[00:00:00] Speaker 01:
Good morning.

[00:00:00] Speaker 01:
My name is Derek Tallarico.

[00:00:02] Speaker 01:
I represent the appellant, Spenhart Swedish Bakery, and I intend to reserve two minutes in rebuttal.

[00:00:08] Speaker 01:
May it please the Court?

[00:00:10] Speaker 01:
I'd like to begin by addressing the two cases the panel directed us to.

[00:00:14] Speaker 01:
The first is Inrei Aslan, which has two relevant holdings.

[00:00:19] Speaker 01:
As to the standard of review, this Court ruled that determinations regarding the executory nature

[00:00:25] Speaker 01:
of the contract under section 365 and the effects of rejection pursuant to that section are conclusions of law, which we reviewed de novo.

[00:00:33] Speaker 04:
The appellant would have the panel... Council, you're very soft spoken and I think I might be getting old here.

[00:00:39] Speaker 04:
Could you speak louder, please?

[00:00:40] Speaker 01:
Absolutely.

[00:00:41] Speaker 01:
Thank you.

[00:00:42] Speaker 01:
The appellant would have the panel conclude that eight years later, Helms overturned Aslan and took the remarkable position that application of the legal standard

[00:00:54] Speaker 01:
for the executory nature of a contract is a matter of fact.

[00:00:58] Speaker 01:
It did not and it is not.

[00:01:00] Speaker 01:
The facts are not in dispute in this case.

[00:01:04] Speaker 01:
What's at issue is the application of the law to those facts on a de novo standard.

[00:01:10] Speaker 01:
The main takeaway from ASLON is that sequenced performance does not equate to a contract being non-executory.

[00:01:19] Speaker 01:
This squares with this court's ruling in Helms, which focuses on

[00:01:23] Speaker 01:
the outstanding nature of performance obligations at the petition date.

[00:01:28] Speaker 01:
Performance does not have to be due to be performed at the moment of bankruptcy in order to be outstanding.

[00:01:36] Speaker 01:
In Aslan, the debtor-seller had an obligation to provide documents and the non-debtor-buyer had an obligation to tender a purchase payment.

[00:01:45] Speaker 01:
The obligation to purchase was not yet due until the documents had been provided.

[00:01:50] Speaker 04:
Council, you know, and I know you want to get onto this part of the argument, but I guess I'm wondering on the financial accommodation part of the statute.

[00:02:03] Speaker 04:
Section 365 says that you can assume a contract to extend a financial accommodation for the benefit of the debtor.

[00:02:14] Speaker 04:
So here, the pension fund was owed some $40 million.

[00:02:21] Speaker 04:
They signed an agreement where now it's $3 million.

[00:02:24] Speaker 04:
Why isn't that a financial accommodation?

[00:02:28] Speaker 01:
I'd point the court to its decision in Sun Runner Marine in 1991, where the court determined that, consistent with legislative history, a financial accommodation refers to the extension of new money.

[00:02:42] Speaker 00:
The only case... Well, here, weren't they essentially giving them $35 million?

[00:02:46] Speaker 01:
No, Your Honor, I don't believe so.

[00:02:49] Speaker 01:
There was a dispute as to what was... What was the dispute?

[00:02:52] Speaker 00:
There was no dispute.

[00:02:53] Speaker 00:
There was a determination which was sent to Sven Hartz, and they didn't contest it.

[00:02:59] Speaker 00:
So, what was the dispute?

[00:03:01] Speaker 01:
The process of what led to the settlement agreement... I'm sorry?

[00:03:07] Speaker 01:
There was a two-year settlement negotiation that occurred.

[00:03:12] Speaker 01:
that led to the settlement agreement, which demonstrates that there was an issue as to what was owed and what should and could be paid.

[00:03:20] Speaker 00:
And was it anywhere near the difference between $3 million and $40 million?

[00:03:27] Speaker 00:
Was there any argument in the world?

[00:03:29] Speaker 00:
It seems obvious that what was happening here, and according to the record, was there was an inquiry into Sven Hart's financial situation.

[00:03:40] Speaker 00:
And the pension fund was ultimately persuaded that there was no way they were going to be able to pay anything like the amount that they actually owed.

[00:03:49] Speaker 00:
And that's how they came up with the $3 million.

