Bankruptcy and Executory Contracts: Contract Assumption, Contract Rejection

Introduction

Bankruptcy law is a complex field that involves various legal concepts and procedures. One of the critical aspects of bankruptcy is the treatment of executory contracts. This guide provides a comprehensive overview of executory contracts in bankruptcy, focusing on contract assumption and contract rejection. We will explore the legal framework, key statutes, and relevant case law to offer a detailed understanding of these concepts.

What is an Executory Contract?

An executory contract is a contract under which both parties have ongoing obligations that have not yet been fully performed. In the context of bankruptcy, executory contracts are significant because they can impact the debtor's estate and the rights of creditors.

Legal Definition

The term "executory contract" is not explicitly defined in the Bankruptcy Code. However, it is generally understood based on the definition provided by Professor Vern Countryman: a contract is executory if the obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach excusing the performance of the other.

Examples of Executory Contracts

• Leases: Both the lessor and lessee have ongoing obligations.
• Service Contracts: Both parties have continuing duties to perform services.
• Supply Agreements: Both parties have ongoing delivery and payment obligations.

Legal Framework

The treatment of executory contracts in bankruptcy is governed by several key provisions in the U.S. Bankruptcy Code.

Section 365 of the Bankruptcy Code

Section 365 of the Bankruptcy Code is the primary statute governing executory contracts. It provides the debtor or trustee with the option to assume or reject executory contracts.

• Assumption: The debtor or trustee decides to continue performing the contract.
• Rejection: The debtor or trustee decides to terminate the contract.

Link to Section 365 of the Bankruptcy Code

Rule 6006 of the Federal Rules of Bankruptcy Procedure

Rule 6006 outlines the procedures for assuming, rejecting, or assigning executory contracts. It requires the debtor or trustee to file a motion and obtain court approval.

Link to Rule 6006

Contract Assumption

Assuming an executory contract means that the debtor or trustee decides to continue performing the contract. This decision can have significant implications for the bankruptcy estate and the parties involved.

Requirements for Assumption

To assume an executory contract, the debtor or trustee must:

1. Cure Defaults: Any existing defaults under the contract must be cured.
2. Provide Adequate Assurance: The debtor or trustee must provide adequate assurance of future performance.

Court Approval

The assumption of an executory contract requires court approval. The court will consider factors such as the benefit to the estate and the interests of creditors.

Case Law

Several court cases have shaped the interpretation of contract assumption in bankruptcy:

• NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984): The Supreme Court held that a debtor in possession has the authority to assume or reject executory contracts, subject to court approval.
• In re Texaco Inc., 254 B.R. 536 (Bankr. S.D.N.Y. 2000): The court emphasized the importance of curing defaults and providing adequate assurance of future performance.

Contract Rejection

Rejection of an executory contract means that the debtor or trustee decides to terminate the contract. This decision can relieve the debtor of burdensome obligations but may also result in claims for damages.

Effects of Rejection

• Termination of Obligations: The debtor is relieved of future performance obligations.
• Damage Claims: The non-debtor party may file a claim for damages resulting from the rejection.

Court Approval

Like assumption, rejection of an executory contract requires court approval. The court will evaluate the impact on the estate and the interests of creditors.

Case Law

Key cases that have influenced the interpretation of contract rejection include:

• Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. ___ (2019): The Supreme Court ruled that rejection of a trademark license does not terminate the licensee's rights to use the trademark.
• In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993): The court established a standard for evaluating the business judgment of the debtor in rejecting an executory contract.

Special Considerations

Intellectual Property Licenses

Intellectual property licenses present unique challenges in bankruptcy. Section 365(n) of the Bankruptcy Code provides special protections for licensees of intellectual property.

Link to Section 365(n)

Leases of Nonresidential Real Property

Leases of nonresidential real property are subject to specific rules under Section 365(d)(4) of the Bankruptcy Code. The debtor must assume or reject the lease within 120 days of the bankruptcy filing, subject to court-approved extensions.

Link to Section 365(d)(4)

Collective Bargaining Agreements

Collective bargaining agreements are treated differently under Section 1113 of the Bankruptcy Code. The debtor must follow specific procedures to reject a collective bargaining agreement, including negotiating with the union and obtaining court approval.

Link to Section 1113

Practical Considerations

Strategic Decision-Making

The decision to assume or reject an executory contract involves strategic considerations. The debtor or trustee must evaluate the benefits and burdens of the contract and consider the impact on the estate and creditors.

Negotiations with Counterparties

Negotiations with counterparties can play a crucial role in the assumption or rejection process. The debtor or trustee may negotiate terms to cure defaults or provide adequate assurance of future performance.

Impact on Creditors

The assumption or rejection of executory contracts can significantly impact creditors. Creditors may have claims for damages resulting from rejection, and the treatment of these claims can affect the distribution of the bankruptcy estate.

Conclusion

Executory contracts are a critical aspect of bankruptcy law, and the decision to assume or reject these contracts can have far-reaching implications. Understanding the legal framework, requirements, and strategic considerations is essential for navigating this complex area of law. By following the procedures outlined in the Bankruptcy Code and relevant case law, debtors and trustees can make informed decisions that benefit the estate and protect the rights of creditors.

References

1. Section 365 of the Bankruptcy Code
2. Rule 6006 of the Federal Rules of Bankruptcy Procedure
3. Section 365(n) of the Bankruptcy Code
4. Section 365(d)(4) of the Bankruptcy Code
5. Section 1113 of the Bankruptcy Code

This guide aims to provide a comprehensive understanding of executory contracts in bankruptcy, focusing on contract assumption and rejection. By adhering to the legal framework and considering practical implications, parties involved in bankruptcy can navigate these complex issues effectively.