Assuming and assigning executory contracts: A history of indeterminate "applicable law"

American Bankruptcy Law Journal

Volumn 70, Issue 2, 1996, Pages 95-126

  King, Brett W ^a,b,c,d  

^a UNIVERSITY OF CHICAGO   (United States)

^b NORTHWESTERN UNIVERSITY   (United States)

^c UNIVERSITY OF MINNESOTA   (United States)

^d RAND CORPORATION   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 3042933487     PISSN: 00279048     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (134)

1. 11 U.S.C. § 365 (1994). Under the Code, certain types of executory contracts, such as those for financial accommodation, may be treated differently than executory contracts in general. Such exceptions are not generally relevant to the issues discussed in this Article. As such, references in the Article to § 365 will only refer to applicable provisions of executory contracts and unexpired leases in general, and not to specific types of executory contracts or unexpired leases which may be treated differently under the Code.
2. A trustee is always appointed under Chapter 7. See 11 U.S.C. §§ 701-03 (1994). Section 1104(a) of the Code provides that a trustee may be appointed by the court in a Chapter 11 case upon the request of a party in interest. See 11 U.S.C. § 1104(a) (1994).
3. The term "debtor-in-possession" generally refers to a "debtor who during the pendency of a case prior to confirmation retains property in the fiduciary capacity of a trustee of the estate." In re Grinstead, 75 B.R. 2, 3 (Bankr. D. Minn. 1985). For most purposes, a debtor-in-possession has all the rights and responsibilities of a trustee in bankruptcy. 11 U.S.C. § 1107(a) (1994). See United States v. Carolina Parachute Corp., 907 F.2d 1469, 1472 n.4 (4th Cir. 1990)("Although section 365 refers to a trustee, a debtor in possession may exercise the power of the trustee to assume executory contracts."); Breedon v. Catron (In re Catron), 158 B.R. 629, 632 (E.D. Va. 1993)(concluding that while § 365(c) speaks only in terms of a "trustee* § 1107(a) of the Code makes it clear that it also applies to a debtor-in-possession), aff'd per curiam. 25 F.3d 1038 (4th Cir. 1994).
4. The classic and widely accepted definition of an executory contract is "a contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." Vern A. Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L. REV. 439, 460 (1973). The Countryman definition has been so widely accepted that it was incorporated into the legislative history of the Code. See REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. NO. 137, Part II, 93d Cong., 1st Sess. 198-99 (1973). The House and Senate Reports contain a modified version of this concept, see H.R. REP. NO. 595, 95th Cong., 1st Sess. 347 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6303-04; S. REP. NO. 989, 95th Cong., 2d Sess. 58 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5844. See also Chattanooga Memorial Park v. Still (In re Jolly), 574 F.2d 349, 351 (6th Cir.)(noting that courts frequently use the Countryman definition to determine whether an executory contract exists), cert. denied, 439 U.S. 929 (1978).
5. The classic and widely accepted definition of an executory contract is "a contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." Vern A. Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L. REV. 439, 460 (1973). The Countryman definition has been so widely accepted that it was incorporated into the legislative history of the Code. See REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. NO. 137, Part II, 93d Cong., 1st Sess. 198-99 (1973). The House and Senate Reports contain a modified version of this concept, see H.R. REP. NO. 595, 95th Cong., 1st Sess. 347 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6303-04; S. REP. NO. 989, 95th Cong., 2d Sess. 58 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5844. See also Chattanooga Memorial Park v. Still (In re Jolly), 574 F.2d 349, 351 (6th Cir.)(noting that courts frequently use the Countryman definition to determine whether an executory contract exists), cert. denied, 439 U.S. 929 (1978).
6. 11 U.S.C. § 365(a) (1994). See Sharon Steel Corp. v. National Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989); Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309 (5th Cir. 1985); Carey v. Mobile Oil Corp. (In re Tilco, Inc.), 558 F.2d 1369, 1372-73 (10th Cir. 1977); In re Patterson, 119 B.R. 59, 60 (Bankr. E.D. Pa. 1990); In re J.M. Fields, Inc., 26 B.R. 852, 856 (Bankr. S.D.N.Y. 1983).
7. Technically speaking, a person assigns rights and delegates duties. 3 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 11.1, at 58 (1990). The transfer of a party's interest in a contract or lease may involve both an assignment of a right and the delegation of a duty. When both rights and duties are transferred, it is acceptable to refer to such a transfer as an assignment. Id.
8. As originally enacted at 11 U.S.C. § 365(f)(1) (1978)(emphasis added).
9. As originally enacted at 11 U.S.C. § 365(c)(1)(A) (1978)(amended)(emphasis added).
10. The contradictory nature of these two subsections has repeatedly been recognized by the courts. See, e.g., Gould v. Antonelli (In re Antonelli), No. 92-2541, 1993 U.S. App. LEXIS 21529, at *7 (4th Cir. Aug. 23, 1993)(opining that "§§ 365(c) and 365(f) [are] two bankruptcy code sections that appear on their faces to be contradictory"); Metropolitan Airports Comm'n v. Northwest Airlines (In re Midway Airlines, Inc.), 6 F.3d 492, 496 n.6 (7th Cir. 1993)(noting that the "reference to 'applicable law' in both subsections (c) and (f) is confusing"); Leonard v. General Motors Corp. (In re Headquarters Dodge, Inc.), No. 92-2718, 1992 U.S. Dist. LEXIS 18640, at * 16 (D.N.J. Nov. 25, 1992)(terming the situation involving § 365(c) and (f) as an "ambiguity in the Code"); In re Federated Dep't Stores, Inc., 126 B.R. 516, 517 (Bankr. S.D. Ohio 1990)(describing the interplay of these statutes as ambiguous).
11. In re Rooster, Inc., 100 B.R. 228, 231 (Bankr. E.D. Pa. 1989). See H.R. REP. NO. 595, 95th Cong., 1st Sess. 348 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6304; S. REP. NO. 989, 95th Cong., 2d Sess. 59 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5845.
12. See In re West Elecs., Inc., 852 F.2d 79, 83 (3d Cir. 1988)(applicable law in a case involving a defense procurement contract was found to be the federal Anti-Assignment Act, 41 U.S.C. § 15); Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 943 (5th Cir.)(applicable law governing transfer of airport landing slot leases was the D.C. Code and FAA regulations), reh'g denied, 705 F.2d 450 (5th Cir. 1983); In re Pioneer Ford Sales, Inc., 729 F.2d 27, 28 (1st Cir. 1984)(applicable law held to be state law governing the transfer of automobile franchises); In re Yachthaven Restaurant, Inc., 103 B.R. 68, 78 (Bankr. E.D.N.Y. 1989)(ecutive order issued by Mayor of New York City held to be applicable law). But see City of Jamestown v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 154 B.R. 813, 814 (M.D. Ga. 1993), aff'd, 27 F.3d 534 (11th Cir.)(municipal ordinance governing the transfer of a cable television franchise was not applicable law), reh'g denied, 38 F.3d 575 (11th Cir. 1994); In re Nitec Paper Corp., 43 B.R. 492, 497-98 (Bankr. S.D.N.Y. 1984)(adhering to a narrow construction and excluding from the definition of applicable law specific federal or state statutes which forbid the assignment of contracts).
13. See In re Sunrise Restaurants, Inc., 135 B.R. 149, 152 (Bankr. M.D. Fla. 1991)(legislative history offers "little guidance"); In re Federated Dep't Stores, Inc., 126 B.R. 516, 518 (Bankr. S.D. Ohio 1990)(citing Abney v. Fulton County (In re Fulton Air Serv.), 34 B.R. 568, 572 (Bankr. N.D. Ga. 1983))(legislative history is of little help). See also infra note 23 and accompanying text.
14. A personal service contract has been defined as "[a] contract which contemplates the performance of personal services involving the exercise of special knowledge, judgment, taste, skill, or ability . . . ." 6A C.J.S. Assignment § 32 (1975)(footnotes omitted). See Leonard v. General Motors Corp. (In re Headquarters Dodge, Inc.), No. 92-2718, 1992 U.S. Dist: LEXIS 18640, at *22 (D.N.J. Nov. 25, 1992)(opining that the "general parameters that demarcate a personal service contract have been well-established in bankruptcy law"); In re Rooster, Inc., 100 B.R. 228, 232 (Bankr. E.D. Pa. 1989). This determination generally depends upon the sui generis attributes of the intended performance. In re Compass Van & Storage Corp., 65 B.R. 1007, 1011 (Bankr. E.D.N.Y. 1986). Most notably, determining whether a contract is personal in nature depends "upon the nature of the subject of the contract, the circumstances of the case and the intent of the parties to the contract." 2 COLLIER ON BANKRUPTCY ¶ 365.05 (Lawrence P. King et al. eds., 15th ed. 1995). See 3 FARNSWORTH, supra note 6, § 11.10, at 129.
15. 6 B.R. 370 (Bankr. N.D. Ga. 1980).
