HEALTH CARE BASICS FOR BANKRUPTCY LAWYERS

does not apply. This section mirrors the language in section 365(e)(1)(A) discussed in Sambo's. Essentially, the provision says that a default caused by the debtor's insolvency or financial condition, the commencement of a bankruptcy case or the appointment of a receiver need not be cured as a condition to assumption. In Sambo's, the court found the cross-default provisions in the lease to be "financial condition clauses." This is a stretch. Obviously, a company that is insolvent may be in default under a number of agreements as a result of an inability to make timely payments. However, the defaults are payment defaults, not financial condition defaults. Payment defaults must be cured as a condition of assumption. Using the same logic, a default in payment on an obligation cross-defaulted to another obligation is not a financial condition default, but a payment default. The legislative history of section 365(b)(2) is instructive as to its purpose and limits. Section 365(b)(2) represents a departure from prior law which enforced bankruptcy termination clauses. The legislative history on the statutory change is as follows:

Subsection (e) invalidates ipso facto or bankruptcy clauses. These clauses, protected under present law, permit the other contracting party to terminate the contract or lease, in the event of bankruptcy. This frequently hampers rehabilitation efforts. If the trustee may assume or assign the contract under the limitations imposed by the remainder of the section, the contract or lease may be utilized to assist in the debtor's rehabilitation or liquidation.

The unenforceability of ipso facto or bankruptcy clauses proposed under this section will require the courts to be sensitive to the rights of the nondebtor party to executory contracts and unexpired leases. It the trustee is to assume a contract or lease, the court will have to insure that the trustee's performance under the contract or lease gives the other contracting party the full benefit of his bargain.

This subsection does not limit the application of an ipso facto or bankruptcy clause if a new insolvency or receivership occurs after the bankruptcy case is closed. That is, the clause is not invalidated in toto, but merely made inapplicable during the case for the purposes of disposition of the executory contract or unexpired lease.

Congress decided that a debtor should not lose a valuable contract simply because it filed bankruptcy. Nevertheless, Congress also expressly recognized the need to balance the competing interests of the debtor and the other contracting party and the importance of giving the non-debtor contracting party the benefit of its bargain upon assumption. The proper analysis is that adopted by the courts that have looked at the party's bargain in determining the enforceability of cross-default provisions. This approach also fairly addresses the Sambo's court's concern that cross-default provisions circumvent the limitation on lease rejection damages in section 502(b)(7). If the court finds that the cross-default provisions are an integral part of the parties' bargain, the non-debtor's damages should represent the damages contemplated by the parties at the inception of the contract, as limited by section 502(b)(7) and the policies it effects.

There are certainly fights yet to be fought over the enforceability of cross-default provisions in the bankruptcy context. However, to the extent that each contracting party bears substantial risk if the outcome is unfavorable, compromise will always have a strong appeal.

X. TRANSFERS OF HEALTH CARE PROVIDER ASSETS

This section addresses some of the issues a bankruptcy practitioner should consider in structuring the sale or acquisition of a health care provider or its assets.