Bankruptcy provisions in contracts are often included as a safeguard against potential financial instability of a contract counterparty. However, the enforceability of these provisions in bankruptcy is not guaranteed. Key issues include bankruptcy default provisions, anti-assignment provisions, and automatic stay waivers. Bankruptcy default provisions, which trigger contract termination upon insolvency or bankruptcy filing, are generally unenforceable under Section 365(e)(1) of the Bankruptcy Code. Anti-assignment provisions, which prevent the assignment of contracts without consent, are also typically unenforceable in bankruptcy, with exceptions for personal service contracts and certain intellectual property licenses.

Automatic stay waivers, which allow creditors to bypass the automatic stay imposed by Section 362 of the Bankruptcy Code, are rarely enforced. The automatic stay is designed to provide the debtor with a reprieve from creditor actions, making the enforcement of such waivers uncommon. Given these limitations, relying solely on bankruptcy provisions for protection is not advisable. Instead, parties should consider alternative measures such as obtaining third-party guarantees, perfecting liens, and requiring advance payments or deposits.

To effectively navigate the complexities of bankruptcy provisions in contracts, it is crucial to consult with experienced bankruptcy counsel. They can provide guidance on additional protective steps and ensure that your rights are fully safeguarded. Understanding the nuances of bankruptcy law and the enforceability of various contract provisions can help parties better prepare for potential financial challenges involving their contract counterparties. Read full article here.

Photo of David Fournier David Fournier

David represents various interests in complex bankruptcy proceedings in the District of Delaware and other jurisdictions. His clients include corporate debtors, secured and unsecured creditors, official creditors’ committees, foreign representatives, and others. David also has extensive experience as a mediator in bankruptcy litigation.

Photo of Evelyn Meltzer Evelyn Meltzer

Evelyn focuses her practice on corporate bankruptcy, insolvency, distressed M&A, and creditors’ rights. With more than 20 years of experience, Evelyn understands all facets of a problem or opportunity, strategically devising insightful, innovative, and practical solutions that protect and advance her clients’ interests.

Photo of Kenneth Listwak Kenneth Listwak

Ken has broad experience in bankruptcy and reorganization matters, including adversary proceedings and contested matters in complex bankruptcy cases, and advising and guiding clients through complex issues involving bankruptcy law and Delaware legal practice.

Photo of Tori Lynn Remington Tori Lynn Remington

Tori is an associate in the firm’s Finance and Financial Restructuring + Insolvency practice groups. She has been involved in complex chapter 11 proceedings and litigation matters, representing various parties in interest, including debtors-in-possession, DIP lenders, stalking horse purchasers, and creditors. Tori also…

Tori is an associate in the firm’s Finance and Financial Restructuring + Insolvency practice groups. She has been involved in complex chapter 11 proceedings and litigation matters, representing various parties in interest, including debtors-in-possession, DIP lenders, stalking horse purchasers, and creditors. Tori also has experience in the Court of Chancery representing assignees in Delaware ABCs.