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Amanda Blaske is an Associate in the firm’s Boston office. Her practice focuses primarily on commercial law and corporate reorganization through representation of debtors, creditors, bond trustees, and bond insurers. Prior to joining Mintz Levin, Amanda served as Law Clerk to the Honorable Frank J. Bailey, Chief Judge of the United States Bankruptcy Court for the District of Massachusetts.

In the recently decided case, Mission Product Holdings, Inc. v. Tempnology, LLC, the United States Court of Appeals for the First Circuit took a hardline position that trademark license rights are not protected in bankruptcy. Bankruptcy Code section 365(n) permits a licensee to continue to use intellectual property even if the debtor rejects the license agreement. However, the Bankruptcy Code definition of “intellectual property” does not include trademarks, leading a majority of courts to conclude that trademark rights fall outside the scope of licensee rights under section 365(n). The First Circuit’s decision marks a split from the Seventh Circuit’s decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012), which held that a trademark licensee retains basic contractual rights to use a debtor’s trademarks post-rejection.

In Tempnology, Mission entered into a co-marketing and distribution agreement with Tempnology (the Debtor). Under the agreement, Mission was granted: (i) an exclusive right to distribute certain manufactured products; (ii) a non-exclusive perpetual license to use Tempnology’s intellectual property other than its trademarks; and (iii) a non-exclusive, non-transferable, limited license to use Tempnology’s trademark and logo. After filing its chapter 11 petition, Tempnology moved to reject the co-marketing and distribution agreement. Mission objected and, relying on section 365(n), asserted that it retained its rights under the agreement, including the use of the intellectual property license, its exclusive product distribution rights and its right under the trademark license.

The Bankruptcy Court held that section 365(n) only protected Mission’s non-exclusive intellectual property rights and did not preserve Mission’s exclusive distribution rights or the trademark license. Mission appealed.

The Bankruptcy Appellate Panel for the First Circuit (BAP) agreed that the exclusive distribution rights were not preserved under section 365(n). The BAP also agreed that section 365(n) does not apply to trademarks because the definition of “intellectual property” under the Bankruptcy Code does not include trademarks. However, the BAP did not find that rejection of the agreement extinguished all of Mission’s rights under the trademark license. Instead, the BAP followed the Seventh Circuit’s ruling in Sunbeam and found that “because section 365(g) deems the effect of the rejection to be a breach of contract, and a licensor’s breach of a trademark agreement outside the bankruptcy context does not necessarily terminate the licensee’s rights, rejection under section 365(g) likewise does not necessarily eliminate those rights.” Thus, the BAP held that Mission’s post-rejection rights were governed by the terms of the agreement and non-bankruptcy law.

The First Circuit agreed that neither exclusive distribution rights nor trademarks were considered “intellectual property” under the Bankruptcy Code and thus neither were covered by section 365(n). Accordingly, section 365(n) did not preserve Mission’s exclusive distribution rights or its right to use the trademarks.

The First Circuit went on to reject the BAP’s support of Sunbeam, finding that the Sunbeam approach would impose a burden on a debtor, as the trademark owner, to monitor the quality of the trademark despite having rejected the contract. The Court noted that Sunbeam rested on the notion that it is possible to free the debtor from any continuing performance obligations under a trademark license even while allowing the licensee to continue to use the trademark. The Court reasoned that trademarks, unlike patents, were public-facing messages that required monitoring and control to maintain the goodwill associated with the trademark. Sunbeam’s approach would allow Mission to retain the use of Tempnology’s “trademarks in a manner that would force the Debtor to choose between performing executory obligations arising from the continuance of the license or risking the permanent loss of its trademarks, thereby diminishing the value….” Such a restriction runs afoul of section 365(a) and invites further degradation of a debtor’s fresh start options. Accordingly, the First Circuit concluded that trademark licenses are unprotected from court-approved rejection, and Mission retained no rights post-rejection.

The First Circuit joins the majority of courts that have found a trademark licensee only has a claim for damages upon rejection of its license, despite a recent trend of cases protecting trademark licensee’s rights in bankruptcy. This decision marks a split among the circuits, which may ultimately be resolved by Congressional amendment to the definition of intellectual property in the Bankruptcy Code, or by the Supreme Court.

The filing of a bankruptcy case puts in place an automatic injunction, or stay, that halts most actions by creditors against a debtor. But can a creditor violate the automatic stay by not acting? The Tenth Circuit recently addressed the issue in WD Equipment, LLC v. Cowen (In re Cowen), adding to the split of authority on the issue.

In WD Equipment, the debtor filed for bankruptcy just after creditors repossessed two of his vehicles. After the creditors refused to return the vehicles, the debtor sought to have the creditors held in contempt for willful violations of the automatic stay. The bankruptcy court agreed and ordered the creditors to immediately turn over the vehicles.  When the creditors failed to comply, the debtor commenced an adversary proceeding for violations of the automatic stay.  The bankruptcy court ruled that failing to return the vehicles violated the automatic stay and imposed actual and punitive damages. The district court affirmed the bankruptcy court’s stay ruling, which followed the majority rule (applicable in the Second, Seventh, Ninth and Eighth Circuits) that the act of passively holding onto an asset constitutes exercising control over it and thus violates the automatic stay.

The Tenth Circuit disagreed, viewing the majority rule as resting on “practical” or “policy” considerations rather than “faithful adherence to the text.” Reasoning that the language of the statute is “plain”, the Tenth Circuit found that the automatic stay enjoins an “act”, which means to “take action” or “do something” to obtain control of the estate property. It does not cover “the act of passively holding onto an asset.”

The Tenth Circuit noted that the best, albeit flawed, argument for the majority rule is to read Bankruptcy Code sections 362 and 542 together. Section 542, which requires any entity in possession of estate property to turn it over to the trustee, would likely be enforced through the automatic stay provision. However, the Tenth Circuit dismissed this argument, because there is no textual link between sections 542 and 362. Adopting the minority rule, the Tenth Circuit concluded that the automatic stay only bars affirmative acts to gain possession of estate property. Thus, the creditors’ failure to the turnover the trucks did not violate the automatic stay.

Given the plain language of the statute, it’s difficult to disagree with the Tenth Circuit’s reasoning that the automatic stay only prohibits actions, not inactions (“an act to obtain possession of property of the estate,” “an act to create, perfect or enforce a lien,” “an act to collect, assess, or recover a claim”). However, did the debtor even need to assert a stay violation to obtain possession of the vehicles? Section 542 places an affirmative duty on creditors to turn over estate property. Thus, the debtor could have commenced a turnover action to obtain possession of the vehicles, given that the redemption period had not expired. Nevertheless, the automatic stay can be a powerful tool for debtors, and creditors should be aware of what actions, or inactions, constitute a violation.

 

In SGK Ventures, LLC, the Bankruptcy Court for the Northern District of Illinois ordered that the secured claims of two entities controlled by insiders of the debtor be equitably subordinated to the claims of unsecured creditors.

The debtor (Keywell), a metal recycling company, had a long-standing practice of distributing nearly all of its net income to its members through either special or tax distributions. In 2007 and 2008, Keywell distributed approximately $43.3 million and $29.3 million, respectively, to its members. In late 2008, Keywell found itself in extreme financial distress, eventually tripping a liquidity covenant with its senior lender. Continue Reading Insider Loans Equitably Subordinated