ACI Worldwide Corporation v. Churchill Lane Associates, LLC

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 16-1736
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ACI Worldwide Corporation
lllllllllllllllllllll Plaintiff - Appellee
v.
Churchill Lane Associates, LLC
lllllllllllllllllllll Defendant - Appellant
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Appeal from United States District Court
for the District of Nebraska - Omaha
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Submitted: December 9, 2016
Filed: January 27, 2017
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Before COLLOTON, BEAM, and GRUENDER, Circuit Judges.
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GRUENDER, Circuit Judge.
ACI Worldwide Corporation (“ACI”) brought this action seeking a declaratory
judgment that it validly amended and terminated a Licensing Agreement, thus ending
ACI’s obligation to make royalty payments to Churchill Lane Associates, LLC
(“Churchill”). Churchill counterclaimed for breach of contract, the district court
granted summary judgment in favor of ACI, and Churchill now appeals. We reverse
in part, affirm in part, and remand for proceedings not inconsistent with this opinion.
I. BACKGROUND
Nestor, Inc. (“Nestor”) developed a suite of credit card fraud detection software
products called Proactive Risk Management (“PRISM”). In February 2001, Nestor
entered into a Licensing Agreement with ACI. The Licensing Agreement allowed
ACI to use, modify, enhance, market, sub-license, maintain, and support portions of
PRISM (“licensed software technology”). ACI used the licensed software technology
to develop new software programs (“new technology”), which ACI licensed to its
customers. Per the Licensing Agreement, Nestor owned any new technology
developed by ACI. In addition, ACI agreed to pay Nestor periodic royalties, which
consisted of fifteen percent of the fees paid by ACI’s customers to use the new
technology.
The Licensing Agreement is governed by New York law. Section 9.2 of the
Licensing Agreement (“termination provision”) states that the Licensing Agreement
can be terminated unilaterally by one party if the other party becomes insolvent,
transfers all of its assets, or otherwise ceases to conduct business. Section 9.3 (“post-
termination royalties provision”) states that, even after termination, “ACI shall remain
liable to Nestor for royalties” with respect to “any sublicenses granted by ACI prior
to termination.” Section 11.9 (“amendment provision”) states that “this Agreement
may be amended only by the consent of both parties.”
In 2002, Nestor faced financial difficulties and sought to sell its rights to the
royalties. For that reason, Nestor and ACI executed Amendment 2 to the License
Agreement, which states that “ACI hereby consents to the assignment by Nestor to
a third party of the Royalties due Nestor under the Agreement.” In order to purchase
the rights to the royalties, several Nestor investors formed the entity known as
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Churchill. Although ACI also was interested in acquiring the rights to the royalties,
Churchill outbid ACI. As a result, Nestor and Churchill executed an agreement
entitled Assignment of Royalty Stream in which Nestor irrevocably assigned to
Churchill the future royalties due to Nestor under the Licensing Agreement in
exchange for $3.1 million. Nestor and Churchill also entered into a Servicing
Agreement in which Nestor promised not to modify or terminate the Licensing
Agreement without Churchill’s consent. ACI received notice of the assignment and
began remitting the royalties directly to Churchill.
In 2007, ACI, Nestor, and Churchill executed Amendment 4 to the Licensing
Agreement. This amendment served three purposes: establishing foreign currency
exchange rates for the royalties; applying Section 3.3 of the License Agreement to
Churchill so that ACI would be required to provide Churchill with copies of the
software agreements relating to the royalty payments; and requiring Churchill to sign
ACI’s standard Nondisclosure Agreement. Amendment 4 stated that it was entered
into by all three “parties” and that “all terms and conditions set forth in the License
Agreement shall remain in full force and effect and shall continue to apply to this
Amendment.”
In 2008, Nestor and ACI executed Amendment 5 in which Nestor assigned and
transferred all of its rights in the new technology to ACI in exchange for $500,000.
Notwithstanding this transfer, Amendment 5 clarified that Nestor had “irrevocably”
assigned all of its rights in the royalties to Churchill and that “Nestor no longer has
any right, title or interest of any nature whatsoever in and to such royalties.”
In 2009, Nestor became insolvent and went into receivership. A receiver
appointed by the Rhode Island Superior Court sold all of Nestor’s rights in the
Licensing Agreement and the licensed software technology to American Traffic
Solutions (“ATS”). The Asset Purchase Agreement stated that the assets were being
sold “free and clear of all Liens.” Churchill received notice of this sale and did not
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object. After the sale, ACI continued to pay royalties to Churchill. ACI also engaged
in discussions with Churchill about acquiring the rights to the royalties, but Churchill
declined ACI’s offers.
