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Ipso Facto Clauses in Contracts. Virtually every lawyer insists on a clause authorizing the client to terminate "for cause" (or otherwise forfeit or modify rights) if the other party becomes bankrupt, insolvent, fails to maintain a contractually specified financial condition or makes an assignment for the benefit of creditors. Such clauses permit termination of the agreement simply because of the other party's distressed financial condition. Such clauses are called "ipso facto" clauses. Under current U.S. bankruptcy law, such clauses are not enforceable to enable a creditor to retain any of the debtor's property. 11 USC 362(l). The trustee may sell, use or transfer any debtor property, after notice and hearing. 11 USC 362(b). But ipso facto clauses may permit a services provider (other than a provider of "utility service") to terminate a contract for cause, provided that the trustee has not cured, or given "adequate assurances" of cure, for the default in connection with an "assignment and assumption" of an executory contract. 11 USC 365(b). Indeed, an attempt to enforce such a clause could result in a violation of the "automatic stay" prohibiting filing lawsuits against bankrupt "debtors."
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