1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

3-10-1995

In Re: Columbia Gas

Precedential or Non-Precedential:

Docket 93-7409

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Recommended Citation

"In Re: Columbia Gas" (1995). 1995 Decisions. Paper 71.

http://digitalcommons.law.villanova.edu/thirdcircuit_1995/71
 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 ___________ 

 No. 93-7409 

 ___________ 

 IN RE: COLUMBIA GAS SYSTEM INC.; 

 COLUMBIA GAS TRANSMISSION CORPORATION, 

 Debtors 

 ENTERPRISE ENERGY CORPORATION, 

 Appellant 

v. 

 UNITED STATES OF AMERICA, 

 On behalf of the I.R.S. 

 THOMAS E. ROSS, 

 Trustee 

 _______________________________________________ 

 On Appeal from the United States District Court 

 for the District of Delaware 

 (D.C. Civil Action No. 92-00258) 

 ___________________ 

 Argued January 19, 1994 

 Before: SLOVITER, Chief Judge, 

 SCIRICA and LEWIS, Circuit Judges

 (Filed March 10, 1995) 

 ROBERT J. SIDMAN, ESQUIRE (ARGUED) 

 DUKE W. THOMAS, ESQUIRE 

 Vorys, Sater, Seymour & Pease 

 52 East Gay Street 

 Columbus, Ohio 43216 

 Attorneys for Appellant, 

 Enterprise Energy Corporation 

 ROBERT S. BRADY, ESQUIRE 

 Young, Conaway, Stargatt & Taylor 

 P.O. Box 391 

 Rodney Square North, 11th Floor 

 Wilmington, Delaware 19899-0391 

 Attorney for Appellees, 

 Columbia Gas System Inc. and 

 Columbia Gas Transmission Corporation 

 LINDA E. MOSAKOWSKI, ESQUIRE (ARGUED) 

 GARY R. ALLEN, ESQUIRE 

 DAVID E. CARMACK, ESQUIRE 

 United States Department of Justice 

 Tax Division 

 P.O. Box 502 

 Washington, D.C. 20044 

 Attorneys for Appellee, 

 United States of America, 

 On behalf of the I.R.S. 

 __________________ 

 OPINION OF THE COURT 

 __________________ 

SCIRICA, Circuit Judge. 

 In this bankruptcy matter, we must decide whether 

certain terms in a class action settlement agreement constitute 

an executory contract under 11 U.S.C. § 365 (1988). The Internal 

Revenue Service contended the settlement agreement was not an 

executory contract. Both the bankruptcy court and the district 
court1 agreed with the IRS, and the class members appealed. We 

will affirm. 

I. 

 The facts are undisputed. Columbia Gas System, 

Incorporated, its subsidiary, Columbia Gas Transmission 

Corporation (TCO), and their affiliates comprise a natural gas 

system which explores, produces, purchases, stores, transmits, 

and distributes natural gas. TCO is Columbia Gas System's 

principal gas purchaser from producers in the Southwest, 

Midcontinent, and Appalachia and operates extensive underground 

storage facilities. 

 On July 26, 1985, Enterprise Energy Corporation and two 

other companies filed a class action against TCO in the United 

States District Court for the Southern District of Ohio. The 

district court certified as a class2 the producers of natural gas 

in the Appalachian region who were parties to gas purchase 

contracts with TCO. The class comprised 2163 member producers 

 

1. The district court's opinion is published as Enterprise 

Energy Corp. v. United States ex rel. IRS (In re Columbia Gas 

System, Inc.), 146 B.R. 106 (D. Del. 1992). 

2. The class consists of "[a]ll owners, operators and producers 

of natural gas producing wells in the Appalachian region (New 

York, Pennsylvania, West Virginia, Kentucky, Maryland, Virginia 

and Ohio) who are parties to gas purchase contracts with Columbia 

Gas Transmission Corporation entitling them to receive the 

maximum lawful price or a deregulated price under the NGPA . . . 

and against whom Columbia has invoked a price reduction for 

amounts due under the contracts." Enterprise Energy Corp. v. 

Columbia Gas Transmission Corp., 137 F.R.D. 240, 243 (S.D. Ohio 

1991). 
who held 852 gas purchase contracts. TCO had invoked a price 

reduction under a cost recovery clause which formed the basis of 

their complaint. 

 The gas purchase contracts set the price for each unit 

of natural gas delivered to TCO at the maximum price permitted 

under the Natural Gas Policy Act of 1978 during the month of 

delivery. The class members alleged that TCO breached their gas 

purchase contracts by paying less than the maximum price after it 

invoked the cost recovery clause. 

 For five years there was extensive discovery. As trial 

loomed, the parties entered into a Stipulation of Proposed Class 

Action Settlement ("settlement agreement"), which the district 

court approved on June 18, 1991. Enterprise Energy Corp. v. 

Columbia Gas Transmission Corp., 137 F.R.D. 240 (S.D. Ohio 1991). 

