                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-10-1995

In Re: Columbia Gas
Precedential or Non-Precedential:

Docket 93-7409




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        UNITED STATES COURT OF APPEALS
            FOR THE THIRD CIRCUIT

                    ___________

                    No. 93-7409
                    ___________


       IN RE: COLUMBIA GAS SYSTEM INC.;
    COLUMBIA GAS TRANSMISSION CORPORATION,
                                      Debtors

        ENTERPRISE ENERGY CORPORATION,
                                  Appellant

                        v.

          UNITED STATES OF AMERICA,
           On behalf of the I.R.S.

               THOMAS E. ROSS,
                           Trustee


_______________________________________________

On Appeal from the United States District Court
          for the District of Delaware
        (D.C. Civil Action No. 92-00258)
               ___________________


           Argued January 19, 1994

       Before: SLOVITER, Chief Judge,
      SCIRICA and LEWIS, Circuit Judges

           (Filed    March 10, 1995)


               ROBERT J. SIDMAN, ESQUIRE (ARGUED)
               DUKE W. THOMAS, ESQUIRE
               Vorys, Sater, Seymour & Pease
               52 East Gay Street
               Columbus, Ohio 43216

                    Attorneys for Appellant,
                    Enterprise Energy Corporation
                           ROBERT S. BRADY, ESQUIRE
                           Young, Conaway, Stargatt & Taylor
                           P.O. Box 391
                           Rodney Square North, 11th Floor
                           Wilmington, Delaware 19899-0391

                             Attorney for Appellees,
                             Columbia Gas System Inc. and
                             Columbia Gas Transmission Corporation


                           LINDA E. MOSAKOWSKI, ESQUIRE (ARGUED)
                           GARY R. ALLEN, ESQUIRE
                           DAVID E. CARMACK, ESQUIRE
                           United States Department of Justice
                           Tax Division
                           P.O. Box 502
                           Washington, D.C. 20044

                             Attorneys for Appellee,
                             United States of America,
                             On behalf of the I.R.S.




                          __________________

                       OPINION OF THE COURT
                        __________________


SCIRICA, Circuit Judge.



          In this bankruptcy matter, we must decide whether

certain terms in a class action settlement agreement constitute

an executory contract under 11 U.S.C. § 365 (1988).      The Internal

Revenue Service contended the settlement agreement was not an

executory contract.   Both the bankruptcy court and the district
court1 agreed with the IRS, and the class members appealed.    We

will affirm.



                                I.

          The facts are undisputed.   Columbia Gas System,

Incorporated, its subsidiary, Columbia Gas Transmission

Corporation (TCO), and their affiliates comprise a natural gas

system which explores, produces, purchases, stores, transmits,

and distributes natural gas.   TCO is Columbia Gas System's

principal gas purchaser from producers in the Southwest,

Midcontinent, and Appalachia and operates extensive underground

storage facilities.

          On July 26, 1985, Enterprise Energy Corporation and two

other companies filed a class action against TCO in the United

States District Court for the Southern District of Ohio.     The

district court certified as a class2 the producers of natural gas

in the Appalachian region who were parties to gas purchase

contracts with TCO.   The class comprised 2163 member producers

1
 . The district court's opinion is published as Enterprise
Energy Corp. v. United States ex rel. IRS (In re Columbia Gas
System, Inc.), 146 B.R. 106 (D. Del. 1992).
2
 . The class consists of "[a]ll owners, operators and producers
of natural gas producing wells in the Appalachian region (New
York, Pennsylvania, West Virginia, Kentucky, Maryland, Virginia
and Ohio) who are parties to gas purchase contracts with Columbia
Gas Transmission Corporation entitling them to receive the
maximum lawful price or a deregulated price under the NGPA . . .
and against whom Columbia has invoked a price reduction for
amounts due under the contracts." Enterprise Energy Corp. v.
Columbia Gas Transmission Corp., 137 F.R.D. 240, 243 (S.D. Ohio
1991).
who held 852 gas purchase contracts.    TCO had invoked a price

reduction under a cost recovery clause which formed the basis of

their complaint.

            The gas purchase contracts set the price for each unit

of natural gas delivered to TCO at the maximum price permitted

under the Natural Gas Policy Act of 1978 during the month of

delivery.    The class members alleged that TCO breached their gas

purchase contracts by paying less than the maximum price after it

invoked the cost recovery clause.

            For five years there was extensive discovery.   As trial

loomed, the parties entered into a Stipulation of Proposed Class

Action Settlement ("settlement agreement"), which the district

court approved on June 18, 1991.    Enterprise Energy Corp. v.

Columbia Gas Transmission Corp., 137 F.R.D. 240 (S.D. Ohio 1991).

