In a case of first impression, the Seventh Circuit in Sunbeam Products, Inc. v. Chicago American Manufacturing held that a trademark licensee is entitled to the contracted-for rights to that trademark even after a chapter 7 trustee rejects the trademark license as an executory contract. Lakewood Engineering & Manufacturing Co. (the “Licensor”) entered into a contract with Chicago American Manufacturing (the “Licensee”) giving the Licensee the right to sell fans bearing the Licensor’s trademark. It also provided that the Licensee could continue to use the trademark for the period of the contract even if the Licensor breached. Three months later, the Licensor was forced into an involuntary chapter 7 bankruptcy proceeding in which the trustee rejected the licensing agreement as an executory contract. When Sunbeam Products, Inc. (the “Purchaser”) acquired the Licensor’s assets, including the trademark, it demanded that the Licensee cease using the trademark. The Licensee refused, and the Purchaser sought an injunction to prevent the Licensee from producing and selling fans bearing the Licensor’s trademark. The bankruptcy court held for the Licensee on equitable grounds. On a direct appeal, the Seventh Circuit held for the Licensee, but did so on different grounds.
By: Courtney Pasquariello
St. John’s Law Student American Bankruptcy Institute Law Review Staff
Injecting uncertainty into the claims process, the Sixth Circuit Court of Appeals held that a lessor’s lease rejection claim must be recomputed if it fails to realize the projected mitigation amount used to compute its claim. In Giant Eagle, Inc., v. Phar-Mor, Inc., Giant Eagle, Inc. and Valu Eagle Associates (“GE”) entered into long-term equipment leases with Phar-Mor. Phar-Mor filed Chapter 11 during the lease term and rejected the equipment leases. As a result of Phar-Mor’s rejection, GE made claims for undisputed administrative expenses as well as claims for future rent minus rent recovered from mitigation. Upon recovering the equipment from Phar-Mor, GE attempted to fulfill its duty to mitigate damages by releasing the equipment under a new agreement with Snyder’s Drugstores, Inc. However, during Synder’s new lease term, Snyder too sought relief under Chapter 11 and rejected the equipment leases. After recovering the equipment, GE was unable to re-let it and sought to recover additional future rental damages in the Phar-Mor bankruptcy case. Although the lower courts sided with Phar-Mor, stating that “once a lessor mitigates its damages by re-letting the equipment, the lessor cannot claim damages from the debtor for the period covered by the new lease,” the Sixth Circuit disagreed. Instead, the appellate court focused on the fact that once a lease was rejected, the debtor was liable for damages resulting from the breach regardless of mitigation or attempted mitigation.