Court Opinion

ID: 9366244
Source: CourtListenerOpinion
Date Created: 2023-01-26 15:04:09.709557+00
Date Added: 2024-06-11T17:15:50.904881
License: Public Domain

Case: 21-30668    Document: 00516429246         Page: 1   Date Filed: 08/11/2022

           United States Court of Appeals
                for the Fifth Circuit                           United States Court of Appeals
                                                                         Fifth Circuit

                                                                       FILED
                                                                 August 11, 2022
                                 No. 21-30668
                                                                  Lyle W. Cayce
                                                                       Clerk

   In the Matter of Falcon V, L.L.C.,

                                                                        Debtor,

   Argonaut Insurance Company,

                                                                   Appellant,

                                     versus

   Falcon V, L.L.C.,

                                                                      Appellee.

                 Appeal from the United States District Court
                     for the Middle District of Louisiana
                           USDC No. 3:20-CV-702

   Before Higginbotham, Higginson, and Oldham, Circuit Judges.
   Stephen A. Higginson, Circuit Judge:
         This appeal arises out of the bankruptcy of Falcon V, LLC and its
   affiliates. After the bankruptcy court confirmed Falcon V’s reorganization
   plan, Argonaut Insurance Company asked the court to interpret the plan,
   arguing primarily that a $10.5 million suretyship agreement was an
   “executory contract” and that the reorganized Falcon V had therefore
Case: 21-30668         Document: 00516429246                Page: 2        Date Filed: 08/11/2022

                                            No. 21-30668

   assumed the agreement under the reorganization plan’s express terms. The
   bankruptcy court concluded that Falcon V had not assumed the agreement
   and disallowed Argonaut’s $7.3 million unsecured claim against Falcon V.
   The district court affirmed the judgment of the bankruptcy court. We
   AFFIRM.
                                                  I.
           The relevant facts are uncontested. Appellee Falcon V, LLC and its
   affiliates ORX Resources, LLC and Falcon V Holdings, LLC (collectively
   “Falcon V”) engage in oil and gas exploration and development. Appellant
   Argonaut Insurance Company (“Argonaut”) provides surety bonds. 1 Falcon
   V and Argonaut entered into an arrangement that the parties refer to as the
   “Surety Bond Program.” Under the Surety Bond Program, Argonaut posted
   four irrevocable performance bonds (the “Bonds”) guaranteeing Falcon V’s
   obligations to various third-party obligees. These obligations related
   primarily to the plugging, abandonment, and restoration of oil and gas wells.
   The largest bond was in favor of Hilcorp Energy I LP, in the amount of
   $10,000,000. The other three bonds were in favor of Chevron Corporation,
   the Louisiana Office of Conservation, and the United States, in the amounts
   of $300,000, $250,000, and $25,000, respectively. The Bonds provide that
   if Falcon V fails to perform its obligations, Argonaut must either pay the
   obligee an amount equal to the obligation or perform the obligation itself, up
   to the amount of the bond. The Bonds further provide that “regardless of the
   payment or nonpayment by [Falcon V] of any premiums owing with respect
   to this Bond, [Argonaut’s] obligations under this Bond are continuing
   obligations and shall not be affected or discharged by any failure by [Falcon

           1
              “A surety bond creates a three-party relationship, in which the surety becomes
   liable for the principal’s debt or duty to the third party obligee.” Ins. Co. of the W. v. United
   States, 243 F.3d 1367, 1370 (Fed. Cir. 2001).

                                                  2
Case: 21-30668       Document: 00516429246             Page: 3     Date Filed: 08/11/2022

                                       No. 21-30668

   V] to pay any such premiums.” In exchange, Falcon V agreed to pay
   premiums to Argonaut and to indemnify Argonaut for any payments that
   Argonaut makes under the Bonds (the “Indemnity Agreement”).
          In May 2019, Falcon V filed for Chapter 11 bankruptcy. On Falcon V’s
   motion, the bankruptcy court authorized (but did not require) Falcon V to
   continue performing the obligations that it owed Argonaut as part of the
   Surety Bond Program. 2 Argonaut subsequently filed a proof of claim against
   Falcon V in the amount of $10,575,000 (the combined value of the Bonds).
   Argonaut stated that $3.2 million of the claim was secured and the rest was
   unsecured. Argonaut further stated its position that the Surety Bond
   Program “may not be assumed and assigned, for among other reasons,
   because such agreement constitutes a ‘financial accommodation,’” although
   it reserved its rights in case the Bonds and Indemnity Agreement were
   deemed “executory contracts.” On October 10, 2019, the bankruptcy court
   confirmed Falcon V’s Second Amended Plan of Reorganization (the
   “Plan”), which stated that, with certain exceptions not relevant here, each
   reorganized Falcon V entity “shall be deemed to have assumed each
   executory contract . . . to which it is a party.”
          In February 2020, Argonaut sent Falcon V a letter requesting that, in
   accordance with section 12 of the Indemnity Agreement, Falcon V provide
   Argonaut with an additional $7.3 million of collateral in order to fully secure
   the Bonds. Falcon V refused, stating that Argonaut’s claims against it had
   been discharged under the Plan. Argonaut then filed in the bankruptcy court
   a Motion to Interpret and Affirm the Terms of the Confirmed Chapter 11
   Plan, arguing that the reorganized Falcon V had assumed the Surety Bond

