Corporation v. Sunterra Corporation

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 In Re: SUNTERRA CORPORATION,
Debtor.
RCI TECHNOLOGY CORPORATION,
formerly known as Resort Computer No. 03-1193 Corporation,
Plaintiff-Appellant,
v.
SUNTERRA CORPORATION,
Defendant-Appellee. 
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
J. Frederick Motz, District Judge.
(CA-02-2539)
Argued: December 4, 2003
Decided: March 18, 2004
Before WIDENER, LUTTIG, and KING, Circuit Judges.
Reversed and remanded by published opinion. Judge King wrote the
opinion, in which Judge Widener and Judge Luttig joined.
COUNSEL
ARGUED: Jay Alan Shulman, SAUL EWING, L.L.P., Baltimore,
Maryland, for Appellant. Kenneth Oestreicher, WHITEFORD, TAY-

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LOR & PRESTON, L.L.P., Baltimore, Maryland, for Appellee. ON
BRIEF: Irving E. Walker, SAUL EWING, L.L.P., Baltimore, Mary-
land, for Appellant. John F. Carlton, WHITEFORD, TAYLOR &
PRESTON, L.L.P., Baltimore, Maryland, for Appellee.
OPINION
KING, Circuit Judge:
RCI Technology Corporation appeals from an order entered in the
District of Maryland affirming the bankruptcy court’s ruling in favor
of Sunterra Corporation. RCC Tech. Corp. v. Sunterra Corp., 287
B.R. 864 (D. Md. 2003).1 RCI contends that the district court erred
in ruling that Sunterra, as the Chapter 11 debtor in possession, was
entitled to assume a nonexclusive license of copyrighted software.2
On appeal, we are called upon to decide whether, pursuant to 11
U.S.C. § 365(c), such a debtor in possession may assume, over the
licensor’s objection, a nonexclusive software license. In so deciding,
we must resolve the issue of whether the disjunctive term "or," as
used in the "assume or assign" language of § 365(c), should be con-
strued in the conjunctive as "and." Because we are unable to so con-
strue § 365(c), Sunterra was precluded from assuming the
nonexclusive software license, and we reverse and remand.
I.
A.
At all times material to this appeal, RCI conducted business as a
software development company for the resort and hospitality industry.
1RCI Technology Corporation was formerly known as Resort Com-
puter Corporation, or RCC.
2Pursuant to Chapter 11 of the Bankruptcy Code, a debtor in posses-
sion remains in possession of the pre-petition assets and administers
them for the benefit of its creditors. In re Southeast Hotel Prop. Ltd.
P’ship, 99 F.3d 151, 152 n.1 (4th Cir. 1996) (citing 11 U.S.C. §§ 322,
1101(1), 1104, 1107).
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RCI’s software products were used by entities in this industry, such
as Sunterra, for functions such as recording reservations, managing
resort properties, and marketing and financing timeshares.3 Sunterra
owns or controls more than 150 subsidiaries and related entities, con-
stituting one of the world’s largest resort management businesses.
In the 1990s, Sunterra launched a program called Club Sunterra.
Membership in the Club allowed timeshare owners at Sunterra resorts
to trade their timeshare rights for such rights at other Sunterra resorts.
Because tens of thousands of timeshare owners and units were
involved in the Club, Sunterra needed to develop an integrated com-
puter system to assist its management of the Club. For this purpose,
Sunterra decided to acquire RCI’s Premier Software4 and modify it
into a unique computer program, the SWORD System.
In 1997, RCI and Sunterra entered into a software license agree-
ment (the "Agreement"), pursuant to which RCI granted Sunterra a
nonexclusive license to use Premier Software (the "Software"). Under
the Agreement, effective December 31, 1997, RCI was required to
provide Sunterra a "non-exclusive, worldwide, perpetual, irrevocable,
royalty-free license to . . . use, copy, modify, and distribute" the Soft-
ware (the "License"). Agreement § 3.1. Sunterra paid RCI $3.5 mil-
lion for the License. Because the Software, as marketed, did not meet
Sunterra’s requirements, the Agreement authorized Sunterra to utilize
the Software to develop its own software system. Under the Agree-
ment, Sunterra owned any enhancements it made to the Software (the
"Sunterra Enhancements"). Id. §§ 2.15, 3.6.3. Sunterra, in turn,
granted RCI a license to use the Sunterra Enhancements. Id. § 3.2.2.
Sunterra thereafter invested approximately $38 million in developing
the SWORD System.
3A timeshare has been defined as "a share in a property under a time-
sharing scheme." Oxford English Dictionary 879 (Vol. 4 & Supp. 1986).
The term time-sharing has been described as "[t]he ownership or right of
a property (esp. as a holiday home) for a fixed limited time each year."
Id.4It is uncontested that RCI’s Premier Software is a copyrighted com-
puter program registered with the United States Copyright Office.
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B.
On May 31, 2000, Sunterra filed a Chapter 11 bankruptcy petition
in the District of Maryland. Two years later, on June 21, 2002, the
bankruptcy court confirmed Sunterra’s Plan of Reorganization, effec-
tive July 29, 2002. Prior to the Plan’s confirmation, on March 28,
2002, RCI filed a motion to have the court deem the Agreement
rejected (the "Motion"). RCI claimed that the Agreement was an
executory contract and that Sunterra, as debtor in possession, was pre-
cluded by 11 U.S.C. § 365(c) (hereinafter "§ 365(c)" or the "Statute")
from assuming the Agreement without RCI’s consent.5 RCI main-
tained that, because it had refused to consent to assumption of the
Agreement, the court was required by law to deem the Agreement
rejected.
