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The Bankruptcy Protector

February 23, 2018

Riding Through International Waters: Assumption and Assignment of Executory Contracts in a Chapter 15 Section 363 Sale

By Dylan Trache

Section 365 of the Bankruptcy Code provides a mechanism for the assumption and assignment or rejection of executory contracts.  However, sometimes a contract is overlooked and is not affirmatively assumed or rejected in a bankruptcy case.  Some courts have ruled that such contracts “ride through” the bankruptcy case and remain enforceable after reorganization.  But what happens when the debtor does not reorganize, and instead sells its assets in a Section 363 sale?  May an executory contract that is neither assumed and assigned, nor rejected be enforceable against a purchaser?  The United States Bankruptcy Court for the District of Delaware said “no” in the case of Thane International, Inc.

Thane International’s lenders commenced a proceeding in Canada against it under Canada’s Bankruptcy and Insolvency Act.  A receiver was appointed, and he filed a Chapter 15 petition in the United States Bankruptcy Court for the District of Delaware, with the goal of obtaining approval of the sale of substantially all of the debtor’s assets to a newly formed company (“New Thane”) under Section 363 of the Bankruptcy Code.  The sale was quickly approved and closed.

Several months after the closing, a contract party, Stanley Jacobs Productions, Ltd., which had produced an infomercial for the debtor, filed suit against New Thane, claiming that it was owed royalties.  After several motions, the case was transferred to the bankruptcy court to determine whether the production agreement was assumed and assigned to New Thane in connection with the 363 sale.  Specifically, Stanley Jacobs contended that the sale order constituted an assumption and assignment of its contract and that New Thane’s post-closing conduct reinforced that conclusion.  New Thane argued that it was not bound to pay the royalties because Section 365 had not been followed and no assumption nor assignment had occurred.

Neither the asset purchase agreement nor the sale order specifically referenced Stanley Jacobs’ contract.  After reviewing the requirements of Section 365 and applicable bankruptcy rules, the court found that the failure to specifically request assumption and assignment in a motion was itself fatal to Stanley Jacob’s claim of assumption. 

The court also rejected Stanley Jacobs’ claim that New Thane’s course of conduct constituted an implied or tacit assumption.  This conduct largely took three forms.  First, New Thane sent Stanley Jacobs a “Royalty Adjustment Letter” which Stanley Jacobs claimed recognized an agreement between the parties.  However the court found the language of the letter did not express an agreement between Stanley Jacobs and New Thane, particularly in the reference to “your agreement” as opposed to “our agreement.”  Second, Stanley Jacobs argued that New Thane’s briefing in the case reflected an admission that the agreement was assumed.  However, the court ruled that the applicable sentence in the brief which might appear to concede assumption was mere argument and did not constitute a factual declaration or admission that the agreement had been assumed.  Finally, Stanley Jacobs argued that New Thane’s post-closing use of the applicable infomercial signified the assumption of the underlying agreement.  But the court rejected this notion.  Noting that other courts had found reorganized debtors obligated under contracts that were neither assumed nor rejected, it found that an asset purchaser would not be treated similarly in the absence of a motion. 

The court then addressed the fact that parties, including Stanley Jacobs, did not receive notice of any proposed assumption and assignment, and that no cure had been paid.  Indeed Stanley Jacobs claimed not to have received notice of the sale at all.  The court concluded that any failure to provide notice was the fault of the now defunct seller, not New Thane, and that the asset purchaser would not be inflicted with burdens based upon the debtor’s failure to provide proper notice.  Further, the court recognized that no cure had been paid, another requirement of Section 365.

Finally, the Court noted that Bankruptcy Rule 6006(e) precluded a finding that the sale motion and order constituted a formal assumption motion.  Rule 6006(e) provides requirements for motions seeking authority to assume multiple contracts.  None of the requirements set forth in the rule were satisfied, and the Court conclude that the sale motion could not operate as a request for assumption and assignment under Section 365.

In rejecting the arguments of Stanley Jacobs, the court noted that Stanley Jacobs might have separate remedies and be entitled to damages for the post-closing use of the infomercial.  However, that issue was beyond the scope of the matter presented for adjudication.

The Thane decision is important because it reinforces the requirements of express assumption and assignment of an executory contract in a sale process.  Purchasers and contract parties should insist on clarity and precision with respect to the contracts that will be the subject of an asset purchase agreement and ensure that the proper motions are filed to effectuate any desired assumption and assignment.

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