Two Swords for Bankruptcy’s Gordian Knot: Making Sense of Section 365

by Ben­jamin S. Win­ter1

It some­times comes to pass that Con­gress’ small over­sight today becomes the courts’ big prob­lem tomor­row. So it is with sec­tion 365 of the Bank­rupt­cy Code.2 Much dis­agree­ment has arisen sur­round­ing the appli­ca­tion of this pro­vi­sion in Chap­ter 11 pro­ceed­ings. Unlike the liq­ui­da­tion pro­ce­dures of Chap­ter 7, Chap­ter 11 allows debtors to restruc­ture their oblig­a­tions while remain­ing in busi­ness and retain­ing the use and con­trol of assets involved in that busi­ness as the debtor in pos­ses­sion. The pur­pose of this process is to facil­i­tate the suc­cess­ful reor­ga­ni­za­tion of the debtor, which in turn works to pre­serve the jobs of the debtor’s employ­ees, pro­mote the pay­ment of cred­i­tors, and encour­age sta­bil­i­ty in the indus­try.3

The pow­er to assume execu­to­ry con­tracts is a sig­nif­i­cant tool in the hands of busi­ness­es seek­ing to reor­ga­nize. Execu­to­ry con­tracts are con­tracts for which each par­ty has a mate­r­i­al unper­formed oblig­a­tion outstanding—that is, they are con­tracts that have not been com­plete­ly ful­filled by either side.4 By assum­ing an execu­to­ry con­tract, a debtor in pos­ses­sion takes on its unful­filled pre­bank­rupt­cy oblig­a­tions under that con­tract and, in exchange, becomes enti­tled to receive the ben­e­fits of enforc­ing the con­tract against oth­ers. The debtor’s abil­i­ty to take on the ben­e­fits and oblig­a­tions of an execu­to­ry con­tract may be cru­cial to its chances of suc­cess­ful reor­ga­ni­za­tion, par­tic­u­lar­ly when the debtor relies on con­trac­tu­al agree­ments for the goods, ser­vices, or streams of rev­enue essen­tial to run­ning its busi­ness­es. For instance, a tech­nol­o­gy-ori­ent­ed firm may rely heav­i­ly on its con­tracts to pro­vide ongo­ing tech­no­log­i­cal ser­vices to oth­er busi­ness­es in exchange for ongo­ing pay­ments; an inabil­i­ty to assume these con­tracts could spell doom for the firm’s attempt­ed reorganization.

Despite the clear impor­tance to debtors of being able to assume execu­to­ry con­tracts, courts have been split over whether to allow the prac­tice. Most, but not all, cir­cuit courts to address the issue have con­clud­ed that the plain text of sec­tion 365 for­bids assump­tion.5 In con­trast, low­er courts have large­ly allowed assump­tion under sec­tion 365, empha­siz­ing that deny­ing a finan­cial­ly strained busi­ness the abil­i­ty to retain its con­tracts would frus­trate of the goals of Chap­ter 11.6

In this Con­tri­bu­tion, I con­tend that the cir­cuit courts for­bid­ding assump­tion have not focused on the prop­er aspect of sec­tion 365 and have thus over­looked cru­cial lan­guage in the statute which allows assump­tion. I fur­ther argue that the inter­ac­tion between sec­tions 365 and 1107 pro­vides an inde­pen­dent basis to per­mit debtors in pos­ses­sion to assume execu­to­ry con­tracts; while sec­tion 1107 man­dates that the sub­stan­tive rule of sec­tion 365 be applied to trustees and debtors in pos­ses­sion alike, the out­come of that rule may dif­fer when applied to two dif­fer­ent enti­ties. In light of the com­pelling leg­isla­tive his­to­ry and pol­i­cy con­sid­er­a­tions, either of these two veins of tex­tu­al analy­sis pro­vides suf­fi­cient jus­ti­fi­ca­tion for courts to con­clude that debtors in pos­ses­sion may assume execu­to­ry contracts.

I. Leg­isla­tive His­to­ry, Bank­rupt­cy Pol­i­cy, and the Com­pet­ing Inter­pre­ta­tions of Sec­tion 365

Sec­tion 365 begins by vest­ing in the trustee of the bank­rupt­cy estate—and, by exten­sion, in the debtor in pos­ses­sion as well—the pow­er to assume or reject the execu­to­ry con­tracts of the debtor.7 The Code goes on to qual­i­fy this pow­er, how­ev­er, stat­ing that:

The trustee may not assume or assign any execu­to­ry con­tract or unex­pired lease of the debtor, whether or not such con­tract or lease pro­hibits or restricts assign­ment of rights or del­e­ga­tion of duties, if—


(A) applic­a­ble law excus­es a par­ty, oth­er than the debtor, to such con­tract       or lease from accept­ing per­for­mance from or ren­der­ing per­for­mance to an    enti­ty oth­er than the debtor or the debtor in pos­ses­sion, whether or not such con­tract or lease pro­hibits or restricts assign­ment of rights or del­e­ga­tion of duties; and

(B) such par­ty does not con­sent to such assump­tion or assign­ment[.]8

Accord­ing to the rea­son­ing of mul­ti­ple cir­cuit courts, the lan­guage of sec­tion 365(c) estab­lish­es a “hypo­thet­i­cal test.”9 Under the hypo­thet­i­cal test, a debtor in pos­ses­sion may not assume an execu­to­ry con­tract over the counterparty’s objec­tion if applic­a­ble law would bar assign­ment to a hypo­thet­i­cal third par­ty, even where the debtor in pos­ses­sion has no inten­tion of actu­al­ly assign­ing the con­tract.10 Oth­er courts inter­pret sec­tion 365(c) as man­dat­ing what has become known as the “actu­al test,” under which the debtor in pos­ses­sion can freely assume con­tracts unless the reor­ga­ni­za­tion in ques­tion would result in the actu­al assign­ment of the con­tract.11

The leg­isla­tive his­to­ry of sec­tion 365(c) clear­ly sup­ports the use of the actu­al test. In 1984, Con­gress enact­ed the Bank­rupt­cy Amend­ments and Fed­er­al Judge­ship Act (“BAFJA”).12 Under the law extant in 1978, a trustee could not assume or assign when “applic­a­ble law excus­es a par­ty, oth­er than the debtor, to such con­tract or lease from accept­ing per­for­mance from or ren­der­ing per­for­mance to the trustee or an assignee of such con­tract or lease . . . .”13 The 1984 amend­ment replaced “the trustee” with the phrase “an enti­ty oth­er than the debtor or the debtor in pos­ses­sion.”14 