[00:03:52] Speaker 00:
There was no dispute of any significance as to the amount of money.

[00:03:56] Speaker 01:
Well, I think Sven Hart did dispute whether or not that was the strength of that dispute.

[00:04:02] Speaker 00:
Where in the record does it show that there was any dispute as to the amount of money that they owed?

[00:04:11] Speaker 01:
Well, the issues that were argued at the bankruptcy court and the BAP do not go to the underlying claim itself.

[00:04:21] Speaker 00:
I know, but I'm asking where on the records or any indication that Svenhart's ever disputed that they owed, I mean, $35, $36, or $37 million, millions and millions of dollars in the 30s.

[00:04:36] Speaker 01:
Other than the fact that they agreed to settle that, no, there is nothing else.

[00:04:39] Speaker 03:
And so how is it not a financial accommodation at that point?

[00:04:43] Speaker 01:
Because it's not an extension of credit.

[00:04:47] Speaker 01:
What the bankruptcy code seeks to limit

[00:04:52] Speaker 01:
is requiring a third party to come out of pocket to extend credit to a debtor in a circumstance where that debtor may be in a different financial position than they were.

[00:05:03] Speaker 00:
And that's exactly what happened here, because the pension fund has a responsibility tied to that money.

[00:05:11] Speaker 00:
And so they are out of pocket in the sense that they are going to have to pay benefits based on money they don't have.

[00:05:19] Speaker 01:
But it's a claim.

[00:05:20] Speaker 00:
What do you mean it's a claim?

[00:05:22] Speaker 01:
It's a claim that the pension fund has to spend hearts, a claim for spend hearts to pay them money.

[00:05:27] Speaker 00:
Correct.

[00:05:27] Speaker 00:
And they gave them a financial accommodation of asking for much less money because they were persuaded, exactly as you said, that spend hearts couldn't pay it.

[00:05:39] Speaker 00:
So they gave them an accommodation.

[00:05:40] Speaker 00:
It's like a workouts agreement.

[00:05:43] Speaker 01:
And that's why I point the court to Sunrunner Marine.

[00:05:47] Speaker 03:
In Sunrunner, I think I'm looking at the passage you're talking about.

[00:05:52] Speaker 03:
It says that there was an extension of money or credit there, but it doesn't say that that's Necessary it seems like it's sufficient, but it where does it say that that's necessary to be a financial accommodation I Think it comes to it points out that that I mean this is a case-by-case determination and and I believe Sun runner does stand for the principle that

[00:06:16] Speaker 01:
the extension of money is the granting, the giving of funds.

[00:06:20] Speaker 04:
Well, this is a debt restructuring.

[00:06:22] Speaker 04:
You refer to it as a settlement, but it's a debt restructuring.

[00:06:25] Speaker 04:
It is, in fact, a financial accommodation, isn't it?

[00:06:30] Speaker 01:
We don't believe, no, don't believe so.

[00:06:31] Speaker 03:
I mean, is Sunrunner your only case?

[00:06:32] Speaker 03:
Because as I read Sunrunner, it says that there was an extension of money or credit, and they think that's a financial accommodation.

[00:06:40] Speaker 03:
But I don't read anywhere where it says that's the only way something could be a financial accommodation, unless you can point me to something that I'm missing here.

[00:06:49] Speaker 01:
I'll review if there's additional cases for rebuttal.

[00:06:54] Speaker 03:
Great.

[00:06:54] Speaker 03:
Let's hear from the other side then.

[00:07:03] Speaker 02:
Good morning and may it please the court.

[00:07:05] Speaker 02:
I'm Joshua Schifrin here on behalf of the pension fund.

[00:07:09] Speaker 02:
The bankruptcy court ruled in favor of the pension fund on three independent grounds and the BAP affirmed on two of those grounds.

[00:07:18] Speaker 02:
And we submit that none of those grounds are due for reversal here today.

[00:07:22] Speaker 02:
To start with the subject that the panel was touching upon on the financial accommodation piece.

[00:07:29] Speaker 02:
I'll note that the statute is disjunctive.

[00:07:34] Speaker 02:
It says under section 365C2, a contract that is a loan or debt refinance, excuse me, or debt financing or financial accommodation for the benefit of the debtor cannot be assumed.

