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Executory Contract and Unexpired Lease
LAWDOG is intended to assist in the understanding of basic concepts. See Disclaimer. Always obtain legal advice from legal professionals.
Executory Contract
Unexpired Lease
Assumption Or Rejection
Exceptions
The Bankruptcy Code does not offer a definition for "Executory Contract". Courts have interpreted "Executory Contract" to be a contract where there remains substantial performance yet to be completed by both the debtor and the nondebtor party at the time the bankruptcy is filed. However, it may also be interpreted to include a situation where there remains substantial performance yet to be completed by only one of the parties, or as a contract which may benefit the estate of the debtor "from performance or breach". Section 365 of the Bankruptcy Code is reproduced here for illustration purposes only.
An executory contract may have a significant impact on the rights of a creditor in a bankruptcy. Bankruptcy law may permit a debtor or trustee to take advantage of the benefit of a contract by performance, or to avoid liability by rejecting it. See Assumption or Rejection below. Actual cases should be discussed with your actual legal advisor or legal department.
With approval of the court, a Trustee or debtor-in-possession may assume or reject any unexpired lease of the debtor. See Assumption or Rejection below. The lease must be a "true lease". A true lease may be a lease which reserves title to the property to the lessor, and the property does not become the property of the lessee at the end of its term for little or no value. A transaction involving a lease which permits the leased property to become the property of the lessee at the end of a lease term for little or no value may be treated as a "security agreement" instead of as a true lease.
An example of a true lease may be a lease to commercial real property. An example of a lease which may be determined to be a security transaction might be an equipment lease which requires no or nominal payment at the end of the lease term to acquire title and ownership of the equipment. Actual cases should be discussed with your actual legal advisor or legal department. Section 365 of the Bankruptcy Code is reproduced here for illustration purposes only.
The trustee, subject to the approval of the court, may assume or reject any executory contract or unexpired lease of the debtor. This is generally done by filing a motion with the court and giving notice of a hearing, and may be included in a confirmed plan under Chapter 11, 12, or 13.
If Contract Or Lease Is In Default
If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee cures the default, compensates the other party for actual pecuniary loss, and provides adequate assurance of future performance under such contract or lease. See Section 365 (b) of the Bankruptcy Code reproduced here for illustration purposes only.
In a case under Chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected. See Section 365 (d) of the Bankruptcy Code reproduced here for illustration purposes only.
In a case under Chapter 11, 12, or 13, the trustee may assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor at any time before the confirmation of a plan. However, the court, on the request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease. See Section 365 (d) of the Bankruptcy Code reproduced here for illustration purposes only .
There are, however, exceptions. The trustee may not assume or assign a personal service contract, a contract to loan money or issue securities, or a nonresidential lease which was terminated before the filing of a bankruptcy. See Section 365(c) of the Bankruptcy Code reproduced here for illustration purposes only.
