Recent Developments

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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 Some of the cases may well have been superseded, reversed or otherwise no longer be good law.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.

Recent Developments The Financially Troubled Company

New Ruling Finds Important Protection For Managers Of Insolvent Delaware LLCs

Derivative Claims Against Directors Of An Insolvent Delaware Corporation. With its 2007 decision in North American Catholic Educational Programming, Inc. v. Gheewalla, et al., 930 A.2d 92 (Del. 2007), the Delaware Supreme Court held that directors of an insolvent Delaware corporation could be sued derivatively by creditors for breaches of fiduciary duty. To read that decision, click on the case name in the prior sentence. For a discussion of the case, you may find this earlier post of interest: "Delaware Supreme Court Addresses, For The First Time, Whether Creditors Can Sue Directors For Breach Of Fiduciary Duty When The Corporation Is Insolvent Or In The Zone Of Insolvency."

What About LLCs? The Gheewalla decision clarified that creditors of a Delaware corporation that is insolvent (but not one only in the "zone of insolvency") can assert derivative claims against the corporation’s directors, but a question remained: Would that same ruling extend to managers of Delaware limited liability companies, the LLC equivalent of a corporation’s directors. Although a number of commentators and some court decisions assumed that it would, a recent Delaware Chancery Court decision has answered the question, somewhat surprisingly, with a decisive "no."

New Chancery Court Ruling. In the new decision, CML V, LLC v. Bax, C.A. No. 5373-VCL (Del.Ch. Nov. 3, 2010), the Delaware Chancery Court undertook an extensive analysis of the Delaware LLC Act and also examined the issue more broadly.

  • The Court held that under the literal terms of the Delaware LLC Act, specifically 6 Del. C. section 18-1002, only LLC members and their assignees have standing to bring derivative claims because the LLC Act provides that only they are "proper plaintiffs." The LLC Act does not give an insolvent LLC’s creditors standing to bring derivative claims. The situation is different for creditors of insolvent corporations because the governing Delaware corporation statutes do not impose exclusive derivative standing provisions.
  • Although the Chancery Court acknowledged that arguments could be made for allowing creditors to bring derivative actions against managers of an insolvent LLC, the Court saw no reason to set aside the literal reading of the LLC Act’s standing provision. The Court also noted that the Delaware Limited Partnership Act has a similar exclusive standing provision.

For a full discussion of the decision, including a link to the opinion itself, be sure to read Francis G.X. Pileggi’s excellent post entitled "Chancery Bars Derivative Claim of Creditor Against Insolvent LLC, Based on LLC Act."  

Impact On An Insolvent LLC’s Creditors. So where does this new decision leave creditors of an insolvent Delaware LLC?

  • Under the Chancery Court decision, unlike directors of a Delaware corporation, managers of a Delaware LLC are not be subject to derivative claims by creditors if the entity becomes insolvent. 
  • If the decision is followed by other courts — specifically including bankruptcy courts where claims involving managers of bankrupt LLCs may more often be litigated — then an insolvent LLC’s creditors will not have access to potential D&O type claims. Instead, those creditors will have to rely on contractual remedies against the LLC to protect themselves. 

Stay Tuned. As noted, the bankruptcy court is often the forum where insolvency-related matters are litigated. Should these claims be pursued outside of the Chancery Court, it will be interesting to see how other courts interpret the Delaware LLC Act’s provisions. 

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.

Business Bankruptcy Issues Recent Developments

Third Circuit Decision Suggests Another Way For Trademark Licensees To Protect Against License Rejection In Bankruptcy

Trademark licensees have long faced the serious risk of losing all license rights to a trademark if the licensor files bankruptcy and rejects the trademark license as an executory contract. However, a recent decision from the U.S. Court of Appeals for the Third Circuit in the In re: Exide Technologies case may give some trademark licensees new hope of retaining their license rights even in bankruptcy.

Limited protection of Section 365(n). It can be devastating for a licensee to lose access to licensed intellectual property. Often a licensee will build in licensed technology into its products or develop an entire business line or brand around a licensed trademark.  Recognizing how important in-licensed IP can be, in 1988 Congress added Section 365(n) of the Bankruptcy Code, giving licensees of certain types of intellectual property special protections in bankruptcy. These protections allow licensees to retain their rights to the licensed intellectual property – but there’s a catch. The Bankruptcy Code’s definition of “intellectual property” includes, among other things, patents, patent applications, copyrights, and trade secrets, but unfortunately for trademark licensees, it does not include trademarks. Follow the link in this sentence for more on Section 365(n)’s licensee protections other than in the trademark area.

