The Ninth Circuit's Expansive Reading of "Financial Accommodations" that Cannot Be Assumed or Assigned in Bankruptcy
It is generally well understood that agreements to extend credit or provide financing to a debtor cannot be assumed or assigned in bankruptcy. Even so, the provision of the Bankruptcy Code that precludes assumption or assignment—section 365(c)(2)—also extends to "financial accommodations," a term that is not defined in the Bankruptcy Code and has been the subject of relatively few bankruptcy and appellate court rulings. The U.S. Court of Appeals for the Ninth Circuit examined the meaning of the term in In re Svenhard's Swedish Bakery, 154 F.4th 1100 (9th Cir. 2025). The court of appeals ruled that a deeply discounted settlement of pension plan withdrawal liability is a "financial accommodation" that cannot be assumed or assigned, thereby extending the reach of section 365(c)(2) well beyond conventional lending arrangements.
Assumption and Rejection of Executory Contracts and Unexpired Leases in Bankruptcy
Section 365(a) of the Bankruptcy Code provides that, with certain exceptions delineated elsewhere in the statute, "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." The trustee's power to assume or reject is conferred upon a DIP under section 1107(a) of the Bankruptcy Code. Rejection results in a court-authorized breach of the contract, with any claim for damages treated as a prepetition claim against the estate on a par with the claims of other general unsecured creditors (unless the debtor has posted security). 11 U.S.C. § 365(g). Assumption of a contract requires, among other things, that the trustee or DIP "cure" all existing monetary defaults and provide "adequate assurance of future performance." 11 U.S.C. § 365(b). The cure obligations set forth in section 365(b)(1) do not apply to defaults triggered by the debtor's financial condition (including its bankruptcy filing) and certain other breaches. See 11 U.S.C. § 365(b)(2).
The Bankruptcy Code does not define the term "executory." Many courts have adopted the test for executoriness articulated by Professor Vern Countryman, who in 1973 defined an "executory" contract as a "contract under which the obligations 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." See V. Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973); see also V. Countryman, Executory Contracts in Bankruptcy: Part II, 57 Minn. L. Rev. 479 (1974); see generally Collier on Bankruptcy ("Collier") ¶ 365.02 (16th ed. 2022) (citing cases). If a contract or agreement is not executory, it may be neither assumed nor rejected. Instead, the contract may give rise to either an estate asset or a liability—in the latter case, a claim that may be asserted against the estate by the non-debtor party.
Upon assumption, most kinds of executory contracts or unexpired leases may be assigned by the trustee or DIP to third parties under the circumstances specified in sections 365(c) and 365(f). Pending the decision to assume or reject, the trustee or DIP generally is obligated to keep current on most obligations that become due under the contract postpetition. 11 U.S.C. §§ 365(d)(3) and (d)(5).
However, the trustee or DIP may not assume or assign any executory contract or unexpired lease, whether or not such contract or lease prohibits or restricts an assignment of rights or delegation of duties, if: (i) applicable law excuses the non-debtor party from accepting performance from or rendering performance to an entity other than the debtor or the DIP, and the non-debtor party does not consent to assumption or assignment (11 U.S.C. § 365(c)(1)); (ii) the contract is one "to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor" (11 U.S.C. § 365(c)(2) (emphasis added); or (iii) the lease is a non-residential real property lease that was terminated under applicable non-bankruptcy law prior to entry of the order for relief. 11 U.S.C. § 365(c)(3).
The scope of section 365(c)(2) is limited. It "applies only to extensions of credit that are 'loans,' 'debt financing' or 'financial accommodations,' and not to all contracts to extend credit." Collier on Bankruptcy ¶ 365.07[2] (16th ed. 2025) (citing cases); see also In re Village Roadshow Entertainment Group USA Inc., No. 25-10475 (TMH), 2025 WL 3093845, at *3 (Bankr. D. Del. Nov. 5, 2025) ("In determining whether a contract is one to extend financial accommodations, the whole contract must be considered because '[a] contract is not a "financial accommodations" contract if the extension of credit is merely incidental to the broader contractual arrangement involving the debtor.'" (citations and footnotes omitted), stay pending appeal denied, No. 25-1405-CFC, 2025 WL 3719840 (D. Del. Dec. 23, 2025); In re Servicom, LLC, No. 18-31722 (AMN), 2025 WL 2165774, at *6 (Bankr. D. Conn. July 18, 2025) (finding that a factoring agreement was not "a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor within the meaning of § 365(e)(2) or § 365(c)(2)" because the factoring relationship between the factor and the debtor was a "true sale" and not a disguised lending relationship).
