Elizabeth Gomiela
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In Argonaut Insurance Company v. Falcon V, L.L.C., the U.S. Court of Appeals for the Fifth Circuit held the $10.5 million surety agreement between Argonaut Insurance Company (“Argonaut”), the creditor, and Falcon V, L.L.C. (“Falcon”), the debtor, was not an executory contract and, therefore, could not have been assumed by Falcon under its reorganization plan.[1] As a result, Argonaut was unable to recover the $7.3 million unsecured claim against Falcon, demonstrating the importance of carefully reviewing plans to confirm your clients will not be negatively impacted.[2]
Falcon engages in oil and gas exploration and development and Argonaut provides surety bonds. Prior to Falcon filing for bankruptcy, it entered into a surety agreement with Argonaut under which Argonaut posted four irrevocable bonds guaranteeing Falcon’s obligations to various third-party obligees.[3] In exchange, Falcon and Argonaut entered into an Indemnity Agreement, stating that Falcon would pay Argonaut premiums and “indemnify Argonaut for any payments Argonaut makes under the [b]onds.”[4]
In 2019, Falcon filed for bankruptcy and the bankruptcy court confirmed the reorganization plan which stated Falcon “shall be deemed to have assumed each executory contract . . . to which it is a party.”[5] In 2020, Argonaut, in accordance with the Indemnity Agreement, requested Falcon provide additional collateral to fully secure the bonds.[6]Falcon refused, stating Argonaut's claims against it were discharged under the reorganization plan.[7] Argonaut then filed a motion in bankruptcy court to interpret and affirm the reorganization plan, arguing Falcon assumed the surety agreement because it is an executory contract.[8] The bankruptcy court held that the surety agreement was not assumed under Falcon’s plan because it was not an executory contract.[9] The district court and Fifth Circuit Court of Appeals affirmed the bankruptcy court’s decision.[10]
A contract is executory if it satisfies these two prongs: “[(1)] performance remains due to some extent on both sides and [(2)] 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.”[11] “This definition of executory contracts was first proposed by Professor Vern Countryman and is known as the ‘Countryman test.’”[12] Applying the Countryman test, “the bankruptcy and district court [in Falcon’s case] focused on the obligations that Falcon [] and Argonaut owed each other.”[13] Both courts concluded that the surety agreement between Falcon and Argonaut failed the Countryman test’s first prong, stating “even though Falcon [] has a continuing obligation to pay premiums to Argonaut and to indemnify Argonaut for any payments that Argonaut makes under the [b]onds, . . . Argonaut has already posted the [b]onds and does not owe further performance to Falcon [].”[14]
The Fifth Circuit also held that the surety agreement between Argonaut and Falcon does not satisfy the second prong of the Countryman test, which requires 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.”[15] The bonds Argonaut posted were irrevocable, “meaning that even if Falcon failed to perform its obligations under the [surety agreement], Argonaut would not be excused from its performance obligations to the obligees[.]”[16]Accordingly, the Fifth Circuit held that the surety agreement was not an executory contract and thus, was not assumed under the express terms of Falcon’s confirmed plan.[17]
A more careful review of Falcon’s plan would have shown the negative impact it would have on Argonaut. “[Falcon’s] plan contained a catch-all provision providing that all of the debtors' executory contracts and unexpired leases would be deemed assumed at confirmation, unless otherwise specifically enumerated.”[18] “The surety [agreement] was not specifically enumerated.”[19] Argonaut mistakenly believed that this agreement with Falcon was protected as an executory contract which would be assumed, and did not object to confirmation.[20] Properly reviewing a plan for even general language can protect your client from detrimental outcomes, such as the one Argonaut faced here.
[1] Argonaut Ins. Co. v. Falcon V, L.L.C. (In re Falcon V, L.L.C.), 44 F.4th 348, 350 (5th Cir. 2022).
[2] Id. at 351.
[3] Id. at 350.
[4] Id. at 351.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id. at 356.
[11] Id. at 352 (quoting RPD Holdings, L.L.C. v. Tech Pharmacy Services (In re Provider Meds), 907 F.3d 845, 851 (5th Cir. 2018) (internal citations omitted).
[12] Id. at 352–53 (citing Spy Media Grp., LLC v. Bruce Cohen Productions (In re Weinstein Co. Holdings LLC), 997 F.3d 497, 504 (3d Cir. 2021)) (internal quotation marks omitted).
[13] Id. at 353.
[14] Id.
[15] Id. at 355.
[16] Id. at 354–55.
[17] Id. at 365.
[18] Lisa Tancredi & Laura Murphy, 5th Circ. Bankruptcy Ruling Signals New Sureties Road Map, LAW360 (August 24, 2022, 2:42 PM), https://www.law360.com/articles/1523827/5th-circ-bankruptcy-ruling-signa....
[19] Id.
[20] Id.