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I Want to Use My Licensed Intellectual Property in My Company’s Chapter 11 Case by Assuming My Already Existing License, but My Lawyer Tells Me We Are in the Wrong State to Do It. Really?

Editor’s Note: Our good colleagues at Willamette Management Associates were kind enough to feature a Bryan Cave Article in its Spring 2016 issue of Insights.  If you are a bankruptcy attorney, then no doubt at some point you have had to deal with the mind-numbing exercise of determining when IP contracts or licenses (or government contracts, remember West Electronics, folks?) can be assumed, or assumed and assigned, or neither.  This analysis can, in some circuits, result in a potentially huge loss of value to debtors and creditors, a la Sunterra.  Your editorial team at the Bankruptcy Cave is annoyed that this problem, and this circuit split, has existed for over 30 years; but we are relieved to have an up-to-date Bryan Cave article on this.  The article also includes a discussion of how the ABI Commission is planning to solve this problem.  The Insights article by can be found by clicking here

Thanks again to Willamette for the opportunity, and the permission to cross post at the Bankruptcy Cave.

 

 

 

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It Ain’t Over ‘Til It’s Over: Circuits are Limiting the Use of Equitable Mootness

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Over the summer, four appellate court decisions addressed the doctrine of equitable mootness: In re Tribune Media Co., 799 F.3d 272 (3d Cir. 2015); In re One2One Commc’ns, LLC, No. 13-3410, 2015 WL 4430302 (3d Cir. July 21, 2015); In re Sagamore Partners, Ltd., No. 14-11106, 2015 WL 5091909 (11th Cir. Aug. 31, 2015); and In re Transwest Resort Props., Inc., 801 F.3d 1161 (9th Cir. 2015). These decisions indicate a trend away from the doctrine’s application, or at least the presumption that it should be determinative.

“‘Equitable mootness’ is a narrow doctrine by which an appellate court deems it prudent for practical reasons to forbear deciding an appeal when to grant the relief requested will undermine the finality and reliability of consummated plans of reorganization.” Tribune, 799 F.3d at 277–78.

Courts analyzing a claim of equitable mootness weigh two considerations: whether a confirmed plan has been substantially consummated and, if so, whether granting the relief requested in the appeal would fatally scramble the plan and/or significantly harm third parties who have justifiably relied on plan confirmation. Id.210-260 pdf

Equitable mootness encouraged debtors to hurry to consummate a plan when they knew an appeal was likely—if the plan was substantially consummated, the appeal of the confirmation order was presumed equitably moot. The scaling back of equitable mootness in these Circuits acknowledges that appellate courts have a “virtually unflagging obligation” to exercise the jurisdiction conferred upon them. One2One Commc’ns, 2015 WL 4430302, at *3 (internal citations omitted). It is important to note that while its application has been curtailed, the Third Circuit has made clear that it is not at this time willing to abandon the doctrine entirely (see concurring opinion of Judge Ambro in Tribune).

The take-away for creditors is this: appellate courts are more likely than ever to consider an appeal on its merits, even when the plan has been substantially consummated and third parties have relied thereupon. A claim of equitable mootness, on its own, may no longer be a death knell for aggrieved parties under the plan.

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Rolling the Dice on Collective Bargaining Agreements in Bankruptcy: A Lesson From In re Trump Entertainment Resorts, Inc.

In In re Trump Entertainment Resorts, Inc., a bankruptcy case currently pending before the United States Bankruptcy Court for the District of Delaware at Case No. 14-12103, the union at a famous Atlantic City casino made a bet on its ability to “hold up” the casino’s bankruptcy process and force hard line negotiations on an expired collective bargaining agreement. Ultimately, this gamble did not pay off, as the Honorable Judge Kevin Gross held that the casino was permitted to reject the expired collective bargaining agreement as an “executory contract” under the Bankruptcy Code. Put succinctly, the union’s negotiation tactics resulted in the loss of all benefits under the collective bargaining agreement for union members

While the holding in Trump is predicated on extreme factual circumstances, it serves as a reminder that parties seeking to “stiff-arm” negotiations may face serious repercussions, particularly in the context of bankruptcy.

