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CONFIDENTIAL – Do Not Disclose to Competitors
THE TWENTY-SECOND ANNUAL DUBERSTEIN
BANKRUPTCY MOOT COURT COMPETITION
March 1–3, 2014
IN RE FOODSTAR, INC., DEBTOR
FOODSTAR, INC., PETITIONER,
v.
RAVI VOHRA, RESPONDENT.
BENCH MEMO
February 2014 Dear Competition Judge:
Thank you for your participation in the 2014 Honorable Conrad B. Duberstein Bankruptcy Moot Court Competition. The Duberstein competition continues to be one of the premier moot court competitions in the country due to the exceptional quality of its judges. This Bench Memo is designed to introduce you to the fact pattern and help you prepare for judging the oral argument rounds.
This year’s fact pattern concerns two current issues in chapter 11 practice: (1) whether rejection of a trademark licensing agreement under section 365 terminates the licensee’s right to continue to use the trademark; and (2) whether the presumption against extraterritorial application of statutes prevents the application of section 365 to a foreign licensing agreement. While numerous issues may arise out of the facts of this hypothetical fact pattern, the Supreme Court granted certiorari on these two issues and the competitors’ arguments should therefore be limited to matters relating only to these issues.
The Bench Memo is designed to help you assimilate these materials quickly. It begins with a series of suggested questions to ask the competitors. We strongly encourage that you ask each oralist at least one of the sample questions. Moreover, we hope that these questions will also assist you by stimulating your own questions regarding the issues.
Also contained in the Bench Memo is the fact pattern (i.e., the decision below), which was provided to the competitors. That opinion should provide you with an excellent background as to the legal positions likely to be asserted at oral argument. In addition, we have included short summaries of the facts, procedural history, and the opinion. These are followed by short briefs of many of the cases that we anticipate will be cited by the competitors, as well as excerpts of relevant statutory provisions. This should provide a basic reference to most of the arguments presented by the competitors. However, the competitors must conduct their own substantive research and, as a result, may refer to cases or make arguments that are not addressed in this packet.
Thank you for making the Twenty-Second Annual Duberstein Moot Court Competition a success!
Sincerely,
Elizabeth H. Shumejda Executive Research Editor
American Bankruptcy Institute Law Review
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TABLE OF CONTENTS
SAMPLE QUESTIONS TO ASK COUNSEL ................................................................................ 1 SUMMARY OF THE FACTS ........................................................................................................ 9
PROCEDURAL HISTORY .......................................................................................................... 10 SUMMARY OF THE DECISION BELOW
MAJORITY .................................................................................................................................. 11 DISSENT ..................................................................................................................................... 13
WRIT OF CERTIORARI .............................................................................................................. 15 DECISION BELOW (Fact Pattern) ............................................................................................... 16
CASE BRIEFS Andrus v. Glover Constr. Co.,
112 S. Ct. 773 (1992) ........................................................................................................ 39 ASM Capital LP v. Ames Dep’t Stores, Inc., (In re Ames Dep’t Stores),
582 F.3d 422 (2d Cir. 2009) .............................................................................................. 40 In re Bachinski,
393 B.R. 522 (Bankr. S.D. Ohio 2008) ............................................................................. 41 Barcamerica Int’l USA Trust v. Tyfield Imps., Inc.,
289 F.3d 589 (9th Cir. 2002) ............................................................................................. 42 Daimler AG v. Bauman,
No. 11–965 (S.Ct. Jan. 14, 2014) ...................................................................................... 44 Dewsnup v. Timm,
502 U.S. 410 (1992) .......................................................................................................... 46 E.E.O.C. v. Arabian Am. Oil Co.,
499 U.S. 244 (1991) .......................................................................................................... 47 In re Exide Technologies,
607 F.3d 957 (3d Cir. 2010) .............................................................................................. 50 Hong Kong & Shanghai Banking Corp. v. Simon (In re Simon),
153 F.3d 991 (9th Cir. 1998) ............................................................................................. 52 Jaffe v. Samsung Elecs. Co.,
737 F.3d 14 (4th Cir. 2013) ............................................................................................... 54
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Kiobel v. Royal Dutch Petroluem Co., 133 S.Ct. 1659 (2013) ....................................................................................................... 55
Lewis Bros. Bakeries v. Interstate Brands Corp. (In re Interstate Bakeries Corp.)
690 F.3d 1069 (8th Cir. 2012) .......................................................................................... 57 Lubrizol Enters. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers),
756 F.2d 1043 (4th Cir. 1985) ........................................................................................... 59 In re Matusalem,
158 B.R. 514 (Bankr. S.D. Fla. 1993) ............................................................................... 61 Maxwell Commc’n Corp. v. Societe Generale, (In re Maxwell Commc’n Corp.),
93 F.3d 1036 (2d Cir. 1996) .............................................................................................. 62 Morrison v. Nat’l Australia Bank Ltd.,
561 U.S. 247 (2010) .......................................................................................................... 64 New York Cent. R.R. v. Chisholm,
268 U.S. 29 (1925) ............................................................................................................ 66 In re Old Carco LLC,
406 B.R. 180 (Bankr. S.D.N.Y. 2009) .............................................................................. 67 Pension Transfer Corp. v. Beneficiaries Under the Fruehauf Trailer Corp. Ret. Plan (In re
Fruehauf Trailer Corp.), 444 F.3d 203 (3d Cir. 2006) .................................................... 68 Person’s Co. v. Christman,
900 F.2d 1565 (Fed. Cir. 1990) ......................................................................................... 70 Sunbeam Prods., Inc. v Chic. Am. MFG,
686 F. 3d 372 (7th Cir. 2012) ............................................................................................ 72 Tenucp Prop. LLC v. Riley,
429 B.R. 817 (Bankr. App. Panel 1st Cir. 2010) ............................................................... 74 Thompkins v. Lil' Joe Records, Inc.,
476 F.3d 1294 (11th Cir. 2007) ......................................................................................... 76 Underwood v. Hilliard,
98 F.3d 956 (7th Cir. 1996) ............................................................................................... 77 In re XMH Corp.,
647 F.3d 690 (7th Cir. 2011) ............................................................................................. 78
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RELEVANT STATUTES 11 U.S.C. § 101(5) – Definitions .................................................................................................. 80 11 U.S.C. § 101(35A) – Definitions .............................................................................................. 81
11 U.S.C. § 362(a) – Automatic Stay ............................................................................................ 82 11 U.S.C. § 365(a), (b), (e)–(k), (n) – Executory contracts and unexpired leases ........................ 83
11 U.S.C. § 503(b) – Allowance of administrative expenses ....................................................... 90 11 U.S.C. § 507(a)(2) – Priorities ................................................................................................. 93
11 U.S.C. § 541(a) – Property of the estate ................................................................................... 94 11 U.S.C. § 726(b) – Distribution of property of the estate .......................................................... 95
11 U.S.C. § 1107(a) – Rights, powers, and duties of debtor in possession ................................... 96 11 U.S.C. § 1141(d)(1) – Effect of confirmation .......................................................................... 97
28 U.S.C. § 1334(e)(1) – Bankruptcy cases and proceedings ....................................................... 98 GATT Uruguay Round Agreement on Trade Related Aspects of Intellectual Property (TRIPS)
Section II, Article 16 ......................................................................................................... 99 HOUSE REPORT NO. 95-595, 1978 U.S.C.C.A.N. 5963 ............................................................... 100
HOUSE REPORT NO. 82-2320, 1952 U.S.C.C.A.N. 1960 ............................................................. 102 SENATE REPORT NO. 100-505, 1988 U.S.C.C.A.N. 3200 ........................................................... 103
Innovation Act, H.R. 3309, 113TH CONG. § 6(d) (as reported by S. Comm. on the Judiciary, Dec. 9, 2013) ................................................................................................................... 104
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SAMPLE QUESTIONS TO ASK COUNSEL
SAMPLE QUESTIONS FOR PETITIONER, FOODSTAR, INC., ON LICENSE REJECTION
Where in the Code does it say that rejection nullifies, rescinds, or vaporizes a licensee’s rights? If you think that section 365 is an avoiding power, why isn’t it included in sections numbers 540's and 550's? Why doesn’t it use words like avoid? Didn't we say in Dewsnup that avoiding powers should not be read into Code provisions? Was there any pre-Code law on the effect of rejection of licenses like this? Section 365(g) tells us that rejection equals breach. A material breach by Foodstar would not deprive Vohra of his rights to use the mark. Why doesn’t our inquiry end with the plain language of the statute? Isn’t a trademark license property? So aren’t we dealing with a property right that has already been transferred to Vohra, and not just with the contractual aspects of this agreement? Regardless of our view on whether rejection terminates Vohra’s rights, shouldn’t the court have considered the equities of Vohra’s rights and refused to permit rejection here? (Note: This question explores the standard for rejection.) Is it your view that rejection of a contract with a covenant not to compete also terminates the debtor’s duty not to compete? You argue that the exclusion of trademarks from section 365(n) indicates that rejection terminates the license. But, isn’t it equally likely that section 365(n) merely establishes a special process for other types of intellectual property and that the exclusion of trademarks merely excludes them from that process while saying nothing about how they should be treated? How does the bankruptcy discharge affect your argument? Wouldn’t Vohra have a right to an equitable remedy in the Eastlandian courts that would not be a “claim” and thus would not be affected by the discharge? Lubrizol relied on the legislative history indicating that section 365 converts the non-debtor counter-party’s contractual rights into a monetary claim. No one disputes that section 365 does do that in all ordinary contract cases. The only issue arises in contracts like this that include property transfers. Thus, the Sunbeam interpretation is not refuted by the general comment in the legislative history, is it? The legislative history to section 365(n) suggests that trademarks were left out of that section “to allow the development of equitable treatment” of trademarks by the courts. How is this treatment of Vohra equitable?
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Is the Code’s general policy of providing the broadest possible relief strong enough to support your interpretation of section 365?
Judge’s Notes and Questions:
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SAMPLE QUESTIONS FOR PETITIONER, FOODSTAR, INC., ON EXTRATERRITORIAL APPLICATION
Is this a United States trademark or an Eastlandian trademark? We require a “clear statement” of Congressional intent that the Bankruptcy Code apply extraterritorially. I see no such express statement in the Code. At best you can point to inferences, and even then, only two. Do you think that meets your heavy burden of producing unmistakably clear evidence of Congressional intent? Even if we agree that section 542 of the Bankruptcy Code applies to bring extraterritorial assets into the estate, I see nothing in section 365 that indicates an intention to apply it extraterritorially. Don’t we have to find a clear statement for each provision we apply? Your strongest argument is based on section 542, but isn’t it clear from the legislative history of its predecessor (Act section 70(a)) that Congress’ stated intention in adding the words “wherever located” was to ensure the estate’s title to those assets? Is there anything express in the legislative history that states Congress wanted the Bankruptcy Code’s rules to apply extraterritorially? Didn’t we make clear in Kiobel that there is a distinction between extraterritorial jurisdiction and extraterritorial application of a law? How does the Bankruptcy Code’s world-wide jurisdictional provision constitute a clear expression of Congressional intent to apply the Code’s substantive provisions worldwide? Was Judge Brozman wrong in Maxwell to hold that the presumption blocked the section 547 preference power from applying to a purely foreign transaction? Haven’t our courts made it pretty clear in Jaffee and Vitro that we do not accept extraterritorial application of foreign bankruptcy law in cases like this? Doesn’t that suggest your position is incorrect? Under the “touch and concern” analysis, is the small economic impact in this case enough? Is mere economic impact ever enough? What connection does this license agreement have to the United States? Is that enough? Shouldn’t our law respect reasonable commercial expectations? How could Vohra have expected that his license agreement might ever be subject to United States law? If Vohra had not voluntarily submitted to the United States Bankruptcy Court’s jurisdiction, could you have enforced the license termination in the Eastlandian courts? Even if we agree with you, shouldn’t we remand with instructions to apply comity here? Won’t you lose if we do that?
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Judge’s Notes and Questions:
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SAMPLE QUESTIONS FOR RESPONDENT, RAVI VOHRA, ON LICENSE REJECTION
Why doesn’t Congress’ inaction for 30 years on Lubrizol indicate its acceptance of that result? Hasn’t the system worked fine with Lubrizol for 30 years? Why should we be an activist Court and change things rather than wait for Congress to act? Aren't trademarks different from patents and copyrights? Shouldn’t we wait for Congress to craft an exception if one is to be made for them? You don’t seem to like legislative history when Lubrizol relied on it. If we also ignore the legislative history of section 365(n), doesn’t Congress’ exclusion of trademarks from that section compel the conclusion that the plain statutory language results in termination of Vohra’s rights under the license? Wasn’t the Sunbeam Court wrong in relying on the analogy to real estate lessees? Doesn’t the section 365(h)(1) carve-out for lessees demonstrate that 365 does terminate their rights – absent the exception created by section 365(h)(1)? Would sub-sections (h), (i), (j), and (n) of section 365 be necessary if rejection merely meant breach? How would a company like Chrysler or General Motors ever be able to reorganize if they had to reduce the size of their dealer networks? Under your theory Foodstar would be in material breach of its license agreement with Vohra. Thus, under standard contract law it could not enforce any contract provisions against Vohra. How then could it police the use of the mark to prevent it from being destroyed for the estate by Vohra’s actions? Isn't section 365(g) merely a timing section? It converts what would be a post-petition breach into a pre-petition breach. Even if we agree that section 365(g) also tells us that rejection is a “breach,” how do you jump from there to the conclusion that it says that rejection is only a breach? How is section 365(g) “plain”? Why would Congress call it “rejection” if that was identical to breach? Don’t we presume that when Congress uses different terms—rejection and breach—in the same section, that it means different things? If rejection is nothing more than a breach, what does the section 365 power to reject add? Doesn’t your view render rejection superfluous? Section 365 allows a debtor to “assume,” “reject,” or “assume and assign” executory contracts. Both assumption and assignment under 365 are very different from principles of non-bankruptcy
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contract law. Against that backdrop, why should we assume that Congress intended the third option—rejection—would be identical non-bankruptcy contract law?
Judge’s Notes and Questions:
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SAMPLE QUESTIONS FOR RESPONDENT, RAVI VOHRA, ON EXTRATERRITORIAL APPLICATION
Don’t you agree that “wherever located” covers the whole Earth? How could Congress have been clearer that our Bankruptcy Code applies globally? How strong is the presumption against extraterritoriality? Is it a merely a tie-breaker or a robust presumption? Wouldn’t it be fair to say that at the time the Bankruptcy Code was enacted in 1978, the presumption was weak enough such that the Code would have applied extraterritorially? Why should we apply our new doctrine to statutory language drafted long ago? Didn’t we consider the historical context in Kiobel? If we consider it here, do you lose? Do you contend that the statute must expressly state that it applies extraterritorially or can we deduce Congressional intent from the structure and purpose of the law and legislative history? Has any Court of Appeals, other than the Thirteenth Circuit, rejected the extraterritorial application of the Bankruptcy Code? Doesn’t Chapter 15, with its policy of recognizing and enforcing other nations’ bankruptcy laws in the United States, show that Congress intended bankruptcy law to be extraterritorial? Aren’t most major businesses global in nature? How could our Bankruptcy Code work if it only applied within the United States? You ask us to limit the Bankruptcy Code to the territory of the United States, but how can we tell where intangible assets are? How can your approach possibly work with modern businesses that have many valuable intangible assets? If bankruptcy creates a res that is in the custody of a Bankruptcy Court located in the United States (i.e. custodial legis), and all assets worldwide are part of that res, then application of the Code to those assets is not an extraterritorial application of the law. Correct? Why would the Bankruptcy Code grant exclusive jurisdiction over all assets wherever located if Congress did not intend for the Bankruptcy Court to administer those assets using our law? The Bankruptcy Code is an integrated statute whose provisions create a process for reorganization rather than a statutory setting for multiple discrete causes of actions. Thus, once we determine that at least part of the Code applies extraterritorially, doesn’t the whole Code similarly apply? Doesn’t your view require that the Court engaged in a detailed, multi-factored analysis for each dispute involving foreign property or a foreign party in order to determine whether the Bankruptcy Code applies?
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Judge’s Notes and Questions:
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SUMMARY OF THE FACTS Foodstar Systems, Inc. (“Foodstar”) is an international fast food restaurant chain known for its “Burger Bites” franchise. It has enjoyed great success in the gourmet hamburger industry by focusing on a niche market: the sale of miniature hamburgers. In the hopes of boosting revenue prior to its initial public offering, Foodstar acquired Minicakes, a successful miniature cupcake chain. However, Foodstar’s attempt to merge its miniature hamburger product line with Minicakes’ miniature cupcake product line was unsuccessful. Due to the difficulties in producing cupcakes and hamburgers in the same kitchen, coupled with the collapse in demand for miniature cupcakes, Foodstar was forced to abandon its effort to create franchise stores serving tiny food items. As a result of its failed attempt to successfully merge with Minicakes, Foodstar filed for chapter 11 bankruptcy in the District of Moot. Foodstar was unable to obtain financing for a reorganization and now plans to liquidate in chapter 7. Its primary asset is the valuable “Burger Bites” trademark, which is registered with the United States Patent and Trademark Office as well as in the trademark offices of 26 other nations. Foodstar intends to sell its “Burger Bites” trademark along with an assignment to the buyer of all the franchise agreements for the stores franchised by Foodstar. Foodstar holds the trademark and is the franchisor of the local hamburger restaurants in all 26 nations, except in Eastlandia. Eastlandia is home to the first Burger Bites restaurant, where Viraj Deshmukh, an Eastlandia citizen, first developed the concept for this miniature hamburger franchise. Deshmukh granted a 20-year exclusive license to Ravi Vohra, also an Eastlandia citizen, to use the “Burger Bites” trademark in the territory of Eastlandia. This license agreement was executed in Eastlandia and is governed by Eastlandian law; thus, Vohra maintains the exclusive right to use the trademark in Eastlandia. Currently, there are 32 Burger Bites restaurants in Eastlandia, each of which falls under Vohra’s franchise agreements. Shortly after Deshmukh entered into the Vohra license agreement, Foodstar acquired worldwide rights to the “Burger Bites” trademark from Deshmukh, including Deshmukh’s rights under the Vohra license agreement. Foodstar then expanded its Burger Bites franchise to nations around the world, with the one exception of Eastlandia.
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PROCEDURAL HISTORY
In preparation for its anticipated sale of the “Burger Bites” trademark, Foodstar filed a motion to reject the Vohra license agreement. Though Vohra has no apparent connection to the United States, he nonetheless appeared in the case and filed an objection to Foodstar’s motion. Vohra argued that section 365 of the United States Bankruptcy Code could not be applied extraterritorially to an agreement having no connection to the United States. Alternatively, Vohra argued that rejection of the license agreement was not in the best interests of the estate because it would deprive the estate of the benefits of the license while failing to terminate or alter Vohra’s exclusive right to use the trademark in Eastlandia. No evidence was presented at the hearing regarding Foodstar’s motion to reject the Vohra license agreement; rather, the parties filed a joint stipulation as to all pertinent facts. The parties stipulated to the following: (i) the license was an executory contract; (ii) the worldwide “Burger Bites” trademark would sell for 10 to 15 percent less if subject to Vohra’s license; (iii) Eastlandia has adopted the UNICTRAL Model Law on Cross Border Insolvency (which is the basis of Chapter 15 of the United States Bankruptcy Code); and (iv) Eastlandian bankruptcy law permits rejection of trademark licenses, but rejection under Eastlandian law does not terminate the licensee’s rights to use the trademark pursuant to the license. At the conclusion of the hearing, the Honorable Joel Gaffney, United States Bankruptcy Judge for the District of Moot, entered an order finding that rejection of the Vohra license agreement was in the best interests of the estate. Judge Gaffney authorized rejection of the Vohra license agreement on the ground that it would produce a higher sale price for the “Burger Bites” trademark. Vohra timely appealed this order to the district court. Notwithstanding the order authorizing rejection of the Vohra license, Vohra refused to relinquish his rights to use the trademark in Eastlandia. Vohra sent letters to Foodstar in which he asserted his intention to continue using and enforcing his rights to the “Burger Bites” trademark in Eastlandia. In response, Foodstar filed an adversary proceeding in the Bankruptcy Court for the District of Moot against Vohra seeking a declaration that rejection of the license terminated Vohra’s rights in the trademark. Foodstar also requested an injunction against Vohra’s continued use of the trademark. Foodstar then moved for summary judgment and the bankruptcy court entered an order declaring Vohra’s rights terminated and enjoining Vohra from using the “Burger Bites” trademark. Vohra appealed the order and the bankruptcy court stayed its injunction pending the outcome of this appeal. The district court combined the appeals and affirmed both orders without opinion. This appeal followed.
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SUMMARY OF THE DECISION BELOW
MAJORITY 1) Rejection of a Trademark License Does Not Terminate the Licensee’s Rights
The first issue before the court was whether rejection of a trademark licensing agreement pursuant to section 365 of the Bankruptcy Code terminates the licensee’s right to continue using the trademark. Section 365(a) allows a trustee (or debtor in possession) the opportunity to determine, subject to court approval, which of the debtor’s pre-petition contracts and leases are beneficial to the bankruptcy estate and should therefore be assumed, and which are detrimental and should thus be rejected. A debtor’s determination about assumption or rejection is generally honored unless it is so manifestly unreasonable that it could not be based on the exercise of sound business judgment. Since the only alleged benefit in this case is the termination of Vohra’s right to use the trademark, the Court asserted that the Bankruptcy Court’s order must be reversed if rejection does not have that effect. Therefore, the Court found that the critical inquiry here was the effect of rejection of the Vohra license. In reversing the decision below, the Court analyzed the plain language of the statute and determined that a breach of an executory contract by a debtor has several consequences under section 365(g), but that termination of the non-breaching party’s rights is simply not among them. Therefore, the Court concluded that Vohra, the licensee, retained all of the rights granted in the license agreement to use the “Burger Bites” trademark in Eastlandia. For almost 30 years, the only appellate level decision directly addressing this issue held that rejection by a debtor-licensor terminated the licensee’s rights to use the trademark. See Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.) 756 F.2d 1043 (4th Cir. 1985). This decision was highly criticized. Congress’ subsequent enactment of section 365(n) effectively overturned the Fourth Circuit’s decision by affording special protection to licensees of certain types of “intellectual property” in cases where a debtor rejects a license. However, while the definition of “intellectual property” in section 365(n) includes patents, copyrights and trade secrets, it omits trademarks. Therefore, it is not clear what it means to “reject” an executory trademark licensing agreement pursuant to section 365. In addressing this question, the Court joined the Seventh Circuit in finding that rejection of a trademark license agreement by a licensor does not alter the licensee’s rights to use the trademark. The Court concluded that Congress’ decision to provide special treatment for patents and copyrights, by way of including them in the definition of “intellectual property” in section 365(n), “says nothing about the proper treatment of trademarks.” It further reasoned that section 365(n) established a special process for patent and copyright licenses, one that may be inapplicable to trademarks due to their unique characteristics. It held that this could explain Congress’ failure to include trademarks in the category of intellectual property protected by section 365(n).
