Free Appellant's Brief - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE In re: EBC I, INC. f/k/a ETOYS, INC., et al., Debtors. EBC I, INC., f/k/a ETOYS, INC., Appellant, v. AMERICA ONLINE, INC., Appellee. ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Bankruptcy Case No. 01-706 Adv. No. 03-50003(MFW)

Civil Action No. 08-100(JJF)

EBC I, INC.'S OPENING BRIEF IN SUPPORT OF ITS APPEAL

MORRIS, NICHOLS, ARSHT & TUNNELL LLP Richard D. Allen (#469) Gregory W. Werkheiser (#3553) Thomas W. Briggs, Jr. (#4076) 1201 North Market Street, 18th Floor P. O. Box 1347 Wilmington, DE 19899-1347 (302) 658-9200 Attorneys for Appellant EBC I, Inc., f/k/a eToys, Inc. June 3, 2008

2309382

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TABLE OF CONTENTS Page JURISDICTIONAL STATEMENT............................................................................................ 1 STATEMENT OF THE ISSUES................................................................................................ 2 STATEMENT OF THE CASE................................................................................................... 3 I. II. NATURE AND STAGE OF THE PROCEEDING. ............................................. 3 STATEMENT OF FACTS. ................................................................................. 4 A. B. C. Factual Background Related To The Interactive Marketing Agreement. .............................................................................................. 4 The Bankruptcy Court's Summary Judgment Decision. ........................... 6 The Bankruptcy Court's Final Decision. .................................................. 7

STANDARD AND SCOPE OF REVIEW................................................................................ 10 ARGUMENT ........................................................................................................................... 11 I. THE BANKRUPTCY COURT APPLIED THE WRONG LEGAL STANDARD. .................................................................................................... 11 A. B. C. The Bankruptcy Court Failed To Apply The Totality Of The Circumstances Test. ........................................................................ 11 The Bankruptcy Court Erred By Failing To Value The Advertising Services. ............................................................................. 14 The Bankruptcy Court's Failure To Apply The Totality Of Circumstances Test Led It To Ignore Numerous Facts That Should Have Been Considered. .............................................................. 15 1. The Bankruptcy Court Erred In Failing To Take Into Account The Ability Of AOL To Resell The Advertising Services................................................................... 15 The Bankruptcy Court Ignored Undisputed Evidence As To The Value Of The Advertising Services...................................................................................... 16

2.

D.

Conclusion............................................................................................. 18

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II.

THE TOTALITY OF CIRCUMSTANCES INDICATES A VALUE OF APPROXIMATELY $4.5 MILLION FOR THE ADVERTISING SERVICES TRANSFERRED TO AOL.................................. 18 THE BANKRUPTCY COURT ERRED IN FINDING THE AGREEMENT WAS NON-ASSIGNABLE. ..................................................... 19 A. B. The Agreement Was Not Executory. ...................................................... 20 The Bankruptcy Court Erroneously Concluded That § 365(c)(1) Would Apply To An Assignment Of The Agreement. ............................................................................................ 21 Applicable Law And The Express Terms Of the Agreement Did Not Render It Non-Assignable. ....................................................... 22 The Record Contradicts The Bankruptcy Court's Finding Of "de minimis" Value. ......................................................................... 27

III.

C. D. IV.

ETOYS IS ENTITLED TO AN AWARD OF PREJUDGMENT INTEREST........................................................................................................ 29

CONCLUSION ........................................................................................................................ 31

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TABLE OF AUTHORITIES Page(s) CASES Aero-Fastener, Inc. v. Sierracin Corp. (In re Aero-Fastener, Inc.), 177 B.R. 120 (Bankr. D. Mass. 1994) ................................................................................. 12 American Airlines, Inc. v. Continental Airlines, Inc. (In re Continental Airlines, Inc.), 152 B.R. 420 (D. Del. 1993) ............................................................................................... 10 American Furn. Outlet USA, Inc. v. Woodmark Originals, Inc. (In re American Furn. Outlet USA, Inc.), 209 B.R. 49 (Bankr. M.D.N.C. 1997).............................................................................12, 17 Baldi v. Lynch (In re McCook Metals, L.L.C.), 319 B.R. 570 (Bankr. N.D. Ill. 2005) .................................................................................. 17 BFP v. Resolution Trust Corporation, 511 U.S. 531 (1994)............................................................................................................ 11 Brantley v. Weeks, 116 B.R. 443 (Bankr. D.Md. 1990) ..................................................................................... 30 Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81 (3d Cir. 1988).................................................................................................. 10 Broyhill v. DeLuca (In re DeLuca), 194 B.R. 65 (Bankr. E.D. Va. 1996).................................................................................... 24 Drewes v. FM Da-Sota Elevator Co. (In re Da-Sota Elevator Co.), 939 F.2d 654 (8th Cir. 1991)............................................................................................... 26 Epperson v. Epperson, 62 S.E. 344 (Va. 1908)........................................................................................................ 24 Ferrari v. Computer Assoc. Int'l, Inc. (In re First Software Corp.), 84 B.R. 278 (Bankr. D. Mass. 1988) ................................................................................... 17 Gennrich v. Montana Sport U.S.A., LTD (In re International Ski Serv., Inc.), 119 B.R. 654 (Bankr. W.D. Wisc. 1990) ............................................................................. 12 In re Aerbox Composite Structures, LLC, 373 B.R. 135 (Bankr. D.N.M. 2007) ................................................................................... 23 In re ANC Rental Corp., Inc., 277 B.R. 226 (Bankr. D. Del.)............................................................................................. 22

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In re Brun, 360 B.R. 669 (Bankr. C.D. Cal. 2007)................................................................................. 11 In re Columbia Gas Sys. Inc., 50 F.3d 233 (3d Cir. 1995).................................................................................................. 21 In re Compass Van & Storage Corp., 65 B.R. 10007 (Bankr. E.D.N.Y. 1986)..........................................................................25, 26 In re CVA General Contractors, Inc., 267 B.R. 773 (Bankr. W.D. Tex. 2001)............................................................................... 21 In re EBC I, Inc., 356 B.R. 631 (Bankr. D. Del. 2006)...................................................................................... 7 In re Fastrax, Inc., 129 B.R. 274 (Bankr. M.D. Fla. 1991) ................................................................................ 26 In re Federal-Mogul Global Inc., -- B.R. --, 2008 WL 783747 (Bankr. D. Del. March 19, 2008) ............................................ 21 In re Firemarms Import and Export Corp., 131 B.R. 1009 (Bankr. S.D. Fla. 1991) ............................................................................... 21 In Re Freuhauf Trailer Corporation, 444 F.3d 203 (3d. Cir. 206)................................................................................................. 12 In re Headquarters Dodge, Inc., 13 F.3d 674 (3d Cir. 1994).................................................................................................. 26 In re Hechinger Invs. Co., 489 F.3d 568 (3d Cir. 2007)................................................................................................ 29 In re Optimum Merchants Serv., 163 B.R. 546 (Bankr. D. Neb. 1994) ................................................................................... 26 In Re R.M.L. Inc., 92 F.3d 139 (3d Cir. 1996).................................................................................................. 12 In re Ricke Home Centers, Inc., 209 F.3d 291 (3d Cir. 2000)................................................................................................ 23 In re Rooster, Inc., 100 B.R. 228 (Bankr. E.D. Pa. 1989) .............................................................................23, 26 In re Sacred Heart Hosp. of Norristown, 200 B.R. 114 (Bankr. E.D. Pa 1996) ................................................................................... 29