Sunterra opposed the Motion, asserting that the Statute was inappli-
cable because the Agreement was not an executory contract.6 Sunterra
also maintained that it was not precluded from assuming the Agree-
5Section 365(c) of Title 11 provides, in pertinent part:
(c) The trustee may not assume or assign any executory con-
tract . . . of the debtor, whether or not such contract . . . prohibits
or restricts assignment of rights or delegation of duties, if —
(1)(A) applicable law excuses a party, other than the
debtor, to such contract . . . from accepting performance
from or rendering performance to an entity other than the
debtor or the debtor in possession, whether or not such con-
tract . . . prohibits or restricts assignment of rights or delega-
tion of duties; and
(B) such party does not consent to such assumption or
assignment . . . .
11 U.S.C. § 365(c) (emphasis added). The term "trustee," as used in the
Statute, includes a Chapter 11 debtor in possession. See, e.g., In re Cata-
pult Entm’t, Inc., 165 F.3d 747, 750 (9th Cir. 1999). And the term "appli-
cable law" means "applicable non-bankruptcy law." In re Pioneer Ford
Sales, Inc., 729 F.2d 27, 28 (1st Cir. 1984).
6In the context of the Statute, "a contract is executory if performance
is due to some extent on both sides." Lubrizol Enters., Inc. v. Richmond
Metal Finishers, Inc., 756 F.2d 1043, 1045 (4th Cir. 1985).
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ment because the Statute should be interpreted as prohibiting a debtor
in possession from assuming and assigning a contract, and it intended
only to assume — not to assign. Finally, Sunterra contended that the
Statute did not prohibit assumption of the Agreement because RCI
had agreed to permit reasonable assignments thereof.
On June 6, 2002, the bankruptcy court relied on Lubrizol Enter-
prises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th
Cir. 1985), and held, in a bench ruling, that the Statute did not pro-
hibit Sunterra, as debtor in possession, from assuming the Agreement.
It decided that the Agreement was not an executory contract and that,
if it were, the Statute did not preclude assumption because Sunterra
did not intend to assign the Agreement. The court concluded that pro-
hibiting Sunterra from assuming the Agreement was nonsensical
because RCI would not be damaged if Sunterra, as debtor in posses-
sion, assumed the very contract rights it had possessed prior to bank-
ruptcy. The following day, on June 7, 2002, the court entered an order
denying the Motion. In re Sunterra Corp., No. 00-5-6931-JS (Bankr.
D. Md.).
On June 14, 2002, RCI appealed the bankruptcy court’s decision
to the district court, which, on January 10, 2003, affirmed. RCC Tech.
Corp. v. Sunterra Corp., 287 B.R. 864 (D. Md. 2003) (the "Opinion").
The district court disagreed with the bankruptcy court’s finding that
the Agreement was not executory, but concluded that the Statute did
not preclude Sunterra, as debtor in possession, from assuming it.
In its Opinion, the district court acknowledged that the Statute, read
literally, precluded Sunterra, as debtor in possession, from assuming
the Agreement because: (1) copyright law excused RCI from accept-
ing performance from a party other than Sunterra,7 and (2) RCI did
not consent to Sunterra’s assumption of the Agreement. Id. at 865. In
explaining its ruling, the court recognized the existence of a circuit
7Because the Software is a duly registered copyrighted computer pro-
gram, copyright law is the applicable nonbankruptcy law that would
excuse RCI from accepting performance under the Agreement from an
entity other than Sunterra. See, e.g., In re CFLC, Inc., 89 F.3d 673, 679
(9th Cir. 1996); In re Golden Books Family Entm’t, Inc., 269 B.R. 300,
309 (Bankr. D. Del. 2001).
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split on the issue of whether the Statute should be applied literally. It
acknowledged that at least three circuits, the Third, Ninth, and Elev-
enth, as well as several bankruptcy courts, have followed a "literal
test" (generally called the "hypothetical test") in applying the Statute
to the assumption of executory contracts.8 See In re West Elecs., Inc.,
852 F.2d 79, 83 (3d Cir. 1988) (characterizing § 365(c)(1)(A) as pos-
ing "a hypothetical question"); In re Catapult Entm’t, Inc., 165 F.3d
747, 750 (9th Cir. 1999) (same); In re James Cable Partners, 27 F.3d
534, 537 (11th Cir. 1994) (same); In re Catron, 158 B.R. 629, 633-38
(E.D. Va. 1993) (same), aff’d without op., 25 F.3d 1038 (4th Cir.
1994). On the other hand, the First Circuit, along with a majority of
the bankruptcy courts, have applied the "actual test" in such circum-
stances.9 See Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d
489, 493 (1st Cir. 1997) (rejecting the literal test in favor of the actual
test); see also In re Catapult, 165 F.3d at 749 n.2 (collecting bank-
ruptcy court decisions adopting actual test).
