The Eighth Circuit recently issued an opinion in the Interstate Bakeries Corporation bankruptcy case reversing its previous holding that a perpetual royalty-free trademark license constituted an executory contract that could be assumed or rejected in bankruptcy.The Eighth Circuit, in a rehearing en banc on its earlier decision in Interstate III2, determined that the contract at issue should be considered part of an integrated agreement with another contemporaneously executed deal. When the Eighth Circuit expanded the parameters of the contract being considered, it determined that certain unperformed obligations by the bankrupt were not material and the contract was not executory.3

Case Background

In 1995, Interstate Bakeries, Inc. (“Interstate”) announced an acquisition of the Continental Banking Company; however, the United States Department of Justice asserted that the proposed acquisition violated antitrust laws.In January 1996, the United States District Court for the Northern District of Illinois entered a final judgment that required Interstate to divest at least one of its brands in four geographic territories and grant one or more parties a perpetual, royalty-free, assignable, exclusive license to use the brand in the relevant territory.

On December 27, 1996, Interstate Brands Corporation(“IBC”), the Chicago Baking Co. (“CBC”) and Lewis Brothers Bakeries, Inc. (“LBB”) entered into an asset purchase agreement (the “APA”) and a License Agreement whereby LBB and CBC paid IBC $20 million,plus the assumption of certain liabilities, for IBC’s Butternut Bread business operations in the Chicago market and the Sunbeam Bread business operations and assets in the Central Illinois market. Pursuant to the APA and the License Agreement, IBC granted LBB and CBC a “perpetual, royalty-free, assignable, transferable, exclusive license” (the “License”) to use the Butternut trademark, and other IBC trademarks, in the Chicago market.

On September 22, 2004, Interstate and eight related subsidiaries and affiliates, including IBC, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the Western District of Missouri.

Interstate did not originally disclose the License as an executory contract in its Bankruptcy Schedules and Statement of Financial Affairs. The first time Interstate disclosed the License was in a November 21, 2008, filing of an amended exhibit to its proposed Plan of Reorganization (the “Plan”); the filing identified the License as an executory contract that Interstate intended to assume in connection with its Plan. In response, on December 1, 2008, LBB and CBC filed an adversary proceeding against Interstate, seeking a declaratory judgment that the License was not an executory contract that could be assumed or rejected under 11 U.S.C. § 365.

On December 4, 2008, Interstate filed a motion to reject the License, and on January 8, 2009, Interstate filed an Answer and Counterclaim to LBB and CBC’s complaint, which reiterated Interstate’s intent to reject the License. Both Interstate and LBB/CBC filed motions for summary judgment in the adversary proceeding; shortly after each side had responded to the other’s motion for summary judgment, Interstate filed a notice to withdraw its motion to reject the License and its Counterclaim seeking rejection.

The Bankruptcy Court’s Decision

The issue before the bankruptcy court was whether the License Agreement was an executory contract pursuant to 11 U.S.C. § 365.The bankruptcy court focused the majority of its analysis on the “seminal” case of In re Exide Technologies, Inc., 340 B.R. 222 (Bankr. D. Del. 2006), appeal denied, judgment aff’d Enersys Delaware, Inc. v. Exide Technologies, Inc. 2008 WL 522516, Case No. 02-11125 (D. Del. Feb 27, 2008) (Exide II).Relying on Exide II9, the bankruptcy court held that IBC and LBB both had material, outstanding obligations under the License Agreement and consequently, these obligations caused the License Agreement to be executory and subject to assumption or rejection under 11 U.S.C. § 365. In re Interstate Bakeries Corp., 2010 WL 2332142 at *7 (Bankr. W.D. Mo. June 4, 2010) (Interstate I).

The District Court Affirms

LBB and CBC appealed the bankruptcy court’s decision to the United States District Court for the Western District of Missouri. See In re Interstate Bakeries Corp., 447 B.R. 879, 886 (W.D. Mo. 2011) (Interstate II). The district court concluded that it did not need to engage in the same materiality analysis of the unperformed obligations that the Exide court undertook because the explicit language of the License acknowledged that that character and quality of the trademark was material and LBB/CBC’s obligations in this regard remained ongoing. Based on LBB/CBC’s unperformed material obligations, the district court affirmed the bankruptcy court.

A Three-Judge Panel of the Eighth Circuit Affirms

After the district court’s ruling, LBB and CBC appealed to the United States Court of Appeals for the Eighth Circuit.10 A divided panel of the Eighth Circuit affirmed the ruling of the district court, holding that LBB and CBC had unperformed material obligations under the License Agreement and that IBC had its own unperformed material obligations, including: notice and forbearance related to the trademarks, as well as maintaining and defending the trademarks and other infringement-related obligations. In re Interstate Bakeries Corp., 690 F.3d 1069, 1075. Finding that both sides to the License Agreement had at least one unperformed material obligation, the Eighth Circuit affirmed the district court’s holding that the License Agreement was an executory contract. Id. LBB filed a petition for a rehearing en banc, which was granted.11

The Eighth Circuit Reverses in Rehearing En Banc

The Eighth Circuit was requested to rehear the appeal en banc.12 After deciding that the issue of whether the License Agreement was an executory contract was not moot,13 the Eighth Circuit revisited what was the proper agreement at issue for the executory contract analysis and concluded that it was not solely the License Agreement, but the License Agreement and the APA. In re Interstate Bakeries Corp., 2014 WL 2535294 at *4. Under Illinois law, whether the APA and the License Agreement should be considered separate agreements or a single agreement depends on the intention of the parties as evidenced by the terms of the agreement. Id. at *5. Noting, among other factors, that the APA and the License Agreement were entered into contemporaneously, that the APA lists the License as an asset sold pursuant to the APA, that the APA directs the parties to enter into the License Agreement, and that both the APA and the License Agreement define the “Entire Agreement” to include both documents, the Eighth Circuit determined the issue before it was whether the integrated agreement — the APA and the License Agreement — was an executory contract. Id.

After determining that the License Agreement and the APA should be examined as a single agreement, the Eighth Circuit analyzed the unperformed obligations of IBC and LBB through the lens of the doctrines of substantial performance and material breach14 to determine whether the License Agreement and the APA were an executory contract under Professor Countryman’s standard.15 Id. at *6 The Eighth Circuit concluded, relying on the Third Circuit’s holding in Exide III, that the contract was not executory because IBC had substantially performed its obligations under the APA and that IBC’s remaining obligations under the License were relatively minor.16 Id. at *7

Conclusion

Since the Eighth Circuit reached opposite conclusions on the same set of facts (indeed, in the same case) as to whether certain unperformed obligations under the contract — whether limited to the License Agreement or expanded to include the APA and the License Agreement — demonstrates that a court can easily reach different conclusions as to whether that agreement is an executory or nonexecutory contract. Consequently, parties to a contract with a bankrupt entity, where any unperformed obligations on both sides of the agreement remain, should be prepared that different courts and in fact, sometimes the same court, may reach divergent conclusions about whether a contract is executory based on the scope of the entire agreement and the unperformed obligations.