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    Business Law Legal Research Blog

    BANKRUPTCY: Rejection or Assumption of Executory Contracts Under 11 U.S.C. § 365

    Posted by Anne B. Hemenway on Thu, Aug 18, 2016 @ 11:08 AM

    Anne Hemenway—Senior Attorney, National Legal Research Group

         A personal service contract, such as one between an artist and a manager or between a recording group and a record company, may be rejected or assumed under the U.S. Bankruptcy Code. Generally, such management or promotional agreements are considered to be executory contracts under 11 U.S.C. § 365(a). An executory contract under § 365 is not specifically defined, but the term commonly refers to a contract that has performance due from both the debtor and the contracting party. In re Gen. Datacomm Indus., 407 F.3d 616 (3d Cir. 2005). Professor Vern Countryman's definition in Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973), is considered to be the definitive definition of an executory contract.

         A trustee or debtor-in-possession has a right to assume or reject executory contracts under § 365 within the time frames set forth in § 365(d), but the agreement remains in effect pending the actual act of assumption or rejection. In re Nat'l Steel Corp., 316 B.R. 287 (Bankr. N.D. Ill. 2004). If a personal service contract is rejected, it is considered breached under § 365(g) as of the date immediately preceding the date the bankruptcy petition was filed.     The Code states, however, that a personal service contract may not be assumed or assigned without the consent of all the parties. See 11 U.S.C. § 365(c); In re Taylor, 913 F.2d 102 (3d Cir. 1990). The assumption or rejection of an executory contract, including personal service contracts, relates only to the contract obligations that remain unfulfilled as of the date the petition is filed. In re Phila. News., LLC, 424 B.R. 178 (Bankr. E.D. Pa. 2010). In Taylor, the appellate court affirmed that the music-publishing agreement the debtor had with Delightful Music, Ltd., was an executory contract and that the debtor-in-possession could reject it under § 365. The rejection, however, would relate only to those aspects of the executory contract that remained unfulfilled as of the date the Chapter 11 petition was filed. Any default of the contract for prepetition services of the debtor would become an asset of the estate.

         In In re Ortiz, 400 B.R. 755 (C.D. Cal. 2009), the Chapter 7 trustee rejected a promotional agreement executed prepetition by the debtor, a professional boxer, and a boxing promoter. The promotional agreement was considered to be an executory contract under § 365. The court held that the rejection was proper and that, under the statute, it constituted a prepetition breach of the promotional agreement. Importantly, however, the court reversed the bankruptcy court, which had held that the rejection was tantamount to a complete termination of the contract. Instead, the court held that rejection does not necessarily extinguish the contract or eliminate the nondebtor's equitable rights under the contract.

         Under § 365(a), an artist who files for reorganization may, as the debtor-in-possession, reject an unfavorable and costly management agreement as part of the artist's fresh-start initiative. Under Chapter 7, a trustee may not assume a personal service agreement without the artist's consent. If rejected, the artist/debtor should be aware, however, that the rejection may not be tantamount to an extinction of the agreement and that the other party may retain some equitable rights under the agreement.

    Topics: bankruptcy, contracts, Anne B. Hemenway, executory, personal service contract, performance by debtor and contracting party

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