Lewis Bros. Bakeries Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.)

• Decision Date: 06 June 2014
• Docket Number: No. 11–1850.,11–1850.
• Citation: 751 F.3d 955
• Parties: In re INTERSTATE BAKERIES CORPORATION, Debtor, Lewis Brothers Bakeries Incorporated and Chicago Baking Company, Appellant, v. Interstate Brands Corporation, Appellee, United States; Federal Trade Commission, Amici Curiae.
• Court: U.S. Court of Appeals — Eighth Circuit

751 F.3d 955

In re INTERSTATE BAKERIES CORPORATION, Debtor,Lewis Brothers Bakeries Incorporated and Chicago Baking Company, Appellant,

v. Interstate Brands Corporation, Appellee,United States; Federal Trade Commission, Amici Curiae.

No. 11–1850.

United States Court of Appeals, Eighth Circuit.

Submitted: Oct. 22, 2013.

Filed: June 6, 2014.

J. Mark Fisher, Chicago, IL, for appellant.

Paul M. Hoffmann, Kansas City, MO, for appellee.

Adam D. Chandler, Washington, DC, for amicus parties.

Before RILEY, Chief Judge, WOLLMAN, LOKEN, MURPHY, BYE, SMITH, COLLOTON, GRUENDER, BENTON, SHEPHERD, and KELLY, Circuit Judges, En Banc.

COLLOTON, Circuit Judge.

Interstate Bakeries Corporation (“Interstate Bakeries”) and Lewis Brothers Bakeries, Inc. (“LBB”) both sought a declaratory judgment from the bankruptcy court to determine whether a license agreement between Interstate Brands Corporation (“IBC”), a subsidiary of Interstate Bakeries, and LBB was executory under 11 U.S.C. § 365(a). The bankruptcy court ruled that the agreement was executory, and the district court affirmed. Because the license agreement was part of a larger, integrated agreement that IBC has substantially performed, we reverse.

I.

In 1995, Interstate Bakeries announced its acquisition of Continental Baking Company, the owner of the Wonder and Hostess brands and trademarks. The United States Department of Justice, however, challenged the proposed acquisition as inconsistent with the antitrust laws. United States v. Interstate Bakeries Corp. & Cont'l Baking Co., No. 95–C–4194, 1995 WL 803559 (N.D.Ill. Aug. 7, 1995). In January 1996, the United States District Court for the Northern District of Illinois entered a final judgment to resolve the antitrust dispute. The judgment required Interstate Bakeries

to grant to one or more purchasers a perpetual, royalty-free, assignable, transferable, exclusive license to use the Relevant Labels to produce (or have produced for it) and sell White Pan Bread in the Relevant Territories, together with such Bread Assets as are reasonably necessary in order for the acquirer ... to remain a viable competitor in the White Pan Bread market in each Relevant Territory.

Id. at *3. The “Bread Assets” included various plants, land, buildings, fixtures, machinery, equipment, vehicles, route books, customer lists, and other records used in the distribution of the brands. Id. at *1–2.

The 1996 judgment called for Interstate Bakeries to divest itself of at least one of its Labels in each of four territories: (1) Eastern Wisconsin, (2) Chicago, (3) Central Illinois, and (4) Southern California. Id. at *2–3. The Labels at issue included Wonder, Mrs. Karl's, Butternut, Sunbeam, and Weber's. Id. The judgment defined “Label” to encompass, inter alia, “all legal rights associated with a brand's trademarks, trade names, copyrights, designs, and trade dress.” Id. at *2.

In December 1996, pursuant to the 1996 judgment, IBC entered into an agreement to sell its Butternut bread operations and assets in the Chicago territory and its Sunbeam bread operations and assets in the Central Illinois territory to LBB. To effect this transfer, IBC and LBB entered into two agreements: an Asset Purchase Agreement and a License Agreement. The Asset Purchase Agreement provided for the transfer to LBB of tangible assets and “the perpetual, royalty-free, assignable, transferable exclusive license to use the trademarks ... pursuant to the terms of the License Agreement.” The License Agreement provided that for “a fee of ten dollars ($10.00), and other good and valuable consideration, set forth in the Allocation Agreement described in Section 2.3 of the Purchase Agreement,” “IBC grants to [LBB] ... [a] license to use the Chicago Trademarks.” Of the $20 million purchase price, the parties agreed to allocate $8.12 million to the intangible assets, including the trademark licenses, and the remaining $11.88 million to the various tangible assets.

The License Agreement defined the “Chicago Trademarks” as thirteen marks: Butternut, Butternut Design, Mrs. Karl's, Gingham Design, Country Wheat, Blue Seal, Home Style, Honey Wheat, Old World, Dixie Rye, Hearty Rye, Fun Buns, and Sun Maid Raisin. The agreement provided mutual duties of notification regarding any infringement of the rights under the marks. It also required that the goods sold under the marks be of the same character and quality as those sold by IBC at the time of the agreement, and provided that LBB's failure to maintain such quality would constitute a material breach of the agreement.

