In this part three of our discussion of the foreclosure process on commercial real estate in Louisiana, we are detailing the procedures involved in ordinary process foreclosures in Louisiana. Foreclosing on collateral by ordinary process in Louisiana involves filing a civil suit against the mortgagor asking the court to recognize that the indebtedness is due and that the mortgage grants the creditor a valid lien on the mortgaged property.

The lawsuit will proceed as a normal lawsuit would, first with service of the petition on the defendant, with appropriate delays for answering. The suit will move through the discovery process to the summary judgment stage or through a trial on the merits. While the lawsuit is pending, the creditor may request that the court order the property to be sequestered (i.e., seized during the period of the lawsuit) by showing that the defendant has the power to conceal, dispose of, or waste the property or its revenues. La. C.C.P. Art. 3571. Essentially, this provides a mechanism for pre-judgment seizure of the property.

Once the creditor obtains a final judgment in its favor, and all deadlines for appeal have run, the creditor will need to request that the judgment be made executory and that the court grant an order for a writ of fieri facias (also known as a writ of fifa). The writ will be issued by the parish clerk of court and will direct the sheriff of that parish to seize and sell any property belonging to the defendant in the parish to satisfy the judgment. A positive benefit of utilizing the ordinary process foreclosure procedure is that the seizure and sale may include more than just the collateral property in the mortgage, as the judgment granted will grant the creditor a judicial mortgage on all property owned by the defendant within the parish.

Similar to the executory method of foreclosure, the seizing creditor will need to provide an appraisal of the property, if the property is being sold with appraisal and will need to provide notice of the sale to any other individual or entity with an interest in the property to be sold.

While ordinary process is not usually the preferred method for foreclosure in Louisiana, it provides a mechanism to seize and sell collateral property when the creditor cannot meet all of the requirements for use of executory process. This usually arises when the creditor may have acquired the loan and collateral from another lender and does not have the original note or instrument evidencing the debt, or if the mortgage does not contain a confession of judgment or is not in authentic form (i.e., executed before a notary and two witnesses).

An experienced lawyer can review a creditor’s loan documents to determine if ordinary process foreclosure the appropriate method to seek the seizure and sale of collateral property. Kean Miller works with lenders, servicers, and law firms from across the country on workouts, foreclosures, dation en paiement (read “deed in lieu”), note sales, and commercial bankruptcy cases. We would be glad to talk with you about how we may be able to help with your distressed credit situation.

Contracting parties use contractual indemnity provisions to customize risk allocation.  Indemnification clauses vary widely and are typically heavily negotiated; however, if the events and related damages covered under the indemnity are appropriate in nature and scope, parties can manage risk expectations and avoid disputes.  In order to select the appropriate indemnification scheme for any contract or project, it is vital to assess risk in terms of events and consequences, and the likelihood that those events or consequences will occur.

Under the indemnification regime known as “knock-for-knock”, each party contractually accepts liability for its own people and property regardless of any parties’ negligence or fault, including that of the indemnified parties.  In other words, each party’s indemnity undertaking amounts to, “My people, my property, my problem”, regardless of fault.

This amounts to a contractual agreement replacing the default rule at law which would otherwise make each party liable for its own negligence or fault. Essentially, a knock-for-knock indemnification regime bases liability on ownership or control, rather than negligence or fault.

This arrangement can be attractive for multiple reasons.  First, because it avoids the complications of determining proportionate fault among the parties, it should reduce legal costs.  This is particularly important where there are numerous parties present (with their respective personnel and property) at a project site, performing their respective services in close physical proximity to one another.

Second, if the knock-for-knock indemnification regime is consistently applied across all contracts for work on a single project, a single indemnitor should indemnify and defend all the parties against whom a claim is made, which reduces the litigation costs related to that claim.

Exclusions to the “regardless of fault” concept within a knock-for-knock regime are often used for the purpose of excluding claims arising from particularly egregious behavior.  Gross negligence and willful misconduct are commonly excluded for this reason, sometimes to conform to the public policy of some states, and also because such claims may not be insurable by the indemnitor.  For the same reasons, parties sometimes exclude claims that arise out of the sole negligence of the indemnified party.