Incidental to its approval under Federal Rule of Civil Procedure

23(e), id. at 248, the court issued an order stating in part:

                 f. Named plaintiffs, Class Members and
            defendant [TCO] shall now consummate and be
            bound by the Settlement.

                 g. Except for claims arising under the
            Settlement on behalf of Class Members or
            Columbia, and at such time as this Order of
            the Court approving the Settlement as final
            is non-appealable, named plaintiffs and all
            Class Members . . . shall be deemed to
            release and forever discharge the defendant
            . . . from any and all claims of the type
            asserted in this litigation relating to
            defendant's exercise of the cost recovery
            clause contained in the Class Members' gas
            purchase contracts at any time during the
            period commencing on or about July 10, 1985
            and ending on or about July 10, 1991.
                 h. Jurisdiction is hereby retained as
            to matters related to the interpretation,
            administration and consummation of the
            Settlement as approved in this Order.


Id. at 252.     The order became final and unappealable on July 18,

1991.

            The settlement agreement required TCO to deposit $30

million into an escrow account "in settlement of, and as a full

and complete discharge and release of TCO, for all of [the class

members'] claims arising on or before January 1991."     Enterprise

Energy Corp. v. United States ex rel. IRS (In re Columbia Gas

System, Inc.), 146 B.R. 106, 109 (D. Del. 1992).     TCO was to pay

$15 million into escrow by March 21, 1991, and the other $15

million by March 23, 1992.     This schedule was apparently set for

TCO's convenience; TCO's duty to make the second payment was not

contingent on the class members' performance of any of their

obligations.     TCO paid the first $15 million on time but then

filed for bankruptcy.

             Under the settlement agreement, class members were

entitled to receive their share of the escrow monies only after

they executed a release of claims and a supplemental contract.

The settlement agreement stated "payments to individual Class

Members out of the escrowed amounts will be contingent upon

receipt by [TCO] of a duly executed release of all such Claims

and a duly executed contract supplement . . . ."     J. App. at 57-

58.     While each class member had to execute a release to get

payment from the escrow fund, the claims each held against TCO

were to be extinguished (and they in fact were, see supra,
district court order ¶ g) by the court order accepting the

settlement agreement.

          The supplemental contracts were designed to implement

amendments and clarifications of pricing and other terms

concerning future gas deliveries to TCO.   The settlement

agreement established the terms of these contracts, including

increasing the price TCO would pay to the class members.    Because

many class members relied on TCO as the principal purchaser of

their gas, the supplemental contracts were important to them, a

point made in the following exchange at oral argument before the

district court:

          The Court: So that . . . supplying the
          supplemental agreements, contracts, was not
          just an option that [the class members] had.
          It was necessary for their continued
          operation?

          [Counsel for the Class]: Exactly, your honor.
          Exactly.


Id. at 276.

          By July 31, 1991, the class members involved in forty-
one of the purchase contracts had completed the execution of the

release and supplemental contracts and were entitled to their

share of the escrow monies.   But on that day, thirteen days after

the settlement agreement had become final, TCO filed a voluntary

Chapter 11 petition in bankruptcy in Delaware.   On February 20,

1992, the class members filed a motion to compel TCO to assume or

reject the settlement agreement under the Bankruptcy Code, 11
U.S.C. § 365.3    TCO and the class members had agreed that TCO

would assume the settlement agreement and jointly filed a

proposed order.

          After notice of the proposed order was sent to the

proper parties, the United States filed an objection on behalf of

the Internal Revenue Service, one of TCO's creditors.4    Finding

the settlement agreement was not executory within the meaning of

11 U.S.C. § 365, the bankruptcy court upheld the objection and

denied the class members' motion.5

           The class members appealed to the United States

District Court for the District of Delaware.     The district court

held that the settlement agreement was a contract, but affirmed

the bankruptcy court on the grounds the contract was not

executory for purposes of § 365.     In re Columbia Gas, 146 B.R. at

113-14.   Therefore TCO did not have the option of assuming or



3
.   Section 365 provides in part:

          § 365.    Executory contracts and unexpired
          leases

               (a) Except as provided in sections 756 and 766 of
          this title and in subsections (b), (c), and (d) of this
          section, the trustee, subject to the court's approval,
          may assume or reject any executory contract or
          unexpired lease of the debtor.
4
 . The record suggests that the IRS's claim is substantial,
apparently in the range of $500 million over the next five years.
J. App. at 287.
5
 . The bankruptcy court also apparently held the settlement
agreement was not a contract, as it cited cases holding that
judicial orders cannot be considered executory contracts.
rejecting the settlement agreement.    Id. at 114.   This appeal

followed.

                                II.

            We "exercise plenary review of the legal standard

applied by the district and bankruptcy courts, but review the

latter court's findings of fact on a clearly erroneous standard."

In re Abbotts Dairies, Inc., 788 F.2d 143, 147 (3d Cir. 1986)

(citations omitted).   "Because in bankruptcy cases the district

court sits as an appellate court, our review of the district

court's decision is plenary."   Brown v. Pennsylvania State

Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988); see also

Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101

(3d Cir. 1981).