Introduction

The circuits are split on the issue of whether a bankruptcy court retains jurisdiction to consider a motion to reject an expired collective bargaining agreement under 11 U.S.C. § 1113(c), or if a bankruptcy court lacks jurisdiction because the only duties following the expiration of a collective bargaining agreement are statutory (specifically, arising under the National Labor Relations Act (“NLRA”)), and thus, fall outside a bankruptcy court’s powers to accept or reject such agreements under section 1113. Weighing in on this issue, on October 20, 2014, Judge Gross entered an opinion (“Opinion”) in the Trump bankruptcy case finding that the Court retained jurisdiction to approve the rejection of an expired collective bargaining agreement under section 1113(c).

Facts

The Debtors, which include affiliates Trump Entertainment Resorts, Inc. and Trump Taj Mahal Associates, LLC (“Taj Mahal”) filed for bankruptcy protection on September 9, 2014, and shortly thereafter, on September 26, 2014, filed a motion (“Motion”) seeking to reject the collective bargaining agreement (“CBA”) between Taj Mahal and UNITE HERE Local 54 (“Union”) on the grounds that the affiliated Debtors would be forced to liquidate if the estates were not permitted to reject the CBA.

The Debtors operated two casinos, including the Taj Mahal Casino Hotel on the Atlantic City boardwalk. The Court characterized the Debtors’ financial situation as “desperate,” with EBITDA falling from $32 million to negative $6.1 million in 2013, and with the last twelve months EBITDA of negative $25.7 million as of June 30, 2014. Opinion, pp.2-3. At the time of the Motion, the Debtors only had enough cash to operate for two months and were unable to obtain debtor-in-possession financing.

Prior to bringing the Motion, the Debtors made various efforts to negotiate the terms of the CBA with the Union, which “stiff-armed” the Debtors and engaged in a “program of misinformation” designed to drive customers away from the Taj Mahal Casino. Opinion, p.7. The rejection of the CBA offered the Debtors a chance to save $14.6 million per year in payments thereunder, which, along with a handful of other concessions, would enable the Debtors to remain operational. Absent the rejection of the CBA, the Debtors would be forced to shut down by October 20, 2014, liquidate all assets, and lay off over 3,000 employees. Thus, the Debtors’ reorganization was “dependent on rejection of the CBA.” Opinion, p.8.

Analysis

When a collective bargaining agreement expires, the NLRA provides that an employer must maintain the status quo of the prior agreement while negotiating the terms of a new collective bargaining agreement. Under the Bankruptcy Code, a debtor’s ability to accept or reject a collective bargaining agreement is governed by section 1113. Courts have split on the issue of whether section 1113 applies “in a situation where a collective bargaining agreement has expired but the terms of the agreement remain in effect by virtue of the employer’s status quo obligations under the NLRA.” Opinion, p.10 (collecting cases).

In Trump, the Union argued that since the CBA had expired and the Debtors’ only continuing liabilities thereunder were statutory (e.g., imposed by the NLRA) rather than contractual, the expired CBA was no longer an “executory contract” that the Debtors were able to accept or reject under section 1113. The Court rejected the Union’s reading of section 1113, and found that both the language and legislative history of the provision established that the Court may enter an order rejecting the obligations under a CBA that continue in effect due to the NLRA in the wake of an expired collective bargaining agreement. Opinion, p.11. The Court also noted that the Union’s reading of section 1113 made “little sense,” and created an “illogical result” in which the Debtors would be forced to liquidate and all employees (including Union members) would lose their jobs. As such, the CBA would be of no effect.

Finally, the Court stated that there is little reason to distinguish between an expired and unexpired collective bargaining agreement, as the distinction would merely give labor unions the “power to hold up a debtor’s bankruptcy case.” Opinion, p.18. This “hold-up power . . . wholly ignores the policy and bargaining power balances Congress struck in Section 1113 and exalts form over substance.” Id. Given these factors, the Court found that it had jurisdiction under section 1113(c) to consider the Motion, which it ultimately granted.

