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February 20, 2018 | Posted by Kelly Porcelli | Permalink

The Bottom Line

The First Circuit in Mission Product Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir. 2018), recently held that the Debtor’s rejection of a trademark license left the licensee with only a pre-petition damages claim in lieu of any obligation by the Debtor to further perform under the trademark license or the grant of exclusive distribution rights.  The case is notable because (i) it excludes distribution rights from the protections of Section 365(n) of the Bankruptcy Code and (ii) it declines to follow certain cases (including in the First Circuit) that included trademark rights as protected intellectual property rights post-rejection.

Why This Case Is Interesting

The Seventh Circuit’s approach in Sunbeam, which permitted a trademark licensee to retain rights post-rejection, has been an exception to both the plain reading of the Bankruptcy Code and the majority of cases interpreting the issue.  The First Circuit’s decision furthers a divide among circuit courts on whether to grant protection to trademarks despite the language of the Bankruptcy Code.  For certain distressed businesses, including retailers with popular private label products, trademarks can be a valuable right. The ability of the debtor versus the non-debtor licensee to control the use of that trademark can affect the overall restructuring.  This latest decision adds to the uncertainty (depending upon where a case is filed) on the treatment of this potentially valuable property right.

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February 9, 2018 | Posted by Priya Baranpuria | Permalink

The Bottom Line

The Bankruptcy Court in the Southern District of Mississippi (the “Court”), in In re Franchise Services of North America, Inc., Case No. 1702316EE (Bankr. S.D. Miss. Dec. 18, 2017), upheld the blocking power held by a “substantial equity holder”, prohibiting a company from filing bankruptcy, as “valid enforceable and . . . not contrary to public policy under federal law.”  Two affiliated parties moved for the dismissal of the bankruptcy case as unauthorized.  Of note, one of the moving parties was a creditor of the debtor but its affiliate (holding the golden share) was not.  The court examined the universe of reported cases examining golden shares or blocking provisions and distinguished between the capacity of the affiliated moving parties – creditor vs shareholder.  The Court denied the request of the creditor affiliate but granted the request of the shareholder affiliate and dismissed the chapter 11 petition for lack of corporate authorization.  

Why the Case is Interesting

Until this case, only six bankruptcy courts and one district court addressed whether a “golden share” shareholder could block a company from filing for bankruptcy where the consent requirement was embedded in the debtor’s organizational documents. The Court disregarded the relevance of a wholly-owned, controlled subsidiary of a creditor holding the “golden share” in allowing the shareholder to exercise its governance rights.  The presiding judge, Judge Edward Ellington has certified the case for direct appeal to the Fifth Circuit.  If the Fifth Circuit accepts the direct appeal, this will be the first time a Circuit Court has been asked to address this issue.  The Fifth Circuit’s decision may shape the landscape for structuring a loan.  Depending on the Fifth Circuit’s decision, creditors may structure loans to grant an affiliated equity holder a golden share approval right to any bankruptcy filing.  Although not specifically addressed in the decision, the debt at issue ($3 million) followed the much more substantial equity investment ($15 million) in the Debtor.  This is not a case where the lender is taking equity of the borrower as part of the initial loan transaction where the issuance of the equity is not in exchange for a separate investment, as opposed to part of the overall loan transaction.

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January 3, 2018 | Posted by Philip Guffy | Permalink

The Bottom Line

The Nevada District Court recently held, in Mont. Dept. of Revenue v. Blixseth, No. 13-cv-01324-JAD, 2017 WL 6417632 (D. Nev. 15, 2017), that a creditor must have a fully undisputed claim to be a “qualified creditor” that may petition for an involuntary bankruptcy.  The Court found that the 2005 amendments to the Bankruptcy Code overruled existing Ninth Circuit precedent that had allowed a creditor to maintain an involuntary petition if at least a portion of its claim was undisputed and the other requirements were met.  When seeking qualified petitioning creditors, this narrows the field of eligible co-petitioners.

Why This Case is Interesting

Involuntary bankruptcy cases can be a powerful tool for creditors, and this decision raises the bar for use.  Creating a legitimate dispute over the amount of a claim may not be difficult for certain debtors.  For example, disputes over whether a default interest rate should be applied could potentially disqualify a claim even when the principal amount owed is undisputed.  While this “overruling” has yet to be confirmed by the Ninth Circuit, creditors seeking to commence an involuntary bankruptcy will want to take steps to ensure their claims are not subject to a bona fide dispute.

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January 2, 2018 | Posted by Kelly Porcelli | Permalink

The Bottom Line

Addressing an issue of first impression in the Eleventh Circuit, the Court in Mantiply v. Horne (In re Horne), 876 F.3d 1076 (11th Cir. 2017), recently held that section 362(k)(1) of the Bankruptcy Code authorizes payment of attorneys’ fees and costs incurred by debtors in successfully pursuing an action for damages resulting from an automatic stay violation and in defending the damages award on appeal.

