October 03, 2018

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

Rejection Did Not Vitiate Subordination of Contractual Rights

By Michael Enright

U.S. District Court Judge Analisa Torres, in the Southern District of New York, recently upheld the bankruptcy court’s ruling that a subordination provision in an executory contract was enforceable notwithstanding the debtor’s rejection of the contract. 344 Individuals v. Giddens (In re Lehman Brothers, Inc.), Case No. 17-6246 (September 26, 2018). The decision involved an appeal from proceedings in the Lehman Bros. cases, and involved claims brought by former Shearson employees who entered into deferred compensation agreements in the 1980s. The agreements contained provisions stating that the employees’ rights to receive benefits were unsecured, subordinated obligations. The employees claimed that the agreements had been breached and that the breach vitiated the subordination provisions, putting them on an equal footing with general unsecured creditors. The court first concluded that the employees’ position was contrary to applicable New York contract law. The court then turned to the employees’ further assertion that because the contracts were rejected in the course of the bankruptcy case, the contracts were deemed breached, and the trustee could not cherry pick particular provisions to enforce against the employees as counterparties to a rejected executory contract. The court held, however, that the subordination provisions still bound the employees with regard to their claims. Rejection of the contracts did not completely terminate the contracts, nor did it revoke or void contractual obligations. Rather, rejection simply freed the estate from the obligation to perform the contracts.  The employees could pursue claims for damages upon such a breach of their contracts, but their ability to collect damages would still be subordinated as they had agreed. Rejection did not elevate the priority of the employees’ claims based on breach of contract. The decision is a good reminder that rejection of an executory contract “does not make the contract disappear,” and does not involve “contract-vaporizing properties.” 

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.