Bankruptcy. Notwithstanding any other provision of this Agreement, the bankruptcy (as defined in the Act) of a Member shall not cause the Member to cease to be a member of the Company and, upon the occurrence of such an event, the Company shall continue without dissolution. The Code does not define "executory contract", but most courts have adopted this definition: "a contract under which the obligation 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 the performance of the other.". If an executory contract or lease is rejected, the bankruptcy court will enter an order setting a usually short deadline by which the counterparty or lessor must file a rejection damage proof of Author: Charles M. Tatelbaum.
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Promptly complete and return the questionnaire and attend the organizational meeting the US Trustee interviews and appoints committee members. Negotiate for the following debtor waivers in the critical vendor order: a section preference waiver for any payments received by the vendor from the debtor during the day period before bankruptcy; a section disgorgement waiver providing that critical vendor payments to the vendor may not be clawed back if the critical vendor order is reversed; and a disgorgement waiver providing that critical vendor payments to the vendor may not be clawed back if the case converts to a Chapter 7 liquidation or becomes a liquidating Chapter 11 case.
Ensure that the critical vendor agreement is clearly a postpetition contract, which is not subject to rejection as a prepetition executory contract. Note that the critical vendor order may preclude the pursuit of reclamation claims. If You Owe the Debtor Money, Exercise and Protect Setoff and Recoupment Rights Seek relief from the automatic stay to: exercise setoff rights against the debtor; and retain property subject to setoff as a defense to a turnover action requesting the vendor to return property of the estate in its possession of the debtor.
If the debtor requests use of case collateral: seek relief from the automatic stay to avoid a ruling that refusing to make a payment to the debtor was an exercise of setoff rights in violation of the automatic stay; or consent to this request only if the form of that consent preserves setoff rights and the debtor provides satisfactory adequate protection.
If the debtor obtains court approval to sell its assets outside of the ordinary course of business in a section sale, insist on adequate protection for any sale of property against which there are setoff rights. File a proof of claim asserting setoff rights, both to protect against the possibility that a court finds these rights waived and to reserve the right to assert an unsecured claim if there is a deficiency remaining after effecting a setoff. Properly document any steps involved before effectuating a recoupment during bankruptcy to help defend against a debtor attacking the action as an improper setoff taken in violation of the automatic stay.
Protect Rights Under Executory Contracts If you have an executory contract with the debtor, request that the court set a deadline by which the debtor must assume, assign, or reject the contract. However, it may be necessary to seek relief from the automatic stay to exercise these rights. Request the relief from the automatic stay to modify the terms of the contract or exercise termination rights. Determine whether the debtor is in default under the contract and whether the vendor has waived these defaults.
If the debtor assumes the contract and there are unwaived defaults, it must: cure these defaults, including all non-monetary defaults, or provide adequate assurance that the default will be cured promptly; and provide adequate assurance of future performance. Consider requesting a specific line item on cash collateral or DIP financing budget that references the vendor and authorizes continued payments to it.
Ensure that the court or secured creditor has not revoked this authorization before making each shipment and before accepting each payment. For a sale of a property against which there are setoff rights, request adequate protection. Proactively Deal With Possible Preference Actions Identify any possible preferences—typically goods sold to the debtor within 90 days prior to the petition date.
Gather necessary facts to show that: there was no technical preference for example, that a non-debtor paid the alleged preference ; all of the elements of a preference are not satisfied; or a defense applies for example, the payment was made in the ordinary course of business. If all of the elements of a preference are satisfied and no defenses apply, negotiate a settlement with the debtor.
Review the Proposed Plan and Disclosure Statement Review the proposed plan of reorganization and disclosure statement to determine: whether the claim is classified appropriately under the plan; and the proposed treatment for that class of claims.
What is so significant about executory contracts in a bankruptcy proceeding is that the Bankruptcy Code authorizes a bankruptcy trustee, and in the case of a Chapter 11 proceeding the debtor-in-possession, to reject any executory contract or lease where it is in the best business judgment of the trustee or debtor-in-possession to do so.
Provisions in executory contracts and leases that prohibit or restrict such rejections are unenforceable. Some of the traps and pitfalls for counterparties to executory contracts and leases, where one party is in a bankruptcy proceeding, include:.
The above is a simplification of many of the rules, problems and pitfalls involved with executory contracts and leases when one of the parties enters a bankruptcy proceeding. However, it is crucial that businesses affected seek immediate legal advice and take steps to protect their interests, as delay can be disastrous. Factors include:. The creditor may move the court to compel the debtor to decide in a shorter time frame.
Postpetition contracts are not subject to assumption or rejection. In re Lesle Fay Co. Is the contract "executory"? Contracts where performance remains due on both sides are executory. See, e.
Consequently, when the debtor Louisiana Land and Exploration Co. Contracts in which one party has no postpetition obligation or no obligation other than the payment of money are not executory. See In re Munple, Ltd. Sebro Packaging Corp. Metalsource Corp. A contract substantially performed is not executory.
In re Pacific Exp. Daly, B. Pfaff Plumbing and Heating, F. A contract or lease no longer in existence is not executory and cannot be assumed. See In re Stewart Foods, Inc.
However, the termination process must be complete and not subject to reversal. See Moody v. Amoco Oil Co. Dade County, B.
Compare In re Huffman, B. A contract is not terminated merely because the debtor defaults or breaches the contract prepetition.