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Assumption or Rejection in Bankruptcy & the Uneasy Period Until the Election is Made

February 8, 2017 David L. Stevens Bankruptcy

Executory-contract-bankruptcyUnder the Bankruptcy Code, debtors and bankruptcy trustees are authorized to assume or reject executory contracts and unexpired leases in bankruptcy. The legislature, in drafting Section 365 of the Bankruptcy Code, understood the importance of permitting a debtor to shed burdensome contracts and retain beneficial ones.  In providing a trustee or a debtor with the rights and powers provided for in Section 365, the legislature was careful to provide some protections for the counterparty, particularly during the period of time from filing until the election to assume or reject is made.

The purpose of § 365 is to enable the trustee or debtor to maximize the value of the debtor’s estate by assuming executory contacts and unexpired leases that benefit the estate and rejecting those that do not.  In re Rickel Home Centers, Inc., 209 F3d 291, 298 (3rd Cir 2000). The Third Circuit further noted, “[b]ecause executory contracts and unexpired leases involve a continuing relationship between the debtor and other parties, section 365 gives special treatment to rights and liabilities flowing from these contracts and leases.” In re Rickel Home Centers, Inc., 209 F3d at 298. 

Commercial Landlords Have Special Protections

Section 365(d)(4) of the Bankruptcy Code, explicitly governs the assumption or rejection of nonresidential real property and states: 

An unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender the nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by the earlier of-

  • the date that is 120 days after the date of the order for relief;
  • the date of the entry of an order confirming a plan.

11 U.S.C. 364(d)(4). A debtor may seek to extend the deadline for it to assume or reject executory contracts and unexpired leases. “The Court may extend the period…prior to the expiration of the 120-day period, for 90 days on the motion of the trustee or lessor for cause.” 11. U.S.C. 365(d)(4)(B).” A review of both pre- and post BAPCPA cases shows that an overwhelming majority of courts hold that a trustee need only file a motion to assume [or reject] before the deadline.” In re Simbaki, Ltd., 520 B.R. 241, 245 (Bankr. S.D. Tex. 2014)(citing In re Station Inc., 840 F2d 682 (9th Cir. 1988); In re Filene’s Basement, LLC, 2014 WL 17134416 (Bankr. D. Del. Apr. 29, 2014); In re Citrus Tower Boulevard Imagaing Ctr., LLC, 2012 1820814 (Bankr. N.D. Ga. Apr. 2, 2012); In re Treasure Isles HC, 462 B.R. 645, 651 (6th Cir. BAP 2011); In re Akron Thermal Ltd. P’ship, 414 B.R. 193 (N.D.Ohio 2009); In re Kroh Bros. Development Co., 100 B.R. 280 (W.D.Mo. 1989); In re Delta Paper Co., 74 B.R. 58 (Bankr. E.D. Ten. 1987).

The Deadline to Reject/Assume May be Extended

The Third Circuit Court of Appeals has stated that “nothing prevents a bankruptcy court from granting an extension because a particular debtor needs additional time to determine whether the assumption or rejection of particular leases is called for by the plan of reorganization that it is attempting to develop.” In re Channel Home Centers, Inc., 989 F.2d 682, 689 (3d Cir. 1993). The term “cause” as used in section 365(d)(4) is not defined in the Bankruptcy Code nor does the Bankruptcy Code establish formal criteria for evaluating a request for an extension of the initial 120-day period. Although the decision to extend a debtor’s time to assume or reject leases of nonresidential real property is generally within the sound discretion of the Court, in determining whether cause exists for an extension of the initial 120-day period, Courts consider several factors, including the following:

  • whether the debtor was paying for the use of the property;
  • whether the debtor’s continued occupation…could damage the lessor beyond the compensation available under the Bankruptcy Code;
  • whether the lease is the debtor’s primary asset; and
  • the complexity of the case warrants the requested extension.

See In re Burger Boys, Inc, 94 f.3d, 755, 760-61 (2d Cir. 1996); In re Channel Home Centers, Inc., 989 F.2d at 689 ([I]t is permissible for a bankruptcy court to consider a particular debtor’s need for more time in order to analyze leases in light of the plan it is formulating.”)

From the time the petition is filed until the lease or executory contract is assumed or rejected, the counterparty must continue to perform. The ability to delay the decision to assume or reject a lease or executory contract, and the power to assume in part or reject in part, puts the counterparty in a precarious position until such time as an election is made.

Section 365 of the Bankruptcy Code gives broad rights to a debtor or trustee in an attempt to empower it to maximize the assets of the estate.  But it does also attempt to balance those rights with protections for the countervailing interests and counterparties.  Seeking experienced bankruptcy counsel at the outset will yield the best results for an effected party.

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David L. Stevens

I have a passion for what I do. There are few things I enjoy more than helping good people and viable businesses find solutions to overwhelming debt.

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