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The business judgment rule concerning assumption or rejection of an executory contract is usually applied as a two-part test. First, the court must determine if the decision shows benefit to the estate in the "'exercise of a sound business judgment.'" If so, the transaction should be approved unless manifestly unreasonable or made in bad faith. Only a finding of bad faith or gross abuse of discretion would justify setting aside the debtor's business judgment.
Insider cases may change the test. The district court considered the potential assumption or rejection of several interrelated leases concerning a ship building operation where insiders had a significant interest in the non-debtor lessor/secured creditor. After the court determined that certain agreements were leases and others were disguised financing transactions, the court considered the standard of review for assumption of a lease under § 365 where an insider has a significant interest in the non-debtor. Courts ordinarily apply the business judgment rule in considering a request for assumption or rejection of an unexpired lease. The court found two decisions where the courts subjected a transaction involving insiders to heightened scrutiny. Both cases addressed the issue of a purchase of estate assets by a fiduciary, rather than assumption or rejection of an executory contract. The district court found that heightened scrutiny was an appropriate standard and looked for evidence of fraud, collusion or bad faith. Finding none, the court affirmed the bankruptcy court's decision allowing assumption of the leases.
2.4 Trustee vs. Debtor.
Rent-subsidized housing is not a familiar asset in this author's environment, but obviously can have great significance in urban areas like San Francisco and New York. In a New York case, the court allowed a trustee in a chapter 7 case to assume and assign debtor's rent-subsidized lease. The