A knock-for-knock regime is likely not desirable for contracts where there is no common project site, as the parties’ people and property are not likely to cause harm to one another.  It is also not desirable for contracts where the risks to one party’s people and property are significantly greater or lesser than the risks to the other party’s people and property, for example where a contractor enters a project site with limited personnel and property to perform very dangerous work for a large and valuable facility with many employees and other contractors present.

If a knock-for-knock regime is used, it is extremely important to ensure that the same knock-for-knock regime is used in all of the contracts of every contractor present at the project site.  This is vital to ensure that every party at the site ultimately takes sole responsibility for claims for injury to its people and damages to its property regardless of fault.  Any inconsistencies in those indemnification regimes could lead to a party being left holding the bag for injury to people other than its own and damages to property of others, which is not the desired goal of a knock-for-knock regime.

It is also important to understand and comply with state law requirements and limitations regarding knock-for-knock regimes.  Because a knock-for-knock regime, by its nature, requires each party to indemnify the other party for certain claims regardless of fault, including the indemnified party’s own negligence, some states require such indemnification provisions to be expressly stated in a conspicuous manner in the contract.  Also, some states have anti-indemnity statutes which prohibit certain types of contracts from requiring one party to indemnify another party for liabilities caused by the indemnified party’s own negligence.  These anti-indemnity statutes most commonly apply to contracts involving motor carrier transportation, construction, and oilfield work.  There are ways to bring knock-for-knock indemnity schemes into compliance with such anti-indemnity statutes, often through the use of insurance.  Parties should consult their legal counsel to ensure compliance, as these laws can be somewhat complicated to maneuver.

The Louisiana Supreme Court ruled today in Daniel Bennett v. Demco Energy Services, et al., 2023-CC-01358 (La. 5/10/24), 2024 WL ***, a claim for defense and indemnity under a Master Services Agreement filed before a judicial finding of liability or loss is not premature. The Court explained “[w]e hold that a claim for indemnity raised during the pendency of the litigation and before a finding of liability is not premature….in light of our ruling today, to the extent any prior jurisprudence can be interpreted otherwise, we now clarify that such a claim for indemnity is not prohibited before a liability adjudication.” Bennett, 2023-CC-01358 (La. 5/10/24), 2024 WL ***, at *4-5.

The Court reversed the First Circuit Court of Appeal’s previous ruling which had granted an exception of prematurity and dismissed without prejudice a cross claim filed by Cox Communications, LLC against Cable Man, Inc. finding a cause of action for defense and indemnity was not ripe prior to a determination of damages owed and an actual loss sustained by an indemnitee. Bennett was remanded for further proceedings consistent with the opinion.

While there is a potential for an application for rehearing to be filed within fourteen days with the Louisiana Supreme Court, the Bennett ruling allowing the assertion of defense and indemnity before a finding of liability will have important implications on the timing of assertions of these claims in the context of construction litigation and beyond.

  • Link to May 10, 2024 Ruling of Louisiana Supreme Court in 2023-CC-01358:

23-1358.CC.OPN.pdf (lasc.org)

  • Link to Reversed September 11, 2023 Ruling of Louisiana First Circuit Court of Appeal in 2023 CW 0581:

2023 CW 0581 Decision Writ.pdf (la-fcca.org)

On April 23, 2024, by a vote of 3-2 along party lines, the Federal Trade Commission (FTC) voted to approve a final rule effectively banning employers from using non-compete agreements, with a few limited exceptions. The measure reflects an unprecedented effort by the FTC to expand its rule-making authority. The final rule “shall supersede” all state laws, regulations, orders, and interpretations regarding non-competes, unless the state laws afford more protection to employees. Whether the rule will survive legal challenges remains unclear, but as the legal landscape concerning non-competes continues to shift, employers should cautiously review any non-compete clauses going forward and not make any major changes to their current practices just yet.

The rule is a sweeping ban on all new non-competes with workers of all levels. A non-compete clause is broadly defined by the FTC as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from

1. seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

2. operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The FTC stated that whether a prohibition constitutes a “non-compete clause” is a “fact-specific inquiry.” For example, a non-solicitation clause, if sufficiently broad, could fall under the FTC’s definition of a prohibited non-compete clause. The FTC did clarify, however, that a “garden leave” provision, where an employee receives the same total annual compensation while employed by the employer, is not considered a non-compete.

