Tag: business reorganization

Cool Tech Hot Mess: Tempnology — An Update

Pixabay at Pexels

The First Circuit Court of Appeals recently issued another opinion (the court’s third)  in the long running saga of  Tempnology LLC (now known as Old Cold, LLC).    The opinion, Mission Product Holdings, Inc. v. Schleicher & Stebbins Hotels, does not blaze any new legal trails.  Rather, it upholds the entry of an order granting a secured creditor relief from stay to foreclose on certain collateral. 

Read only for  its holding — the decision is unremarkable.   But when read as part of the long history of litigation rooted in a  deal described by the Supreme Court with some understatement  as “a licensing agreement gone wrong”  — the value of the decision emerges.  Indeed, as noted in my post earlier this year,  Cool Tech — Hot Mess: Tempnology a Year After SCOTUS Argument, litigation over fallout from the deal has lasted years longer than the deal itself.   If such outcomes can be avoided, then this blog’s objective of advocating for  forward thinking deal-making will be met. 

The Debtor, the Lender and the Licensee

The litigation relates to disputes involving the following three parties:   

(i)  Tempnology — the  Debtor which manufactured  “Coolcore” branded clothing and accessories designed to stay cool when used in exercise;

(ii) Schleicher & Stebbins Hotels — the Debtor’s secured lender,  which also purchased the Debtor’s assets at a bankruptcy auction conducted under Section 363 of the Bankruptcy Code; and 

 (iii) Mission Product Holdings, Inc. –the Debtor’s trademark  licensee, which bid for the Debtor’s assets at the auction but lost out to the secured lender.    

Prior First Circuit Decisions 

The First Circuit’s  prior opinions were both issued in  January 2018.   In the first decision, the First Circuit rejected  the licensee’s attempt to unwind the sale and have its  own bid recognized as the winner.   The First Circuit ruled that the sale had already closed and the lender had been deemed “a good faith purchaser” entitled to protection under section Bankruptcy Code 363(m) from having the sale unwound.  

In the second decision, the First Circuit held that the Debtor’s rejection of the applicable trademark license agreement left the licensee with only a pre-petition damages claim and no further rights to the licensed rights.  The licensee appealed that  decision to the United States Supreme Court, which reversed in an opinion issued in  May 2019  —  holding that a debtor-licensor’s rejection of a trademark  license did not deprive a licensee of  rights provided for in the license. 

Relief from Stay Litigation 

 As noted in the  prior post, the Supreme Court decision did not bring an end to  issues pending in the bankruptcy case. Specifically, proceedings continued  concerning the rights of the secured lender to relief from the automatic stay with respect to certain remaining collateral in the estate excluded from the sale. 

On that issue, in the fall of 2018, the Bankruptcy Court held that the Supreme Court review of the license issues did  not preclude the Bankruptcy Court  from granting relief from stay to the secured lender.   The  licensee opposed the relief then  appealed the order to the Bankruptcy Appellate Panel (BAP) which affirmed in a decision issued June 18, 2019.   The licensee appealed that decision to the First Circuit in July 2019.  

First Circuit’s October 2020 Opinion

In its decision issued this week, the First Circuit affirmed the order granting the secured lender relief from stay. 

The First Circuit began by confirming that the  licensee’s appeal was not moot and that the Court possessed jurisdiction to decide the appeal.   The Court  then reviewed the merits of the licensee’s argument  on an abuse of discretion standard.   On three fundamental points raised by the licensee, the First Circuit left little doubt about its ruling.  Specifically, the Court: 

      • characterized as “poppycock” the licensee’s principal argument that the secured lender waived its liens, either implicitly or explicitly, by virtue of its participation in the bidding process;        
      • concluded  that there was “no question” that the lender held valid liens in excess of the value of the debtor’s  remaining assets and that the lender  thus satisfied its burden of proof needed to prevail on a motion for relief from stay; and        
      • rejected the licensee’s contention that the Bankruptcy Court abused its discretion by refusing to grant discovery and a full evidentiary hearing before granting relief from stay — on this point the First Circuit determined there “clearly” was no such abuse and that the licensee’s contention that the secured lender “waived its liens made no sense for a slew of  reasons.” 

