The month Section 365(n) protected my license and deleted my remedy, at 81K MRR

That sentence came from a restructuring adviser, nine days after the company whose API sat underneath our scheduling product filed for Chapter 11. We were at 81K MRR, about sixty percent of which touched that dependency on every request. I had assumed bankruptcy was a cliff: the vendor dies, the contract dies, I scramble. What actually happened was stranger and more expensive. The license survived in full. The service did not. And the provision everyone told me to rely on, Section 365(n) of the Bankruptcy Code, turned out to be the instrument that took away the only remedy I wanted, while leaving my payment obligation exactly where it was.

Quick answer (2026)

This is a composite diary: the company and the figures are assembled from several operators' experiences, and every statute quoted is real and linked. If a software vendor files Chapter 11 and rejects your license, rejection is a breach and not a cancellation, so your license survives. If you then elect to retain your rights under Section 365 of the Bankruptcy Code, Section 365(n)(1)(B) retains them "excluding any other right under applicable nonbankruptcy law to specific performance of such contract". Section 365(n)(2)(B) requires that you "shall make all royalty payments due under such contract", and Section 365(n)(2)(C) says you "shall be deemed to waive" both your setoff rights and your administrative expense claim. For a licensee of a hosted service, that combination preserves a right to code you may never have possessed, removes the remedy that would have compelled delivery, and keeps you paying.

The clock my vendor's landlord got, and I did not

The first thing I learned is that two of my vendor's counterparties were treated very differently by the same statute in the same case.

My vendor rented an office. Under Section 365(d)(4)(A), an unexpired lease of nonresidential real property "shall be deemed rejected" if the trustee does not assume or reject it by the earlier of two dates, one of which is "the date that is 120 days after the date of the order for relief". A court can extend that by ninety days for cause, and after that a further extension comes "only upon prior written consent of the lessor in each instance". The landlord also gets interim performance by operation of the statute: Section 365(d)(3) says "The trustee shall timely perform all the obligations of the debtor" under such a lease until it is assumed or rejected.

None of that applied to me. My software license is an executory contract, and Section 365(d)(2) says that in a Chapter 11 case the trustee may assume or reject it "at any time before the confirmation of a plan".

There is an equivalent to interim performance for licensees, and it is weaker in two specific ways. Section 365(n)(4) says that unless and until the trustee rejects the contract, the trustee shall "perform such contract", but only "on the written request of the licensee", and only "to the extent provided in such contract or any agreement supplementary to such contract". The landlord's version arrives automatically and covers all the obligations of the debtor. Mine had to be asked for in writing, and its content was capped by whatever my own agreement had already promised.

So the landlord had an automatic, self-executing answer inside four months, with veto power over further delay. I had no automatic answer at all. Same debtor, same case, two counterparties, two completely different experiences of time. I spent six weeks not knowing whether the thing my product depended on would exist, and the statute was content for that to continue until a plan was confirmed.

What the election actually buys

Rejection sounds terminal and is not. Section 365(g) says rejection "constitutes a breach of such contract", and in Mission Product Holdings v. Tempnology the Supreme Court put it plainly: "A rejection breaches a contract but does not rescind it."

That is the part most writing about vendor bankruptcy stops at, and it is genuinely good news. My license was not cancelled. I was a party to a breached contract, which is an ordinary commercial position with ordinary commercial remedies.

Section 365(n)(1) then offers a choice. I could treat the contract as terminated, or I could retain my rights "as such rights existed immediately before the case commenced". Everyone advised the second. Nobody read me the parenthetical in the middle of it, which retains those rights while "excluding any other right under applicable nonbankruptcy law to specific performance of such contract".

Specific performance is the remedy that makes a counterparty actually do the thing. For a dependency I ran against over the network, it was the only remedy with any value at all. Damages against an insolvent estate are an exercise in queueing, and the queue is long and the estate is by definition short. The election preserved my rights and deleted the one remedy that could have turned those rights into a working service.

It is worth being precise about what I retained rights to. The definition in Section 101(35A) lists six categories of intellectual property, and the one that fit was a "work of authorship protected under title 17", qualified by the closing phrase "to the extent protected by applicable nonbankruptcy law". I had retained my rights to a body of code. I had never held a copy of it.

The price list inside the election

The election is not free, and its cost is set out in three subparagraphs that are easy to read past.

