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TITLE 11–BANKRUPTCY

CHAPTER 3–CASE ADMINISTRATION

Sub Chapter IV –Administrative Powers

Sec. 365. Executory contracts and unexpired leases

  (a) Except as provided in sections 765 and 766 of this title and in 
subsections (b), (c), and (d) of this section, the trustee, subject to 
the court's approval, may assume or reject any executory contract or 
unexpired lease of the debtor.
    (b)(1) If there has been a default in an executory contract or 
unexpired lease of the debtor, the trustee may not assume such contract 
or lease unless, at the time of assumption of such contract or lease, 
the trustee--
        (A) cures, or provides adequate assurance that the trustee will 
    promptly cure, such default;
        (B) compensates, or provides adequate assurance that the trustee 
    will promptly compensate, a party other than the debtor to such 
    contract or lease, for any actual pecuniary loss to such party 
    resulting from such default; and
        (C) provides adequate assurance of future performance under such 
    contract or lease.

    (2) Paragraph (1) of this subsection does not apply to a default 
that is a breach of a provision relating to--
        (A) the insolvency or financial condition of the debtor at any 
    time before the closing of the case;
        (B) the commencement of a case under this title;
        (C) the appointment of or taking possession by a trustee in a 
    case under this title or a custodian before such commencement; or
        (D) the satisfaction of any penalty rate or provision relating 
    to a default arising from any failure by the debtor to perform 
    nonmonetary obligations under the executory contract or unexpired 
    lease.

    (3) For the purposes of paragraph (1) of this subsection and 
paragraph (2)(B) of subsection (f), adequate assurance of future 
performance of a lease of real property in a shopping center includes 
adequate assurance--
        (A) of the source of rent and other consideration due under such 
    lease, and in the case of an assignment, that the financial 
    condition and operating performance of the proposed assignee and its 
    guarantors, if any, shall be similar to the financial condition and 
    operating performance of the debtor and its guarantors, if any, as 
    of the time the debtor became the lessee under the lease;
        (B) that any percentage rent due under such lease will not 
    decline substantially;
        (C) that assumption or assignment of such lease is subject to 
    all the provisions thereof, including (but not limited to) 
    provisions such as a radius, location, use, or exclusivity 
    provision, and will not breach any such provision contained in any 
    other lease, financing agreement, or master agreement relating to 
    such shopping center; and
        (D) that assumption or assignment of such lease will not disrupt 
    any tenant mix or balance in such shopping center.

    (4) Notwithstanding any other provision of this section, if there 
has been a default in an unexpired lease of the debtor, other than a 
default of a kind specified in paragraph (2) of this subsection, the 
trustee may not require a lessor to provide services or supplies 
incidental to such lease before assumption of such lease unless the 
lessor is compensated under the terms of such lease for any services and 
supplies provided under such lease before assumption of such lease.
    (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; or
        (2) such contract is a contract to make a loan, or extend other 
    debt financing or financial accommodations, to or for the benefit of 
    the debtor, or to issue a security of the debtor;
        (3) such lease is of nonresidential real property and has been 
    terminated under applicable nonbankruptcy law prior to the order for 
    relief; or
        (4) such lease is of nonresidential real property under which 
    the debtor is the lessee of an aircraft terminal or aircraft gate at 
    an airport at which the debtor is the lessee under one or more 
    additional nonresidential leases of an aircraft terminal or aircraft 
    gate and the trustee, in connection with such assumption or 
    assignment, does not assume all such leases or does not assume and 
    assign all of such leases to the same person, except that the 
    trustee may assume or assign less than all of such leases with the 
    airport operator's written consent.

    (d)(1) In a case under chapter 7 of this title, if the trustee does 
not assume or reject an executory contract or unexpired lease of 
residential real property or of personal property of the debtor within 
60 days after the order for relief, or within such additional time as 
the court, for cause, within such 60-day period, fixes, then such 
contract or lease is deemed rejected.
    (2) In a case under chapter 9, 11, 12, or 13 of this title, the 
trustee may assume or reject an executory contract or unexpired lease of 
residential real property or of personal property of the debtor at any 
time before the confirmation of a plan but the court, on the request of 
any party to such contract or lease, may order the trustee to determine 
within a specified period of time whether to assume or reject such 
contract or lease.
    (3) The trustee shall timely perform all the obligations of the 
debtor, except those specified in section 365(b)(2), arising from and 
after the order for relief under any unexpired lease of nonresidential 
real property, until such lease is assumed or rejected, notwithstanding 
section 503(b)(1) of this title. The court may extend, for cause, the 
time for performance of any such obligation that arises within 60 days 
after the date of the order for relief, but the time for performance 
shall not be extended beyond such 60-day period. This subsection shall 
not be deemed to affect the trustee's obligations under the provisions 
of subsection (b) or (f) of this section. Acceptance of any such 
performance does not constitute waiver or relinquishment of the lessor's 
rights under such lease or under this title.
    (4) Notwithstanding paragraphs (1) and (2), in a case under any 
chapter of this title, if the trustee does not assume or reject an 
unexpired lease of nonresidential real property under which the debtor 
is the lessee within 60 days after the date of the order for relief, or 
within such additional time as the court, for cause, within such 60-day 
period, fixes, then such lease is deemed rejected, and the trustee shall 
immediately surrender such nonresidential real property to the lessor.
    (5) Notwithstanding paragraphs (1) and (4) of this subsection, in a 
case under any chapter of this title, if the trustee does not assume or 
reject an unexpired lease of nonresidential real property under which 
the debtor is an affected air carrier that is the lessee of an aircraft 
terminal or aircraft gate before the occurrence of a termination event, 
then (unless the court orders the trustee to assume such unexpired 
leases within 5 days after the termination event), at the option of the 
airport operator, such lease is deemed rejected 5 days after the 
occurrence of a termination event and the trustee shall immediately 
surrender possession of the premises to the airport operator; except 
that the lease shall not be deemed to be rejected unless the airport 
operator first waives the right to damages related to the rejection. In 
the event that the lease is deemed to be rejected under this paragraph, 
the airport operator shall provide the affected air carrier adequate 
opportunity after the surrender of the premises to remove the fixtures 
and equipment installed by the affected air carrier.
    (6) For the purpose of paragraph (5) of this subsection and 
paragraph (f)(1) of this section, the occurrence of a termination event 
means, with respect to a debtor which is an affected air carrier that is 
the lessee of an aircraft terminal or aircraft gate--
        (A) the entry under section 301 or 302 of this title of an order 
    for relief under chapter 7 of this title;
        (B) the conversion of a case under any chapter of this title to 
    a case under chapter 7 of this title; or
        (C) the granting of relief from the stay provided under section 
    362(a) of this title with respect to aircraft, aircraft engines, 
    propellers, appliances, or spare parts, as defined in section 
    40102(a) of title 49, except for property of the debtor found by the 
    court not to be necessary to an effective reorganization.

