CALL TODAY 408-971-6270
Diemer, Whitman & Cardosi, LLP | Attorneys At Law

Executory Contracts and Business Bankruptcy

contract.jpgAn executory contract is simply a contract that has yet to be fulfilled by either party. In other words, both parties to the contract will still have remaining performance obligations. Executory contracts can play a significant role in a business bankruptcy case. If you have any questions or concerns about how an executory contract might impact a bankruptcy case, contact an experienced San Jose business bankruptcy attorney to learn more.

Treatment of Executory Contracts

During the bankruptcy process, executory contracts are dealt with differently than other unsecured claims against the debtor company. Debtors have a considerable amount of power when it comes to executory contracts. There are three important things to consider:

  • The debtor, or the company's managing trustee, has the power to decide whether or not an executory contract will be performed. Essentially, the debtor can decide to reject the contract, thereby extinguishing the obligations.
  • Even when the bankruptcy process begins, the non-debtor party to the contract has an obligation to continue performing their duties under the contract. This is true even though they might still be waiting for a decision from the debtor company over whether or not the contract will be rejected.
  • Finally, if the debtor chooses to keep the contract in place, the debtor must be able to perform the full extent of their obligations under the contract. The debtor may not accept the contract unless the performance obligations under the contract can still be met in full. The debtor cannot unilaterally alter specific performance provisions.

Assignment of Executory Contracts

Beyond acceptance or rejection of an executory contract, there is also a third option for debtors known as 'assignment'. When an executory contract is assigned, it means the full obligations of the contract are still being accepted, but the obligations of the contract are being shifted over to a third party. Debtors may wish to assign a contract because the contract itself still has inherent value, but it no longer has value to that company once the bankruptcy process finishes.

For example, imagine that a company is entering Chapter 11 bankruptcy and one of the remaining executory contracts is a multi-year commercial lease. The company might have no further use for that specific commercial space after the reorganization. However, the lease itself might still have value, particularly if the lease contract price is below the current market rate. Therefore, the debtor company may be able to 'assign' that lease to a third party in exchange for some form of compensation. However, in some circumstances, executory contracts can not be assigned without the consent of the non-debtor party.

Contact an Experienced San Jose Business Bankruptcy Attorney

The interaction between business bankruptcy law and contract law is especially complex. If you are on either side of a bankruptcy dispute involving an executory contract, you need to speak to an experienced San Jose business bankruptcy attorney immediately. At Diemer, Whitman & Cardosi, LLP we proudly serve clients throughout Silicon Valley, including in San Francisco, Palo Alto and Oakland. Contact us today to schedule a free initial case evaluation.

Source:

https://www.law.cornell.edu/uscode/text/11/365

No Comments

Leave a comment
Comment Information