In its Opinion, the district court recognized that resolution of the
dispute turned on which of the two tests applied. If the literal test
8The term literal test is derived from a literal interpretation of the Stat-
ute, under which the disjunctive "or" in § 365(c) is construed to mean
what it says. If § 365(c) is construed literally, "a debtor in possession
may not assume an executory contract over the nondebtor’s objection if
applicable law would bar assignment to a hypothetical third party, even
where the debtor in possession has no intention of assigning the contract
in question to any such third party." In re Access Beyond Techs., Inc.,
237 B.R. 32, 48 (Bankr. D. Del. 1999) (original emphasis omitted and
emphasis added) (citing In re James Cable Partners, 27 F.3d 534, 537
(11th Cir. 1994); In re West Elecs., Inc., 852 F.2d 79, 83 (3d Cir. 1988)).
Although generally called the hypothetical test, the test is premised on
a literal interpretation of the Statute, and it is more aptly referred to as
the "literal test."
9Under the actual test, the disjunctive "or" in § 365(c) is construed as
the conjunctive "and." In applying the actual test, therefore, a court must
make a case-by-case inquiry into whether the nondebtor party would be
compelled to accept performance from someone other than the party with
whom it had originally contracted, and a debtor would not be precluded
from assuming a contract unless it actually intended to assign the con-
tract to a third party. Summit Invest. & Dev. Corp. v. Leroux, 69 F.3d
608, 612 (1st Cir. 1995).
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applied, Sunterra could not assume the Agreement because RCI was
excused, pursuant to applicable copyright law, from accepting perfor-
mance from a hypothetical third party. On the other hand, if the actual
test applied, Sunterra, as debtor in possession, was entitled to assume
the Agreement because it did not intend to assign, and RCI would not
actually be forced to accept performance from a party other than Sun-
terra. The court then adopted the actual test, interpreting the disjunc-
tive "or" in the conjunctive as "and," and holding that, because RCI
would not, in the circumstances, be forced to accept performance
from a party other than Sunterra, the Statute did not preclude it from
assuming the Agreement.10
Finally, the district court addressed Sunterra’s contention that,
because RCI had agreed that it would not unreasonably withhold its
consent regarding future assignments of the License by Sunterra, RCI
had impliedly consented for Sunterra, as debtor in possession, to
assume the Agreement. The court deemed unpersuasive Sunterra’s
contention that RCI consented to assumption of the Agreement. It
determined, however, that its adoption and application of the actual
test rendered the consent issue moot. It thus affirmed the bankruptcy
court’s ruling that the Statute did not bar Sunterra, as debtor in pos-
session, from assuming the Agreement. RCI has filed a timely appeal,
and we possess jurisdiction pursuant to 28 U.S.C. § 158(d).
II.
We review de novo the judgment of a district court sitting in
10As the district court explained, the literal test has the "obvious virtue
of being consistent with the dictate of the Supreme Court that the plain
meaning of a statute must be enforced when its terms are unambiguous."
Opinion at 865 (citing Patterson v. Shumate, 504 U.S. 753, 757-59
(1992)). The court adopted the actual test, however, declaring that,
although it "has the weakness of reading the statutory language ‘assume
or assign’ to mean ‘assume and assign,’ . . . . it has the virtue of being
consistent with the general goals of Chapter 11 because it allows licens-
ees to benefit from the protections of the bankruptcy law while encourag-
ing the maximization of the economic value of the debtor’s estate." Id.
at 866 (emphasis added) (citing In re Cardinal Indus., Inc., 116 B.R.
964, 981 (Bankr. S.D. Ohio 1990)).
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review of a bankruptcy court, "applying the same standards of review
that were applied in the district court." In re Shangra-La, 167 F.3d
843, 847 (4th Cir. 1999). Accordingly, we review de novo the issue
of whether the Agreement was an executory contract. Lubrizol, 756
F.2d at 1045 (observing that issue of whether contract is executory is
one of law); Bose Corp. v. Consumers Union of the United States,
Inc., 466 U.S. 485 (1984) (observing that issues of law are reviewed
de novo). We also review de novo an issue of statutory construction.
United States v. Childress, 104 F.3d 47, 50 (4th Cir. 1996) (observing
that issues of statutory construction are reviewed de novo).
III.
In its appeal, RCI contends that we should reverse for several rea-
sons. First, it maintains that, because the plain meaning of the Statute
can be applied without producing a result that is patently absurd, the
court erred in failing to do so. Second, RCI contends that general
bankruptcy policy cannot be relied upon to support the decision not
to apply the plain meaning of the Statute. Third, RCI maintains that
the Statute is unambiguous and that use of legislative history to con-
strue the Statute was inappropriate. Finally, RCI contends that, if leg-
islative history can be utilized, it does not support the Opinion.
On the other hand, Sunterra maintains that, for multiple reasons,
we should affirm. First, it asserts that the Statute applies only to exec-
utory contracts, and that the Agreement was not executory. Second,
it contends that, if the Agreement was executory, we should affirm
because courts need not apply the plain meaning of a statute to pro-
duce an absurd result or be inconsistent with clearly established legis-
lative intent. On this point, Sunterra maintains that the literal test —
interpreting the disjunctive "or" in the Statute to mean what it says —
would have produced an absurd result and been inconsistent with leg-
islative intent. Finally, Sunterra contends that the Statute does not pre-
clude assumption of an executory contract if the nondebtor party, i.e.,
RCI, consents to the assignment, and RCI, in section 5.11 of the
Agreement, impliedly consented to reasonable assignments. Sunterra
asserts that assumption was "automatically reasonable" because it
would leave undisturbed the identity of Sunterra as the licensee. Sun-
terra contends, therefore, that we should affirm because RCI had con-
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sented to assumption of the Agreement by Sunterra as debtor in
possession. We address these issues in turn.