[00:07:46] Speaker 00:
How would you describe, if we were to write an opinion in this, as to what constitutes a financial accommodation, just some description of it?

[00:07:56] Speaker 02:
I think that the description can be found in the Ninth Circuit's case, SAB, and also within the description of what the congressional intent behind the exception is, which is that it's an exchange

[00:08:14] Speaker 02:
for a promise to pay money over time, made based on considerations of the financial circumstances of the debtor.

[00:08:23] Speaker 02:
And there's a recognition in making that contract that if those circumstances were to change, that that extension of credit or that financial arrangement should not be assumed.

[00:08:38] Speaker 02:
Should not be assumable, I should say.

[00:08:40] Speaker 02:
I don't know if that's a helpful definition or not, but I think that those are the essential elements of it.

[00:08:45] Speaker 02:
Is that it?

[00:08:45] Speaker 00:
And I think the essential element... In those circumstances, you should change meaning if they file for bankruptcy.

[00:08:49] Speaker 00:
Is that what you mean?

[00:08:50] Speaker 02:
Yes, that's right.

[00:08:51] Speaker 02:
If they file for bankruptcy.

[00:08:52] Speaker 02:
And that, looking at the case law, looking at the TS Industries case and the Boutique case... Because the whole point of this was to get paid even if a lot less than what you got.

[00:09:02] Speaker 02:
That's right.

[00:09:03] Speaker 02:
I mean, this was an arrangement entered into the... But if it's assumed, then you...

[00:09:11] Speaker 00:
are supposedly getting what you did agree to.

[00:09:15] Speaker 00:
So you are getting paid a lot less than what you agreed to, but what you would do, but you're getting paid.

[00:09:22] Speaker 02:
Well, the circumstances have dramatically changed.

[00:09:25] Speaker 02:
I mean, they're written into the recitals of the agreement that the pension fund agreed to accept $3 million in lieu of $39 million because it thought that at the time it was making the best of a bad situation.

[00:09:38] Speaker 02:
this was what it was going to be able to receive from an entity that said it was going to remain in business.

[00:09:44] Speaker 02:
Lo and behold, it turns out in bankruptcy that this entity actually has a successor that is a deep pocket.

[00:09:52] Speaker 00:
And the settlement agreement is a ploy to... That's kind of fortuitous to the description of what's financial accommodation, right?

[00:10:01] Speaker 00:
I mean, that's the facts of this case, but in terms of what makes it a financial accommodation and why the bankruptcy would matter,

[00:10:09] Speaker 02:
Yes, it is fortuitous in this case, and it is unusual that I think that the posture of this motion to assume is coming to the court because the debtors not wanting to take advantage of the financing of the pension fund, but rather to... To get off on a slightly different question.

[00:10:32] Speaker 00:
As I understand it,

[00:10:40] Speaker 00:
Settlement, there's another agreement, which is the agreement between Sven Hartz and the successor, MSB, is that what it's called?

[00:10:50] Speaker 02:
USB.

[00:10:51] Speaker 00:
USB.

[00:10:53] Speaker 00:
And at least at that juncture, I think it was at that juncture, USB said, but we won't take the assignment unless the agreement is declared valid.

[00:11:10] Speaker 00:
And the bankruptcy court said, I'm not going to declare it valid, and that has been argued today, but it seems to be consistent with our case law.

[00:11:20] Speaker 00:
So why isn't that the end of the story?

[00:11:23] Speaker 02:
It could well be the end of the story.

[00:11:25] Speaker 02:
I think that there's three grounds that the

[00:11:30] Speaker 02:
Bankruptcy Court found any one of which could well be at the end of the story for the settlement agreement.

[00:11:35] Speaker 00:
But that was sort of an afterthought, as I understand it, in the Bankruptcy Court.

[00:11:40] Speaker 00:
Well, I'm not going to do it.

[00:11:41] Speaker 00:
But he didn't say because I'm not going to do it.

[00:11:43] Speaker 00:
The other two issues don't matter anymore.

[00:11:46] Speaker 02:
Correct.

[00:11:46] Speaker 02:
I think that any of those grounds are sufficient reasons why the Bankruptcy Court would not approve the settlement agreement between USB and Svenhards.