A com­mit­tee report per­tain­ing to the lan­guage enact­ed in 1984 states:15

This amend­ment makes it clear that the pro­hi­bi­tion against a trustee’s pow­er to assume an execu­to­ry con­tract does not apply where it is the debtor that is in pos­ses­sion and the per­for­mance to be giv­en or received under a per­son­al ser­vice con­tract will be the same as if no peti­tion had been filed because of the per­son­al ser­vice nature of the con­tract.16

This report con­sti­tutes an explic­it state­ment not only that debtors in pos­ses­sion should be treat­ed dif­fer­ent­ly from trustees under sec­tion 365, but that the restric­tions on the trustee’s pow­er to assume execu­to­ry con­tracts sim­ply do not apply to the debtor in pos­ses­sion. The leg­isla­tive his­to­ry thus unam­bigu­ous­ly sup­ports the view that sec­tion 365(c) should be inter­pret­ed to allow assump­tion by a debtor in pos­ses­sion.  

Argu­ments attempt­ing to neu­tral­ize this strong state­ment of con­gres­sion­al intent are unper­sua­sive. Cir­cuits adopt­ing the hypo­thet­i­cal test name three rea­sons for dis­count­ing the impor­tance of leg­isla­tive his­to­ry, name­ly, that it relates to a dif­fer­ent pro­posed bill, was four years old at the time of BAFJA’s pas­sage, and express­es the views of only one com­mit­tee in the House.17 The crit­i­cism that the House report was gen­er­at­ed from the une­n­act­ed Tech­ni­cal Amend­ments Act of 1980 is true enough, but seems marked­ly weak­ened by the fact that the exact same statu­to­ry lan­guage was incor­po­rat­ed into the enact­ed BAFJA.18 That the com­mit­tee report was four years old and orig­i­nat­ed in only one cham­ber of Con­gress does not suf­fice to over­come this com­plete­ly unam­bigu­ous con­gres­sion­al instruction. 

Pol­i­cy con­sid­er­a­tions also clear­ly favor the actu­al test. The hypo­thet­i­cal test pos­es a fun­da­men­tal threat to the suc­cess­ful reor­ga­ni­za­tion of debtors by allow­ing non­debtors to block assump­tion of con­tracts essen­tial to the debtor’s busi­ness, poten­tial­ly mere­ly because ful­fill­ing the con­tract is no longer advan­ta­geous for the non­debtor.19 Such a rule rais­es the specter of depriv­ing a strug­gling debtor of what may be its most valu­able asset, lead­ing in turn to liq­ui­da­tion of the debtor and the atten­dant loss of jobs and eco­nom­ic pro­duc­tiv­i­ty.20 Even some courts adopt­ing the hypo­thet­i­cal test have con­ced­ed that sound bank­rupt­cy pol­i­cy favors the oppo­site posi­tion.21

Dis­al­low­ing assump­tion of con­tracts would also inter­fere with oth­er parts of the statu­to­ry scheme of bank­rupt­cy. For instance, the Bank­rupt­cy Code dis­fa­vors con­trac­tu­al pro­vi­sions which mod­i­fy or ter­mi­nate a debtor’s con­trac­tu­al rights or prop­er­ty inter­ests mere­ly because a bank­rupt­cy peti­tion has been filed, and numer­ous statu­to­ry pro­vi­sions inval­i­date con­trac­tu­al claus­es pur­port­ing to do so.22 The hypo­thet­i­cal test short-cir­cuits this pol­i­cy by allow­ing non­debtors to effec­tive­ly ter­mi­nate their con­tracts mere­ly because a bank­rupt­cy case has been opened, thus ren­der­ing the Bank­rupt­cy Code in con­flict with itself and fur­ther frus­trat­ing its pur­pos­es. 

Despite these clear indi­ca­tions of pol­i­cy and leg­isla­tive his­to­ry, courts adopt­ing the hypo­thet­i­cal test are cor­rect that poli­cies and com­mit­tee reports not enact­ed into law can­not over­come clear statu­to­ry lan­guage to the con­trary.23 These courts err, how­ev­er, in con­clud­ing that the statute is unam­bigu­ous. The text of sec­tion 365 and its inter­ac­tion with sec­tion 1107 each inde­pen­dent­ly pro­vide ade­quate grounds to con­strue the Code as cre­at­ing an actu­al test.

II. The Text of Sec­tion 365(c)

Courts hold­ing that the plain mean­ing of sec­tion 365(c) requires a hypo­thet­i­cal test appear to focus exten­sive­ly on whether the provision’s dis­junc­tive lan­guage stat­ing that the “trustee may not assume or assign” can be read in the con­junc­tive as “may not assume and assign.”24 Some courts adopt­ing the actu­al test have agreed that their posi­tion is in ten­sion with the statute’s plain lan­guage,25 while oth­ers have avoid­ed grap­pling with the issue in depth,26 and still oth­ers have assert­ed that the test is sup­port­ed by oth­er aspects of the text of sec­tion 365(c).27

Courts adopt­ing the actu­al test have the bet­ter argu­ment under the text of sec­tion 365.28 While courts dis­al­low­ing assump­tion of con­tracts are cor­rect that “or” can­not plau­si­bly be read as “and,” this is not the piv­otal lan­guage with­in the statute. Instead, it is the section’s phrase “[t]he trustee may not assume or assign . . . if . . . applic­a­ble law excus­es a par­ty” which pro­vides mul­ti­ple lines of evi­dence that sec­tion 365(c) is best inter­pret­ed as requir­ing an actu­al test. First, while courts approv­ing the hypo­thet­i­cal test have tak­en the phrase “applic­a­ble law” to mean any non­bank­rupt­cy law which could pos­si­bly be applic­a­ble, in actu­al­i­ty “the phrase ‘applic­a­ble law’ is com­mon­ly used to refer to the law applic­a­ble to the facts of the case at hand rather than some law that may be applic­a­ble to anoth­er set of cir­cum­stances.”29 In oth­er words, a law against assign­ment is not applic­a­ble unless it is actu­al­ly being called into oper­a­tion to pre­vent an attempt­ed assign­ment. Since no non­bank­rupt­cy law is offend­ed by the deci­sion of the debtor in pos­ses­sion to retain the con­tract into which it orig­i­nal­ly entered, there sim­ply is no applic­a­ble law for­bid­ding assump­tion by the debtor in possession.