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In re Surfside Resort and Suites, Inc., 344 B.R. 179 (Bankr. M.D. Fla. 2006) ................................................................................ 21 In re Travelot Co., 286 B.R. 447 (Bankr. S.D. Ga. 2002).............................................................................24, 25 In re Wills Motors, Inc., 133 B.R. 303 (Bankr. S.D.N.Y. 1991)................................................................................. 23 Kepler v. Security Pac. Hous. Serv. (In re McLaughlin), 183 B.R. 171 (Bankr. W.D. Wisc. 1995) ............................................................................. 12 Kidder Skis Int'l v. Williams, 60 B.R. 808 (W.D. Mo. 1985)............................................................................................. 16 McFarland v. Leyh, 52 F.3d 1330 (5th Cir. 1995)............................................................................................... 29 McGuire v Brown, 76 S.E. 295 (Va. 1912)........................................................................................................ 24 Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635 (3d. Cir. 1991)..........................................................................................10, 13 Merchants Fund, Inc. v. Bartl, 15 B.R. 448 (Bankr. E.D.Va. 1981) .................................................................................... 19 Peltz v. Worldnet Corp. (In re USN Comm., Inc.), 280 B.R. 573 (Bankr. D. Del. 2002)...............................................................................29, 30 Shearer v. Tepsic (In re Emergency Monitoring Tech., Inc.), 366 B.R. 476 (Bankr. W.D. Pa. 2007) ................................................................................. 17 Sigmon v. Royal Cake Co., Inc., 13 F.3d 818 (4th Cir. 1994)................................................................................................. 29 Slutsky v. Michel Tire Co. (In re Vann), 26 B.R. 148 (Bankr. S.D. Ohio 1983).................................................................................. 12 Speciner v. Gettinger Assoc. (In re Brooklyn Overall Co., Inc.), 57 B.R. 999 (Bankr. E.D.N.Y. 1986) .................................................................................. 17 Stone Street Capital, Inc. v. Granati (In re Granati), 270 B.R. 575 (Bankr. E.D. Va. 2001).................................................................................. 24 U.C. Castings Co. v. Knight, 754 F.2d 1363 (7th Cir. 1985)............................................................................................. 19

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Varisco v. Groweat Food Co. (In re Varisco), 16 B.R. 634 (Bankr. M.D. Fla. 1981) .................................................................................. 26 W.M. Jordan Co., Inc. v. Sielaff, 1988 WL 619397 (Va. Cir. Ct)............................................................................................ 19 Walsh v. Gutshall (In re Walter), 261 B.R. 139 (Bankr. W.D. Pa. 2001) ................................................................................. 12 Widemire v. Siddiki Bros., Inc. (In re King Arthur Clock Co., Inc.), 105 B.R. 669 (Bankr. S.D. Ala. 1989)................................................................................. 12

STATUTES 11 U.S.C. § 365(b)(1)(C) .................................................................................................................... 27 § 365(c)(1)....................................................................................................................passim § 548 ............................................................................................................................passim 28 U.S.C. § 158(a)(1)........................................................................................................................ 1, 7 § 1961................................................................................................................................. 30

OTHER AUTHORITIES 5 Collier on Bankruptcy ¶ 550.02[3][a]..................................................................................... 11 Rules 8001 and 8002 of the Federal Rules of Bankruptcy Procedure........................................... 1

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JURISDICTIONAL STATEMENT This Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a)(1). EBC I, Inc. f/k/a eToys, Inc. ("eToys") brings this appeal as of right from the (1) Findings of Fact and Conslusions of Law (Adv. D.I. 111) (Appellant's Appendix at A1-29 (hereinafter, "App")) (the "FOF/COL"), (2) the Opinion Granting Judgment in Favor of America Online, Inc. (Adv. D.I. 112) (App. at A30-66) (the "Opinion" or "Op. at ___"), and (3) the Order Granting Judgment in Favor of America Online, Inc., dated January 10, 2008 (Adv. D.I. 113) (App. at A67) (the "Final Order") of the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), which constitutes a final, appealable order for purposes of 28 U.S.C. § 158(a)(1). In accordance with Rules 8001 and 8002 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), eToys filed its Notice of Appeal of the FOF/COL, the Opinion and the Final Order (Adv. D.I. 115) (App. at A68) (the "Notice of Appeal") on January 22, 2008, and filed its Statement Of Issues And Designation Of Items To Be Included In Record On Appeal By Appellant (Adv. D.I. 117) (App. at A71-105) with the Clerk of the Bankruptcy Court on February 1, 2008. The Bankruptcy Court Clerk transmitted the record to this Court (Adv. D.I. 119), and this Court docketed the appeal on February 15, 2008 (D.D.I. 4).

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STATEMENT OF THE ISSUES 1. Whether the Bankruptcy Court erroneously concluded that the fully paid

up contract rights of eToys under an agreement with America Online, Inc. n/k/a AOL LLC ("AOL") had no value because the Bankruptcy Court failed to apply the correct legal standard. 2. Whether the Bankruptcy Court erred in failing to award damages to eToys

because application of the correct legal standard mandated an award of $4,462,500. 3. Whether the Bankruptcy Court erred in holding that the agreement was not

assignable under Virginia law and/or 11 U.S.C. § 365(c)(1). 4. Whether the Bankruptcy Court should award pre-judgment interest.

