Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

District Court Provides Guidance on 'Psychedelic Confusion'

By John J. Rapisardi and Matthew Kremer
December 01, 2022

The U.S. District Court for the Southern District of New York recently provided critical guidance on what the court observed as the "psychedelic confusion" surrounding the intersection of Bankruptcy Code §365, governing the assumption and rejection of executory contracts, and Bankruptcy Code §503, governing administrative priority. (The classification of any claims entitled to administrative priority status would allow for such claims to be paid in full, as opposed to treatment as prepetition unsecured claims which would receive a discounted distribution.) Specifically, in Finance of America v. Mortgage Winddown (In re Ditech Holding), No. 21-cv-10038 (LAK), 2022 WL 4448867 (S.D.N.Y. Sept. 23, 2022), U.S. District Court Judge Lewis A. Kaplan sought to answer the "single question" of in what circumstances (if any) a postpetition breach of an executory contract could give rise to an administrative expense priority claim? (Bankruptcy Code §365(g) provides that rejection of a prepetition contract "constitutes a breach of contract" immediately prior to the debtor's bankruptcy filing, meaning the resulting rejection damage claim is a general unsecured claim. See, 11 U.S.C. §365(g). As a result, the payment of the claim "can be thought of as being in little tiny Bankruptcy Dollars, which may be worth only ten cents in U.S. dollars." Cohen v. Drexel Burnham Lambert Group (In re Drexel Burnham Lambert Group), 138 B.R. 687, 706 (Bankr. S.D.N.Y. 1992) (quoting Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 228 (1989)).) The court rejected the Bankruptcy Court's analysis that focused on whether a contract extension created a new postpetition contract or modified an existing contract under state law. See, Finance of America v. Mortgage Winddown (In re Ditech Holding), No. 19-10412 (JLG), 2021 WL 4928724 (Bankr. S.D.N.Y. Oct. 21, 2021). Instead, the court concluded that the appropriate test is whether the postpetition breach was within the parties' "fair contemplation" at the time they entered the contract. If a postpetition breach was not within the parties' fair contemplation, then the breach is deemed to arise postpetition and the resulting claims are eligible for administrative expense priority to the extent they constitute "actual, necessary costs and expenses" of preserving the estate.

But even if the breach was foreseeable and the resulting claims arise prepetition, the analysis does not end here. Judge Kaplan recognized the well-established equitable claim of quasi-contract (or quantum meruit) — something the Bankruptcy Court failed to do. That is, where a debtor elects to receive goods or services postpetition the party supplying goods or services is eligible for administrative priority if the estate receives a demonstrable benefit.

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
Bankruptcy Sales: Finding a Diamond In the Rough Image

There is no efficient market for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. This article identifies ways in which investors may more easily discover bankruptcy asset sales.

Judge Rules Shaquille O'Neal Will Face Securities Lawsuit for Promotion, Sale of NFTs Image

A federal district court in Miami, FL, has ruled that former National Basketball Association star Shaquille O'Neal will have to face a lawsuit over his promotion of unregistered securities in the form of cryptocurrency tokens and that he was a "seller" of these unregistered securities.

Why So Many Great Lawyers Stink at Business Development and What Law Firms Are Doing About It Image

Why is it that those who are best skilled at advocating for others are ill-equipped at advocating for their own skills and what to do about it?

Blockchain Domains: New Developments for Brand Owners Image

Blockchain domain names offer decentralized alternatives to traditional DNS-based domain names, promising enhanced security, privacy and censorship resistance. However, these benefits come with significant challenges, particularly for brand owners seeking to protect their trademarks in these new digital spaces.

Coverage Issues Stemming from Dry Cleaner Contamination Suits Image

In recent years, there has been a growing number of dry cleaners claiming to be "organic," "green," or "eco-friendly." While that may be true with respect to some, many dry cleaners continue to use a cleaning method involving the use of a solvent called perchloroethylene, commonly known as perc. And, there seems to be an increasing number of lawsuits stemming from environmental problems associated with historic dry cleaning operations utilizing this chemical.