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Finally, the Court held that section 365 is not a contract-avoiding power. There exist provisions within the Bankruptcy Code that explicitly empower trustees to rescind contracts through avoidance powers, such as sections 544, 548 and 549; however, the Court concluded that other Code provisions should not be intperpreted to do so absent clear language to that effect. “The Code provides a trustee with ample avenues to prohibit a licensee from using a trademark. Section 365 is not one of them.” 2) The Presumption Against Extraterritorial Application of Statutes Bars Application
of Section 365 to the Vohra License Agreement The second issue before the Court was whether the presumption against extraterritorial application of statutes prevents the application of section 365 to a foreign license agreement. The Court held that even if section 365 did operate as an avoiding power, the presumption against extraterritoriality blocks application of such a power to an executory contract that has no connection to the United States other than the fact that a debtor in a U.S. bankruptcy proceeding is a party to the contract. The Supreme Court announced over 20 years ago that there exists a strong presumption against extraterritoriality, a presumption that can only be rebutted by a “clear statement” of Congressional intent to apply a statutory provision to foreign conduct. The proponent of extraterritoriality bears a very high burden of producing unambiguous, clear evidence of such intent. Although the Court acknowledged that it is reasonable to interpret the U.S. Bankruptcy Code as having worldwide applicability, it concluded that this is merely one plausible interpretation of the statute and is therefore insufficient to overcome the presumption. Moreover, the Court noted that this presumption cannot be rebutted simply by making reference to the modest financial impact that rejection of a licensing agreement might have on the distributions in a bankruptcy case. The Court rejected the notion that Congress intended for each and every provision of the Bankruptcy Code to be applied to transactions that have no connection to the United States other than the pendency of a bankruptcy proceeding. In so doing, the Court explained that the presumption against extraterritoriality is a concept wholly distinguishable from the jurisdictional reach of U.S. bankruptcy courts. Rather, the presumption focuses on whether a substantive statutory provision should be interpreted to apply to a foreign transaction. “The fact that Congress granted jurisdiction to a United States court gives no indication whatsoever about its intent as to the law that should be applied to that dispute.” In sum, while recognizing that the bankruptcy court has jurisdiction over the Eastlandian trademark license, the Court clarified that the question is whether United States substantive law applies to Foodstar’s attempt to reject the Vohra license. Lastly, the Court identified the various options available to Foodstar with respect to the Vohra license agreement. Noting that standard choice of law principles point to the application of Eastlandian law, the Court alternatively suggested that since Eastlandia has adopted the UNCITRAL Model Law on Cross Border Insolvency, Foodstar could initiate an ancillary proceeding in Eastlandia to obtain relief.
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SUMMARY OF THE DECISION BELOW
DISSENT 1) Rejection of a Trademark License Terminates the Licensee’s Rights to Use the
Licensed Trademark In his dissent, Judge Lutfy dismissed the notion that rejection simply constitutes a breach, and thereby disagreed with the majority’s conclusion that section 365(g) dictates that the only effect of rejection is the debtor’s breach of its contractual obligations. The dissent reasoned that rejection cannot be identical to a breach because a debtor needs no special bankruptcy power to commit a breach; therefore, the power to reject a contract must provide the debtor with more than its non-bankruptcy ability to breach a contract. In support, the dissent suggested that the only effect of rejection, in cases that support the majority’s viewpoint, is that rejection frees the estate from the debtor’s obligation to perform. However, the bankruptcy discharge already relieves the estate of the debtor’s obligation to perform. As such, the dissent asserted that the majority’s interpretation of section 365(g) would render the Code’s rejection provision without purpose. Instead, the dissent interpreted section 365(g) as a timing provision, in that it indicates when rejection damages have arisen. In support of this notion, the dissent explained that rejection is a breach that gives rise to a damage claim in favor of the non-debtor counter-party. Under bankruptcy law, if such a claim arose prior to the petition date, then it would be a “claim” in the case that would receive its ratable distribution and be discharged. If, on the other hand, the claim arises after the filing, then it is considered an administrative expense that will be paid in full ahead of ordinary pre-petition obligations. The dissent argued that since a debtor cannot use section 365(g) to reject an executory contract until after it has filed for bankruptcy, section 365(g) is thus necessary in order to convert the post-bankruptcy rejection into a pre-bankruptcy breach. As such, the dissent concluded that 365(g) defines the time at which a rejection constitutes a breach, thereby supporting the view that Congress intended rejection to convert the non-debtor counter-party’s contractual rights into a monetary claim against the estate. Using bankruptcy policy, as opposed to principles of contract law, to guide its interpretation of the Code’s rejection provision, the dissent explains how the majority’s holding severely impairs the reorganization policy of the Code.
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2) The Bankruptcy Code Applies to All Assets, Including Foreign Assets The dissent identified two sections of the Bankruptcy Code that it considers express statutory statements of extraterritorial intent: the jurisdictional rules of section 1334(e)(1) and the definition of “property of the estate” as contained in section 541(a). Section 1334(e)(1) grants U.S. bankruptcy courts “exclusive jurisdiction . . . of all property, wherever located, of the debtor.” “Property of the estate” is defined in section 541(a) to include “all the following property, wherever located.” The dissent argued that the “wherever located” language employed in both sections constitutes a clear indication of Congressional intent to extend the Bankruptcy Code beyond the territorial limits of the United States. The dissent explained that section 1334(e)(1) is a jurisdictional provision that establishes the court’s custody of the “res” that is the core of the bankruptcy case. Therefore, its inclusion of foreign property compels the conclusion that the entire Bankruptcy Code applies extraterritorially. Moreover, the dissent concluded that the majority created an unworkable test that subverts the bankruptcy scheme envisioned by Congress because it requires a determination as to which nation’s bankruptcy law applies to each individual asset of the estate. This is an unrealistic endeavor in today’s globalized, digital world, argued the dissent. Lastly, the dissent views the presumption against extraterritoriality as an all-or-nothing proposition that cannot be applied to each section of the Bankruptcy Code independently. Unlike other regulatory schemes, explained the dissent, the Code is not a collection of discrete regulatory rules each of which can be applied in isolation.
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No. 13-628
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM 2013 IN RE FOODSTAR, INC., DEBTOR FOODSTAR, INC. PETITIONER, v. RAVI VOHRA RESPONDENT. December 6, 2013 THE PETITION FOR A WRIT OF CERTIORARI IS GRANTED, LIMITED TO THE FOLLOWING QUESTIONS: 1. Whether rejection of a trademark licensing agreement under 11 U.S.C. section 365 terminates the licensee’s right to continue to use the trademark? 2. Whether the presumption against extraterritorial application of statutes prevents the application of 11 U.S.C. section 365 to a foreign licensing agreement? © St. John’s University School of Law – This problem may not be used or reproduced for any purpose other than the Duberstein Competition without express permission. Contact [email protected] or (718) 990-6620 to obtain permission for other uses.
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UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT
______________________________________________ | IN RE FOODSTAR, INC., | DEBTOR | Case No. 13-4080 | RAVI VOHRA | | Appellant, | | v. | | FOODSTAR, INC. | | Appellee. | | | | ______________________________________________ | Decided: October 14, 2013 Before Judges LUTFY, SISODIA and SCHWARTZ, Circuit Judges SISODIA, Circuit Judge: I. Factual Background and Procedural History This appeal presents two important but unresolved issues of bankruptcy law. The first is
the question of what it means to “reject” an executory trademark licensing agreement under the
section 365 power to assume or reject contracts. For almost 30 years the only appellate decision
directly addressing the issue was the oft-criticized decision in Lubrizol Enterprises, Inc. v.
Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043 (4th Cir.
1985), that rejection by a debtor-licensor terminated the licensee’s rights to use the trademark.
We join in the Seventh Circuit’s recent rejection of Lubrizol, and hold that section 365 is not an
avoiding power and that rejection by a licensor does not alter the licensee’s rights to use the
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trademark. See Sunbeam Products, Inc. v. Chicago American Mfg., LLC, 686 F.3d 372 (7th Cir.),
cert. denied, ___ U.S. ___, 133 S.Ct. 790 (2012). The second issue is also of recent vintage,
forced upon us by the Supreme Court’s dramatic expansion of the presumption against
extraterritorial application of federal statutes. While older case law gives little reason to question
the extraterritoriality of the Bankruptcy Code, the Supreme Court’s recent re-interpretation of
that doctrine and its forceful application of it in an opinion earlier this year leaves little doubt
that section 365 cannot be applied to a license like the instant one that has no connection to the
United States other than the licensor’s pending bankruptcy case.
These issues arise out of the chapter 11 reorganization of Foodstar, Inc., the franchisor for
the popular Burger Bites fast food restaurant chain. Foodstar is incorporated under the laws of
the State of Moot and its headquarters are located in the State of Moot. The chain carved out a
successful niche in the very competitive gourmet hamburger fast food industry by focusing on
very small burgers, while most of its competitors focused on extremely large burgers. Hoping to
boost revenues in preparation for an initial public offering of its stock, Foodstar acquired
Minicakes, one of several successful miniature cupcake chains, and attempted to merge the
miniature hamburger and miniature cupcake product lines into combined franchised stores
serving tiny food items. That effort was a dismal failure. Not only was it difficult to produce
quality cupcakes and quality hamburgers in the same kitchen, but the collapse in demand for
miniature cupcakes forced Foodstar to abandon the idea of selling cupcakes in its hamburger
stores.
Foodstar’s losses from its cupcake venture left it deeply in debt and without sufficient
operating capital to run its hamburger franchise. In an effort to reorganize the business, Foodstar
filed a chapter 11 bankruptcy. Foodstar was unable to obtain financing for a reorganization of
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the business and now plans to liquidate in chapter 11. Its primary asset is its valuable “Burger
Bites” trademark that it intends to sell along with an assignment to the buyer of all of the
franchise agreements for the stores franchised by Foodstar.
Trademarks, like all intellectual property rights, are territorial in nature. See Person’s Co.,
Ltd. v. Christman, 900 F.2d 1565, 1568-69 (Fed.Cir. 1990) (“The concept of territoriality is basic
to trademark law; trademark rights exist in each country solely according to that country's
statutory scheme.”). The Burger Bites trademark is registered with the United States Patent and
Trademark Office, giving Foodstar exclusive rights to use the mark in the United States. In
addition, the trademark has been registered to Foodstar in the trademark offices of 26 other
nations, giving it rights in those countries as well. See GATT Uruguay Round Agreement on
Trade Related Aspects of Intellectual Property (TRIPS). The only problem arises in the nation of
Eastlandia. In all other countries, Foodstar holds the trademark and is the franchisor of the local
hamburger restaurants.
The Eastlandia situation is special. In fact, Eastlandia is the place where the first Burger
Bites restaurant was located. The concept was developed by an Eastlandian citizen, Viraj
Deshmukh. Deshmukh granted a 20-year exclusive license to Ravi Vohra to use the Burger
Bites trademark in the territory of Eastlandia. Vohra is also a citizen of Eastlandia. The license
agreement was executed in Eastlandia and is governed by Eastlandian law. The Eastlandian
license agreement was similar to standard United States trademark licenses, with provisions
giving the licensor control over quality and many other aspects of Vohra’s operations. Thirty-
two Burger Bites hamburger restaurants operate in Eastlandia, all under franchise agreements
with Vohra. Shortly after Deshmukh entered into the Vohra license, Foodstar acquired the
worldwide rights to the trademark from Deshmukh, including all of Deshmukh’s rights under the
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Vohra license agreement. Foodstar then developed and expanded the Burger Bites franchise in
the United States and other nations, except Eastlandia.
In preparation for the planned sale of the Burger Bites trademark, Foodstar filed a motion
to reject the Vohra license agreement. Although Vohra has no apparent connection to the United
States other than the instant licensing agreement, he appeared in the bankruptcy case and filed an
objection to the motion. In his objection, Vohra argued that section 365 could not be applied
extraterritorially to an agreement having no connection to the United States. In the alternative,
he argued that rejection was not in the best interest of the estate because rejection would merely
deprive the estate of the benefits of the license without terminating or altering Vohra’s exclusive
right to use the trademark in Eastlandia.
No evidence was presented at the hearing on the motion to reject the license agreement.
Instead the parties filed a joint stipulation of all pertinent facts, including stipulations that the
license was an executory contract and that the worldwide Burger Bites trademark would sell for
10 to 15 percent less if it was subject to Vohra’s license than if Vohra’s rights were terminated.
In addition, the parties stipulated that Eastlandian bankruptcy law permits rejection of trademark
licenses, but that rejection under Eastlandian law does not terminate the licensee’s rights to use
the trademark pursuant to the license and that Eastlandia has adopted the UNICTRAL Model
Law on Cross Border Insolvency (which is the basis of Chapter 15 of the United States
Bankruptcy Code). At the conclusion of the hearing, the Hon. Joel Gaffney, United States
Bankruptcy Judge for the District of Moot, entered an order finding that rejection was in the best
interest of the estate because it would produce a higher sale price for the Burger Bites trademark
and authorizing the rejection of the Vohra license agreement on that ground. Vohra timely
appealed that order to the district court.
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Notwithstanding the rejection, Vohra refused to relinquish its rights to use the trademark in
Eastlandia. Vohra asserted in letters to Foodstar that he intended to continue to use and enforce
his rights in the Burger Bites trademark in Eastlandia. In response, Foodstar filed an adversary
proceeding in the bankruptcy court against Vohra seeking a declaration that rejection of the
license terminated Vohra’s rights in the trademark and requesting an injunction against Vohra’s
continued use of the trademark. Foodstar moved for summary judgment and the bankruptcy
court entered an order declaring Vohra’s rights terminated and enjoining Vohra from using the
Burger Bites trademark. Vohra promptly appealed and the bankruptcy court stayed its injunction
pending the outcome of this appeal.
The district court combined the appeals and affirmed both orders without opinion. This
appeal followed.
II. Discussion
On appeal from a district court’s review of a bankruptcy court decision, we review findings
of fact for clear error and factual findings may only be overturned if they are “completely devoid
of a credible evidentiary basis or bear no rational relationship to the supporting data.” Pension
Transfer Corp. v. Beneficiaries under the Third Amendment to Fruehauf Trailer Corp.
Retirement Plan No. 003, 444 F.3d 203, 209-10 (3d Cir. 2006) (citation omitted). However, the
lower court’s legal conclusions are reviewed de novo, and an appellate court need not give any
deference to a lower court’s conclusions of law. ASM Capital.LP v. Ames Dep’t Stores, Inc., (In
re Ames Dep’t Stores, Inc.), 582 F.3d 422, 426 (2d Cir. 2009). Since the parties stipulated to the
facts, our review is limited to the lower court’s conclusion of law.
We reverse the decision below on two alternative grounds. First, we hold that, upon
rejection of a trademark license in bankruptcy, the licensee may continue to make use of the
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licensed trademark in accordance with the agreement. In addition, even if section 365 did
operate as an avoiding power, the presumption against extraterritoriality blocks application of it
to an executory contract that has no United States connection other than the fact that the debtor is
a party to it. The bankruptcy court’s orders authorizing rejection of the Vohra license and
enjoining Vohra were based on its erroneous conclusion that section 365 terminated Vohra’s
rights to use the Burger Bites trademark in Eastlandia. Since we hold that Vohra’s rights could
not be terminated, there were no grounds to authorize rejection or to issue an injunction and we
reverse both orders.
A. Rejection of a Trademark License Does Not Terminate the Licensee’s Rights
We are faced with a simple question that has a simple answer. What are the rights of a
non-debtor party to a contract that has been rejected in the bankruptcy case of its debtor/counter-
party? This question rarely matters in ordinary contracts for goods and services because the only
right the non-debtor has is a right to payment that is converted into a bankruptcy claim and paid
its share of the estate. See 11 U.S.C. § 101(5). The issue becomes important only when the non-
debtor has been granted some right (other than a payment right) that under non-bankruptcy
contract law continues after the counter-party breaches. The trademark license involved in this
case presents such a situation, as do patent licenses, copyright licenses, real estate leases, and
contracts with non-compete provisions.
As with many supposedly difficult issues of bankruptcy law, this question is answered by
the plain language of the statute. The issue became a difficult one only because some judges
refused to do their duty and instead imported their own personal preferences into the law.
Section 365(a) allows a trustee, subject to the court's approval, to “assume or reject any
executory contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a). This provision gives
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Foodstar1 the opportunity to determine which of its pre-petition contracts and leases are
beneficial to the bankruptcy estate and thus should be assumed and which are detrimental and
thus should be rejected. Tenucp Property, LLC v. Riley (In re GCP CT School Acquisition, LLC),
429 B.R. 817, 824 (B.A.P. 1st Cir. 2010). While court approval is required, the focus is on the
benefit to the estate and Foodstar’s determination that rejection of the Vohra license was
advantageous should be honored unless it is so manifestly unreasonable that it could not be based
on the exercise of sound business judgment. Since the only alleged benefit in this case is the
termination of Vohra’s right to use the trademark, the Bankruptcy Court’s order must be reversed
if rejection does not have that effect.
What is the effect of rejection? The plain language of the Code could not be clearer.
Section 365(g) provides, “the rejection of an executory contract or unexpired lease of the debtor
constitutes a breach of such contract or lease ….” 11 U.S.C. § 365(g). A breach by the debtor
has several consequences, but the elimination of the non-breaching party’s rights is not among
them. Sunbeam, 686 F.3d at 376-77. “Rejection does not ‘nullify,’ ‘rescind,’ or ‘vaporize’ the
contract or terminate the rights of the parties.” In re Bachinski, 393 B.R. 522, 544 (citation
omitted). Thus, Vohra retains all of the rights granted in the license agreement to use the Burger
Bites trademark in Eastlandia.
This would be the end of our inquiry, but for the Fourth Circuit’s declaration in Lubrizol
that rejection terminated a patent licensor’s rights to use the patented technology. See Lubrizol,
756 F.2d at 1048. The Lubrizol Court elevated its reading of legislative history to trump the
express statutory language and was wrongly decided. Congress agreed and enacted section
365(n) to reverse Lubrizol. Strangely, Congress’ rejection of Lubrizol is the source of the
1 There is no trustee in this case, but Foodstar, as a debtor in possession, is vested with the powers of a trustee. 11 U.S.C. § 1107(a).
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argument that it retains vitality. Section 365(n) provides special protection to licensees of
“intellectual property” in cases where the debtor rejects the license. See 11 U.S.C. § 365(n).
Under that section, the licensee under a rejected intellectual property license may either (1) elect
to treat the contract as terminated if the rejection “amounts to such a breach as would entitle the
licensee to treat such contract as terminated . . .” or (2) “retain its rights … under such contract
… to such intellectual property ….” 11 U.S.C. § 365(n)(1)(A) & (B) (emphasis added).
Congress also added a definition of “intellectual property,” encompassing patents, copyrights
and trade secrets, but intentionally omitting trademarks, trade names and service marks. See 11
U.S.C. § 101(35A); see also In re Exide Technologies, 607 F.3d 957, 966–67 (3d Cir.) (Ambro,
J., concurring), cert. denied, ___ U.S. ___, 131 S.Ct. 1470 (2011). Since section 365(n)’s
enactment, some courts have reasoned that Congress’ intentional exclusion of trademarks is a
Congressional affirmation that Lubrizol’s interpretation of section 365’s effect should continue
to apply to trademarks (and arguably all cases not covered by a statutory exception). See Exide,
607 F.3d at 966 (collecting cases).
Sometimes an omission is just an omission. Congress’ decision to provide special
treatment for patents and copyrights says nothing about the proper treatment of trademarks.
Foodstar’s argument would be a strong one if section 365(n) simply reversed Lubrizol for patents
and copyrights, but the section does far more than that. It sets out an elaborate process for
rejection of the covered licenses, providing an election to the licensee, 11 U.S.C. § 365(n)(1),
and replacing or modifying many of its non-bankruptcy rights. See 11 U.S.C. § 365(n)(2 - 4).
None of this flows from a simple rejection of Lubrizol. Instead, section 365(n) is more properly
seen as establishing a special process for patent and copyright licenses. Congress’ failure to R 9
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include trademarks is easily explained by the unique characteristics of trademarks that may make
the section 365(n) process inappropriate.
The Lubrizol reasoning converts section 365 into a contract-avoiding power. While the
Bankruptcy Code explicitly empowers the trustee to rescind contracts through avoidance powers
in sections 544, 548, and 549, we should not interpret other Code provisions to do so absent clear
language to that effect. See Dewsnup v. Timm, 502 U.S. 410, 420 (1992) (holding that section
506(d) did not include the power to avoid undersecured liens). The Code provides a trustee with
ample avenues to prohibit a licensee from using a trademark. Section 365 is not one of them.
B. The Presumption Against Extraterritorial Application of Statutes Bars Application of
Section 365 to the Vohra License Agreement
Prior to 1991, the presumption against extraterritoriality was little more than a prudential
consideration courts employed when asked to apply a statute to foreign conduct or activities.
Like its sister trans-border principles – comity and the notion that statutes ought not be construed
to violate the law of nations if a possible alternative construction exists – the presumption against
extraterritoriality was at best a “tie-breaker” in cases where it was unclear whether Congress
intended to apply a statute extraterritorially.
It is a tiebreaker no more. Cf. Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 130
S.Ct. 2869, 2892 (2010) (Stevens, J., dissenting) (arguing against the change).
