Hanford Nichols Lockwood

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1Silver Eagle Labs, Inc. and Michele Lockwood joined Lockwood
in filing the Reconsideration Motion. 	The court will refer to
them and Lockwood collectively as “the Moving Parties.”
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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 05-31424-DM
HANFORD NICHOLS LOCKWOOD, JR., 	)
aka HANFORD NICHOLS LOCKWOOD, IV, 	) Chapter 7
)
Debtor. 	)
___________________________________)
MEMORANDUM DECISION
Hanford Nichols Lockwood, Jr. (“Lockwood”), the debtor in
this chapter 7 case, filed a motion (the “Reconsideration Motion”)
pursuant to Federal Rule of Civil Procedure 60(b) (“Rule 60(b)”),
made applicable here by Federal Rule of Bankruptcy Procedure 9024,
for relief from an order authorizing the assumption and assignment
of an executory contract (the “Assumption Order”). 1 	E. Lynn
Schoenmann, the chapter 7 trustee (“Trustee”) for debtor’s estate,
and JMS Labs Limited (U.S.A.), LLC (“JMS”), the counter-party to
the executory contract and the entity to which the Trustee
assigned the assumed contract, opposed the Reconsideration Motion.
After a hearing on February 1, 2008, the court took the matter
under advisement. 	For the reasons set forth below, the court will
enter an order granting the Reconsideration Motion in part and
Signed and Filed: April 07, 2008
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
April 07, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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2The following discussion constitutes the court’s findings of
fact and conclusions of law. 	Fed. R. Bankr. P. 7052(a).
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denying it in part. 2
I. 	FACTS
Prior to the petition date, Lockwood designed and patented an
“improved nasal dilator system” (the “patent”). 	Pursuant to a
Patent and Know-how Purchase Agreement (the “IP Agreement”),
Lockwood licensed use of the patent to JMS. 	At that time,
Lockwood was the owner of the patent and the licensor under the IP
Agreement.
Pursuant to section 4(a) of the IP Agreement, JMS agreed to
pay Lockwood four percent of the net sales price of the nasal
dilators sold or leased by JMS. 	Section 16 of the IP Agreement
states that “LOCKWOOD agrees that any patentable or unpatentable
improvements on the MaxAir (tm) Nasal Dilators made by him shall
be included hereunder as though they had been included in this
Agreement when said Agreement was made and entered into, and this
without further payment or additional royalty by JMS.”
On May 9, 2005, Lockwood filed a chapter 13 petition and his
case was converted to chapter 7 on May 23, 2005. 	On August 19,
2005, JMS filed an adversary proceeding objecting to Lockwood’s
discharge. 	This court entered a judgment denying Lockwood’s
discharge; the Bankruptcy Appellate Panel for the Ninth Circuit
affirmed the judgment on August 30, 2007. 	That affirmance has not
been appealed.
On July 8, 2005, the IP Agreement was deemed rejected
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3Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and
to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as
enacted and promulgated prior to the effective date of The
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
Pub. L. 109-8, 119 Stat. 23.
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pursuant to section 365(d)(1), 3 which required Trustee to assume
or reject (or obtain an extension to do either) the executory
contract within sixty days after the order for relief in order to
prevent a deemed rejection. 	More than one year later, on July 16,
2006, Trustee and JMS filed a joint Motion for Order Authorizing
and Approving Transfer of All Assets and Assumption and Assignment
of Executory Contract (the “Assignment Motion”).
In the Assignment Motion, JMS and Trustee sought approval of
a sale whereby JMS would acquire all of the rights of the estate
(including its interests in the patent and its interests as the
licensor under the IP Agreement) for $150,000. 	In other words,
upon approval of the sale, JMS would become the owner of the
patent, as well as the licensee and licensor under the IP
Agreement. 	It no longer would be paying the royalty payments
contemplated by Section 4(a) of the IP Agreement.
Significantly, in the Assignment Motion (at page 5, lines 17-
20), JMS and Trustee stated that no dispute existed as to adequate
assurance of future performance or curing of defaults as “[i]n
fact, the Trustee and JMS believe that, upon the assumption and
assignment of the IP Agreement, the rights as owner of the Patents
and as licensee will merge in JMS.” 	(Emphasis added). 	Not only
did JMS and Trustee acknowledge this merger of interests in order
to advance their position that the proposed assignment satisfied
the requisites of section 365, they did not request in their
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moving papers that they be relieved of the consequences of such a
merger. 	Yet, when JMS presented the Assumption Order to the court
for signing, it included a clause that stated: “Nothing contained
herein shall be deemed to extinguish, by merger (including but not
limited to merger of title) or otherwise, any rights that JMS has
under the IP Agreement.” 	Lockwood’s counsel did not object to the
form of the Assumption Order and the court signed it despite the
inclusion of language that was broader than the relief requested
in the Assignment Motion and inconsistent with admissions made in
the Assignment Motion.
