Thoughts From the BAP on How to (re)Define an “Executory Contract”

by Greenberg Glusker Fields Claman & Machtinger LLP

Making a quiet entrance into the public realm during the final week of last year, a new opinion from the United States Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) suggests that it is time to revisit the definition of an “executory contract” as has been applied for years by the United States Court of Appeals for the Ninth Circuit. The opinion, Carruth v. Eutsler (In re Eutsler), B.A.P. 9th Cir. December 27, 2017, is careful to follow the Ninth Circuit’s holding in Unsecured Creditors’ Comm. v. Southmark Corp. (In re Robert L. Helms Constr. & Dev. Co.), in deciding an appeal which turned on whether or not a shareholders’ agreement that contained a buy-out mechanism was executory or not. But the new BAP opinion lingers on a discussion of how and why that long-relied-on authority should be revisited.

It is tempting to dismiss the BAP’s provocative musings on executory contracts as nothing more than intellectual day-dreaming. But practitioners have for many years been reading, analyzing, debating, drafting around, and counseling clients about Helms and the “Countryman” definition of executory contracts adopted by Helms. A change to the rule in Helms would be a seismic event—a contract provision that most thought would be interpreted in one manner would suddenly be thrown into question and potential challenge. Millions of dollars riding not only on options but also on franchise agreements, licensing arrangements, film development and distribution deals, and countless other transactions would have to be re-analyzed. Thus, although the BAP did not actually change the rule—it has no power to do so and to its credit the panel acknowledged as much—even the potential for such a change is a significant event.

The underlying case: Carruth v. Eutsler

In Eutsler, the founder and then 25.5% owner of a company filed a chapter 13 case. The shares held by Eutsler were subject to a “Stock Restriction/Buy-Sell Agreement” allowing either the company or the 49% minority shareholders to buy the shares in certain circumstances, including the bankruptcy of shareholder/debtor Eutsler. The company, still controlled by Eutsler and/or the other seemingly friendly (the opinion does not say so but it seems likely) 25.5% shareholder, received notice of Eutsler’s bankruptcy case but never exercised the buy-out provision. Later (at least as they claim) the minority shareholders learned of the bankruptcy case and wanted to try to buy Eutsler’s shares under the formula. The Bankruptcy Court found for Eutsler and the minority shareholders appealed to the BAP.

The BAP explained that the provision in the shareholders’ agreement provided that, “upon the occurrence of certain ‘terminating events,’ one of which was ‘the filing of any proceedings for bankruptcy . . . by a Shareholder,’ that shareholder was required to give written notice to the corporation and other shareholders. The corporation then had the option, but not the obligation, to purchase the shareholder’s stock at a price-based formula. If the corporation did not timely exercise the option, the other shareholders had the same option.” Eutsler, pp. 2-3.

The Bankruptcy Court ruled that the shareholders’ agreement was not an “executory contract” and that therefore the minority shareholders’ rights under the agreement to trigger the buy-sell mechanism were lost after the filing of the bankruptcy case. The BAP affirmed that ruling, characterizing the shareholder agreement as an option agreement and finding under Helms that it was not an executory contract. The BAP agreed with the Bankruptcy Court’s analysis about whether or not the shareholders’ agreement was executory, writing:

The bankruptcy court correctly held that the Ninth Circuit has adopted Professor Countryman’s definition of an executory contract: “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.” Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973); see In re Helms Constr., 139 F.3d at 705 (“An executory contract is one ‘on which performance remains due to some extent on both sides.’”).

Executory contracts: the BAP criticizes the “Countryman” decision

This result, although adding to the caselaw in the area and worthy of scrutiny by those dealing with similar contracts and facts, is not particularly noteworthy. What is noteworthy is that the BAP went out of its way to criticize the “Countryman” definition used to identify executory contracts in the first place in the Ninth Circuit (and many other circuits), a test which has literally been used for decades by courts and practitioners.

The BAP had previewed in a footnote that as far as it was concerned there were issues with the reasoning of Helms:

We explain in footnotes why we think the court of appeals should revisit some of those issues, including the definition of “executory contract” in general and specifically whether an option contract such as the Buy-Sell Agreement is an executory contract.

The BAP felt that a “new” test proposed in an article co-authored by the prominent law professor Jay Westbrook would be a better idea. It stated:

Most courts follow the Countryman definition, but some decisions adopt a more flexible approach. See, e.g., Chattanooga Mem’l Park v. Still (In re Jolly), 574 F.2d 349, 351 (6th Cir. 1978) (“[D]efinitions [such as Countryman’s] are helpful, but do not resolve this problem. The key, it seems, to deciphering the meaning of the executory contract rejection provisions, is to work backward, proceeding from an examination of the purposes rejection is expected to accomplish. If those objectives have already been accomplished, or if they can’t be accomplished through rejection, then the contract is not executory within the meaning of the Bankruptcy Act.”). A very recent law review article makes a powerful argument in favor of a “modern contract approach” to executory contracts. Under that approach, all contracts with any unperformed obligation on either side, material or not, are “executory contracts” under § 365. Jay Lawrence Westbrook & Kelsi Stayart White, The Demystification of Contracts in Bankruptcy, 91 Am. Bankr. L.J. 481 (2017). The alternative approaches have much to recommend them; the Countryman definition turns on factors that have little if anything to do with the underlying policies of bankruptcy law and produce anomalous results in some cases. But neither party to this appeal challenges Helms Construction, and we could not disregard or overrule it even if they asked us to do so.

Still walking through the Helms analysis to affirm the Bankruptcy Court, the BAP noted in yet another footnote that the new proposed test would make every limited liability company operating agreement an executory contract:

The advocates of the modern contract approach would treat LLC operating agreements (which are similar in many respects to the Buy-Sell Agreement in this case) and options in general as executory contracts. Westbrook & White, supra n.6, at 503-06, 511-13. This approach has substantial appeal, but we are not writing on a blank slate. Instead, we must follow Helms Construction, which holds otherwise.


At least this author does not find a rule that would turn every single LLC operating agreement (and there are millions of them) into an “executory contract”—meaning that the entities could file bankruptcy and reject their own charters—something that has “substantial appeal.” It also would be in conflict with the way LLC operating agreements and the economic agreements they embody have been treated over the last 20 years by bankruptcy courts, although that is a topic for another day.

For the moment, the “Countryman” definition remains the law in the Ninth Circuit. Those with executory contract questions in 2018 can only wonder how whatever advice they give (or receive) might be viewed years in the future when disputes arise and a court must render a decision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Greenberg Glusker Fields Claman & Machtinger LLP | Attorney Advertising

Written by:

Greenberg Glusker Fields Claman & Machtinger LLP

Greenberg Glusker Fields Claman & Machtinger LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.