363 Sale Fails After Court Enjoins Use of Assets Commingled With Non-debtor’s IP Rights & Confidential Information

363 Sale Fails After Court Enjoins Use of Assets Commingled With Non-debtor’s IP Rights & Confidential Information

One of bankruptcy’s most important—and often used—tools is the ability to sell estate property free and clear of interests in such property, such as liens and encumbrances.

However, certain interest in estate property can make a “363 sale” impossible, as shown by a recent decision out of the U.S. Bankruptcy Court for the District of Delaware.

DeCurtis, LLC, a software company, filed a chapter 11 petition after a jury found it liable for breach of contract and patent infringement in a suit brought by Carnival Corporation. The suit was filed after Carnival hired DeCurtis to build software, which would be owned by Carnival. As part of the agreement, DeCurtis agreed to not use any confidential information obtained during the engagement with Carnival in its work with other clients.

Despite those commitments, DeCurtis did, in fact, use Carnival’s confidential information to build software for its other clients, including Carnival’s competitors.

In bankruptcy, DeCurtis sought approval to sell substantially all of its assets free and clear of all encumbrances, including any rights Carnival had over DeCurtis’ software assets. Carnival opposed the sale and initiated an adversary proceeding seeking a determination of the extent of Carnival’s ownership rights over the debtor’s software assets.

After trial, the court found that Carnival’s confidential information was incorporated into the debtor’s software assets. As a result, it concluded that Carnival had an ownership interest in such assets.

Ordinarily, the fact that another party has an ownership interest over estate property would not be a problem in the context of a 363 sale: after all, that is what it is for. Unfortunately for the debtor, Carnival’s ownership interest was different.

The court found that the harm caused to Carnival by permitting DeCurtis to continue to market, sell, and install its software assets could not be readily quantified, because it was not possible to compute in monetary terms the value of the competitive harm to Carnival caused by DeCurtis’ use of Carnival's technology and confidential information. It noted that loss of goodwill and loss over control over reputation were unquantifiable harms.

The court thus enjoined the sale, use, or disclosure of the debtor’s software assets which included Carnival’s technology and confidential information.