Court Opinion

ID: 145964
Source: CourtListenerOpinion
Date Created: 2010-05-06 00:09:53+00
Date Added: 2024-06-11T09:35:14.201875
License: Public Domain

Cite as: 556 U. S. ____ (2009)            1

                   Statement of KENNEDY, J.

SUPREME COURT OF THE UNITED STATES
   N. C. P. MARKETING GROUP, INC., PETITIONER
        v. BG STAR PRODUCTIONS, INC., ET AL.
   ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED 

    STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

              No. 08–463.   Decided March 23, 2009 

   The petition for a writ of certiorari is denied.
   Statement of JUSTICE KENNEDY, with whom JUSTICE
BREYER joins, respecting the denial of certiorari.
   The object of Chapter 11 of the Bankruptcy Code is to
empower a debtor with going concern value to reorganize
its operations to become solvent once more. In a typical
case, the debtor takes on the role of “debtor in possession,”
11 U. S. C. §1101(1), allowing it to retain possession and
control of its business. A debtor-in-possession operates its
business and performs many functions that would fall to
the trustee under other chapters of the Bankruptcy Code.
§1107(a).
   At issue in this petition is the power of a debtor-in
possession to assume executory contracts held by the
debtor before bankruptcy. §365(a). Section 365 gives the
debtor-in-possession the power to assume—that is, to
continue to receive the benefits of, while also continuing to
perform its obligations under—the debtor’s leases, ongoing
performance contracts, and licenses to use the property of
others. This power is withdrawn, however, if
    “applicable law excuses a party, other than the debtor,
    to [an executory contract] from accepting performance
    from or rendering performance to an entity other than
    the debtor or the debtor in possession, whether or not
    such contract or lease prohibits or restricts assign
    ment of rights or delegation of duties; and . . . such
    party does not consent to such assumption or assign
    ment . . .” §§365(c)(1)(A)–(B).
2        N. C. P. MARKETING GROUP, INC. v. BG STAR
                     PRODUCTIONS, INC.                         

                    Statement of KENNEDY, J. 

According to the Court of Appeals for the Ninth Circuit,
this language means that a debtor-in-possession may
assume an executory contract only if hypothetically it
might assign that contract to a third party. That is to say,
if the debtor-in-possession lacks hypothetical authority to
assign a contract, then it may not assume it—even if the
debtor-in-possession has no actual intention of assigning
the contract to another. In re Catapult Entertainment,
Inc., 165 F. 3d 747 (CA9 1999). The so-called “hypotheti
cal test” is preferred by a majority of the other Courts of
Appeals that have addressed this question. See In re
Sunterra Corp., 361 F. 3d 257 (CA4 2004); In re James
Cable Partners, L. P., 27 F. 3d 534 (CA11 1994) (per cu
riam); In re West Electronics, Inc., 852 F. 2d 79 (CA3
1988).
   The hypothetical test is not, however, without its de
tractors. One arguable criticism of the hypothetical ap
proach is that it purchases fidelity to the Bankruptcy
Code’s text by sacrificing sound bankruptcy policy. For
one thing, the hypothetical test may prevent debtors-in
possession from continuing to exercise their rights under
nonassignable contracts, such as patent and copyright
licenses.    Without these contracts, some debtors-in
possession may be unable to effect the successful reorgani
zation that Chapter 11 was designed to promote. For
another thing, the hypothetical test provides a windfall to
nondebtor parties to valuable executory contracts: If the
debtor is outside of bankruptcy, then the nondebtor does
not have the option to renege on its agreement; but if the
debtor seeks bankruptcy protection, then the nondebtor
obtains the power to reclaim—and resell at the prevailing,
potentially higher market rate—the rights it sold to the
debtor.
   To prevent §365(c) from engendering unwise policy, one
Court of Appeals, and a number of Bankruptcy Courts,
reject the hypothetical test in favor of an “actual test,”
                 Cite as: 556 U. S. ____ (2009)           3

                   Statement of KENNEDY, J.

under which a Chapter 11 debtor-in-possession may as
sume an executory contract provided it has no actual
intent to assign the contract to a third party. See Institut
Pasteur v. Cambridge Biotech Corp., 104 F. 3d 489, 493
(CA1 1997) (applying the actual test); In re Catapult, 165
F. 3d, at 749, n. 2 (collecting Bankruptcy Court decisions
favoring the actual test). Of course, the actual test may
present problems of its own. It may be argued, for in
stance, that the actual test aligns §365(c) with sound
bankruptcy policy only at the cost of departing from at
least one interpretation of the plain text of the law. See
id., at 751–755.
   The division in the courts over the meaning of §365(c)(1)
is an important one to resolve for Bankruptcy Courts and
for businesses that seek reorganization. This petition for
certiorari, however, is not the most suitable case for our
resolution of the conflict. Addressing the issue here might
first require us to resolve issues that may turn on the
correct interpretation of antecedent questions under state
law and trademark-protection principles. For those and
other reasons, I reluctantly agree with the Court’s decision
to deny certiorari. In a different case the Court should
consider granting certiorari on this significant question.