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STATEMENT OF THE CASE I. NATURE AND STAGE OF THE PROCEEDING. On March 7, 2001, eToys and its affiliates filed a voluntary petition under title 11 of the United States Code (as amended, the "Bankruptcy Code"). On the petition date, eToys filed a motion seeking, inter alia, the authority to auction and sell the reorganized stock of the debtors under a plan of reorganization or to sell substantially all of the debtors' assets. In May 2001, the Bankruptcy Court approved a sale of substantially all of eToys' assets to KB Consolidated, Inc. This adversary proceeding was commenced on January 3, 2003 by EBCI, Inc., the successor to eToys, Inc. under its Chapter 11 plan against AOL. eToys asserted claims under §548 of the Bankruptcy Code, as well as under state law, arising from two events ­ the amendment of a contract between eToys and AOL in November 2000 and the termination of that contract by AOL in late February 2001, shortly before eToys filed its petition in bankruptcy. In an opinion of December 7, 2006, the Bankruptcy Court granted partial summary judgment to eToys on its claim arising from the termination of the contract. However, on January 10, 2008, the Bankruptcy Court issued an opinion, along with finding of fact and conclusions of law, ruling in favor of AOL on all claims. eToys has appealed that decision with respect to its claims arising from the termination of the contract, but has not appealed with respect to its claims based on the amendment to the contract. This is eToys' opening brief in support of its appeal.

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II.

STATEMENT OF FACTS. A. Factual Background Related To The Interactive Marketing Agreement.

Most of the facts on which eToys' claims are based relating to the termination of the agreement were essentially undisputed. On August 10, 1999, eToys and AOL entered into a contract entitled Interactive Marketing Agreement (the "Agreement") (App. at A106-144), under which AOL agreed to provide over a three year period specified "impressions" on its website, which were essentially advertisements that would appear when AOL members logged on to the AOL system. eToys agreed to make 12 quarterly payments of $1.5 million over the three year term of the Agreement, for a total of $18 million (App. at A3, FOF 19). During the first year of the agreement, eToys made all of the required payments but AOL delivered substantially fewer impressions than it was obligated to deliver. In addition, AOL realized that it would be unable to meet its obligations under the Agreement during the last two years. By the spring of 2000, eToys was seeking relief because of AOL's underperformance in delivering impressions. As the Bankruptcy Court found, AOL recognized that the

underdelivery of impressions was material but wanted to delay negotiation until the holiday season when it would have greater leverage over eToys (App. at A7, FOF 52-53). The parties eventually negotiated an amendment to the Agreement (the "Amendment") (App. at A146-152), which was signed in mid-November, 2000. The Amendment resolved the dispute as to past underperformance by AOL, reduced the number of impressions AOL had to deliver in the future, and reduced the total payment obligation of eToys to $8.25 million. By the time of the Amendment, eToys had already made five quarterly payments, totaling $7.5 million. It made one additional payment of $750,000 in connection with the amendment of the Agreement, and those payments satisfied in full eToys' payment obligations

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under the Agreement. The effect of the Amendment and the final payment was to change the Agreement from one in which eToys made payments over the term of the Agreement as services were delivered to one in which eToys had paid in advance for all services to be delivered by AOL for the last two years of the Agreement. Slightly more than three months after the Amendment was signed, eToys announced its disappointing holiday sales and made statements indicating it was insolvent. Relying solely on eToys' insolvency, within days AOL gave notice purporting to terminate the Agreement, but did not return any of the money eToys had paid in advance for the services to be provided by AOL through August 2002. As the Bankruptcy Court found, AOL had a finite amount of advertising space that it could sell on its system and the effect of the termination was to free up advertising space which AOL could then resell to other customers at potentially higher rates (App. at A12, FOF 95). Because in connection with the Amendment, the parties had agreed that the value of the services provided during the first year was approximately $2.3 million, the services to be provided over the remaining two years were valued by the parties at $5.95 million. AOL's recordkeeping system did not allow it to determine all of the impressions actually delivered by AOL prior to termination (App. at A153). However, as the Bankruptcy Court found, the

evidence showed that AOL did not deliver any of certain types of impressions it was supposed to deliver by the end of 2000 and only a small percentage of other impressions it was supposed to deliver (App. at A9, FOF 69-70). On the other hand, AOL did deliver more impressions of a certain type than it was obligated to deliver (App. at A9-10, FOF 71-72). Overall, the evidence showed that, prior to termination of the Agreement, AOL had delivered approximately 25 percent of the impressions it was obligated to deliver in the last two years of the Agreement.

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AOL never disputed that number, and never offered any different number as to the value of the impressions delivered prior to termination. Thus, the essentially undisputed evidence showed that eToys had paid about $4.5 million for services to be delivered during the last two years which were never delivered by AOL because of the termination of the Agreement. As noted, the Bankruptcy Court found that the effect of the termination was to free up advertising space which could then be sold by AOL. The Bankruptcy Court nonetheless found that there was no evidence of the fair market value of the impressions as of the date of the termination (Op. at 34). That conclusion, which was unnecessary given the basis for the

Bankruptcy Court's holding, was simply incorrect. eToys offered into evidence the internal list of rates for such impressions of AOL which were in effect as of February 2001 when AOL terminated the Agreement (App. at A166). In addition, the price agreed to by the parties for such impressions only three months earlier when they negotiated the Amendment was strong evidence of the fair market value. B. The Bankruptcy Court's Summary Judgment Decision.

Following the completion of discovery, AOL filed a motion for summary judgment on all remaining claims of eToys, and eToys filed a motion for partial summary judgment. With respect to eToys' claims based on the termination of the Agreement, the

Bankruptcy Court denied AOL's motion and granted partial summary judgment to eToys. In the summary judgment opinion, the Bankruptcy Court noted that eToys sought "a determination that AOL's termination of the contract, and consequently the retention of payments made by the Debtor in advance for services never delivered, constitutes a fraudulent

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transfer as a matter of law under section 548."1 In re EBC I, Inc., 356 B.R. 631, 636 (Bankr. D. Del. 2006). It was undisputed that the termination of the Agreement occurred within one year of filing the bankruptcy petition and that eToys was insolvent at the time. The Bankruptcy Court found that "the termination of the contract by AOL resulted in the transfer of property of the debtor, mainly the advertising services for which the debtor had prepaid." 356 B.R. at 637. The Bankruptcy Court also found "to the extent it (eToys) paid more to AOL than the value of the services provided to it by AOL, the termination of the contract eliminated that value." 356 B.R. at 642. The Bankruptcy Court said that, on the then existing record, it was: unable to determine what value in services AOL provided to the debtor after the Amendment to the contract. A further hearing will, therefore, be scheduled to consider evidence on this point. Id. As found by the Bankruptcy Court, eToys had paid a total of $8.25 million and had received through the first year of the Agreement about $2.3 million in services. Thus, under the

Bankruptcy Court's opinion, the only remaining issue on eToys' claims based on the termination of the Agreement was the "value in services AOL provided to the debtor after the Amendment to the contract." 356 B.R. at 642. Once that fact issue was resolved, eToys was entitled under the Bankruptcy Court's decision to recover the amount it had paid for services over the final two years of the contract, which AOL never delivered because of the termination. C. The Bankruptcy Court's Final Decision.