Looking Ahead

Although the First Circuit’s opinion should bring to a close the dispute over the relief from stay issue, the bankruptcy case remains open.   The licensee previously filed an amended proof of claim and an administrative expense motion seeking damages for both the pre-bankruptcy and post-bankruptcy period. 

Last year, the parties agreed to defer any action on the damage claims pending the First Circuit’s decision on the challenge to the relief from stay order.   With the First Circuit ruling now issued, the parties will need to evaluate  whether to exercise rights previously reserved against each other.  

While that plays out to an inevitable conclusion at some point, others entering into business agreements of any type should keep the Tempnology situation in mind when crafting an appropriate agreement at the outset of a deal as well as strategically overcoming  obstacles that  arise.  

 

Finding Business Solutions — Some Helpful Resources

COVID-19 has injected substantial economic uncertainty into countless businesses of every size.  The uncertainty has forced parties to review deals with essential business partners  and seek revised terms if possible.  Similar discussions are likely to continue for quite some time  as the economic fallout continues.

Such efforts reflect three of the Five Keys to Dealing Effectively with Disruption discussed  at the beginning of the crisis:  avoid denial, accelerate communication and appreciate cash position.   Some businesses seeking revised terms, however, have been unable to obtain needed relief.    For those confronting that situation, it is essential to remember the two other keys for dealing effectively with disruption:   (i) attack the problem and not the people and (ii) assistance — obtain it.

In particular, be prepared to understand all options for attacking the problem with the assistance of business minded solution providers.   While actual or threatened litigation may be possible, be prepared to understand potential consequences as well of  threatened or actual insolvency options.

Because time is money, deal making in insolvency is commonplace.  Most parties affected by a proceeding have a real economic incentive to reach resolution (subject to any necessary court approval) without the time, expense and uncertainty of litigation.   Of course, not every business dispute in an insolvency proceeding is consensually resolved — but business realities make resolution highly likely. 

Parties  at odds may find it difficult  to come to agreement directly on consensual terms — especially when operating in the unfamiliar waters of an actual or threatened insolvency proceeding.   For that reason, the use of third party neutral mediation has grown considerably in facilitating discussions.

That reality gives rise to a basic question:   if parties might ultimately find a solution in an insolvency setting  would it not  have been better for  those same parties to have attacked  the problem viciously in search of a  better  solution without the need for such a  proceeding in the first place?   After all,  any proceeding (including one on a pre-arranged or prepackaged basis) will consume precious resources and deplete value otherwise available for  a solution.

Many resources exist for those interested in finding effective solutions to difficult problems.  Dealing with distress is itself distressing  — but with the right tools and game plan it can be done.   Listed below are some resources about  dispute resolution and negotiation helpful in promoting solutions in difficult circumstances:

  • The Summer 2020 Edition of the New York Summer Dispute Resolution Lawyer  contains a variety of articles examining dispute resolution topics in the COVID era including some co-authored by Jeffrey T. Zaino  — who will be presenting to the American Bankruptcy Institute  Mediation Committee membership in mid-September on dispute resolution topics -details to come.   Other particularly interesting pieces were contributed by former ABI Mediation Committee co-chair Leslie Berkoff as well as Elayne Greenberg, the Assistant Dean of Dispute Resolution Programs and Director of the Hugh L. Carey Center for Dispute Resolution at St. John’s University School of Law. 
  • The American Bar Association Section of Dispute Resolution site contains a variety of resources of interest including the materials related to a LEAP (legal education, ADR and problem solving) — a much needed effort to integrate dispute resolution into law school curricula.
  • A few years back,  the ABI Mediation Committee collaborated on the book   “Bankruptcy Mediation” (which Leslie and I co-edited).  The book benefits from  a chapter contributed by Professor Greenberg as well as chapters contributed by others.  The book  remains  an excellent resource both for mediators as well as advocates and parties dealing with challenging issues in difficult situations. 
  •  MediatBankry is a blog maintained by esteemed insolvency practitioner (and former ABI Committee Member of the Year) Don Swanson who regularly produces interesting discussion focused on the use of dispute resolution in and out of insolvency situations.
  • Coming up virtually this Fall are opportunities for further exploring the role of mediation in solving problems.   One program will be presented by the Boston Bar Association and grew out of discussions with the COVID Task of the Bankruptcy Section.  The program is  provided as a service those representing consumers and consists of two parts.   The first session on September 10 will focus on the  basics of mediation.   That will be followed by a longer session on October 20  further exploring the potential use of mediation to benefit consumers facing difficult circumstances.  I am pleased to join both these sessions.  Details to follow and will be posted on the BBA website.