Incidental to its approval under Federal Rule of Civil Procedure 

23(e), id. at 248, the court issued an order stating in part: 

 f. Named plaintiffs, Class Members and 

defendant [TCO] shall now consummate and be 

bound by the Settlement. 

 g. Except for claims arising under the 

Settlement on behalf of Class Members or 

Columbia, and at such time as this Order of 

the Court approving the Settlement as final 

is non-appealable, named plaintiffs and all 

Class Members . . . shall be deemed to 

release and forever discharge the defendant 

. . . from any and all claims of the type 

asserted in this litigation relating to 

defendant's exercise of the cost recovery 

clause contained in the Class Members' gas 

purchase contracts at any time during the 

period commencing on or about July 10, 1985 

and ending on or about July 10, 1991. 
 h. Jurisdiction is hereby retained as 

to matters related to the interpretation, 

administration and consummation of the 

Settlement as approved in this Order. 

Id. at 252. The order became final and unappealable on July 18, 

1991. 

 The settlement agreement required TCO to deposit $30 

million into an escrow account "in settlement of, and as a full 

and complete discharge and release of TCO, for all of [the class 

members'] claims arising on or before January 1991." Enterprise

Energy Corp. v. United States ex rel. IRS (In re Columbia Gas 

System, Inc.), 146 B.R. 106, 109 (D. Del. 1992). TCO was to pay 

$15 million into escrow by March 21, 1991, and the other $15 

million by March 23, 1992. This schedule was apparently set for 

TCO's convenience; TCO's duty to make the second payment was not 

contingent on the class members' performance of any of their 

obligations. TCO paid the first $15 million on time but then 

filed for bankruptcy. 

 Under the settlement agreement, class members were 

entitled to receive their share of the escrow monies only after 

they executed a release of claims and a supplemental contract. 

The settlement agreement stated "payments to individual Class 

Members out of the escrowed amounts will be contingent upon 

receipt by [TCO] of a duly executed release of all such Claims 

and a duly executed contract supplement . . . ." J. App. at 57-

58. While each class member had to execute a release to get 

payment from the escrow fund, the claims each held against TCO 

were to be extinguished (and they in fact were, see supra, 
district court order ¶ g) by the court order accepting the 

settlement agreement. 

 The supplemental contracts were designed to implement 

amendments and clarifications of pricing and other terms 

concerning future gas deliveries to TCO. The settlement 

agreement established the terms of these contracts, including 

increasing the price TCO would pay to the class members. Because 

many class members relied on TCO as the principal purchaser of 

their gas, the supplemental contracts were important to them, a 

point made in the following exchange at oral argument before the 

district court: 

 The Court: So that . . . supplying the 

supplemental agreements, contracts, was not 

just an option that [the class members] had. 

It was necessary for their continued 

operation? 

 [Counsel for the Class]: Exactly, your honor. 

Exactly. 

Id. at 276. 

 By July 31, 1991, the class members involved in fortyone of the purchase contracts had completed the execution of the 

release and supplemental contracts and were entitled to their 

share of the escrow monies. But on that day, thirteen days after 

the settlement agreement had become final, TCO filed a voluntary 

Chapter 11 petition in bankruptcy in Delaware. On February 20, 

1992, the class members filed a motion to compel TCO to assume or 

reject the settlement agreement under the Bankruptcy Code, 11 
U.S.C. § 365.3 TCO and the class members had agreed that TCO 

would assume the settlement agreement and jointly filed a 

proposed order. 

 After notice of the proposed order was sent to the 

proper parties, the United States filed an objection on behalf of 

the Internal Revenue Service, one of TCO's creditors.4 Finding 

the settlement agreement was not executory within the meaning of 

11 U.S.C. § 365, the bankruptcy court upheld the objection and 

denied the class members' motion.5 

 The class members appealed to the United States 

District Court for the District of Delaware. The district court 

held that the settlement agreement was a contract, but affirmed 

the bankruptcy court on the grounds the contract was not 

executory for purposes of § 365. In re Columbia Gas, 146 B.R. at 

113-14. Therefore TCO did not have the option of assuming or 

 

3. Section 365 provides in part: 

 § 365. Executory contracts and unexpired 

leases

 (a) Except as provided in sections 756 and 766 of 

this title and in subsections (b), (c), and (d) of this 

section, the trustee, subject to the court's approval, 

may assume or reject any executory contract or 

unexpired lease of the debtor. 

4. The record suggests that the IRS's claim is substantial, 

apparently in the range of $500 million over the next five years. 

J. App. at 287. 

5. The bankruptcy court also apparently held the settlement 

agreement was not a contract, as it cited cases holding that 

judicial orders cannot be considered executory contracts. 
rejecting the settlement agreement. Id. at 114. This appeal 

followed. 

II. 

 We "exercise plenary review of the legal standard 

applied by the district and bankruptcy courts, but review the 

latter court's findings of fact on a clearly erroneous standard." 

In re Abbotts Dairies, Inc., 788 F.2d 143, 147 (3d Cir. 1986) 

(citations omitted). "Because in bankruptcy cases the district 

court sits as an appellate court, our review of the district 

court's decision is plenary." Brown v. Pennsylvania State 

Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988); see also

Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101 

(3d Cir. 1981). 

