Rejecting Pre-Bankruptcy Contracts

Question 1

What is an executory contract

Answer 1

A contract where both parties still have material obligations left to perform

Question 2

What is the priority level of a claim for breach/rejection of a pre-petition contract

Answer 2

Normal unsecured

Question 3

What is the priority for an assumed contract

Answer 3

507 gives it admin priority if necessary to preserve the estate 503(b)

Question 4

Does the court have to approve the rejection of a contract?

Answer 4

Yes, but BJR deference. If there is blatant self-dealing or favoring contracts with insiders, the court may reject

Question 5

What are the requirements before a debtor can assume a contract?

Answer 5

Cure default, compensate for any loss, and provide adequate assurance of future performance (disregard ipso facto clauses)

Question 6

What are the 3 limitations on the ability of a debtor to assign contracts?

Answer 6

1) Must cure/comp/assure
2) if state law independent of the contract allows the contractee to reject the assignment, state law governs
3) If the contract is for debt financing or issuing a security, it cannot be assigned

Question 7

What are the rights of a licensee of IP when the debtor wants to revoke the contract?

Answer 7

Can either treat the treat the contract as rejected or retain the IP rights as they existed before the case began

Question 8

What is the downside of all bankruptcy claims?

Answer 8

Not paid until a plan is confirmed. Enter critical vendor payments

Question 9

What are the strategic implications of all or nothing rejection of contracts?

Answer 9

There is an incentive to sign one contract for multiple deliveries because if the debtor wants to accept future deliveries also has to accept past deliveries and pay for them

Question 10

What is the result of a contract is breached and the normal result would be a specific performance remedy?

Answer 10

502(c) The value of specific performance is converted to dollars and added as a bankruptcy claim.
This means breaches of non-competes (very hard to value and specific performance candidates) have to be estimated in dollars

Question 11

What is the rule for rejection of a trademark license? Cite Case

Answer 11

Trademarks are not within the scope of intellectual property in the bankruptcy code, but in Mission Products, SCOTUS said the contractual rights continue after rejection (debtor can’t rescind the continuing rights of a counterpart)

Question 12

What pieces of info need to be considered when giving advice to suppliers of bankrupt or nearly bankrupt firms?

Answer 12

1) Look at DIP loan and inadequate adequate protection balances

Question 13

What are the 2 end runs around contract rejection for some suppliers? (one code section)

Answer 13

1) 503b9 gives suppliers admin priority for shipments in the 20 days before the bankruptcy
2) State law reclamation rights are protected from preference avoidance for 45 days after the debtor received the goods (no later than 20 days post petition

Question 14

What are the rules for determining if a supplier gets an admin claim for its delivery?

Answer 14

If performance is post-petition, it gets the admin claim automatically if in ordinary COB
If performance is pre-peititon it gets the admin claim only if assumed as part of a larger contract (minus reclamation and 20 day rules above)

Question 15

What are the rules for if consumer claims will get paid?

Answer 15

In ch 11 the DIP will want to preserve good will, so K-Mart critical vendor analysis; Plust 507(a)7
In Ch 7, the only protection is 507(a)7 which provides admin priority protection for individuals who have placed deposits for products that were not received (probably excludes gift cards/warranties/loyalty programs)
507a7 is limited to 3025 and to consumer/personal claims

Question 16

Where else do we see what is basically a kmart analysis other than critical vendors?

Answer 16

Cross collateralization
Management KERPs (in statute form)
Preferential treatment of consumer claims

Question 17

What protection is there for pre-petition wage claims without Kmart?

Answer 17

507(a)4 admin priority for up to 13650 of pre petition wages for up to 180 days prebankruptcy

Question 18

What are the 2 prongs of Kmart?

Answer 18

1) But for immediate full payment the supplier would stop dealing with the debtor
2) The continued dealings with the critical vendor will preserve or increase the value of the estate enough that even the disfavored creditors will not be harmed

Question 19

What are the other options to satisfy a critical vendor other than Kmart?

Answer 19

Pay in cash with Dip loan $, maybe admin priority on post-petition performances is good enough (just have to wait and be rational/not bitter), some contractees are still obligated to keep performing

Question 20

What is the contradiction between critical vendor doctrine and equitable subordination of creditors?

Answer 20

If financial creditors flex their leverage to get repaid, they are equitably subordinated. If trade creditors flex their leverage to get paid on pre-petition sales, they are rewarded under KMart

Question 21

What was the spark for Congress to pass 1113?

Answer 21

SCOTUS in Bildiscso said that the bankruptcy code trumped the NLRA and that the debtor could use its 365 power to reject any labor contract using its business discretion

Question 22

How did Congress mess up when making the changes in 1113?

Answer 22

It did not give the labor contract a clear path to a bankruptcy claim if the labor contract was ultimately rejected because 502 only allows claims for contracts rejected under 365, not 1113
Northwest airlines says they have no claim at all

Question 23

What are the requirements of 1113?

Answer 23

1) Only necessary modifications and is fair and equitable to all parties
2) employees’s rep refuses to accept the plan without good cause
3) balance of equities clearly favors rejection

Question 24

What is the current approach to mass tort liability? Cite Code

Answer 24

524

1) Refuse to recognize that future tort claimants have bankruptcy claims
2) appoint a special representative for the future tort claimants
3) If severe enough, the debtor can pursue a trust and channeling order (but will cost them the majority of the equity and must pass 75% vote of claimants)

Question 25

What is leverage do future tort claimants have in bankruptcy?

Answer 25

They have no cramdown, so they have a lot of leverage under 524(g) (even after the post-asbestos softening)

Question 26

What is a damper for post-asbestos future tort claimants?

Answer 26

A softer version of 524(g) still applies but the debtor suggest the representative for the future tort claimants and the court usually approves, so the debtor’s not going to suggest anyone overly zealous