The Metamorphosis of Assignment Clauses in Bankruptcy

You negotiate a license agreement that provides for the assignment of the agreement to successors in interest so long as they agree to be bound by the terms of the agreement. You then file a Chapter 11 bankruptcy and as a debtor in possession, seek to assume that license agreement. The other party to the contract objects to such assumption and the Bankruptcy Court says that in light of such objection you cannot assume the license agreement. You cannot reorganize without the license. You are dead.

This nightmare unfortunately is a reality. Recently, the Fourth Circuit Court of Appeals joined the Ninth, Third and Eleventh Circuits in adopting the “hypothetical test” in denying a debtor in possession's assumption of an executory contract under section 365(c) of the Bankruptcy Code despite an express assignability provision in the contract. In RCI Tech. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257 (4th Cir. 2004), the Fourth Circuit not only became the fourth Circuit Court of Appeals to follow the Catapult Test, as the hypothetical test is referred to in light of the Ninth Circuit Court of Appeals decision in In re Catapult Entm't., Inc., 165 F.3d 747 (9th Cir. 1999), but expanded the Catapult decision to deny assumption where the contract contained the objecting party's express consent to the assignment of the contract to successors in interest of the debtor.