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The Bankruptcy StrategistFeaturesBankruptcyContractsInsurance LitigationLitigation

D&O Policy 'Bankruptcy Exclusion' Held To Be an Unenforceable 'Ipso Facto' Clause

By Mark D. Silverschotz

Among the more mundane aspects of Chapter 11 bankruptcy analysis — whether pre-petition planning by a prospective debtor or post-petition evaluation by creditors — is the review of contracts which may be deemed "executory" under 11 U.S.C. §365. This is because a debtor, pursuant to that statute's subsection (a), and subject to certain restrictions not relevant here, may "assume" valuable contracts or "reject" those which are financially disadvantageous.

As a predicate to such assumption, a debtor must either "cure" or provide "adequate assurance" that it will "promptly cure" any defaults in existence at the time that assumption is proposed. 11 U.S.C. §365(b)(1)(A). If a contract provides that simply being in bankruptcy is a default, although such cure would seem to be impossible to accomplish, the Bankruptcy Code solves for this problem by providing that the cure obligation "does not apply to a default that is a breach of a provision relating to (A) the insolvency or financial condition of the debtor … [or] (B) the commencement of a [bankruptcy] case …." 11 U.S.C. §365(b)(2). These disfavored provisions generally are referred to (although not in the statute) as "ipso facto clauses."

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