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United States

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In recent years, it has become common practice in large chapter 11 cases for debtors to include language in their proposed chapter 11 plan which purports to release certain nondebtors from the claims of third parties.  Although some third parties may consent to the release—such as by voting in favor of the plan or otherwise electing to do so during the plan solicitation process—circumstances frequently arise in which the debtors seek approval from the bankruptcy court to release nondebtors from third parties’ claims without the consent of the third parties.

The US Supreme Court has reversed the First Circuit’s ruling in Mission Products (Mission Prod. Holdings v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir. 2018)), thereby allowing the trademark licensee in that case to continue using the licensed trademark despite the debtor trademark licensor’s rejection of the underlying trademark agreement in its bankruptcy case.

The decision, written by Justice Kagan, provides a solid analysis of section 365 of the Bankruptcy Code.  A philosophical debate exists within the US bankruptcy community about what the purpose of a debtor’s rejection of a contract is — is it simply to free a debtor from the burdens associated with the contract, or does it also have the effect of eviscerating the non-debtor contract counterparty’s rights?  Except with respect to certain types of contracts marked for particular treatment (such as intellectual property licenses under section 365(n) of the Bankruptcy Code), the Bankruptcy Code is pretty laconic about the effect of rejection:  “the rejection of an executory contract constitutes a breach of such contract,” with such breach being deemed to have occurred “immediately before the date of the filing of the [bankruptcy] petition.”