Broad reading of executory contract when licence obligations are unfulfilled

In Lewis Bros Bakeries Inc v Interstate Brands Corp (Case No 11-1850, August 30, 2012), a case originating out of bankruptcy court, the US Court of Appeals for the Eighth Circuit has affirmed the bankruptcy court’s finding that a perpetual, royalty-free, assignable, transferable, exclusive licence granted as part of the sale of the business operations, assets and intellectual property associated with two bread baking brands was an executory contract. 

In 1996 Interstate Brands Corp sold its Butternut Bread baking business operations and assets in the Chicago area and its Sunbeam Bread baking business operations and assets in the Central Illinois territory to Lewis Brothers Bakeries. The parties entered into a licence agreement, granting Lewis Brothers a perpetual, royalty-free, assignable, transferable, exclusive licence to the brands and trademarks in certain parts of Illinois.

In 2004 Interstate Brands filed for bankruptcy protection and later asserted that the licence that was included with the sale of the two baking businesses was an executory contract because there were performance obligations on both sides which, if not performed, would excuse performance by the other side. Interstate Brands also asserted that it would have the power to maintain or reject the deal in bankruptcy court. Lewis Brothers had previously agreed that it would be a material breach if it failed to maintain the character and quality of the goods sold under the trademarks in the licence agreement and Interstate Brands had the standard obligations of notice, forbearance of licensing, and defence of the marks. 

Lewis Brothers filed an adversary proceeding within the bankruptcy case for a declaratory judgment that the licence agreement was not an executory contract. The bankruptcy court disagreed, holding that Lewis Brothers maintained obligations to, among other things, defend the trademarks and control the quality of the goods under the license agreement. The district court affirmed the bankruptcy court’s decision.

The Eighth Circuit affirmed, holding that the licence agreement was an executory contract because the parties maintained at least one remaining material obligation. The court followed Countryman for analysing executory contracts - that is, the court analysed whether obligations remained on both sides so underperformed that the failure of either party to complete performance of those obligations would constitute a material breach excusing the performance of the other.

The Eighth Circuit found that the obligations remaining on a licence agreement entered into as part of the sale of a business was an executory contract. The court distinguished precedent from the US Court of Appeals for the Third Circuit, Exide Technologies, on the grounds that Lewis Brothers, the non-debtor, maintained the obligation of the non-debtor to observe quality standards.

Ulrika E Mattsson, McDermott Will & Emery LLP, Chicago