N.C.P. Marketing Group, Inc. v. BG Star Productions, Inc.
Headline: Court refuses to resolve split over whether companies in bankruptcy can keep nonassignable contracts, leaving lower courts’ tests intact and affecting firms with patent or copyright licenses.
Holding: The Court declined to review the split over whether a company reorganizing in bankruptcy may assume nonassignable contracts, leaving the lower courts’ conflict between the hypothetical and actual tests unresolved.
- Leaves lower-court split over contract assumption unresolved.
- Creates continued uncertainty for reorganizing firms with nonassignable licenses.
- Allows contract counterparties to retain leverage in some courts.
Summary
Background
A company trying to reorganize under Chapter 11 (known as a debtor-in-possession) and the other parties to its contracts disagree about whether the reorganizing company can keep and continue performing contracts that cannot be assigned to someone else. The conflict turns on Section 365 of the Bankruptcy Code and affects leases, ongoing contracts, and licenses. Some appeals courts apply a “hypothetical test” that bars assumption if the contract could not be assigned. Other courts use an “actual test” and allow assumption so long as there is no real intent to assign. The Ninth Circuit adopted the hypothetical test, and other courts vary in their approach.
Reasoning
The central question was whether the Supreme Court should take this case to resolve the split about assuming nonassignable contracts. Justice Kennedy, joined by Justice Breyer, explained that although the dispute is important for bankruptcy courts and businesses, this particular case was not a suitable vehicle for deciding the issue. The statement notes that resolving the question here might require first answering related state-law and trademark-protection issues. For those reasons, the Court declined to review the matter and left the lower-court disagreement undisturbed.
Real world impact
Because the Court denied review, the disagreement among lower courts remains. Companies that depend on patent or copyright licenses and other nonassignable contracts may still face different outcomes in different courts. The decision to deny review is not a final ruling on the legal question, so the issue could be settled later in a different case that is better suited for review.
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