Dallas Bar Association
HEADNOTES Focus Bankruptcy & Commercial Law
July 2016 Volume 41 Number 7
DBA and AT&T Dedicate Habitat Home On Saturday June 11, a large group of DBA members, AT&T staff, and Habitat volunteers helped to celebrate 25 years of DBA service to the Dallas Area Habitat for Humanity. The DBA dedicated the first of two Habitat for Humanity homes.
This home was the DBA/AT&T home, which was fully funded by a generous donation from AT&T, through its Senior Executive Vice President and General Counsel David McAtee and the AT&T Legal Department. DBA Presi-
DBA President Jerry Alexander (left) and AT&T General Counsel David McAtee (right) presented the home to the Campos family.
Focus
dent Jerry Alexander and Mr. McAtee welcomed the homeowners—the Campos family of Jose and Fancisa and their children Danilo, Darwin, and Angelique to their new home. Thank you to all who donated, par-
ticipated, and volunteered to build! We appreciate all your hard work. The date for the second dedication is still to be determined. To participate in the project for next year, contact Ethan at ethan.minshull@wickphillips.com. HN
Thank you to Mr. McAtee and the AT&T Legal Department for their support and generous donation that fully funded the DBA/AT&T Habitat home.
Bankruptcy & Commercial Law
Ipso Facto Clauses in Executory Contracts BY JACOB SPARKS
An ipso facto clause—sometimes called a termination-on-bankruptcy provision—is a contractual or other provision conditioned on a debtor’s bankruptcy, insolvency, or financial condition, or the appointment of a custodian, that results in a loss of property rights or the elimination or limitation of obligations that existed prior to the triggering event or condition. More simply and narrowly stated for the scope of this article, an ipso facto clause is a contract or lease provision specifying that insolvency, a bankruptcy filing, or a similar event will terminate or modify the contract or lease. For example, a contract or lease might say, “this Agreement shall terminate, without notice upon the institution by or against either party of insolvency, receivership, or bankruptcy proceedings or any other proceedings for the settlement of either party’s debts.” Although many contracts contain ipso facto clauses, as a general rule, the Bankruptcy Code bars the enforcement of such clauses in executory contracts. Attorneys who do not practice bankruptcy law may be wondering what it means for a contract to be “executory.” An executory contract is one on which performance
remains due to some extent on both sides. Although the Bankruptcy Code does not define the term “executory contract,” the majority of courts have adopted the “Countryman definition” first articulated by Professor Vern Countryman in 1963. This definition provides that a contract is executory “if at the time of the bankruptcy filing, the failure of either party to complete performance would constitute a material breach of the contract, thereby excusing the performance of the other party.” Bankruptcy Code section 541(a) provides that “all legal or equitable interests of the debtor in property as of the commencement of the case” become property of a debtor’s bankruptcy estate, and section 365(e) invalidates ipso facto and other provisions that would otherwise prevent the estate from receiving the benefit of a lease or executory contract. Specifically, section 365(e) (1) provides that an executory contract or unexpired lease may not be terminated or modified after the commencement of a case because ofa provision in an executory contract, an unexpired lease, or in applicable law, conditioned on (1) the financial condition of the debtor, (2) the commencement of a case under the Code, or (3) the appointment of or taking possession of the debtor’s
property by a trustee under the Code or by a prebankruptcy custodian. Furthermore, Bankruptcy Code section 541(c)(1) provides that a debtor’s interest in property becomes bankruptcy estate property regardless of, any provision in an agreement, transfer instrument, or applicable nonbankruptcy law restricting the debtor’s transfer of the interest or conditioned on (1) the financial condition of the debtor, (2) the commencement of a case under the Code, or (3) the appointment of or taking possession of the debtor’s property by a trustee under the Code or by a prebankruptcy custodian. Section 541(c)(1) thus ensures that whatever property interests a debtor has at case commencement becomes bankruptcy estate property Additionally, Bankruptcy Code section 363(l) provides that a trustee (or a debtor proposing a plan of reorganization) may use, sell, or lease bankruptcy estate property, notwithstanding any provision in a contract, lease, or applicable law that forfeits, modifies, or terminates the debtor’s interest in such property that is conditioned on (1) the financial condition of the debtor, (2) the commencement of a case under the Code, or (3) the appointment of or taking possession of the debtor’s property by
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a trustee under the Code or by a prebankruptcy custodian. Section 363(l) thus protects the use of bankruptcy estate property once it is in the hands of the bankruptcy estate by invalidating any contractual or other provision that limits the use, sale, or lease of bankruptcy estate property based on the bankruptcy filing. Of course, there are exceptions to the general rule. Bankruptcy Code sections 365(e) (2)(A) and (B) provide two exceptions to Code section 365(e)(1)’s general invalidation of ipso facto clauses. The first exception in Code section 365(e)(2)(A) applies in situations when applicable nonbankruptcy law excuses a party from accepting performance from or rendering performance to the trustee or assignee, and the nondebtor party does not consent to the assumption or assignment. The second exception in section 365(e)(2) (B) applies to executory contracts to make a loan or extend other credit or financial accommodation, and to issue a security of the debtor. Case law on these exceptions is complex and outside the scope of this article, so interested parties should consult a bankruptcy attorney. HN Jacob Sparks is an attorney in the Dallas office of Spencer Fane LLP. He can be reached at jsparks@spencerfane.com.
The 2016 DBA Membership Directory is now available in print & online. Check out the directory and legal resource guide used by Dallas attorneys! To view the Online Directory and Legal Resource & Expert Witness Guide, go to www.dallasbar.org/pictorial and login. To request a copy of the new directory, contact pictorial@dallasbar.org.