In a recent decision in the Distributed Energy Systems bankruptcy ("DES" or "Debtors"), the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware provided a concise discussion of what is required for a debtor to assume and assign an executory contract. DES filed a motion seeking to assume and assign contracts with ePower and Vestas Wind Systems to CB Wind Acquisition Corp ("CB Wind"). CB Wind previously purchased all of Debtors’ assets. Due to what Debtors’ termed a "scrivener’s error," the ePower and Vestas contracts were not included in the schedules to the original asset purchase agreement.
ePower objected to the assumption of its contract on several grounds. First, ePower argued that DES failed to prove CB Wind could provide adequate assurance of future performance. Next, ePower claimed that its contract was not an executory contract and therefore not subject to assumption and assignment under section 365 of the Bankruptcy Code. Finally, ePower argued that Debtors’ failure to include its contract in the sale motion evidenced its original intent to reject the agreement.
Application of the Business Judgment Standard
Turning first to the Bankruptcy Code, the Court recognized that section 365(a) allows DES to assume executory contracts provided it cures all defaults. The Court also recognized that the Debtors’ decision to assume an executory contract receives "great deference" under the business judgment standard. The Court found that DES demonstrated proper business judgment through the "numerous concessions and  ample consideration" DES received by assigning the ePower contract to CB Wind.
Adequate Assurance of Future Performance
Two factors supported the Court’s finding that Debtors proved adequate assurance of future performance by CB Wind. First, the Court previously approved the sale of Debtors’ assets to CB Wind and no other party in interest objected as to the Debtors’ adequate assurance. Even though the lack of such an objection was not, on its face "proof positive of adequate assurance," the Court still found the lack of objection compelling. Besides the lack of objections from others, the Court found that the ePower contract did not require CB Wind to pay out money. Instead, the contract required CB Wind to seek funding from third parties.
Whether the Contract Is Executory
Citing the Third Circuit’s decision in In re Columbia Gas System, 50 F.3d 233, 239 (3d Cir. 1995), the Court defined an executory contract as one where the obligation of the debtor and third party "are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other." As to the ePower contract, the Court highlighted terms of the contract requiring "ongoing exclusive collaboration." Such collaboration included the parties continuing pursuit of wind and water-powered generators and provided the proof needed to convince the Court that the agreement was executory.
Intent to Reject Irrelevant
During the evidentiary hearing, substantial testimony was put forward regarding the Debtors’ intent to reject the ePower contract. The Court found the issue of the Debtors’ intent irrelevant "as the fact remains that the Debtors did not seek and the Court did not approve a rejection" of the contract. Further, the Court recognized the Debtors’ ongoing right to assume and assign contracts through plan confirmation.
Court Finds Vestas Contract Not Executory
For the reasons stated above, the Court found that the ePower contract was executory and subject to assumption and assignment. Using the same reasoning, however, led to a different result for the Vestas contract. Under the language of the contract, Vestas remains obligated to maintain the confidentiality of information, however, the Court found the Debtors did not have "any remaining obligations to perform and, therefore, the agreement is not executory." Having found that the contract was not executory, the Court further concluded that it lacked authority to approve assumption and assignment of the Vestas agreement.
It is always helpful for attorneys to have opinions like this one, addressing issues that frequently arise in bankruptcy proceedings (i.e. executory versus non-executory contracts). Like with other opinions discussed in this blog, courts often look to the language of the contract, versus the intent of the parties, when interpreting a contract. Doing so provides what some consider a welcome level of predictability to business transactions.