In re Charles W. Dowdy

Mississippi bankruptcy court holds that agreement encompassing both settlement agreement resolving claims for past-due performance royalties and contemporaneously executed ASCAP licensing agreements is not a single agreement, permitting the debtor to assume the licensing agreements without paying-or curing any default on payment of $400,000 due under the settlement agreement.

In May 2011, Charles W. Dowdy and Southwest Broadcasting, Inc., entered into a stipulation and settlement agreement to resolve claims for unpaid licensing fees and copyright infringement brought by ASCAP in the Southern District of Mississippi. As part of the settlement agreement, Dowdy and Southwest agreed to pay ASCAP $400,000 plus interest for past royalties. Contemporaneously with the execution of the settlement agreement, Southwest and three other radio broadcasting companies entered into forward-looking licensing agreements with ASCAP.

Dowdy later dissolved Southwest, assumed their liabilities, transferred their assets to himself, and, four months after the settlement and licensing agreements were executed, filed a Chapter 11 bankruptcy petition. In a motion by Dowdy to assume certain executory contracts (namely, the licensing agreements the two broadcasting companies entered into with ASCAP), the debtor proposed curing defaults relating to the licensing agreements, but it did not provide for payment of—or propose to cure any default on—the $400,000 settlement payment. ASCAP objected, contending that the settlement and licensing provisions formed a single executory contract for purposes of Section 365 of the Bankruptcy Code.

The court disagreed. First, the court noted, although an executory contract must normally be assumed or rejected in its entirety, a debtor may seek to assume one agreement and not another when a single contract contains severable agreements. Looking to the parties’ intention, the court held that the licensing agreements were independently enforceable as separate agreements under Section 365. The settlement agreement did two things—it resolved the existing claims, and it prevented future claims by providing for separate licensing agreements for the radio stations moving forward. The court noted that the licensing agreements were not part of the settlement agreement but, rather, were “purposely executed separately,” and payment under the licensing agreements was to be made separately from payment of the $400,000 settlement. Finally, although a default under the licensing agreements constituted a breach of the settlement agreement, a default under the settlement agreement did not constitute breach of or “nullify” the licensing agreements. Therefore, the court held, the licensing agreements were severable and could be separately assumed. In reaching this conclusion, the court distinguished the debtor’s situation from cases in which settlement agreements provided for the payment of past-due royalties and ongoing licensing fees as a single sum. Here, the $400,000 settlement amount was due separately, and breach of the obligation to pay that debt wouldn’t nullify the licensing agreement.