Analyzing Executory Contract Decisions

Evaluates assumption, rejection, and assignment decisions for executory contracts and unexpired leases in bankruptcy under §365 of the Bankruptcy Code.

When To Use

• Debtor is preparing schedules of executory contracts and unexpired leases for assumption/rejection motions
• Distressed investor is underwriting a target with significant lease or contract exposure
• Turnaround advisor needs to model cure cost scenarios and rejection claim liabilities
• Evaluating whether a contract qualifies as executory under the Countryman test (material unperformed obligations on both sides)
• Assessing assignability of contracts despite anti-assignment clauses (§365(f)) or applicable law restrictions

Inputs To Gather

• Complete list of executory contracts and unexpired leases from debtor's schedules (Schedule G)
• Cure amounts for each contract (pre-petition arrearages, penalties, fees)
• Counterparty identity, financial condition, and strategic importance
• Contract terms: remaining term, renewal options, termination provisions, change-of-control clauses
• Market comparables for lease rates or service pricing (to assess above/below market status)
• Any anti-assignment provisions, IP license restrictions, or personal-services clauses
• Applicable non-bankruptcy law governing assignment restrictions [VERIFY — varies by jurisdiction and contract type]
• Debtor's go-forward business plan identifying operationally critical contracts

Workflow

1. Classify each contract — Confirm executory status using the Countryman test. Flag contracts where executory status is disputed (e.g., fully paid licenses, expired-but-holdover leases). Separate real property leases from personal property leases and non-lease contracts, as different statutory provisions apply.

2. Categorize by decision — Sort contracts into three buckets:

   • Assume — Contract is operationally necessary and at or below market terms; debtor can cure defaults and provide adequate assurance of future performance
   • Reject — Contract is above-market, non-essential, or burdensome; rejection damages are quantifiable and manageable as a general unsecured claim
   • Assume and assign — Contract has value to a purchaser in a §363 sale; assess whether anti-assignment provisions are overridden under §365(f) [VERIFY — certain exceptions apply for personal-services, financial accommodation, and non-residential real property leases in shopping centers]

3. Calculate cure costs — For each contract proposed for assumption, quantify:

   • Pre-petition monetary defaults (rent arrearages, unpaid invoices)
   • Non-monetary defaults that must be cured (if applicable under controlling circuit law) [VERIFY — circuits split on whether non-monetary defaults must be cured]
   • Penalties, late fees, and interest through the anticipated cure date
   • Aggregate cure exposure and rank by magnitude

4. Model rejection claim exposure — For rejected contracts, estimate:

   • Rejection damages claim (breach treated as pre-petition unsecured claim)
   • For real property leases: statutory cap under §502(b)(6) — the greater of one year's rent or 15% of remaining term (not to exceed three years), plus unpaid pre-petition rent [VERIFY — confirm current statutory formula]
   • For employment contracts: statutory cap under §502(b)(7)
   • Impact on unsecured claims pool and projected recovery rates

5. Assess adequate assurance — For contracts to be assumed, evaluate whether the debtor (or assignee) can demonstrate adequate assurance of future performance, including:

   • Financial wherewithal to perform going forward
   • Track record and operational capacity
   • Shopping center lease requirements under §365(b)(3) (tenant mix, use clauses, radius restrictions) [VERIFY — applicable only to shopping center leases]

6. Evaluate strategic and timing considerations — Flag deadline-sensitive issues:

   • Non-residential real property lease assumption deadline (§365(d)(4)): 120 days after petition, extendable by 90 days for cause [VERIFY — confirm current statutory deadlines]
   • Personal property lease performance obligations under §365(d)(5) and (d)(10)
   • Impact of plan confirmation timeline on contract decisions
   • Counterparty leverage and likelihood of contested cure amounts

Output

• Contract decision matrix — Table listing each contract with counterparty, contract type, recommended action (assume/reject/assign), cure amount, rejection claim estimate, and strategic rationale
• Cure cost summary — Aggregate cure exposure by category with high/base/low scenarios
• Rejection claim impact analysis — Projected rejection claims and effect on unsecured creditor recovery
• Risk flags — Contracts with disputed executory status, contested cure amounts, assignability challenges, or imminent statutory deadlines
• Recommendation narrative — Summary of key findings with prioritized action items for the debtor, purchaser, or investment committee

Quality Checks

• Verify that every contract on Schedule G is accounted for in the analysis — no gaps
• Confirm cure amounts tie to debtor's books and records or counterparty cure notices
• Validate rejection claim cap calculations against the current statutory formula
• Ensure anti-assignment analysis addresses both §365(f) override scope and applicable exceptions
• Check that adequate assurance analysis reflects the specific requirements for the contract type (especially shopping center leases)
• Flag any contracts where the executory determination is uncertain and note the analytical basis for the classification
• Mark all jurisdiction-dependent conclusions with [VERIFY] for local counsel review