Are Settlement Agreements Executory Contracts? Courts That Say “No” Give More Power to Creditors in Bankruptcy Actions

(Excerpt) In order to provide for quick and efficient resolutions in bankruptcy cases, courts will often encourage settlement agreements. Settlement agreements are so common that it is unusual for there not to be a settlement between adversaries. Additionally, settlement agreements are favored by law to allow the parties to avoid the expense and burdens that are associated with litigating claims. Courts have taken two approaches when analyzing disputes that involve settlement agreements. Some courts have held that a settlement agreement is a court approved contract between two adversarial parties and its interpretation is governed by the general provisions of contract law. Other courts have held that settlement agreements are executory contracts under section 365 of title 11 of the United States Code (the “Bankruptcy Code”) allowing a trustee to assume or reject any executory contract or unexpired lease of a debtor. This memorandum explores the consideration of courts when deciding which approach to take when determining the validity of settlement agreements. Part I examines the use of common law contract doctrine to be applied to settlement agreements. Part II analyzes court decisions that that have held settlement agreements to be executory contracts under both the “Countryman” definition of executory contracts and the “functions test.” This memorandum concludes with a discussion of the effects that this choice has on bankruptcy litigation