By way of a bankruptcy clause, parties purport to regulate the consequences of a party's bankruptcy. Typically, such a clause provides for termination of the contract in case of a party's bankruptcy. Some clauses go beyond that – for example, by adding that the bankrupt party must forfeit certain rights or pay penalties. In its recent Megapool decison(1) the Supreme Court suggested two possible grounds for challenging a bankruptcy clause by which the bankrupt party forfeits certain rights: violation of law, and violation of the principles of reasonableness and fairness. The first ground is new and makes it easier to challenge forfeiture-on-bankruptcy clauses.
Megapool was a household appliances retailer which offered its customers credit through a credit card issued by Laser. Laser paid the purchase price to Megapool at a discount, while Megapool delivered the goods to the customer. The customer had to pay the undiscounted purchase price to Laser within six months, failing which Laser extended a three-year loan to the customer. For each loan extended, Laser had to pay a fee to Megapool. The contract between Megapool and Laser provided that it could be terminated by a party on the bankruptcy of the other party. Another clause provided that the fee would lapse on termination. Megapool was declared bankrupt and Laser, after terminating the contract, refused to pay the fees accrued.
Megapool's bankruptcy trustees sued Laser, challenging the fee forfeiture. Essentially, they asserted that the relevant clause was invalid because Megapool had performed its end of the contract, while the fees to be paid in return lapsed only by reason of bankruptcy, thereby disproportionately prejudicing Megapool and its creditors. Laser argued that the clause was reasonable in its effect since the bankruptcy had caused it various damage, such as forgone profits and prematurely written-down investments.
The lower courts rejected the trustees' claim and the Supreme Court rejected the appeal in cassation. However, the Supreme Court did rule that a bankruptcy clause which has the effect that the bankrupt party forfeits a right solely because of its bankruptcy may be invalid depending on the circumstances, due to violation of the Bankruptcy Code rule that the bankruptcy estate comprises all assets of the bankrupt party and thus comprises any right to payment of fees for services rendered before the bankruptcy. In addition, the Supreme Court considered that invoking such a clause may, again depending on the circumstances, be unacceptable pursuant to the principles of reasonableness and fairness. However, the Supreme Court found that in the case at hand, the reason for forfeiture of the fees was not the mere bankruptcy of Megapool, but rather the loss of Laser's income as a result of that bankruptcy, in consideration for which the fee should partly be deemed to have accrued. The Supreme Court also deemed relevant the fact that the fee would lapse in case of termination generally, and not only in case of bankruptcy.
The Supreme Court's judgment held that a clause forfeiting rights merely due to bankruptcy may be invalid because it violates the principle that the bankruptcy estate comprises all assets of the bankrupt party. It has been suggested that this approach may apply to conveyances that are conditional on bankruptcy. This judgment makes it easier to challenge a bankruptcy clause forfeiting rights, although the claimant will still have to assert (and, if contested, prove) the circumstances warranting the invalidity. Megapool demonstrates that this may be difficult if the party benefiting from the forfeiture suffered damage as a result of the bankruptcy which was proportionate to the forfeited rights.
For further information on this topic please contact Mark Mouthaan at NautaDutilh's Amsterdam office by telephone (+31 20 71 71 000), fax (+31 20 71 71 397) or email (email@example.com). Alternatively, please contact Walter Schellekens at NautaDutilh's Rotterdam office by telephone (+31 10 224 0000), fax (+31 10 224 0056) or email (firstname.lastname@example.org).