Practical Implications

While the ruling in the Trump case seems to be driven largely by extreme facts (e.g., the reality of a complete shut-down absent the rejection of the CBA, and a Union that was unwilling to negotiate), the Opinion eliminates any distinction between an expired and unexpired collective bargaining agreement in bankruptcy. This holding may operate to shift the balance of negotiating power to debtors. In jurisdictions following this holding, bankruptcy may prove a particularly attractive option for a company that is heavily laden with union obligations and is facing difficult negotiations, as it enables the employer to short-cut its negotiation obligations under the NLRA, which otherwise requires the parties to negotiate to an impasse. Thus, parties seeking to agree to the terms of a collective bargaining agreement that is near expiration would be wise to factor this bankruptcy-effect on NLRA regulations as a risk in pushing off or shirking negotiation responsibilities.

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A debtor’s “increasing” burden of proof in the face of a motion for relief from stay

In Ryerson, the court held that a debtor’s burden of showing a successful reorganization changes depending on the timing in the case. The court found that early in the case, a debtor must show that reorganization is “plausible,” near the expiration of the exclusivity period a debtor must show that reorganization is “probable,” and, after expiration of the exclusivity period, the debtor must show reorganization is “assured.”

I. Short Factual Background.

In 2003, the debtor, a real estate developer, used funds from a line of a credit to purchase acres of contiguous lakefront land on Lake Coeur d’Alene in Idaho. The debtor’s obligations under the line of credit were restated and evidenced by three promissory notes secured by liens on the property. In 2013, the debtor defaulted on his obligations and filed for chapter 11 relief less than two weeks prior to the scheduled foreclosure sale for the property. Twenty-six days after the petition date, the lender requested relief from the automatic stay under Section 362(d)(2) to pursue foreclosure on the property.

II. Legal Discussion.

The court first examined the value of the property and the various claims against the property to determine if the debtor lacked equity. The court found that after taking into considering the lender’s claim, various judgment liens, and claims for unpaid real property taxes, the debtor lacked equity in the property.

The court cited United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76 (1988) for the proposition that after the party seeking relief from the automatic stay demonstrates the debtor lacks equity in the property, the burden then shifted to the debtor to show both a “reasonable possibility of successful reorganization within a reasonable time” and “if there is conceivably to be an effective reorganization, this property will needed for it.” Id. Although acknowledging that a relief stay hearing should not be converted into a confirmation hearing, the court stated that the “effective reorganization is a moving target, which is more difficult to attain as the chapter 11 case progresses” and that the “debtor’s burden increases from showing a successful reorganization is ‘plausible’ early in the case, to showing reorganization is ‘probable’ near the expiration of the exclusivity period, and finally to showing reorganization is ‘assured’ after the exclusivity period expires.” In re Ryerson, 2014 WL 642876, at *7 (quoting In re Sun Valley Newspapers, Inc., 171 B.R. 71, 75 (B.A.P. 9th Cir. 1994)).

In deciding which standard to apply, the “plausible” standard—reorganization is “plausible” early in the case—the “probable” standard—reorganization is “probable” near the expiration of the exclusivity period—or the “assured” standard—after the exclusivity period expired, reorganization must be “assured”—the court noted that the lender had filed its relief stay motion only twenty-six days after the petition date, but by the time the court heard the motion, the exclusivity period had expired and the debtor had filed a plan of reorganization. The court held, however, that the debtor had not carried its burden even under the least stringent “reorganization is plausible” standard.

The proposed plan of reorganization failed to address key issues, including, among other things, the lender’s ability to credit bid and the logistics of payment of claims from the sale of the property in question while simultaneously attempting to reserve funds to later attack lender’s claim. Additionally, the proposed plan was predicated on using proceeds from the sale of the property to pay other creditors; however, the evidence established that the property would not generate value beyond the amount of the secured claims.

III. Conclusion.

This case will be helpful in the representation of lenders, particularly in single asset real estate cases where the debtor under Section 362(d)(3) must either begin making adequate protection payments or file a plan of reorganization that has a reasonable likelihood of being confirmed within a reasonable time, because it holds that further along in a bankruptcy case, it becomes more difficult for a debtor to demonstrate the likelihood of a successful reorganization.

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