## Facts

- RMF owned a metal-coating process technology and, in July 1982, granted Lubrizol a nonexclusive license to use it.
- RMF’s continuing obligations included duties to (1) notify Lubrizol and defend certain patent infringement suits, (2) notify Lubrizol of other licensing and adjust royalties under a most-favored-licensee type provision, and (3) indemnify Lubrizol for specified losses tied to misrepresentation or breach of warranty.
- Lubrizol’s continuing obligations included accounting for and paying royalties for use of the process and cancelling certain existing indebtedness.
- The agreement contemplated Lubrizol would defer use of the technology until May 1, 1983; Lubrizol never used the technology.
- RMF filed for Chapter 11 protection on August 16, 1983 and, as debtor-in-possession, moved to reject the license under 11 U.S.C. § 365(a) to sell or relicense the technology without the agreement’s restrictions.
- The bankruptcy court approved rejection after finding (1) the contract was executory and (2) rejection would benefit the estate under a business judgment analysis.
- The district court reversed, concluding the agreement was not executory and that rejection would not materially benefit the estate.

## Issues

1. Whether the technology licensing agreement was an “executory contract” subject to rejection under 11 U.S.C. § 365(a).
2. Whether the debtor-in-possession satisfied the standard for court approval of rejection, including whether rejection could reasonably be expected to substantially benefit the estate.
3. Whether rejection extinguished the licensee’s right to continued use of the technology or instead left the licensee limited to a damages claim.

## Decision

- The Fourth Circuit reversed the district court and remanded for entry of judgment consistent with the bankruptcy court’s order approving rejection.
- The court held the license was executory because both parties had remaining material obligations as of the bankruptcy filing.
- The court held the bankruptcy court properly applied a deferential business judgment standard and did not abuse its discretion in finding rejection advantageous to the estate.
- The court held rejection constituted a statutory breach that eliminated the debtor’s performance obligations and left Lubrizol with a general unsecured prepetition claim for damages, not an ongoing right to use the technology.

## Legal Principles

- A contract is executory under § 365(a) when material obligations remain unperformed on both sides at the petition date.
- A bankruptcy court generally should approve rejection of an executory contract when, in the debtor’s sound business judgment, rejection can reasonably be expected to provide a substantial benefit to the estate, absent bad faith or clear abuse.
- Rejection under § 365(a), through § 365(g), operates as a breach and typically converts the counterparty’s remedy into a prepetition damages claim rather than specific performance.
- A nonexclusive licensee’s right to use licensed technology may be treated as a contractual right subject to rejection, rather than as an interest that survives rejection.

## Conclusion

The court held that RMF’s nonexclusive technology license to Lubrizol was an executory contract that RMF could reject in Chapter 11 under § 365(a) because ongoing material duties remained on both sides and rejection could increase the estate’s value; rejection functioned as a breach that cut off Lubrizol’s continued use rights and left it with only a general unsecured damages claim.


Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043 (4th Cir. 1985)