Emory Bankruptcy Developments Journal


Ha Khuong


One of the most important and valuable tools that a business debtor has for reorganization under the bankruptcy proceedings is assuming and assigning executory contracts. However, circuit courts are divided on the issue of whether the Anti-Assignment Act, in conjunction with Section 365(c)(1)(A) of the Bankruptcy Code, prohibits the assumption of an executory government contract over the objection of the government where the contract is to be performed by the debtor-in-possession. Some circuit courts apply the “Hypothetical Test” which restricts a debtor-in-possession from assuming an executory contract over an objection if applicable law would bar assignment to a hypothetical third party, even if the debtor-in-possession has no intention of assigning the contract to a third party, and the contract is to be performed by the same performing party (i.e., debtor-in-possessions or reorganized debtor). Others adopt the “Actual Test,” which holds that laws, such as the AAA, only prohibit assumption where the debtor-in-possession actually intends to subsequently assign the assumed contract to an unrelated third party.

In the case of a government contract, courts have to balance between protecting government interests and the debtor’s interest in reorganization. While government interests can have underlying considerations (such as national security concerns) that are crucial for the success of the U.S., the debtor’s interest in reorganization is also crucial in helping the economy to weather a crisis. However, both the Hypothetical Test and the Actual Test mechanically favor one side over the other, putting either the country’s national security or its economy at risk. Therefore, this Comment proposes that courts use a four-pronged analysis that examines each case in light of the totality of the circumstances.