11 U.S.C. § - U.S. Code - Unannotated Title Bankruptcy § Executory contracts and unexpired leases. Specifically, §(i) of the Bankruptcy Code—the statute at issue in Nickels—provides in relevant part that if the debtor rejects the contract of sale for real property while the nondebtor purchaser is in possession, the nondebtor purchaser may treat the contract as terminated or remain in possession of the real property. 3 If the. Bankruptcy Code Section (n) Protects Licensees Right to Continued Use of Intellectual Property. Find out more about this topic, read articles and blogs or research legal issues, cases, and codes on karacto.xyz
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It seems reasonably clear what Countryman was up to. He wanted to distinguish "executory contract" on one side from "security interest" on the other. The buyer takes possession, but then files bankruptcy without paying. What are the rights of the parties? If the deal is a security agreement, the rights are tolerably clear. If six percent is the "right" rate, then the court can impose the plan on the secured creditor. However, the court can't do anything of the sort if the deal is an executory contract, even though the economics may be the same.
If the deal is an executory contract, the rights are equally clear and dramatically different. The DIP may assume or reject. But assume means "assume in tote"—assume the contract with all its attendant obligations, and no nonsense about scaling down or rewriting. Or he must "reject in tote," which means he must give back the property for any shortfall there remains an unsecured claim.
Which should the DIP do? The answer to that question ought to depend on the value of the deal. If the contract is burdensome to the estate, he ought to reject Countryman taught us to think of it as an analog to abandoning worthless property. If it is a benefit to the estate, he ought to assume or even as we shall see below assign it to a third party. The DIP has to act within the realm of "business judgment" in deciding whether to assume or reject, but the courts aren't eager to second-guess him.
Even within "business judgment," though, the DIP cannot assume on a whim. He must "cure and assure. How soon must the DIP decide whether to assume or reject? The practical effect of this rule is to put the ball in the non-debtor's court. If he is tired of waiting for a decision, it is he who must ask the court to make a determination—and the court may choose not to make a determination if it thinks the issue is best left to the plan.
It is one thing to assume the executory contract, but quite another to assign it to a third party. Remarkably, the Code provides both. To assign, the DIP must first assume recall "cure and assure". Then he must provide "adequate assurance of future performance by the assignee. Not every contract is eligible for assumption and assignment. If Metallica were to go into bankruptcy, you wouldn't want Ozzfest to have to accept a performance from Barbra Streisand.
The Code seems also to say that if the contract cannot be assigned, it cannot be assumed. In chapter 7, perhaps this makes sense: you wouldn't want the trustee striding onstage. But suppose Metallica files for relief under chapter 11 and remains as DIP.
You might not think that the Code should prohibit its assumption of its own deal, but it may: In an important case, the Code used just such reasoning to prevent the assumption of an intellectual property agreement. In re Catapult Entertainment, F. One notable fact of executory contract law is that courts seem to assume that if something is an executory contract when the debtor is the transferee, then it must be also when the debtor is the transferor.
It isn't obvious that this must be so. But in a much-noticed case, the Fourth Circuit held that a technology licensing agreement was an executory contract when the debtor was the licensor. Lubrizol Enterprises Inc. Richmond Metal Finishers Inc. The decision touched off a rumpus in the Intellectual Property IP bar. The trustee will then be obligated to deliver title to [the nondebtor lessee]. However, if it is determined that [the nondebtor lessee] did not properly exercise the option or, by his prior acts, breached the lease and thereby terminated the option, then he must surrender the property to the Debtor A sale agreement for the pier was drafted, but it was never executed by Nickels, and Nickels "maintained that it never agreed to sell the pier to Wild Waves.
Wild Waves never furnished any payment called for by the agreement for sale, and Nickels never delivered the deed. In , Nickels commenced an action in New Jersey state court, wherein Wild Waves filed a counterclaim seeking a determination that an oral agreement to purchase the pier was entered into between itself and Nickels. Although Nickels' bankruptcy case was commenced while the state court action was pending, Wild Waves obtained relief from the automatic stay so that the state court action could continue.
The state court judge ultimately found that an oral agreement to sell the pier existed between Nickels and Wild Waves. He further found that the "'lease and sale were two aspects of a thoroughly integrated agreement. After the state court rendered its decision, Nickels sought to proceed on its previously filed motion to reject the lease which was treated as a motion to reject the written lease and the oral contract of sale. The district court found that the bankruptcy court's treatment of the lease and oral contract as one seamless agreement was in error; instead, it found that the lease and oral contract were "independent components of the parties' integrated agreement as to the disposition of the pier.
The district court also found significant that the oral agreement was not contingent on compliance with the terms of the lease.
Here, however, the only contingency for the sale is the receipt of the mortgage loan commitment. The Summit Land court stated:. It is possible to deduce the type of "possession" which Congress sought to protect from the statutory scheme and this legislative history. Allowing the purchaser to remain in possession and to receive title suggests a concern for buyers whose connection with the land is more permanent than ephemeral, more continuous than intermittent, more exclusive than shared, and more personal than delegable.
The Commission's emphasis on dislocation, for example, is meaningless in the event a contract is transferred to another. Indeed, the distinction between "purchaser in possession" and "party not in possession" may reflect congressional awareness that buyers under land sale contracts often assign their interest to third parties. Allowing the purchaser to retain the investment value of the land also has significance. In Nickels , Wild Waves' connection to the pier seemed to be more permanent, continuous and exclusive than Nickels' connection to it.
Apparently, the district court thought differently. However, the district court in Nickels acknowledged that the application of this statute is not limited to those types of contracts. Viewing the lease and the oral contract for sale as separate aspects of the agreement, it is clear that Wild Waves is in possession of the leased premises under the lease and not the oral contract for sale.
Section i is thus inapplicable because there is no contract for sale "under which [Wild Waves] is in possession" of any part of the pier. Accordingly, the district court reversed the decision of the bankruptcy court and remanded the matter for further proceedings.