Executory Contracts and Unexpired Leases in Bankruptcy

When a business or individual files for bankruptcy, they don't automatically lose their ongoing contracts and leases — but the other parties to those contracts don't automatically keep them either. 11 U.S.C. § 365 gives the bankruptcy trustee (or debtor-in-possession in Chapter 11) a powerful tool: the right to assume contracts and leases that benefit the estate, reject those that are burdensome, or assign them to third parties for value. The automatic stay (§ 362) governs enforcement of contracts pending assumption or rejection — see automatic stay in bankruptcy. — often regardless of anti-assignment clauses in the original agreement. This power reshapes the bankruptcy landscape for landlords, suppliers, technology licensors, employees, and contract counterparties of every type. A retailer in Chapter 11 can reject hundreds of unprofitable store leases and walk away from the remaining rent obligations — the landlord's damages become a general unsecured claim, capped at the greater of one year's rent or 15% of the remaining lease term (not to exceed 3 years). An IP licensor in bankruptcy can reject a software license, and whether the licensee gets to keep using the software depends on a patchwork of Circuit law and § 365(n).

Current Law (2026)

Legal Authority

• 11 U.S.C. § 365(a) — General authority (the trustee or debtor in possession may assume or reject any executory contract or unexpired lease of the debtor; subject to court approval)
• 11 U.S.C. § 365(b) — Cure requirements for assumption (if there is a default in the contract, the trustee must cure the default or provide adequate assurance of prompt cure, compensate the non-debtor party for any actual pecuniary loss, and provide adequate assurance of future performance — before assuming a contract with an outstanding default)
• 11 U.S.C. § 365(c) — Limits on assignment (a contract cannot be assumed or assigned if applicable non-bankruptcy law excuses the non-debtor party from accepting performance from an assignee — the "applicable law" exception; also prohibits assumption of certain financial accommodation contracts and licenses to use intellectual property if the licensor is the debtor and applicable law excuses the non-debtor licensee from accepting performance)
• 11 U.S.C. § 365(d) — Timing requirements (Chapter 7 trustee must decide within 60 days; for Chapter 11 nonresidential real property leases, deemed rejected if not assumed within 210 days; debtor must timely perform all obligations arising from and after the petition date until assumption or rejection)
• 11 U.S.C. § 365(f) — Assignment over anti-assignment clauses (notwithstanding any provision in the contract or applicable law that restricts assignment, the trustee may assign an assumed contract or lease if adequate assurance of future performance is provided; anti-assignment clauses in commercial contracts are thus largely unenforceable in bankruptcy)
• 11 U.S.C. § 365(g) — Effect of rejection (rejection constitutes a breach immediately before the date of the filing of the petition; the non-debtor party has a prepetition claim for damages — a general unsecured claim, subject to any cap)
• 11 U.S.C. § 365(n) — Intellectual property licenses (if the debtor-licensor rejects an IP license, the licensee may elect to retain its rights under the license for the duration of the license, including any renewal; licensee must continue paying royalties and waive any setoff or administrative expense claim against the estate; applies to patents, copyrights, trademarks are excluded from the Code's definition of intellectual property under § 101(35A))
• 11 U.S.C. § 365(o) — Commitment to maintain capital (financial institutions cannot use § 365 to reject commitments to maintain capital ratios — protecting banking regulators' ability to require capital maintenance)
• 11 U.S.C. § 1113 — Rejection of collective bargaining agreements (a debtor may not reject a CBA under § 365; instead must follow a specific process: make a proposal to the authorized representative of employees based on necessary information, negotiate in good faith, and obtain court approval only if the union has rejected the proposal without good cause and the balance of equities clearly favors rejection)
• 11 U.S.C. § 1114 — Payment of insurance benefits to retired employees (same framework as § 1113 for retiree health benefits — debtor must negotiate before modifying, court approval required, balancing test)

