One of the benefits the US Bankruptcy Code offers debtors is the ability to assign freely contracts under which the debtor has ongoing performance obligations, even if the underlying contract contains a restriction or prohibition against such assignment. Section 365 of the Bankruptcy Code has its limits and does impose certain conditions to such assignment, such as the curing of defaults under the contract (other than so-called “ipso facto” defaults) and the requirement that the assignee be capable of future performance under the contract.
One other limitation on the Bankruptcy Code’s freedom of assignment policy is that, if applicable nonbankruptcy law excuses the nondebtor counterparty from accepting performance from, or rendering performance to, a different party, then the debtor may not assign the contract unless the counterparty consents. Although bankruptcy courts interpret this restriction narrowly, limitations on assignment in two types of contracts are well-recognized: (1) intellectual property licenses (because federal law recognizes restrictions on a licensee’s ability to transfer) and (2) “personal services contracts.”
The intellectual property rights limitation is straightforward, but what is a “personal services contact” for the purpose of this rule? The classic example is that, if someone is going to pay an individual (say, Taylor Swift) to perform at their birthday party, then Taylor can’t let me step in and perform for her. Although section 365’s requirement that the assignee be capable of performing under the contract should be sufficient to ensure that I’m not singing on the birthday stage, it is easy in the individual context to see where Taylor Swift’s skill is so specialized or unique that even an assignment to Rihanna might not be permitted.
But what about when performance is rendered by a corporate operation comprised of many talented individuals, and not a single individual? That is the issue that Bankruptcy Judge Mastando of the US Bankruptcy Court for the Southern District of New York recently addressed in the VICE Media Group’s chapter 11 cases.
In 2019, Showtime acquired the rights to VICE, a weekly documentary series that features “agenda-setting,” longform, on-the-ground journalism. VICE Media characterized its series as one that was created “to engage and occasionally enrage.” The series has been nominated for a Primetime Emmy every year since its debut and has won several other awards, including a Peabody. In their chapter 11 cases, the VICE debtors sold substantially all their assets to a purchaser owned by their senior secured lenders. As part of the sale, the VICE debtors sought approval to assign the Showtime contract to the purchaser. The purchaser also agreed to use the same management and creative talent to produce the remaining episodes of the VICE series for Showtime.
Showtime challenged the assignment on two grounds: (1) the contract was a personal services contract under California law, and California law prohibits the nonconsensual assignment of personal services contracts, and (2) the purchaser had not provided adequate assurance that it was capable of performing under the assigned contract. In support of its objection, Showtime pointed to contract provisions that gave Showtime approval rights over key personnel, including the director.
Finding that the Showtime contract was not a “personal services contract,” the bankruptcy court reasoned that a contract with a corporate entity instead of an individual is evidence that the contract is not one for “personal services.” The court also noted that Showtime’s control over key personnel changes demonstrated that the parties anticipated that at least some employees would be replaced during the term of the contract.
Showtime cited Woolley, a California case, to support its position that the contract with the VICE debtors was a “personal services contract.” The bankruptcy court distinguished Woolley because it involved a different situation — a hotel management company seeking to enjoin the hotel owner from terminating its management agreement as a result of an alleged breach. Although the bankruptcy court did not elaborate on this distinction, Woolley is consistent with a line of cases standing for the proposition that a management agreement creates a principal-agent relationship, and, in most cases, a court will not enjoin the principal from terminating the agency relationship. The bankruptcy court also noted that the Woolley contract, unlike the Showtime contract, was managerial in nature. Although this was an additional basis for the Woolley court’s refusal to enjoin termination, it is doubtful whether that distinction was even necessary to the Vice decision as US bankruptcy courts do not necessarily allow state law blanket characterizations of contracts to dictate the application of the restriction on assignment contained in section 365 of the Bankruptcy Code.
The bankruptcy court also found that the purchaser had demonstrated its ability to perform under the contract. Not only would the purchaser be in a stronger financial position than the VICE debtors, but the purchaser intended to retain the same management team and creative talent.
In the end, the bankruptcy court did not definitively state that a commercial entity’s contract can never be considered a personal services contract. That the purchaser intended to retain the same management and creative team perhaps made the bankruptcy court’s task a bit easier. It would be interesting to see, for example, how the court would rule if the debtors had proposed to assign the Showtime contract to a different production company comprised of an equally talented and award-winning, but different, management and creative team. The Vice reasoning, as well as the other bankruptcy cases that have addressed this issue in the context of corporate entities instead of individuals, suggest that, at best, counterparties face an uphill battle in trying to prove that contracts with corporate debtors are “personal services contracts” that cannot be assigned in a US bankruptcy case without their consent.