Unable to acquire the rights to the royalties from Churchill, ACI instead
purchased from ATS all of Nestor’s remaining rights, title, and interest in the licensed
software technology and the Licensing Agreement on July 20, 2014. The following
day, ACI unilaterally executed a Termination of License Agreement declaring that
“Licensor and Licensee hereby terminate the License Agreement as of the Effective
Date and agree that all provisions of the License Agreement that were designated to
survive termination are likewise terminated as of the Effective Date.”1 Several weeks
later, ACI sent Churchill a letter stating that “the license agreement, including the
royalty obligations assigned to Churchill Lanes, is no longer in effect.” ACI also
enclosed a check representing the “full and final payment” for the balance of royalties
due. Churchill did not consent to the termination, and it informed ACI that it
believed it was still entitled to further royalties.
On October 20, 2014, ACI filed this diversity action in federal court, seeking
a declaratory judgment that it validly terminated the Licensing Agreement and that
it owed no further royalties to Churchill. Churchill responded that ACI could not
amend or terminate the Licensing Agreement without Churchill’s consent because
Churchill was a party to the Licensing Agreement, and even if Churchill was not a
party, it was at least a third-party beneficiary. Churchill also counterclaimed for
royalties due under the Licensing Agreement. Churchill filed a motion for partial
summary judgment, and ACI filed a motion for summary judgment.
1
Consistent with the positions of both parties throughout this litigation, we treat
this clause as both a purported amendment and a purported termination of the
Licensing Agreement.
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The district court denied Churchill’s motion and granted summary judgment
in favor of ACI. The court held that, due to the terms of Amendment 4, which was
signed by all three parties, Churchill was “a party to the agreement in some capacity.”
ACI Worldwide Corp. v. Churchill Lane Assoc., LLC, No. 8:14CV249, 2016 WL
5107137, at *7 (D. Neb. Mar. 9, 2016). Nevertheless, the court held that Churchill
had only those rights intended by Amendment 4, which did not include retroactively
making Churchill a full party to the Licensing Agreement or the amendment provision
specifically. Id. On that basis, the court held that “Churchill’s permission was not
needed to amend the Licensing Agreement.” Id. Thus, the court concluded that ACI
“validly amended the Licensing Agreement, eliminating the obligation to pay post-
termination Royalties on sublicenses.” Id. at *8. The court further held that ACI
validly terminated the Licensing Agreement pursuant to the termination provision
because Nestor had become insolvent. Id. at *9-10. Churchill now appeals.
II. DISCUSSION
Churchill argues that (1) ACI’s amendment of the Licensing Agreement to
eliminate the post-termination royalties provision is invalid, and (2) ACI’s
termination of the Licensing Agreement is invalid. If ACI’s amendment is invalid,
then ACI will continue to owe Churchill royalties on any sublicenses granted before
the alleged termination date of July 21, 2014. If ACI’s termination also is invalid,
ACI will continue to owe royalties on any sublicenses it has granted since the alleged
termination date and that it will grant in the future. We review de novo the grant of
summary judgment for ACI, viewing the facts in the light most favorable to Churchill.
See McPherson v. O’Reilly Auto., Inc., 491 F.3d 726, 730 (8th Cir. 2007).
A. Amendment of the Licensing Agreement
ACI responds that its amendment of the Licensing Agreement to eliminate the
post-termination royalties provision was valid for several reasons. First, ACI
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contends that Churchill possessed only the limited rights identified in Amendment 4,
which did not include making Churchill a full party to the entire Licensing Agreement
such that any future amendments would require its consent. Second, ACI contends
that Churchill is not entitled to the protections of a third-party beneficiary or assignee
because Churchill had only the rights specified in Amendment 4 and because any
remaining rights were extinguished by the receivership sale of Nestor’s assets to ATS.
Third, ACI contends that even if Churchill retains any rights, those rights are only to
royalties “due to” the licensor, and because the licensor and licensee interests have
merged in ACI, royalties are no longer “due to” either the licensor or Churchill.
Although we agree with ACI and the district court that Amendment 4 did not
have the effect of retroactively making Churchill a full party to the License
Agreement, we do not agree that either Amendment 4 or the receivership sale
prevents Churchill from exercising the legal rights of a third-party beneficiary or
assignee. We also do not agree with ACI that the doctrine of merger prevents
additional royalties from becoming due to Churchill. Therefore, we conclude that
ACI did not validly amend the Licensing Agreement to eliminate the post-termination
royalties provision, and royalties are still due to Churchill for any sublicenses granted
by ACI prior to July 21, 2014.
1. Full-Party Status
Churchill argues that it became a full party to the Licensing Agreement by
virtue of Amendment 4 because it was entered into by all three “parties”—Nestor,
ACI, and Churchill—and it declared that “all terms and conditions set forth in the
License Agreement shall remain in full force and effect and shall continue to apply
to this Amendment.” Under New York law, “[t]he modification of a contract results
in the creation of a new contract between the parties which pro tanto supplants the
affected provisions of the original agreement while leaving the balance of it intact.”
Cappelli v. State Farm Mut. Auto. Ins. Co., 259 A.D.2d 581, 582 (N.Y. App. Div.
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1999). Thus, according to Churchill, because it was a party to Amendment 4, it was
also a party to the Licensing Agreement, and all of the terms of the original
agreement, including the amendment provision, apply to Churchill.
However, the mere presence of Amendment 4 does not make Churchill a full
party to the Licensing Agreement. As the district court recognized, New York law
“does not suggest that a new party is retroactively conferred with all the rights and
obligations of other parties in the original agreement when, as here, the terms of the
contract and its amendments, read together, unambiguously reveal that the parties
intended otherwise.” ACI, 2016 WL 5107137, at *7. Indeed, if the parties had
intended for Churchill to become a full party to the License Agreement, they could
have expressly stated as much in Amendment 4. Instead, Amendment 4 states only
that Section 3.3 of the License Agreement will apply to Churchill and does not
mention other provisions. This omission suggests that the parties did not intend to
modify the Licensing Agreement to apply all provisions to Churchill. See Mary
Matthews Interiors, Inc. v. Levis, 208 A.D.2d 504, 506 (N.Y. App. Div. 1994) (“A
‘modification agreement [leaves] intact . . . those provisions of the original agreement
which were not expressly or impliedly supplanted.’”) (alteration in original) (quoting
Tejani v. Allied Princess Bay Co., 204 A.D.2d 618, 620 (N.Y. App. Div. 1994)).
Furthermore, if Churchill became a full party to the Licensing Agreement, many of
the provisions referring only to the rights of two parties would make little sense. For
example, the amendment provision states that “this Agreement may be amended only
by the consent of both parties.” Also, Section 11.8, which concerns where notices
may be sent, lists only the names and addresses of Nestor and ACI. Hence, as far as
express contractual rights are concerned, Churchill possesses only those rights
identified by Amendment 4. Therefore, Churchill was not a full party to the entire
Licensing Agreement.2
2
Churchill also argues that ACI made a binding judicial admission that
Churchill was a party to the Licensing Agreement when ACI’s complaint alleged that
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2. Third-Party Beneficiary and Assignee Status
Churchill argues that, even if the district court was correct to hold that
Churchill was a party to the License Agreement only for limited purposes, Churchill
is at least a third-party beneficiary for all other purposes. Under New York law, “an
intended beneficiary of a contract may maintain an action as a third party.” Alicea v.
City of New York, 145 A.D.2d 315, 317 (N.Y. App. Div. 1988). To maintain such an
action, the third party must establish: “(1) the existence of a valid and binding
contract between other parties, (2) that the contract was intended for his benefit and
(3) that the benefit to him is sufficiently immediate, rather than incidental, to indicate
the assumption by the contracting parties of a duty to compensate him if the benefit
is lost.” Burns Jackson Miller Summit & Spitzer v. Lidner, 451 N.E.2d 459, 469
(N.Y. 1983).
Churchill asserts that the amendments to the Licensing Agreement show that
Churchill was a third-party beneficiary because, after these amendments, ACI’s
obligation to pay royalties was owed to Churchill rather than Nestor. Moreover, ACI
recognized this obligation by paying the royalties directly to Churchill from 2002 to
2014. Indeed, “where the performance is rendered directly to a third party, that party
is generally considered an intended beneficiary of the contract.” Alicea, 145 A.D.2d
at 318. Thus, ACI’s actions suggest that Churchill may be characterized as a third-
party beneficiary of the Licensing Agreement.
However, we note that Churchill may be better characterized simply as an
assignee of Nestor’s rights to the royalties. “When a valid assignment is made, the
Churchill consented to personal jurisdiction “pursuant to the ACI License
Agreement.” However, as the district court recognized, this claim regarded only
personal jurisdiction and did not constitute “a binding admission that Churchill
incurred other rights and obligations under the Licensing Agreement.” ACI, 2016
WL 5107137, at *7 n.10.
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assignee steps into the assignor’s shoes and acquires whatever rights the latter had.”
