Debtor may not Sell its Intellectual Property Free and Clear of Creditor’s Interests

Jae Hwang

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

Section 363 of title 11 of the United States Code (the “Bankruptcy Code”) allows a debtor to sell its bankruptcy assets free and clear of liens and interests only if certain circumstances are met.[1]  In addition, section 363 provides that an entity with an interest in the assets being sold is entitled to “adequate protection.”[2]  The United States Bankruptcy Court for the District of Delaware held in In re DeCurtis Holdings LLC that a debtor was enjoined from selling its bankruptcy assets free and clear if its creditor retained an ownership interest in the assets pursuant to a contract and would suffer irreparable harm from the sale of such assets.[3]

In 2014, Carnival Corporation (“Carnival”) hired DeCurtis Holdings LLC and DeCurtis LLC (collectively, “DeCurtis” or “Debtors”) to develop a new software architecture, eventually called the “Ocean Platform,” for Carnival’s cruise lines.[4]  DeCurtis entered into certain contracts with Carnival, which imposed confidentiality and use restrictions on DeCurtis and granted ownership rights to all work product and deliverables made by DeCurtis to Carnival (collectively, “Carnival Information”).[5]  In 2016, DeCurtis left its engagement with Carnival and developed its own interactive cruise platform, the DeCurtis Experience Platform (“DXP”), which was marketed to other cruise lines.[6]

In April 2020, Carnival filed a complaint against DeCurtis in the U.S. District Court for the Southern District of Florida for breach of contract, misappropriation of trade secrets, and patent infringement.[7]  Following a jury finding that DeCurtis breached its contract with Carnival and that its DXP software infringed patents relating to Carnival’s Ocean Platform, the Florida district court issued a judgment against DeCurtis in the amount of $21 million.[8]  Thereafter, DeCurtis filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.[9]  DeCurtis sought to sell substantially all of its assets free and clear of all encumbrances pursuant to section 363 of the Bankruptcy Code.[10]  However, the initial bidder placed certain conditions on the sale of DeCurtis’s assets, including a finding by the court that DeCurtis actually owned certain DXP assets and that such assets did not infringe any of Carnival’s intellectual property rights.[11]  Thus, DeCurtis moved for a declaration from the bankruptcy court that it owned the DXP assets and that Carnival had no ownership rights.[12]  Separately, Carnival filed a complaint with the bankruptcy court seeking a declaratory judgment that the DXP assets were Carnival’s sole property and a permanent injunction preventing Debtor from selling or using such assets.[13]

            The bankruptcy court held that Carnival had an ownership interest in the DXP assets and enjoined Debtors from selling such assets free and clear of all encumbrances.[14]  The bankruptcy court further found that DeCurtis breached its contract with Carnival by using confidential Carnival Information to create the DXP assets, though the DXP assets was Carnival’s sole property and to be used for Carnival’s sole benefit.[15]  Moreover, because Carnival owned all Carnival Information pursuant to its contract with DeCurtis, the court ruled that Carnival retained an ownership interest in the DXP assets.[16]  The court also enjoined DeCurtis from selling or using the DXP assets, finding that Carnival would suffer irreparable harm if the DXP assets were sold to or used by another party.[17]  The court reasoned that the potential misuse of highly confidential and valuable information would impair a company’s goodwill and competitive position and that money damages would not adequately compensate for such unquantifiable losses.[18]  Moreover, the court found that the balance of hardships favored the plaintiff where the injunction would do no more than require the defendant to comply with its contractual obligations.[19]  Finally, the court held there was a public interest in “protecting against unethical business behavior, including misappropriation of confidential information, and in upholding contracts as written.”[20]

            Under section 363 of the Bankruptcy Code, a debtor may sell certain assets free and clear of encumbrances; however, a bankruptcy court under section 363(e) may prohibit the sale to provide “adequate protection” to an entity that has an interest in the assets to be sold, such as an ownership interest pursuant to a contract or intellectual property rights.[21]  The court may also enjoin the sale and use of the assets by the debtor if the sale would result in irreparable harm to the objecting entity and money damages would not compensate for the harm.[22]