N. C. P. Marketing Group, Inc. v. BG Star Productions, Inc.

Background

A company in Chapter 11 bankruptcy sought to keep and continue performing contracts and licenses while it reorganized. The Bankruptcy Code (section 365) normally lets a debtor-in-possession assume such executory contracts, but section 365(c)(1) limits that power when another party is excused from accepting performance from anyone other than the original contracting party. The dispute centers on whether that rule bars assumption when the debtor has no actual plan to transfer the contract.

Reasoning

The main question is whether a debtor-in-possession may assume contracts that cannot be assigned to a third party. Some Courts of Appeals follow a “hypothetical test,” permitting assumption only if the contract could hypothetically be assigned. Other courts use an “actual test,” allowing assumption so long as the debtor has no intent to assign it. Justice Kennedy’s statement explains both views and highlights policy concerns: the hypothetical test can block the use of vital patent or copyright licenses and can give nondebtor parties a chance to reclaim and resell rights at higher market rates. Kennedy notes the split among lower courts and the policy tradeoffs between following the statute’s text and promoting successful reorganizations.

Real world impact

The Court denied review of the Ninth Circuit’s approach, leaving the disagreement unresolved. That means uncertainty will continue for companies trying to reorganize under Chapter 11, for parties holding intellectual property licenses, and for bankruptcy courts handling these disputes. The Justice urged that the Court consider this important question in a future, more suitable case.