First, Section 365(n)(2)(B): a licensee who elects to retain "shall make all royalty payments due under such contract for the duration of such contract". The payment obligation is not suspended by the fact that performance has stopped. It is a condition of keeping the rights.

Second, Section 365(n)(2)(C) says the licensee "shall be deemed to waive" two things. One is "any right of setoff it may have with respect to such contract". Setoff is not a technicality: Section 553 preserves a creditor's right "to offset a mutual debt owing by such creditor to the debtor". The natural instinct of every operator in my position, to stop paying and net the loss against what is owed, is the precise thing the election signs away. We were owed credits under a service level term, and had roughly four months of fees sitting against them. Electing to retain converted that from a balance I could apply into a claim I could only file.

The other waiver is "any claim allowable under section 503(b) of this title arising from the performance of such contract". Section 503(b) covers administrative expenses, including "the actual, necessary costs and expenses of preserving the estate", and those are paid ahead of general unsecured creditors. So the election also surrenders the priority position for claims arising from performance.

Third, Section 365(n)(3)(A) says that on written request the trustee shall provide the intellectual property to the licensee, but only "to the extent provided in such contract". If your agreement never promised you a copy or an escrow release, there is nothing the trustee is obliged to hand over.

Put together: keep paying in full, do not net, do not claim priority, and possibly receive no artifact at all.

The one word the statute never defines

Here is the detail I found hardest to accept. The word "royalty" appears exactly once in all of Section 365, and it appears in Section 365(n)(2)(B), the subparagraph that creates the payment duty.

It is not defined for this purpose. Section 101 of the Code does define a "term overriding royalty", but that definition is about interests in liquid or gaseous hydrocarbons, and it has nothing to do with software. The statute conditions the survival of your rights on paying "royalty payments" and never says what one is.

Our agreement was a flat monthly fee per seat, with no usage component and nothing that anyone drafting it would have called a royalty. I do not know how a court would characterise it, and I am not going to pretend otherwise. Both readings are uncomfortable. If the fee is a royalty, you keep paying it in full for a service that has stopped. If it is not a royalty, then it is unclear what payment keeps the election alive. We kept paying, on advice, because the downside of guessing wrong ran toward losing the rights entirely.

What I got wrong

I assumed there was no mechanism at all to force a decision, and told two people so. That is false, and the correction is in the same sentence I had already read. Section 365(d)(2) continues: the court, "on the request of any party to such contract or lease", may order the trustee "to determine within a specified period of time" whether to assume or reject. A lever exists. It is discretionary rather than automatic, it names no number of days where the landlord's provision names 120, and crucially somebody has to go and ask for it. Nobody was going to ask on my behalf. That motion should have been week one, not week seven.

I assumed rejection cancelled the license, and built a migration plan on that premise before reading Section 365(g). It does not. The license survived the whole time.

And I spent the better part of a week reading about trademarks, because that is what most of the writing on this provision is about. Section 101(35A) does not include trademarks, and the word does not appear anywhere in Section 101. That gap is real and well documented, and it was not my gap. My dependency was code. I had been studying the most-discussed limb of a statute instead of the limb that governed me.

What actually happened

Limits

This is United States federal law, Chapter 11, and it is not legal advice. The diary is a composite. No court tested our particular facts: we were never in litigation, and everything above is my reading of the statutory text with counsel, not a ruling.

Practitioners have written about Section 365(n) and software licensing before, and a 2023 piece by Taft covers the assume, assign and reject structure and makes the sound drafting point that retained rights are of limited use without source code access. I did not link it because the page was returning a server error when I checked it. What I have not found written down is the arithmetic of the election itself, which is why this post is mostly about three subparagraphs rather than about drafting tips.

The royalty characterisation above is genuinely unsettled as far as I can tell, and I have stated it as an ambiguity rather than resolving it.

The one thing I would tell you

File the motion. Section 365(d)(2) lets any party ask the court to put the trustee on a clock, and the single most expensive thing I did was wait politely for an answer that the statute never obliged anyone to give me on any particular day.

Everything else in this story was decided before the filing, in a contract I signed years earlier. Whether the trustee owes you a copy of anything depends entirely on whether your agreement already said so. Whether the election is worth taking depends on whether you hold an artifact that keeps working without the other side. If your dependency is a service that only runs on someone else's machines, the protection everyone will point you to preserves your rights to the code and removes your ability to make anyone run it.