The application of this prohibition extends to all “workers,” which the FTC broadly defined as including employees, independent contractors, interns, and volunteers. The rule excluded from this prohibition non-competes between franchisors and franchisees, non-competes related to the sale of a business, as well as workers for non-profits, including many workers in the healthcare industry.

The FTC’s rule is scheduled to go into effect 120 after the rule is published in the Federal Register, so the rule is not yet effective. As written, the rule allows existing non-competes to remain in place only for senior executives; however, The FTC narrowly defined a “senior executive” as a worker in a “policy-making position” earning more than $151,164 annually. Those identified in “policy-making positions” include a company’s president, CEO, or a similarly situated individual. Other officers, such as vice presidents, must hold responsibilities that afford them the final authority to make policy decisions that control significant aspects of the business. The FTC excluded from this definition individuals who have the final authority to make decisions over subsidiaries of the business but not over the business as a whole.

Should the rule become final and effective, most notably, employers will be required to provide notice to non-senior executive workers with existing non-competes stating that the non-compete agreement will no longer be enforced. This notice must be provided to both current and former workers by the effective date of the final rule.

The FTC received over 26,000 public comments when it first proposed this rule in January of 2023. So, unsurprisingly, legal challenges immediately began following the FTC’s 3-2 vote in favor of the rule. Ryan LLC, a tax service firm, filed the first legal challenge to the FTC rule on the same day it was announced, arguing the FTC’s lacked the authority to enact the rule. The US Chamber of Commerce, a critic of the rule from its initial proposal, filed a lawsuit the following day in Federal District Court in Tyler, Texas, along with the Business Roundtable, and other trade groups.

Employers should adopt a wait-and-see approach until there is further clarity on the rule’s legal challenges. And even if the FTC’s rule survives legal challenge, the rule’s scope will inevitably be subject to litigation that tests the contours of the rule.

Today, April 30, 2024, the U.S. Department of Energy (DOE) revised its National Environmental Policy Act (NEPA) implementing procedures to revise categorical exclusions for upgrading and rebuilding powerlines and for solar photovoltaic systems. Under the new rulemaking, environmental reviews will not automatically be required for projects related to solar installations. The rulemaking also adds a categorical exclusion for certain energy storage systems and adds flexibility for power grid powerline relocation.

A categorical exemption (“CX”) is applicable where a federal agency, including the DOE, has concluded that a proposed project or action does not have a significant effect on the human environment and for which neither an environmental assessment (EA) nor an environmental impact statement (EIS) is required.[1] Once a CX is promulgated through notice and comment rulemaking, it is added to an Appendix that includes the relevant requirements for the specific CX and other requirements applicable to all CXs.

One of the primary changes made by the rulemaking is the removal of a land area limitation currently in place for solar projects. The current CX for solar projects excludes the installation, modification, operation, and removal of solar photovoltaic (PV) systems, but only if the project is located within a previously disturbed or developed area comprising less than 10 acres.[2] However, the new rule removes this 10-acre limit, making the exclusion available to larger projects.

DOE regulations also require that projects comply with additional requirements, known as “integral elements,” in order to be eligible for a CX. These conditions apply to any CX, including the CX for solar projects. Under these additional requirements, projects must not:

  • threaten a violation of applicable environment, safety, and health requirements;
  • require siting and construction or major expansion of waste storage, disposal, recovery, or treatment facilities;
  • disturb hazardous substances, pollutants, or contaminants that preexist in the environment such that there would be uncontrolled or unpermitted releases;
  • have the potential to cause significant impacts on environmentally sensitive resources [1]; or
  • involve governmentally designated noxious weeds or invasive species, unless certain conditions are met.[3]

DOE received comments to the proposed rule raising concerns about impacts of solar projects on wildlife and habitat. In response to those concerns, DOE added a condition that a proposed project must be “consistent with applicable plans for the management of wildlife and habitat, including plans to maintain habitat connectivity” in order to qualify for a CX.

The final rule will go into effect on May 30. The full version of the final rule can be viewed here.