          2
           The bankruptcy court made clear that “nothing in this order or the Motion shall
   be deemed to constitute post-petition assumption or adoption of any agreement.”

                                             3
Case: 21-30668       Document: 00516429246         Page: 4   Date Filed: 08/11/2022

                                    No. 21-30668

   Program under the provision in the Plan stating that Falcon V assumed the
   executory contracts to which it was a party. Argonaut also argued that even
   if the Surety Bond Program had not been assumed, it had “passed-through”
   the bankruptcy.
          The bankruptcy court issued an order concluding that the Surety
   Bond Program was not assumed under the Plan. The court reasoned that
   “because Argonaut owed no continuing performance to Falcon V, the surety
   bond program is not an executory contract,” and it alternatively determined
   that even “if the surety bond program were executory, it is a non-assumable
   financial accommodation.” The court ultimately ordered that Argonaut’s
   unsecured claim against Falcon V (totaling over $7.3 million) was disallowed
   under 11 U.S.C. § 502(e)(1)(B), though it did note that Argonaut also held an
   allowed secured claim for $3.2 million. The bankruptcy court did not
   expressly address Argonaut’s argument that if the Surety Bond Program had
   not been assumed it had nonetheless passed through the bankruptcy.
          Argonaut appealed to the district court, which affirmed the
   bankruptcy court’s judgment. The district court determined that “the
   parties’ surety bond contracts are not executory contracts, and therefore
   cannot be assumed or enforced against [Falcon V].” The district court
   further stated that the bankruptcy court did not err by declining to expressly
   address whether the Surety Bond Program passed through the bankruptcy,
   explaining that “the pass-through (or ‘ride-through’) doctrine applies
   exclusively to executory contracts that are ‘neither assumed nor rejected at
   bankruptcy.’”
          Argonaut then appealed to this court.
                                        II.
          “In reviewing a decision of the district court affirming the bankruptcy
   court, we apply ‘the same standard of review to the bankruptcy court that the

                                         4
Case: 21-30668          Document: 00516429246                 Page: 5        Date Filed: 08/11/2022

                                             No. 21-30668

   district court applied,’ reviewing [conclusions] of law de novo and findings of
   fact for clear error.” In re Provider Meds, L.L.C., 907 F.3d 845, 850 (5th Cir.
   2018). Argonaut raises two issues on appeal. Argonaut primarily argues that
   the bankruptcy and district courts erred in determining that the Surety Bond
   Program was not assumed under the Plan. Alternatively, Argonaut argues
   that even if the Surety Bond Program were not assumed, the district court
   erred by determining that the Surety Bond Program did not “pass through”
   the bankruptcy.
                                                   A.
             We first consider whether Falcon V “assumed” the Surety Bond
   Program under the Plan. Subject to court approval, a debtor “may assume or
   reject any executory contract,” 11 U.S.C. § 365(a); see also id. § 1107(a), and,
   as explained above, Falcon V’s Second Amended Plan of Reorganization
   states that, with certain exceptions not relevant here, each of the reorganized
   Falcon V entities “shall be deemed to have assumed each executory
   contract . . . to which it is a party.” Accordingly, the bankruptcy court
   ordered that “all executory contracts . . . of [Falcon V] shall be deemed
   assumed to the extent assumable under Bankruptcy Code section 365.”
   Argonaut argues that the Surety Bond Program qualifies as an executory
   contract under Section 365 and that the bankruptcy and district courts
   therefore erred in determining that the Program was not assumed under the
   Plan. 3

