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Bankruptcy | Case Law | Executory Contracts 365

EXECUTORY CONTRACTS § 365

General

In re Imperial Credit Industries, Inc., 527 F.3d 959 (9th Cir. 2008)

A chapter 7 debtor’s obligation on a claim arising from a capital maintenance agreement

with the FDIC under § 365(o) is not entitled to administrative expense priority, where it is

specifically provided for under § 507(a)(9).

In re JZ L.L.C., 371 B.R. 412 (9th Cir. BAP 2007)

Licensing agreement issued by debtor that was neither assumed nor assigned in chapter 11

case rides through the bankruptcy.

In re Pomona Valley Medical Group, Inc., 476 F.3d 665, 670 (9th Cir. 2006)

“. . .[I]n evaluating the rejection decision, the bankruptcy court should presume that the

debtor-in-possession acted prudently, on an informed basis, in good faith, and in the honest belief

that the action taken was in the best interests of the bankruptcy estate. . . .It should approve the

rejection of an executory contract under § 365(a) unless it finds that the debtor-in-possession’s

conclusion would be ‘advantageous is so manifestly unreasonable that it could not be based on

sound business judgment, but only on bad faith, or whim or caprice.’”

Rejection of the contract does not otherwise affect the parties’ substantive rights under the

contract or state law. Claims under California Business and Professions Code survived motion to

dismiss.

In re G.I. Industries, Inc., 204 F.3d 1276 (9th Cir. 2000)

Bankruptcy court could adjudicate validity of contract when considering proof of claim

under executory agreement rejected by trustee.

In re AEG Acquisition Corp., 161 B.R. 50 (9th Cir. B.A.P. 1993)

Contract is not executory when all that is left for debtor to do is pay. Citing In re Pacific

Express, Inc., 780 F.2d 1482 (9th Cir. 1986).

In re Joshua Slocum, Ltd. 922 F.2d 1081 (3d Cir. 1990)

Shopping center defined

In re Qintex Entertainment, Inc., 950 F.2d 1492 (9th Cir. 1991)

Executory k does not become asset of estate until it is assumed (licensing agreement)

In re Aslan, 909 F.2d 367 (9th Cir. 1990)

When debtor secures rejection of non-assumed executory contract under §365(g), date of

breach is day immediately prior to filing of bankruptcy petition (definition of executory contract

discussed)

In re Westworld Comm. Healthcare, Inc., 95 B.R. 730 (Bankr.C.D. Cal. 1989)

Right to attorney fees as “any pecuniary loss” under 365(b)(1)(B)

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In re Sigel & Co., Ltd., 923 F.2d 142 (9th Cir. 1991)

Purchase of joint venture share prior to filing did not terminate agreement - debtor had

power to cure default when the contract says nothing about cure of a breach

In re Arizona Appetito’s Stores, 893 F.2d 216 (9th Cir. 1990)

Timely motion to reject does not toll 60 days for motion to assume

In re Elm, Inc., 942 F.2d 630 (9th Cir. 1991)

1. Court should order surrender of premises, if appropriate

2. Must determine interests if necessary to decide 365(d)(4) issues.

Executory Contracts - Leases

In re Onecast Media, Inc., 439 F.3d 558 (9th Cir. 2006)

“While rejection of a lease prevents the debtor from obtaining future benefits of the lease. .

., it does not rescind the lease or defeat any pending claims or defenses that the debtor had in

regard to that lease.” Where the landlord drew down entirely on a letter of credit purchased by the

debtor and held by the landlord as security, the trustee was entitled to recover the difference

between the landlord’s damages and the balance of the amount drawn down, since that amount was

property of the estate.

In re At Home Corp., 392 F.3d 1064 (9th Cir. 2004), cert. denied, 546 U.S. 814,126 S.Ct. 338

(2005)

“. . . [A] bankruptcy court has the discretion to grant a motion to reject a nonresidential

lease of real property retroactively. The retroactive date of rejection need not be on or after the

date on which the landlord regains possession.”

In re TreeSource Industries, Inc., 363 F.3d 994 (9th Cir. 2004)

Commercial property lessor’s claim for damages arising from debtor’s failure to remove a

concrete pad were not entitled to administrative priority. The lease was breached only upon its

rejection, not postpetition and pre-rejection. Thus damages were simply an unsecured claim.