Trademark licensee’s special risk. With no special protection, the trademark licensee faces the risk of having its license, usually considered to be an executory contract, rejected by the trademark owner in bankruptcy. If the trademark owner decides that the license is now unfavorable and a better deal can be had under a new license agreement with someone else, the trademark owner likely will reject the existing trademark license agreement and, generally, terminate the licensee’s rights to use the mark. The enforceability of phase-out provisions, which allow a licensee to continue to use a mark for a limited time period after a license is terminated, is unclear. Regardless, most courts hold that the trademark licensee eventually will lose its rights to the trademark following rejection. In some cases the ability to re-license can be of great value to a trademark owner in bankruptcy, and thus to its creditors, but it puts the licensee at substantial risk. For more on this topic, you may find this earlier blog post on the trademark licensee’s predicament of interest.

The Third Circuit’s Exide Decision. In a June 1, 2010 decision in In re: Exide Technologies (a copy of the decision is available by clicking on the preceding link), the Third Circuit examined a series of agreements, determined to constitute one integrated agreement, pursuant to which Exide Technologies sold an industrial battery business, and licensed certain trademark rights, to EnerSys. When Exide filed Chapter 11 bankruptcy in 2002, it sought to reject the agreement as an executory contract. The bankruptcy court granted Exide’s motion to reject the agreement, and that decision was affirmed by the district court. On appeal to the Third Circuit, that court held that under New York law, which governed the agreement, once a party has substantially performed, a later breach by that party does not excuse performance. The Third Circuit further held that EnerSys had substantially performed the agreement in the more than ten years since it was signed, rendering the agreement no longer an executory contract. 

  • The Third Circuit held that EnerSys had substantially performed by paying the full purchase price and operating under the agreement for ten years, as well as assuming certain liabilities related to the business EnerSys purchased when it obtained the trademark license.
  • The Court of Appeals also held that EnerSys’s obligation not to use the trademark outside of the licensed business was not a material obligation because it was a condition subsequent and, in any event, did not relate to the agreement’s purpose — the transfer of the industrial battery business in return for a $135 million payment.
  • Likewise, the Third Circuit concluded that a quality standards provision was minor because it related only to the standards of the mark for each battery produced and not to the transfer of industrial battery business that was the agreement’s purpose.
  • In addition, an indemnity obligation that had subsequently expired, and a further assurances obligation where no remaining required cooperation was identified, were held not to outweigh the factors supporting a finding of substantial performance.

A Concurring Opinion On The Effect Of Rejection. Judge Ambro wrote a concurring opinion to address the bankruptcy court’s conclusion that rejection of a trademark license left EnerSys without the right to use the Exide mark. In his concurrence, Judge Ambro analyzed the history of Section 365(n), disagreed that the exclusion of trademarks from its reach created a negative inference that rejection of a trademark license should be tantamount to termination, and stated that courts should be able to prevent the extinguishment of all rights upon rejection. As Judge Ambro wrote in his conclusion:

Courts may use § 365 to free a bankrupt trademark licensor from burdensome duties that hinder its reorganization. They should not—as occurred in this case—use it to let a licensor take back trademark rights it bargained away. This makes bankruptcy more a sword than a shield, putting debtor-licensors in a catbird seat they often do not deserve.

It will be interesting to see whether other courts follow Judge Ambro’s views or continue to hold that trademark licensees whose licenses have been rejected no longer retain any rights to use the trademarks at issue.

A New Argument For Trademark Licensees? For trademark licensees looking to preserve their rights in the face of a motion to reject a trademark license, the Exide Technologies decision may provide some additional support.

  • However, before breathing a sigh of relief, trademark licensees should remember that the decision involved a series of agreements that had been largely performed over the decade since they were signed. In many ways, the trademark licensee was just a part of what the Third Circuit found was, chiefly, an agreement to sell a business division. In essence, although the trademark itself was not sold, the trademark license rights went along with the business. 
  • Typically, trademark licenses more often arise not in connection with a sale of a business but as a separate, often stand-alone, license of certain trademarks for commercial exploitation by the licensee. In that context, it may be far more difficult to establish that the agreement has been substantially performed such that it is no longer an executory contract.

Still, for those situations in which the argument is available, the Third Circuit’s decision in Exide Technologies underscores that all trademark licenses are not executory contracts and, at least in some cases, the trademark licensee might just get to keep the license rights after all, even in the face of a rejection motion in bankruptcy. 

Business Bankruptcy Issues Recent Developments

Official Bankruptcy Forms Revised To Reflect April 1, 2010 Dollar Amount Adjustments

As discussed in an earlier post called "On The Rise: Bankruptcy Dollar Amounts Will Increase On April 1, 2010," various dollar amounts in the Bankruptcy Code and related statutory provisions were increased for cases filed on or after April 1, 2010. Now several official bankruptcy forms have been revised to reflect these new dollar amounts.

Remember, the increased dollar amounts reflected on these forms apply only to cases filed on or after April 1st.