My bankruptcy law students are aware that, as a general rule, federal bankruptcy law treats ipso facto clauses in contracts and leases with considerable disfavour. Ipso facto clauses are clauses that provide for a contract or lease to terminate in the event that a party files for bankruptcy. The Latin phrase means “by the fact itself” or “by that very fact” and its usage reflects the notion that a contract or lease including such a clause is designed to terminate “by the very fact” that one of the parties files for bankruptcy. Bankruptcy law doesn’t like ipso facto clauses because they deprive the bankruptcy estate of valuable assets that could otherwise be monetized for the benefit of creditors.
As my bankruptcy law students also know, there are exceptional circumstances in which these clauses do hold up. Ken Adams, Bob Eisenbach, and I just had an article published in the ABA’s Business Law Today that discusses these clauses and proposes model language that practitioners can use when drafting them. We also suggest – well it was Ken’s idea really – that we should cut out the Latin and start referring to ipso facto clauses in plain old English as “termination-on-bankruptcy” provisions. I welcome any thoughts and comments on the article.