What happens when both parties to an executory contract are in chapter 11 reorganization? Do the usual rules about contract rejection still apply?
Bankruptcy Judge Barry S. Schermer of St. Louis, Mo., declined an invitation to adopt a different test. He applied the usual business judgment rule.
The debtor in Judge Schermer’s court was a producer of bauxite that was indisputably losing money on the contract. The purchaser, which used the bauxite to produce aluminum, opposed a motion to reject the supply agreement.
The purchaser told Judge Schermer that rejection of the contract would put the company out of business, with the resulting loss of more than 2,000 jobs. The judge rejected the purchaser’s contention that the court should balance the equities.
In his opinion on April 7, Judge Schermer found no authority for deviating “from the well established business judgment rule,” which authorizes rejecting an executory contract “except on a finding of bad faith or gross abuse” of the debtor’s business judgment.
The judge also held that threatening to reject the contract as leverage to negotiate a new contract did not represent bad faith justifying denial of the rejection motion.