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Understanding the treatment of executory bankruptcy contracts

Few Bradley County businesses enter bankruptcy in a vacuum. A small retailer may have existing supply contracts with expiration dates long after the anticipated bankruptcy filing date. Both retailers and manufacturers may have unexpired real estate or equipment leases. In a Chapter 7 bankruptcy, the debtor may wish to walk away from such obligations, but in a Chapter11 business or commercial bankruptcy proceeding, the debtor may wish to continue a real estate lease or an important supply contract. The Bankruptcy Code uses the legal concept of "executory contract" to handle both problems.

The Bankruptcy Code gives the bankruptcy trustee the power to either reaffirm or reject any executory contract. The Code does not define executory contract, but it generally understood that an executory contract is an agreement under which either party or both parties have unfulfilled duties to perform. Under a supply agreement, for example, the debtor may have ordered products for delivery long after the bankruptcy petition has been filed. Until the products have been delivered, the contract is "executory." Likewise, a real estate lease with an expiration date that postdates the filing of the bankruptcy petition is executory.

The trustee's power to affirm a real estate lease is contingent upon no default in the lease terms by either the landlord or the tenant. The trustee can also cure any such default before affirming the lease. A company contemplating doing business after its plan of reorganization has been approved has an obvious interest in affirming a lease of its operating space or storage facility. If any party objects to a proposed affirmation, the trustee must demonstrate that affirmation services the proper business interests of the debtor.

The portion of the Bankruptcy Code dealing with executory contracts has many qualifications and reservations that lie beyond the scope of this post. Anyone contemplating filing a bankruptcy petition may wish to consult an experienced bankruptcy lawyer about existing contracts and whether they are subject to the provisions of the section that deals with executory contracts.

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