property licenses are often central to the agreement. Consider:

➢ You have secured a perpetual, paid-up license to Acme Super Software v.1. You have agreed to pay for the license in installments over the next two years. The day after you install the software, Acme enters bankruptcy. If you had paid for the software up front, the bankruptcy would be irrelevant to you. You would have your product, your license would continue without regard to the bankruptcy filing, and you would not owe anything more to Acme. Under the installment option, however, the trustee would doubtless elect to accept your contract and enforce your obligation to finish paying for the product. Indeed, the court would probably hold that the trustee is obligated to collect from you, to increase the assets available to pay the creditors.

➢ You have contracted for Acme Super Sof

Bankruptcy In one of his Nero Wolfe novels, Rex Stout writes that: “(B)ankruptcy is not a disgrace; it is merely a catastrophe.” Wolfe and his redoubtable assistant Archie Goodwin then proceed to find a wealthy client embroiled in a perplexing murder. Wolfe had an unfair advantage – the author of the story was on his side. He therefore caught, or made, all the breaks needed to break the case, and recover his solvency. For the rest of us, bankruptcy is not resolved so neatly.

In legal terms, “bankruptcy” means the inability to pay one's bills as they come due. If the situation cannot be promptly resolved, the debtor may wind up in bankruptcy court, either for reorganization (also known as “Chapter 11”) or for dissolution (“Chapter 7”). In either case, management will be replaced by a trustee who will be assigned to collect the debtor's assets, identify all the debts, and work out a plan to either pay off the creditors over time and start the company over, or close the company and pay the creditors some percent of what is due to them. If your employer enters bankruptcy, it is probably time to pack up and look for solvent pastures. If one of your IT vendors enters bankruptcy, your headaches may just be beginning. Your projects may not be completed or you may not receive the product you paid for.

IT agreements generally attempt to address this exposure in a straight-forward matter. Most provide that either party may terminate the agreement if the other enters bankruptcy and does not promptly discharge the bankruptcy. In other words, we have a contract under which I am to build a computer system for you, write the software for it, deliver it, install it and train your personnel how to use it. Owing to unfortunate decisions on my part, my company enters bankruptcy. You send a letter terminating our agreement, file a claim in the bankruptcy proceeding, offset my claims against you against what you paid to me and then find another vendor.

Not quite.

One of the wrinkles of bankruptcy law is the “automatic stay,” a provision of the Bankruptcy Code that prohibits attempts to enforce claims against the debtor without permission of the bankruptcy court. The provision is intended to give the debtor, or the trustee in bankruptcy, temporary protection from claims, permitting him or her to concentrate on forming an action plan. Although there are exceptions to the automatic stay, in general it prohibits attempts to collect debts, foreclose on property, seize security or collateral or terminate pending contracts. Thus the automatic termination described above is prohibited by law. More, bankruptcy courts deal harshly with violations of the automatic stay. Attempting to enforce an automatic termination provision could therefore result in significant fines or other sanctions.

The standard provision contains a second flaw, in that it permits the non-bankrupt party to terminate unilaterally. Another wrinkle of the Code is that it permits only the trustee to terminate contracts that have not yet been completed (in legal jargon, an “executory agreement”). As a result, even without the automatic stay, the contract remains in force until the trustee decides to either honor it or terminate it. Until the trustee makes that decision, business under the contract should go on as usual.

In the IT context, bankruptcy requires special handling because IT contracts often contain long term service obligations (e.g. support and maintenance) and because grants of intellectual property licenses are often central to the agreement. Consider:

➢ You have secured a perpetual, paid-up license to Acme Super Software v.1. You have agreed to pay for the license in installments over the next two years. The day after you install the software, Acme enters bankruptcy. If you had paid for the software up front, the bankruptcy would be irrelevant to you. You would have your product, your license would continue without regard to the bankruptcy filing, and you would not owe anything more to Acme. Under the installment option, however, the trustee would doubtless elect to accept your contract and enforce your obligation to finish paying for the product. Indeed, the court would probably hold that the trustee is obligated to collect from you, to increase the assets available to pay the creditors.

