Leases and Executory Contracts in Chapter 11

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By Ken Ayotte, University of California at Berkeley Law School

Ayotte_Kenneth_medium_webThis paper offers the first empirical analysis of the timing and disposition decisions large Chapter 11 debtors make with respect to their leases and executory contracts in bankruptcy.  In particular, I analyze the effect of the revised 365(d)(4), which requires tenant-debtors to make decisions on their real estate leases within seven months unless the landlord grants an extension.

I find that the seven month deadline strongly accelerated real estate lease disposition decisions.  This suggests the existence of renegotiation frictions that prevent debtors from buying more time from their landlords.  The accelerated timeline, moreover, may have affected case outcomes.  Using a difference-in-differences methodology, I find that the probability of reorganization fell significantly more for lease-intensive debtors than for non-lease-intensive debtors after BAPCPA.

The paper also offers many new stylized facts.  For example, I find that most assignments occur in the context of a going-concern sale of the whole firm or business unit, rather than on an individual basis.  I also find that many debtors assume contracts early, rather than maximizing the “option value” of waiting.  Examining early assumptions in detail, I find evidence consistent with “implicit contracting” motives, whereby assuming early secures benefits for the debtor that the formal contract alone could not.

The full paper may be found here.