<Abstract>
In this article, legal relationships between two bankrupt parties involved in an executory contract are examined. First, contractual relationships are analyzed on the premise that the trustee is granted a rejection right, not a termination right(de lege ferenda; concerning first and second propositions below). Then, it is discussed whether and how contractual relationships can be transformed when both contract parties enter bankrupt proceedings (bilateral bankuruptcy) compared to when one of the contract parties enters bankrupt proceedings (unilateral bankuruptcy) (de lege lata: concerning third and fourth propositions below). The conclusions are as follows: First, (1) in the case of bilateral bankruptcy, the effect of assuming executory contracts takes place only if both trustees choose to assume the executory contract. (2) If one trustee chooses to assume and the other trustee chooses to refuse, then the trustee who chose to assume may exercise a claim for expectation damages as a bankruptcy claim against the trustee who chose to refuse. If partial performance by either of the two contract parties has been made before the commencement of bankruptcy proceedings, a claim for the return of such performance or its equivalent value is always prohibited. Even if one contract party enjoys benefits that exceed its expectation interests due to the partial performance made by the other contract party, a claim for return of the excess is not permitted. (3) If both trustees choose to refuse, no claims can be made against each other. Second, in a lease contract, if the bankrupt lessee’s trustee chooses to refuse the executory lease contract, the lease contract should, in principle, be deemed terminated immediately. However, if the lessee has paid partial rent in advance, the lease contract shall be deemed terminated when the rental period corresponding to the rent paid in advance ended after the trustee’s rejection. The same principle applies even if both the lessor and the lessee go bankrupt and the lessee’s trustee chooses to refuse. In this case, if the lessor’s trustee chooses to assume, the lessor’s trustee can exercise a claim for expectation damages as a bankruptcy claim. If the lessor’s trustee chooses to refuse, no claims can be made against each other. Third, if, based on the legal principles of contract law, the executory contract is divided or the ipso-facto clause is invalidated under a unilateral bankruptcy, the same conclusion should be drawn under a bilateral bankruptcy. However, if the division of the executory contract or the invalidation of the ipso-facto clause is specifically permitted to protect the bankruptcy estate or the bankruptcy debtor under a unilateral bankruptcy, the opposite conclusion should be drawn in a bilateral bankruptcy (the dualistic argument). Fourth, Korean Supreme Court considers the seller as a rehabilitation secured creditor when rehabilitation procedures are initiated against the buyer in the retention of title sale. According to the Supreme Court’s opinion, the seller, who reserves ownership until the price is fully paid, is not considered the owner of the object of the sale, but the buyer is the owner. However, if we consider a case where the seller also entered the rehabilitation procedures (a bilateral bankruptcy), we can confirm that the conclusion of the above precedent is not valid. Regardless of unilateral or bilateral bankruptcy, the sales contract with reservation of title should be viewed as an executory contract, and the seller should be considered as the owner.
<Keywords>
executory contract, insolvencies of two contract parties, trustee’s right to reject executory contract, restitution of performance made in advance, modification of contract law doctrines under insolvency proceedings.
Choi Joon-kyu, Legal Relationship between two Bankrupt Parties of Executory Contract, JURIS, Vol.1, No.69(2024), pp. 3–38.
<Abstract>
In this article, legal relationships between two bankrupt parties involved in an executory contract are examined. First, contractual relationships are analyzed on the premise that the trustee is granted a rejection right, not a termination right(de lege ferenda; concerning first and second propositions below). Then, it is discussed whether and how contractual relationships can be transformed when both contract parties enter bankrupt proceedings (bilateral bankuruptcy) compared to when one of the contract parties enters bankrupt proceedings (unilateral bankuruptcy) (de lege lata: concerning third and fourth propositions below). The conclusions are as follows: First, (1) in the case of bilateral bankruptcy, the effect of assuming executory contracts takes place only if both trustees choose to assume the executory contract. (2) If one trustee chooses to assume and the other trustee chooses to refuse, then the trustee who chose to assume may exercise a claim for expectation damages as a bankruptcy claim against the trustee who chose to refuse. If partial performance by either of the two contract parties has been made before the commencement of bankruptcy proceedings, a claim for the return of such performance or its equivalent value is always prohibited. Even if one contract party enjoys benefits that exceed its expectation interests due to the partial performance made by the other contract party, a claim for return of the excess is not permitted. (3) If both trustees choose to refuse, no claims can be made against each other. Second, in a lease contract, if the bankrupt lessee’s trustee chooses to refuse the executory lease contract, the lease contract should, in principle, be deemed terminated immediately. However, if the lessee has paid partial rent in advance, the lease contract shall be deemed terminated when the rental period corresponding to the rent paid in advance ended after the trustee’s rejection. The same principle applies even if both the lessor and the lessee go bankrupt and the lessee’s trustee chooses to refuse. In this case, if the lessor’s trustee chooses to assume, the lessor’s trustee can exercise a claim for expectation damages as a bankruptcy claim. If the lessor’s trustee chooses to refuse, no claims can be made against each other. Third, if, based on the legal principles of contract law, the executory contract is divided or the ipso-facto clause is invalidated under a unilateral bankruptcy, the same conclusion should be drawn under a bilateral bankruptcy. However, if the division of the executory contract or the invalidation of the ipso-facto clause is specifically permitted to protect the bankruptcy estate or the bankruptcy debtor under a unilateral bankruptcy, the opposite conclusion should be drawn in a bilateral bankruptcy (the dualistic argument). Fourth, Korean Supreme Court considers the seller as a rehabilitation secured creditor when rehabilitation procedures are initiated against the buyer in the retention of title sale. According to the Supreme Court’s opinion, the seller, who reserves ownership until the price is fully paid, is not considered the owner of the object of the sale, but the buyer is the owner. However, if we consider a case where the seller also entered the rehabilitation procedures (a bilateral bankruptcy), we can confirm that the conclusion of the above precedent is not valid. Regardless of unilateral or bilateral bankruptcy, the sales contract with reservation of title should be viewed as an executory contract, and the seller should be considered as the owner.
<Keywords>
executory contract, insolvencies of two contract parties, trustee’s right to reject executory contract, restitution of performance made in advance, modification of contract law doctrines under insolvency proceedings.