Non-Monetary Defaults Need Not be Cured to Assume Contract

The obligation of a chapter 11 debtor-in-possession ("DIP") or bankruptcy trustee to cure defaults under a contract as a condition to assuming it is well understood. However, the Bankruptcy Code's exclusion of certain kinds of defaults from the cure obligation has been controversial in the courts. So much so, in fact, that a rift recently emerged in the circuits concerning whether or not non-monetary defaults must also be cured before a contract can be assumed in bankruptcy. The rift's provenance lies in a ruling recently handed down by the First Circuit. In In re BankVest Capital Corp., the Court Corp of Appeals held that section 365(b)(2)(B) excuses a DIP or trustee from curing non-monetary defaults under a lease as a condition to assumption.

Assumption And Rejection Of Executory Contracts

Section 365(a) of the Bankruptcy Code allows a DIP or bankruptcy trustee, subject to court approval, to "assume" (reaffirm) or "reject" (breach) almost any "executory" contract or agreement. Although the term is not defined in the statute, "executory" is generally understood to mean that performance remains due to some extent on both sides of an agreement. In a chapter 1 1 case, the DIP or trustee may make the decision to assume or reject most executory contracts at any time prior to confirmation of a plan of reorganization, unless the court orders otherwise upon request of the non-debtor contracting party. This latitude affords the DIP an opportunity to determine which of its executory contracts should be retained as part of its overall reorganization strategy and which should be discarded because they are burdensome or unnecessary.

Assumption is subject to certain restrictions and conditions. The first depends on whether or not the contract is in default. If so, section 365(b) provides that the contract can be assumed only if the DIP or trustee cures the default, compensates the other party for any pecuniary loss resulting from the default and provides adequate assurance of future performance under the contract. The cure requirements do not include the obligation to remedy a default consisting of a breach of a provision relating to the debtor's bankruptcy filing, insolvency or financial condition or the appointment of a trustee or custodian. Such " ipso facto" clauses effecting facto forfeiture or modification of a debtor's rights under a contract based upon the debtor's financial condition are generally unenforceable in bankruptcy. Section 365(e)...