Section 365 - Executory contracts and unexpired leases

200 Analyses of this statute by attorneys

  1. The Exciting (or Bewildering?) Intersection of Bankruptcy Code Section 365 and the Sale of LLC Membership Interests

    Nelson Mullins Riley & Scarborough LLPJody BedenbaughOctober 6, 2021

    See N.C. Gen. Stat. Ann. § 57D-3-03 (“The approval of all members is required to . . . [a]dmit any person as a member”); N.C. Gen. Stat. Ann. § 57D-5-04 (economic interest holder may become a member only if provided in the operating agreement or by approval of other members); N.C. Gen. Stat. Ann. § 57D-5-02 (“The transfer of an economic interest or portion thereof does not entitle the transferee to become or exercise any rights of a member other than to receive the economic interest or the portion thereof assigned to the transferee”).One potential avenue through this web of restrictions is Bankruptcy Code Section 365. The applicability of Section 365 turns on whether the LLC operating agreement is considered an “executory contract.”

  2. Fifth Circuit Weighs In on Bankruptcy Asset Sales Free and Clear of Leasehold Interests

    Jones DayMark DouglasMay 25, 2022

    This is so in part because the statute itself does not define "interest."Although section 363(f) is generally acknowledged to encompass liens and security interests, some courts, taking into account both the language of the provision and its underlying purpose, have interpreted it much more broadly to also include leasehold interests, among other things. Broadly applied, however, section 363(f) arguably conflicts with certain other provisions of the Bankruptcy Code.One of those provisions is section 365(h)(1) of the Bankruptcy Code. That section provides that, if the trustee or DIP rejects an unexpired real property lease under which the debtor is the lessor, the nondebtor lessee (and any permitted successor or assign, pursuant to subsection (h)(1)(D)) has the option of retaining its rights under the lease for the balance of the lease term "to the extent that such rights are enforceable under applicable nonbankruptcy law."Courts disagree as to whether the rights of a lessee (or sublessee) under section 365(h)(1) are effectively extinguished where the debtor does not reject the lease and the leased real property is sold free and clear under section 363(f). Until 2022, only two federal courts of appeals had weighed in on this question, both staking out what was previously considered to be the minority view.

  3. In A Major Victory For Trademark Licensees, Supreme Court Holds That Rejection Of A Trademark License Does Not Terminate The Licensee’s Rights

    Cooley LLPBob EisenbachMay 21, 2019

    After dividing the courts for a number of years, we finally have the answer to the big question of whether rejection of a trademark license by a debtor-licensor deprives the licensee of the right to use the trademark. Here’s the question on which the Supreme Court granted certiorari in the Mission Product Holdings, Inc. v Tempnology, LLC case:Whether, under §365 of the Bankruptcy Code, a debtor-licensor’s “rejection” of a license agreement—which “constitutes a breach of such contract,” 11 U.S.C. §365(g)—terminates rights of the licensee that would survive the licensor’s breach under applicable nonbankruptcy law.On May 20, 2019, the Supreme Court issued is decision in Tempnology, diving deep into the meaning of rejection of executory contracts in bankruptcy and delivering the answer:“We hold it does not. A rejection breaches a contract but does not rescind it.

  4. The Trend Of Protecting Trademark Licensees In Bankruptcy Continues: For The First Time A Court Extends Section 365(n) Protections To Trademark Licensees On Equitable Grounds

    Cooley LLPBob EisenbachNovember 9, 2014

    In a 22-page revised decision dated November 3, 2014, Judge Kaplan identified three issues facing the court:I. Whether trademark licensees to rejected intellectual property licenses fall under the protective scope of 11 U.S.C. § 365(n), notwithstanding that “trademarks” are not explicitly included in the Bankruptcy Code definition of “intellectual property”;II. Whether a sale of Debtors’ assets pursuant to 11 U.S.C. § 363(b) and (f) trumps and extinguishes the rights of third party licensees under § 365(n); andIII.