A.
First, Sunterra contends that the Statute does not prohibit assump-
tion of the Agreement because the Statute applies only to executory
contracts and the Agreement was not executory.11 In assessing
whether a contract is executory, we are obliged, under Lubrizol, 756
F.2d at 1045, to apply what courts have referred to as the Countryman
Test. Under the Countryman Test, a contract is executory if the "‘obli-
gations of both the bankrupt and the other party to the contract are so
far unperformed that the failure of either to complete the performance
would constitute a material breach excusing the performance of the
other.’" Gloria Mfg. Corp. v. Int’l Ladies’ Garment Workers’ Union,
734 F.2d 1020, 1022 (4th Cir. 1984) (quoting Countryman, Executory
Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973)).
Applying the Countryman Test, the Agreement was not executory
unless it was executory as to both Sunterra and RCI when Sunterra
petitioned for bankruptcy.12 We must therefore assess whether, at the
time of the Chapter 11 filing, the obligations of both Sunterra and
RCI were so unperformed that the failure of either to complete perfor-
mance would constitute a material breach of the Agreement.
On this point, we agree with the district court that the Agreement
was executory when Sunterra petitioned for bankruptcy. When the
bankruptcy petition was filed, each party owed at least one continuing
material duty to the other under the Agreement — they each pos-
sessed an ongoing obligation to maintain the confidentiality of the
source code of the software developed by the other, i.e., the Software
and the Sunterra Enhancements.13 Agreement §§ 3.1.3, 3.2.2, 3.10,
3.11.
11If the Agreement was not executory, it was not subject to the Statute,
and it would have survived the bankruptcy filing unaffected. See In re
Access, 237 B.R. at 41.
12The date a bankruptcy petition is filed is the critical time for deter-
mining whether a contract is executory. See, e.g., In re Columbia Gas
Sys. Inc., 50 F.3d 233, 240 (3d Cir. 1995); In re Access, 237 B.R. at 41
n.10.
13The term source code, as used in the Agreement, means the human-
readable form of the Software and the Sunterra Enhancements. Agree-
ment § 2.19.
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B.
If the Agreement was executory, Sunterra agrees that a straightfor-
ward application of the Statute prohibits it from assuming the Agree-
ment without RCI’s consent. More specifically, Sunterra
acknowledges that § 365(c) is drawn in the disjunctive and, by its
plain language, prohibits Sunterra from "assuming or assigning,"
rather than from "assuming and assigning," the Agreement. And as a
settled principle, "unless there is some ambiguity in the language of
a statute, a court’s analysis must end with the statute’s plain language
. . . ." Hillman v. I.R.S., 263 F.3d 338, 342 (4th Cir. 2001) (citing
Caminetti v. United States, 242 U.S. 470, 485 (1917)) (the "Plain
Meaning Rule").
Sunterra maintains that the Plain Meaning Rule has no application
here, relying on the two narrow exceptions to application of a stat-
ute’s plain language. The first such exception, premised on absurdity,
exists "when literal application of the statutory language at issue
results in an outcome that can truly be characterized as absurd, i.e.,
that is so gross as to shock the general moral or common sense . . . ."
Id. (quoting Sigmon Coal Co. v. Apfel, 226 F.3d 291, 304) (4th Cir.
2000) (internal quotation marks omitted), aff’d sub nom. Barnhart v.
Sigmon Coal Co., 534 U.S. 438 (2002). The second exception is
premised on legislative intent, and it exists only "when literal applica-
tion of the statutory language at issue produces an outcome that is
demonstrably at odds with clearly expressed congressional intent
. . . ." Id. A reviewing court may look beyond the plain language of
an unambiguous statute only when one of these exceptions is impli-
cated. Sigmon Coal, 226 F.3d at 304. And we have recognized that
"the instances in which either of these exceptions to the Plain Mean-
ing Rule apply ‘are, and should be, exceptionally rare.’" Hillman, 263
F.3d at 342 (quoting Sigmon Coal, 226 F.3d at 304).
Sunterra maintains that we should affirm because, although the
plain language of the Statute precludes its assumption of the Agree-
ment, application of the literal test produces a result that is both
absurd and demonstrably at odds with clearly expressed legislative
intent. Specifically, Sunterra contends that we should reject the plain
meaning of the Statute, and read the disjunctive "or" as the conjunc-
tive "and," for three reasons: (1) the plain meaning of § 365(c) is
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absurd because it creates internal inconsistencies therein; (2) the plain
meaning of § 365(c) is absurd because it is inconsistent with general
bankruptcy policy; and (3) the plain meaning of § 365(c) is incompat-
ible with its legislative history. We examine these contentions in turn.
1.
