The Supreme Court’s recent decision in Mission Product Holdings v. Tempnology clarifies what happens to contractual rights upon a debtor’s rejection of a contract under Section 365 of the Bankruptcy Code. The question before the Court was whether a debtor trademark-licensor’s rejection of a licensing agreement deprived the licensee of the licensee’s rights to use the trademark. The Court held that rejection did not because a rejection breaches a contract but does not rescind it. “And that means all the rights that would ordinarily survive a contract breach . . . remain in place.”
Justice Kagan wrote the 8-1 opinion for the Court. She reasoned that Section 365 reflects a general bankruptcy rule that the bankruptcy estate cannot possess anything more than the debtor itself did outside bankruptcy. Noting that rejection “constitutes a breach” under Section 365(g), the Court held that a debtor’s rejection has the same effect as it would outside of bankruptcy. “Such an act cannot rescind rights that the contract previously granted. Here, that construction of Section 365 means that the debtor-licensor’s rejection cannot revoke the trademark license.”
The case decides a central issue in reorganizations and provides important guidance for practitioners.