➢ You have contracted for Acme Super Soft

ts, and work out a plan to either pay off the creditors over time and start the company over, or close the company and pay the creditors some percent of what is due to them. If your employer enters bankruptcy, it is probably time to pack up and look for solvent pastures. If one of your IT vendors enters bankruptcy, your headaches may just be beginning. Your projects may not be completed or you may not receive the product you paid for.

IT agreements generally attempt to address this exposure in a straight-forward matter. Most provide that either party may terminate the agreement if the other enters bankruptcy and does not promptly discharge the bankruptcy. In other words, we have a contract under which I am to build a computer system for you, write the software for it, deliver it, install it and train your personnel how to use it. Owing to unfortunate decisions on my part, my company enters bankruptcy. You send a letter terminating our agreement, file a claim in the bankruptcy proceeding, offset my claims against you against what you paid to me and then find another vendor.

Not quite.

One of the wrinkles of bankruptcy law is the “automatic stay,” a provision of the Bankruptcy Code that prohibits attempts to enforce claims against the debtor without permission of the bankruptcy court. The provision is intended to give the debtor, or the trustee in bankruptcy, temporary protection from claims, permitting him or her to concentrate on forming an action plan. Although there are exceptions to the automatic stay, in general it prohibits attempts to collect debts, foreclose on property, seize security or collateral or terminate pending contracts. Thus the automatic termination described above is prohibited by law. More, bankruptcy courts deal harshly with violations of the automatic stay. Attempting to enforce an automatic termination provision could therefore result in significant fines or other sanctions.

The standard provision contains a second flaw, in that it permits the non-bankrupt party to terminate unilaterally. Another wrinkle of the Code is that it permits only the trustee to terminate contracts that have not yet been completed (in legal jargon, an “executory agreement”). As a result, even without the automatic stay, the contract remains in force until the trustee decides to either honor it or terminate it. Until the trustee makes that decision, business under the contract should go on as usual.

In the IT context, bankruptcy requires special handling because IT contracts often contain long term service obligations (e.g. support and maintenance) and because grants of intellectual property licenses are often central to the agreement. Consider:

➢ You have secured a perpetual, paid-up license to Acme Super Software v.1. You have agreed to pay for the license in installments over the next two years. The day after you install the software, Acme enters bankruptcy. If you had paid for the software up front, the bankruptcy would be irrelevant to you. You would have your product, your license would continue without regard to the bankruptcy filing, and you would not owe anything more to Acme. Under the installment option, however, the trustee would doubtless elect to accept your contract and enforce your obligation to finish paying for the product. Indeed, the court would probably hold that the trustee is obligated to collect from you, to increase the assets available to pay the creditors.

➢ You have contracted for Acme Super Sof

part, my company enters bankruptcy. You send a letter terminating our agreement, file a claim in the bankruptcy proceeding, offset my claims against you against what you paid to me and then find another vendor.

Not quite.

One of the wrinkles of bankruptcy law is the “automatic stay,” a provision of the Bankruptcy Code that prohibits attempts to enforce claims against the debtor without permission of the bankruptcy court. The provision is intended to give the debtor, or the trustee in bankruptcy, temporary protection from claims, permitting him or her to concentrate on forming an action plan. Although there are exceptions to the automatic stay, in general it prohibits attempts to collect debts, foreclose on property, seize security or collateral or terminate pending contracts. Thus the automatic termination described above is prohibited by law. More, bankruptcy courts deal harshly with violations of the automatic stay. Attempting to enforce an automatic termination provision could therefore result in significant fines or other sanctions.

The standard provision contains a second flaw, in that it permits the non-bankrupt party to terminate unilaterally. Another wrinkle of the Code is that it permits only the trustee to terminate contracts that have not yet been completed (in legal jargon, an “executory agreement”). As a result, even without the automatic stay, the contract remains in force until the trustee decides to either honor it or terminate it. Until the trustee makes that decision, business under the contract should go on as usual.

