What Happens to Business Contracts and Leases in Chapter 11?

Chapter 11 does not automatically cancel every business contract or lease. A debtor in possession may often continue performing while deciding whether to assume, reject, or, in appropriate circumstances, assign an executory contract or unexpired lease. These decisions require attention to court approval, defaults, cure costs, statutory deadlines, and exceptions under 11 U.S.C. § 365.

What Is an Executory Contract?

An executory contract generally refers to an agreement under which both parties still have important performance obligations. Common business examples may include supply agreements, service contracts, franchise agreements, software licenses, employment agreements, equipment leases, and commercial real-estate leases.

Whether a particular agreement is executory is a legal question. A contract is not necessarily executory merely because money remains unpaid. The agreement’s terms, applicable nonbankruptcy law, and the parties’ remaining duties all matter.

What Does It Mean to Assume a Contract or Lease?

Assumption generally means that the debtor elects to keep the contract or lease and remain bound by it. Under 11 U.S.C. § 365, assumption is subject to court approval.

If the agreement is in default, assumption commonly requires the debtor to cure—or provide adequate assurance of a prompt cure—compensate the other party for qualifying financial losses, and provide adequate assurance of future performance. Some defaults and contract provisions receive different treatment under the statute.

What Does Rejection Mean?

Rejection generally means that the bankruptcy estate will not continue performing the agreement. Rejection is treated as a breach; it does not necessarily rescind the contract or erase every right associated with it. The nondebtor party may have a claim for damages, usually treated as a prepetition claim, subject to the Bankruptcy Code’s rules and any applicable limitations.

Rejection can help a reorganizing business stop future performance under a burdensome agreement, but the consequences should be evaluated carefully. Special protections may apply to certain licensees, purchasers, tenants, and other parties.

Can a Contract or Lease Be Assigned to Someone Else?

Some agreements can be assumed and assigned even when their terms restrict assignment. The debtor generally must first satisfy the requirements for assumption and provide adequate assurance that the proposed assignee can perform. Section 365 contains important exceptions, including circumstances involving applicable law, personal services, intellectual-property interests, financial accommodations, and leases already terminated under nonbankruptcy law.

Can the Other Party Terminate the Agreement Because of Bankruptcy?

A clause that permits termination solely because of insolvency, a bankruptcy filing, or appointment of a trustee is often called an “ipso facto” clause. Section 365 generally restricts enforcement of these provisions after the bankruptcy case begins, but statutory exceptions exist. A party may also have independent grounds for relief based on post-filing performance, expiration, or other enforceable rights.

What Happens to a Commercial Real-Estate Lease?

A commercial tenant generally must continue timely performing post-filing lease obligations unless the court orders otherwise under the statute. The debtor must decide whether to assume or reject an unexpired nonresidential real-property lease within the statutory period.

Section 365(d)(4) generally sets a deadline of 120 days after the order for relief. The court may grant an extension of up to 90 additional days for cause. Further extensions generally require the landlord’s prior written consent. If the lease is not assumed within the applicable period, it is deemed rejected and the property must be surrendered to the landlord.

Because a valuable location may be central to operations, commercial leases should be reviewed before filing. Rent defaults, common-area charges, taxes, insurance, renewal options, assignment provisions, and cure amounts can affect the reorganization strategy.

What Happens While the Business Decides?

The debtor should ordinarily continue meeting post-filing obligations associated with agreements it uses. The automatic stay may prevent certain collection or termination actions, but it does not give a business a cost-free right to use another party’s property or services. A contract counterparty may ask the court to require a decision within a specified time or seek other relief.

The U.S. Courts’ Chapter 11 overview notes that disputes may arise over the assumption or rejection of executory contracts and unexpired leases. Early negotiation can sometimes narrow cure disputes and preserve important commercial relationships.

Contracts That Require Special Analysis

Section 365 contains specialized rules and exceptions. Agreements requiring particular attention may include:

• Commercial real-estate and equipment leases
• Intellectual-property licenses
• Franchise and dealership agreements
• Government contracts
• Personal-service and employment agreements
• Loan commitments and other financial accommodations
• Collective bargaining agreements
• Shopping-center leases
• Contracts involving regulated rights or nonassignable licenses

No general article can determine the treatment of a particular agreement. Contract language and applicable federal, state, or regulatory law must be reviewed.

Contract Planning Before a Chapter 11 Filing

A New Orleans business considering reorganization should prepare a complete list of leases and ongoing contracts. For each agreement, identify the counterparty, expiration date, renewal options, assignment restrictions, defaults, cure amount, security deposits, guarantees, and whether the agreement is essential to future operations.

Management should also compare the cost of assumption with the operational effect of rejection. A profitable contract may preserve revenue, while an above-market lease or unproductive service agreement may interfere with a feasible plan.

Frequently Asked Questions

Does Chapter 11 let a business rewrite any contract?

No. Chapter 11 provides tools for assumption, rejection, and sometimes assignment, but it does not permit a debtor to freely rewrite every agreement. Modification may require consent, a confirmed plan, another Bankruptcy Code provision, or applicable nonbankruptcy law.

Can a landlord evict a business immediately after filing?

The automatic stay may temporarily prevent eviction or collection activity, but exceptions and prior termination issues can apply. The debtor must address post-filing rent and the statutory assumption deadline.

Can a business keep only the favorable parts of a contract?

Generally, an executory contract must be assumed or rejected as a whole rather than divided into favorable and unfavorable provisions, although questions about severability and multiple agreements can be fact-specific.

Chapter 11 Guidance for New Orleans Businesses

Bickham Law advises Louisiana businesses concerning commercial agreements, creditor negotiations, and bankruptcy strategy. Learn more about Chapter 11 bankruptcy, business reorganization, Subchapter V, and business matters.

Request a Free Consultation

If contracts or leases are affecting your company’s ability to reorganize, call Bickham Law at 504-584-5730 or request a free consultation. Our office is located at 650 Poydras Street in New Orleans.

This article provides general information and is not legal advice. Contract and bankruptcy outcomes depend on the agreement, applicable law, court orders, and facts of the case.