The ability of a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to assume, assume and assign, or reject executory contracts and unexpired leases is an important tool designed to promote a "fresh start" for debtors and to maximize the value of the bankruptcy estate for the benefit of all stakeholders. Bankruptcy courts generally apply a deferential "business judgment" standard to the decision of a trustee or DIP to assume or reject an executory contract or an unexpired lease. In In re J.C. Penney Direct Marketing Services, L.L.C. , 50 F.4th 532 (5th Cir. 2022), the U.S. Court of Appeals for the Fifth Circuit affirmed lower court rulings approving a DIP’s decision, at the behest of the purchaser of its assets, to reject a commercial ground lease, even though an agent retained by the DIP to market its shopping center leases acted in bad faith in negotiations with a sublessee intent upon acquiring the ground lessor’s interest. In so ruling, the Fifth Circuit rejected the sublessee’s argument that the DIP’s decision to reject the lease should not receive deference under the business judgment standard due to the agent’s bad faith. According to the Fifth Circuit, in the absence of evidence […]