16. Id. at 372 n.2 (quoting REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. NO. 137, Part II, 93d Cong, 1st Sess. 199 (1973)).
17. Id. at 372. Historically, a trustee has been denied the right to assume or assign a personal service contract. See Miller v. Mutual Holding Co. (In re Miller). 101 F.2d 323, 324 (6th Cir. 1939); Villar & Co. v. Conde, 30 F.2d 588, 590 (1st Cir. 1929). The court in In re D. H. McBride & Co., 132 F. 285, 288 (S.D.N.Y. 1904)(citing Arkansas Valley Smelting Co. v. Beiden Mining Co., 127 U.S. 379 (1888)), stated this policy succinctly that: "[R]ights arising out of contracts involving a relation of personal confidence cannot be transferred in invitum is an elementary rule." Courts of equity historically have refused to compel individuals to abide by contracts of a personal nature upon the commencement of a bankruptcy case. See In re Noonan, 17 B.R. 793, 798 (Bankr. S.D.N.Y. 1982)(citing 5A CORBIN, CONTRACTS § 1204 (1964)); 4 J. POMEROY, EQUITY JURISPRUDENCE § 1343, at 943-44 (5th ed. 1941). For an in depth analysis of the assumption of personal service contracts, see In re Compass Van & Storage Corp., 65 B.R. 1007, 1011 (Bankr. E.D.N.Y. 1986).
18. In re Taylor Mfg., Inc., 6 B.R. 370, 372 (Bankr. N.D. Ga. 1980)(citing 1A SUTHERLAND, STATUTORY CONSTRUCTION § 20.22, at 74 (4th ed. 1972))("It is obvious from the construction of these two provisions [(§§ 365(f) and 365(c)(1)(A)] that subsection (f) is intended to represent the general rule while subsection (c) is an exception to that rule.").
19. See supra note 16.
20. A contract for the services of a famous opera singer is a popular example of a personal service contract and courts have historically viewed artists as representing the typical instance of such contracts. This tradition traces its lineage back to the noted nineteenth century English case of Lumley v. Wagner, 1 De G., M. & G. 604, 619, 622 (Ch. App. 1852). Lumley involved a then prominent opera singer, Johanna Wagner, who had contracted to sing exclusively during a certain period of time. She was enjoined from singing at a competing theater during the pendency of her contract, although specific performance could not be decreed because it was for personal service. The performing artist example arose early in this country in the decision of Taylor v. Palmer, 31 Cal. 240 (1866). The court in Palmer opined that: [a]ll painters do not paint portraits like Sir Joshua Reynolds, nor landscapes like Claude Lorraine, nor do all writers write dramas like Shakespeare or fiction like Dickens. Rare genius and extraordinary skill are not transferable, and contracts for their employment are therefore personal, and cannot be assigned. But rare genius and extraordinary skill are not indispensable to . . . the construction of brick sewers with manholes and covers, and contracts for such work are not personal, and may be assigned. Id. at 247-48. More recently, courts have continued the tradition. See Metropolitan Airports Comm'n v. Northwest Airlines, Inc. (In re Midway Airlines, Inc.), 6 F.3d 492, 495 (7th Cir. 1993)(noting that a contract for the services of Luciano Pavarotti could not be performed by Michael Jackson); Drewes v. FM Da-Sota Elevator Co. (In re Da-Sota Elevator Co.), 939 F.2d 654, 655-56 & n.7 (8th Cir. 1991)(noting that a contract for Luciano Pavarotti could be performed by no one else). See also DOUGLAS G. BAIRD & THOMAS A. JACKSON, CASES, PROBLEMS, AND MATERIALS ON BANKRUPTCY 283 (2d ed. 1990)("There has always been a worry that the trustee of the debtor . . . might try for example to 'assume' the debtor's executory contract to sing at the Metropolitan Opera."). For an updated version of this example, see 1 DAVID G. EPSTEIN ET AL., BANKRUPTCY, PRACTITIONER TREATISE SERIES § 5-15, at 472 (1992)("Under contract law, . . . Andrew Dice Clay could not assign or delegate his contract to perform at the Omni during the Olympics to J.J. A bankruptcy filing by the Dice Man (Mr. Clay) should not change that result").
21. In re Taylor Mfg., Inc., 6 B.R. at 372.
22. In re Taylor, 103 B.R. 511, 517 n.4 (D.N.J. 1989)(indicating that "there is no indication, in either the legislative history of the Code or the relevant caselaw, that personal service contracts are intended to be outside the scope of the general provision allowing rejection of 'any executory contract' "), aff'd in part, 913 F.2d 102 (3d Cir. 1990).
23. The term "applicable law" is used in numerous other places throughout the Bankruptcy Code, see. eg., 11 U.S.C. §§ 365(e)(1), 365(e)(2)(A), 365(f)(3), 365(h)(1), 502(b)(1), 510(a), 541(c)(2) (1994). An inconsistent definition of "applicable law" between § 365(c)(1)(A) and § 365(f) could make interpreting these other sections of the Code problematic.
24. The legislative history cited in Taykr Manufacturing, provides that one type of contract, those involving nondelegable duties, was nonassignable, but it did not exclude other types of contracts as well. See infra notes 26-34 and accompanying text. Additionally, the passage cited by the court as evidence of legislative intent was in fact from a House Report which actually accompanied an earlier version of the bill than that which ultimately passed. As described by one court, "this construction is merely a paraphrase and not particularly fruitful in application and § 365(c) applies by its terms to both assignment and delegation . . . ." Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d 689, 694 (6th Cir. 1992). See id. at 699 (Guy, Jr., J., concurring)("This case [(Taylor Manufacturing)] . . . is clearly in error since section 365(c) governs not only delegation of duties but also assignment of rights.").
25. As one court has noted regarding § 365: The two clauses at the beginning of § 365(f) simply cannot be reconciled. Thus, the court must either ignore the subsection (c) exception or ignore the "applicable law" language of subsection (f) . . . . [W] ere the court to . . . give effect to the language instructing the court to disregard applicable law, the subsection (c) exception to (f)(1) would be rendered totally nugatory; the rule would swallow up the exception. Breeden v. Catron (In re Catron), 158 B.R. 629, 636-37 (E.D. Va. 1993)(citation omitted), aff'd per curiam, 25 F.3d 1038 (4th Cir. 1994). See 2A J. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION § 53.01 (4th ed. 1984 & Supp. 1989).
26. See infra note 27.
27. In re Taylor Mfg., Inc., 6 B.R. 370, 372 (Bankr. N.D. Ga. 1980)(emphasis added).
28. Id. (citing 2 COLLIER ON BANKRUPTCY ¶ 365.05, at 365-33 (15th ed. 1980)("When an executory contract is of such a nature as to be based upon personal service or skills, or upon personal trust or confidence, the trustee has traditionally been unable to assume or assign the rights of the bankrupt in such contract"). This Collier cite defines one type of contract that is nonassumable; it does not purport to define the entire set of nonassumable or nonassignable contracts. See In re Pioneer Ford Sales, Inc., 729 F.2d 27, 29 (1st Cir. 1984)("The Taylor court cites 2 Collier on Bankruptcy § 365.05 and the Commission Report, H.R. DOC. NO. 93-137, 93d Cong., 1st Sess. 199 (1973), in support [of its narrow interpretation of § 365(c)(1)(A)]. Both of these sources speak of personal services. However, they do not say that [§ 365] (c)(1)(A), was intended to be limited to personal services").
29. This contention was in fact made by one of the litigants in the Taylor Manufacturing case: "The position of the trustee is that the exception of subsection (c) should apply only to executory contracts 'of such a nature as to be based upon personal services or skills or upon personal trust or confidence.' " In re Taylor Mfg., Inc., 6 B.R. 370, 371 (Bankr. N.D. Ga. 1980)(quoting Collier). Ironically, the reference in Collier which was the foundation of the Taylor Manufacturing ruling and many succeeding cases was later changed to expand it significantly beyond the scope of personal service contracts. See 2 COLLIER ON BANKRUPTCY ¶ 365.05 (Lawrence P. King et al. eds., 15th ed. 1995)("[T]he wording of § 365(c)(1)(A)] is such that considerably more contracts than those which one would normally consider personal service contracts are affected . . . . [T]he reference to applicable law in section 365(c) includes situations in which state or federal law can be said to bar assignment.").
30. Although the holding in Taylor Manufacturing was never actually adopted by a circuit court, it was twice cited as authority for the proposition that only personal service contracts are nonassignable under § 365. See Metropolitan Airports Comm'n v. Northwest Airlines (In re Midway Airlines, Inc.), 6 F.3d 492, 495 (7th Cir. 1993); Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 943 (5th Cir.), reh'g denied, 705 F.2d 450 (5th Cir. 1983).
