Cherry Picking Contract Provisions in Bankruptcy: Not so Taboo After All?

One of the quintessential principles of the Bankruptcy Code is that when a debtor assumes an executory contract, it must assume the contract as a whole - a debtor cannot cherry pick the contract provisions it wants to assume while rejecting others. Two recent bankruptcy court decisions - In re Hawker Beechcraft, Inc. and In re Contract Research Solutions, Inc. - demonstrate a growing trend among debtors to test the parameters of this general rule. But they also provide guidance to parties on how they can structure their agreements to limit or expand a counterparty's ability to selectively assume contract provisions in bankruptcy.

Section 365 of the Bankruptcy Code and the Rule Against Piecemeal Assumption

As a general rule, a debtor cannot retain the benefits of a contract without accepting its burdens, but must assume or reject a contract in its entirety. However, a single contract may be comprised of multiple agreements and a debtor can assume certain parts of a contract while rejecting others so long as the contract is divisible or severable under applicable state law. While the applicable state law will differ, the determination of whether a contract is divisible often turns on the intent of the parties as expressed by the terms of the contract.

Recent Decisions Testing Limits of the General Rule Against Piecemeal Assumption

The extent to which a contract is divisible for purposes of assumption under the Bankruptcy Code was recently addressed by two bankruptcy courts - with opposite results.

In In re Contract Research Solutions, Inc., 2013 WL 1910286 (Bankr. D. Del. May 1, 2013), the debtor sought to reject the third amendment to a real property lease that it sought to assume, arguing that it was severable from the lease and the prior two amendments because, among other things, it was for a different building. In rejecting the debtor's argument, the Bankruptcy Court for the District of Delaware found that (1) the third amendment explicitly stated that it amended and ratified the lease, (2) the obligations in the lease and the third amendment involved the same two parties and the same subject matter, and (3) the parties' obligations were mutually dependent and interrelated. In addition, the court found it significant that the parties had entered into a separate lease for space in another building, which demonstrated that they were capable of making a truly separate agreement. Based on these factors, the bankruptcy court held that the...