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RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.)

United States Court of Appeals for the Fourth Circuit

December 4, 2003, Argued ; March 18, 2004, Decided

No. 03-1193

Opinion

 [*260]  KING, Circuit Judge:

RCI Technology Corporation appeals from an order entered in the District of Maryland affirming the bankruptcy court's ruling in favor of Sunterra Corporation. RCC Tech. Corp. v. Sunterra Corp., 287 B.R. 864 (D. Md. 2003). 1 RCI contends that the district court erred in ruling that Sunterra, as the Chapter 11 debtor in possession, was entitled to assume a nonexclusive license of copyrighted software. 2 On appeal, we are called upon to decide whether, pursuant to 11 U.S.C. § 365(c), such a debtor in possession may assume, over the licensor's [**2]  objection, a nonexclusive software license. In so deciding, we must resolve the issue of whether the disjunctive term "or," as used in the "assume or assign" language of § 365(c), should be construed in the conjunctive as "and." Because we are unable to so construe § 365(c), Sunterra was precluded from assuming the nonexclusive software license, and we reverse and remand.

At all times material to this appeal, RCI conducted business as a software development company for the resort and hospitality industry. RCI's software products were used by entities in this industry,  [**3]  such as Sunterra, for functions such as recording reservations, managing resort properties, and marketing and financing timeshares. 3 Sunterra owns or controls more than 150 subsidiaries and related entities, constituting one of the world's largest resort management businesses.

In the 1990s, Sunterra launched a program called Club Sunterra. Membership in the Club allowed timeshare owners at Sunterra resorts to trade their timeshare rights for such rights at other Sunterra resorts. Because tens of thousands of timeshare owners and units were involved in the Club, Sunterra needed to develop an integrated computer system to assist its management of the Club. For this purpose, Sunterra decided to acquire RCI's Premier Software [**4]  4 and modify it into a unique computer program, the SWORD System.

In 1997, RCI and Sunterra entered into a software license agreement (the "Agreement"), pursuant to which RCI granted Sunterra a nonexclusive license to use Premier Software (the "Software"). Under the Agreement, effective December 31, 1997, RCI was required to provide Sunterra a "non-exclusive, worldwide, perpetual, irrevocable, royalty-free license to …use, copy, modify, and distribute" the Software (the "License"). Agreement § 3.1. Sunterra  [*261]  paid RCI $ 3.5 million for the License. Because the Software, as marketed, did not meet Sunterra's requirements, the Agreement authorized Sunterra to utilize the Software to develop its own software system. Under the Agreement, Sunterra owned any enhancements it made to the Software (the "Sunterra Enhancements"). Id. §§ 2.15, 3.6.3. Sunterra, in turn, granted RCI [**5]  a license to use the Sunterra Enhancements. Id. § 3.2.2. Sunterra thereafter invested approximately $ 38 million in developing the SWORD System.

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361 F.3d 257 *; 2004 U.S. App. LEXIS 5131 **; Bankr. L. Rep. (CCH) P80,068; 51 Collier Bankr. Cas. 2d (MB) 1276; 42 Bankr. Ct. Dec. 222

In re: SUNTERRA CORPORATION, Debtor. RCI TECHNOLOGY CORPORATION, formerly known as Resort Computer Corporation, Plaintiff- Appellant, v. SUNTERRA CORPORATION, Defendant-Appellee.

Prior History:  [**1]  Appeal from the United States District Court for the District of Maryland, at Baltimore. (CA-02-2539). J. Frederick Motz, District Judge.

RCC Tech. Corp. v. Sunterra Corp., 287 B.R. 864, 2003 U.S. Dist. LEXIS 1055 (D. Md., 2003)

Disposition: Reversed and remanded.

CORE TERMS

debtor in possession, literal, assign, executory contract, absurd, License, provisions, Software, plain meaning, applicable law, district court, nondebtor, contends, consented, executory, bankruptcy court, Plain Meaning Rule, rights, disjunctive, legislative history, prohibits, plain language, excuses, successor in interest, general bankruptcy, literal reading, circumstances, inoperative, superfluous, implicates

Bankruptcy Law, Administrative Powers, Executory Contracts & Unexpired Leases, Unassumable Contracts, General Overview, Judicial Review, Standards of Review, De Novo Standard of Review, Civil Procedure, Appeals, De Novo Review, Procedural Matters, Business & Corporate Compliance, Contracts Law, Types of Contracts, Executory Contracts, Breach, Material Breach, Contracts Law, Defenses, Ambiguities & Mistakes, Governments, Legislation, Interpretation, Assignments, Assignments, Assignment of Obligations, Consent Requirements, Standards of Performance, Creditors & Debtors