Sec­ond, caselaw sup­ports this read­ing. Notably, the only cir­cuit court to specif­i­cal­ly exam­ine the section’s “applic­a­ble law” lan­guage came to the con­clu­sion that it cre­at­ed an actu­al test.30 Inter­pret­ing 11 U.S.C. § 365(e)(2), which con­tains lan­guage high­ly sim­i­lar to sec­tion 365(c) and uses the same “applic­a­ble law excus­es a par­ty” con­struc­tion, the Fifth Cir­cuit con­clud­ed that the plain text of the statute required an actu­al test.31

Third, the choice of verb in “applic­a­ble law excus­es a par­ty” points toward the actu­al test.32 Con­gress placed the verb in the indica­tive (“law excus­es”) rather than the con­di­tion­al mood (“law would excuse”), sug­gest­ing that the law must be called into actu­al oper­a­tion to excuse the non­debtor from an attempt­ed assign­ment. More­over, to “excuse” is defined as “[t]o relieve from lia­bil­i­ty; to relieve from a duty or oblig­a­tion.”33 The word “excuse” thus implies that there already exists some actu­al duty or oblig­a­tion to which the excuse applies. As an exam­ple, a per­son is excused from jury ser­vice only after actu­al­ly being sum­moned. Had Con­gress intend­ed to refer to “any poten­tial­ly applic­a­ble law which could excuse,” it could have used such lan­guage. Thus, under the text of sec­tion 365(c), debtors in pos­ses­sion are prop­er­ly allowed to assume execu­to­ry con­tracts, pro­vid­ed that they make no attempt to assign them.34

III. The Inter­ac­tion Between Sec­tions 365(c) and 1107

Though less explored than the text of sec­tion 365(c) itself, sec­tion 1107 con­sti­tutes an addi­tion­al area of dis­agree­ment for courts address­ing the ques­tion of assump­tion of execu­to­ry con­tracts in the con­text of bank­rupt­cy pro­ceed­ings. Sec­tion 365(c) applies, under its own terms, to trustees, not debtors in pos­ses­sion.35 And the trustee is an entire­ly dif­fer­ent enti­ty from the debtor in pos­ses­sion as a mat­ter of both fact and law.36 The con­nec­tion between the two is to be found in sec­tion 1107, which grants the debtor in pos­ses­sion the pow­ers of the trustee, “[s]ubject to any lim­i­ta­tions on a trustee.”37 Because of this lan­guage, many courts have assumed, with­out dis­cus­sion, that the word “trustee” is inter­change­able with “debtor in pos­ses­sion” in the Bank­rupt­cy Code.38 This for­mal­is­tic game of sub­sti­tu­tion is unnec­es­sary and hin­ders the exe­cu­tion of the Code’s purposes.

The supe­ri­or posi­tion, as artic­u­lat­ed in cas­es such as In re Foot­star, Inc., rec­og­nizes that sec­tion 1107 oper­ates not by sub­sti­tut­ing the phrase “debtor in pos­ses­sion” for “trustee” in var­i­ous parts of the Code, but by incor­po­rat­ing the sub­stan­tive lim­i­ta­tions on the trustee against the debtor in pos­ses­sion.39 Under this view, the sub­stan­tive lim­i­ta­tion of sec­tion 365(c) upon the trustee is a bar against assump­tion or assign­ment where doing so would force the non­debtor to do busi­ness with a par­ty with which it did not choose to bar­gain.40 Thus, while trustees are not per­mit­ted to assume execu­to­ry con­tracts because doing so would force the non­debtor to deal with a new par­ty, assump­tion by debtors in pos­ses­sion pos­es no such prob­lem and is allow­able.41

This under­stand­ing of sec­tion 1107 does not nul­li­fy sec­tion 365(c) as to the debtor in pos­ses­sion. That the debtor in possession’s pow­er to assume execu­to­ry con­tracts is in some way qual­i­fied by sec­tion 365(c) is beyond ques­tion. Sec­tion 1107 does not, how­ev­er, man­date that the lim­i­ta­tions upon the trustee be applied to the debtor in pos­ses­sion through a rote game of word sub­sti­tu­tion. Rather, the statute requires only that the pow­ers of the debtor in pos­ses­sion be “[s]ubject to any lim­i­ta­tions on a trustee.”42 Giv­en that the statute does not define the term “lim­i­ta­tions,” courts have rea­son­ably con­strued 1107 to require that the sub­stance of the lim­i­ta­tions on the trustee be applied to the debtor in pos­ses­sion.43

Prece­dent from numer­ous courts con­firms that sec­tion 1107 lim­its the pow­er of the debtor in pos­ses­sion by apply­ing func­tion­al, sub­stan­tive rules rather than by rigid­ly sub­sti­tut­ing “debtor in pos­ses­sion” for “trustee” in the lan­guage of the statute. A series of cas­es in cir­cuit courts con­sid­ered the abil­i­ty of a debtor in pos­ses­sion to bring suit to avoid imper­mis­si­ble pref­er­ence pay­ments;44 such actions are sub­ject to a statute of lim­i­ta­tions under 11 U.S.C. § 546(a).45 The ver­sion of sec­tion 546(a) then in place stat­ed that an “action or pro­ceed­ing under [spec­i­fied sec­tions] may not be com­menced after the ear­li­er of (1) two years after the appoint­ment of a trustee under [spec­i­fied sec­tions]; or (2) the time the case is closed or dis­missed.”46 As with sec­tion 365, the por­tions of the Bank­rupt­cy Code deal­ing with pref­er­ence-avoid­ance actions were writ­ten in terms of the trustee, mean­ing that the debtor in possession’s autho­riza­tion to bring such actions and the lim­i­ta­tions on that pow­er depend­ed upon sec­tion 1107.

