## Facts

- Orion Pictures Corporation, a film producer and distributor, filed for Chapter 11 reorganization on December 11, 1991.
- Orion and Showtime Networks, Inc. were parties to a 1986 output licensing agreement requiring Showtime to license qualifying Orion-distributed films.
- The agreement included a “key-man” clause conditioning Showtime’s obligations on Orion’s continued employment of at least two of four named executives in similar roles.
- After Orion changed its executive hierarchy in 1990–1991, Showtime asserted that Orion violated the key-man clause beginning April 2, 1991, and notified Orion by letters dated October 17, 1991 and November 20, 1991.
- On March 20, 1992, Orion commenced (1) an adversary proceeding seeking damages (about $77 million) and declaratory relief for anticipatory breach, and (2) a motion to assume the agreement under 11 U.S.C. § 365.
- The key-man clause dispute was the central contested issue in both the adversary proceeding and the assumption motion.
- Showtime moved to withdraw the reference of the adversary proceeding to the district court, arguing it was non-core and implicated a jury-trial right; the district court denied withdrawal, treating it as core.
- The bankruptcy court held a combined evidentiary hearing on the assumption motion and adversary proceeding, found no key-man breach, approved assumption, and then dismissed the adversary proceeding without prejudice as moot.
- The district court affirmed; Showtime appealed.

## Issues

1. Whether a bankruptcy court may decide the merits of a disputed contract breach (the key-man clause) in a § 365 assumption proceeding, effectively disposing of an associated adversary action.
2. Whether the debtor’s adversary proceeding for anticipatory breach and declaratory relief under a prepetition contract is a core proceeding under 28 U.S.C. § 157(b) or a non-core “related to” proceeding requiring district-court adjudication (including preservation of any jury-trial right).
3. Whether the district court erred in denying withdrawal of the reference of the adversary proceeding.

## Decision

- Reversed the district court’s judgment affirming the bankruptcy court’s orders and remanded.
- Held that the bankruptcy court erred by converting the § 365 assumption hearing into a merits adjudication of the parties’ contract dispute.
- Held that the adversary proceeding was non-core; the district court should have withdrawn the reference so the dispute could proceed in the district court with appropriate procedural protections.
- Rejected the bankruptcy court’s dismissal of the adversary proceeding as “moot,” because mootness resulted from the improper merits determination during the assumption process.

## Legal Principles

- A § 365 motion to assume an executory contract is a summary proceeding focused on the debtor’s business judgment and whether assumption benefits the estate, not a forum for full adjudication of disputed breach, validity, or damages issues.
- Traditional state-law contract claims that could exist outside bankruptcy are generally non-core, even if the contract is important to the reorganization.
- In non-core proceedings, absent consent, the bankruptcy court lacks authority to enter final judgment and at most may submit proposed findings and conclusions to the district court.
- Procedural rights associated with non-core contract litigation, including the allocation of final adjudicatory authority and any jury-trial right, cannot be bypassed by resolving merits disputes through an assumption hearing.

## Conclusion

The Second Circuit required separation between § 365 assumption decisions and full merits litigation of disputed contract rights, and held that Orion’s anticipatory-breach and declaratory-relief action against Showtime was a non-core contract dispute that should proceed in the district court rather than being finally determined through the bankruptcy court’s assumption process.


In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993)