In June 2007, a one-day trial was held on eToys' claim based on the amendment of the Agreement and on what the Bankruptcy Court had said was the one remaining fact issue
1

Section 548 of the Bankruptcy Code permits a debtor to recover property, or the value thereof, where it: (1) voluntarily or involuntarily transferred property; (2) did not receive reasonably equivalent value for the property transferred; (3) did so within one year of filing its petition for bankruptcy; and (4) did so at a time when it was insolvent. 11 U.S.C. § 548(a)(1)(B).

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on eToys' claims based on the termination of the Agreement. As to the latter, eToys presented a document record consisting principally of charts generated by AOL showing what impressions had been delivered prior to the termination and price list showing the value of such impressions. Following post-trial briefing, the Bankruptcy Court issued its decision on January 10, 2008. Much of the Bankruptcy Court's decision was devoted to eToys' claim based on the amendment of the Agreement, and the Bankruptcy Court found for several reasons that the Amendment did not constitute a constructively fraudulent transfer under § 548. With respect to eToys' claim based on the termination of the Agreement, the Bankruptcy Court purported to reaffirm its decision on summary judgment (Op. at 20-24). The Bankruptcy Court reiterated the conclusion in its summary judgment opinion that "the retention of the payments made by eToys in advance for services never delivered, constituted a transfer of property of eToys, namely the advertising services for which eToys had pre-paid." (Op. at 2021) (emphasis added). The Bankruptcy Court also reaffirmed that "the loss of valuable property rights of a debtor, such as entitlement to services for which the debtor had paid in advance, is potentially recoverable under Section 548." Id. In addition, while the Bankruptcy Court said that it had not on summary judgment decided the value issue, it reiterated that the way to determine the value transferred as a result of the termination of the Agreement was to compare the services provided by AOL before termination with the amounts paid: The Court agrees with AOL's contention that it must consider the value of all the services rendered by AOL under the 1999 Agreement and the Amendment (and compare them to the payments made) in order to determine if eToys received less than reasonably equivalent value under the 1999 Agreement and the Amendment as a result of the termination.

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(Op. at 24).2 However, nowhere in the Opinion did the Bankruptcy Court thereafter do that analysis ­ i.e., determine the value of all the services rendered by AOL prior to termination and compare that value to the payments made. Similarly, the Bankruptcy Court never resolved, or even addressed, what it had said in the summary judgment opinion was the one remaining issue ­ "what value in services AOL provided to the Debtor after the Amendment to the contract." Rather than valuing what it specifically identified as the property transferred ­ "the advertising services for which eToys had pre-paid" ­ the Bankruptcy Court took an entirely different analytical approach, and found that eToys' rights under the contract had no value for two reasons: (1) eToys ceased its operations in connection with its bankruptcy filing, and the Agreement "had no value to eToys because eToys was no longer operating" (Op. at 27); and (2) the contract was not assignable and therefore could not have been sold as an asset in bankruptcy. The Bankruptcy Court went on to conclude that, even if the Agreement was assignable in bankruptcy, "the price paid for that contract would have been de minimus" (Op. at 32) and also found that there was no evidence of any subsequent sale by AOL of the impressions (Op. at 3435) ­ however, that discussion is dicta because, even though AOL agreed that the contract had some value as an asset in bankruptcy, the Bankruptcy Court did not award eToys even that value.

2

AOL contended that it had provided other services besides the impressions and those services should also be valued in calculating what eToys received for its payments.

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STANDARD AND SCOPE OF REVIEW It is well-established that "[f]actual determinations of the bankruptcy court are subject to a clearly erroneous standard . . . while legal determinations are subject to de novo review." American Airlines, Inc. v. Continental Airlines, Inc. (In re Continental Airlines, Inc.), 152 B.R. 420, 423 (D. Del. 1993) (citing In re Morrissey, 717 F.2d 100, 104 (3d Cir. 1983) and J.P. Fyfe, Inc. v. Bradco Supply Corp., 891 F.2d 66, 69 (3d Cir. 1989)); Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988). Thus, although the appellate court must accept the Bankruptcy Court's "finding of historical or narrative facts," the appellate court exercises "plenary review of the trial court's choice and interpretation of legal precepts and its application of those precepts to the historical facts." Mellon Bank, N.A. v. Metro

Communications, Inc., 945 F.2d 635, 642 (3d. Cir. 1991) (citing Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d. Cir. 1981)). Because the relevant facts are largely undisputed, the appeal presents primarily legal issues. The principal issue on appeal is whether the Bankruptcy Court's first decision, in which it held that eToys was entitled to recover the amounts paid for services never delivered, was correct or whether its second decision, in which it held eToys was entitled to nothing, was correct.

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ARGUMENT I. THE BANKRUPTCY COURT APPLIED THE WRONG LEGAL STANDARD. The Bankruptcy Court's conclusion that the property transferred by eToys to AOL as a result of the termination had no value was based on a flawed analysis reflecting at least three errors. First, the Bankruptcy Court failed to apply the correct legal standard, under which the Court must examine the "totality of circumstances" in valuing the property transferred. Second, as a result, the Bankruptcy Court ended up valuing the wrong thing -- even though the Bankruptcy Court found that the result of the termination was the transfer of the advertising services for which eToys had prepaid, the Bankruptcy Court did not value those services but instead valued the Agreement assuming a hypothetical sale of it, which ignored the actual circumstances. Third, the Bankruptcy Court further disregarded the actual circumstances by ignoring undisputed evidence of AOL's ability to resell those services as a result of the termination (which it could not have done had the contract been transferred) and the value of those services. A. The Bankruptcy Court Failed To Apply The Totality Of The Circumstances Test.

