Opinion ID: 2557
Heading Depth: 1
Heading Rank: 3

Heading: The Law Relevant to a Chapter 11 Debtor's Proposed Assumption and Assignment of Contracts

Text: It is useful at this point to note that contract assumption is an important re-organizational tool under Chapter 11 because it allows a trustee, or a debtor in possession, see id. § 1107(a) (granting debtor in possession virtually same rights and powers as trustee in Chapter 11 proceedings), to go through the inventory of executory contracts ... and decide which ones it would be beneficial to adhere to and which ones it would be beneficial to reject, In re Lavigne, 114 F.3d 379, 386 (2d Cir.1997) (internal quotation marks omitted). [1] Section 365 enables a debtor in possession effectively to compel non-debtor parties to contracts to continue to do business with it when the bankruptcy filing might otherwise make them reluctant to do so. In re Chateaugay Corp., 10 F.3d 944, 955 (2d Cir.1993) (internal quotation marks omitted). Assumption, however, is subject to court approval based on a review of the totality of the circumstances. See In re Orion Pictures Corp., 4 F.3d 1095, 1099 (2d Cir.1993) ([A] bankruptcy court reviewing a trustee's or debtor-in-possession's decision to assume or reject an executory contract [pursuant to § 365] 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.). For a bankruptcy court to make a responsible determination as to an assumption application, it is important for the court to know the universe of claims arising under the contracts to be assumed. See, e.g., In re Buckhead Am. Corp., 180 B.R. 83, 88 (D.Del.1995) (observing that it would be difficult to see how court could determine if assumption was a reasonable exercise of the debtor's business judgment... if, at the time of ruling on the [assumption] motion, unknown claims existed relative to a designated [executory] agreement). It is particularly important for a bankruptcy court to know to what degree a debtor is in default on an executory contract because a debtor cannot assume such a contract unless the debtor satisfies several statutory conditions designed to make the non-debtor contracting party whole. See In re Ionosphere Clubs, Inc., 85 F.3d 992, 999 (2d Cir.1996). Specifically, a debtor must (1) cure the default, or provide adequate assurance that it will promptly cure it; (2) compensate, or provide adequate assurance that the trustee will promptly compensate, the non-debtor party to the contract for any actual monetary loss caused by the debtor's default; and (3) provide adequate assurance of future performance under the contract. 11 U.S.C. § 365(b)(1)(A)-(C). The first requirement effectively confers priority status on claims of default arising under an assumed contract. See id. § 365(b)(1)(A); cf. In re Chateaugay Corp., 10 F.3d at 954; American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119, 124 (2d Cir.1960). The resolution of these claims, generally referred to as cure claims, strives to restore the debtor-creditor relationship ... to pre-default conditions, In re Taddeo, 685 F.2d 24, 26-27 (2d Cir.1982), bringing the contract back into compliance with its terms, see 3 Collier on Bankruptcy § 365.05[3], at 365-54 (15th ed. rev.2008).