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It is generally understood that bankruptcy law requires debtors to cure all contractual defaults before assuming any executory contract because debtors would receive a windfall without such requirement: They could assume (and compel performance on) contracts that they had breached without paying any resulting damages claim. If such a result were permitted under the Code, failing companies would have even less incentive to continue performing on contracts pre-petition because they could presumably seek to assume those contracts in bankruptcy without penalty. For this reason, Bankruptcy Code ' 365(b)(1) expressly provides that a debtor may only assume an executory contract if the debtor first:
Despite this well-understood and widely applied Code provision, the Bankruptcy Reform Act of 1994 modified Section 365 in such a way as to potentially eliminate the long-standing obligation to cure certain defaults in connection with the assumption of executory contracts. Specifically, Section 365(b)(2)(D) now provides that:
The requirements of Section 365(b)(1) do not apply to a default that is a breach of a provision relating to the satisfaction of any penalty rate or provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease. 11 U.S.C. ' 365(b)(2)(D) (emphasis added).
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