In re Thane: If It Walks Like a Duck and Quacks Like Duck, It Still Might Not Be an Assumed Contract

May 24, 2018

On Feb. 21, 2018, the U.S. Bankruptcy Court for the District of Delaware issued its opinion in Stanley Jacobs Prod. Ltd. v. 9472541 Can. Inc. (In re Thane Int'l Inc.).[1] The issue was whether an executory contract that was neither affirmatively assumed nor rejected was assumed and assigned in a § 363 sale transaction.

Debtors Thane International Inc., et al. (collectively, Old Thane) sold consumer products through a combination of channels, such as direct-to-consumer sales and retail store sales. Like so many in the retail space, Old Thane experienced financial difficulties when television advertising and sales declined. On Oct. 16, 2015, certain senior lenders initiated a proceeding against Old Thane under Canada’s Bankruptcy and Insolvency Act to appoint Richter Advisory Group as a receiver. That same day, 9472541 Canada Inc., 9472550 Canada Inc. and 635427 Inc. (collectively, New Thane) offered to purchase substantially all of Old Thane’s assets.

On Oct. 25, 2015, Richter initiated chapter 15 bankruptcy proceedings in Delaware for Old Thane, and a motion was filed for an order authorizing the sale of substantially all assets to New Thane pursuant to the terms of a certain purchase agreement and authorizing the assignment of certain executory contracts and leases. A sale order was entered and the sale to New Thane closed post-petition on Dec. 18, 2015.

In March 2011, Stanley Jacobs Prod. Ltd (SJPL) and Old Thane had executed a certain production agreement for SJPL to create an infomercial for Old Thane’s FlavorStone® Cookware product; Old Thane was bound to pay royalties to SJPL, and SJPL was not to produce content for Old Thane’s competitors while receiving such royalties. Pursuant to the express terms of the production agreement, Old Thane could assign the production agreement, but Old Thane had to give the required notice.

The purchase agreement approved by the bankruptcy court did not identify all contracts and related liabilities to be assumed by New Thane, but it provided that New Thane shall “assume the obligations relating to those Contracts being purchased by it in accordance with Schedule 1 and Schedule 2.” Neither Schedule 1 nor 2 of the purchase agreement referenced the production agreement with SJPL. Schedule 1 did, however, note that the assets sold by Old Thane include “Other Assets,” which were, in part, defined as “Debtor Contracts, equipment, inventory and Accounts Receivable, as applicable.”

Old Thane did not notify SJPL of the filing of the chapter 15 cases. New Thane continued to use the informercial post-closing. SJPL found out about Old Thane’s bankruptcy upon receiving a letter from New Thane concerning royalty adjustments about six weeks post-closing.

Eight months after the closing of the sale, SJPL filed an action in California for the payment of alleged outstanding royalties (including pre-closing liabilities), asserting that New Thane assumed the production agreement through the sale. The issue was referred to Delaware Bankruptcy Judge Kevin Gross as to whether the production agreement still could in fact be assumed and assigned in the § 363 sale transaction approved by him.

Judge Gross wrote that “as it stands, the proceeding is in a no-man’s land where the executory contract [was] neither definitively assumed nor definitively rejected.”[2] New Thane advocated formalism and argued that because the strictures of Bankruptcy Code § 365 were not met, assumption and assignment of the production agreement did not occur. SJPL argued that the sale order, in conjunction with New Thane’s post-closing conduct, effectuated a valid assumption and assignment. The court discussed what requirements, if any, of § 365 were satisfied.

First, the court stated that assumption and rejection of executory contracts require the filing a formal motion. Old Thane’s not filing an assumption motion was a “fatal flaw,” and it could not have expressly assumed the production agreement[3].

The court further addressed the “hazy doctrine”[4] of implied assumption, which is “a series of acts over a period of time evidencing a continuity of purpose.” [5] Although SJPL claimed that the royalty-adjustment letter supported a finding for assumption, the court rejected this argument since the letter made it clear that the production agreement was between Old Thane and SJPL, not New Thane, with the use of the words “your agreement,” not “our agreement.” The court rejected SJPL’s argument that New Thane filed a briefing in district court that could be construed as making a declaration of assumption. Also, while SJPL argued that New Thane enjoyed the benefits of the production agreement post-closing, the continued use of the informercial did not obviate the need for a formal motion to assume. Judge Gross wrote that “uncertainty is a standard that the Court is uncomfortable perpetuating. Condoning such informal means of assumption will force courts to meddle in the fact-laden intricacies of transactions....”[6]

Regarding the § 365 notice requirement, SJPL was not given the notice required by 11 U.S.C. § 365. It was Old Thane’s, not New Thane’s, responsibility to give notice to SJPL, and it had not. As to cure amounts, SJPL did not receive any cure amounts due on the production agreement; the court stated that the Bankruptcy Code was clear that an assumption cannot occur without the necessary cure or adequate assurance of a cure.

Lastly, even if the sale motion could have been considered an assumption motion to assume multiple contracts, the court concluded that it did not satisfy the six specific requirements for motions seeking authority to assume multiple contracts set forth in Federal Bankruptcy Rule 6006(f) (identification of contract, parties, cure amounts, etc.).

While the court found no assumption and that New Thane was not liable for pre-closing liabilities, it noted that SJPL may be entitled to damages for New Thane’s post-closing use, although that issue was beyond the bankruptcy court’s jurisdiction.

 

Practice Pointers for Counsel

In conjunction with a § 363 sale, do not make any assumptions that certain contracts have been impliedly assumed, even if the buyer’s course of conduct might indicate that. Even if an apparent assumption of a contract looks like a duck, walks like a duck and quacks like a duck because of the parties’ post-closing course of conduct, the contract may not have been assumed unless a proper formal motion has been filed that complies with 6006(f), adequate notice has been provided and cure amounts have been paid.

 

[1] No. 17-50476 (KG), 2018 Bankr. LEXIS 464 (Bankr. D. Del. Feb. 21, 2018).

[2] Thane, p. 9 (quoting Greater Se. Cmty. Hosp. Corp. I, 327 B.R. 26, 30 (Bankr. D.D.C. 2005)).

[3] Thane, p. 10

[4] Thane, p. 12.

[5] See, e.g., 10-6006 Collier on Bankruptcy ¶ 6006.01, n. 16 (16th ed. 2017); Corp. Commc’n Servs. of Dayton LLC v. MCI Commc’ns Servs. Inc., No. 3:08-CV-046, 2009 WL 3756274, at *12 (S.D. Ohio Nov. 9, 2009), aff’d sub nom. Corp. Commc’n Servs. of Dayton LLC. v. MCI Commc’ns Servs. Inc., 444 F. App’x 866 (6th Cir. 2011).

[6] Thane, p. 12.

 

This article was originally published in the May 2018 edition of the Asset Sales Committee Newsletter. Participation in ABI's committees is one of the many benefits of becoming a member.  Committees provide networking and leadership opportunities.  For additional information on how you could become involved in ABI and our Committees please visit membership.abi.org.

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