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Delaware Court Considers Rejection of Executory Contracts by Debtors During Bankruptcy
If a debtor declines a contract in a bankruptcy case, the non debtor can be impacted in several ways. In 2019, the Supreme Court heard the Mission Products case, which attempted to settle a split among circuit courts regarding the impact of rejecting a contract under the Bankruptcy Code’s Section 365.
This case required the Supreme Court to determine if a non-debtor could retain a trademark license following the license’s rejection by a licensor/debtor. Despite the creation of bankruptcy laws to protect non debtors from the repercussions of rejected contracts, a majority of the Supreme Court found that the debtor’s choice to reject an executory contract during bankruptcy is similar in impact to a breach that occurs when bankruptcy is not involved. The Court further held that no act by the non debtor can rescind rights previously granted by the contract.
In the aftermath of Mission Product, the impact of the case’s ruling has been impacted by a wide range of courts. Most recently, a federal district court in Delaware in the case of Caliber North Dakota LLC v. Nine Point Energy Holdings established a clear rule involving the right of non debtors after the rejection of contracts during a bankruptcy proceeding.
The case, which concerned an oil and gas production company and its midstream service provider, bankruptcy and district courts found that the non debtor counter-parties held on to existing contractual rights after the debtor’s rejection of a contract during bankruptcy and that these rights end when they rely on future performance by the debtor. Consequently, this case, Nine Points, highlights some guidelines to the Supreme Court’s Mission Products ruling.
The Role of the Mission Products Case
The Mission Products case involved the Tempnology LLC company that manufactured athletic clothing and licensed the right to use one of the company’s trademarks and associated rights to a licensee, Mission Product Holdings Incorporated. Tempnology tried to use its Chapter 11 bankruptcy filing to decline its license and subsequently terminated Mission’s rights under the license.
A bankruptcy court held that termination of its license agreement revoked Mission Product’s ability to utilize the trademark. The Appellate Court from the Bankruptcy Division reversed this decision. The case was appealed to a higher federal court, which reinstated the bankruptcy court’s decision. The United States Supreme Court granted certiorari.
Justice Kagan wrote the majority opinion for Mission Products. She began by noting that the case was still active and not moot. Justice Kagan then addressed the meaning and repercussions of rejection under bankruptcy law and the circuit split that had arisen. Some courts found that the rejection functioned as a breach and the non-debtor party has not only a claim for damages but also maintains the rights that a non-debtor would have outside of bankruptcy. Another group of courts found that rejection represents a rescission of the agreement and leaves the non-debtor with the only remedy of filing a claim in the bankruptcy case.
The Supreme Court sided with the first group of courts. Behind the court’s ruling was the finding that debtors in bankruptcy should not be allowed to use its breached contract to deny the other party the rights it was afforded under a contract. Subsequently, the Supreme Court reversed the First Circuit’s decision and remanded the case to bankruptcy court.
The Supreme Court’s ruling in Mission Products therefore resolved the question of whether a rejection of a contract by a non debtor should be viewed as either a rescission or termination. The case, however, left open various uncertainties about bankruptcy. Disagreements about the post-rejection rights of a non debtor will likely result in higher Chapter 11 costs. Additionally, the impact of Mission Products is somewhat limited because even though a debtor’s rejection is not as powerful as some lower courts believed it to be, a debtor still has other various powerful tools that exist only in bankruptcy including automatic stays and lien avoidance.
The Potential Influence of Nine Point Energy
The Nine Point Energy case involves the Nine Point oil and gas company and its service agreement with the midstream service provider, Caliber. A contract between the two contained a “dedications” section that exclusively granted all of the company’s oil and gas leases as well as produced minerals to Caliber. Additionally, in accordance with the terms of the contract, Nine Point agreed to only provide Caliber with oil and gas.
Nine Point then filed for bankruptcy. Caliber alleged the dedication should survive the company’s rejection of the contract between the two entities. Caliber claimed that in rejecting a contract, a debtor is unable to take away contractual rights or interests in property granted to another party. Caliber also argued that similar to the Mission Products case, Caliber had been granted a right through the contract.
Nine Point responded that the dedications meant little without the existence of Nine Point’s ongoing contractual obligations and that because Nine Point was unable to be forced to perform following a rejection of the contract, dedications failed to outlast the rejection. Nine Point’s rejection of the contract. Nine Points argued that if Caliber was correct, it would prevent a debtor from receiving replacements after rejecting a contract including exclusive rights and would permit the non debtor to protect themselves from another party’s rejection by adding a section addressing exclusivity to any contract.
The bankruptcy court ruled against Caliber’s argument and noted that in Mission Products, the counter-party could rightfully continue using the trademark following rejection and that in Nine Points, Caliber had no rights to utilize the dedications excluding in the performance of contracts.
Caliber appealed to Delaware district court, which ultimately agreed with the bankruptcy court’s ruling. The District Court noted that while Mission Products suggest that rejection does not limit a non debtor’s use of contractual rights are not dependent on future performance, the ruling does not permit a non debtor to require a debtor to satisfy the terms of a contract following its rejection.
The District Court also found that Caliber lacked the right to utilize the dedications excluding in the performance of contracts which will only happen if Nine Point performs. Consequently, the contract between Caliber and Nine Point was rejected and the dedication did not survive the rejection.
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