Over a vigorous dissent, the Supreme Court in E.E.O.C. v. Arabian America Oil Co., 499
U.S. 244 (1991) (“Aramco”) announced a robust presumption that could be rebutted only by a
“clear statement” of Congressional intent to apply a statutory provision to foreign conduct. The
proponent of extraterritorially bears a very heavy burden of producing unmistakable clear
evidence of such an intent. R 10
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Were we writing on a pre-Aramco slate, we would agree that it is reasonable to interpret
the entire Bankruptcy Code to apply worldwide since the evidence of Congressional intent
weighs slightly in that direction. But a plausible interpretation of the statute simply is not
enough to overcome the presumption. Morrison, 130 S. Ct. at 2883 We have seen no statement
of any intent to apply the entire Code, or specifically section 365, extraterritorially -- much less a
clear one. While the dissent points to two statutory references and one legislative statement from
a prior version of the bankruptcy law suggesting that the Code has some extraterritorial reach,
generic terms are not enough to rebut the presumption. See Kiobel v. Royal Dutch Petroleum
Co., ___ U.S. ___, 133 S. Ct. 1659, 1665 (2013) (finding that terms like “any” and “every” are
not enough to rebut the presumption against extraterritoriality). “Boilerplate terms” and even
express statutory references to “foreign commerce” do not give a statute extraterritorial effect
without more specificity. Aramco, 499 U.S. at 250–51; New York Cent. R. Co. v. Chisholm, 268
U.S. 29, 31-32 (1925). Just how overwhelming the proof of intent must be is clear from the
Court’s most recent holding in Kiobel that a statute named the Alien Tort Statute lacks
extraterritorial reach.
Even prior to the Court’s recent Morrison and Kiobel decisions, some eminent jurists
recognized that Aramco limited the extraterritorial reach of the Code. In the famous Maxwell
cross-border bankruptcy case, the late Judge Brozman recognized that the presumption barred
application of the section 547 preference power to a foreign lending transaction. See In re
Maxwell, 170 B.R. 800, 809-14 (Bankr. S.D.N.Y.), aff’d, 93 F.3d 1036 (2d Cir. 1996) (affirmed
on comity grounds). Any lingering doubts about the Court’s shift in Aramco have been swept
away by its more recent cases.
Two references in the Bankruptcy Code suggest an extraterritorial intent. They are the R 11
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jurisdictional grant over “all property, wherever located, of the debtor” in 28 U.S.C. § 1334(1)
and the inclusion in the section 541 definition of property of the estate of the words “all of the
following property, wherever located.” 11 U.S.C. § 541(a). The impact of the jurisdictional
grant is easily dispensed with. The Kiobel Court cleared up the confusion between jurisdictional
provisions and substantive legal rules. The presumption focuses not on the jurisdiction of the
United States courts, but rather on whether a substantive statutory provision should be
interpreted to apply to a foreign transaction. Rejecting a similar argument based on the grant of
extraterritorial jurisdiction under the Alien Tort Statute, the Court explained, “The question … is
not whether a federal court has jurisdiction … [but] instead whether the court has authority to
recognize a cause of action under U.S. law ….” Kiobel, 133 S.Ct. at 1666. No one questions the
Bankruptcy Court’s jurisdiction over the Eastlandian trademark license. The question is whether
United States substantive law applies to the debtor’s attempt to reject it. The fact that Congress
granted jurisdiction to a United States court gives no indication whatsoever about its intent as to
the law that should be applied to that dispute.
Just as you can’t carry an ocean in a thimble, the two extraterritorial words in section
541(a) can’t extend our entire Bankruptcy Code to every corner of the earth. While creating a
plausible argument for extraterritoriality, the “wherever located” language in section 541(a) and
the related legislative history to the predecessor provision in an earlier bankruptcy law simply do
not constitute an unambiguously clear indication that Congress intended that each and every
provision of the Bankruptcy Code be applied to transactions having no bearing on the territory of
the United States other than the pendency of a bankruptcy case in our courts. A careful reading
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of these references shows that the only thing Congress expressly indicated is that the debtor’s
title to foreign assets passed into the estate.2
The dissent views extraterritoriality as an all-or-nothing proposition, phrasing the question
as whether the Bankruptcy Code applies extraterritorially and then using the single clear instance
of extraterritorial application as proof that it does. The inquiry, however, is far more nuanced.
The presumption applies at every stage of the analysis to act as a check against extraterritorial
application of the law. As the Morrison Court stated, “[W]hen a statute provides for some
extraterritorial application, the presumption against extraterritoriality operates to limit that
provision to its terms.” 130 S. Ct. at 2882. We find nothing in the cited section 541 references to
suggest that section 365 should be applied extraterritorially and certainly nothing to suggest that
it should be applied to a situation involving a completely foreign transaction.
While the presumption against extraterritoriality may be rebutted if the issues “touch and
concern the territory of the United States," the impact must have "sufficient force to displace the
presumption.” Kiobel, 133 S. Ct. at 1669. This is not a light requirement and is not satisfied by
the modest financial impact that rejection of a licensing agreement might have on the
distributions in a bankruptcy case.
Our holding today does not gut the Bankruptcy Code. Foodstar has several different
options for dealing with the Vohra license agreement. Standard choice of law principles would
point to the application of Eastlandian law here. Alternatively, since Eastlandia has adopted the
UNCITRAL Model Law on Cross Border Insolvency, Foodstar can initiate an ancillary
proceeding in Eastlandia to obtain needed relief. This is the approach that shows respect for the
sovereignty of Eastlandia and avoids the conflicts that the presumption against extraterritoriality
2 Indeed, the legislative history addresses only this limited title question. See H.R. Rep. No. 2320 (1952), reprinted in 1952 U.S.C.C.A.N. 1960.
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is designed to avoid. Respect is a two-way street and on the very area of treatment of intellectual
property licensees, our courts have refused to give extraterritorial effect to contrary German
principles. See Jaffe v. Samsung Elec. Co., Ltd., ___ F.3d ___, 2003 WL 26478864 n.3 (4th Cir.,
12/03/13) (applying 11 U.S.C. § 365(n) to Germany patent license rejection and discussing
territorial application of bankruptcy principles).
III. Conclusion
For the foregoing reasons, we reverse.
LUTFY, Circuit Judge, dissenting:
I respectfully dissent from both of the conclusions reached by the majority. Our duty as
jurists when asked to construe a statute is to consider all relevant sources so that we can arrive at
the most faithful reading of the statute. We are not free to substitute our policy choices for those
made by Congress. While I agree that it is improper to resort to legislative history and other
sources when the statutory language is clear and the result not absurd, it is equally improper to
declare language “plain” and refuse to consider legislative history and policy when reasonable
alternative readings of the statutory text exist. That is the case here and the majority’s fixation
on its unexplained reading of the statutory language without considering the relevant legislative
history, bankruptcy policy, and the context in which that Code operates causes it to misconstrue
section 365 and to misapply the presumption against extraterritoriality.
A. Rejection of a Trademark License Terminates the Licensee’s Rights to Use the
Licensed Trademark
The primary difference between my interpretation of section 365 and that of the majority is
that the majority believes section 365(g) tells us that the effect of rejection is merely a breach,
whereas I believe it tells us “when” rejection damages are deemed to arise. We do not disagree
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that one effect of rejection is that the debtor is in breach of its contractual or lease obligations.
Where we disagree is that the majority believes that the only effect of rejection is a breach. I fail
to see how the statutory language makes either one of these interpretations plain and am thus
duty-bound to explain why my interpretation is the more faithful reading of the statute.
If “rejection” equals “breach” as the majority and some other courts contend, then why
would Congress need to include such a power in the Bankruptcy Code? A debtor needs no
special bankruptcy power in order to commit a breach; it can simply stop performing or
repudiate the contract and cause an anticipatory breach. The non-debtor counter-party has no
power to make the debtor perform. See 11 U.S.C. § 362(a) (staying actions). The power to
“reject” a contract must provide the debtor with something more than its non-bankruptcy ability
to breach the contract. 3 Further, if rejection is identical to breach, then why did Congress use the
term “rejection” to describe it instead of simply giving the trustee the power to “assume or
breach any executory contract”? See 11 U.S.C. § 365(a). Finally, a debtor’s rejection of an
executory contract would at least constitute an anticipatory breach under non-bankruptcy law, so
there would be no need for section 365(g) if its purpose was to define rejection rather than
merely time it.
In contrast, interpreting section 365(g) as a timing section presents no such problems.
Rejection is a breach (and may be much more) that gives rise to a damage claim in favor of the
non-debtor counter-party. Under bankruptcy law, the time when the breach occurred, and when
3 Section 365 gives a debtor the power to “assume,” “reject,” or assume and “assign” executory contracts. 11 U.S.C. 365(a & f(2)). Of these, only “assign” is a term commonly used in non-bankruptcy contract law. But the assignment bankruptcy law envisions is quite different from a non-bankruptcy contractual assignment because it relieves the estate of its obligations. See 11 U.S.C. § 365(k). It also overrides many of the non-debtor counter-party’s rights. See 11 U.S.C. § 365(e) & (f). Similarly, the power to “assume” overrides many non-bankruptcy contractual rights. See, e.g., 11 U.S.C. § 365(b) & (e) (expanding the right to cure and overriding certain contractual terms). Under the majority’s view, Congress gave debtors three powers in section 365. Two of these are very different from any existing non-bankruptcy contract law principle. However, the third power is identical to one of the most central concepts of contract law, yet Congress chose a new term to describe it. That is a contorted, not a plain, reading of the language.
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the claim arose, is of critical importance. If the claim arose before bankruptcy was filed, then it
would be a “claim” in the case that would receive its ratable distribution and be discharged. See
11 U.S.C. §§ 101(5) & 1141(d)(1). If, on the other hand, the claim arose after the filing, then it
would be an “administrative expense” and would be paid in full ahead of ordinary pre-petition
creditors. See 11 U.S.C. §§ 503(b) & 507(2). Since a debtor can’t use section 365 to reject an
executory contract until after it has filed bankruptcy, section 365(g) is necessary in order to
convert the post-bankruptcy rejection into a pre-bankruptcy breach so that the resulting damage
claim will be treated just like other pre-petition debts. Section 365(g) does this by providing that
rejection “constitutes a breach … immediately before the date of the filing of the petition.” See
11 U.S.C. § 365(g)(1).4 Further, the legislative history confirms my view that “[s]ubsection (g)
defines the time as of which a rejection … constitutes a breach.” H.R. Rep. No. 95-595, at 349
(1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6305; S. Rep. No. 95-989, at 60 (1978), reprinted
in 1978 U.S.C.C.A.N. 5787, 5846.
Rejection is not defined in the Bankruptcy Code and has no established meaning in non-
bankruptcy contract law. Perhaps that is why Congress chose the term so that it would be
interpreted in light of the policies underlying section 365. The Fourth Circuit did precisely that
in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers,
Inc.), 756 F.2d 1043 (4th Cir. 1985). The Bankruptcy Code adopts the “broadest possible
definition” of claim in order to give “the broadest possible relief.” H.R. Rep. No. 95-595 at 309;
S. Rep. No. 95-989 at 21-22. The broad relief policy of the Bankruptcy Code supports the
Lubrizol interpretation of section 365. As discussed by the Lubrizol court, the legislative history
4 Section 365(g)(2) completes the timing rule by providing that a rejection following a prior assumption results in a post-petition breach, and therefore gives the non-debtor counter-party an administrative expense allowance. See 11 U.S.C. § 365(g)(2). The section provides additional rules to deal with cases that are converted from one chapter to another, which is necessary because pre-conversion administrative expenses have a different priority than post-conversion administrative expenses. See 11 U.S.C. § 365(g)(2)(A) & (B); see also 11 U.S.C. § 726(b).
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of section 365 further supports the view that Congress intended rejection to convert the non-
debtor counter-party’s contractual rights into a monetary claim against the estate.5
The majority can provide no explanation of what purpose rejection serves if it constitutes
nothing more than a breach of contract. The only effect noted in cases supporting the majority’s
view is that rejection “merely frees the estate from the obligation to perform.” Sunbeam
Products, Inc. v. Chicago American Mfg., LLC, 686 F.3d 372, 377 (7th Cir.), cert. denied, ___
U.S. ___, 133 S.Ct. 790 (2012), quoting Thompkins v. Lil’Joe Records, Inc., 476 F.3d 1294,
1306 (11th Cir. 2007). But the combined impact of the broad claim definition and the bankruptcy
discharge already relieves the estate of the obligation to perform so the majority’s interpretation
renders the rejection provision mere surplusage.
Congressional action and inaction support the view that Lubrizol was correctly decided.
While mere inaction suggests nothing, in this case Congress actually considered Lubrizol and
passed legislation to modify its holding, but only slightly. Had Lubrizol misinterpreted the effect
of rejection, Congress easily could have reversed it. Instead it created an exception to it for
“intellectual property;” an exception that would have been unnecessary under the majority’s
interpretation of section 365. Were that all Congress had done, I might agree with Judge Ambro
that this is too much freight for a negative inference to bear. See In re Exide Technologies, 607
F.3d 957, 967 (3d Cir.) (Ambro, J., concurring), cert. denied, ___ U.S. ___, 131 S.Ct. 1470
(2011). But Congress also created other similar exceptions, all of which preserve some of the
non-debtor counter-party’s contractual rights, for lessees under unexpired real estate leases (11
5 The legislative reports state that “The purpose is to treat rejection claims as prepetition claims.” H.R. Rep. No. 95-595 at 349; S. Rep. 95-989 at 60 (emphasis added). Read in conjunction with the claim definition, this statement supports the Lubrizol view.
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U.S.C. § 365(h)(1)),6 owners of timeshare interests (11 U.S.C. § 365(h)(2)), and purchasers of
real property or timeshare interests who are already in possession (11 U.S.C. § 365(i & j)).
Under the majority’s view, Congress has added numerous provisions to section 365 to preserve
contractual rights that section 365 never altered. The more reasonable interpretation is that
Congress added the exceptions because section 365 otherwise converts those rights into damage
claims.
The case is even stronger for trademark licenses. Congress intentionally left trademarks
out of the definition of “intellectual property” that was protected by section 365(n). As the
Senate Judiciary Committee report stated, “since [matters related to trademark] could not be
addressed without more extensive study, it was determined to postpone congressional action in
this area and to allow the development of equitable treatment of this situation by the bankruptcy
courts.” See S. Rep. No. 100-505, at 5 (1988), reprinted in 1988 U.S.C.C.A.N. 3200, 3204
(noting that trademark licenses “raise issues beyond the scope of this legislation” because these
“licensing relationships depend to a large extent on control of the quality of the products or
services sold by the licensee”). Where Congress explicitly enumerates certain exceptions,
additional exceptions are not to be implied, in the absence of contrary legislative intent. Andrus
v. Glover Const. Co., 446 U.S. 608, 616-17 (1980).
As Congress recognized, trademarks are a special type of intellectual property.
Termination of the licensee’s rights is the only sensible interpretation of rejection. The owner of
a trademark does not own the words, but rather the “goodwill” associated with the words that
describe the source of the product and provide an assurance of its quality. In re XMH Corp., 647
6 The Sunbeam Court uses the example of a real estate lessee to support its argument that section 365 does not terminate the rights of the non-debtor party to a contract, apparently not realizing that the lessee’s continued right to remain in the premises following rejection is the result of an exception to section 365 and not an example of its operation. See Sunbeam, 686 F.3d at 377. In fact, if the lease term has not yet commenced, the tenant’s rights in the premises are “vaporized”. This would not be the effect of a non-bankruptcy breach by a landlord and thus the example Sunbeam uses proves its reasoning wrong.
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F.3d 690, 995-96 (7th Cir. 2011). Trademarks are recognized and protected because they give
consumers a quick reference to the quality and source of the product. See id. However, because
of this feature of trademarks, a trademark owner who fails to exercise quality control over the
use of the trademark loses protection under the Lanham Act. See, e.g., Barcamerica Int’l USA
Trust v. Tyfield Imps., Inc., 289 F.3d 589 (9th Cir. 2002). If rejection is merely a breach that
does not terminate the licensee’s right to use the trademark, that continued use could cause the
debtor to lose all rights in the trademark. Under contract law, the debtor/licensor would not be
able to enforce the contract while it was in material breach, so how could it protect the
underlying trademark, which is a significant asset of the estate?
Rejection is not simply a breach, nor is it a vaporization, termination or rescission of the
contract. These formulations are too simplistic. Rejection draws its meaning from bankruptcy
policy, not from contract law. In cases like a trademark license, where the licensee’s continued
use of the trademark imposes on the debtor a continuing relationship with the licensee and
continuing duties in order to protect the underlying estate asset, it must be read to convert the use
right into a damage claim.7
Finally, the majority’s holding seriously impairs the reorganization policy of the
Bankruptcy Code. Under Lubrizol, the rejection claim is converted into a monetary claim that
can be restructured in the reorganization so that the obligations under the license no longer
encumber the debtor’s fresh start. The recent Chrysler bankruptcy case provides a good example
7 Much of the judicial resistance to this theory confuses asset transfers with licenses and leases. See, e.g., Thompkins, 476 F.3d at 1307-08. Rejection should not be read to rescind payments previously made on the contract or assets already transferred pursuant to the contract. However, where recognition of the continuing contractual rights of the non-debtor counter-party will impose an on-going burden on the debtor, those rights must be converted into a damage claim and restructured so that the Bankruptcy Code’s rehabilitative purpose is not thwarted. This is the common thread drawn from the exceptions Congress has added to section 365. All involve situations where recognition of the post-rejection rights requires an on-going relationship that will burden the debtor. The only sensible interpretation of the resulting statutory patchwork is that rejection converts these rights into damage claims, except in those cases where Congress has provided otherwise.
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why rejection should be interpreted to terminate the non-debtor counter-party’s rights under a
trademark license agreement. Chrysler had to dramatically reduce its dealer network in order to
save the business. In re Old Carco LLC, 406 B.R. 180, 193-96 (Bankr.S.D.N.Y.), aff’d mem.,
420 Fed. Appx. 89 (2d Cir. 2011). This involved the termination of dealership franchise
agreements that included licenses of the Chrysler trademark. Fortunately, the Court adopted the
Lubrizol view and saved the American automotive industry. Id. at 211. That would not be
possible under today’s ruling.
B. The Bankruptcy Code Applies to All Assets, Including Foreign Assets
The English language is constantly evolving, but I am unable to find any dictionary that
supports my colleagues’ view that the phrase “wherever located” does not clearly indicate an
intention to extend the Bankruptcy Code beyond the territorial limits of the United States. What
a quaint pre-internet, pre-globalization world the majority envisions where a bankruptcy law
could be used to reorganize our largest commercial enterprises while addressing only those
assets located within the physical boundaries of the United States. In a world where all
significant commercial enterprises have some global operations and a business’ most valuable
assets are intangible, the majority’s test requiring a complex factor-analysis of the center of
gravity for each intangible asset to determine which nation’s bankruptcy law applies to the
particular asset subverts the bankruptcy scheme envisioned by Congress.
While the presumption against extraterritoriality requires us to find a clear indication of
Congressional intent to apply a statute extraterritorially, that presumption is not a trump card that
ends our inquiry. See Morrison v. Nat’l Australia Bank, Ltd., 130 S. Ct. 2869, 2877 (2010).
Instead, it is merely one among many statutory construction tools we use to reach the “most
faithful reading possible” of a statute. Id. 130 S. Ct. at 2892 (Stevens, J., dissenting). We look
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not only to the statutory language, but also to the “context,” Morrison, 130 S. Ct. at 2883,
including the legislative history and even the historical setting. See Kiobel v. Royal Dutch
Petroleum Co., ___. U.S. ___, 133 S. Ct. 1659, 1666-69 (2013) (examining historical events).
In the case of the Bankruptcy Code the language of the statute, express statements in the
legislative history, and the context of bankruptcy practice all strongly support extraterritorial
application of the entire Code to all aspects of any bankruptcy case. This is the conclusion of the
Courts of Appeal that have addressed the issue and it should be ours as well. See, e.g.,
Underwood v. Hilliard, 98 F.3d 956 (7th Cir. 1996) (affirming contempt sanctions against party
who violated automatic stay by bringing action against debtor in Nevis); Hong Kong and
Shanghai Banking Corp., Ltd. v. Simon, 153 F.3d 991 (9th Cir. 1998) (affirming sanctions
against creditor who sought collection on a discharged debt in Hong Kong).
Congress clearly expressed its intention that the Bankruptcy Code apply extraterritorially
in two lynchpin sections of the Bankruptcy Code. The bankruptcy jurisdictional rules are the
clearest expression of the global reach of our bankruptcy law. The Code grants the United States
courts “exclusive jurisdiction … of all of the property, wherever located, of the debtor … and of
property of the estate.” 28 U.S.C. § 1334(e)(1) (emphasis added). The “property of the estate”
reference in section 1334(e) ties into the other express statutory statement of extraterritorial
intent. “Property of the estate” is defined in section 541(a) to include “all the following property,
wherever located and by whomever held: [listing types of property]” 11 U.S.C. § 541(a)
(emphasis added). While a general inclusive modifier such as “any” or “every” would “not rebut
the presumption against territoriality,” see Kiobel, 133 S. Ct. at 1665, the phrase “wherever
located” is a geographical term that manifests a clear intention to have the bankruptcy court’s
authority over assets like the Vohra license extend worldwide.
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Further, the history of section 541 confirms that Congress added that phrase in order to
make clear that our bankruptcy laws apply worldwide. Following World War II, businesses
began to expand their reach globally and our bankruptcy laws would have become ineffective if
they were construed to apply to United States assets only. Thus, in 1952, Congress amended
section 70a of the former Bankruptcy Act to expressly extend its reach to the overseas assets of
United States’ bankrupts. The amended section read:
“The trustee of the estate of a bankrupt ... shall ... be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this Act, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located ... (5) property ... which prior to the filing of the petition he [the bankrupt] could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized[.]”
11 U.S.C. § 70a (repealed 1978) (emphasis added). Further, the legislative history of the 1952
amendment makes it clear that the Congress intended section 70a to apply extraterritorially. The
House Report accompanying the bill provides, “[S]ection 70a [is amended] to make clear that a
trustee in bankruptcy is vested with the title of the bankrupt in property which is located without,
as well as within, the United States.” H.R. Rep. No. 2320 (1952), reprinted in 1952
U.S.C.C.A.N.1960 (emphasis added). A clearer statement of intent to apply a statute to non-
United States property is hard to imagine.
