Opinion ID: 768223
Heading Depth: 3
Heading Rank: 2

Heading: Bankruptcy Code Sections 1141(d) and 365

Text: 15 Section 1141(d) binds some creditors to the terms of the confirmed reorganization plan while discharging all others. See 11 U.S.C. 1141(d)(1)(A) (1994) (Except as otherwise provided for in the plan or the order confirming the plan, the confirmation of a plan . . . discharges the debtor from any debt that arose before the date of such confirmation.). Section 1141(d) also enumerates different types of claims that are excepted from discharge. See 1141(d) (the debtor is discharged from any debt except as otherwise provided for in this subsection). Although National Gypsum correctly points out that the list of exceptions is exclusive and makes no reference to 365, it is incorrect to extrapolate from this that a default amount owed on an executory contract is always a claim within the ambit of 1141(d). 16 The Bankruptcy Code provides special rules for the treatment of executory contracts and unexpired leases during a Chapter 11 reorganization. See 11 U.S.C. 365 (1994). In general, section 365 allows the trustee, subject to the court's approval, [to] assume or reject any executory contract or unexpired lease of the debtor. Id. Under 365, a debtor may elect one of two options when assessing how to treat an executory contract or unexpired lease to which it is a party; the contract or lease may either be rejected or assumed. 4 17 The authority to reject an executory contract is vital to the basic purpose of a Chapter 11 reorganization, because rejection can release the debtor's estate from burdensome obligations that can impede a successful reorganization. NLRB v. Bildisco & Bildisco, 465 U.S.513, 528, 79 L. Ed. 2d 482, 104 S. Ct. 1188 (1984). The Bankruptcy Code provides that the effect of a rejection of an executory contract is a breach, see 11 U.S.C. 365(g) (1994), and the breach gives rise to a claim for damages by the non-debtor party to the contract. See Wainer v. A.J. Equities, Ltd., 984 F.2d 679, 684 (5th Cir. 1993); see also Bildisco, 465 U.S. at 518. The claim created by the rejection of the contract or lease is then afforded treatment similar to all other unsecured claims that are either provided for in the plan or are discharged through 1141(d). The non-debtor whose lease or contract is rejected is then afforded the opportunity, subsequent to the debtor's decision on how to treat the contract or lease, to protect its interests by filing a proof of claim after which the non-debtor is treated as an unsecured creditor. See In re Parkwood Realty Corp., 157 B.R. 687, 690 (W.D. Wash. 1993).([The Code] clearly contemplates that a party to an executory contract will receive notiice of rejection when it receives a copy of the Disclosure Statement and Plan, giving it a window in which to file a proof of claim for damages.); see also LAWRENCE P. KING, ET AL., COLLIER ON BANKRUPTCY 365.09[1] (15th ed. 1999) (hereinafter COLLIER ON BANKRUPTCY). 5 The non-debtor, former contractual partner only becomes an unsecured creditor after rejection. Therefore, the non-debtor is not required to have filed a proof of claim prior to the claims bar date, a date that in all likelihood preceded the debtor's decision to reject the contract or lease. 6 18 Rather than reject the contract or lease, the debtor may choose to assume it. An assumed lease or contract will remain in effect through and then after the completion of the reorganization. The non-debtor party to the agreement is not released from its duties and must continue to perform; likewise, the debtor must continue to perform or pay for the services or other costs that are not discharged. The act of assumption must be grounded, at least in part, in the conclusion that maintenance of the contract is more beneficial to the estate than doing without the other party's services. MMR Holding Corp. v. C&C Consultants, Inc. (In re MMR Holding Corp.), 203 B.R. 605, 612 (Bankr. M.D. La. 1996); see In re Eagle Bus Mfg., Inc., 148 B.R. 481, 483 (Bankr. S.D. Tex. 1992). Since not all contracts are zero-sum bargains, the contract will not necessarily be a detriment to the other party. Nevertheless, it is the debtor who decides whether to maintain the contract, and this authority vests the debtor with a considerable amount of power: 19 Section 365 is intended to provide a means whereby a debtor can force anotherparty to an executory contract to continue to perform under the contract if (1) the debtor can provide adequate assurance that it, too, will continue to perform, and if (2) the debtor can cure any defaults in its past performance. The provision provides a means whereby a debtor can force others to continue to do business with it when the bankruptcy filing might otherwise make them reluctant to do so. The section thus serves the purpose of making the debtor's rehabilitation more likely. 20 Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 1985); see RICHARD I. AARON, BANKRUPTCY LAW FUNDAMENTALS, 9.04[3] (1999) (The power to reject unfavorable contracts is a potent weapon in the arsenal of unique bankruptcy powers.). 21 Not surprisingly, the Bankruptcy Code affords the non-debtor a measure of protection, since it is possible that the contract is not beneficial to the non-debtor, and the non-debtor lacks any decision-making authority in the assumption process. 7 Section 365 allows a debtor to 'continue in a beneficial contract provided, however, that the other party is made whole at the time of the debtor's assumption of said contract.' Eagle Bus, 148 B.R. at 483 (quoting In re J.W. Mays, 30 B.R. 769, 772 (Bankr. S.D.N.Y. 1983)). This cure requirement is set forth in 365(b)(1): 22 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- 23 (A) cures, or provides adequate assurance that the trustee will promptly cure, such default; 24 (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 25 (C) provides adequate assurance of future performance under such contract or lease. 26 11 U.S.C. 365. 27 Thus, the debtor party must take full account of the cost to cure all existing defaults owed to the non-debtor party when assessing whether the contract is beneficial to the estate. See Three Sisters Partners, L.L.C. v. Harden (In re Shangra La, Inc.), 167 F.3d 843, 849 (4th Cir. 1999); MMR Holding, 203 B.R. at 613 (Assumption presumes curing all prepetition default . . . .). 28 A non-debtor is further protected by the requirement that an executory contract may not be assumed in part and rejected in part. See COLLIER ON BANKRUPTCY 365.03[1]. Where the debtor assumes an executory contract, it must assume the entire contract, cum onere - the debtor accepts both the obligations and the benefits of the executory contract. See Bildisco, 465 U.S. at 531. Although this rule can have broader application, in the instant case this condition serves only to reinforce the cure requirement of 365(b)(1). See Adventure Resources, Inc. v. Holland, 137 F.3d 786, 798 (4th Cir. 1998) (That the obligations of an executory contract be accepted along with its benefits is made plain by the Bankruptcy Code's requirement that, as conditions of the contract's assumption, the debtor cure any existing default and compensate all non-debtor parties for actual pecuniary losses that have resulted therefrom.). 29 National Gypsum asks us to find that 1141(d)(1) can be read to provide for discharge of amounts in default underassumed executory contracts, thereby nullifying the cure requirement of section 365(b)(1). The bankruptcy and district courts, citing our opinion in Wainer v. A.J. Equities, Ltd., 984 F.2d 679 (5th Cir. 19993), held that the discharge power of 1141(d) does reach out to extinguish the need to cure existing default on executory contracts that are assumed by the reorganized debtor. We agree.