Contributed by Laura Napoli
Finding an innovative way to overcome an unfavorable decision can sometimes be a good thing. Creativity has its limits, however, as one debtor recently learned firsthand. In Exide Tech. v. Enersys Delaware, Inc. (In re Exide Tech.), the United States Bankruptcy Court for the District of Delaware decided that a debtor, unhappy with a decision it had received from the Third Circuit, could not attempt to circumvent the circuit court’s decision by, among other things, attempting to stretch the definition of a “claim” beyond the parameters provided in the Bankruptcy Code.
Exide Technologies and Enersys Delaware, Inc. manufactured industrial batteries. In 1991, Exide granted Enersys an exclusive license to use one of Exide’s trademarks for Enersys’ battery business. Years later, in 2002, Exide filed for bankruptcy and sought to reject the agreement granting Enersys the license to use the trademark. Enersys objected to Exide’s motion to reject the license agreement, arguing that the agreement was not executory.
Although the bankruptcy court held that the contract could be rejected, on appeal the Third Circuit reversed, finding the agreement was not executory because it did not contain any ongoing material obligations for Enersys as of the date of Exide’s bankruptcy filing. The Third Circuit thus concluded that Exide could not reject the agreement.
Undeterred by the Third Circuit’s decision, Exide commenced an adversary proceeding in the bankruptcy court seeking declaratory judgments that Enersys’ rights under the agreement were “claims” that had been discharged by confirmation of Exide’s plan of reorganization under section 1141(d) of the Bankruptcy Code and that Enersys’ right to use the trademark could be extinguished by default under section 1141(c) of the Bankruptcy Code. Enersys filed a motion to dismiss the complaint. Section 1141(d)(1) of the Bankruptcy Code provides that confirmation of a plan “discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h) or 503(i).” Section 1141(c) of the Bankruptcy Code provides that “property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor.”
“Dealing with” Property
The court considered Exide’s second argument first. Exide contended that Enersys’s interest in the trademark was similar to a lien that would be eliminated by plan confirmation pursuant to section 1141(c). Relying on a Seventh Circuit case, the court noted that, for a lien or other property to be extinguished, it had to determine whether Exide’s plan actually “dealt with” the property at issue. A plan “deals with” property if it gives some indication that it has compensated the creditor or otherwise affected its interest.
Applying this reasoning to the facts at hand, the court found that Exide’s plan only “dealt with” Enersys’s rights in the trademark by providing the agreement would be rejected so that Exide could regain the exclusive license. Yet, because the Third Circuit had already determined that Exide could not reject the agreement, Exide could not deprive Enersys of its rights to use the trademark under the agreement. The court held that Exide could not use a boilerplate provision of its plan to divest Enersys of its interest while blatantly disregarding the Third Circuit’s decision.
Scope of a “Claim”
Turning next to Exide’s argument that Enersys’s right to use the trademark was a “claim” that had been discharged by Exide’s plan confirmation, the court acknowledged that claims arising from the rejection of executory contracts are typically discharged by plan confirmation. Again, however, the court noted that the Third Circuit had already determined that the agreement was not executory. Further, because Exide had not breached the agreement, Enersys had neither a right to payment nor a right to an equitable remedy for breach of performance prior to plan confirmation. Thus, the court concluded that Enersys did not have a “claim” as defined by section 101(5) of the Bankruptcy Code.
Although Exide tried to argue that the word “claim” should be interpreted in the broadest possible way, the court was unconvinced, holding that the definition of “claim” requires some sort of pre-confirmation event triggering the right to payment. In this case, there was no pre-confirmation injury or breach that established a right to payment in connection with the agreement. Although Exide argued that it was required to permit Enersys to use the trademark and to forbear from using the trademark itself, the court deemed those allegations insufficient to constitute a “right to payment.”
Finally, Exide argued that, during the litigation relating to rejection of the agreement, Enersys’s expert had testified that if the trademark agreement were rejected, Enersys would suffer damages. The court rejected Exide’s argument, holding that this amounted only to a potential rejection damage claim. Because the agreement could not be rejected per the Third Circuit, there was no plausible, actual claim for relief based on a pre-confirmation right to payment. Concluding that nothing in Exide’s complaint established that Exide had breached its performance of the agreement pre-confirmation, the court held that no “claim” had arisen that could be discharged.
As a final blow to Exide, the court held that the complaint was barred by judicial estoppel. Exide’s contention that the agreement was an executory contract throughout the plan confirmation process was inconsistent with its position that plan confirmation discharged Enersys’s claims to use of the trademark and caused the trademark to vest as property of Reorganized Exide free and clear of any liens. Finding that Exide’s complaint was made in bad faith to circumvent the Third Circuit’s decision, the court noted that to accept Exide’s position would be to provide Exide with an unfair advantage, allowing it to gain control over the trademark in spite of the Third Circuit’s decision that Exide could not reject the agreement.
In short, although Exide may have employed creative arguments in an attempt to get around the Third Circuit’s ruling, it appears that Exide’s creativity went too far.