1. Meaning of Executory Contracts

An executory contract is generally defined as a contract under which both parties still have material obligations to perform at the time of bankruptcy filing.

The Classic Definition

The most widely accepted formulation comes from Professor Vern Countryman:

A contract is executory if the obligations of both parties are so unperformed that failure by either would constitute a material breach.

2. Statutory Framework

(A) U.S. Bankruptcy Code – Section 365

Section 365 governs executory contracts and unexpired leases.

Key Powers of the Debtor/Trustee:

Assume the contract (continue performance)

Reject the contract (treat as breach)

Assign the contract to a third party (subject to conditions)

3. Assumption of Executory Contracts

Requirements for Assumption:

Cure of defaults

Compensation for losses caused by default

Adequate assurance of future performance

Effect:

Contract continues as if bankruptcy had not occurred

Becomes binding on the estate

4. Rejection of Executory Contracts

Legal Effect:

Treated as a breach of contract (not termination)

Breach is deemed to occur immediately before the bankruptcy filing

Consequences:

Counterparty receives a pre-petition unsecured claim for damages

Debtor is relieved from future performance

5. Assignment of Executory Contracts

The debtor may assign contracts if:

Defaults are cured

Adequate assurance of performance is provided

Limitations:

Certain contracts (e.g., personal services, intellectual property licenses in some cases) may not be assignable

6. Special Types of Executory Contracts

(A) Intellectual Property Licenses

Special protection for licensees under §365(n)

(B) Real Estate Leases

Separate provisions for landlords and tenants

(C) Collective Bargaining Agreements

Governed by stricter standards

7. Legal Issues in Executory Contracts

(A) What qualifies as “executory”?

Courts differ in interpretation.

(B) Timing of rejection

Debtor may delay decision, affecting counterparties.

(C) Ipso facto clauses

Clauses terminating contract upon bankruptcy are generally unenforceable.

(D) Rights of counterparties

Balancing debtor relief with fairness to creditors.

8. Important Case Laws

1. Countryman Definition (Scholarly Standard)

Though not a case, courts widely adopt this definition as the foundation of executory contract analysis.

2. NLRB v. Bildisco & Bildisco (1984)

Concerned rejection of a collective bargaining agreement.

Principle: Executory contracts can be rejected if it benefits the estate, subject to heightened scrutiny for labor contracts.

3. Mission Product Holdings, Inc. v. Tempnology, LLC (2019)

Concerned trademark licensing.

Principle: Rejection constitutes breach, not rescission—licensee retains rights even after rejection.

4. Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (1985)

Concerned rejection of an IP license.

Principle: Rejection terminated licensee rights (later limited by statute through §365(n)).

5. In re Orion Pictures Corp. (1993)

Concerned whether a contract was executory.

Principle: Courts should focus on remaining obligations and avoid deciding underlying contract disputes at assumption stage.

6. In re Columbia Gas Systems Inc. (1995)

Addressed classification of contracts.

Principle: Not all ongoing relationships are executory; material obligations must remain on both sides.

7. In re Sunterra Corp. (2004)

Concerned software license agreements.

Principle: Certain licenses may not be assignable without consent due to applicable non-bankruptcy law.

8. In re Chesapeake Energy Corp. (2020)

Concerned rejection of midstream agreements.

Principle: Courts examine whether agreements are true executory contracts or property interests.

9. Policy Considerations

(A) Debtor Rehabilitation

Allows debtor to shed burdensome contracts.

(B) Maximization of Estate Value

Focus on economically beneficial agreements.

(C) Fairness to Creditors

Ensures counterparties receive compensation.

(D) Commercial Certainty

Balancing flexibility with predictability in contracts.

10. Criticism and Challenges

Uncertainty in defining executory contracts

Potential unfairness to counterparties

Strategic use by debtors to escape obligations

Complex treatment of IP and technology contracts

11. Conclusion

Executory contracts form a cornerstone of bankruptcy restructuring, allowing debtors to:

Retain valuable agreements

Reject burdensome obligations

Courts and statutes strive to balance:

Debtor’s fresh start

Creditor protection

Commercial fairness

The evolving jurisprudence—especially in cases like Mission Product Holdings v. Tempnology—clarifies that rejection is a breach, not an erasure of rights, reinforcing stability in commercial relationships during insolvency.