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Supreme Court Holds Other Party Retains Its Rights When Debtor “Rejects” Contract in Bankruptcy

May 21, 2019

On May 20, 2019, the Supreme Court held that a debtor’s rejection of an executory contract under Section 365 of the Bankruptcy Code has the same effect as a breach of contract outside of bankruptcy in Mission Product Holdings Inc. v. Temnology, LLC, NKA Old Cold LLC. Justice Kagan, writing for the majority, concluded this act could not “rescind rights that the contract previously granted.”

 

The Court framed the issue in this case as whether a debtor-licensor’s rejection of a trademark licensing agreement deprives the licensee of its rights to use the trademark. Justice Kagan emphasized Section 365 illustrates a general bankruptcy rule, that the debtor’s bankruptcy estate cannot possess anything more than the debtor did outside of the bankruptcy. Outside of bankruptcy, a breach of the license by the licensor would not terminate the licensee’s right to use the intellectual property granted under it, and the debtor could not rescind the already conveyed license. This guided the Court’s analysis to the rejection-as-breach conclusion, and prevents a debtor in bankruptcy from gaining interests or assets it previously gave up.

 

Supreme Court of the United States Opinion

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