A Trustee’s Rejection of a Contract does not Necessarily Suspend the Non-Debtor Counterparties’ Contractual Obligations

Cav Meininger 

St. John's University School of Law 

American Bankruptcy Institute Law Review Staff


In Music Royalty Consulting Inc. v. Reservoir Media Management, Inc., the Southern District of New York addressed the implications of the rejection of a contract on a dispute between two non-debtor publishing entities, Music Royalty Consulting, Inc. (“MRCI”) and Reservoir Media Management, Inc. (“Reservoir”).[1] Pursuant to a contract with Scott Storch, an artist, Storch licensed the copyrights to his songs to Reservoir in exchange for a share of the revenue from his songs.[2] After Storch assigned his interest in revenue to MRCI,[3] Storch filed for relief under chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”).  The trustee appointed in Storch’s bankruptcy case rejected the contract between Storch and Reservoir.[4] Consequently, Reservoir stopped making royalty payments to MRCI.[5] MRCI then sued Reservoir for breach of contract in the Southern District of New York.[6] Reservoir then moved for summary judgment to dismiss the breach of contract claim, contending: (1) the rejection was an event of default under the terms of the contract; and (2) the rejection relieved Reservoir of its obligation to pay MRCI as the assignee of the contract. [7] The district court disagreed and found that Reservoir was liable to MRCI for the royalty payments.[8]

The parties agreed that the contract between Storch and Reservoir was breached when the trustee rejected the contract.[9] However, they disagreed as to the ramifications of the breach.  According to the district court, the rejection terminated Storch’s obligation to deliver new music to Reservoir.[10] The rejection, however, did not excuse Reservoir from its obligation to make royalty payments.  The district court noted that the impact of the breach on the assignment to MRCI should be determined by “what the contract means in contract law outside of bankruptcy.”[11] Under the terms of the contract, the breach permitted Reservoir to either suspend its obligation to MRCI, or to terminate the contract.[12] The contract further required Reservoir to give written notice of suspension or termination within 90 days of the default.[13]Reservoir failed to give timely notice MRCI.  Instead, it waited three years after Storch filed bankruptcy to give notice MRCI.[14] Thus, according to the district court, Reservoir had waived its contractual right to suspension.[15]

 Under the Bankruptcy Code, a trustee or a debtor in possession may reject an executory contract.  Rejection is a breach.  The consequence of a breach will generally be governed by applicable non-bankruptcy law, which in this instance was the underlying contract.  Here, according to the district court, the rejection was an event of default that would have allowed Reservoir to suspend or terminate its obligation to pay revenues to MRCI.[16] However, Reservoir had to take certain steps to do so.  Because Reservoir sat on its rights, it waived the ability to suspend or terminated its obligations.[17] Consequently, the district court found it liable to MRCI notwithstanding that Storch was no longer obligated to perform his obligations under the contract to Reservoir.[18]

[1] See Music Royalty Consulting, Inc, v. Reservoir Media Mgmt., Inc., No. 18 Civ. 9480 (CM), 2022 WL 1137137, at *1 (S.D.N.Y. Apr. 18, 2022).

[2] Id. at *5.

[3] Id.

[4] Id. at *7.

[5] See id. at *8-*9.

[6] Id. at *9.

[7] Id. at *12.

[8] See id. at *30.

[9] Id. at *18.

[10] Id. 

[11] Id. at *12 (quoting Mission Prod. Holdings, Inc. v. Tempnology, LLC139 S. Ct. 1652, 1661 (2019)). 

[12] Id. at *18.

[13] Id.

[14] Id. 

[15] Id. at *19.

[16] Id. at *18.

[17] Id. at *19.

[18] Id. at *30.