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The ability to assume or reject executory contracts is one of the primary tools used by debtors in a Chapter 11 reorganization. Where a debtor has a contract with a third party that is “executory”—meaning that ongoing performance obligations remain for both the debtor and the contract counterparty on the date of the bankruptcy filing—the debtor can choose to either assume or reject the contract under 11 USC § 365.
If a debtor chooses to assume the contract, it must cure all defaults under the agreement, and the agreement will “ride through” the bankruptcy unaltered. If the debtor rejects an executory contract, the rejection is treated as a breach by the debtor, and the counterparty to the contract is left with a claim in the bankruptcy for rejection damages caused by the breach. Generally, the standard applied by bankruptcy courts to determine whether rejection of an executory contract should be approved is low. Unless there is bad faith, a bankruptcy court will typically defer to the debtor’s business judgment that rejection is in the best interest of the estate.