Confusion About Section 365(b)(2)(D)

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:

• cures, or provides adequate assurance that it will promptly cure any defaults under the contract;
• compensates, or provides adequate assurance that it will promptly compensate, a party for any actual pecuniary loss resulting from such default; and
• provides adequate assurance of future performance under the contract. 11 U.S.C. ' (b)(1).

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: