BB&K In The News

BB&K Attorney Cathy Ta Says Bankruptcy is a Way to Move Forward in the Riverside Press-Enterprise

Generally, filing for bankruptcy is seen as a last resort for many businesses and individuals; understandably, the hardships of financial insolvency appear to even multiply at the mere thought of a bankruptcy filing.

However, what should be known about a bankruptcy filing is its usefulness as a tool to maintain, and even to rehabilitate, those business relationships that are vital to the business’ current and future operations, including those relationships that would end outside of bankruptcy.

Executory contracts

Only contracts that are executory, such as unexpired real property leases, may be assumed or rejected as part of the bankruptcy process, subject to bankruptcy court approval and certain limitations.

If a contract or lease has terminated prior to the bankruptcy filing date, known as the petition date, it would be non-executory and incapable of assumption or rejection.

The Bankruptcy Code does not define an executory contract; however, the U.S. Ninth Circuit Court of Appeals has adopted Harvard Law School Professor Vern Countryman’s definition: “a contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.”

This means that if one party has substantially performed its side of the bargain, such that that party’s failure to perform further would not constitute a material breach excusing performance by the other party, the contract is not executory and cannot be assumed or rejected.

Whether a lease is unexpired and executory would be determined by this definition.

Assumption or Rejection

The ability to assume or reject an executory contract has significant implications in the context of a debtor who is a business operator, lessor or lessee – from offering the debtor a way to continue business relationships to relieving the debtor from future performance obligations that have become too burdensome or counterproductive with its long-term goals.

If assumed, the executory contract would resume in full force and effect, despite the bankruptcy filing and even when the debtor has defaulted under the contract as long as the default is cured (or adequate assurance of future cure is provided) and adequate assurance of future performance is provided.

Further, if assumed, the executory contract may be sold and assigned for value.

Typically, the rights of the non-debtor party would be limited to challenging the adequacy of any cure or assurance of future performance provided.

Thus, through the filing of a bankruptcy, a debtor would be afforded an opportunity it otherwise would not have to resume, or even rehabilitate, a business relationship that is in default through an election to assume that executory contract.

It also allows a debtor to maximize whatever value there may be left of the executory contract and devote it toward its long-term turnaround goals.

If an executory contract is rejected, the debtor would be able to walk away and be relieved from future performance obligations under the contract. This includes having to surrender the real property almost immediately if the contract is an unexpired lease.
Under the Bankruptcy Code, the rejection would be treated as if a breach of the contract had occurred immediately before the petition date, regardless of when the actual rejection is made.

The non-debtor party would have a claim for damages that would be administered as part of the bankruptcy process, including being subject to payment of pennies on the dollar and to the debtor’s discharge, should there be one.

A Way Forward

The usefulness of bankruptcy as a business tool to resume and rehabilitate business relationships all depends on timing – more often than not, a business or an individual’s exploration of its utility occurs too late rather than too early.

Therefore, instead of thinking of bankruptcy as a last resort, bankruptcy should be thought of as a potential resource in advancing a way forward, with those key business relationships and executory contracts intact.

This article first appeared in The Press-Enterprise on Sept. 4, 2016. Republished with permission.