Executory Contracts and Performance Decisions in Bankruptcy

79 Pages Posted: 8 Apr 1997

See all articles by Jesse M. Fried

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Abstract

This paper focuses on the treatment in bankruptcy of a debtor's executory contracts - contracts under which the debtor still owes (or is owed) performance at the time it files for bankruptcy. Under the bankruptcy laws of most countries, including the U.S., the bankruptcy trustee usually disposes of an executory contract in one of two ways: either by (1) assuming and seeking performance of the contract; or by (2) rejecting the contract, in which case any resulting damage claim is treated as a prebankruptcy unsecured claim and receives its ratable share of the assets available to pay unsecured claims. Since such unsecured claims are typically paid only a fraction of their face amount, a party injured by rejection usually receives less than full compensation. This approach is widely supported by U.S. bankruptcy commentators. The paper first explains how this ratable damages rule can give the bankruptcy trustee an incentive to reject contracts when performance would be efficient. It then shows that the manner in which the ratable damages rule is actually applied by U.S. courts tends to worsen the problem. The paper concludes by considering various arrangements for eliminating the distortion.

Keywords: executory contracts, bankruptcy, inefficient breach

JEL Classification: K12, G33

Suggested Citation

Fried, Jesse M., Executory Contracts and Performance Decisions in Bankruptcy. Duke Law Journal, Vol. 46, pp. 517-574, 1996. Available at SSRN: https://ssrn.com/abstract=10381 or http://dx.doi.org/10.2139/ssrn.10381

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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