31. See, e.g. In re Boogaart of Florida, Inc., 17 B.R. 480, 486 (Bankr. S.D. Fla. 1981)((indicating that "§ 365(c)'s exception to § 365(f) applies only to personal service contracts or contracts based upon personal trust or confidence")(citing Taylor Manufacturing and 2 COLLIER ON BANKRUPTCY ¶ 365.05, at 365-34 (15th ed. rev. 1981)).
32. 16 B.R. 634 (Bankr. M.D. Fla. 1981).
33. Id. at 638. Despite the fact that the Varisco court failed to cite any authority for its adoption of the personal service contract limitation, Varisco itself was soon cited as authority for this proposition. See In re Bronx-Westchester Mack Corp., 20 B.R. 139, 143 (Bankr. S.D.N.Y. 1982)(citing Varisco for the proposition that "Code § 365(c)(1)(A) . . . relates to executory contracts that are personal in nature"). See also Metropolitan Airports Comm'n v. Northwest Airlines, Inc. (In re Midway Airlines, Inc.), 6 F.3d 492, 495 (7th Cir. 1993)(quoting Bronx-Westchester for the proposition that an "'agreement which does not depend upon a special relationship between the parties is not within the reach of [the § 365] exception'"); In re Sunrise Restaurants, Inc., 135 B.R. 149, 153 (Bankr. M.D. Fla. 1991)(citing Varisco for the proposition that a franchise agreement is not a personal service contract and is therefore assumable under § 365(c)); In re Tom Stimus Chrysler-Plymouth, Inc., 134 B.R. 676, 679 (Bankr. M.D. Fla. 1991)(citing Varisco in support of the personal service contract limitation).
34. In re Haffner's 5 Cent to $1.00 Stores, Inc., 26 B.R. 948, 950 (Bankr. N.D. Ind. 1983)(stating that "section (c)(1)(A) is generally understood to refer to contracts for nondelegable personal services," citing Taylor Manufacturing as its authority). Sloppy judicial rulings regarding the Taylor Manufacturing decision occurred not only among the bankruptcy courts, but even within the same court in one instance. This began in 1983, when the bankruptcy court in Fulton Air Services adopted the narrow interpretation of Taylor Manufacturing. See Abney v. Fulton County (In re Fulton Air Serv., Inc.), 34 B.R. 568, 571 (Bankr. N.D. Ga. 1983)("Most courts considering § 365(c) have found this provision to apply only to nondelegable personal service contracts.")(emphasis added). Five years after its decision in Fulton Air Services, the same court, in an opinion written by the same judge, decided Secretary of the Army v. Terrace Apartments, Ltd. (In re Terrace Apartments, Ltd.), 107 B.R. 382, 384 (Bankr. N.D. Ga. 1989)("[T]his Court has previously held that § 365(c) applies only to nondelegable contracts such as personal service contracts.")(citing Fulton Air Services)(emphasis added). The ruling in Terrace Apartments actually expands the scope of § 365(c)(1)(A) by the insertion of the words "such as" in its decision, in spite of the fact that it purports merely to be a restatement of that court's previous holding in Fulton Air Services.
35. See In re Lile, 103 B.R. 830, 838 (Bankr. S.D. Tex. 1989). aff'd, 161 B.R. 788 (S.D. Tex. 1993), aff'd in part, 43 F.3d 668 (5th Cir. 1994)("A majority of courts, which have considered 11 U.S.C. § 365(c) when confronted with an issue of nonassignability, have found 11 U.S.C. § (c)(1)(A) to apply only to 'contracts based upon personal services or skills, or upon personal trust or confidence.'")(emphasis added & citations omitted). But see In re Rooster, Inc., 100 B.R. 228, 232 n.6 (Bankr. E.D. Pa. 1989)(decided two months before Lile)("[T]he Third Circuit adheres to the majority view, however, that § 365(c) is applicable to any contract subject to a legal prohibition against assignment [not just personal service contracts]."). See also Metropolitan Airports Comm'n v. Northwest Airlines, Inc. (In re Midway Airlines, Inc.), 6 F.3d 492, 495 (7th Cir. 1993)("Some courts have held that § 365(c) applies only to 'personal service contracts.'")(citing Taylor Manufacturing)(emphasis added); Gould v. Antonelli (In re Antonelli), No. 92-2541, 1993 U.S. App. LEXIS 21529, at *10 (4th Cir. Aug. 23, 1993)("Some courts have decided that § 365(c) applies only to certain kinds of executory contracts, that is, contracts based upon 'personal service or skills, or upon personal trust or confidence.'")(citing Taylor Manufacturing and Collier)(emphasis added); Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 943 (5th Cir.)(noting that the lower court ruling which it was overturning followed the proposition in Taylor Manufacturing that only personal service contracts are nonassignable under § 365), reh'g denied, 705 F.2d 450 (5th Cir. 1983). Ultimately, Taylor Manufacturing was to become so ubiquitous in the debate that it, and its progeny Varisco, were even mistakenly cited as authority for an expansive reading of § 365(c). See In re Nitec Paper Corp., 43 B.R. 492 (Bankr. S.D.N.Y. 1984): Appellee's contention that 11 U.S.C. § 365(c) applies only to personal service contracts, though having some support in case law, is essentially incorrect. The language of 11 U.S.C. § 365(c) gives no indication that its scope is limited to personal service contracts. Courts have interpreted this language to mean that Congress did not intend to limit § 365(c) in this manner . . . ." Id. at 497 (citing In re Braniff Airways, Inc., 700 F.2d at 943; Varisco v. Oroweat Food Co. (In re Varisco), 16 B.R. 634 (Bankr. M.D. Fla. 1981); In re Taylor Mfg., Inc., 6 B.R. 370 (Bankr. N.D. Ga. 1980)). As the debate on § 365(c)(1)(A) continued over the next ten years, Nitec was cited as authority for the expansive reading of § 365(c)(1)(A) in a number of courts, none of which seemed to notice the mistaken Taylor Manufacturing citation. See. eg., Metropolitan Airports Comm'n v. Northwest Airlines (In re Midway Airlines), No. 92 C 3232, 1992 U.S. Dist. LEXIS 16466, at *6 (N.D. Ill. Oct. 29, 1992); In re Lile, 103 B.R. at 839; and, perhaps most ironically, 2 COLLIER ON BANKRUPTCY ¶ 365.05, at 365-45 n.3c (Lawrence P. King et al. eds., 15th ed. 1995).
36. 700 F.2d 935 (5th Cir.), reh'g denied, 705 F.2d 450 (5th Cir. 1983).
37. Braniff Airways, Inc. v. CAB (In re Braniff Airways, Inc.), 29 B.R. 717 (Bankr. N.D. Tex. 1983). Braniff was technically not the first case to find the § 365(c)(1)(A) exception was not limited to personal service contracts. See Government Nat'l Mortgage Corp. v. Adana Mortgage Bankers, Inc. (In re Adana Mortgage Bankers, Inc.), 12 B.R. 977 (Bankr. N.D. Ga. 1980). The Adana Mortgage court barred the assumption of a financing contract by the debtor-in-possession. However, the Adana Mortgage case dealt with a financial accommodation under § 365(c)(2) of the Code, despite the fact that in the decision the court seemed unable to distinguish financial accommodation from other types of executory contracts under § 365(c)(1)(A). For this reason, Adana Mortgage is technically not a § 365(c)(1)(A) case and is therefore of little value in tracing the history of the treatment of executory contracts, except perhaps to note the added confusion surrounding this section of the Bankruptcy Code. See In re Prime, Inc., 15 B.R. 216, 218 (Bankr. W.D. Mo. 1981)(opining that "the [Adana Mortgage] court seemed to mix provisions of Section 365(c)(1) with those of Section 365(c)(2)").
38. Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 943 (5th Cir.), reh'g denied, 705 F.2d 450 (5th Cir. 1983)(citation omitted). See Breedon v. Catron (In re Catron), 158 B.R. 629, 638 n.9 (E.D. Va. 1993)(concluding that if Congress "intended to limit the scope of § 365(c) or § 365(f) to cases involving personal services contracts, it surely could have and would have so stated"), aff'd per curiam, 25 F.3d 1038 (4th Cir. 1994).
39. 7 D.C. CODE ANN. §§ 1101-07 (1995).
40. National Capital Airports, 14 C.F.R. § 159.91(a) (1980).
41. Pension Benefit Guaranty Corp. v. Braniff Airways, Inc (In re Braniff Airways, Inc.), 700 F.2d 935, 943 (5th Cir.), reh'g denied, 705 F.2d 450 (5th Cir. 1983).
42. Id.
43. There was no mention of the competing provision of § 365(f) in the Braniff decision. This omission has drawn criticism. See Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d 689, 698 (6th Cir. 1992)(Guy, Jr. J., concurring)("The court in . . . [Braniff] . . . rejected [Taylor Manufacturing's] narrow construction of 365(c), but in so doing seemed to suggest that 'applicable law' is not limited at all. The court failed to note that such a reading could bring 365(c) into direct conflict with 365(f), since 'applicable law' would, under its approach, mean the same thing in both subsections.").
44. Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 943 (5th Cir.), reh'g denied, 705 F.2d 450 (5th Cir. 1983). Interestingly, the Braniff court characterized the narrow construction of the statute limiting it to personal service contracts as "radical." Id.
45. 34 B.R. 568 (Bankr. N.D. Ga. 1983).
46. Id. at 572.
47. Id.
48. Id. The Fulton court cited the passage quoted in Taylor Manufacturing, see supra note 23. The court was also forthright in noting the weakness in relying on this one House Report, stating that "it should be noted that the legislative history is not helpful in construing § 365(c). Reference to personal service contracts does not appear in the history." Id.
49. In noting that the Braniff interpretation of § 365(c)(1)(A) would render part of § 365(f) "meaningless," the court in Fulton noted that "[i]t is a rule of statutory construction that a statute should, if possible, be 'construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant, and so that one section will not destroy another unless the provision is the result of obvious mistake or error.'" Id. (quoting 2A SUTHERLAND, STATUTORY CONSTRUCTION § 46.06, at 63 (4th ed. 1973)). The Fulton court did not, however, discuss situations where the "if possible" qualification was not applicable, as may well be the case with §§ 365(c)(1)(A) and 365(f).
50. The court reasoned that a broad interpretation of § 365(c)(1)(A) would deprive the debtor-in-possession of many contracts which may be crucial to the reorganization process. Abney v. Fulton County (In re Fulton Air Serv., Inc.), 34 B.R. 568, 570-71 (Bankr. N.D. Ga. 1983).
51. Id. at 572.
52. See id.
53. The Fulton court focused on reapplying the Taylor Manufacturing triad while adding a linguistic analysis which is not particularly valuable. The difference between "prohibits" and "excuses" does not seem altogether helpful given the many other linguistic analyses attempted. See. e.g., infra notes 53-59 & 116-17 and accompanying text.
54. 729 F.2d 27 (1st Cir. 1984).
55. Id. at 31.
56. Id. at 29 (citation omitted). This analysis would, of course, be complicated when other sections of the Code, which also use the term "applicable law," are considered. See supra note 22.
57. In re Pioneer Ford Sales, Inc., 729 F.2d 27. 29 (1st Cir. 1984).
58. The court's legal reasoning in Pioneer Ford appears to have been cited favorably in only one other case, see Metropolitan Airports Comm'n v. Northwest Airlines, Inc. (In re Midway Airlines, Inc.), 6 F.3d 492, 495 (7th Cir. 1993)(finding Pioneer Ford's reasoning to be "particularly persuasive" for ruling on the assignability of leases for aircraft landing slots), but explicitly criticized in others. See, e.g., infra note 58.
59. One court criticized Pioneer Ford's linguistic analysis as a "dense passage . . . founded on the erroneous belief that section 365(f) applies only when the bar to assignment is in a (legally-enforceable) contractual provision. Section 365(f), however, specifically includes within its scope situations in which the bar to assignment is not contractual but purely a product of the law." Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d 689, 699 (6th Cir. 1992)(Guy, Jr., J., concurring)(citation omitted). See id. at 695 (Joiner, J.)("There is simply nothing in the language of § 365(f) which supports the limitation read into it by" the Pioneer Ford court.).
60. See Leonard v. General Motors Corp. (In re Headquarters Dodge), No. 92-2718, 1992 U.S. Dist. LEXIS 18640. at *22 (D.N.J. Nov. 25, 1992)("The general parameters that demarcate a personal service contract have been well-established in bankruptcy law."); In re Compass Van & Storage Corp., 65 B.R. 1007, 1011 (Bankr. E.D.N.Y. 1986)("There is a plethora of case authority extant interpretative of the essential criteria which earmark authentic personal service contracts"). For a historical view of cases which have addressed this issue in the past, see Arkansas Valley Smelting Co. v. Belden Mining Co., 127 U.S. 379 (1888); In re D. H. McBride & Co., 132 F. 285, 288 (S.D.N.Y. 1904); Foster v. Callaghan, 248 F. 944 (S.D.N.Y. 1918); Sackman v. Stephenson, 11 N.Y.S.2d 69 (1939); La Rue v. Groezinger, 84 Cal. 281, 24 P. 42 (1890).
61. Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, § 362(a), 98 Stat. 333, 361 [hereinafter the "1984 Amendments"].
62. 11 U.S.C. § 365(c)(1) (1984) (amended). Bracketed language indicates deletions by the 1984 Amendments to § 365(c)(1)(A) of the Code; italicized language indicates additions.
63. 1 DAVID G. EPSTEIN ET AL., BANKRUPTCY § 5-15, at 475 (West 1992).
64. The 1984 Amendments were originally part of the Technical Amendments Act of 1980, which sought to "correct technical errors, clarify and make minor, substantive changes" to the Bankruptcy Code. See H.R. REP. NO. 1195, to accompany S. 658, 96th Cong., 2d Sess. (1980). For an extensive legislative history of the 1984 Amendments, see In re Cardinal Indus., Inc., 116 B.R. 964, 978-80 (Bankr. S.D. Ohio 1990).
65. See EPSTEIN ET AL., supra note 62, at 475. The committee report stated: [T]his amendment makes it clear that a prohibition against a trustee's power to assume an executory contract does not apply when it is the debtor that is in possession and the performance to be given or received under a personal service contract will be the same as if no petition had been filed because of the personal service nature of the contract. H.R. REP. NO. 1195, 96th Cong., 2d Sess. § 27(b) (1980). See In re Cardinal Indus., Inc., 116 B.R. at 978 ("Given the urgency with which BAFJA [(the Bankruptcy and Federal Judgeship Act)] was passed, its legislative "history" is comprised solely of statements inserted rather than actually read into the Congressional Record. 130 CONG. REC. H7471-7500 (daily ed. June 29, 1984); 130 CONG. REC. S8886-8900 (daily ed. June 29, 1984), reprinted in Appendix 3, COLLIER ON BANKRUPTCY Part XX (15th ed. 1989). Consequently there is no authoritative legislative history for BAFJA as enacted in 1984.").
66. 50 B.R. 640 (Bankr. MD, Pa. 1985).
67. Id. at 645-46. Peer Review was technically not the first case under the Code to rule the § 365(c)(1)(A) prohibited assumption. The court in Skeen v. Harms (In re Harms), 10 B.R. 817, 821 (Bankr. D. Colo. 1981), also ruled that this statute prohibited assumption. However, Hams premised its holding on the separate entity theory, a theory seemingly discredited by the Supreme Court in 1984. See infra note 84.
68. In re Pennsylvania Peer Review Org., Inc., 50 B.R. at 645-46.
69. Id. This ruling broke with the only consensus up to that time regarding § 365, that "applicable law" applied only to applicable nonbankruptcy law. See supra notes 10-11 and accompanying text.
70. The restrictions of § 365(c)(1)(A) apply to both the assumption and to the assignment of executory contracts by the trustee or debtor-in-possession. Section 365(f) applies only to the assignment of such executory contracts. Therefore, cases such as Peer Review usually do not address the conflict between these two statues, since only the former is applicable to the case being decided. See, e.g., In re West Elecs., Inc., 852 F.2d 79 (3d Cir. 1988). But see Breedon v. Catron (In re Catron), 158 B.R. 629, 636-37 (E.D. Va. 1993)(discussing the two sections and finding them to be irreconcilable), aff'd pa curiam, 25 F.3d 1038 (4th Cir. 1994).
71. The primary goal of the Bankruptcy Code under Chapter 11 is the rehabilitation of the debtor, while the Code aims at an orderly and equitable distribution of the debtor's assets under Chapter 7. See H.R. REP. NO. 595, 95th Cong., 1st Sess. 220 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6179-80. See also Raymond T. Nimmer, Executory Contracts in Bankruptcy: Protecting the Fundamental Terms of the Bargain, 54 U. COLO. L. REV. 507, 509 (1983)(indicating that the basic premise of Chapter 11 is to provide the debtor with a "fresh start").
72. Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, § 283(e)(1), 100 Stat. 3088, 3117 [hereinafter the "1986 Amendments"].
73. See In re Hartec Enters., Inc., 117 B.R. 865, 870 (Bankr. W.D. Tex. 1990)(citations omitted), vacated on other grounds, 130 B.R. 929 (W.D. Tex. 1991).
74. 852 F.2d 79 (3d Cir. 1988).
