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Truthiness, Or the Shenanigans of Executoriness

posted by Jason Kilborn

For the first time in nearly two decades of wrestling with section 365 of the Bankruptcy Code, I feel like I really understand the practical problems with the notion of "executoriness," as well as a constructive way forward. This enlightenment arrived via a great new paper by Jay Westbrook and his former student, Kelsi Stayart (who passed the July bar and was admitted in November--yay!), entitled "The Abolition of Dysfunctional Contracts in Bankruptcy Reorganizations." This paper lays out with razor sharpness the problems that courts have encountered with using "executoriness" as a gateway to applying section 365 to important contracts like options, IP licenses, LLC operating agreements, and non-compete covenants. The ABI's Chapter 11 Reform Commission does not come out of this looking very good, at least in its appraisal of the case law on executory contracts. The only well-settled rule, as Westbrook and Stayart reveal, is that "executoriness functions only as a saboteur." The argument is persuasive, the analysis of the current (sad, chaotic, and frequently contradictory) state of affairs is lucid and entertaining, and the proposed solution (refocusing on state law and hard policy compromises) is compelling. This paper is a must-read for professors preparing to teach a class on section 365 in the coming weeks, as well as for the ABI Commission members, who seem to have really dropped the ball on this one.


Dysfunctional Analysis purports:
We understand the concern that might arise about the possible negative practical consequences of applying section 365 to contracts in which only the debtor owes a duty to pay money, but we stress there is no conceptual difficulty with doing so.
A declaration of “ride-through” means the debtor does not receive its discharge and fresh start because it is not relieved of its obligations under these “non-executory” contracts.

These are truly psychedelia and schizophrenic statements. I searched for the words “Constitution” and “363 sale” in the note and could not find them so I assume this note applies to bankruptcy in some other country.

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