Earlier this week, the United States Supreme Court issued an opinion regarding appeals of orders denying relief from the automatic stay.  Generally, the automatic stay (section 362 of the Bankruptcy Code) prevents creditors from taking action against the debtor’s assets outside the bankruptcy process. In order to continue debt collection efforts, creditors can file a motion for relief from stay.

In Ritzen Group., Inc. v. Jackson Masonry LLC, No. 18-938, the Supreme Court considered the finality of a bankruptcy court order denying a motion for relief from stay and the time to appeal such an order.   In this case, a creditor did not appeal such an order until the end of the bankruptcy case.

In the unanimous opinion written by Justice Ginsburg, the Supreme Court affirmed the Sixth Circuit Court of Appeals and found that the creditor’s appeal at the end of the case was untimely because the 14 days within which to file an appeal ran from the day the order denying stay relief was entered.  Id. at 5.

The Supreme Court explained that “Orders in bankruptcy cases qualify as ‘final’ when they definitively dispose of discrete disputes within the overarching bankruptcy case.”  Id. at 1 (citation omitted).  The Court further reasoned that the bankruptcy “court’s order ended the stay-relief adjudication and left nothing more for the Bankruptcy Court to do in that proceeding.”  Id. at 12.

iPic-Gold Class Entertainment, Inc. (IPIC) has filed a Chapter 11 case in Delaware to sell its business through a “363” bankruptcy auction.

iPic is a Florida-based, publicly traded movie theater and restaurant company with 16 locations in 9 states that provide a “luxurious movie-going experience at an affordable price.” After achieving double-digit growth supported by its unique offering and market position, new market entrants and competitive pricing slowed iPic’s growth. But the company believes that its underlying business model remains strong, “bolstered by positive guest experience and loyalty.”

iPic is going forward with a “naked” auction at this time, with no stalking-horse bidder in hand. If a stalking-horse offer (e.g., opening bid) is presented before the auction, it may be possible to negotiate for typical stalking-horse protections such as expense reimbursements and break-up fees. iPic is seeking approval of a 90-day marketing process, with a proposed bid deadline of October 11, 2019 and closing by the first week of November. No minimum bid has been established. The company reports store-level EBITDA of $15.06 million for the year ended December 31, 2018, and $158.7 million in assets at book value.

NovaSom, Inc. has filed a Chapter 11 case in Delaware in order to sell its business through a “363” bankruptcy auction. We are providing you with information about the case that you can forward on if you have clients who may be interested in purchasing any of NovaSom’s assets.

NovaSom is a Maryland-based home sleep testing company. In 2010-2012, it developed a device, AccuSom, that sends sleep data wirelessly rather than requiring patients to return a device to a lab to download data. It is the only in-home sleep test available in the marketplace that provides patient support and next-day test results. Additional information is available here.

Between 2013 and 2017, orders for AccuSom grew 500%. The average sales price, however, dropped by nearly 30% due to market conditions and the general availability of home sleep testing providers. The company’s filings indicate that the significant cost of growing sales has thus far prevented NovaSom from reaching profitability.

At present, one entity, VirtuOx, has expressed interested in buying NovaSom’s assets for an estimated $5.3 million. The bid deadline for competing bidders is September 19, 2019 at 4:00 p.m (Certain qualifications must be met to qualify as a bidder).  If the company receives qualified, competing bids, the auction will be held on September 23, 2019 in Philadelphia, PA.  The sale hearing will be held two days later.

Stephanie Slater writes:

The United States Supreme Court granted certiorari to determine the applicable legal standard for holding a creditor in civil contempt when a creditor attempts to collect a debt that falls within an issued bankruptcy discharge order.  In Taggart v. Lorenzen, 139 S.Ct. 1795 (2019), the Court unanimously decided to adopt an “objective standard,” holding that a court has permission to issue civil contempt sanctions against a creditor where there is “not a fair ground of doubt” in determining whether the creditor’s conduct is lawful under the discharge order.  While holding a creditor in civil contempt for violating a bankruptcy discharge order is not litigated as frequently as other bankruptcy matters, the Supreme Court’s decision could have an effect on how creditors act in bankruptcy and will impact how courts interpret these types of contested issues.

