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Summarizing by Shane Ramsey


Fifth Circuit leaves the door open to preventing automatic rejection if the existence of an executory contract is intentionally undisclosed.

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Case Type:
Case Status:
17-11113 (5th Circuit, Oct 29,2018) Published
Court concluded that the non-exclusive patent licenses were "executory contracts" that were deemed rejected by operation of law 60 days after conversion of the cases from chapter 11 to chapter 7. Much of the opinion addresses the materiality of each party's obligation under the license agreement and concluded that the obligations were not illusory, and that they were material. Because the licenses were deemed rejected 60 days after the cases were converted, the purchaser failed to acquire any rights under the debtor's IP licenses, and the IP licensor prevailed in the litigation.
Procedural context:
Almost a year after the bankruptcy court approved a 363 sale to RPD, Tech Pharmacy (the third-party licensor) filed a state court lawsuit against the debtor licensees, alleging that the debtors breached their obligations under certain pre-bankruptcy licenses. RPD, the purchaser, intervened in the state court action and removed it to federal court where it was referred to the bankruptcy court to decide what rights (if any) RPD acquired from the bankruptcy sale orders. The bankruptcy court held that RPD failed to acquire rights under the licenses because they were never scheduled and they were deemed rejected by operation of law under 365(d)(1) before the sales were approved. The district court affirmed, and RPD appealed to the Fifth Circuit.
The debtors (OnSite or Provider Meds) were in the business of providing pharma dispensary machines to long-term care facilities. However, before filing bankruptcy, the debtors had been sued by a company (Tech Pharmacy Services) that held the patents for this technology. That litigation resulted in a settlement and license agreement under which the debtors paid the licensor $4,000 per machine and agreed to provide regular reports of the locations where the machines were installed. In 2012 and 2013, the debtors filed chapter 11 bankruptcy petitions. The cases were later converted to chapter 7. More than 60 days later (which is very important), the bankruptcy court approved sales of the debtors' assets to RPD Holdings. Then, almost a year later, the licensor filed suit against the debtor licensees in state court to adjudicate their alleged breaches of the licenses. RPD intervened in the action and removed the case to federal court, construing the lawsuit as a collateral attack on the bankruptcy sale orders.
Higginbotham, Smith and Graves

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