    (7) Any order entered by the court pursuant to paragraph (4) 
extending the period within which the trustee of an affected air carrier 
must assume or reject an unexpired lease of nonresidential real property 
shall be without prejudice to--
        (A) the right of the trustee to seek further extensions within 
    such additional time period granted by the court pursuant to 
    paragraph (4); and
        (B) the right of any lessor or any other party in interest to 
    request, at any time, a shortening or termination of the period 
    within which the trustee must assume or reject an unexpired lease of 
    nonresidential real property.

    (8) The burden of proof for establishing cause for an extension by 
an affected air carrier under paragraph (4) or the maintenance of a 
previously granted extension under paragraph (7)(A) and (B) shall at all 
times remain with the trustee.
    (9) For purposes of determining cause under paragraph (7) with 
respect to an unexpired lease of nonresidential real property between 
the debtor that is an affected air carrier and an airport operator under 
which such debtor is the lessee of an airport terminal or an airport 
gate, the court shall consider, among other relevant factors, whether 
substantial harm will result to the airport operator or airline 
passengers as a result of the extension or the maintenance of a 
previously granted extension. In making the determination of substantial 
harm, the court shall consider, among other relevant factors, the level 
of actual use of the terminals or gates which are the subject of the 
lease, the public interest in actual use of such terminals or gates, the 
existence of competing demands for the use of such terminals or gates, 
the effect of the court's extension or termination of the period of time 
to assume or reject the lease on such debtor's ability to successfully 
reorganize under chapter 11 of this title, and whether the trustee of 
the affected air carrier is capable of continuing to comply with its 
obligations under section 365(d)(3) of this title.
    (10) The trustee shall timely perform all of the obligations of the 
debtor, except those specified in section 365(b)(2), first arising from 
or after 60 days after the order for relief in a case under chapter 11 
of this title under an unexpired lease of personal property (other than 
personal property leased to an individual primarily for personal, 
family, or household purposes), until such lease is assumed or rejected 
notwithstanding section 503(b)(1) of this title, unless the court, after 
notice and a hearing and based on the equities of the case, orders 
otherwise with respect to the obligations or timely performance thereof. 
This subsection shall not be deemed to affect the trustee's obligations 
under the provisions of subsection (b) or (f). Acceptance of any such 
performance does not constitute waiver or relinquishment of the lessor's 
rights under such lease or under this title.
    (e)(1) Notwithstanding a provision in an executory contract or 
unexpired lease, or in applicable law, an executory contract or 
unexpired lease of the debtor may not be terminated or modified, and any 
right or obligation under such contract or lease may not be terminated 
or modified, at any time after the commencement of the case solely 
because of a provision in such contract or lease that is conditioned 
on--
        (A) the insolvency or financial condition of the debtor at any 
    time before the closing of the case;
        (B) the commencement of a case under this title; or
        (C) the appointment of or taking possession by a trustee in a 
    case under this title or a custodian before such commencement.

    (2) Paragraph (1) of this subsection does not apply to an 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--
        (A)(i) applicable law excuses a party, other than the debtor, to 
    such contract or lease from accepting performance from or rendering 
    performance to the trustee or to an assignee of such contract or 
    lease, whether or not such contract or lease prohibits or restricts 
    assignment of rights or delegation of duties; and
        (ii) such party does not consent to such assumption or 
    assignment; or
        (B) such contract is a contract to make a loan, or extend other 
    debt financing or financial accommodations, to or for the benefit of 
    the debtor, or to issue a security of the debtor.

    (f)(1) Except as provided in subsection (c) of this section, 
notwithstanding a provision in an executory contract or unexpired lease 
of the debtor, or in applicable law, that prohibits, restricts, or 
conditions the assignment of such contract or lease, the trustee may 
assign such contract or lease under paragraph (2) of this subsection; 
except that the trustee may not assign an unexpired lease of 
nonresidential real property under which the debtor is an affected air 
carrier that is the lessee of an aircraft terminal or aircraft gate if 
there has occurred a termination event.
    (2) The trustee may assign an executory contract or unexpired lease 
of the debtor only if--
        (A) the trustee assumes such contract or lease in accordance 
    with the provisions of this section; and
        (B) adequate assurance of future performance by the assignee of 
    such contract or lease is provided, whether or not there has been a 
    default in such contract or lease.