Lit­i­gants seek­ing to evade the statute of lim­i­ta­tions argued that sec­tion 1107 func­tions by sub­sti­tut­ing the term “debtor in pos­ses­sion” for “trustee,” mean­ing that the statute would set the statute of lim­i­ta­tions with ref­er­ence to the “appoint­ment of a debtor in pos­ses­sion.”47 Accord­ing to this line of argu­ment, a debtor in pos­ses­sion is not appoint­ed, but rather comes into being at the fil­ing of the bank­rupt­cy peti­tion, lead­ing to the con­clu­sion that the statute of lim­i­ta­tions does not apply where the case is still open and no trustee has been appoint­ed.48

Not a sin­gle court of appeals accept­ed this inflex­i­ble mode of rea­son­ing. Most cir­cuit courts ruled that the statute of lim­i­ta­tions did apply to the debtor in pos­ses­sion, rea­son­ing that focus­ing on the appoint­ment or non-appoint­ment of a debtor in pos­ses­sion was undu­ly lit­er­al and ignored that sec­tion 1107 “giv[es] a [debtor in pos­ses­sion] pow­ers par­al­lel­ing those of a trustee.”49 As these courts’ deci­sions indi­cate, the order­ly admin­is­tra­tion of the bank­rupt­cy sys­tem is best served when the pow­ers of the debtor in pos­ses­sion are deter­mined not by for­mal­is­tic, rigid exer­cis­es in word sub­sti­tu­tion, but by the prag­mat­ic rela­tion­ship of func­tion­al equiv­a­lence between the debtor in pos­ses­sion and trustee.50

In these cas­es, courts rec­og­nized the sub­stan­tive rule of sec­tion 546(a)—namely, that once an enti­ty was empow­ered to bring an avoid­ance action, it had two years to do so—and applied that rule to the debtor in pos­ses­sion by allow­ing avoid­ance actions until two years after the debtor in pos­ses­sion came into being. These rul­ings sup­port the con­clu­sion that when sec­tion 1107 makes lim­i­ta­tions on the pow­ers of trustees applic­a­ble against debtors in pos­ses­sion, it is the sub­stance of these lim­i­ta­tions that should be applied.51 Courts ana­lyz­ing sec­tion 365(c) should like­wise see through to the sub­stan­tive lim­i­ta­tion of the statute, which is ulti­mate­ly a rule for­bid­ding assump­tion or assign­ment when doing so would force a con­tract­ing par­ty to do busi­ness with a stranger against its will. Since assump­tion by the debtor in pos­ses­sion does not vio­late this sub­stan­tive rule, such assump­tion is not for­bid­den by 365(c) under the prop­er inter­pre­ta­tion of sec­tion 1107. 


Courts need not ignore the statute’s plain text to read sec­tion 365(c) in accor­dance with leg­isla­tive his­to­ry and sound bank­rupt­cy pol­i­cy. Because the phrase “applic­a­ble law” refers only to law which is being called into actu­al oper­a­tion by a man­i­fest attempt to force the non­debtor to do busi­ness with a new par­ty, assump­tion by the debtor in pos­ses­sion does not offend 365(c) and is per­mis­si­ble. Even if this were not the case, the sub­stan­tive lim­i­ta­tion of sec­tion 365(c) is that par­ties may not assume or assign con­tracts where doing so would forcibly change the par­ties to a con­tract, and it is this sub­stan­tive rule which is incor­po­rat­ed against the debtor in pos­ses­sion by sec­tion 1107. Giv­en these tex­tu­al bases for doing so, as well as the com­pelling leg­isla­tive his­to­ry and pol­i­cy con­sid­er­a­tions, courts inter­pret­ing 11 U.S.C. § 365(c) should find that the statute per­mits assump­tion of execu­to­ry con­tracts by debtors in possession.


1. Ben­jamin Win­ter is a J.D. Can­di­date (2021) at New York Uni­ver­si­ty School of Law. This piece arose from the prob­lem pre­sent­ed at the 2020 Duber­stein Bank­rupt­cy Moot Court Com­pe­ti­tion at St. John’s Uni­ver­si­ty School of Law. The ques­tion pre­sent­ed asked whether sec­tion 365 per­mits a debtor in pos­ses­sion to assume an execu­to­ry con­tract over the objec­tion of the non­debtor par­ty where applic­a­ble law excus­es the non­debtor from accept­ing per­for­mance from or ren­der­ing per­for­mance to an enti­ty oth­er than the debtor or debtor in pos­ses­sion. This Con­tri­bu­tion presents a refine­ment of the argu­ments made by the author on behalf of the debtor in possession.

2. See Daniel J. Bus­sel, Textualism’s Fail­ures: A Study of Over­ruled Bank­rupt­cy Deci­sions, 53 Vand. L. Rev. 887, 915 (2000) (char­ac­ter­iz­ing sec­tion 365(c) as sub­ject to “botched, incom­plete, and tardy amend­ments” and stat­ing that the “sto­ry of § 365(c)(1)(A) reads like the plot of The Marx Broth­ers Amend The Bank­rupt­cy Code”).

3. See NLRB v. Bild­is­co & Bild­is­co, 465 U.S. 513, 527 (1984) (“[T]he pol­i­cy of Chap­ter 11 is to per­mit suc­cess­ful reha­bil­i­ta­tion of debtors . . . .”). 

4. This is the so-called Coun­try­man test for execu­tori­ness. See, e.g., RCI Tech. Corp. v. Sun­ter­ra Corp. (In re Sun­ter­ra Corp.), 361 F.3d 257, 264 (4th Cir. 2004). This test was pro­mul­gat­ed by Har­vard Law School Pro­fes­sor Vern Coun­try­man. Cohen v. Drex­el Burn­ham Lam­bert Grp. (In re Drex­el Burn­ham Lam­bert Grp.), 138 B.R. 687, 696–97 (Bankr. S.D.N.Y. 1992). Under this test, which has been adopt­ed quite wide­ly by courts, a con­tract is execu­to­ry if the oblig­a­tions of both sides are “so far unper­formed that the fail­ure of either [par­ty] to com­plete per­for­mance would con­sti­tute a mate­r­i­al breach excus­ing the per­for­mance of the oth­er.” Id. at 697. But see id. at 708 (reject­ing Coun­try­man test). 

