The Abolition of Dysfunctional Contracts in Bankruptcy Reorganizations

posted in: Avoidance | 0

By Jay Lawrence Westbrook and Kelsi Marie Stayart, University of Texas at Austin School of Law

A traditional case law test has limited the application of bankruptcy contract rules to contracts that have a certain nearly mystical quality of “executoriness.” Contracts that fail the “Countryman” test are deemed not subject to those value-maximizing rules. Courts treat these contracts in a variety of ways, but often these contracts are removed entirely from the bankruptcy estate, destroying value and crippling reorganization efforts. These effects are especially serious with regard to less-traditional types of contracts, including IP licenses, options, and LLC operating agreements. The application of the test undercuts almost every policy underlying the Bankruptcy Code, including the fresh start and equal treatment of creditors. The test also gives judges an unpredictable and nearly unlimited discretion in resolving contracts often worth huge amounts of money.

Section 365 of the Bankruptcy Code allows a trustee or debtor-in-possession to assume or reject “executory contracts.” Assumption permits the estate to take on profitable contracts and make the contract counterparty perform, while elevating the counterparty to an administrative claimant. Rejection permits the bankruptcy estate to escape unprofitable or ill-advised contracts, leaving the contract counterparty with a damage claim payable in small Bankruptcy Dollars. The effect is to spread losses among all unsecured creditors while minimizing the overall loss. The existing approach prevents the achievement of these important results.

We propose an abolition of the requirement of “executoriness,” thus subjecting virtually all contracts to Section 365. In its place, we offer a simple approach to analyzing contracts in bankruptcy that aligns with and advances the fundamental principles of bankruptcy reorganization.

For the full article, see here.

Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?

By Daniel M. Glosband, Goodwin Procter LLP, and Jay Lawrence Westbrook, The University of Texas School of Law

Glosband_M_Daniel WestbrookIn a recent case, In re Barnet, 737 F. 3d 238 (2d Cir. 2013), the Court held that section 109(a) of the Bankruptcy Code bars a foreign bankruptcy proceeding from recognition under Chapter 15 unless the debtor in the foreign proceeding also has a presence in the United States. The Court professed to use a plain meaning rule, but its plain meaning approach and its conclusion that section 109(a) applied to recognition were inappropriate for several reasons:

1) since the term “debtor”  is defined differently in Chapter 15 than in section 101(13), it cannot have a “plain” meaning for Chapter 15 purposes;

2) while it is plain that section 103(a) applies Chapter 1 to Chapter 15, the way in which section 109(a) functions in relation to Chapter 15 is not straightforward and requires a structural analysis that the Court sidestepped;  and

3) the Congressional mandate in section 1508—which requires that, in interpreting Chapter 15, courts shall consider its international origin and the need to promote an application that is consistent with the needs of international insolvency practice—requires flexibility, not rigid literalism.

Section 109(a) should not apply to recognition of a foreign proceeding. The Barnet decision represents a stubborn adherence to literal statutory interpretation when the statutory provisions at issue prima facie were not susceptible to literal interpretation and when Congress instructed courts to look beyond the statute for guidance in harmonizing Chapter 15 with the Model Law.

This is a brief summary of a much longer article forthcoming in the International Insolvency Review. For the full article see here. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd.