Business Bankruptcy Issues

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Business Bankruptcy Issues Recent Developments

Amendments To The Federal Bankruptcy Rules, Including Rule 2019, To Take Effect December 1, 2011

Almost every year, changes are made to the set of rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The changes address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. There are seven amendments to the national bankruptcy rules this year. Some affect bankruptcy cases involving individuals but major revisions have been made to Rule 2019, which governs disclosures by ad hoc committees and groups of creditors or equity security holders in Chapter 11 business bankruptcy cases and in Chapter 9 municipality cases. All of the new amendments will take effect on December 1, 2011, barring unlikely action by Congress.

Read All About It. A copy of the Advisory Committee’s report, together with a redline of the new rule amendments, is available by following the link in this sentence. The report also includes the Advisory Committee’s notes on each new or amended rule.

Significant Revisions to Rule 2019: Controversy Resolved? Over the past several years, Rule 2019, the national bankruptcy rule regarding disclosure by unofficial committees and groups of hedge fund and other investors, has been the subject of much litigation and a number of conflicting court decisions, including opposite views from different bankruptcy judges in Delaware. Follow the link in this sentence for a collection of previous posts on the blog discussing those past decisions and the controversy surrounding old Rule 2019.

In an attempt to put the controversy to rest, the Advisory Committee drafted, and the Supreme Court has approved, a new Rule 2019, which will take effect on December 1, 2011. It requires disclosure in Chapter 11 and Chapter 9 cases by unofficial committees, groups and entities consisting of or representing multiple creditors or equity security holders that are (1) acting in concert to advance common interests, and (2) not composed entirely of affiliates or insiders of each other, and which take a position before the court or solicit votes on confirmation of a plan.

The new rule focuses on the nature and purpose of the committee or group, rather than how it names itself. In contrast, old Rule 2019 covered entities and committees, leading to disputes over whether a self-designated "group" had to make disclosures. Also dropped from the final version of new Rule 2019 was language from the initial proposed rule amendments that would have permitted the court to require disclosure of the amount paid for a disclosable economic interest, another topic of much prior controversy. 

Disclosable Economic Interest. Amended Rule 2019 is built around the defined term "disclosable economic interest," which is defined to mean the following:

Any claim, interest, pledge, lien, option, participation, derivative instrument, or any other right or derivative right granting the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest.

Required Disclosures Under Rule 2019. A covered group or committee will be required to file a verified statement disclosing facts and circumstances on the following topics listed in new Rule 2019(c):

  • The group or committee’s formation;
  • Any entity’s employment and the party at whose instance the employment was arranged;
  • Each member’s and entity’s name, address, and nature and amount of their disclosable economic interest;
  • For each member of a group or committee claiming to represent any entity beyond the group’s members, the date of acquisition by quarter and year of each disclosable economic interest, unless acquired more than a year before the bankruptcy petition was filed; and
  • Where applicable, a copy of any instrument authorizing the entity, group, or committee to act on behalf of creditors or equity security holders.

If any material changes have occurred since the group or committee’s last statement, a supplemental statement must be filed whenever the group or committee takes a position before the court or solicits votes on confirmation of a plan.

Consequences of Non-Compliance With Rule 2019. A party in interest or the court on its own motion can determine whether there has been any failure to comply with the new Rule 2019’s requirements. If so, the court may refuse to permit the group or committee from being heard in the case and/or hold invalid any authority, objection, or plan votes made or obtained by the non-complying entity, group or committee, as well as grant any other appropriate relief.

Other Business Bankruptcy Rule Amendments. In addition to Rule 2019, three of the other new amendments directly impact business bankruptcy cases.

  • New Rule 1004.2 applies in Chapter 15 cross-border bankruptcy cases. It requires that any petition for recognition of a foreign proceeding under Chapter 15 of the Bankruptcy Code state the center of the debtor’s main interests (aka, "COMI"), as well as each country in which a foreign proceeding involving the debtor is pending. The rule is designed to help identify whether the foreign proceeding is a foreign main or nonmain proceeding.
  • Amended Rule 2003(e) will require the United States Trustee or designee to file a statement specifying the date and time to which any Section 341(a) meeting of creditors has been adjourned. This rule amendment was included to be sure that creditors who did not attend a meeting of creditors could learn when the continued meeting will take place, information that sometimes was known only to those who attended the original meeting.
  • Rule 6003, discussed in this prior blog post on the 2007 rule amendments, has been amended to clarify that although a court cannot, absent immediate and irreparable harm, enter an order during the 21 days after a petition has been filed on certain matters, including employment of professionals, it can enter an order after those first 21 days that grants relief effective as of a date prior to entry of the order, i.e., as of the petition date.