             3
             Argonaut further argues that the bankruptcy court erred in concluding that even
   if the Surety Bond Program were an executory contract, it is unassumable because it is a
   financial accommodation. See 11 U.S.C. § 365(c)(2) (“The trustee may not assume or
   assign any executory contract . . . of the debtor . . . if . . . such contract is a contract to make
   a loan[] or extend other debt financing or financial accommodations.”). Argonaut
   maintains that financial accommodations are assumable with the consent of the party

                                                    5
Case: 21-30668         Document: 00516429246                Page: 6       Date Filed: 08/11/2022

                                           No. 21-30668

           “The Bankruptcy Code does not define the term ‘executory
   contract,’ but we have concluded that a contract is executory if ‘performance
   remains due to some extent on both sides’ and 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.’” In re Provider Meds, 907 F.3d at 851
   (citations omitted). In other words, “the test for an executory contract is
   whether, under the relevant state law governing the contract, each side has
   at least one material unperformed obligation as of the bankruptcy petition
   date.” In re Weinstein Co. Holdings LLC, 997 F.3d 497, 504 (3d Cir. 2021).
   This definition of executory contracts was first proposed by Professor Vern
   Countryman and is known as the “Countryman test.” Id.; see Vern
   Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev.
   439, 460 (1973). 4

   extending the accommodation. Because we ultimately hold that the Surety Bond Program
   is not an executory contract, we do not address this issue.
           4
             The vast majority of circuits have adopted the Countryman test. See Gallivan v.
   Springfield Post Rd. Corp., 110 F.3d 848, 851 (1st Cir. 1997); Sharon Steel Corp. v. Nat’l Fuel
   Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989); Lubrizol Enters., Inc. v. Richmond Metal
   Finishers, Inc., 756 F.2d 1043, 1045 (4th Cir. 1985); In re Chi., Rock Island & Pac. R.R. Co.,
   604 F.2d 1002, 1004 (7th Cir. 1979); In re Interstate Bakeries Corp., 751 F.3d 955, 962 (8th
   Cir. 2014); In re Pac. Express, Inc., 780 F.2d 1482, 1487 (9th Cir. 1986); In re Baird, 567 F.3d
   1207, 1211 (10th Cir. 2009). However, both the Sixth and Eleventh Circuits have endorsed
   the “functional approach,” under which “the question of whether a contract is executory
   is determined by the benefits that assumption or rejection would produce for the estate.”
   In re Gen. Dev. Corp., 84 F.3d 1364, 1375 (11th Cir. 1996) (quoting In re Gen. Dev. Corp., 177
   B.R. 1000, 1012 (S.D. Fla. 1995)); see also Thompkins v. Lil’ Joe Recs., Inc., 476 F.3d 1294,
   1305 n.13 (11th Cir. 2007); In re Jolly, 574 F.2d 349, 351 (6th Cir. 1978). See generally 3
   Collier on Bankruptcy ¶ 365.02 (16th ed. 2020) (discussing the Countryman test
   and the functional approach); 2 Norton Bankruptcy Law & Practice 3d
   §§ 46:6, 46:7 (same).

                                                  6
Case: 21-30668     Document: 00516429246           Page: 7   Date Filed: 08/11/2022

                                    No. 21-30668

          The Third Circuit has explained the logic behind the Countryman test
   as follows:
          To facilitate the debtor’s rehabilitation, the Countryman test
          attempts to foolproof the debtor’s choice to assume or reject
          contracts; thus, the debtor only has that flexibility for
          executory contracts—those contracts where there could be
          uncertainty about whether they are valuable or burdensome. A
          helpful perspective is to view executory contracts 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. Under this framework, a contract where the debtor
          fully performed all material obligations, but the nonbankrupt
          counterparty has not, cannot be executory; that contract can be
          viewed as just an asset of the estate with no liability. Treating
          it as an executory contract risks inadvertent rejection because
          the debtor would in effect be giving up an asset by rejecting it.
          On the other extreme, where the counterparty performed but
          the debtor has not, the contract is also not executory because it
          is only a liability for the estate. Treating it as an executory
          contract risks inadvertent assumption, for the debtor would
          effectively be agreeing to pay the liability in full when the
          counterparty should instead pursue the claim against the estate
          like other (typically unsecured) creditors. . . . Only where a
          contract has at least one material unperformed obligation on
          each side—that is, where there can be uncertainty if the
          contract is a net asset or liability for the debtor—do we invite
          the debtor’s business judgment on whether the contract should
          be assumed or rejected.
   In re Weinstein Co. Holdings, 997 F.3d at 504–05 (cleaned up).
          In applying the Countryman test to this case, the bankruptcy and
   district courts focused on the obligations that Falcon V and Argonaut owed
   each other. They both concluded that even though Falcon V has a continuing
   obligation to pay premiums to Argonaut and to indemnify Argonaut for any