In September 2004, Interstate Bakeries and eight of its subsidiaries and affiliates, including IBC, filed voluntary bankruptcy petitions under Chapter 11. See In re Interstate Bakeries Corp., No. 04–45814, 2010 WL 2332142 (Bankr.W.D.Mo. June 4, 2010) ( Interstate Bakeries I ). In November 2008, Interstate Bakeries first disclosed the existence of the License Agreement, as part of an amended plan of reorganization. Id. at *1. Interstate Bakeries identified the agreement as an executory contract that it intended to assume as part of its plan of reorganization. Id.

In December 2008, LBB filed an adversary complaint, seeking a declaratory judgment that the License Agreement is not an executory contract under 11 U.S.C. § 365 and is therefore not subject to assumption or rejection by the debtor. Interstate Bakeries countered by moving to reject the License Agreement and seeking a declaration that it is an executory contract. Both parties moved for summary judgment. Before the bankruptcy court could rule, Interstate Bakeries withdrew its motion to reject the License Agreement, reinstated its request to assume the License Agreement, and reiterated its request for a declaration that the License Agreement is an executory contract.

The bankruptcy court, looking solely to the License Agreement, found that both IBC and LBB had material, outstanding obligations. Relying on what it called the “seminal case” from a Delaware bankruptcy court in In re Exide Techs., 340 B.R. 222 (Bankr.D.Del.2006), appeal denied, judgment aff'd,No. 06–302–SLR, 2008 WL 522516 (D.Del. Feb. 27, 2008), vacated and remanded,607 F.3d 957 (3d Cir.2010), the court concluded that “[t]he existence of all of these material, unperformed (or continuing) obligations leads the Court to the inescapable conclusion that the License [Agreement] is executory and, therefore, subject to assumption under 11 U.S.C. § 365.” Interstate Bakeries I, 2010 WL 2332142, at *7.

LBB appealed to the district court pursuant to 28 U.S.C. § 158(a)(1), and the district court affirmed the bankruptcy court. In re Interstate Bakeries Corp., 447 B.R. 879 (W.D.Mo.2011) ( Interstate Bakeries II ). Also looking solely to the License Agreement, the district court reasoned that LBB's “failure to maintain the character and quality of goods sold under the Trademarks would constitute a material breach of the License Agreement, thus a material obligation remains under the License Agreement, and it is an executory contract.” Id. at 880.

LBB appealed to this court. While the appeal was pending, Interstate Bakeries changed its name to Hostess Brands, Inc. Hostess Brands filed a bankruptcy petition in the Southern District of New York in January 2012, and the New York bankruptcy court in November 2012 granted Hostess Brands authority to wind down its business.

In the meantime, in August 2012, a divided panel of this court affirmed the districtcourt. In re Interstate Bakeries Corp., 690 F.3d 1069 (8th Cir.2012) ( Interstate Bakeries III ). The full court, after receiving the views of the Antitrust Division of the Department of Justice and the Federal Trade Commission, granted LBB's petition for rehearing en banc.¹

II.

A.

Before considering the merits, we must address IBC's contention that events occurring after entry of the district court's judgment have rendered the case moot. IBC informed this court that on July 19, 2013, pursuant to the New York bankruptcy proceeding, the company sold its Butternut Assets—including the Butternut brand, marks incorporating the term “butternut,” the Gingham Design, and the Butternut Country White brand—to an affiliate of Flowers Foods, Inc., an unrelated third party. The sale to the Flowers Foods affiliate was made “subject to such rights and interests (if any) of LBB.”

IBC says the appeal is moot because “the opportunity for IBC to realize any value from rejection of the License Agreement has now passed because IBC no longer owns the Butternut trademarks.” This argument fails because IBC acknowledges that it “still owns four of the twelve trademarks that are the subject of the License Agreement.” Although the Butternut trademarks may well be the most significant of the assets governed by the License Agreement with LBB, a decision in this case will still affect the rights of IBC and LBB with respect to the four remaining marks owned by IBC and covered by the License Agreement.

IBC suggests alternatively that there is no live case or controversy because it has waived any right to reject the License Agreement in bankruptcy. In its motion to dismiss the case as moot, IBC stated that it “has no reason to, and hereby acknowledges that it will not, seek rejection of the License Agreement under Section 365 of the Bankruptcy Code.” The carefully worded acknowledgment, however, does not address the precise dispute in this case: whether the bankruptcy court correctly determined that the License Agreement is executory. There is still a live controversy on that question. A declaration that the License Agreement is not executory—regardless of whether IBC would assume or reject the agreement in bankruptcy—would affect the value of LBB's exclusive, perpetual, royalty-free license by removing uncertainty about the status of the License Agreement. A judgment in favor of LBB also would allow the company to plan its ongoing business without the potential that Flowers Foods or any other...