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The Metamorphosis of Assignment Clauses in Bankruptcy
Last month, we discussed “The Debtor's Nightmare,” explaining how the Fourth Circuit joined the Ninth, Third and Eleventh Circuits in adopting the “hypothetical test” in denying a debtor in possession's assumption of an executory contract under section 365 (c) of the Bankruptcy Code despite an express assignability provision in the contract. RCI Tech. v. Sunterra Corp. (In re Sunterra Corp), 361 F.3d 257 (4th Cir. 2004). This month, we continue with “the debtor's paradox.”
The Debtor's Paradox
Sunterra begs the question: If a debtor is prohibited from assuming an agreement when the debtor could not hypothetically assign the agreement, why can't the debtor assume the agreement when the agreement contains consent to assignment so that the debtor hypothetically assign the agreement? The Fourth Circuit seems to be telling debtors that they are stuck either way by saying, “Debtor, you can't assume if you can't assign, but even if you do have consent to assign, you still can't assume.”
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