Assumption of Liabilities

Some guidance on this issue was recently provided by the U.S. Bankruptcy Court for the District of Delaware in In re Taylor-Wharton International LLC v. Blasingame, 2010 Bankr. LEXIS 3994 (Bankr D. Del. Nov. 23, 2010). The key facts in the case are as follows:

• On Dec. 7, 2007, Taylor-Wharton acquired certain assets and assumed certain liabilities from Harsco Corporation pursuant to an asset and stock purchase agreement.
• Under the purchase agreement, Taylor-Wharton assumed, among other things, all liabilities relating to accidents occurring after the closing date caused by products manufactured by Harsco prior to closing (the “assumption of liability provision”).
• On March 2, 2009, a lawsuit was filed in Alabama District Court by certain plaintiffs (the “Blasingame plaintiffs”) against a Taylor-Wharton subsidiary alleging product liability for injuries suffered in a 2008 explosion for a product manufactured by Harsco prior to December 2007.
• On Nov. 19, 2009, Taylor-Wharton filed for bankruptcy under Chapter 11 of the Bankruptcy Code in Delaware. The Blasingame lawsuit was dismissed as a result of the bankruptcy filing.
• On May 26, 2010, Taylor-Wharton's plan of reorganization was approved. The order confirming the plan contained a provision allowing the Blasingame plaintiffs to seek to reinstate their lawsuit in Alabama District Court.
• On June 7, 2010, the Delaware Bankruptcy Court entered an order approving Taylor-Wharton's rejection of the purchase agreement with Harsco as an executory contract.
• On July 14, 2010, the Blasingame plaintiffs filed a petition for reinstatement of their lawsuit with the Alabama District Court. Taylor-Wharton opposed the petition on the ground that the sole basis for Taylor-Wharton's legal responsibility to the Blasingame plaintiffs was the purchase agreement that had been rejected.
• Shortly thereafter, Taylor-Wharton filed a complaint with the Bankruptcy Court arguing that the rejection of the purchase agreement excused Taylor-Wharton from any potential liability under the assumption of liability provision.
• The Blasingame plaintiffs and Harsco filed motions to dismiss Taylor-Wharton's claims, which the Bankruptcy Court granted.

The Bankruptcy Court's Analysis

In dismissing Taylor-Wharton's claims, the Bankruptcy Court focused on how the rejection of executory contracts operates under the Bankruptcy Code. Under ' 365 of the Bankruptcy Code, debtors and debtors-in-possession have the right to assume or reject contracts that are “executory” as of the date of the bankruptcy petition. As defined in the case law, an executory contract is a contract under which the obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach excusing the performance of the other party. The Bankruptcy Court stated that rejection of an executory contract constitutes a breach of contract, not a rescission of the contract, and has the effect of relieving the debtor from future performance of the contract but does not undo past performance. The Bankruptcy Court also added that an executory contract must be assumed or rejected in its entirety; a debtor cannot pick and choose provisions to assume or reject.