Executory Contracts in Bankruptcy

Executory contracts are contracts whose terms have not been completely fulfilled. If there are 2 parties to a contract, each has to fulfil his or her obligation otherwise there will be what we consider in law as a breach of contract. The contracts are listed on schedule 6G of bankruptcy filings.

They can range from a debtor owning monetary rights from licensing certain inventions/patents, to owing money to the other party such as a lease, and installment payments.

Contracts are contracts and one would think they should always be fulfilled. However, in bankruptcy, a debtor has the right to disavow the contract and render the contract virtually cancelled.

Here are some examples when such contracts are considered assets:

• When the value in the lease has increased over time and disavowing the lease would be a loss to the debtor or the bankruptcy estate. If for example, a debtor signed a lease in a commercially viable location for 10 years for $12,000 a year and now the lease is valued at $30,000 a year with 4 more years left on the lease, the bankruptcy trustee may sell the rights to the lease and gain some money to distribute to creditors. Of course a debtor may do so himself/herself but these are some possibilities
• Copyright Agreements – a licensor to a licensee such as a software specialist who invents a program and licenses the right to his software for a fee
• Timeshare contracts
• Lease of mineral rights, or basic mining rights holding value

Some examples when such contracts may be cancelled if debtor chooses to do so:

• Personal property leases that are burdensome such as poorly contracted car leases
• Insurance contracts
• Installment payments for equipment

The sole purpose of the listings on the schedule 6G is to notify the Court of the existence of such contracts. The debtor will have the right to retain or to reject the contracts as he or she wishes.