In determining that the property transferred had no value to eToys, the Bankruptcy Court applied the wrong legal standard. It was undisputed that eToys received nothing when AOL terminated the Agreement. Thus, as the Bankruptcy Court recognized, eToys was entitled to recover the value of the property transferred (Op. at 24). Under settled law "[w]hen the value of property is recovered, as opposed to the property itself, the term `value' refers to fair market value." 5 Collier on Bankruptcy ¶550.02[3][a](15th ed. rev. 2007), BFP v. Resolution Trust Corporation, 511 U.S. 531 (1994) ("the price which it might be expected to bring if offered for sale in a fair market"); In re Brun, 360 B.R. 669, 674 (Bankr. C.D. Cal. 2007)

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("[t]ypically, courts equate `value' with the fair market value of the subject property at the time of the transfer.") (collecting cases); Walsh v. Gutshall (In re Walter), 261 B.R. 139, 145 (Bankr. W.D. Pa. 2001); American Furn. Outlet USA, Inc. v. Woodmark Originals, Inc. (In re American Furn. Outlet USA, Inc.), 209 B.R. 49, 52-53 (Bankr. M.D.N.C. 1997); Kepler v. Security Pac. Hous. Serv. (In re McLaughlin), 183 B.R. 171, 177 (Bankr. W.D. Wisc. 1995) ("The market price at the time of the transfer is the proper measure of § 550 damages."); Aero-Fastener, Inc. v. Sierracin Corp. (In re Aero-Fastener, Inc.), 177 B.R. 120, 140 (Bankr. D. Mass. 1994); Gennrich v. Montana Sport U.S.A., LTD (In re International Ski Serv., Inc.), 119 B.R. 654, 659 (Bankr. W.D. Wisc. 1990); Widemire v. Siddiki Bros., Inc. (In re King Arthur Clock Co., Inc.), 105 B.R. 669, 672 (Bankr. S.D. Ala. 1989); Slutsky v. Michel Tire Co. (In re Vann), 26 B.R. 148, 149 (Bankr. S.D. Ohio 1983). In the Third Circuit, the determination under Section 548 of the value of property transferred requires application of the totality of circumstances test. In Re Freuhauf Trailer Corporation, 444 F.3d 203, 213 (3d. Cir. 206); In Re R.M.L. Inc., 92 F.3d 139, 154 (3d Cir. 1996). Under that test the Court must examine all of the circumstances of the transfer including the "fair market value of the benefit received as a result of the transfer." In Re Freuhauf Trailer Corporation, 444 F.3d at 213. In granting partial summary judgment to eToys, the Bankruptcy Court had found that the value of the advertising services which were transferred to AOL by reason of the termination was essentially the negotiated price for such services agreed to by the parties only three months earlier. For that reason, it concluded that the value of the services transferred was the difference between what eToys had paid in advance, and the value of the services received before termination. That analysis correctly looked at the fair market value of the property transferred ­ the advertising services.

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However, in its final opinion, the Bankruptcy Court did not purport to apply the totality of circumstances test at all.3 Instead, it looked only to the value of the contract to eToys when it was about to file a petition in bankruptcy saying that the Bankruptcy Court "must consider what value the 1999 Agreement, as amended, had to eToys immediately before and after the termination" (Op. at 25) and subsequently finding that the agreement "had no value to eToys immediately before its termination." (Op. at 27) (emphasis added). The Bankruptcy Court relied on Mellon Bank N.A. v. Metro Communications Inc., 945 F.2d 635 (3d Cir. 1991) to support its assertion that the relevant inquiry was the "value to eToys", but that case does not support such an analysis. To begin with, that decision preceded the later Third Circuit decisions which make clear that the court must consider the totality of circumstances in determining value. Moreover, that case involved a leveraged buyout in which all of the debtor's assets were secured to protect a loan to the buyer and the court said that, under such circumstances, it was appropriate to examine the going concern value of the corporation before and after the transaction. However, in examining whether the debtor received reasonably equivalent value, the court examined all of the circumstances, and nothing in the decision supports the view that only the "value to the debtor" was relevant. The totality of circumstances test required, at a minimum, that the Bankruptcy Court consider factors such as the value of the services as agreed upon by the parties only three months earlier, the value as reflected on quoted prices of AOL for such services at the time of termination, and the value as reflected by AOL's ability to resell those services. The Bankruptcy Court erred in failing to apply the totality of circumstances test.

3

Only late in the opinion, in a section which is dicta, does the Bankruptcy Court even make a passing reference to the totality of circumstances test (Op. at 32).

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B.

The Bankruptcy Court Erred By Failing To Value The Advertising Services.

The Bankruptcy Court compounded its error because, in failing to apply the totality of circumstances test, the Bankruptcy Court ended up valuing the wrong thing. The Bankruptcy Court expressly recognized both in its summary judgment decision and in its final decision that the property transferred as a result of the termination was "the advertising services for which eToys had pre-paid" (Op. at 21). That conclusion was plainly correct because, as the Bankruptcy Court found, the termination freed up advertising space which AOL could then sell to other customers. However, instead of valuing those services, it purported to value the contract itself in the context of a theoretical sale, rather than such services (Op. at 25). The Agreement was not assigned by eToys, as the Bankruptcy Court's valuation analysis assumed. Instead, AOL terminated the Agreement pursuant to Section 5.6, relying solely on eToys' public announcement of its insolvency (App. at A171). The legal effect of the termination was to end the contract, and the practical effect was to transfer those advertising services back to AOL, which was both relieved of its obligation to provide the specified advertising services and able to resell at current rates the advertising space on its website that had been reserved for eToys. In contrast, in an assignment, the contract would have continued rather than terminated, and the practical effect would have been the opposite of termination because AOL would have remained obligated to perform and deliver services to the buyer and would not have been able to resell that advertising space to others. Thus, the Bankruptcy Court should have valued what it said was the property actually transferred to AOL ­ "the advertising services for which eToys had pre-paid" ­ because the termination returned that advertising space to AOL. In ignoring the actual facts of the termination and the effect of the termination, the Bankruptcy Court plainly did not examine the "totality of circumstances" or, for that matter, any of the actual

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circumstances.

The value of those services was, as the Bankruptcy Court had seemed to

recognize on summary judgment, the amount paid by eToys and kept by AOL for the services never delivered. C. The Bankruptcy Court's Failure To Apply The Totality Of Circumstances Test Led It To Ignore Numerous Facts That Should Have Been Considered.

Had the Bankruptcy Court properly applied the totality of circumstances test, and valued what was actually transferred, it would have considered numerous, essentially undisputed facts which it ignored. The totality of circumstances test required that such facts be considered. 1. The Bankruptcy Court Erred In Failing To Take Into Account The Ability Of AOL To Resell The Advertising Services.

The Bankruptcy Court recognized that an actual resale of the property transferred by the transferee is strong evidence of the value of that property (Op. at 32-33), but concluded that "there is no evidence in this case of any subsequent sale or the value received from that sale" (Op. at 34-35), which is simply incorrect. AOL's own system made it impossible to determine whether the specific advertising space reserved for eToys and freed up by the termination was later resold, but AOL's primary witnesses testified that in all likelihood such services were resold (App. at A174; App. at A176) and AOL's trial witness acknowledged: Q. A. And had they been resold, the starting point in a resale would have been the then existing rate cards correct? Yes.