The legislative history of current section 541(a) of the Bankruptcy Code confirms that it
carries forward the global reach of former section 70(a): “The scope of this paragraph [§
541(a)(1) is] broad. It includes all kinds of property, including tangible or intangible property,
causes of action (see Bankruptcy Act § 70a (6)), and all other forms of property currently
specified in section 70a of the Bankruptcy Act § 70a ….” H.R. Rep. No. 95–595, at 367 (1977),
reprinted in 1978 U.S.C.C.A.N. 5963, 6323; S. Rep. No. 95–989, at 82 (1978), reprinted in 1978
U.S.C.C.A.N. 5787, 5868.
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The majority insists that we dissect the Bankruptcy Code and apply the presumption
against extraterritoriality to each section independently. This misperceives the nature of
bankruptcy. Unlike the securities laws at issue in Morrison, the Bankruptcy Code is not a
collection of discrete regulatory rules that can be applied in isolation to different types of
conduct. Instead, the Bankruptcy Code establishes an integrated judicial procedure for the
adjustment of debts and reorganization of a debtor, and that is an all-or-nothing proposition.
Bankruptcy is much like a class action and, just like in a class action, the presumption
against extraterritoriality does not require us to analyze the extraterritorial effect of any United
States rule triggered by the filing of the case. To hold that section 365 does not apply to foreign
assets in a bankruptcy case would be like holding that a discovery request in a class action case
does not apply to records stored on a server located overseas.
The majority’s rejection of section 1334(e)(1) as merely jurisdictional is similarly
misguided. The grant of jurisdiction over all property in section 1334(e)(1) is not a jurisdictional
statute of the sort at issue in Kiobel. Section 1334(e)(1) is the provision that establishes the
court’s custody of the res that is the core of the bankruptcy case, and its inclusion of foreign
property compels the conclusion that the entire Bankruptcy Code applies extraterritorially.
By establishing a res that is located in the United States section 1334(e)(1) has another
important effect. The Bankruptcy Court’s application of section 365 to property that is in its
custody in the United States is not an extraterritorial application at all. Further, even in the
absence of an expressed Congressional intention to apply a law extraterritorially, a statute will
apply extraterritorially if it touches and concerns the United States. Kiobel, 133 S.Ct. at 1669.
The Supreme Court has cautioned that the mere existence of a United States’ connection (like the
employment activities that took place in Texas in E.E.O.C. v. Arabian America Oil Co., 499 U.S.
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244 (1991)) are not sufficient unless the United States’ activity was the “focus” of the statute.
Morrison, 130 S. Ct. at 2884. Since the focus of the Bankruptcy Code is the reorganization of a
business enterprise and the section 365 power to reject executory contracts is integral to that
process even if the contract is a completely foreign one, application of the “touch and concern”
test confirms section 365’s extraterritorial reach.
For the aforementioned reasons, I cannot join the majority’s opinion and must respectfully
dissent.
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CASE BRIEFS
Andrus v. Glover Construction Co. 446 U.S. 608 (1980)
Cited For: The proposition that when Congress enumerates certain exceptions, additional exceptions may not be implied in the absence of contrary legislative intent. Facts: The Bureau of Indian Affairs awarded a road construction contract to an Indian owned construction company without complying with the advertising requirements of the Federal Property and Administrative Services Act (“FPASA”). The Buy Indian Act (“BIA”) directs the Secretary of the Interior to employ Indian labor "[s]o far as may be practicable," and permits him to purchase "the products of Indian industry . . . in open market.” In 1977, the BIA invited three Indian-owned construction companies to bid on repairing and improving a road spanning five miles for a negotiated price of $1.2 million. A non-Indian contractor brought suit because it was not afforded the opportunity to bid on the project. Procedural Posture: The District Court for the Eastern District of Oklahoma granted summary judgment in favor of the non-Indian contractor. The Court of Appeals for the Tenth Circuit affirmed. Issue: Whether the Buy Indian Act authorizes the Bureau of Indian Affairs to enter into road construction contracts with Indian-owned companies without first advertising for bids pursuant to Title III of the FPASA. Holding: No. The Supreme Court determined that the Ninth Circuit erred in including a third exception to Congress's express creation of two exceptions under the Federal Tort Claims Act. Rationale: The Buy Indian Act, which permits the Secretary of the Interior to purchase “the products of Indian industry . . . in the open market,” does not authorize the Department of Interior’s Bureau of Indian Affairs (“BIA”) to enter into road construction contracts with Indian-owned companies without first advertising for bids pursuant to Title III of the FPASA. The Court reasoned that there is no such authority even if the Buy Indian Act's language, “the products of Indian industry,” is construed so as to embrace road construction, since, while negotiated procurements “otherwise authorized by law” are one of the specified exceptions to Title III's broad directive in 41 U.S.C. section 252(c) that all procurement by the covered executive agencies (including the BIA) proceed through advertising, such exception is omitted from the list of the exceptions specified in section 252(e) to the requirement that section 252(c) not be construed to permit any road construction contract to be negotiated without advertising. From this omission only one inference can be drawn: Congress meant to bar the negotiation of road construction projects under the authority of laws like the Buy Indian Act.
40
ASM Capital LP v. Ames Dep’t Stores (In re Ames Dep’t Stores) 582 F.3d 422 (2d Cir. 2009)
Cited For: Standard of review purposes. The bankruptcy court’s legal conclusions are reviewed de novo, and an appellate court need not give deference to the bankruptcy court’s conclusions of law. Facts: Ames Department Stores (“Ames”) filed a voluntary petition under chapter 11. ASM Capital (“ASM”) acquired claims against the bankruptcy estate from various creditors, including two administrative expense claims. Ames then filed preference actions against certain of its creditors, including the creditor from which ASM acquired its two claims. While the preference actions were pending, Ames made payments to its claimants, but refused to make payments to any of the following: (a) claimholders who were also defendants in a preference action; (b) claimholders who acquired their claims from a defendant in a preference action; and (c) claimholders who refused to sign a release fixing the amount of their administrative claims. As a result, Ames refused to make payments to ASM on the grounds that ASM had received the claims from a defendant in a preference action. ASM responded by filing a motion in the bankruptcy court seeking to compel Ames to pay ASM. Ames opposed the motion on the grounds that section 502(d) of the Code barred payments on ASM’s claims until the return of any preferential transfer, while ASM argued that section 502(d) does not apply to administrative expense claims. Procedural Posture: The bankruptcy court denied ASM’s motion. The district court affirmed the ruling. In holding that section 502(d) does not apply to administrative expense claims, the Second Circuit reversed. Issue: Whether section 502(d) of the Bankruptcy Code, which states that a court shall disallow any claim of an entity that owes money or property as a result of a preferential transfer, applies to an entity seeking payment of an administrative expense claim. Holding: No. The Second Circuit Court of Appeals found that the word “claim” in section 502(d) is not meant to include administrative expenses. An entity has a right to payment for an administrative expense notwithstanding the fact that it owes money or property due to a preferential transfer. Rationale: The Second Circuit held that section 502(d) does not apply to disallow administrative claims under section 503(b). This conclusion was based upon statutory interpretation of section 502(d). Specifically, the Second Circuit identified several Code provisions that distinguish between claims and administrative expenses. For example, the court observed that section 507(a)(2) refers to administrative “expenses” whereas other subsections under 507(a) refer to allowed unsecured “claims.” The court noted that the language of section 502(d) indicates that it is merely an exception to sections 502(a) and (b), which do not apply to administrative claims. Administrative claims, which are covered by section 503 and not sections 502(a) or (b), should not therefore be subject to section 502(d)’s provisions for disallowing claims.
41
In re Bachinski 393 B.R. 522 (Bankr. S.D. Ohio 2008)
Cited For: The proposition that although rejection of an executory contract constitutes a breach, it does not eliminate the nonbreaching party’s rights. Facts: Approximately two years prior to filing a joint chapter 7 bankruptcy petition, Gary J. Bachinski and Lisa Bachinski (“the Bachinskis”) formed a business relationship with Simmons Capital Advisors. By the time the chapter 7 proceeding commenced, the Bachinskis owed Simmons Capital over $200,000. Accordingly, the parties entered into a settlement agreement, which became effective three months prior to commencement of the Bachinskis’ bankruptcy case. The agreement resulted in the entry of a prepetition state court consent judgment in favor of Simmons Capital. Procedural Posture: Simmons Capital commenced this adversary proceeding seeking a determination that the amounts due and owing under the Bachinskis settlement agreement are nondischargeable. Both parties filed motions for summary judgment in the bankruptcy court. Issue: Whether the chapter 7 trustee’s rejection of the settlement agreement pursuant to section 365 voids or unwinds transfers of property interests held by the parties pursuant to a settlement agreement entered into prior to the rejection. Holding: No. The bankruptcy court determined that even if the settlement agreement is considered an executory contract, its rejection would not void or reverse transfers of property rights or interests made by the parties in accordance with the terms of an agreement that was entered into prior to its rejection. Therefore, the court determined that the Bachinskis are still indebted to Simmons Capital according to their prepetition settlement agreement, regardless of the trustee’s rejection. Rationale: Rejection of an executory contract does not “nullify,” “rescind,” or “vaporize” the contract or terminate the rights of the parties. Nor does it serve as an avoiding power that is separate and apart from the express avoiding powers already provided for in section 365 of the Code. If a debtor enters into a contract prepetition and confers rights in an asset to a nondebtor party, a trustee cannot thereafter void the transfer and retrieve that property unless the trustee finds authority to do so in another provision of the Code, a provision other than section 365. As such, rejection does not undo the performances of parties to a contract, either prepetition or postpetition, as long as they precede the contract’s assumption or rejection.
42
Barcamerica Int’l USA Trust v. Tyfield Imports, Inc. 289 F.3d 589 (9th Cir. 2002)
Cited For: The proposition that trademarks are protected because they give consumers a quick reference to the quality and the source of a given product; as such, a trademark owner who fails to exercise quality control over the use of its trademark may be estopped from asserting its rights to the trademark. Facts: In 1984, the U.S. Patent and Trademark Office granted Barcamerica International’s (“Barcamerica”) application to use the “Leonardo Da Vinci” trademark. In 1988, Barcamerica entered into a licensing agreement with Renaissance Vineyards (“Renaissance”) through which Barcamerica granted Renaissance the nonexclusive right to use the “Leonardo Da Vinci” mark for five years or 4,000 cases, whichever came first. In return, Barcamerica received $2,500. The parties later entered into a second agreement, which granted Renaissance an exclusive license to use the “Da Vinci” mark in the U.S. for its wine products and alcoholic beverages. Neither agreement, both of which were drafted by Barcamerica’s counsel, contained a quality control provision. Rather, the only evidence indicating that Barcamerica made any effort to exercise quality control over Renaissance’s wines and its use of the trademark is the testimony of Barcamerica’s Principal. The testimony reveals that he occasionally and informally tasted the wine but that, at the time the agreements were signed, he simply relied on the reputation of the “world-famous wine maker” employed by Renaissance. Cantine Leonardo Da Vinci Social Cooperative (“Cantine”) is a wine producer who has sold products bearing the “Da Vinci” trade name since 1972. In 1996, Tyfield Importers became the exclusive U.S. importer and distributer of Cantine wine bearing the “Da Vinci” mark. That same year, Cantine learned of Barcamerica’s registration of the trademark. After an investigation into Barcamerica’s use of the mark, Cantine concluded that Barcamerica was no longer selling any wine products bearing the trademark and it therefore determined that Barcamerica had abandoned it. Tyfield then commenced a proceeding in the U.S. Patent and Trademark Office seeking to cancel Barcamerica’s registration of the trademark. Barcamerica filed a trademark infringement action in 1998 and the U.S. Patent and Trademark Office thereafter suspended its proceeding. Barcamerica then moved for a preliminary injunction, seeking to enjoin Tyfield from any further use of the “Da Vinci” mark. Procedural Posture: The District Court for the Eastern District of California denied Barcamerica’s motion, finding that there existed a question as to whether Barcamerica could demonstrate a bona fide use of the mark so as to overcome the claim of trademark abandonment. The district court granted summary judgment in favor of Tyfield. Barcamerica appealed. Issue: Whether the licensor, Barcamerica, abandoned its trademark by engaging in uncontrolled or “naked” licensing.
43
Holding: Yes. The Ninth Circuit found that Barcamerica had abandoned its trademark by engaging in naked licensing. Rationale: The Court of Appeals for the Ninth Circuit began by noting that it is well established that a trademark owner, a licensor, may grant a license and remain protected provided that the licensee maintains quality control over the goods and services sold under that trademark. However, when a licensor fails to exercise adequate control over its licensee, a court may find that the licensor has effectively abandoned the trademark. Under such circumstances, a licensor is estopped from asserting rights to the trademark. Here, the Ninth Circuit found that Barcamerica engaged in naked licensing without any control over the quality of goods produced by Renaissance, its licensee. The court found that Barcamerica failed to make even a minimal effort in the form of annual sampling of Renaissance’s wine. Barcamerica argued that because Renaissance made objectively good wine, the public was not deceived by Renaissance’s use of the trademark; therefore, its license was legally acceptable. Nevertheless, the Ninth Circuit concluded that whether a licensee’s wine is objectively good or bad is simply irrelevant to this analysis. As a result, the cancellation of Barcamerica’s registration of the “Da Vinci” mark was appropriate in this case.
44
Daimler AG v. Bauman No. 11–965 (S. Ct. Jan. 14, 2014)
NOTE: This case is not cited in the fact pattern. However, competitors may cite to it for the following proposition: attentiveness to the principles of international comity require application of foreign law when the transaction at issue occurred entirely outside of the United States. Facts: Twenty-two Argentinian residents filed suit in a California district court against DaimlerChrysler (“Daimler”), a German manufacturer of Mercedes-Benz vehicles, asserting that Dailmer was vicariously liable for actions that allegedly occurred in Argentina, by an Argentinian subsidiary of Daimler. In claiming that Daimler’s Argentinian subsidiary had collaborated with state security forces to kidnap, detain, torture and kill certain Argentinian workers, plaintiffs relied on California’s “long-arm” jurisdiction statutes to support its assertion that suit was properly brought in California due to the business conducted within the state by another of Daimler’s subsidiaries, an American subsidiary incorporated in Delaware with its principal place of business in New Jersey. Plaintiffs sought damages from Dailmer for these alleged human-rights violations pursuant to the laws of the United States, California, and Argentina.
Procedural Posture: The California federal district court granted Daimler’s motion to dismiss for lack of personal jurisdiction. The Ninth Circuit reversed. Relying on an agency theory, the Ninth Circuit concluded that Daimler’s American subsidiary was its “agent” for jurisdictional purposes, thereby subjecting Daimler to suit in California. Issue: Whether the Due Process Clause of the Fifth Amendment allows a California court to exercise jurisdiction over a foreign corporation based solely on the contacts of its in-state subsidiary, when the conduct at issue occurred entirely abroad and involved only foreign plaintiffs. Holding: In a unanimous decision, the Supreme Court found that Daimler is not amenable to suit in California for injuries allegedly caused by the conduct of Daimler’s foreign subsidiary because such conduct took place entirely outside of the United States. Rationale: Justice Ginsburg, writing for the majority, relied on the transnational context of the dispute in reaching its holding and found that the Ninth's Circuit's decision posed a threat to “international comity” because “other nations do not share the uninhibited approach to personal jurisdiction” as advanced by the Ninth Circuit. “Considerations of international rapport [] reinforce our determination that subjecting Daimler to the general jurisdiction of courts in California would not accord with the 'fair play and substantial justice' due process demands.” The Court therefore suggested that it would be preferable to bring such suits where the conduct occurred or where the plaintiffs or defendants are primarily based.
45
Concurrence: Justice SOTOMAYOR concurring in judgment In her concurrence, Justice Sotomayor characterized the majority’s approach as “wholly foreign to our due process analysis,” accusing the majority of creating “a new rule of constitutional law that is unmoored from decades of precedent.” She criticized this new rule because a foreign defendant, in order to be subject to general jurisdiction, “must not only possess continuous and systematic contacts with a forum state, but those contacts must also surpass some unspecified level when viewed in comparison to the company’s ‘nationwide and worldwide’ activities.” Justice Sotomayor asserted that this would “produce deep injustice.” Nevertheless, she agreed that the result reached by the Court’s is correct because allowing the suit in this case “would be unreasonable given that the case involves foreign plaintiffs suing a foreign defendant based on foreign conduct, and given that a more appropriate forum is available.”
46
Dewsnup v. Timm 502 U.S. 410 (1992)
Cited For: The proposition that because the Bankruptcy Code empowers a trustee to rescind contracts through avoidance powers in sections 544, 548 and 549, other Code provisions should not be interpreted to do so absent clear language to that effect. Facts: Dewsnup, the chapter 7 debtor, asserted that its debt of approximately $120,000, owed to Timm, exceeded the fair market value of the land securing the debt. The debtor argued that section 506(a) defines a claim as “secured” only to the extent of the judicially determined value and, therefore, a court could avoid any claim that was not an “allowed secured claim,” as mentioned in section 506(d) and as defined in subsection (a). Specifically, section 506(d) states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” Procedural Posture: The Bankruptcy Court for the District of Utah ruled that the then value of the land in question was $39,000, but refused to grant the requested relief. The debtor appealed. The district court affirmed. The Court of Appeals for the Tenth Circuit also affirmed, and the debtor again appealed. Issue: Whether a debtor, pursuant to section 506(d) of the Code, may “strip down” a creditor's lien on real property to the value of the collateral, as judicially determined, when that value is less than the amount of the claim secured by the lien. Holding: No. The Supreme Court affirmed, holding that a debtor cannot strip down the creditors’ lien on real property to the judicially determined the value of collateral. Rationale: The Supreme Court determined that section 506(d) of the Bankruptcy Code does not allow Dewnsup to “strip down” a creditor’s lien to the judicially determined value of the collateral because the claim is secured by a lien and has been fully allowed pursuant to section 502. Therefore, the claim cannot be classified as “not an allowed secured claim” for purposes of the line-voiding provision of section 506(d). Despite Petitioner’s assertion, the words “allowed secured claim” need not be read as an indivisible term of art defined by reference to section 506(a), but should be read term-by-term to refer to any claim that is, first, allowed and second, secured.
47
E.E.O.C. v. Arabian Am. Oil Co. 499 U.S. 244 (1991)
Cited For: The proposition that statutes do not apply extraterritorially in the absence of a clearly expressed congressional intent to do so. Facts: Ali Boureslan, a naturalized U.S. citizen born in Lebanon, was hired by Aramco Service Company (“ASC”), a subsidiary of Arabian American Oil Company (“Aramco”), as a cost engineer in Texas. Both companies are Delaware corporations licensed to do business in Texas. Aramco's principal place of business is Saudi Arabia, while ASC's principal place of business is Texas. In 1980, Boureslan was transferred, at his request, to work for Aramco in Saudi Arabia. When he was later discharged by Aramco, Boureslan filed discrimination charges with the Equal Employment Opportunity Commission (“EEOC”). He then initiated suit in the U.S. District Court for the Southern District of Texas against Aramco and ASC. Bourselan sought relief under both state law and Title VII of the Civil Rights Act of 1964 on the ground that he was harassed and eventually discharged due to his race, religion, and national origin. Aramco and ASC filed a motion for summary judgment on the basis that the district court lacked subject matter jurisdiction over Boureslan's claim because the protections of Title VII do not extend to U.S. citizens employed abroad by American employers. Procedural Posture: The District Court for the Southern District of Texas granted summary judgment in favor of Aramco and thus dismissed Boureslan's Title VII claim. The Fifth Circuit affirmed. The Supreme Court, after vacating the panel's decision and rehearing the case en banc, affirmed the district court's dismissal of Boureslan's complaint. Both Boureslan and the EEOC petitioned for certiorari. Certiorari was granted to resolve the issue of statutory interpretation. Issue: Whether Title VII of the Civil Rights Act of 1964 applies extraterritorially to regulate the employment practices of U.S. employers who employ U.S. citizens abroad. Holding: No. Title VII of the Civil Rights Act of 1964 does not apply extraterritorially to regulate the employment practices of U.S. employers who employ U.S. citizens abroad. Rationale: The Supreme Court acknowledged that there is a longstanding principle of American law whereby legislation of Congress, unless a contrary intent is shown, is meant to apply only within the territorial jurisdiction of the U.S. Therefore, in order for Congress to exercise its authority to enforce its laws beyond the territorial boundaries of the U.S., it must be clear that the legislation was initially intended to be applied extraterritorially. Unless there is an expressed, affirmative intention of Congress, courts should presume that the law is primarily concerned with domestic conditions. In this case, the Court noted that the language of the statute did not indicate that the legislature intended for this statute to apply extraterritorially and its legislative history did not
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suggest otherwise. The Court found that the evidence offered in support of the notion that Congress enacted Title VII with the intent for it to apply extraterritorially is insufficient in several respects. First, the Court dismissed Petitioners’ argument that the statute’s broad jurisdictional language thus reveals Congress' intent to extend the statute to extraterritorial lands because the language relied upon by Petitioners is ambiguous. In order to adopt such a view, the Court would noted that it would have to deduce by inference, from boilerplate language, that Congress intended the statute to apply extraterritorially. Moreover, this type of boilerplate language can be found in several congressional acts, none of which have ever been held to apply overseas. Second, the Court similarly found unpersuasive Petitioners’ argument that Title VII's “alien-exemption provision” clearly manifests an intent on behalf of Congress to protect U.S. citizens with respect to their employment abroad. The Court held that if Petitioners’ were correct, there would be no way of distinguishing between U.S. employers and foreign employers when applying the exemption. The Court concluded that without a clear expression of congressional intent, the statute should not be interpreted in such a way as to raise difficult issues of international law by applying the laws of the U.S. to foreign corporations operating in foreign commerce. Third, the other elements of Title VII suggest a purely domestic focus. The Court stated that the statute as a whole indicates a concern that it not unduly interfere with the sovereignty and laws of the States. The statute fails to even mention foreign nations or foreign proceedings, and the statute does not address the subject of conflicts with foreign laws and procedures. Lastly, the Court argued that if Congress wished for Title VII to apply overseas, it would have done so. Concurrence: Justice SCALIA, concurring in part and concurring in the judgment. Justice Scalia noted that the state of law regarding deference to the EEOC was left unsettled. He would have resolved the issues by assuming, without deciding, that the EEOC was entitled to deference on the particular point in question. However, deference is not abdication, and it requires courts to accept only those agency interpretations that are reasonable in light of the principles of statutory construction. Therefore, given the presumption against extraterritoriality that the Court accurately described and the requirement that the intent to overcome it be “clearly expressed,” Justice Scalia agreed with the majority. Dissents: Justice MARSHALL, with whom Justice BLACKMUN and Justice STEVENS join. The dissent conceded that the majority correctly stated that in determining congressional intent, the rule of construction that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the U.S. should be applied. However, the dissent argued that rule is not a “clear statement” rule, the application of which would relieve the Court of the duty to give effect to all available indicia of legislative will. Instead, a court may properly rely on this presumption only after exhausting all of the traditional tools “whereby unexpressed congressional intent may be ascertained.” Using these tools, the dissent concluded that it is clear that Congress intended Title VII to protect U.S. citizens from discrimination by U.S. employers operating overseas.
