Under Section 365(a) of the Bankruptcy Code, a debtor in bankruptcy may assume executory contracts or unexpired leases to which the debtor was a party before its bankruptcy filing. Before it is permitted to do so, however, the debtor must cure any and all defaults existing under the agreement (see 11 U.S.C. 365(b)(1)), thereby making the nondebtor counter-party “whole” upon assumption.
Section 547, a separate provision of the Bankruptcy Code, allows the debtor in certain circumstances to avoid and recover pre-petition payments made to a contract counter-party. Because the assumption of contracts and leases usually occurs at an earlier phase of the bankruptcy process, a debtor’s later action to avoid pre-petition payments can potentially “re-impair” a contract counter-party that was previously made whole under Section 365(b)(1). To prevent this result, bankruptcy courts have recognized the so-called Kiwi defense, which holds that the assumption of an executory contract or unexpired lease under section 365 bars a subsequent avoidance action under Section 547, see In re Kiwi International Airlines, 344 F.3d 311, 316 (3d Cir. 2003).
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