Page 53 - Bankruptcy Volume 1

and not to exceed three times its annual lease (3 x $100,000 or $300,000). Thus, the claim for damages
could not exceed $225,000.

Because lease rejection claims are prepetition unsecured claims and the lessor may eventually receive
far less than its allowed claim when a plan of reorganization is ultimately approved, many debtors are
able to renegotiate the terms of the lease to market rates, both in bankruptcy and in out-of-court
workouts.

Assumption

If the debtor or trustee chooses to assume an executory contract or unexpired lease, the debtor or trustee
must cure any defaults under the contract except defaults related to ipso facto clauses, and provide ade-
quate assurance of future performance. Upon assuming an executory contract or unexpired lease, the es-
tate incurs an administrative obligation equal to the total amount owing under the executory contract or
unexpired lease.

Section 365(e) of the Bankruptcy Code invalidates contract clauses that terminate or modify an executo-
ry contract or any other right or obligation under such contract as a result of the debtor’s insolvency or
financial condition, the commencement of a bankruptcy case, or the appointment of a receiver or a cus-
todian in bankruptcy. A debtor may assume executory contracts or unexpired leases notwithstanding any
ipso facto clauses except (a) contracts to make a loan, extend other debtor financing or financial ac-
commodations to or for the benefit of the debtor, or to issue a security of the debtor; (b) any non-
residential real property lease that has been terminated under applicable non-bankruptcy law prepetition;
or (c) any contract or lease where applicable law excuses the nondebtor party to the contract or lease
from accepting performance from or rendering performance to an entity other than the debtor, and the
nondebtor party to the contract or lease does not consent to the assignment or assumption of the contract
or lease.

Ipso facto clauses are enforceable in bankruptcy for certain derivatives contracts, referred to as safe har-
bor contracts, which include forward contracts, swaps, securities and commodities contracts, and repur-
chase agreements. With respect to these safe harbor contracts, the nondebtor party may terminate the
contract based on the financial condition of the debtor or the commencement of a bankruptcy case. The
rationale for enforcing ipso facto clauses in safe harbor contracts is that the special nature of derivatives
contracts leaves the nondebtor party exposed to market fluctuations that would affect the value of the
contract. Termination, on the other hand, decreases the likelihood that the nondebtor party will incur
massive losses that could trigger potentially devastating chain reactions in financial markets.

Accountants often advise on the value of a tenant’s leasehold interests on assumption and assignment.
An accountant may also work with real estate experts and may play a role in determining the appropriate
discount rate and present value of the lease as of the date of the proposed assignment.

Strategic and Operational Analyses

Accountants are often called to assist management in identifying and analyzing organizational units that
for strategic or operational reasons will no longer be required. Accountants can become involved in
postpetition consulting activities such as identifying an organization’s unnecessary general and adminis-
trative expenses, recommended alternative courses of action, or both. Such consulting assignments are
often performed under difficult circumstances, because much of a debtor’s middle management may fear
for their job security. Accountants often provide the analysis to determine which departments or divi-
sions will not survive the bankruptcy. It is not within the scope of this practice aid to describe all of the

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