In the United States Bankruptcy Court

for the Northern District of Iowa


KWIK-WAY INDUSTRIES INC. d/b/a
KWIK-WAY MANUFACTURING COMPANY
Bankruptcy No. L-91-01725C
Debtor(s). Chapter 11

Ruling Re: Notion to Surrender Property and Motion for Administrative Expense


This matter is before the Court on two motions by William Kopecko, Joseph Duchae, and Leroy Fuller (collectively referred to as "Kopecko"). Kopecko has made a motion for the surrender of property which the debtor, Kwik-Way Industries, Inc., ("KWI" or "Kwik-Way") holds under a licensing agreement with Kopecko and a motion requesting an administrative expense priority under 11 U.S.C. § 503(b).(1)

These are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(A) & (0). The following opinion denying the request for administrative expense priority constitutes this Court's findings of fact, conclusions of law, and order pursuant to Fed.R.Bankr.P. 7052.

Findings of Fact and Procedural Background

Kwik-Way and Kopecko entered into a licensing agreement on November 16, 1981. Pursuant to that agreement, Kopecko, as licensor, licensed to Kwik-Way as licensee, the exclusive right to manufacture and market a vehicle disc brake resurfacing apparatus in exchange for royalty payments from Kwik-Way and Kwik-Way's agreement not to re-transfer the technology to other producers. After operating under the licensing agreement for a number of years, Kwik-Way learned that other competing manufacturers were producing and marketing very similar products. Kwik-Way believed it had the exclusive right to produce and market the product. Kwik-Way eventually stopped making payments under the licensing agreement prompting Kopecko to file a lawsuit in the Wisconsin State courts.

Kwik-Way and Kopecko eventually settled the lawsuit by a settlement agreement dated March 1, 1991, which acted to reinstate and modify the original licensing agreement by nullifying or replacing some of the previous terms. The modified license agreement provided that Kwik-Way pay Kopecko $230,000 over time in exchange for Kopecko transferring all relevant patent rights in the disc brake resurfacing apparatus to Kwik-Way. The license agreement required Kwik-Way to pay $12,500.00 per quarter to Kopecko over a four-year period stretching from January 1, 1991, through December 31, 1994. The agreement specified that the periodic payments could be construed as a royalty of $40.00 per unit but that the total payment of $230,000 would not increase based on the number of units Kwik-Way sold. The agreement also provided that Kopecko would assign and transfer all right, title, and interest in the relevant patents and related trade secrets to Kwik-Way effective as of December 31, 1994.

Kwik-Way operated under the licensing agreement until it filed for Chapter 11 bankruptcy on September 21, 1991. Kwik-Way has not continued to make the payments due under the agreement while in bankruptcy. Kwik-Way's Chapter 11 plan of reorganization was confirmed on April 21, 1992. Kwik-Way has never assumed nor purported to assume this contract during the bankruptcy or under the confirmed Chapter 11 plan. The parties stipulate that if it is determined the modified licensing agreement is an executory contract that the contract was rejected as of the date of confirmation.

Kopecko filed a motion for turnover of property on March 18, 1992. In that motion, Kopecko argued, among other things, that the modified licensing agreement constituted an executory contract which Kwik-Way had rejected. Kopecko requested the Court to order Kwik-Way to turnover all benefits it acquired under the agreement including patents and technical documents, drawings and prototypes, and all inventory on hand manufactured using the technology under the license agreement. Kwik-Way resisted the motion to the extent that it argued the license agreement constituted an executory contract and to the extent it requested turnover of inventory or disassembly of equipment manufactured with the patent technology. The Court took this matter under advisement after a hearing.

Kopecko then filed a request for payment of an administrative expense pursuant to § 503(b)(1)(A) of the Bankruptcy Code. Kopecko requested the payment of administrative expense for the period between petition and plan confirmation when Kopecko argues that Kwik-Way used the rights under the agreement to benefit the estate. Kwik-Way argues that the rights it received under the agreement really provided no benefit to the estate and, therefore, should not be allowed as administrative expenses. Kwik-Way contends that the claim of Kopecko should be treated as an unsecured claim. The Court took this issue under advisement after a hearing.

The Court understands that for the purpose of this proceeding the parties have largely resolved the issue of turnover or surrender of property relating to the license agreement. Kwik-Way has agreed to turnover any drawings or technical material it holds relating to executing the patented technology. Kopecko has agreed that it will need to file a separate adversary proceeding to request injunctive relief if it wants to prevent Kwik-Way from manufacturing and/or selling products made with this technology in the future. The only issue remaining from the motion to surrender property is whether the licensing agreement is an executory contract. That issue ties directly to Kopecko's request for an administrative expense priority which also remains in issue.

Conclusions of Law

I. Executory Contract

Kopecko argues that the licensing agreement, as modified by the settlement, is an executory contract for the purposes of § 365, and that Kwik-Way has rejected the executory contract pursuant to Kwik-Way's Plan of Reorganization and by operation of § 365(d)(1). Section 365(d)(1) states:

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In a case under chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of residential property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for case, within such 60-day period, fixes, then such contract or lease is deemed rejected.

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As indicated, the parties stipulate that if the contract is an executory agreement, then it was rejected by the order of confirmation. However, Kwik-Way argues that the licensing agreement, as modified, is not an executory contract so it does not fall under the provision of the plan which rejected executory contracts or § 365(d)(1).

The Eight Circuit recently has determined that a contract is an executory contract when there are material unperformed obligations by both parties remaining after the bankruptcy filing such that failure to complete the remaining obligations would be a material breach. Cameron v. Pfaff Plumbing (In re Asp Construction), No. 91-2414, slip op. at 4-6 (8th Cir. June 9, 1992). Courts generally have construed license agreements to be executory contracts. See. e.g., Lubried Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers,

Inc.), 756 F.2d 1043, 1045-46 (4th Cir. 1985); In re Chipwich, 54 B.R. 427, 430 (Bankr. S.D.M.Y. 1985). This is true even where the debtor is the licensee. Otto Preminger Films, Ltd. v. Qintex Entertainment, Inc. (In re Ointex Entertainment, Inc.), 950 F.2d 1492, 1495-96 (9th Cir. 1991) (citing In re Three Star Telecast, Inc., 93 B.R. 310, 312 (D.P.R. 1988); In re New York Shoes, Inc., 84 B.R. 947, 960 (Bankr. E.D. Pa. 1988); In re Best Film & Video Corp., 46 B.R. 861, 869 (Bankr. E.D.N.Y. 1985)). However, not all courts have found that licensing agreements constitute executory contracts. In re Learning Publications, Inc., 94 B.R. 763, 765 (Bankr. M.D. Fla. 1988); In re Stein and Day, Inc., 81 B.R. 263, 267 (Bankr. S.D.N.Y. 1988).

Kwik-Way argues that license agreements are not per se executory contracts. Based on the above authority and common sense, this Court agrees. As the Ninth Circuit observed in the Ointex Entertainment case, the critical determination is whether significant unperformed obligations remain on both sides of the contract. 950 F.2d at 1496. Kwik-Way argues that the remaining obligations under the modified licensing agreement do not constitute material unperformed obligations so as to render the contract executory.

This Court disagrees. The duties remaining on both sides under the license agreement at the date of the bankruptcy petition were material obligations. In particular, the Court finds the following obligations the most significant: Kopecko's duty to convey the title to the patents to Kwik-Way at the end of the modified contract's term and to forbear from selling, licensing or otherwise conveying the patent rights until that time; Kwik-Way's obligation to continue making payments for the use of the technology; and Kwik-Way's promise not to retransfer the relevant drawings, prototypes and other technology to any other entity. Hence, the Court finds that this is an executory contract.

Kwik-Way argues that the settlement agreement essentially changed the license agreement into an installment purchase

agreement. Kwik-Way asserts that as an installment purchase agreement the settlement agreement should not be treated as an executors contract. This position, however, is inconsistent with the law in the Eighth Circuit. In Brown v. First Nat. Bank in Lenox, 844 F.2d 580 (8th Cir. 1988), the court found that under Iowa law an installment land contract was an executory contract under § 365. Hence, Kwik-Way's position that the modified agreement is an installment sales contract does not help Kwik-Way on this issue.

