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Executory Contracts: Third Circuit Does Not Recognize the Doctrine of Implied Assumption

A recent case before bankruptcy judge Karen B. Owens of the United States Bankruptcy Court for the District of Delaware, In re Dura Auto. Sys., LLC, No. 19-12378 (KBO), 2021 WL 2456944 (Bankr. D. Del. June 16, 2021), provides a cautionary reminder that the Third Circuit does not recognize the doctrine of implied assumption (i.e., assumptions implied through a course of conduct as opposed to those that are assumed pursuant to a motion and court order).

In October 2019, Dura and several of its affiliates filed for chapter 11. The case was later converted to a chapter 7 liquidation. Before its bankruptcy filing, Dura contracted with Plasti-Paint Inc. to paint roof rails and provide related services. Plasti-Paint filed unsecured claims in Dura’s bankruptcy case for approximately $3 million arising from those contracts. Plasti-Paint continued to provide services to Dura post-filing.

In June 2020, Dura sold most of its assets for $65 million. As part of the deal, certain executory contracts were assumed and assigned to the buyer. However, Plasti-Paint's contracts were not among those. Even so, Plasti-Paint continued to provide services to the buyer for several months after the sale. In the interim, Plasti-Paint sold its claims against Dura to Hain Capital Investors Master Fund Limited (“Hain”).

In October 2020, Hain filed a motion contending that Dura "impliedly assumed" the Plasti-Paint contracts based on the buyer’s and Plasti-Paint's post-sale conduct. Accordingly, Hain asked the bankruptcy court to order Dura’s buyer to pay $1.8 million as a cure amount under section 365(b)(1)(A) of the Bankruptcy Code

Bankruptcy Judge Owens denied Hain's request. Under section 365 of the Bankruptcy Code, an executory contract may be assumed, assumed and assigned to a third party, or rejected. Federal Rules of Bankruptcy Procedure 6006 and 9014 further require requests to assume, assign or reject executory contracts be made by motion. Since Dura never sought nor received court approval to assign the contract, and because the parties had not executed a written assignment and assumption agreement, Judge Owens held that no assumption occurred and no cure amount need be paid.

In rejecting Hain's argument that the conduct of Plasti-Paint and Dura’s purchaser led to an implicit assumption, Bankruptcy Judge Owens said, “While Hain ... argues that the conduct of Plasti-Paint and the [Dura] Purchaser gives rise to an implicit assumption, the Court of Appeals for the Third Circuit rejected this doctrine in University Medical Center v. Sullivan (In re University Medical Center) [973 F.2d 1065 (3d Cir. 1992)], holding that ‘assumption must be approved. It cannot be presumed.’ While courts outside the Third Circuit have held otherwise, they are in a small minority.” In re Dura Auto. Sys., LLC at *3.

Accordingly, creditors that operate in the jurisdictions within the Third Circuit (including Delaware) should ensure that any purported assignment of their contracts are evidenced by a writing that is approved by the bankruptcy court.