            Jurisdiction in the bankruptcy court was proper under

28 U.S.C. § 157(a) (1988).    The district court had jurisdiction

over the appeal from the final order of the bankruptcy court, id.

§ 158(a), and we have jurisdiction over the appeal of the

district court's judgment under 28 U.S.C. § 158(d).

                                III.

            In this appeal, we must decide whether the settlement

agreement was a contract, and if so, whether it was executory so

that TCO could elect to assume or reject it under § 365 of the

Bankruptcy Code.

            The IRS argues the settlement agreement is not a

contract but a judgment of the court.6   It maintains "[s]ince the

6
 . The class members contend the IRS did not properly preserve
this point for appeal because it did not cross-appeal from the
Settlement Agreement was merged into the court's judgment, it

cannot be an executory contract within the meaning of Bankruptcy

Code Section 365."    Appellee's Br. at 32.   The bankruptcy court

apparently agreed, observing "there is authority to the effect

that the phrase 'executory contract' should not normally be

applied to a judicial order."    J. App. at 178.   While the

bankruptcy court did not explicitly hold the agreement was a

judgment, the cases it cited7 hold that where contracts have been

reduced to judgment there is no "contract" remaining for purposes

of § 365.     The district court, however, distinguished those

cases, holding "[f]or bankruptcy purposes . . . it is appropriate

to treat the judicially approved settlement agreement in this

case as a contract."    In re Columbia Gas, 146 B.R. at 113.

            At the outset, we should ask whether this settlement

agreement would be considered a contract had there been no

bankruptcy.    Generally, application of the Bankruptcy Code does

not change the attributes of a given legal relationship.       Butner


(..continued)
district court's judgment which held the settlement agreement is
a contract. We disagree because "it is . . . settled that the
appellee may, without taking a cross-appeal, urge in support of a
decree any matter appearing in the record, although his argument
may involve an attack upon the reasoning of the lower court or an
insistence upon a matter overlooked or ignored by it." Dalle
Tezze v. Director, Office of Workers' Compensation Programs,
United States Dep't of Labor, 814 F.2d 129, 132 (3d Cir. 1987)
(quoting United States v. American Ry. Express Co., 265 U.S. 425,
435 (1924)).
7
 . Roxse Homes, Inc. v. Roxse Homes Ltd. Partnership, 83 B.R.
185 (D. Mass.), aff'd without op., 860 F.2d 1072 (1st Cir. 1988);
In re Jolly, 574 F.2d 349 (6th Cir.), cert. denied, 439 U.S. 929
(1978).
v. United States, 440 U.S. 48 (1979).   Thus, if the settlement

agreement should be considered a contract under relevant

nonbankruptcy law, it will be a contract in bankruptcy "[u]nless

some federal interest requires a different result . . . ."   Id.

at 55.

          Although settlement agreements may be judicially

approved, they share many characteristics of voluntary contracts

and are construed according to traditional precepts of contract

construction.   cf. Fox v. United States Dep't of Housing & Urban

Dev., 680 F.2d 315, 319 (3d Cir. 1982) (observing this point for

consent decrees).   In a nonbankruptcy context, we have treated a

settlement agreement as a contract.   See Halderman v. Pennhurst

State Sch. & Hosp., 901 F.2d 311, 318 (3d Cir.), cert. denied,

498 U.S. 850 (1990).

           We see nothing special in this bankruptcy that counsels

a different approach.    The core of this settlement agreement was

consensual obligations.    The parties crafted the agreement and

the court approved it.    There is no judgment on the merits, a

factor that distinguishes cases cited by the bankruptcy court.

Furthermore, the rights and obligations of the parties do not

derive solely from the court's judgment, but depend at least in

part on the performance of the other party.    What is especially

significant in this case is that there remains an agreement that

the debtor can breach which could give rise to a claim against

it.   Although we recognize that not all settlement agreements

should be considered contracts, we believe the factors already

enumerated are sufficient to consider this settlement agreement
as a contract for purposes of § 365.    In this respect, we agree

with the district court.

                                 IV.

          The heart of this dispute is whether the settlement

agreement was executory on July 31, 1991, when TCO filed its

bankruptcy petition.    The term "executory contract" is not

defined in the Bankruptcy Code, and the phrase does not indicate

its intended scope.

          The legislative history of § 365 suggests a broad

reading of "executory."    Congressional reports stated "[t]hough

there is no precise definition of what contracts are executory,

it generally includes contracts on which performance remains due

to some extent on both sides."    H.R. Rep. No. 595, 95th Cong.,

1st Sess. 347 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6303;

S. Rep. No. 989, 95th Cong., 2d Sess. 58 (1978), reprinted in

1978 U.S.C.C.A.N. 5787, 5844.

          Most courts have agreed that the definition suggested

by the legislative history would cut too broadly, "since it is

the rare agreement that does not involve unperformed obligations

on either side."   Mitchell v. Streets (In re Streets & Beard Farm
Partnership), 882 F.2d 233, 235 (7th Cir. 1989).   As one

commentator observed, "[a]ll contracts to a greater or less

extent are executory.   When they cease to be so, they cease to be

contracts."   Vern Countryman, Executory Contracts in Bankruptcy:

Part I, 57 Minn. L. Rev. 439, 450 (1973) (citation omitted).