In addition, on page 6 of the Assignment Motion, JMS and
Trustee acknowledged that with respect to the contract being
assumed and assigned, “there are only two parties to the
agreement, the Trustee and JMS” and that “the parties are
effectively amending and then assuming the agreement, which is
authorized procedure.” 	In other words, Lockwood was no longer
considered a party to the IP Agreement and had not agreed to any
amendment or modification of IP Agreement. 	Similarly, at the
hearing on the Assignment Motion, JMS agreed with the court that
assumption and assignment was not unlike a novation between JMS
and Trustee.
Nevertheless, notwithstanding these acknowledgments by
Trustee and JMS, JMS is now attempting to enforce the IP Agreement
against Lockwood. 	Specifically, JMS has filed a state court
action against Lockwood to force him to turn over “improvements
and modifications” to the patent which he had agreed to provide as
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4In response to the Reconsideration Motion, JMS argued that
the Moving Parties lacked standing to prosecute the
Reconsideration Motion as they had no pecuniary interest in or
arising from the Assumption Order. 	The court disagrees, as it
noted at the hearing. 	To the extent JMS is attempting to utilize
the Assumption Order and the rights it acquired thereunder to
enforce the IP Agreement against, and obtain intellectual property
from, Lockwood and the Moving Parties, they are detrimentally
affected by it and have a pecuniary interest in the matter. 	They
therefore have standing to prosecute the Reconsideration Motion.
Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.),
177 F.3d 774, 777 (9th Cir. 1999) (party has standing to appeal an
order that diminishes the party’s property, increases its burdens,
or detrimentally affects its rights).
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the initial licensor under the IP Agreement. 4 	On February 29,
2008, the Moving Parties removed the state court action to this
court, where it is pending as Adversary Proceeding No. 08-3019.
After JMS filed an amended complaint in the state court (now
removed) action indicating that it seeks to enforce Lockwood’s
obligations under the IP Agreement, the Moving Parties filed the
Reconsideration Motion, arguing that (1) the court erred in
allowing the IP Agreement to be assumed and assigned following its
deemed rejection, and (2) the court erred in signing an order that
purported to prevent the invocation of legal defenses or doctrines
(specifically, the doctrine of merger) otherwise possibly
available to Lockwood as a result of the sale of the patent and
the assignment of the IP Agreement. 	The Moving Parties requested
this court to strike the language in the Assumption Order
regarding merger, as that relief was not sought in the Assignment
Motion and was inconsistent with the admissions made by JMS and
Trustee.
The court is not persuaded by the Moving Parties’ first
argument, but agrees with their second contention. 	Therefore, the
court will modify the Assignment Order to strike the merger
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5The Ninth Circuit explained in Onecast Media that
[w]hile rejection of a lease prevents the debtor from
obtaining future benefits of the lease (such as ongoing
possession of leased premises), it does not rescind the
lease or defeat any pending claims or defenses that the
debtor had in regard to that lease. 	See 3 COLLIER ON
BANKRUPTCY § 365.09[1] (Alan N. Resnick & Henry J.
Sommer eds., 15th rev. ed. 2005) (“Rejection does not
. . . 	affect the parties’ substantive rights under the
contract or lease, such as the amount owing or a measure
of damages for breach and does not waive any defenses to
the contract.”).
Onecast Media, 439 F.3d at 563. 	Therefore, even when rejection
occurs, the parties to the contract can waive the breach and
reinstate the contract, just as they could under state law.
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language and other language purporting to limit or affect the
rights and defenses of Lockwood; it will not vacate the approval
of the sale, assumption and assignment.
II. 	DISCUSSION
A. 	Approval of the Assumption and Assignment Was Appropriate
Lockwood contends that this court lacked jurisdiction to
approve the assumption and assignment of the IP Agreement after
its deemed rejection, that the order was thus void and that JMS
was therefore limited to the remedies provided in section 365(n)
to licensees of intellectual property upon rejection of their
contract. 	The court disagrees. 	When a rejection occurs, an
executory contract does not cease to exist. 	Rather, the rejection
operates as a breach. 	See 11 U.S.C. § 365(g) (“ . . . the
rejection of an executory contract or unexpired lease of the
debtor constitutes a breach of such contract or lease . . .”);
First Ave. West Bldg., LLC v. James (In re Onecast Media, Inc.),
439 F.3d 558, 563 (9th Cir. 2006) (rejection constitutes a breach
of contract); 5 Kopolow v. P.M. Holding Corp. (In re Modern
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Textile, Inc.), 900 F.2d 1184, 1191 (8th Cir. 1990) (“We find it
clear from these sections that the Trustee’s rejection operates as
a breach of an existing and continuing legal obligation of the
debtor, not as a discharge or extinction of the obligation itself.
