Leases and Executory Contracts in Chapter 1

27 Pages Posted: 28 Oct 2015

See all articles by Kenneth Ayotte

Kenneth Ayotte

University of California, Berkeley - School of Law

Date Written: December 2015

Abstract

This article offers the first empirical analysis of the timing and disposition decisions large Chapter 11 debtors make with respect to their leases and other bilateral (“executory”) contracts in bankruptcy, with an emphasis on commercial real estate leases. Section 365, which governs these contracts, allows debtors to choose whether to keep (“assume”), abandon (“reject”), or transfer (“assign”) their contracts, with time limits provided by the Bankruptcy Code. The main goal of the article is to analyze a controversial change to the Code in 2005 (BAPCPA) that shortens the time to expiration of a debtor's option to reject, requiring tenant‐debtors to make decisions on their real estate leases within seven months unless a landlord grants an extension. I find that the seven‐month limit strongly accelerated real estate lease disposition decisions, suggesting that bankruptcy bargaining is far from a frictionless, Coasean world. Further, I find that BAPCPA is associated with a significantly lower probability of reorganization for the most lease‐intensive firms. I also test a simple theory of real options, and I find that debtors do not behave as the simple theory suggests. In particular, many executory contracts are assumed before expiration. I present suggestive evidence of implicit contracting motives: debtors often assume early in order to secure performance from their counterparties that cannot be guaranteed by the contract alone.

Suggested Citation

Ayotte, Kenneth, Leases and Executory Contracts in Chapter 1 (December 2015). Journal of Empirical Legal Studies, Vol. 12, Issue 4, pp. 637-663, 2015. Available at SSRN: https://ssrn.com/abstract=2681423 or http://dx.doi.org/10.1111/jels.12087

Kenneth Ayotte (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
225
PlumX Metrics