 Jurisdiction in the bankruptcy court was proper under 

28 U.S.C. § 157(a) (1988). The district court had jurisdiction 

over the appeal from the final order of the bankruptcy court, id.

§ 158(a), and we have jurisdiction over the appeal of the 

district court's judgment under 28 U.S.C. § 158(d). 

III. 

 In this appeal, we must decide whether the settlement 

agreement was a contract, and if so, whether it was executory so 

that TCO could elect to assume or reject it under § 365 of the 

Bankruptcy Code. 

 The IRS argues the settlement agreement is not a 

contract but a judgment of the court.6 It maintains "[s]ince the 

 

6. The class members contend the IRS did not properly preserve 

this point for appeal because it did not cross-appeal from the 
Settlement Agreement was merged into the court's judgment, it 

cannot be an executory contract within the meaning of Bankruptcy 

Code Section 365." Appellee's Br. at 32. The bankruptcy court 

apparently agreed, observing "there is authority to the effect 

that the phrase 'executory contract' should not normally be 

applied to a judicial order." J. App. at 178. While the 

bankruptcy court did not explicitly hold the agreement was a 

judgment, the cases it cited7 hold that where contracts have been 

reduced to judgment there is no "contract" remaining for purposes 

of § 365. The district court, however, distinguished those 

cases, holding "[f]or bankruptcy purposes . . . it is appropriate 

to treat the judicially approved settlement agreement in this 

case as a contract." In re Columbia Gas, 146 B.R. at 113. 

 At the outset, we should ask whether this settlement 

agreement would be considered a contract had there been no 

bankruptcy. Generally, application of the Bankruptcy Code does 

not change the attributes of a given legal relationship. Butner 

(..continued) 

district court's judgment which held the settlement agreement is 

a contract. We disagree because "it is . . . settled that the 

appellee may, without taking a cross-appeal, urge in support of a 

decree any matter appearing in the record, although his argument 

may involve an attack upon the reasoning of the lower court or an 

insistence upon a matter overlooked or ignored by it." Dalle 

Tezze v. Director, Office of Workers' Compensation Programs, 

United States Dep't of Labor, 814 F.2d 129, 132 (3d Cir. 1987) 

(quoting United States v. American Ry. Express Co., 265 U.S. 425, 

435 (1924)). 

7. Roxse Homes, Inc. v. Roxse Homes Ltd. Partnership, 83 B.R. 

185 (D. Mass.), aff'd without op., 860 F.2d 1072 (1st Cir. 1988); 

In re Jolly, 574 F.2d 349 (6th Cir.), cert. denied, 439 U.S. 929 

(1978). 
v. United States, 440 U.S. 48 (1979). Thus, if the settlement 

agreement should be considered a contract under relevant 

nonbankruptcy law, it will be a contract in bankruptcy "[u]nless 

some federal interest requires a different result . . . ." Id.

at 55. 

 Although settlement agreements may be judicially 

approved, they share many characteristics of voluntary contracts 

and are construed according to traditional precepts of contract 

construction. cf. Fox v. United States Dep't of Housing & Urban 

Dev., 680 F.2d 315, 319 (3d Cir. 1982) (observing this point for 

consent decrees). In a nonbankruptcy context, we have treated a 

settlement agreement as a contract. See Halderman v. Pennhurst 

State Sch. & Hosp., 901 F.2d 311, 318 (3d Cir.), cert. denied, 

498 U.S. 850 (1990). 

 We see nothing special in this bankruptcy that counsels 

a different approach. The core of this settlement agreement was 

consensual obligations. The parties crafted the agreement and 

the court approved it. There is no judgment on the merits, a 

factor that distinguishes cases cited by the bankruptcy court. 

Furthermore, the rights and obligations of the parties do not 

derive solely from the court's judgment, but depend at least in 

part on the performance of the other party. What is especially 

significant in this case is that there remains an agreement that 

the debtor can breach which could give rise to a claim against 

it. Although we recognize that not all settlement agreements 

should be considered contracts, we believe the factors already 

enumerated are sufficient to consider this settlement agreement 
as a contract for purposes of § 365. In this respect, we agree 

with the district court. 

IV. 

 The heart of this dispute is whether the settlement 

agreement was executory on July 31, 1991, when TCO filed its 

bankruptcy petition. The term "executory contract" is not 

defined in the Bankruptcy Code, and the phrase does not indicate 

its intended scope. 