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Additionally, the dissented noted that the language of Title VII is broad enough to encompass discrimination by U.S. employers abroad because nothing in the text of the statute indicates that the protection of an “individual” from employment discrimination depends on the location of that individual's workplace. The “alien exemption” provision confirms that Congress did in fact expect Title VII's central prohibition to have an extraterritorial reach. Absent an intention that Title VII apply “outside any State,” Congress would have had no reason to craft this extraterritorial exemption. Moreover, since only discrimination against aliens is exempted, employers remain accountable for discrimination against U.S. citizens abroad. That inference is sufficient to rebut the presumption against extraterritoriality. The dissent concludes that the history of the alien-exemption provision confirms the inference that Congress expected Title VII to have extraterritorial application. Furthermore, the dissent suggested that rather than attempting to reconcile its interpretation of Title VII with the language and legislative history of the alien-exemption provision, the majority contents itself with pointing out various legislative silences that, in the majority's view, communicate a congressional intent to limit Title VII to instances of domestic employment discrimination. However, the majority was incorrect in its assertions, argues the dissent. For example, Congress addressed the subject of conflicts with foreign law by enacting the alien-exemption provision, the purpose of which was “to remove conflicts of law which might otherwise exist between the United States and a foreign nation in the employment of aliens outside the United States by an American enterprise.” Lastly, the extraterritorial application of Title VII is supported not only by its language and legislative history but also by pertinent administrative interpretations, argues the dissent. In this case, the EEOC's interpretation is reinforced by the long-standing interpretation of the Department of Justice, the agency with secondary enforcement responsibility under Title VII. The dissent concludes by noting that the majority offers no response to the view of the Department of Justice. Rather, the majority simply discounts the force of the EEOC's views on the ground that the EEOC has been inconsistent.
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In re Exide Technologies 607 F.3d 957 (3d Cir. 2010)
Cited For: The proposition that Congress intentionally omitted trademarks from its definition of “intellectual property” as contained in section 365(n) of the Bankruptcy Code. Facts: In 1991, Exide Technologies (“Exide”) sold its industrial battery business to EnerSys Delaware, Inc. (“EnerSys”). As part of this transaction, which was governed by a series of agreements (collectively, the “transaction agreements”), Exide granted an exclusive license to EnerSys to use the “Exide” trademark in the industrial battery business. However, approximately ten years later, Exide decided to reenter the industrial battery business and therefore sought to regain the right to use the Exide mark. EnerSys refused to relinquish its exclusive rights. As a result, when Exide filed for chapter 11 bankruptcy protection in 2002, it sought to regain the right to use the Exide mark by requesting court approval to reject the transaction agreements as executory contracts pursuant to section 365(a) of the Code. Procedural Posture: The bankruptcy court found that the transaction agreements constituted a single “integrated agreement,” and that the integrated agreement was an executory contract subject to rejection under section 365(a) of the Code. It held that rejection of the integrated agreement terminated Exide’s obligations and EnerSys’s rights under it, including EnerSys’s exclusive right to use the Exide mark in the industrial battery business. The district court affirmed the bankruptcy court’s ruling. EnerSys appealed, arguing that the integrated agreement was not an executory contract subject to rejection and, in the alternative, that rejection did not terminate EnerSys’s rights. Issue: Whether a trademark license agreement, when considered as part of a series of transaction agreements executed in connection with the sale of a business, is an executory contract subject to rejection under section 365(a) of the Bankruptcy Code. Holding: No. The Court of Appeals for the Third Circuit found that the agreement between Exide and EnerSys was not an executory contract because it did not contain any ongoing, material obligations on the part of EnerSys. Rationale: In determining whether the integrated agreement constituted an executory contract, the Third Circuit applied its version of the “Countryman Definition”: “an executory contract is a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either party to complete performance would constitute a material breach excusing performance of the other.” In order to determine whether both parties had material unperformed obligations under the integrated agreement, the court applied relevant non-bankruptcy law, which in this case was New York law. According to the court, under New York law, a material breach is one that occurs prior to the rendering of substantial performance and
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that is so substantial as to defeat the purpose of the entire transaction. Therefore, the focus of the court’s inquiry was to determine whether, at the time of Exide’s proposed rejection of the integrated agreement, each party had any unperformed material obligation remaining under the integrated agreement. If not, then the integrated agreement would not constitute an executory contract. Applying this standard, the Third Circuit concluded that the integrated agreement was not an executory contract; accordingly, Exide could not reject it under section 365(a). The court concluded that EnerSys had substantially performed its obligations under the integrated agreement because, among other factors, it had paid the full purchase price for Exide’s battery business and had been operating under the integrated agreement and using the assets purchased under the transaction, including the Exide mark, to produce batteries. Concurring Opinion: Circuit Judge AMBRO Judge Ambro wrote separately to express his view that a licensor’s rejection of a trademark license pursuant to section 365(a) of the Code does not necessarily deprive the licensee of its rights in the licensed mark. Judge Ambro argued that Congress’s omission of trademarks from the definition of “intellectual property” in the Code should not be used to infer that Congress intended to exclude trademark licenses from the protections contained in section 365(n). Citing the legislative history of section 365(n), he argued that because trademark licenses raise additional issues (such as quality control) which required further study by Congress at the time section 365(n) was enacted, Congress left the “equitable treatment” of the rejection of trademark licenses to the bankruptcy courts. In the case at bar, Judge Ambro argued that the bankruptcy court should have used its “equitable powers to give Exide a fresh start without stripping EnerSys of its fairly procured trademark rights.” He suggested that the bankruptcy court could have allowed Exide to reject the integrated agreement to avoid its future obligations under the agreement while leaving EnerSys’s rights to the Exide mark unaffected. In sum, Judge Ambro asserted that while section 365(n) operates as a shield to protect the bankrupt licensor from burdensome ongoing duties that would hinder its reorganization, it should not serve as a sword to put the debtor-licensor in a position that it does not deserve.
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Hong Kong & Shanghai Banking Corp. v. Simon (In re Simon) 153 F.3d 991 (9th Cir. 1998)
Cited For: The proposition that the language of the Bankruptcy Code, its legislative history and the context of bankruptcy practice each supports the extraterritorial application of the entire Code to all aspects of bankruptcy cases. Facts: Hong Kong and Shanghai Banking Corp., Ltd. (“Hong Kong-Shanghai”), an international banking company incorporated in Hong Kong, extended a loan for over $24 million to Odyssey International Holdings, an international company incorporated in the British Virgin Islands. William Neil Simon (“Simon”), Odyssey’s major shareholder, personally guaranteed the loan. Under the guarantee agreement, Simon was required to satisfy the loan in full within one year. However, in light of his mounting personal debt, Simon filed for chapter 7 bankruptcy protection. Simon listed the guarantee to Hong Kong-Shanghai in his bankruptcy schedules as an outstanding liability. Hong Kong-Shanghai filed a proof of claim with the bankruptcy court in the amount of more than $37 million. Hong Kong-Shanghai did not, however, file a proof of claim for Simon’s guarantee of the loan, nor did it object to the discharge of his debts. Procedural Posture: The bankruptcy court entered an order granting Simon a discharge of all debts and issued an injunction enjoining all creditors from instituting or continuing any action or engaging in any act to collect such debts. Hong Kong-Shanghai then sought a declaratory judgment from the bankruptcy court arguing that while Simon’s discharge and the injunction against it were effective within the U.S., the discharge and injunction were not enforceable outside of the U.S. The bankruptcy court granted Simon’s motion to dismiss for failure to state a claim upon which relief may be granted. The court noted that although the discharge injunction was not directly enforceable in Hong Kong, it was enforceable in the U.S. district court pursuant to the imposition of sanctions against Hong Kong-Shanghai, followed by collection proceedings of Hong Kong-Shanghai’s property located in the U.S. The District Court for the Northern District of California affirmed. Hong Kong-Shanghai appealed. Issue: Whether a foreign creditor is subject to bankruptcy court sanctions for pursuing foreign collection of a debt that has been discharged in a domestic bankruptcy in which the foreign creditor participated. Holding: Yes. A bankruptcy court may sanction a foreign creditor for violating a court injunction. Rationale: The Court of Appeals for the Ninth Circuit found that the order did not involve an improper extraterritorial application of a statute as applied to estate property because section 541 of the Code expressly includes all of the debtor’s property regardless of its geographic location. The court found that the discharge injunction was properly applied to Hong Kong-Shanghai, as to
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Simon’s non-estate property, because Hong Kong-Shanghai participated in the bankruptcy and therefore subjected itself to the orders of the bankruptcy court. As to actions against the bankruptcy estate, the Ninth Circuit concluded that Congress clearly intended extraterritorial application of the Code. The Code confers in rem jurisdiction to the bankruptcy court over all the property comprising the debtor’s estate regardless of its geographic location. Protection of in rem or quasi in rem jurisdiction is a sufficient basis for a court to restrain another court’s proceedings; thus, enjoining actions instituted to preserve the court’s exclusive in rem jurisdiction are valid. International comity does not compel a different result in this case, reasoned the Ninth Circuit, because there was no conflicting proceeding in a foreign nation. Concurrence: Circuit Judge HALL, concurring in part, dissenting in part, and concurring in the judgment. Judge Hall disagreed with the majority’s conclusion that Congress clearly intended for the Code to be applied extraterritorially, specifically in regards to property of the estate. While the language of section 541(a) may plausibly apply to property located within foreign jurisdictions, Judge Hall asserted that the Code is not intended to apply extraterritorially merely when it is plausible or desirable to do so. Rather, the court must assume that Congress legislates against the backdrop of the presumption against extraterritoriality. If the court were to permit possible or plausible interpretations of language such as that involved here, there would be little left of the presumption against extraterritorial application, argued Judge Hall.
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Jaffe v. Samsung Electronics Co. 737 F.3d 14 (4th Cir. 2013)
Cited For: The proposition that in the context of intellectual property licensees, U.S. courts have refused to give extraterritorial effect to contrary German principles. Facts: A German manufacturer of semiconductor devices filed for bankruptcy in Germany. The principal assets of the corporation consisted of 10,000 patents, approximately 4,000 of which were U.S. patents. After the German insolvency proceeding, Dr. Michael Jaffe, the insolvency administrator, filed an application in the Bankruptcy Court for the Eastern District of Virginia under chapter 15 of the Bankruptcy Code. Jaffe petitioned for the bankruptcy court to recognize the German insolvency proceeding as a “foreign main proceeding” in order to obtain certain privileges available under chapter 15. Specifically, Jaffe sought permission for the court to manage the administration of the German manufacturer’s assets situated within the U.S. Procedural Posture: The bankruptcy court entered an order recognizing the German insolvency proceeding as a “foreign main proceeding,” as well as an order conditioned on the requirement that Jaffe afford the licenses of the manufacturer’s patents the treatment they would have received in the U.S under section 365(n) of the Code. Jaffe appealed, claiming that the bankruptcy court erred in its construction of chapter 15 and abused its discretion in applying it. Issue: How courts should reconcile the United States’ interests in recognizing and cooperating with the foreign insolvency proceeding with its interests in protecting creditors of the foreign debtor, as provided by sections 1521 and 1522 of the U.S. Bankruptcy Code. Holding: Affirming the judgment of the district court, the Fourth Circuit Court of Appeals concluded that the bankruptcy court properly considered both the interests of the creditors and other interested entities, as it was required to do pursuant to section 1521(a) of the Code, as well as the interests of the debtor pursuant to section 1522(a). The Fourth Circuit also determined that the bankruptcy court properly applied section 365(n) to ensure that the licensees were sufficiently protected under the debtor’s U.S. patents. Rationale: Finding that the bankruptcy court properly construed section 1522(a) as requiring the application of a balancing test, the Fourth Circuit found that the bankruptcy court reasonably exercised its discretion in balancing the interest of the licensee against the interests of the debtor. Section 1522(a) of the Code requires the bankruptcy court to protect both the creditor and the debtor. Therefore, the Fourth Circuit concluded that courts must ensure that the relief sought by a foreign representative does not intrude upon the interests of other entities involved in the proceeding. In sum, the court determined that each entity involved in the U.S. bankruptcy proceeding must be afforded some protection by the court.
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Kiobel v. Royal Dutch Petroluem Co. 133 S.Ct. 1659 (2013)
Cited For: The proposition that the presumption against extraterritorial application of federal law is not easily overcome. Facts: Shell Petroleum Development Company of Nigeria (“Shell Nigeria”) engages in oil exploration in Nigeria and is a joint subsidiary of the Royal Dutch Petroleum Company (“Dutch Petro”) and Shell Transport and Trading Company (“Shell”), companies incorporated in Netherlands and England, respectively. In the early 1990s, Shell Nigeria engaged in oil exploration and production in Ogoniland, a 250 square mile area located in the Niger delta. The residents of Ogoniland began protesting the environmental effects of Shell Nigeria’s practices. In response, the Nigerian Government violently suppressed the demonstrations. As a result, the residents of Ogoniland claimed that throughout the 1990s Nigerian military and police forces attacked Ogani villages, beating, raping, killing, and arresting residents and destroying or looting property. Due to these atrocities, some of the residents sought asylum in the United States where they now reside as legal residents. These residents filed suit against Dutch Petro and Shell Nigeria in the District Court for the Southern District of New York for aiding and abetting the Nigerian Government’s violent tactics by providing the Nigerian forces with food, transportation and compensation. Plaintiffs sought relief under customary international law, claiming jurisdiction was proper pursuant to the Alien Tort Statute. Procedural Posture: The District Court for the Southern District of New York dismissed some of the claims on the grounds that the facts alleged to support those claims did not give rise to a violation of the law of nations. For the remaining claims, the district court certified an interlocutory appeal. On interlocutory appeal, the Court of Appeals for the Second Circuit dismissed the entire complaint, reasoning that the law of nations does not recognize corporate liability. Issue: Whether and under what circumstances courts may recognize a cause of action under the Alien Tort Statute for violations of the law of nations occurring within the territory of a sovereign other than the United States. Holding: The Alien Tort Statute does not apply to violations of the law of nations occurring within the territory of a sovereign other than the United States. Rationale: The Supreme Court reaffirmed that there exists a presumption against extraterritorial application of United States law. This presumption serves to protect against unintended conflict between U.S. laws and the laws of other nations. To rebut this presumption, there must be a clear indication that the law was intended by Congress to apply extraterritorially as gathered from the text of the statute, its purposes, its legislative history, and its historical background. Use of
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generic terms such as “any civil action” or “every tort” do not overcome this presumption. Even when claims “touch and concern” the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application. In particular, mere corporate presence will not suffice. The principles underlying the presumption against extraterritoriality apply to the Alien Tort Statute, and nothing in the statute or its context rebuts that presumption. Furthermore, all of the relevant conduct took place outside the United States. Concurrence: Justice KENNEDY concurred Justice Kennedy wrote separately, noting that it was a proper disposition for the opinion to leave open a number of significant questions regarding the reach and interpretation of the Alien Tort Statute, and the presumption against extraterritorial application may require some further elaboration and explanation. Justice ALITO and Justice THOMAS concur on the ground that this case falls within the scope of the presumption against extraterritoriality because the domestic conduct at issue does not violate an international law norm that has as much definite content and acceptance among civilized nations as the historical paradigms familiar when the Alien Tort Statute was enacted. The justices also noted that the opinion, perhaps wisely, leaves much unanswered. Justice BREYER, Justice GINSBURG, Justice SOTOMAYOR, and Justice KAGAN agree with the Court’s conclusion, but reject its reasoning. They argue that the presumption against extraterritoriality applies to statutes that focus on domestic affairs. In contrast, the Alien Tort Statute was enacted with foreign matters in mind; therefore, the purpose of the statute was to address violations of the law of nations, many of which occur abroad. Instead of invoking the presumption against extraterritoriality, the justices would find the Alien Tort Statute applicable where the alleged tort occurs on American soil, when the defendant is an American national, or when the defendant’s conduct substantially and adversely affects an important American national interest. The justices found that neither the parties nor the relevant conduct in this case have sufficient ties to the United States such that the Alien Tort Statute confers jurisdiction.
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Lewis Bros. Bakeries v. Interstate Brands Corp. (In re Interstate Bakeries Corp.) 690 F.3d 1069 (8th Cir. 2012)
NOTE: This case is not cited in the fact pattern. However, competitors may cite to it for the following proposition: perpetual, royalty-free, and exclusive trademark license agreements qualify as executory contracts subject to assumption or rejection under section 365 of the Bankruptcy Code. Facts: Lewis Brothers Bakery (“LBB”) sought a declaratory judgment that an agreement (the “trademark license agreement”) between LBB and the debtor, Interstate Brands Corp. (“IBC”), was not executory. Pursuant to this agreement, IBC sold to LBB its “Butternut Bread” business operations and assets in Chicago, as well as its “Sunbeam Bread” business operations and assets in Illinois. The agreement granted LLB a “perpetual, royalty free, assignable, transferable, exclusive” license to those brands and trademarks. In 2004, IBC filed for chapter 11 relief. In 2008, IBC filed an amended plan of reorganization, in which it contended the agreement with LBB was an executory contract, and thereby subject to assumption or rejection by the bankruptcy estate pursuant to section 365 of the Code. Relying on the Third Circuit’s decision in In re Exide Technologies, LBB asserted that the trademark license agreement was not executory because both LBB and IBC had substantially performed prior to the IBC bankruptcy filing. Procedural Posture: LBB filed an adversary proceeding in the bankruptcy court, seeking a declaratory judgment that the trademark license agreement was not an executory contract. The bankruptcy court disagreed with LBB, finding that because both parties to the agreement had outstanding obligations, the contract was subject to assumption or rejection under section 365 of the Code. The district court affirmed, holding that the agreement was an executory contract because LBB’s failure to maintain the character and quality of goods sold under the trademarks would constitute a material breach, thereby entitling IBC to terminate the agreement. LBB appealed. Issue: Whether the trademark license agreement at issue is an executory contract and, therefore, subject to assumption or rejection by the chapter 11 debtor under section 365 of the Code. Holding: Yes. Finding that there existed material obligations under the contract that had yet to be performed by either party, the Eight Circuit concluded that the trademark license agreement at issue is an executory contract—and is therefore subject to assumption or rejection by the debtor under section 365. Rationale: In reaching its conclusion that the trademark license agreement was executory, the Court of Appeals for the Eighth Circuit distinguished the instant case from the Third Circuit’s decision in In re Exide Techs. The primary basis for the distinction related to the materiality of LBB’s remaining obligations and turned on a requirement that LBB maintain the quality of the goods manufactured under the trademark license agreement. According to the court, “[t]he parties [in
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Exide] had not even contemplated or discussed any quality standards, so the [Exide] court refused to import such an obligation into the agreement and thereafter conclude the obligation was material.” On the other hand, the Eighth Circuit found that the quality-standard provision in the trademark license agreement was material because “[h]ere, it cannot be argued the parties did not contemplate any quality standards as it is an explicit provision of the [Trademark] License Agreement. Moreover, the plain language of the agreement provides [that] breach of the quality provision would be material.” In other words, the court determined that the “quality standards” term of the trademark license agreement was material primarily, if not exclusively, because the contract said that the provision was material. Because the trademark license agreement providing for use of the trademark was ongoing and “perpetual,” the court concluded that LBB had a “remaining material obligation” under the agreement, nonperformance of which would excuse IBC from its obligations. Similarly, IBC also had “remaining material obligations” under the trade license agreement. Namely, IBC had unperformed obligations of notice and forbearance with regard to the trademarks, in addition to its obligation to maintain and defend the trademarks against infringement actions. The Eighth Circuit likewise concluded that these obligations, like LBB’s, were material. In sum, because both parties maintain at least one remaining material obligation, the License Agreement constitutes an executory contract and may therefore be assumed or rejected by the debtor pursuant to section 365 of the Code. Dissent: Circuit Judge COLLOTON Asserting that the majority erroneously focused on the License Agreement alone, Judge Colloton argued that the relevant contract at issue is the integrated agreement, which includes both the Asset Purchase Agreement and the License Agreement. Thus, looking at the Asset Purchase Agreement and the License Agreement as one contract, the dissent concluded that it is not executory because IBC “substantially performed” its obligations under the contract, and its failure to perform any of its remaining obligations would not constitute a “material breach.” “Material breaches” go to the root or essence of the contract. Here, the essence of the agreement was the sale of IBC’s “Butternut Bread” and “Sunbeam Bread” business operations in specific territories, not merely the licensing of IBC’s trademark. Since then, IBC has transferred all its tangible assets and inventory to LBB, executed the License Agreement, and received the full $20 million purchase price from LBB. As such, IBC’s remaining contractual obligations do not relate to the purpose of the agreement, which was the sale of IBC’s “Butternut Bread” and “Sunbeam Bread” business operations. The dissent concludes that in order for a contract to be executory for purposes of section 365, both parties must have so far underperformed that a failure of either to complete performance would constitute a material breach, thereby excusing performance by the other party. In the instant case, the contract at issue is not executory because IBC has not underperformed. Instead, it has performed “all the essential elements necessary to the accomplishment of the purpose of the contract.” Or, put another way, IBC “substantially performed” its obligations under the integrated contract, such that its failure to perform any remaining obligations would not constitute a breach.