5. For cir­cuits hold­ing that sec­tion 365 does not allow assump­tion, see Sun­ter­ra Corp., 361 F.3d at 271; In re West Elecs., Inc., 852 F.2d 79, 83 (3d Cir. 1988); City of Jamestown v. James Cable Part­ners (In re James Cable Part­ners), 27 F.3d 534, 538 & n.8 (11th Cir. 1994) (per curi­am); Perl­man v. Cat­a­pult Ent. (In re Cat­a­pult Ent.), 165 F.3d 747, 750 (9th Cir. 1999). But see Insti­tut Pas­teur v. Cam­bridge Biotech Corp., 104 F.3d 489, 493 (1st Cir. 1997) (hold­ing sec­tion 365 allows assumption). 

6. In re Foot­star, Inc., 323 B.R. 566, 569 & n.2 (Bankr. S.D.N.Y. 2005) (not­ing that the “great major­i­ty” of low­er courts have allowed assump­tion and col­lect­ing cases).

7. 11 U.S.C. § 365(a).

8. Id. § 365(c).

9. See, e.g., Cat­a­pult Ent., 165 F.3d at 750. The hypo­thet­i­cal test has also been called the “lit­er­al test” by some courts. See Sun­ter­ra Corp., 361 F.3d at 262. 

10. Applic­a­ble law refers to applic­a­ble non­bank­rupt­cy law. Sun­ter­ra Corp., 361 F.3d at 261 n.5.

11. Cat­a­pult Ent., 165 F.3d at 751.

12. In re Car­di­nal Indus., Inc., 116 B.R. 964, 978 (Bankr. S.D. Ohio 1990).

13. Sum­mit Inv. & Dev. Corp. v. Ler­oux, 69 F.3d 608, 613 (1st Cir. 1995).

14. Car­di­nal Indus., 116 B.R. at 979. This amend­ment ren­dered the lan­guage “or an assignee of such con­tract or lease” super­flu­ous, and this phrase was sub­se­quent­ly struck by an amend­ment in 1986. In re Foot­star, Inc., 323 B.R. 566, 574 n.5 (Bankr. S.D.N.Y. 2005).

15. Because BAFJA was hasti­ly passed to respond to a deci­sion of the Supreme Court, “there is no author­i­ta­tive leg­isla­tive his­to­ry for BAFJA as enact­ed in 1984.” Car­di­nal Indus., 116 B.R. at 978. How­ev­er, the lan­guage in BAFJA amend­ing the Bank­rupt­cy Code was actu­al­ly tak­en ver­ba­tim from the Tech­ni­cal Amend­ments Act of 1980, which had been lan­guish­ing in Con­gress for years due to insuf­fi­cient impe­tus for its pas­sage. Id. at 978–79. The por­tion of the com­mit­tee report repro­duced above relat­ed to the Tech­ni­cal Amend­ments Act.

16. H.R. Rep. No. 96–1195, at 12 (1980) (empha­sis added). The ref­er­ence to per­son­al ser­vice con­tracts with­in this leg­isla­tive his­to­ry may stem from the view, espoused by a minor­i­ty of courts and dat­ing to around the time of the cre­ation of the cit­ed com­mit­tee report, that sec­tion 365(c) applies only to per­son­al ser­vice con­tracts. See In re Roost­er, Inc., 100 B.R. 228, 232 n.6 (Bankr. E.D. Pa. 1989) (ref­er­enc­ing cas­es apply­ing the minor­i­ty position).

17. E.g., Perl­man v. Cat­a­pult Ent. (In re Cat­a­pult Ent.), 165 F.3d 747, 754 (9th Cir. 1999); RCI Tech. Corp. v. Sun­ter­ra Corp. (In re Sun­ter­ra Corp.), 361 F.3d 257, 270 (4th Cir. 2004).

18. Car­di­nal Indus., 116 B.R. at 979.

19. See In re GP Express Air­lines, 200 B.R. 222, 232 (Bankr. D. Neb. 1996) (“[B]ankruptcy reor­ga­ni­za­tions will be defeat­ed when debtors in pos­ses­sion can­not suc­ceed to their pre-bank­rupt­cy contracts.”).

20. See Car­di­nal Indus., 116 B.R. at 981 (con­sid­er­ing this threat).

21. See, e.g., Cat­a­pult Ent., 165 F.3d at 754 (“[T]hat the plain lan­guage of § 365(c)(1) may be bad pol­i­cy does not jus­ti­fy a judi­cial rewrite.”); Sun­ter­ra Corp., 361 F.3d at 268 (assert­ing that even if pol­i­cy out­come were “quite unrea­son­able,” the result was not “so gross­ly incon­sis­tent with bank­rupt­cy pol­i­cy as to be absurd”).

22. GP Express Air­lines, 200 B.R. at 232 (cit­ing 11 U.S.C. §§ 363(l), 365(e), 541(c) as examples). 

23. These courts are legal­ly cor­rect. See, e.g., Davis v. Mich. Dep’t of the Trea­sury, 489 U.S. 803, 808 n.3 (1989) (“Leg­isla­tive his­to­ry is irrel­e­vant to the inter­pre­ta­tion of an unam­bigu­ous statute.”); Hart­ford Under­writ­ers Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 1314 (2000) (“It suf­fices that the nat­ur­al read­ing of the text pro­duces the result we announce. Achiev­ing a bet­ter pol­i­cy out­come … is a task for Con­gress, not the courts.”). They are also cor­rect as a nor­ma­tive mat­ter. Allow­ing une­n­act­ed leg­isla­tive his­to­ry or judi­cial assess­ments of pol­i­cy to over­come an unam­bigu­ous statute foments legal insta­bil­i­ty, impedes pre­dictabil­i­ty, and cor­rupts demo­c­ra­t­ic legit­i­ma­cy and accountability.

24. E.g., Cat­a­pult Ent., 165 F.3d at 754 (“The actu­al test effec­tive­ly engrafts a nar­row excep­tion onto § 365(c)(1) for debtors in pos­ses­sion, pro­vid­ing that, as to them, the statute only pro­hibits assump­tion and assign­ment, as opposed to assump­tion or assign­ment.”); Sun­ter­ra Corp., 361 F.3d at 260 (“[W]e must resolve the issue of whether the dis­junc­tive term ‘or’ . . . should be con­strued in the con­junc­tive as ‘and.’”).

