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The Party Must Go On: Ipso Facto Provisions in Event Contracts

The COVID-19 pandemic has wreaked havoc on many sectors of the US economy.  The hospitality industry has been particularly hard hit, causing many hotels and other conference venues to seek bankruptcy protection.  Such bankruptcy filings can create considerable problems for organizations with conferences and events scheduled at these venues, many of which must be booked and planned years in advance.  Therefore, organizations often include “ipso facto” provisions in their event contracts entitling them to declare a default under the contract or to terminate the contract outright if the venue files a bankruptcy case.

Although seemingly straightforward, in practice these “ipso facto” provisions are rarely enforceable against debtors in bankruptcy.  Section 365(e)(1) of the Bankruptcy Code specifically overrides and renders unenforceable any executory contract provision that purports to modify or terminate the contract because of the insolvency or financial condition of the debtor or the filing of a bankruptcy case by the debtor.  Additionally, section 541(c) of the Bankruptcy Code provides that an interest of the debtor in property, including contracts, becomes property of the debtor’s bankruptcy estate notwithstanding any contract provision “conditioned on the insolvency or financial condition of the debtor” or the commencement of a bankruptcy case that would result in the forfeiture, modification, or termination of the debtor’s interest in the contract.  Combined, these provisions ensure that any contracts with a bankrupt party survive and remain enforceable despite the bankruptcy filing. 

Making matters worse, once a venue files for bankruptcy, an event contract cannot be terminated for any reason without specific bankruptcy court approval.  Effective immediately upon the bankruptcy filing, section 362(a)(3) of the Bankruptcy Code bars any act to “exercise control over property of the [bankruptcy] estate,” which includes any attempt to terminate contracts to which the debtor is a party.  Event contracts often represent substantial revenue for the venue and thus are important assets that a bankrupt venue will seek to preserve at all costs.  For this reason, attempts to terminate contracts in violation of section 362(a) of the Bankruptcy Code can result in significant penalties and sanctions against the offending party. 

It is critical to note that these restrictions do not apply to valid terminations of an event contract occurring before the venue files its bankruptcy case.  Prudent organizations should carefully monitor their important event venues, and, if any concerns regarding a venue’s solvency or ability to fulfill its contract responsibilities arise, terminate the contract in accordance with the contract terms (if possible) as promptly as possible.  If an organization does find itself locked into an event contract with a bankrupt venue, it should immediately seek the assistance of legal counsel to protect itself in the bankruptcy case and, if possible, explore its options to escape the contract without violating the Bankruptcy Code. 

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