          The language and legislative history of § 365 having

proved unavailing, courts and commentators sought to analyze the
purpose of § 365 in order to formulate a definition of "executory

contract."   Executory contracts in bankruptcy are best recognized

as a combination of assets and liabilities to the bankruptcy

estate; the performance the nonbankrupt owes the debtor

constitutes an asset, and the performance the debtor owes the

nonbankrupt is a liability.   See Thomas H. Jackson, The Logic and

Limits of Bankruptcy Law 106-07 (1986).   The debtor (or trustee

that has stepped into the debtor's shoes) may elect to assume an

executory contract, in which case § 365 mandates that the debtor

accept the liability with the asset and fully perform his end of

the bargain.   11 U.S.C. § 365(b).

          The debtor will assume an executory contract when the

package of assets and liabilities is a net asset to the estate.

When it is not the debtor will (or ought to) reject the contract.

11 U.S.C. § 365(a).   Because assumption acts as a renewed

acceptance of the terms of the executory bargain, the Bankruptcy

Code provides that the cost of performing the debtor's

obligations is an administrative expense of the estate, which

will be paid first out of the assets of the estate.8   11 U.S.C. §


8
 . In In re Taylor, 913 F.2d 102, 106-07 (3d Cir. 1990), we
stated:

          [T]he "assume or reject" dichotomy means
          simply that if the trustee wishes to obtain
          for the estate the future benefits of the
          executory portion of the contract, the
          trustee must also assume the burdens of that
          contract, as an expense of bankruptcy
          administration (i.e., having priority over
          all pre-bankruptcy claims of creditors).
507(a)(1) (1988); University Medical Ctr. v. Sullivan (In re

University Medical Ctr.), 973 F.2d 1065, 1078 (3d Cir. 1992).

           In cases where the nonbankrupt party has fully

performed, it makes no sense to talk about assumption or

rejection.    At that point only a liability exists for the

debtor--a simple claim held by the nonbankrupt against the

estate, Jackson, supra, at 106--and "[t]he estate has whatever

benefit it can obtain from the other party's performance and the

trustee's rejection would neither add to nor detract from the

creditor's claim or the estate's liability."   Countryman, supra,

at 451.   Rejection is meaningless in this context, and assumption

would be of no benefit to the estate, serving only to convert the

nonbankrupt's claim into a first priority expense of the estate

at the expense of the other creditors.9 Id. at 452.
(..continued)
Through the mechanism of assumption, § 365 allows the debtor to
continue doing business with others who might otherwise be
reluctant to do so because of the bankruptcy filing. Richmond
Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir.
1985).

          Rejection, which is appropriate when a contract is a
liability to the bankrupt, is equivalent to a nonbankruptcy
breach. 11 U.S.C. § 365(g). Rejection leaves the nonbankrupt
with a claim against the estate just as would a breach in the
nonbankruptcy context, and unless the nonbankrupt's claim is
somehow secured, he will be a general unsecured creditor of the
estate. Accordingly, if the debtor is insolvent, the
nonbankrupt's claim for breach will not be paid in full. An
appropriate rejection in bankruptcy will thus benefit the
creditors as a whole at the expense of the nonbankrupt. See
Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 108
(1986).
9
 . In this circumstance, elevating the nonbankrupt's claim to
administrative expense priority by "assuming" it would offend
"the general policy of the bankruptcy laws [which] is equality of
distribution among all creditors . . . ." H.R. Rep. No. 595,
            Likewise, if the debtor has fully performed, the

performance owed by the nonbankrupt is an asset of the bankruptcy

estate and should be analyzed as such, not as an executory

contract.    Jackson, supra, at 107.   Rejection of the contract at

this point is no different from abandonment of property of the

estate, an action taken only when the property is "burdensome to

the estate or . . . is of inconsequential value and benefit to

the estate."    11 U.S.C. § 554(a) (1988).

            These considerations led us to adopt, as have many

courts of appeals, the following definition of executory contract

for purposes of § 365: "[An executory contract is] a contract

under which the obligation of both the bankrupt and the other

party to the contract are so far unperformed that the failure of

either to complete performance would constitute a material breach

excusing performance of the other."    Sharon Steel Corp. v.

National Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989)

(citing cases).

