Tag: dispute resolution

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. 

Can Your Business Partners Handle Disruption?

As discussed in “Five Keys to Dealing Effectively with Disruption” posted last month, denial is a hallmark of disruption.  Successfully navigating disruption requires not only avoiding denial yourself – but also ensuring your business partners do not live in that state.

The importance of dealing with the “brutal facts” is not a novel concept in business or elsewhere.  Jim Collins made the point in Good to Great as summarized here:

Productive change begins when you confront the brutal facts. Every good-to-great company embraced what we came to call “The Stockdale Paradox”: you must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time, have the discipline to confront the most brutal facts of your current reality, whatever they might be.

Unfortunately, even if you understand the brutal facts, you may very well have a business partner who does not.   A partner’s denial can destroy value and create unnecessary expense.  Check out my posted publications and presentations for a small sampling of the types of consequences that may result from an optimistic yet reality-denying partner.

As noted in “Why Optimism May Not be Enough to Carry us Through Times of Crisis” by  Dr. Tomas Chamorro-Premuzic in Fast Company recently: “Even if people crave optimism in tough times, our objective well-being is more important than our subjective well-being, and that depends more on competence than confidence.”

Indeed, employees, customers, vendors, investors, lenders, and other key constituents need more than optimism and confidence from leaders of a partner firm dealing with distress.   Deriving false comfort from such traits from a partner is tantamount to cohabiting their state of denial.  A better approach is to ensure essential business partners develop a credible plan and demonstrate an ability to complete the hard work necessary to implement.

In situations where a key partner needs help in constructing a well-grounded plan, consider the role mediation can play in helping to introduce objective standards in reaching a reality-based solution that achieves mutual interests.  Mediation remains an option even in these days of social distancing as tools exist to help bring parties in remote locations together virtually as this article by Leslie Berkoff notes.  When a partner’s plan cannot be adapted to reality after good faith efforts to address, then alternatives to that business partner must be considered.

In sum, be aware of a partner’s optimistic plan that is not vetted by adequate forward thinking.   This series of tweets from a British town this past week (focused on best practices for social distancing)  helps to make the point.   The tweets highlighted the decision-making behind the use of a half a ton of dynamite to remove a 45-foot, 8 ton whale from the coast of Oregon in 1970.

As the bemused eye-witness reporter observed in this  vintage television news report, “the blast blasted blubber beyond all believable bounds” including on spectators and cars parked a quarter mile away.  Others vested in a better outcome (such as the town and nearby property owners) surely would have enjoyed a less odious outcome by ensuring the removal crew’s optimism was matched with an adequate amount of forward thinking in developing the removal plan.

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.

Resiliency Resources

Many people were looking forward this March to NCAA basketball tournaments – not a march into an economic and human calamity.

Yet, with the pandemic upon us, the need to navigate serious challenges is at hand.  Last week, I posted Five Keys to Dealing Effectively with Disruption noting the importance to businesses of:

          • Avoiding Denial
          • Attacking the Problem not the People
          • Assistance – Obtaining it
          • Accelerating Communication
          • Appreciating Cash Position

A flood of information has poured forth this week  with advice on various aspects of the current situation.  Assistance is critical in developing an effective plan – and that assistance must come from credible, reputable sources.   Here are some helpful resources  from such sources that will be useful in implementing the Five Keys:

Team working remotely?  Do it safely and securely.

The National Cyber Security Alliance launched the COVID-19 Security Resource Library – a free resource on current scams, cyber threats, remote working issues, disaster relief, and more.    Do not let your focus on attacking the current problem blind you or your team to the additional threats posed by malicious actors with intent to disrupt your operations.

Stay safe and spread the message (not the virus)

The Global Resilience Institute at Northeastern University established COVID-19: How to be Safe & Resilient with the goal of providing critical tools and skills needed for people to stay safe and to help others to stay safe.   Share through your network to ensure others are informed and to promote social connectedness.  As a member of Infragard, I have attended programs at the Institute and admire their commitment to forward-thinking in managing disruption.