In re BCE West, L.P., 319 F.3d 1166 (9th Cir. 2003)

Section 363(d)(3) does not apply to debtor lessors, only to non-debtor lessees.

In re LPM Corp., 300 F.3d 1134 (9th Cir. 2002)

Nothing in the language of § 365(d)(3) grants a commercial landlord's administrative claim

superpriority status. Rather, it simply imposes a duty on a debtor to make its rental payments in a

timely manner.

In re Cukierman, 265 F.3d 846 (9th Cir. 2001)

1. Obligations denominated in commercial lease as “further rent” were entitled to

administrative priority under unexpired lease provision in bankruptcy code, even though

obligations actually represented repayments of promissory notes.

2. Because no action or proceeding had been brought to enforce the terms of the lease or to

declare the parties respective rights, the attorney fees clause in the lease was not applicable.

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Further, lessor was not entitled to interest on the unpaid lease obligations “because it is not an

obligation under the lease.”

In re George, 177 F.3d 885 (9th Cir. 1999), cert. denied, 528 U.S. 1135 (2000)

agreement in question was a “true” lease, thus §365(d)(4) applied. No waiver of automatic

rejection by accepting payments

In re Building Block Child Care Centers, Inc., 234 B.R. 762 (9th Cir. B.A.P. 1999)

Commercial tenant required to cure pre-petition defaults to former landlord before

assuming lease with successor landlord where first landlord expressly retained right to receive cure

payments upon assumption.

In re Victoria Station, 875 F.2d 1380 (9th Cir. 1989)

60 day period for assumption of nonresidential lease may be extended more than once

In re Lomax, 194 B.R. 862 (9th Cir. B.A.P. 1996)

Landlord’s election to terminate lease was acceptance of debtor’s offer of surrender,

resorting premises to landlord and limiting damages under 502(b)(6)

In re Circle K Corp, 98 F.3d 484 (9th Cir. 1996)

The term “gross sales” included only commissions debtor received for ticket sales, not total

sales price of ticket sales.

In re McSheridan, 184 B.R. 91 (9th Cir. B.A.P. 1995)

1) rent reserved under §502(b)(6)(A)

for a charge to constitute rent reserved under §502(b)(6)(A), a 3-part test must be met:

(1) charge must be (a) designated as “rent” or additional rent in the lease; or (b) be

provided as the tenant’s/lessee’s obligation in the lease;

(2) the charge must be related to the value of the property or the lease thereon; and

(3) the charge must be properly classifiable as rent because it is a fixed, regular or

periodic charge

2) triple net lease...

- damages for breach of covenants is not a separate claim from the termination

damages. In addition, the claim arising from breach of the lease conceptually encompasses all

time intervals and treats the claim as if the breach occurred immediately prior to the filing of the

bankruptcy case - see §502(g).

In re Westside Print Works, Inc., 180 B.R. 557 (9th Cir. B.A.P. 1995)

1. Bankruptcy Code gives lessor no independent right to recover attorneys’ fees from

debtor-in-possession of commercial property

2. Property tax and increased security provisions found to be ambiguous or waived.

Towers v. Chickering & Gregory (In re Pacific-Atlantic Trading Co.), 27 F.3d 401 (9th Cir. 1994)

Lessor was entitled to an administrative expense claim for 60 days’ rent at the contract rate

because the trustee had an affirmative duty under §365(d)(3) to “perform all the obligations of the

debtor” under the lease.

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In re First Alliance Corp., 140 B.R. 531 (9th Cir. B.A.P. 1992)

Post-petition rents are not credits against damages in landlord’s claim for debtor’s rejection

of pre-bankruptcy lease.

In re Pollock, 139 B.R. 938 (9th Cir. B.A.P. 1992)

Severability test. Sale of business sublease assumable by debtors if severable from note

obligation.

In re Standor Jewelers West, Inc., 129 B.R. 200 (9th Cir. B.A.P. 1991)

A clause in a lease providing for a substantial portion of the lease appreciation upon

assignment is invalid under §365(f).

In re Windmill Farms, 841 F.2d 1467 (9th Cir. 1988)

Under Cal. law a lease terminates for nonpayment of rent at least by the time the lessor

files an unlawful detainer action, provided that a proper three-days’ notice to pay rent or quit has

been given, and the lessee has failed to pay the rent in default within the three-day period and

further provided that the lessor’s notice contained an election to declare the lease forfeited.