Sunterra maintains that adherence to the Plain Meaning Rule pro-
duces an absurd result because it sets § 365(c) at war with itself and
its neighboring statutory provisions. Specifically, Sunterra maintains
that a literal reading of § 365(c) implicates the absurdity exception
because it renders inoperative and superfluous § 365(f)(1),14 as well
as the phrase "or the debtor in possession" found in § 365(c)(1)(A).
Sunterra, relying on Sutherland Statutory Construction, contends that
we should interpret § 365(c) to minimize any discord among the pro-
visions of § 365 and, if possible, construe § 365(c) so that none of
§ 365 is inoperative or superfluous. 2A Norman J. Singer, Sutherland
Statutory Construction § 46.06 (5th ed. 1992) ("A statute should be
construed so that effect is given to all its provisions, [and] so that no
part will be inoperative or superfluous . . . .").
a.
In support of its inconsistency contention, Sunterra first maintains
that it is absurd to read § 365(c)(1) literally because such a reading
renders § 365(f)(1) inoperative and superfluous. The asserted incon-
sistency between § 365(c)(1) and § 365(f)(1) arises from use of the
term "applicable law" in each provision. In re Catapult, 165 F.3d at
751. Subsection (c)(1) bars assumption (absent consent) when "appli-
cable law" would bar an assignment. And subsection (f)(1) provides
14Subsection 365(f)(1) of the Bankruptcy Code provides, in pertinent
part, as follows:
Except as provided in subsection (c) of this section, notwith-
standing a provision in an executory contract . . . of the debtor,
or in applicable law, that prohibits, restricts, or conditions the
assignment of such contract . . ., the trustee may assign such con-
tract . . . under paragraph (2) of this subsection . . . .
11 U.S.C. § 365(f)(1) (emphasis added).
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that, contrary provisions in applicable law notwithstanding, execu-
tory contracts may be assigned. Of course, the assumption of an exec-
utory contract is a necessary prerequisite to its assignment under
§ 365. See 11 U.S.C. § 365(f)(2)(A) (providing that trustee may
assign executory contract only if trustee first assumes such contract
in accordance with provisions of § 365). A literal reading of
§ 365(c)(1), therefore, initially appears to render § 365(f)(1) inopera-
tive or superfluous.
The Sixth Circuit, in its decision in In re Magness, squarely
addressed the issue of whether the seemingly warring provisions of
§ 365(c)(1) and § 365(f)(1) are reconcilable. In re Magness, 972 F.2d
689, 695 (6th Cir. 1992). In so doing, the court acknowledged that
"section 365(c), the recognized exception to 365(f), appears at first to
resuscitate in full the very anti-assignment ‘applicable law’ which
365(f) nullifies." Id. As the court observed, however, the conflict
between § 365(c)(1) and § 365(f)(1) is illusory, because "each subsec-
tion recognizes an ‘applicable law’ of markedly different scope." Id.;
accord In re James Cable, 27 F.3d at 537-38; In re Lil’ Things, Inc.,
220 B.R. 583, 590-91 (Bankr. N.D. Tex. 1998); In re Antonelli, 148
B.R. 443, 448 (D. Md. 1992), aff’d without op., 4 F.3d 984 (4th Cir.
1993). First, § 365(f)(1) lays out the broad rule — "a law that, as a
general matter, ‘prohibits, restricts, or conditions the assignment’ of
executory contracts is trumped by the provisions of subsection (f)(1)."
In re Catapult, 165 F.3d at 752 (citing In re James Cable, 27 F.3d at
538; In re Magness, 972 F.2d at 695). Section 365(c)(1), in contrast,
creates a carefully crafted exception to the broad rule, under which
"applicable law does not merely recite a general ban on assignment,
but instead more specifically ‘excuses a party . . . from accepting per-
formance from or rendering performance to an entity’ different from
the one with which the party originally contracted . . . ." Id. Therefore,
under the broad rule of § 365(f)(1), the "applicable law" is the law
prohibiting or restricting assignments as such; whereas the "applica-
ble law" under § 365(c)(1) embraces "legal excuses for refusing to
render or accept performance, regardless of the contract’s status as
‘assignable’ . . . ." In re Magness, 972 F.2d at 699 (Guy, J., concur-
ring).
In order to determine whether a law is overridden by § 365(f)(1)
under the foregoing interpretation of § 365(f)(1) and § 365(c)(1), a
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court must ask why "applicable law" prohibits assignment. In re Cata-
pult, 165 F.3d at 752 (citing In re Magness, 972 F.2d at 700 (Guy,
J., concurring); In re Antonelli, 148 B.R. at 448). And only applicable
anti-assignment law predicated on the rationale that the identity of the
contracting party is material to the agreement is resuscitated by
§ 365(c)(1). Id. Premised on this interpretation, we agree with those
Circuits that apply § 365(c)(1) literally — the provisions of
§ 365(c)(1) are not inevitably set at odds with the provisions of
§ 365(f)(1). In re Catapult, 165 F.3d at 752; In re James Cable, 27
F.3d at 538; In re Magness, 972 F.2d at 695.
b.