[00:11:57] Speaker 00:
But I understand that question is out of the case.

[00:12:00] Speaker 02:
Oh, I don't believe that it is out of the case.

[00:12:02] Speaker 00:
As to whether to agree, whether to approve that agreement.

[00:12:06] Speaker 02:
I thought that issue was dropped.

[00:12:09] Speaker 02:
Oh, sorry.

[00:12:09] Speaker 02:
Correct.

[00:12:11] Speaker 02:
That's not before you.

[00:12:13] Speaker 02:
The ultimate question of whether or not the USB settlement agreement should be approved is not before you.

[00:12:19] Speaker 02:
But there were three grounds upon which the, with respect to the motion to assume,

[00:12:27] Speaker 02:
that the Bankruptcy Court found that it was not going to grant the relief sought by Sfenhart.

[00:12:34] Speaker 02:
One was the issue of an executory contract.

[00:12:36] Speaker 02:
Another was a financial arrangement.

[00:12:38] Speaker 02:
And the third was that in the context of a summary proceeding under 365, the Court could not determine the validity of... I understand that, but I didn't understand that the Bankruptcy Court said, and therefore

[00:12:52] Speaker 00:
There is no assignment that's going to happen here, and therefore the whole arrangement collapses.

[00:13:05] Speaker 00:
The whole question of whether there should be an assumption or assignment doesn't matter anymore.

[00:13:09] Speaker 00:
I don't think they said that.

[00:13:11] Speaker 02:
No, and I agree with that.

[00:13:12] Speaker 02:
The court didn't say those words.

[00:13:15] Speaker 00:
But it's important to... What I'm asking you doesn't matter anymore.

[00:13:18] Speaker 02:
Yes, it does, because USB and Svenhards have made it clear that they have no interest in this settlement, in this issue, unless they can get that declaration from the court that this is a valid and subsisting contract.

[00:13:33] Speaker 02:
Otherwise, they've said that this issue is moot and they're not pursuing it.

[00:13:36] Speaker 02:
So we believe it is.

[00:13:38] Speaker 00:
What issue is moot?

[00:13:40] Speaker 02:
Whether or not the contract, excuse me, whether or not the agreement should be approved, assumed, apologize.

[00:13:46] Speaker 02:
whether or not the agreement should be assumed will be moot unless- And you think if we agree that this is not the place to decide the validity.

[00:13:55] Speaker 00:
All right, one last question.

[00:13:57] Speaker 00:
What's going on with all the Oregon litigation?

[00:14:00] Speaker 02:
Currently, that case is set for trial before Judge Simon in November.

[00:14:04] Speaker 02:
The parties had filed cross motions for summary judgment.

[00:14:06] Speaker 00:
Your case, the other one has been- Yes.

[00:14:09] Speaker 02:
The Svendhardt's, you're right.

[00:14:11] Speaker 02:
There's several pieces of litigation.

[00:14:13] Speaker 02:
One of which is the pension fund versus USB, in which we have alleged claims for, under ERISA, under the theory of successor liability under resilient floor.

[00:14:24] Speaker 02:
And in that case, USB has raised the existence of the agreement that's brought us here today as a defense.

[00:14:34] Speaker 02:
That case is set for trial in November.

[00:14:36] Speaker 02:
There's a case brought by Svenhards against USB, and that case has been stayed.

[00:14:43] Speaker 02:
pending the outcome of this appeal.

[00:14:45] Speaker 00:
So that case, the Oregon case involving you, is going to decide the validity of the agreement?

[00:14:51] Speaker 02:
That's correct, Your Honor.

[00:14:52] Speaker 02:
In that case, very much so.

[00:14:55] Speaker 02:
The USB has raised that agreement in response.

[00:15:00] Speaker 02:
The pension fund has raised some questions and is prepared to put on evidence regarding the validity of the agreement.

[00:15:09] Speaker 03:
But you're not telling us to wait for that?

[00:15:13] Speaker 02:
I don't think that you need to wait.

[00:15:15] Speaker 02:
I don't think that issue is necessary to be determined in order to determine this appeal.

[00:15:19] Speaker 02:
I don't think that really the question before you is on that point is whether or not under 365 a question about the validity of the agreement can be determined on a summary proceeding.

[00:15:35] Speaker 02:
And the courts have been very clear that it can't.

