by Benjamin S. Winter*
Observers generally agree that the assumption of executory contracts by debtors in possession in Chapter 11 proceedings promotes the purposes of the Bankruptcy Code and accords with Congress’ intent. Yet courts have been riven by the question of whether the plain text of section 365 allows the practice. This Contribution argues that courts forbidding assumption of executory contracts by debtors in possession have misdirected the focus of their textual analysis. Close examination of an overlooked phrase within section 365 and of the interactions between sections 365 and 1107 provides two independent textual bases for courts to read the Code in keeping with congressional intent.
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.
* 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, 13–14 (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 249–50. 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, 141–42 (Bankr. D.N.M. 2007) (same).
44. See infra notes 49–51 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).
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, 801–02 (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, 983–84 (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.