When a New York business deals with a party that is in bankruptcy, it should beware of executory contracts. An executory contract is a contract between a debtor and another party under which both parties have material obligations remaining. If either party stopped performing, the non-performance would be a breach of contract.
Real property rentals and equipment leases are examples of executory contracts. In these contracts, the lessor has a duty to give future possession of the property and the lessee has an obligation to make lease payments.
Executory contracts matter in a New York bankruptcy because the debtor or a bankruptcy trustee determines whether to perform or refuse to perform duties under an executory contract. The entire agreement must be assumed or rejected. The debtor or trustee may not assume part of the agreement and reject or modify the rest of the deal.
In a Chapter 7, where the bankruptcy estate gets liquidated, executory contracts must be assumed or rejected within 60 days of the filing of the bankruptcy petition. In Chapter 13 bankruptcy, executory contracts must be assumed or rejected before confirmation of a repayment plan unless the court allows for another date. The repayment plan details how much the debtor will pay creditors over time.
Agreeing to perform an executor contract translates to assumption of the agreement and refusing to perform means rejection of the contract. Rejection is automatic if the deal is not assumed within a certain time. Rejection of an executory agreement is treated as a pre-petition breach of contract, with damages treated as an unsecured claim. An unsecured claim has lower priority than a secured claim, and may not get paid if there are not enough assets in a bankruptcy estate.
If a New York debtor assumes the executory contract, the debtor has to cure any defaults, and show that it can really perform in the future. Assumption requires court approval. If a debtor assumes and assigns the executory contract to another party, such as a buyer of assets, the debtor has to cure any defaults and the purchaser has to show that the buyer can really perform under the agreement in the future. An executory agreement may usually be assigned though it has an anti-assignment clause in the contract. An anti-assignment clause usually does not allow for assignment of a contract unless a party gives its consent for assignment. Under bankruptcy laws, a debtor may assign its agreement to a third party to take over the performance though the non-debtor party negotiated a requirement that its consent must be obtained prior to assignment.
To learn more about executory contracts, contact an experienced New York bankruptcy attorney.