Bankruptcy

Basic principles of bankruptcy

• Automatic Stay 11 U.S.C. 362
  • See United States v. Inslaw, Inc., 932 F.2d 1467 (D.C. Cir. 1991) (claimed violation of license agreement not a violation of automatic stay)
  • See Computer Communciations, Inc. v. Codex Corp., 824 F.2d 725 (9th Cir. 1987) (termination of contract by creditor prohibited by 11 U.S.C. 365(e))
• Chapter 11 v. Chapter 7
• Secured vs. Unsecured claims
• "Perfected Security Interests"
• "Executory Contracts"

Issues from the Licensee's Perspective

Enforceability of Licenses in Bankruptcy

Basic issue - Executory Contracts (example: Lubrizol v. Richmond, 756 F.2d 1043 (4th Cir. 1985), cert. denied, 475 U.S. 1057 (1985))

Section 365(n)

• excludes trademarks
• excludes materials in development
• can accommodate certain "related" agreements such as an escrow
  • See Example Software Escrow Term.
• Problems with 365(n) and breach by licensor - In Re Prize Frize Inc., 27 U.S.P.Q.2d 1780 (9th Cir. 1994)

Example Escrow Clauses:

• Pro Supplier Escrow Clause
• Pro Customer Escrow Clause

Issues from the Licensor's Perspective

Transfer of Rights in Bankruptcy

Assumption requires cure of default; if default cannot be cured, may not be assumed:

• In re Claremont Acquisition Corporation, Inc., 113 F.3d 1029 (9th Cir. 1997) (incurable breach)
  • Note: from a recent case: "Congress legislatively overruled Claremont Acquisition in enacting the current version of the section: Section 365(b)(1)(A) now requires all monetary defaults to be cured prior to assumption of an executory contract, but excepts incurable nonmonetary defaults, such as breach of a continuous operation clause in a real property lease"
  • See also Cal Worthington and His Dog Spot
• See also In re Pioneer Ford Sales, Inc., 729 F.2d 27 (1st Cir. 1984) (assignment subject to "reasonable consent" rejected reasonably)

• Is assumption by the bankruptcy estate permitted? (interpretation of 11 U.S.C. 365(c))
  • Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir. 1977) (Everex rule of non-assignability rejected) ("actual test" -- "no assignment" clause not a problem to retain rights when no assigment contemplated) (1st cir)
  • Perlman v. Catapult Entertainment, Inc., 165 F.3d 747 (9th Cir. 1999) ("hypothetical test" -- "no assignment" clause prevents retaining rights even when no assigment contemplated) (9th, 3rd, 4th)

Security Interests in IP

Basic issue: where to file, with UCC-1 or with PTO or copyright office?

1. Copyright
   1. In re Peregrine Entertainment, 116 B.R. 194 (C.D. Cal. 1990)
   2. Includes accounts receivable - In re Avalon Software, Inc., 209 B.R. 517 (Bankr. D. Ariz 1997)
   3. But see In re World Auxiliary Power, 303 F.3d 1120 (9th Cir. 2002)
2. Trademark
   1. In re 199Z, Inc., 137 B.R. 778 (C.D. Ca. 1992)
3. Patent
   1. In re Cybernetic Services, Inc., 252 F.3d 1039 (9th Cir. 2001)