In consumer bankruptcy petitions, there is a subsection in the filing documents titled Schedule G which requires the disclosure of all executory contracts and unexpired leases. Broadly speaking, these items are contracts or leases between two parties agreeing to perform one or more actions in return for one or more actions. At the time of the bankruptcy filing, the obligations to perform these actions are ongoing, having not been completed by either party.
Common forms of executory contacts and unexpired leases we see in our bankruptcy practice are those contracts for development, services and cellphones; leases for cars, apartments or houses, business property and equipment; and timeshares, among other examples. With certain qualifiers, the person filing for bankruptcy may choose to continue their relationship with these entities, called an “assumption,” or reject them if they are too burdensome, also known as a “rejection.” In other words, if you the lessee no longer need the car or apartment you are currently leasing, you can sever the relationship with the lessor and “return” the property.
Business and Non-Consumer Bankruptcy Filings
However, in business and non-consumer bankruptcy filings, things can get a bit murkier. If, for some reason, the item is neither assumed nor rejected by the debtor in some circumstances, it may survive the bankruptcy filing and still be binding on the entity to an extent. For more details on this wrinkle, please see In re Polysat, Inc., 152 B.R. 886, 890 (Bankr. E.D. Pa. 1993). Moreover, in some circumstances along these lines, depending on the nature of the filing and subject to some time constraints, Trustees may inject themselves into the mix and choose to assume or reject the item. Please see 11 U.S. Code § 365 (a).
In these cases, the primary factor in the Trustee’s decision to intervene is the same as that for the debtors, that the assumption or rejection of the item appears to be beneficial or burdensome to the debtor’s estate. In Chapter 7 bankruptcies, the Trustee must make their decision within 60 days of the order for relief, whereas in Chapters. 9, 11, 12 and 13 petitions, there is no exact time limit for the most part but the decision must to be made prior to the confirmation of the plan. Please see 11 U.S. Code § 365 d(1) and d(2) respectively.
In Chapter 7 cases, if the item is not assumed by the Trustee, then it is deemed rejected. If the Trustee chooses to assume the agreement and there has been a default, the Trustee must cure it for it to survive or provide adequate assurance of compensation or future performance. Please see 11 U.S. Code § 365 b(1) A, B and C respectively.
For those interested in the nitty gritty details on the subject, of which there are legion, the United States Department of Justice’s Office of United States Attorneys’ Manual’s section containing its Civil Resource Manual starting with section 59. Executory Contracts in Bankruptcy – Introduction, Threshold Issues and its several succeeding sections on the topic should satisfy the curious. It is a complicated and nuanced area of bankruptcy law.
If you have any questions on the subject or any other bankruptcy-related or Social Security disability related topics, don’t hesitate to contact us for a free consultation.