 

In sum, when dealing with a difficult business solution, ensure you are well equipped to assess all options for moving forward in the best manner.   There is a wide variety of endings to distressed situations — and it is important to fight smartly for the best resolution possible. 

Thinking Strategically About Business Outcomes

In  The New Boardroom Imperative: From Agility To Resilience Julian Birkinshaw, (Professor of Strategy and Entrepreneurship, London Business School) discusses the critical issue of strategic resilience –  the ability  “to make smart choices about the scope of business activities in the face of uncertainty.”

Recent posts here have outlined key strategies for tackling business challenges and provided a sampling of resources helpful in developing an effective plan.   See Five Keys to Dealing Effectively with Disruption and Resiliency Resources.

This post “zooms” out (the word choice clearly reflecting too many videoconferences) to focus on three business outcomes in a time of disruption. What are those three outcomes?  Fundamentally:  reorganization, sale or liquidation.   There are many paths to reach any of these outcomes – including in-court and out of court avenues.   Each outcome, of course, has significant consequences.

Although some businesses strategically implement a sale or a liquidation on their own terms, many find themselves dealing with those outcomes only because the opportunity to achieve a reorganization has evaporated.  Indeed, the inability to reorganize can lead to a sale or liquidation – voluntarily or involuntarily.  Resilient business leaders work to avoid such results by strategically assessing higher value reorganization options and then working to implement successfully.

What options exist in aid of reorganization?  In the United States, the federal law governing business reorganizations is Chapter 11 of the United States Bankruptcy Code.  Unfortunately, over the years, Chapter 11 has proven to be an imperfect mechanism for allowing small or medium sized businesses to reorganize.   Last summer, Congress attempted to address that situation by passing the Small Business Reorganization Act of 2019 (SBRA), which became effective in February 2020.

The SBRA adds a new subchapter V to Chapter 11 with the goal of making business reorganization more affordable and more achievable for the nation’s small businesses.  Specifics about subchapter V are detailed here.  The Coronavirus Aid, Relief and Economic Security Act (CARES Act) passed yesterday expands the availability of  subchapter V by making its provisions applicable to a broader range of businesses.  Specifically, as amended, for the next year the debt limit for a small business eligible for relief has increased from $2,725,625 to $7,500,000.  Of course, businesses with debt above that limit can still seek relief under the non-small business provisions of Chapter 11.

Federal bankruptcy relief is just one tool in the toolbox for seeking to implement a business restructuring — and not a perfect  tool.  Other options also exist both in and out of court.  For example, out of court negotiations or mediation with key constituents towards new agreements can be remarkably effective as described here.  Be sure to think critically before selecting any particular tool as each has advantages and disadvantages.   As the saying goes — once the hammer is in hand, every problem begins to look like a nail.  Be sure to act proactively to take advantage of the utility of the most value-preserving and value-enhancing tools while time exists to do so.  And be on guard against the possibility that a key business partner may start wielding a tool that could have significant implications for your own business.

Understanding the options for implementing a successful business reorganization should help in thinking critically about your own business – and (just as importantly) the businesses of your key partners.  Ultimately, part of the ability to make smart choices about current and future business activities in the face of today’s uncertainty relies on such an informed understanding.