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

Recording of a 90-minute CLE video webinar with Q&A

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Conducted on Thursday, September 9, 2021

Recorded event now available

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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. We will give particular consideration to how recent U.S. Supreme Court authority on this question has affected leverage and negotiating positions. We will also consider how creative counsel structure and draft agreements to maximize leverage in the event of a future insolvency or bankruptcy by one of the parties to the contract.

Description

In Mission Prod. Holdings Inc. v. Tempnology L.L.C., 139 S. Ct. 1652 (2019), the U.S. Supreme Court held 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." Thus, Tempnology recognized that the contracting counterparty could 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. Although Tempnology involved the post-rejection use of a trademark, the case has a much broader application.

More and more counterparties are testing the parameters of Tempnology and seeking to maximize the rights of counterparties after rejection. The issue can be critical when the counterparty holds an option. Whether the option can be enforced may turn on whether the option has been exercised but not performed. One reading of Tempnology is that vested rights stay with the non-debtor.

The rationale of Tempnology has also become increasingly important in the context of the rejection of midstream contracts when oil and gas exploration and production companies have filed bankruptcy. Many of these midstream contracts convey to the counterparty certain real property rights, such as an easement or a dedication of oil and gas. Courts distinguish between the rejection of the contract that may contain a covenant running with the land and the effect of the rejection on the enforceability of the covenants.

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Outline

  1. Overview of statutory framework for contract rejection under Section 365(g)
  2. Tempnology decision and rationale
  3. Tempnology as applied in different types of agreements
    1. Options
    2. Oil & gas
    3. Debtor as licensee or grantee
    4. Debtor's post-rejection obligations
  4. Strategies for counterparties

Benefits

The panel will review these and other pivotal issues:

  • What types of vested rights and options do counterparties have?
  • How can counterparties improve their positions in bankruptcy using the Tempnology rationale?
  • Could the breaching party (the debtor) use "rejection as a breach" to enable the debtor to retain benefits without assuming contracts?
  • Does the analysis change if the debtor is the party that holds the vested right, or as in Tempnology, is the licensee and not the licensor?

Faculty

Young, Jonathan
Jonathan W. Young
Partner
Locke Lord

Mr. Young is Co-Chair of the Firm's Bankruptcy, Restructuring and Insolvency Practice Group. He regularly advises...  |  Read More

Rosenbloom, Chelsey
Chelsey R. List
Attorney
Locke Lord

Ms. Rosenbloom's practice focuses on corporate restructuring, insolvency, bankruptcy and related litigation...  |  Read More

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