There has been much commentary on the issue of whether an option in a contract is executory or not. Recently, In re Le Yang (22-00075, S.D. Ind. Oct. 23, 2023), Debtor sold an option to purchase a 70% interest in real property for almost $55,000. Upon the exercise of the option, the purchaser would then pay another $157,000. The option was recorded along with a mortgage in favor of the buyer, but the option had not been exercised before the bankruptcy filing. Debtor filed a motion to reject the option as an executory contract under 11 U.S.C Section 365(a) arguing that both parties to the contract had remaining unperformed obligations.

 Judge Moberly of the Bankruptcy Court in the Southern District of Indiana stated that the Seventh Circuit adopted the well-known and widely approved definition of an executory contract known as Countryman (as have the Third Circuit and other Circuits) whereby an executory contract is one where the obligations of both parties are so far unperformed that a failure by either to complete performance would constitute a material breach excusing performance by the other. Here, the Judge held that the option would be an executory contract if, “at the time of filing [,] each party has material unperformed obligations.” She went on to say that she was not persuaded that the holder of the option had “a remaining obligation to elect on the option” and that the option holder had no material obligations to perform on the filing date of the bankruptcy. She further said that the holder’s “future obligations are contingent upon it actually exercising the option.” If the holder were never to exercise the option, she said that “nothing happens” and neither party would have committed a breach.

Contrary to Debtor’s contention that the holder of the option would be obliged to remove the recordings in the land records if the holder were never to exercise the option, Judge Moberly did not view the obligation as “material.” She said that “[m]ost agreements have some degree of unperformed obligations on both sides, [but] this does not render all agreements executory under § 365.”

There has been much commentary on this issue, including whether bankruptcy or state law should apply (here, if a state law analysis was performed, it has been argued that the result would have been the same), and whether the Section 365 rights are “avoiding” powers, which is often found not to be but merely a breach.

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or to lbaskin@sgrvlaw.com.