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A Failure to Assume
In most Chapter 11 cases, the debtor (or trustee if one is appointed), either prior to or in connection with plan confirmation, will move to assume or reject its executory contracts, unexpired leases, or both (collectively “Executory Contracts”) pursuant to ' 365 of the Bankruptcy Code. This article discusses the “ride-through” doctrine, which courts have developed to resolve the ambiguity resulting from a debtor's failure to assume or reject an Executory Contract under ' 365 prior to plan confirmation. Under this doctrine, “executory contracts that are neither affirmatively assumed or rejected by the debtor under ' 365, pass through bankruptcy unaffected.” In re Hernandez, 287 B.R. 795, 799 (Bankr. D. Ariz. 2002); see also In re Polysat, Inc., 152 B.R. 886, 890 (Bankr. E.D. Pa. 1993).
This article will not deal with leases of non-residential real property because the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) amended ' 365(d)(4) and imposed an outside limit of 210 days for a debtor-lessee to assume or reject a pre-petition lease of non-residential real estate. Thus, under amended ' 365(d)(4), a non-residential real estate lease where the debtor is the lessee is deemed rejected if the debtor has neither assumed nor rejected it: a) within 120 days of the bankruptcy filing, subject to one 90-day nonconsensual extension by court order (additional extensions require the lessor's consent), or b) before plan confirmation, whichever is earlier. Accordingly, non-residential leases can no longer ride through a Chapter 11 bankruptcy case.
Pursuant to ' 1141(b), all property of a debtor's estate, whether scheduled or unscheduled, vests in the reorganized debtor upon plan confirmation, unless a court order or the plan provides otherwise. Because a debtor's rights under its Executory Contracts become property of its bankruptcy estate, those rights simply re-vest in the debtor upon plan confirmation if they are not otherwise modified in the bankruptcy. See Hernandez, 287 B.R. at 799; see also Consolidated Gas, Elec. Light and Power Co. of Baltimore v. United Ry. and Elec. Co. of Baltimore, 85 F.2d 799, 805 (4th Cir. 1936) (holding that an Executory Contract not rejected “continues in place between the parties, passing through the bankruptcy to the reorganized debtor”). The ride-through doctrine follows a fundamental tenet of Chapter 11, the “'policy of allowing the [debtor] freedom to run the business without having to obtain court approval at every step.'” In re Penn Traffic Co., 322 B.R. 63, 72-73 (Bankr. S.D.N.Y. 2005).
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