Rule Amendments for Individual Bankruptcy Cases. The balance of the new rule amendments involve cases in which the debtor is an individual.

  • Amended Rule 3001(c), governing proofs of claim, requires in an individual debtor’s case that an itemized statement of interest, fees, expenses or other charges be filed with the proof of claim. If a security interest is claimed in the debtor’s property, a statement must also be included giving the amount required to cure any default. If the property involved is the debtor’s principal residence, the proof of claim must attach, and give the information required by, a new official form addressing this rule change, and also must include information related to any escrow account. Penalties for non-compliance can include barring the claimant from presenting the omitted information in any contested matter or adversary proceeding, and an award of reasonable attorney’s fees and expenses caused by the failure.
  • New Rule 3002.1, related to claims secured by a Chapter 13 debtor’s principal residence, sets forth a number of additional requirements when the claim is provided for under Section 1322(b)(5) of the Bankruptcy Code. The new rule details required information related to post-petition fees, expenses, and charges, as well as procedures for determining those amounts and the final cure amount.
  • Rule 4004(b) has been amended to allow a party in interest, under certain circumstances, to seek an extension of time to file an objection to a debtor’s discharge after the deadline for filing such objections to discharge has already expired.

Updated Official Forms. As mentioned, some of the pending amended rules will require revisions in official bankruptcy forms. You can find the proposed revised forms, which will be formally released on December 1, 2011 (unless Congress surprises us and prevents the amendments from taking effect), by following the link in this sentence.

Conclusion. For business bankruptcy professionals, and companies and investors involved in Chapter 11 bankruptcy cases, the most important change to the Federal Rules of Bankruptcy Procedure this year is the newly revised Rule 2019. However, several of the other amendments also will impact Chapter 11 cases, and all are worthy of note.

Business Bankruptcy Issues Recent Developments

Summer 2011 Edition Of Bankruptcy Resource Now Available

The Summer 2011 edition of the Absolute Priority newsletter, published by the Bankruptcy & Restructuring group at Cooley LLP, of which I am a member, has just been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy and insolvency topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

  • Recent case law on the impact of a confirmed plan on a second bankruptcy filing by a successor to the original debtor;
  • The Second Circuit’s recent decision limiting "gifting" in a Chapter 11 plan;
  • The reach of the Section 546(e) securities transaction safe harbor defense in avoidance actions; and
  • An update on litigation by the Madoff trustee against feeder funds and its broader implications.

This edition also reports on some of our recent representations, including the Chapter 11 bankruptcy case for our client Metropark USA, Inc., and our work for official committees of unsecured creditors in Chapter 11 cases involving major retailers and others. Recent committee cases include Blockbuster, Orchard Brands, ArchBrook Laguna Holdings, Signature Styles, Claim Jumper Restaurants, OTC Holding Corp., Urban Brands, Mervyn’s Holdings, Sierra Snowboard, Trade Secrets, Mt. Diablo YMCA, and Pacific Metro, among others.

I hope you find the latest edition of Absolute Priority to be of interest.

Business Bankruptcy Issues Recent Developments

First Published Court Of Appeals Opinion Issued Answering Whether Trademark Licenses Are Assignable In Bankruptcy

It’s been a long wait, but we finally have a published decision from a U.S. Court of Appeals answering whether a trademark license is assignable in bankruptcy without the licensor’s consent. On July 26, 2011, the U.S. Court of Appeals for the Seventh Circuit issued an opinion in In re: XMH Corp., written by Circuit Judge Richard A. Posner, and a copy of the opinion is available by following the link in this sentence. Until now, the closest we had come to a Court of Appeals decision on this issue was an unpublished affirmance by the U.S. Court of Appeals for the Ninth Circuit of the district court’s decision in In re N.C.P. Marketing Group, Inc., 337 B.R. 230 (D. Nev. 2005). For more on the Ninth Circuit case  including the Supreme Court’s interest in one of the issues in the case, take a look at these earlier posts on the blog, here, here, and here.