    (3) Notwithstanding a provision in an executory contract or 
unexpired lease of the debtor, or in applicable law that terminates or 
modifies, or permits a party other than the debtor to terminate or 
modify, such contract or lease or a right or obligation under such 
contract or lease on account of an assignment of such contract or lease, 
such contract, lease, right, or obligation may not be terminated or 
modified under such provision because of the assumption or assignment of 
such contract or lease by the trustee.
    (g) Except as provided in subsections (h)(2) and (i)(2) of this 
section, the rejection of an executory contract or unexpired lease of 
the debtor constitutes a breach of such contract or lease--
        (1) if such contract or lease has not been assumed under this 
    section or under a plan confirmed under chapter 9, 11, 12, or 13 of 
    this title, immediately before the date of the filing of the 
    petition; or
        (2) if such contract or lease has been assumed under this 
    section or under a plan confirmed under chapter 9, 11, 12, or 13 of 
    this title--
            (A) if before such rejection the case has not been converted 
        under section 1112, 1208, or 1307 of this title, at the time of 
        such rejection; or
            (B) if before such rejection the case has been converted 
        under section 1112, 1208, or 1307 of this title--
                (i) immediately before the date of such conversion, if 
            such contract or lease was assumed before such conversion; 
            or
                (ii) at the time of such rejection, if such contract or 
            lease was assumed after such conversion.

    (h)(1)(A) If the trustee rejects an unexpired lease of real property 
under which the debtor is the lessor and--
        (i) if the rejection by the trustee amounts to such a breach as 
    would entitle the lessee to treat such lease as terminated by virtue 
    of its terms, applicable nonbankruptcy law, or any agreement made by 
    the lessee, then the lessee under such lease may treat such lease as 
    terminated by the rejection; or
        (ii) if the term of such lease has commenced, the lessee may 
    retain its rights under such lease (including rights such as those 
    relating to the amount and timing of payment of rent and other 
    amounts payable by the lessee and any right of use, possession, 
    quiet enjoyment, subletting, assignment, or hypothecation) that are 
    in or appurtenant to the real property for the balance of the term 
    of such lease and for any renewal or extension of such rights to the 
    extent that such rights are enforceable under applicable 
    nonbankruptcy law.

    (B) If the lessee retains its rights under subparagraph (A)(ii), the 
lessee may offset against the rent reserved under such lease for the 
balance of the term after the date of the rejection of such lease and 
for the term of any renewal or extension of such lease, the value of any 
damage caused by the nonperformance after the date of such rejection, of 
any obligation of the debtor under such lease, but the lessee shall not 
have any other right against the estate or the debtor on account of any 
damage occurring after such date caused by such nonperformance.
    (C) The rejection of a lease of real property in a shopping center 
with respect to which the lessee elects to retain its rights under 
subparagraph (A)(ii) does not affect the enforceability under applicable 
nonbankruptcy law of any provision in the lease pertaining to radius, 
location, use, exclusivity, or tenant mix or balance.
    (D) In this paragraph, ``lessee'' includes any successor, assign, or 
mortgagee permitted under the terms of such lease.
    (2)(A) If the trustee rejects a timeshare interest under a timeshare 
plan under which the debtor is the timeshare interest seller and--
        (i) if the rejection amounts to such a breach as would entitle 
    the timeshare interest purchaser to treat the timeshare plan as 
    terminated under its terms, applicable nonbankruptcy law, or any 
    agreement made by timeshare interest purchaser, the timeshare 
    interest purchaser under the timeshare plan may treat the timeshare 
    plan as terminated by such rejection; or
        (ii) if the term of such timeshare interest has commenced, then 
    the timeshare interest purchaser may retain its rights in such 
    timeshare interest for the balance of such term and for any term of 
    renewal or extension of such timeshare interest to the extent that 
    such rights are enforceable under applicable nonbankruptcy law.

    (B) If the timeshare interest purchaser retains its rights under 
subparagraph (A), such timeshare interest purchaser may offset against 
the moneys due for such timeshare interest for the balance of the term 
after the date of the rejection of such timeshare interest, and the term 
of any renewal or extension of such timeshare interest, the value of any 
damage caused by the nonperformance after the date of such rejection, of 
any obligation of the debtor under such timeshare plan, but the 
timeshare interest purchaser shall not have any right against the estate 
or the debtor on account of any damage occurring after such date caused 
by such nonperformance.
    (i)(1) If the trustee rejects an executory contract of the debtor 
for the sale of real property or for the sale of a timeshare interest 
under a timeshare plan, under which the purchaser is in possession, such 
purchaser may treat such contract as terminated, or, in the alternative, 
may remain in possession of such real property or timeshare interest.
    (2) If such purchaser remains in possession--
        (A) such purchaser shall continue to make all payments due under 
    such contract, but may, offset against such payments any damages 
    occurring after the date of the rejection of such contract caused by 
    the nonperformance of any obligation of the debtor after such date, 
    but such purchaser does not have any rights against the estate on 
    account of any damages arising after such date from such rejection, 
    other than such offset; and
        (B) the trustee shall deliver title to such purchaser in 
    accordance with the provisions of such contract, but is relieved of 
    all other obligations to perform under such contract.

