Nine Point Energy Holdings, Inc. and its affiliates (collectively, “Nine Point” or “Nine Point Debtors”) was an oil and gas exploration and production company that sought to reorganize in Chapter 11 through of a sale in operation of almost all of their assets. To maximize value, Nine Point sought to sell these assets free and clear of its intermediary services agreements, which included provisions that prevented Nine Point from acquiring intermediary services from anyone other than its counterparty, Caliber North Dakota, LLC. (“Caliber”). The dispute over Nine Point’s ability to do so was the driving factor in its bankruptcy filing.
One of the issues in dispute was whether the United States Supreme Court’s decision in Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S.Ct. 1652 (2019), prevented the rejection of the contracts from eliminating Caliber’s exclusive right to provide intermediary services to Nine Point. The US Bankruptcy Court for the District of Delaware ruled not. On appeal, the Delaware District Court agreed in Caliber North Dakota, LLC vs. Nine Point Energy Holdings, Inc. (In re Nine Point Energy Holdings, Inc.), 2021 WL 3269210 (D. Del. 30 July 2021). The district court held that mission productThe participation of did not apply because the only value of the exclusivity provisions was the leverage it created for Caliber to force Nine Point to perform the enforceable obligations rejected by Nine Point, which would go to the against the objectives of Article 365 of the Bankruptcy Code. This case is an important clarification of the implications of mission product because it confirms that the creative contract cannot prevent a debtor from exercising and benefiting from his rights of withdrawal under the Bankruptcy Code.
Rejection and mission product
Section 365(a) grants debtors broad power to assume or reject enforceable contracts and unexpired leases. Section 365(g) further explains that the rejection “constitutes a breach” of the underlying contract immediately before the bankruptcy filing, and counterparties to rejected contracts are generally treated as creditors prior to the petition with respect to damages resulting from the rejection.
However, a split in the circuit has emerged as to the impact of the rejection on the individual provisions of the rejected contracts, in particular the provisions granting a counterparty a non-exclusive license to use the debtor’s intellectual property, which may entitle the licensee to the protections set forth in Section 365(n) of the Bankruptcy Code. The seventh circuit, in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372, 376-77 (7th Cir. 2012), focused on treating rejection as violation. Because breaches outside the context of bankruptcy do not “vaporizethe rights of a non-infringing party, the court held, the dismissal also could not eliminate the patent and trademark license. The First Circuit, however, took the opposite position in In re Tempnology, LLC, 879 F.3d 389 (1st Cir. 2018), holding that this would defeat the underlying purpose of the Bankruptcy Code of “freeing the debtor’s estate from onerous obligations”, identifier. at 402, to allow a licensee to retain non-exclusive rights to use a mark after rejection. Thus, the court concluded, rejection under a trademark license agreement would constitute a termination of the underlying contract.
In mission product, the Supreme Court resolved the “violation versus nullification” dispute in favor of the “dismissal as violation” courts. There, the obligor, Tempnology, LLC (“Tempnology”), entered into an agreement granting Mission Product Holdings, Inc. (“MPH”) a non-exclusive license to use the Tempnology marks. After filing for bankruptcy, Tempnology sought to reject this agreement and asked the bankruptcy court to declare that the rejection would eliminate the non-exclusive license granted to MPH. MPH argued that the rejection did not eliminate the non-exclusive license.
The Supreme Court held that the rejection constituted a breach of contract and that such breach did not eliminate MPH’s non-exclusive license. To analyze this last question, the Court raised an assumption about how breach is dealt with in the non-bankruptcy context. In his hypothesis, a reseller rents a photocopier from a law firm and agrees to maintain it monthly in exchange for a monthly fee. During the term of the lease, however, the licensee ceases to maintain the photocopier. The law firm has a choice: it can continue to pay the dealer’s rent while suing for damages, or it can terminate the contract and return the photocopier (which simultaneously halts payment and sue for damages- interests). Importantly, the Court noted, the choice rests with the law firm, not the offending concessionaire, to continue to enjoy the rights granted under the contract.