25. The court in In re Fas­trax, Inc., 129 B.R. 274, 277 (Bankr. M.D. Fla. 1991), held that “even though § 365(c) speaks in the dis­junc­tive and pro­vides that a debtor may not assume or assign an unex­pired execu­to­ry con­tract with­out con­sent, a sen­si­ble con­struc­tion of this sec­tion,” in light of the leg­isla­tive his­to­ry, per­mits only the con­clu­sion that debtors in pos­ses­sion may assume such contracts.

26. Inter­pret­ing lan­guage in sec­tion 365(e) near­ly iden­ti­cal to that in 365(c), the First Cir­cuit assert­ed, with­out elab­o­ra­tion, that “it is at least as plau­si­ble to con­strue these pro­vi­sions as requir­ing an actu­al show­ing” of an intend­ed assign­ment. Sum­mit Inv. & Dev. Corp. v. Ler­oux, 69 F.3d 608, 612 (1st Cir. 1995). The cir­cuit lat­er explic­it­ly extend­ed its rea­son­ing to sec­tion 365(c), again with­out explain­ing its tex­tu­al basis in great detail. Insti­tut Pas­teur v. Cam­bridge Biotech Corp., 104 F.3d 489, 493 (1st Cir. 1997) (“[S]ubsections 365(c) and (e) con­tem­plate a case-by-case inquiry into whether the non­debtor par­ty . . . actu­al­ly was being ‘forced to accept per­for­mance under its execu­to­ry con­tract from some­one oth­er than the debtor par­ty with whom it orig­i­nal­ly con­tract­ed.’” (quot­ing Ler­oux, 69 F.3d at 612)).

27. One bank­rupt­cy court premised its adop­tion of the actu­al test on the phrase, “applic­a­ble law,” which it assert­ed referred to actu­al­ly applic­a­ble law—the actu­al test—rather than law that could, in oth­er fac­tu­al cir­cum­stances, be applicable—the hypo­thet­i­cal test. Tex­a­co, Inc. v. La. Land & Expl. Co., 136 B.R. 658, 671 (Bankr. M.D. La. 1992). As will be explained, this is the view which will ulti­mate­ly be endorsed by this Contribution. 

28. Because of the com­pelling leg­isla­tive his­to­ry and bank­rupt­cy pol­i­cy, the actu­al test should be employed unless the statute’s text unam­bigu­ous­ly fore­clos­es such an approach. Thus, even if the argu­ments advanced here did not estab­lish that the actu­al test is the best tex­tu­al inter­pre­ta­tion, they cer­tain­ly cre­ate suf­fi­cient ambi­gu­i­ty for the use of that test to be justified.

29. Tex­a­co, 136 B.R. at 671.

30. Bon­neville Pow­er Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 249 (5th Cir. 2006).

31. Id. at 24950. While the court cau­tioned that the lan­guage of sec­tion 365(c) is dif­fer­ent and could lead to a dif­fer­ent result, the lan­guage actu­al­ly relied upon in the tex­tu­al inter­pre­ta­tion is iden­ti­cal between the two sec­tions. Id. at 250 (“Con­gress might have cho­sen the excep­tion to apply if any law pro­hib­it­ed the assign­ment, but instead Con­gress teth­ered the excep­tion to ‘applic­a­ble’ law that ‘excus­es a par­ty.’”). The court went so far as to say that a lit­i­gant sug­gest­ing that the “applic­a­ble law excus­es a par­ty” phrase points toward the hypo­thet­i­cal test was “creat[ing] smoke and erect[ing] mir­rors.” Id.

32. 11 U.S.C. § 365(c)(1)(A) (empha­sis added). 

33. Excuse, Ballentine’s Law Dic­tio­nary (3d ed. 1969).

34. An alter­na­tive read­ing of sec­tion 365(c) was offered by then-Cir­cuit Judge Brey­er in In re Pio­neer Ford Sales, Inc., 729 F.2d 27 (1st Cir. 1984). Breyer’s read­ing aris­es from poten­tial con­flicts between sub­sec­tions (c) and (f) of sec­tion 365. Sub­sec­tion (f) pro­vides in per­ti­nent part:

Except as pro­vid­ed in sub­sec­tions (b) and (c) of this sec­tion, notwith­stand­ing a pro­vi­sion in an execu­to­ry con­tract or unex­pired lease of the debtor, or in applic­a­ble law, that pro­hibits, restricts, or con­di­tions the assign­ment of such con­tract or lease, the trustee may assign such con­tract or lease under para­graph (2) of this subsection.