    (j) A purchaser that treats an executory contract as terminated 
under subsection (i) of this section, or a party whose executory 
contract to purchase real property from the debtor is rejected and under 
which such party is not in possession, has a lien on the interest of the 
debtor in such property for the recovery of any portion of the purchase 
price that such purchaser or party has paid.
    (k) Assignment by the trustee to an entity of a contract or lease 
assumed under this section relieves the trustee and the estate from any 
liability for any breach of such contract or lease occurring after such 
assignment.
    (l) If an unexpired lease under which the debtor is the lessee is 
assigned pursuant to this section, the lessor of the property may 
require a deposit or other security for the performance of the debtor's 
obligations under the lease substantially the same as would have been 
required by the landlord upon the initial leasing to a similar tenant.
    (m) For purposes of this section 365 and sections 541(b)(2) and 
362(b)(10), leases of real property shall include any rental agreement 
to use real property.
    (n)(1) If the trustee rejects an executory contract under which the 
debtor is a licensor of a right to intellectual property, the licensee 
under such contract may elect--
        (A) to treat such contract as terminated by such rejection if 
    such rejection by the trustee amounts to such a breach as would 
    entitle the licensee to treat such contract as terminated by virtue 
    of its own terms, applicable nonbankruptcy law, or an agreement made 
    by the licensee with another entity; or
        (B) to retain its rights (including a right to enforce any 
    exclusivity provision of such contract, but excluding any other 
    right under applicable nonbankruptcy law to specific performance of 
    such contract) under such contract and under any agreement 
    supplementary to such contract, to such intellectual property 
    (including any embodiment of such intellectual property to the 
    extent protected by applicable nonbankruptcy law), as such rights 
    existed immediately before the case commenced, for--
            (i) the duration of such contract; and
            (ii) any period for which such contract may be extended by 
        the licensee as of right under applicable nonbankruptcy law.

    (2) If the licensee elects to retain its rights, as described in 
paragraph (1)(B) of this subsection, under such contract--
        (A) the trustee shall allow the licensee to exercise such 
    rights;
        (B) the licensee shall make all royalty payments due under such 
    contract for the duration of such contract and for any period 
    described in paragraph (1)(B) of this subsection for which the 
    licensee extends such contract; and
        (C) the licensee shall be deemed to waive--
            (i) any right of setoff it may have with respect to such 
        contract under this title or applicable nonbankruptcy law; and
            (ii) any claim allowable under section 503(b) of this title 
        arising from the performance of such contract.

    (3) If the licensee elects to retain its rights, as described in 
paragraph (1)(B) of this subsection, then on the written request of the 
licensee the trustee shall--
        (A) to the extent provided in such contract, or any agreement 
    supplementary to such contract, provide to the licensee any 
    intellectual property (including such embodiment) held by the 
    trustee; and
        (B) not interfere with the rights of the licensee as provided in 
    such contract, or any agreement supplementary to such contract, to 
    such intellectual property (including such embodiment) including any 
    right to obtain such intellectual property (or such embodiment) from 
    another entity.

    (4) Unless and until the trustee rejects such contract, on the 
written request of the licensee the trustee shall--
        (A) to the extent provided in such contract or any agreement 
    supplementary to such contract--
            (i) perform such contract; or
            (ii) provide to the licensee such intellectual property 
        (including any embodiment of such intellectual property to the 
        extent protected by applicable nonbankruptcy law) held by the 
        trustee; and

        (B) not interfere with the rights of the licensee as provided in 
    such contract, or any agreement supplementary to such contract, to 
    such intellectual property (including such embodiment), including 
    any right to obtain such intellectual property (or such embodiment) 
    from another entity.

    (o) In a case under chapter 11 of this title, the trustee shall be 
deemed to have assumed (consistent with the debtor's other obligations 
under section 507), and shall immediately cure any deficit under, any 
commitment by the debtor to a Federal depository institutions regulatory 
agency (or predecessor to such agency) to maintain the capital of an 
insured depository institution, and any claim for a subsequent breach of 
the obligations thereunder shall be entitled to priority under section 
507. This subsection shall not extend any commitment that would 
otherwise be terminated by any act of such an agency.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2574; Pub. L. 98-353, title III, 
Secs. 362, 402-404, July 10, 1984, 98 Stat. 361, 367; Pub. L. 99-554, 
title II, Secs. 257(j), (m), 283(e), Oct. 27, 1986, 100 Stat. 3115, 
3117; Pub. L. 100-506, Sec. 1(b), Oct. 18, 1988, 102 Stat. 2538; Pub. L. 
101-647, title XXV, Sec. 2522(c), Nov. 29, 1990, 104 Stat. 4866; Pub. L. 
102-365, Sec. 19(b)-(e), Sept. 3, 1992, 106 Stat. 982-984; Pub. L. 103-
394, title II, Secs. 205(a), 219(a), (b), title V, Sec. 501(d)(10), Oct. 
22, 1994, 108 Stat. 4122, 4128, 4145; Pub. L. 103-429, Sec. 1, Oct. 31, 
1994, 108 Stat. 4377.)