            Thus, unless both parties have unperformed obligations

that would constitute a material breach if not performed, the

contract is not executory under § 365.    When it is the

nonbankrupt party who has substantially performed so that its

failure to complete performance would not constitute a material

breach excusing performance of the debtor,10 the nonbankrupt
(..continued)
95th Cong., 1st Sess. 186 (1977), reprinted in 1978 U.S.C.C.A.N.
5963, 6147.
10
 . In order to determine whether failure to perform the
remaining obligations would constitute a material breach, we need
to consider contract principles under the relevant nonbankruptcy
party is "relegated to the position of a general creditor of the

bankrupt estate."   Marcus & Millichap Inc. v. Munple, Ltd. (In re
(..continued)
law. In Hall v. Perry (In re Cochise College Park, Inc.), 703
F.2d 1339, 1348 n.4 (9th Cir. 1983), the court noted "a
bankruptcy court should determine whether one of the parties'
failure to perform its remaining obligations would give rise to a
'material breach' excusing performance by [the] other party under
the contract law applicable to the contract . . . ." See also
Terrell v. Albaugh (In re Terrell), 892 F.2d 469, 472 (6th Cir.
1989) (citing In re Cochise); Mitchell v. Streets (In re Streets
& Beard Farm Partnership), 882 F.2d 233, 235 (7th Cir. 1989)
(looking to relevant state law).

          In this case, the settlement agreement was created by
the parties in a federal court in Ohio, and Ohio law would
therefore normally apply. Klaxon Co. v. Stentor Co., 313 U.S.
487, 496 (1941). However, the parties do not indicate any
particular law as governing either the issue of material breach
or the construction of the settlement agreement. Where, as here,
"the parties do not make an issue of choice of law, we have no
obligation to make an independent determination of what rule
would apply if they had made an issue of the matter." In re
Stoecker, 5 F.3d 1022, 1029 (7th Cir. 1993). Accordingly, like
the parties and the district court, we will construe the issue of
what would constitute a material breach under general contract
principles. See Schiavone Constr. Co. v. Time, Inc., 847 F.2d
1069, 1076 n.3 (3d Cir. 1988) (allowing consensus of parties and
lower courts as to choice of law to control when no reason to
unsettle that agreement is present).

          Finally, we believe application of Ohio law would
result in a similar analysis of the general contract principles
upon which we rely. See Rhodes v. Rhodes Indus., Inc., 595
N.E.2d 441, 447 (Ohio Ct. App. 1991) (adopting Restatement of
Contracts (Second) approach to materiality of breach); see also
Kichler's, Inc. v. Persinger, 265 N.E.2d 319, 321 (Ohio Ct. App.
1970); Blenheim Homes, Inc. v. Mathews, 196 N.E.2d 612, 614 (Ohio
Ct. App. 1963); Boehl v. Maidens, 139 N.E.2d 645, 649 (Ohio Ct.
App. 1956). Thus, there is no need for us to examine further the
issue of which substantive law to apply, as the result does not
depend on our choice. Weekes v. Michigan Chrome & Chem. Co., 352
F.2d 603, 606 (6th Cir. 1965); cf. Benevides v. Alexander (In re
Alexander), 670 F.2d 885, 888 (9th Cir. 1982) (holding no need to
look at state law for whether contract is an executory contract,
but even if examined under state law there would be no change in
the outcome).
Munple, Ltd.), 868 F.2d 1129, 1130 (9th Cir. 1989).    The time for

testing whether there are material unperformed obligations on

both sides is when the bankruptcy petition is filed.    Collingwood

Grain, Inc. v. Coast Trading Co. (In re Coast Trading Co.), 744

F.2d 686, 692 (9th Cir. 1984) (holding contracts executory at

time of petition can be assumed); Carlson v. Farmers Home Admin.

(In re Newcomb), 744 F.2d 621, 624 (8th Cir. 1984) (stating

critical time to be when the petition was filed).

           As we have noted, at stake is the relative priority11

of the claims of the IRS and the class members to TCO's assets in

bankruptcy.   If the contract is executory, TCO would assume it,

and the $15 million TCO still owes would become an administrative

expense of the estate.    As an administrative expense, the class

members' claims would fall into the category afforded highest

payment priority.   11 U.S.C. § 507(a)(1); University Medical

Ctr., 973 F.2d at 1078.    If the contract is not executory, the

class members would have a general unsecured claim and would have

lowest payment priority, and would be paid after the IRS's claim,

which is seventh in priority regardless of the outcome of this

dispute.   11 U.S.C. § 507(a)(7) (1988).12

11
 . The priority of the claims determines whether and how much
of the claims are paid, regardless of whether the debtor
liquidates or reorganizes. See 11 U.S.C. § 726(a)(1) (1988)
(specifying liquidation scheme with first priority claims paid
before seventh priority claims, which are paid before unsecured
claims); id. § 1129(a)(8), (9) (requiring administrative expenses
to be paid in full in cash on effective date of a
reorganization).
12
 . We note the IRS's claim would have eighth priority in cases
commenced after October 22, 1994. See Bankruptcy Reform Act of
                               A.

          The contract was clearly executory on TCO's side when

it filed for bankruptcy, a point both parties appear to accept.

