The U.S. Court of Appeals for the Third Circuit has held that unperformed obligations to more particularly describe easements in property conveyed by the debtor prepetition did not constitute "duties" remaining to be performed under a contract. Therefore, the sale contract and prepetition deed were not an executory contract that could be assumed and assigned by the estate’s trustee pursuant to section 365 of the Bankruptcy Code.

The unpublished opinion In re Midwest Portland Cement Co. (Glosser v. Maysville Reg’l Water District Kents Run Partnership, Ltd.), 2006 WL 565683 (3rd Cir. March 9, 2006) addressed a contract entered into between the Midwest Portland Cement Co. ("debtor" or "Midwest") and Maysville Regional Water District ("Maysville") in or around March 1993 for the sale of real property located in Muskingum County, Ohio.

As part of the sale contract, Midwest retained an easement through Maysville’s property so that it could construct certain machinery necessary to mine from an adjacent property, owned by Kents Run Partnership Ltd. ("Kents Run"), where Midwest had mining rights. Maysville, in turn, obtained an easement to run waterlines from certain of the purchased property across adjacent land that Midwest still owned. The parties recorded a deed reflecting the sale in or around December 1993, and Maysville made full payment under the sale contract.

Midwest became an involuntary chapter 7 debtor in or around May 1997. In 2002, the bankruptcy court approved a settlement by and among Midwest’s trustee and certain other claimants in the bankruptcy, which, among other things, called for the trustee to seek approval to assume the 1993 Maysville contract on the grounds that the contract is "executory" under Bankruptcy Code section 365(a), and assign the easements granted Midwest therein to Kents Run, one of the settling parties.

The bankruptcy court held that the contract was not executory, reasoning in part that the parties’ sale of the property became final and complete upon recordation of the deed, and neither party had remaining obligations that would constitute a material breach if unperformed. The district court affirmed, and Kents Run appealed.

The Third Circuit, in affirming both lower courts, noted that an executory contract, as defined for purposes of section 365, 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 the performance of the other." (Citing Sharon Steel Corp. v. Nat’l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1995)).

The Third Circuit first determined that the deed was complete and properly recorded. Next, the court acknowledged that the terms of the parties’ recorded deed required a further description of Midwest’s easement—but only after Midwest, among other things, constructed its conveyor belt and storage facility. The deed likewise provided that Maysville must first construct its waterlines before added description of its easement became an obligation.

The court observed that neither Maysville nor Midwest was under a contractual duty or promise to create the contemplated improvements on the easements; and Kents Run did not dispute that neither Maysville nor Midwest had developed the easements by the time the petition was filed. The court therefore found that absent such a duty, failure to perform the contingent obligations of further description of the easements did not constitute a material breach of the contract.

Of note is the fact that this unpublished opinion provides only guidance, and not precedence, to other Third Circuit courts facing similar issues.

This article is presented for informational purposes only and is not intended to constitute legal advice.