75. Id. at 80-82. The § 365(c)(1)(A) issue comes up regularly in cases involving the government. See, eg., United States v. Carolina Parachute Corp., 907 F.2d 1469 (4th Cir. 1990)(assumption issues involving a bankrupt supplier of parachutes); In re American Ship Bldg. Co., 164 B.R. 358 (Bankr. M.D. Fla. 1994)(debtor-in-possession allowed to assume a contract with the United States Navy to build naval vessels); In re Plum Run Serv. Corp., 159 B.R. 496 (Bankr. S.D. Ohio 1993)(debtor-in-possession not allowed to assume a base operational support contract with the Navy); In re Fastrax, Inc., 129 B.R. 274 (Bankr. M.D. Fla. 1991)(debtor-in-possession allowed to assume a subcontract in connection with work for the United States Air Force); In re Ontario Locomotive & Indus. Ry. Supplies, Inc., 126 B.R. 146 (Bankr. W.D.N.Y. 1991)(debtor-in-possession allowed to assume a contract to remanufacture three United States Navy locomotives); Secretary of the Army v. Terrace Apartments, Ltd. (In re Terrace Apartments, Ltd.), 107 B.R. 382 (Bankr. N.D. Ga. 1989)(debtor-in-possession allowed to assume a sweetheart lease for real property against the wishes of the United States Army). For additional problems faced by the Department of Defense in bankruptcy situations, see Brett W. King, Federal Acquisition Law in an Era of Declining Defense Spending: Defining the Government's Interest in Defense Contractor Property, 42 NAVAL L. REV. 35 (1995); Scott E. Ransick, Adverse Impact of the Federal Bankruptcy Law on the Government's Rights in Relationship to the Contractor in Default, 124 MIL. L. REV. 65 (1989).
76. Id. at 80-82. The § 365(c)(1)(A) issue comes up regularly in cases involving the government. See, eg., United States v. Carolina Parachute Corp., 907 F.2d 1469 (4th Cir. 1990)(assumption issues involving a bankrupt supplier of parachutes); In re American Ship Bldg. Co., 164 B.R. 358 (Bankr. M.D. Fla. 1994)(debtor-in-possession allowed to assume a contract with the United States Navy to build naval vessels); In re Plum Run Serv. Corp., 159 B.R. 496 (Bankr. S.D. Ohio 1993)(debtor-in-possession not allowed to assume a base operational support contract with the Navy); In re Fastrax, Inc., 129 B.R. 274 (Bankr. M.D. Fla. 1991)(debtor-in-possession allowed to assume a subcontract in connection with work for the United States Air Force); In re Ontario Locomotive & Indus. Ry. Supplies, Inc., 126 B.R. 146 (Bankr. W.D.N.Y. 1991)(debtor-in-possession allowed to assume a contract to remanufacture three United States Navy locomotives); Secretary of the Army v. Terrace Apartments, Ltd. (In re Terrace Apartments, Ltd.), 107 B.R. 382 (Bankr. N.D. Ga. 1989)(debtor-in-possession allowed to assume a sweetheart lease for real property against the wishes of the United States Army). For additional problems faced by the Department of Defense in bankruptcy situations, see Brett W. King, Federal Acquisition Law in an Era of Declining Defense Spending: Defining the Government's Interest in Defense Contractor Property, 42 NAVAL L. REV. 35 (1995); Scott E. Ransick, Adverse Impact of the Federal Bankruptcy Law on the Government's Rights in Relationship to the Contractor in Default, 124 MIL. L. REV. 65 (1989).
77. The government is normally protected against an unconsented to transfer of its contracts by statutory language in the Anti-Assignment Act, 41 U.S.C. § 15, which provides in relevant part: No contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer will cause the annulment of the contract or order transferred, so far as the United States is concerned. . . . 41 U.S.C. § 15 (1994). Despite the broad wording of this statute, the courts have placed significant restrictions upon its use as they have defined the term "transferred" quite narrowly. In applying 41 U.S.C. § 15, the court in Thompson v. Commissioner of Internal Rev., 205 F.2d 73 (3d Cir. 1953), stated that it would not mechanically define "transfer" in terms of a mere change in legal identity, but would instead pragmatically test each situation by the extent to which such change would deprive the government of the particular management and financial responsibility which rendered the contractor a responsible bidder. Id. at 76-77. Under this test, the courts have exempted from the broad reach of this statute those assignments which do not present the dangers that the statute was designed to obviate. See. e.g., Tuftco Corp. v. United States, 614 F.2d 740, 744 (Ct. Cl. 1980). The statute has been held inapplicable to a transfer by court order, intestate succession, or testamentary disposition, to an executor or administrator, a receiver, or otherwise by operation of law. See Thompson, 205 F.2d at 76 (citing authorities). Transfers resulting from the merger or consolidation of two corporations or a distribution in kind to stockholders upon dissolution have been excepted from the reach of the statute. Id. An assignment for the benefit of creditors, a judicial sale, and subrogation to an insurer have all been held exempt transfers. Id.
78. The court in West Electronics used both the 1984 and 1986 Amendments in constructing its ruling. See infra note 80.
79. In re West Elecs., Inc., 852 F.2d 79, 83 (3d Cir. 1988).
80. This reading of the statute is probably the most consistent with the actual wording of the text. It basically interprets § 365(c)(1)(A) as providing that the debtor-in-possession may not assume or assign any executory contract if applicable law excuses a nondebtor party from accepting performance from or rendering performance to a third party. Fidelity to the text, however, appears to be West Electronics only redeeming quality. See EPSTEIN ET AL., supra note 62, at 474 ("West Electronics is consistent with the language of § 365(c)(1). . . . Such a result, however, not only ignores the very real practical differences between assignment and assumption, but also other provisions of the Bankruptcy Code."). See also United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989)(holding that the plain meaning of the language of the Bankruptcy Code controls since there was no evidence that the literal application of the statute would contradict the intent of the drafters).
81. In re Hartec Enters, Inc., 117 B.R. 865, 871 (Bankr. W.D. Tex. 1990), vacated on other grounds, 130 B.R. 929 (W.D. Tex. 1990); In re Lile, 103 B.R. 830, 840 (Bankr. S.D. Tex. 1989). See generally In re Taylor, 103 B.R. 511, 517 (D.N.J. 1989)(opining that the underlying purpose of the Bankruptcy Code is to allow the individual debtor to obtain a fresh start), aff'd in pan, 913 F.2d 102 (3d Cir. 1990); Abney v. Fulton County (In re Fulton Air Serv, Inc.), 34 B.R. 568. 572-73 (Bankr. N.D. Ga. 1983)("The Court is mindful of Congress' intent to allow a financially distressed entity to reorganize. In many instances, an unexpired lease is the entity's major asset. To deprive it of the benefits which derive from the assignment of such a lease, would be to deprive it of a realistic chance of successfully reorganizing."). See also Perez v. Campbell, 402 U.S. 637, 648 (1971). But we In re Nitec Paper Corp., 43 B.R. 492, 499 & n.7 (Bankr. S.D.N.Y. 1984)("A reorganization must be formulated within the bounds of existing state and federal law. . . . The Supreme Court has indicated several situations where the bankruptcy code must bend in the face of contrary federal policy.").
82. In re West Elecs., Inc., 852 F.2d 79. 83 (3d Cir. 1988)("We conclude that assignment of a contract calling for the production of military equipment is precisely what Congress intended to prevent when it prohibited assignments . . . ."); id. ("The literal meaning of the words chosen by Congress clearly requires the analysis and conclusion we have just articulated and we are confident that it is what Congress intended. We think that by including the words 'or the debtor in possession' in 11 U.S.C. § 365(c)(1) Congress anticipated an argument like the one here made . . . ."); id. at n.2 ("While [§ 365(c)] previously was arguably somewhat ambiguous on the point decided herein, we are persuaded that the 1986 amendment merely clarified Congress' original intent and that, in any event, there can be no doubt about the meaning of the section in the present form.").
83. See In re Hartec Enters., Inc., 117 B.R. 865, 871 (Bankr. W.D. Tex. 1990)("The hypothetical test posited by West . . . fails to adequately account for the 1984 and 1986 amendments" to the Code.), vacated on other grounds, 130 B.R. 929 (W.D. Tex. 1990); In re Cardinal Indus, Inc. 116 B.R. 964, 979 (Bankr. S.D. Ohio 1990)(indicating that a discussion of the legislative history of § 365 demonstrates the West Electronics hypothetical test was inappropriate both before and after the 1984 Amendments). Interestingly, the Cardinal court justified a holding contrary to West Electronics also based on the 1986 Amendments. See discussion infra notes 119-20 and accompanying text.
84. In re Cardinal Indus., Inc., 116 B.R. 964, 975-82 (Bankr. S.D. Ohio 1990).
85. In re West Elecs., Inc., 852 F.2d 79, 83 (3d Cir. 1988)(conduding that "in the context of the assumption and assignment of executory contracts, a solvent contractor and an insolvent debtor in possession going through bankruptcy are materially distinct entities").
