Assumption and Assignment
Assumption and Assignment is the Bankruptcy Code Section 365 process through which a debtor first assumes an executory contract or unexpired lease and then transfers it to an assignee, subject to statutory requirements including cure obligations where applicable and adequate assurance of future performance.
Assumption comes before assignment
Section 365(f)(2) requires the contract or lease to be assumed in accordance with the statute before assignment.
That sequence means existing defaults and cure obligations cannot simply be ignored because a new buyer will take over.
Adequate assurance protects the counterparty
The buyer or other assignee must demonstrate adequate assurance of future performance.
The required showing depends on the contract and circumstances, and specialized rules apply to certain shopping-center leases.
Anti-assignment clauses can be overridden
Section 365(f) generally permits assignment notwithstanding contractual or legal provisions that prohibit, restrict or condition assignment, subject to the statute's exceptions.
This can make contracts more transferable in bankruptcy than they would be outside the case.
The process is central to going-concern sales
A buyer often values the business because of leases, customer relationships, vendor agreements, IP licenses or other contracts.
A Section 363 asset sale and Section 365 contract transfer therefore frequently proceed together.
Cure amounts can transfer value from purchase price to contract counterparties
Assume a buyer offers $200 million for a business but requires assumption and assignment of contracts carrying $15 million of undisputed cure obligations.
If the estate must pay those cure amounts to transfer the contracts, only $185 million remains before other sale costs—unless the buyer separately funds or assumes the cure burden.
A competing $195 million bid that takes responsibility for all $15 million of cure costs may produce more net value even though its nominal purchase price is lower.
The assignment analysis therefore belongs inside the purchase-price model.
For buyers, contracts can be essential assets. For counterparties, cure and adequate assurance are the statutory protections that prevent the estate from transferring a valuable agreement while leaving qualifying defaults unresolved.
Common mistakes
Assuming a buyer automatically gets every contract The debtor designates specific contracts for assumption and assignment.
Assuming anti-assignment language always controls Section 365 can override many restrictions.
Ignoring cure costs Those amounts can materially change transaction economics.
Example
A retailer sells stores through a Section 363 transaction. The buyer wants 20 store leases. The debtor seeks court approval to cure qualifying defaults, assume those leases and assign them to the buyer, which provides adequate assurance that it can perform the lease obligations after closing.
Example
A retailer sells stores through a Section 363 transaction. The buyer wants 20 store leases. The debtor seeks court approval to cure qualifying defaults, assume those leases and assign them to the buyer, which provides adequate assurance that it can perform the lease obligations after closing.
Professional note
The asset price can be meaningless without the contract package. In a going-concern sale, cure amounts, anti-assignment exceptions and adequate-assurance disputes can determine whether the buyer actually receives the relationships that support enterprise value.
Related terms
- Section 363 Sale
A Section 363 Sale is a bankruptcy-court-approved sale of estate property under Bankruptcy Code Section 363, commonly used to sell substantial assets or an operating business outside the ordinary course of business during Chapter 11.
- Stalking Horse Bid
A Stalking Horse Bid is an initial negotiated offer for bankruptcy assets that serves as the baseline or floor for a court-supervised sale process while remaining subject to higher or otherwise better competing bids.
- Executory Contract
An Executory Contract in bankruptcy is a contract subject to treatment under Bankruptcy Code Section 365 that the trustee or debtor in possession may generally assume or reject, subject to statutory conditions, exceptions and court approval.
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