                      Historical and Revision Notes

                         legislative statements

    Section 365(b)(3) represents a compromise between H.R. 8200 as 
passed by the House and the Senate amendment. The provision adopts 
standards contained in section 365(b)(5) of the Senate amendment to 
define adequate assurance of future performance of a lease of real 
property in a shopping center.
    Section 365(b)(4) of the House amendment indicates that after 
default the trustee may not require a lessor to supply services or 
materials without assumption unless the lessor is compensated as 
provided in the lease.
    Section 365(c)(2) and (3) likewise represent a compromise between 
H.R. 8200 as passed by the House and the Senate amendment. Section 
365(c)(2) is derived from section 365(b)(4) of the Senate amendment but 
does not apply to a contract to deliver equipment as provided in the 
Senate amendment. As contained in the House amendment, the provision 
prohibits a trustee or debtor in possession from assuming or assigning 
an executory contract of the debtor to make a loan, or extend other debt 
financing or financial accommodations, to or for the benefit of the 
debtor, or the issuance of a security of the debtor.
    Section 365(e) is a refinement of comparable provisions contained in 
the House bill and Senate amendment. Sections 365(e)(1) and (2)(A) 
restate section 365(e) of H.R. 8200 as passed by the House. Sections 
365(e)(2)(B) expands the section to permit termination of an executory 
contract or unexpired lease of the debtor if such contract is a contract 
to make a loan, or extend other debt financing or financial 
accommodations, to or for the benefit of the debtor, or for the issuance 
of a security of the debtor.
    Characterization of contracts to make a loan, or extend other debt 
financing or financial accommodations, is limited to the extension of 
cash or a line of credit and is not intended to embrace ordinary leases 
or contracts to provide goods or services with payments to be made over 
time.
    Section 365(f) is derived from H.R. 8200 as passed by the House. 
Deletion of language in section 365(f)(3) of the Senate amendment is 
done as a matter of style. Restrictions with respect to assignment of an 
executory contract or unexpired lease are superfluous since the debtor 
may assign an executory contract or unexpired lease of the debtor only 
if such contract is first assumed under section 364(f)(2)(A) of the 
House amendment.
    Section 363(h) of the House amendment represents a modification of 
section 365(h) of the Senate amendment. The House amendment makes clear 
that in the case of a bankrupt lessor, a lessee may remain in possession 
for the balance of the term of a lease and any renewal or extension of 
the term only to the extent that such renewal or extension may be 
obtained by the lessee without the permission of the landlord or some 
third party under applicable non-bankruptcy law.


                        senate report no. 95-989

    Subsection (a) of this section authorizes the trustee, subject to 
the court's approval, to assume or reject an executory contract or 
unexpired lease. Though there is no precise definition of what contracts 
are executory, it generally includes contracts on which performance 
remains due to some extent on both sides. A note is not usually an 
executory contract if the only performance that remains is repayment. 
Performance on one side of the contract would have been completed and 
the contract is no longer executory.
    Because of the volatile nature of the commodities markets and the 
special provisions governing commodity broker liquidations in subchapter 
IV of chapter 7, the provisions governing distribution in section 765(a) 
will govern if any conflict between those provisions and the provisions 
of this section arise.
    Subsections (b), (c), and (d) provide limitations on the trustee's 
powers. Subsection (b) requires the trustee to cure any default in the 
contract or lease and to provide adequate assurance of future 
performance if there has been a default, before he may assume. This 
provision does not apply to defaults under ipso facto or bankruptcy 
clauses, which is a significant departure from present law.
    Subsection (b)(3) permits termination of leases entered into prior 
to the effective date of this title in liquidation cases if certain 
other conditions are met.
    Subsection (b)(4) [enacted as (c)(2)] prohibits the trustee's 
assumption of an executory contract requiring the other party to make a 
loan or deliver equipment to or to issue a security of the debtor. The 
purpose of this subsection is to make it clear that a party to a 
transaction which is based upon the financial strength of a debtor 
should not be required to extend new credit to the debtor whether in the 
form of loans, lease financing, or the purchase or discount of notes.
    Subsection (b)(5) provides that in lease situations common to 
shopping centers, protections must be provided for the lessor if the 
trustee assumes the lease, including protection against decline in 
percentage rents, breach of agreements with other tenants, and 
preservation of the tenant mix. Protection for tenant mix will not be 
required in the office building situation.
    Subsection (c) prohibits the trustee from assuming or assigning a 
contract or lease if applicable nonbankruptcy law excuses the other 
party from performance to someone other than the debtor, unless the 
other party consents. This prohibition applies only in the situation in 
which applicable law excuses the other party from performance 
independent of any restrictive language in the contract or lease itself.
    Subsection (d) places time limits on assumption and rejection. In a 
liquidation case, the trustee must assume within 60 days (or within an 
additional 60 days, if the court, for cause, extends the time). If not 
assumed, the contract or lease is deemed rejected. In a rehabilitation 
case, the time limit is not fixed in the bill. However, if the other 
party to the contract or lease requests the court to fix a time, the 
court may specify a time within which the trustee must act. This 
provision will prevent parties in contractual or lease relationships 
with the debtor from being left in doubt concerning their status vis-a-
vis the estate.
    Subsection (e) invalidates ipso facto or bankruptcy clauses. These 
clauses, protected under present law, automatically terminate the 
contract or lease, or permit the other contracting party to terminate 
the contract or lease, in the event of bankruptcy. This frequently 
hampers rehabilitation efforts. If the trustee may assume or assign the 
contract under the limitations imposed by the remainder of the section, 
the contract or lease may be utilized to assist in the debtor's 
rehabilitation or liquidation.
    The unenforcibility [sic] of ipso facto or bankruptcy clauses 
proposed under this section will require the courts to be sensitive to 
the rights of the nondebtor party to executory contracts and unexpired 
leases. If the trustee is to assume a contract or lease, the court will 
have to insure that the trustee's performance under the contract or 
lease gives the other contracting party the full benefit of his bargain.
    This subsection does not limit the application of an ipso facto or 
bankruptcy clause if a new insolvency or receivership occurs after the 
bankruptcy case is closed. That is, the clause is not invalidated in 
toto, but merely made inapplicable during the case for the purposes of 
disposition of the executory contract or unexpired lease.
    Subsection (f) partially invalidates restrictions on assignment of 
contracts or leases by the trustee to a third party. The subsection 
imposes two restrictions on the trustee: he must first assume the 
contract or lease, subject to all the restrictions on assumption found 
in the section, and adequate assurance of future performance must be 
provided to the other contracting party. Paragraph (3) of the subsection 
invalidates contractual provisions that permit termination or 
modification in the event of an assignment, as contrary to the policy of 
this subsection.
    Subsection (g) defines the time as of which a rejection of an 
executory contract or unexpired lease constitutes a breach of the 
contract or lease. Generally, the breach is as of the date immediately 
preceding the date of the petition. The purpose is to treat rejection 
claims as prepetition claims. The remainder of the subsection specifies 
different times for cases that are converted from one chapter to 
another. The provisions of this subsection are not a substantive 
authorization to breach or reject an assumed contract. Rather, they 
prescribe the rules for the allowance of claims in case an assumed 
contract is breached, or if a case under chapter 11 in which a contract 
has been assumed is converted to a case under chapter 7 in which the 
contract is rejected.
    Subsection (h) protects real property lessees of the debtor if the 
trustee rejects an unexpired lease under which the debtor is the lessor 
(or sublessor). The subsection permits the lessee to remain in 
possession of the leased property or to treat the lease as terminated by 
the rejection. The balance of the term of the lease referred to in 
paragraph (1) will include any renewal terms that are enforceable by the 
tenant, but not renewal terms if the landlord had an option to 
terminate. Thus, the tenant will not be deprived of his estate for the 
term for which he bargained. If the lessee remains in possession, he may 
offset the rent reserved under the lease against damages caused by the 
rejection, but does not have any affirmative rights against the estate 
for any damages after the rejection that result from the rejection.
    Subsection (i) gives a purchaser of real property under a land 
installment sales contract similar protection. The purchaser, if the 
contract is rejected, may remain in possession or may treat the contract 
as terminated. If the purchaser remains in possession, he is required to 
continue to make the payments due, but may offset damages that occur 
after rejection. The trustee is required to deliver title, but is 
relieved of all other obligations to perform.
    A purchaser that treats the contract as terminated is granted a lien 
on the property to the extent of the purchase price paid. A party with a 
contract to purchase land from the debtor has a lien on the property to 
secure the price already paid, if the contract is rejected and the 
purchaser is not yet in possession.
    Subsection (k) relieves the trustee and the estate of liability for 
a breach of an assigned contract or lease that occurs after the 
assignment.