(App. at A178). Indeed, AOL's Rule 30(b)(6) witnesses testified that AOL considered the services it was to provide under the Amendment to have a higher value than the amount eToys had paid (App. at A173). Thus, the fact that the termination freed up advertising space which

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AOL could then resell and the fact that its witnesses testified that it was likely such advertising space was resold flatly contradict the Bankruptcy Court's conclusion. 2. The Bankruptcy Court Ignored Undisputed Evidence As To The Value Of The Advertising Services.

The Bankruptcy Court also clearly erred in finding that there was no evidence of the value of the services even if AOL had been able to resell them. Specifically, the Bankruptcy Court said: AOL contends, however, that eToys has failed to present any evidence of the fair market value of the impressions. It notes that there is no evidence in the record that AOL was able to resell those impressions or at what price. Even if they were resold, AOL argues that the prices on its rate card in November 2000 are not indicative of the fair market value because the evidence established that impressions were sold to large retailers like eToys at substantial discounts from the rate card prices. The Court agrees with AOL. (Op. at 34) (emphasis added). The conclusion that there was no evidence of fair market value is simply nonsensical because the November 2000 amendment was in fact a sale of impressions not just to a "large retailer like eToys", but to eToys itself. Thus, that contract plainly established the fair market value of those impressions only three months earlier. Moreover, it was undisputed that the rates internally published by AOL as shown on rate cards did not change between November of 2000 and February of 2001. Courts routinely determine the value of property recoverable from a transferee based on evidence of what the transferee actually did receive, or could have received, in a further disposition of the property at issue. See, e.g., Kidder Skis Int'l v. Williams, 60 B.R. 808, 810 (W.D. Mo. 1985) (reversing bankruptcy court and reducing trustee's recovery under section 550(a)(1) based on lesser amount transferee of ski inventory was able to obtain through its resale

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of such items); Shearer v. Tepsic (In re Emergency Monitoring Tech., Inc.), 366 B.R. 476, 510 (Bankr. W.D. Pa. 2007) (authorizing trustee to recover value equal to the sale price the transferee was able to obtain in further sale of monitoring contracts it had seized from debtor); Baldi v. Lynch (In re McCook Metals, L.L.C.), 319 B.R. 570, 593 (Bankr. N.D. Ill. 2005) (authorizing trustee's recovery under section 550(a) based on defendant's share of the benefit received when contract to acquire smelter was transferred to entity that defendant controlled); American Furn. Outlet USA, Inc. v. Woodmark Originals, Inc. (In re American Furn. Outlet USA, Inc.), 209 B.R. 49 (Bankr. M.D.N.C. 1997) (rejecting amount specified in credit memo as a basis for determining the value of property transferred under section 550(a) in favor of amounts actually obtained by transferee in subsequent sale of property); Ferrari v. Computer Assoc. Int'l, Inc. (In re First Software Corp.), 84 B.R. 278, 284 (Bankr. D. Mass. 1988) (stating "[i]t is axiomatic that what a willing buyer will pay a willing seller is the absolute best indication of fair market value" and holding that value of property recoverable by trustee should be fixed based on the amount for which the transferee actually resold the property rather than what was specified in credit memo issued to debtor); Speciner v. Gettinger Assoc. (In re Brooklyn Overall Co., Inc.), 57 B.R. 999, 1004 (Bankr. E.D.N.Y. 1986) (authorizing trustee's recovery against landlord under section 550(a)(1) measured by the value of the additional rent the landlord was able to collect from new tenant following debtor's transfer of lease back to landlord). The undisputed evidence showed that AOL was both able to resell the space it had reserved for eToys and that it would have done so at no less than the price agreed to with eToys three months earlier, and if AOL resold the impressions to a buyer other than a "large retailer", it would have received a higher price than eToys had paid.

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D.

Conclusion.

The Bankruptcy Court's decision led to a result which is simply inconsistent with the purposes of the Bankruptcy Code ­ AOL gets to retain money it was paid for services which it never performed, and which it was then able to resell, to the detriment of numerous creditors who actually provided services to eToys and were never paid for such services. The Bankruptcy Court was able to reach such a conclusion only by failing to apply the proper legal standard, by failing to value what it had twice found was the property transferred and by ignoring the undisputed evidence of the value of those services. The decision was incorrect and must be reversed. II. THE TOTALITY OF CIRCUMSTANCES INDICATES A VALUE OF APPROXIMATELY $4.5 MILLION FOR THE ADVERTISING SERVICES TRANSFERRED TO AOL. As set forth below, had the Bankruptcy Court properly applied the "totality of circumstances" test to value the property actually transferred by eToys to AOL ­ the advertising services for which eToys had prepaid ­ the Bankruptcy Court would have arrived (on essentially undisputed evidence) at a value for the property transferred of $4,462,500. Here, the totality of the circumstances confirm that, as the Bankruptcy Court has already held, the proper valuation of the rights lost was the difference between what eToys had paid and what it received for several reasons: (a) that was the price negotiated at arms-length between the parties only three months earlier; (b) it was a price based on AOL's current rate cards; (c) those remained the rates shown on rate cards of AOL when it terminated the Agreement; (d) AOL by reason of the termination was relieved of its obligation to provide those services; and (e) AOL was then able to resell those services at its existing rates. The undisputed evidence shows that the parties had agreed that the value of the services provided during the first year was approximately $2.3 million and that the services to be

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provided over the remaining two years was $5.95 million.4 Overall, the evidence showed that, prior to the termination of the Agreement, AOL had delivered approximately 25 percent of the impressions it was obligated to deliver in the last two years, which the parties had valued at $5.95 million. AOL never disputed that number and never offered contrary evidence as to the value of impressions delivered prior to termination.5 Thus, eToys is entitled to damages from the termination of the Agreement of $4,462,500, which is the amount it paid for services it did not receive. This amount is fair to AOL, which was not only excused from its future performance but was also able to sell the advertising space to others. III. THE BANKRUPTCY COURT ERRED IN FINDING THE AGREEMENT WAS NON-ASSIGNABLE. As discussed, the Bankruptcy Court used the wrong legal standard when it ignored the totality of circumstances and instead valued the Agreement "to eToys" in a bankruptcy liquidation. Even if that had been a proper approach, the Bankruptcy Court

4

Under well-established law, a plaintiff need not provide an exact calculation of damages in order to recover. Rather, a plaintiff need only provide a reasonable basis for a determination of damages. Merchants Fund, Inc. v. Bartl, 15 B.R. 448, 455 (Bankr. E.D.Va. 1981) (applying Virginia law); see also, e.g., U.C. Castings Co. v. Knight, 754 F.2d 1363, 1371, 1373 (7th Cir. 1985) (damages are not rendered uncertain because they cannot be calculated with precision and defendant cannot complaint about inexactness of calculation where defendant's record keeping contributed to imprecision); W.M. Jordan Co., Inc. v. Sielaff, 1988 WL 619397, at *7 (Va. Cir. Ct). ("It is axiomatic that damages may be fixed when the circumstances are such as to permit a reasonable and probable estimate of them."). AOL claims to have "substantially complied with its obligations" in year 2 prior to termination (AOL PFF 79, Adv. D.I. 101). However, AOL's records show that it failed to deliver many of the impressions it was obligated to deliver by February 2001 (PFF 4142, Adv. D.I. 102). But even if AOL had "substantially complied," the schedules in the Amendment contemplated that only about 30% of the total impressions were due to be delivered by February 2001 (PFF 39-40, Adv. D.I. 102).