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Lubrizol Enters. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers) 756 F.2d 1043 (4th Cir. 1985)
Cited For: The general proposition that section 365 of the Bankruptcy Code is an avoiding power and that rejection by a debtor-licensor terminates the licensees’ rights to use an executory trademark. Facts: Richmond Metal Finishers (“RMF”) entered into a contract with Lubrizol Enterprises (“Lubrizol”) in 1992, granting Lubrizol a nonexclusive license to utilize a metal coating process owned by RMF. Under the agreement, RMF was required to do the following: (1) notify Lubrizol if there was any patent infringement suit on the technology, and if so, RMF was to defend it; (2) notify Lubrizol if there were any other licensing of the technology, and if there was, RMF agreed to lessen the royalty patents if there was a lower royalty rate established with in another licensing agreement; and (3) to indemnify Lubrizol from losses suffered because of misrepresentation or breach of warranty by RMF. In return, Lubrizol agreed to pay RMF royalties for use of the process and the cancellation of some existing indebtedness. Also contained in the agreement was a provision specifying that Lubrizol would not use the technological metal coating process until May 1983, with which Lubrizol complied. When RMF filed for chapter 11 bankruptcy relief in 1983, it sought an order from the bankruptcy court, pursuant to section 365(a), seeking to reject the contract with Lubrizol such that RMF could successfully sell the licensing of the process unencumbered by the provisions in the Lubrizol agreement. Procedural Posture: The bankruptcy court approved the rejection of the executory technology licensing agreement pursuant to section 365(a) of the Code, explaining that the rejection passed a two-part test applicable in determining the propriety of a rejection. The district court reversed, concluding that the two-part test relied upon by the bankruptcy court was in fact not met under the facts of this case. Specifically, the district court found that rejection would not deprive the nonbankrupt party of all of its rights under the agreement; as such, the rejection would not be beneficial to RMF, giving the court grounds to deny the approval of the rejection. Issue: Whether rejection of an agreement pursuant to section 365(a) of the Code deprives a nonbankrupt party of its rights under a licensing agreement, such that rejection would be considered beneficial to the debtor. Holding: Yes. Rejection leaves the nonbankrupt party with monetary damages only, therefore making the rejection beneficial to the debtor because the nonbankrupt party has no rights under the agreement to continue to use the process. Rationale: The Court of Appeals for the Fourth Circuit utilized the same two-part test employed by the lower courts: was the contract executory, and, if so, was the rejection advantageous to the
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debtor’s bankruptcy. The Fourth Circuit reasoned that the contract was executory because obligations to both the bankrupt RMF and the other party to the contract, Lubrizol, remained unperformed by both parties such that the failure by either to fulfill its obligations would constitute a material breach and thus excuse the performance of the other non-breaching party. The more narrow issue came under the second prong of the test. In contrast to the decisions below, the Fourth Circuit found that through rejection, a debtor can deprive the other contracting party of all of its rights to the licensing agreement. Under section 365(g) of the Code, the party who is affected by the rejection can treat the rejection as a breach and seek monetary damages; however, this party may not see specific performance as would otherwise be called for under a breach of this type of contract. Although section 365(g) treats rejection as a material breach, the Fourth Circuit looked to the legislative history and determined that the purpose of the provision was to provide the nonbankrupt party with a damages remedy only, not a remedy in specific performance. To allow specific performance would be contrary to the purpose of rejection under section 365(a) and would therefore run contrary to congressional intent, concluded the court. It thus followed that if rejection would be advantageous to the bankrupt debtor, like in corporate litigation, courts should defer to the debtor’s decision to reject an executory contract because of the business advantage that it anticipates will likely result from such rejection. Lastly, the court should accept the debtor’s decision unless it can be shown that the decision was made in bad faith or was an abuse of its discretion.
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In re Matusalem 158 B.R. 514 (Bankr. S.D. Fla. 1993)
NOTE: This case is not cited in the fact pattern. However, competitors may cite to it for the following proposition: that rejection of an intellectual property license agreement under section 365(n) of the Code does not terminate the counterparty’s rights to use the intellectual property. Facts: The chapter 11 debtor, owner and franchisor of a rum brand with a trademarked formula and production method, gave an exclusive license to Ron Matusalem, Inc. (“Inc.”) to manufacture and market the rum using this formula and methodology. Litigation arose between the parties and the debtor sought to terminate Inc.’s rights under the franchise agreement. Following an unsuccessful attempt in state court to declare the franchise agreement terminated due to breach, the chapter 11 debtor filed for bankruptcy in order to reject the franchise agreement and thereby terminate Inc.’s rights thereunder. Procedural History: The debtor’s motion to reject the franchise agreement as an executory contract was denied by Bankruptcy Court for the Southern District of Florida. Issue: Whether rejection of an intellectual property license agreement, if permitted under section 365 of the Code, terminates the counterparty’s rights under the agreement. Holding: No. Under section 365(n) of the Code, rejection of an intellectual property license agreement does not terminate the counterparty’s rights to use the intellectual property. Rationale: The bankruptcy court held that the franchise agreement at issue qualified as an “intellectual property” licensing agreement, the debtor’s rejection of which would not prevent the licensee from continuing to use the secret formula and trade name. Irrespective of the licensee's right to use the trademark, the court held that under section 365(n), the licensee retains the right, even after rejection, to use the trade secret processes and formulas. Furthermore, the court concluded that the debtor was not allowed to reject the franchise agreement because rejection would provide no economic benefit to the estate or the debtor's creditors. As a result, the licensee was allowed to continue its use of both the secret formula and the Matusalem name.
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Maxwell Commc’n Corp. v. Societe Generale (In re Maxwell Commc’n Corp.) 93 F.3d 1036 (2d Cir. 1996)
Cited For: The proposition that the Bankruptcy Code does not apply extraterritorially absent clear affirmative intent on the part of Congress. Facts: Maxwell Communication Corp. (“MCC”), an English holding company, owned two American companies: Macmillan, Inc. and Official Airlines Guide, Inc. (“OAG”). Together, these entities constituted approximately 80% of MCC's total assets. In 1991, MCC filed for chapter 11 bankruptcy. The next day, MCC filed a petition to the High Court of Justice (in England) for an administration order under the Insolvency Act of 1986. Several people were appointed as joint administrators in the English proceeding; meanwhile the district court appointed an examiner in the U.S. proceeding. The examiner's mandate was to harmonize the two proceedings so as to permit reorganization under U.S. law, which would maximize the return to creditors. In 1993, the joint administrators, with the consent of the examiner, filed a plan of reorganization in the U.S. and a scheme of arrangement in England. The plan and scheme were mutually dependent and, in their effect, constituted a single mechanism, consistent with the laws of both countries, for reorganizing MCC through the sale of its assets. Within ninety days prior to its entry into chapter 11, Maxwell liquidated certain U.S. assets and transferred the proceeds to three non-U.S. banks. Two of the Banks, Barclays Bank plc (“Barclays”) and National Westminster Bank plc (“NatWest”) were English banks; the third Bank, Societe Generale, was a French bank. Following the commencement of Maxwell's chapter 11 proceeding, its English administrators, joined by an examiner appointed by the bankruptcy court, initiated adversary proceedings against the banks pursuant to section 547 of the Bankruptcy Code to recover the prepetition transfers to the banks. Procedural Posture: The bankruptcy court denied Maxwell's section 547 application to recover funds deposited in foreign banks on the ground that the presumption against the extraterritorial application of U.S. law applies to section 547, and because the “center of gravity” of the transfers existed outside of the U.S., Maxwell was relegated to looking to the preference laws of England for recovery of the transfers. Additionally, the bankruptcy court held that principles of comity required deference to U.K law. Maxwell appealed. The District Court for the Southern District of New York affirmed, engaging in a two-part inquiry that examined (i) whether the transfers were centered outside of the U.S., and (ii) whether Congress intended for section 547 to apply extraterritorially. Issue: Whether section 547 of the Bankruptcy Code applies extraterritorially and if it does, whether the doctrine of comity nevertheless dictates a dismissal. Specifically, whether the U.S. debtor could bring an avoidance proceeding under U.S. law against three banks located in England. Holding: No. U.S. preference law does not apply extraterritorially; nevertheless, if it did apply overseas, a dismissal would still be warranted under the doctrine of comity.
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Rationale: The Court of Appeals for the Second Circuit affirmed the holdings of the lower courts on the ground that comity supported deference to English courts and to English law, noting that not every transaction that has a foreign element represents an extraterritorial application of U.S. laws. Rather, courts must look at the facts of each case to determine whether they have a center of gravity outside the U.S. Once it is determined that the facts as a whole have a center of gravity outside the U.S., the court's attention should shift to the propriety of the proposed extraterritorial application of U.S. law. Here, it is not suggested that the use of section 547 would be anything other than extraterritorial. Applying the Court’s ruling in Aramco, that unless an affirmative intent of Congress to the contrary has been clearly expressed in the statute itself, courts must presume that Congress is primarily concerned with domestic conditions, the Court held that U.S. preference law does not apply overseas. There is nothing in either the language or the legislative history of section 547 that demonstrates a clearly expressed congressional intent that this particular Code provision should apply extraterritorially. Although the definition of transfer found in section 101(54) of the Code is undeniably broad, it makes no reference to the place where the transfer occurred or the place where the property is now found. As the Supreme Court made clear in Aramco, broad boilerplate statutory language, without more, does not confer extraterritorial effect of the statute. Alternatively, the Second Circuit found that section 547 does not apply because of the doctrine of comity. If the presumption against extraterritoriality has been overcome, the court must still consider a second canon of statutory construction: an act of Congress should never be construed so as to violate the law of nations if a possible alternative construction exists. The traditional federal choice-of-law rule applies the law of the jurisdiction that has the greatest interest in the controversy. Under this test, courts must evaluate the various contacts each jurisdiction has with the controversy in terms of their relative importance with respect to a particular issue and make a reasoned determination as to which jurisdiction's laws and policies are implicated to the greatest extent. In this case, English law should govern the resolution of these suits. MCC was a publicly owned holding company, incorporated in England, and managed by MCC executives in London. MCC negotiated its loans with these defendants in England and provided that English law would govern resolution of any disputes that arise. The challenged transfers occurred in England and the recipients, two of which were English banks, were located in England. Therefore, application of English law is most appropriate in this case.
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Morrison v. Nat’l Australia Bank Ltd. 561 U.S. 247 (2010)
Cited For: The proposition that when a statute gives no “clear indication” of an extraterrestrial application, the statute is not meant to have extraterrestrial effect. Facts: National Australia Bank (“National”), a foreign bank, purchased HomeSide Lending (“HomeSide”) in 1998, a mortgage servicing company headquartered in Florida. In 2001, National announced that it would be writing down the value of HomeSide’s assets by $450 million, and by another $1.75 billion two months later. National explained these write-downs as the result of a failure to anticipate the lowering of interest rates and other mistaken assumptions in financial models. Petitioners, Australian citizens who purchased National’s common stock before the write-downs, sued National, claiming that the write-downs were part of an intentional scheme to defraud. Petitioners brought suit in the District Court for the Southern District of New York for violations of sections 10(b) and 20(a) of the Securities and Exchange Act, arguing that because the alleged fraud occurred in Florida, National should be subject to U.S. securities laws. Meanwhile, National argued that because the alleged fraud related to trading in Australian securities, U.S. securities laws did not apply. Procedural Posture: The district court, finding no jurisdiction because the acts in the U.S. were “at most, a link in the chain” of the allege securities fraud scheme that culminated in Australia, dismissed the case. The Court of Appeals for the Second Circuit affirmed, noting that the acts that occurred in the U.S. did not comprise the heart of the alleged fraud. Issue: Whether Section 10(b) of the Securities Exchange Act of 1934 provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges. Holding: No. Section 10(b) of the Securities Exchange Act of 1934 does not provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges. Rationale: In a unanimous decision, the Supreme Court noted that there exists a long-standing principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the U.S. That statutory language can be interpreted to apply extraterritorially does not override the presumption against extraterritoriality. Although the statute itself need not say that “this law applies abroad,” there must be clear indication—and context can be consulted as well—of extraterritoriality. This presumption applies to all cases, including those that arise under the Securities Exchange Act. However, there is no affirmative indication in the Exchange Act that section 10(b) applies extraterritorially. Furthermore, section
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10(b) applies when the purchase or sale is made in the United States, or involves a security listed on a domestic exchange, neither of which applies to National. Concurrence: Justices STEVENS and GINSBURG concur Justice Stevens and Justice Ginsburg disagreed with the majority in that the presumption against extraterritoriality should be a flexible rule of thumb, not a clear statement rule. All available evidence concerning the meaning of a provision should be considered in determining a statute’s extraterritorial application. The justices concur because the bulk of the fraud did not occur in the U.S., nor did the fraud have an adverse impact on American investors or markets. Justice BREYER concurred on the ground that section 10(b) only applies to two categories of transactions—the purchase or sale of any security registered on a national securities exchange or the purchase or sale of any security not so registered—neither of which applies to National. Neither apply because National’s common stock are not listed in any exchange in the U.S. and the purchase of the unregistered securities took place entirely in Australia and involved only Australian investors.
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New York Central R.R. v. Chisholm 268 U.S. 29 (1925)
Cited For: The proposition that federal statutes do not give rise to extraterritorial jurisdiction when such statutes lack specificity. Facts: The decedent was employed by New York Central Railroad (“the railroad”) and suffered fatal injuries while working on a train in Canada. The decedent's administrator brought an action against the railroad under the Federal Employers' Liability Act (“FELA”). Procedural Posture: The trial court entered judgment for the decedent’s administrator. In the appeal by the railroad, the Court of Appeals for the First Circuit certified the question of whether the administrator had a cause of action against the railroad under FELA for a death that occurred while the train upon which the decedent was working was situated in Canada. The First Circuit found that FELA undertook to impose liability only for negligence and therefore it had no extraterritorial effect. The First Circuit further determined that the railroad was subject only to such obligations as were imposed by the laws and statutes of Canada, the place where the alleged negligence transpired. Issue: Whether an administrator has a cause of action against the railroad under FELA for a death that occurred in a foreign jurisdiction. Holding: No. The Supreme Court determined that the administrator had no cause of action based upon FELA and that the railroad was subject only to such obligations as were imposed by the laws and statutes of the country where the alleged act of negligence occurred. Rationale: The Supreme Court determined that legislation is presumptively territorial and confined to limits over which the law-making power has jurisdiction. The general and almost universal rule is that the character of an act as either lawful or unlawful must be determined wholly by the law of the country where the act is committed.
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In re Old Carco LLC 406 B.R. 180 (Bankr. S.D.N.Y. 2009)
Cited For: The general proposition that rejection of a trademark license agreement should be interpreted to terminate the nondebtor counterparty’s rights. Facts: Old Carco LLC (“Chrysler”) and its affiliated debtors filed for chapter 11 bankruptcy. In connection with the sale of substantially all of their assets, the debtors sought approval from the bankruptcy court to reject a number of dealership franchise agreements as executory contracts pursuant to section 365 of the Code. In contesting this relief, the dealers focused on the impact of various state laws that, outside of the bankruptcy setting, protect dealers and limit a vehicle manufacturer's rights to terminate, relocate and consolidate dealerships. The debtors challenged the constitutionality of these state dealer statutes, arguing that the statutes were preempted by the Bankruptcy Code to the extent that the enforcement of the statutes conflicted with the terms of the sale order or impacted the rejection of the dealership agreements. Procedural Posture: The debtors sought authorization from the bankruptcy court to reject certain executory contracts and unexpired leases with domestic automobile dealers. Issue: Whether state statutes designed to protect automobile dealers and franchisees warrant the application of a heightened standard in determining whether to authorize rejection of dealer contracts and leases under section 365 of the Bankruptcy Code. Holding: No. State statutes designed to protect automobile dealers and franchisees does not warrant application of heightened standard in determining whether to authorize rejection of dealer contracts and leases. Rather, the sound business judgment standard is appropriate. Rationale: The bankruptcy court concluded that case law indicates that the business judgment standard is the appropriate standard to determine whether to permit a debtor to assume or reject a contract under section 365, unless there is a showing of bad faith. The court noted that a heightened standard only applies to statutes meant to protect the national public interest. Here, the statutes are state statutes, not congressional statutes, and by their terms they protect only the public interest of their respective states. Likewise, the bankruptcy court concluded that the Automobile Dealers Day in Court Act (“ADDCA”) does not warrant application of a heightened standard. The ADDCA, which requires good faith dealing, is coextensive with rejection powers as contained in section 365 of the Code, which provides that rejection of an executory contract or unexpired lease must not be made in bad faith. Thus, the proper standard to apply to Chrysler’s decision to reject the contracts is the business judgment standard. And since Chrysler determined that rejection of the agreements was in the best interest of the bankruptcy estate, rejection was appropriate in this case.
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Pension Transfer Corp. v. Beneficiaries Under the Fruehauf Trailer Corp. Ret. Plan (In re Fruehauf Trailer Corp.)
444 F.3d 203 (3d Cir. 2006) Cited For: Standard of review purposes; findings of fact are reviewed for clear error and may be overturned only if they are “completely devoid of a credible evidentiary basis or bear no rational relationship to the supporting data.” Facts: Fruehauf Trailer Corporation (“Fruehauf”), a Delaware corporation, designed, manufactured and sold truck trailers throughout the U.S. Due to the rapid overexpansion of its business, Fruehauf’s long-term liabilities began to exceed revenues. In an effort to address this problem, Fruehauf implemented certain cost-saving measures, including reducing its work force, closing certain facilities, and freezing the calculation of retirement benefits for all employees at 1991 salary levels. In addition, Fruehauf began exploring the possibility of selling the company. In order to retain certain employees until such sale was consummated, Fruehauf entered into contracts with certain top executives and instituted a key employee retention program. Despite these efforts, Fruehauf’s fiscal state continued to decline, so Fruehauf’s board held an emergency meeting where the board approved, among other things, an amendment to the pension plans of approximately 400 employees (almost all of whom were executives or managers). The amendment lifted the 1991 benefits freeze for those employees who vested in the pension plan and calculated benefits based on their 1996 salaries. The source of funding for the amendment was a surplus on the union members’ pension plan; if the surplus funds were not used to fund the amendment, they would revert back to the company. When Fruehauf later filed a petition for chapter 11 relief, most of its assets were sold to Wabash National L.P. (“Wabash”). Meanwhile, Fruehauf’s remaining assets were placed in a liquidation trust and the pension plan was taken over by the Pension Transfer Corporation (“PTC”), a subsidiary of the liquidation trust. Fruehauf, as debtor in possession, brought an adversary proceeding in the bankruptcy court against the pension plan on the grounds that the payouts under the amendment to the plan would result in a fraudulent transfer under section 548 of the Bankruptcy Code. Procedural Posture: The bankruptcy court granted Fruehauf's request for a preliminary injunction against the pension plan and enjoined the plan from distributing payments. When the bankruptcy court approved Fruehauf's amended reorganization plan and substituted PTC as the administrator of the pension plan, PTC replaced Fruehauf in the adversary action, which was transferred to the district court. The district court then found that the pension plan payments constituted fraudulent transfers under section 548. The court reasoned that the amendment was never properly presented to Fruehauf’s board and the amount spent under the amended pension plan exceeded the amount normally expended to retain key employees. The court also held that PTC, as replacement for Fruehauf, had a property interest in any surplus in the union members’ pension plan, and that the amended plan irrevocably transferred this property interest to the defendants. While the court agreed that PTC failed to prove that Fruehauf received no value from this transfer, it concluded that any value it may have received was not “reasonably equivalent” to the cost of the transfer. The district court stated that the defendants failed to demonstrate that the amended plan was
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indeed responsible for retaining key employees and that Wabash would not have purchased Fruehauf if it were not a going concern. Thus, the district court concluded that payments under the amended pension plan would be a fraudulent transfer of property of the debtor’s estate that could be avoided. The defendants filed an appeal to the Third Circuit. Issue: Whether the amendment to the pension plan was a fraudulent transfer pursuant to section 548 of the Code. Holding: Yes. By employing a totality of the circumstances approach, the Third Circuit concluded that the amendment to the pension plan was fraudulent even though the alleging party did not provide the court with a precise calculation of the benefits conferred and received. Rationale: The Third Circuit stated that PTC, the party bringing this fraudulent conveyance action, had the burden of proving that (i) Fruehauf had a property interest in the pension surplus, (ii) the interest was transferred within one year of the filing of the debtor’s bankruptcy case, (iii) Fruehauf was insolvent at the time of the transfer or became insolvent as a result of the transfer, and (iv) Fruehauf did not receive “reasonably equivalent value” for the transferred property interest. The court asserted that there was no dispute that the alleged transfer was made within one year of Fruehauf’s filing and that Fruehauf was insolvent. Accordingly, the court analyzed whether PTC had sufficiently established the remaining elements of a fraudulent transfer. In regards to whether Fruehauf had a property interest in the pension surplus, the court began by noting that the Bankruptcy Code defines property interests broadly by including “all legal or equitable interests of the debtor in property.” Under ERISA, an employer who sponsors a qualifying retirement plan is entitled to recoup any surplus upon termination of the plan. Accordingly, this recoupment right is a transferable property interest and, therefore, Fruehauf’s potential recoupment in the future of the pension surplus was a transferable property interest under section 548. Next, the court concluded that the allocation of the pension surplus was a transfer as defined in the Code. The Bankruptcy Code defines “transfer” in the broadest possible terms: “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in property.” Here, upon ratification of the Third Amendment by the Board, the benefits of the pension plan accrued to the defendants. Thus, the district court correctly concluded that the allocation of part of the Company's future interest in the pension plan's surplus, in the form of increased benefits, constituted a “transfer.” Lastly, the court concluded that Fruehauf gave up something of value with the ratification of the amended pension plan. In regards to whether Fruehauf received value in exchange for the value it gave up, the court noted that totality of the circumstances must be examined. If the totality of the circumstances demonstrates that the debtor received only minimal value for the benefit it conferred, the plaintiff need not provide the court with an exact calculation. The Third Circuit thus concluded that the amendment to the pension plan was fraudulent under section 548 of the Code even though PTC did not provide the court with a precise calculation of the benefits conferred and received.
