## Facts

- Footstar, Inc. and affiliates operated footwear departments inside Kmart stores under “store-within-a-store” agreements.
- Under the agreements, Footstar ran the shoe departments using Kmart branding and paid Kmart compensation tied to shoe sales.
- Footstar filed Chapter 11 cases and continued operating as debtor-in-possession; the cases were procedurally consolidated.
- The Kmart-related agreements were profitable and central to Footstar’s reorganization plan.
- Footstar moved under 11 U.S.C. § 365(a) to assume the executory agreements.
- Kmart objected under § 365(c)(1), arguing applicable nonbankruptcy law excused it from accepting performance from an entity other than the original counterparty, making the contracts nonassumable absent Kmart’s consent.
- Kmart characterized the agreements as akin to personal-services or special-trust arrangements, asserting it had bargained specifically for Footstar and should not be forced to accept performance from a debtor-in-possession that could later assign the contracts.

## Issues

1. Whether 11 U.S.C. § 365(c)(1) bars a debtor-in-possession from assuming an executory contract when applicable nonbankruptcy law would bar assignment to a third party and the counterparty does not consent.
2. Whether the Footstar–Kmart agreements were nonassignable personal-services or special-trust contracts under applicable nonbankruptcy law.
3. Whether § 365(c)(1) should be applied using a “hypothetical” assignment approach or an “actual” proposed-assignment approach.

## Decision

- The court overruled Kmart’s objection and granted Footstar’s motion to assume the agreements.
- The court held § 365(c)(1) does not prohibit assumption merely because nonbankruptcy law could bar assignment to a third party; the restriction applies when the debtor actually seeks a nonconsensual assignment.
- The court rejected Kmart’s contention that the agreements were personal-services or similarly nondelegable contracts.
- The ruling permitted continued performance by Footstar as debtor-in-possession, while leaving any future proposed assignment to be evaluated separately under § 365(c)(1) and applicable law.

## Legal Principles

- Under § 365(a), a debtor-in-possession may assume an executory contract with court approval, subject to statutory limits.
- Section 365(c)(1) limits assumption or assignment only where applicable law would excuse the nondebtor from dealing with a party other than the debtor or debtor-in-possession and the nondebtor does not consent; it is triggered by a forced change in the identity of the performing party.
- A debtor-in-possession is generally treated as the same legal entity as the prepetition debtor for purposes of continued performance, so assumption that maintains the same performing entity is not treated as dealing with an “entity other than the debtor or the debtor in possession.”
- Contracts are not treated as nonassumable personal-services agreements absent a showing that performance depends on unique personal qualities or a relationship of trust of the type traditionally deemed nondelegable.
- Approval of assumption does not authorize a later assignment; a proposed assignment must independently satisfy § 365’s requirements, including § 365(c)(1) where applicable.

## Conclusion

The court permitted Footstar to assume profitable store-within-a-store agreements with Kmart, holding that § 365(c)(1) does not bar assumption by a debtor-in-possession based solely on a hypothetical inability to assign under nonbankruptcy law, and that the agreements were not personal-services contracts that would prevent continued performance by the debtor-in-possession.


In re Footstar, Inc., 323 B.R. 566 (Bankr. S.D.N.Y. 2005)