This article is written by Elizabeth A. Patton and originally appeared on the Fox Advertising Law blog, https://advertisinglaw.foxrothschild.com

This week, the U.S. Supreme Court issued a decision in the Product Holdings, Inc. v. Tempnology, LLC N/K/A Old Cold LLC case previously blogged about here and here.  The issue in that case was whether, when a trademark owner/licensor files for bankruptcy, the licensee of the trademark can legally continue use of the mark or whether the trademark owner/licensor can reject its obligations under the licensing agreement and effectively prohibit the licensee’s continued use of the mark.  The Supreme Court decided 8-1 in favor of the former — i.e. that a bankrupt trademark owner/licensor cannot revoke a trademark licensee’s right to use the already-licensed mark.  This reverses what the First Circuit held and is more consistent with the exception Congress previously created for the licensing of patents and copyrights, where licensees of such intellectual property retain their rights even after a licensing agreement has been rejected by a bankrupt intellectual property owner.

In Monday’s opinion written by Justice Kagan, the Supreme Court found that the protections granted to bankrupt companies by Section 365 of the Bankruptcy Code do not extend this far and that a rejection of licensing obligations by a bankrupt trademark owner/licensor would breach the contract but would not constitute a rescission of the contract.  Justice Sotomayor concurred to point out that non-bankruptcy law could still impact individual cases and that other forms of intellectual property are still governed by different rules.  Justice Gorsuch dissented on the basis of the license agreement at issue having already expired.  Regardless of what happens next in this specific case, the Supreme Court’s ruling has implications for other cases across the country and an impact on future licensing disputes.

At the end of last week, Sinemia, a movie ticket subscription service, filed a Chapter 7 bankruptcy petition in Delaware, amidst multiple lawsuits and an investigation by the FTC.  The company, which permitted users to purchase monthly or yearly plans for movie passes, ended its operations effective immediately on Thursday, as announced on the company website.

One of the suits is a class action over an alleged scheme to pass hidden processing fees on to customers.  Another action was commenced by MoviePass, a competitor, which claims that Sinemia misappropriated patented elements of MoviePass’ business model.  And, while the subject matter of the FTC investigation is not public, it is feasible it could be related to the deceptive marketing practice claims of the afore-mentioned class action.

Ultimately, the financial threat of these lawsuits, together with the inability to raise funds and competition from other subscription services and movie theaters building similar purchasing plans, forced the company to shut down operations and pursue Chapter 7 bankruptcy.

In October of this year, Sears Holdings Corp and affiliated Debtors filed a Chapter 11 case in the U.S. Bankruptcy Court for the Southern District of New York in a case pending before Judge Drain. Since that time, the company has been reducing its debt and its physical footprint by closing stores.  After the bankruptcy was filed, Sears unsecured creditors began to claim that the Debtors’ former CEO & Chairman siphoned value away from Sears in a multitude of insider transactions.

store closingLast week, the Debtors brought suit against its former CEO, his hedge fund and other investors claiming that when Sears was declining, its controlling shareholder (who also served as its CEO & Chairman) transferred billions of dollars for “grossly inadequate consideration or no consideration at all.”

The Complaint brings claims for a variety of fraudulent transfers including actual and constructive fraudulent transfers under Section 548 of the Bankruptcy Code as well as fraudulent transfers under the New York Debtor and Creditor Law in addition to claims to recover illegal dividends and for breaches of fiduciary duties.  The Debtors claim that had these transfers not occurred, they would have had billions more available to pay claims of creditors and that jobs could have been saved.

For example, during the last several years, Sears engaged in a variety of asset transfers wherein it spun off some of its brands.  The Debtors claim that these asset transfers were part of a strategy put in place to strip out Sears’ most valuable assets for the benefit of the Defendants.

This case is reflective of common themes in bankruptcy cases and resulting bankruptcy litigation and will be interesting to follow.  A copy of the Complaint can be found here, and Law360 also provided a detailed summary of the case.

