Ipso Facto Clause

The term “ipso facto” means “by the fact itself” in Latin. In the bankruptcy context, an ipso facto clause in a contract provides that the contract is terminated (or modified) merely by the fact itself that the other party filed a bankruptcy case. Section 365(e)(1) provides that ipso facto clauses in executory contracts (i.e., contracts in which performance remains due by both parties) are not enforceable.  However, section 365(e)(2) provides exceptions to that bar: an ipso facto clause may be enforceable if “applicable law” excuses a non-debtor party from accepting performance from or rendering performance to the debtor or any assignee of the debtor over the non-debtor party’s objection. “Applicable law” refers to non-bankruptcy law.  Consider a personal services contract – state law likely excuses a non-debtor diva assoluta opera soprano from rendering performance to a person or entity (say, a shopping mall) to which the debtor opera house  had assigned its contract rights.  Ipso facto issues are frequently seen in the intellectual property realm, in which the non-debtor licensor is anxious to curtail a debtor-licensee’s right in bankruptcy to assume and perhaps assign the license to a third-party, without the licensor’s consent.  Courts are split as to whether a debtor-licensee may assume an executory contract with an ispo facto clause over the objection of the non-debtor licensor. Reuel D. Ash contributed to this definition.

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