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further the Chapter 11 goal of permitting the successful rehabilitation of Debtors." The court cited no authority for imposition of this standard.
Section 365 vests power in the trustee (or debtor in possession) with respect to executory contracts and unexpired leases. This may create a conflict between the interests of the debtor and those of the trustee and creditors. For example, if a debtor provides a security or cleaning deposit and prepaid rent to a landlord under a lease, the trustee may seek to reject the lease in order to recover the funds for the estate. In a case arising out of Oregon, the courts found that the prepaid rent and deposit were exempt under Oregon law, as was the leasehold interest. Consequently, the trustee could not reject the lease. The Ninth Circuit's opinion reasons that exempt property is outside the scope of § 365, as exempt property is "removed from the bankruptcy estate." The court held that a lease of the exempt homestead may not be assumed or rejected. If this is so, then is the trustee or DIP precluded from using § 365 to cure an unexpired lease of homestead property?
Courts accept, the business judgment rule as the test for reviewing a motion to assume or reject under § 365. In an attempt to change the outcome, the non-debtor party argued that the debtor had to show a severe hardship or burden in order to justify rejection of an executory contract or unexpired lease. The bankruptcy court disagreed, applying the business judgment rule, and the district court affirmed. The business judgment rule protected the estate's and non-debtor's interests.
