The 11th Circuit Court of Appeal recently issued its decision in the case of Thompkins v. Lil' Joe Records, Inc. et al., ___ F.3d ___, 2007 WL 316302 (11th Cir. 2007). The resolution of the case hinged on the effect of the previous rejection of certain executory contracts.
In this case, a recording company previously rejected its contract with a rap star to purchase certain copyrights from him while it was in chapter 11. The confirmed chapter 11 plan ordered that all contracts between the parties be rejected and that the copyrights be sold to a rival recording company. Years later, the rapper brought suit claiming inter alia that he was still the owner of the copyrights due to the previous rejection of the executory contract.
The 11th Circuit affirmed the District Court's decision in the recording studio and its assignees favor. It held that the rejection of the transfer agreement of the copyright as an executory contract to the debtor in possession did not cause the ownership of the copyrights to revert to the rap artist. Therefore, the copyrights properly passed into the recording company's bankruptcy estate and from there were legally sold and assigned to a rival recording company.
The 11th Circuit rejected the argument that the rejection of an executory contract is the functional equivalent of a contract rescission which would render the contract void and put the parties back into the positions they occupied before the contract was formed. The Court explained that section 365 of the bankruptcy code ordinarily deems the rejection of an executory contract to be "a breach of such contract...immediately before the date of the filing of the [bankruptcy] case" and that while it is true that a debtor must either assume or reject an executory contract in its entirety, that rejection of a contract does make the contract disappear--it merely frees the estate from the obligation to perform. The rejection of a contract has absolutely no effect upon a contract's continued existence--the contract is not cancelled, repudiated, rescinded, or in any other fashion terminated.
The Court further observed that that the rejection of an executory contract affects the unperformed portion of an executory agreement differently from those provisions of the agreement that by their nature are fully executed. Section 365 addresses only future performance obligations of the parties and does not have any impact upon the executed portions of a contract.
In the case herein, the transfer of the copyrights to the debtor in possession was fully executed and they did not revert to the transferor as a result of the rejection of the executory contract. The rejection only freed the debtor in possession from its future obligations and allowed the other party a pre-petition claim for damages resulting from the breach. In short, the rejection had no effect on the now former debtor in possession 's ownership of the copyrights.