In re Stralem, 303 A.D.2d 120, 123 (N.Y. App. Div. 2003). “No particular words are
necessary to effect an assignment; it is only required that there be a perfected
transaction between the assignor and assignee, intended by those parties to vest in the
assignee a present right in the things assigned.” Leon v. Martinez, 638 N.E.2d 511,
513 (N.Y. 1994). Accordingly, Churchill and Nestor effected a valid assignment
when they executed the Assignment of Royalty Stream, which stated that “the
Assignor irrevocably sells, transfers, conveys and assigns . . . to the Assignee, and the
Assignee irrevocably purchases from the Assignor, all Royalties.”
Regardless of whether Churchill is characterized as a third-party beneficiary
or as an assignee, the same legal protection applies: once ACI had notice of the
assignment and began to remit the royalties to Churchill, neither ACI nor Nestor
could prejudice Churchill’s rights to the royalties without Churchill’s consent. See
Barnum v. Millbrook Care Ltd. P’ship, 850 F. Supp. 1227, 1236 (S.D.N.Y. 1994)
(“[T]he parties to an agreement may subsequently modify the agreement even without
the consent of the creditor beneficiary as long as the creditor beneficiary has not
accepted, adopted or relied upon the original agreement.”); Poughkeepsie Sav. Bank
v. R & G Sloane Mfg. Co., 84 A.D.2d 212, 217 (N.Y. 1981) (“[A]n assignee of a
chose in action . . . who has given notice of the assignment [to the debtor], is not
liable to be prejudiced by any new dealings between the original parties to the
contract.”) (quoting Myers v. Davis, 22 N.Y. 489, 491 (1860)). This rule is best
illustrated by Poughkeepsie Savings Bank v. R & G Sloane Manufacturing Co..
There, a landlord delivered an assignment of rents to a bank, the tenant began
remitting its rental checks to the assignee bank, and the landlord and tenant agreed
to cancel the lease in exchange for the payment of $30,000 to the landlord.
Poughkeepsie, 84 A.D.2d at 213. The court held that once “the tenant has been given
notice of the assignment, the landlord and tenant cannot agree to cancel the lease
without the consent of the assignee, and such an agreement is ineffective to impair
the assignee’s rights.” Id. at 216. Here, as in Poughkeepsie, Churchill acquired the
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legal protections of a third-party beneficiary or assignee when ACI received notice
of the assignment and began remitting royalties to Churchill. As a result, ACI could
not thereafter impair Churchill’s rights by amending the post-termination royalties
provision without Churchill’s consent.
ACI responds that Churchill is not entitled to such protections for two reasons.
First, ACI argues that, because the parties expressly addressed Churchill’s rights in
Amendment 4 and because Churchill did not negotiate the right to consent to
amendments, there is no need to “enhance Churchill’s rights by operation of law.”
Hence, ACI attempts to distinguish Poughkeepsie on the basis that the bank was a
“complete stranger” to the lease and had not “passed” on rights to consent or receive
notice of changes. Indeed, the district court seemed to subscribe to this theory when
it determined that, because it found that Churchill was a limited party rather than a
nonparty, “it need not consider Churchill’s alternative argument that, if not a party,
it was a third-party beneficiary to the Licensing Agreement.” ACI, 2016 WL
5107137, at *7 n.9.
However, although ACI argues against enhancing Churchill’s rights, ACI fails
to recognize that Churchill acquired such rights in 2002 and that it is effectively
arguing that Amendment 4 reduced those rights. Yet, ACI and the district court cite
no legal authority suggesting that an assignee of rights loses its legal protections
whenever the assignee and the original parties form a new agreement regarding
ancillary matters and neglect to reduce to writing all of the legal protections that the
assignee previously acquired. Rather, just as the silence of Amendment 4 could not
modify the Licensing Agreement to grant Churchill full-party status, it likewise could
not modify Churchill’s then-existing legal rights. Cf. Beth Israel Med. Ctr. v.
Horizon Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 585 (2d Cir. 2006)
(“Because waiver of a contract right must be proved to be intentional, the defense of
waiver requires a clear manifestation of an intent by plaintiff to relinquish her known
right and mere silence, oversight or thoughtlessness in failing to object to a breach
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of the contract will not support a finding of waiver.”) (quotations omitted).
Therefore, Churchill acquired the legal protections of either a third-party beneficiary
or assignee in 2002, and we see no reason to conclude that Amendment 4 eliminated
those protections in 2007.
