I recently wrote about executory contracts in New York bankruptcy in the context of private licenses, but one issue that debtors (and creditors) might have is recognizing when a contract is not executory but some other unusual category. Sometimes the confusion comes down to misunderstanding an at-will contract for an executory agreement, but there can be others.
In an at-will contract, usually employment or storage situations, the parties have the privilege of terminating their obligations at any time under any circumstance. The only caveat is that the terminating party must fulfill any remaining obligations it has to the non-performing party. For instance, an employer must pay any unpaid wages to an at-will employee it let go of to the extent the employee did the work.
Understandably, at-will contracts can be confused with executory contracts because performance occurs in small increments over time. However, an at-will contract doesn’t require the parties to continue performance the way a residential lease does. In the lease, the parties must fulfill their respective obligations until the term is up. In an at-will agreement, the parties can part company whenever they want, with only final payment or performance required.
The question to ask oneself when determining if an agreement is an executory contract is whether there are any post-petition obligations by any of the parties other than paying money. If the answer is yes, then the contract will be executory. If no, then it’s some other kind of agreement. Here are some examples of those according to the U.S. Attorneys’ Manual.
- Real estate brokerage commissions aren’t executory agreements, even if they’re conditioned on closing sales.
- Contracts requiring a party to convey patent rights aren’t executory.
- Promissory notes aren’t executory agreements.
- Agreements by the debtor to pay retrospective premiums aren’t executory.
- Substantially performed contracts aren’t executory. Substantial performance differs greatly from at-will agreements because the payment is withheld until the performance is complete. The only question is whether the performing party’s efforts were complete enough for the purposes of the agreement to trigger payment. If the party substantially completed its obligations, then there aren’t any post-petition obligations, so the contract isn’t executory.
- Contracts no longer in existence aren’t executory. This can include contracts that have been fulfilled or that were terminated before the petition was filed.
- Unilateral contracts aren’t executory because only one party is promising to perform. These are usually reward that the other party signals acceptance only by performing all the conditions stated in the reward offer.
The U.S. Attorneys’ Manual containing these and other examples is here.
Contracts can be fascinating for lawyers, tedious to others, and confusing to debtors. Understanding the ramifications of a particular contract in bankruptcy is a compelling reason to hire an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