In re Port Angeles Waterfront Assoc, 134 B.R. 377 (9th Cir. B.A.P. 1991)

Once 60 days ran, lease terminated (waterfront project = lease). In re Moreggia & Sons,

Inc., 852 F.2d 1179 (9th Cir. 1988) distinguished.

Moreggia & Sons, Inc. 852 F.2d 1179 (9th Cir. 1988)

Lease that is more in the nature of a financing arrangement is excepted from 60 day

requirement.

In re Orvco, Inc. 95 B.R. 724 (9th Cir. B.A.P. 1989)

1) While a non bankruptcy court must order the payment of rent due during 365(d)(3) 60

day period, that doesn’t mean that amount due is all an administrative priority

2) After lease is rejected, if 363(d)(3) period rent remains unpaid, landlord does not have

an immediate right to payment...may be paid in administrative.

In re Texscan Corp., 107 B.R. 227 (9th Cir. B.A.P. 1989), aff’d. 976 F.2d 1269 (9th Cir. 1992)

Executory contract that expires postpetition but before motion to assume is filed cannot be

assumed.

Executory Contracts - Non-lease contracts:

In re Southern Pacific Funding Corporation, 268 F.3d 712 (9th Cir. 2001)

Subordination clause in indenture agreement that preserved certain secured creditors' rights

both pre- and post- bankruptcy did not violate § 365(e)(1) of the bankruptcy code.

In re Crow Winthrop Operating Partnership, 241 F.3d 1121 (9th Cir. 2001)

1) Issues of anti-assignment and change of ownership properly considered on motion rather

than in an adversary proceeding; 2) bankruptcy court properly found that prohibition on change of

ownership was an illegal anti-assignment clause under § 365(f).

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In re Catapult Entertainment, Inc., 165 F.3d 747 (9th Cir. 1999)

Ch. 11 bankruptcy debtor in possession may not assume executory contract made

nonassignable by nonbankruptcy law due to materiality of nondebtor party’s identity, unless

nondebtor party consents. §365(c)(1)

In re Robert L. Helms Construction and Development Co., Inc., 139 F.3d 702 (9th Cir. 1998) en

banc

It is a question of fact for bankruptcy court whether option contract to purchase real

property is an executory contract that may be accepted or rejected by bankruptcy trustee

In re The Circle K Corporation, 127 F.3d 904 (9th Cir. 1997), cert. denied, 522 U.S. 1148 (1998)

Lease provision barring exercise of renewal option by lessee in default does not preclude

defaulting Chapter 11 bankruptcy debtor from doing so

In re Claremont Acquisition Corporation, Inc., 113 F.3d 1029 (9th Cir. 1997)

Debtor car dealer’s incurable nonmonetary default precludes assignment of dealership

franchise agreement in bankruptcy proceeding. §356(b)(2)(d) only applies to monetary penalties

not having to be cured.

In re CFLC, Inc., 174 B.R. 119 (N.D.Cal. 1994), aff’d 89 F.3d 673 (9th Cir. 1996)

Executory contracts are assignable in bankruptcy notwithstanding any contractual

provision restricting assignment, unless the contract is of a kind that applicable law makes

nonassignable. The court in disallowing the assignment followed the traditional federal rule of

nonassignability of non-exclusive patent licenses absent the express consent of the patent holder.

In re Prize Frize, Inc., 32 F.3d 426 (9th Cir. 1994)

License fees were royalties for purposes of §363(n) and had to be paid if promisor elected

to retain rights under contract.

In re Texscan Corp., 976 F.2d 1269 (9th Cir. 1992)

Retrospective insurance premium k between insurer and insured is not an executory k

In re Sun Runner Marine, Inc., 945 F.2d 1089 (9th Cir. 1991)

Flooring agreement was an executory k but was not assumable because it constituted a

financial accommodation

In re Texscan Corp., 107 B.R. 227 (9th Cir. B.A.P. 1989), aff’d. 976 F.2d 1269 (9th Cir. 1992)

Executory contract that expires post-petition but before motion to assume is filed cannot be

assumed

In re Munple, Ltd., 868 F.2d 1129 (9th Cir. 1989)

Real estate Brokers commission earned prepetition is not an executory contract.

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