In re Centura Software Corp., Bankruptcy No. 01-32164-DM.

• Decision Date: 24 July 2002
• Docket Number: Bankruptcy No. 01-32164-DM.,Adversary No. 01-3239.
• Citation: 281 B.R. 660
• Parties: In re CENTURA SOFTWARE CORPORATION, dba Mbrane, aka Mbrane Incorporated, Raima, Centura Solutions, Vista Development Corporation, Debtor. Raima UK Limited, an English corporation, Plaintiff, v. Centura Software Corporation, dba Mbrane, aka Mbrane Incorporated, Raima, Centura Solutions, Vista Development Corporation, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of California

281 B.R. 660

In re CENTURA SOFTWARE CORPORATION, dba Mbrane, aka Mbrane Incorporated, Raima, Centura Solutions, Vista Development Corporation, Debtor Raima UK Limited, an English corporation, Plaintiff, v. Centura Software Corporation, dba Mbrane, aka Mbrane Incorporated, Raima, Centura Solutions, Vista Development Corporation, Defendant.

Bankruptcy No. 01-32164-DM.

Adversary No. 01-3239.

United States Bankruptcy Court, N.D. California.

July 24, 2002.

COPYRIGHT MATERIAL OMITTED

Dillon E. Jackson, Foster, Pepper & Shelfelman, PLLC, Seattle, WA, Douglas G. Boven, Crosby, Heafey, Roach & May P.C., San Francisco, CA, for Raima UK, Ltd.

Michael B. Schwarz, LeBoeuf, Lamb, Green & MacRae, L.L.P., San Francisco, CA, for The Official Committee of Unsecured Creditors.

David S. Caplan, Brooks & Raub, APC, Palo Alto, CA, for Centura Software Corp.

MEMORANDUM DECISION ON MOTIONS FOR PARTIAL SUMMARY JUDGMENT

DENNIS MONTALI, Bankruptcy Judge.

I. INTRODUCTION

The court has been asked to decide what appears to be a question of first impression: following a debtor's rejection of a license agreement that grants a counter-party a license to use the debtor's software and trademarks, may the counter-party continue to use the trademarks after electing to retain its rights in the software? While the result may appear harsh to the counter-party, the court concludes that once a license has been rejected, the counter-party may not continue to use the trademarks.

Two motions have been filed in this adversary proceeding involving a dispute over rights asserted by Plaintiff Raima UK Limited ("Raima UK") to continue to market and sell software products under trademarks owned by Debtor/Defendant Centura Software Corporation ("Centura US"). Raima UK filed its motion for partial summary judgment ("Setoff Rights Motion"), requesting a determination that (1) its exercise of setoff rights was proper, (2) Centura US' termination of Raima UK's license agreement ("Raima UK Trademark Agreement") was therefore invalid and improper, and (3) Raima UK is entitled to the fees and costs it has incurred in obtaining the order invalidating the termination. Centura U.S. and the Committee of Unsecured Creditors ("Committee") filed their joint motion for partial summary judgment pursuant to 11 U.S.C. § 365(n)¹ ("365(n) Motion"). They requested a determination that, under § 365(n), Raima UK could not retain any trademark or obtain specific performance rights under the rejected Raima UK Trademark Agreement.

The matter came on for hearing on June 14, 2002. Dillon E. Jackson, Esq. appeared for Raima UK. David Caplan, Esq. and Michael B. Schwarz, Esq. appeared for Centura U.S. and Committee, respectively. For the reasons set forth below, the court will grant the 365(n) Motion and deny the Setoff Rights Motion.

II. FACTS²

Raima UK was a wholly-owned English subsidiary of Raima Corporation ("Raima US"). Under the Raima UK Trademark Agreement, Raima U.S. granted Raima UK the exclusive right to market and sell its software ("Raima Software") under its trademarks ("Raima Trademarks") in the United Kingdom, Channel Islands, and the Republic of Ireland ("the UK market"). In return, during the term of the agreement, Raima UK was to pay a minimum of $100,000.00 in license fees for each fiscal year ending March 31. In December 1995, Raima UK was sold to a third party. Subsequently, in a reverse triangular merger in June 1999, Centura U.S. acquired all Raima US' rights, title, and interest in Raima Software and Raima Trademarks, including its rights under the Raima UK Trademark Agreement. Centura UK was, and still is, a wholly-owned subsidiary of Centura US.

On November 30, 2000, in order to exploit the UK market, Centura UK entered into an agreement ("Centura UK Agreement") with Raima UK. The Centura UK Agreement was a sublicense which provided Centura UK the right to sell Raima Software under Raima Trademarks in the UK market. Centura UK was to pay Raima UK the license fees for its sales, and Raima UK would in turn pay Centura U.S. pursuant to the Raima UK Trademark Agreement. Section 10.5 of the Centura UK Agreement ("Section 10.5") also provided that, in the event that Centura UK delays or fails to pay Raima UK any fees resulting from its sale, Raima UK "will have the right to set off such delayed or unpaid amounts against any amounts payable by Raima UK to Centura [US] or Centura UK."

