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Recent Case Creates Uncertainty Regarding Surety Bonds In Bankruptcy

| Dec 30, 2021 | Bankruptcy, Bankruptcy, Debt, Business, Debt

By: Laura Day DelCotto

In our many chapter 11 coal-industry cases over the years, the surety bonding company always plays a very major role in the case. The bonding company issues are detailed and fact-intensive, dealing with multiple bonds, bond collateral, permits, leases, regulatory oversight and coal operations that all fit together like a large puzzle. These issues can’t be glossed over without digging into the weeds.

One issue that arises is whether the surety bond contracts are executory contracts, subject to being assumed or rejected. Historically in our jurisdiction, this is exactly the case. The bonding company negotiates heavily with proposed buyers about issuing new bonds and/or what happens with existing bonds and bond collateral.

A recent case out of a Louisiana district court appeal from a bankruptcy court order analyzes whether surety bonds issued to an oil and gas company were “executory.” In In re Falcon V LLC, Case No. 20-00702 (M.D. La. 2021), the District Court affirmed the Bankruptcy Court in holding that the surety bond contracts were not executory contracts.

As is fairly routine, the Debtor made a first day motion to continue with the “surety bond program” as a critical service that was required by law in order to operate as a going concern.   Bond premiums would continue to be paid. The bonding company asserted in its pleadings and proof of claim that the bonds were non-assumable and non-assignable.

The Plan was confirmed, and provided that all executory contracts not expressly rejected were assumed. The bonding company didn’t object. Post-confirmation, when the reorganized debtor quit paying, the bonding company sought a court order that the bonds had been assumed. Both the bankruptcy court and the district court ruled against the bonding company. This is a good lesson on not taking such totally inconsistent positions in a case.

Whether or not surety bonds are “executory contracts” will continue to be debated, and there is some speculation that the bonding company may appeal to the circuit court. We will continue to watch these developments as this is a crucial issue in all types of cases where surety bonds exist.

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DelCotto Law Group is Kentucky’s asset preservation and business restructuring law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.