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March 7, 2018 | Posted by Philip Guffy | Permalink

The Bottom Line

The Delaware Bankruptcy Court recently held, in Stanley Jacobs Prod., Ltd. v. 9472541 Can. Inc. (In re Thane Int'l, Inc.), No. 17-50476 (KG), 2018 Bankr. LEXIS 464 (Bankr. D. Del. Feb. 21, 2018), that a debtor must file a formal motion to assume and assign an executory contract and, in so holding, rejected the doctrine of “implied assumption” based on the conduct of the debtor.  The decision declined to follow cases allowing assumption by conduct and underscores the need for affirmative motion practice to assume an agreement as part of a sale transaction.

Why This Case Is Interesting

The court adopted a strict, formulaic approach to determining whether a debtor has assumed an executory contract.  Unless the debtor has filed a formal motion that has been granted by the court, the decision supports an argument that the contract has not been assumed even if the debtor or an alleged third-party assignee makes use of the contract and derives a benefit therefrom.  (The decision does not address whether there is another basis to seek damages from the use of the services covered by the unassumed contract.)  In the instant case, the contract could have been included in an underlying sale of assets and the case underscores the need to make sure that, as part of any sale of assets including executory contracts or unexpired leases, the purchaser or the non-debtor contract party will want to verify whether the contract or lease is expressly included as an assumed contract as part of the sale motion.  Conduct or accepting the benefits of a contract or lease alone does not constitute assumption under this decision.

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March 6, 2018 | Posted by Adam Rogoff, Megan Wasson | Permalink
In another decision affecting Chapter 11 cases, U.S. Bank National Association v. Village at Lakeridge, --- S. Ct. ---, 2018 WL 1143822 (2018), on March 5, 2018, the United States Supreme Court issued a unanimous decision, authored by Justice Kagan, affirming the Ninth Circuit’s decision to review the Bankruptcy Court’s determination of a mixed question of fact and law for clear error, rather than de novo. The decision concerned whether a particular creditor was a non-statutory “insider” of the Chapter 11 debtor following a transfer of a claim by an insider to a third party that  (favorably) impacted the ability of the debtor to confirm a cram-down plan. read more
February 28, 2018 | Posted by Andrew Pollack | Permalink

On Feb. 27, 2018, the Supreme Court handed down a unanimous opinion, authored by Justice Sotomayor, resolving a Circuit split over the interpretation of Section 546(e) of the Bankruptcy Code, the “safe harbor” provision that shields specified types of payments “made by or to (or for the benefit of)” a financial institution from avoidance on fraudulent transfer grounds.

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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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