A debtor has the power to assume and assign executory contracts even when those contracts expressly bar such assumption and assignment (see section 365(f) of the Bankruptcy Code). Thus, the debtor may sell its interests under a contract over its counterparty’s objection. This power may be very beneficial to a debtor in possession (and its creditors) if assignment of those rights yields a substantial price either by themselves or in conjunction with a sale of business assets. This power is subject to certain limitations.
In Katherine O’Malley, “Contracts That Cannot Be Assigned Under Section 365(c)(1) of the Bankruptcy Code,” (Reinhart, Boemer Van Duren E-Alert, Dec. 16, 2014), the author summarizes types of contracts subject to the limitation on assignment set by section 365(c)(1)(A), which states:
“(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if
(1) (A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and
(B) such party does not consent to such assumption or assignment . . . “
As O’Malley points out, courts originally construed this provision as applying only to personal service contracts, like that of the opera singer’s contract with the opera house. A bankrupt opera singer cannot assign her contractual rights to another singer unless the opera house consents. The opera house can say, “It’s Angela Gheorghiu or no-one, except maybe Anna Netrebko!” and bankruptcy law will back up the company. The nature of opera diva services are obviously unique and personal, and the opera company had only bargained for a certain type of performance.
O’Malley poses eight other broad categories of contracts which, under state law or federal law are deemed “personal” in some meaningful way or, like federal contracts, are categorically barred from transfer even outside of bankruptcy. These categories are: partnership agreements, patent licenses, copyright licenses (nonexclusive), trademark licenses, government contracts, franchise agreements, limited liability company agreements, and joint venture agreements.
O’Malley has thus, with admirable concision, limited the unknown unknowns, guiding potential debtors, counterparties, and asset purchasers as to what the debtor can do with its contractual rights in a bankruptcy case.
The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.
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