II. Administrative Expense

Kopecko has requested administrative expense treatment under § 503(b) of its claim under the rejected executory contract for Kwik-Way's use of the rights under the licensing agreement in the period between petition and rejection of the contract claim.(2)

As one court noted, "(i]t is well established that once an executory contract or lease is rejected, the creditor may file an administrative claim for the 'reasonable value of the use or occupation' by the trustee of the creditors' assets during the time before rejection." Broadcast Corp. of Georgia v. Broadfoot, 54 B.R. 606, 609 (N.D. Ga. 1985) aff'd 789 F.2d 1530, 1532 (11th Cir. 1986) (quoting 2 Collier on Bankruptcy ¶ 365.03 at 365-24). The party requesting an administrative expense payment must establish that they are entitled to administrative expense treatment. In re Amarex, 853 F.2d 1526, 1530 (10th Cir. 1988) (citations omitted); In re Finevest Foods, Inc., 140 B.R. 581, 583 (Bankr. M.D. Fla. 1992) (citations omitted). In this district, there is a two part test for establishing administrative expense priority under § 503(b). In re Ramaker, 117 B.R. 959, 962 (Bankr. N.D. Iowa 1990). The debt must (1) arise from a transaction with the debtor-inpossession and (2) benefit the debtor-in-possession in operating the business. Id. (quoting In re Jartran, Inc., 732 F.2d 584, 587 (7th Cir. 1984)) (other citation omitted). There is no dispute that the first part of this test is satisfied here. The parties argue about whether and to what extent Kopecko has provided assets which have benefitted Kwik-Way in the period between petition and rejection.

Kopecko asserts that Kwik-Way's use of the right to manufacture and market the brake resurfacing apparatus under the modified licensing agreement has provided a substantial benefit to Kwik-Way's business and should be compensated as an administrative expense at the rate specified in the settlement agreement. Kwik-Way disagrees. Kwik-Way believes that the rights it received under the modified licensing agreement have, in reality, provided little or no benefit for the estate. In particular, Kwik-Way asserts that the rights to exclusively produce and manufacture the apparatus have become worthless. Kwik-Way argues that the patent rights it received under the license agreement are unenforceable. Kwik-Way asserts that there is "prior art" technology and that its attempts to enforce its exclusive right to produce the product line would be pointless. Hence, Kwik-Way argues that the rights it received under the agreement would be worthless.

The party requesting an administrative expense priority under § 503(b) bears the burden of proving it is entitled to the priority. In re Amarex, 853 F.2d 1526, 1530 (10th Cir. 1988) In re Finevest Foods, Inc., 140 B.R. 581, 583 (Bankr. M.D. Fla. 1992). Here, the Court finds that Kopecko has failed to establish that the modified licensing agreement provided any benefit to the debtor in operating its business after filing for bankruptcy.

Kopecko had the opportunity to present evidence on how their property benefitted the Kwik-Way estate both at the hearing on their motion for surrender of property and the hearing on their request for an administrative expense. Kopecko failed to present any evidence at either hearing. Kwik-Way, on the other hand, presented uncontroverted. testimony at the first hearing from the witnesses who testified that the rights Kwik-Way received under the modified licensing agreement had no value for the estate.

Kopecko did not refute or controvert this evidence. Kopecko asserts only that the testimony of Kwik-Way's witnesses established that Kwik-Way remained in possession of the technology after the case was filed, that they continued to produce and sell the apparatus, and that the apparatus was a significant product line. They believe these facts establish that Kwik-Way used and benefitted from the technology. These assertions, however, do not address Kwik-Way's evidence that the right to use the technology under the license agreement was worthless because it was unenforceable. Likewise, they do not address the evidence Kwik-Way provided that the license agreement and patent rights are unenforceable because "prior-art" or prior patents already existed before Kopecko obtained patent rights.

This failure to address these issues is fatal to Kopecko's request for an administrative expense. This Court is making no determination as to the validity of the patent or Kopecko's right to injunctive or other equitable-relief. However, in the context of this claim for allowance of an administrative claim, the Court concludes that Kopecko that Kopecko has failed its burden of establishing that they provided something valuable to Kwik-Way's estate. Hence, Kopecko's request for administrative expense payments must be denied.

O R D E R

IT IS THEREFORE ORDERED the motion by William Kopecko, Joseph Duchae, and Leroy Fuller requesting an administrative expense priority under 11 U.S.C. § 503(b) is denied.

DONE AND ORDERED this 21st day of August, 1992.

Michael J. Melloy
Chief Bankruptcy Judge

1. All statutory references are to Title 11 of the United States

Code ("the Bankruptcy Code") unless otherwise indicated.

2. In addressing this issue, the court is not deciding whether Kopecko has any prepetition claim under the rejected agreement, or whether Kwik-Way has any counterclaim under the contract.

Moreover, neither is the Court deciding any of the consequences of rejecting the licensing agreement. The Court decides only whether Kopecko is entitled to an administrative expense payment for the estates use of the licensed technology during the period between petition and rejection.