 The legislative history of § 365 suggests a broad 

reading of "executory." Congressional reports stated "[t]hough 

there is no precise definition of what contracts are executory, 

it generally includes contracts on which performance remains due 

to some extent on both sides." H.R. Rep. No. 595, 95th Cong., 

1st Sess. 347 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6303; 

S. Rep. No. 989, 95th Cong., 2d Sess. 58 (1978), reprinted in

1978 U.S.C.C.A.N. 5787, 5844. 

 Most courts have agreed that the definition suggested 

by the legislative history would cut too broadly, "since it is 

the rare agreement that does not involve unperformed obligations 

on either side." Mitchell v. Streets (In re Streets & Beard Farm 

Partnership), 882 F.2d 233, 235 (7th Cir. 1989). As one 

commentator observed, "[a]ll contracts to a greater or less 

extent are executory. When they cease to be so, they cease to be 

contracts." Vern Countryman, Executory Contracts in Bankruptcy: 

Part I, 57 Minn. L. Rev. 439, 450 (1973) (citation omitted). 

 The language and legislative history of § 365 having 

proved unavailing, courts and commentators sought to analyze the 
purpose of § 365 in order to formulate a definition of "executory 

contract." Executory contracts in bankruptcy are best recognized 

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. See Thomas H. Jackson, The Logic and 

Limits of Bankruptcy Law 106-07 (1986). The debtor (or trustee 

that has stepped into the debtor's shoes) may elect to assume an 

executory contract, in which case § 365 mandates that the debtor 

accept the liability with the asset and fully perform his end of 

the bargain. 11 U.S.C. § 365(b). 

 The debtor will assume an executory contract when the 

package of assets and liabilities is a net asset to the estate. 

When it is not the debtor will (or ought to) reject the contract. 

11 U.S.C. § 365(a). Because assumption acts as a renewed 

acceptance of the terms of the executory bargain, the Bankruptcy 

Code provides that the cost of performing the debtor's 

obligations is an administrative expense of the estate, which 

will be paid first out of the assets of the estate.8 11 U.S.C. § 

 

8. In In re Taylor, 913 F.2d 102, 106-07 (3d Cir. 1990), we 

stated: 

 [T]he "assume or reject" dichotomy means 

simply that if the trustee wishes to obtain 

for the estate the future benefits of the 

executory portion of the contract, the 

trustee must also assume the burdens of that 

contract, as an expense of bankruptcy 

administration (i.e., having priority over 

all pre-bankruptcy claims of creditors). 
507(a)(1) (1988); University Medical Ctr. v. Sullivan (In re 

University Medical Ctr.), 973 F.2d 1065, 1078 (3d Cir. 1992). 

 In cases where the nonbankrupt party has fully 

performed, it makes no sense to talk about assumption or 

rejection. At that point only a liability exists for the 

debtor--a simple claim held by the nonbankrupt against the 

estate, Jackson, supra, at 106--and "[t]he estate has whatever 

benefit it can obtain from the other party's performance and the 

trustee's rejection would neither add to nor detract from the 

creditor's claim or the estate's liability." Countryman, supra, 

at 451. Rejection is meaningless in this context, and assumption 

would be of no benefit to the estate, serving only to convert the 

nonbankrupt's claim into a first priority expense of the estate 

at the expense of the other creditors.9 Id. at 452. 

(..continued) 

Through the mechanism of assumption, § 365 allows the debtor to 

continue doing business with others who might otherwise be 

reluctant to do so because of the bankruptcy filing. Richmond 

Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 

1985). 

 Rejection, which is appropriate when a contract is a 

liability to the bankrupt, is equivalent to a nonbankruptcy 

breach. 11 U.S.C. § 365(g). Rejection leaves the nonbankrupt 

with a claim against the estate just as would a breach in the 

nonbankruptcy context, and unless the nonbankrupt's claim is 

somehow secured, he will be a general unsecured creditor of the 

estate. Accordingly, if the debtor is insolvent, the 

nonbankrupt's claim for breach will not be paid in full. An 

appropriate rejection in bankruptcy will thus benefit the 

creditors as a whole at the expense of the nonbankrupt. See

Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 108 

(1986). 

9. In this circumstance, elevating the nonbankrupt's claim to 

administrative expense priority by "assuming" it would offend 

"the general policy of the bankruptcy laws [which] is equality of 

distribution among all creditors . . . ." H.R. Rep. No. 595, 
 Likewise, if the debtor has fully performed, the 

performance owed by the nonbankrupt is an asset of the bankruptcy 

estate and should be analyzed as such, not as an executory 

contract. Jackson, supra, at 107. Rejection of the contract at 

this point is no different from abandonment of property of the 

estate, an action taken only when the property is "burdensome to 

the estate or . . . is of inconsequential value and benefit to 

the estate." 11 U.S.C. § 554(a) (1988). 

 These considerations led us to adopt, as have many 

courts of appeals, the following definition of executory contract 

for purposes of § 365: "[An executory contract is] a contract 

under which the obligation of both the bankrupt and the other 

party to the contract are so far unperformed that the failure of 

either to complete performance would constitute a material breach 

excusing performance of the other." Sharon Steel Corp. v. 

National Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989) 

(citing cases). 

 Thus, unless both parties have unperformed obligations 

that would constitute a material breach if not performed, the 

contract is not executory under § 365. When it is the 

nonbankrupt party who has substantially performed so that its 

failure to complete performance would not constitute a material 

breach excusing performance of the debtor,10 the nonbankrupt 

(..continued) 

95th Cong., 1st Sess. 186 (1977), reprinted in 1978 U.S.C.C.A.N. 