                                         7
Case: 21-30668         Document: 00516429246                Page: 8       Date Filed: 08/11/2022

                                           No. 21-30668

   payments that Argonaut makes under the Bonds, the Surety Bond Program
   nonetheless does not satisfy the Countryman test’s first prong because
   Argonaut has already posted the Bonds and does not owe further
   performance to Falcon V. As the bankruptcy court reasoned, “Argonaut
   posted bonds prepetition and owes no further performance to Falcon V. . . .
   [B]ecause Argonaut owed no continuing performance to Falcon V, the surety
   bond program is not an executory contract.” Similarly, the district court
   stated that “as between [Falcon V] and Argonaut, the parties’ obligations
   under the Surety Bond Program flow in one direction, from [Falcon V] to
   Argonaut. The Countryman test requires more for an executory contract:
   performance must remain due on both sides.” 5
           Argonaut argues that the bankruptcy and district courts’ application
   of the Countryman test “gives no practical effect to Argonaut’s (and [Falcon
   V’s]) unperformed duties to the obligees under the Bonds,” and it urges us
   to “apply the Countryman framework in a manner that accounts for all
   obligations in a multiparty arrangement.” At oral argument, Argonaut
   proposed that the Countryman test should be modified as follows for surety
   contracts: “Where the surety and the principal continue to owe obligations
   to the obligee, and the principal has not fulfilled its indemnity obligations to
   the surety, that is an executory contract.” In the Surety Bond Program,
   Argonaut is the surety and Falcon V is the principal,6 and Argonaut maintains

           5
              While the bankruptcy court resolved this issue based solely on the Countryman
   test’s first prong, the district court further determined that because “Argonaut’s bonds are
   irrevocable,” Falcon V’s failure to perform would “not create a material breach that
   excuses Argonaut’s performance, as required by the second prong of the Countryman
   test.”
           6
               See Balboa Ins. Co. v. United States, 775 F.2d 1158, 1160 (Fed. Cir. 1985) (“A
   suretyship is the result of a three-party agreement, whereby one party (the surety) becomes
   liable for the principal’s or obligor’s debt or duty to the third party obligee.”); supra Part I
   (describing the structure of the Surety Bond Program).

                                                  8
Case: 21-30668        Document: 00516429246         Page: 9    Date Filed: 08/11/2022

                                     No. 21-30668

   that because (1) both it and Falcon V remain obliged to the various third-party
   obligees and (2) Falcon V has not fulfilled its indemnity obligations to
   Argonaut, the Surety Bond Program qualifies as executory under this
   modified test.
          We decline to adopt Argonaut’s proposed modification to the
   Countryman test. Argonaut offers no authority in support of the
   modification, and it makes no attempt to explain how the modification would
   further the test’s goal of “facilitat[ing] the debtor’s rehabilitation” by giving
   debtors discretion to assume or reject those contracts “where there can be
   uncertainty if the contract is a net asset or liability for the debtor.” In re
   Weinstein Co. Holdings, 997 F.3d at 504–05. Rather, Argonaut’s proposed
   test seems designed simply to elevate the rights of sureties above those of
   other creditors.
          However, we do agree with Argonaut that courts should apply the
   Countryman test to multiparty contracts in a flexible manner that accounts
   for the various obligations owed to all of the parties, rather than focusing
   exclusively on the flow of obligations between the debtor and the creditor.
   We can imagine cases in which, for example, a debtor might wish to assume
   a tripartite agreement under which it owes performance to a creditor, the
   creditor owes performance to a third party, and the third party owes
   performance to the debtor. Accordingly, when applying the Countryman test
   to this case, we consider not just the obligations that Falcon V and Argonaut
   owe to each other but also their respective obligations to the third-party
   obligees.
          Recall that the Countryman test has two prongs. First, a contract is
   executory only “if ‘performance remains due to some extent on both sides.’”
   In re Provider Meds, 907 F.3d at 851 (quoting In re Murexco Petroleum, Inc., 15
   F.3d 60, 62 (5th Cir. 1994)). Falcon V has a continuing obligation to pay