11 U.S.C. § 365(f)(1). This cre­ates an appar­ent con­flict, because the por­tion of sub­sec­tion (f) mak­ing con­tracts assign­a­ble is effec­tive­ly nul­li­fied and ren­dered sur­plusage by sub­sec­tion (c). And though lit­i­gants have argued that this con­flict indi­cates that the hypo­thet­i­cal test should be reject­ed in favor of the actu­al test, see RCI Tech. Corp. v. Sun­ter­ra Corp. (In re Sun­ter­ra Corp.), 361 F.3d 257, 265–66 (4th Cir. 2004), it must be con­ced­ed that the actu­al test does not tru­ly resolve this con­flict. Even if debtors in pos­ses­sion are per­mit­ted to assume under the actu­al test, the pro­vi­sion of (f) mak­ing con­tracts assign­a­ble is still ren­dered inop­er­a­tive by sub­sec­tion (c). Breyer’s approach, how­ev­er, does resolve the con­flict by focus­ing on the por­tion of 365(c) read­ing “[t]he trustee may not assume or assign any execu­to­ry con­tract . . . if . . . applic­a­ble law excus­es a par­ty . . . whether or not such con­tract or lease pro­hibits or restricts assign­ment . . . .” 11 U.S.C. § 365(c) (empha­sis added). In Breyer’s view, this lan­guage oper­ates to “pre­vent the trustee from assign­ing (over objec­tion) con­tracts of the sort that con­tract law ordi­nar­i­ly makes nonas­sign­a­ble, i.e. con­tracts that can­not be assigned when the con­tract itself is silent about assign­ment.” Pio­neer Ford, 729 F.2d at 28. This view is sup­port­able from a pol­i­cy per­spec­tive in that it pro­tects default rules of assign­a­bil­i­ty, which are gen­er­al­ly based on leg­isla­tive pol­i­cy judg­ments of what types of con­tracts are ren­dered prob­lem­at­ic by being made assign­a­ble. Under this con­struc­tion, sub­sec­tions (c) and (f) would work togeth­er to enforce the default rule against assign­a­bil­i­ty of, for instance, per­son­al ser­vice con­tracts, while over­rid­ing con­trac­tu­al pro­vi­sions against assign­ment of less prob­lem­at­i­cal­ly trans­ferred agree­ments, such as those for the mere pay­ment of mon­ey. Breyer’s inter­pre­ta­tion in Pio­neer Ford, though lack­ing in sup­port from leg­isla­tive his­to­ry, is both ele­gant and tex­tu­al­ly plau­si­ble. How­ev­er, the Pio­neer Ford deci­sion dealt with an actu­al attempt­ed assign­ment, and thus does not address the issue of assump­tion by the debtor in pos­ses­sion. Id. Because the tex­tu­al basis for Breyer’s approach does not seem inher­ent­ly incom­pat­i­ble with the tex­tu­al bases for the actu­al test advanced in this arti­cle, it may well be that the two can be com­bined, cre­at­ing a sit­u­a­tion in which debtors in pos­ses­sion may always assume with­out assign­ment, and both trustees and debtors in pos­ses­sion may assume and assign pro­vid­ed that assign­ment is not for­bid­den by a law mak­ing the con­tract manda­to­ri­ly nonas­sign­a­ble or nonas­sign­a­ble by default. This com­bi­na­tion would pro­tect debtors in pos­ses­sion by allow­ing them to retain their essen­tial con­tracts, aid the reor­ga­ni­za­tion process by mak­ing at least some con­tracts assign­a­ble, and pro­tect non­debtors hold­ing con­tracts which the law deems too sen­si­tive to allow assign­ment with­out an explic­it con­trac­tu­al pro­vi­sion for such. Indeed, this under­stand­ing of sec­tion 365 appears to be the cur­rent law of the First Cir­cuit, which adopt­ed both Breyer’s approach in Pio­neer Ford, id. at 28–29, and the actu­al test in Insti­tut Pas­teur v. Cam­bridge Biotech Corp., 104 F.3d 489, 493 (1st Cir. 1997). Though a full exam­i­na­tion of the inter­ac­tion between Pio­neer Ford and the actu­al test is beyond the scope of this Con­tri­bu­tion, the author sug­gests this top­ic as a poten­tial area for future scholarship. 

35. 11 U.S.C. § 365(c) (“The trustee may not assume or assign . . . .” (empha­sis added)).

36. See In re Foot­star, Inc., 323 B.R. 566, 571 (Bankr. S.D.N.Y. 2005) (“[N]o pro­vi­sion of the Bank­rupt­cy Code states in words or sub­stance that ref­er­ences in the Code to ‘trustee’ are to be con­strued to mean ‘debtor’ or ‘debtor in possession.’”).

37. 11 U.S.C. § 1107(a). The full text of 1107(a) reads as follows:

Sub­ject to any lim­i­ta­tions on a trustee serv­ing in a case under this chap­ter, and to such lim­i­ta­tions or con­di­tions as the court pre­scribes, a debtor in pos­ses­sion shall have all the rights, oth­er than the right to com­pen­sa­tion under sec­tion 330 of this title, and pow­ers, and shall per­form all the func­tions and duties, except the duties spec­i­fied in sec­tions 1106(a) (2), (3), and (4) of this title, of a trustee serv­ing in a case under this chapter.


38. See In re West Elecs., Inc., 852 F.2d 79, 82 (3d Cir. 1988) (“The trustee [which includes the debtor in pos­ses­sion] may not assume . . . any execu­to­ry con­tract . . . .” (alter­ation in orig­i­nal) (foot­note omit­ted) (quot­ing 11 U.S.C. § 365(c))); City of Jamestown v. James Cable Part­ners (In re James Cable Part­ners), 27 F.3d 534, 537 (11th Cir. 1994) (per curi­am) (“The trustee [read debtor in pos­ses­sion] may not assume or assign . . . .” (alter­ation in orig­i­nal) (quot­ing 11 U.S.C. § 365(c))); Perl­man v. Cat­a­pult Ent. (In re Cat­a­pult Ent.), 165 F.3d 747, 750 (9th Cir. 1999) (“[I]t is well-estab­lished that § 365(c)’s use of the term ‘trustee’ includes Chap­ter 11 debtors in pos­ses­sion.”); Sun­ter­ra Corp., 361 F.3d at 261 n.5 (same hold­ing as Cat­a­pult Ent.); Insti­tut Pas­teur, 104 F.3d at 492 & n.7 (same).

39. Foot­star, 323 B.R. at 577 (explain­ing that courts should “focus[] on the sub­stan­tive lim­i­ta­tion set forth in the statute as applied to the debtor in pos­ses­sion and rec­og­nize[] that the result may vary from the lit­er­al lan­guage of the statute because the statute was writ­ten in the per­spec­tive of the trustee”).

40. Id. (hold­ing that the “sub­stan­tive lim­i­ta­tion in Sec­tion 365(c)(1)” is to “bar[] assump­tion or assign­ment but only ‘if’ the non-debtor would be excused from con­tin­u­ing per­for­mance with an enti­ty ‘oth­er than the debtor or debtor in pos­ses­sion’” (empha­sis added) (quot­ing 11 U.S.C. § 365 (c))).

41. Id. at 577–78 (apply­ing “the lan­guage of the sub­stan­tive lim­i­ta­tion” to a debtor in pos­ses­sion and con­clud­ing that “this par­tic­u­lar lim­i­ta­tion on the trustee’s pow­er to ‘assume or assign’ does not bar a debtor in pos­ses­sion who assumes but does not assign its con­tract, since a trustee is an ‘enti­ty oth­er than’ the debtor, but the debtor in pos­ses­sion is not” (quot­ing 11 U.S.C. § 365 (c))).

42. 11 U.S.C. § 1107(a).

