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What is an executory contracts in a business bankruptcy?


Many Tennessee businesses that are considering bankruptcy have a number of continuing contracts, such as a supply contract, a real estate lease or any contract in which both parties have unperformed obligations. The bankruptcy code accords such contracts, known as executory contracts, a special status: the debtor in a business or commercial bankruptcy may either affirm or reject any such contract. The central question faced by debtors and their contracting partners is whether a given agreement is, in fact, an executory contract.

The bankruptcy code specifically gives a debtor the right to affirm or reject an unexpired lease, but it does not otherwise define the term "executory contract." The appellate courts have most commonly defined an executory contract as a contract, executed prior to the filing of the petition, under which both parties are still under some duty to perform. If the debtor rejects the contract, the contract is void and neither party has any further obligations. If the party affirms the contract, the relationship of the parties remains unchanged.

If a contract is determined to be non-executory, the debtor has no right to reject it and must perform any remaining obligations. The parties to prepetition agreements often disagree on whether their contract is executory, and the matter usually winds up in front of the bankruptcy judge. Another common question is when does an executory contract become part of the bankrupt estate. Any contract that is neither assumed nor rejected by the debtor will not be affected by the bankruptcy proceeding; the contract will remain in effect, and when the proceeding is completed, the debtor and the other party will both be bound by its terms.

Executory contracts can raise many complicated legal questions. Any business that is weighing the pros and cons of bankruptcy may wish to consult an experienced bankruptcy attorney for a review of its unperformed contracts and advice about how bankruptcy will affect the company's legal obligations.

Source: Justice.gov, "59. Executory Contracts in Bankruptcy -- Introduction, Threshold Issues," accessed on Feb. 3, 2018

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