In other words, the lessor’s claim against the debtor for breach
of the lease survives the Trustee’s rejection of the lease.”);
Century Indem. Co. v. Nat’l Gypsum Co. Settlement Trust (In re
Nat’l Gypsum Co.), 208 F.3d 498, 505 (5th Cir. 2000) (“The
Bankruptcy Code provides that the effect of a rejection of an
executory contract is a breach, see 11 U.S.C. § 365(g)(1994), and
the breach gives rise to a claim for damages by the non-debtor
party to the contract.”).
If the parties to the contract agree to waive the breach and
rejection, the court has jurisdiction to approve the assumption of
that contract. 	The court agrees with those cases holding that a
lessor or counter-party to an executory contract can waive the
automatic rejection under section 365(d)(4) as long as the
intention to relinquish or waive a right or advantage is clearly
established by the evidence. 	In re Southern Motel Assocs., Ltd.,
81 B.R. 112 (Bankr. M.D. Fla. 1987) (lessor may waive its right to
have lease deemed rejected if, through its conduct, it evidences
an intention to have lease treated as continuing, but waiver of
such right must be clearly established by evidence); see also
Bethesda-Union Soc’y of Savannah, Inc. v. Austin (In re Austin),
102 B.R. 897, 900-01 (Bankr. S.D. Ga. 1989); In re T.F.P.
Resources, Inc., 56 B.R. 112, 115-16 (Bankr. S.D.N.Y. 1985) (“It
thus appears that § 365(d)(4) can be waived by a lessor. Like
former § 70(b), it was enacted for the benefit of lessors and we
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6The Moving Parties cite In re Las Margaritas, Inc., 54 B.R.
98 (Bankr. D. Nev. 1985), for the proposition that a bankruptcy
court does not “have the jurisdiction to reinstate the debtor’s
right to assume, or to approve a sale or assignment of” a lease or
executory contract that has been deemed rejected under section
365(d)(4). 	Id. at 99. 	The court does not agree with this legal
conclusion. 	If both parties to the contract or lease explicitly
agree to waive the deemed rejection (as here), nothing in the
Bankruptcy Code denies the bankruptcy court the jurisdiction and
authority to approve such a waiver and a subsequent assumption and
assignment of that contract or lease. 	In Las Margaritas, unlike
here, the debtor was -- over the objections of the lessor and
counter-party -- attempting to assume a lease that had been deemed
rejected.
The Moving Parties also rely on Transamerica Comm’l Fin.
Corp. v. Citibank, N.A. (In re Sun Runner Marine, Inc.), 945 F.2d
1089 (9th Cir. 1991), where the Ninth Circuit held that a
“financial accommodation contract” could not be assumed even with
the consent of the lender as section 365(c)(2) “prohibits the
assumption of all financial accommodation contracts with no
reference to the consent of the non-debtor party to the contract.”
Id. at 1092. 	Such contracts would allow an unsecured creditor to
receive full payment on its unsecured claim at the expense of
other unsecured creditors. 	As the Ninth Circuit notes, the
prohibition against the assumption of financial accommodation
contracts “protects all unsecured creditors, not just the lender,
and the lender’s consent alone is not sufficient to abrogate it.”
Id.
In contrast, section 365(d)(4) is not prohibitive; it merely
provides that a contract is deemed rejected when the relevant time
period expires. 	It does not prohibit the parties to the contract
to waive (here, explicitly) the deemed rejection or preclude the
court from approving a such a consensual assumption. 	And unlike
section 365(c)(2), section 365(d)(4) was enacted for the benefit
of the counter-party to the lease or executory contract, and not
for the benefit of all unsecured creditors. 	The counter-party can
waive the benefit.
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also see no reason why that benefit can not be waived,
notwithstanding the conclusiveness of the self-executing mechanism
of § 365(d)(4).”); In re VMS Nat. Props., 148 B.R. 942, 945
(Bankr. C.D. Cal. 1992). 6
The Ninth Circuit has not decided whether the equitable
doctrines of waiver and estoppel are available under section
365(d)(4). 	George v. City of Morro Bay (In re George), 177 F.3d
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7That said, the waivers of default and rejection incorporated
into the Assumption Order should be limited to the parties who
sought it: JMS and Trustee. 	The Assumption Order should not have
contained language waiving or eliminating rights and defenses of
others.
