Argonaut Ins. Co. v. Falcon V LLC
Argonaut Ins. Co. v. Falcon V LLC, 20-00702 (US District Court, M.D. La. Sept. 30, 2021) holds Surety Bonds Aren’t Executory Contracts, Can’t Be Assumed, and Can’t “Ride Through” bankruptcy, unaffected. The US District Court affirmed a Bankruptcy Court decision, to hold that an irrevocable surety bond isn’t executory because it gives the bonding company no further obligations to the debtor. The US Court of Appeals for the Fifth Circuit has adopted the definition of executory contracts proposed by Prof. Vern Countryman of Harvard Law School. The professor called a contract executory if it is “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). Because the surety bond was not an executory contract, per 11 USC 365, the bankruptcy debtor could not “assume” that contract. Moreover, because the surety bonds are “irrevocable.”, “the Reorganized Debtors failure to perform does not create a material breach that excuses [the bond company’s] performance, as required by the second prong of the Countryman test.” Seems unfair to the bonding company. Even worse for the bonding company, the District Court decision ruled that surety bonds cannot pass unaffected through bankruptcy because the ride-through doctrine applies only to executory contracts that were neither assumed nor rejected.