In Re Qimonda Ag Bankruptcy Litigation.Micron Technology Inc.

• Decision Date: 02 July 2010
• Docket Number: No. 1:10cv26,1:10cv28.,1:10cv27,1:10cv26
• Citation: 433 B.R. 547
• Parties: In re QIMONDA AG BANKRUPTCY LITIGATION.Micron Technology, Inc., Appellant,v.Qimonda AG, et al., Appellees.Elpida Memory, Inc., et al., Appellants,v.Qimonda AG, et al., Appellees.Nanya Technology Corp., Appellant,v.Qimonda AG, et al., Appellees.
• Court: U.S. District Court — Eastern District of Virginia

433 B.R. 547

In re QIMONDA AG BANKRUPTCY LITIGATION.

Micron Technology, Inc., Appellant,

v.Qimonda AG, et al., Appellees.

Elpida Memory, Inc., et al., Appellants,

v.Qimonda AG, et al., Appellees.

Nanya Technology Corp., Appellant,

v.Qimonda AG, et al., Appellees.

Nos. 1:10cv26, 1:10cv27, 1:10cv28.

United States District Court,

E.D. Virginia,

Alexandria Division.

July 2, 2010.

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MEMORANDUM OPINIONT.S. ELLIS, III, District Judge.

This appeal from the Eastern District of Virginia Bankruptcy Court (“Bankruptcy Court”) presents several novel questions concerning cross-border insolvency proceedings conducted pursuant to Chapter 15 of the Bankruptcy Code, 11 U.S.C. §§ 1501-1532 (2006). Specifically at issue are the following questions:

(i) whether the Bankruptcy Court properly ensured that appellants were sufficiently protected, as required by 11 U.S.C. § 1522, in modifying the discretionary relief previously granted under 11 U.S.C. § 1521;

(ii) whether the Bankruptcy Court erred in concluding that 11 U.S.C. § 365(n) does not apply automatically in a Chapter 15 proceeding; and

(iii) whether the Bankruptcy Court erred in granting comity to German Insolvency Code § 103, which treats executory intellectual property license contracts differently from licenses protected under § 365(n).

I.

Appellee Qimonda AG (“Qimonda”) is a German company with its headquarters in Munich, Germany. From 2006 to the time of its insolvency in 2009, Qimonda, a major producer of dynamic random access memory (“DRAM”) chips for computers, operated globally through a number of subsidiaries, including Qimonda North America Corporation and Qimonda Richmond, LLC.¹ Qimonda claims to hold approximately 12,000 patents, including at least 4,000 U.S. patents and over 1,000 pending U.S. patent applications. The remaining patents were issued by Germany and various other countries.

Appellee Michael Jaffé is a German attorney who specializes in insolvency law. In April 2009, the Munich, Germany insolvency court appointed Jaffé as Insolvency Administrator of Qimonda's estate. Thereafter, the U.S. Bankruptcy Court named Jaffé as Qimonda's Foreign Representative in the Chapter 15 proceeding.²

Between 1995 and 2008, Qimonda (or its predecessor entities) entered into various joint venture and patent cross-licensing agreements with appellants, ³ all of which are international electronics companies that manufacture and sell semiconductors in the United States and abroad. Pursuant to these agreements, Qimonda and appellants have perpetually and irrevocably cross-licensed tens of thousands of patents.

In January 2009, Qimonda commenced insolvency proceedings in Munich, Germany. In the course of the proceeding, Jaffé was appointed Insolvency Administrator of Qimonda's estate. In this capacity, Jaffé then filed in the U.S. Bankruptcy Court a petition for recognition of the German insolvency proceeding under Chapter 15 of the Bankruptcy Code. Following a hearing on the petition, the Bankruptcy Court issued two orders, both dated July 22, 2009. The first order correctly recognized the German insolvency proceeding as a “foreign main proceeding,” i.e., an insolvency proceeding “pending in the country where the debtor has the center of its main interests.” 11 U.S.C. § 1517 (setting forth prerequisites to granting recognition).⁴ The second order (the “July 22, 2009 supplemental order”)-issued under § 1521 ⁵-appointed Jaffé as Foreign Representative and granted discretionary relief to appellees. Pertinent here is paragraph 4 of the July 22, 2009 supplemental order, which made certain provisions of the Bankruptcy Code applicable to Qimonda's Chapter 15 proceeding:

Pursuant to 11 U.S.C. § 1521(a) and in addition to those sections made applicable pursuant to § 1520, the following sections of title 11 of the United States Code are also applicable in this proceeding: §§ 305-307, 342, 345, 349, 350, 364-366, 503, 504,546,551,558.

In re Qimonda AG, 1:09-14766 (Bankr.E.D.Va. July 22, 2009) (Supplemental Order).

