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Business Bankruptcy Issues Recent Developments

A Closer Look At Recent Trends At The Intersection Of Intellectual Property And Bankruptcy Law

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I had the honor of being a panelist at the American Bankruptcy Institute‘s 22nd Annual Southwest Bankruptcy Conference last Friday, speaking on current developments in business bankruptcy. My part of the discussion focused on recent intellectual property and bankruptcy law trends. Among the topics I covered were:

  • the direction U.S. Courts of Appeals have been taking over the last few years in protecting trademark licensees from the harsh effects of rejection of their trademark licenses by a licensor in bankruptcy,
  • whether Section 365(n) of the Bankruptcy Code protecting (non-trademark) IP licensees applies in cross-border cases under Chapter 15 of the Bankruptcy Code, and
  • recent Congressional efforts to reform how IP is treated in bankruptcy cases.

For those who couldn’t attend the conference, you can follow the link in this sentence for a copy of the article I prepared on these topics. I hope you find it of interest.

Image Courtesy of Flickr by BusinessSarah

Business Bankruptcy Issues

Cooley GO: A Great New Resource For Entrepreneurs And Their Companies

Cooley Go

Cooley GO

Earlier this month, Cooley LLP launched Cooley GO, a terrific new resource center for entrepreneurs with businesses at all stages of the growth cycle. Cooley GO is a mobile-friendly microsite that provides a wide range of free legal and business content covering formation, financing, building a team, working with directors and advisors, intellectual property, M&A, IPOs and more.

I have the pleasure of being a contributor to Cooley GO. A new post I wrote called “A Key Customer Filed for Bankruptcy: Should You Keep Doing Business With Them?” is now on the Cooley GO site. To read the article just follow the link in the prior sentence.

Be sure to explore the full Cooley GO site. Among other tools, Cooley GO provides entrepreneurs with the ability to:

I hope you find Cooley GO to be a helpful resource for your business.

Business Bankruptcy Issues

Why Creditors Can’t Afford To Ignore Objections To Bankruptcy Claims

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It’s been several years since I last posted about objections to bankruptcy claims, and the topic is so important to creditors that it’s time to revisit it.

File And Forget? When a customer or other party with which you do business files bankruptcy, it’s important to file a proof of claim on time by the deadline (also known as a “bar date”) set in the case. Once you do, however, months or even years can go by before you hear anything more about your claim from the debtor, bankruptcy trustee, or other party responsible for reviewing claims and ultimately distributing money to creditors. In fact, the only thing you may hear about your claim for quite some time is an offer to purchase it made by one or more claims buyers.

No News Is Not Necessarily Good News About Your Claim. Unfortunately, the passage of time may lull you into thinking that no objection will ever be filed to your claim. However, the urgency of reorganizing a debtor’s business or liquidating its assets means that the claim objection process is typically left until near the end of the bankruptcy case, often after a plan of reorganization has been confirmed in a Chapter 11 case. Likewise, a Chapter 7 trustee may put off filing claim objections until it’s clear there will be money to distribute to unsecured creditors. As a result, an objection to your claim may be brought long after you filed it, often years later.

Is That An Objection To My Claim? When an objection is filed, it may not always be obvious at first that it applies to your claim. In smaller cases the title of a claim objection may list your name as the target of the objection, but don’t count on that in larger cases. In cases with hundreds or thousands of claims, the debtor or other estate representative will almost certainly combine an objection to your claim with others. Instead of a pleading specifically mentioning your name in its title or text, the objection will likely have the word “omnibus” in it and may have a name such as “Notice of Debtors’ One Hundred Fifteenth Omnibus Objection To Claims (No Liability)” or some similarly titled document.

  • Be careful: the format of these objections can be a trap for the unwary. Buried within the objection’s many pages of text and attached exhibits may be just a few lines, often only in a list or chart, identifying your claim as one of dozens to which an objection has been filed.
  • Given the passage of time, the debtor may have sold — and changed — its name, so the name of the debtor listed on the objection may not even be familiar to you (although the old name should appear near the new one).
  • When filed, the objection may assert (1) your claim should be zero, (2) the amount doesn’t square with the debtor’s books and records and should be less, or (3) your claim should be reclassified as some lower priority claim (for example, from a priority claim to a general unsecured claim).
  • Whatever the objection’s name or format, the point is the same: ignore it at your peril. If you don’t file a formal response with the bankruptcy court by the deadline set in the objection (and there’s always a deadline) your claim could be disallowed in its entirety. If that happens, you will recover absolutely nothing from the bankruptcy estate.

Stay Vigilant To Protect Your Rights. Protecting your rights in a bankruptcy case requires diligence and timely action — often no easy task. In mega bankruptcy cases, literally thousands of pleadings can be filed during the course of a case. Many will be served, whether in paper or electronic form, and yet only a few may be directly relevant to you or your claim. For this reason, it’s critical that you or your attorney keep track of the pleadings served in a bankruptcy case. The bottom line is, if you see anything that looks like a claim objection, review all of the pages carefully, including the exhibits. If an objection to your claim is filed, you have to respond on time and defend your claim. Otherwise, despite your efforts earlier in the case to file a timely proof of claim, you may well find yourself with a disallowed, and worthless, claim.

Image Courtesy of Flickr by Sam Howzit

Business Bankruptcy Issues The Financially Troubled Company

A New Way Of Looking At Termination On Bankruptcy Contract Clauses

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Image Courtesy of NobMouse

Ken Adams, Professor Adrian Walters, and I recently collaborated on an article about the ubiquitous “termination on bankruptcy” or ipso facto clauses in contracts. The article was just published by the American Bar Association’s Business Law Section in its online publication, Business Law Today. It’s titled “Termination-On-Bankruptcy Provisions: Some Proposed Language” and is available by following the link. You can also download a PDF of the article.

The article offers proposed language for agreements governed by U.S. law and also by foreign law. I have posted on termination on bankruptcy provisions in the past, discussing how U.S. bankruptcy law usually — but not always — renders those clauses unenforceable. This new article recognizes those limitations but suggests proposed model language to address settings in which the provision is enforceable, together with an analysis of the specific language proposed.

I hope you find the article of interest.

Business Bankruptcy Issues Recent Developments

Patent Reform Bill, And Its Revisions To Bankruptcy Code Section 365(n), Stalls In The Senate

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Image courtesy of Matt H. Wade

In December 2013 I wrote about the Innovation Act, H.R. 3309, a bill focused on patent infringement litigation and other patent law reforms that passed the House of Representatives on a bipartisan basis. My interest in the bill was because it would make the most sweeping changes to the treatment of intellectual property licenses in bankruptcy since the 1988 enactment of Section 365(n) of the Bankruptcy Code. Follow the link in this sentence for a full discussion of the proposed law.

Proposed Changes In The House-Passed Innovation Act. To bring you up to date, here are the four major changes the Innovation Act would make to Section 365(n)’s protections for IP licensees.

  • First, it would extend Section 365(n)’s protections, including through an amendment to Section 101(35A) of the Bankruptcy Code’s definition of intellectual property, to licenses of trademarks, service marks, and trade names.
  • Second, rejection of a trademark, service mark, or trade name license would not relieve the trustee (or presumably a debtor in possession in a Chapter 11 case) of the debtor’s contractual obligations to monitor and control the quality of a licensed product or service.
  • Third, it would expand the payments that a licensee would have to continue to make to the estate, if it elected to retain its license rights, to include not only “royalty” payments but also “other” payments under the license.
  • Fourth, it would amend Section 1522 of the Bankruptcy Code to make Section 365(n) directly applicable to Chapter 15 cases, providing that if a foreign representative rejects or repudiates an IP license, the licensee would be entitled to elect to retain its IP rights under Section 365(n).

If enacted and signed by the President, the Innovation Act’s revisions would apply as of the date of enactment to pending and future cases.