The purpose of the provision is to prevent a trustee or DIP from requiring new advances of money from a creditor. See In re Jonesboro Tractor Sales, Inc., 619 B.R. 223, 233 (Bankr. E.D. Ark. 2020); In re Cent. Illinois Energy, L.L.C., 482 B.R. 772, 787 (Bankr. C.D. Ill. 2012), aff'd sub nom. Rafool v. Evans, 497 B.R. 312 (C.D. Ill. 2013). The term "financial accommodation" is not defined in the Bankruptcy Code. However, it has been narrowly construed to mean an extension of money or credit to accommodate another. See In re Thomas B. Hamilton Co., Inc., 969 F.2d 1013, 1018–19 (11th Cir. 1992); In re Jonesboro Tractor Sales, Inc., 619 B.R. 223, 231 (Bankr. E.D. Ark. 2020).
If an executory contract falls within the scope of section 365(c)(2), an "ipso facto" clause in the agreement providing for termination or modification of the agreement due to the debtor's financial condition or a bankruptcy filing is enforceable pursuant to section 365(e)(2)(B) of the Bankruptcy Code.
Svenhard
Svenhard's Swedish Bakery (the "debtor") was a commercial bakery in California. As a participating employer in a pension fund for bakery employees, the debtor was obligated to make pension contributions on behalf of covered employees.
In 2014, financial difficulties prompted the debtor to sell its business to United States Bakery ("USB"). As part of that sale, the debtor agreed to transfer one of its California bakery facilities and its equipment to USB, to lease the facility and its equipment back from USB for five years, and to close its other bakery facility. Upon closing that facility, the debtor terminated its workforce and stopped contributing to the pension fund.
The pension fund notified the debtor that its withdrawal from the fund triggered withdrawal liability under the Employee Retirement Income Security Act of 1974 ("ERISA") in the amount of approximately $50 million and a delinquent-contribution liability of more than $500,000 for failing to make severance and vacation payouts. Instead of timely contesting these liabilities under ERISA procedures, the debtor provided the pension fund with information regarding its "limited assets."
The pension fund ultimately agreed to settle the amount of the debtor's withdrawal and delinquent-contribution liabilities for a significantly reduced amount (approximately $3 million) to be paid in monthly installments over 20 years. The settlement agreement stated that the pension fund agreed to the settlement because there would be little or no value remaining for the fund if the debtor's secured creditors foreclosed on their collateral.
Despite the settlement, USB terminated the sale-leaseback agreement, causing the debtor to default on its obligations in November 2019. In December 2019, the debtor filed for chapter 11 protection in the Eastern District of California. The debtor then sought bankruptcy court authority to assume the settlement agreement under section 365, to assign the agreement to USB, and to approve the settlement as "fair and equitable" under Rule 9019 of the Federal Rules of Bankruptcy Procedure. The pension fund objected to the proposed assumption and assignment, arguing, among other things, that the settlement agreement was not an executory contract and could not be assumed in any case because it was a "financial accommodation."
The bankruptcy court held that, under the Countryman test, the settlement agreement was not executory, and could not be assumed (or rejected) because, among other things, as of the chapter 11 petition date, the pension fund "had no obligation to perform and needed to do nothing to avoid being in breach." See In re Svenhard's Swedish Bakery, 647 B.R. 554, 562 (Bankr. E.D. Cal. 2022), aff'd, 653 B.R. 471 (B.A.P. 9th Cir. 2023), aff'd on other grounds, 2025 WL 2627837 (9th Cir. Sept. 12, 2025). The bankruptcy court also concluded that, even if it were executory, the settlement agreement could not be assumed because it was a "financial accommodation" under section 365(c)(2). According to the court, "[t]he essence of the [settlement agreement] to accept $3 million on account of the $46+ million withdrawal liability is the provision to [the debtor] of a financial accommodation premised on its alleged inability to pay the full liability." Id. at 563.
