Effective Date of Chapter 11 Plan Can Be Material Condition Precedent to Settlement Agreements

By: Kevin Murray

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

            In In re Essar Steel Minnesota LLC, the United States Bankruptcy Court for the District of Delaware held that the deadline for a Chapter 11 plan to become effective was a material condition precedent to a settlement agreement, and failure to meet the deadline relieved a counterparty from any further obligations under the settlement agreement.[1]The debtor, Mesabi Metallics (formerly known as Essar Steel Minnesota LLC), was the lessee to mineral leases in the Mesabi Range in Minnesota.[2]Following entry into the leases, Glacier Park Iron Ore Properties (“GPIOP”) became the owner and lessor of the property.[3]The leases required Mesabi to pay a royalty based on the amount of iron ore extracted from the leased property and to maintain a minimum production requirement, which if not met allowed GPIOP to terminate the leases.[4]Mesabi failed to meet the production requirements in 2016 and filed a petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”).[5]

          Following the bankruptcy filing, Mesabi and GPIOP entered into a settlement agreement pursuant to which Mesabi agreed to assume the leases.  Under the settlement agreement, Mesabi’s assumption was dependent upon the Chapter 11 plan becoming effective no later than October 31, 2017.[6]If the plan became effective by the deadline, any previous defaults would be waived and the leases would be amended to reflect that going forward.[7]However, if the plan did not become effective by the deadline, the mineral leases would be rejected and revert back to GPIOP.[8]

          The Chapter 11 plan did not become effective before the October 31, 2017 deadline.[9]Consequently, the leases were “automatically rejected pursuant to Section 365 of the Bankruptcy Code and reverted to GPIOP.”[10]GPIOP subsequently entered into new leases conveying mineral rights to Cliffs Inc. on December 9, 2017.[11]Mesabi’s plan became effective on December 22, 2017.[12]Thereafter, Mesabi filed a complaint against Cliff’s and GPIOP asserting, among other things, tortious interference and breach of contract claims.[13]Both parties moved for partial summary judgment, which hinged on whether Mesabi retained the right to assume the leases despite the Chapter 11 plan not becoming effective by the October 31 deadline.[14]The Delaware bankruptcy court granted partial summary judgment for GPIOP holding that the material condition precedent was not met rendering the rest of the contract unenforceable, and GPIOP was entitled to enter into new leases.[15]

            Under 11 U.S.C. § 365 of the Bankruptcy Code, an unexpired lease of nonresidential real property where the debtor is the lessee shall be immediately surrendered by the trustee to the lessor.[16]The Court simply analyzed the settlement agreement under common law principles.[17]The settlement agreement explicitly stated that assumption of the leases “shall only become enforceable and effective upon (i) the occurrence of the Effective Date of the Plan on or before October 31, 2017[.]”[18]This was a valid and enforceable condition precedent that relieved GPIOP of any further obligations when Mesabi failed to meet the deadline.[19]The Mesabi Metallics decision was consistent with the Bankruptcy Code,[20]which in analogous circumstances requires a lease to be rejected and the trustee to surrender the property when the deadline to assume a lease has passed.[21]

          The Messabi Metallics decision encourages parties negotiating settlement agreements to treat the terms as contract provisions by which the parties will be bound. The bankruptcy court stated “when a contractual provision is clear and unambiguous, courts should not rewrite, modify, or limit its effect by strained construction.”[22]Here, the bankruptcy court found that the settlement agreement was negotiated by sophisticated parties and included unambiguous explicit language to render the effective date a material condition precedent to the settlement agreement.[23]The parties were bound by the terms of the contract and were unable to rewrite the terms after the expiration of a deadline to satisfy a condition precedent.