5963, 6147. 

10. In order to determine whether failure to perform the 

remaining obligations would constitute a material breach, we need 

to consider contract principles under the relevant nonbankruptcy 
party is "relegated to the position of a general creditor of the 

bankrupt estate." Marcus & Millichap Inc. v. Munple, Ltd. (In re 

(..continued) 

law. In Hall v. Perry (In re Cochise College Park, Inc.), 703 

F.2d 1339, 1348 n.4 (9th Cir. 1983), the court noted "a 

bankruptcy court should determine whether one of the parties' 

failure to perform its remaining obligations would give rise to a 

'material breach' excusing performance by [the] other party under 

the contract law applicable to the contract . . . ." See also

Terrell v. Albaugh (In re Terrell), 892 F.2d 469, 472 (6th Cir. 

1989) (citing In re Cochise); Mitchell v. Streets (In re Streets 

& Beard Farm Partnership), 882 F.2d 233, 235 (7th Cir. 1989) 

(looking to relevant state law). 

 In this case, the settlement agreement was created by 

the parties in a federal court in Ohio, and Ohio law would 

therefore normally apply. Klaxon Co. v. Stentor Co., 313 U.S. 

487, 496 (1941). However, the parties do not indicate any 

particular law as governing either the issue of material breach 

or the construction of the settlement agreement. Where, as here, 

"the parties do not make an issue of choice of law, we have no 

obligation to make an independent determination of what rule 

would apply if they had made an issue of the matter." In re 

Stoecker, 5 F.3d 1022, 1029 (7th Cir. 1993). Accordingly, like 

the parties and the district court, we will construe the issue of 

what would constitute a material breach under general contract 

principles. See Schiavone Constr. Co. v. Time, Inc., 847 F.2d 

1069, 1076 n.3 (3d Cir. 1988) (allowing consensus of parties and 

lower courts as to choice of law to control when no reason to 

unsettle that agreement is present). 

 Finally, we believe application of Ohio law would 

result in a similar analysis of the general contract principles 

upon which we rely. See Rhodes v. Rhodes Indus., Inc., 595 

N.E.2d 441, 447 (Ohio Ct. App. 1991) (adopting Restatement of 

Contracts (Second) approach to materiality of breach); see also

Kichler's, Inc. v. Persinger, 265 N.E.2d 319, 321 (Ohio Ct. App. 

1970); Blenheim Homes, Inc. v. Mathews, 196 N.E.2d 612, 614 (Ohio 

Ct. App. 1963); Boehl v. Maidens, 139 N.E.2d 645, 649 (Ohio Ct. 

App. 1956). Thus, there is no need for us to examine further the 

issue of which substantive law to apply, as the result does not 

depend on our choice. Weekes v. Michigan Chrome & Chem. Co., 352 

F.2d 603, 606 (6th Cir. 1965); cf. Benevides v. Alexander (In re 

Alexander), 670 F.2d 885, 888 (9th Cir. 1982) (holding no need to 

look at state law for whether contract is an executory contract, 

but even if examined under state law there would be no change in 

the outcome). 
Munple, Ltd.), 868 F.2d 1129, 1130 (9th Cir. 1989). The time for 

testing whether there are material unperformed obligations on 

both sides is when the bankruptcy petition is filed. Collingwood 

Grain, Inc. v. Coast Trading Co. (In re Coast Trading Co.), 744 

F.2d 686, 692 (9th Cir. 1984) (holding contracts executory at 

time of petition can be assumed); Carlson v. Farmers Home Admin. 

(In re Newcomb), 744 F.2d 621, 624 (8th Cir. 1984) (stating 

critical time to be when the petition was filed). 

 As we have noted, at stake is the relative priority11

of the claims of the IRS and the class members to TCO's assets in 

bankruptcy. If the contract is executory, TCO would assume it, 

and the $15 million TCO still owes would become an administrative 

expense of the estate. As an administrative expense, the class 

members' claims would fall into the category afforded highest 

payment priority. 11 U.S.C. § 507(a)(1); University Medical 

Ctr., 973 F.2d at 1078. If the contract is not executory, the 

class members would have a general unsecured claim and would have 

lowest payment priority, and would be paid after the IRS's claim, 

which is seventh in priority regardless of the outcome of this 

dispute. 11 U.S.C. § 507(a)(7) (1988).12 

 

11. The priority of the claims determines whether and how much 

of the claims are paid, regardless of whether the debtor 

liquidates or reorganizes. See 11 U.S.C. § 726(a)(1) (1988) 

(specifying liquidation scheme with first priority claims paid 

before seventh priority claims, which are paid before unsecured 

claims); id. § 1129(a)(8), (9) (requiring administrative expenses 

to be paid in full in cash on effective date of a 

reorganization). 

12. We note the IRS's claim would have eighth priority in cases 

commenced after October 22, 1994. See Bankruptcy Reform Act of 
A. 