Business resources from corporate turnaround professionals

The Turnaround Management Association (TMA) has compiled a COVID-19 Business Resource Site to collect resiliency resources for businesses.   Contributions come from the group’s large, professionally diverse organization (almost 10,000 members in 53 chapters worldwide). Note:   as a past president of the Northeast Chapter  and as a current member of the global board, I am pleased to  co-chair the next global TMA Annual Meeting  (Boston on September 30 – October 2).

Boston business resources

The Greater Boston Chamber of Commerce has established a COVID-19 Resource Page to help businesses navigate developments, which includes periodic updates and resources from the government,  public policy analysis, and industry-specific insights into actions of employers in responding to the situation.

Other resources

Other noteworthy sites include:

Finally,  MWI (where I trained as a mediator) announced two programs:

        • Online Mediation:  the ability to mediate commercial (and other) matters using video conferencing including virtual breakout rooms .  Note:  non-profits and charities are able take advantage of this service for no charge (for one session) through the end of June 2020.
        • Online Trainings:    online training on negotiation skills and other  programs geared towards sales teams, procurement, and business leaders. Note: companies in Massachusetts can apply to be reimbursed for 50% to 75% of the costs through a partnership with the Workforce Training Fund

All of the above resources can be used to implement the Five Keys of avoiding denial, attacking the problem (not the people), obtaining assistance, communicating well and appreciating the critical importance of cash in business resiliency.

The availability of resources does not make the process of dealing with disruption simple but awareness of resources is critical in charting a path forward.

Trade Creditor Strategies

I was pleased to join Adrienne Walker from Mintz and Lindsay Zahradka Milne from Bernstein Shur on a business panel  yesterday hosted by Massachusetts Continuing Legal Education.   Our focus was on strategies for trade creditors to obtain  (and keep) payment in light of  issues arising in recent financial meltdowns including Sports Authority, Toys R Us, Sears,  Papa Gino’s and many other distressed companies.

We covered a lot of territory in a short amount of time with thoughtful insights and commentary from the audience.  Topics included  maximizing lien rights, obtaining critical vendor status, risks associated with post-petition administrative claim recoveries,  the value of reclamation claims, recent consignment issues, and minimizing preference exposure.

My focus was on lien issues which included the practicality of obtaining and perfecting a security interest under Article 9 of the Uniform Commercial Code.  The discussion also covered various non Article 9 liens including judgment liens, state statutory liens (including mechanics liens) and federal statutory liens (including the Perishable Agriculture Commodities Act).

My top takeaways for trade creditors from the session:

  •  Be Proactive:   Trade creditors who actively monitor and manage receivables are best positioned to avoid the pain of a customer’s financial distress.   Understand the reality that a customer’s  filing could completely extinguish all amounts owed and could also result in the forced return of certain funds paid to the creditor before filing as a “preference.”   Avoid putting off dealing with the unpleasantness of a customer issue; rather make it a priority to protect your right to payment.

 

  • Explore Lien Rights Early:   Creditors often explore lien rights only after experiencing non-payment.  A better strategy is to consider the possibility of lien rights at the outset of a business relationship.   Establishing lien rights requires strict compliance with detailed statutory elements such as those created by Article 9 of the UCC or other statutes.   If lien rights are important, take the time to ensure that the lien is properly created and not subject to attack.

 

  •  Understand Consignment:    Some trade vendors believe that shipping goods to a customer “on consignment” can insulate the vendor from any financial issues of the customer.   However, the law of consignment is highly complex drawing from both the common law and operative provisions of the Uniform Commercial Code enacted by the states.   If you intend to be protected by a consignment relationship, it is imperative that the relationship withstand judicial scrutiny.   Two decisions (available here)  issued on November 26 2018  in the Sports Authority case drill down into these issues and provide a sense of the complexities that can arise.

 

  • Treat DIPs with Care:  “DIP” stands for “debtor in possession” — the term used to describe a company that has filed for chapter 11 relief.    Conventional wisdom teaches that supplying a company in chapter 11 (a DIP) offers some protection to a creditor as claims arising from amounts due post-petition constitute “administrative expense claims” and not just mere “general unsecured claims” (the term given to amounts due for obligations arising pre-petition).   In Toys R Us, however, vendors holding millions of dollars in “admin” claims faced the prospect of no payment whatsoever given the retailer’s cessation of restructuring efforts and implementation of a liquidation.  Although a settlement was reached which provided some payment to holders of admin claims, the recovery was nowhere near 100 percent.   In short, before supplying any company operating in chapter 11, be careful to understand the dynamics of the case and the practical ability to compel payment.

