Surety bonds are not enforceable contracts


As we have previously reported over the years, a key provision of the Bankruptcy Code is Section 365, a lengthy provision that deals with the disposition of enforceable contracts between debtor and non-debtors in bankruptcy proceedings. . Over many decades, Section 365 has been amended myriad times to deal with special contracts ranging from real estate leases to equipment leases to aircraft leases. But the preliminary question that must be answered by the court remains: is the agreement in question an enforceable contract capable of being presumed or rejected in the event of bankruptcy? At a time when the unprecedented real estate boom may finally be coming to an end given rising interest rates and a possible recession, the processing of performance bonds and related agreements may become an area of ​​concern. ‘interest. Surprisingly, until now, no federal circuit court of appeals had determined whether a bond agreement was an enforceable contract. In an opinion issued by the United States Court of Appeals for the Fifth Circuit dated August 11, in a case titled In the Falcon V case, Case No. 21-30668, the court held that a surety bond is not an enforceable contract and that the debtor’s obligations under the surety bonds could not be performed.

The surety program and bankruptcy procedures

According to the notice, the debtor and its affiliates were engaged in oil and gas exploration and development. As part of a “bond program”, an insurer had issued four irrevocable bonds guaranteeing the performance of the debtor vis-à-vis third parties relating mainly to the sealing, abandonment and restoration of oil and gas wells. If the debtor fails to fulfill its obligations, the insurer would be required either to pay the third party an amount equal to the obligation, or to perform the obligations itself up to the amount of the bond. The total bond amount was $10,575,000. The debtor was required to pay premiums to the insurer and to indemnify the insurer for any payments the insurer had to make under the bonds. The bonds also provided that the insurer’s obligations to third parties would continue whether or not the debtor paid the premiums due to the insurer.


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