After House Passage, Action On A Senate Version. After passing the House, the Innovation Act moved to the Senate and was referred to the Senate Committee on the Judiciary. Senator Patrick Leahy, the Senate Judiciary Committee Chairman, had introduced a similar bill, S. 1720, the “Patent Transparency and Improvements Act of 2013.”  As introduced, that bill would have made many of the same changes to Section 365(n) and the Bankruptcy Code definition of intellectual property (specifically, adding in coverage of trademarks as discussed above) as in the House-passed Innovation Act. The Senate bill would have also addressed the applicability of Section 365(n) in Chapter 15 cases, but by amending a different section of Chapter 15.

The Legislation Hits A Roadblock. The Senate Judiciary Committee held a hearing on S. 1720, and a number of discussions and negotiations involving companies affected by patent litigation ensued. However, those efforts reached an impasse and on May 21, 2014, Senator Leahy announced:

We have been working for almost a year with countless stakeholders on legislation to address the problem of patent trolls who are misusing the patent system. This is a real problem facing businesses in Vermont and across the country.

Unfortunately, there has been no agreement on how to combat the scourge of patent trolls on our economy without burdening the companies and universities who rely on the patent system every day to protect their inventions.  We have heard repeated concerns that the House-passed bill went beyond the scope of addressing patent trolls, and would have severe unintended consequences on legitimate patent holders who employ thousands of Americans.

I have said all along that we needed broad bipartisan support to get a bill through the Senate. Regrettably, competing companies on both sides of this issue refused to come to agreement on how to achieve that goal.

Because there is not sufficient support behind any comprehensive deal, I am taking the patent bill off the Senate Judiciary Committee agenda.  If the stakeholders are able to reach a more targeted agreement that focuses on the problem of patent trolls, there will be a path for passage this year and I will bring it immediately to the Committee.

We can all agree that patent trolls abuse the current patent system.  I hope we are able to return to this issue this year.

Conclusion. Senator Leahy’s statement makes clear that the focus of this legislation is on patent litigation reform, not bankruptcy and IP licenses. The fate of the legislation will depend on whether the interested parties can reach agreement on those patent issues. However, the stalling of the patent legislation also means the bankruptcy provisions, at least for now, will stay on hold; it seems unlikely the bankruptcy provisions would move forward in legislation separate from the overall patent reform effort. Stay tuned, but the odds now seem considerably lower that these changes to the treatment of IP licenses in bankruptcy will be enacted.

Business Bankruptcy Issues Recent Developments

What The U.S. Supreme Court’s Unamimous Decision In A Homestead Exemption Case Says About The Power Of Bankruptcy Courts In Business Cases

 

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It seems that most bankruptcy decisions by the U.S. Supreme Court involve individual debtors, and the Supreme Court’s latest opinion is no exception. Even though the decision is not in a business bankruptcy case, it examines the bankruptcy court’s powers under Section 105(a) of the Bankruptcy Code. Section 105(a) is commonly invoked in business bankruptcy cases to prevent business disruption through “first day” motions and orders, as part of a Section 363 sale of assets free and clear of liens, and in granting other relief to facilitate a debtor’s reorganization. This fact makes the Supreme Court’s most recent decision, discussed below, of interest for both individual and business bankruptcy cases.

The Key Holding: Exempt Property Really Is Exempt. In an unamimous decision issued on Tuesday, March 4, 2014 in Law v. Siegel (click on the link for a copy of the opinion), the Supreme Court held that a bankruptcy court cannot surcharge a debtor’s homestead exemption to pay for the Chapter 7 trustee’s administrative expenses, even if those expenses were incurred as a result of the debtor’s fraudulent misrepresentations.

  • The bankruptcy court had surcharged the debtor’s $75,000 California homestead exemption to cover the trustee’s fees and costs, but the Supreme Court reversed. It held that Bankruptcy Code Section 522(k)’s explicit language that a debtor’s exempt property “is not liable for payment of any administrative expense” (other than in inapplicable and specific circumstances detailed in that section), precludes a bankruptcy court from invoking either its authority under Section 105(a) to issue orders to “carry out” the provisions of the Bankruptcy Code, or its inherent sanctioning powers, to surcharge the debtor’s homestead exemption.
  • In short, where Congress has declared a debtor’s exempt property off limits, a bankruptcy court cannot not use Section 105(a) to override that specific statutory limitation.