43. See Foot­star, 323 B.R. at 577 (explain­ing that it accords with prece­dent to “focus[] on the sub­stan­tive lim­i­ta­tion” of the statute); see also In re Adel­phia Commc’ns Corp., 359 B.R. 65, 72 n.13 (Bankr. S.D.N.Y. 2007) (fol­low­ing Foot­star); In re Aer­obox Com­pos­ite Struc­tures, LLC, 373 B.R. 135, 14142 (Bankr. D.N.M. 2007) (same).

44. See infra notes 4951 and accom­pa­ny­ing text.

45. See, e.g., U.S. Brass & Cop­per Co. v. Caplan (In re Cen­tu­ry Brass Prods.), 22 F.3d 37, 38–40 (2d Cir. 1994).

46. Id. at 39. Con­gress lat­er amend­ed the statute to resolve the issue con­sid­ered by the courts. See 11 U.S.C. § 546(a).

47. See, e.g., Con­str. Mgmt. Servs., Inc. v. Mfrs. Hanover Tr. Co. (In re Coastal Grp.), 13 F.3d 81, 84 (3d Cir. 1994).

48. Id.

49. Cen­tu­ry Brass, 22 F.3d at 40 (empha­sis added). Two cir­cuits ruled that debtors in pos­ses­sion were not sub­ject to the statute of lim­i­ta­tions of sec­tion 546 because such statutes are pro­ce­dur­al, and, in these courts’ view, sec­tion 1107 incor­po­rates against the debtor in pos­ses­sion only sub­stan­tive lim­i­ta­tions. M.K. Moore & Sons, Inc. v. Slut­sky (In re WM. Cargile Con­trac­tor, Inc.), No. 96–4353, 1998 U.S. App. LEXIS 7964, at *15 (6th Cir. 1998) (unpub­lished deci­sion); Gleis­chman Sum­n­er Co. v. King, Weis­er, Edel­man & Bazar, 69 F.3d 799, 80102 (7th Cir. 1995). These deci­sions thus seem large­ly inap­po­site in the con­text of sec­tion 365(c), as lim­i­ta­tions on assump­tion and assign­ment are more sub­stan­tive than statutes of lim­i­ta­tions. In any event, it is worth note that nei­ther of these two deci­sions applied sec­tion 1107 by sub­sti­tut­ing the term “debtor in pos­ses­sion” for “trustee.”

50. Zilkha Ener­gy Co. v. Leighton, 920 F.2d 1520, 1524 (10th Cir. 1990) (“[A] debtor in pos­ses­sion . . . is the func­tion­al equiv­a­lent of an appoint­ed trustee.”); Upgrade Corp. v. Gov’t Tech. Servs., Inc. (In re Soft­waire Ctr. Int’l, Inc.), 994 F.2d 682, 684 (9th Cir. 1993) (per curi­am) (find­ing per­sua­sive and fol­low­ing Zilkha’s func­tion­al equiv­a­lent rea­son­ing). While the Fourth Cir­cuit found that the statute of lim­i­ta­tions under sec­tion 546(a) does not apply to debtors in pos­ses­sion, it did not do so on the grounds that there is no appoint­ment of a debtor in pos­ses­sion. See Mau­rice Sport­ing Goods, Inc. v. Maxway Corp. (In re Maxway Corp.), 27 F.3d 980, 98384 (4th Cir. 1994). Rather, because the statute then in place pro­vid­ed that an “action or pro­ceed­ing . . . may not be com­menced,” as opposed to pro­vid­ing that the trustee could not bring an action, the court ruled that “by its terms, § 546(a) applies both to trustees and debtors in pos­ses­sion” direct­ly with­out impli­cat­ing sec­tion 1107.  Id. at 984.  In so rul­ing, the court char­ac­ter­ized sec­tion 1107 as estab­lish­ing a “gen­er­al statu­to­ry scheme of func­tion­al equiv­a­len­cy,” id., sug­gest­ing that the sec­tion 1107 analy­sis should be more sub­stan­tive and prac­ti­cal than formalistic.

51. Cer­tain lan­guage in the Third Circuit’s sec­tion 546 deci­sion does pro­vide sup­port for the notion that sec­tion 1107 oper­ates by replac­ing the word “trustee” with “debtor in pos­ses­sion.” Coastal Grp., 13 F.3d at 84–85 (“[T]he more nat­ur­al approach would view § 1107(a) as an invi­ta­tion to sub­sti­tute the term ‘debtor-in-pos­ses­sion’ for the entire § 546(a)(1) phrase ‘trustee appoint­ed under Sec­tion 702, 1104, 1163, 1302, or 1202 of this title . . . .’”). The court nev­er­the­less found that the statute of lim­i­ta­tions applied to the debtor in pos­ses­sion because it found that the word “appoint­ment” was broad enough to encom­pass the com­ing into being of the debtor in pos­ses­sion. Id. at 84. Though the lat­ter find­ing is per­haps dubi­ous, the deci­sion does not seri­ous­ly under­mine the propo­si­tion that sec­tion 1107 incor­po­rates sub­stan­tive rules against the debtor in pos­ses­sion. This is so because sub­sti­tut­ing “debtor in pos­ses­sion” for “trustee” fre­quent­ly cre­ates an out­come which aligns with appli­ca­tion of the sub­stan­tive rule. For instance, sec­tion 365(a) pro­vides that “the trustee . . . may assume or reject any execu­to­ry con­tract” as qual­i­fied by lat­er sub­sec­tions. 11 U.S.C. § 365(a). Whether one ana­lyzes this sub­sec­tion by the sub­sti­tu­tion of words or by search­ing for its sub­stan­tive rule, it is clear that the debtor in pos­ses­sion should have the pow­er to assume or reject execu­to­ry con­tracts, sub­ject to the lat­er sub­sec­tions. Giv­en the Coastal Group court’s (per­haps erro­neous) con­clu­sion that sub­sti­tut­ing “debtor in pos­ses­sion” for “trustee” cre­ates lan­guage requir­ing appli­ca­tion of the statute of lim­i­ta­tions to the debtor in pos­ses­sion, its asser­tion that the terms are inter­change­able is bet­ter seen as a short­hand way of divin­ing and apply­ing the sub­stan­tive rule than as a repu­di­a­tion of the prin­ci­ple that sec­tion 1107 deals in such sub­stan­tive rules.