Chapter 11: Executory Contracts

Web posted and Copyright © 1/12/98, American Bankruptcy Institute.

The following abstract summarizes the text of submissions made to the National Bankruptcy Review Commission. The abstract is organized by NBRC working group and topic.

The Final Report of the NBRC can be viewed on-line. To obtain a copy of any document shown below, contact the Center for Legislative Archives, Room 205, National Archives Building, Washington, D.C. 20408. The telephone number is 202/501-5350. Mr. R. Michael McReynolds, Deputy Director, will be able to assist with specific inquiries. (The NBRC documents will be housed at this location until June, 1999. Thereafter, the records will be transferred to the Center's archives in College Park, MD.)
 

ID Name Group Other Code
Sec
Cross
Ref
Problem Referenced Proposed Solutions
NBRC-0223 Frank R. Kennedy Professor, Michigan Law School; former Executive Director, Commission on the Bankruptcy Laws of the United States (1973) Cover letter discussing various areas of concern

Author provides a list of 30 "Topics for Consideration by Commission on Bankruptcy Laws." The recommended topic relating to executory contracts was: Revision of treatment of executory contracts and leases in light of NBC recommendations. None.
NBRC-0301 National Bankruptcy Conference National Bankruptcy Conference (NBC), Bernard Shapiro - Chair


National Bankruptcy Conference believes that the following issue merits study by the NBRC: whether the law of executory contracts should be "totally reconsidered." NBC concludes that executory contract law should be "reconsidered." (No additional details are provided. The NBC Report, however, which discusses this position more thoroughly, has been "refined" and will be available to the NBRC.)
NBRC-0303 Commercial Law League of America Commercial Law League of America (CLLA)


The Commerical Law League of America believes that the following issue should be considered by the NBRC: Should § 365 be amended to clarify the effect of "rejection" Should the courts be given specific authority to exercise more procedural control over debtors' decisions to assume or reject contracts What duties should be imposed on the non-debtor party to an executory contract pending assumption or rejection The CLLA believes that these issues should receive top priority (no additional details are provided). Discussion of these issues should include clarification of § 365 as to the definiation of an executory contract.
NBRC-0320 Robert M. Zinman, on behalf of the Bankruptcy Institute American Bankruptcy Institute ("ABI") Numerous position papers, memoranda and research material 365
None. "Section 365 should be amended to clarify the effect of rejection, which really means that the debtor has breached the contract and the contract should be terminiated by the order approving the rejection. The debtor should be allowed to reject the contract after approval by the court. During the period pending the assumption of rejection of the contract the non-debtor party can be assured of payment for the goods or services provided during the case" (no additional details provided).
NBRC-0357 David Epstein National Bankruptcy Conference
365
In these preparatory materials for the December 18, 1996 plenary session on Chapter 11, the author outlines on behalf of the National Bankruptcy Conference issues relating to the operation of 11 U.S.C. § 365. The author submits this issue outline for the NBRC's consideration.
NBRC-0518 George A. Hahn Attorney


Author discusses the need for the Code to be amended to provide for temporary orders governing performance of prebankruptcy contracts by the estate and the counter party during the period prior to the estate's election to perform or breach the contract. Author "strongly endorse[s] the views expressed in Professor Westbrook's memorandumof 2/27/97. "Temporary performance orders would provide all counter parties with a dimensionof fairness and certainty presently lacking by requiring a better balancing of the interests of the parties."
NBRC-0545 Kurt F. Gwynne & Linda M. Zimmermann Attorneys
365 362, 108 Authors submit a 47 page memorandum discussing suggested areas of study for proposed amendments to § 365 of the Bankruptcy Code regarding Executory Contracts and Unexpired Leases. 10
NBRC-0633 Leslie J. Polt Attorney
365(b)(2)(D)
A question of interpretation exists with regard to § 365(b)(2)(D), which provides an exception to the need to cure defaults in an executory contract before the debtor or trustee can assume or assign an executory contract. The question is whether the language of the provision exempts the debtor from having to perform only "penalty provisions" or whether it relieves the debtor of the obligation to cure all defaults that do not involve the payment of money. The latter interpretation has been adopted by at least one court, and it is this interpretation that the author objects to as being unfair, in that it gives the debtor the right to resurrect a contract that was, for all intents and purposes, cancelled prepetition due to the debtor's nonmonetary, noncurable defaults. Author requests that the Commission give serious consideration for a greater balancing of the equities between debtor and non-debtor parties to executory contracts in the application of §365(b)(2)(D).
NBRC-0668 International Council of Shopping Centers

365
ICSC feels that the suggested deletion of "executoriness" and the "material breach" tests would "completely resontruct the fundamentals of bankruptcy contract law" and would not help matters, but in fact cause further confusion. Do not delete the test of "executoriness" and "material breach" from section 365.
NBRC-0668 International Council of Shopping Centers



ICSC objects to the proposed substitution of the new concept of "election to breach" in place of the concept of "rejection". ICSC feels that such a change would not materially clarify the concept expressed. Instead of reducing the amount and complexity involving a debtor's decision to reject a prepetition contract, which at the present plays out against a backdrop of fairly well-developed case law, the suggested revieion will necessarily result in a glut of new litigation as the courts struggle to delineate the consequences of a debtor's election to breach. Do not substitute the concept of "election to breach" for the current concept of "rejection".
NBRC-0668 International Council of Shopping Centers

