Rejecting Pre-Bankruptcy Contracts Flashcards
What is an executory contract
A contract where both parties still have material obligations left to perform
What is the priority level of a claim for breach/rejection of a pre-petition contract
Normal unsecured
What is the priority for an assumed contract
507 gives it admin priority if necessary to preserve the estate 503(b)
Does the court have to approve the rejection of a contract?
Yes, but BJR deference. If there is blatant self-dealing or favoring contracts with insiders, the court may reject
What are the requirements before a debtor can assume a contract?
Cure default, compensate for any loss, and provide adequate assurance of future performance (disregard ipso facto clauses)
What are the 3 limitations on the ability of a debtor to assign contracts?
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
What are the rights of a licensee of IP when the debtor wants to revoke the contract?
Can either treat the treat the contract as rejected or retain the IP rights as they existed before the case began
What is the downside of all bankruptcy claims?
Not paid until a plan is confirmed. Enter critical vendor payments
What are the strategic implications of all or nothing rejection of contracts?
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
What is the result of a contract is breached and the normal result would be a specific performance remedy?
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
What is the rule for rejection of a trademark license? Cite Case
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)
What pieces of info need to be considered when giving advice to suppliers of bankrupt or nearly bankrupt firms?
1) Look at DIP loan and inadequate adequate protection balances
What are the 2 end runs around contract rejection for some suppliers? (one code section)
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
What are the rules for determining if a supplier gets an admin claim for its delivery?
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)
What are the rules for if consumer claims will get paid?
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
Where else do we see what is basically a kmart analysis other than critical vendors?
Cross collateralization
Management KERPs (in statute form)
Preferential treatment of consumer claims
What protection is there for pre-petition wage claims without Kmart?
507(a)4 admin priority for up to 13650 of pre petition wages for up to 180 days prebankruptcy
What are the 2 prongs of Kmart?
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
What are the other options to satisfy a critical vendor other than Kmart?
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
What is the contradiction between critical vendor doctrine and equitable subordination of creditors?
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
What was the spark for Congress to pass 1113?
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
How did Congress mess up when making the changes in 1113?
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
What are the requirements of 1113?
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
What is the current approach to mass tort liability? Cite Code
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)
What is leverage do future tort claimants have in bankruptcy?
They have no cramdown, so they have a lot of leverage under 524(g) (even after the post-asbestos softening)
What is a damper for post-asbestos future tort claimants?
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
