## Facts

- Catapult Entertainment, Inc., a California corporation, developed an online gaming network and became insolvent.
- Stephen Perlman granted Catapult two nonexclusive patent and technology licenses in 1994.
- Catapult filed a Chapter 11 case and proposed a reorganization tied to a reverse triangular merger that would make Catapult a wholly owned subsidiary of Mpath Interactive, Inc.
- In connection with the plan, Catapult sought bankruptcy court approval to assume numerous executory contracts, including Perlman’s nonexclusive patent licenses, under 11 U.S.C. § 365(a).
- Perlman objected to assumption of his licenses without his consent.
- The bankruptcy court approved assumption and confirmed the plan; the district court affirmed.

## Issues

1. Whether 11 U.S.C. § 365(c)(1) prohibits a Chapter 11 debtor in possession from assuming nonexclusive patent licenses over the licensor’s objection when applicable nonbankruptcy law would bar assignment without consent.
2. Whether § 365(c)(1) applies based on a “hypothetical” inability to assign to a third party, or only when the debtor actually intends to assign the contract.
3. Whether a debtor in possession may be treated as an “entity other than the debtor” for purposes of § 365(c)(1).

## Decision

- The Ninth Circuit reversed the district court and held that § 365(c)(1) barred Catapult, as debtor in possession, from assuming Perlman’s nonexclusive patent licenses without Perlman’s consent.
- The court adopted the “hypothetical test”: if applicable law would excuse the nondebtor from accepting performance from an assignee, the debtor may not assume (or assign) absent consent, even if no assignment is planned.
- The court held federal patent law treats nonexclusive patent licenses as personal and nonassignable without the licensor’s consent.
- The court rejected the argument that assumption by a debtor in possession is not barred because the debtor in possession is the same entity as the debtor; the statutory text distinguishes “debtor” and “debtor in possession.”

## Legal Principles

- Under § 365(c)(1), when applicable nonbankruptcy law would excuse the nondebtor party from accepting performance from an entity other than the debtor or debtor in possession, and the nondebtor does not consent, the contract may not be assumed or assigned.
- In the Ninth Circuit, § 365(c)(1) is applied through the “hypothetical test,” treating the inability to assign to a hypothetical third party as sufficient to bar assumption without consent.
- Federal patent law generally makes nonexclusive patent licenses nonassignable without the licensor’s consent; this nonassignability is “applicable law” for § 365(c)(1).
- A debtor in possession may be treated similarly to a trustee for § 365 purposes, and the statutory reference to “debtor” and “debtor in possession” supports applying § 365(c)(1) to a debtor in possession.

## Conclusion

The Ninth Circuit held that, because federal patent law would bar assignment of nonexclusive patent licenses without the licensor’s consent, § 365(c)(1) prevents a Chapter 11 debtor in possession from assuming such licenses over the licensor’s objection, even absent any intended assignment.


Perlman v. Catapult Ent. Inc. (In re Catapult Ent. Inc.), 165 F.3d 747 (9th Cir. 1999)