                         house report no. 95-595

    Subsection (c) prohibits the trustee from assuming or assigning a 
contract or lease if applicable nonbankruptcy law excuses the other 
party from performance to someone other than the debtor, unless the 
other party consents. This prohibition applies only in the situation in 
which applicable law excuses the other party from performance 
independent of any restrictive language in the contract or lease itself. 
The purpose of this subsection, at least in part, is to prevent the 
trustee from requiring new advances of money or other property. The 
section permits the trustee to continue to use and pay for property 
already advanced, but is not designed to permit the trustee to demand 
new loans or additional transfers of property under lease commitments.
    Thus, under this provision, contracts such as loan commitments and 
letters of credit are nonassignable, and may not be assumed by the 
trustee.
    Subsection (e) invalidates ipso facto or bankruptcy clauses. These 
clauses, protected under present law, automatically terminate the 
contract or lease, or permit the other contracting party to terminate 
the contract or lease, in the event of bankruptcy. This frequently 
hampers rehabilitation efforts. If the trustee may assume or assign the 
contract under the limitations imposed by the remainder of the section, 
then the contract or lease may be utilized to assist in the debtor's 
rehabilitation or liquidation.
    The unenforceability of ipso facto or bankruptcy clauses proposed 
under this section will require the courts to be sensitive to the rights 
of the nondebtor party to executory contracts and unexpired leases. If 
the trustee is to assume a contract or lease, the courts will have to 
insure that the trustee's performance under the contract or lease gives 
the other contracting party the full benefit of his bargain. An example 
of the complexity that may arise in these situations and the need for a 
determination of all aspects of a particular executory contract or 
unexpired lease is the shopping center lease under which the debtor is a 
tenant in a shopping center.
    A shopping center is often a carefully planned enterprise, and 
though it consists of numerous individual tenants, the center is planned 
as a single unit, often subject to a master lease or financing 
agreement. Under these agreements, the tenant mix in a shopping center 
may be as important to the lessor as the actual promised rental 
payments, because certain mixes will attract higher patronage of the 
stores in the center, and thus a higher rental for the landlord from 
those stores that are subject to a percentage of gross receipts rental 
agreement. Thus, in order to assure a landlord of his bargained for 
exchange, the court would have to consider such factors as the nature of 
the business to be conducted by the trustee or his assignee, whether 
that business complies with the requirements of any master agreement, 
whether the kind of business proposed will generate gross sales in an 
amount such that the percentage rent specified in the lease is 
substantially the same as what would have been provided by the debtor, 
and whether the business proposed to be conducted would result in a 
breach of other clauses in master agreements relating, for example, to 
tenant mix and location.
    This subsection does not limit the application of an ipso facto or 
bankruptcy clause to a new insolvency or receivership after the 
bankruptcy case is closed. That is, the clause is not invalidated in 
toto, but merely made inapplicable during the case for the purpose of 
disposition of the executory contract or unexpired lease.