How It Works

Section 365 does not define "executory contract" — courts apply the Countryman test: a contract is executory if both parties have unperformed obligations significant enough that failure to perform would constitute a material breach (11 U.S.C. § 365(a)). A fully performed contract is not executory; a one-sided contract (seller delivered, buyer hasn't paid) is treated by most courts as not executory under § 365, leaving the unpaid seller to a general unsecured claim. The power to assume or reject is one of the most consequential tools in Chapter 11: a debtor can reject unfavorable long-term contracts — above-market supply agreements, money-losing leases — at the cost of giving the counterparty a prepetition breach claim dischargeable in bankruptcy, and can assume favorable contracts even over objection provided it cures defaults and demonstrates ability to perform going forward (§ 365(b)). Commercial landlords have specific protections: the 210-day deemed-rejection deadline for nonresidential real property leases (§ 365(d)(4)) forces a timely decision rather than indefinite limbo, and the damage cap under 11 U.S.C. § 502(b)(6) limits a rejected lease's recoverable claim to the greater of one year's rent or 15% of remaining rent (not to exceed three years) — a landlord with 10 years left on a $1M/year lease has a claim capped at $3M, not $10M.

Intellectual property licenses in bankruptcy are among the most contested areas in technology transactions. When a debtor-licensor rejects an IP license, the licensee may elect under § 365(n) to retain its rights for the duration of the agreement and continue paying royalties, waiving setoff or administrative expense claims against the estate — but trademarks are excluded from this protection (they fall outside the Bankruptcy Code's § 101(35A) definition of "intellectual property"), leaving trademark licensees in a legally precarious position. The Supreme Court's Mission Product Holdings v. Tempnology (2019) partially filled this gap by holding that rejection constitutes breach but does not rescind, meaning licensees may retain previously granted rights even after rejection. In ordinary commercial law, anti-assignment clauses are enforceable; in bankruptcy, § 365(f) overrides them — a trustee may assign a valuable contract to a buyer over objection if adequate assurance of future performance is provided, with exceptions for personal services contracts and contracts governed by applicable non-bankruptcy law that would excuse the non-debtor from accepting a substitute. Collective bargaining agreements receive separate protection under § 1113: a debtor cannot reject a CBA through ordinary § 365 procedures but must negotiate in good faith and obtain court approval under a strict balancing test.

How It Affects You

If you're a commercial landlord: Know the 210-day clock. If your tenant files Chapter 11, you're entitled to current rent as an administrative expense from the petition date forward. Track whether the tenant assumes or rejects your lease — if not assumed within 210 days, it's deemed rejected. Your damage claim for a rejected lease is capped under § 502(b)(6). Monitor the bankruptcy closely; landlords can and should participate in the case.

If you're a software or IP licensor: The Tempnology decision means your licensee can likely retain license rights even if you reject the license in bankruptcy. Review your license agreements to understand your obligations — and know that § 365(n) requires continued royalty payments from the licensee even after rejection. For new licenses, consider whether jurisdiction-specific protections (some states have stronger IP licensor protections) are available.

If you're a technology company that licenses IP from another company: Evaluate your licensor's financial health. A bankruptcy filing by your licensor triggers § 365 issues. If the licensor rejects your license, you can elect § 365(n) protection — but only if you promptly make the election and continue paying royalties. Failure to make the election means you lose the right to use the IP.

If you supply goods or services under a long-term contract: Your contract is an executory contract the debtor can assume or reject. If rejected, you have a prepetition damage claim — typically an unsecured claim that will receive cents on the dollar. If the debtor wants to assume your contract, it must cure all payment defaults before assumption. Negotiate from this position.

If you're a union or covered employee: Collective bargaining agreements cannot be rejected under ordinary § 365 procedures — the debtor must follow the mandatory § 1113 negotiation process, and the court applies a balancing test before permitting rejection. This provides significantly more protection than ordinary contracts have.

State Variations

Executory contracts and lease assumption/rejection are governed exclusively by federal bankruptcy law. State contract law determines what the underlying obligations are and whether a breach occurred, but the bankruptcy court controls whether contracts are assumed or rejected and the consequences.