It had not paid the second $15 million into escrow, nor had it

completed the administrative work necessary to authorize

distribution of the escrow monies to those class members who had

signed and executed releases and supplemental contracts.    While

the administrative details TCO still had to perform are arguably

non-material (an issue we need not reach), the $15 million

payment is unquestionably a material obligation,13 and TCO's

failure to make the second payment certainly would constitute a

material breach.

                               B.

          The materiality of the class members' unperformed

obligations is a closer question.   As we have noted, the

obligations on both sides must be so far unperformed so that

failure of either to complete performance would constitute a

material breach excusing performance of the other.   The class

members had unperformed duties under the settlement agreement.

Only 41 of the 852 contracts had been processed when TCO filed

for bankruptcy, and the class members responsible for the

remaining 811 contracts still had to execute releases and
(..continued)
1994, Pub. L. No. 103-394, §§ 304(c), 702, 108 Stat. 4106, 4132
(1994).
13
 . While the district court suggests TCO's completed
performance was substantial, it stops short of stating TCO's
remaining obligations were not material. In re Columbia Gas, 146
B.R. at 114.
supplemental contracts in order to receive their shares of the

escrow fund.   It must be the contention of the class members that

these obligations are sufficiently material that failure to

perform would constitute a material breach of the agreement by

the class members.14

          In order to determine the materiality of the class

members' obligations, we turn first to basic contract principles.

There is a distinction in the law between failure of a

condition15 and a breach of a duty: "Non-occurrence of a

condition is not a breach by a party unless he is under a duty

that the condition occur."   Restatement (Second) of Contracts §

225(3) (1981).16   This distinction between a condition and a duty
14
 . The class members also argue the settlement agreement
represents an accord, which, if not satisfied, would allow the
members to revive their original claims against TCO. They cite
In re Miller, 54 B.R. 710, 712 (Bankr. D.N.D. 1985), which
distinguishes novation, an agreement to extinguish one duty and
replace it with another, from an accord, by which a party agrees
to accept a substitute performance for a pre-existing duty,
although the original duty is not extinguished until the accord
is performed. While the court stated that novation is never
presumed in an ambiguous situation, id. at 713, we believe this
situation is not ambiguous. Unlike the parties in In re Miller,
who had specifically allowed for reinstatement of the original
claim upon failure of the settlement, id., the parties here have
an explicit court order which extinguishes the old claims and
replaces them with the Settlement Agreement. See supra part I
for the text of the district court's order. As the district
court noted, "[T]he order approving the settlement agreement
suggests that there could only be an action for breach of
contract." In re Columbia Gas, 146 B.R. at 113 n.3. We agree.
15
 . The Restatement has dropped the term "condition precedent"
in favor of simply stating it as "condition." E. Allen
Farnsworth, 2 Farnsworth on Contracts § 8.2, at 349 (1990). We
will follow that convention here.
16
 . See Restatement (Second) of Contracts § 225 cmt. d, which
provides:
(or promise) is important here.    The Restatement makes clear that

while "a contracting party's failure to fulfill a condition

excuses performance by the other party whose performance is so

conditioned, it is not, without an independent promise to perform

the condition, a breach of contract subjecting the nonfulfilling

party to liability for damages."    Merritt Hill Vineyards, Inc. v.

Windy Heights Vineyard, Inc., 460 N.E.2d 1077, 1081-82 (N.Y.

1984) (citing Restatement (Second) of Contracts § 225).     In this

case, if the remaining obligations in the contract are mere

conditions, not duties, then the contract cannot be executory for

purposes of § 365 because no material breach could occur.

          The determination whether a contract term is a promise

or condition is a problem of interpretation, so that "each case

turns on its own facts . . . ."    E. Allen Farnsworth, 2

Farnsworth on Contracts § 8.4, at 366 (1990).    We are mindful

that:

          Interpreting a settlement agreement presents
          a question of contract law, in which [t]he
          primary object . . . is to give effect to the
          intention of the parties. Absent clear
          language in the settlement agreement to
          resolve a dispute over the proper
          construction of a contract, a court may go
          outside the four corners of the contract and
          consider extrinsic and parol evidence
(..continued)

          [A] term making an event a condition of an
          obligor's duty does not of itself impose a
          duty on the obligee and the non-occurrence of
          the event is not of itself a breach by the
          obligee. Unless the obligee is under such a
          duty, the non-occurrence of the event gives
          rise to no claim against him.
          presented by the parties. This requires the
          district court to then conduct fact-finding
          so that it may resolve the ambiguities
          inherent in the contract. . . . [But i]f the
          court finds that a contract is ambiguous and
          that extrinsic evidence is undisputed, then
          the interpretation of the contract remains a
          question of law for the court to decide.


Lumpkin v. Envirodyne Industries, Inc., 933 F.2d 449, 455-56 (7th
Cir.), cert. denied, 502 U.S. 939 (1991) (citations omitted).

                                   1.

          With these principles in mind, we turn first to an

analysis of the releases and then to the contract supplements.