                               Amendments

    1994--Subsec. (b)(2)(D). Pub. L. 103-394, Sec. 219(a), added subpar. 
(D).
    Subsec. (d)(6)(C). Pub. L. 103-429, Sec. 1(1), substituted ``section 
40102(a) of title 49'' for ``section 101 of the Federal Aviation Act of 
1958 (49 App. U.S.C. 1301)''.
    Pub. L. 103-394, Sec. 501(d)(10)(A), which directed the substitution 
of ``section 40102 of title 49'' for ``the Federal Aviation Act of 1958 
(49 U.S.C. 1301)'', could not be executed because the phrase ``(49 
U.S.C. 1301)'' did not appear in text.
    Subsec. (d)(10). Pub. L. 103-394, Sec. 219(b), added par. (10).
    Subsec. (g)(2)(A), (B). Pub. L. 103-394, Sec. 501(d)(10)(B), 
substituted ``1208, or 1307'' for ``1307, or 1208''.
    Subsec. (h). Pub. L. 103-394, Sec. 205(a), amended subsec. (h) 
generally. Prior to amendment, subsec. (h) read as follows:
    ``(h)(1) If the trustee rejects an unexpired lease of real property 
of the debtor under which the debtor is the lessor, or a timeshare 
interest under a timeshare plan under which the debtor is the timeshare 
interest seller, the lessee or timeshare interest purchaser under such 
lease or timeshare plan may treat such lease or timeshare plan as 
terminated by such rejection, where the disaffirmance by the trustee 
amounts to such a breach as would entitle the lessee or timeshare 
interest purchaser to treat such lease or timeshare plan as terminated 
by virtue of its own terms, applicable nonbankruptcy law, or other 
agreements the lessee or timeshare interest purchaser has made with 
other parties; or, in the alternative, the lessee or timeshare interest 
purchaser may remain in possession of the leasehold or timeshare 
interest under any lease or timeshare plan the term of which has 
commenced for the balance of such term and for any renewal or extension 
of such term that is enforceable by such lessee or timeshare interest 
purchaser under applicable nonbankruptcy law.
    ``(2) If such lessee or timeshare interest purchaser remains in 
possession as provided in paragraph (1) of this subsection, such lessee 
or timeshare interest purchaser may offset against the rent reserved 
under such lease or moneys due for such timeshare interest for the 
balance of the term after the date of the rejection of such lease or 
timeshare interest, and any such renewal or extension thereof, any 
damages occurring after such date caused by the nonperformance of any 
obligation of the debtor under such lease or timeshare plan after such 
date, but such lessee or timeshare interest purchaser does not have any 
rights against the estate on account of any damages arising after such 
date from such rejection, other than such offset.''
    Subsec. (n)(1)(B). Pub. L. 103-394, Sec. 501(d)(10)(C), substituted 
``a right to'' for ``a right to to''.
    Subsec. (o). Pub. L. 103-394, Sec. 501(d)(10)(D), substituted ``a 
Federal depository institutions regulatory agency (or predecessor to 
such agency)'' for ``the Federal Deposit Insurance Corporation, the 
Resolution Trust Corporation, the Director of the Office of Thrift 
Supervision, the Comptroller of the Currency, or the Board of Governors 
of the Federal Reserve System, or its predecessors or successors,''.
    Subsec. (p). Pub. L. 103-429, Sec. 1(2), which directed the 
amendment of subsec. (p) by substituting ``section 40102(a) of title 
49'' for ``section 101(3) of the Federal Aviation Act of 1958'', could 
not be executed because subsec. (p) was repealed by Pub. L. 103-394, 
Sec. 501(d)(10)(E). See below.
    Pub. L. 103-394, Sec. 501(d)(10)(E), struck out subsec. (p), which 
read as follows: ``In this section, `affected air carrier' means an air 
carrier, as defined in section 101(3) of the Federal Aviation Act of 
1958, that holds 65 percent or more in number of the aircraft gates at 
an airport--
        ``(1) which is a Large Air Traffic Hub as defined by the Federal 
    Aviation Administration in Report FAA-AP 92-1, February 1992; and
        ``(2) all of whose remaining aircraft gates are leased or under 
    contract on the date of enactment of this subsection.''
    1992--Subsec. (c)(4). Pub. L. 102-365, Sec. 19(c), added par. (4).
    Subsec. (d)(5) to (9). Pub. L. 102-365, Sec. 19(b), added pars. (5) 
to (9).
    Subsec. (f)(1). Pub. L. 102-365, Sec. 19(d), substituted for period 
at end ``; except that the trustee may not assign an unexpired lease of 
nonresidential real property under which the debtor is an affected air 
carrier that is the lessee of an aircraft terminal or aircraft gate if 
there has occurred a termination event.''
    Subsec. (p). Pub. L. 102-365, Sec. 19(e), added subsec. (p).
    1990--Subsec. (o). Pub. L. 101-647 added subsec. (o).
    1988--Subsec. (n). Pub. L. 100-506 added subsec. (n).
    1986--Subsec. (c)(1)(A). Pub. L. 99-554, Sec. 283(e)(1), struck out 
``or an assignee of such contract or lease'' after ``debtor in 
possession''.
    Subsec. (c)(3). Pub. L. 99-554, Sec. 283(e)(2), inserted ``is'' 
after ``lease'' and ``and'' after ``property''.
    Subsecs. (d)(2), (g)(1). Pub. L. 99-554, Sec. 257(j), (m)(1), 
inserted reference to chapter 12.
    Subsec. (g)(2). Pub. L. 99-554, Sec. 257(m)(2), inserted references 
to chapter 12 and section 1208 of this title.
    Subsec. (h)(1). Pub. L. 99-554, Sec. 283(e)(2), inserted ``or 
timeshare plan'' after ``to treat such lease''.
    Subsec. (m). Pub. L. 99-554, Sec. 283(e)(3), substituted 
``362(b)(10)'' for ``362(b)(9)''.
    1984--Subsec. (a). Pub. L. 98-353, Sec. 362(a), amended subsec. (a) 
generally, making minor changes.
    Subsec. (b). Pub. L. 98-353, Sec. 362(a), amended subsec. (b) 
generally, inserting in par. (3) reference to par. (2)(B) of subsec. (f) 
of this section, in par. (3)(A) inserting provisions relating to 
financial condition and operating performance in the case of an 
assignment, and in par. (3)(C) substituting ``that assumption or 
assignment of such lease is subject to all the provisions thereof, 
including (but not limited to) provisions such as a radius, location, 
use, or exclusivity provision, and will not breach any such provision 
contained in any other lease, financing agreement, or master agreement 
relating to such shopping center'' for ``that assumption or assignment 
of such lease will not breach substantially any provision, such as a 
radius, location, use, or exclusivity provision, in any other lease, 
financing agreement, or master agreement relating to such shopping 
center''.
    Subsec. (c). Pub. L. 98-353, Sec. 362(a), amended subsec. (c) 
generally, substituting in par. (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 or an assignee of such contract or 
lease, whether or not such contract or lease prohibits or restricts 
assignment of rights or delegation of duties'' for ``applicable law 
excuses a party, other than the debtor, to such contract or lease from 
accepting performance from or rendering performance to the trustee or an 
assignee of such contract or lease, whether or not such contract or 
lease prohibits or restricts assignment of rights or delegation of 
duties'' and adding par. (3).
    Subsec. (d). Pub. L. 98-353, Sec. 362(a), amended subsec. (d) 
generally, inserting in par. (1) reference to residential real property 
or personal property of the debtor, inserting in par. (2) reference to 
residential real property or personal property of the debtor, and adding 
pars. (3) and (4).
    Subsec. (h)(1). Pub. L. 98-353, Sec. 402, amended par. (1) 
generally. Prior to amendment, par. (1) read as follows: ``If the 
trustee rejects an unexpired lease of real property of the debtor under 
which the debtor is the lessor, the lessee under such lease may treat 
the lease as terminated by such rejection, or, in the alternative, may 
remain in possession for the balance of the term of such lease and any 
renewal or extension of such term that is enforceable by such lessee 
under applicable nonbankruptcy law.''
    Subsec. (h)(2). Pub. L. 98-353, Sec. 403, amended par. (2) 
generally. Prior to amendment, par. (2) read as follows: ``If such 
lessee remains in possession, such lessee may offset against the rent 
reserved under such lease for the balance of the term after the date of 
the rejection of such lease, and any such renewal or extension, any 
damages occurring after such date caused by the nonperformance of any 
obligation of the debtor after such date, but such lessee does not have 
any rights against the estate on account of any damages arising after 
such date from such rejection, other than such offset.''
    Subsec. (i)(1). Pub. L. 98-353, Sec. 404, amended par. (1) 
generally, inserting provisions relating to timeshare interests under 
timeshare plans.
    Subsecs. (l), (m). Pub. L. 98-353, Sec. 362(b), added subsecs. (l) 
and (m).


