Legal Definitions - assume or reject

Assume or Reject

In the context of bankruptcy, "assume or reject" refers to a critical decision made by a debtor (an individual or business filing for bankruptcy) or a court-appointed trustee regarding certain ongoing agreements.

Specifically, it applies to executory contracts (contracts where both sides still have significant obligations to perform) and unexpired leases (leases that have not yet ended). Within a specific timeframe set by bankruptcy law, the debtor or trustee must choose one of two paths for each of these agreements:

• Assume: To continue with the contract or lease, meaning the debtor or trustee agrees to uphold all its terms and obligations. This typically happens when the agreement is beneficial to the bankruptcy estate or crucial for the debtor's reorganization.
• Reject: To terminate the contract or lease, effectively ending the debtor's obligations under it. This usually occurs when the agreement is burdensome, unprofitable, or no longer necessary for the debtor's financial recovery.

This decision allows the debtor or trustee to strategically manage assets and liabilities, shedding unfavorable agreements while preserving those that are valuable for a fresh start or liquidation.

Here are a few examples illustrating how "assume or reject" works:

• Example 1: Retail Store Lease

  Imagine a clothing boutique, "Chic Threads," files for Chapter 11 bankruptcy to reorganize its business. Chic Threads has an unexpired lease for its prime storefront location in a busy mall.

  • If the boutique's management (acting as the debtor-in-possession) believes the location is vital for its future success and can afford the rent after restructuring, they would assume the lease. This means Chic Threads commits to continuing rent payments and fulfilling all other lease terms, keeping its physical store open.
  • Conversely, if the location is too expensive, or the boutique plans to shift to online-only sales to cut overhead, they might reject the lease. This would allow Chic Threads to vacate the premises and stop paying rent, freeing up resources for other parts of their reorganization plan.

• Example 2: Software Maintenance Contract

  Consider "DataFlow Solutions," a software company that has filed for bankruptcy. DataFlow has an ongoing contract to provide monthly software maintenance and support services to a major client, "Global Innovations Inc."

  • If the contract with Global Innovations is profitable and provides a stable revenue stream that DataFlow needs to emerge from bankruptcy, the trustee might decide to assume the contract. DataFlow would then continue to provide the agreed-upon services, and Global Innovations would continue its payments, maintaining a valuable business relationship.
  • However, if the contract is barely profitable, requires significant resources that DataFlow no longer has due to downsizing, or is with a client that has been consistently difficult, the trustee might reject the contract. This would relieve DataFlow of its service obligations, allowing it to focus its limited resources on more profitable ventures or core operations, even if it means losing that client's revenue.