In re: WEINSTEIN COMPANY HOLDINGS LLC, et al., Debtors
Nos. 20-1750 and 20-1751
United States Court of Appeals for the Third Circuit
May 21, 2021
PRECEDENTIAL
Argued January 13, 2021
Before: AMBRO, KRAUSE, and PHIPPS, Circuit Judges
(Opinion filed: May 21, 2021)
Angela M. Butcher (Argued)
Michael I. Gottfried
Roye Zur
Elkins, Kalt, Weintraub, Reuben, Gartside
10345 West Olympic Boulevard
Los Angeles, CA 90064
Kevin S. Mann
Christopher P. Simon
Cross & Simon
1105 North Market Street
Suite 901, P.O. Box 1380
Wilmington, DE 19899
Counsel for Appellants
Sidley Austin
787 Seventh Avenue
New York, NY 10019
R. Craig Martin, Esq.
DLA Piper
1201 North Market Street
Suite 2100
Wilmington, DE 19801
Counsel for Appellee
Anne M. Collart
William P. Deni, Jr.
Lawrence S. Lustberg
Gibbons
One Gateway Center
Newark, NJ 07102
Counsel for Amicus Appellant Producers Guild of America Inc.
AMBRO, Circuit Judge
The Chapter 11 bankruptcy process gives a debtor many means to rehabilitate its business, including several to manage contractual obligations. Chief amongst them is the flexibility to assume (i.e., continue) or reject (i.e., breach) executory contracts, which are contracts where the debtor and the nonbankrupt counterparty each has material obligations left to perform as of the bankruptcy filing.
With great power comes great responsibility. To assume an executory contract, a dеbtor must cure existing defaults and put the contract in the same place as if the bankruptcy never happened. See
I.
In September 2011, Cohen and his production company entered into the Cohen Agreement with SLP Films, Inc., a non-debtor special purpose entity formed by TWC to make Silver Linings Playbook (the “Picture“). The parties structured the Cohen Agreement as a “work-made-for-hire” contract, meaning Cоhen owned none of the intellectual property in the Picture.1 App. 2331, Cohen Agreement ¶ 9; see Cmty. for
[i]f the Picture is produced with [Cohen] as the producer thereof and [Cohen] fully perform[s] all required services and obligations hereunder and in relation to the Picture, and [is] not otherwise in breach or default hereof, [Cohen] shall be entitled to reсeive [Contingent Compensation].
App. 2329, Cohen Agreement ¶ 3. The Picture was successfully released in November 2012 and resulted in an Academy Award for Best Actress for Jennifer Lawrence. After some corporate maneuvers, TWC purports to own all the rights pertaining to the Picture, including the Cohen Agreement.2
The sale closed in July 2018, though the Purchase Agreement gave Spyglass until November 2018 to designate which of TWC‘s executory contracts it wanted to assume as part of the sale. App. 691, Purchase Agreement § 2.8(a) (defining “Assumed Contracts“); App. 694, 741. However, Spyglass believed the Cohen Agreement was not executory at all. In October 2018, it filed a declaratory judgment action against Cohen seeking a determination that the Cohen Agreement “is not executory and therefore was already [sold] to [Spyglass] pursuant to
The stakes became even higher. In November 2018, writers, producers, and actors with similar works-made-for-hire contracts (the “Talent Party Agreements“) hitched their wagon to the Cohen dispute and argued that their contracts are also executory, the implication being that Spyglass has to pay them millions of dollars in contingent compensation. Apр. 894; Cohen Br. at 6–7; Dist. Ct. Op. at 1, n.1 (“The parties stipulated to joint briefing of these appeals.“).
In January 2019, the Bankruptcy Court held a hearing on Spyglass‘s motion for summary judgment in the Cohen dispute, recognizing that its ruling might serve as a bellwether for the Talent Party Agreements. It issued a bench ruling granting Spyglass‘s motion for summary judgment, concluding that the Cohen Agreement was not an executory contract and thus could be sold under
II.
The District Court had jurisdiction under
We stand in the shoes of the District Court and exercise plenary review of the Bankruptcy Court‘s decision granting summary judgment in favor of Spyglass. In re AE Liquidation, Inc., 866 F.3d 515, 522 (3d Cir. 2017). We may affirm the grant of summary judgment only if “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Id. (quoting
III.
However, this reading “would cut too broadly,” as almost all contracts involve some unperformed obligations on both sides. In re Columbia Gas Sys. Inc., 50 F.3d 233, 238 (3d Cir. 1995). Thus, our Circuit (and several others) adopted the following definition proposed by Professor Vern Countryman: “[An executory contract is] a contract under which the obligation of both the bankrupt and the other party to the
To facilitate the debtor‘s rehabilitation, the Countryman test attempts to foolproof the debtor‘s choice to assume or reject contracts; thus, the debtor only has that flexibility for executory contracts—those contracts where there could be uncertainty about whether they are valuable or burdensome. A helpful perspective is to view executory contracts “as a combination of assets and liabilities to the bankruptcy estate; the performance the nonbankrupt owes the debtor constitutes an asset, and the performance the debtor owes the nonbankrupt is a liability.” Columbia Gas, 50 F.3d at 238 (citing Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 106–07 (1986)). Under this framework, a contract where the debtor
This context meshes with how a buyer can purchasе the debtor‘s contracts as part of a
However, if the contract is not executory, it can be sold to a
IV.
