Page 12 - US Bankruptcy Code Overview

Assignment
- Anti-Assignment Clauses: Contractual prohibitions on assignment are generally not enforceable. 11 U.S.C. § 365(f)(1).
- However, a contract cannot be assumed and assigned without permission of the other contracting party if applicable non-bankruptcy law would excuse the non-debtor counterparty from accepting performance from or rendering performance to an entity other than the debtor. 11 U.S.C. § 365(c).
To assign a contract, a debtor must:
1. assume the contract (and satisfy the requirements of assumption, including curing any monetary defaults); and
2. even if the contract is not in default, provide adequate assurance of future performance under the contract by the assignee (i.e., that the assignee is as able to perform under the contract as the debtor was when the contract was originally signed). 11 U.S.C. § 365(f).
Rejection
- If the debtor chooses to reject a contract, the rejection is treated as a breach of the contract immediately preceding the bankruptcy filing – not a termination of the contract. 11 U.S.C. § 365(g).
- The non-debtor counterparty can then assert any damages resulting from the breach as a pre-petition claim. However, post-petition payment obligations are afforded administrative priority.
• Duty to mitigate, generally
> SPECIAL TREATMENT OF IP CONTRACTS
If the debtor is the licensor of intellectual property and decides to reject the contract, a licensee may:
- elect to treat the license as terminated upon licensor’s rejection, OR
- retain its rights under the license for duration of the license (including any extensions), including a right to enforce any exclusivity provisions.
11 U.S.C. § 365(n).
If the licensee elects to retain its rights:
- Licensee is not entitled to specific or future performance from licensor (e.g., licensor does not have to do updates to intellectual property). Szombathy v. Controlled Shredders Inc., 1997 WL 189314 (N.D. Ill. 1997) .
- Licensee must make royalty payments.
- Licensee is deemed to waive any set off and any administrative claim arising from performance of the license.
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