  5. Blog: In A Major Victory For Trademark Licensees, Supreme Court Holds That Rejection Of A Trademark License Does Not Terminate The Licensee’s Rights

    Cooley LLPMay 22, 2019

    After dividing the courts for a number of years, we finally have the answer to the big question of whether rejection of a trademark license by a debtor-licensor deprives the licensee of the right to use the trademark. Here’s the question on which the Supreme Court grantedcertiorari in the Mission Product Holdings, Inc. v Tempnology, LLC case: Whether, under §365 of the Bankruptcy Code,a debtor-licensor’s “rejection” of a license agreement—which “constitutes a breach of such contract,” 11 U.S.C.§365(g)—terminates rights of the licensee that wouldsurvive the licensor’s breach under applicable nonbankruptcylaw. On May 20, 2019, the Supreme Court issued is decision inTempnology,diving deep into the meaning of rejection of executory contracts in bankruptcy and delivering the answer: “We hold it does not.

  6. Blog: The Trend Of Protecting Trademark Licensees In Bankruptcy Continues: For The First Time A Court Extends Section 365(n) Protections To Trademark Licensees On Equitable Grounds

    Cooley LLPRobert EisenbachNovember 11, 2014

    The latest example comes in the Crumbs Bake Shop, Inc. Chapter 11 bankruptcy case in New Jersey. On October 31, 2014, Judge Michael B. Kaplan of the U.S. Bankruptcy Court for the District of New Jersey rejected a motion by the buyer of the assets of Crumbs to clarify, among other things, that it purchased the Crumbs trademarks free of trademark licenses previously entered into by Crumbs. In a 22-page revised decision dated November 3, 2014, Judge Kaplan identified three issues facing the court: I. Whether trademark licensees to rejected intellectual property licenses fall under the protective scope of 11 U.S.C.§ 365(n), notwithstanding that “trademarks” are not explicitly included in the Bankruptcy Code definition of “intellectualproperty”; II. Whether a sale of Debtors’ assets pursuant to 11 U.S.C.§ 363(b) and (f) trumps and extinguishes the rights of third party licensees under§ 365(n); and III.

  7. Risky Business: Uncertain Outcomes for Application of Bankruptcy Code 365

    Holland & Hart LLPChris LeCatesJuly 9, 2020

    Variations in How States Treat Oil & Gas Leases Make Dispositions ComplicatedAbility of a debtor to assume, assign, or reject oil and gas “leases” under section 365 of the Bankruptcy CodeSection 365(a) of the Bankruptcy Code (11 U.S.C. § 365) provides that “the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor.” On the face of the statute, it would appear an oil and gas lease may be rejected in bankruptcy as an “unexpired lease.”

  8. New York Bankruptcy Court Raises the Cost of Keeping Funded Debt: Debtor Needs to Pay Default Interest Rate in Reinstatement of Accelerated Debt

    Kramer Levin Naftalis & Frankel LLPSeptember 15, 2023

    t drives the analysis on options. What happens when the cost of the debtor’s existing funded debt is (well) below the market? This question has arisen more frequently in recent times, given higher interest rates. (A related question is what happens when the debtor is unable to refinance with a third party and, therefore, may need to seek to retain its existing secured debt?)An option exists in the Bankruptcy Code—specifically, Section 1124—that allows claims to be “reinstated” and left “unimpaired” under a plan of reorganization, even if the debt was accelerated and payable in full as a result of a bankruptcy filing. In other words, the reorganized debtor can keep the debt—even over the objection of the secured creditor—subject to curing certain defaults. Not all types of default need to be cured to reinstate debt. Specifically, Section 1124 references the exceptions set forth in Section 365(b)(2) as defaults that need not be cured as a prerequisite to leaving a claim unimpaired.Under Section 365(b)(1) of the Bankruptcy Code, which applies to executory contracts and unexpired leases, a debtor may assume an executory contract on which it defaulted prepetition if the debtor cures certain defaults. Section 365(b)(2) provides a carve-out for four categories of default that will not prevent assumption of the contract if left uncured. The fourth of Section 365(b)(2)’s exceptions is “the satisfaction of any penalty rate or penalty provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease.” 11 U.S.C. § 365(b)(2)(D). Notably, not all contracts or leases are covered by Section 365, and pertinent to this article, Section 365(c) excludes financial accommodations. The basic premise is that a debtor cannot force a non-debtor to continue to lend money.The interplay between the reinstatement of funded debt and the curing of defaults was recently addressed by the Bankruptcy Court for the Southern District of New York in In re G

