In a 21 page opinion (the “Opinion”) released February 20, 2015, in the Trump Entertainment Resorts, Inc bankruptcy (Case No. 14-12103), Judge Gross, granted the motion of Trump AC Casino Marks, LLC (“Trump AC”) to modify the automatic stay to allow litigation to proceed, which could result in termination of their license with the Debtors. The Opinion is available here. Seeking relief from the automatic stay is a topic which frequently appears on this blog. A couple of posts written by my colleagues that summarize the law are here:
Seeking Relief from the Automatic Stay in Delaware
How does the “automatic stay” of the bankruptcy code apply to landlords?
The Debtors used the Trump name pursuant to a license agreement with Trump AC, and their use required them to comply with certain “standards of quality”. Opinion at *3. On August 4, 2014, Trump AC initiated a state court lawsuit seeking to terminate the trademark license for failing to meet the standards of quality. Opinion at *5. On September 9, 2014, the Debtors filed for bankruptcy protection, which had the effect of stopping the state court litigation pursuant to the automatic stay of bankruptcy. The Debtors current plan is for the equity holders of the Debtor to be wiped out, and for current debt-holders to assume all of the equity of the reorganized company, including assumption of the trademark license. Opinion at *6.
While the analysis is extensive, and I encourage all readers of this blog to review it for themselves, it boils down to one simple concept: Agreements not assignable absent consent under non-bankruptcy law are not assignable under the Bankruptcy Code. Opinion at *2. As explained by Judge Gross, “the substantial weight of authority holds that under federal trademark law, trademark licenses are not assignable in the absence of some express authorization from the licensor…” Opinion at *12.
Judge Gross also cites extensively to In re West Elecs. Inc., 852 F.2d 79 (3d Cir. 1988) in the Opinion. West is the leading case law in the Third Circuit regarding the assumption of executory contracts and the limitations of such assumption provided by Bankruptcy Code § 365(c)(1). In fact, the West opinion goes one step beyond just the prohibition of assignment of an unassignable contract, providing that a debtor cannot even assume a contract which cannot be assigned under applicable law. Opinion at *10 (citing In re Catapult Entm’t, Inc., 165 F.3d 747, 750 (9th Cir. 1999).
Holders of executory contracts need to closely examine whether it is in their interest to allow an assignment of their contract, and whether such an assignment is allowed under applicable non-bankruptcy law. If it is not, and if they don’t want the agreement assumed, they need to make absolutely clear that they do not consent to an assumption or assignment. The best way to make that clear — file a motion for relief from stay to terminate the contract. Opinion at * 15 (“Trump AC clearly does not consent to the assumption or assignment of the Trademark License Agreement, as is evident from its filing of the Stay Motion.”).