Petitioner Bradley Taggart was a part owner of Sherwood Park Business Center.  The company and two other owners filed a lawsuit against Taggart in Oregon state court.  The lawsuit claimed that Taggart breached the Business Center’s Operating agreement, but Taggart filed for Chapter 7 bankruptcy before the trial began.  As is typical in the conclusion of a bankruptcy proceeding, the Federal Bankruptcy Court granted a discharge order releasing Taggart from liability for his pre-bankruptcy debts.

Oregon state court eventually entered a judgment against Taggart, which prompted Sherwood to seek attorney’s fees incurred after the Chapter 7 bankruptcy petition date.  A point of contention between the parties was whether Taggart “returned to the fray.” If Taggart did return to the fray, a discharge order would not cover post-petition attorney’s fees from pre-petition litigation.  If Taggart did not “return to the fray,” the bankruptcy discharge order would immunize collection of post-petition attorney’s fees that are the result of pre-petition litigation.

This was the beginning of a back and forth battle between Taggart and Sherwood.  Taggart went back to Federal Bankruptcy Court to argue that (1) he did not “return to the fray” in state court based on the definition set in In re Ybarra[1] and (2) that the court should take action and hold Sherwood in civil contempt for violating Taggart’s discharge order.  Ultimately, the court did not agree with either of Taggart’s arguments.  Taggart then appealed to Federal District Court. The court agreed with Taggart’s arguments and remanded the case to the Bankruptcy Court.

The Bankruptcy Court used a standard similar to strict liability and determined that it was appropriate to hold Sherwood in civil contempt.  The Bankruptcy Court decided that Sherwood should be held in civil contempt because Sherwood was “aware of the discharge” order and “intended the actions.”

Sherwood appealed and the Bankruptcy Appellate Panel decided to do away with the sanctions.  The Ninth Circuit agreed with the decision and used a subjective standard that if a creditor has a “good faith belief” that a discharge order “does not apply to the creditor’s claim,” they are not subject to contempt even if the creditor’s belief is unreasonable.

Discharge orders are not detailed or lengthy in nature, but they do have an important effect on creditors and the individual debtor.  Pursuant to §524(a)(2) of the Bankruptcy Code, a discharge order  “operates as an injunction” barring creditors from collecting on any of the debt that has been discharged under the order and §105 allows a court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”

Justice Breyer delivered the opinion and found it helpful to look at how civil contempt sanctions are used outside of bankruptcy.  In the past, the Court recognized that civil contempt is a severe remedy and that based on principles of fairness, a party should have explicit notice of what they can and cannot do before being held to the extremes of civil contempt.  This standard is generally an objective standard, and when there is a “fair ground of doubt” regarding the wrongfulness of the conduct, civil contempt is not appropriate.  According to the Court, these traditional civil contempt principles are easily transferrable to analyze issues surrounding bankruptcy discharge orders.

The Court first addressed its apprehensions with the Ninth Circuit’s “subjective standard.”  The Court was concerned it placed too much of an emphasis on states of mind that are difficult to prove which would ultimately force parties back into litigation, defeating the purpose of the discharge order.  Next, the Court rejected Taggart’s strict liability “awareness” and “intention” standard and doubted Taggart’s proposed “solution” for creditors to obtain an advance determination from the federal bankruptcy court as to whether the creditor’s debt was discharged.  The Court feared this would create more litigation, additional costs, and delays disadvantaging not only debtors, but creditors as well.

In a desire to strike a “careful balance” between the interests of debtors and creditors, the Court believed that an objective standard was appropriate.  Rooted in traditional principles of civil contempt, a court can use civil contempt sanctions on a creditor for violating a discharge order where there is not a “fair ground of doubt” as to whether the creditor’s conduct is lawful under the discharge order.

[1] In re Ybarra, 424 F. 3d 1018, 1027 (9th Cir. 2005).

Stephanie Slater is a summer associate, resident in the firm’s Wilmington office.

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.