Thereafter, Jaffé, acting as Qimonda's Foreign Representative, sent letters to Samsung, Infineon, Elpida, and Nanya electing nonperformance of the patent cross-licensing agreements between Qimonda and these appellants pursuant to German Insolvency Code § 103.⁶ This prompted at least Samsung and Elpida to respond by sending letters to the Foreign Administrator, asserting their rights under the Bankruptcy Code to retain licenses for Qimonda's patents. More specifically, Samsung and Elpida in their letters-consistent with appellants' position on appeal-argued that § 365(n) does not permit appellees to elect nonperformance of the cross-licensing agreements. Instead, § 365(n) allows appellants (i) to accept appellees' termination and sue for damages, or (ii) to reject appellees' termination, thereby continuing the patent licenses. See 3 Collier on Bankruptcy ¶ 365.14. In short, the parties dispute whether their cross-licensing agreements may be terminated by appellees without appellants' consent under German Insolvency Code § 103, or whether § 365(n) precludes such an action.

Given this dispute, the Foreign Administrator filed a motion in the Bankruptcy Court to amend the July 22, 2009 supplemental order. Specifically, the Foreign Administrator requested that the Bankruptcy Court (i) remove the reference to § 365 made in paragraph 4 or, in the alternative, (ii) insert at the conclusion of paragraph 4 the proviso that “Section 365(n) applies only if the Foreign Representative rejects an executory contract pursuant to Section 365 (rather than simply exercising the rights granted to the Foreign Representative pursuant to the German Insolvency Code).” In support of the motion, the Foreign Representative argued that “[t]he changes requested to the Supplemental Order ... are consistent with principals [sic] of comity and the core purposes of Chapter 15.”

Following briefing and argument, the Bankruptcy Court granted the Foreign Administrator's motion to amend the July 22, 2009 supplemental order over appellants' objections. More precisely, in a November 19, 2009 order issued under § 1522(c),⁷ the Bankruptcy Court stated that

[t]he application of Section 365 to the instant proceeding shall not in any way limit or restrict (i) the right of the Administrator to elect performance or nonperformance of agreements under § 103 German Insolvency Code or such other applicable rule of law in the Foreign Proceeding, or (ii) the legal consequence of such election; provided, however, if upon a motion by the Administrator under Section 365 of the Bankruptcy Code, the Court enters an Order providing for the assumption or rejection of an executory contract, then Section 365 shall apply without limitation solely with respect to the contracts subject to such motion.

In re Qimonda AG, 1:09-14766 (Bankr.E.D.Va. Nov. 19, 2009) (Order).

Accordingly, the Bankruptcy Court issued a revised supplemental order (the “November 19, 2009 supplemental order”) containing the following proviso in paragraph 4:

provided, however, Section 365(n) applies only if the Foreign Representative rejects an executory contract pursuant to Section 365 (rather than simply exercising the rights granted to the Foreign Representative pursuant to the German Insolvency Code).

In re Qimonda AG, 1:09-14766 (Bankr.E.D.Va. Nov. 19, 2009) (Supplemental Order).

In an accompanying memorandum opinion, the Bankruptcy Court gave the following reasons for granting the Foreign Administrator's motion and conditioning the applicability of § 365(n) on the formal rejection of an executory contract under the Bankruptcy Code:

(i) that the application of § 365 to Qimonda's patent portfolio would substantially undermine German Insolvency Code § 103, which permits an administrator to elect nonperformance of an executory contract;

(ii) that § 365 must give way to the German Insolvency Code because “[a]ncillary proceedings such as the Chapter 15 proceeding pending in this court should supplement, but not supplant, the German proceeding”;

(iii) that “[i]f the patents and patent licenses are dealt with in accordance with the bankruptcy laws of the various nations in which the licensees or licensors may be located or operating, there will be many inconsistent results”;

(iv) that the inconsistent treatment of Qimonda's patent portfolio may result in the portfolio being “splintered” or “shattered into many pieces that can never be reconstructed”;

(v) that the application of § 365(n) to only certain patents in Qimonda's portfolio will “diminish[ ] the value of these assets” and “may well be detrimental to parties who are or wish to license the patents”;

(vi) that it was an “unfortunate but inevitable result” of Qimonda's insolvency and the Foreign Administrator's election of nonperformance under the German Insolvency Code that appellants would be forced “to bid for licenses for which they have already paid”; and

(vii) that “[a]ll patents should be treated the same” on the ground that “[t]here should not be disparate results simply because of the location of a factory or research facility or corporate office.”

In re Qimonda AG, 2009 WL 4060083, 2009 Bankr.LEXIS 3786 (Bankr.E.D.Va. Nov. 19, 2009).

On January 11, 2010, appellants filed three separate notices of appeal, with Micron and Nanya filing individually; and Elpida, Infineon, and Samsung filing jointly (the “Elpida appellants”).⁸ On appeal, appellants argue that the Bankruptcy Court erred in conditioning the applicability of § 365(n) on the Foreign Representative's formal rejection of the parties' cross-licensing agreements under the Bankruptcy Code. More specifically, the parties principally raise four issues:

(i) whether the decision to grant comity to German law is reviewed de novo or for an abuse of discretion;

(ii) whether the Bankruptcy Court's decision to amend its July 22, 2009 supplemental order was consistent with the procedural...