 

  • Understand Preference Risk:    A trade creditor that receives payment in the 90 day period before a customer’s bankruptcy filing is at risk of having that payment examined and potentially challenged as an “avoidable preference.”   There are several defenses available to a trade creditor to defend against such an action.   The best defenses rest on good facts.  Thus, it is imperative that a creditor obtaining payment from a financially distressed firm do so with an eye towards strengthening available defenses in case of a later challenge.    Our session highlighted several recent decisions impacting the ordinary course of business defense, subsequent new value defense and other theories.   The time to think  about such issues is well before a preference lawsuit is filed.

In sum, the opportunity to collaborate with Adrienne and Lindsay was terrific.  The conference also included an excellent presentation on non-judicial options for restructuring and sales as well as an insightful judicial forum.

 

Building Resilient Businesses — Fall 2018 Collaborations

As noted on the About page, this blog focuses on essential aspects of building resilient businesses:   protecting assets, navigating change, solving problems, and getting deals done effectively.

Key components of resiliency are awareness and openness to change.  Denial is absolutely not a strategy.   Resilient business keep  pace with innovation, think strategically,  exercise sound judgment, rely on core values  and build  effective teams.

This Fall has offered numerous opportunities to connect with others on topics at the intersection of technology and  finance – each fundamental to any resilient business.   This post  highlights a few recent and upcoming events/writings  and provides links to those interested in exploring further.

  • In late September, I was pleased to attend a TMA Global Executive Board meeting in connection with the 2018 TMA Annual Conference.   Plenty  of interesting discussions there — but I particularly enjoyed the keynote from Frits van Paasschen, who held the CEO position at  Coors then Starwood and several senior positions at other global companies before that.   He  authored The Disruptors’ Feast — which carries the apt subtitle “How to avoid being devoured in today’s rapidly changing global economy.”   Based on his remarks, I very much look forward to reading the book.
  • This summer, I received an invitation from the American Bar Association Law Practice Division to serve on the board of its Legal Technology Resource Center (LTRC).   The LTRC is focused on  providing legal technology guidance and resources for the efficient and effective practice of law.  Guidance is provided through a technology blog, regular webinars,  various publications and a dedicated website — Law Technology Today.  As  technology continues to evolve rapidly, I look forward to working with the LTRC team who I enjoyed meeting earlier this month.
  • Coming up next week on October 23,  I will join Silvia De Sousa of Thomson Dorman Sweatman LLP in Winnipeg and Kiriakoula Hatzikiriakos of the National Bank of Canada in Montreal (who recently published Secured Lending in Intellectual Property) to present a webinar sponsored by the Canadian Bar Association focused on Secured Transactions in Domain Names & Websites  As has been proven time and again, websites and domain names can be sources of value for companies and creditors — but critical to unlocking that value is successfully navigating various legal issues and understanding cross-border implications.
  • Each year, Massachusetts Continuing Legal Education hosts a New England Bankruptcy Law Conference.   This year, I will join Adrienne Walker from Mintz and Lindsay Zahradka Milne from Bernstein Shur on a business panel focused on trade creditor issues.  With stories of significant trade creditor issues emanating from the Toys R Us case and similar situations, a discussion focused on  practical tools for trade creditors is timely.
  • Finally,  the 2018 Norton Annual Survey of Bankruptcy Law  was published this Fall.  The book contains my chapter analyzing technology and intellectual property issues  in distressed circumstances — including a discussion of the Tempnology case which was the subject of  an earlier blog post here.   Since that blog post in early September,  activity before the Supreme Court has continued with petitioner Mission Product Holding filing a reply brief on September 25 arguing that the High Court should grant review and resolve the question of whether rejection requires termination of a licensee’s rights.   Stay tuned.

In sum, the Fall has offered some interesting opportunities to collaborate with others in  thinking through effective solutions for companies dealing with rapid change.   Technology, finance, and disruption are sure to remain constant partners going forward.