EXECUTORY CONTRACTS - 11 U.S.C.

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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

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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 unlikely
  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 manufacturer 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?

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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 debtors contract
  because rejection means that the debtors
  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.

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EXAMPLES

• Example 1 On 2/1 Seller and Buyer agreed to
  sale of goods _at_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.

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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-debtor party is disproportionate
  to estate benefit.
• Term Executory Contract Not Defined in Code.
• Widely Accepted Definition Prof. Vern
  Countryman A contract under which the
  obligation of both the bankrupt debtor 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
• Alternative Benefit to the estate.
• Rejection vs. Assumption
• Debtor must first determine whether to assume or
  reject the executory contract.

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REJECTION - DEFINED

• Examples highlighting 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 Sellers
  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 shouldnt the seller
  be able to reject the contract under Section 365?