Legal Question in Bankruptcy in Massachusetts

Contract termination in Bankruptcy - Does autostay prohibit?

My company has a contract with a datacenter provider which specifically lists bankruptcy-voluntary or involuntary of either party as a cause for termination of the master service agreement. The provider has filed for Chapter 11 protection and claims that we cannot exercise the bankrupcy termination clause because an automatic stay is in effect.

This seems to me to be patently absurd in that if this were the case then the vast number of contracts which list bankruptcy as a cause of termination are known to be unenforcable in advance.

From my lay perspective the automatic stay provision of the Bankruptcy code seems specifically aimed at protecting the debtor against the actions of creditors seeking to recover property or funds or to bring an action against the debtor. There certainly doesn't appear to be anything in Section 362(a) which would prohibit one from terminating a contract so long as we weren't attempting to collect anything, such as a deposit.

Am I misunderstanding this or is the provider blowing smoke? Does an automatic stay preclude us from exercising the termination clause of our contract?

Many thanks in advance for any suggestions.


Asked on 12/31/01, 6:34 pm

1 Answer from Attorneys
Warren Agin Swiggart & Agin, LLC

Re: Contract termination in Bankruptcy - Does autostay prohibit?

The provision you reference is what is called an "ipso facto" clause and is, in fact, unenforceable. You can not terminate a contract merely because the other party has filed a bankruptcy petition. However, you may be able to terminate the contract if the company breaches it in some other manner or the contract is terminable at will. Also, you may be able to take advantage of 11 USC 365 to protect yourself in other ways. For example, you could use a variety of strategies to negotiate protections from the debtor's sudden termination of services. The strategies available in connection with hosting contracts are complex and require a detailed understanding of both hosting contracts and the relevant bankruptcy code provisions. You should make sure you consult with a bankruptcy attorney who has experience in the technology field.

You do need to be concerned about violating the automatic stay or becoming liable to the debtor for your breach of the contract. Depending on the terms of the contract, terminating it could violate the automatic stay. In many cases, better safe than sorry is the rule and court approval should be sought.

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Answered on 1/01/02, 1:45 pm


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