                    Effective Date of 1994 Amendment

    Amendment by Pub. L. 103-394 effective Oct. 22, 1994, and not 
applicable with respect to cases commenced under this title before Oct. 
22, 1994, see section 702 of Pub. L. 103-394, set out as a note under 
section 101 of this title.


                    Effective Date of 1992 Amendment

    Section 19(f) of Pub. L. 102-365 provided that: ``The amendments 
made by this section [amending this section] shall be in effect for the 
12-month period that begins on the date of enactment of this Act [Sept. 
3, 1992] and shall apply in all proceedings involving an affected air 
carrier (as defined in section 365(p) of title 11, United States Code, 
as amended by this section) that are pending during such 12-month 
period. Not later than 9 months after the date of enactment, the 
Administrator of the Federal Aviation Administration shall report to the 
Committee on Commerce, Science, and Transportation and Committee on the 
Judiciary of the Senate and the Committee on the Judiciary and Committee 
on Public Works and Transportation of the House of Representatives on 
whether this section shall apply to proceedings that are commenced after 
such 12-month period.''


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-506 effective Oct. 18, 1988, but not 
applicable to any case commenced under this title before such date, see 
section 2 of Pub. L. 100-506, set out as a note under section 101 of 
this title.


                    Effective Date of 1986 Amendment

    Amendment by section 257 of Pub. L. 99-554 effective 30 days after 
Oct. 27, 1986, but not applicable to cases commenced under this title 
before that date, see section 302(a), (c)(1) of Pub. L. 99-554, set out 
as a note under section 581 of Title 28, Judiciary and Judicial 
Procedure.
    Amendment by section 283 of Pub. L. 99-554 effective 30 days after 
Oct. 27, 1986, see section 302(a) of Pub. L. 99-554.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.


                             Airport Leases

    Section 19(a) of Pub. L. 102-365 provided that: ``Congress finds 
that--
        ``(1) there are major airports served by an air carrier that has 
    leased a substantial majority of the airport's gates;
        ``(2) the commerce in the region served by such a major airport 
    can be disrupted if the air carrier that leases most of its gates 
    enters bankruptcy and either discontinues or materially reduces 
    service; and
        ``(3) it is important that such airports be empowered to 
    continue service in the event of such a disruption.''

                  Section Referred to in Other Sections

    This section is referred to in sections 106, 348, 363, 502, 541, 
553, 555, 556, 557, 559, 560, 744, 901, 929, 1110, 1123, 1124, 1167, 
1168, 1169, 1222, 1322 of this title.



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