In Part 1, we discussed how, despite widespread usage, termination in the event of bankruptcy clauses (“ipso facto” clauses) are generally unenforceable pursuant to the bankruptcy code. In this second part, we discuss why these clauses are still prevalent in commercial transactions and the exceptions that allow for enforceability in certain situations.

Why Do Ipso Facto Clauses Remain in Most Contracts?

If ipso facto clauses are generally not enforceable, then why do practically all commercial agreements continue to include them? There are several reasons.

Practically all commercial transactions, including licenses, services agreements, and supply agreements, contain a provision that triggers termination rights, without notice, to a party whenever the other party files for bankruptcy or experiences other insolvency-related event. In Part 1 of a two-part series, we discuss how the commonly used termination-on-insolvency clauses are generally unenforceable despite their widespread use.

Standard Ipso Facto Provision

(Bankr. S.D. Ind. Dec. 4, 2017)

The bankruptcy court grants the motion to dismiss, finding the defendant’s security interest in the debtor’s assets, including its inventory, has priority over the plaintiff’s reclamation rights. The plaintiff sold goods to the debtor up to the petition date and sought either return of the goods delivered within the reclamation period or recovery of the proceeds from the sale of such goods. Pursuant to 11 U.S.C. § 546(c), the Court finds the reclamation rights are subordinate and the complaint should be dismissed. Opinion below.

(Bankr. E.D. Ky. Nov. 22, 2017)

(B.A.P. 6th Cir. Nov. 28, 2017)

The Sixth Circuit B.A.P. affirms the bankruptcy court’s dismissal of the Chapter 12 bankruptcy case. The court finds that the bankruptcy court failed to give the debtor proper notice and opportunity to be heard prior to the dismissal. However, the violation of due process was harmless error. The delay in filing a confirmable plan and continuing loss to the estate warranted the dismissal. Opinion below.

Judge: Preston

Attorney for Appellant: Heather McKeever

(6th Cir. Nov. 14, 2017)

(Bankr. W.D. Ky. Nov. 1, 2017)

The bankruptcy court grants the creditor’s motion for stay relief to proceed with a state court foreclosure action. The creditor had obtained an order granting stay relief in a prior bankruptcy filed by the debtor’s son, the owner of the property. The debtor’s life estate interest in the property does not prevent the foreclosure action from proceeding. Opinion below.

Judge: Lloyd

Attorney for Debtor: Mark H. Flener

Attorney for Creditor: Bradley S. Salyer

The Sixth Circuit affirms the B.A.P., holding the entry of summary judgment in favor of the creditors in the nondischargeability action was appropriate. The creditors obtained a default judgment against the debtor in Tennessee state court. The default judgment was on the merits and the doctrine of collateral estoppel applied. Opinion below.

Judge: Rogers

Appellant: Pro Se

Attorneys for Creditors: Keating, Muething & Klekamp, Joseph E. Lehnert, Brian P. Muething, Jason V. Stitt

(Bankr. E.D. Ky. Nov. 1, 2011)

(Bankr. S.D. Ind. Oct. 20, 2017)

The bankruptcy court dismisses the debtor’s complaint against the lender, which asserted claims related to the lender’s foreclosure of its mortgage lien in state court. The court dismisses the stay violation claim, because the property was not property of the estate at the time of the alleged acts, and dismisses the remaining claims because the court lacks subject-matter jurisdiction. Opinion below.

Judge: Carr

Attorney for Debtor: Sawin, Shea & Des Jardines LLC, J. Andrew Sawin