A typical contract may contain a clause allowing one party to terminate the contract should the other party encounter financial trouble such as insolvency or bankruptcy. This type of provision is known as a “Termination Upon Bankruptcy” clause. The specific contract language in such a provision is known as an ipso facto (i.e. “by the fact itself”) clause, meaning that the existence of a bankruptcy filing is reason enough to terminate the contract.
Termination clauses are often found in different types of contracts:
- Licenses
- Leases
- Development agreements
Factors that may trigger the termination clause may include:
- Filing for bankruptcy by contract party
- Having an involuntary bankruptcy filed against the party
- Becoming insolvent
- Written statement of insolvency by the party
- Making a general assignment for the benefit of creditors
- Invoking the contract’s financial condition covenant
According to Section 541(c) of the US Bankruptcy Code, a contract that terminates because of the financial condition of the debtor will be unenforceable once a bankruptcy case has been filed. Section 365(e)(1) pertains to termination- type ipso facto clauses in executory contracts – stating that such a contract may not be enforced, terminated or modified based on the financial condition of the debtor/party.
Whichever side of a contract or bankruptcy is in question, a knowledgeable attorney is best qualified to address the complexity of interpreting contract language.
Working with an experienced, knowledgeable Arizona creditor’s attorney can help tremendously when evaluating a bankruptcy filing. If you would like more information about termination-upon-bankruptcy contracts, creditors’ rights, or if you need assistance from an attorney, contact Windtberg & Zdancewicz to schedule an initial consultation.
The attorneys at Windtberg & Zdancewicz, PLC, provide clients with experienced legal representation in all collection matters. We are experienced in creditor’s rights including garnishments, charging orders, attachment, property execution, trustee’s sales, foreclosures, judgments, judgment collection, domestication of foreign judgments, and creditor’s issues in bankruptcy cases. If you need assistance with your collection matters, please contact us at (480) 584-5660.