The second pillar of Sunterra’s inconsistency contention is that a
literal reading of § 365(c)(1) creates a conflict within itself. Specifi-
cally, Sunterra contends that § 365(c)(1) cannot be read literally
because, when so read, the phrase "or the debtor in possession" found
in § 365(c)(1)(A) is rendered inoperative and superfluous. Certain
bankruptcy courts have agreed with Sunterra’s contention, observing,
for example, that, "[i]f the directive of Section 365(c)(1) is to prohibit
assumption whenever applicable law excuses performance relative to
any entity other than the debtor, why add the words ‘or debtor in pos-
session?’ The [literal] test renders this phrase surplusage." In re
Hartec Enters., Inc., 117 B.R. 865, 871-72 (Bankr. W.D. Tex. 1990);
accord In re Fastrax, Inc., 129 B.R. 274, 277 (Bankr. M.D. Fla.
1991); In re Cardinal Indus., Inc., 116 B.R. 964, 979 (Bankr. S.D.
Ohio 1990). As the Ninth Circuit has recognized, however, this posi-
tion is untenable because "[a] close reading of § 365(c)(1) . . . dispels
this notion." In re Catapult, 165 F.3d at 752.
By its plain language, § 365(c)(1) addresses both assumption and
assignment. Id. An assumption and an assignment are "two conceptu-
ally distinct events," and the nondebtor must consent to each indepen-
dently. Id. Under the plain language of § 365(c)(1), therefore, two
independent events must occur before a Chapter 11 debtor in posses-
sion is entitled to assign an executory contract. The debtor in posses-
sion must first obtain the nondebtor’s consent to assume the contract,
and it must thereafter obtain the nondebtor’s consent to assign the
contract. Therefore, "where a nondebtor consents to the assumption
of an executory contract, § 365(c)(1) will have to be applied a second
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time if the debtor in possession wishes to assign the contract in ques-
tion." Id. And in the second application of § 365(c)(1), the issue is
whether "applicable law excuses a party from accepting performance
from or rendering performance to an entity other than . . . the debtor
in possession." 11 U.S.C. § 365(c)(1)(A) (emphasis added). We agree,
therefore, that the phrase "debtor in possession," far from being ren-
dered inoperative or superfluous by a literal reading of subsection
(c)(1), dovetails neatly with the disjunctive language therein: "The
trustee may not assume or assign . . . ." 11 U.S.C. § 365(c) (emphasis
added); see In re Catapult, 165 F.3d at 752.
In light of the foregoing, Sunterra’s inconsistency contention also
lacks merit — the Statute may be read literally without creating an
irreconcilable conflict within itself or with its neighboring statutory
provisions.
2.
Sunterra next maintains that the bankruptcy court and the district
court properly declined to read the Statute literally, correctly conclud-
ing that to do so would produce a result that is inconsistent with gen-
eral bankruptcy policy. Those courts declined to adhere to the Plain
Meaning Rule because they concluded that a literal reading of the
Statute conflicts with general bankruptcy policy, implicating the
absurdity and intent exceptions to the Rule. Indeed, the district court
decided that the result produced by the plain language of the Statute
was "quite unreasonable." Opinion at 866. We turn to Sunterra’s con-
tention that the intent and absurdity exceptions apply here.
a.
We first assess whether a conflict between the Statute and general
bankruptcy policy implicates the absurdity exception to the Plain
Meaning Rule. The district court refused to read § 365(c) literally
because it viewed the result produced by such a reading to be "quite
unreasonable." In assessing whether a plain reading of a statute impli-
cates the absurdity exception, however, the issue is not whether the
result would be "unreasonable," or even "quite unreasonable," but
whether the result would be absurd. See Maryland State Dep’t of
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Educ. v. U.S. Dep’t of Veterans Affairs, 98 F.3d 165, 169 (4th Cir.
1996).
Sunterra maintains that reading § 365(c) literally is absurd because
such a reading conflicts with the general bankruptcy policy of foster-
ing a successful reorganization and maximizing the value of the debt-
or’s assets. RCI, on the other hand, asserts that reading § 365(c)
literally is not absurd because Congress did not sacrifice every right
of a nondebtor party to the reorganization process, and that courts
should not assume that "sections of the Bankruptcy Code unfavorable
to the debtor were enacted in error." RCI observes that the Bank-
ruptcy Code contains many provisions preserving the rights of non-
debtor parties from its general debtor-favorable application (the
"Nondebtor Provisions"). See, e.g., 11 U.S.C. §§ 362(b) (listing
exceptions to automatic stay, authorizing nondebtor parties to exer-
cise their nonbankruptcy rights notwithstanding § 362(a)), 555-557,
559, 560 (protecting rights of nondebtor party under securities con-
tracts, commodities contracts, grain storage contracts, repurchase
agreements, and swap agreements, from effects of automatic stay,
avoidance powers, and provisions of § 365). In response, Sunterra
acknowledges that "anyone looking at § 365 appreciates that the
Bankruptcy Code balances non-debtor rights with those of a debtor-
in-possession." Sunterra maintains, however, that most of the Non-
debtor Provisions address particular grievances of an identifiable con-
stituency, or were enacted in response to particular court decisions.
Sunterra contends, therefore, that the mere existence of such provi-
sions does not make it plausible that, in enacting the Statute, Congress
intended to preclude Chapter 11 debtors from assuming executory
contracts existing prior to the bankruptcy filing.
