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

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.