Exploring Temporary Stays of Early Termination Rights


Under the Bankruptcy Code (Title 11, U.S.C., §§ 101 et seq., the “Bankruptcy Code”) non-debtor counterparties to qualified financial contracts generally are not subject to the automatic stay under section 362 and the prohibition on ipso facto clauses under section 365(e).  As a result, upon the commencement of a bankruptcy case under the Bankruptcy Code, counterparties are able to exercise their contractual right to cause the liquidation, termination or acceleration of the transactions under qualified financial covenants.

The same is not necessarily true when a bank, insurance company or other similar regulated entity becomes insolvent.  Such entities are not eligible to be debtors under the Bankruptcy Code.[1] While the insolvency regimes for such entities do not provide for an automatic injunction barring creditor remedies, the insolvency regime will provide a brief stay preventing counter-parties to qualified financial contracts with such entity from terminating, liquidating or accelerating a qualified financial contract during such period.

The American Bankruptcy Institute recently released its Chapter 11 Reform Report.  The Reform Report proposed a number of revisions to Chapter 11 related to confirmation, valuation, financing and asset sales, among others.  The Reform Report also proposed a number of revisions to the safe harbor protections, which were discussed in Part II of Orrick’s Restructuring Team’s summary and analysis of the Reform Report.  As mentioned in the summary of the proposed changes to the safe harbor protections,  the Commission considered, but rejected, incorporating a temporary stay on the exercise by a non-debtor counterparty of its contractual rights to terminate and liquidate qualified financial contracts.  Read More.