If a class member declined to execute a release, the settlement

agreement provides that TCO retains that class member's portion

of the $30 million.   But the class member's cause of action

against TCO on the gas purchase contract would not be revived.

All such claims were extinguished when the district court's order

became final on July 18, 1991.17



17
 . The settlement agreement here is much like the insurance
contract in Commercial Union Insurance Co. v. Texscan Corp. (In
re Texscan Corp.), 976 F.2d 1269, 1273 (9th Cir. 1992), where the
court held that because of a statute, the bankrupt's failure to
pay insurance premiums could not relieve the nonbankrupt insurer
from its obligation to provide insurance coverage. Even if the
failure to pay premiums might be a material breach absent the
statute, the court held, the statute meant the insurer's
performance was not excused and therefore the definition of
"executory" in the Bankruptcy Code was not met. Id. Here, even
if the failure to execute the releases and supplemental contracts
were a breach of part of the settlement agreement (which we hold
it is not), the operation of the court order would prevent that
breach from operating to excuse performance by either the class
members or TCO. Thus, on this basis as well, the remaining
obligations do not suffice to make the contract executory.
           The language of the settlement agreement makes clear

the parties intended to make execution of the releases a

condition of payment rather than a duty: "[P]ayments to

individual Class Members out of the escrowed amounts will be

contingent upon receipt by [TCO] of a duly executed release

. . . .   If the amount allocated to a particular contract by

Class Counsel . . . is not finally distributed to that particular

contract, then such Distributable Amount . . . shall be returned

to [TCO] . . . ."   J. App. at 57-58, 64-65.18   The parties

specified that the class members' claims would be extinguished

(as they in fact were) by the court order accepting the

settlement agreement.   Thus, the releases served no more than the

administrative purpose of a condition to the class members'

ability to get payment from the escrow fund.

           The numerous references in the agreement stating a

given clause as "Subject to final Court approval of the

Settlement," or the equivalent, see ¶¶ 1, 2, 4, 5, 6, 7, 8, 9,

11, 12, 14, J. App. at 57-66, also demonstrate how the parties

intended to allocate rights and duties in the contract.    The

"subject to" phrase was used largely to qualify TCO's duty to pay

money, demonstrating that "final Court approval" was the linchpin

of the contract for TCO because the heart of the exchange was

extinguishing the class members' claims in exchange for money.

18
 . The class members also argue that TCO's recovery of unused
money in substance excuses TCO's performance of payment,
therefore making the contract executory under the definition in
Sharon Steel Corp. v. National Fuel Gas Distribution Corp., 872
F.2d 36, 39 (1989). We do not agree.
The claims were extinguished upon final court approval and the

parties made that event, not execution of the releases, key to

the agreement.

           The consequence of a class member's failure to execute

a release supports this textual analysis.    A class member who

failed to execute a release would not get its share of the

settlement fund, but TCO would still get the benefit of the class

member's inability to sustain a cause of action.    As the district

court observed, "the parties seem to agree that if this case

involved a simple exchange of money for execution of a release of

all claims, there would be no question that the contract would

not be executory."    In re Columbia Gas, 146 B.R. at 114.   Nor

would any class member's failure absolve TCO from its duty to

place the second $15 million into escrow, a duty which was to

ripen on March 23, 1992, without regard to the actions of any

class member.    No failure on the part of the class members to

execute a release under the settlement agreement could have

created a material breach of the contract.   Rather, the releases

were a condition for each member to get its share of the

settlement money.

                                 2.

           The settlement agreement also required each class

member to complete a supplemental contract for future gas sales

to TCO.   The question is whether that obligation is sufficient to

constitute a "duty" as expressed in the Restatement section 225.

           There is no indication that the supplemental contracts

were designed to do more than take the terms of the global
settlement agreement created by the class and TCO and apply them

specifically to each class member.    As such they were

functionally ministerial duties; they did not, nor were they

supposed to, alter the relationship forged by the settlement

agreement.   The terms of the supplemental contracts were

expressly stated in the settlement agreement itself and were

designed to be implemented with it.    This demonstrates the

supplemental contracts were intended to confirm, not to create,

the new purchasing arrangement between TCO and the class members.

          We agree with the district court that "executing the

contract supplements will be little more than a perfunctory act

utilizing preapproved terms and conditions.    Obviously these

ministerial acts are analogous to the execution of the release to

be found in the settlement of any case."   In re Columbia Gas, 146

B.R. at 114; see also Mitchell v. Streets (In re Streets & Beard

Farm Partnership), 882 F.2d 233, 235 (7th Cir. 1989) (holding

unperformed delivery of legal title to be a formality rather than

"the kind of significant legal obligation that would render the

contract executory"); In re GEC Indus., 107 B.R. 491, 492 (Bankr.

