On May 1, 2015, RCC Consultants (RCC) filed a voluntary chapter 11 bankruptcy proceeding in the United States Bankruptcy Court for the District of New Jersey. Because many municipalities across the country could be impacted by this filing, IWCE’s Urgent Communications Editor Donny Jackson asked Jeffrey Rubin, an attorney who practices bankruptcy and telecommunications law at Shulman Rogers, and Alan Tilles, chairman of Shulman Rogers’ telecommunications department, about the filing. In Part 1, we explore the impact of the filing on RCC Consultants’ customers.

1.What is a Chapter 11 bankruptcy filing?

A Chapter 11 bankruptcy is when the debtor—in this case, RCC—is allowed to continue its business operations in the ordinary course while attempting to reorganize its business and financial affairs free from the duress and financial pressure of its creditors. When a bankruptcy proceeding is commenced, the debtor obtains the benefit of an automatic stay from any litigation, lien enforcement and other actions by creditors attempting to collect on their respective debts. It also stays actions that would affect or interfere with property of the debtor’s estate. The automatic stay is very broad and gives the debtor breathing room to focus its efforts on its reorganization prospects.

2.What happens to the contract between RCC and the customer as a result of the bankruptcy filing?

Because the case is in its very early stages, our knowledge of this specific case is limited. Generally, if the contract was in existence as of May 1, 2015 (the date of the filing), the bankruptcy proceeding does not change the legal status of the contract between the parties. If the contract is deemed to be an “executory contract,” then—in accordance with Section 365 of the United States Bankruptcy Code—RCC can either assume or reject the contract, subject to bankruptcy-court approval. Whether RCC Consultants assumes or rejects the contract will be determined after it conducts an analysis of what is in the best interests of RCC, its estate and its creditors as it strives to reorganize.

3.Will RCC assume or reject my contract?

That depends on the individual case. RCC will conduct an independent analysis of each contract to determine whether or not it is beneficial or burdensome to its reorganization efforts to assume or reject a particular contract. Generally, one would suppose that RCC would want to assume existing customer contracts for consulting purposes for the income to be generated from such contracts for RCC’s benefit.

4.What if my contract is assumed by RCC?

If RCC assumes the contract, then the contract continues in accordance with its terms. 

5.What if RCC was in default of the contract as of May 1, 2015?  Can RCC still assume the contract?

Yes, but only if RCC is able to show the following:

1. RCC cures the default or provides adequate assurance that the default will be promptly cured;
2. RCC compensates or provides adequate assurance that RCC will promptly compensate the customer for pecuniary loss to the customer resulting from the default; and
3. RCC provides adequate assurance of future performance under the contract.

It should be noted that the above requirements do not apply to a default under a contract that constitutes a breach of a provision contained in such contract relating to insolvency or financial condition of RCC, the commencement of a bankruptcy case by RCC or the appointment of a trustee or custodian for RCC for the benefit of RCC’s creditors or similar provisions.

6.What if RCC rejects the contract?

Generally, the rejection of an executory contract by RCC constitutes a breach of such contract immediately before the date of the filing of the petition (in this case, April 30, 2015).  The customer will then in all likelihood be a general unsecured creditor in the bankruptcy proceeding and damages under the contract will be determined as of the petition date, not the rejection date.

7.When must RCC make the decision to assume or reject?

With respect to a general contract for consulting services, RCC may assume or reject the contract at any time before confirmation of a plan of reorganization or as part of such a plan of reorganization. If RCC desires to assume or reject before plan confirmation, it may do so by motion and notice to all relevant parties. If the customer has valid reasons, the customer can try to force the issue by filing its own motion to compel RCC to assume or reject the specific contract within a certain time period.

8.What happens if the contract is neither assumed nor rejected during the bankruptcy?

Section 365 provides that the debtor may assume or reject the contract. What if RCC takes no action? In such an event, the contract is deemed to “ride through” the Chapter 11 bankruptcy proceeding. An existing contract that is not assumed in the bankruptcy proceeding is not deemed to be rejected.  Assuming that the plan is also silent, the contract will “ride through” the bankruptcy and continue to exist thereafter.

9.What contracts are covered under Section 365 of the Bankruptcy Code?

Section 365 only covers executory contracts. Also, Section 365(c) provides that a debtor may not assume or assign any executory contract if “applicable law excuses a party, other than the debtor, to such contract . . . from accepting performance from or rendering performance to an entity other than the debtor . . ., whether or not such contract . . . prohibits or restricts assignment of rights or delegation of duties and such party does not consent to such assumption or assignment.” For example, a contract may not be assumed or assigned, if the contract provides or requires the services of a particular person or such services are unique and cannot be performed by someone else.

10. Can a municipality cancel an existing contract?

Without having reviewed a contract for the specifics of that situation, it can be said that a customer of RCC would need a compelling reason or justification to file a motion with the bankruptcy court to compel RCC to assume (and if applicable cure) or reject the contract within a specified period. Unless there are special provisions in the contract or otherwise that would preempt the bankruptcy code allowing cancellation, of which we are not aware, the motion to compel would be the proper course of action.

For further information, please contact Jeffrey W. Rubin at jrubin@shulmarogers.com or Alan S. Tilles at atilles@shulmanrogers.com.