Executory Contracts in Bankruptcy Part I: What You Need to Know
When a company files for bankruptcy, it is common for it to have a number of contracts still in effect. These contracts can range from leases and employment agreements to licensing agreements and purchase orders.
Executory contracts, in particular, are a unique type of contract that can have a significant impact on a bankruptcy case. In this article, we`ll explore what executory contracts are, how they are treated in bankruptcy, and what you need to know if you are a party to an executory contract with a bankrupt company.
What are Executory Contracts?
An executory contract is a contract where both parties have ongoing obligations to perform. In other words, it is a contract where neither party has fully performed or received all the benefits of the agreement. Examples include a lease agreement where the tenant still owes rent or a supply contract where the supplier has not yet delivered all the goods.
Executory contracts are a unique type of contract because they are still in progress and the parties are still obligated to perform. This means that if one of the parties files for bankruptcy, the contract can become a major issue in the bankruptcy case.
How are Executory Contracts Treated in Bankruptcy?
Under bankruptcy law, when a debtor (the party filing for bankruptcy) has an executory contract with another party, they have the option to assume or reject the contract. If the debtor decides to assume the contract, they are agreeing to continue to perform their obligations under the contract. If they reject the contract, they are essentially ending the contract and the other party will have a claim for damages.
Assuming a contract can be beneficial for both parties. For example, if a tenant has a lease agreement with a landlord and the tenant assumes the lease, they can continue to operate their business in the same location and the landlord will continue to receive rent payments. However, if the debtor rejects the contract, it can leave the other party in a difficult position. For example, if a supplier has a supply contract with a bankrupt company and the contract is rejected, the supplier may not be able to sell their goods to anyone else and may be left with a significant financial loss.
What You Need to Know as a Party to an Executory Contract
If you are a party to an executory contract with a bankrupt company, it is important to understand your rights and obligations. First, you should monitor the bankruptcy case to see if the debtor decides to assume or reject the contract. If the debtor assumes the contract, you should continue to perform your obligations under the contract as usual. If the debtor rejects the contract, you will have a claim for damages against the bankrupt company.
It is also important to understand the priority of your claim in the bankruptcy case. If you have a secured claim (such as a lien on property), your claim will have a higher priority than an unsecured claim (such as a claim for damages from a rejected contract). You should consult with a bankruptcy attorney to understand your rights and obligations as a party to an executory contract in a bankruptcy case.
Conclusion
Executory contracts can be a major issue in a bankruptcy case, and it is important to understand your rights and obligations if you are a party to such a contract. As a copy editor with experience in SEO, it is important to communicate complex legal concepts in a way that is easy to understand for readers. Understanding executory contracts and their impact on a bankruptcy case can be crucial for businesses and individuals alike.