The Demystification of Contracts in Bankruptcy

Abstract

A company’s ability to retain favorable contracts while escaping unprofitable ones is central to a successful reorganization in Chapter 11 cases. Yet a strange and elusive doctrine often leads the courts to impose unpredictable and perverse results in contract cases. The doctrine requires that a contract have a quality of “executoriness,” or it must leave the precincts of the Bankruptcy Code for an anarchic limbo where the courts fashion surprising and often unexplained relief. The American Bankruptcy Institute Review Commission ignored the unanimous recommendation of its committee of contract experts, preferring to retain this outdated doctrine with an explanation as unclear as many of the cases attempting to apply it. Based on a reading of all contemporary executoriness cases, this article examines executoriness in each of the major categories of contracts where it imposes confusion and loss in reorganization practice and demonstrates the correct solutions to each. It does so by tying them to the fundamental economic and social policies underlying bankruptcy law.