Why This Case is Interesting

On its face, section 362(k) applies to “individuals” which has created some uncertainty as to whether that means “natural persons” only or also corporate debtors.  The cases are not uniform with some courts holding that section 362(k)’s benefits apply only to natural persons who are debtors, see In re Chateaugay Corp., 920 F.2d 183 (2d Cir. 1993), and others holding a broader scope that includes corporate debtors, see Budget Service Co. v. Better Homes of Virginia, Inc., 804 F.2d 289 (4th Cir. 1986).  There is also a split over whether a bankruptcy trustee satisfies the requirement for an individual.  Compare In re Pace, 67 F.3d 187 (9th Cir. 1995) (excluding trustee), with In re Garofalo’s Finer Foods, Inc., 186 B.R. 414 (E.D. Ill. 1995) (including trustee). 

With this decision, the Eleventh Circuit joined the Ninth Circuit in adopting a broad reading of section 362(k)(1), holding that it entitles individuals to not only attorneys’ fees incurred in ending the stay violation but also fees incurred in prosecuting a damages action and in defending that judgment on appeal.  The Court found that section 362(k)(1) explicitly contemplates a departure from the American Rule—that each side pays its own attorney’s fees—authorizing costs and attorneys’ fees incurred by the debtor in prosecuting a damages violation and defending those judgments on appeal.  As noted, while the case (and Code section) applies to individuals and there is not uniformity among the courts whether that excludes other entities, like corporations, given the increased use of Chapter 11 by individual debtors (typically after triggering a bad boy guarantee relating to a failed business venture), creditors should be mindful of the extent to which damage claims can be pursued.

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December 13, 2017 | Posted by Alexander J. Nicas | Permalink

The Bottom Line

Third-party releases attract significant attention and debate in Chapter 11 cases.  A Southern District of New York bankruptcy court recently weighed in on this hot topic and issued a decision in In re SunEdison, Inc., et al., Case No. 16-10992 (SMB) (Bankr. S.D.N.Y. Nov. 8, 2017), Docket No. 4253, that deals a blow to debtors seeking confirmation of a plan of reorganization that includes broad non-consensual third-party releases.  In his decision, Judge Stuart Bernstein denied the Debtors’ request to force non-voting creditors to release non-debtor third-parties under their Chapter 11 plan of reorganization (the “Plan”) because the Debtors had failed to demonstrate that: (a) non-voting creditors had impliedly consented to the releases set forth in the Plan, (b) the bankruptcy court had jurisdiction to release the non-voting creditors’ third-party claims, or (c) approval of the requested non-consensual third-party releases were appropriate under governing Second Circuit law – Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005) (“Metromedia”). 

Why This Case is Interesting

The bankruptcy court’s decision in SunEdison adds to the debate over the propriety of third-party releases and the bankruptcy court’s authorization to approve them.  These releases are often a significant part of pre-petition negotiations among various parties, whether as part of plan funding or to facilitate the settlement of material disputed claims.  The decision recognizes that such releases are permissible in the Second Circuit so long as there is a proper evidentiary record to establish that non-consensual third-party releases satisfy the standards set forth in Metromedia.  The decision also provides interesting insight on the ability to shift the burden to an impacted creditor through “deemed consent,” but it cuts against recent bankruptcy court decisions that have approved releases on this basis when clear and unambiguous language in a disclosure statement and voting ballot states that third-party releases will bind both voting and non-voting creditors.  And, it directly questions whether consent can ever be inferred by inaction, regardless of whether disclosure is appropriate.

One issue that the SunEdison decision does not touch on directly is whether Stern v. Marshall, 564 U.S. 462 (2011) prohibits a bankruptcy court from entering a final confirmation order approving non-consensual third-party releases.  Although Stern was mentioned in footnote 5 of the SunEdison decision, the bankruptcy court punted on this issue because Judge Bernstein denied the third-party release in its proposed form.  Whether Stern precludes a bankruptcy court from issuing a final confirmation order approving third-party releases was recently dealt with in Millennium Lab II, LLC, et. al., Case No. 15-12284 (LSS), (Bankr. D. Del. Oct. 3, 2017), Docket No. 476.  In Millennium Lab, Judge Laurie Selber Silverstein authored a 69 page opinion in which she found that bankruptcy courts have constitutional adjudicatory authority to enter a final order confirming a plan of reorganization, even if the plan contains non-consensual third-party releases.  Kramer Levin Corporate and Restructuring partner Adam C. Rogoff recently participated in a Debtwire podcast discussing the Delaware bankruptcy court’s decision in Millennium Lab

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