A few weeks back, I wrote about how New York bankruptcy addresses publicly issued licenses, ranging from driver’s licenses to occupational licenses. Now I’ll discuss private licenses, which generally come up in bankruptcy cases with a business dimension. What are these and how do they work? Actually, people buy private licenses all the time without even thinking about it. Usually this occurs in the context of admissions to premises, e.g. for sporting or music events. The ticket authorizes the holder to enter the property and participate in certain activities at a set time.
Essentially, all licenses are the legal granting of permission to engage in some kind of activity relating to property owned by whoever is issuing the license. As such they are assets to the bankruptcy estate that are therefore protected by the automatic stay. (Just don’t expect the trustee to care much about cheap tickets that can’t be resold.) Bankruptcy treats private licenses as a type of “executory contract,” which are agreements that both parties have not completely performed their obligations. The most common forms of these are leases, including apartment leases, and service agreements, like cell phone plans. Each month one party pays for the property or plan, and the other party provides it.
Debtors can assume unexpired executory contracts if they do so within 60 days of the section 351 meeting of the creditors. Debtors (as “licensees”) must cure any missed payments to licensors, but on the bright side the licensed properties are removed from the bankruptcy estate and debtors can use them freely. However, assumption agreements are final; debtors cannot rescind them. You can read more about assuming leases versus reaffirming debts here.
Alternatively, debtors can reject executory agreements, leaving them breached as of prior to the bankruptcy petition. Debtors need not cure any pre-bankruptcy fees or royalties. In this scenario, the damages by the breach will become a claim against the bankruptcy estate, so the licensor will probably not be repaid in full. Relatedly, termination on bankruptcy clauses in the licensing agreement that are drafted in favor of the licensor are generally unenforceable.
The Bankruptcy Code dedicates an entire section to how trustees handle executory contracts, section 365. Trustees may assume executory contracts as debtors can, and trustees can reject them too. Trustees can’t assume executory contracts for loans or personal services. Section 365(n) also creates special rules for intellectual property licenses if the trustee rejects them.
Finally, debtors and trustees can try and assume a license and assign it to another party. The third party must provide assurances of future performance, but the bankruptcy court makes that determination, not the licensor. Most contractual terms limiting such assignments are not enforceable in bankruptcy unless some other law prohibits the assignment and the licensor objects.
If your bankruptcy includes privately agreed licenses, including business agreements, then you’ll need an experienced New York bankruptcy case to help with the added complexity.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
