Section 365 of the Bankruptcy Code governs the assumption, rejection, and assignment of executory contracts and unexpired leases in bankruptcy cases. Although the definition of an executory contract has not been codified, it is considered to be a contract that has not been fully performed. The assumption or rejection of an executory contract is achieved through court approval, except in certain instances concerning Chapter 7 bankruptcy. Rejection leads to a non-administrative unsecured claim for damages. Following rejection, neither the estate nor the other party owes performance to one another.
The trustee or debtor in possession must assume or reject an executory contract in its entirety. However, when a “contract” is actually several different contracts, the “contract” may be divisible. State law governs divisibility. This makes it difficult to pinpoint exactly what conditions make a contract divisible. However, case law tends to cite the intent of the parties as the most important factor governing divisibility. But, if a court finds that two or more “contracts” are part of an integrated transaction, the contract must be assumed or rejected in its entirety.
This Article will focus on the rules of divisibility in Kansas, New Jersey, Texas, and Illinois. Kansas focuses on the intent of the parties. New Jersey looks to intent and the noninterrelatedness of the obligations of the parties to the agreement. Texas looks at the intent of the parties, the subject matter of the agreement, and the conduct of the parties. Finally, Illinois looks at whether the parties would be willing to exchange part performance irrespective of subsequent events or whether the divisions made are simply for the purpose of requiring periodic payments. Part I of this Article examine the rejection of executory contracts generally. Part II will examine how the rules of divisibility are applied in Kansas, New Jersey, Texas, and Illinois. Finally, Part III will highlight the practical implications of divisibility in regards to the two parties to the contract.