Making a quiet entrance into the public realm during the final week of last year, a new opinion from the United States Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) suggests that it is time to revisit the definition of an “executory contract” as has been applied for years by the United States Court of Appeals for the Ninth Circuit. The opinion, Carruth v. Eutsler (In re Eutsler), B.A.P. 9th Cir. December 27, 2017, is careful to follow the Ninth Circuit’s holding in Unsecured Creditors’ Comm. v. Southmark Corp. (In re Robert L. Helms Constr. & Dev. Co.), in deciding an appeal which turned on whether or not a shareholders’ agreement that contained a buy-out mechanism was executory or not. But the new BAP opinion lingers on a discussion of how and why that long-relied-on authority should be revisited.
It is tempting to dismiss the BAP’s provocative musings on executory contracts as nothing more than intellectual day-dreaming. But practitioners have for many years been reading, analyzing, debating, drafting around, and counseling clients about Helms and the “Countryman” definition of executory contracts adopted by Helms. A change to the rule in Helms would be a seismic event—a contract provision that most thought would be interpreted in one manner would suddenly be thrown into question and potential challenge. Millions of dollars riding not only on options but also on franchise agreements, licensing arrangements, film development and distribution deals, and countless other transactions would have to be re-analyzed. Thus, although the BAP did not actually change the rule—it has no power to do so and to its credit the panel acknowledged as much—even the potential for such a change is a significant event. Continue reading