365 544, 547, 548 "Professor Westbrook rightly eschews a debtor's use of the rejcetion power to avoid a pre-petition grant of "dominion over a specific asset," where the avoidance of the transfer could not be achieved under sections 544, 547 or 548 of the Bankruptcy Code, and certainly most bankruptcy participants would agree that contract rejection may not be employed in bankruptcy to avoid rights in property created by the contract. ICSC believes, however, that the vast majority of the opportunities to use rejection as an acoiding pposer have been foreclosed by sections 365(h) and (n), and that any revision to clarify that rejection is not an avoiding power should leave untouched such "special interest" remedial provisions." "Rejection is clearly not an avoiding power and section 365 might prudently be amended to so state but the "Special Interest" provisions of that Section should not be deleted."
NBRC-0668 International Council of Shopping Centers



"Although Professor Westbrook believes that temporary performance and interim protectin orders will somehow make the assumption/rejection process more"fair," it is clear that any such orders will most surely involve the revision of contact [sic} terms to the detriment of the non-debtor party. ICSC would object to any new provision of the Bankruptcy Code which would undermine the protections afforded non-debtor parties to executory contracts and unexpired leases under sections 365(d) (3) and 365(d) (10) of the Bankruptcy Code.
NBRC-0668 International Council of Shopping Centers



ICSC has "no particularly strenuous objection" to clarifying the option of "assumption" if the intent is to clarify that an "election to perform" and subsequent assignment releases the debtor of the continuing obligations under the assigned contract, or that the "election to perform" is not contingent upon an additional finding that the contract would be assignable under nonbankruptcy law. "ICSC does, however, echo the concerns set forth in the "Competing Considerations" section of the proposal that the concepts of "assumption" and "assignment" have been less problematic than the concept of "rejection" and that the change in terminology will almost inevitably result in additional and unnecessary litigation." "ICSC submits that the concepts of "assumption" and "assignment" are not so far broken as to compel a legislative fix at this time."
NBRC-0712 Daniel H. Brunner Chapter 13 Trustee, Eastern District of Washington
365 1303, 1306, 1322(b)(7) There is a conflict between §365 which speaks of the trustee assuming lease and executory contracts of the debtor, and Chapter 13 provisions which give the debtor possession and the right to use, sale and lease of the property of the estate, and which permit executory contracts to be assumed, rejected or assigned in the debtor's plan. This conflict leads to confusion. Add the provisions of §365 to §1303 and grant the debtor the right, exclusive of the trustee, to assume or reject leases.
NBRC-0838 Howard S. Harris Representative of American Automobile Manufacturers Association from Ford Copy of In re Claremont Acquisition Corporation, Inc., 1997 WL 236, 282 at p. 3 (9th Cir. Cal.) 365
AAMA is not pleased with legislation proposed in the House because they would allow the assumption of executory contracts upon the cure of monetary defaults only. Contracts between automobile manufacturers and their dealers include many other provisions, and dealers may be in breach of non-monetary clauses which could render them incapable of operating under law, or which could harm the reputation of the manufacturer if they were allowed to continue doing business. AAMA prefers the holding of the 9th Circuit Court of Appeals in In re Claremont Acquisition Corporation that "in genreal, a debtor must cure all defaults, both monetary and non-monetary, prior to the assumption and assignment of an executory contract." The NBRC should: a) recommend at the earliest possible date that Congress not take action on the changes to § 365(b)(2) that are currently pending before the House; and b) include in its final recommendations to Congress a recommendation that in addition to providing adequate assurances of future performance, a debtor must cure all non-monetary defaults under an executory contract before that contract can be assumed.
NBRC-1118 Jay L. Westbrook Benno C. Schmidt Chair of Business Law, The University of Texas at Austin
365
Author responds to request by Prof. Warren that he look at the Commission proposal concerning compensation for interim contract performance to consider if the proposal is properly stated. "At the core of my analysis of the executory contract problem is the conclusion that for most purposes state contract law should apply, subject to the limitations on remedies imposed by the very nature of insolvency. Compensation to a counterparty required to perform or to prepare to perform on an interim basis should be calculated applying ordinary contract principles." N/A
NBRC-1132 William J. Perlstein Attorney, Wilmer, Cutler & Pickering "The Progress of Executory Contracts in Bankruptcy: Countryman to Andrew to Westbrook"

Author is forwarding a short paper which he prepared for a seminar he did in September, 1994, which discusses the evolution of executory contract theories from Professor Countryman to Mike Andrew to Professor Westbrook. N/A
NBRC-1174 Preston T. Towber Attorney, Hirsch & Westheimer
365(d)(3)
Author writes to Judge Jones to express his problem with the proposed revisions to §365. Author is particularly concerned with how it affects residential real property leases. "This section has not been interpreted consistently by the bankrutpcy courts and needs more teeth put into it." "I think the statute should be written as requiring timely performance, specifically stating that the monthly rate is presumed valid and requiring the Debtor to go to court to relieve it of this requirement within ten days of the filing date."