Implications For Business Bankruptcy Cases?  As a business bankruptcy blog, the focus here is on whether the Supreme Court’s decision tells us anything about a bankruptcy court’s powers outside the exempt property context (especially since corporate debtors cannot claim exemptions). At first blush, the Supreme Court’s decision is, of course, a direct rejection of the use of Section 105(a), at least to impose a surcharge on exempt property. But does the decision otherwise weaken a bankruptcy court’s powers under Section 105(a) and its inherent powers?

An insight into the answer seems to come at the very end of the decision. After acknowledging that its holding imposes a heavy financial burden on the Chapter 7 trustee, and could lead to inequitable results in other cases, the Supreme Court addressed what else a bankruptcy court could do to respond to a debtor’s misconduct:

Our decision today does not denude bankruptcy courts of the essential “authority to respond to debtor misconduct with meaningful sanctions.” Brief for United States as Amicus Curiae 17. There is ample authority to deny the dishonest debtor a discharge. See §727(a)(2)–(6). (That sanction lacks bite here, since by reason of a postpetition settlement between Siegel and Law’s major creditor, Law has no debts left to discharge; but that will not often be the case.) In addition, Federal Rule of Bankruptcy Pro­cedure 9011—bankruptcy’s analogue to Civil Rule 11—authorizes the court to impose sanctions for bad-faith litigation conduct, which may include “an order directing payment. . . of some or all of the reasonable attorneys’ fees and other expenses incurred as a direct result of the viola­tion.” Fed. Rule Bkrtcy. Proc. 9011(c)(2). The court may also possess further sanctioning authority under either §105(a) or its inherent powers. Cf. Chambers, 501 U. S., at 45–49. And because it arises postpetition, a bankruptcy court’s monetary sanction survives the bankruptcy case and is thereafter enforceable through the normal proce­dures for collecting money judgments. See §727(b). Fraud­ulent conduct in a bankruptcy case may also subject a debtor to criminal prosecution under 18 U. S. C. §152, which carries a maximum penalty of five years’ imprisonment.

But whatever other sanctions a bankruptcy court may impose on a dishonest debtor, it may not contravene express provisions of the Bankruptcy Code by ordering that the debtor’s exempt property be used to pay debts and expenses for which that property is not liable under the Code.

Conclusion. The Supreme Court’s discussion of the range of actions a bankruptcy court could take to address debtor misconduct helped narrow the decision to situations where a bankruptcy court uses Section 105(a) in contravention of express statutory language. The Supreme Court’s effort to make clear that, outside of those settings, bankruptcy courts possess a broad range of authority, specifically including under Section 105(a), Bankruptcy Rule 9011, and its inherent powers, seems to reinforce, rather than weaken, the power of bankruptcy courts. That makes this decision important for individual — and business — bankruptcy cases.

Image courtesy of Flickr by Kyle Rush

Business Bankruptcy Issues Recent Developments

Winter 2014 Edition Of Bankruptcy Resource Now Available

I hope you had a wonderful holiday season and Happy New Year everyone.

To start the new year off, the Winter 2014 edition of the Absolute Priority newsletter, published by the Bankruptcy & Restructuring group at Cooley LLP, of which I am a member, has 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. 

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

  • An Eleventh Circuit ruling that indirect benefits from a Subchapter S election can constitute reasonably equivalent value for fraudulent transfer purposes;
  • The Ninth Circuit’s decision permitting recharacterization claims; and
  • A recent Seventh Circuit decision on the validity of a cross-collateralized real estate lien.

It also reports on some of our recent representations, including for official committees of unsecured creditors in Chapter 11 cases involving major retailers and others, and our work for Chapter 11 debtors. Recent committee cases include Mervyn’s Holdings, Appleseed’s Intermediate Holdings, and Underground Energy, among others. Recent debtor representations include Cylex (now Immunology Partners), IntraOp Medical (now MC Liquidation), and Nirvanix.

I hope you find the latest edition of Absolute Priority to be of interest. Please note that this will be the final issue in newsletter format, as soon our group will be providing future insights through a new Absolute Priority blog, in addition to this In The (Red) blog. Stay tuned for more details.