The Context. The dispute that led to the Seventh Circuit’s decision arose in the Chapter 11 bankruptcy case of Hartmarx Corporation (which later changed its name to "XMH"). One of its subsidiaries, Simply Blue ("Blue"), which was also in bankruptcy, sold its assets in a Section 363 sale to two buyers (the "purchasers").

  • Among Blue’s assets was an executory contract with Western Glove Works ("Western"), which Blue sought to assign to the purchasers. Western objected, arguing that the contract could not be assigned because it was a sublicense to Blue of a trademark licensed by Western. The bankruptcy court agreed with Western and XMH appealed. 
  • That’s when things got a little complicated. While XMH’s appeal was pending, Blue and the purchasers amended the contract. Under the amendment, title to the contract was left with Blue but the purchasers assumed all of Blue’s contractual duties, together with the right to receive all fees to which Blue was otherwise entitled. The bankruptcy court approved the amendment and Western appealed from that decision.
  • In the meantime, the district court reversed the bankruptcy court’s original decision holding that the contract could not be assigned, effectively allowing the original contract to be assigned. Western appealed the district court’s decision and that brought the case to the Seventh Circuit. 

The Court’s Decision. After disposing of a few jurisdictional issues springing from the complicated way the case had played out, the Seventh Circuit reached the merits. The Court first looked to Section 365(c)(1) of the Bankruptcy Code, which limits assignment of an executory contract if "applicable law" permits the non-debtor party to the contract to refuse to accept performance from an assignee, regardless of whether the contract prohibits or restricts assignment. In the XMH Corp. case, the contract did not prohibit or restrict assignment (but neither did it permit it). Western argued that "applicable law" was trademark law because the contract stated that Western was a licensee of a trademark for "Jag Jeans." The Court noted that "Jag" is a federally registered trademark, although "Jag Jeans" is not.

The Court held that if the contract included a trademark sublicense when XMH attempted to assign the contract, it was not assignable. This was true regardless of whether federal trademark law applied, any particular state’s trademark law applied, and also, apparently, even if Canadian law applied (Western is a Canadian company). The Seventh Circuit put it this way:

None of this matters, though, because as far as we’ve been able to determine, the universal rule is that trademark licenses are not assignable in the absence of a clause expressly authorizing assignment. Miller v. Glenn Miller Productions, Inc., 454 F.3d 975, 988 (9th Cir. 2006)(per curiam); In re N.C.P. Marketing Group, Inc., 337 B.R. 230, 235-36 (D. Nev. 2005); 3 McCarthy on Trademarks § 18:43, pp. 18-92 to 18-93 (4th ed. 2010).

After describing how consumers rely on a trademark as an indicator of a good’s quality, the Court explained that if a trademark owner (or licensee sublicensing the mark) allows another company to produce the trademarked goods, it

will not want the licensee to be allowed to assign the license (that is, sublicense the trademark) without the owner’s consent, because while the owner will have picked his licensee because of confidence that he will not degrade the quality of the trademarked product he can have no similar assurance with respect to some unknown future sublicensee.

Because this is the normal reaction of a trademark owner, it makes sense to make the rule that a trademark license is not assignable without the owner’s express permission a rule of contract law–what is called a ‘default’ rule because it is the rule if the parties do not provide otherwise (as they are allowed to do).

Ultimately, the Seventh Circuit held that although the contract included a trademark sublicense, the sublicense had expired and the parties had not designated the contract, post-expiration, as a trademark sublicense. Further, the Court held that the balance of the contract was only a service agreement and not an implied trademark license. The Court also refused to go down the "dark path" of whether a contract could be a trademark license for some purposes but not others. As such, with no actual trademark sublicense in existence at the time of assignment, the default rule discussed above did not apply and the executory contract could be assigned. The Seventh Circuit affirmed the lower courts’ decisions approving the assignment of the contract as amended.

An IP Attorney’s Observations. For the perspective of an in-house intellectual property attorney on the Seventh Circuit’s decision, including helpful links to the trademark and the parties’ underlying agreements, you may find Pamela Chestek’s discussion of the case on her "Property, intangible" blog, interesting reading.

Good News For Trademark Owners. With the Seventh Circuit’s XMH Corp. decision, we now have two Courts of Appeals (the Seventh and Ninth Circuits) on record holding that trademark licenses are not assignable in bankruptcy absent the consent of the trademark owner or sublicensor. While the full force of a decision depends on whether other courts follow its holding, trademark owners will likely find the guidance provided by this decision meaningful, especially given the Seventh Circuit’s observation that the non-assignability of trademark licenses is "the universal rule." That said, how the decision is viewed in other circuits, particularly in Delaware and New York where many large Chapter 11 cases are filed, remains to be seen, so stay tuned. 