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885, 890 (9th Cir. 1999). 	It has, however, set forth the elements
of such waiver: “(1) the existence at the time of the waiver of a
right, privilege, advantage or benefit; (2) the actual or
constructive notice thereof; and (3) the intention to relinquish
such right, privilege, advantage or benefit.” 	Id. at 889. 	Here,
all three elements have been clearly established by the counter-
party’s (JMS’s) admission in the Assignment Motion that it was
waiving the deemed rejection and by its request that this court
disregard the deemed waiver. 	As both of the parties to the
contract (JMS and the estate, through the Trustee) explicitly
moved this court to disregard the rejection and to approve the
assumption and assignment, this court had jurisdiction to enter
the Assumption Order. 7
Because the court did have jurisdiction to enter the
Assumption Order, the order is not void. 	In addition, in light of
the court’s approval of the assignment and assumption of the IP
Agreement, section 365(n) (which limits a licensee’s remedies in
the event of rejection) is inapplicable. 	Therefore, the court
will deny the request to vacate those portions of Assumption Order
approving the assumption and assignment of the IP Agreement.
B. 	The Language Regarding Merger Must Be Stricken
As noted above, the language in the order attempting to
circumvent the legal effect of merger was inconsistent with the
admissions of Trustee and JMS in their Assumption Motion that the
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8The court makes no determination here whether or not the
doctrine of merger would apply; the issue has not been properly
presented or briefed. 	The court likewise expresses no opinion as
to whether JMS has a viable and enforceable claim against the
Moving Parties as a result of the Assumption Order. 	While JMS
contended at oral argument on the Reconsideration Motion that the
IP Agreement remains binding on Lockwood because of the denial of
his discharge, the parties have not briefed this issue. 	The court
will not resolve it now, particularly as too many other issues
remained unaddressed. 	Even though Trustee and JMS could (and did)
waive the sixty-day deadline for the assumption of the executory
contract, does the assumption and assignment result in the
individual debtor (as opposed to the estate) being bound to
perform the estate’s future obligations on an ongoing basis if he
has any defenses to performance arising out of the IP Agreement or
arising out of the deemed rejection and breach of the IP
Agreement? 	In other words, while the estate (through Trustee) and
JMS may have cured or waived defaults as between themselves in the
assumption and assignment process, is the individual debtor
(Lockwood) bound when he was not a party to, or consented to, that
“effectively amended” agreement? 	Can JMS enforce a one-sided
performance against Lockwood when it is no longer performing its
obligations as licensee under the IP Agreement? 	Can JMS assert
rights as a licensee when it is now the licensor and owner of the
patent?
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rights of JMS as holder of the patent and as licensee would merge.
Moreover, the Assignment Motion did not seek such relief. 	The
court therefore erred in approving that language. 	Pursuant to
FRCP 60(b)(6) (incorporated by Rule 9024), the Moving Parties are
entitled to relief from that provision of the Assumption Order.
Even if JMS and Trustee had sought such relief in their
Assignment Motion and even if they had not judicially admitted
that the merger would occur upon assumption and assignment of the
IP Agreement, the court is not certain how approval of the
language would have been appropriate in the absence of authority
that this court could have circumvented the legal doctrine of
merger if it would have otherwise been applicable. 8 	The court
will therefore grant the Reconsideration Motion to the extent it
requests that the sentence containing the merger language be
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9Similarly, the Assumption Order contains other language
regarding the legal effect of the deemed rejection on Lockwood
which appears broader than the relief requested in the Assignment
Motion. 	Even though Trustee and JMS, in arguing that assumption
and assignment was possible after the deemed rejection, admitted
that the IP Agreement and the assumption/assignment was only
between the estate and JMS, the Assumption Order provided on page
2 that “[t]o the extent that there was any previous rejection,
neither the IP Agreement nor any rights therein reverted or
transferred to [Lockwood].” 	The court should not have approved
language that would have waived the rights of third parties
(including Lockwood) to assert whatever defenses they may have
arising from the deemed rejection/breach. 	That sentence will
likewise be stricken and vacated pursuant to FRCP 60(b)(6).
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stricken. 9
III. 	CONCLUSION
Counsel for the Moving Parties should upload and serve an
order consistent with this Memorandum Decision 	.
*** END OF MEMORANDUM DECISION ***
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COURT SERVICE LIST
Lawrence A. Jacobson, Esq.
Cohen and Jacobson
900 Veterans Blvd., Ste. 600
Redwood City, CA 94063
Barry Milgrom, Esq.
Luce, Forward, Hamilton & Scripps LLP
Rincon Center II
121 Spear St., Ste. 200
San Francisco, CA 94105-1582
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