D. Del. 1989) (holding seller's unperformed warranty obligations

insufficient to make contract executory; buyer's administrative

steps to submit claims for breach of warranty are merely

procedural and do not make contract executory).    An individual

class member's failure to execute the supplemental contract would

not constitute a material breach of the settlement agreement but

rather would be the failure of a condition that would relieve
TCO's obligation to pay that member its portion of the escrow

monies.19

            Further, TCO cannot really be concerned with whether a

given class member executes a supplemental contract, as the main

terms governing the future purchases were embodied in the

settlement agreement itself.   The supplemental contracts were

more important to the class members (the obligors) than to TCO

(the obligee).   Class counsel made clear before the district

court that the supplemental contracts were important to the class

members.    The supplemental contracts required TCO to pay higher

19
 . Although in a different context, we believe In re Sudbury,
Inc., 153 B.R. 776 (Bankr. N.D. Ohio 1993), is instructive. The
debtor claimed its insurance policies and related retrospective
premium payments were not executory contracts. Id. at 776. The
insurers argued the policies were executory and that the premium
claims should get administrative expense priority. Id. at 776-
77. Bankruptcy did not relieve the insurers' obligation to
provide coverage, and the payments the debtor owed did not alone
make the policies executory. Id. at 778.

          The insurers argued the debtor had obligations to
fulfill under cooperation clauses in the event it filed a claim.
Id. at 779. The court held these obligations were not enough to
make the policies executory. The court observed the debtor's
failure to fulfill these obligations on a particular claim would
only provide an insurer with a defense to that claim, but would
not void the insurers' general obligations under the policies.
Id.   The court also noted that the insurers' concern was gaining
administrative expense priority, not having the debtor perform
the cooperation clauses. Id. at 780-81.

          The supplemental contracts here are analogous to the
obligations under the cooperation clauses. The analogy is
inexact but it illustrates the function of the supplemental
contracts. The debtor's failure to cooperate on a given claim,
like a class member's failure to execute a supplemental contract,
would relieve the other party (TCO/the insurers) from paying that
one claim but not from the more general obligations embodied in
the settlement agreement/insurance policies as a whole.
prices than under the old contracts and thus benefitted the

class, and the class even concedes the primary benefit of the

contract supplements inured to the class members.    Without more,

it was unlikely that the parties intended that failure to execute

them would be a breach by the class members.

          Although, as the class members point out, the

supplements were also designed to prevent future disputes and as

such they presumably benefit TCO, we are convinced that on

balance the obligation to execute the supplemental contracts is

not sufficient to make the settlement agreement executory.    Like

the releases, the contract supplements were conditions to the

class members' receipt of their portion of the settlement fund.

Any class member's failure to execute the supplement would not

constitute a breach of the settlement agreement.20

20
 . The facts here are readily distinguishable from those in
Sharon Steel, in which we found an executory contract existed and
observed: "The agreement is characterized by reciprocal
obligations continuing into the future: National Fuel has
promised to provide natural gas to Sharon, and Sharon has
promised to purchase the gas at a certain price . . . ." 872
F.2d at 39. This met the bankruptcy definition of executory
contract because either side's failure to perform would clearly
have been a material breach. Here, the class members'
obligations were merely conditions. TCO promised to pay an
additional $15 million into the escrow account, and the class
members' entitlement to those monies was contingent on completion
of the releases and supplemental contracts.

          The difference between the agreement in Sharon Steel
and the agreement here illustrates the importance of the
definition of executory contracts for purposes of the Bankruptcy
Code. Absent the limits imposed by Sharon Steel's definition of
executory contract, the agreement here might appear executory.
But the factual differences between this case and Sharon Steel
point out that not every contract that appears executory because
it has not been completely performed is executory for purposes of
§ 365. See Countryman, supra, at 450 ("All contracts to a
                                C.

           An examination of the purpose of § 365 leads to the

same result.   The only functional difference between assumption

and rejection in this case, were the contract to be considered

executory, is that assumption would give the class a higher

priority to the unpaid $15 million.   In return TCO would gain

nothing of value: the releases add no rights to the estate not

already given by the district court's order, and the supplements

provide only a marginal benefit to TCO.     The Ohio District

Court's order bound the class as a whole.    Once the order became

final and unappealable, all the class members were bound by it.

Accordingly, the class members' failure to complete the tasks

required for them to receive their money could not breach the

agreement between the class and TCO, but could only serve as the

failure of conditions precedent to their right to settlement

monies.   Assumption would not add assets to the bankruptcy

estate.   See In re Sudbury, Inc., 153 B.R. at 778-81 (holder

unjustified in seeking first priority through executory contract

provisions when pre-petition claim was not entitled to priority

as administrative expense pursuant to 11 U.S.C. § 503).    The

agreement is not an executory contract for purposes of § 365.

                                V.



(..continued)
greater or less extent are executory. When they cease to be so,
they cease to be contracts. But that expansive meaning can
hardly be given to the term as used in the Bankruptcy Act
. . . ." (citation omitted)).
          For the reasons set forth, we will affirm the judgment

of the district court.