[1] See 40 C.F.R. § 1508.1(d).

[2] 10 C.F.R. Part 1021, Appx. B, at § B5.16, available at https://www.ecfr.gov/current/title-10/chapter-X/part-1021.

[3] 10 C.F.R. Part 1021, Appx. B.

Last month, a federal district court in Alabama ruled that the Corporate Transparency Act (“CTA”) is unconstitutional.[1] The CTA, which took effect on January 1, 2024, requires an estimated 32 million entities to report personal information about their beneficial owners to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The CTA aims to assist federal law enforcement in combatting money laundering and other financial crimes carried out through anonymous shell companies.

Specifically, on March 1, 2024, the U.S. District Court for the Northern District of Alabama concluded that the CTA exceeds the Constitution’s limits on Congress’s power and enjoined the U.S. Treasury Department and FinCEN from enforcing the CTA against the plaintiffs in that case. The issue before the Court concerned whether Congress has the constitutional power to regulate millions of entities and their owners upon corporate formation under state law. The Court answered in the negative—at least for the plaintiff entities.

The government argued that the CTA falls within Congress’s broad power to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations. However, the Court held that the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary and proper means of achieving Congress’s stated policy goals.

Subsequently, on March 11, 2024, the U.S. Justice Department filed a Notice of Appeal to the U.S. Court of Appeals for the Eleventh Circuit. Following the Eleventh Circuit’s ruling, the case will likely be appealed to the U.S. Supreme Court.

What does this mean for your company?

The Court’s ruling only prevents FinCEN from enforcing the CTA against the plaintiffs in the case. While this litigation is ongoing, FinCEN has indicated that it will continue to implement the CTA while complying with the Court’s order. Companies that were not a member of the National Small Business Association as of March 1, 2024, or a plaintiff in the case should assume that the recent ruling has no effect on its reporting obligations under the CTA.

For existing companies formed prior to January 1, 2024, the deadline to file beneficial owner reports is January 1, 2025. The filing deadline for companies formed on or after January 1, 2024, is 90 days after the company received notice of its formation. For now, companies which are not exempt from the CTA should still assume that they must comply with their respective filing deadline.

Should you have any questions about whether your company is subject to the CTA, please feel free to reach out to us.

[1] National Small Business United, d/b/a the National Small Business Association v. Yellen, No. 22-CV-1448 (N.D. Ala.).

Words are powerful. Being acutely aware of word choice and precise language in contracts is key to a successful agreement. Even in the world of construction, words matter as shown by the recent Louisiana Supreme Court case, Gustavo Bonilla v. Verges Rome Architects—A Professional Architectural Corporation, et al., 2023-0928 (La. 3/22/24), 2024 WL 1229219, — So.3d. — (2024). In Gustavo Bonilla, the Louisiana Supreme Court held no duty exists for an architect or contract administrator to protect against injury of a subcontractor’s employee, relying upon the Louisiana Civil Code for contract interpretation.

In this case, the City of New Orleans (“NOLA”) entered into a construction contract with a general contractor, Tuna Construction, LLC (“Tuna”) to renovate a multiservice center; this construction contract contained attachments including NOLA’s General Conditions. Tuna then subcontracted with Meza Services, Inc. (“Meza”) for demolition services. NOLA separately entered into a Design Agreement with Verges Rome Architects (“VRA”) as a consultant for “professional design and contract administration services.” Id., 2024 WL 1229219, at *1. VRA also retained an engineering consultant, Morphy Makofsky, Inc. (“MMI”), on the project. When construction ensued at the project, an employee of sub-subcontractor Meza, Mr. Bonilla, was injured on the second floor of the building when a large concrete vault structure collapsed during demolition.

The injured worker of the sub-subcontractor filed suit against the architect, VRA, and MMI, alleging “negligence in preparation and approval of the design plans and specifications, the failure to design and/or require support for the area being demolished, and the failure to monitor and supervise the execution of the plans to ensure safety at the job site.” Id., 2024 WL 1229219 at *2. VRA was granted summary judgment by the trial court by arguing that under relevant contractual provisions, it owed no duty to oversee, supervise, or maintain the construction site or the worker’s safety. The Fourth Circuit Court of Appeal reversed “inferring a duty from contractual provisions relating to required site visits and reporting deviations from the contract.” Id.

