This blog publishes articles and updates focused on bankruptcy law, restructuring matters, creditor and debtor considerations, court decisions, and procedural developments that affect businesses and individuals navigating financial distress.

Content includes practical analysis of case outcomes, regulatory changes, and emerging trends, as well as perspectives from legal practitioners on how bankruptcy and insolvency issues are addressed in real-world scenarios.

November 2007

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Recent Developments

How The Credit Crunch May Affect Corporate Debt Refinancings And Bank Lending

The Economist has two new articles on how the current troubles in the credit markets may impact the broader economy. The first is on the topic of "Business and the Credit Crunch." After discussing how several private equity buyout deals have unraveled, it offers an interesting observation:

What happens to private equity may be a leading indicator of how the crisis in the financial system will affect the rest of the business world, both because private-equity deals are so dependent on large amounts of debt, and because many of the shrewdest judges of corporate value work for private-equity funds. The number of new private-equity deals has plunged with the financial crisis, and nobody expects activity to pick up again soon. The collapse of deals suggests that the business climate has changed sharply.

While the article stops short of forecasting a recession in the United States, it notes that $160 billion of leveraged loans will come due in 2008 and "refinancing them may be a struggle in today’s financial markets." As one analyst commented, a severe recession — if it were to happen — could push the default rate on corporate bonds as high as 20%.

A second article focuses on the capital needs of commercial and investment banks as a result of recent and predicted write-downs. The open question is what impact these reductions in capital will have on future lending, in particular if banks seek to maintain capital ratios in the 10% range often seen. One prediction: write-downs through next year could reduce lending by as much as $2 trillion.

What does all this mean for business bankruptcy? A lot will depend on how long the credit crunch lasts and how widespread its impact extends.

  • It’s been almost five months since early signs first emerged of a turn in the buyout debt market that presaged the credit crunch and few are ready to predict when it will end.
  • Many insolvency professionals believe a significant increase in Chapter 11 bankruptcy filings is coming, even without a recession.
  • If the economy falls into an actual recession, the number of defaults on corporate bond issuances and other debt would rise dramatically.

With most economists still predicting that the U.S. economy will slow but not dip into recession, the most interesting question may be what would the default picture look like in such a low growth economy. These Economist articles suggest it may not be a pretty sight. 

Business Bankruptcy Issues Recent Developments

Assumption Of Trademark Licenses In Bankruptcy: An Update On The N.C.P. Marketing Case

Over a year ago, I posted on a first of its kind decision in In re: N.C.P. Marketing Group, Inc., 337 B.R. 230 (D.Nev. 2005), in which the U.S. District Court for the District of Nevada held that trademark licenses are personal and nonassignable absent a provision in the trademark license to the contrary. Click here for a copy of the N.C.P Marketing Group decision and here to read the earlier post on the case.

The N.C.P. Marketing Court’s Analysis. In reaching its conclusion, the District Court held that under the Lanham Act, the federal trademark statute, a trademark owner has a right and duty to control the quality of goods sold under the mark:

Because the owner of the trademark has an interest in the party to whom the trademark is assigned so that it can maintain the good will, quality, and value of its products and thereby its trademark, trademark rights are personal to the assignee and not freely assignable to a third party.  

The trademark owner in that case, Billy Blanks of the Billy Blanks® Tae Bo® fitness program, successfully moved the court to compel rejection of the trademark license because under the "hypothetical test" analysis of Section 365(c)(1) of the Bankruptcy Code adopted by the U.S. Court of Appeals for the Ninth Circuit, contracts that cannot be assigned by the debtor without the nondebtor party’s consent cannot be assumed by the debtor either. (For a full discussion of these issues, take a look at this earlier post entitled "Assumption of Intellectual Property Licenses In Bankruptcy: Are Recent Cases Tilting Toward Debtors?")  

The Ninth Circuit Appeal. In December 2005, the parties appealed this decision to the Ninth Circuit. The appeal was fully briefed and had been scheduled for oral argument on November 5, 2007.

  • In July 2007, however, the N.C.P. Marketing Chapter 11 case was converted to Chapter 7. 
  • On October 24, 2007, the Chapter 7 trustee asked the Ninth Circuit to reschedule the oral argument because of a pending settlement in the case.
  • In response, the Ninth Circuit took the oral argument off calendar and directed the parties to move to dismiss the appeal if the settlement is approved by the Bankruptcy Court.

Still No Court Of Appeals Decision. If the settlement is approved, no Ninth Circuit decision will be issued. Instead, this case seems to be headed to an ending similar to that in In re Wellington Vision, Inc. (see this earlier post on the Wellington Vision case for more details), perhaps the only other bankruptcy decision to date to address this trademark issue. There, conversion of the case to Chapter 7 also led to a settlement without an appellate decision. With these recent developments in the In re N.C.P. Marketing case, trademark licensors and licensees will have to wait longer still for an appeals court decision on this important issue at the intersection of trademark and bankruptcy law.