Abstract
Commercial loan agreements define events of default that trigger the lender's contractual remedies, such as acceleration of principal and interest, higher interest rates, and termination rights. The borrower's filing of a petition for bankruptcy is one event of default commonly used in loan agreements. The issue of enforceability of such default provisions, known in bankruptcy as ipso facto clauses, has generated irreconcilable judicial precedent. Some courts look to the text of the Bankruptcy Code to conclude that, in a loan agreement, no Code section expressly bars these clauses. Other decisions invalidate all ipso facto clauses on policy grounds, concluding that they impede the debtor's ability to reorganize. This Article reviews the treatment of ipso facto clauses in commercial loan agreements, under the Bankruptcy Code, and in recent court opinions. The Article proposes that, under the current statutory scheme, ipso facto clauses remain enforceable in the context of a loan agreement.