Opinion ID: 1378988
Heading Depth: 4
Heading Rank: 2

Heading: Frustration of Purpose and Commercial Impracticability

Text: Even if bankruptcy court approval were not required for settlement agreements made between debtors in bankruptcy and their creditors, this purported agreement would still be unenforceable. At the time the agreement was made, TSE was a debtor-in-possession involved in a Chapter 11 reorganization, and the terms of the proposed agreement directly reflected the state of affairs in the bankruptcy proceeding. Under the terms of the agreement, TSF was to purchase NCC's and Interstate's creditor claims against TSE, and in exchange, NCC and Interstate would remove their objections to confirmation of TSE's modified bankruptcy plan so confirmation could proceed. The terms of the agreement provided: (1) TSF would purchase NCC's claim in class 12 and NCC's equity interest in class 18 of TSE's modified plan; (2) TSF would purchase a portion of Interstate's class 13 claim, and TSF would ensure Interstate received the balance of Interstate's claim over a three-year period at 9% interest; (3) the total purchase price to be divided among NCC and Interstate would be $2.5 million, and of that amount, $475,000 was to be allocated to Interstate's class 13 claim; (4) after the purchase and transfer of NCC's and Interstate's claims, NCC and Interstate would withdraw all objections to confirmation of TSE's modified plan; and (5) the settlement would be a final settlement of all of NCC's and Interstate's claims and NCC's state court foreclosure action would be dismissed with prejudice. After NCC filed suit in the district court seeking enforcement of the agreement, NCC and TSF agreed to stay litigation on the contract dispute so settlement negotiations could continue in the bankruptcy court. In the meantime, the bankruptcy case was converted from a Chapter 11 reorganization to a Chapter 7 liquidation. The estate's primary asset, the ethanol plant, was sold, and substantial interim distributions were made to various creditors and administrative expense claimants. Both NCC and TSF were well aware the administration of the bankruptcy case was continuing while the contract dispute was litigated. Yet, neither party sought a delay or alteration in the administration of the bankruptcy case during that time. During that same time, NCC successfully negotiated a settlement agreement with the Trustee. However, the bankruptcy court could not enforce the new settlement because the bankruptcy proceeding was stayed due to the contract litigation in the district court. Under the facts of this case, with such a drastic change in circumstances from the time of the original agreement to the time the district court attempted to enforce the agreement, the purpose of the agreement had been frustrated and was no longer enforceable. Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. Restatement (Second) of Contracts § 265 (1981). See also Groseth Int'l., Inc., v. Tenneco, Inc., 410 N.W.2d 159, 165-68 (S.D.1987) (providing a detailed discussion of the doctrines of commercial frustration and commercial impracticability). Likewise, there may be excuse from performance where very greatly increased difficulty is caused by facts not only unanticipated, but inconsistent with the facts that the parties very obviously assumed would likely continue to exist. Id. at 167 (citations omitted). The most important question is whether an unanticipated circumstance has made performance of the promise vitally different from what the parties contemplated when they entered the contract. Id. (citation omitted). The facts that exist today are inconsistent with the facts the parties obviously assumed would likely continue to exist at the time the purported settlement was made. Id. This is clear from the context of the agreement. The proposed agreement was made during bankruptcy proceedings for TSE. TSF was created for the sole purpose of providing funding to TSE in an effort to return the ethanol plant to operation. When TSF negotiated with NCC, TSF's primary purpose in agreeing to purchase NCC's claims against TSE's bankruptcy estate was to remove NCC's objections to confirmation of TSE's modified plan. Once those objections were removed, TSE would have been more likely to obtain bankruptcy court approval of its modified plan and succeed in reorganization. The parties later disagreed as to whether a meeting of the minds had occurred, TSF refused to perform, and NCC refused to remove its objections to TSE's modified plan. The bankruptcy court's conversion of the bankruptcy estate to a Chapter 7 liquidation was not contemplated by the parties, and because the ethanol plant then would necessarily be sold, the conversion defeated TSF's entire purpose in negotiating with NCC. Neither TSF nor NCC contemplated the liquidation of the bankruptcy estate. When NCC read the terms of the purported agreement on the record, NCC stated TSF would purchase NCC's class 12 claim and class 18 equity interest in TSE's estate. TSF can no longer purchase those class claims because, after the conversion, such classes ceased to exist. Similarly, TSF cannot purchase Interstate's class 13 claim as contemplated because that class claim also does not exist. Further, NCC and Interstate agreed to remove all objections to the modified bankruptcy plan after TSF purchased NCC's and Interstate's claims against TSE's estate. NCC and Interstate can no longer carry out their end of the bargain because no plan exists today, partially as a consequence of NCC's and Interstate's continued objections to the plan. The circumstances in the bankruptcy case changed dramatically from the time the proposed agreement was read into the record at the June 21, 2004 hearing to the time the district court attempted to enforce the agreement on December 27, 2007. The agreement is no longer enforceable in its original form. The district court erred in finding the agreement was enforceable. [4]