In re Logical Software, Inc.

• Decision Date: 07 November 1986
• Docket Number: Bankruptcy No. 86-10324-JNG.
• Citation: 66 BR 683
• Parties: In re LOGICAL SOFTWARE, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

66 B.R. 683 (1986)

In re LOGICAL SOFTWARE, INC., Debtor.

Bankruptcy No. 86-10324-JNG.

United States Bankruptcy Court, D. Massachusetts (Boston).

November 7, 1986.

Paul D. Moore, Foley, Hoag & Eliot, Boston, Mass., for debtor/movant.

Robert Somma, Goldstein & Manello, Boston, Mass., for respondent.

MEMORANDUM

JAMES N. GABRIEL, Bankruptcy Judge.

The matter before the Court is the Debtor's Motion for Authority to Reject Executory Contract with Infosystems Technology, Inc., ("ITI"), pursuant to section 365(a) of the Bankruptcy Code. ITI objects to the motion. Both parties have submitted memoranda and affidavits in support of their respective positions. A hearing was held on the matter on September 8, 1986, at which time the parties voiced no objection to having the Court decide the matter without an evidentiary hearing.

FACTS

There is no serious dispute as to the facts. The Debtor commenced its case under Chapter 11 by filing a voluntary petition on March 14, 1986. It is operating its business and managing its affairs as debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.

Since July, 1981, the Debtor has been engaged in the business of developing, licensing and maintaining computer software. The Debtor licenses its computer technology under a series of exclusive and non-exclusive licenses to various licensees or developers for distribution. Occasionally, it sells its software to end users. The Debtor's two principal products are its LOGIX and Softshell software. The Debtor's software and its rights to license or to sell that software constitute its principal assets. Accordingly, the sale, licensing or distribution of the Debtor's software is the major potential source of funds available for the Debtor's reorganization. Since the commencement of the bankruptcy case, the Debtor has been analyzing its existing license or distribution agreements and negotiating with third parties with respect to new agreements. The Debtor has also attempted to resolve outstanding disputes with respect to existing agreements, including a long-standing dispute with ITI, to enable it to project future royalties.

The Debtor entered into a Distribution Agreement (the "Agreement") with ITI on or about March 30, 1984. Under the Agreement, the Debtor granted ITI the exclusive rights of distribution with respect to the Debtor's LOGIX technology on certain computers and/or computer series of specified manufacturers (e.g., Wang, Fortune Systems, Xerox, Apple and certain IBM series), as well as non-exclusive rights on computers or computer series of other specified manufacturers. Of the 12 licenses and approximately 5000 sublicenses issued on the Debtor's products, ITI possesses the only exclusive license by virtue of the Agreement. The Agreement, which purports to be non-terminable, expires on January 1, 2082, unless otherwise terminated by agreement of the parties.

As provided in the Agreement, ITI paid the Debtor $304,375 in pre-paid license fees. The Agreement further provides that ITI is to pay license fees to the Debtor on the basis of percentages of certain revenues received by ITI from licensing LOGIX or software incorporating LOGIX. Under the Agreement, ITI received a copy of the LOGIX source code. The terms of the Agreement allow ITI to modify that code and market the resulting program under the name LOGIX or another name.

ITI, in fact, modified some of the LOGIX source code, wrote additional source code and marketed the resulting software to its customers under the name RUBIX. Since 1985, the development and marketing of RUBIX has provided ITI with 100% of its earnings. Indeed, ITI completely changed its business orientation from consulting and systems development to product development in reliance on the LOGIX license.

The Debtor's relationship with ITI has been marked by discord from its inception, however. The Debtor describes the relationship as resulting in "numerous and continuous disputes and protracted and costly litigation, the burdens of which were a precipitating cause of the instant Chapter 11 case." ITI concurs, describing the relationship as "contentious and problematical." The Agreement itself was entered as part of a settlement of disputes between the parties. Furthermore, the Debtor's Schedules and Statement of Financial Affairs reveal that ITI sued the Debtor in the United States District Court for the District of Maryland with respect to its distribution rights and recovered a judgment in excess of 17 million dollars. Likewise, the Debtor sued ITI in the United States District Court for the District of Massachusetts for business torts, breach of contract and trademark infringement, seeking approximately 5.5 million dollars. The Debtor recovered a judgment against ITI in that suit. Both cases are on appeal. As a consequence, it is not surprising that the parties are now unable to reach an agreement as to the amount of royalties owed by ITI to the Debtor.

During the period between January 1, 1982 and December 31, 1985, ITI asserts that it paid the Debtor a total of approximately $450,000 pursuant to the Agreement. Accordingly, ITI contends that its payments to the Debtor average $10,000 per month. The Debtor, predictably, views that figure as exaggerated, suggesting that it is comprised not only of royalties but also consulting fees, interest on late payments and the like and that the amount of royalties in fact paid by ITI average $2,654 per month. The Debtor also points out that ITI has only tendered a single payment of $39.50 for post-petition royalties in all of 1986, based upon revenues the Debtor claims to be grossly understated. Moreover, the Debtor states that it must constantly demand accountings and payments of royalties from ITI and that ITI has asserted setoffs with respect to both pre-petition and post-petition claims it has against the Debtor.

In view of its troublesome relationship with ITI, and its inability to effectuate a compromise acceptable to both parties, the Debtor, on July 7, 1986, moved for authority to reject its executory contract with ITI. In support of its motion, the Debtor indicates that its management and board of directors, in the exercise of their sound business judgment, concluded that rejection of the Agreement with ITI was in the best interests of the Debtor, its creditors and the bankruptcy estate. The Debtor also notes in its motion that ITI's exclusive rights with respect to LOGIX and its assertion of rights with respect to Softshell have adversely affected its ability to negotiate with third parties for sales of rights in LOGIX or for license or distribution arrangements on more favorable or profitable terms than those contained in the Agreement.

In its objection to the Debtor's motion, ITI emphasizes the detriment to the estate and to creditors that would stem from rejection and the likely destruction of its own business. Specifically, ITI juxtaposes the Debtor's income stream from the Agreement ($10,000 per month) with its claim against the estate in the event that the Agreement is permitted to be rejected. ITI estimates that its claim against the estate, based upon damages for lost profits, customer claims and going concern value, would be between $14.4 million and $62.5 million. According to ITI, such a claim would reduce the dividend payable to other creditors to...