Contracts That Cannot Be Assigned Under Section 365(C)(1) Of The Bankruptcy Code: The List Is Expanding

Section 365(a) of the Bankruptcy Code (the "Code") provides that a trustee in bankruptcy or a Debtor in Possession ("DIP") has the power to assume or reject an executory contract or unexpired lease. Though the Code does not define "executory contract," the accepted definition is "a contract under which the obligations 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." Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). Section 365(c)(1) of the Code carves out some exceptions to a debtor's general assumption and assignment authority. Though section 365(c)(1) is often referred to as the "personal service contracts exception," since courts initially limited the scope of section 365(c)(1) to contracts and leases that qualified as personal service contracts under state law, courts have since broadened the application of this section to include various other types of executory contracts and leases.

Personal Service Contracts. Originally, courts that addressed section 365(c)(1) held that it applied only to personal service contracts. The most common example of the non-delegable or non-assignable nature of a personal service contract is that of a famous opera singer who has contracted with an opera to perform. She cannot assign her contractual duty to another singer because the nature of the services is unique and personal. Courts have characterized agreements to render professional services as a physician, lawyer or architect; options to purchase stock given to an employee; and agency agreements for the sale of land as personal service contracts. See 6 Am. Jur. 2d Assignments § 30 (2004).

Partnership Agreements. The Uniform Partnership Act of 1997 and the Uniform Partnership Act of 1914 (together, the "Uniform Partnership Acts") provide that a person can become a partner only with the consent of all of the existing partners, and that a partner's only transferrable interest in the partnership is the partner's share of the partnership's profits and losses, and the partner's right to receive distributions. Since the Uniform Partnership Acts restrict the assignment of a partner's full partnership interest, courts have given effect to these restrictions by invoking section 365(c)(1) of the Code. See, e.g., Stumpf v. McGee (In re O'Connor), 258 F.3d 392, 402 (5th Cir. 2001).

Patent Licenses. Under the Patent Act, a party that "invents or discovers a new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent...." 35 U.S.C. § 101. The party holding the patent holds certain rights, including the right to exclude others from using, selling or importing the...