To the contrary, the existence of the Nondebtor Provisions makes
it plausible that Congress meant what it said in the Statute. And as
Judge Traxler observed in Sigmon Coal, if it is plausible that Con-
gress intended the result compelled by the Plain Meaning Rule, we
must reject an assertion that such an application is absurd. Sigmon
Coal, 226 F.3d at 308 (holding statute not absurd because, although
literal application of statute produced somewhat anomalous result,
plausible explanation existed). In these circumstances, application of
the Plain Meaning Rule does not produce a result so grossly inconsis-
tent with bankruptcy policy as to be absurd.
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b.
We turn next to Sunterra’s contention on the intent exception.
Affirming the bankruptcy court, the district court decided that the
actual test, reading the disjunctive "or" as the conjunctive "and," is
"far more harmonious" with bankruptcy policy than the literal test.
Opinion at 866. Relying on United States v. Ron Pair Enterprises,
Inc., 489 U.S. 235 (1989), the court declined to apply the plain mean-
ing of the Statute, declaring that, "[a]lthough the plain meaning of
statutes must generally be enforced, there is a competing principle
that statutes should not be interpreted to produce results that are
unreasonable in light of the drafters’ intentions." Id. The court then
ruled that, because the literal test produced a result that conflicted
with the goals of Chapter 11, it need not apply the plain meaning of
the Statute. Id.
In its Ron Pair decision, the Supreme Court held that a statute’s
"plain meaning should be conclusive except in the ‘rare cases [in
which] the literal application of [the] statute will produce a result
demonstrably at odds with the intentions of its drafters.’" 489 U.S. at
242 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571
(1982)) (emphasis added). Under Ron Pair, therefore, a court is
obliged to apply the Plain Meaning Rule unless the party contending
otherwise can demonstrate that the result would be contrary to that
intended by Congress. Requiring a demonstration that the plain mean-
ing of a statute is at odds with the intentions of its drafters is a more
stringent mandate than requiring a showing that the statute’s literal
application is unreasonable in light of bankruptcy policy.
Some bankruptcy commentators maintain that sound bankruptcy
policy supports adoption of the actual test. See 3 Lawrence P. King,
Collier on Bankruptcy § 365.06[1][d][iii] (15th ed. revised). As the
Supreme Court has repeatedly emphasized, however, Congress is the
policymaker — not the courts. Hartford Underwriters Ins. Co. v.
Union Planters Bank, N. A., 530 U.S. 1, 13 (2000)(citing Kawaauhau
v. Geiger, 523 U.S. 57, 64 (1998); United States v. Noland, 517 U.S.
535, 541-42, n.3 (1996); Union Bank v. Wolas, 502 U.S. 151, 162
(1991)). And, put simply, the modification of a statutory provision to
achieve a preferable policy outcome is a task reserved to Congress.
Id.
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As the Ninth Circuit has recognized, application of the actual test
"effectively engrafts a narrow exception onto § 365(c)(1) for debtors
in possession, providing that, as to them, the statute only prohibits
assumption and assignment." Catapult, 165 F.3d at 754. Under the
actual test, the disjunctive "or" of § 365(c) is read as the conjunctive
"and," and the term "assume" is effectively read out of the Statute. No
matter how appealing such an interpretation may be from a policy
standpoint, "we cannot adopt [such interpretation] as our own without
trespassing on a function reserved for the legislative branch . . . ." Sig-
mon Coal, 226 F.3d at 308.
In these circumstances, any perceived conflict between a literal
reading of the Statute and general bankruptcy policy fails to implicate
the intent exception to the Plain Meaning Rule. As we observed in
Sigmon Coal, a federal court must "determine the meaning of the stat-
ute passed by Congress, not whether wisdom or logic suggests that
Congress could have done better . . . ." Id. We conclude, therefore,
that the intent exception is not implicated here.
3.
Sunterra next maintains that the district court should be affirmed
because a literal application of the Statute produces an outcome at
odds with legislative history. Importantly, § 365, as it now reads, was
added to the Bankruptcy Code in 1984 (the "1984 Act"), and there is
no relevant legislative history for the 1984 Act. In re Cardinal, 116
B.R. at 978. Sunterra contends, however, that the 1984 amendments
had their genesis in a 1980 House amendment to an earlier Senate
technical corrections bill. That amendment "was accompanied by ‘a
relatively obscure committee report,’" In re Catapult, 165 F.3d at 754
(quoting 1 David G. Epstein, et al., Bankruptcy § 5-15 (1992)), which
states:
This amendment makes it clear that the prohibition against
a trustee’s power to assume an executory contract does not
apply where it is the debtor that is in possession and the per-
formance to be given or received under a personal service
contract will be the same as if no petition had been filed
because of the personal nature of the contract.
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H.R. 1195, 96th Cong., 2d Sess. § 27(b) (1980) (the "1980 Report").
The First Circuit relied on the 1980 Report in its adoption of the
actual test. Summit Invest. & Dev. Corp. v. Leroux, 69 F.3d 608, 613
(1st Cir. 1995). Sunterra contends that a literal reading of the Statute
is at odds with the 1980 Report, and that this contradiction supports
its position. However, legislative history suggesting an interpretation
contrary to a statute’s plain meaning is not necessarily sufficient to
override the Plain Meaning Rule. In Sigmon Coal, for example, we
declined to rely on legislative history to displace the plain meaning
of the statute, because the history consisted merely of a statement
made by a single member of Congress. 226 F.3d at 306. Although
such legislative history was "worthy of consideration, [it was] simply
not the sort of conclusive legislative history that would trump con-
trary language in the statute." Id.
