Look “Outside Bankruptcy”: A U.S. Supreme Court Standard for Resolving Bankruptcy Questions

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Looking beyond (photo by Marilyn Swanson)

By: Donald L. Swanson

In 2019, the U.S. Supreme Court issued two opinions on bankruptcy-specific topics that identify a common legal standard. The standard is this:

In deciding a question under the Bankruptcy Code, look to legal standards that apply “outside bankruptcy” for guidance

Both opinions do just that.  Here’s how.

FIRST OPINION

The U.S. Supreme Court issued its Mission Product Holdings, Inc. v. Tempnology, LLC, opinion (Case No. 17-1657) on May 20, 2019.

Here is a summary of the opinion (italics and bold face added for emphasis).

–The Question

Since the rejection of an executory contract under § 365 of the Bankruptcy Code constitutes a breach of such contract, does a debtor-licensor’s rejection of a trademark licensing agreement deprive the licensee of its rights to use the trademark?

–The Conclusion

“We hold it does not.” That’s because:

  • a rejection breaches a contract but does not rescind it, which means that all rights that would ordinarily survive a contract breach remain in place; and
  • a debtor’s rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy.

–The Rationale

“We start with the text of the Code’s principal provisions on rejection—and find that it does much of the work. . . . a rejection is a breach. And ‘breach’ means in the Code what it means in contract law outside bankruptcy.”

“So the first place to go in divining the effects of rejection is to non-bankruptcy contract law, which can tell us the effects of breach.

“Consider a made-up executory contract to see how the law of breach works outside bankruptcy. . . . And now return to bankruptcy.”

“If the licensor breaches the agreement outside bankruptcy . . . , everything said above goes.”

Outside of bankruptcy, a licensor’s breach does not terminate a licensee’s right to use the licensed intellectual property. . . . the same consequences follow in bankruptcy.”

“Section 365 reflects a general bankruptcy rule: The estate cannot possess anything more than the debtor itself did outside bankruptcy.

“Whatever limitations on the debtor’s property apply outside of bankruptcy apply inside of bankruptcy as well.”

“A debtor’s property does not shrink by happenstance of bankruptcy, but it does not expand, either.”

SECOND OPINION

The U.S. Supreme Court issued its Taggart v. Lorenzen opinion (Case No. 18-489) on June 3, 2019.

Here is a summary of the opinion (italics and bold face added for emphasis)..

–The Question

What are “the criteria for determining when a court may hold a creditor in civil contempt for attempting to collect a debt that a discharge order has immunized from collection.”

–The Conclusion

We conclude that “civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.”

–The Rationale

“Our conclusion rests on a longstanding interpretive principle . . . ”

“Under traditional principles of equity practice, courts have . . . “

“In cases outside the bankruptcy context, we have said that . . . “

“These traditional civil contempt principles apply straightforwardly to the bankruptcy discharge context.”

“Based on the traditional principles that govern civil contempt, the proper standard is an objective one.”

“In our view, that standard strikes the careful ‘balance between the interests of creditors and debtors’ that the Bankruptcy Code often seeks to achieve.”

EDITORIAL COMMENT

These two opinions from the U.S. Supreme Court are nearly twins:

  • Mission Products v. Tempnology is a mere two weeks older than Taggart v. Lorenzen; and
  • Both opinions turn on the same legal concept: i.e., look to legal standards applied outside bankruptcy to determine how legal standards should be applied in similar bankruptcy contexts.

CONCLUSION

It will be interesting to see if and how the U.S. Supreme Court continues to utilize this “outside bankruptcy” concept for resolving bankruptcy-specific questions.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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