing.

Murexco filed for Chapter 11 bankruptcy on May 4, 1992, and

filed a "Motion of Debtor to Reject Executory Contract." The

purpose of th e motion was to enable the trustee to reject the

Letter Agreement, which is considered a severable por tion of the

APA. Phoenix contested the motion, arguing that the APA was not

executory and thus the severable Letter Agreement—and the sale of

Murexco's operating rights—could not be rejected by the Trustee.

At the trial on the motion, Murexco's president testified that

Murexco still had a duty—but only one duty—to perform under the

APA: to obtain consents of nonoperating working interest owners in

the affected wells t o Murexco's sale of its operating rights.

Murexco relies on the Joint Operating Agreements (JOAs) to supply

this duty. Without those consents, Murexco argued, HarCor could

not become the operator of record. 2

The bankruptcy court construed the Letter Agreement and the

APA. That court concluded that the provisions of the APA that set

up the contract operatorship were executory, and held that the

contract operating agreement was executory. 3 Phoenix appealed.rights [sic] is determined to be an executory contract, and is

hereby rejected. Murexco ... retains its rights as the operator

under the Joint Operating Agreement."

4 Matter of Killebrew, 888 F.2d 1516, 1519 (5th Cir.1989).

5 Id.

6 11 U.S.C. § 365(a).

4 The district court reversed, holding that the contract was not

executory, as failure to have HarCor named the operator of record

would not result in a mater ial breach of the APA. The trustee

appeals the ruling of the district court.

II

ANALYSIS

A. Standard of Review

Although this case has already been reviewed on appeal by the

district court, we review the bankruptcy court' s findings as if

this were an appeal from a trial in the district court. 4 The

bankruptcy court's findings of fact are reviewed for clear error;

its conclusions of law are reviewed de novo. 5

B. Executory Agreement?

To dispose of this appeal, we need only review the conclusion

that the APA or the Letter Agreement was executory at the time the

bankruptcy petition was filed.

Section 365 of the Bankruptcy Code provides that "the

trustee, subject to the court's approval, may assume or reject any

executory contract or unexpired lease of the debtor." 6 This

provision allows a trustee to relieve the bankruptcy estate of

burdensome agreements which have not been complete ly performed.7 NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n. 6, 104

S.Ct. 1188, 1194 n. 6, 79 L.Ed.2d 482 (1984) (quoting H.R.Rep.

No. 95-595, 95th Cong., 1st Sess. 347 (1977)).

8 See, e.g., In re Child World, Inc., 147 B.R. 847

(Bankr.S.D.N.Y.1992); In re Flexible Automation Systems, Inc.,

100 B.R. 986 (N.D.Ill.1989); In re Placid Oil Co., 72 B.R. 135,

137 (Bankr.N.D.Tex.1987). The source of this definition is a

two-part article by Professor Vern Countryman, Executory

Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 458-62

(1973), and Executory Contracts in Bankruptcy: Part II, 57

Minn.L.Rev. 479 (1974).

9 Although the Letter Agreement anticipated the negotiation

of a "definitive contract operating agreement," Murexco does not

urge this as a possible ground to conclude that the Letter

Agreement is still "executory."

5 The Code does not define "executory contract," but both parties

agree that the relevant inquiry is whether performance remains due

to some extent on both sides. 7 Courts applying § 365(a) have

ind icated that an agreement is executory 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. 8

Harcor has the continuing duty to perform under the Letter

Agreement as the contract operator. The issue, then, is whether

Murexco has any duties the nonperformance of which would constitute

a material breach of the letter agreement. We think not.

First, the Letter Agreement obligates Murexco to make HarCor

the contract operator of the wells in question. Neither disputes

that HarCor i s the contract operator of the wells. 9 Second, the

Letter Agreement requires Murexco to use its "best efforts to cause10 Although Murexco argues that its duty was to obtain

consents of the nonoperating working interest owners, that

"duty," if it is one, is one arising under the JOAs, not under

the APA. Such consents were allegedly required so that Phoenix

could be named the operator of record. But Murexco was not

obligated to name HarCor the operator of record; rather, Murexco

was obligated to use its best efforts to have HarCor named the

operator of record.

6 HarCor to become the operator of record." 10 Whether this condition

has been met is not necessarily decisive of the executory or

non-executory status of the Letter Agreement: the issue is whether

Murexco's failure to perform this obligation would constitute a

material breach of the Letter Agreement. We agree with the

district court's conclusion that nonperformance of Murexco's duty

to use its "best efforts" would not constitute a material breach.

We rely on the APA itself to reach this conclusion.

The parties agreed that "best efforts" me ans "a good faith

attempt by each party to cause the designated actions to occur";

provided that "if one or more of such actions do not occur, the

validity of the Agreement, and the actions otherwise required to be

taken by the Parties, shall not be affected." Thus as a matter of

law, the failure of Murexco to complete pe rformance would not

constitute a material breach of the contract—it w ould not excuse

HarCor's performance. The parties' clearly intended that if

Murexco did not succeed in having HarCor named the operator of

record, the remainder of the APA—including HarCor's duty to perform

as the contract operator of the wells—would be unaffected by such

failure. Clearly, then, Murexco's failure to perform any duty

subject to the "best efforts" clause would not constitute a11 As the bankruptcy court judgment has been reversed, it is

void. Atlantic Coast Line Railroad Co. v. St. Joe Paper Co., 216

F.2d 832, 833 (5th Cir.), cert. denied, 348 U.S. 963, 75 S.Ct.

522, 99 L.Ed.2d 750 (1954). The findings and conclusions in

support of that reversed judgment are thus void.

7 material breach excusing performance by HarCor.

Nevertheless, Murexco argues that HarCor's "acquisition" of

consents of the working interest owners or gaining operator of

record status was a condition precedent to the first closing under

Article VIII of the APA. But Article VIII of the APA specifically

states that "[a]ll conditions precedent shall be deemed to have

been satisfied upon the occurrence of the First Closing." As the

first closing did occur, the "outstanding duty"—that Murexco

insists is a condition precedent—was deemed satisfied by the plain

wording of the APA. As that duty is thus deemed performed by

agreement of the parties, Murexco cannot now argue that it has an

outstanding, unperformed duty un der the APA. It follows, then,

that as neither the APA nor the severable Letter Agreement is

executory, neither may be rejected by the trustee under 11 U.S.C.

§ 365(a).

III

CONCLUSION

For the foregoing reasons, we find that at the time Murexco's

C hapter 11 petition was filed, neither the APA nor Exhibit 11 to

the APA was not executory. We therefore affirm the district

court's reversal of the bankruptcy court's judgment. 11

AFFIRMED.