Legal Definitions - reject, assume or

The legal term "assume or reject" refers to a critical decision made by a trustee, typically in a bankruptcy or insolvency proceeding, regarding the debtor's existing contracts or unexpired leases. The trustee must evaluate whether continuing (assuming) or terminating (rejecting) these agreements would be most beneficial to the bankruptcy estate and its creditors.

• To assume a contract or lease means the trustee chooses to continue the agreement, taking on the debtor's obligations and rights under its terms. This decision is usually made when the contract or lease is valuable or profitable for the estate, helping to maximize assets for creditors.
• To reject a contract or lease means the trustee chooses to terminate the agreement. This action is treated as a breach of contract by the debtor immediately before the bankruptcy filing, allowing the other party to file a claim for damages against the estate. Rejection typically occurs when the contract or lease is burdensome, unprofitable, or not in the best interest of the estate.

Here are some examples illustrating this concept:

• Example 1 (Assuming a beneficial lease): A restaurant chain files for Chapter 11 bankruptcy. One of its restaurant locations has a long-term lease with a rent significantly below current market rates for that area. The bankruptcy trustee reviews the lease and determines that this particular location is highly profitable and that continuing the lease would generate substantial revenue for the bankruptcy estate.

  Explanation: In this situation, the trustee would likely assume the lease. By assuming it, the trustee ensures the bankruptcy estate retains the benefit of the favorable rent and the profitable operation of that restaurant, which directly benefits the creditors by increasing the funds available for distribution.

• Example 2 (Rejecting an unprofitable supply contract): A construction company enters Chapter 7 bankruptcy. The company has a standing contract to purchase concrete from a specific supplier at a fixed price that is now considerably higher than what other suppliers are charging in the current market. Fulfilling this contract would result in significant financial losses for any ongoing projects.

  Explanation: The bankruptcy trustee would likely reject this supply contract. Continuing to purchase materials at an above-market price would deplete the estate's assets and harm creditors. By rejecting the contract, the trustee frees the estate from a burdensome obligation, and the concrete supplier would then have a claim for damages against the estate for the breach of contract.

• Example 3 (Assuming a contract for future revenue): A marketing agency files for bankruptcy, but it has a contract with a major client to complete a large advertising campaign. The campaign is nearly finished, and a significant final payment is due upon delivery. The trustee assesses that the remaining work requires minimal resources and that completing it would bring in substantial funds to the estate.

  Explanation: The trustee would likely assume this service contract. By completing the advertising campaign, the estate can collect the final payment, which would significantly increase the funds available to distribute to creditors. The trustee takes on the obligation to finish the work in order to realize the financial benefit for the estate.