## Facts

- Riodizio, Inc. operated a restaurant and obtained financing from Riodizio Company, LLC in June 1995 through related transactions.
- As part of the financing relationship, Riodizio issued LLC a stock option warrant allowing LLC to purchase roughly 60% of Riodizio’s stock at a nominal price (about $1 per share).
- The warrant required the debtor to keep the offer open and to issue shares if LLC exercised; LLC could exercise by tendering the purchase price.
- The parties also entered a shareholders agreement granting LLC significant management and financial control rights.
- After business deterioration, Riodizio filed for Chapter 11 and moved under 11 U.S.C. § 365 to reject both the warrant and the shareholders agreement as executory contracts.
- LLC objected, arguing the warrant was not executory and that rejection would improperly deprive LLC of bargained-for equity and control rights exchanged for its financing.
- In prior proceedings, the court had denied a separate motion to reject an equipment “lease,” ruling that arrangement was a secured financing rather than a true lease.

## Issues

1. Whether the stock option warrant was an executory contract subject to rejection under 11 U.S.C. § 365.
2. Whether the shareholders agreement was executory and, if so, whether rejection should be approved based on benefit to the estate under § 365.

## Decision

- The court held the warrant was an executory contract and granted the debtor’s motion to reject it under § 365.
- The court held the shareholders agreement was executory but declined to authorize rejection on the existing record.
- The court scheduled an evidentiary hearing to determine whether rejection of the shareholders agreement would provide a net benefit to the estate.

## Legal Principles

- An executory contract is one where obligations of both parties remain so unperformed that failure by either to perform would constitute a material breach excusing the other’s performance.
- Option-style instruments may qualify as executory contracts when the debtor has continuing duties (e.g., to keep the option open and deliver the contracted-for property upon exercise) and the option holder has remaining performance (e.g., to exercise and pay).
- Rejection under 11 U.S.C. § 365 requires more than executory status; the debtor must show, under a business-judgment standard, that rejection is expected to produce a net benefit to the estate.
- Courts may apply a functional, economic-effects analysis in evaluating executory status and rejection, focusing on the practical consequences of assumption or rejection for the estate.

## Conclusion

The bankruptcy court permitted rejection of a stock warrant that it treated as executory because each side retained material performance tied to exercise, and rejection would prevent value dilution; it treated the shareholders agreement as executory as well, but required an evidentiary showing that rejection would improve the estate’s position before authorizing it.


In re Riodizio, Inc., 204 B.R. 417 (Bankr. S.D.N.Y. 1997)