Starion Energy, Inc., along with two subsidiaries and affiliates, has filed a petition for relief under chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 18-12608).  Starion, headquartered in Middlebury, Connecticut, is a competitive retailer of electricity operating in eleven states.  According to the First Day Declaration, Starion has filed for chapter 11 relief because of a lack of working capital—litigation commenced against Starion by the Commonwealth of Massachusetts on October 15, 2018, has resulted in over $3.5 million of Starion’s funds being frozen pursuant to a preliminary injunction.  Starion has filed an petition for relief Adversary Complaint seeking turnover of the frozen funds.  No claims and noticing agent has been proposed. The cases have been assigned to the Honorable Mary F. Walrath.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Prescription Advisory Systems & Technology, Inc. (“PAST”), a medical technology and software company, has filed a petition for relief under chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 18-12601).  PAST, based in Jenkintown, PA, estimates its assets to be between $0 – $50,000 and its liabilities to be between $1–$10 million.  The Board Resolution attached to the Petition discloses that PAST is seeking approval of up to $125,000.00 in DIP Financing.  The First Day Declaration explains that PAST has filed in order to effectuate a balance sheet restructuring supported by a majority of its noteholders.  The case has been assigned to the Honorable Brendan Linehan Shannon.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Upcoming Committee Formation Meeting: Tuesday, November 13, 2018

Case Name: 18-12491 (CSS)

Location: The Doubletree Hotel, 700 King Street, Wilmington DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition for relief.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Upcoming Committee Formation Meeting: Thursday, November 15, 2018

Case Name: 18-12537 (MFW)

Location: Delaware State Bar Association 405 King Street, 2nd Floor, Wilmington DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition for relief.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Upcoming Committee Formation Meeting: Friday, November 09, 2018

Case Name: 18-12439 (BLS)

Location: Delaware State Bar Association 405 King Street, 2nd Floor, Wilmington DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition for relief.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

PGHC Holdings, Inc., along with eight affiliates and subsidiaries, has filed a petition for relief under chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 18-12537).  Based in Dedham, MA, the Debtors collectively own and operate the Papa Gino’s and DeAngelo’s restaurant chains.  The Petition estimates the Debtors’ liabilities to be between $50-$100 million and that the Debtors’ assets will be insufficient for a distribution to unsecured creditors.  The board resolutions attached to the petition contemplate a sale under section 363 of the Bankruptcy Code and authorize the Debtors’ entry into an asset purchase agreement with WC Purchaser LLC for substantially all of the debtors’ assets.  Epiq Corporate Restructuring, LLC is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Mary F. Walrath.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Dixie Electric, LLC, along with twelve affiliates and subsidiaries, has filed a petition for relief under chapter 11 in the Bankruptcy Code for the District of Delaware (Lead Case No. 18-12477).  Dixie Electric, based in Houston, Texas, is a provider of electrical infrastructure materials and services to the upstream and midstream oil industries.  According to the First Day Declaration, Dixie Electric has filed for chapter 11 protection as a result of decreased demand, a tightening labor market and unprofitable lump sum contracts.  Last week, Dixie Electric announced that it had entered into a restructuring support agreement with an ad hoc group of its secured lenders, and would enter chapter 11 with a pre-packaged plan of reorganization.  Dixie Electric is seeking to have a combined hearing on approval of its disclosure statement and confirmation of its prepackaged plan of reorganization held on December 13, 2018.  Prime Clerk LLC is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Kevin Gross.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Upcoming Committee Formation Meeting: Friday, November 02, 2018

Case Name: 18-12394 (KJC)

Location: Delaware State Bar Association 405 King Street, 2nd Floor, Wilmington DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition for relief.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

On October 26, 2018, the U.S. Supreme Court granted a petition for a writ of certiorari in the case of Mission Product Holdings, Inc. v. Tempnology, LLC, to decide the issue of whether a debtor-licensor’s rejection of a trademark license agreement under section 365 of the Bankruptcy Code terminates the rights of the licensee to use the applicable trademarks.  No. 17-1657, 2018 WL 2939184 (U.S. Oct. 26, 2018).  The appeal arises from a decision by the U.S. Court of Appeals for the First Circuit, holding that the rejection by debtor Tempnology, LLC (“Tempnology” or the “Debtor”), of its marketing and distribution agreement (the “Agreement”) with Mission Product Holdings, Inc. (“Mission”), left Mission with only a pre-petition damages claim and no continuing trademark license or distribution rights.  See Mission Product Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389, 392 (hereinafter, the “First Circuit Decision”).