 The contract was clearly executory on TCO's side when 

it filed for bankruptcy, a point both parties appear to accept. 

It had not paid the second $15 million into escrow, nor had it 

completed the administrative work necessary to authorize 

distribution of the escrow monies to those class members who had 

signed and executed releases and supplemental contracts. While 

the administrative details TCO still had to perform are arguably 

non-material (an issue we need not reach), the $15 million 

payment is unquestionably a material obligation,13 and TCO's 

failure to make the second payment certainly would constitute a 

material breach. 

B. 

 The materiality of the class members' unperformed 

obligations is a closer question. As we have noted, the 

obligations on both sides must be so far unperformed so that 

failure of either to complete performance would constitute a 

material breach excusing performance of the other. The class 

members had unperformed duties under the settlement agreement. 

Only 41 of the 852 contracts had been processed when TCO filed 

for bankruptcy, and the class members responsible for the 

remaining 811 contracts still had to execute releases and 

(..continued) 

1994, Pub. L. No. 103-394, §§ 304(c), 702, 108 Stat. 4106, 4132 

(1994). 

13. While the district court suggests TCO's completed 

performance was substantial, it stops short of stating TCO's 

remaining obligations were not material. In re Columbia Gas, 146 

B.R. at 114. 
supplemental contracts in order to receive their shares of the 

escrow fund. It must be the contention of the class members that 

these obligations are sufficiently material that failure to 

perform would constitute a material breach of the agreement by 

the class members.14

 In order to determine the materiality of the class 

members' obligations, we turn first to basic contract principles. 

There is a distinction in the law between failure of a 

condition15 and a breach of a duty: "Non-occurrence of a 

condition is not a breach by a party unless he is under a duty 

that the condition occur." Restatement (Second) of Contracts § 

225(3) (1981).16 This distinction between a condition and a duty 

 

14. The class members also argue the settlement agreement 

represents an accord, which, if not satisfied, would allow the 

members to revive their original claims against TCO. They cite 

In re Miller, 54 B.R. 710, 712 (Bankr. D.N.D. 1985), which 

distinguishes novation, an agreement to extinguish one duty and 

replace it with another, from an accord, by which a party agrees 

to accept a substitute performance for a pre-existing duty, 

although the original duty is not extinguished until the accord 

is performed. While the court stated that novation is never 

presumed in an ambiguous situation, id. at 713, we believe this 

situation is not ambiguous. Unlike the parties in In re Miller, 

who had specifically allowed for reinstatement of the original 

claim upon failure of the settlement, id., the parties here have 

an explicit court order which extinguishes the old claims and 

replaces them with the Settlement Agreement. See supra part I 

for the text of the district court's order. As the district 

court noted, "[T]he order approving the settlement agreement 

suggests that there could only be an action for breach of 

contract." In re Columbia Gas, 146 B.R. at 113 n.3. We agree. 

15. The Restatement has dropped the term "condition precedent" 

in favor of simply stating it as "condition." E. Allen 

Farnsworth, 2 Farnsworth on Contracts § 8.2, at 349 (1990). We 

will follow that convention here. 

16. See Restatement (Second) of Contracts § 225 cmt. d, which 

provides: 
(or promise) is important here. The Restatement makes clear that 

while "a contracting party's failure to fulfill a condition 

excuses performance by the other party whose performance is so 

conditioned, it is not, without an independent promise to perform 

the condition, a breach of contract subjecting the nonfulfilling 

party to liability for damages." Merritt Hill Vineyards, Inc. v. 

Windy Heights Vineyard, Inc., 460 N.E.2d 1077, 1081-82 (N.Y. 

1984) (citing Restatement (Second) of Contracts § 225). In this 

case, if the remaining obligations in the contract are mere 

conditions, not duties, then the contract cannot be executory for 

purposes of § 365 because no material breach could occur. 

 The determination whether a contract term is a promise 

or condition is a problem of interpretation, so that "each case 

turns on its own facts . . . ." E. Allen Farnsworth, 2 

Farnsworth on Contracts § 8.4, at 366 (1990). We are mindful 

that: 

 Interpreting a settlement agreement presents 

a question of contract law, in which [t]he 

primary object . . . is to give effect to the 

intention of the parties. Absent clear 

language in the settlement agreement to 

resolve a dispute over the proper 

construction of a contract, a court may go 

outside the four corners of the contract and 

consider extrinsic and parol evidence 

(..continued) 

 [A] term making an event a condition of an 

obligor's duty does not of itself impose a 

duty on the obligee and the non-occurrence of 

the event is not of itself a breach by the 

obligee. Unless the obligee is under such a 

duty, the non-occurrence of the event gives 

rise to no claim against him. 
presented by the parties. This requires the 

district court to then conduct fact-finding 

so that it may resolve the ambiguities 

inherent in the contract. . . . [But i]f the 

court finds that a contract is ambiguous and 

that extrinsic evidence is undisputed, then 

the interpretation of the contract remains a 

question of law for the court to decide. 

