Document Type
Research Memorandum
Publication Date
2024
Abstract
(Excerpt)
Settlement agreements will often contain sequential responsibilities, meaning that one party’s obligations are not due until the other party’s obligations are fulfilled. While such settlement agreements are contractual in nature, this does not automatically entitle them to be considered executory contracts under section 365 of title 11 of the United States Code (the "Bankruptcy Code").
Section 365 of the Bankruptcy Code does not define "executory contract." Many courts employ the "Countryman test" which states that "a contract is executory if 'the obligations of both parties are so underperformed that the failure of either party to complete performance would constitute a material breach and thus excuse the performance of the other.'" The Countryman test consists of two elements: (1) whether both parties have remaining material obligations; and (2) if, as of the petition date, failure to perform those obligations would give rise to a material breach and excuse performance by the other party. When determining these elements, the Butner principle causes state contract law to control.
This memorandum analyses the split between various Circuits as to the potential executory nature of settlement agreements with sequential performance, particularly when one party’s duty is a release of claims. Part I discusses the first prong of the Countryman test and how courts determine the materiality of parties' obligations. Part II discusses the second prong of the Countryman test and how courts determine if a failure to perform a sequential obligation would give rise to a material breach.