N.C.P. Marketing Group, Inc. v. BG Star Productions, Inc.
The Supreme Court declined to hear a bankruptcy case asking whether a company reorganizing under Chapter 11 can keep using contracts, like patent or copyright licenses, that it could not legally transfer to someone else.
Justice Kennedy, joined by Justice Breyer, wrote separately to flag a real split among the lower courts on this question but explained that this particular case was a poor vehicle for resolving it, while suggesting the Court take up the issue in a future case.
How it got here: The Ninth Circuit applied the 'hypothetical test' to a bankruptcy dispute, and the losing party asked the Supreme Court to review that ruling, which the Court declined to do.
The Case in Depth
What happened
A company reorganizing under Chapter 11 of the Bankruptcy Code sought to continue using an executory contract — an ongoing agreement like a license — that it held before filing for bankruptcy. The dispute centered on whether federal bankruptcy law lets a debtor-in-possession keep such a contract when the contract could not legally be handed off to a different company, even if the debtor never intended to hand it off.
The question before the Court
When a company in bankruptcy wants to keep using a contract like a patent license, must it prove it could have legally handed that contract to someone else?
Why it matters
Businesses reorganizing in bankruptcy often depend on licenses and contracts that cannot be freely transferred, such as patent or copyright licenses. Depending on which legal test a court uses, a reorganizing company could lose the right to keep using those contracts, or the other party to the contract could get a windfall by reclaiming and reselling those rights at a higher price.
What changes now
The Supreme Court denied review, so the split among the lower courts over which legal test applies remains unresolved for now. The circuit courts will continue to apply different rules depending on where a bankruptcy case is filed. Justice Kennedy's statement signals that the Court may be willing to take up this issue again if a cleaner case, without complicating state-law or trademark questions, comes before it.
What this does not decide
This is a statement explaining why certiorari was denied, not a ruling on the merits. It does not resolve whether the "hypothetical test" or the "actual test" is the correct way to read Section 365(c)(1), and it leaves the existing circuit split fully intact.
How the Court got there
The legal reasoning, step by step
- Justice Kennedy explained that Section 365 of the Bankruptcy Code normally lets a company reorganizing in bankruptcy, called a debtor-in-possession, keep the benefits and obligations of contracts it held before filing, such as leases and licenses.
- That power is cut off, though, when the law otherwise lets the other side of the contract refuse to deal with anyone but the original debtor, unless that other party agrees to let the contract continue.
- Kennedy described a split among the circuit courts over how to read that cutoff: most courts apply a 'hypothetical test,' asking only whether the debtor could theoretically have handed the contract to a stranger, even if it never planned to.
- He noted the competing 'actual test,' used by one circuit, which instead asks whether the debtor-in-possession actually intends to hand the contract to someone else, reasoning that this better serves the purpose of helping companies reorganize.
- Kennedy concluded that resolving which test is correct matters a great deal, but this case was tangled up with separate state-law and trademark questions that would need to be answered first, making it a poor case for settling the split.