This context sets the stage for the dispute before us. Is the Cohen Agreement an executory contract? If so, the contract was assumed and assigned to Spyglass, so it must cure existing defaults and pay approximately $400,000 in contingent compensation to Cohen. If not, Spyglass only needs to comply with post-closing obligatiоns coming due under the Cohen Agreement, see Weinstein, 2020 WL 1320821, at *5 (noting the Bankruptcy Court‘s determination, not challenged by either party on appeal, that Spyglass is obligated to purchase
New York law governs the Cohen Agreement. App. 2336, Cohen Agreement ¶ 23. Thus, we analyze whether the Agreement “contained at least one obligation for both [TWC] and [Cohen] that would constitute a material breach under New York law if not performed.” In re Exide Techs., 607 F.3d 957, 962 (3d Cir. 2010). In New York, “[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.” Feldmann v. Scepter Grp., Pte. Ltd., 185 A.D.3d 449, 450 (N.Y. App. Div. 2020) (quoting O & G Indus., Inc. v. Nat‘l R.R. Passenger Corp., 537 F.3d 153, 163 (2d Cir. 2008)).
New York also follows the substantial performance doctrine, meaning “[i]f the party in default has substantially performed, the other party‘s performance is not excused.” Hadden v. Consol. Edison Co., 312 N.E.2d 445, 449 (N.Y. 1974). These are two sides of the same coin, as “[s]ubstantial performance and material breach are interrelated concepts[;] . . . if it is determined that a breach is material, or goes to the root or essence of the contract, it follows that substantial performance has not been rendered, and further performance by the other party is excused.” In re Interstate Bakeries Corp., 751 F.3d 955, 962 (8th Cir. 2014) (internal quotation marks and citation omitted).
On TWC‘s side, its obligation to pay contingent compensation to Cohen is clearly material. Here, the amount
Cohen‘s remaining obligations, however, are a different story. At a high level, the essence of the Cohen Agreement was for Cohen to produce the Picture in exchange for money. Thus, he contributed almost all his value when he produced the movie. At the time of TWC‘s bankruptcy, the Picture had been released for six years and Cohen had not done any further work on it. Indeed, other courts agree that the employee in a work-made-for-hire contract usually does not have material obligations after the work is completed despite ancillary negаtive covenants or indemnification obligations. See In re Qintex Ent., Inc., 950 F.2d 1492, 1497 (9th Cir. 1991) (holding that contract between an actor and a production company was not executory after the movies were made because the actor “substantially completed [his] duties under the contracts“); In re Stein & Day Inc., 81 B.R. 263, 266 (Bankr. S.D.N.Y. 1988) (holding that a publishing contract is not executory where the author wrote two books and assigned to the debtor-publisher the “full term of the copyright for the books“).
However, our analysis cannot еnd here. Cohen argues that where parties already agreed an obligation is material, a court should not substitute its own judgment. Here, the Agreement provided that TWC must pay contingent compensation provided Cohen is “not otherwise in breach or default.” App. 2329, Cohen Agreement ¶ 3. Based on this provision, he argues that all his obligations are material, as even a breach of a technical provision would excuse TWC‘s obligation to pay contingent compensation.
Cohen is correct that parties can contract around a default rule such as the substantial performance rule, that is, they can agree that what to the ordinary person is immatеrial is nonetheless not so. See Jacob & Youngs v. Kent, 129 N.E. 889, 891 (N.Y. 1921) (Cardozo, J.) (explaining that parties can avoid that rule by “apt and certain words“); see also Ian Ayres, Regulating Opt-Out: An Economic Theory of Altering Rules, 121 Yale L.J. 2032, 2049 (2012) (describing the Jacob & Youngs decision as a “determination that the [parties‘] actions were insufficient to contract around the substantial performance (default) rule“). In General DataComm, we also acknowledged that where the contract makes plain that certain unperformed obligations are material, we can conclude the contract is executory without further analysis. 407 F.3d at 623–24. Put another way, a breach can be considered material if “upon a reasonable interpretation of the contract, the parties considered the breаch as vital to the existence of the contract.” 23 Richard A. Lord, Williston on Contracts § 63:3 (4th ed. 2018).
