Exploring Temporary Stays Of Early Termination Rights

Under the Bankruptcy Code (Title 11, U.S.C., §§ 101 et seq., the "Bankruptcy Code") non-debtor counterparties to qualified financial contracts generally are not subject to the automatic stay under section 362 and the prohibition on ipso facto clauses under section 365(e). As a result, upon the commencement of a bankruptcy case under the Bankruptcy Code, counterparties are able to exercise their contractual right to cause the liquidation, termination or acceleration of the transactions under qualified financial covenants.

The same is not necessarily true when a bank, insurance company or other similar regulated entity becomes insolvent. Such entities are not eligible to be debtors under the Bankruptcy Code.^[1] While the insolvency regimes for such entities do not provide for an automatic injunction barring creditor remedies, the insolvency regime will provide a brief stay preventing counter-parties to qualified financial contracts with such entity from terminating,