Supply Contract Trumps Preference

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Almond Products, Inc. A Supply contract may be an absolute defense to a preference claim. A supply contract is an “executory contract”, a bankruptcy term meaning a contract where both parties to the contract owe material performance obligations. In furtherance of the Chapter 11 policy of restructurings, the Bankruptcy Code provides that a debtor may, in its discretion, assume or reject an executory contract.

If the debtor elects to reject an executory contract, the resulting damage claim, including the unpaid pre-petition invoices, are deemed to be a general unsecured claim. Experience indicates that such claims often have little value, so rejecting a contract is a cheap and easy for the debtor.

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