Second, ACI contends that whatever protections Churchill received as a third-
party beneficiary or assignee were extinguished by the receivership sale to ATS in
2009. ACI claims that “Churchill lost contractual rights during the receivership
action” because “the receivership court entered a final order cancelling all agreements
affecting the License Agreement and the PRISM technology (save only those listed
on [the schedule of assumed executory contracts]) and approving the sale of all of
Nestor’s assets free and clear of claims and unassumed contracts.” Thus, according
to ACI, because neither the Assignment of Royalty Stream nor the Servicing
Agreement were listed on the schedule of assumed executory contracts and because
Churchill did not object to this omission, the receivership action “expressly cancelled
the applicable agreements.” According to this view, Churchill had no valid
assignment at all following the sale.
However, the receivership court’s order did not, in fact, expressly cancel any
agreements not listed on the schedule of Assumed Executory Contracts. Rather, the
order noted only that any contracts not listed on that schedule were “expressly not
assumed by Purchaser.” Although the Assignment of Royalty Stream and Servicing
Agreement were not listed on the schedule of assumed executory contracts, the
Licensing Agreement was listed, and the amendments to that agreement declare that
Nestor irrevocably assigned the royalties to Churchill. ACI cites no legal authority
to support the proposition that a receivership sale “free and clear” of all liens can
eliminate the legal protections of an assignee when the assignment is announced in
a contract surviving the receivership action. Moreover, Churchill did not consent to
any loss of assignee rights by failing to object to the receivership sale. See Excelsior
Capital, LLC v. Superior Broad. Co., 101 A.D.3d 670, 672 (N.Y. App. Div. 2012)
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(“[M]ere silence or failure to consent is insufficient, standing alone, to establish
consent.”).
Therefore, we find that the receivership sale to ATS did not eliminate
Churchill’s assignment or its rights as a third-party beneficiary or assignee. The fact
that ACI continued to remit royalties directly to Churchill even after the receivership
sale underscores this finding. Because Churchill maintained these rights, ACI could
not eliminate the post-termination royalties provision without Churchill’s consent.
3. Doctrine of Merger
ACI argues that even if it did not validly amend the Licensing Agreement,
ACI’s obligation to pay further royalties ceased on July 21, 2014, when ACI acquired
from ATS all of Nestor’s remaining rights as licensor. According to ACI, when this
occurred, ownership of the licensor and licensee interests merged in ACI. Thus,
Churchill was no longer entitled to royalties because Churchill had been assigned
only the right to receive royalties “due to” the licensor, and the licensor had been
extinguished through merger.
In the context of real property, New York courts consistently apply this
doctrine of merger to extinguish easements when the title in fee to both the dominant
and servient estates becomes vested in one person. See Will v. Gates, 680 N.E.2d
1197, 1200 (N.Y. 1997) (“The merger doctrine proceeds from a recognition that a
person cannot have an easement in his or her own land because all the uses of an
easement are fully comprehended in the general right of ownership.”) (citations
omitted). However, this doctrine has not previously been applied to intellectual-
property licenses. See In re Lockwood, 414 B.R. 593, 599 n.8 (Bankr. N.D. Cal.
2008) (finding “no case authority indicating that the doctrine of merger applies to
licenses and patents and other intellectual property”).
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Furthermore, even in the real property context, “[t]he doctrine of merger has
never been favored in equity,” and estates will not merge when doing so would impair
“some intervening right or equity in a third person.” Dunkum v. Maceck Bldg. Corp.,
176 N.E. 392, 394 (N.Y. 1931). Indeed, at least one court has denied a merger when
it would have eliminated the rights of an assignee. In Trustees of Conquistador
Council Boy Scouts Trust Fund v. International Minerals & Chemical Corp., a
landlord assigned rental payments to an assignee, the tenant bought the property from
the landlord, and the tenant ceased paying rent on the ground that the leasehold
merged into the fee simple. 570 P.2d 593, 594 (N.M. 1977). Nevertheless, the court
held that “the doctrine of merger does not apply to extinguish the lesser (leasehold)
estate when the lessee acquires the greater estate (fee), when to so apply the doctrine
would prejudice the rights of an innocent third party.” Id. at 595.
ACI responds that Churchill would not be prejudiced by such a merger because
“Churchill did not receive a promise to be paid a sum certain each month.” Rather,
Churchill was assigned only the right to be paid what becomes due to Nestor each
month, and Churchill assumed the risk that nothing could become due to Nestor.
However, although Churchill may have assumed the risk of no royalties becoming
due based on the terms of the Licensing Agreement, nothing suggests that Churchill
assumed the risk of ACI acquiring Nestor and eliminating the licensor interest
altogether. Indeed, the court in Conquistador did not rest its holding on the fact that
the lease may have been for a sum certain each month. Rather, the court held that
allowing a lessee to extinguish an assignment by purchasing the lessor’s interest
“would result in rendering extinct and worthless many assignments and pledges of
rentals made to third persons in a wide variety of business and financial transactions.”
