Ipso Facto Clauses: Not Always Unenforceable in Bankruptcy

Description

Many contracts including leases, partnership agreements, lending agreements and other financial instruments contain “ipso facto” clauses which state that a bankruptcy filing or the debtor’s insolvency constitutes a default entitling the counterparty to terminate the agreement and exercise its remedies.

Pursuant to several sections of the Bankruptcy Code, ipso facto clauses are generally not enforceable in bankruptcy. The Code also provides that the invalidation of ipso facto clauses does not apply certain non-assignable contracts and other financing instruments for the benefit of the debtor.

However, courts are not uniform in approaching bankruptcy default clauses. Some find them wholly unenforceable and others decline to enforce only if they impede the debtor’s fresh start. The GGP and American Airlines bankruptcy cases provide guidance on circumstances in which the clause might be enforced.

Listen as our authoritative panel of bankruptcy practitioners discusses ipso facto clauses that fall squarely within the Bankruptcy Code’s invalidation of ipso facto clauses, the types of clauses that may not be expressly addressed in the Code, and the reasoning and analysis of recent court cases that have considered ipso facto clauses in a variety of contexts.