When a business has dealings with a party that is in bankruptcy, it should be aware of executory contracts. It's a contract between a debtor and another party under which both sides have material performance remaining. If either side stopped performing, the non-performance would be a breach.
Real property and equipment leases are examples of executory contracts. In these agreements, the lessor has a duty to provide future possession of the property and the lessee has a duty to make the payments.
Executory contracts matter in bankruptcy because the debtor or a bankruptcy trustee decides whether to agree to perform or refuse to perform its obligations under an executory contract. The entire contract must be assumed or rejected. The debtor or trustee may not assume part of the contract and reject or modify the rest. In a Chapter 7 liquidation case, executory contracts must be assumed or rejected within 60 days of the filing of the bankruptcy petition. In Chapter 13 executory contracts must be assumed or rejected before confirmation of a plan unless the court provides another date.
Agreeing to perform translates to assumption of the contract and refusing to perform translates to rejection of the contract. Rejection is automatic if the contract is not assumed within a proscribed time. Rejection of an executory contract is treated as a pre-petition breach of the contract, with damages treated as an unsecured claim.
If a debtor assumes the executory contract, it has to cure any defaults, and show that it can actually perform in the future. Assumption requires court approval. If a debtor assumes and assigns the executory contract to someone else, commonly a buyer of its assets, at a minimum the debtor has to cure any defaults and the buyer has to show that it can actually perform under the contract in the future. An executory contract may generally be assigned even when it has an anti-assignment clause in the contract. This means that a debtor may assign its agreement to a third party to take over the performance even when the non-debtor party negotiated a requirement that its consent must be obtained prior to assignment.