Lumpkin v. Envirodyne Industries, Inc., 933 F.2d 449, 455-56 (7th 

Cir.), cert. denied, 502 U.S. 939 (1991) (citations omitted). 

1. 

 With these principles in mind, we turn first to an 

analysis of the releases and then to the contract supplements. 

If a class member declined to execute a release, the settlement 

agreement provides that TCO retains that class member's portion 

of the $30 million. But the class member's cause of action 

against TCO on the gas purchase contract would not be revived. 

All such claims were extinguished when the district court's order 

became final on July 18, 1991.17 

 

17. The settlement agreement here is much like the insurance 

contract in Commercial Union Insurance Co. v. Texscan Corp. (In 

re Texscan Corp.), 976 F.2d 1269, 1273 (9th Cir. 1992), where the 

court held that because of a statute, the bankrupt's failure to 

pay insurance premiums could not relieve the nonbankrupt insurer 

from its obligation to provide insurance coverage. Even if the 

failure to pay premiums might be a material breach absent the 

statute, the court held, the statute meant the insurer's 

performance was not excused and therefore the definition of 

"executory" in the Bankruptcy Code was not met. Id. Here, even 

if the failure to execute the releases and supplemental contracts 

were a breach of part of the settlement agreement (which we hold 

it is not), the operation of the court order would prevent that 

breach from operating to excuse performance by either the class 

members or TCO. Thus, on this basis as well, the remaining 

obligations do not suffice to make the contract executory. 
 The language of the settlement agreement makes clear 

the parties intended to make execution of the releases a 

condition of payment rather than a duty: "[P]ayments to 

individual Class Members out of the escrowed amounts will be 

contingent upon receipt by [TCO] of a duly executed release 

. . . . If the amount allocated to a particular contract by 

Class Counsel . . . is not finally distributed to that particular 

contract, then such Distributable Amount . . . shall be returned 

to [TCO] . . . ." J. App. at 57-58, 64-65.18 The parties 

specified that the class members' claims would be extinguished 

(as they in fact were) by the court order accepting the 

settlement agreement. Thus, the releases served no more than the 

administrative purpose of a condition to the class members' 

ability to get payment from the escrow fund. 

 The numerous references in the agreement stating a 

given clause as "Subject to final Court approval of the 

Settlement," or the equivalent, see ¶¶ 1, 2, 4, 5, 6, 7, 8, 9, 

11, 12, 14, J. App. at 57-66, also demonstrate how the parties 

intended to allocate rights and duties in the contract. The 

"subject to" phrase was used largely to qualify TCO's duty to pay 

money, demonstrating that "final Court approval" was the linchpin 

of the contract for TCO because the heart of the exchange was 

extinguishing the class members' claims in exchange for money. 

 

18. The class members also argue that TCO's recovery of unused 

money in substance excuses TCO's performance of payment, 

therefore making the contract executory under the definition in 

Sharon Steel Corp. v. National Fuel Gas Distribution Corp., 872 

F.2d 36, 39 (1989). We do not agree. 
The claims were extinguished upon final court approval and the 

parties made that event, not execution of the releases, key to 

the agreement. 

 The consequence of a class member's failure to execute 

a release supports this textual analysis. A class member who 

failed to execute a release would not get its share of the 

settlement fund, but TCO would still get the benefit of the class 

member's inability to sustain a cause of action. As the district 

court observed, "the parties seem to agree that if this case 

involved a simple exchange of money for execution of a release of 

all claims, there would be no question that the contract would 

not be executory." In re Columbia Gas, 146 B.R. at 114. Nor 

would any class member's failure absolve TCO from its duty to 

place the second $15 million into escrow, a duty which was to 

ripen on March 23, 1992, without regard to the actions of any 

class member. No failure on the part of the class members to 

execute a release under the settlement agreement could have 

created a material breach of the contract. Rather, the releases 

were a condition for each member to get its share of the 

settlement money. 

2. 

 The settlement agreement also required each class 

member to complete a supplemental contract for future gas sales 

to TCO. The question is whether that obligation is sufficient to 

constitute a "duty" as expressed in the Restatement section 225. 

 There is no indication that the supplemental contracts 

were designed to do more than take the terms of the global 
settlement agreement created by the class and TCO and apply them 

specifically to each class member. As such they were 

functionally ministerial duties; they did not, nor were they 

supposed to, alter the relationship forged by the settlement 

agreement. The terms of the supplemental contracts were 

expressly stated in the settlement agreement itself and were 

designed to be implemented with it. This demonstrates the 

supplemental contracts were intended to confirm, not to create, 

the new purchasing arrangement between TCO and the class members. 

