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Sunbeam Prods. v. Chi. Am. Mfg., LLC - 686 F.3d 372, 2012 U.S. App. LEXIS 13883, 103 U.S.P.Q.2D (BNA) 1421, 67 Collier Bankr. Cas. 2d (MB) 1808, Bankr. L. Rep. (CCH) P82,303, 56 Bankr. Ct. Dec. 189, 2012 WL 2687939

Rule:

What 11 U.S.C.S. § 365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party's rights remain in place. After rejecting a contract, a debtor is not subject to an order of specific performance. The debtor's unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as a pre-petition obligation, which may be written down in common with other debts of the same class. But nothing about this process implies that any rights of the other contracting party have been vaporized.

Facts:

A trustee for debtor trademark licensor sold the debtor's business to a buyer and rejected a seasonal license with defendant licensee under 11 U.S.C.S. § 365(a). Plaintiff buyer sued the licensee for continuing to make and sell debtor-branded goods. The U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, allowed the licensee to continue to make and sell the goods for the season. The buyer appealed. The bankruptcy judge thought § 365(n) and 11 U.S.C.S. § 101(35A) left open the question whether rejection of an intellectual-property license ended the licensee's right to use trademarks, and allowed the licensee, which invested substantial resources in making debtor-branded goods, to continue using the marks on equitable grounds. But a court could not override the Bankruptcy Code by declaring enforcement would be inequitable..

Issue:

Does the rejection of an intellectual-property license end the licensee's right to use trademarks, thus allowing the licensee, which invested substantial resources in making debtor-branded goods, to continue using the marks on equitable grounds?

Answer:

No

Conclusion:

The Bankruptcy Court's judgment was affirmed, but on other grounds. But a court could not override the Bankruptcy Code by declaring enforcement would be inequitable.What § 365(g) did by classifying rejection as breach was establish that in bankruptcy, as outside, the other party's rights remained in place. After rejecting a contract, a debtor was not subject to an order of specific performance. Rejection under § 365(a) was not the functional equivalent of a rescission, rendering void the contract and requiring that the parties be put back in the positions they occupied before the contract was formed. It merely freed the estate from the obligation to perform and had absolutely no effect upon the contract's continued existence. Because the trustee's rejection of the license with the licensee did not abrogate the licensee's contractual rights, the adversary proceeding properly ended with a judgment in the licensee's favor.

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