In Re Sudbury, Inc.
1993 Bankr. LEXIS 636, 153 B.R. 776, 24 Bankr. Ct. Dec. (CRR) 389 (1993)
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Rule of Law:
An insurance policy whose coverage period expired pre-petition is not an executory contract under § 365 of the Bankruptcy Code, even if the debtor has outstanding obligations to pay retrospective premiums and cooperate, if the contract contains a 'bankruptcy clause' providing that the debtor's failure to pay does not excuse the insurer's obligation to pay claims.
Facts:
- Sudbury, Inc. purchased occurrence-based insurance policies from National Union Fire Insurance Company and The Continental Insurance Company.
- The policies included retrospective premium agreements, where the final premium amount was adjusted annually based on claims experience.
- The policies contained 'Bankruptcy Clauses' stating that Sudbury's bankruptcy or insolvency would not relieve the insurers of their obligation to pay claims.
- The policies also included 'Cooperation Clauses' requiring Sudbury to provide notice, information, and assistance to the insurers in handling claims for the insurer to be obligated to pay.
- All policy periods expired or were terminated before Sudbury filed for bankruptcy.
- Sudbury still owed outstanding retrospective premiums under the agreements.
- The insurers remained obligated to adjust, administer, and pay claims arising from occurrences that took place during the now-expired policy periods.
Procedural Posture:
- Sudbury, Inc. filed for Chapter 11 bankruptcy.
- In the U.S. Bankruptcy Court, Sudbury, Inc. (the Debtor) filed a motion for a declaration that its insurance policies with National Union and Continental (the Insurers) are not executory contracts under § 365.
- The Insurers responded, arguing the policies were executory contracts and that their claims for retrospective premiums were entitled to administrative expense priority.
- The court confirmed the Debtor's plan of reorganization.
- The parties entered an agreed order allowing the Debtor to reject the policies if the court determined them to be executory contracts.
- The parties submitted stipulated facts to the court for its ruling on the Debtor's motion.
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Issue:
Are expired, occurrence-based insurance policies executory contracts under § 365 of the Bankruptcy Code where the debtor owes retrospective premiums and has ongoing cooperation duties, and the insurer remains obligated to pay claims for pre-petition occurrences?
Opinions:
Majority - David F. Snow, Bankruptcy Judge
No. Expired, occurrence-based insurance policies are not executory contracts under § 365 of the Bankruptcy Code where the parties' obligations are not mutually dependent. The court applied the Countryman definition of an executory contract, which requires that the obligations of both parties be so unperformed that the failure of either to perform would constitute a material breach excusing the performance of the other. Here, the 'Bankruptcy Clauses' in the policies explicitly severed this mutuality by providing that the debtor's failure to pay premiums due to insolvency would not excuse the insurers' duty to pay claims. Therefore, the debtor's failure to pay is not a material breach that would excuse the insurers' performance. Similarly, the court found the debtor's duties under the 'Cooperation Clauses' were not the primary, bargained-for consideration but were conditions or ministerial obligations. A failure to cooperate on one claim would only provide a defense to that specific claim, not excuse the insurers' performance on all other claims, and thus does not meet the Countryman test for a material breach.
Analysis:
This decision clarifies that the mere existence of unperformed obligations on both sides of a contract does not automatically make it executory for bankruptcy purposes. The key is whether the obligations are interdependent, such that one party's breach would excuse the other's performance. By focusing on the effect of a 'Bankruptcy Clause,' the court prevents insurers from leveraging a debtor's ongoing need for coverage to elevate their pre-petition claims for premiums to high-priority administrative expenses. This ruling reinforces a functional approach to § 365, ensuring that the decision to classify a contract as executory serves a valid bankruptcy purpose, rather than simply reordering creditor priorities.
