No Assumption of an Agreement to Extend a Financial Accommodation

The following is a case update written by ILC Advisor Lieb M. Lerner analyzing In Re Svenhard’s Swedish Bakery,  ___ F. 4th ___, 2025 WL 2627837 (9th Cir. Sep 12, 2025), a recent case of interest:

Summary

The Ninth Circuit held that a debtor’s pre-bankruptcy settlement agreement providing for installment payments of a deeply discounted debt is a contract to extend “financial accommodation” under 11 U.S.C. § 365(c)(2) that cannot be assumed or assigned in the debtor’s bankruptcy case.

Facts

In 2014, Svenhard’s Swedish Bakery (“Svenhard”), a commercial bakery with two facilities in California, sold its business to United States Bakery (“USB”). The sale required Svenhard to close its Oakland facility and to move its operations to the Exeter facility under a sale-leaseback arrangement.  Svenhard stopped making contributions on behalf of certain employees covered by the Bakery and Confectionary Union and Industry International Pension Fund (the “Pension Fund”), which alleged plan termination liabilities of $39.5 million against Svenhard.

The Pension Fund and Svenhard negotiated a settlement agreement for Svenhard to pay $3.5 million plus interest (instead of $39.5 million) in monthly payments over 20 years.  The Settlement Agreement stated that the Pension Fund agreed to the reduced amount because otherwise the company’s secured creditors would take all of Svenhard’s assets and the reduced payments would allow Svenhard to continue operating while making the agreed monthly payments.

Despite the Settlement Agreement, Svenhard soon ceased operations, defaulted on the settlement payments, and filed for chapter 11.  After some litigation in the bankruptcy court between Svenhard and USB, those parties reached a conditional compromise to settle their litigation, which was contingent on the bankruptcy court authorizing the assumption and assignment of the Settlement Agreement to USB. The Pension Fund objected to Svenhard’s motion to assume and assign the Settlement Agreement as an executory contract under Bankruptcy Code Section 365 (11 U.S.C. § 365), arguing that the agreement was not assumable or assignable.

The bankruptcy court denied Svenhard’s motion on two grounds:   (1) the Settlement Agreement was not an “executory contract” within the meaning of Section 365(a), and (2) the Settlement Agreement was a “financial accommodation” not subject to assumption or assignment under Section 365(c)(2).  On appeal, the Bankruptcy Appellate Panel (BAP) affirmed on the first ground, but left the second undecided.  Svenhard then appealed to the Ninth Circuit (the “Court”), which under de novo review affirmed on the second ground, ruling that the Settlement Agreement was a “financial accommodation” not subject to assumption or assignment under Section 365(c)(2).  The Court chose to not decide whether the Settlement Agreement was an executory contract.

Reasoning

Bankruptcy Code Section 365(c)(2) provides an exception to the general rule allowing a trustee (or debtor in possession in a Chapter 11 case) to assume or assume and assign an executory contract under § 365(a).  A trustee or debtor in possession “may not assume or assign any executory contract … if … such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor.”  

The Court applied what it termed the “ordinary, contemporary, and common meaning” of “financial accommodations” at the time the Bankruptcy Code – and this statute – were adopted in 1978, which it discerned from that era’s editions of Black’s Law Dictionary (rev. 4th Ed. 1968), The American Heritage Dictionary of the English Language (1976), and Webster’s Third New International Dictionary (1976).  In one form or another, all defined an “accommodation” as a loan, financial favor, or arrangement to accommodate a need.  The Court also applied the “superfluity canon” and stressed that in order to not have any part of Section 365 be superfluous, “financial accommodations” must necessarily be different than “a loan” or “other debt financing.”  The Court rejected Svenhard’s arguments that to fall within the statutory exception a “financial accommodation” must necessarily be a loan, finding that the cases cited by Svenhard for that proposition were instead consistent with interpreting a “financial accommodation” as being something other than a loan.

The Court found that the Settlement Agreement was a financial accommodation under the statute.  The agreement involved the forbearance and reduction of the much larger amount owed to the Pension Fund and provided for a schedule of payments over time that Svenhard was to pay while it continued to operate its business.  The Settlement Agreement therefore fell within the ordinary meaning of “financial accommodations” and thus could not be assumed or assigned under Section 365(c)(2).

Author’s Comments

The Ninth Circuit’s decision clarifies that the “financial accommodation” exception in Section 365(c)(2) is not limited to traditional loans or credit facilities. Instead, it encompasses contracts in which a creditor agrees to forbear or reduce payment obligations due to the debtor’s financial distress.  Notably, the Court relied on express language in the Settlement Agreement that described the financial accommodation being provided to Svenhard.  Given that analysis, drafters of settlement agreements should consider the benefits and burdens of similar language if a future bankruptcy is contemplated and whether potential assumption and assignment of the agreement is desired.

These materials were written by Leib Lerner, a partner, and Douglas Harris, an associate, in the Financial Restructuring and Reorganization Practice Group at Alston & Bird, LLP.  Editorial contributions were provided by ILC member Gary M. Kaplan (gkaplan@fbm.com), a partner at Farella Braun + Martel LLP in San Francisco, California, and the Hon. Meredith Jury (ret.). 

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