All bankruptcy practitioners know that a debtor may choose which contracts to assume and which contracts to reject. But may a debtor reject contracts that are part of an overall, integrated transaction? In a recent bankruptcy decision, the court found the answer to be no, at least if the parties are careful in drafting their contracts.
In In re Trinity Corp., 514 B.R. 526 (Bankr. E.D. Ky. 2014), the debtor sought to reject two contracts that were part of a complex, integrated transaction. The debtor operated a coal production facility in Kentucky. Another company operated its own coal production facility on adjacent property. The debtor and its neighbor-competitor agreed that when the property had previously been divided, the division was “cumbersome and illogical.” To remedy this, the parties negotiated a comprehensive property exchange in 2008. The 2008 transaction was documented by a series of agreements including a master agreement which itself identified sixteen ancillary documents that were required to be executed at the closing. After it filed its bankruptcy petition, the debtor sought to reject two of these ancillary documents, thus retaining the master agreement and the remaining fourteen ancillary documents. The non-debtor party objected to the proposed rejection, arguing that the two agreements sought to be rejected were part of an indivisible, integrated property exchange agreement and that the debtor could not sever these two agreements for purposes of rejection.
The court agreed, and rebuffed the debtor’s attempt to reject the two ancillary agreements. Key to the court’s decision was its finding that the parties had intended that the master agreement and the sixteen ancillary documents constituted one indivisible contract. In support of this finding, the court noted:
- The master agreement and ancillary agreements were executed contemporaneously;
- The master agreement and ancillary agreements all related to the same subject matter;
- The master agreement provided that it would be “cancelled and treated as if void and of no force and effect” unless the ancillary documents were entered into at the closing;
- The master agreement defined the “entire agreement” to include the schedules and exhibits, and models of the ancillary documents were attached as exhibits to the master agreement;
- The two ancillary agreements sought to be rejected both defined the “entire agreement” as including the master agreement;
- The consideration for each of the ancillary agreements was the various property rights that the parties exchanged pursuant to the master agreement.
The court also found that it is appropriate for courts considering the divisibility of a contract “to look at the object to be attained and the common sense of the situation.” In this regard, the court found that the stated purpose of the 2008 transaction was to remedy the cumbersome and illogical manner in which the parties had initially obtained their property rights and to enable both parties to conduct their business operations more efficiently. Rejection of the two ancillary documents, while maintaining the master agreement and the remaining ancillary documents, would frustrate the parties’ purpose.
What does Trinity Coal tell us? First and foremost, the decision teaches us that it is crucial in the context of a complex, integrated transaction to include clear and unambiguous language in the contracts demonstrating that the various contracts constitute one indivisible agreement. Attorneys drafting such agreements would be well advised to include provisions such as those found key by the Trinity Coal court, namely that the various contracts constitute one indivisible contract, that the contracts would not be entered into without all of the contracts being entered into contemporaneously, and that the benefits conferred by the entire, integrated transaction constitute the consideration supporting each of the various contracts.
Words do count, especially if one is faced with the clever debtor seeking to pick and choose which contracts it wants and those it does not want.