Third Circuit Rules in Weinstein Bankruptcy That Work-Made-for-Hire Contract Was Non-Executory
The Business Advisor
Affirming lower court rulings, a three judge panel on the United States Court of Appeals for the Third Circuit ruled that Spyglass Media (formerly known as Lantern) does not owe Silver Linings Playbook producer Bruce Cohen the approximately $400,000 in contingent compensation owed to Cohen that was due before the sale of the assets of The Weinstein Company to Spyglass.
The Weinstein Company filed for bankruptcy protection following widespread allegations of sexual harassment and assault perpetrated by Harvey Weinstein, and following unsuccessful attempts to restructure debts out of court. The Weinstein Company entered into an asset purchase agreement with Lantern to sell substantially all of its assets and commenced its bankruptcy case on March 19, 2018. On May 9, 2018, the bankruptcy court approved the sale to Lantern and authorized the company to consummate the transactions contemplated by the Lantern asset purchase agreement. The sale closed on July 13, 2018. Prior to closing, Lantern’s due diligence uncovered substantial unpaid participation liabilities under various talent agreements. While Lantern ultimately agreed to honor post-closing participation obligations, it denied responsibility for participations arising under such contracts prior to the closing.
Due to the fact that the various talent agreements contained substantially similar terms and raised similar legal issues, Lantern commenced an adversary proceeding against Bruce Cohen, producer of Silver Linings Playbook, to serve as a test case concerning whether Lantern would be required to cure (or pay) on account of the pre-closing liabilities owed to each of the counterparties under the talent agreements. In connection with the Cohen adversary proceeding, Lantern sought a judgment that (i) Cohen’s agreement was non-executory in nature and (ii) as a result, Cohen’s agreement was properly assigned to Lantern free and clear of any claims arising thereunder. The bankruptcy court ruled in favor of Lantern on summary judgment and the district court affirmed.
In determining whether summary judgment was proper, the Third Circuit first had to consider with the Cohen agreement was an executory contract. For purposes of Bankruptcy Code section 365, a contract is executory when the obligations of both parties to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other. The determination of what constitutes a material breach is determined by applicable state law, and is a question of law to be determined by the judge. In this case, New York law governed the Cohen agreement. As noted by the Third Circuit, if the contract is determined to be executory, the buyer (or Lantern in this case) has to cure all existing defaults, basically putting the contract in the same place as if the bankruptcy did not happen. On the other hand, if the contract is non-executory, it can be sold to a section 363 purchaser like any liability or asset leaving the purchaser free to determine which liabilities it wants to voluntarily assume.
Applying the Third Circuit’s prior interpretation of New York law in In re Exide Technologies1, and looking to New York state law, the Third Circuit concluded that under New York law, a material breach is a failure to do something that is so fundamental to a contract that the failure to perform that obligation defeats the essential purpose of the contract. New York follows the substantial performance doctrine, meaning that if the party in default has substantially performed, the other party’s performance is not excused.
Noting that The Weinstein Company failed pay Cohen the contingent compensation due Cohen, the Third Circuit quickly concluded that the company had a material obligation due and owing Cohen. However, when it came to determining whether Cohen had any material obligations due The Weinstein Company, the Third Circuit noted that was a “different story”. In essence, the Cohen contract was for Cohen to produce the picture in exchange for money. At the time of the bankruptcy, the film had been released for six years and Cohen had not done any further work on the film. Although the Third Circuit noted that there were certain ancillary obligations remaining under the contract, the Third Circuit deemed them to be “after-thoughts” in connection with production agreements.
Although the Third Circuit had little trouble in concluding that the remaining obligations were not material, the court noted that the Cohen agreement provided that The Weinstein Company must pay contingent compensation provided Cohen is “not otherwise in breach or default”. Based on this contractual provision, Cohen argued that all his obligations are material. While the Third Circuit noted that in certain instances parties can contract around certain rules such as the “substantial performance” rule under New York law, in order to do so, the parties must clearly and unambiguously do so. In the instant case, the Third Circuit found that the nine word phrase buried in the “covenants” section of the contract was not clear and unambiguous. Further, due to the fact that such language was only in the “covenants” section and not in the termination, the Third Circuit concluded the cases cited by Cohen were distinguishable because courts only tend to defer to the parties’ agreement where such language is included in the termination or remedies sections of contracts. According to the Third Circuit, when parties say that breach of a provision would result in termination of the contract, they make clear that the provision is material. By contrast, covenants address the parties’ obligations and are not a natural place to look when determining which obligations the parties consider to be material. Finally, the Third Circuit concluded by stating that parties can sometimes override provisions of the Bankruptcy Code, but in this case, the language in the Cohen agreement was not sufficiently clear and unambiguous to reach such as result.
As a result of the Third Circuit’s opinion, most work-for-hire agreements that are substantially performed (at least by one side) are unlikely to be considered executory. Nevertheless, talent whose agreements are acquired by the buyer will be entitled to have their post-sale participations and other rights honored by the buyer. The decision is significant in providing clarity on a buyer’s ongoing obligations under non-executory contracts and it applies a strict application of the legal standard for determining whether a contract is executory, rejecting certain ongoing obligations (such as covenants not to sue and indemnities) that some courts have relied on in other contexts to find contracts to be executory.
1607 F.3d 957 (3d Cir. 2010).