Lewis Brothers Bakeries Inc. v. Interstate Brands Corp.

Lewis Brothers Bakeries Inc. v. Interstate Brands Corp., 8th Cir. Court of Appeals, No. 11-1850 [June 6, 2014]
In an En Banc decision, the 8th Circuit Court of Appeals reversed the judgment of the district court and bankruptcy court that held that the material and outstanding obligations of the licensing agreement had yet to be performed or constituted a continuing and ongoing obligation and such was an executory contract and subject to assumption under 11 USC §365. The appellate court reversed the lower courts because they held that the license agreement was part of a larger, integrated agreement that IBC has substantially performed. With no ongoing or outstanding obligation, the contract was not an executory agreement subject to assumption. Three Judges from the full panel issued a separate substantial opinion concurring in part and dissenting on the courts reversal based on the finding that the contract was not an executory agreement subject to assumption.
Procedural context:
Interstate Bakeries Corporation (“Interstate Bakeries”) and Lewis Brothers Bakeries, Inc. (“LBB”) both sought a declaratory judgment from the bankruptcy court to determine whether a license agreement between Interstate Brands Corporation (“IBC”), a subsidiary of Interstate Bakeries, and LBB was executory under 11 U.S.C. § 365(a). The bankruptcy court ruled that the agreement was executory, and the district court affirmed.
In 1995, Interstate Bakeries announced its acquisition of Continental Baking Company, the owner of the Wonder and Hostess brands and trademarks. The United States Department of Justice, challenged the proposed acquisition as inconsistent with the antitrust laws. United States v. Interstate Bakeries Corp. & Cont’l Baking Co., No. 95-C-4194, 1995 WL 803559 (N.D. Ill. Aug. 7, 1995). In January 1996, the United States District Court for the Northern District of Illinois entered a final judgment to resolve the antitrust dispute. The judgment required Interstate Bakeries to grant to one or more purchasers a perpetual, royalty-free, assignable, transferable, exclusive license to use the Relevant Labels to produce (or have produced for it) and sell White Pan Bread in the Relevant Territories, together with such Bread Assets as are reasonably necessary in order for the acquirer . . . to remain a viable competitor in the White Pan Bread market in each Relevant Territory. The “Bread Assets” included various plants, land, buildings, fixtures, machinery, equipment, vehicles, route books, customer lists, and other records used in the distribution of the brands. The 1996 judgment called for Interstate Bakeries to divest itself of at least one of its Labels in each of four territories: (1) Eastern Wisconsin, (2) Chicago, (3) Central Illinois, and (4) Southern California. The Labels at issue included Wonder, Mrs. Karl’s, Butternut, Sunbeam, and Weber’s.The judgment defined “Label” to encompass, inter alia, “all legal rights associated with a brand’s trademarks, trade names, copyrights, designs, and trade dress.” In December 1996, pursuant to the 1996 judgment, IBC entered into an agreement to sell its Butternut bread operations and assets in the Chicago territory and its Sunbeam bread operations and assets in the Central Illinois territory to LBB. To effect this transfer, IBC and LBB entered into two agreements: an Asset Purchase Agreement and a License Agreement. The Asset Purchase Agreement provided for the transfer to LBB of tangible assets and “the perpetual, royalty-free, assignable, transferable exclusive license to use the trademarks . . . pursuant to the terms of the License Agreement.” The License Agreement provided that for “a fee of ten dollars ($10.00), and other good and valuable consideration, set forth in the Allocation Agreement described in Section 2.3 of the Purchase Agreement,” “IBC grants to [LBB] . . . [a] license to use the Chicago Trademarks.” Of the $20 million purchase price, the parties agreed to allocate $8.12 million to the intangible assets, including the trademark licenses, and the remaining $11.88 million to the various tangible assets. The License Agreement defined the “Chicago Trademarks” as thirteen marks: Butternut, Butternut Design, Mrs. Karl’s, Gingham Design, Country Wheat, Blue Seal, Home Style, Honey Wheat, Old World, Dixie Rye, Hearty Rye, Fun Buns, and Sun Maid Raisin. The agreement provided mutual duties of notification regarding any infringement of the rights under the marks. It also required that the goods sold under the marks be of the same character and quality as those sold by IBC at the time of the agreement, and provided that LBB’s failure to maintain such quality would constitute a material breach of the agreement. In September 2004, Interstate Bakeries and eight of its subsidiaries and affiliates, including IBC, filed voluntary bankruptcy petitions under Chapter 11. See In re Interstate Bakeries Corp., No. 04–45814, 2010 WL 2332142 (Bankr. W.D. Mo. June 4, 2010) (Interstate Bakeries I). In November 2008, Interstate Bakeries first disclosed the existence of the License Agreement, as part of an amended plan of reorganization. Interstate Bakeries identified the agreement as an executory contract that it intended to assume as part of its plan of reorganization. In December 2008, LBB filed an adversary complaint, seeking a declaratory judgment that the License Agreement is not an executory contract under 11 U.S.C. § 365 and is therefore not subject to assumption or rejection by the debtor. Interstate Bakeries countered by moving to reject the License Agreement and seeking a declaration that it is an executory contract. Both parties moved for summary judgment. Before the bankruptcy court could rule, Interstate Bakeries withdrew its motion to reject the License Agreement, reinstated its request to assume the License Agreement, and reiterated its request for a declaration that the License Agreement is an executory contract. The bankruptcy court, looking solely to the License Agreement, found that both IBC and LBB had material, outstanding obligations. Relying on what it called the “seminal case” from a Delaware bankruptcy court in In re Exide Techs., 340 B.R. 222 (Bankr. D. Del. 2006), appeal denied, judgment aff’d, No. 06–302–SLR, 2008 WL 522516 (D. Del. Feb. 27, 2008), vacated and remanded, 607 F.3d 957 (3d Cir. 2010), the court concluded that “[t]he existence of all of these material, unperformed (or continuing) obligations leads the Court to the inescapable conclusion that the License [Agreement] is executory and, therefore, subject to assumption under 11 U.S.C. § 365.”

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