[00:15:37] Speaker 00:
But it does seem pertinent to the question that I was asking you because if, for example,

[00:15:43] Speaker 00:
it is determined in that litigation that the agreement is valid, then in other words, it wouldn't seem very wise for us to turn this case on the failure of this court to determine whether the agreement is valid because some courts could decide whether the agreement is valid.

[00:16:06] Speaker 02:
I think that's right.

[00:16:07] Speaker 02:
And we're not asking you to declare that the agreement is valid or invalid.

[00:16:10] Speaker 00:
No, but you were, as I understand it, agreeing with my deposit that because USB's participation in this at all turned on whether or not the agreement, there was a declaration that the agreement was valid, that that was a third basis on which we can simply say, no, never mind about the other two issues.

[00:16:32] Speaker 00:
But that doesn't seem particularly wise

[00:16:35] Speaker 00:
given the pendency of this other case.

[00:16:38] Speaker 02:
I will agree that that issue is perhaps murkier because of the other case.

[00:16:43] Speaker 02:
I think that there is a way through it, which is that it's just not a question that should be answered in the context of the motion before you one way or the other, but I understand.

[00:16:53] Speaker 03:
But if we only said that, that wouldn't help things very much, right?

[00:16:56] Speaker 03:
It would be better for us to decide one of the other two issues?

[00:16:59] Speaker 02:
I would agree with that.

[00:17:01] Speaker 03:
If we say that the first issue is the executoriness, we don't need to decide that either if we agree with you on the financial accompanies.

[00:17:11] Speaker 02:
That's correct, Your Honor.

[00:17:13] Speaker 03:
And is that what you would recommend that we do, decide the second issue if we list them as one, two, three?

[00:17:17] Speaker 02:
Yeah, I think that makes a lot of sense, Your Honor.

[00:17:19] Speaker 02:
Yep.

[00:17:20] Speaker 02:
Thank you.

[00:17:22] Speaker 02:
Unless there are other questions, I'll step down.

[00:17:26] Speaker 03:
Thank you.

[00:17:26] Speaker 03:
Thank you.

[00:17:36] Speaker 01:
Thank you.

[00:17:37] Speaker 01:
To pick up on the financial accommodation issue, I think it's relevant and important to recognize that this is not an extension of credit in any way, not directly or otherwise.

[00:17:51] Speaker 00:
But where does the statute say that it has to be an extension of credit?

[00:17:58] Speaker 00:
It says it has to be a financial accommodation.

[00:18:00] Speaker 00:
It doesn't say it has to be an extension of credit.

[00:18:02] Speaker 01:
Correct.

[00:18:03] Speaker 01:
And so there is a, but I think the point and the key here is that there's a debt that's already owed, and this is a settlement on that debt.

[00:18:12] Speaker 00:
But it's a settlement purely as a financial accommodation.

[00:18:17] Speaker 00:
I mean, in ordinary English, i.e., because you can't afford to pay it.

[00:18:22] Speaker 01:
That was, I believe, the motivating factor for why US Bakeries, sorry, the pension fund, settled as it did.

[00:18:31] Speaker 01:
as far as Spenhard's motivations, I think we're getting off of and looking behind what was the reasons for the settlement.

[00:18:41] Speaker 01:
And it was a settlement on a debt that was owed to be paid over time.

[00:18:49] Speaker 01:
And the case law, and if you look back to the report by the committee and the judiciary, the purpose of not allowing financial accommodations to be required

[00:19:00] Speaker 01:
is to prevent new advances of credit.

[00:19:02] Speaker 01:
We had a debt here that was already owed.

[00:19:04] Speaker 01:
There was no new advance to be made.

[00:19:07] Speaker 01:
And that is what the statute's designed to guard against.

[00:19:11] Speaker 03:
And did you find anything that said that's the only thing the statute is designed?

[00:19:15] Speaker 03:
We realize that that's sufficient, but what about this question about whether it's necessary?

[00:19:21] Speaker 01:
It's it's I believe just inherent from this the statute itself and the committee report even though the statute says or do you have a response to the?

