Institut Pasteur v. Cambridge Biotech Corp. - 104 F.3d 489 (1st Cir. 1997)

Rule:

11 U.S.C.S. §§ 365(c) and (e) contemplate a case-by-case inquiry into whether the nondebtor party actually was being forced to accept performance under its executory contract from someone other than the debtor party with whom it originally contracted. Where the particular transaction envisions that the debtor-in-possession would assume and continue to perform under an executory contract, the bankruptcy court cannot simply presume as a matter of law that the debtor-in-possession is a legal entity materially distinct from the prepetition debtor with whom the nondebtor party contracted. Rather, sensitive to the rights of the nondebtor party, the bankruptcy court must focus on the performance actually to be rendered by the debtor-in-possession with a view to ensuring that the nondebtor party will receive the full benefit of its bargain.

Facts:

Debtor Cambridge Biotech Corporation manufactured and sold retroviral diagnostic tests for detecting the human immunodeficiency virus associated with AIDS. Prior to filing bankruptcy, debtor and appellant Institut Pasteur and Pasteur Sanofi Diagnostics had entered into mutual cross-license agreements whereby each acquired a nonexclusive perpetual license to use some of the technology patented or licensed by the other. Debtor filed a Chapter 11 bankruptcy proceeding and thereafter continued to do business. Its reorganization plan, inter alia, proposed the sale of its stock to a subsidiary of bioMerieux Vitek, Inc. ("bioMerieux"), a major competitor of appellant Pasteur. The bankruptcy court affirmed debtor's plan, holding that the proposed sale of CBC stock to bioMerieux did not constitute a de facto "assignment" of the cross-licenses to bioMerieux, but merely an assumption of the cross-licenses by the reorganized debtor under new ownership, and that Bankruptcy Code § 365(c) enabled CBC to assume the cross-licenses as debtor-in-possession because the prepetition licensing relationship between Pasteur and CBC was neither "unique" nor "something in the category of a personal services contract." Unsuccessful in their intermediate appeal of the bankruptcy court's confirmation of debtor's reorganization plan, appellants again appealed the bankruptcy court order, contending that the CBC Plan would effect a de facto assignment of its two cross-licenses to bioMerieux, contrary to Bankruptcy Code § 365(c)(1).

Issue:

Should the court confirm the debtor’s Chapter 11 plan, notwithstanding appellant’s contention that the same would effect a de facto assignment of its cross-licenses to a third party?

Answer:

Yes.

Conclusion:

On appeal, the court affirmed the district court's order confirming the Chapter 11 plan. The court noted that subsections 365© and (e) contemplated a case-by-case inquiry into whether the nondebtor party (viz., Pasteur) actually was being forced to accept performance under its executory contract from someone other than the debtor party with whom it originally contracted. Where the particular transaction envisioned that the debtor-in-possession would assume and continue to perform under an executory contract, the bankruptcy court cannot simply presume as a matter of law that the debtor-in-possession was a legal entity materially distinct from the prepetition debtor with whom the nondebtor party (viz., Pasteur) contracted. Rather, sensitive to the rights of the nondebtor party (viz., Pasteur)," the bankruptcy court must focus on the performance actually to be rendered by the debtor-in-possession with a view to ensuring that the nondebtor party (viz., Pasteur) will receive the full benefit of its bargain. In the case at bar, the court found that the ultimate findings of fact and conclusions of law made by the bankruptcy court did not constitute error as appellant had failed to make the requisite individualized showing that it would be deprived of the full benefit of its bargain with debtor if the plan was confirmed.