Id.
Therefore, we decline to hold that the doctrine of merger applies in this
context. Because merger does not apply, the licensor and licensee interests do not
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merge, and thus royalties are still due to Churchill for all sublicenses granted prior to
the alleged termination date.
B. Termination of the Licensing Agreement
Even though ACI’s amendment of the Licensing Agreement is invalid, that
does not necessarily mean that ACI’s termination is likewise invalid. In fact, ACI’s
termination of the Licensing Agreement is valid because, unlike ACI’s purported
amendment, the termination does not impair Churchill’s rights. This conclusion
follows from the rule that “an assignee takes no greater right than that of his
assignor.” Poughkeepsie, 84 A.D.2d at 218 (quotation omitted). Thus, in
Poughkeepsie, the assignee bank’s consent was required to cancel the lease agreement
only because the assignor landlord’s consent was required for such an action. See id.
at 217 (“[A]n assignee . . . is not liable to be prejudiced by any new dealings between
the original parties to the contract.”) (quotation omitted). Likewise, Churchill’s
consent was required to amend the post-termination royalties provision only because
Nestor’s consent would have been required for such a modification. In contrast,
under the terms of the termination provision, Nestor’s consent was not required for
ACI unilaterally to terminate the Licensing Agreement once Nestor became insolvent.
Consequently, if Churchill could prevent ACI from terminating the agreement based
on Nestor’s insolvency, Churchill would hold even greater rights as an assignee than
Nestor held as an original party to the Licensing Agreement. Therefore, allowing
ACI to terminate the Licensing Agreement based on the termination provision does
not impair Churchill’s rights.
Indeed, Churchill concedes that Nestor’s insolvency and receivership satisfied
the conditions listed in the termination provision and would have allowed ACI to
terminate the Licensing Agreement in 2009 without the consent of either Nestor or
Churchill. However, Churchill provides three reasons why ACI’s termination in 2014
is invalid.
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First, Churchill argues that ACI’s termination is invalid because it is barred by
the election of remedies doctrine. This doctrine states that “[o]nce a party elects to
continue [a] contract, he can never thereafter elect to terminate the contract based on
that breach.” Bigda v. Fischbach Corp., 898 F. Supp. 1004, 1011-12 (S.D.N.Y.
1995). Churchill argues that because ACI elected to continue paying royalties, ACI
is precluded from terminating the License Agreement in 2014 based on Nestor’s acts
in 2009. However, the election of remedies doctrine applies only to a party’s decision
to continue performing a contract following a breach of that contract. See AM
Cosmetics, Inc. v. Solomon, 67 F. Supp. 2d 312, 317 (S.D.N.Y. 1999) (“[I]f one party
to a contract materially breaches the contract during the course of a continuing
performance, the injured party has two options: he may terminate the contractual
relations at that time or he may choose to continue performance under the contract
despite that breach.”). Nestor’s insolvency and receivership did not constitute a
breach of the Licensing Agreement. See Hanna v. Florence Iron Co. of Wisc., 118
N.E. 629, 630 (N.Y. 1918) (“Mere insolvency of one of the parties to a contract does
not relieve the other party from performance thereof and would not excuse the refusal
of [a party] to carry out its contract.”). Rather, insolvency was a condition allowing
ACI to terminate the Licensing Agreement. Accordingly, the election of remedies
doctrine does not render ACI’s termination invalid.
Second, Churchill argues that ACI’s termination is invalid because ACI
notified Churchill that it was terminating the Licensing Agreement based on its status
as licensor and licensee rather than Nestor’s insolvency. Churchill asserts that “ACI
cannot terminate a contract for one reason and then later assert in litigation it was
entitled to terminate for another reason.” However, this doctrine is “based on
equitable estoppel.” G. Amsinck & Co. v. Springfield Grocer Co., 7 F.2d 855, 860
(8th Cir. 1925). Equitable estoppel requires “a representation by the party estopped
which misleads, and an innocent and deleterious change of position in reliance upon
that representation.” Williams v. Neely, 134 F. 1, 11 (8th Cir. 1904). Thus, the cases
cited by Churchill correctly hold that the defendants could not justify termination on
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one basis and then later assert a breach of contract as a different basis, but that is
because the plaintiffs could have remedied the breach if the defendants had originally
cited the breach as the reason. See Date Sys. of New Jersey v. Philips Business Sys.,
No. 78 Civ. 6015-CSH, 1986 WL 733, at *1, *6-7 (S.D.N.Y. Jan. 6, 1986); Rode &
Brand v. Kamm Games, Inc., 181 F.2d 584, 587 (2d Cir. 1950). Here, even if ACI
originally cited Nestor’s insolvency as the reason for termination, Churchill could not
have remedied a breach or prevented ACI from legally terminating the Licensing
Agreement. Therefore, ACI’s failure to specify the correct legal justification does not
render its termination invalid.
