11 U.S.C. Section 365 -- Executory Contracts and Unexpired Leases

What Is Section 365?

Section 365 of Title 11 of the United States Code (Executory Contracts and Unexpired Leases) is a foundational provision of the Bankruptcy Code. It gives the trustee or debtor in possession the power to assume (keep), reject (walk away from), or assign (transfer to a third party) executory contracts and unexpired leases. This is one of the most powerful tools in bankruptcy.

Key Provisions of Section 365

Key provisions include:

• 365(a) -- Power to Assume or Reject: Subject to court approval, the trustee may assume or reject any executory contract or unexpired lease. An executory contract is one where material obligations remain on both sides.
• 365(b) -- Cure Requirements: To assume a contract, the debtor must cure any existing defaults, compensate the other party for actual losses, and provide adequate assurance of future performance.
• 365(c) -- Anti-Assignment Provisions: Certain contracts cannot be assumed if applicable law excuses the other party from accepting performance from someone other than the debtor (personal service contracts, most government contracts).
• 365(d) -- Timing: In Chapter 7, the trustee must assume or reject within 60 days of the order for relief (extendable by court). For nonresidential real property leases in Chapter 11, the deadline is 120 days (extendable to 210 days).
• 365(f) -- Assignment: The trustee may assign an executory contract or unexpired lease regardless of anti-assignment clauses, as long as defaults are cured and the assignee provides adequate assurance of future performance.
• 365(h)-(i) -- Protections for Tenants and Licensees: If the debtor-landlord rejects a lease, the tenant can stay and continue paying rent. Similar protections exist for intellectual property licensees under 365(n).

How This Affects You

Practical applications of Section 365:

• Residential leases: If you are renting and file Chapter 7, the trustee will almost always reject your residential lease (keeping it provides no value to the estate). You can typically remain in the apartment by continuing to pay rent directly to the landlord.
• Commercial leases: Business debtors in Chapter 11 often reject unprofitable leases to shed excess locations. Rejection caps the landlord's damage claim at the greater of one year's rent or 15% of the remaining term (up to 3 years).
• Vehicle leases: You must decide within 60 days of filing (Chapter 7) whether to assume or reject. If you are current on payments and want to keep the car, you assume. If not, you reject and return the vehicle.
• Service contracts: Cell phone contracts, gym memberships, and similar executory contracts can be rejected, treating any termination fee as a pre-petition unsecured claim.

Related Bankruptcy Code Sections

Section 365 works in conjunction with several other provisions of the Bankruptcy Code:

• Section 363 -- Use, sale, or lease of property
• Section 521 -- Debtor duties (statement of intention for leases)
• Section 1322 -- Chapter 13 plan treatment of contracts

Understanding how these sections interact is critical for anyone navigating the bankruptcy process, whether as a debtor, creditor, or attorney.