In reversing the appellate court and upholding the trial court’s decision, the Louisiana Supreme Court emphasized “the duty owed to an employee of a contractor by an engineer or architect is determined by the express provisions of the contract between the parties.” Id. Relying upon Louisiana Civil Code articles 1983, 2045, and 2046, the Court held that the clear and unambiguous language of the General Conditions and Design Agreement dictated that VRA owed no duty to the sub-subcontractor’s employee, Mr. Bonilla. Id., 2024 WL 1229219 at *6. While noting that Section F(5) of the Design Agreement required the architect to make weekly visits, the purpose was to ensure that progress and work was proceeding per the Specifications. Further, the Court focused upon Section 2.3 of the General Conditions stating “undertaking the periodic visits and observations by [Architect] or his associates shall not be construed as supervision of actual construction.” Id., 2024 WL 1229219, at *7. The Court recognized that safeguards required of the General Contractor in the General Conditions for safety and strength of scaffolding, staging, hoisting equipment and temporary shorting further supported that the architect was not liable for a breach of any duty to the subcontractor’s employee. Id., 2024 WL 1229219 at *8. The result of Gustavo Bonilla aligns with common sense and typical expectations, that the contractor, not design professionals are customarily responsible for safety and for their means and methods.

23-0928.C.OPN.pdf (lasc.org)

Media outlets around Louisiana recently reported on a new program from the Louisiana Workforce Commission pursuant to which employers have the opportunity to report job applicants who are either no-shows for job interviews or who turn down job offers. Here are links to stories from WAFB in Baton Rouge, KTBS in Shreveport, KNOE in Monroe, KATC in Lafayette, and KPLC in Lake Charles.

Employers can submit these reports electronically through the Louisiana Workforce Commission website. Here are the two links to electronic reporting portals within the Louisiana Workforce Commission website.

To receive unemployment benefits, an unemployed person must seek suitable work while receiving benefits. Under this reporting program, the Louisiana Workforce Commission can investigate an unemployment recipient’s job-seeking efforts, and if the recipient has declined job interviews or job offers, the recipient may lose their unemployment benefits. This is a new program aimed at helping employers who are having difficulty filling job openings. The future will tell if the program meets its goal.

Back in March of 2023, the U.S. Supreme Court granted cert in the case of Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC (find our coverage of that grant here). Last week, the Court released its opinion in that case, a 9-0 decision in favor of the insurer-appellant. In short, the Court put the presumption back into the presumptive enforceability of choice-of-law clauses in maritime contracts.

To briefly recap the case, Great Lakes Insurance issued a maritime insurance contract for a yacht owned by Raiders Retreat Realty Co., which has its headquarters in Pennsylvania. The parties’ insurance policy had a choice-of-law clause that selected New York law to govern any disputes arising under said contract.

Subsequently, Raiders’ yacht ran aground near Fort Lauderdale, Florida, sustaining significant damage. Great Lakes denied Raiders’ insurance claim on the grounds that the yacht’s fire-extinguishing equipment was not timely recertified or inspected and that Raiders had misrepresented the state of this equipment in the past, thereby voiding the policy.

After denying the claim, Great Lakes filed a related declaratory judgment action in federal court in Pennsylvania. In response, Raiders asserted contractual counterclaims against Great Lakes under Pennsylvania law. Great Lakes then moved to dismiss the Pennsylvania-based counterclaims because they violated the policy’s New York choice-of-law clause.

The district court agreed with Great Lakes and rejected Raiders’ counterclaims. But the Third Circuit reversed, holding that the presumptive enforceability of choice-of-law clauses must yield to a strong public policy of the state where a suit is brought.

With Justice Kavanaugh delivering the opinion, the Court reversed the Third Circuit and held that choice-of-law provisions in maritime contracts are presumptively enforceable under federal maritime law, with a few narrow exceptions that did not apply to this case.