In the IT context, bankruptcy requires special handling because IT contracts often contain long term service obligations (e.g. support and maintenance) and because grants of intellectual property licenses are often central to the agreement. Consider:

➢ You have secured a perpetual, paid-up license to Acme Super Software v.1. You have agreed to pay for the license in installments over the next two years. The day after you install the software, Acme enters bankruptcy. If you had paid for the software up front, the bankruptcy would be irrelevant to you. You would have your product, your license would continue without regard to the bankruptcy filing, and you would not owe anything more to Acme. Under the installment option, however, the trustee would doubtless elect to accept your contract and enforce your obligation to finish paying for the product. Indeed, the court would probably hold that the trustee is obligated to collect from you, to increase the assets available to pay the creditors.

➢ You have contracted for Acme Super Sof

ourts deal harshly with violations of the automatic stay. Attempting to enforce an automatic termination provision could therefore result in significant fines or other sanctions.

The standard provision contains a second flaw, in that it permits the non-bankrupt party to terminate unilaterally. Another wrinkle of the Code is that it permits only the trustee to terminate contracts that have not yet been completed (in legal jargon, an “executory agreement”). As a result, even without the automatic stay, the contract remains in force until the trustee decides to either honor it or terminate it. Until the trustee makes that decision, business under the contract should go on as usual.

In the IT context, bankruptcy requires special handling because IT contracts often contain long term service obligations (e.g. support and maintenance) and because grants of intellectual property licenses are often central to the agreement. Consider:

➢ You have secured a perpetual, paid-up license to Acme Super Software v.1. You have agreed to pay for the license in installments over the next two years. The day after you install the software, Acme enters bankruptcy. If you had paid for the software up front, the bankruptcy would be irrelevant to you. You would have your product, your license would continue without regard to the bankruptcy filing, and you would not owe anything more to Acme. Under the installment option, however, the trustee would doubtless elect to accept your contract and enforce your obligation to finish paying for the product. Indeed, the court would probably hold that the trustee is obligated to collect from you, to increase the assets available to pay the creditors.

➢ You have contracted for Acme Super Sof

property licenses are often central to the agreement. Consider:

➢ You have secured a perpetual, paid-up license to Acme Super Software v.1. You have agreed to pay for the license in installments over the next two years. The day after you install the software, Acme enters bankruptcy. If you had paid for the software up front, the bankruptcy would be irrelevant to you. You would have your product, your license would continue without regard to the bankruptcy filing, and you would not owe anything more to Acme. Under the installment option, however, the trustee would doubtless elect to accept your contract and enforce your obligation to finish paying for the product. Indeed, the court would probably hold that the trustee is obligated to collect from you, to increase the assets available to pay the creditors.

➢ You have contracted for Acme Super Software v.1, paid for it and for two years of support and maintenance. The day after you install the product , Acme goes bankrupt. Once again the bankruptcy is irrelevant to the license. You have paid for it and received the product and that part of the transaction is complete and unchanged. The trustee will probably reject the executory portion of the agreement – the support and maintenance obligation. (Not only will it cost money to provide support, but the employees who could provide it have probably moved to new companies.) As you cannot force trustee to provide the support you paid for, you will become an unsecured creditor. In due course you can expect to recover only a portion of what you paid.

➢ You have received the software, agreed to pay for it over time, contracted for long term support and paid for the first year of support in advance. Again Acme goes bankrupt the day after you install the software. You owe payments for the software; vendor owes you support. The trustee may reject to obligation to provide support, and require you to complete your payments for the software. In addition, you:

➢ May not offset what you paid for support against what you owe for the license;

➢ Lose all right to any improvements, upgrades, fixes or modification that Acme creates AFTER the bankruptcy filing; and,

➢ You lose any protection against third party infringement claims that may have been specified in your contract with Acme. In sum, the standard bankruptcy provisions found in IT agreements are unenforceable under US law. Customers are protected, however, to the extent that they have licensed intellectual property (and paid or continue to pay for it). Continuing obligations to provide support will likely be rejected by the trustee and the majority of any prepaid fees for such will be lost.