5

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committed clear errors in applying it.6 First, and as a threshold matter, the Bankruptcy Court erroneously concluded that the Agreement remained executory as of the Petition Date. Second, the Bankruptcy Court erroneously concluded that section 365(c)(1) of the Bankruptcy Code applied, thereby allowing AOL the opportunity to interpose alleged restrictions on assignment contained within the Agreement. Third, the Bankruptcy Court erroneously concluded, despite the express language of the Agreement, that eToys could never have assigned the Agreement in its bankruptcy case. Finally, the Bankruptcy Court erroneously found that the Agreement had "de minimis" value. Whether considered individually or cumulatively these fundamental errors require the reversal of the Bankruptcy Court's conclusion that the advertising services under the Agreement had no value. A. The Agreement Was Not Executory.

A threshold issue to be resolved before the Bankruptcy Court could embark upon its journey to conclude that the Agreement was not assignable was for the Bankruptcy Court to find that the Agreement was executory. This it did in a seven word sentence in a footnote where the Bankruptcy Court pronounced without analysis that "[t]he 1999 Agreement was an executory contract." (Op. at 28 n.7). However, both at the time of AOL's purported termination of the Agreement and as of the Petition Date, eToys has fully performed all of its material obligations under the Agreement. For the Agreement to remain executory on those dates, eToys had to have material remaining duties, the nonfulfillment of which would have subjected eToys to a claim for
6

This is yet another instance where the Bankruptcy Court, despite having reserved only the narrow issue of what value should be assigned to the services provided by AOL after the Agreement was amended in November 2000, belatedly reconsidered its earlier ruling and accepted post-trial arguments made by AOL without giving eToys a full and fair chance to respond.

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damages. See In re Columbia Gas Sys. Inc., 50 F.3d 233, 241 (3d Cir. 1995) ("[I]f the remaining obligations in the contract are mere conditions, not duties, then the contract cannot be executory for purposes of § 365 because no material breach could occur."). It is undisputed that eToys had by then fully funded the $8,250,000 it was required to pay to AOL under the Agreement. All that was left to occur was for eToys to receive the benefits of its prepaid advertising services.7 B. The Bankruptcy Court Erroneously Concluded That § 365(c)(1) Would Apply To An Assignment Of The Agreement.

In erroneously concluding that section 365(c)(1) of the Bankruptcy Code applies to any agreement where the "identity of the contracting party is material to the ongoing performance of the contract," (Op. at 28), the Bankruptcy Court incorrectly abandoned the very analysis it had previously adopted and described as the view accepted by the majority of courts.8
7

One analogue to this situation involves a debtor's prepayment of premiums under an insurance policy. As the Bankruptcy Court itself recently stated, "courts have recognized that where one of the parties to the insurance policy has fulfilled the central agreement to such contract, such as the obligation of the insured to pay the premium in exchange for the insurer's defense and payment of indemnity claims against the insured, the contract is no longer executory." In re Federal-Mogul Global Inc., -- B.R. --, 2008 WL 783747, *8 (Bankr. D. Del. March 19, 2008) (Ex. 1 hereto). See also, e.g., In re Surfside Resort and Suites, Inc., 344 B.R. 179, 187 (Bankr. M.D. Fla. 2006); In re CVA General Contractors, Inc., 267 B.R. 773, 779 (Bankr. W.D. Tex. 2001); In re Firemarms Import and Export Corp., 131 B.R. 1009, 1013 (Bankr. S.D. Fla. 1991). The relevant portions of section 365 state: The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity *818 other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and (B) such party does not consent to such assumption or assignment; (Continued . . .)

8

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See In re ANC Rental Corp., Inc., 277 B.R. 226, 236 (Bankr. D. Del.) ("[W]e follow the majority of courts addressing this issue and conclude that, for section 365(c)(1) to apply, the applicable law must specifically state that the contracting party is excused from accepting performance from a third party under circumstances where it is clear from the statute that the identity of the contracting party is crucial to the contract or public safety is at issue.") (collecting cases) (emphasis added), aff'd, 280 B.R. 808 (D. Del. 2002), aff'd, 57 Fed. Appx. 912, 2003 WL 328427 (3d Cir. 2003) (Unpublished). Accordingly, it is the established rule in this District and elsewhere that the mere reservation of the right to "require approval by the contracting party to any assignment" is "not sufficient for application of section 365(c)(1) . . . ." Id. at 236. C. Applicable Law And The Express Terms Of the Agreement Did Not Render It Non-Assignable.

As was true in ANC Rental and numerous other cases, this Agreement was one that merely reserved the option to AOL to consent and did not flatly prohibit assignment. The Agreement states: 23. Assignment. MP will not assign this Agreement or any right, interest or benefit under this Agreement without the prior written consent of AOL, which consent shall not be unreasonably withheld. While AOL had to consent to any assignment, its consent could not

(App. at A138).

unreasonably be withheld. Accordingly, had AOL not terminated the Agreement, there remained the possibility that eToys' business could have been reorganized or its assets sold as a turnkey operation that would have allowed the Agreement to be assigned for substantial value.

(. . . continued) 11 U.S.C. § 365(c)(1).