  9. Default Under Assumed Lease Need Not Be Material or Ongoing to Trigger Landlord's Entitlement to Adequate Assurance of Future Performance

    Jones DayMark DouglasFebruary 1, 2023

    ured prior to the debtor's request to assume the lease or were "minor deviations" from the lease terms, and "any adequate assurance responsive to the alleged defaults would be little more than simple promises not to deviate from the contract terms again."Assumption, Assumption and Assignment, and Rejection of Executory Contracts and Unexpired Leases in BankruptcySection 365(a) of the Bankruptcy Code provides that, with certain exceptions delineated elsewhere in the statute, "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." The trustee's power to assume or reject contracts or leases (among other powers) is conferred upon a DIP under section 1107(a) of the Bankruptcy Code. Rejection results in a court-authorized breach of the contract, with any claim for damages treated as a prepetition claim against the estate on a par with the claims of other general unsecured creditors (unless the debtor has posted security). 11 U.S.C. § 365(g). Assumption of a contract requires, among other things, that if there have been defaults under the contract, the trustee or DIP cure all existing monetary defaults and provide "adequate assurance of future performance."In particular, section 365(b)(1) provides as follows:(1) 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—(A) cures, or provides adequate assurance that the trustee will promptly cure, such default other than a default that is a breach of a provision relating to the satisfaction of any provision (other than a penalty rate or penalty provision) relating to a default arising from any failure to perform non-monetary obligations under an unexpired lease of real property, if it is impossible for the trustee to cure such default by performing non-monetary acts at and after the time of assumption, except that if such d

  10. Cure and Reinstatement of Defaulted Loan Under Chapter 11 Plan Requires Payment of Default-Rate Interest

    Jones DayDecember 8, 2023

    urts have struggled to determine exactly what a debtor must do to cure defaults, for purposes of cure and reinstatement in a chapter 11 plan, where payment terms under the loan agreement have been accelerated and the agreement requires the payment of a higher default rate of interest. Certain Bankruptcy Code provisions added by Congress in 1994 left uncertain whether a debtor must pay the default rate of interest to cure and reinstate a lender's claim under such an agreement. On the one hand, section 1123(d) of the Bankruptcy Code provides that, if a chapter 11 plan proposes to cure a default under a contract, the cure amount must be determined in accordance with the underlying agreement and applicable nonbankruptcy law. This provision facially suggests that a debtor must pay a contractual default rate of interest to cure and reinstate a lender's prepetition claim, to the extent the payment of default interest is in accordance with non-bankruptcy (usually state) law.On the other hand, section 365(b)(2)(D) of the Bankruptcy Code—which Congress incorporated into section 1124(2)—provides that curing defaults for purposes of the debtor's assumption of an executory contract or unexpired lease does not require the debtor to satisfy "any penalty rate or penalty provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease." 11 U.S.C. § 365(b)(2)(D). Debtors frequently point to section 365(b)(2)(D) in arguing that cure and reinstatement under section 1124(2) of the Bankruptcy Code should not require payment of a contractual default interest rate.A substantial majority of courts, including the U.S. Courts of Appeals for the Ninth and Eleventh Circuits, have held that such a cure amount must include any default-rate interest required under either the contract or applicable nonbankruptcy law. However, the arguable dissonance between section 1123(d) and section 365(b)(2)(D) of the Bankruptcy Code has long been a source of conster