For at least three reasons, the 1980 Report is not conclusive on
congressional intent concerning the 1984 Act. First, the 1980 Report
relates to a 1980 proposal, which was never enacted, rather than to the
1984 Act; and we have held that courts are not free to replace a stat-
ute’s plain meaning with "unenacted legislative intent." United States
v. Morison, 844 F.2d 1057, 1064 (4th Cir. 1988). Second, the 1980
Report was prepared several years prior to enactment of the Statute.
In re Catapult, 165 F.3d at 754. Finally, it reflects the views of only
a single House committee. Id. For these reasons, we agree with the
Ninth Circuit that the 1980 Report is not "the sort of clear indication
of contrary intent that would overcome the unambiguous language of
subsection (c)(1)." Id. We must decline, therefore, to reject the Stat-
ute’s plain meaning on this basis.
C.
Finally, we turn to Sunterra’s contention that, in any event, RCI
consented to Sunterra’s assumption of the Agreement. Pursuant to the
Statute, a debtor in possession may assume or assign an executory
contract if the nondebtor party consents thereto. 11 U.S.C.
§ 365(c)(1)(B). Sunterra maintains that RCI had agreed, in section
5.11 of the Agreement, that it would not prohibit Sunterra from trans-
ferring the License to a successor in interest if the transfer included
substantially all of Sunterra’s assets, and that in so doing, RCI con-
sented to its assumption of the License.
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The provision of the Agreement at issue provides that the assign-
ment section of the Agreement shall not preclude the transfer of the
License to a successor in interest of substantially all of Sunterra’s
assets if the assignee agrees in writing to be bound by the License (the
"Transfer Provision").15 Sunterra maintains that RCI had consented, in
the Transfer Provision, to permit transfer of the License to a successor
in interest under certain circumstances. RCI contends that any consent
it provided to Sunterra in the Transfer Provision is irrelevant because,
under the Statute, the issue is whether applicable law prohibited the
transfer irrespective of the provisions of the Agreement. In support of
this proposition, RCI observes that the Statute applies "whether or not
such contract . . . prohibits or restricts assignments of rights . . . ." Id.
§ 365(c)(1)(A).
RCI’s reliance on this aspect of the Statute’s language is mis-
placed. The Transfer Provision does not prohibit or restrict Sunterra
from transferring its rights under the Agreement; the Transfer Provi-
sion favors assignment — it entitles Sunterra to assign the Agreement
without RCI’s consent so long as the assignment includes substan-
tially all of Sunterra’s assets. Rather than being irrelevant, therefore,
the issue of contractual consent in the Transfer Provision could be
determinative of whether the Statute barred Sunterra’s assumption.
See In re Midway Airlines, Inc., 6 F.3d 492, 497 (7th Cir. 1993) (find-
ing proassignment contract language determinative of assignment
issue under § 365(c)). Accordingly, we must disagree with RCI that
the Agreement, in permitting Sunterra to transfer the License to a suc-
cessor in interest, is irrelevant to whether the Statute precluded Sun-
terra from assuming or assigning the Agreement.
Finally, RCI maintains that, even if it consented to Sunterra’s trans-
fer of the License to a successor in interest under certain circum-
stances, the Transfer Provision applies only to assignments, and not
15The Transfer Provision of the Agreement provides:
The provisions of this section shall not preclude the transfer of
this license to a successor in interest of substantially all of [Sun-
terra’s] assets if the assignee agrees in writing to be bound by
this License.
Agreement § 5.11.
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to assumptions. We agree. The Transfer Provision is set forth in the
"Assignment" section of the Agreement, and all other provisions of
that section apply, by their terms, exclusively to assignments.16
In sum, we draw the following conclusions. RCI consented to Sun-
terra’s assignment of the License to a successor in interest under cer-
tain circumstances. The Transfer Provision, however, does not apply
to an assumption of the Agreement by a Chapter 11 debtor in posses-
sion. Because the terms assumption and assignment describe "two
conceptually distinct events," In re Catapult, 165 F.3d at 752, and
because the Transfer Provision pertains to an assignment rather than
an assumption, RCI did not consent to Sunterra’s assumption of the
Agreement. Without RCI’s consent, Sunterra was precluded from
assuming the Agreement.
IV.
Pursuant to the foregoing, the bankruptcy court erred, and the dis-
trict court erred in affirming the bankruptcy court. We therefore
reverse, and we remand for such other and further proceedings as may
be appropriate.
REVERSED AND REMANDED
16In support of the proposition that RCI, by virtue of the Transfer Pro-
vision, consented to assumption of the Agreement, Sunterra relies on the
Seventh Circuit decision in In re Midway Airlines. 6 F.3d 492 (7th Cir.
1993). The agreement at issue there, however, explicitly contemplated
assumption and assignment in the bankruptcy context. The Transfer Pro-
vision, on the other hand, contemplates neither an assignment in the
bankruptcy context nor an assumption.
Sunterra also relies on a Louisiana bankruptcy court decision In re
Supernatural Foods, 268 B.R. 759 (Bankr. M.D. La. 2001), to support
the proposition that RCI, by the Transfer Provision, consented to
assumption of the Agreement. We are unpersuaded by that decision,
however, and we decline to follow it.
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