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Other courts have similary concluded that the section 365(c)(1) exception to the free assignability of contracts does not bar assignment in bankruptcy when it merely conditions assignment, as is the case here, on the contracting party's consent, not to be unreasonably withheld.9 For example, in In re Wills Motors, Inc., 133 B.R. 303, 308 (Bankr. S.D.N.Y. 1991), the court stated of an automobile dealer franchise statute containing comparable language that "[m]anifestly, this statute cannot be described as an anti-assignment law which triggers the application of 11 U.S.C. § 365(c)(1)" because "[a]ssignments of automobile franchise agreements are permitted . . . if the parties consent, or if the franchisor acts unreasonably in withholding consent."10 Thus, the Bankruptcy Court erred in concluding that the advertising services under the Agreement were without value because they were non-transferable when the Agreement contains language allowing assignment. Likewise flawed was the Bankruptcy Court's reliance on a handful of cases to reach the conclusion that this Agreement was one Virginia law, to the extent it constitutes applicable law under section 365(c)(1), would render non-assignable. (Op. at 28-29). None of these cases suggests that Virginia's concept of what constitutes a personal services contract is in any way different from that which prevails elsewhere and none of the cases provides support for the conclusion that a Virginia court would deem this Agreement to be a personal services

9

"The Code generally favors free assignability as a means to maximize the value of the debtor's estate." In re Ricke Home Centers, Inc., 209 F.3d 291, 299 (3d Cir. 2000). As a result, courts have held that section 365(c)(1) must be construed narrowly. See, e.g., In re Rooster, Inc., 100 B.R. 228, 233 n.13 (Bankr. E.D. Pa. 1989). See also, e.g., In re Aerbox Composite Structures, LLC, 373 B.R. 135, (Bankr. D.N.M. 2007) (stating in dicta that "[t]he Court agrees that the License Agreement does not prohibit assignment, and that by requiring Tubus Bauer not to unreasonably withhold its consent to assignment, the assignment term of the License Agreement is less restrictive than the general federal common law prohibition against assignment of patents absent consent of the licensor").

10

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contract. For instance, Stone Street Capital, Inc. v. Granati (In re Granati), 270 B.R. 575, 58182 (Bankr. E.D. Va. 2001), contained no analysis of what constitutes a non-assignable personal services contract under Virginia law and merely made the unremarkable statement without regard to the application of section 365(c)(1) that "[a]s a general proposition, contract rights are freely assignable unless the identity of the contracting parties is material or unless assignment is precluded by the terms of the contract itself or by public policy."11 The Bankruptcy Court ignored numerous cases involving agreements governing commercial relationships between sophisticated parties, which are far more apposite to the current situation. Chief among these is In re Travelot Co., 286 B.R. 447 (Bankr. S.D. Ga. 2002), where the debtor, an internet based provider of travel booking services, sought to assume its contract with Cable News Network ("CNN"), pursuant to which CNN agreed to provide Travelot with advertising services in the form of presentation on CNN's travel website and pop up ad impressions that its users could access. The agreement contemplated a close working relationship, with the parties agreeing "that the key to success of the proposed venture was Travelot's obtaining a cooperative agreement with a technology partner that could provide the technical expertise in order to connect the CNN.com visitor with the provider and ultimately with the local travel agent." Id. at 450. In addition, their agreement contained detailed provisions
11

Similarly, the agreement at issue in Epperson v. Epperson, 62 S.E. 344 (Va. 1908), was the quintessential personal services contract because it was one which obligated two sons to "jointly support and care for their parents, while they lived . . . ." Id. at 346. Nor does the agreement at issue in McGuire v Brown, 76 S.E. 295 (Va. 1912), withstand any comparison to the instant situation because it was an agreement among relatives by which one group delegated exclusively to the other the responsibility for the sale of their land and gave him "an equal voice in all matters pertaining to a sale of this land," including equal control over the price at which the land should be sold. Finally, the limited liability company operating agreement at issue in Broyhill v. DeLuca (In re DeLuca), 194 B.R. 65 (Bankr. E.D. Va. 1996), bears no similarity to this Agreement, as it involved an operating agreement to pursue a real estate development project under which the managing members had extremely broad discretion allocated to them by the other member.

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governing the use of the CNN trademark and the manner in which Travelot's service was presented on the CNN.com website, including provisions which reflected "CNN's contractual retention of control over the manner in which Travelot was to present its product on the CNN website . . . ." Id. at 458. While the court did not specifically frame its analysis in terms of whether the agreement was in the nature of a contract for personal services, its careful analysis of all of these elements led it to conclude that the contract was not one that would be subject to section 365(c)(1)'s exception to the free assignability of contracts in bankruptcy. Along the same lines, in In re Compass Van & Storage Corp., 65 B.R. 10007 (Bankr. E.D.N.Y. 1986), the debtor was an entity engaged in the moving and storage business under the name of Allied Van Lines, Inc. ("Allied") pursuant to an agency agreement with Allied. The court acknowledged that "the . . . competency, financial stability and the integrity of the person at the helm of Compass [are] of material concern and consequence to Allied" and that "[p]rudent business practice warrants assurance that the chief operating officer of Compass has the knowledge and expertise in the moving and storage business." Id. at 1012. Nevertheless, relying on the terms of the agreement, the court reasoned as follows in concluding that the agreement was not in that narrow class of contracts which could not be assigned in bankruptcy: The Agency Contract by its terms is not dependent upon any special personal relationship, special knowledge, or unique skill or talent, but rather it typifies and tracks the ordinary consensual agency, franchise, or distributorship agreements, which have been consistently interpreted by the courts as not within the ambit or proscript of Section 365(c)(1)(A). . . . By its clear and specific terms, the contract quantifies as an agreement for the loyal, diligent and efficient performance of labor and service by Compass in strict compliance with Allied's reasonable rules and regulations and to keep and report in the manner prescribed by Allied or any governmental authority complete records and accounts pursuant to its duties and responsibilities thereunder. Thus, the functional business pursuit and intendment of the parties is explicit. The

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instrument contains no reference of compelling personal service to effectuate the objectives of the agency agreement. Id. at 1011-12 (emphasis added).12 As in Compass, this Agreement is one drafted to outline the terms of a "functional business pursuit" and is not committed to "a special knowledge, unique skill or talent, [or] singular judgment and taste." Compass, 65 B.R. at 1011-12. At its most basic level, it is undisputed that the Agreement was one pursuant to which AOL provided specialized internet advertising services to eToys for a fee. Thus, if any party to the Agreement could treat it as personal and nonassignable it was eToys and not AOL. Furthermore, the express terms of the contract are not conditioned upon the involvement of any individual associated with eToys' business. Nor do they suggest any feature

12

See also, e.g., In re Headquarters Dodge, Inc., 13 F.3d 674 (3d Cir. 1994) (reversing district court's categorical holding that franchise agreement was subject to section 365(c)(1) as a personal services contract and remanding for a factual determination of the character of the contract); Drewes v. FM Da-Sota Elevator Co. (In re Da-Sota Elevator Co.), 939 F.2d 654 (8th Cir. 1991) (although recognizing that "skilled workmanship and sound management practices" were conducive to success and that customers would "eschew entrusting their elevator maintenance work to any Tom, Dick or Harow who turns up as the highest bidder at an auction to be held by a trustee in bankruptcy," the court held that elevator service contract had commercial value that should result in their being included in the debtor's estat