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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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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