86. 465 U.S. 513, 528 (1984). In Bildisco, the Supreme Court found that if the debtor-in-possession: were a wholly "new entity," it would be unnecessary for the Bankruptcy Code to allow it to reject executory contracts, since it would not be bound by such contracts in the first place. For our purposes, it is sensible to view the debtor-inpossession as the same "entity" which existed before the filing of the bankruptcy petition, but empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have done absent the bankruptcy filing. Id. Although the Court in Bildisco ultimately viewed the debtor-in-possession as the same entity as the prepetition debtor, it limited its ruling to the contractual realities of the labor dispute before it and made no ruling to cover all debtors-in-possession. Id. at 522. Therefore, despite the wording against the separate entity theory, the concept has proven quite resilient. See, eg., Breedon v. Catron (In re Catron), 158 B.R. 629, 632 (E.D. Va. 1993)(holding that the debtor-in-possession is to be viewed as a separate entity for purposes of § 365(c)(1)(A) construction because of a transformation of legal obligations), aff'd pa curiam, 25 F.3d 1038 (4th Cir. 1994); Patton v. John Deere Co. (In re Durham), 87 B.R. 300, 302 (Bankr. D. Del. 1988)(limiting Bildisco to § 365 cases), aff'd, 100 B.R. 711 (D. Del. 1989); In re Sunset Developers, 69 B.R. 710, 713 (Bankr. D. Idaho 1987)(holding that the debtor-in-possession was a different legal entity than the debtor/partner). See also United States v. Evatt (In re Evatt), 112 B.R. 417, 419-20 (W.D. Okla. 1990); United States v. Gore (In re Gore), 124 B.R. 75, 78 (Bankr. E.D. Ark. 1990); In re Priestly, 93 B.R. 253, 258-60 (Bankr. D.N.M. 1988); Walat Farms, Inc v. United States (In re Walat Farms, Inc.), 69 B.R. 529, 531 (Bankr. E.D. Mich. 1987). Most courts, however, have found that the wording in Bildisco has put an end to the separate entity theory altogether. See United States v. Gerth, 991 F.2d 1428, 1436 (8th Cir. 1993)(debtor and debtor-in-possession are same entity for purposes of mutuality under § 553 of the Code); Fanelli v. Hensley (In re Triangle Chems., Inc.), 697 F.2d 1280, 1284 (5th Cir. 1983)(as a practical matter, the debtor and the debtor-in-possession are functionally the same entity); In re Allen, 135 B.R. 856, 868 (Bankr. N.D. Iowa 1992)(Bildisco language is unambiguous and was clearly intended to put and end to the distinction between the debtor and the debtor-in-possession); In re Fastrax, Inc., 129 B.R. 274, 277 (Bankr. M.D. Fla. 1991)("The proposition that the debtor is a different legal entity from a debtor in possession is a non-sequitur in the context of § 365."); In re Ontario Locomotive & Indus. Ry. Supplies, Inc., 126 B.R. 146, 147 (Bankr. W.D.N.Y. 1990)(indicating that Bildisco has laid to rest the separate entity doctrine "for all time").
87. Generally, an ipso facto clause is a contractual provision that triggers a default, modification, forfeiture or termination upon the filing of a petition under the Code or similar debtor protection schemes. The Bankruptcy Code renders such provisions inoperative under §§ 365(e)(1) and 365(b)(2). The hypothetical test in West Electronics would seem to allow such clauses despite their dear statutory prohibition under the Code. See In re Cardinal Indus., Inc., 116 B.R. 964, 973 (Bankr. S.D. Ohio 1990); City of Jamestown v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 154 B.R. 813, 815 (M.D. Ga. 1993), aff'd. 27 F.3d 534 (11th Cir.), reh'g denied, 38 F.3d 575 (11th Cir. 1994). But see 11 U.S.C. § 365(e)(2)(a) (1994)(seemingly giving force to ipso facto clauses in instances where § 365(c)(1)(A) is applicable). For an in depth discussion of the ipso facto clause, see Robert L. Ruben, Note, Legislative and Judicial Confusion Concerning Executory Contracts in Bankruptcy, 89 DICK. L. REV. 1029, 1037-42 (1984).
88. In re West Elecs., Inc., 852 F.2d 79, 84 (3d Cir. 1988)(Higginbotham, J., concurring in part & dissenting in part)(citation omitted).
89. See, e.g., Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608, 614 (1st Cir. 1995)(rejecting the hypothetical test formulated in West Electronics); Texaco, Inc. v. Louisiana Land & Exploration Co., 136 B.R. 658, 670-71 (M.D. La. 1992)(opining that the West Electronics hypothetical test is "incorrect" and "furthers no bankruptcy purpose at all"); In re American Ship Bldg. Co., 164 B.R. 358, 362 (Bankr. M.D. Fla. 1994)(indicating that in order "[t]o accept the legal authority that espouses the [West Electronics] hypothetical test to prevent a debtor from assuming its own contract is clearly not envisioned by the Bankruptcy Code and would be, at the least, 'a legal tautology'"); In re Fastrax, Inc., 129 B.R. 274, 274 (Bankr. M.D. Fla. 1991)(concluding that West Electronics may be appropriate only in instances of certain government contracts); In re Ontario Locomotive & Indus. Ry. Supplies, Inc., 126 B.R. 146, 148 (Bankr. W.D.N.Y. 1990)("Congress did not intend to bar assumption of any contract as long as it will be performed by the debtor or debtor in possession."); In re James Cable Partners, L.P., 148 B.R. 59, 61 (Bankr. M.D. Ga. 1992)(concluding that West's argument missed the point), aff'd, 154 B.R. 813 (M.D. Ga. 1993), aff'd, 27 F.3d 534 (11th Cir.), reh'g denied, 38 F.3d 575 (11th Cir. 1994); In re Cardinal Indus., Inc., 116 B.R. 964, 979 (Bankr. S.D. Ohio 1990)(opining that "the hypothetical test established in West is clearly not appropriate under § 365(c)"). See also Morris W. Macey & James R. Sacca, Reconciling Sections 365(c)(1) and (f)(1) of the Bankruptcy Code: Should Anti-Assignment Laws Prohibit Assumption of Contracts By a Debtor in Possession?, 100 COM. L.J. 117, 121-25 (1995).
90. The names given to each approach are merely to distinguish them from each other in loose relation to their interpretive breadth, and are not necessarily drawn from the case law. Indeed, the courts have not even been able to agree amongst themselves about appropriate titles to give each type of interpretation. See, e.g. Leonard v. General Motors Corp. (In re Headquarters Dodge, Inc.), No. 92-2718, 1992 U.S. Dist. LEXIS 18640, at *16 n.2 (D.N.J. Nov. 25, 1992): This Court also notes that the varying nomenclature used to describe these approaches has added to the confusion. For example, the narrow approach is occasionally referred to as the "majority" approach, Lile, 103 B.R. at 838; Fulton, 34 B.R. at 571, or "literal" approach. Texaco, 136 B.R. at 671. Courts also developed various characterizations of the broad view such as "the recent trend." Lile, 103 B.R. at 839. See also supra note 34 and accompanying text, where two courts ruling only months apart each stated that opposite interpretations were the "majority" approach.
91. See supra notes 29-34 and accompanying text.
92. In re Washington Capital Aviation & Leasing, 156 B.R. 167, 175 n.5 (Bankr. E.D. Va. 1993)(accepting the personal service contract limitation of Taylor Manufacturing); In re Raby, 139 B.R. 833, 835-36 (Bankr. N.D. Ohio 1991)(land installment contract is not a personal service contract and is therefore assignable); In re Tom Stimus Chrysler-Plymouth, Inc., 134 B.R. 676, 679 (Bankr. M.D. Fla. 1991)(franchise agreement is not a personal service contract and may be assigned); In re Ontario Locomotive & Indus. Ry. Supplies, Inc., 126 B.R. 146, 147 (Bankr. W.D.N.Y. 1990)(stating in dicta somewhat contrary to its holding that "[t]his Court is convinced . . . that section 365(c) was meant to be narrowly confined to personal service contracts which call for the performance of non-delegable duties"); Secretary of the Army v. Terrace Apartments, Ltd. (In re Terrace Apartments, Ltd.), 107 B.R. 382, 383 (Bankr. N.D. Ga. 1989)(holding that § 365(c) is applicable only to personal service contracts); In re Compass Van & Storage Corp., 65 B.R. 1007, 1010-11 (Bankr. E.D.N.Y. 1986)(concluding that an agency contract is not a personal service contract and is therefore assumable under § 365(c)); Abney v. Fulton County (In re Fulton Air Serv., Inc.), 34 B.R. 568, 572 (Bankr. N.D. Ga. 1983)(real property lease is not a personal service contract and is therefore assignable); In re Haffner's 5 Cent to $1.00 Stores, Inc., 26 B.R. 948, 951 (Bankr. N.D. Ind. 1983)(shopping center leases do not fall within the personal service contract limitation and are therefore assignable); In re Bronx-Westchester Mack Corp., 20 B.R. 139, 143 (Bankr. S.D.N.Y. 1982)(assumption and assignment of lease allowable); Varisco v. Oroweat Food Co. (In re Varisco), 16 B.R. 634, 638 (Bankr. M.D. Fla. 1981)(allowing assignment of non-personal distribution contract).