[00:19:30] Speaker 01:
Your opposing counsel's quotation Eastby Sun River Ts industries all of those cases identify that what that means is the extension of new credit With a final minute, I'd just like to invite

[00:19:50] Speaker 01:
Putting forth that the implications of this case here extend far beyond and have potential to significantly upset the balance of debtor-creditor relationship in bankruptcy.

[00:20:00] Speaker 01:
For decades, parties have understood that outstanding obligations, whether due at the moment of filing or only upon a sequence of performance, made a contract executory.

[00:20:09] Speaker 03:
I think we might, if we were to agree with you about that, I think you

[00:20:14] Speaker 03:
I personally find those arguments persuasive, but I'm stuck on the other issue because you can't win just on that first issue, right?

[00:20:20] Speaker 03:
You have to win on the second issue also.

[00:20:22] Speaker 01:
I think it is telling and informative that there has been no case to find that... Hold on, counsel.

[00:20:33] Speaker 04:
The answer to your question is yes.

[00:20:34] Speaker 04:
You have to win on the second issue, right?

[00:20:36] Speaker 01:
We do have to win on that issue.

[00:20:37] Speaker 01:
Yes, we do.

[00:20:38] Speaker 00:
What about this question that I was raising about if we agree that in this proceeding the validity of the settlement agreement with the pension fund can't be reviewed and won't be reviewed, does that blow up the

[00:21:03] Speaker 00:
a U.S.B.-Svenhardt agreement to assume and assign such that the case goes away for that reason?

[00:21:12] Speaker 01:
No, Your Honor, for two reasons.

[00:21:14] Speaker 01:
One, I think the financial accommodation and executoriness can still be decided separate.

[00:21:19] Speaker 01:
Apart from that, I think... Well, I understand they can be.

[00:21:21] Speaker 00:
I'm asking you, if there isn't going to be any assignment, if there is no declaration as to the validity of the agreement, then why are we deciding anything about it?

[00:21:33] Speaker 01:
Two things.

[00:21:34] Speaker 01:
One, that provision can be waived by U.S.

[00:21:38] Speaker 01:
Bakeries and that issue, as the court points out, is being decided by another court and will be binding on the parties.

[00:21:44] Speaker 01:
And this settlement does not have to hinge on that.

[00:21:51] Speaker 01:
That will be decided in the other court and U.S.

[00:21:53] Speaker 01:
Bakeries can waive that element of their settlement agreement and that can be put forth to the lower courts.

[00:22:05] Speaker 01:
And just as a final point on the financial accommodation, the Budiet case, which was argued extensively, is different from our case because that's a workout agreement on a debtor-creditor, a lender-borrower relationship.

[00:22:22] Speaker 01:
This is not a lender-borrower relationship.

[00:22:25] Speaker 01:
This is a claim.

[00:22:26] Speaker 01:
And that is significant in a difference to whether or not this fits into a financial accommodation or not.

[00:22:36] Speaker 00:
Well, I don't understand.

[00:22:37] Speaker 00:
If somebody owes money on a debt, doesn't the bank come in and make a claim?

[00:22:45] Speaker 00:
You owe me money?

[00:22:47] Speaker 00:
So that's a claim.

[00:22:48] Speaker 00:
So how does that distinguish anything?

[00:22:52] Speaker 01:
Because it is a claim and not a requirement

[00:22:56] Speaker 01:
to extend money as a financial accommodation.

[00:22:59] Speaker 00:
I don't understand what you say, but it's a claim.

[00:23:01] Speaker 00:
But the debt on a loan is also a claim.

[00:23:08] Speaker 00:
And the notion that it can't be assumed is in the statute.

[00:23:14] Speaker 00:
So I don't understand why the fact that it's a claim has to do with anything.

[00:23:18] Speaker 01:
Because it's the direction of the obligation.

[00:23:20] Speaker 01:
The financial accommodation being the accommodation of paying and extending money to a distressed debtor versus the accommodation of restructuring and dealing with a claim owed by, already owed by the debtor to the, in most cases.

[00:23:35] Speaker 04:
And this is back to your argument that has to be an extension of new money.

[00:23:40] Speaker 04:
Correct.

[00:23:43] Speaker 03:
Thank you.

[00:23:44] Speaker 03:
We've taken you over your time.

[00:23:45] Speaker 03:
Thank you both sides for the argument.

[00:23:47] Speaker 03:
This case is submitted.