Contracts To Make “Financial Accommodations” Cannot Be Assumed Or Assigned—§ 365(c)(2) (In re Svenhard)

By: Donald L Swanson

11 U.S.C. § 365(c)(2) says (emphasis added):

• “(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor . . . , if— . . . (2) such contract is a contract to make a loan, or extend other debt financing orfinancial accommodations, to or for the benefit of the debtor.”

An opinion on such § 365(c)(2) prohibition is Svenhard’s Swedish Bakery v. Bankery and Confectionary Union and Industry International Pension Fund (In re Svenhard’s Swedish Bakery), Case No. 23-60045 (9th Cir., decided September 12, 2025), which cites and discusses two Ninth Circuit precedents: In re Easebe Enterprises, Inc., 900 F.2d 1417 (9th Cir. 1990),[fn. 1], and In re Sun Runner Marine, Inc., 945 F.2d 1089 (9th Cir. 1991)

This article summarizes each of those three opinions, in chronological order, to illustrate how the § 365(c)(2) prohibition works.

In re Easebe Enterprises, Inc.

Debtor holds a pre-petition lease of real property, with an option to purchase the property for $800,000 payable by (i) a cash deposit of $75,000, and (ii) Debtor’s promissory note for the remainder, secured by a first priority deed of trust.

In Debtor’s Chapter 11 bankruptcy, Debtor files an Application for Authority to Assume Unexpired Lease. The Bankruptcy Court grants this Application but makes no specific mention of the option to purchase.

Later, Debtor attempts to exercise the option by tendering the $75,000 in cash with escrow instructions to lessors, who find the escrow instructions unacceptable and refuse to sign.

So, Debtor files an Application for Authority to Exercise Option for Purchase of Real Property and to Incur Secured Indebtedness.  Lessors object.  After three hearings thereon, the Bankruptcy Court concludes:

• the option was non-assumable under § 365(c)(2), because it is a “financial accommodations” contract with Debtor.

Appeals reach the Ninth Circuit Court of Appeals, which affirms because:

• an executory contract to extend loans or “financial accommodations” to or for debtor’s benefit may not be assumed (§ 365(c)(2)) — a purpose is to prevent the trustee from requiring new advances of money;
• the undefined terms “loan,” “debt financing” and “financial accommodations” in § 365(c)(2) are to be strictly construed, so as not to apply to ordinary contracts;
• contracts requiring money or other property to be delivered in exchange for a promise to pay are non-assumable, while those that require money or property to be delivered in exchange for goods or services are assumable; and
• the terms of Debtor’s option fall within the ambit of § 365(c)(2) because Debtor’s delivery of a promissory note is required.

In re Sun Runner Marine, Inc.

Debtor manufactures boats.

Debtor has this financing arrangement with Creditor: Creditor lends money to retail boat dealers for buying boats from Debtor and reselling those boats to customers.  The financing arrangement works like this:

• once Creditor agrees to finance a particular dealer, Debtor will deliver a boat to the dealer and Creditor will pay Debtor for the boat, charging the payment as a loan to the dealer secured by a lien on the boat;
• when dealer sells the boat, Creditor’s loan for the boat will be repaid; and
• if dealer defaults, Debtor is obligated to repurchase the boat by paying Creditor the unpaid balance on the dealer’s loan.

Debtor files Chapter 11 bankruptcy, and Creditor files a motion to compel Debtor to assume or reject the financing arrangement as an executory contract.  Debtor and Creditor stipulate to assumption of the financing arrangement.

Debtor’s primary Lender objects to the stipulated assumption of the financing arrangement, but the Bankruptcy Court approves the assumption anyway.  So, Lender appeals to the Ninth Circuit BAP. 

The Ninth Circuit BAP reverses, holding that the financing arrangement is not assumable under § 365(c)(2), because it is a “financial accommodation.”

On further appeal, the Ninth Circuit Court of Appeals rules: the financing arrangement qualifies as a “financial accommodation” contract that cannot be assumed, because of § 365(c)(2).  Here is its rationale:

• the term “financial accommodation” is the extension of money or credit to accommodate another;
• the financing arrangement contemplates new loans from Creditor to the dealers, with proceeds going directly to Debtor, who incurs secondary liability for repayment; and
• thus, the financing arrangement is a “financial accommodation” contract for Debtor’s benefit—and is, therefore, within the purview of the § 365(c)(2) prohibition against assumption and assignment.