 We agree with the district court that "executing the 

contract supplements will be little more than a perfunctory act 

utilizing preapproved terms and conditions. Obviously these 

ministerial acts are analogous to the execution of the release to 

be found in the settlement of any case." In re Columbia Gas, 146 

B.R. at 114; see also Mitchell v. Streets (In re Streets & Beard 

Farm Partnership), 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., 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 contract executory). An individual 

class member's failure to execute the supplemental contract would 

not constitute a material breach of the settlement agreement but 

rather would be the failure of a condition that would relieve 
TCO's obligation to pay that member its portion of the escrow 

monies.19

 Further, TCO cannot really be concerned with whether a 

given class member executes a supplemental contract, as the main 

terms governing the future purchases were embodied in the 

settlement agreement itself. The supplemental contracts were 

more important to the class members (the obligors) than to TCO 

(the obligee). Class counsel made clear before the district 

court that the supplemental contracts were important to the class 

members. The supplemental contracts required TCO to pay higher 

 

19. Although in a different context, we believe In re Sudbury, 

Inc., 153 B.R. 776 (Bankr. N.D. Ohio 1993), is instructive. The 

debtor claimed its insurance policies and related retrospective 

premium payments were not executory contracts. Id. at 776. The 

insurers argued the policies were executory and that the premium 

claims should get administrative expense priority. Id. at 776-

77. Bankruptcy did not relieve the insurers' obligation to 

provide coverage, and the payments the debtor owed did not alone 

make the policies executory. Id. at 778. 

 The insurers argued the debtor had obligations to 

fulfill under cooperation clauses in the event it filed a claim. 

Id. at 779. The court held these obligations were not enough to 

make the policies executory. The court observed the debtor's 

failure to fulfill these obligations on a particular claim would 

only provide an insurer with a defense to that claim, but would 

not void the insurers' general obligations under the policies. 

Id. The court also noted that the insurers' concern was gaining 

administrative expense priority, not having the debtor perform 

the cooperation clauses. Id. at 780-81. 

 The supplemental contracts here are analogous to the 

obligations under the cooperation clauses. The analogy is 

inexact but it illustrates the function of the supplemental 

contracts. The debtor's failure to cooperate on a given claim, 

like a class member's failure to execute a supplemental contract, 

would relieve the other party (TCO/the insurers) from paying that 

one claim but not from the more general obligations embodied in 

the settlement agreement/insurance policies as a whole. 
prices than under the old contracts and thus benefitted the 

class, and the class even concedes the primary benefit of the 

contract supplements inured to the class members. Without more, 

it was unlikely that the parties intended that failure to execute 

them would be a breach by the class members. 

 Although, as the class members point out, the 

supplements were also designed to prevent future disputes and as 

such they presumably benefit TCO, we are convinced that on 

balance the obligation to execute the supplemental contracts is 

not sufficient to make the settlement agreement executory. Like 

the releases, the contract supplements were conditions to the 

class members' receipt of their portion of the settlement fund. 

Any class member's failure to execute the supplement would not 

constitute a breach of the settlement agreement.20

 

20. The facts here are readily distinguishable from those in 

Sharon Steel, in which we found an executory contract existed and 

observed: "The agreement is characterized by reciprocal 

obligations continuing into the future: National Fuel has 

promised to provide natural gas to Sharon, and Sharon has 

promised to purchase the gas at a certain price . . . ." 872 

F.2d at 39. This met the bankruptcy definition of executory 

contract because either side's failure to perform would clearly 

have been a material breach. Here, the class members' 

obligations were merely conditions. TCO promised to pay an 

additional $15 million into the escrow account, and the class 

members' entitlement to those monies was contingent on completion 

of the releases and supplemental contracts. 

 The difference between the agreement in Sharon Steel

and the agreement here illustrates the importance of the 

definition of executory contracts for purposes of the Bankruptcy 

Code. Absent the limits imposed by Sharon Steel's definition of 

executory contract, the agreement here might appear executory. 

But the factual differences between this case and Sharon Steel

point out that not every contract that appears executory because 

it has not been completely performed is executory for purposes of 

§ 365. See Countryman, supra, at 450 ("All contracts to a 
C. 

 An examination of the purpose of § 365 leads to the 

same result. The only functional difference between assumption 

and rejection in this case, were the contract to be considered 

executory, is that assumption would give the class a higher 

priority to the unpaid $15 million. In return TCO would gain 

nothing of value: the releases add no rights to the estate not 

already given by the district court's order, and the supplements 

provide only a marginal benefit to TCO. The Ohio District 

Court's order bound the class as a whole. Once the order became 

final and unappealable, all the class members were bound by it. 

Accordingly, the class members' failure to complete the tasks 

required for them to receive their money could not breach the 

agreement between the class and TCO, but could only serve as the 

failure of conditions precedent to their right to settlement 

monies. Assumption would not add assets to the bankruptcy 

estate. See In re Sudbury, Inc., 153 B.R. at 778-81 (holder 

unjustified in seeking first priority through executory contract 

provisions when pre-petition claim was not entitled to priority 

as administrative expense pursuant to 11 U.S.C. § 503). The 

agreement is not an executory contract for purposes of § 365. 

V. 

(..continued) 

greater or less extent are executory. When they cease to be so, 

they cease to be contracts. But that expansive meaning can 

hardly be given to the term as used in the Bankruptcy Act 

. . . ." (citation omitted)). 
 For the reasons set forth, we will affirm the judgment 

of the district court.