Document Type
Research Memorandum
Publication Date
2025
Abstract
(Excerpt)
Under Section 365(a) of title 11 of the United States Code (the "Bankruptcy Code"), "a trustee [or debtor in possession], subject to the court’s approval, may assume, or reject an executory contract." Generally, a contract is executory if "performance remains due to some extent on both sides." In general, a debtor may decide whether its executory contract is a good deal going forward. The debtor will likely want to reject a contract that is no longer a good deal in order to repudiate any further performance of its duties. When reviewing the trustee or debtor-in-possession’s decision to assume or reject an executory contract, a bankruptcy court should apply the "business judgment" test.
Section 365(g) of the Bankruptcy Code provides that rejection of an executory contract "constitutes a breach of such contract." As a result of such rejection, the counterparty thus has a claim against the estate for damages resulting from the debtor’s non-performance. The counterparty’s prepetition claim places the claimant in the same position as an unsecured creditor.
This article examines what an executory contract is and the effect rejection has on a debtor’s contractual obligations. Part I discusses the two approaches that courts have taken to determine whether a contract is characterized as executory. Part II explores which of the debtor's obligations remain enforceable after contract rejection, considering the meaning of rejection and whether the non-debtor has a claim in bankruptcy