93. The court adopted the Materiality of Identity test in In re Antonelli. See infra note 107.
94. Breedon v. Catron (In re Catron), 158 B.R. 629, 637-38 (E.D. Va. 1993), aff'd per curium, 25 F.3d 1038 (4th Cir. 1994).
95. 27 F.3d 534, 537 (11th Cir.), reh'g denied, 38 F.3d 575 (11th Cir. 1994).
96. United States v. Carolina Parachute Corp. (In re Carolina Parachute Corp.), 108 B.R. 100 (M.D.N.C. 1989). aff'd in part & vacated in part, 907 F.2d 1469 (4th Cir. 1990); In re Plum Run Serv. Corp., 159 B.R. 496, 500 (Bankr. S.D. Ohio 1993); In re Rooster, Inc., 100 B.R. 228, 232 (Bankr. E.D. Pa. 1989).
97. The reasoning for this approach was best enunciated by the court in Leonard v. General Motors Corp. (In re Headquarters Dodge, Inc.), No. 92-2718, 1992 U.S. Dist. LEXIS 18640, at *16 (D.N.J. Nov. 25, 1992)(The boundlessly broad approach allows the exception in § 365(c)(1)(A) to swallow the rule in § 365(f) and such a reading renders § 365(f) meaningless; the broad approach without circumscription defeats a congressional intention to make § 365(c)(1)(A) a narrow exception to the general rule and undermines a "congressional policy" which favors assignments; the unlimited broad approach subverts a fundamental purpose of the Code - to allow financially distressed entities to reorganize more effectively. On the other hand, the purely narrow approach ignores the provision limiting assumption and assignment of contracts to any contract subject to a legal prohibition against assignment.). See Texaco, Inc. v. Louisiana Land & Exploration Co., 136 B.R. 658, 670-71 (M.D. La. 1992)(mineral lease is not a contract of significant public importance); In re Federated Dep't Stores, Inc., 126 B.R. 516, 518-19 (Bankr. S.D. Ohio 1990)(although a § 365(b)(3) case, court ruled out applying § 365(c)(1)(A), in part, because a shopping center lease is not a contract of significant public importance).
98. In re Headquarters Dodge, Inc., 1992 U.S. Dist. LEXIS 18640, at *20. See In re Nitec Paper Corp., 43 B.R. 492 (S.D.N.Y. 1984)(federally subsidized electric power contract is nonassignable by statutory command); Pennsylvania Peer Review Org., Inc. v. United States (In re Pennsylvania Peer Review Org., Inc.), 50 B.R. 640 (Bankr. M.D. Pa. 1985)(assignment of a government contract barred).
99. See United States v. Wincom Corp. (In re Wincom Corp.), 76 B.R. 1, 2 (Bankr. D. Mass. 1987)("In the absence of a specific statutory exception, the government should be held to the same standards as any other contracting party."). See also In re University Med. Ctr., 973 F.2d 1065, 1077 (3d Cir. 1992)("'Nor do we believe that government agencies, after choosing to contract with private corporations, should receive more favorable treatment than other similarly situated parties.'")(quoting Corporacion de Servicios Medicos Hospitalarios v. Mora (In re Corporacion de Servicios Medicos Hospitalarios), 805 F.2d 440, 447 n.10 (1st Cir. 1986)). See generally Larry J. Gusman, Rethinking Boyle v. United Technologies Corp., Government Contractor Defense: Judicial Preemption of the Doctrine of Separation of Powers?, 39 AM. U. L. REV. 391 (1990); Terrie Hanna, Note, The Government Contract Defense and the Impact of Boyle v. United Technologies Corp, 70 B.U. L. REV. 691 (1990).
100. See supra notes 63-64.
101. See City of Jamestown v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 154 B.R. 813-14 (M.D. Ga. 1983)(assumption allowed if the assuming party is someone other than the debtor or debtor- in-possession, although the court seemed more sympathetic to the Broad Approach on appeal, Ke supra note 93), aff'd, 27 F.3d 534 (11th Cir.), reh'g denied, 38 F.3d 575 (11th Cir. 1994); Summit Inv. & Dev. Corp. v. LeRoux (In re LeRoux), 167 B.R. 318, 321 (Bankr. D. Mass.)("A debtor in possession can assume and perform a personal service contract notwithstanding that such contract is otherwise barred from assumption and assignment by a trustee under applicable law."), aff'd, 1995 WL 447800 (D. Mass. Oct. 20, 1994), aff'd, 69 F.3d 608 (1st Cir. 1995); American Ship Bldg. Co., 164 B.R. 358, 363 (Bankr. M.D. Fla. 1994). See also In re Ontario Locomotive, & Indus. Ry. Supplies, Inc., 126 B.R. 146, 147 (Bankr. W.D.N.Y. 1990)(although adopting the Narrow Approach, the court also wrote that assumption is allowed if it is by the debtor or the debtor-in-possession). It has been noted that: Prior to the 1984 amendments, the trustee could not assume a personal service contract if applicable law excused the objecting nondebtor party from accepting performance from the trustee. . . . Section 365(c)(1)(A) now states, however, that the trustee may not assume a personal service contract if applicable law excuses the objecting nondebtor party from accepting performance from "an entity other than the debtor or the debtor in possession." This leaves open the possibility that the trustee or debtor in possession may assume an executory contract with an objecting nondebtor where performance continues by the debtor or debtor in possession. In re Fryar, 99 B.R. 747, 750 (Bankr. W.D. Tex.), vacated on other grounds, 113 B.R. 317 (W.D. Tex. 1989). Two other cases are sympathetic to the Intermediate Approach. See In re Sunrise Restaurants, Inc., 135 B.R. 149, 153 (Bankr. M.D. Fla. 199)("[A] sensible construction of [§ 365(c)] permits but one conclusion - that this Section was designed solely to govern the Debtor-In-Possession's ability to assign a contract which it has already assumed."); In re Fastrax, Inc., 129 B.R. 274, 278 (Bankr. M.D. Fla. 1991)("Section 365(c)(1) was designed only to prevent a debtor-in-possession from assigning unexpired executory contracts . . . .").
102. In re Hartec Enters., Inc., 117 B.R. 865, 872 (Bankr. W.D. Tex. 1990), vacated on other grounds, 130 B.R. 929 (W.D. Tex. 1991). Given the name "actual test," the Hartec court found that: [t]he "actual" test still operates to prohibit assumption or assignment in the same situations which 41 U.S.C. § 15 was designed to address - cases in which the Government would be forced to deal with an entirely new entity. A trustee in bankruptcy (as distinguished from the debtor in possession) is one such new entity, for example. That trustee will always be "an entity other than the debtor or debtor in possession" and will always be barred from taking over a government contract absent the government's consent. The debtor in possession, however, is not "an entity other than the debtor or debtor in possession," and so could always assume the contract. Id. This ruling would go against the general bankruptcy policy that the debtor-in-possession stands in the shoes of the trustee. See supra note 3. Although Hartec was subsequently vacated because the parties to the case ultimately settled their differences, the rationale and discussion of the bankruptcy court was never overturned or criticized.
103. Although at least one case does purport to look to see if performance will be the same after the transfer of the contract, see In re Fastrax, Inc., 129 B.R. 274 (Bankr. M.D. Fla. 1991), most do not and even Fastrax fails to fully consider this issue. Additionally, these tests simply do not make sense in relation to the text of § 365(c)(1)(A). The statute provides that "the trustee may not assume or assign," yet the Intermediate Approach requires the courts to treat instances of assumption completely different from assignment, when clearly this is not intended by the Code. Also, to conclude, as these cases often do, that § 365(c)(1)(A) only applies when the assuming party is "someone other than the debtor or debtor in possession" seems strange in that the debtor can never be an assuming party.
104. See supra notes 53-59. The First Circuit briefly discussed § 365(c)(1)(A) again in 1995, but without mentioning Pioneer Ford or its reasoning. The only apparent result of the decision was to further distance the
105. 6 F.3d 492, 495-96 (7th Cir. 1993).
106. See supra notes 35-43.
107. 972 F.2d 689 (6th Cir. 1992).
108. Id. at 694-70.
109. See Gould v. Antonelli (In re Antonelli), No. 92-2541, 1993 U.S. App. LEXIS 21529, at *12 (4th Cir. Aug. 23, 1993). Under this test, § 365(f) is viewed as a contractual or statutory prohibition against assignment of executory contracts and is ineffective against the debtor-in-possession, who may assign a contract in contravention of such law. Under § 365(c)(1)(A), however, there is one instance in which the trustee's power to override applicable law is diminished, and that is where the attempted assignment by the debtor-in-possession will have an impact upon the rights of a nondebtor third party. Any law which protects the rights of such a nondebtor third party by allowing him or her to refuse to accept from or render performance to an assignee will also prohibit assignment by the trustee. See In re Antonelli, 148 B.R. 443, 448 (D. Md. 1992), aff'd, Gould v. Antonelli (In re Antonelli), No. 92-2541, 1993 U.S. App. LEXIS 21529 (4th Cir. Aug. 23, 1993). In adopting the reasoning of In re Magness, the bankruptcy court in Antonelli indicated that the opinion: suggested that a sensible way to reconcile Section 365(f) and Section 365(c) is to read the words "applicable law" in Section 365(f) as applying to laws prohibiting assignments by express mandate or express validation of contractual anti-assignment provisions and to read the same words in Section 365(c) as applying to the underlying common law principle excusing under certain circumstances the non- assigning party from performance even in the absence of an express anti-assignment rule. I do not pretend that this distinction is not somewhat facile. Id. The decision of the district court in Antonelli was followed by the Court of Appeals for the Fourth Circuit, Gould v. Antonelli (In re Antonelli), No. 92-2541, 1993 U.S. App. LEXIS 21529, at *9 (4th Cir. Aug. 23, 1993)(indicating "that the non-debtor party to a contract is excused from [accepting] performance [from an assignee] if the identity of the debtor is a material condition of the contract when considered in the context of the obligations which remain to be performed under the contract").