Implementing Regulations

Section 365 is self-executing — it is administered directly by bankruptcy courts under the Federal Rules of Bankruptcy Procedure, particularly Rule 6006 (assumption/rejection of executory contracts) and Rule 6007.

Pending Legislation

Congress has periodically considered codifying or limiting Tempnology for trademark licenses, and has debated whether § 365(n) should be extended to trademark licensees. No legislation has been enacted. The treatment of technology and IP licenses in financially distressed companies remains an active area of case law development.

Recent Developments

• Mission Product Holdings v. Tempnology (2019): The Supreme Court held that rejection of an executory contract constitutes a breach but does not rescind the contract — meaning a licensee retains the rights it was granted even after the licensor rejects the license in bankruptcy. This resolved a circuit split and largely resolved the trademark license gap (circuits had divided on whether trademark licensees could retain rights after rejection), though some uncertainty remains for complex licensing arrangements.
• Real estate lease rejections in Chapter 11 retail bankruptcies (2020–2024): Major retail Chapter 11 cases — J.Crew, Pier 1, Tailored Brands, Tuesday Morning — rejected thousands of store leases, accelerating the commercial real estate pressures associated with e-commerce. Courts have consistently upheld broad lease rejection authority; landlord damage caps under § 502(b)(6) limited recovery to 1-3 years even for leases with decades remaining.
• Crypto and DeFi contract rejection (2022–present): FTX, Celsius, and Voyager Digital bankruptcies raised novel questions about whether "user agreements," staking agreements, and liquidity pool contracts constitute executory contracts subject to § 365. Courts have generally found these are executory contracts — allowing trustees to reject unfavorable DeFi arrangements and reclaim assets — while also preserving traditional clawback exposure for customer withdrawals under preference law.
• Section 1113 and airline/hospital CBAs: The § 1113 process has been heavily litigated in airline and healthcare bankruptcies. Courts have interpreted the "necessary for the reorganization" standard strictly — mere cost savings are not sufficient; the debtor must demonstrate the modifications are necessary to confirm a plan. This has generally protected unions' leverage in the § 1113 process.
• DOGE contract terminations and § 365 questions (2025): The Trump administration's DOGE-driven mass termination of federal contracts — including thousands of grants, research contracts, DEI consulting contracts, and technology services contracts — has raised questions about whether contractors whose agreements were unilaterally terminated have executory contract claims against the government. Unlike private bankruptcies, government contract terminations are governed by the Federal Acquisition Regulation (FAR) termination-for-convenience clauses rather than § 365; contractors must pursue claims through the Armed Services or Civilian Board of Contract Appeals, not bankruptcy court. However, contractors forced into financial distress by abrupt federal terminations — particularly small businesses with concentrated government contract exposure — have faced Chapter 11 filings where their other contracts and leases become subject to § 365.
• AI licensing agreements and executory contract status (2024–2025): The rapid adoption of AI-powered software tools has created a new category of executory contract questions: are AI platform subscription agreements, API access agreements, and AI model licenses executory contracts subject to § 365 assumption and rejection? Courts have generally analyzed AI licenses under the same framework as other software licenses, applying the Tempnology rule (rejection = breach, not rescission). However, AI agreements raise novel issues: tiered usage pricing, data rights provisions, and AI model fine-tuning agreements create bilateral performance obligations that may or may not meet the "substantial unperformed obligations on both sides" test for executory status. Practitioners in tech-sector bankruptcies (several significant AI startup failures occurred in 2024-2025) are navigating this unsettled area.
• Retail bankruptcy wave continues (2024–2025): Red Lobster (2024), Conn's (2024), and additional retailer filings continued the post-pandemic retail bankruptcy wave, generating additional case law on lease rejection timing, 210-day deemed rejection under § 365(d)(4), and landlord § 502(b)(6) damage caps. Courts have enforced the 210-day clock strictly, with deemed rejections occurring in cases where the debtor failed to formally move for extension. Commercial landlords with retail tenants in financial distress should monitor bankruptcy dockets closely and file motions to compel assumption or rejection if the 210-day deadline approaches.