Hostess Bankruptcy Fallout in 8th Circuit

     ST. LOUIS (CN) – Barring successors of Hostess Brands from rejecting an old licensing agreement, the full 8th Circuit said the contract has been substantially performed.
     The dispute concerns a 1996 asset transfer between Lewis Brothers Bakeries (LBB) and Interstate Bakeries. Interstate, which more recently changed its name to Hostess Brands, had entered into the 1996 agreement to settle antitrust concerns related to its acquisition of Continental Baking, the then owner of the Wonder and Hostess brands.
     LBB took two of Interstate’s labels – the Butternut Bread operations in the Chicago territory, and the Sunbeam bread operations in central Illinois.
     In addition to the asset-purchase agreement, the companies reached a licensing agreement requiring the goods sold under the marks to be of the same character and quality as those sold by Interstate at the time of the agreement. LBB’s failure to maintain such quality would constitute a material breach of the agreement.
     In November 2008, four years after Interstate filed for voluntary bankruptcy, it disclosed the existence of the licensing agreement, which it characterized as executory and said would be used as part of its reorganization plan.
     LBB’s challenge of this issue fell flat in the bankruptcy court and in U.S. District Court for the Western District of Missouri, which found a remaining material obligation in light of LBB’s “failure to maintain the character and quality of goods sold under the trademarks.”
     As LBB appealed to the 8th Circuit, the rechristened Hostess Brands filed for bankruptcy. A bankruptcy judge in Manhattan authorized Hostess to wind down its business in late 2012, and Interstate revealed last year that it sold its Butternut assets to an affiliate of Flower Foods Inc.
     A three-judge panel with the federal appeals court initially affirmed the executory designation but agreed to rehear the issue en banc.
     In reversing 8-3 Friday, the court said a live controversy remains on the issue, despite Interstate’s claim that the bankruptcy proceedings rendered it moot.
     “A declaration that the license agreement is not executory – regardless of whether IBC would assume or reject the agreement in bankruptcy-would affect the value of LBB’s exclusive, perpetual, royalty-free license by removing uncertainty about the status of the license agreement.” Judge Steven Colloton wrote for the majority. “A judgment in favor of LBB also would allow the company to plan its ongoing business without the potential that Flowers Foods or any other successor or assign of IBC could reject the license agreement in a later bankruptcy proceeding.”
     Ultimately the court found that the licensing agreement is part of a larger contract that LBB substantially performed.
     “The essence of the agreement here was the sale of IBC’s Butternut bread and
     Sunbeam bread business operations in specific territories, not merely the licensing of
     IBC’s trademark,” Colloton wrote. “The agreement called for LBB to pay $20 million for IBC’s assets. The parties allocated $11.88 million for tangible assets, such as real property, machinery and equipment, computers and licensed computer software, vehicles, office equipment, and inventory. They allocated another $8.12 million toward intangible assets, including the license. IBC has transferred all of the tangible assets and inventory to LBB, executed the License Agreement, and received the full $20 million purchase price from LBB.
     “IBC’s remaining obligations concern only one of the assets included in the sale – the license. They involve such matters as obligations of notice and forbearance with regard to the trademarks, obligations relating to maintenance and defense of the marks, and other infringement-related obligations. When considered in the context of the entire agreement, these remaining obligations are relatively minor and do not relate to the central purpose of the agreement to sell the Butternut and Sunbeam bread operations and assets to LBB in certain territories.”
     Judge Kermit Bye contended in the dissent that material aspects of the contract have yet to be performed.
     “There is no question LBB has an ongoing obligation which would result in a material breach if not performed,” Bye wrote, joined Judges Lavenski Smith and Jane Kelly. “In section 5.2 of the license agreement, the parties expressly indicated a failure of LBB to maintain the quality and character of the goods sold under the licensed trademarks would constitute a material breach. Accordingly, LBB cannot be said to have substantially performed.
     “I also conclude IBC has not substantially performed because IBC has ongoing obligations which would result in a material breach if not performed. For example, because IBC has granted LBB an exclusive license to use the pertinent trademarks in the territories mentioned in the integrated agreement, IBC has a continuing obligation to refrain from marketing its products under those trademarks in those territories.”

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