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MONTH-IN-BRIEF (Apr 2019)

Bankruptcy Law

Termination Of Contract Held Not To Be A Transfer

By Michael Enright

Trustees and Debtors often consider whether to challenge the prepetition termination of a contract as a constructively fraudulent transfer under Section 548 of the Bankruptcy Code, or applicable state fraudulent transfer law. The support for this lies in the notion that the termination is a parting by the Debtor with an interest in its property. On the other hand, some courts have reasoned that the only rights the Debtor had under the contract included the termination rights, to which it was already subject, and concluded that such a termination was not a transfer for fraudulent transfer purposes. We can now add In re Pazzo Pazzo, Inc., Case No. 18-13516 (Bankr. D.N.J., April 24, 2019) to the mix. There, the court had to decide whether the prepetition termination of a purchase option connected with the Debtor’s lease of its premises could be avoided as a fraudulent transfer. In concluding that the termination of the option could not be attacked under Section 548, the court cited to cases holding that termination in accordance with contractual terms was not a transfer at all, because the Debtor had not lost any rights other than its contract rights that were dependent upon compliance with contractual terms. The court also relied on the policy of protecting parties’ expectations in real estate contracts and avoiding unnecessary uncertainty in the marketplace. The court noted that the presence of collusion might lead to a different outcome. The decision merits consideration in any controversy concerning the review of prepetition terminations of contracts with the Debtor.    

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