The distinction between a covenant and termination provision is meaningful. When parties say that breach of a provision would result in termination or rescission of the contract, they make clear that the provision is material. Williston on Contracts § 63:3 (stating that a breach is material if “the parties considered the breach as vital to the existence of the contrаct“) (emphasis added). By contrast, covenants address the parties’ obligations (i.e., what they must and must not do) and typically are not a natural place to look when
Further, the requirement that Cohen not be in breach or default may be better viewed as a condition precedent to TWC‘s payment obligation, as evidenced by the word “if” that begins the relevant provision. See Pac. Emps. Ins. Co. v. Glob. Reinsurance Corp. of Am., 693 F.3d 417, 430 (3d Cir. 2012) (describing a condition precedent as an event whose occurrence triggers an obligation). This is relevant, as “[t]here is a distinction . . . between failure of a condition and a breach of a duty . . . . [I]f the remaining obligations in the contract are mere conditions, not duties, then the contract cannot be executory for purposes of
Finally, if we accept Cohen‘s argument, then the parties also overrode protections in the Bankruptcy Code. Interstate Bakeries, 751 F.3d at 962 (“The doctrine of substantial performance . . . is inherent in the Countryman definition of exеcutory contract.“). As explained above, the Code‘s treatment of contracts facilitates the debtor‘s rehabilitation by treating non-executory contracts where only the debtor has material obligations to perform as liabilities of the estate, so the debtor does not accidentally assume them without good reason. Here, the logical implication of Cohen‘s position is that the Cohen Agreement would be an executory contract forever, no matter how much he has already performed. Oral Arg. Tr. 23:22–25. That would be a highly unusual result and would contravene the protections created for the Debtors by the Bankruptcy Code.
To be cleаr, we recognize that parties can contract around a state‘s default contract rule regarding substantial performance, and by doing so they can also override the Bankruptcy Code‘s intended protections for the debtor. However, that result can only be accomplished clearly and unambiguously in the text of the agreement. For the reasons explained above, we do not believe the Cohen Agreement avoided New York‘s substantial performance rule. As we agree with the Bankruptcy and District Courts that Cohen‘s remaining obligations are immaterial and ancillary to the purpose of the contract, we hold that the Cohen Agreement is nоt executory.
Cohen raises two additional arguments that the Bankruptcy Court erred by granting summary judgment. We are unpersuaded by both.
First, Cohen argues that, even if the Cohen Agreement is not executory on its face, the Bankruptcy Court should have allowed for additional discovery and factfinding. While he is correct that under New York law “[t]he issue of whether a party has substantially performed is usually a question of fact,” a court can decide it as a matter of law “where the inferences are certain.” Exide, 607 F.3d at 963 (citation omitted). Indeed, we previously held that the contracts at issue in Exide were not executory based on “[o]ur inspection of the record.” Id. New York courts have аlso frequently resolved the materiality of contractual provisions as a question of law. See, e.g., Wiljeff, LLC v. United Realty Mgmt. Corp., 82 A.D.3d 1616, 1617 (N.Y. App. Div. 2011) (“[W]here the evidence concerning the materiality is clear and substantially uncontradicted . . . [,] the question is a matter of law for the court to decide.“) (second alteration in original) (citation omitted). In this case, the decisions of the Bankruptcy and District Courts were well supported by the plain text of the Cohen Agreement, as well as uncontradicted evidence that the Picture was made and released nearly six years before the Debtors’ bankruptcy filing. Cohen‘s position is further undercut by the fact he chose not to submit an affidavit or present a witness at thе hearing in the Bankruptcy Court. Further, he does not explain what evidence the Bankruptcy Court should develop if there were a remand. In this context, we reject his argument that the Bankruptcy Court erred by not allowing for additional factfinding.
* * * * *
Bankruptcy often affects contract counterparties who do business with the debtor. Here, TWC owes money to Cohen under a work-made-for-hire production services contract, but he has no material obligations left to perform, as he produced and released the film several years before TWC‘s bankruptcy. No provision in the contract clearly and unambiguously overrode New York‘s default substantial performance rule that obligations are immaterial if they do not go to the root and purpose of the transaction. Accordingly, the Bankruptcy Code views the Cohen Agreement as a non-executory contract that is in essence a liability for the Debtors that can be sold to Spyglass under
Notes
Gordon (“Gordon“) with respect to the Picture). “Cash Breakeven” shall mean the point at which “Contingent Proceeds” are first achieved, but calculated utilizing the applicable distribution fees referred to above. Company makes no representation that the Picture will generate any Contingent Compensation, or any particular amount of Contingent Compensation.3. Contingent Compensation: If the Picture is produced with Artist [Bruce Cohen] as the producer thereof and Lender [Bruce Cohen Productions] and Artist fully perform all required services and obligations hereunder and in relation to the Picture, and are not otherwise in breach or default hereof, Artist shall be entitled to recеive the following “Contingent Compensation“:
(a) 5% of 100% of “Adjusted Gross Receipts” (if any) payable prospectively from and after “Cash Breakeven” (as both such terms are defined below) is reached, but calculated with an across-the-board 15% distribution fee.
(b) “Adjusted Defined Receipts“, “Cash Breakeven” and “Contingent Proceeds” shall be defined, computed, paid and accounted for in accordance with the terms and conditions of Company‘s Exhibit “DRCB” and Exhibit “CB“, as modified only by the Riders to such Exhibits, attached hereto and incorporated by reference (and in any event to be defined, computed, paid and accounted for no less favorably than Jon