Prize Frize, Inc., In re, 93-55422
| Decision Date | 09 August 1994 |
| Docket Number | No. 93-55422,93-55422 |
| Citation | 32 F.3d 426 |
| Parties | , 25 Bankr.Ct.Dec. 1615, Bankr. L. Rep. P 76,039, 31 U.S.P.Q.2d 1861 In re PRIZE FRIZE, INC., Debtor. ENCINO BUSINESS MANAGEMENT, INC., Appellant, v. PRIZE FRIZE, INC.; U.S. Trustee, Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Michael S. Goergen, Encino, CA, for appellant.
Steven L. Crane, Angel and Neistat, Los Angeles, CA, for appellees.
Appeal from the Ninth Circuit Bankruptcy Appellate Panel.
Before: D.W. NELSON and NOONAN, Circuit Judges, and KING *, District Judge.
This case, of first impression in any circuit, turns on whether license fees, paid by a licensee for the use of technology, patents, and proprietary rights, are "royalties" within the meaning of 11 U.S.C. Sec. 365(n)(2)(B) and, as such, must continue to be paid after the licensor in bankruptcy has exercised its statutory right to reject the contract.
With slight alterations we adopt the concise statement of facts made by the BAP, In re Prize Frize, Inc., 150 B.R. 456 (9th Cir.BAP 1993):
The debtor, Prize Frize, Inc., is the owner and licensor of all technology, patents, proprietary rights and related rights used in the manufacture and sale of a french fry vending machine. On March 6, 1991, the debtor entered into a License Agreement granting an exclusive license to utilize the proprietary rights and to manufacture, use and sell the vending machine. In consideration for the license to use the proprietary information and related rights, the licensee agreed to pay the debtor a $1,250,000 license fee--$300,000 to be paid within ten days of execution of the agreement with the balance due in $50,000 monthly payments. The licensee also agreed to pay royalty payments based on a percentage of franchise fees, of net marketing revenues and of any sales of the machines or certain related products. The license agreement also provided that if there was a failure of design and/or components of the machines to the extent that they were not fit for their intended use and were withdrawn from service, then the licensee's obligations would be suspended for a period of 180 days, during which time the debtor was entitled to cure any defect. Encino Business Management, Inc. (EBM) is the successor licensee under this license.
The debtor filed its Chapter 11 petition on March 12, 1991. In September of 1991, EBM, which had become the licensee, stopped making the $50,000 per month license fee payments and has made no payments since. EBM contends that there is a design defect in the machines which caused the machines to be withdrawn from service and which allowed the suspension of its obligation to pay the debtor.
The debtor subsequently filed a motion to reject the license agreement with EBM and to compel EBM to elect whether it wished to retain its rights under section 365(n)(1). EBM did not file a written response to the motion. At the hearing, EBM's counsel indicated that he did not oppose rejection. He disputed, however, that EBM should be required The bankruptcy court entered an order indicating that the debtor might reject the agreement, that EBM might elect whether to retain its rights under the agreement pursuant to section 365(n)(1) and that if EBM elected to retain its rights under the agreement it must do the following: (1) make all license fee payments presently due in the amount of $350,000 within seven days of its election; (2) pay the $400,000 balance of the license fee in monthly installments of $50,000; and (3) waive any and all rights of setoff with respect to the contract and applicable non-bankruptcy law and any claim under section 503(b) arising from performance under the agreement. The court's order also stated that assuming, arguendo, that EBM's payment obligations were properly suspended, the 180-day suspension period had ended and the September to March monthly payments were now due.
to immediately pay $350,000 in past due license fee payments, contending that the obligation to make such payments was suspended because of the purported design defect.
EBM appealed. The BAP held that the license fees were "royalty payments" within the meaning of 11 U.S.C. Sec. 365(n)(1)(B). The BAP also noted that EBM had submitted no evidence of a design defect justifying it in suspending the payments. The BAP affirmed the order of the bankruptcy court. EBM appeals.
No evidence has been presented by EBM of design defect, and so we do not consider this basis for EBM's appeal but proceed to its principal contention.
Section 365 of the Bankruptcy Code is an intricate statutory scheme governing the treatment by the trustee in bankruptcy or the debtor-in-possession of the executory contracts of the debtor. There is no dispute that the license agreement between EBM and the debtor was executory, i.e. there were obligations on both sides which to some extent were unperformed. See In re Frontier Properties, Inc., 979 F.2d 1358, 1364 (9th Cir.1992); In re Quintex Entertainment, Inc., 950 F.2d 1492, 1495-96 (9th Cir.1991). Consequently, the debtor had the right to reject the contract. However, section 365(n)(1) qualifies this right when the debtor is "a licensor of a right to intellectual property." There is no dispute that the debtor is such a licensor. See 11 U.S.C. Sec. 101(56) (defining intellectual property). Consequently, EBM as "the licensee under such contract" could make an election. Sec. 365(n)(1). EBM could either treat the contract as terminated as provided by (n)(1)(A), or EBM could retain its rights to the intellectual property for the duration of the contract and any period for which the contract might be extended by the licensee as of right under applicable nonbankruptcy law. Id. at (n)(1)(B).
EBM elected to retain its rights. It was then obligated to "make all royalty...
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