The recent bankruptcies of Chrysler, LLC (Chrysler) and GM Corporation (GM) have raised many novel legal questions and issues, including unusual procedures for the assumption and assignment of executory contracts. The Chrysler and GM bankruptcies also are a reminder of the pitfalls facing contract counterparties. The Bankruptcy Code, 11 U.S.C. §365, permits a debtor to reject or assume, and, after assumption, assign executory contracts and unexpired leases. The Bankruptcy Code also provides protections for contract counterparties that require the debtor to: (1) cure all outstanding defaults at the time of assumption, (2) compensate the counterparty for actual pecuniary loss resulting from the default or provide adequate assurance of such compensation and (3) provide adequate assurance of future performance. The Bankruptcy Code does not set forth the procedures that a debtor must follow to assume and assign contracts. However, debtors routinely establish procedures, approved by court order, for the assumption and assignment of executory contracts when selling all or substantially all of their assets in bankruptcy.
Chrysler and GM both proposed procedures for the assumption and assignment of executory contracts, and these procedures were approved by the court. The breakneck speed at which both cases are moving through the court also has significantly affected contract counterparties. Chrysler filed for bankruptcy on April 30, 2009, and on May 3, 2009 Chrysler filed its motion to approve bidding procedures, including procedures for assumption and assignment of executory contracts. Similarly, GM filed for bankruptcy on June 1, 2009 and filed its bidding procedures motion, including assumption and assignment procedures, that same day. Bidding procedures and assumption and assignment procedures are not traditionally sought in “first-day motions.”
Unlike assumption and assignment procedures encountered in most bankruptcy cases, Chrysler’s procedures provided for two notices. The first notice advised the counterparty of the expected assumption and assignment of the contract and included Chrysler’s version of the cure amount. Two noteworthy issues regarding the first notice warrant further discussion. First, the cure amounts were calculated as of April 30, 2009, the petition date. Calculating the cure amounts as of the petition date is not in compliance with the Bankruptcy Code, which requires that all existing defaults be cured as of the date of the assumption of the contract. This problem was exacerbated by a provision in the notice that payment of the designated cure amount would be in full satisfaction of all obligations arising before the assumption and assignment. Second, the notices were sent to the highest corporate parent level entity instead of to the actual parties to the contract.
As a result of the inaccurate calculation of cure amounts, numerous contract counterparties, who did not otherwise oppose the assumption and assignment of their contracts to the purchaser, were required to file objections. The pace of these cases and the provision of notice only to the parent, combined with the requirement that objections to cure amounts be filed within ten days of service, further complicated the assumption and assignment of contracts that were otherwise uncontested. In fact, many suppliers were required to scramble and file a last-minute objection to the cure amount to preserve their rights.
Unlike traditional assumption and assignment procedures, the Chrysler contracts were not assumed at the expiration of the ten-day period even when no objections were filed. Instead, contracts were assumed when the supplier received a second notice, which informed the supplier that the contract had been assumed and assigned. Until receipt of the second notice, but before a deadline established by Chrysler, up to 90 days after the closing of the Fiat sale, Fiat could exclude contracts for which the counterparty received the first notice. Also unusual was the provision permitting the purchaser to exclude a contract for which the counterparty received the first notice but had not yet received the second notice. If the contract counterparty did not receive the second notice, or the purchaser deemed the contract not assumed, Chrysler was permitted to assume or reject the contract at a later date.
GM’s bidding procedures motion included assumption and assignment procedures similar to those in Chrysler’s bankruptcy case, in addition to some other unusual procedures. GM’s procedures, like Chrysler’s, require that counterparties file objections, if any, within ten days of the date of the notice. A notable difference between GM’s and Chrysler’s procedures is that GM uses a secure Web site that enables the counterparty to view information for only their individual contract. In Chrysler’s case, the expected assumed contracts were made public by filing schedules with the court. GM also established a call center for the attempted resolution of cure amount objections. As only some contract counterparties have received notice of their password for the Web site, and contract counterparties have not yet received notice that their contract has been assumed, we are still waiting to see if the assumption and assignment procedures in GM’s bankruptcy case will work better than those used in Chrysler’s.
Chrysler’s and GM’s assumption and assignment procedures are an important reminder for suppliers to these and other debtors. Suppliers must be vigilant and watch for important notices from bankrupt companies. These notices should be forwarded to counsel as soon as possible to avoid missing the short deadlines provided for in the procedures and outlined in the notices. Further, suppliers should avoid being lulled into a sense of security by assuming the debtor will treat them fairly regarding the assumption and assignment of their executory contract, especially when the supplier supports the assumption of their contract. Instead, suppliers must confirm that the cure amount has been calculated correctly and conforms to the requirements of the Bankruptcy Code. In these difficult economic times, suppliers must be cautious with regard to assumption and assignment of their contracts with debtors.
I. William Cohen and Ross A. Hoogerhyde
