Can An Executory Contract Lose Its Executoriness? "Maybe," Says The Second Circuit

The ability of a chapter 11 debtor-in-possession ("DIP") or bankruptcy trustee to assume or reject unexpired leases or contracts that are "executory" as of the bankruptcy filing date is one of the most important entitlements created by the Bankruptcy Code. It allows a DIP to rid itself of onerous contracts and to preserve contracts that can either benefit its reorganized business or be assigned to generate value for the bankruptcy estate and/or fund distributions to creditors under a chapter 11 plan. The fundamental importance of affording the DIP or trustee adequate time to decide whether a given contract should be assumed or rejected, even when the attendant delay and uncertainty may subject nondebtor contracting parties to considerable prejudice, is deeply rooted in the fabric of U.S. bankruptcy jurisprudence. As demonstrated by a ruling recently handed down by the Second Circuit Court of Appeals, courts