Applying this assumption in the context of bankruptcy, the Court explained that if the dealer had filed for bankruptcy and elected to reject its lease with the law firm, the rejection would release the debtor from the obligation to maintain the copier. . However, the business would have the option of either: (i) keeping the copier and continuing to pay the rental charges and file a claim against the estate for damages suffered as a result of the lack of maintenance; or (ii) return the copier and file a claim against the estate for damages. The Court recognized that the first option would generally not be attractive to the company because its breach claim would likely be treated as a general unsecured claim. The Court held that a counterparty to a rejected contract is not required to relinquish the non-exclusive license rights it received under a rejected pre-application contract.
On March 15, 2021, Nine Point debtors filed for Chapter 11 bankruptcy in Delaware. On the same day they filed for bankruptcy, some of Nine Point’s debtors sought to dismiss their Intermediate Services Agreements and filed adversarial proceedings seeking, among other things, a ruling that the dismissal would allow Nine Point to sell its assets. frank and clear of those contracts. Caliber opposed the remedy, arguing, among other things, that although the contracts could be rejected, under mission product, its exclusive right to provide median services to Nine Point would remain in effect. Caliber also drew parallels to non-competition clauses, which some courts have upheld after rejection. See, for example, Sir Speedy, Inc. v. Walrus, 256 BR 657, 660 (D. Mass. 2000) (holding that debtor was not released from its obligations under the non-competition clause even though the underlying franchise agreement was validly rejected) ; In re Spooner, 2012 WL 909515, at *4 (Bankr. ND Ohio March 16, 2012) (“[R]discharge of the debtor from the onerous obligation to refrain from engaging in competitive activities cannot be accomplished by rejecting the non-competition agreement.”).
The bankruptcy court ruled that Caliber’s exclusive rights would not survive the rejection. The court distinguished mission product because the non-debtor counterparty “had the right to continue to use this license after the rejection, notwithstanding that the debtor was relieved of its obligation to perform”. Nine Point Energy Holdings, Inc. v. Caliber Measurement Services LLC (In re Nine Point Energy Holdings, Inc., 2021 WL 2212007, at *6 (Bankr. D. Del. 1 June 2021). In Nine dots, on the other hand, Caliber had “no right to use the [exclusivity rights] except in its performance of contracts. » Identifier.
Upholding the bankruptcy court’s order, the district court also distinguished mission product. The District Court explained that the non-exclusive license at issue in mission product did not “permit a non-debtor to force the debtor to perform a contract after its rejection”. Caliber North Dakota, LLC vs. Nine Point Energy Holdings, Inc. (In re Nine Point Energy Holdings, Inc.), 2021 WL 3269210, at *8 (D. Del. 30 July 2021). “The fundamental flaw in Caliber’s argument,” the court continued, “is that an ‘exclusivity’ clause requires future performance by both parties. Thus, if it is possible to consider an exclusivity as something that belongs to Caliber, it only makes sense if it is an obligation to [Nine Point].” Identifier. to *8 n.7. Because dismissal allows a debtor to eliminate its enforceable obligations under the contract, the district court explained, dismissal eliminates contractual rights that would allow the counterparty to require the debtor to perform those obligations. .
Court decisions in Nine dots present an important clarification of the mission product holding. Rights granted before the motion that would effectively allow a non-debtor to thwart the dismissal do not survive the dismissal. To analyze whether particular contractual rights will survive rejection, one must consider whether the underlying rights confer value or can be effectively enforced without the debtor subsequently fulfilling its enforceable obligations that have been rejected. While non-competition clauses or non-exclusive licenses confer value without the need for subsequent affirmative action on the part of the debtor, the obligation for a debtor to purchase services exclusively from the counterparty does not confer value. value only if the debtor uses these services. Therefore, rejection eliminates these types of exclusivity obligations.
Court rulings also have practical implications on the parties’ ability to contract under Article 365 of the Bankruptcy Code. Creative provisions designed to prevent a debtor from subsequently exercising its rights of rejection effectively are unlikely to survive rejection under the Nine dots court analyses.
Jones Day is representing Nine Point Debtors in their Chapter 11 cases.