174 B.R. 119 (N.D.Cal. 1994), C-94-1079, In re CFLC, Inc.

Docket Nº:C-94-1079 CW, C-94-1279 CW.
Citation:174 B.R. 119
Party Name:In re CFLC, INC., a Delaware corporation, formerly known as Everex Systems, Inc., a Delaware corporation, Debtor.
Case Date:October 04, 1994
Court:United States District Courts, 9th Circuit, Northern District of California

Page 119

174 B.R. 119 (N.D.Cal. 1994)

In re CFLC, INC., a Delaware corporation, formerly known as Everex Systems, Inc., a Delaware corporation, Debtor.

Nos. C-94-1079 CW, C-94-1279 CW.

United States District Court, N.D. California.

October 4, 1994

Page 120

        John Walshe Murray, Patrick M. Costello, Mark A. Wayne, Murray & Murray, Palo Alto, CA, for appellant in docket No. C-94-1079 CW.

        William P. Weintraub, Daniel L. Egan, Richard M. Adler, Murphy Weir & Butler, San Francisco, CA, for appellant in docket No. C-94-1279 CW.

        George C. Webster, II and K. John Shaffer, Stutman Treister & Glatt, Los Angeles, CA, for Cadtrak Corporation.


        WILKEN, District Judge.



        This matter came on regularly for hearing on September 2, 1994 before the United States District Court for the Northern District of California, the Honorable Claudia Wilken presiding, on the consolidated appeal of Appellant CFLC, Inc. and Appellant Everex Systems, Inc. This Court took the matter under submission. Based upon the written submissions and oral arguments of all counsel, the Court now affirms the orders of the bankruptcy court.



        The district court has jurisdiction over this appeal pursuant to 28 U.S.C.§ 158(a). The bankruptcy court's conclusions of law are reviewed de novo and its findings of fact under the clearly erroneous standard. Fed.R.Bankr. 8013; In re Wegner, 839 F.2d 533, 536 (9th Cir.1988).



        In 1986, Appellant CFLC Inc. ("CFLC") entered into a patent license agreement with Appellee Cadtrak Corporation ("Cadtrak"). For a one time payment of $290,000.00 by CFLC, Cadtrak granted CFLC, and any company more than 50% owned by CFLC, a royalty-free, non-exclusive license to certain intellectual property protected by a patent. By its terms, the license is non-transferable and can be terminated by Cadtrak upon CFLC's bankruptcy. The license recites that it shall be construed in accordance with the laws of the state of California.

        On January 4, 1993, CFLC commenced a Chapter 11 proceeding. It sold certain divisions, subsidiaries and property for approximately twenty million dollars. It thereafter sought and obtained bankruptcy court approval to sell "substantially all" of its remaining assets for approximately $5 million to Yside Corporation, including its remaining operating assets, certain intangible assets such as name and goodwill, and certain contract rights. Yside Corporation has since taken the name of Everex Systems Inc. ("Everex") and is the second Appellant in this matter. Under the terms of the sales agreement, CFLC was required to assign to Everex executory contracts designated by Everex. The sale closed on November 12, 1993.

        On January 4, 1994, CFLC filed a motion in its Chapter 11 proceeding to assume executory contracts, including the Cadtrak license, and assign them to Everex. Cadtrak opposed the assignment. CFLC's motion was granted as to all contracts except the Cadtrak license. The bankruptcy court, Judge Randall J. Newsome presiding, held that the Cadtrak license was not assignable without the consent of Cadtrak. From that ruling, CFLC and Everex now appeal.



         The Bankruptcy Code generally authorizes a trustee to assume and assign executory contracts of the debtor. 11 U.S.C.

Page 121

        § 365 . Subsection 365(f)(1) allows executory contracts to be assigned notwithstanding a provision in the contract which prohibits or restricts such assignments, except as otherwise provided in subsection 365(c). Subsection 365(c)(1) prohibits assignment over the objection of the other party to the contract when "applicable law excuses" the other party "from accepting performance from or rendering performance to an entity other than the debtor." This language is interpreted as prohibiting the trustee from assigning over objection a contract of the sort that applicable law makes nonassignable when the contract itself is silent about assignment. Matter of Midway Airlines Inc., 6 F.3d 492, 495 (7th Cir.1993); In re Pioneer Ford Sales, Inc., 729 F.2d 27, 29 (1st Cir.1984). Thus, subsection 365(f) operates to delete a nonassignability clause from a contract and render it "silent" regarding assignment, but subsection 365(c) restores the nonassignability if applicable law holds such "silent" contracts to be nonassignable.

        The instant patent license contract provides that it shall be interpreted according to the laws of the state of California. However, the bankruptcy court held that the federal law regarding the assignability of patent licenses preempts the state law and must be applied. Thus the major issue on appeal is which law is "applicable" within the meaning of subsection 365(c). This issue cannot usefully be separated, however, from the content of the conflicting federal and state law.

        The venerable federal doctrine applied by the bankruptcy court dates back to the nineteenth century, thus pre-dating Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1942). The United States Supreme Court held several times in that century that nonexclusive patent licenses may not be assigned absent the patent holder's express consent. The leading case is Hapgood v. Hewitt, 119 U.S. 226, 233, 7 S.Ct. 193, 197, 30 L.Ed. 369 (1886) (citing earlier cases with similar holdings). Little reasoning was articulated in these cases; rather the Court seemed to assume that the point needed no explanation. The Court has never contradicted itself on this point, and the circuits have uniformly followed Hapgood, even after Erie.

        In 1957, the California Supreme Court decided that, in light of the rule of Erie that there is no general federal common law, federal law should no longer apply to the issue of assignability of patent...

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