The Court drew support for this rule of presumptive enforceability from its jurisprudence regarding forum-selection clauses, such as the classic case of The Bremen v. Zapata Off-Shore Co. Ironically, Raiders had relied on The Bremen for support based on a statement from the case that a “contractual choice-of-forum clause should be held unenforceable if enforcement would contravene a strong public policy of the forum in which suit is brought.” But as the Supreme Court pointed out, that sentence referred to a conflict between federal maritime law and a foreign country’s law.

Raiders further argued that the Court’s decision in Wilburn Boat Co. v. Fireman’s Fund Insurance Co. precluded any uniform federal presumption of enforceability for choice-of-law provisions in maritime contracts. But, as the Court pointed out, Wilburn Boat was not about a choice-of-law clause; it only determined what substantive rule applied to a party’s breach of a warranty in a marine insurance policy.

The Wilburn Boat Court held that no established federal admiralty rule controlled because states historically regulated insurance and federal courts were in no position to set a nationwide standard for insurance law. Instead, the Court determined that state law governed the warranty issue.

Distinguishing Wilburn Boat, the Court explained that here, state law had no gap to fill, because there is already a uniform federal rule on the enforceability of choice-of-law provisions. And even though states primarily regulate insurance, that responsibility does not resolve which state law applies in a case.

Finally, the Court did recognize a few instances where otherwise valid choice-of-law clauses would be disregarded, such as when the chosen law contravened a federal statute on point or an established federal maritime policy. Also, there must be a reasonable basis for the chosen jurisdiction in any choice-of-law provision, though a body of law being “well developed, well known, and well regarded” is good enough.

Justice Thomas issued a concurring opinion to further highlight how Wilburn Boat “rests on flawed premises and, more broadly, how the decision is at odds with the fundamental precept of admiralty law.” He explained that the Supreme Court has retreated from Wilburn Boat and that “[l]itigants and courts applying Wilburn Boat in the future should not ignore these developments.”

Baseball superstar Shohei Ohtani recently agreed to a 10-year, $700 million contract with the Los Angeles Dodgers.  While the headline number came as a shock to even sports business nerds like us, as always, the devil was in the details: $680 million of Ohtani’s contract is deferred until after Ohtani is no longer obligated to play for the Dodgers.    

Our last post contemplated what might happen to Ohtani’s $680 million in deferred compensation if the Dodgers filed bankruptcy in 2034 (i.e., after Ohtani no longer has to play for the Dodgers, but before Ohtani’s deferred compensation kicked in) and ways Ohtani might protect himself.  If you loved that post but were left wondering “what might happen if the Dodgers filed bankruptcy before the end of the 2033 baseball season? (i.e., while Ohtani is still required to suit up under the contract),” today is your lucky day because we take that issue head on.

Ohtani’s contract provides a unique illustration of an “executory contract,” a key term in most Chapter 11 bankruptcy cases. In essence, an executory contract is one where performance remains due on both sides of the contract.  During the contract’s first 10 years (2024-2033), Ohtani’s contract is executory because both Ohtani and the Dodgers owe performance to each other – Ohtani is obligated to play baseball for the Dodgers and the Dodgers are obligated to pay Ohtani.  After that, Ohtani’s contract is not executory because only the Dodgers owe performance to Ohtani – the Dodgers must pay Ohtani $680 million, but Ohtani owes no obligation to the Dodgers.

Thus, as discussed in our earlier post, if the Dodgers were to file bankruptcy after the 2033 season (i.e., once Ohtani’s contract is no longer executory), Ohtani would be like any other creditor to whom the Dodgers owed money.  If the Dodgers were to file bankruptcy before then, however, Ohtani is a counterparty to an executory contract with a bankrupt debtor and the Dodgers (not Ohtani) would have the option to assume-and-assign, assume, or reject Ohtani’s contract.  We will discuss those in reverse order.

Rejection: When a debtor rejects a contract, the rejection serves as a material breach of the contract by the debtor that occurred immediately before the debtor filed for bankruptcy. The debtor is no longer required to perform under the contract and the non-debtor counterparty receives a claim against the debtor’s estate for its damages from that breach.

