Opinion ID: 652880
Heading Depth: 2
Heading Rank: 1

Heading: The Motion to Assume

Text: 12 After taking evidence on the issue, the bankruptcy court decided, in the context of deciding the Motion to Assume, that Orion had not violated the key-man clause. We hold that it was error for the bankruptcy court to decide a disputed factual issue between the parties to a contract in the context of determining whether the debtor or trustee should be permitted to assume that contract. 13 Under 11 U.S.C. Sec. 365(a), [a] trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease term of the debtor. Since 11 U.S.C. Sec. 1107(a) gives debtors-in-possession the same rights and powers of a trustee, a debtor-in-possession, such as Orion, also may assume a contract with bankruptcy court approval. See Theatre Holding Corp. v. Mauro, 681 F.2d 102, 105 n. 2 (2d Cir.1982); In re Sundial Asphalt Co., 147 B.R. 72, 80 (E.D.N.Y.1992). 14 The purpose behind allowing the assumption or rejection of executory contracts is to permit the trustee or debtor-in-possession to use valuable property of the estate and to renounce title to and abandon burdensome property. 2 Collier on Bankruptcy p 365.01 (15th ed. 1993). If the trustee or debtor-in-possession rejects an executory contract pursuant to Sec. 365, the other party to the rejected contract becomes a general creditor of the estate for any damages flowing from the rejection. In re Minges, 602 F.2d 38, 41 (2d Cir.1979). In short, Sec. 365 permits the trustee or debtor-in-possession, subject to the approval of the bankruptcy court, to go through the inventory of executory contracts of the debtor and decide which ones it would be beneficial to adhere to and which ones it would be beneficial to reject. 15 The bankruptcy court erred because it misapprehended the fundamental nature and purpose of a motion to assume. At heart, a motion to assume should be considered a summary proceeding, intended to efficiently review the trustee's or debtor's decision to adhere to or reject a particular contract in the course of the swift administration of the bankruptcy estate. It is not the time or place for prolonged discovery or a lengthy trial with disputed issues. Cf. In re Docktor Pet Ctr., Inc., 144 B.R. 14, 16 (Bankr.D.Mass.1992) ([A] motion to assume an executory contract is generally, and should be, a summary proceeding. It is not the place for an extended breach of contract suit.). 16 In In re Minges, we held that a bankruptcy court reviewing a trustee's or debtor-in-possession's decision to assume or reject an executory contract should examine a contract and the surrounding circumstances and apply its best business judgment to determine if it would be beneficial or burdensome to the estate to assume it. 602 F.2d at 43. In reviewing a trustee's or debtor-in-possession's decision to assume an executory contract, then, a bankruptcy court sits as an overseer of the wisdom with which the bankruptcy estate's property is being managed by the trustee or debtor-in-possession, and not, as it does in other circumstances, as the arbiter of disputes between creditors and the estate. Although several bankruptcy courts have read Sec. 365 as authorizing them to resolve questions involving the validity of contracts before deciding whether to permit the trustee or debtor-in-possession to assume the contracts, see, e.g., In re L.T. Ruth Coal Co., 66 B.R. 753, 757-58 (Bankr.E.D.Ky.1986); In re Nexus Communications, Inc., 55 B.R. 596, 598 (Bankr.E.D.N.C.1985); In re National Sugar Refining Co., 21 B.R. 196, 198 (Bankr.S.D.N.Y.1982), we believe that nothing in Sec. 365 provides such authorization. 17 As we held in Minges, the process of deciding a motion to assume is one of the bankruptcy court placing itself in the position of the trustee or debtor-in-possession and determining whether assuming the contract would be a good business decision or a bad one. Every business person would like to control the end result of her projections and judgments: a stock analyst who had the power to cause stocks to rise and fall to meet her projections would have an enviable track record. This is essentially what the bankruptcy court did here. Permitting a bankruptcy court to rule conclusively on a decisive issue of breach of contract would render the use of business judgment required by In re Minges unnecessary, and is incompatible with the limited purpose of motions to assume of ensuring that valuable property is preserved and burdensome property discarded. 18 Finally, it is important to keep in mind that the bankruptcy court's business judgment in deciding a motion to assume is just that--a judgment of the sort a businessman would make. In no way is this decision a formal ruling on the underlying disputed issues, and thus will receive no collateral estoppel effect. In a given case, a bankruptcy court might decide that it would be beneficial for the trustee or debtor-in-possession to assume a certain contract because the court thinks it unlikely that a court would hold that the debtor had breached the contract, and thus assuming the contract would be a good business judgment. This business judgment could turn out to be wrong, however, if a later fact finder in an adversary proceeding decides that the underlying contract was in fact breached. In such a case, the judge's wrong decision is simply an error of business judgment, not legal error. 19 Our conclusion that the bankruptcy court erred in adjudicating the key-man issue in deciding the Motion to Assume is also informed by the fact that motions to assume always involve contracts, and allowing a bankruptcy court to decide a disputed legal contract issue in the course of deciding a motion to assume could usurp litigants' Seventh Amendment jury-trial rights. Our holding that contract issues may not be decided as part of a motion to assume eliminates the possibility that any such constitutional problems will arise. We note that there is no prohibition on bankruptcy courts, for reasons of efficiency, hearing motions to assume and trying related adversary proceedings simultaneously. They merely must be treated as conceptually separate proceedings, which is to say that adversary proceeding issues are not to be decided as part of a motion to assume. 20 Because the bankruptcy court improperly decided the key-man issue in deciding the Motion to Assume, we vacate the bankruptcy court's holding on this issue. Since the bankruptcy court might not have granted the Motion to Assume if it had known that it was not empowered to decide the key-man issue, we vacate the grant of the Motion to Assume and remand it to the bankruptcy court for further proceedings consistent with this opinion. 21