Executory Contract Rejection in Bankruptcy: Leveraging the Rights of Contract Counterparties

This CLE course will consider the rights, obligations, and negotiating posture of a contract counterparty following the rejection of that contract under Bankruptcy Code Section 365. The panel will also offer practical guidance for structuring and drafting agreements to maximize leverage in the event of a future insolvency or bankruptcy by one of the parties to the contract.

It is not always clear whether a contract is in fact executory for purposes of Section 365. Although the Countryman test predominates, it is not the only way to determine "executoriness." Settlement agreements and options can be particularly thorny. In re Svenhard's Swedish Bakery, 154 F.4th 1100 (9th Cir. 2025), expanded the definition of the statutory exclusion for "financial accommodations." Applying these tests may produce unexpected results.

It is now well-settled that the debtor's rejection of an executory contract under Bankruptcy Code Section 365 operates as a breach, not a termination, of the contract and that "all the rights that would ordinarily survive a contract breach ... remain in place." Mission Prod. Holdings Inc. v. Tempnology L.L.C., 139 S. Ct. 1652 (2019). The non-debtor contracting counterparty can decide whether to continue performing and maintain the vested property rights granted under that contract, or stop performing and give up or return to the debtor those vested property rights. How this plays out in IP-related contracts, options, oil and gas leases that convey real property rights, contracts involving restrictive covenants, and more is not always straightforward.

Listen as this experienced panel reviews how Section 365 operates when the non-debtor party has vested rights and strategies for maximizing them.