Nice Tentative by Chief Judge Sheri Bluebond on Rejecting a Family Law Contract

United States Bankruptcy Court
Central District of California
Chief Judge Sheri Bluebond, Presiding

Wednesday, May 20, 2015 Hearing Room 1475

2:15-11273 [debtor] Chapter 11
#7.00 Motion for an Order Rejecting Family Law Contract

The parties’ marital settlement agreement IS an executory contract.  The issue is whether there are unperformed obligations remaining on both sides of the contract that are sufficiently material that, if either party failed to perform these obligations, it would constitute a breach of the contract, relieving the other party of a duty of further performance.  Counsel for [the debtor] claims that [her] only remaining obligations are ministerial and therefore do not count.  This is not true.  Cooperating with transfers of title of real property is not merely a ministerial act in this context.  Refusing to cooperate in transfers of title would constitute a material breach of the contract.  The fact that the debtor would be able to compel performance and, if necessary, have a court official execute deeds on her behalf does not mean that these are not material obligations.  But there are other ongoing obligations as well that have been held sufficient to cause a given contract to be treated as executory, including the parties’ obligations to indemnify each other and hold each other harmless from and against certain obligations, the obligations with regard the payment of tax liabilities and expenses, and the like. Find more details about family laws practice here.

[The debtor] has cited to a handful of cases in which various obligations were treated as not being sufficient to make a given contract executory.  A careful review of executory contracts cases would reveal that the identical obligation has been held sufficient to cause a contract to be characterized as executory in one instance and to be insufficient in another.  This is because courts, adopting an outcome-oriented approach, have either attempted to avoid adverse results or to create desired benefits for one party or the other by manipulating the definition of executoriness.  This court rejects that approach.  Properly understood, rejection does not result in avoidance of the contract. It merely constitutes a thorough breach of the contract that is deemed to have occurred immediately prior to the petition date.  For an extensive, scholarly discussion of these issues, see M. Andrews, “Executory Contracts in Bankruptcy: Understanding ‘Rejection,'” 59 U. Colo. L. Rev. 845 (1985).

The Court notes as an aside that it is far from clear to the Court that permitting rejection of the contract would enable the debtor to recover the $850,000 in cash that [the debtor] has obtained or retained under the settlement agreement.  Rejection is a breach of the contract by the debtor. It is not a rescission of the agreement.  It generally permits the debtor to avoid having to perform future obligations under the agreement (unless those obligations are specifically enforceable in the event of a breach), but it does not entirely unwind the agreement or require the nonbreaching party to forego consideration already obtained under the agreement.  If the debtor wants to unwind the agreement, he will need to bring an action to avoid the agreement or transactions that have occurred under the agreement under section 547 or 548.

However. a determination that the contract in question is executory is not the end of the analysis. The Court must also determine whether rejection is permissible on these facts. Although the parties did not provide the Court with citations to any cases that have fact patterns that are remotely similar to the instant case, the Court was able to locate at least two, neither of which is binding upon this court: In re Tomaseki, 2014 Bankr. LEXIS 1238 (Bankr. D. Del. 2014) and In re Gardner, 26 B.R. 65 (Bankr. W.D.N.C. 1982). Both of these cases find that the parties’ marital settlement agreements are executory contracts but opine that permitting rejection of the contracts would be inappropriate.

As to the property settlement portions of these agreements, the courts note that, to the extent that these provisions are detrimental to the estate, they can, in an appropriate case, be attacked as preferences or fraudulent transfers.  As to the alimony portions, the courts note that the state court always has the ability to adjust support payments and that permitting the debtor to reject the agreement would serve merely to further confuse and delay the resolution of these issues in family court and to permit the debtor to use rejection as a weapon against his former spouse and/or children, which would appear to be inconsistent with provisions of the bankruptcy code intended to protect such parties and to make obligations to them nondischargeable.  Thus, these courts do not find any benefit to the bankruptcy estate from permitting rejection that could not be obtained in a manner that wouldn’t undermine these protections.

The Court is inclined to follow the reasoning of these two decisions.  If the interests of third parties have been adversely affected by the terms of the parties’ agreement — either the outright transfers or the size of the ongoing support obligations — the debtor in possession may seek to avoid the agreement as either a preference or a fraudulent transfer, but he may not reject the agreement under section 365.

Deny motion.

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