Recently, the Dutch Supreme Court rendered a judgment in which it has given a detailed explanation of the effects of bankruptcy proceedings on a contract or other legal relationship. The case in question involved a dispute between a bankruptcy trustee and a bank as to whether the bank could file its post-bankruptcy legal costs as a claim in the bankruptcy proceedings. The Supreme Court took the opportunity to elaborate on earlier case law and provide clarification regarding claims arising out of continuing performance contracts – such as licence contracts – and claims for damages.
This judgment is noteworthy in that the Supreme Court has deviated from its usual policy of limiting itself to the specific matter at hand. Instead it has also addressed, at a more general level, the effects of a bankruptcy on certain types of contracts and legal relationships. Consequently, the judgment can serve as a practical guide for assessing the effects of bankruptcy proceedings in a variety of scenarios.
Discussion and case law
The question of how to deal with claims that arise after the opening of bankruptcy proceedings, but that result from a contract or other legal relationship entered into prior to the bankruptcy, has been the subject of legal debate for a long time. The issue is whether such claims can be filed in the bankruptcy proceedings. In this regard, two principles of Dutch bankruptcy law collide: (i) the principle that bankruptcy proceedings generally do not affect contracts in force at the time of the opening of the bankruptcy (although in most cases the bankruptcy trustee cannot be forced to perform the debtor's contractual obligations) and (ii) the principle that the bankruptcy "freezes" the legal position of all the parties involved (the fixation principle).
In earlier judgments (in the Nebula and the Berzona cases), the Supreme Court made a distinction between "passive" defaults and "active" defaults by a bankruptcy trustee under existing contracts. A failure by the trustee with respect to an obligation to "perform" (such as an obligation to make a payment, grant a right or surrender an asset) constitutes a "passive" default, while a failure with respect to an obligation to "permit" or to "tolerate" (e.g. where a tenant has the right to quiet enjoyment of the property or a licensee has the right to use certain IP rights) constitutes an "active" default, because such a default involves a positive act by the trustee, such as evicting the tenant from the property.
A trustee is permitted to "passively" default, but not to "actively" default. Simply put: if the contract says that the debtor must do something, then the trustee is allowed to default on this obligation, but the trustee cannot actively do something which would constitute a breach of the contract (or statutory law). In another earlier judgment (the Koot Beheer/Tideman judgment) the Supreme Court ruled that if the trustee decides to "passively" default under an existing contract, this gives rise to a claim that the creditor can file in the bankruptcy proceedings. The Supreme Court added that this also applies to claims that do not arise until after the date of the opening of the proceedings but that derive from a legal relationship already in existence on that date. The judgment sparked a great deal of discussion in legal literature, as it seemed at odds with the fixation principle in that – for example – it would allow a creditor to deliberately leave in place a continuing performance contract (particularly a contract under which no performance is required on the part of the creditor, or at any rate not any longer) and to file all claims that arise from that contract after the date of the bankruptcy, while the trustee is precluded from terminating the contract.
In its recent judgment, the Supreme Court has elaborated on the judgment in the Koot Beheer/Tideman case, stating that the earlier judgment was too broadly worded. It has ruled that if a claim arises after the opening of the bankruptcy proceedings it may only be filed if and to the extent that the claim was "already inherent in the legal position of the creditor" as it existed at the time of the opening of the proceedings, in other words: if the new claim does not constitute an increase in the rights that the creditor already had or were bound to accrue out of the legal relationship at the time of the opening of the proceedings. The filing of claims that do not meet this condition is precluded by the fixation principle.
The Supreme Court has addressed certain specific situations and explained how this interpretation affects them.
Continuing performance obligations
With respect to continuing performance obligations of the bankrupt debtor, such as those where the debtor is the lessor under a lease or the licensor under a licence contract, the Supreme Court explains that the trustee cannot terminate the contracts in question (unless there is a contractual or statutory right to do so) and that creditors are entitled to specific performance, also after the date of the bankruptcy. This does not constitute a violation of the fixation principle, as the debtor's obligation to perform already exists on the date of the bankruptcy.
With respect to a periodical obligation of the debtor (a) for which no contractual consideration on the creditor's part is required (or at any rate not any longer), e.g. because the creditor has paid in advance, or (b) that is required as consideration for a continuing obligation of the creditor (e.g. licence fees), the creditor can file his claim(s), also where a claim arises after the date of the opening of the bankruptcy proceedings.
If a contract in existence at the time of the opening of the bankruptcy proceedings imposes an obligation on the creditor to perform, the claim for counter-performance that arises following performance by the creditor can be filed in the proceedings. However, where the creditor's performance is possible but not required under the contract, a claim for counter-performance arising from performance by the creditor cannot be filed in the proceedings. This is because the creditor's (own) conduct would have had the effect of increasing the rights he had based on his legal position as at the time of the bankruptcy, which, according to the Supreme Court, constitutes a breach of the fixation principle.
This judgment is good news for licensees (as well as others) because it confirms that earlier case law also applies to licence contracts, whereas previously this could only be deduced, as licence contracts were not explicitly mentioned. Thus a Dutch bankruptcy trustee cannot terminate a right of use granted to the licensee of an IP right prior to the licensor's bankruptcy (unless the debtor or the trustee has a right of termination under the licence contract). Furthermore, in principle the trustee cannot deny the licensee the continued use of the licensed IP right and the licensee can file claims deriving from the contract, also where claims arise after the date of the bankruptcy.
However, it is conceivable that a bankruptcy trustee will still be able to sell and transfer the IP right to a third party free and clear of the licence. If a licence contract were to contain an obligation for the licensor to transfer the licensee's rights when it transfers the licensed IP right to a third party, a decision by the trustee to transfer that IP right without transferring the licence would constitute a "passive" – and hence permissible – default under the contract. The situation however might be different in certain circumstances, in particular where a licence has been registered, as registration gives the relevant licence statutory effect against third parties. This, however, is another debate: one that has not yet been resolved in case law.
The Supreme Court furthermore rules that the same principles apply to claims for damages: the filing of such claims will not constitute a breach of the fixation principle if they derive from a legal relationship already in existence on the date of the bankruptcy and such claims were already inherent in the legal position of the creditor.
In the case of claims for damages due to non-performance of contractual obligations, the above rule is already provided for in the Dutch Bankruptcy Act (section 37a), but this judgment makes it clear that the rule also applies to claims for damages other than for non-performance of contractual obligations.