§ 107.2 — Executory Contracts

Revised: June 7, 2004

[1]

Debtors sometimes file Chapter 13 to rehabilitate and assume a favorable executory contract or to reject an unfavorable one. The reported decisions are not particularly receptive to plans intended solely to permit the debtor to escape performance of an unfavorable contract or to avoid a state court order for specific performance, finding this singular intent indicative of bad faith.1

[2]

The claims that arise from rejection of an executory contract become ordinary prepetition unsecured debts with no special rights against the debtor or the debtor’s assets.2 A Chapter 13 case filed to manage a large deficiency after repossession of a car is little different from a filing to manage the effects of rejection of an unfavorable lease of a car, of equipment or of a business location. The Code permits a Chapter 13 debtor to reject an unfavorable lease or executory contract by following the rules in § 365, and the debtor can deal with the resulting unsecured claim through the plan.3 The Code does not suggest that good faith in § 1325(a)(3) is an additional condition on the assumption or rejection of contracts by Chapter 13 debtors. In fact, a Chapter 13 debtor can assume or reject under §§ 1322(b)(7) and 365 in advance of confirmation—before § 1325(a)(3) is even in play.4

[3]

Having said all of that, there are limits to what Chapter 13 debtors can do to landlords and lessors in a good-faith Chapter 13 plan. You won’t find those limits in § 365, but you will find them in reported decisions like In re Day.5 In Day, within six years of receiving discharges in Chapter 7 cases, public housing tenants filed Chapter 13 cases “intended solely to avoid payment of rent to the [public housing authority] falling due after the debtors legitimately received discharges of prior rent obligations in their previous Chapter 7 cases.”6 This was just too much for the bankruptcy court. The court found that the proposed plans were “no more than disguised Chapter 7 liquidations” that would permit the debtors to remain public housing tenants for years on end without paying rent. The court held that the debtors could not satisfy the good-faith requirement without paying the rent in full:

[A]s a condition for allowing them to proceed to discharge rent obligations owed to the CHA again in these Chapter 13 cases, filed within the six-year period following their prior Chapter 7 discharge, we will require the Debtors to propose and perform according to Chapter 13 plans which will pay to the CHA all of the rent obligations falling due subsequent to their Chapter 7 discharges.7

 

1  See, e.g., Shell Oil Co. v. Waldron, 785 F.2d 936 (11th Cir. 1986); Chinichian v. Campolongo, 784 F.2d 1440 (9th Cir. 1986); In re Bruce, 80 B.R. 927 (Bankr. C.D. Ill. 1987); Setzer v. Hot Prod., Inc., 47 B.R. 340 (Bankr. E.D.N.Y. 1985); In re Meehan, 46 B.R. 96 (Bankr. E.D.N.Y. 1985), aff’d, 59 B.R. 380 (E.D.N.Y. 1986). See also In re Hawes, 73 B.R. 584 (Bankr. E.D. Wis. 1987) (Chapter 13 petition is a mere litigation tactic to defeat former employer’s state court injunctive action to enforce a contractual restrictive covenant.).

 

2  See 11 U.S.C. § 502(g).

 

3  See discussion of executory contracts beginning at § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts.

 

4  See § 56.1 [ Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts ] § 51.3  Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts. See also § 174.4 [ Lessor Can Accelerate Assumption or Rejection ] § 102.7  Lessor Can Accelerate Assumption or Rejection.

 

5  208 B.R. 358 (Bankr. E.D. Pa. 1997).

 

6  208 B.R. at 374.

 

7  208 B.R. at 375.