December 28, 2006
What happens to the ignored license agreement?
A new, and interesting, decision from the U.S. Bankruptcy Court for the District of Idaho deals with a fairly common, although little litigated scenario - how does a chapter 11 reorganization plan affect a license agreement that debtors and creditors ignore during the case?
The reason I state this is a common state of affairs is simple. In most chapter 11 cases, the debtor is a party to a large number of licensing agreements - of all different kinds - that never get listed in the bankruptcy schedules or receive specific treatment in the reorganization plan. Generally, the agreements are not key agreements and, post-confirmation, life simply goes on as before.
In In re JZ, LLC, 2006 WL 3782988 (Bankr. D. Idaho), life did not, simply, go on. The debtor, which filed its chapter 11 petition in 2001, confirmed a plan in 2004. Prior to its filing, it was a party to a license agreement with Diamond Z Trailer, Inc. (exactly what kind of license agreement, the decision does not say). After plan confirmation, the debtor sued Diamond Z, claiming Diamond Z was in breach of the agreement. Diamond Z raised two defenses. First, that the debtor had failed to schedule the contract as an asset of the estate and, thus, the contract remained property of the bankruptcy estate. Second, that the contract was no longer in effect because it was not assumed in the bankruptcy case.
The Court followed the Hernandez decision (In re Hernandez II, 287 B.R. 795 (Bankr. D. Ariz. 2002) on the "ride-through" issue. The Court held that an executory contract that is not treated in the plan, or assumed or rejected, simply "rides through" the bankruptcy case unaffected. The Court also held that the debtor's failure to schedule the contract did not affect this result.
As for the argument that the contract and cause of action were not property of the reorganized debtor because they were not disclosed, the court held that the non-disclosure did not, in these circumstances, prevent the contract rights from revesting in the reorganized debtor pursuant to the plan. The Court also held that the claim for breach of the contract accrued post-petition, and thus did not have to be scheduled in order to vest in the reorganized debtor upon plan confirmation. ¶ 5:08 PM
The reason I state this is a common state of affairs is simple. In most chapter 11 cases, the debtor is a party to a large number of licensing agreements - of all different kinds - that never get listed in the bankruptcy schedules or receive specific treatment in the reorganization plan. Generally, the agreements are not key agreements and, post-confirmation, life simply goes on as before.
In In re JZ, LLC, 2006 WL 3782988 (Bankr. D. Idaho), life did not, simply, go on. The debtor, which filed its chapter 11 petition in 2001, confirmed a plan in 2004. Prior to its filing, it was a party to a license agreement with Diamond Z Trailer, Inc. (exactly what kind of license agreement, the decision does not say). After plan confirmation, the debtor sued Diamond Z, claiming Diamond Z was in breach of the agreement. Diamond Z raised two defenses. First, that the debtor had failed to schedule the contract as an asset of the estate and, thus, the contract remained property of the bankruptcy estate. Second, that the contract was no longer in effect because it was not assumed in the bankruptcy case.
The Court followed the Hernandez decision (In re Hernandez II, 287 B.R. 795 (Bankr. D. Ariz. 2002) on the "ride-through" issue. The Court held that an executory contract that is not treated in the plan, or assumed or rejected, simply "rides through" the bankruptcy case unaffected. The Court also held that the debtor's failure to schedule the contract did not affect this result.
As for the argument that the contract and cause of action were not property of the reorganized debtor because they were not disclosed, the court held that the non-disclosure did not, in these circumstances, prevent the contract rights from revesting in the reorganized debtor pursuant to the plan. The Court also held that the claim for breach of the contract accrued post-petition, and thus did not have to be scheduled in order to vest in the reorganized debtor upon plan confirmation. ¶ 5:08 PM