Additional developments have transpired in the the Imerys Talc bankruptcy proceedings since Imerys commenced an adversary proceeding in the Chapter 11 case against Cyprus Mines Corp. and Cyprus Amax Minerals Co. earlier this month over Cyprus’ right to use certain insurance policies in the defense of talc-related asbestos lawsuits.

On March 20, 2109, Cyprus went on the offensive by filing a motion seeking standing to pursue a temporary restraining order and injunction, arguing that the automatic stay that currently only protects Cyprus from the litigation of hundreds of pending asbestos lawsuits should extend to Cyprus as well.

The granting of this motion, Cyprus argued, would prevent further financial harm to Imerys and its bankruptcy estate.  For example, without an automatic stay, Cyprus would pass on any defense and judgment costs in the pending suits to the Imerys bankruptcy estate through the filing of administrative expense claims.   Cyprus noted in the motion that Cyprus and Imerys have an “identity of interest,” stemming from Imerys’ agreement to assume and pay any talc-related liabilities incurred by Cyprus.

The subject of the lawsuits against the two entities relate to the harm caused by asbestos allegedly contained in Johnson & Johnson’s baby powder, of which Imerys talc was a component.

The deadline to object to the Cyprus motion falls on April 3, 2019 with a hearing date still to be determined.

 

 

As a follow-up to our recent post about the Imerys Talc bankruptcy proceedings (the chapter 11 cases filed by a supplier of talc to cosmetic and other companies, like Johnson & Johnson), last week the Imerys Debtors brought suit in their Chapter 11 cases against two affiliated coal companies.

The new adversary proceeding relates to the ownership of insurance policies with proceeds estimated in the hundreds of millions of dollars.  The Debtor claims that pursuant to an agreement entered into in 1992, it owns the policies despite that the policies previously provided coverage to the coal mining companies (Cyprus Mines Corp & Cyprus Amax Minerals Co) between 1961 and 1986.

Prior to the Debtors’ filing suit, the Cyprus entities filed an emergency motion in the Debtors’ bankruptcy case seeking relief from the automatic stay to use the insurance policies and proceeds to cover their own costs and legal fees related to approximately 700 pending and future lawsuits in which plaintiffs claim that talc contained asbestos and caused cancer.  Generally, the automatic stay (section 362 of the Bankruptcy Code) prevents creditors from taking action against the debtor’s assets.

Before filing its chapter 11 case, Imerys had been involved in the Cyprus lawsuits and had been defending & indemnifying Cyprus.  In Cyprus’s emergency motion, the Cyprus entities claim that the Debtors’ bankruptcy filing was a “surprise” and that the any liability imposed on Cyprus in these lawsuits rests with the Debtors.  In the new adversary Complaint, the Debtors seek injunctive and declaratory relief that (1) the Debtors own all of the rights to the insurance policies and (2) the automatic stay prohibits the Cyprus companies from accessing the proceeds of such policies.

As these issues are just taking shape, we will continue to monitor them.  Insurance policies are often at the center of various bankruptcy litigation matters, including directors and officers liability and fiduciary claims, and accordingly, this case may result in new precedent and decisions out of the Delaware Bankruptcy Court that is relevant to our practice more broadly.  Stay tuned.

Earlier this week, the U.S. Court of Appeals for the Second Circuit revived 88 fraudulent transfer cases that were consolidated on appeal.  In those actions, the trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC sought to recover billions of dollars in funds transferred out of the U.S. to foreign investors, called feeder funds. In re Picard, 17-2992(L) (2d Cir. Feb. 25, 2019).

moneyThe feeder funds then transferred the funds to other foreign investors, resulting in hundreds of appellees.  On appeal, the Second Circuit was considering whether “where a trustee seeks to avoid an initial property transfer under § 548(a)(1)(A) [with actual intent], either the presumption against extraterritoriality or international comity principles limit the reach of § 550(a)(2) such that the trustee cannot use it to recover property from a foreign subsequent transferee that received the property from a foreign initial transferee.”  Id. 3-4.