Raima UK asserts that, because of Centura UK's sale of Raima Software, Centura UK became obligated in December 2000 to pay Raima UK approximately $38,000.00 in license fees. When Centura UK failed to pay, Raima UK held back $20,000.00 from its First Quarter 2001 license fees payment due Centura US. After the setoff, it paid Centura U.S. approximately $82,000. Raima UK contends that by exercising its right of setoff, pursuant to Section 10.5 and making the payment, it satisfied its obligation to pay Centura U.S. the annual minimum license fee of $100,000.

In June 2001, Centura UK went into liquidation in England. Subsequently, in August 2001, Centura U.S. filed its Chapter 11 petition in this court. It then terminated the Raima UK Trademark Agreement on November 5, 2001, on the grounds that Raima UK had failed to pay the minimum license fees.

On November 18, 2001, this court issued a Stipulated Order Approving Rejection of License Agreements. The order provided for the rejection of the Raima UK Trademark Agreement, with Raima UK retaining any rights it may have under § 365(n).

On November 21, 2001, Raima UK filed a complaint against Centura U.S. commencing this adversary proceeding. It alleged that it was not in breach of any obligation under the Raima UK Trademark Agreement and it was entitled to market and sell Raima Software under Raima Trademarks in the UK market. It also prayed for an order directing Centura U.S. or its predecessors to provide software updates and documentation. In addition, it requested attorney fees and costs incurred for filing the complaint. On January 17, 2002, Centura U.S. filed its answer and counterclaims. Its counterclaims included a request for the determination that Raima UK does not retain any rights to use the trademarks under the rejected Raima UK Trademark Agreement. After this court granted Committee's Stipulation to Intervene, Committee also filed similar counterclaims on May 10, 2002.

On March 29, 2002, Raima UK filed the Setoff Rights Motion, seeking partial summary judgment that the termination was invalid because the setoff of $20,000 was a proper exercise of its rights under Section 10.5. It requested a determination that, although Centura U.S. was not a signatory to the Centura UK Agreement, it was nonetheless bound by Section 10.5 (among other provisions) because Centura UK was its agent. Centura U.S. and the Committee denied any agency relationship and opposed this Setoff Rights Motion.

On May 17, 2002, Centura U.S. and Committee filed the 365(n) Motion, seeking partial summary judgment requesting the court to determine that § 365(n) does not protect Raima UK's rights to Raima Trademarks in the rejected agreement.

III. DISCUSSION

A. Setoff Rights Motion

1. Burden of Proof

Under Rule 7056, incorporating Federal Rules of Civil Procedure Rule 56, the moving party must come forward with evidence which would entitle it to a directed verdict if the evidence went uncontroverted at trial. Houghton v. South, 965 F.2d 1532, 1537 (9th Cir.1992). Once that burden is met, it shifts to the non-moving party, "who must present significant probative evidence tending to support its claim or defense." Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551, 1558 (9th Cir.1991). Summary judgment should only be granted where the evidence shows "no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

2. Whether Centura UK was Centura US' Agent Is a Question of Fact

The first question is whether an agency relationship existed between Centura U.S. and Centura UK. If undisputed facts establish that one existed, then Centura U.S. was bound by the Centura UK Agreement and Section 10.5. The court would then determine if it was proper for Raima UK to have exercised its setoff rights against the minimum payment required by the Raima UK Trademark Agreement. If the court determines that the exercise was proper, it would grant the Setoff Rights Motion. However, if the facts fail to establish that Centura UK was an agent, the court will not be able to reach a conclusion as to whether Centura U.S. was indeed bound as a matter of law, and would therefore deny the motion. Because Section 16 of the Raima UK Trademark Agreement states that the agreement shall be governed and construed in all respects by English law, English law applies in the court's determination of the existence of agency.

Under English law, an agency relationship may be established in many ways, including actual or apparent authority. 2 Chitty on Contracts ¶ 32-020.³ One of the ways to establish actual authority is by presenting proof of express authorization by the principal. Id. ¶ 32-025. To establish ostensible agency, the party asserting the existence of the relationship must prove that the principal, (1) by its conduct, created an appearance of agency, (2) made a representation of such authority to a third party, and (3) caused him or her to rely on the appearance of agency.⁴ Guenter Treitel, The Law of Contract, pp. 658-60 (10th ed.1999).

Raima UK alleged that Centura UK had express or ostensible authority to act on Centura US' behalf. Therefore, for its partial summary judgment motion to be granted, Raima UK must establish, without any genuine issue of material fact, one of the following: either Centura U.S. had expressly authorized Centura UK to be its agent, or Centura U.S. had, (1) by its conduct, created the appearance that...