Third, Churchill and the dissent argue that ACI could not validly terminate the
License Agreement because Nestor was no longer a “party” to the agreement as of
2014 because it previously transferred all of its remaining interests in the agreement
in 2009. According to Churchill, the termination provision allows for termination
only if a “party” becomes insolvent or meets one of the other conditions listed in the
provision. Hence, when ATS “replaced Nestor as licensor in 2009,” Nestor was no
longer a “party,” and so its insolvency had no bearing on ACI’s right to terminate the
Licensing Agreement.
However, although it may be true that Nestor was no longer a party to the
agreement following its insolvency, that does not mean that its insolvency had no
bearing on ACI’s rights under the termination provision. The termination provision
allows one party unilaterally to terminate the Licensing Agreement if “the other party
. . . becomes insolvent or assigns all, or substantially all, of its assets.” It does not
state that “the other party” must remain a party to the agreement after insolvency or
assigning all of its assets. Indeed, according to Churchill, Nestor ceased to be a
“party” precisely because it assigned all of its assets to ATS. But if Nestor also
ceased to be “the other party” for purposes of this provision upon assigning all of its
assets, then ACI would have no window of opportunity to terminate the Licensing
Agreement on that basis. Thus, the termination provision would be rendered
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meaningless. Because we should “avoid an interpretation that effectively renders
meaningless a part of the contract,” Helmsley-Spear, Inc. v. N.Y. Blood Ctr., Inc., 257
A.D.2d 64, 69 (N.Y. App. Div. 1999), we reject Churchill’s argument that ACI could
terminate the agreement only while Nestor remained a “party.” Rather, we believe
that the termination provision authorized ACI to terminate the agreement if Nestor
became insolvent or assigned its assets while it was a party to the agreement.
Because Nestor still was a party to the agreement in 2009 when it became insolvent,
ACI was entitled to terminate the agreement.
Therefore, ACI validly terminated the License Agreement in accordance with
the termination provision. As a result, ACI does not owe Churchill royalties on any
sublicenses that ACI has granted since July 21, 2014 or that it will grant in the future.
However, because the post-termination royalties provision was not validly amended
prior to termination, ACI continues to owe Churchill royalties on any sublicenses
granted before July 21, 2014.
III. CONCLUSION
For the foregoing reasons, we reverse the entry of summary judgment in favor
of ACI on the issue of amendment of the Licensing Agreement, affirm the entry of
summary judgment in favor of ACI on the issue of termination, and remand to the
district court for further proceedings not inconsistent with this opinion.
BEAM, Circuit Judge, concurring in part and dissenting in part.
I concur in the court's reversal of the district court's entry of summary judgment
in favor of ACI and in the court's collateral ruling that ACI continues to owe
Churchill royalties accruing from all sublicenses granted prior to July 21, 2014. I
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dissent from the court's holding that ACI validly terminated Churchill's continuing
interest in the Licensing Agreement on July 21, 2014.
I agree with the district court and Churchill that Churchill became a party to the
Agreement in 2007 when, due to financial difficulties, Nestor entered into
Amendment 4 of the Agreement with ACI and Churchill. At that time, Churchill
acquired all of Nestor's past, present and future technology-based royalty stream, and,
at least by enforceable implication, Nestor's prerogatives in the technology that
generated such royalties. In addition, without question, Churchill gained the right to
enforce the receipt of royalty assets due from past, present and future ACI-founded
sublicenses.
Under the terms of Amendment 4, ACI acquiesced in this newly formed
tripartite relationship and submitted sublicense royalty collections previously due
Nestor directly to Churchill. As a result, Churchill contends, correctly, that ACI, in
its pleadings, concedes that Churchill became a party to the Licensing Agreement.
Accordingly, subsequent to Amendment 4, the parties to the Licensing Agreement
were Nestor, ACI and Churchill.
The court notes that in 2008, Nestor and ACI executed Amendment 5 through
which Nestor transferred all of its rights in any "new" technology to ACI. Ante at 3.