During the proceedings in the courts below, the U.S. Bankruptcy Court for the SDNY had dismissed the trustee’s adversary proceedings finding that the Trustee was prevented from recovering this property.  The Bankruptcy Court’s decision was following a decision from the U.S. District Court for the SDNY.  On appeal, the Second Circuit disagreed with these lower court decisions and held that “neither doctrine bars recovery in these actions.”  Id. at 5.

The Second Circuit focused on the initial transfers of the funds by which the feeder funds extracted profits from accounts based in the U.S., rather than the subsequent transfers of the funds that occurred outside the U.S.  This decision gives future trustees broader reach to recover property transferred out of the U.S. and it will be interesting to see decisions interpreting this case.

Effective February 1, 2019, a number changes to the local rules of the Delaware Bankruptcy Court became effective.  Practitioners in the jurisdiction should be sure to review the new rules as there are a number of revisions to motion practice, filings, and the calculation of deadlines. 

 A few notable changes include:

·   Shortened Notice for Motons: Motions may now be filed 14 days before a hearing (down from 18) unless the Federal Rules of Bankruptcy Procedure or the court’s local rules state otherwise.  See Del. Bankr. L.R. 9006-1(c)(i).

·   Service of Objection and Replies Eliminated: There is no longer a requirement that objections to a motion or replies to an objection, must be “served so as to be received” by the applicable deadline.  See Del. Bankr. L.R. 9006-1(c)(ii) and 9006-1(d).

·   Motion for a Late Reply Can Be Filed Without Motion to Shorten Notice:  The court will now consider motions to file a late reply at the hearing on the underlying motion.  There is no longer a requirement to file a motion to shorten notice with the motion to file a late reply.  See Del. Bankr. L.R. 9006-1(d).

·   Requirements for Motions to Shorten Notice:  A motion to shorten notice must be filed with an averment by movant’s Delaware Counsel that a reasonable effort was made to notify the debtor, the United States Trustee, any official committee, and any trustee whether such parties object or consent to the relief sought, or the basis why the movant did not make that effort.  See Del. Bankr. L.R. 9006-1(e).

·   7 Day Period for Filing Summonses:  A completed summons must be filed within 7 days of service.  See Del. Bankr. L.R. 7004-2.

·   Shortened Page Limit for Briefs:  Page limits for opening and answering briefs have been reduced to 30 pages (from 40) and reply briefs are down to 15 pages (20 before) unless the Court orders otherwise.  See Del. Bankr. L.R. 7007-2.

·   Filing Plan Supplements: Plan supplements must be filed at least 7 days prior to the earlier of the balloting deadline, or the deadline to object to confirmation of the proposed plan (unless otherwise ordered by the Court).  See Del. Bankr. L.R. 3016-2 and 3017-2; and

·   Retention of Professionals: 21 days has replaced the term “adequate notice time” as the minimum notice period for the hearing on retention applications.  See Del. Bankr. L.R. 2014-1(b).

Yesterday, Imerys Talc America and two affiliated entities filed for chapter 11 bankruptcy protection in the Delaware Bankruptcy Court (Case No. 19-10289). The case is pending before Judge Silverstein.

baby powderThe first day affidavit filed in support of the Debtors’ chapter 11 petitions reveals that the Debtors are in the business of mining, processing and distributing talc.  They supply it to third-party manufactures fur use in personal care and cosmetic products sold to consumers, such as baby powder, makeup and soap.  The Debtors filed their bankruptcy cases because they have been sued by thousands of plaintiffs alleging personal injuries as a result of exposure to talc.  In particular, these plaintiffs allege that they have been diagnosed with ovarian cancer, other gynecological diseases, and respiratory cancers as a result of exposure to talc.

