Fifth Circuit Holds Executory Contract Not Listed On Bankruptcy Schedules Is Automatically Rejected Upon Expiration Of 60-Day Period In Chapter 7 And Not Capable Of Being Sold

The Bottom Line

The Fifth Circuit recently held in RPD Holdings, L.L.C. v. Tech Pharmacy Services (In re Provider Meds, L.L.C.), No. 17-1113 (5th Cir. Oct. 29, 2018), that a patent license that was not specifically listed on the debtors' bankruptcy schedules was automatically deemed rejected where it was not assumed within 60 days of the cases' conversion from Chapter 11 to Chapter 7.

What Happened?

This decision is based upon a series of bankruptcy cases involving OnSite. The entities involved in operating OnSite, referred to as the "OnSite parties," placed dispensing machines with long-term care facilities, then used proprietary OnSite software to remotely dispense pharmaceuticals from the machines to nurses in the facilities. The appellee, Tech Pharmacy Services (Tech Pharm), held a patent on certain system, software and related methods of remote pharmaceutical dispensing. In 2010, Tech Pharm sued several OnSite parties for infringing on this patent, and the OnSite parties counterclaimed, challenging the patent. The parties settled and entered into a License Agreement that granted a "non-exclusive perpetual license" to the OnSite parties for so long as the patents are valid and enforceable. The OnSite parties agreed to pay a one-time licensing fee for each machine placed into operation after the agreement was executed, and to provide quarterly reports for all new machines placed in service.

Beginning in 2012 and continuing into 2013, six of the OnSite parties filed separate Chapter 11 bankruptcy cases in the Northern District of Texas. Each of these cases was later converted to Chapter 7. Five of the six OnSite debtors were parties to the Tech Pharm License Agreement. Despite the bankruptcy requirement that they schedule all assets and creditors, however, none of the debtors listed the License Agreement or Tech Pharm on their schedules.

In three of the OnSite bankruptcy cases, RPD, the appellant, purchased the Onsite debtors' collateral in which it held a security interest. (RPD agreed to purchase the property instead of litigating the validity of its liens). The terms of each sale were set forth in a separate asset purchase agreement (APA), and the bankruptcy court approved each sale by a separate sale order. The License Agreement was not explicitly mentioned in the APAs, but rather the APAs provided that to the extent property subject to the APA was an executory contract, such property was assumed and assigned to RPD.

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