The permanent release of a nondebtor from a debt owed to a third party in a chapter 11 plan is barred per se in some courts and must meet a high standard to be allowed in others. The U.S. Bankruptcy Court for the District of Colorado in In re Midway Gold US Inc. addressed this issue in connection with confirmation of the joint chapter 11 plan of 14 debtor entities in the gold mining and exploration business.

As a threshold issue, the Midway court looked to whether third-party releases are ever allowed in the Tenth Circuit or whether they are barred per se as had been argued and applied in other cases. The court analyzed the Western Real Estate case and concluded a chapter 11 plan could not “bar litigation against nondebtors for the remainder of the discharged debt” and that the court’s authority under § 105(a) could not be used in a manner inconsistent with § 524(e). However, such finding did not translate into an absolute bar of all nondebtor releases in all circumstances.

In connection with its analysis of the nondebtor release, the Midway court reviewed the treatment of nondebtor releases in other circuits and found that while the “Fifth and Ninth Circuits have held a bankruptcy court does not have authority to issue and enforce third-party non-debtor releases in a Chapter 11 plan,” these circuits are in the minority. 

What happens to a licensee’s right to use a trademark if the licensor files for bankruptcy? This critically important question was recently addressed by the First Circuit Court of Appeals in Tempnology. Bucking the current trend of case law, the First Circuit held that a debtor-licensor’s rejection of a trademark license agreement terminates the licensee’s rights to use the mark. Widening the existing circuit split on this important issue, Tempnology presents an attractive case for the Supreme Court’s review and some considerations for licensees of trademarks.

Rejection of Intellectual Property Executory Contracts in Bankruptcy

Rejection of an executory contract pursuant to § 365(a) of the Bankruptcy Code generally relieves the debtor of its obligations to perform under the executory contract. Under § 365(g), the rejection is treated as a breach and the nonrejecting party is entitled to a claim for breach damages.

Section 365(n), however, provides certain protections to licensees in connection with the rejection of intellectual property contracts.