The Bottom Line:

The Bankruptcy Appellate Panel for United States Court of Appeals for the Ninth Circuit (the “BAP”) affirmed that a creditor failed to show cause to change the vote of a purchased claim in order to prevent the “cramdown” of a plan in a single-asset bankruptcy.  Windmill Durango Office, LLC, LLC v. Beal Bank USA, BAP No. NV-11-1728-DKiPa, 2012 Bankr. LEXIS 2947 (9^th Cir. BAP 2012).  This decision is notable as one of the first appellate decisions to address the circumstances under which a bankruptcy court has discretion to prevent a creditor from changing its prior vote, under Rule 3018(a) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), to block the confirmation of a chapter 11 reorganization plan.

Why the Case is Interesting:

There is little appellate guidance on whether a creditor may purchase a claim in order to change a vote and block confirmation of a plan.  This decision affirms that changing a vote requires a showing of “cause” and that seeking to impede confirmation of a plan opposed by the purchasing creditor may not satisfy the cause requirement.

The Bottom Line:

Intellectual property licenses are often crucial components of licensees' businesses, and despite Congress's adoption of section 365(n) of the Bankruptcy Code and its provision that licensees can continue to use licensed intellectual property after a license is rejected by a debtor, a licensor's fall into bankruptcy still raises serious concerns on behalf of non-debtor licensees.  The Seventh Circuit, however, may have provided some comfort to licensees by more definitively limiting the ability of a debtor-licensor's rejection power and the ability to deprive non-debtor licensees of their right to continued use of licensed property. In Sunbeam Prods., Inc. v. Chicago Am. Manuf., LLC, the Seventh Circuit considered the effect on a trademark licensee of the rejection of the intellectual property license by the bankrupt licensor.  No. 11-3920 (7th Cir. July 9, 2012).  While section 365(n) provides that licensees of patents and copyrights can continue to use the intellectual property post-rejection, the statute is silent as to the treatment of trademarks.  The Seventh Circuit held that, despite pre-section 365(n) precedent from the Fourth Circuit (Lubrizol), rejection does not rescind or terminate the underlying agreement itself, and, therefore, the rights of licensees under the license remain intact post-rejection.

Why the Case is Interesting:

The Fourth Circuit's holding in Lubrizol rattled the intellectual property market, spurring Congress into action.  Despite the adoption of section 365(n), however, concerns have persisted over the ability of debtor-licensor to disrupt the ongoing business operations of non-debtor licensees by rejecting license agreements in bankruptcy, particularly with respect to the licensing of trademarks.  The Seventh Circuit's opinion (rejecting Lubrizol) puts trademark licensees on the same footing as other intellectual property licensees protected by section 365(n), despite Congress's omission of trademark licensees from the statute itself.  More broadly, the Court's characterization of the nature of a debtor's rejection power implies that section 365(n) may not even be necessary for licensees to continue to use intellectual property post-rejection. 

Channel 1 – Thorpe Insulation Addresses Insurer Standing to Object to Plan and Assignability of Insurance Contracts to Plan Trusts

Bottom Line:

Our first case discusses whether provisions of a chapter 11 plan were “insurance neutral” and, as such, whether insurers had the right to be heard in contesting the asbestos-liability channeling injunction of the plan.  The Ninth Circuit held that the lower courts improperly excluded the insurers from participating in the Chapter 11 case, finding that the insurers could be economically affected by the terms of the plan and the accompanying 524(g) injunction, and therefore enjoyed party-in-interest standing under Code section 1109(b) to object to both.  But, the decision also invalidates anti-assignment provisions in the insurance policies, holding that these provisions were preempted by section 541 of the Bankruptcy Code and thereby allowing the debtor to transfer its policy interest to the 524(g) trust.  Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), No. 10-56543, 2012 U.S. App. LEXIS 1272 (9th Cir. Jan. 24, 2012).

Why the Case is Interesting:

The question of what makes a 524(g) plan “insurance neutral” is of great interest to parties to asbestos-related bankruptcies, as it affects the degree of involvement insurers may have in the formulation of future claims resolution procedures.

Insurance contracts contain anti-assignment clauses in part to prevent insurers’ loss of control over the resolution of claims that they may be forced to pay in the future.  In affirming the lower courts’ holdings that such anti-assignment provisions are preempted and therefore unenforceable in bankruptcy, the Ninth Circuit threw its weight behind an emerging trend of ignoring these provisions when parsing questions of insurance neutrality.

Moreover, Thorpe serves as an important reminder that, even though a Code section such as 524(g) may contemplate that certain parties’ rights will be impinged upon in a plan of reorganization, that does not mean that such parties are without standing to challenge the nature and extent of such impingements.

Channel 2 – Federal-Mogul Allows Assignment of Insurance Policies Under Broader Preemption Analysis

Bottom Line:

Our second case – issued roughly two months after the Ninth Circuit’s decision in Thorpe – held that, as in Thorpe, a debtor’s insurance rights could validly be assigned to a section 524(g) asbestos trust.  However, in spite of its favorable acknowledgment of the Thorpe opinion, the Third Circuit predicated its decision in Federal-Mogul largely on the basis of its own precedent (particularly Combustion Engineering), and focused its preemption inquiry on a broader statutory reading of section 1123, in addition to section 541.  In re Federal-Mogul Global Inc., Nos. 09-2230 and 09-2231, 2012 U.S. App. LEXIS 8814 (3d Cir. May 1, 2012).

Why the Case is Interesting:

The holding in Federal-Mogul adds a different layer of analysis to the preemption of anti-assignment provisions under federal bankruptcy law by characterizing the assignment right as one inherently authorized in the formulation of a plan of reorganization.  Where Thorpe held that a debtor’s insurance policy rights become property of the estate not subject to nonbankruptcy limitations on transfer under section 541, Federal-Mogul added the reasoning that anti-assignment provisions are also preempted wherever they would otherwise prevent enforcement of such a plan.

Kramer Levin Naftalis & Frankel received a Turnaround Atlas Award Tuesday night for the firm’s work as debtor’s counsel for Saint Vincent Catholic Medical Centers of New York. The complex bankruptcy transaction was named “Healthcare Services Turnaround of the Year” at the annual awards gala in Chicago.