The Weinstein Co Holdings v.
(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
Thomas R. Califano (Argued)
Sidley Austin
787 Seventh Avenue
New York,
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.
OPINION OF THE COURT
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 debtor must cure existing defaults and put the contract in the same place as if the bankruptcy never happened. See
This case is about whether a work-made-for-hire contract between a producer and a bankrupt movie company is an executory contract. The Weinstein Company and its affiliates (“TWC” or the “Debtors“) filed bankruptcy petitions to facilitate the sale of substantially all their assets to Spyglass Media Group, LLC (a/k/a Lantern Entertainment LLC) under
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 Cohen owned none of the intellectual property in the Picture.1
[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 receive [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
In 2017, TWC‘s business cratered following a flood of credible sexual misconduct allegations against its co-founder, Harvey Weinstein. Left with few options, TWC tried to sell its business and ultimately found Spyglass as the only interested buyer. In March 2018, TWC filed for Chapter 11 bankruptcy in the District of Delaware and asked the Bankruptcy Court to approve the sale to Spyglass under
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 Bankruptcy Code section 363.” App. 1152. As noted above, if the Cohen Agreement is an executory contract and therefore assumed and assigned under
contract under
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. App. 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
Court concluded that TWC owned the Cohen Agreement, and could sell it, after hearing testimony from TWC‘s former Executive Vice President, Irwin Reiter, who testified about the chain-of-title for the Cohen Agreement. Id. at 135:16–25, 136:1–3. The District Court affirmed the Bankruptcy Court‘s decision, and Cohen timely appealed to us.6
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
weigh the evidence; rather, we assess whether [it] is such that a reasonable jury could return a verdict for the nonmoving party.” Id. at 523 (internal quotation marks and citation omitted). In short, summary judgment in favor of Spyglass is appropriate if no reasonable jury could conclude the Cohen Agreement is an executory contract.
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
contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973); see also In re Gen. DataComm Indus., Inc., 407 F.3d 616, 623 (3d Cir. 2005) (quoting Countryman and citing to Sharon Steel Corp. v. Nat‘l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989)); 3 Collier on Bankruptcy ¶ 365.02[2](a) n.10 (16th ed. 2020) (collecting cases). “Thus, unless both parties have unperformed obligations that would constitute a material breach if not performed, the contract is not executory under
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
fully performed all material obligations, but the nonbankrupt counterparty has not, cannot be executory; that contract can be viewed as just an asset of the estate with no liability. See 3 Collier, supra ¶ 365.02[2](a). Treating it as an executory contract risks inadvertent rejection because the debtor would in effect be giving up an asset by rejecting it. Id. On the other extreme, where the counterparty performed but the debtor has not, the contract is also not executory because
This context meshes with how a buyer can purchase the debtor‘s contracts as part of a
(Bankr. D. Del. 1999)). To assume a contract, the debtor or the buyer must cure all existing defaults (or provide adequate assurance of a cure), basically putting the contract in the same place as if the bankruptcy did not happen. See
However, if the contract is not executory, it can be sold to a
sale, the buyer must typically fulfill obligations under the contract it bought after the sale closes, just as it would with any other asset or liability. But unless the parties agreed otherwise, no one is required to cure existing defaults, as the nonbankrupt counterparty is already in at least as good a position as
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 obligations 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
the Cohen Agreement as either an executory or non-executory contract), and the $400,000 owed to Cohen pre-closing need not be paid, as it is simply an unsecured claim against the Debtors.
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
of contingent compensation far exceeded that of fixed compensation, reflecting the market reality that producers often try to work on films that will become hits so they can share in the profits. See Awards.com, LLC v. Kinko‘s, Inc., 42 A.D.3d 178, 187 (N.Y. App. Div. 2007) (explaining that failure to pay the “primary consideration” under an agreement is a material breach). Having concluded that TWC had at least one material obligation left to perform under the Cohen Agreement, we do not need to analyze whether other obligations, such as TWC‘s obligation
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 negative 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“).