On appeal by the debtor, a bankruptcy appellate panel for the Ninth Circuit affirmed the bankruptcy court's ruling that the settlement agreement was not an executory contract, but declined to rule on the court's alternate determination that the agreement was an non-assumable financial accommodation. The debtor appealed to the Ninth Circuit.
The Ninth Circuit's Ruling
A three-judge panel of the Ninth Circuit affirmed the rulings below in a unanimous (per curiam) decision.
The Ninth Circuit panel did not decide whether the settlement agreement was "executory." Instead, the court held that the agreement fell within section 365(c)(2)'s prohibition against assuming or assigning any contract "to make a loan, or extend other debt financing or financial accommodations" to or for the benefit of the debtor.
The court reasoned that such a dramatic reduction and forbearance, agreed to because of the debtor's limited assets and inability to pay, fit within the ordinary meaning of a "financial accommodation," which historically encompassed "a loan or other financial favor." Svenhard, 154 F.4th at 1104–05. In reaching that conclusion, the court applied the "superfluity" canon of statutory construction to "give effect to every word of a statute wherever possible." Id. at 1105. In particular, the court found that Congress's inclusion of the words "loan," "debt financing," and "financial accommodations" in section 365(c)(2) indicates that "financial accommodations" must capture more than classic extensions of credit.
The Ninth Circuit's holding was based on a practical view of the settlement agreement: Agreeing to take pennies on the dollar in light of a debtor's financial distress is not merely a settlement of disputed claims. According to the court, the settlement was, in substance and purpose, a form of cash-flow relief and balance-sheet support—a financial favor extended to enable continued operations if the distressed entity.
Outlook
Svenhard is not the first case in which the Ninth Circuit has addressed the meaning of section 365(c)(2). See, e.g., In re Sun Runner Marine, Inc., 945 F.2d 1089 (9th Cir. 1991) (affirming a bankruptcy appellate panel's decision that a flooring agreement providing for a creditor's extension of money or credit in the form of loans to a chapter 11 debtor flooring dealer was a non-assumable financial accommodation under section 365(c)(2)); In re Easebe Enters., Inc., 900 F.2d 1417 (9th Cir. 1990) (holding that an unexpired option agreement to purchase real property qualified as an non-assumable contract to make a loan or extend other debt financing but that a creditor may waive or be estopped from asserting non-assumability on that basis), overruled on other grounds by In re Robert L. Helms Constr. & Dev. Co., Inc., 139 F.3d 702 (9th Cir. 1998). However, Svenhard is significant for a number of reasons.
By characterizing the settlement in Svenhard as a form of cash-flow relief and balance-sheet support, the Ninth Circuit effectively placed a wide range of distressed settlements and debt payment moratoria within the ambit of section 365(c)(2), limiting their portability in bankruptcy.
The opinion concretely expands the category of non-assumable contracts beyond the traditional universe of loans, revolvers, letters of credit, and vendor financing programs. The Ninth Circuit's textual approach invites courts to look at the economic essence and purpose of an arrangement rather than its form or label. If the counterparty's performance reduces or defers amounts otherwise due based on the debtor's financial infirmity—and does so to facilitate the debtor's operations—the arrangement risks classification as a financial accommodation.
In addition, the Ninth Circuit's reasoning reduces the practical importance of the executory-contract debate in this context. Even if a debtor can plausibly argue a settlement is executory, section 365(c)(2) independently forecloses assumption and assignment when the arrangement is a financial accommodation. This creates a threshold barrier to assumption and assignment in bankruptcy that does not touch on the executory-contract debate.
By invoking the superfluity canon of statutory construction to give independent meaning to "financial accommodations," the Ninth Circuit establishes a template for giving that term broad reach in future disputes. That approach will likely inform arguments about other nontraditional agreements—covenant waivers, forbearance agreements, penalty holidays, contingent pay plans, and heavily back-ended amortization schedules secured by performance milestones—whenever their stated purpose is to accommodate distress.