The court also correctly states, pursuant to Amendment 5, that "[n]otwithstanding this
transfer . . . Nestor had [in 2002] 'irrevocably' assigned all of its rights in the royalties
to Churchill and that 'Nestor no longer has any right, title or interest of any nature
whatsoever in and to such royalties.'" Ante at 3. This amendment assignment had to
have included royalties emanating from the use of the new technology as agreed upon
at the outset of the Nestor-ACI relationship in 2001. So, subsequent to that point in
time, and especially on July 21, 2014, the Licensing Agreement, as relevant to this
action, was totally dedicated to the matter of royalties owed by one party to another
party.
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The court mentions, but fails to adequately discuss, the implications
surrounding Nestor becoming insolvent in 2009. At that time, the Rhode Island
Superior Court appointed an insolvency receiver. The receiver, as authorized by the
court, sold "all of Nestor's [still continuing] rights in the Licensing Agreement and
the licensed software technology to [ATS]." Ante at 3. Indeed, the Asset Purchase
Agreement states that the assets were being sold "free and clear of all Liens." Ante
at 3. At that time, ATS was wholly substituted for Nestor as a party to the Licensing
Agreement by action of the Rhode Island court which by law exercised exclusive
jurisdiction over Nestor's property. See Rhode Island General Laws § 7-1.2-1316(f).
Thus, the parties to the Licensing Agreement at that time consisted of Churchill, ACI
and ATS.
The court then observes that, "[u]nable to acquire the rights to the royalties
[that were earlier irrevocably assigned as noted in Amendment 5] from Churchill,
ACI instead purchased from ATS all of Nestor's remaining rights, title, and interest
in the licensed software technology and the Licensing Agreement on July 20, 2014."
Ante at 4. This purchase did not include any Nestor royalty rights because the
receiver had none to sell. In any event, the parties to the Licensing Agreement then
became ACI and Churchill. The next day ACI, armed with whatever rights it had
earlier owned or had then been acquired from the receiver, unilaterally purported to
execute a termination notice to Churchill, although with a later letter stating, "the
license agreement, including the royalty obligations assigned to Churchill Lanes, is
no longer in effect." It appears that no specific contractually required reasons for a
termination were ever advanced by ACI.
This purported termination notice was actually an attempted unilateral
amendment of the Licensing Agreement and is so recognized by the court and both
ACI and Churchill. See ante at 4 n.1. And, in this regard, the Agreement recognizes
as the only grounds potentially applicable here for a termination of a "party" (1)
becoming insolvent, (2) transferring of all its assets or (3) ceasing to conduct
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business. ACI's cancellation of the License Agreement's royalty obligations fully
assigned to Churchill is not one of these applicable grounds for unilateral termination.
Thus, ACI's above-stated unilateral amendment attempt designed to obtain Nestor's
long since assigned royalty rights was ultra vires in the extreme.
To repeat, and as the court concedes, a unilateral termination could be
bottomed only on an allegation that the other party has become insolvent, transferred
all of its assets, or has otherwise ceased to conduct business. Ante at 2. And, the
record clearly establishes that Nestor, as Churchill correctly contends, was no longer
a party to the Agreement at the time ACI rendered its termination notice. If, however,
ACI somehow seeks to support a termination claim based upon Nestor's rights and
assets purchased from ATS, the License Agreement language and prior transactions
between these existing parties to the Agreement clearly prohibit such a result.3
Section 9.3, the post-termination royalties provision, provides that even after
termination, ACI shall remain liable to Nestor for royalties with respect to sublicenses
granted by ACI prior to termination. Without question Churchill acquired all Nestor's
royalty rights well before ATS purchased any rights, title or interest from the receiver
or before ACI purported to acquire them and render its specious termination notice.
Section 11.9 states this Agreement may be amended only by the consent of
both parties. At this time, that would be ACI and Churchill. ACI's purported
termination notice is clearly a unilateral contract amendment and it seeks to function
as such. And, as earlier noted, Churchill paid Nestor $3.1 million for all future
royalties due Nestor under the Licensing Agreement and Churchill and Nestor entered
3
For instance, Section 9.2 of the termination provision states "[e]ither party
may immediately terminate this Agreement . . . if the other party . . . becomes
insolvent." It is difficult to believe that ACI's purported termination coming more
than seven years subsequent to Nestor's insolvency can be deemed either
"immediate," or equitable.
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into an agreement at that time whereby Nestor promised not to modify or terminate
the Licensing Agreement without Churchill's consent. Ante at 3. ACI's purported
termination based upon acquisition of ATS's receivership purchases breach the
underlying Agreement from which ACI now seeks to benefit.
Churchill is entitled to a calculable stream of licensing royalties emanating
from Nestor, ACI and Churchill sources on and after July 21, 2014. From the court's
contrary holding, I dissent.
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