An en banc panel of the U.S. Court of Appeals for the Eighth Circuit reversed an earlier ruling of the same court finding that a trademark license agreement that was entered into as part of an asset purchase agreement was not executory because both parties to the agreement had substantially performed their obligations thereunder; therefore, the agreement could not be rejected under § 365(a) of the Bankruptcy Code.  Lewis Bros. Bakeries, Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), Case No. 11-1850 (8th Cir., June 6, 2014) (Colloton, J.) (Bye, J., concurring-in-part and dissenting-in-part).

Background

In 1996, the Justice Department challenged Interstate Bakeries Corporation’s (Interstate Bakeries) acquisition of the Continental Baking Company under antitrust laws, which resulted in a judgment requiring Interstate Bakeries to divest at least one of its brands in four different geographic territories.  Accordingly, Interstate Brands Corporation (IBC), a subsidiary of Interstate Bakeries, and Lewis Brothers Bakeries (LBB) entered into an asset purchase agreement and a license agreement selling two of Interstate Bakeries’ bread operations and assets, including an exclusive trademark license for 13 different trademarks.

In 2004, Interstate Bakeries and several subsidiaries, including IBC, filed bankruptcy petitions under Chapter 11 and the license agreement with LBB was identified as an executory contract that Interstate Bakeries intended to assume as part of its plan of reorganization.  In 2008, LBB filed a complaint seeking a declaratory judgment that the license agreement was not an executory contract under 11 U.S.C. § 365 and therefore not subject to assumption or rejection by the debtor.  The bankruptcy court reviewed only the license agreement and found that both IBC and LBB had “material, outstanding obligations” and thus held that the license agreement was executory.  LBB appealed and the district court affirmed the bankruptcy court.  LBB then appealed to the 8th Circuit, where a divided panel affirmed the district court.

LBB filed a petition for rehearing en banc, and the full court received amici curiae from the Department of Justice and the Federal Trade Commission arguing that treating the license agreement as an executory contract and allowing Interstate Bakeries to reject the license agreement in bankruptcy would harm the purpose of the original antitrust decree.  LBB’s petition was granted.

The 8th Circuit En Banc

To determine whether the license agreement is executory, the court explained that it must first identify what constitutes the agreement at issue and then establish whether the “agreement” as it is defined is an executory contract under the bankruptcy code.  On the first question, the court disagreed with the lower courts which reviewed only the license agreement as a standalone document.  Instead, the court held that, under the applicable Illinois state law, the appropriate analysis should consider both the license agreement and the asset purchase agreement to be an integrated agreement between the parties.  The court stated that absent evidence showing a contrary intention of the parties, “where two or more instruments are executed by the same contracting parties in the course of the same transaction, the instruments will be considered together.”

Once the court determined that the asset purchase agreement and the license agreement should be considered together as one contract, it turned to the question of whether the integrated agreement was an executory contract, namely, a “contract under which the obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.”  The court then found that the essence of the integrated agreement was the sale of IBC’s two bread operations and not merely the licensing of IBC’s trademarks.  Therefore, in that context, the court concluded that the agreement at issue was not executory because IBC substantially performed its obligations under the asset purchase agreement and the license agreement and that the failure to perform any remaining obligations would not be a material breach.  Citing analogous facts in the U.S. Court of Appeals for the Third Circuit’s decision in In re Exide, the court found that the parties’ remaining obligations under the agreement did not “outweigh the substantial performance rendered and benefits received…” and held that the contract was not executory and reversed and remanded.

Dissent

Judge Bye, joined by Judges Smith and Kelly, filed a dissent arguing that both parties had ongoing, material obligations under the license agreement (even when considered as part of an integrated agreement), and specifically cited LBB’s obligation to maintain quality control of trademarked goods and IBC’s obligation to refrain from use of the trademarks in the territory.