A closer look at Cohen‘s remaining obligations confirms our suspicion—they are all ancillary after-thoughts in a production agreement. For instance, Cohen agreed to refrain from seeking injunctive relief about the exploitation of the Picture. But that covenant is redundant, for Cohen has no claim to the Picture‘s intellectual property rights and is already obligated to respect that property under relevant law. App. 2331, Cohen Agreement ¶ 9–10; Stein & Day, 81 B.R. at 266 (explaining that the agreement not to violate intellectual property in a work is an independent obligation already “imposed by law“). Also immaterial is Cohen‘s obligation to indemnify TWC against third-party claims arising from the breach of his representations, warranties or covenants, as the statute of limitations has likely expired on most, if not all, of the potential claims. App. 2333–34, Cohen Agreement ¶ 15; cf. Exide, 607 F.3d at 964 (explaining that expired indemnity obligation is not material). Finally, the restrictions on Cohen‘s ability to assign the contract are ancillary boilerplate provisions. For instance, the Agreement requires Cohen to comply with a set of procedures to give TWC the right of first refusal if Cohen tries to sell or assign his right to receive contingent compensation. App. 2350, Cohen Agreement Sch. 1 ¶ 3.5. This obligation, however, is not a “significant undertaking,” as Cohen “has no obligation to [TWC] if he wants to accept more favorable terms from [others].” Stein & Day, 81 B.R. at 267. In short, none of Cohen‘s remaining obligations go to the “root of the contract” or “defeat the purpose of the entire transaction” if breached. Exide, 607 F.3d at 962–63 (internal quotation marks and citations omitted).
V.
However, our analysis cannot end 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 immaterial is nonetheless not so.
Although Cohen‘s argument is forceful, we ultimately reject it because the parties did not clearly and unambiguously avoid the substantial performance rule for evaluating executory contracts. For starters, the language Cohen relies on is a nine-word phrase buried in a long covenant provision.9 By contrast,
the cases cited by Cohen where courts deferred to the parties’ agreement that all terms in the contract are material dealt with the remedies or termination section. See Gen. DataComm, 407 F.3d at 623–24 (providing any breach would cause termination of an employee‘s benefits plan); In re Hawker Beechcraft, Inc., 486 B.R. 264, 278 (Bankr. S.D.N.Y. 2013) (providing that buyer‘s “breach of any term, even an immaterial term, would allow [seller] to terminate the [agreement] and sue for specific performance“); Avant Guard Props., LLC v. NYC Indus. Dev., No. 115209/10, 2015 WL 7070066, at *5 (N.Y. Sup. Ct. Jan. 7, 2015) (explaining that the contract‘s termination provision “made it clear . . . that only complete performance will satisfy the agreement“) (emphasis added).
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 contract“) (emphasis added). By contrast,
determining which of those obligations the parties consider to be material.
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 executory 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 clear, 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 not executory.
VI.
Cohen raises two additional arguments that the Bankruptcy Court erred by granting
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 also 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 the 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.
Second, Cohen presses the Hail Mary argument that the Bankruptcy Court did not have enough evidence to conclude that TWC owned the Cohen Agreement and could sell it. However, the Bankruptcy Court‘s decision is well supported by the testimony of Irwin Reiter, who was the Executive Vice President for Accounting and Financial Reporting at TWC, and later held the same role at Spyglass. After Reiter testified about the chain-of-title for the Cohen Agreement, Cohen‘s counsel cross-examined him. The Bankruptcy Court determined that, based on “the evidence presented . . . [,] SLPTWC Films did dissolve . . . [and] the debtor, who was the sole member of that LLC, acquired all of the rights to its property.” App. 2268–69, Bankr. Hr‘g Tr. 135:20–25, 136:4–6. Cohen contends that the Bankruptcy Court neglected to draw factual inferences in his favor, but the summary judgment standard does not require a court to draw improbable inferences. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986). We agree with the Bankruptcy Court that the evidence clearly shows SLPTWC dissolved before TWC‘s bankruptcy and TWC, as its sole member, received all its assets and contract rights.10 Further, Reiter testified the chain-of-title satisfied banks, as TWC was able to “license the picture . . . [and]
borrow based on the picture.” App. 2225, Bankr. Hr‘g Tr. 92:4–5. In any event, Cohen never names who else might own the
* * * * *
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 Bankruptcy Code
Notes
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 receive 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
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.