Delaware Bankruptcy Court: No Implied Assumption Of Executory Contracts In Bankruptcy

• Published date: 28 January 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Contracts and Commercial Law
• Law Firm: Jones Day
• Author: Ms Marissa Alfano and Mark Douglas

The ability of a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to assume, assume and assign, or reject executory contracts and unexpired leases is an important tool designed to promote a "fresh start" for debtors and to maximize the value of the bankruptcy estate for the benefit of all stakeholders. However, the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rules") establish strict requirements for the assumption, assignment, and rejection of contracts and leases. The U.S. Bankruptcy Court for the District of Delaware addressed the consequences of failing to comply with those requirements in In re Dura Auto. Sys., LLC, 628 B.R. 750 (Bankr. D. Del. 2021). The court confirmed that the U.S. Court of Appeals for the Third Circuit-like the majority of other courts that have decided the issue-has rejected the doctrine of "implied assumption" of executory contracts in bankruptcy cases.

Assumption, Assumption and Assignment, and Rejection of Executory Contracts and Unexpired Leases in Bankruptcy

Section 365(a) of the Bankruptcy Code provides that, with certain exceptions delineated elsewhere in the statute, "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." The trustee's power to assume or reject is conferred upon a DIP under section 1107(a) of the Bankruptcy Code. Rejection results in a court-authorized breach of the contract, with any claim for damages treated as a prepetition claim against the estate on a par with the claims of other general unsecured creditors (unless the debtor has posted security). 11 U.S.C. ' 365(g). Assumption of a contract requires, among other things, that the trustee or DIP cure all existing monetary defaults and provide adequate assurance of its future performance. 11 U.S.C. ' 365(b).

One purpose of section 365(a) is to provide the debtor with "a reasonable time within which to determine whether adoption or rejection of the executory contract would be beneficial to an effective reorganization." Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d 1065, 1075 (3d Cir. 1992).

Bankruptcy courts will generally approve assumption or rejection of a contract or lease if presented with evidence that either course of action is a good business decision. See Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652, 1658 (2019) ("The bankruptcy court will generally approve [the] choice [to assume or reject]...