110. Leonard v. General Motors Corp. (In re Headquarters Dodge, Inc.), No. 92-2718, 1992 U.S. Dist. LEXIS 18640 (D.N.J. Nov. 25, 1992).
111. See In re Antonelli, 148 B.R. at 446-47.
112. Id. at 447: In my view the reality is that in attempting to accommodate competing policy interests, all of which are of substantial weight, Congress has enacted statutes which impose conflicting mandates and has created a statutory scheme leaving interstices which the courts necessarily must fill on a case by case basis. Under these circumstances I will not ornament my holding with a facade of precedent or references to what I deem to be inconclusive statutory language.
113. See Macey & Sacca, supra note 87, at 117-18.
114. Breedon v. Catron (In re Catron), 158 B.R. 629, 636 (E.D. Va. 1993), aff'd per curiam, 25 F.3d 1038 (4th Cir. 1994). See supra note 9.
115. Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106 (codified as amended in scattered sections of 11 U.S.C.).
116. At the time of the publication of this Article, the author was a law clerk with the majority staff of the United States Senate Judiciary Committee. This clerkship included work on numerous legal and policy research projects, one of which was the Bankruptcy Technical Corrections Act of 1996 (S. 1559). In an attempt to resolve this long history of confusion in § 365, and to enhance the integrity of the Code, the research surrounding this Article, as well as the Macey & Sacca article supra note 87, and the recommendations of the National Bankruptcy Conference regarding the reform of § 365 were forwarded to the attorney on the Judiciary Committee in charge of bankruptcy matters. Unfortunately, the confusion surrounding the "applicable law" section seems destined to continue. Despite the near unanimous calls for legislative action, there appeared to be "no room" available on S. 1559 for an amendment to § 365 which "might be substantive in nature." Personal Interview with Elizabeth Kessler, Counsel, United States Senate Committee on the Judiciary, Washington, D.C. (April 3, 1996). The above-referenced documents have now been forwarded to Brady C. Williamson, Chair, National Bankruptcy Review Commission. According to Mr. Williamson, the Commission is statutorily required to submit a bankruptcy reform report to Congress by August of 1997. However, because of delays caused by the death of Mike Synar, former Chair, the Commission may ask Congress for an extension. Brady Williamson, Remarks to Bankruptcy Staff & Counsel, Washington, D.C. (April 18, 1996). The next bankruptcy reform act is not expected to pass Congress until 1997 or 1998 at the earliest. Kessler, supra.
117. 116 B.R. 964 (Bankr. S.D. Ohio 1990).
118. Id. at 977. A cogent response to this test was outlined in another § 365(c)(1)(A) case: This argument founders on its initial assumption: that nonassignaility of a contract is sufficient as a matter of law to preclude assumption by the trustee or the debtor in possession. Under § 365(c)(1), nonassignability of a contract is a necessary but not a sufficient condition to preclude assumption. Rather, the statute also requires that the nondebtor parties to the contract fail to consent to the assumption or assignment of the contract. Once the nondebtor parties consent to the assumption of an executory contract found to be nonassignable under the hypothetical test articulated in § 365(c)(1)(A), the "or assign" language of that section comes into play. At that point, the nondebtor parties again have the power to authorize or veto the assignment of such contract. Consequently, this court concludes . . . that a literal reading of § 365(c)(1)(A) renders the "or assign" language in that subsection superfluous, is incorrect. Breedon v. Catron (In re Catron), 158 B.R. 629, 636 (E.D. Va. 1993), aff'd pa curiam, 25 F.3d 1038 (4th Cir. 1994).
119. Id. at 979.
120. In re Cardinal Indus., Inc., 116 B.R. 964, 976 (Bankr. S.D. Ohio 1990)(concluding that a "hypertechnical reading" of the language of § 365(c)(1)(A) and (f) may lead to a "nonsensical result"); id. at 978 (stating that given the uncertainty with respect to the plain meaning of § 365(c)(1)(A) and (f), the language of § 365 cannot be applied in a literal manner). It should be noted that interpreting the reasoning of the court's decision in Cardinal Industries is somewhat difficult in that the published decision is written mostly in the voice of the third person-trustee. This Article assumes that the court in Cardinal Industries adopted for its decision those arguments that it discussed but did not reject.
121. Id. at 978-80.
122. Id. at 978.
123. Id.
124. Id. at 981-82.
125. See id. at 982. The italicized language has been inserted to indicate a slightly modified version of the test proposed in Cardinal Industries, one which includes assignment.
126. The Materiality of Identity test of In re Magness comes close to accomplishing this goal.
127. In re Cardinal Indus., Inc., 116 B.R. 964, 982-85 (Bankr. S.D. Ohio 1990). Normally, the identity of the debtor and the debtor-in-possession is almost identical and, therefore, the assumption of the contract by the former will not normally prejudice the rights of a third party. However, it has been noted by at least one court that the change in the identity of a debtor-in-possession may be so substantially transformed after a reorganization that it would require a different analysis under the transfer provisions of the Anti-Assignment Act. In re Hartec Enters., Inc., 117 B.R. 865, 873 (Bankr. W.D. Tex. 1990), waited on other grounds, 130 B.R. 929 (W.D. Tex. 1991).
128. See In re Cardinal Indus., Inc., 116 B.R. 964, 982 (Bankr. S.D. Ohio 1990)("Where the Trustee's assumption, as the representative of the estate, would not change the essential identity of the entity performing the services under the contract," the exemption in § 365(c) will not apply.). This preserves the bankruptcy policy of treating the debtor-in-possession and the trustee as identical parties. See supra note 84.
129. The Cardinal Industries court did not discuss nondebtor third-party assignment, but disagreed with the proposal in this Article when it noted that "[t]he analysis would be different if an actual assignment to a separate third party were proposed or contemplated." In re Cardinal Indus., Inc. 116 B.R. at 982. But this distinction does not seem to be make sense, even in the case of third-party assignments, if there is no real impact on the performance received by the nondebtor third party holding the executory contract.
130. Id. The ruling in Cardinal Industries has been followed by at least one court. See. eg., In re Manor Place Dev. Assocs., L.P., 144 B.R. 679, 683 (Bankr. D.N.J. 1992).
131. See Breeden v. Catron (In re Catron), 158 B.R. 624, 627 (Bankr. E.D. Va.)("Clearly, legal nomenclature is not dispositive. The essential relationship between debtor in possession and the prepetition debtor under the facts of each case determines whether the two are separate entities under § 365(c)."), aff'd, 158 B.R. 629 (E.D. Va. 1993), aff'd per curiam, 25 F.3d 1038 (4th Cir. 1994).
132. Sullivan v. Town & Country Home Nursing Servs., Inc. (In re Town & Country Home Nursing Servs., Inc.), 963 F.2d 1146, 1155 (9th Cir. 1991). See H.R. REP. NO. 595, 95th Cong., 1st Sess. 43-48 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6004-08.
133. Despite the continuing saga over the scope of the § 365(c)(1)(A) exception, in the sixteen years since Taylor Manufacturing was decided, none of the cases have been reviewed by the Supreme Court.
134. The case for congressional amendment has been recognized See In re Lile, 103 B.R. 830, 840 (Bankr. S.D. Tex. 1989)(indicating that "given the interpretation of 11 U.S.C. § 365(c)(1)(A) stated in the Branifff case and related cases, the language of § 365(c)(1)(A) should be changed by Congress"); EPSTEIN ET AL., supra note 62, at 475 (opining that "Congress should amend section 365(c)(1) to make it clear 'applicable law' prohibitions on assignment do not preclude assumption in bankruptcy"); Macey & Sacca, supra note 87, at 130-31 (calling for congressional action in order to end the "continued morass" of § 365(c)(1)(A) and (f); REFORMING THE BANKRUPTCY CODE: THE NATIONAL BANKRUPTCY CONFERENCE'S CODE REVIEW PROJECT, FINAL REPORT, 208-13 (1994). But see Ransick, supra note 74, at 107 (noting that a congressional amendment to the Code is unlikely).