Breaking Free from Financial Chains: How New York Chapter 11 Executory Contract Rejection Transforms Business Recovery in 2024

For struggling businesses in New York, Chapter 11 bankruptcy offers more than just debt relief—it provides a strategic pathway to escape burdensome contracts and leases that may be dragging the company down. In Chapter 11 bankruptcy, the debtor or trustee can assume or reject the contract any time before confirmation of the bankruptcy plan, giving businesses unprecedented flexibility to shed unprofitable obligations while preserving valuable agreements.

Understanding Executory Contracts in Chapter 11

Though there is no precise definition of what contracts are executory, it generally includes contracts on which performance remains due to some extent on both sides. Bankruptcy debtors have special rights in contracts or leases where both parties have outstanding obligations, known in legal terms as “executory contracts” or “unexpired leases”. But executory contracts don’t fall neatly into the category of “asset” or “debt,” because there are significant unfulfilled obligations for both parties.

Common examples include:

• Real estate and equipment leases. The lessor must make the property or equipment available, and the lessee must make scheduled payments
• Insurance contracts. The insurer must cover losses, and the insured must pay premiums
• Supply contracts, purchase agreements, employment contracts and service contracts

The Strategic Power of Contract Rejection

One of the most touted (and one of the more misunderstood) benefits of chapter 11 is the ability to reject executory contracts and unexpired leases. Rejection, on the other hand, terminates the agreement, potentially freeing up resources but also risking the loss of valuable property or services.

When businesses reject unfavorable agreements, rejection of an executory contract or unexpired lease constitutes a breach of the contract or lease. Generally, the breach is as of the date immediately preceding the date of the petition. The purpose is to treat rejection claims as prepetition claims. This means creditors receive general unsecured claims that typically recover only cents on the dollar.

Critical Timing Considerations for 2024

New York businesses must act strategically when it comes to timing. In a Chapter 11 case, most agreements can be assumed or rejected at any time prior to confirmation of a plan. An agreement is not deemed rejected if the debtor fails to assume or reject within this time. An exception is nonresidential leases, which must be assumed or rejected within 210 days of the date of the Chapter 11 petition or any granted extensions. Otherwise, the lease is considered rejected.

For commercial real estate leases specifically, a debtor tenant must elect whether to assume, reject or assume and assign its leases within 120 days of the bankruptcy filing, although a 90-day extension may be, and generally is, granted by the court. Any extensions beyond 210 days require landlord consent. If a debtor tenant fails to make an election within the requisite timeframe, the lease is automatically deemed rejected, and the tenant must vacate the space.

Financial Benefits and Damage Limitations

When businesses reject leases, the financial impact on landlords is significantly limited. That relation back provision leaves the landlord with a prepetition general unsecured claim – the kind of claim proverbially referred to as 10 cents on the dollar claims but of which many retail Chapter 11 cases receive an even lower dividend – equal to the amount of any prepetition unpaid rent, plus a “rejection damages” claim. The rejection damages claim, also a deemed prepetition general unsecured cents on the dollar claim, is equal to the future rent that would have been received had the lease not been rejected, capped at the greater of one year’s rent or 15 percent, not to exceed three years, of the rent due for the remainder of the lease term.

Professional Guidance is Essential

The complexities of assuming or rejecting leases and contracts necessitate seeking professional guidance. A Chapter 11 bankruptcy attorney with experience handling these transactions can provide invaluable support by weighing the relative advantages and drawbacks, devising workable solutions and representing the debtor effectively throughout the process.

For New York businesses facing financial distress, working with an experienced Chapter 11 Lawyer is crucial to navigating these complex decisions effectively. The Law Offices of Ronald D. Weiss, PC have been supplying expert bankruptcy, foreclosure defense, and debt negotiation services since 1993. We offer practical, compassionate solutions customized to each client’s financial situation. With over 30 legal professionals on our team, we have the resources to handle your important legal matter.

Our law firm concentrates in bankruptcy solutions and is experienced in representing individuals and businesses in Suffolk County, Nassau County and the greater LI and NYC areas in all chapters of the bankruptcy code and in all matters that may arise in bankruptcy cases. In Nassau County, NY we serve the following towns: Oyster Bay, Glen Cove, Hempstead, North Hempstead, and Long Beach. In the greater New York area we serve the following boroughs and counties: Queens, Brooklyn, Staten Island, Manhattan, Bronx, and Westchester.

Moving Forward in 2024

As economic uncertainties continue to challenge New York businesses in 2024, Chapter 11 executory contract rejection remains a powerful tool for corporate restructuring. Chapter 11 can be a very useful way for a financially troubled business to restructure its debts in appropriate situations, force creditors to accept a repayment plan over time when they are not willing to do so out-of-court, or attempt to preserve the “going concern” value of its assets in a sale.

The ability to reject unfavorable lease and service agreements while preserving beneficial relationships gives businesses the flexibility needed to emerge stronger from financial difficulties. However, the decision whether chapter 11 is appropriate for a particular business must be made based on the facts applicable to that business and it will not work for all companies.

For businesses considering Chapter 11 in New York, understanding the strategic use of executory contract rejection can mean the difference between liquidation and successful reorganization. With proper legal guidance and careful planning, this powerful bankruptcy tool can provide the fresh start that struggling companies need to thrive in today’s challenging business environment.