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EXECUTORY CONTRACTS - 11 U.S.C. §365 OVERVIEW

EXECUTORY CONTRACTS - 11 U.S.C. §365 OVERVIEW. DEFINITION OF EXECUTORY CONTRACT- UNDEFINED REJECTION - 11 U.S.C. §365(a) DAMAGES - 11 U.S.C. §§365(g) and502(g) DEEMED REJECTED - 365(d) ASSUMPTION - 11 U.S.C. §365(a) NEED TO “CURE” - 11 U.S.C. §365(b)

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EXECUTORY CONTRACTS - 11 U.S.C. §365 OVERVIEW

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  1. EXECUTORY CONTRACTS - 11 U.S.C. §365OVERVIEW • DEFINITION OF EXECUTORY CONTRACT- UNDEFINED • REJECTION - 11 U.S.C. §365(a) • DAMAGES - 11 U.S.C. §§365(g) and502(g) • DEEMED REJECTED - 365(d) • ASSUMPTION - 11 U.S.C. §365(a) • NEED TO “CURE” - 11 U.S.C. §365(b) • RESTRICTIONS ON ASSUMPTION - 11 U.S.C. §365(c). • ASSIGNMENT OF EXECUTORY CONTRACTS - 11 U.S.C. §365(f). • NON-ASSIGNABLE CONTRACTS

  2. GENERAL CONCEPT • Example: Pre-bankruptcy a manufacturer of specialty manufacturing equipment enters into a contract with the debtor for the design, manufacture and sale of a piece of highly specialized equipment with payment on delivery. • Section365 addresses the question of what happens to that agreement in the event the debtor files a bankruptcy case. • In the case of a chapter 7 it would be ulikely that the trustee would proceed with the contract. • In the case of a chapter 11 what the debtor may wish to do depends on whether the contract is advantageous to the debtor. • Will the manufacturere have a claim in the bankruptcy? • Is the contract automatically repudiated by the bankruptcy filing? • Can the debtor perform the contract and the manufacturer receive the benefit of the bargain after the filing of the bankruptcy petition?

  3. ASSUMPTION VS. REJECTION • REJECTION: If the trustee decides not to perform under the contract, the contract must be rejected, requiring court approval. • Rejection, not defined in the Code, has proven to be a problematic term. It can be best understood as the opposite of assumption. It is deemed breached. Pursuant to section 365(g), rejection is treated as a breach of the debtor’s contract because rejection means that the debtor’s obligations under the contract will not be performed. In other words, if the debtor, in the example, rejects the contract with the manufacturer it means the debtor will not perform his obligations such as payment for the equipment. The manufacturer would have a pre-petition damage claim. §§365(g) and 502(g) • ASSUMPTION: If the trustee decides to have the bankruptcy estate perform the contract (presumably to gain the benefit of a favorable contract) then the contract must be assumed. Assumption requires court approval. • Effect: The contractual obligations become obligations of the estate (administrative expenses). Following assumption, should the trustee breach then the entire claim for breach will be treated as an administrative expense.

  4. EXAMPLES Example #1: On 2/1 Seller and Buyer agreed to sale of goods @$20 a unit with delivery and payment to be made on 4/1. On 3/1 buyer files chapter 11. Because goods can be purchased from another supplier for $15 a unit, Buyer, as DIP, seeks to reject the contract. Example #2: Under the same contract as in #1 above, Seller rather than Buyer files chapter 11. Seller can sell goods to others at $25 a unit. Seller as DIP seeks to reject the contract.

  5. EXECUTORY CONTRACTS - 11 U.S.C.§365 Decision to Assume or Reject Code is silent on standard for decision to assume or reject Generally business judgment rule Some variance when the contract is not burdensome or cost to non-debor party is disproportionate to estate benefit. Term “Executory Contract” Not Defined in Code. Widely Accpeted Definition: Prof. Vern Countryman: “A contract under which the obligation of both the bankrupt [debtor] and the other party to the countract are so far unperformed that the failue of either to complete performance would constitute a material breach excusing performance of the other” Alternative: Benefit to the estate. Rejection vs. Assumption Debtor must first determine whether to assume or reject the executory contract. Rejection 11 U.S.C. §365

  6. REJECTION - DEFINED • Examples Ilustrating Definitional Issues: • Example #1: Seller and Buyer agree to a sale of goods with payment to be made 6 months after delivery of the goods. After Seller delivers the goods but before payment is due, either Seller or Buyer files a chapter 11 petition. Explore from both angles • Example #2: On 2/1, Seller and Buyer agreed to a sale of goods with delivery to be made on 4/1. Buyer paid Seller the price of the goods at the time the agreement was signed as required by the agreement. On 3/1, before the time for Seller’s performance, either Buyer or Seller files a chapter 11 petition. If the Buyer filed there is no obligation that the DIP can assume or reject. The right of the estate to receive the goods can be enforced by the DIP. On the other hand if the Seller files chapter 11 why shouldn’t the seller be able to reject the contract under Section 365?

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