Reaffirmation Agreements – Not Just for Individual Chapter 7 Debtors

Contributed by Blaire Cahn
Reaffirmation agreements are typically viewed as a tool used in chapter 7 cases by individual debtors seeking to retain property and renegotiate the terms of payment on their existing debt.  Section 524(c) of the Bankruptcy Code sets forth certain requirements that must be satisfied for a reaffirmation agreement to be considered enforceable. Although the provisions of section 524(c) do not, by their terms, apply solely to individual debtors, few cases have applied section 524(c) to corporate debtors.  A recent decision by the United States Court of Appeals for the Fifth Circuit in In re American Rice, Inc., which addressed the validity of a reaffirmation agreement in the context of a chapter 11 corporate debtor, however, suggests section 524(c)’s applicability may be broader than many perceive.
At issue in the American Rice case was a 1988 commercial real estate transaction in which a company contracted to purchase commercial real property and to lease the property back to the seller.  The company required certain entities to guarantee to pay it any damages it might incur in connection with the real estate transaction.  In 1998, the company’s successor-in-interest, Sandburg Financial, obtained a judgment against various entities related to American Rice in connection with the guaranty.  Shortly thereafter, American Rice filed for bankruptcy.  Following entry of the order confirming American Rice’s plan, American Rice entered into two post-confirmation agreements with Sandburg Financial:  a covenant not to sue and an indemnity and release.  The agreements generally provided that (i) American Rice would pay any new claims, damages incurred or judgments obtained by Sandburg Financial against American Rice and (ii) American Rice would “reaffirm” its guaranty to pay, after June 2008, all of the obligations of its related entities to Sandburg Financial, and in exchange, Sandburg Financial would not assert any new claims, sue, conduct discovery, or enforce any judgment or guaranty contracts before June 30, 2008 against American Rice.   Following the expiration of the tolling period, Sandburg Financial attempted to enforce the post-confirmation agreements.  In response, American Rice moved to reopen its chapter 11 case.
Although the agreements at issue clearly evidenced American Rice’s post-confirmation willingness to continue to be obligated to Sandburg Financial in connection with the prepetition guaranty, American Rice argued that the post-confirmation agreements were not enforceable under section 524(c) of the Bankruptcy Code.  The court agreed.  It reasoned that the post-confirmation agreements concerned dischargeable prepetition debt,  were not made before the discharge was granted in American Rice’s chapter 11 case, were not filed with the court, and did not contain the necessary disclosures under section 524(c).  As a result, the requirements of section 524(c) of the Bankruptcy Code were not satisfied.  The court dismissed Sandburg Financial’s alternative argument that the post-confirmation agreements constituted new contracts that were supported by new and independent consideration, noting that even additional consideration would not except from section 524(c), an agreement to pay discharged debt.  Ultimately, the Fifth Circuit concluded the post-confirmation contracts were void and unenforceable, affirming the same conclusion reached by the district court.
Although not a common occurrence, this is not the first time that courts have addressed the application of section 524(c) in the context of a corporate debtor’s chapter 11 case.  The United States Bankruptcy Court for the Southern District of New York in In re Texaco, Inc., for example, also considered the application of section 524(c) in corporate debtor chapter 11 cases.
The issue in Texaco related to certain claims between Texaco and Wolverine Exploration Company based on the pricing of natural gas.  Wolverine filed claims in Texaco’s chapter 11 case.  The parties subsequently entered into a stipulation and order where they agreed to resolve the claims in the context of a state litigation.  The matter was later transferred to an arbitration proceeding. Following an unfavorable decision from the arbitration panel, Texaco filed an adversary proceeding and moved to reopen its chapter 11 case.  Texaco argued, in part, that the arbitrators interpreted the stipulation and order as a reaffirmation agreement and that as a result, the stipulation and order were void under section 524(c) of the Bankruptcy Code.  The court disagreed with Texaco’s conclusion and found that section 524(c) was not relevant, concluding that the stipulation and order were not based on agreement involving a dischargeable debt.  Further, the documents at issue constituted an order of the court and not merely an agreement between the debtor and the holder of a claim.  Perhaps in a reference to the fact that Texaco was a corporate debtor, the court noted that Texaco was not the type of debtor for whose protection section 524(c) was intended.

Ultimately, American Rice and Texaco provide little insight as to when or how to apply section 524(c) in corporate debtor chapter 11 cases.  Although section 524(c) contains references that are clearly inapplicable to a corporate debtor (such as, for example, 524(c)(3)’s reference to a debtor’s “dependents,”), there is nothing in the plain language of section 524(c) that precludes its use in corporate debtor cases.  Indeed, section 524(d) (which is referenced in section 524(c)) addresses additional requirements specifically for individuals in connection with reaffirmation agreements.  If reaffirmation agreements didn’t also apply to corporate debtors then such a carve-out would be unnecessary.  Whether corporate debtors will seek to apply section 524(c) in the future and the corresponding response from courts remains to be seen.  In the meantime, the Fifth Circuit’s decision serves as a cautionary tale to creditors of corporate debtors who enter into agreements purporting to “reaffirm” discharged debt post-confirmation.  Any agreements that do not comply with the strict provisos of section 524(c) may ultimately be found to be unenforceable.