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Person’s Co. v. Christman 900 F.2d 1565 (Fed. Cir. 1990)
Cited For: The proposition that trademarks, like all intellectual property rights, are territorial in nature. “The concept of territoriality is basic to trademark law; trademark rights exist in each country solely according to that country’s statutory scheme.” Facts: Person’s Co., Ltd. (“Person’s”) is a Japanese corporation that markets and distributes clothing bearing the logo “PERSON’S.” In 1981, Larry Christman, a U.S. citizen and employee of a sportswear wholesaler, purchased several clothing items bearing the “PERSON’S” logo while on a business trip in Japan. After being advised by legal counsel that no one had yet established a claim to the logo in the U.S., Christman designed his own “PERSON’S” sportswear line. Christman began selling these items in 1982 to sportswear retailers in the U.S. In 1983, Christman formed Team Concepts, Ltd., a Washington corporation, to merchandise his sportswear line. Christman then filed an application for U.S. trademark registration to protect the “PERSON’S” mark. Christman’s registration issued in September 1984 for use on wearing apparel. Meanwhile, Person’s, the Japanese company, began implementing its plan to sell goods under this mark in the U.S.; it filed an application for U.S. trademark registration for the mark “PERSON’S.” In 1986, Christman and Person’s became aware of each other’s advertising in the U.S. Person’s then initiated an action with the U.S. Patent and Trademark Office Trademark Trial and Appeal Board (“PTO Board”) to cancel Christman’s registration due to likelihood of confusion, abandonment, and unfair competition. Christman counterclaimed and asserted prior use and likelihood of confusion as grounds for cancellation of Person’s registration. Christman filed a motion with the PTO Board for summary judgment on all counts. The Board ruled in favor of Christman. Procedural Posture: Person’s challenged the decision of the PTO Trial and Appeal Board, which granted summary judgment in favor of Christman and ordered the cancellation of Person’s trademark registration. Issue: Whether knowledge of a trademark’s use outside of U.S. commerce precludes good faith adoption and use of the identical mark in the U.S., prior to the entry of the foreign user into the U.S. domestic market. Holding: No. Foreign use of a trademark does not preclude good faith adoption and use of the identical mark in the U.S. when the party filing for trademark registration is the first to do so in the U.S. Rationale: Person’s use of the trademark in Japan could not be used to establish priority against a “good faith” senior user in U.S. commerce. Christman was the first to use the trademark in U.S. commerce. Furthermore, Christman had not adopted the mark in bad faith. Copying a mark in use in a foreign country is considered to be done in bad faith unless the foreign mark is famous
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in the U.S. or the copying is undertaken for the purposes of interfering with the prior user’s planned expansion into the U.S. Furthermore, there was no evidence to suggest that the trademark had acquired any notoriety in the U.S. at the time of its adoption by Christman. Therefore, Christman had no reputation or goodwill in the U.S. upon which he could have intended to trade, rendering Person’s unfair competition claims meritless. The court further concluded that Christman had not abandoned the trademark.
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Sunbeam Prods., Inc. v Chic. Am. MFG 686 F. 3d 372 (7th Cir. 2012)
Cited For: The proposition that rejection of a contract pursuant to section 365 of the Bankruptcy Code does not terminate the rights of a nondebtor party to the contract. Facts: Lakewood Engineering & Manufacturing Co. (“Lakewood”) entered into a contract with Chicago American Manufacturing (“CAM”), whereby Lakewood agreed to take orders from retailers for box fans and CAM agreed to manufacture and ship them directly to customers. Lakewood estimated that they would sell about 1.2 million fans during 2009. However, because Lakewood was struggling financially, it agreed to allow CAM to sell the excess box fans in the event that Lakewood could not obtain 1.2 million orders. Three months into their contract, Lakewood’s creditors filed an involuntary chapter 11 bankruptcy petition, and the court appointed trustee decided to sell Lakewood’s business. Sunbeam Products (“Sunbeam”) purchased Lakewood’s assets, along with Lakewood’s trademarks and patents. Sunbeam desired neither to buy Lakewood-branded fans nor compete with CAM in the consumer fan market. As such, the Lakewood trustee rejected the executory portion of the CAM contract pursuant to section 365(a) of the Code. When CAM continued to make and sell the Lakewood-branded fans, Sunbeam and the trustee filed an adversary proceeding to enjoin CMA from selling the fans. Procedural Posture: The bankruptcy court found for CAM on equitable grounds, concluding that section 365(n) of the Code allowed CAM to make use of Lakewood’s patents. Sunbeam appealed to the Seventh Circuit. Issue: Whether a trademark licensee may continue to use a licensed trademark, even though the licensor has rejected the license agreement pursuant to section 365 of the Bankruptcy Code. Holding: Yes. When an intellectual property license is rejected pursuant to section 365 of the Code, the licensee does not lose the ability to use any licensed copyrights, trademarks, or patents. Rationale: The Court of Appeals for the Seventh Circuit reasoned that, outside of bankruptcy, a licensor's breach does not terminate a licensee's right to use intellectual property. The same is true under section 365(g), the court held. When a contract is rejected in the context of a bankruptcy proceeding, a breach is established, but the other party's rights remain in place. Therefore, CAM had the right to continue to perform under the prepetition contract for the production of fans with the Lakewood trademark. The court reasoned that Congress’s omission of trademarks from the definition of “intellectual property” as contained in section 365(n) of the Code was immaterial because rejection merely entails a debtor breach; rejection does not cause the non-breaching party’s rights to be, as the court put it, “vaporized.” Accordingly, because a licensor’s simple breach outside of bankruptcy typically would not cause the licensee to lose the use of the
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licensed property under non-bankruptcy law, the court found no reason why the non-debtor licensee should lose that right in a licensor bankruptcy. In reaching this conclusion, the Seventh Circuit rejected Fourth Circuit’s decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985).
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Tenucp Prop. LLC v. Riley (In re GCP CT Sch. Acquisition LLC) 429 B.R. 817 (Bankr. App. Panel 1st Cir. 2010)
Cited For: The proposition that section 365(a) of the Bankruptcy Code allows a trustee, subject to the court’s approval, to “assume or reject any executory contract or unexpired lease of the debtor.” Facts: GCP CT School Acquisition, the chapter 7 debtor, operated radio and television broadcasting schools. Tenucp Property LLC (“Tenucp”) was the Debtor’s landlord under a written agreement (“the lease”) for office space in California. In 2009, the debtor began suffering financial troubles which forced the schools to shut down abruptly with only a handful of weeks remaining in the semester. The debtor then filed for chapter 7 bankruptcy. The chapter 7 trustee immediately negotiated with investors for funds so that the schools could reopen, seeking by motion authority to operate the debtor's schools for this limited period of time. Included was a proposed budget to pay Tenucp rent under the lease for this limited time, pursuant to section 365. The trustee sought to operate the schools for this limited time because there were prospective buyers for the schools, and she believed by continuing operations, the value of the business would be enhanced for a possible sale. Tenucp did not object to the trustee's motion. Procedural Posture: The bankruptcy court granted the motion. Thereafter, the trustee filed a motion to sell the debtor's assets to a third party and, related to the sale, to assume and assign certain of the real estate leases. In the motion, the trustee stated that Tenucp’s premises would be used to store equipment, furniture and furnishings. The motion provided that a secured lender would be responsible for paying the use and occupancy charges from the time that teaching ended until May 31, 2009. Importantly, in the motion, Tenucp’s lease was not on the list of leases to be assumed. Tenucp did not object to the trustee's motion and the bankruptcy court granted the motion and approved the sale. After the sale was completed, the trustee sent payment to Tenucp for the use and occupancy of the leased premises from April 4 through May 23, noting that payment was in full “accord and satisfaction of any and all administrative expense claims” that Tenucp has against the debtor’s estate. The letter to Tenucp also stated that “[a]ll leases that were not assumed pursuant to the sale order have now been rejected.” Three months later, Tenucp filed a request for payment of an administrative expense claim for rent under the lease from March 13 to July 13, arguing that since the trustee did not file a formal motion to reject the lease, Tenucp was entitled to an administrative rent claim for the 120-day period pursuant to section 365(d)(4). The trustee objected to Tenucp’s request and asserted that the parties had reached an accord and satisfaction for use of the premises. The trustee argued that the prior pleadings filed in the case, such as the motion to operate on a temporary basis and the sale motion, clearly provided notice to Tenucp of the trustee's intention to reject. The bankruptcy court denied Tenucp’s request for an administrative rent claim, finding that Tenucp must have known that May 23, 2009 was the rejection date of the lease. Tenucp appealed to the Bankruptcy Appellate Panel for the First Circuit.
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Issue: Whether a bankruptcy court has the equitable authority to make its approval of a lease rejection retroactive. Holding: Yes. Rejection of an unexpired lease does not take effect until judicial approval is obtained, but the court has equitable power to order rejection to operate retroactively. Rationale: Pursuant to section 365(a) of the Code, a trustee may assume or reject an executory contract or unexpired lease of the debtor, subject to court approval. However, section 365(d) imposes the following two obligations upon the trustee with respect to unexpired nonresidential real property leases: (1) the trustee must perform timely all obligations required under the lease; and (2) the trustee must decide whether to assume or reject a lease within 120 days after the entry of the order for relief. If the trustee fails to act within 120 days, the lease is deemed rejected and the trustee must surrender the leasehold to the lessor. The Panel held that bankruptcy courts have the authority to approve the rejection of a nonresidential lease retroactive to the motion filing date, but only in appropriate cases. Bankruptcy Rules 6006 and 9014 govern the procedure for seeking approval of the rejection of an unexpired nonresidential lease. These rules, as interpreted by the First Circuit, require a debtor seeking the approval to reject a lease to proceed by motion upon reasonable notice and opportunity for hearing. In the instant case, the Panel held that the trustee’s motions provided sufficient notice to Tenucp of its intent to reject the lease as of June 4, 2009. However, the Panel found that the bankruptcy court abused its discretion in ordering the lease be deemed rejected on May 23, 2009 because the date of rejection was not a date indicated in any of the pleadings filed with the court which would have provided notice of the trustee's intent to reject the lease. Accordingly, the Panel affirmed the bankruptcy court decision in part and reversed in part and remanded for the bankruptcy court to enter an order determining the rejection date as provided in the opinion.
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Thompkins v. Lil' Joe Records, Inc. 476 F.3d 1294 (11th Cir. 2007)
Cited For: The proposition that rejection of an executory contract pursuant to section 365 of the Bankruptcy Code frees the estate from the obligation to perform under a contract; it constitutes a breach of contract and does not terminate rights held by a nonbreaching party. Facts: In 1989, rap artist Thompkins entered into an exclusive recording agreement with Luke Records. The agreement (“the 1989 Agreement”) left Thompkins with the right to collect royalties on records released by Luke Records, but it gave him no control over the copyrights. In 1995, Luke Records involuntarily entered chapter 7 bankruptcy, later converting the case to a chapter 11 reorganization. Although Luke Records initially filed a motion to assume its contracts with Thompkins, it withdrew the motion and Luke Records rejected the contracts in its reorganization plan. Luke Records later sold the copyrights to Lil’ Joe Records free and clear of liens and encumbrances in its plan. Thompkins never objected to the sale, nor did he respond to an objection to the proof of claim he filed.
Procedural Posture: Six years later, Thompkins sued Lil’ Joe Records in federal district court for copyright infringement. The court dismissed Thompkins’ infringement claims. It found that Luke Records obtained title to the copyrights under its recording agreement even though it later breached its obligation to pay royalties to him. The court found that Thompkins had no infringement claim because Lil’ Joe held title to the copyrights. Thompkins appealed.
Issue: Whether rejection of a trademark licensing agreement pursuant to section 365 of the Code terminates the licensees right to continue to use the trademark. Holding: No. An executory contract rejected under section 365 of the Code does not deem the contract void. As such, rejection of the 1989 Agreement in this case did not cause the copyrights to revert to Thompkins. Rather, the copyrights properly passed into Luke Records' bankruptcy estate and were legally assigned to Lil' Joe. Rationale: The Eleventh Circuit held that rejection of an unexpired lease under section 365 does not embody the contract-vaporizing properties so commonly ascribed to it. Instead, rejection merely frees the estate from the obligation to perform; it does not make the contract disappear. More specifically, rejection has absolutely no effect upon the contract's continued existence. The contract is not cancelled, repudiated, rescinded, or in any other fashion terminated. Rejection, which is appropriate when a contract is a liability to the bankrupt debtor, is equivalent to a nonbankruptcy breach and a damages claims therefore arises in favor of the non-debtor. When the bankruptcy court approved the rejection of the Agreement, it freed Luke Records from the obligation, or “burden,” to pay royalties under the contractual terms and gave Thompkins a pre-petition claim for damages resulting from the breach.
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Underwood v. Hilliard (In re Rimsat, Ltd.) 98 F.3d 956 (7th Cir. 1996)
Cited For: The proposition that the language of the Bankruptcy Code, its legislative history, and the context of bankruptcy practice each support the extraterritorial application of the Code to all aspects of a bankruptcy case. Facts: Rimsat was a satellite communication company formed to provide services to islands in the South Pacific, with its principal place of business is in Indiana. In light of Rimsat’s financial struggles, Carl Hilliard, director and shareholder of Rimsat, obtained from the High Court of Nevis (a Caribbean nation that belongs to the British Commonwealth) an injunction against Rimsat’s bankruptcy proceeding. In 1995, Hilliard obtained a further order from that court appointing him as receiver with full powers to manage Rimsat’s bankruptcy. Two weeks later, several creditors petitioned Rimsat into filing for chapter 11 relief in Indiana. The trustee, Paul Underwood, brought an adversary proceeding against Hilliard, seeking an order enjoining Hilliard from exercising control of Rimsat’s property or otherwise interfering with the bankruptcy proceeding. Procedural Posture: The bankruptcy court granted the motion. It issued a further injunction commanding Hilliard to turn over all Rimsat property in his control to the trustee and to file an accounting of that property with the court. Hilliard appealed the two injunctions issued by the bankruptcy court. The District Court for the Northern District of Indiana issued an order of contempt against Hillliard, ordering him to pay $1,000 per day for disobeying the second order. The district court reasoned that all bankruptcy proceedings in the United States should be suspended pending foreign proceedings. Issue: Whether contempt sanctions issued by the bankruptcy court against a party appointed as the debtor’s receiver are valid when there is a pending foreign proceeding. Holding: Yes. A valid civil contempt sanction can be issued against the receiver for noncompliance even when there is a foreign proceeding. Rationale: The Bankruptcy Code authorizes, but does not command, a dismissal or suspension of bankruptcy proceedings if there is a pending foreign proceeding. In this case, the plaintiff was the trustee; therefore, under section 543(b) of the Code, the receiver was required to deliver all assets within his control to the plaintiff and file an accounting with the court. Furthermore, because the debtor was domiciled in the United States, the receiver’s argument to suspend pending foreign proceedings was deemed inappropriate. The Court of Appeals for the Seventh Circuit held that it had jurisdiction to review the receiver’s compliance, ultimately finding that the receiver had not complied.
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In re XMH Corp. 647 F.3d 690 (7th Cir. 2011)
Cited For: The proposition that the owner of a trademark does not own the words but rather the “goodwill” associated with the words; these words describe the source of the product and provide an assurance as to its quality. Facts: In 2009, XMH and its subsidiary Simply Blue filed for chapter 11 relief. XMH requested—and received—permission from the bankruptcy court to sell Simply Blue’s assets to certain purchasers. As part of the sale, XMH sought to assign to the purchasers an executory contract that existed between Simply Blue and Western Glove Works (“Western”). Western objected to the assignment, arguing that the contract was a sublicense to Simply Blue of a trademark licensed by Western and could not therefore be assigned without Western’s permission. Procedural Posture: The bankruptcy court ruled in favor of Western, holding that the contract could not be assigned to the purchasers without Western’s consent. However, the bankruptcy court allowed the assignment of an amended contract. Under this amended contract, Simply Blue retained title to the contract. XMH appealed the initial ruling that disallowed the assignment of the original contract to the purchasers. On appeal, the purchasers brought a motion asking to be substituted for XMH. The district court granted the motion, finding that the bankruptcy court’s order disallowing the assignment of the original contract was erroneous. Western then appealed to the Court of Appeals for the Seventh Circuit. Issue: Whether a trademark is assignable without the licensor’s permission in the absence of a clause in the agreement stating that it is assignable. Holding: No. The Court of Appeals for the Seventh Circuit held that trademark licenses are not assignable in the absence of a clause expressly authorizing assignment. The court held that if Western wanted to prevent Blue from assigning the service contract, all it had to do was get Blue to agree to designate the contract as a trademark sublicense. Rationale: Section 365(c)(1) of the Bankruptcy Code limits the assignment of an executory contract of the debtor if “applicable law” authorizes the other party to the contract to refuse to accept performance from an assignee “whether or not such contract . . . prohibits or restricts assignment.” Here, the trademark sublicense was not assignable because, under applicable law (trademark law), the universal rule is that trademark licenses are not assignable in the absence of a clause expressly authorizing such assignment. The rationale behind this rule is that a trademark is a shorthand designation of the “goodwill” of the brand. If a licensee were permitted to sublicense the trademark to a seller over whom the trademark owner has no control, the trademark owner will not be able to ensure the continued quality of the (ex)licensee’s operation.
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However, in the present case, the assigned agreement does not include a trademark license, rather it involves a service agreement. As such, the agreement is assignable. In so holding, the court rejected Western’s argument that there was an “implied” trademark license in the service agreement, questioning why the contract entered into between Simply Blue and Western distinguished between a trademark license and a service agreement if the contract was meant to “imply” a trademark license.
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RELEVANT STATUTES
11 U.S.C. § 101(5)
§ 101(5). Definitions
(5) The term “claim” means—
(A) Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) Right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
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11 U.S.C. § 101(35A) § 101(35A). Definitions
(35A) The term “intellectual property” means--
(A) Trade secret; (B) Invention, process, design, or plant protected under title 35; (C) Patent application; (D) Plant variety; (E) Work of authorship protected under title 17; or (F) Mask work protected under chapter 9 of title 17; to the extent protected by applicable nonbankruptcy law.
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11 U.S.C. § 362(a) § 362(a). Automatic stay (a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or
303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—
(1) the commencement or continuation, including the issuance or employment of process,
of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment
obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax
Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.
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11 U.S.C. § 365(a), (b), (e)–(k), (n) § 365(a), (b), (e)–(k), (n). Executory contracts and unexpired leases (a) Except as provided in sections 765 and 766 of this title and in subsections (b), (c), and (d) of this section, the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor. (b)(1) If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee-
(A) cures, or provides adequate assurance that the trustee will promptly cure, such default other than a default that is a breach of a provision relating to the satisfaction of any provision (other than a penalty rate or penalty provision) relating to a default arising from any failure to perform nonmonetary obligations under an unexpired lease of real property, if it is impossible for the trustee to cure such default by performing nonmonetary acts at and after the time of assumption, except that if such default arises from a failure to operate in accordance with a nonresidential real property lease, then such default shall be cured by performance at and after the time of assumption in accordance with such lease, and pecuniary losses resulting from such default shall be compensated in accordance with the provisions of this paragraph; (B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and (C) provides adequate assurance of future performance under such contract or lease.
(2) Paragraph (1) of this subsection does not apply to a default that is a breach of a provision relating to—
(A) the insolvency or financial condition of the debtor at any time before the closing of the case; (B) the commencement of a case under this title; (C) the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement; or (D) the satisfaction of any penalty rate or penalty provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease.
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(3) For the purposes of paragraph (1) of this subsection and paragraph (2)(B) of subsection (f), adequate assurance of future performance of a lease of real property in a shopping center includes adequate assurance--
(A) of the source of rent and other consideration due under such lease, and in the case of an assignment, that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease; (B) that any percentage rent due under such lease will not decline substantially; (C) that assumption or assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center; and (D) that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.
(4) Notwithstanding any other provision of this section, if there has been a default in an unexpired lease of the debtor, other than a default of a kind specified in paragraph (2) of this subsection, the trustee may not require a lessor to provide services or supplies incidental to such lease before assumption of such lease unless the lessor is compensated under the terms of such lease for any services and supplies provided under such lease before assumption of such lease.
*** (e)(1) Notwithstanding a provision in an executory contract or unexpired lease, or in applicable law, an executory contract or unexpired lease of the debtor may not be terminated or modified, and any right or obligation under such contract or lease may not be terminated or modified, at any time after the commencement of the case solely because of a provision in such contract or lease that is conditioned on-
(A) the insolvency or financial condition of the debtor at any time before the closing of the case; (B) the commencement of a case under this title; or (C) the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement.
(2) Paragraph (1) of this subsection does not apply to an executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment
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of rights or delegation of duties, if—
(A)(i) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to the trustee or to an assignee of such contract or lease, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and
(ii) such party does not consent to such assumption or assignment; or
(B) such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor.
(f)(1) Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.
(2) The trustee may assign an executory contract or unexpired lease of the debtor only if—
(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and (B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.
(3) Notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law that terminates or modifies, or permits a party other than the debtor to terminate or modify, such contract or lease or a right or obligation under such contract or lease on account of an assignment of such contract or lease, such contract, lease, right, or obligation may not be terminated or modified under such provision because of the assumption or assignment of such contract or lease by the trustee.
(g) Except as provided in subsections (h)(2) and (i)(2) of this section, the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease-
(1) if such contract or lease has not been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title, immediately before the date of the filing of the petition; or (2) if such contract or lease has been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title--
(A) if before such rejection the case has not been converted under section 1112, 1208, or 1307 of this title, at the time of such rejection; or
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(B) if before such rejection the case has been converted under section 1112, 1208, or 1307 of this title--
(i) immediately before the date of such conversion, if such contract or lease was assumed before such conversion; or (ii) at the time of such rejection, if such contract or lease was assumed after such conversion.
(h)(1)(A) If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and--
(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to treat such lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any agreement made by the lessee, then the lessee under such lease may treat such lease as terminated by the rejection; or (ii) if the term of such lease has commenced, the lessee may retain its rights under such lease (including rights such as those relating to the amount and timing of payment of rent and other amounts payable by the lessee and any right of use, possession, quiet enjoyment, subletting, assignment, or hypothecation) that are in or appurtenant to the real property for the balance of the term of such lease and for any renewal or extension of such rights to the extent that such rights are enforceable under applicable nonbankruptcy law.
