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U.S. Supreme Court Upholds State Law Rights of Trademark Licensees and Other Non-Debtor Contract Parties in Bankruptcy

On May 20, 2019, the U.S. Supreme Court issued an 8-1 ruling in the case of Mission Product Holdings, Inc. v. Tempnology, LLC. The decision resolves a circuit split, holding that a licensee may retain its right to use licensed trademarks, notwithstanding the debtor-licensor’s rejection of the contract in bankruptcy. The Supreme Court’s decision has potentially far-reaching implications. Because it interprets foundational Bankruptcy Code provisions, the decision applies not only to licensed trademark rights, but to continuing rights granted to non-debtor counterparties under other types of executory contracts. The decision will greatly enhance the negotiating leverage of trademark licensees and other non-debtor contract parties vis-á-vis secured lenders and unsecured creditors, making it more difficult for debtors to shed burdensome trademark licenses in the process of rebranding and reorganizing retail businesses.

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Secured Lenders, Bondholders and Retail Debtors Lose, Landlords and Trade Vendors Win, Under Proposed Bankruptcy Code Revisions

Time to Read: 1 minutes Practices: Business Restructuring, Finance

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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, passed by the U.S. Senate on March 10, 2005 and reported to be on a fast track for enactment into law, is not limited to consumer bankruptcies.

The proposed act creates new obstacles for lenders financing retail borrowers. The act’s provisions for the benefit of landlords and trade vendors will increase costs for bankruptcies of retail borrowers, and hinder the sale of valuable lease designation rights and store locations to repay debt.

In a change helpful to landlords, the bankruptcy court may not allow a debtor to assume or reject commercial real estate leases beyond 210 days after the bankruptcy filing date. In a typical Chapter 11 case, a retail debtor requires a much longer period to maximize the value of its store leases: several months to formulate a business plan and to decide on an optimal schedule for store closings, and significant subsequent time to conduct store liquidation sales and to market store leases for sale to other retailers. In many cases, Chapter 11 retailers prefer to sell lease designation rights -- the right of a third party to sell particular leases at a future date. A purchaser of lease designation rights needs an extended period of time to market and sell the leases. The new 210-day deadline for lease assumption will constrain the ability of retail debtors to sell lease designation rights and will reduce the value of real estate leases as assets available for sale.

Trade vendors will also benefit at the expense of lenders to a retail borrower. The proposed act grants a new administrative priority claim to trade vendors for payment of goods received by the borrower up to 20 days before a Chapter 11 case is filed. In addition, trade vendors will be entitled to assert reclamation claims to recover goods received by an insolvent borrower within 45 days before the bankruptcy filing date. As a result, vendors will be able to increase realization of their prepetition claims in Chapter 11 cases. The effect of this change will be to shift more of the losses in a reorganization to bondholders and secured lenders. This change will also increase the retail borrower’s cash requirements to be financed through debtor-in-possession financing or cash collateral orders.

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