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Executory Contracts
An executory contract is a contract under which performance is due by both parties.
As it relates to the United States Bankruptcy Code, an executory contract is one in which "performance is due to some extent by both parties" in order to fulfill all of its terms and conditions, other than paying or collecting money. In other words, an Executory Contract is one in which both parties have duties or obligations that remain to be completed/satisfied. A Trustee may affirm and accept (assume), or may terminate and surrender an executory contract. Assumption of a executory contract requires bankruptcy court approval, but rejection is automatic if the contract is not assumed within a timeline in the U.S. Bankruptcy Code.
A trustee in bankruptcy may assume or reject n executory contract. In a reorganization case, the debtor, as debtor-in-possession, may also assume or reject an executory contract. Assumption or rejection is subject to court approval. In bankruptcy, real property leases and equipment leases are the most common forms of executory contract. The Lessor has a duty to allow future possession of the property by the debtor in possession or Trustee, and the debtor/lessee has a duty to make future payments.
In bankruptcy, an unexpired lease is an executory contract because both parties have both rights and obligations under the terms of the lease. Once a bankruptcy has been filed, the Trustee may cure any default and preserve the remaining benefits of the debtor's unexpired executory contracts. Alternatively, the Trustee may unilaterally terminate an executory contract and minimize the financial impact of the default. The debtor's rights under an executory contract are protected by the "automatic stay" provisions of the U.S. Bankruptcy Code, which arises immediately upon commencement of the bankruptcy case.
Reprinted with the permission of Credit Research Foundation.
Edited by Michael C. Dennis, author of "Credit and Collection Handbook" and "The Credit and Collection Manager's Manual." His email address is mcdennis13@yahoo.com