November 2012

What is an ipso facto clause?  The phrase ipso facto is Latin for “by the fact itself.”  Ipso facto clauses are sometimes included in lease and purchase contracts, and they assert that if the lessee or purchaser becomes insolvent, or files for bankruptcy protection, then the contract has been breached.  In other words, under such a clause the very act of filing for bankruptcy protection constitutes a breach of contract (hence the appellation, ipso facto clause) that absolves the other party of any further contract obligations.

Are such clauses valid?  The short answer is:  No.
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On occasion I have potential clients who have set up trusts, and want to know if the assets in the trust will be in jeopardy in a Chapter 7 bankruptcy.  My answer has always been:  “It depends.”  And after recently attending a first rate continuing legal education presentation by two erudite colleagues, Mark Jessee and Pat Green, I was happy to see that they echoed my position.

Well, that answer is not very satisfying, is it?  How about a little more detail?

Mark and Pat produced some excellent notes from which I will crib just a bit, using the scholarly exception to copyright infringement, to give you a taste of what is involved.

However:  Caveat Emptor!  This topic is very complicated, and this post just scratches the surface.  If you have a trust, or are planning to set one up, you should consult a competent attorney to discuss the implications — especially if you think bankruptcy is looming on the horizon.
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