Designation Rights

The right to determine which of the debtor’s unexpired leases and executory contracts will be assumed, to whom assumed leases and contracts will be assigned, and the consideration for the assignment of the leases and contracts.

Designation rights are typically sold by the bankruptcy estate to one or more third party bidders. A purchaser of designation rights pays an initial sum to the debtor or trustee, markets the leases or contracts, and then assigns the leases or contracts. After the assignment, the proceeds from the assignment are divided between the estate and the buyer of the designation rights under a court-approved agreement between them.

The debtor usually rejects any leases or contracts that are not assigned within the marketing period.

Designation rights sales are often seen in large commercial retail bankruptcies, such as Montgomery Ward, Kmart, Service Merchandise, and Ames Departments Stores.

There is disagreement among courts and practitioners regarding whether sales of designation rights are authorized by the Code.

Bankruptcy Code § 365. See also Assumption and Assignment of Executory Contracts and Unexpired Leases, Rejection of Executory Contracts and Unexpired Leases.

Email Term