There is no implied assumption of executory contracts, according to Bankruptcy Kevin Gross of Delaware.
On the other hand, Judge Gross pointedly said that a purchaser cannot escape liability for appropriating the benefits of a contract that was not assumed and assigned.
The bankruptcy court had approved the sale of a debtor’s assets in chapter 15. The contract with the producer of an infomercial was not scheduled as one of the contracts being assumed and assigned, nor did the debtor give notice of the bankruptcy to the producer. The producer was unaware of the bankruptcy until several weeks after the sale.
The purchaser nonetheless used one of the producer’s infomercials. The producer sued for outstanding royalties in a California district court. The district court transferred venue, and the case was referred to Judge Gross.
The producer argued that the buyer’s course of conduct and use of the infomercial amounted to an implied assumption of the admittedly executory contract.
In his Feb. 21 opinion, Judge Gross said, “Implied assumption is not a novel issue, but it is an unsettled one.”
Analyzing cases on both sides of the question, Judge Gross flatly held that “there is no assumption” of an executory contract “absent a motion” required by Section 365. He added, “continued use does not obviate the need for a formal motion to assume.” Expanding on his conclusion, the judge said that “there simply cannot be an assumption without providing the necessary cure or adequate assurance of one,” which the producer had not received.
Judge Gross rebelled against the notion of implied assumption because it would “force courts to meddle in the fact-laden intricacies of transactions.”
The producer, however, was denied its right to due process because it was a known creditor not given notice of bankruptcy. The fault, however, was not on the shoulders of the purchaser. Consequently, Judge Gross declined to hold the purchaser liable for the debtor’s failure to give notice.
There being no implied assumption, Judge Gross ruled that the purchaser could not be liable for unpaid prepetition royalties. His opinion does not suggest, one way or another, what the debtor’s liability would be for prepetition royalties and the failure to give notice.
Judge Gross did not allow the purchaser to get off scot-free, however. In the absence of assumption and assignment, he said the purchaser “may not have a contractual right to benefit from its post-closing use” of the contract, and the producer “may, therefore, be entitled to damages.”
Because the issue was “beyond this court’s jurisdiction,” Judge Gross declined to engage in “further discussion of the parties’ relationship, including specific damages.”
The implied assumption of executory contracts is not without support from circuit courts, at least in cases before the adoption of the Bankruptcy Code in 1978. See Straus-Duparquet v. Local Union No. 3, 386 F.2d 649 (2d Cir. 1967), and In re Public Ledger, 161 F.2d 762 (3d Cir. 1947). Those Bankruptcy Act cases arguably were overruled by the Code and its detailed procedures for assumption of contracts and protections for creditors.
For ABI’s discussion of a case last month rejecting the idea of an implied assumption of an employment contract, click here.