1981 ALI-ABA Course of Study Modern Real Estate Transactions August 13-15, 2009 Santa Fe, New Mexico Executory Contracts and Unexpired Leases in Bankruptcy By Richard F. Broude New York, New York 2008 Richard F. Broude. All Rights Reserved.
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1983 TABLE OF CONTENTS Page I. THE STATUTORY FRAMEWORK.................................. 1 A. Executory Contracts as Property of the Estate................ 1 B. Use, Sale or Lease..................................... 1 C. The Automatic Stay.................................... 1 II. WHAT IS AN EXECUTORY CONTRACT?............................ 2 III. TERMINATION PRIOR TO BANKRUPTCY............................ 7 IV. IPSO FACTO CLAUSES......................................... 9 V. EXECUTORY CONTRACTS BEFORE ASSUMPTION OR REJECTION......... 10 A. Generally............................................ 10 B. Leases of Nonresidential Real Property..................... 12 1. What is Nonresidential Real Property?............... 12 2. Administrative Rent.............................. 13 a. Measuring the Rent......................... 13 b. When is the Rent Payable?.................... 15 3. Effect of Failure to Comply With 365(d)(3).......... 16 C. Leases of Personal Property.............................. 17 VI. ASSUMPTION ASSIGNMENT AND REJECTION............................ 17 A. Time for Assumption or Rejection......................... 17 1. Chapter 7 Cases................................. 18 2. Other Cases..................................... 18 3. Leases of Nonresidential Real Property................ 18 4. Shortening Time................................. 21 5. Section 108.................................... 23 B. Pass Through........................................ 24 C. Assumption.......................................... 24 1. Court Order.................................... 24 2. Jurisdiction..................................... 25 3. Requirements................................... 26 4. Standard...................................... 28 5. Effect of Assumption............................. 28 6. Shopping Center Leases........................... 29 7. Ipso Facto Provisions: Cross-Defaults................ 31 8. Non-Assumable Contracts......................... 31 -i-
1984 -iia. Financial Accommodation Contracts; Contracts... 32 To Issue Securities......................... b. Other Non-Assumable Contracts............... 33 9. Who May Assume................................ 37 D. Assignment 365(f)................................... 37 1. Generally....................................... 37 2. Requirements................................... 39 3. Anti-Assignment Provisions....................... 39 E. Rejection............................................ 40 1. Role of the Court................................ 40 2. Inhibitions on Rejecting............................ 41 3. Standard....................................... 41 4. Effect of Rejection............................... 42 a. Generally................................ 42 b. Claim Limitations.......................... 43 c. Leases of Real Property..................... 43 d. Vacating the Premises....................... 45 e. Other Holdings............................ 46 VII. SPECIAL SITUATIONS......................................... 47 A. Real Property Lease and Timeshare Interests................. 47 1. Generally...................................... 47 2. Effect of Rejection: What Is Possession?............. 47 3. The Bankruptcy Reform Act of 1994................. 48 B. Installment Land Contracts and Timeshare Sale Contracts...... 49 C. Licenses of Intellectual Property.......................... 49
1985 I. THE STATUTORY FRAMEWORK Section 365, entitled "Executory contracts and unexpired leases", governs most of what this article will discuss. It has been extensively amended since 1979, most recently in 2005 by BAPCPA. Other sections also apply to this area of bankruptcy administration, most notably 362, 363, and 541. A. Executory Contracts as Property of the Estate Section 541(a) creates an estate comprised in part of all legal or equitable interests of the debtor in property as of the commencement of the case. Section 541(c)(1) provides that an interest of the debtor in property becomes property of the estate notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law (A) that restricts or conditions transfer of such interest by the debtor; or (B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor's interest in property. The debtor's executory contracts and unexpired leases in existence at the time the bankruptcy case is commenced thus become part of the debtor's estate, irrespective of what they may provide about the effect of a bankruptcy proceeding. B. Use, Sale or Lease Similarly, 363(1) provides that, [s]ubject to the provisions of section 365, the trustee may use, sell or lease property under 363(b) and (c) notwithstanding any provision in a contract, a lease, or applicable law that is conditioned on the insolvency or financial condition of the debtor, or on the commencement of a title 11 case or the taking of possession by a trustee or a custodian, and that effects, or gives an option to effect, a forfeiture, modification, or termination of the debtor's interest in such property. C. The Automatic Stay Once a case has commenced, 362(a) operates to prevent the non-debtor party from undertaking unilateral action to terminate an executory contract. Computer Communications, Inc. v. Kodex Corp. (In re Computer Communications, Inc.), 824 F.2d 725 (9th Cir. 1987). In one case, 48th Street Steakhouse Inc. v. Rockefeller Group, Inc. (In re 48th Street Steakhouse Inc.), 835 F.2d 427 (2d Cir. 1987), cert. denied 485 U.S. 1035 (1988), state law was to the effect that terminating a ground lease also terminated a sublease. Thus, an action by a landlord to terminate a ground lease violated the stay when the sublessee was in chapter 11. 17016331.1 61108 1010E 042-1-