(B) If the lessee retains its rights under subparagraph (A)(ii), the lessee may offset against the rent reserved under such lease for the balance of the term after the date of the rejection of such lease and for the term of any renewal or extension of such lease, the value of any damage caused by the nonperformance after the date of such rejection, of any obligation of the debtor under such lease, but the lessee shall not have any other right against the estate or the debtor on account of any damage occurring after such date caused by such nonperformance.
(C) The rejection of a lease of real property in a shopping center with respect to which the lessee elects to retain its rights under subparagraph (A)(ii) does not affect the enforceability under applicable nonbankruptcy law of any provision in the lease pertaining to radius, location, use, exclusivity, or tenant mix or balance.
(D) In this paragraph, “lessee” includes any successor, assign, or mortgagee permitted under the terms of such lease.
(2)(A) If the trustee rejects a timeshare interest under a timeshare plan under which the debtor is the timeshare interest seller and--
(i) if the rejection amounts to such a breach as would entitle the timeshare interest
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purchaser to treat the timeshare plan as terminated under its terms, applicable nonbankruptcy law, or any agreement made by timeshare interest purchaser, the timeshare interest purchaser under the timeshare plan may treat the timeshare plan as terminated by such rejection; or (ii) if the term of such timeshare interest has commenced, then the timeshare interest purchaser may retain its rights in such timeshare interest for the balance of such term and for any term of renewal or extension of such timeshare interest to the extent that such rights are enforceable under applicable nonbankruptcy law.
(B) If the timeshare interest purchaser retains its rights under subparagraph (A), such timeshare interest purchaser may offset against the moneys due for such timeshare interest for the balance of the term after the date of the rejection of such timeshare interest, and the term of any renewal or extension of such timeshare interest, the value of any damage caused by the nonperformance after the date of such rejection, of any obligation of the debtor under such timeshare plan, but the timeshare interest purchaser shall not have any right against the estate or the debtor on account of any damage occurring after such date caused by such nonperformance.
(i)(1) If the trustee rejects an executory contract of the debtor for the sale of real property or for the sale of a timeshare interest under a timeshare plan, under which the purchaser is in possession, such purchaser may treat such contract as terminated, or, in the alternative, may remain in possession of such real property or timeshare interest.
(2) If such purchaser remains in possession--
(A) such purchaser shall continue to make all payments due under such contract, but may, offset against such payments any damages occurring after the date of the rejection of such contract caused by the nonperformance of any obligation of the debtor after such date, but such purchaser does not have any rights against the estate on account of any damages arising after such date from such rejection, other than such offset; and
(B) the trustee shall deliver title to such purchaser in accordance with the provisions of such contract, but is relieved of all other obligations to perform under such contract.
(j) A purchaser that treats an executory contract as terminated under subsection (i) of this section, or a party whose executory contract to purchase real property from the debtor is rejected and under which such party is not in possession, has a lien on the interest of the debtor in such property for the recovery of any portion of the purchase price that such purchaser or party has paid. (k) Assignment by the trustee to an entity of a contract or lease assumed under this section relieves the trustee and the estate from any liability for any breach of such contract or lease occurring after such assignment. ***
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(n)(1) If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect--
(A) to treat such contract as terminated by such rejection if such rejection by the trustee amounts to such a breach as would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity; or
(B) to retain its rights (including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable nonbankruptcy law to specific performance of such contract) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law), as such rights existed immediately before the case commenced, for--
(i) the duration of such contract; and
(ii) any period for which such contract may be extended by the licensee as of right under applicable nonbankruptcy law.
(2) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subsection, under such contract--
(A) the trustee shall allow the licensee to exercise such rights;
(B) the licensee shall make all royalty payments due under such contract for the duration of such contract and for any period described in paragraph (1)(B) of this subsection for which the licensee extends such contract; and
(C) the licensee shall be deemed to waive--
(i) any right of setoff it may have with respect to such contract under this title or applicable nonbankruptcy law; and (ii) any claim allowable under section 503(b) of this title arising from the performance of such contract.
(3) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subsection, then on the written request of the licensee the trustee shall--
(A) to the extent provided in such contract, or any agreement supplementary to such contract, provide to the licensee any intellectual property (including such embodiment) held by the trustee; and
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(B) not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment) including any right to obtain such intellectual property (or such embodiment) from another entity.
(4) Unless and until the trustee rejects such contract, on the written request of the licensee the trustee shall--
(A) to the extent provided in such contract or any agreement supplementary to such contract--
(i) perform such contract; or
(ii) provide to the licensee such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law) held by the trustee; and
(B) not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment), including any right to obtain such intellectual property (or such embodiment) from another entity.
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11 U.S.C. § 503(b) § 503(b). Allowance of administration expenses (b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including--
(1)(A) The actual, necessary costs and expenses of preserving the estate including-- (i) Wages, salaries, and commissions for services rendered after the commencement of the case; and (ii) Wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of Federal or State law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered, if the court determines that payment of wages and benefits by reason of the operation of this clause will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the case under this title;
(B) Any tax--
(i) Incurred by the estate, whether secured or unsecured, including property taxes for which liability is in rem, in personam, or both, except a tax of a kind specified in section 507(a)(8) of this title; or
(ii) Attributable to an excessive allowance of a tentative carryback adjustment that the estate received, whether the taxable year to which such adjustment relates ended before or after the commencement of the case;
(C) Any fine, penalty, or reduction in credit relating to a tax of a kind specified in subparagraph (B) of this paragraph; and
(D) Notwithstanding the requirements of subsection (a), a governmental unit shall not be required to file a request for the payment of an expense described in subparagraph (B) or (C), as a condition of its being an allowed administrative expense;
(2) Compensation and reimbursement awarded under section 330(a) of this title;
(3) The actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by--
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(A) A creditor that files a petition under section 303 of this title;
(B) A creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor;
(C) A creditor in connection with the prosecution of a criminal offense relating to the case or to the business or property of the debtor;
(D) A creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title;
(E) A custodian superseded under section 543 of this title, and compensation for the services of such custodian; or
(F) A member of a committee appointed under section 1102 of this title, if such expenses are incurred in the performance of the duties of such committee;
(4) Reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant;
(5) Reasonable compensation for services rendered by an indenture trustee in making a substantial contribution in a case under chapter 9 or 11 of this title, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title;
(6) The fees and mileage payable under chapter 119 of title 28;
(7) With respect to a nonresidential real property lease previously assumed under section 365, and subsequently rejected, a sum equal to all monetary obligations due, excluding those arising from or relating to a failure to operate or a penalty provision, for the period of 2 years following the later of the rejection date or the date of actual turnover of the premises, without reduction or setoff for any reason whatsoever except for sums actually received or to be received from an entity other than the debtor, and the claim for remaining sums due for the balance of the term of the lease shall be a claim under section 502(b)(6);
(8) The actual, necessary costs and expenses of closing a health care business incurred by a trustee or by a Federal agency (as defined in section 551(1) of title 5) or a department or agency of a State or political subdivision thereof, including any cost or expense incurred-
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(A) In disposing of patient records in accordance with section 351; or
(B) In connection with transferring patients from the health care business that is in the process of being closed to another health care business; and
(9) The value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business.
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11 U.S.C. § 507(a)(2) § 507(a)(2). Priorities (a) The following expenses and claims have priority in the following order:
(2) Second, administrative expenses allowed under section 503(b) of this title, unsecured claims of any Federal reserve bank related to loans made through programs or facilities authorized under section 13(3) of the Federal Reserve Act (12 U.S.C. § 343), and any fees and charges assessed against the estate under chapter 123 of title 28.
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11 U.S.C. § 541(a)
§ 541(a). Property of the estate (a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
(2) All interests of the debtor and the debtor's spouse in community property as of the commencement of the case that is--
(A) under the sole, equal, or joint management and control of the debtor; or (B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor's spouse, to the extent that such interest is so liable.
(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553, or 723 of this title. (4) Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510(c) or 551 of this title.
(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date--
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement with the debtor's spouse, or of an interlocutory or final divorce decree; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan.
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.
(7) Any interest in property that the estate acquires after the commencement of the case.
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11 U.S.C. § 726(b) § 726(b). Distribution of property of the estate
(b) Payment on claims of a kind specified in paragraph (1), (2), (3), (4), (5), (6), (7), (8), (9), or (10) of section 507(a) of this title, or in paragraph (2), (3), (4), or (5) of subsection (a) of this section, shall be made pro rata among claims of the kind specified in each such particular paragraph, except that in a case that has been converted to this chapter under section 1112, 1208, or 1307 of this title, a claim allowed under section 503(b) of this title incurred under this chapter after such conversion has priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title or under this chapter before such conversion and over any expenses of a custodian superseded under section 543 of this title.
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11 U.S.C. § 1107(a) § 1107(a). Rights, powers, and duties of debtor in possession (a) Subject to any limitations on a trustee serving in a case under this chapter, and to such
limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.
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11 U.S.C. § 1141(d)(1) § 1141(d)(1). Effect of confirmation (d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan--
(A) Discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title, whether or not--
(i) A proof of the claim based on such debt is filed or deemed filed under section 501 of this title; (ii) Such claim is allowed under section 502 of this title; or (iii) The holder of such claim has accepted the plan; and
(B) Terminates all rights and interests of equity security holders and general partners provided for by the plan.
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28 U.S.C. § 1334(e)(1)
§ 1334(e)(1). Bankruptcy cases and proceedings (e) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction--
(1) Of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate;
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GATT Uruguay Round Agreement on Trade Related Aspects of Intellectual Property (TRIPS),
Section II, Article 16
Rights Conferred 1. The owner of a registered trademark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. The rights described above shall not prejudice any existing prior rights, nor shall they affect the possibility of Members making rights available on the basis of use.
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HOUSE REPORT NO. 95-595, 1978 U.S.C.C.A.N. 5963
SEC. 365. EXECUTORY CONTRACTS AND UNEXPIRED LEASES
Other contracting party the full benefit of his bargain. An example of the complexity that
may arise in these situations and the need for a determination of all aspects of a particular executory contract or unexpired lease is the shopping center lease under which the debtor is a tenant in a shopping center.
A shopping center is often a carefully planned enterprise, and though it consists of numerous individual tenants, the center is planned as a single unit, often subject to a master lease or financing agreement. Under these agreements, the tenant mix in a shopping center may be as important to the lessor as the actual promised rental payments, because certain mixes will attract higher patronage of the stores in the center, and thus a higher rental for the landlord from those stores that are subject to a percentage of gross receipts rental agreement. Thus, in order to assure a landlord of his bargained for exchange, the court would have to consider such factors as the nature of the business to be conducted by the trustee of his assignee, whether that business complies with the requirements of any master agreement, whether the kind of business proposed will generate gross sales in an amount such that the percentage rent specified in the lease is substantially the same as what would have been provided by the debtor, and whether the business proposed to be conducted would result in a breach of other clauses in master agreements relating, for example, to tenant mix and location.
This subsection does not limit the application of an ipso facto or bankruptcy clause to a new insolvency or receivership after the bankruptcy case is closed. That is, the clause is not invalidated in toto, but merely made inapplicable during the case for the purposes of disportion of the executory contract or unexpired lease.
Subsection (f) partially invalidates restrictions on assignment of contracts or leases by the trustee to a third party. The subsection imposes two restrictions on the trustee: he must first assume the contract or lease, subject to all the restrictions on assumption found in the section, and adequate assurance of future performance must be provided to the other contracting party. Paragraph (3) of the subsection invalidates contractual provisions that permit termination or modification in the event of an assignment, as contrary to the policy of this subsection.
Subsection (g) defines the time as of which a rejection of an executory contract or unexpired lease constitutes a breach of the contract or lease. Generally, the breach is as of the date immediately preceding the date of the petition. The purpose is to treat rejection claim as prepetition claims. The remainder of the subsection specifies different times for cases that are converted from one chapter to another. The provisions of this subsection are not a substantive authorization to breach or reject an assumed contract. Rather, they prescribe the rules for the allowance of claims in case an assumed contract is breached, or if a case under chapter 11 in which a contract has been assumed is converted to a case under chapter 11 in which a contract has been assumed is converted to a case under chapter 7 in which the contract is rejected.
Subsection (h) protects real property lessees of the debtor if the trustee rejects an unexpired lease under which the debtor is the lessor (or sublessor). The subsection permits the lessee to remain in possession of the leased property or to treat the lease as terminated by the rejection. The balance of the term of the lease referred to in paragraph
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SEC. 525. PROTECTION AGAINST DISCRIMINATORY TREATMENT
Such as future financial responsibility or ability, and does not prohibit imposition of requirements such as net capital rules, if applied nondiscriminatorily.
In addition, the section is not exhaustive. The enumeration of various forms of discrimination against former bankrupts is not intended to permit other forms of discrimination. The courts have been developing the Perez rule. This section permits further development to prohibit actions by governmental or quasi-governmental organizations that perform licensing functions, such as a state bar association or a medical society, or by other organizations that can seriously affect the debtors' livelihood or fresh start, such as exclusion from a union on the basis of discharge of a debt to the union's credit union.
The effect of the section, and of further interpretations of the Perez rule, is to strengthen the anti-reaffirmation policy found in section 524(b). Discrimination based solely on nonpayment could encourage reaffirmations, contrary to the expressed policy.
The section is not so broad as a comparable section proposed by the bankruptcy commission, H.R. 31, 94th cong., 1st sess. Sec. 4-508 (1975), which would have extended the prohibition to any discrimination, even by private parties. Nevertheless, it is not limiting either, as noted. The courts will continue to mark the contours of the anti-discrimination provision in pursuit of sound bankruptcy policy.
SUBCHAPTER III-- THE ESTATE
SEC. 541. PROPERTY OF THE ESTATE
This section defines property of the estate, and specifies what property becomes property of the estate. The commencement of a bankruptcy case creates an estate. Under paragraph (1) of subsection (a), the estate is comprised of all legal or equitable interest of the debtor in property, wherever located, as of the commencement of the case. The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action (see bankruptcy act sec. 70a(6)), and all other forms of property currently specified in section 70a of the bankruptcy act sec. 70a, as well as property recovered by the trustee under section 542 of proposed title 11, if the property recovered was merely out of the possession of the debtor, yet remained ‘property of the debtor.‘ the debtor's interest in property also includes ‘title‘ to property, which is an interest, just as are a possessory interest, or leasehold interest, for example. The result of Segal v. Rochelle, 382 U.S.C. 375 (1966), is followed, and the right to a refund is property of the estate.
Though this paragraph will include choses in action and claims by the debtor against others, it is not intended to expand the debtor's rights against others more than they exist at the commencement of the case. For example, if the debtor has a claim that is barred at the time of the commencement of the case by the statute of limitations, then the trustee would not be able to pursue that claim, because he too would be barred. He could take no greater rights than the debtor himself had. But see proposed 11 U.S.C. 108, which would permit the trustee a
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33. Section 22 conforms the scope of section 59d of the act to that of section 2(21).
Section 2(21) gives the court jurisdiction to require receivers or trustees, appointed in proceedings not under the act, as well as assignees for the benefit of creditors and agents authorized to take possession of or to liquidate a person's property, to deliver the property in their possession or under their control to a receiver or trustee appointed under the act. Section 69d, spelling out that power, requires a receiver or trustee, not appointed under the act, of any property of the bankrupt, to account to the bankruptcy court, but does not include the assignee and agent. The bill adds the necessary language and clarification.
34. Section 23 amends section 70a to make clear that a trustee in bankruptcy is vested with the title of the bankrupt in property which is located without, as well as within, the United States. See Nadelman, The National Bankruptcy Act and the Conflict of Laws, 59 Harvard Law Review 1925(1946). The words ‘whereever located‘ have therefore been added at appropriate places. In addition, for ease of reference, the several sentences of section 70a(1) have been made into separate paragraphs.
35. Section 23(e) of the bill makes a clarifying change in section 70c of the act. Section 70c was amended in the last Congress (Public Law 461, 81st Cong., Act of March 18, 1950), simplifying the subdivision and conforming it to the amended section 60a. However, it is now recognized that the amendment did not accurately express what was intended. Since the trustee already has title to all of the bankrupt's property, it is not proper to say that he has the rights of a lien creditor upon his own property. What should be said is that he has the rights of a lien creditor upon property in which the bankrupt has an interest or as to which the bankrupt may be the ostensible owner. Accordingly, the language of section 70c has been revised so as to clarify its meaning and state more accurately what is intended.
36. Section 23(f) provides for the supplying of an omission in section 70e(2). Where under the act a transfer by way of lien, security title or otherwise, or an obligation, is void or voidable against a trustee in bankruptcy, it may under certain circumstances be necessary to preserve the same for the benefit of the estate by subrogating the trustee to the rights of the transferee or obligee, so that the benefits intended for the estate would not be passed on to junior interests not entitled thereto.
Under section 60b, the lien or security title, voidable as a preference, may be preserved for the benefit of the estate and passed to the trustee, and, under section 67a(3), a lien obtained by judicial proceedings, which is voidable, may likewise be preserved for the benefit of the estate and, to evidence title thereto, a conveyance thereof to the trustee may be directed. A like situation may arise under section 70e with respect to a transfer or obligation which is void or voidable against the trustee, but the subdivision contains no provision of preservation for the benefit of the estate similar to that contained in section 60b or section 67a(3). The bill provides language which supplies the omission and which is adapted to the situation.
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D. OTHER MATTERS As such, it is not in any way intended to address broader matters under Section 365 or the
Bankruptcy Code in general. The bill does not affect the test of when a contract is an executory contract or the exercise of business judgment in rejecting an executory contract. Nor does the bill address or intend any inference to be drawn concerning the treatment of executory contracts which are unrelated to intellectual property. In addition, the bill does not treat certain issues related to intellectual property that are already dealt with elsewhere in the Code: Maintaining the confidentiality of trade secrets is adequately provided for in Section 107(b)(2); determinations of whether intellectual property licenses are assumable or assignable can be made in accordance with sections 365(c) and (f). The bill does not deal with debtor licensees.
Finally, the bill does not address the rejection of executory trademark, trade name or service mark licenses by debtor-licensors. While such rejection is of concern because of the interpretation of section 365 by the Lubrizol court and others, see, e.g., In re Chipwich, Inc., 54 Bankr. Rep. 427 (Bankr. S.D.N.Y. 1985), such contracts raise issues beyond the scope of this legislation. In particular, trademark, trade name and service mark licensing relationships depend to a large extent on control of the quality of the products or services sold by the licensee. Since these matters could not be addressed without more extensive study, it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts.
IV. VOTE OF COMMITTEE
On August 10, 1988, with a quorum present, by unanimous consent, the Committee on
the Judiciary, ordered the bill, as amended, reported.
VI. SECTION-BY-SECTION ANALYSIS
Section 1(a) amends Section 101 of the Bankruptcy Code, which sets forth definitions used in the Bankruptcy Code.
A. NEW SECTION 101(52) OF TITLE 11, UNITED STATES CODE
The first new defined term is ‘intellectual property.’ The definition is a listing of types of
intellectual property. The definition sets forth in some instances both the actual type of property as to which the intellectual property proprietor obtains rights (e.g., invention, process, design, confidential research or development information, work of authorship) and the alternative legal mechanism for protecting that underlying property (e.g., trade secret, patents and copyrights). The amendment broadly defines ‘intellectual property’ to include virtually all types of such rights (other than trademarks and similar rights) whether protected by federal or State law, statutory or common law. The bill in no way defines or alters any substantive intellectual property law, it merely refers to . . . .
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Innovation Act, H.R. 3309, 113TH CONG. § 6(d) (as reported by S. Comm. on the Judiciary, Dec. 9, 2013)
SEC. 6. PROCEDURES AND PRACTICES TO IMPLEMENT RECOMMENDATIONS OF THE JUDICIAL CONFERENCE. (d) PROTECTION OF INTELLECTUAL-PROPERTY LICENSES IN BANKRUPTCY.— (1) IN GENERAL.—Section 1522 of title 11, United States Code, is amended by adding at the end the following: ‘‘(e) Section 365(n) shall apply to cases under this chapter. If the foreign representative rejects or repudiates a contract under which the debtor is a licensor of intellectual property, the licensee under such contract shall be entitled to make the election and exercise the rights de- scribed in section 365(n).’’. (2) TRADEMARKS.— (A) IN GENERAL.—Section 101(35A) of title 11, United States Code, is amended—
(i) in subparagraph (E), by striking ‘‘or’’; (ii) in subparagraph (F), by striking ‘‘title 17;’’ and inserting ‘‘title 17; or’’;
and (iii) by adding after subparagraph (F) the following new subparagraph:
‘‘(G) a trademark, service mark, or trade name, as those terms are defined in section 45 of the Act of July 5, 1946 (commonly referred to as the ‘Trademark Act of 1946’) (15 U.S.C. 1127);’’. (B) CONFORMING AMENDMENT.—Section 365(n)(2) of title 11, United States Code, is amended— (i) in subparagraph (B)— (I) by striking ‘‘royalty payments’’ and inserting ‘‘royalty or other payments’’; and (II) by striking ‘‘and’’ after the semicolon; (ii) in subparagraph (C), by striking the period at the end of clause (ii) and inserting ‘‘; and’’; and (iii) by adding at the end the following new subparagraph: ‘‘(D) in the case of a trademark, service mark, or trade name, the trustee shall not be relieved of a contractual obligation to monitor and control the quality of a licensed product or service.”. (3) EFFECTIVE DATE.—The amendments made by this subsection shall take effect on
the date of the enactment of this Act and shall apply to any case that is pending on, or for which a petition or complaint is filed on or after, such date of enactment.
FOR THE PURPOSES OF THE COMPETITION, YOU SHOULD ASSUME THAT THIS BILL HAS NOT YET BEEN ENACTED AND IS STILL AN UNENACTED BILL, REGARDLESS OF WHETHER IT HAS BECOME LAW BY THE TIME OF THE COMPETITION. THUS, THIS BILL (OR ANY SIMILAR BILL) DOES NOT DIRECTLY APPLY TO THE QUESTION UPON WHICH CERTORARI WAS GRANTED BUT MAY BE RAISED IN ARGUMENT FOR WHATEVER WEIGHT IS APPROPRIATE FOR AN UNEACTED BILL.
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