Business Bankruptcy Issues Recent Developments

Bankruptcy Judge’s Free Online Research Binder Now Updated

I have posted in the past about the helpful research binder that former Judge Randall J. Newsome of the United States Bankruptcy Court for the Northern District of California had made available on the Bankruptcy Court’s website. Although Judge Newsome has retired from the bench, fortunately Judge Charles Novack, also of the U.S. Bankruptcy Court for the Northern District of California, has picked up the mantle and has continued to update the research binder. Judge Novack recently released the updated version covering cases through Volume 436 of Bankruptcy Reports. Follow the link in this sentence to access the entire binder in PDF format, which is capable of being searched using a key word or phrase.

The primary focus of the research binder is on Ninth Circuit law, as Judge Novack presides in the Northern District of California, but some out-of-circuit law is also included. The disclaimer Judge Novack includes puts the binder’s use in context:

I have the privilege of continuing Judge Randall Newsome’s research binder. Although this represents the aggregation of his 22 years of research (and my own several months of work), I make no claim as to its current level of accuracy. Some of the cases may well have been superseded, reversed or otherwise no longer be good law. I, like Judge Newsome, post it with the intention of assisting those who are researching bankruptcy matters within the 9th Circuit. Users should consider it a first, but not final research tool, and should cite check all cases before relying on them.

With those caveats, and with Judge Novack’s continuing work, the binder remains a good place to start when researching bankruptcy law issues in Ninth Circuit.

Business Bankruptcy Issues Recent Developments The Financially Troubled Company

Spring 2011 Edition Of Bankruptcy Resource Now Available

The Spring 2011 edition of the Absolute Priority newsletter, published by the Cooley LLP Bankruptcy & Restructuring group, of which I am a member, has just been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy and insolvency topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

  • Recent case law on third-party releases in bankruptcy plans;
  • Treatment of make-whole and no-call provisions in bankruptcy;
  • Breach of fiduciary duty claims against managers of insolvent Delaware LLCs; and
  • Ordinary course of business defense to preferences.

This edition also reports on some of our recent representations, including the successful Chapter 11 reorganization of our client, retailer Crabtree & Evelyn, Ltd., and our work for official committees of unsecured creditors in Chapter 11 bankruptcy cases involving major retailers and others. Recent committee cases include Blockbuster, Orchard Brands, Ultimate Electronics, Claim Jumper Restaurants, OTC Holdings, Urban Brands, Mervyn’s Holdings, Sierra Snowboard, Trade Secrets, Mt. Diablo YMCA, and Pacific Metro, among others.

I hope you find the latest edition of Absolute Priority to be of interest.

Business Bankruptcy Issues Recent Developments

Blast From The Past: Website Provides Quick Access To Older Bankruptcy Code Sections

Thanks to Professor Robert Lawless of the University of Illinois College of Law, also of the Credit Slips blog, you can now save yourself from combing through dusty old books to find the language of Bankruptcy Code provisions going back as far as 1980. Need to find how Section 547 was worded prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), or interested in tracing the evolution of exceptions to the automatic stay of Section 362? Then navigate over to the BankrLaw Project site. Once there, select a date and the site will provide you with the Bankruptcy Code in effect at that time, free of charge. This promises to be a very useful research tool when the text of older Bankruptcy Code provisions is in issue.

Business Bankruptcy Issues Recent Developments

Fall 2010 Edition Of Bankruptcy Resource Now Available

The Fall 2010 edition of the Absolute Priority newsletter, published by the Cooley LLP Bankruptcy & Restructuring group, of which I am a member, has just been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter or to register to receive future editions. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

This edition also reports on some of our recent representations, including the successful Chapter 11 reorganization of our client, retailer Crabtree & Evelyn, Ltd., and our work for official committees of unsecured creditors in Chapter 11 bankruptcy cases involving major retailers and others. Recent committee cases include Eddie Bauer, Uno Restaurant Holdings, Ritz Camera, Filene’s Basement, BT Tires Group, Gottschalk’s, G.I. Joe’s, Trade Secret, Pacific Metro, Mervyn’s Holdings, The Ski Market, and Michael Anthony Management, among others.

I hope you find the latest edition of Absolute Priority to be of interest.