Third Circuit Holds Film Production Contract Was Not Executory in Bankruptcy Case
“[B]ankruptcy inevitably creates harsh results for some players,” explained the U.S. Court of Appeals for the Third Circuit on May 21, 2021, when it denied a film producer’s claim for contractual cure payments. In re Weinstein Company Holdings, LLC, 2021 WL 2023058, *9 (3d Cir. May 21, 2021). Affirming the lower courts, it held that a “work-made-for hire” production agreement (“Agreement”) with the debtor (“TWC”) was “a non-executory contract that is in essence … a liability for [TWC] that can be sold” to an asset purchaser “under … Code § 363 without the need to cure existing defaults.” Id. In practical terms, the decision means that the buyer of this valuable contract only had to “satisfy post-closing obligations but need not worry about [the debtor’s] pre-closing breaches or defaults, which typically remain unsecured claims against the debtor’s estate.” Id. at *1.
“[W]hether a contract is classified as executory or non-executory,” said the court, “has significant implications for its treatment in a bankruptcy sale.” Id. “[A]n executory contract [ordinarily] can be ‘assumed’ and then ‘assigned’ to a buyer under § 365 of the Bankruptcy Code provided all existing defaults are cured.” Id. “At stake” in TWC was whether the buyer of the debtor’s contract (“B”) had to “cure existing defaults and pay around $400,000 owed to” the non-debtor contracting party (“C”) “before the sale’s closing,” but only if the contract was executory. Id. TWC owed the $400,000 to C under the Agreement, but C had “no material obligations left to perform,” having produced and released the relevant film years prior to bankruptcy. Id. at *9.
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Schulte Roth & Zabel LLP by Michael L. Cook. Published May 26, 2021.