                                          9
Case: 21-30668       Document: 00516429246              Page: 10       Date Filed: 08/11/2022

                                         No. 21-30668

   premiums to Argonaut and to indemnify Argonaut for any payments that
   Argonaut makes under the Bonds, and although Argonaut does not owe any
   further performance to Falcon V, since it has already posted the Bonds,
   Argonaut does have obligations to the various third-party obligees under the
   Bonds. 7
           Assuming that the Surety Bond Program satisfies the first
   Countryman requirement, the Program does not satisfy the second
   requirement: that “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.” In re Provider
   Meds, 907 F.3d at 851 (quoting In re Murexco Petroleum, 15 F.3d at 62–63).
   After all, the Bonds are irrevocable, 8 meaning that even if Falcon V failed to
   perform its obligations under the Surety Bond Program, Argonaut would not
   be excused from its performance obligations to the obligees. And because
   Falcon V’s failure to perform would not excuse Argonaut from performing,
   the Surety Bond Program fails the Countryman test, even when applied in
   this flexible manner. 9

           7
             The Surety and Fidelity Association of America argues in an amicus brief that
   Argonaut does in fact have a continuing obligation to Falcon V, namely “the obligation to
   maintain its license and other statutory and regulatory capital, surplus, and reserve
   requirements.” However, Argonaut’s obligation to comply with surety law is owed to
   Texas (whose laws govern the Surety Bond Program), not Falcon V. See In re Coal
   Stripping, Inc., 215 B.R. 500, 502 (Bankr. W.D. Pa. 1997) (rejecting a similar argument on
   the ground that the sureties “owe their obligations to comply with West Virginia surety law
   to West Virginia, not to Debtor”).
           8
             As explained in supra Part I, the Bonds provide that “regardless of the payment
   or nonpayment by [Falcon V] of any premiums owing with respect to the Bond,
   [Argonaut’s] obligations under this Bond are continuing obligations and shall not be
   affected or discharged by any failure by [Falcon V] to pay any such premiums.”
           9
            While the existing Countryman test, flexibly applied, is sufficient to resolve the
   question of whether the Surety Bond Program is an executory contract, we recognize that

                                               10
Case: 21-30668        Document: 00516429246              Page: 11       Date Filed: 08/11/2022

                                          No. 21-30668

           The Surety Bond Program does not satisfy the Countryman test’s
   second requirement. Accordingly, it is not an executory contract, 10 and the
   bankruptcy and district courts correctly determined that it was not assumed
   under the Plan.
                                               B.
           Argonaut alternatively argues that even if Falcon V did not assume the
   Surety Bond Program, the Program is enforceable against them because it
   passed through the bankruptcy unaffected under the “pass-through” or
   “ride-through” doctrine. This argument might have merit if the Surety Bond
   Program were an executory contract that had been neither assumed nor
   rejected. See ASARCO, L.L.C. v. Mont. Res., Inc., 858 F.3d 949, 959 (5th Cir.
   2017) (“Executory contracts that are not assumed or rejected ‘ride through’
   the bankruptcy ‘unaffected by the bankruptcy proceedings.’” (quoting In re
   O’Connor, 258 F.3d 392, 405 (5th Cir. 2001))). However, “nonexecutory
   contracts . . . are not subject to assumption, rejection, or the ride-through
   doctrine.” Id. Because, as explained above, the Surety Bond Program is not
   an executory contract, Argonaut’s alternative argument is unavailing.

   in future multiparty contracts cases, it may make sense for courts to modify the test, and
   we note that because neither party asked us to apply the “functional approach,” see supra
   note 4, to this case, future courts should not consider foreclosed the possibility that the
   functional approach should be adopted for multiparty contract cases.
           10
             At least one district and three bankruptcy courts have also concluded that surety
   agreements similar to the Surety Bond Program do not qualify as executory contracts,
   although not necessarily under the same reasoning as ours. See In re James River Coal Co.,
   No. 306-0411, 2006 WL 2548456, at *4 (M.D. Tenn. Aug. 31, 2006); In re All Phase Elec.
   Contracting, Inc., 409 B.R. 272, 275 (Bankr. D. Conn. 2009); In re Maxon Eng’g Servs., Inc.,
   324 B.R. 429, 432 (Bankr. D.P.R. 2005); In re Coal Stripping, Inc., 215 B.R. at 502–03
   (Bankr. W.D. Pa. 1997). But see In re Evans Prods. Co., 91 B.R. 1003, 1005–06 (Bankr. S.D.
   Fla. 1988) (concluding without analysis that a surety agreement was “clearly executory”).

                                               11
Case: 21-30668   Document: 00516429246       Page: 12   Date Filed: 08/11/2022

                              No. 21-30668

                                  III.
         For the foregoing reasons, the district court’s judgment is
   AFFIRMED.

                                  12