Moreover, the Ninth Circuit rejects Debtor’s argument that the assumption is valid because of Creditor’s consent, even though it acknowledges that the consent argument has “a surface appeal.”  Here’s why:

• § 364 governs post-petition credit, while § 365 governs the post-petition continuation of pre-petition contractual relations;
• upon bankruptcy filing, § 365(c)(2) prohibits the assumption of “financial accommodation” contracts—without containing any reference or regard to the lender’s consent;
• § 364 provides incentives that a debtor may offer, with court approval, to induce a potential lender to extend credit post-petition—including an administrative expense priority under 364(b), a “super-priority” under § 364(c)(1), and a lien under § 364(c)(2) or (3); but
  • § 364 does not allow the debtor to pay a lender’s pre-petition unsecured claim as a condition for post-petition financing; and
• permitting assumption of a “financial accommodation” contract would allow a post-petition lender, like Creditor in this case, to receive full payment on its pre-petition unsecured claim under § 365(b)(1):
  • such a benefit would be at the expense of other unsecured creditors, by diminishing estate assets available to satisfy their claims; and
  • thus the § 365(c)(2) prohibition against assumption and assignment of “financial accommodation” contracts protects all unsecured creditors, not just the lender—which means that Creditor’s consent alone is not sufficient to abrogate it.

In re Svenhard’s Swedish Bakery

Debtor is a commercial bakery in Oakland and Exeter, California.

Debtor has, for a long time, been a participating employer in the Bakery and Confectionary Union and Industry International Pension Fund (“the Pension Fund”)—and is obligated to make pension contributions on behalf of employees to the Pension Fund.

Financial difficulties prompt Debtor to, (i) sell its Exeter facility and equipment, with a lease-back arrangement, (ii) close its Oakland facility, move those operations to Exeter, and terminate its Oakland workforce, and (iii) stop contributing to the Pension Fund.

The Pension Fund takes the position that Debtor has effectively withdrawn from the Pension Fund, making Debtor subject under federal law to, (i) a withdrawal liability of $39 million, and (ii) a contribution liability of $500,000 for failing to make severance and vacation payouts.

Because of Debtor’s distressed financial condition, the Pension Fund agrees to settle those liabilities for Debtor’s promise to pay $3 million over 20 years.

But after only a few months, Debtor ceases operations entirely, defaults on the settlement and files Chapter 11 bankruptcy. In the Bankruptcy, Creditor moves for conversion of the case to Chapter 7, but the bankruptcy court denies the motion, and Creditor appeals.

Meanwhile, Debtor, Creditor and a committee of Debtor’s unsecured creditors participate in a mediation.

Through the mediation, Debtor and Creditor reach a settlement, contingent upon obtaining an order from the Bankruptcy Court that allows the Pension Fund’s settlement agreement with Debtor to be assumed by Debtor and assigned to Creditor.

The Pension Fund opposes the mediated agreement, contending that the Pension Fund’s settlement with Debtor is a “financial accommodation” under § 365(c)(2) that cannot be assumed or assigned. 

The Bankruptcy Court agrees with the Pension Fund, and Debtor appeals to the Ninth Circuit BAP, which affirms, and then to the Ninth Circuit Court of Appeals.

The Ninth Circuit Court of Appeals rules that the Pension Fund’s settlement with Debtor “constitutes a ‘financial accommodation’ that is not assumable or assignable under § 365(c)(2).”  It’s rationale is this:

• the ordinary and common meaning of “financial accommodations” includes contracts to reduce an amount that is owing because of a debtor’s poor financial condition; and
• the Pension Fund’s settlement agreement with Debtor is plainly such a contract.

Conclusion

Very interesting!

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Footnote 1.  The Easebe opinion is overruled on other grounds by In re Robert L. Helms Construction & Development Co., 139 F.3d 702 (9th Cir. 1998)(en banc).  The other grounds are whether an option agreement is an executory contract: (i) Easebe ruled, without analysis, that an option agreement “is an executory contract,” but (ii) the Helms opinion subsequently declares that it is not. 

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