Antitrust Law Daily Wrap Up, ANTITRUST—8th Cir.: License agreement made pursuant to consent decree was not executory, (Jun 9, 2014)

By Linda O’Brien, J.D., LL.M.

An en banc U.S. Court of Appeals in St. Louis has reversed a panel decision and held that a license agreement that was executed as part of an asset divestiture required by a consent decree resolving an antitrust challenge was not executory and therefore not subject to assumption by a debtor in bankruptcy (In re Interstate Bakeries Corporation, June 6, 2014, Colloton, S.).

In 1995, Interstate Bakeries announced its acquisition of Continental Baking Company. To address a U.S. Department of Justice challenge to the acquisition, a district court entered a final judgment to resolve the dispute. The judgment required Interstate to sell certain assets and grant a perpetual license to sell white pan bread in certain territories. Pursuant to the judgment, Interstate—through its subsidiary, Interstate Brands Corporation (IBC)—agreed to sell the assets to Lewis Brothers Bakeries (LBB). An asset purchase agreement provided for the transfer of assets, and a license agreement granted LBB a perpetual license in certain trademarks.

In 2004, Interstate and its subsidiaries, including IBC, filed a voluntary Chapter 11 bankruptcy petition and disclosed the license agreement as an executory contract as part of its reorganization plan. LBB filed an adversary complaint, seeking a declaratory judgment that the license agreement was not an executory contract and therefore not subject to assumption or rejection by the debtor. The bankruptcy court decision that the license agreement was executory was affirmed by the district court. Upon LBB’s appeal, a divided panel affirmed the district court. LBB petitioned for rehearing en banc.

One contract. The court found that the license agreement between IBC and LBB was part of a larger, integrated agreement that IBC substantially performed. Two or more instruments that are executed by the same parties in the course of the same transaction will generally be considered together as one contract. The asset purchase and license agreements between IBC and LBB were entered into contemporaneously and the asset purchase agreement listed the license as an asset sold to LBB. The license agreement defined the entire agreement to include the exhibits and schedules referenced therein and referred to the asset purchase agreement throughout the agreement. Since the plain language of both agreements described the two as one contract, they should be considered as one contract, the court noted.

Substantial performance. Further, the contract was not executory because IBC substantially performed its obligations under the asset purchase and license agreements and its failure to perform the remaining obligations were not a material breach of the integrated agreement, according to the court. For the contract to be executory, both parties would have had to underperform so far that a failure of either to complete performance would constitute a material breach to excuse the performance of the other. In this case, the essence of the agreement was the sale of IBC’s assets. IBC transferred all the assets, executed the license agreement, and received the full purchase price. The only remaining obligation concerned the obligations of notice and forbearance with regard to the trademarks. Those obligations were minor and did not relate to the central purpose of the agreement, the court concluded.

Dissent. In a dissenting opinion, Circuit Judge Bye maintained that IBC did not substantially perform its obligations under the integrated contract. The full purpose of the parties entering into the agreement was the sale of IBC’s bread business to comply with the final judgment entered in the antitrust dispute. The transfer of the assets allowed LBB to make effective use of the perpetual license. The central character of the transfer of the license indicated that it did not play a minor role in the transaction. Bye was joined in his dissent by Circuit Judges Smith and Kelly.

The case is No. 11-1850.

Attorneys: J. Mark Fisher (Schiff & Hardin) for Lewis Brothers Bakeries Incorporated and Chicago Baking Company. Paul M. Hoffmann (Stinson & Leonard) for Interstate Brands Corporation.

Companies: Interstate Bakeries Corporation; Lewis Brothers Bakeries Incorporated; Chicago Baking Company

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