In its most recent precedential bankruptcy decision, the United States Court of Appeals for the Third Circuit held that a claim for breach of contract – even “contingent” or “unliquidated” – is still a claim which can be discharged in a chapter 11 plan.  In re Mallinckrodt PLC, No. 23-1111 (3d Cir. Apr. 25, 2024)  

Sanofi-Aventis US, LLC sold the rights to market and sell an anti-inflammatory drug to Mallinckrodt.  The contract provided that Mallinckrodt would pay (i) $100,000 upfront and (ii) a perpetual royalty of 1% of all net sales over $10 million every year thereafter. Mallinckrodt continued to pay the royalty until it commenced its bankruptcy case. In its bankruptcy case, Mallinckrodt sought to discharge any future obligations for royalty payments. 

After the Bankruptcy Court determined that the contract was not executory, the Seller argued that its right to receive future royalties were not “claims” for bankruptcy purposes and could not be discharged.  The Bankruptcy Court disagreed and held that any claims of the Seller were discharged, leaving the Seller with only its recoveries through the plan.  The District Court affirmed.

On appeal, the Seller continued to argue that its royalties were contingent and unliquidated obligations based on future, unknown sales hurdles and, therefore were not “claims” for bankruptcy purposes. The Court easily dispensed with that argument.  The definition of “claim” in the Bankruptcy Code specifically includes rights to payment that are either “unliquidated” or “contingent.” The Court easily concluded that the right to receive future payments plainly qualified under the statutory definition. Because the Seller’s right to receive payments fell within the statutory definition of “claim”, the Debtor had the right to include those claims within its plan discharge and the Seller could not seek future royalties.

The Seller attempted to analogize its argument to the Court's ruling in In re Grossman’s, 607 F.3d 114 (3d Cir. 2010) (en banc). The Court noted that Grossman’s addressed tort claimants’ claims and whether those claims for prepetition exposure (which were contingent claims) could be discharged (depending on notice).  Here, the Court easily distinguished that this contract plainly identified the future right to payment and the terms of it. The contract language controls and falls within the statutory definition of “claim” in § 101 of the Bankruptcy Code.  There is no “notice” or “due process” concerns because the contract counterparty clearly was aware and participated in the bankruptcy case.