Although the Debtors’ claim that talc is safe, more than 14,000 individuals have sued them for alleged injuries and the Debtors claim that they do not have the financial ability to defend these cases or to fund litigation and settlements.  Historically, the Debtors were the sole supplier of talc to Johnson & Johnson and have been routinely named as a co-defendant in cases brought against J&J related to alleged talc-related injuries.

We will continue to follow these cases as they progress and the impact on the pending litigation claims becomes more clear.  Here is some current news coverage on the Debtors’ recent filings from Reuters and Bloomberg.

The New Jersey Law Journal recently published an article discussing the breadth and extent of bankruptcy court jurisdiction as applied by the Third Circuit Court of Appeals.  The article discusses three cases from last year: (i) Phila. Entm’t & Dev. Partners v. Dep’t of Revenue, 879 F.3d 492 (3d Cir. 2018), (ii) IMMC Corp. v. Erickson, 909 F.3d 589 (3d Cir. 2018), and (iii) In re Tribune Media Co., 902 F.3d 384 (3d Cir. 2018).

The article reminds us that the “Third Circuit held that an individual can impliedly consent to the statutory and constitutional authority of the bankruptcy court,” and that “[practitioners] should carefully evaluate the pros and cons of submitting to bankruptcy court’s jurisdiction.”

Read the full article here.

A recent concurring opinion from a Tenth Circuit decision highlighted the importance of careful pleading in bankruptcy court to ensure a creditor’s prudential standing on appeal.

In Slovak Republic v. Loveridge (In re EuroGas, Inc.), the United States Bankruptcy Court for the District of Utah reopened a chapter 7 bankruptcy case to allow the trustee to investigate the ownership of certain interests in talc deposits located in the Slovak Republic that were undisclosed in the initial bankruptcy proceeding.  It was alleged that the talc claims were property of the estate and were being unlawfully held by the debtor’s successor entity. After investigation, the trustee entered into a settlement with the successor entity and ultimately abandoned any remaining interest that the estate may have had in the talc claims. The bankruptcy court authorized the abandonment over the objection of an unsecured creditor, the Slovak Republic.

The Slovak Republic appealed but the Tenth Circuit Bankruptcy Appellate Panel (“BAP”) ruled that it lacked prudential standing and dismissed the appeal. The Slovak Republic then appealed to the Tenth Circuit.

In its per curiam decision, the Tenth Circuit reasoned that because prudential standing is not a jurisdictional limitation, courts can assume without deciding that prudential standing elements are met.  As a result, the Tenth Circuit declined to decide the issue of prudential standing and simply assumed that the Slovak Republic was a person aggrieved.  Circuit Judge Bacharach, however, wrote a concurrence to address the Slovak Republic’s prudential standing to appeal. Judge Bacharach explained that the Tenth Circuit’s requirements for standing in bankruptcy appeals exceed the jurisdictional requirements of Article III.  In bankruptcy appeals, an appellant must demonstrate that it is aggrieved by a bankruptcy court’s order.  In other words, the appellant’s rights must be impaired by the order.

Accordingly, the Slovak Republic’s prudential standing turned on whether the Slovak Republic was “aggrieved” by the bankruptcy court’s order abandoning the talc claims.  Judge Bacharach reasoned that this standard should be considered in light of the Slovak Republic’s status as an unsecured creditor.  Unsecured creditors generally have a direct pecuniary interest in a bankruptcy court’s orders disposing of property of the estate because such orders directly affect the creditors’ ability to receive payment of their claims.

Notably, Judge Bacharach also found that the BAP erred in relying on the bankruptcy court’s findings of fact on the merits of the trustee’s abandonment in deciding the issue of prudential standing.  In his view, the appellant’s material allegations must be accepted as true and construed favorably toward the appellant. Judge Bacharach concluded that the Slovak Republic had adequately alleged facts which, if accepted as true, supported the assertion that the estate’s unsecured creditors would have obtained more money through competitive bidding on the talc claims than they did through the trustee’s settlement. Therefore, the Slovak Republic had prudential standing to appeal.

Read the full opinion here.