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, a rejection would mean that Ohtani would become a free agent because he would have no further obligation to play for the Dodgers.  Additionally, Ohtani would have a claim against the Dodgers’ estate for the entire amount of his contract that had not yet been paid to him ($680 million-plus).[1]

Assumption: If a debtor assumes a contract, the contract continues just as it did before bankruptcy.  A debtor must take the entire contract it is assuming — it cannot pick and choose which parts of the contract it wants and which parts it does not want.  In addition, a debtor cannot assume a contract unless it promises to promptly cure any defaults under the contract (i.e., if the debtor is two months behind on payments, it must either make those payments or promise to make them promptly before it can assume the contract).  Finally, a debtor must be able to give adequate assurance that it can promptly cure and continue to perform the contract going forward.

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, to assume the contract, the Dodgers would have to: (1) agree to pay all its future obligations to Ohtani ($680 million-plus); (2) provide adequate assurance to Ohtani that it could meet all its future obligations; and (3) promptly cure any payment defaults to Ohtani under the contract.  On the other hand, if the Dodgers chose to assume the contract, Ohtani would have to continue playing for the Dodgers – he cannot get out of his contract just because the Dodgers file for bankruptcy.[2]

Assumption and Assignment: In certain circumstances, a debtor can assume a contract and assign it to another party.  This is particularly common with bankruptcy sales, where a debtor will sell its assets (instead of trying to reorganize).  Since the assets might not be worth much without the executory contracts supporting them, the Bankruptcy Code authorizes debtors to assume the executory contracts and then assign them to a third-party (usually the purchaser of the assets).  Certain contracts, including most personal service contracts, cannot be assigned without the consent of the counterparty.[3]

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, the Dodgers possibly could not assign Ohtani’s contract without his consent because it is a personal services contract.[4]  Thus, if the Dodgers were sold to a third-party through bankruptcy, Ohtani would have to consent to that sale before the new Dodgers owner could guarantee fans that Ohtani would play.

At this point you might be thinking, “great summary Eric and Mack, but what happens before a debtor decides to assume or reject the contract?”  Excellent question! 

The short answer is that the debtor has no obligation to perform, but the counterparty to the executory contract must continue performing.  Although the debtor has no obligation to perform, counterparties to executory contracts are entitled to compensation from the debtor for the reasonable value of the goods and services they provide during the debtor’s bankruptcy case.  Moreover, their compensation is entitled to an “administrative priority” claim against the debtor, which means their compensation will be paid ahead of most other creditors.  In a recent bankruptcy case concerning baseball,[5] a bankruptcy judge ruled (as have most bankruptcy judges that have faced similar issues) that the “reasonable value” of the services provided by MLB teams to a media company that licensed the MLB team’s rights to broadcast MLB games was the rate provided for in the contract. 

Going back to our scenario of a Dodgers bankruptcy while Ohtani is still playing; Ohtani would be required to play for the Dodgers while they decided whether to assume or reject his contract.  That said, while the Dodgers would not have any “formal” obligation to pay Ohtani his contract rate during this time, the Dodgers would have to pay Ohtani the “reasonable value” of the services he provided, which most courts would say is his “contract rate” (circular, we know).

If you find yourself as a party to an executory contract with a bankruptcy debtor, you should contact counsel.  Team Shohei – give us a shout if the front office starts to use words like “restructuring” or “right-sizing the balance sheet” in the future.  We’d love to help you out!

[1] It is worth noting that since 1993, four MLB franchises have filed bankruptcy (the Baltimore Orioles in 1993, the Chicago Cubs in 2009, the Texas Rangers in 2010, and the Los Angeles Dodgers in 2011) and not a single player contract was rejected. 

[2] Even if his contract says he can walk away if the Dodgers file for bankruptcy, federal law says that provision in the contract is void and unenforceable.

[3] See 11 U.S.C. § 365(c)(1).  This exception is one of the many arcane nuances to executory contracts in bankruptcy, which is partly why, despite their outsize importance in bankruptcy, executory contracts have been called the most “psychedelic” area of bankruptcy law.  See Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 228 (1989). 

[4] We say possibly because most MLB contracts explicitly require the player to agree that the contract can be freely assigned (without such a clause, trades would be impossible).  Ohtani, however, has a full “no-trade” (i.e., no assignment) clause in his contract. 

[5] In re Diamond Sports Group, LLC, et al. (Bankr. S.D. Tex. 23-90116).