The Supreme Court’s ultimate decision likely will resolve a long-standing circuit split and provide much needed guidance to trademark license counterparties, as other courts have held that rejection of a trademark license agreement does not terminate the licensee’s rights to continue using a debtor’s trademarks post-rejection.  See, e.g., Sunbeam Prods., Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012).  Indeed, the International Trademark Association has called the circuit split the “most significant unresolved legal issue in trademark licensing.”  Amicus Curiae Brief of the International Trademark Association in Support of Petitioner at 3, Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657 (U.S. July 11, 2018).

Statutory Background

Section 365(a) of the Bankruptcy Code permits a debtor-in-possession to “reject” an “executory contract” that, in its business judgment, is not beneficial to the company.  See 11 U.S.C. § 365(a); see also First Circuit Decision, 879 F.3d at 394.  Pursuant to section 365(g) of the Bankruptcy Code, rejection under section 365(a) “constitutes a breach of such contract . . . immediately before the date of the filing of the petition.”  11 U.S.C. § 365(g); see also Sunbeam, 686 F.3d at 377 (“What § 365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party’s rights remain in place.”).  Furthermore, section 365(n)(1) of the Bankruptcy Code permits the licensee under a rejected “intellectual property” contract either to (i) treat the contract as terminated and assert a claim for pre-petition damages, or (ii) retain the same rights under the contract that existed immediately before the commencement of the debtor’s bankruptcy case.  See 11 U.S.C. § 365(n); see also S. Rep. No. 100-505 (1998), reprinted in 1988 U.S.C.C.A.N. 3200 (explaining that section 365(n) was designed “to make clear that the rights of an intellectual property licensee to use the licensed property cannot be unilaterally cut off as a result of the rejection of the license pursuant to Section 365 in the event of the licensor’s bankruptcy”).  Section 365(n) of the Bankruptcy Code was enacted in response to the Fourth Circuit decision of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), which held that a debtor’s rejection of a license agreement terminates the licensee’s rights to use the previously licensed intellectual property and leaves that licensee with the sole remedy of money damages.  Id. at 1048.  Although section 101(35A) of the Bankruptcy Code sets forth an enumerated list of what constitutes “intellectual property,” that list does not include trademarks.  See 11 U.S.C. § 101(35A) (including, among other things, trade secrets, patents, and copyrights in the definition).

Factual and Procedural History

Tempnology was in the business of producing specialized products, such as towels, socks, and headbands, designed to “remain at low temperatures even when used during exercise.”  First Circuit Decision, 879 F.3d at 392.  These products were marketed under the “Coolcore” and “Dr. Cool” brands.  Id.  On November 21, 2012, the Debtor and Mission entered into the Agreement, which provided Mission with three categories of rights: (i) distribution rights to certain of Tempnology’s products manufactured within the United States; (ii) a nonexclusive license to use certain of Tempnology’s intellectual property, excluding trademarks; and (iii) a nonexclusive, non-transferrable, limited license to Tempnology’s trademarks and logo.  Id. at 393.  On September 1, 2015, faced with accruing multi-million dollar net operating losses, Tempnology filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Hampshire (the “Bankruptcy Court”).  Id. at 394.

The day after Tempnology filed for bankruptcy it moved (the “Rejection Motion”) to reject the Agreement, along with sixteen other agreements.  First Circuit Decision, 879 F.3d at 394.  In support of the Rejection Motion, the Debtor argued that the Agreement “hindered [its] ability to derive revenue from other marketing and distribution opportunities.”  Id.  Moreover, Tempnology blamed Mission, and the grant of exclusive distribution rights under the Agreement, for its bankruptcy, alleging that the Agreement “essentially starved the Debtor from any income.”  Id.  Mission objected to the Rejection Motion, arguing that section 365(n) of the Bankruptcy Code permitted it to retain its intellectual property licenses and exclusive distribution rights under the Agreement.  Id. 

The Bankruptcy Court granted the Rejection Motion, subject to Mission’s ability to “preserve its rights” under section 365(n) of the Bankruptcy Code.  First Circuit Decision, 879 F.3d at 394.  Tempnology subsequently moved for a determination of the applicability and scope of Mission’s rights under section 365(n).  Id.  The Bankruptcy Court held, over Mission’s further objection, that Mission’s election under section 365(n) preserved neither Mission’s exclusive distribution rights nor its trademark license, because, among other things, neither fell within the definition of “intellectual property” under section 101(35A) of the Bankruptcy Code.  Id.; see also In re Tempnology, 541 B.R. 1 (Bankr. D.N.H. 2015). 

Mission appealed to the Bankruptcy Appellate Panel for the First Circuit (the “BAP”), which affirmed the Bankruptcy Court’s conclusion with respect to Mission’s exclusive distribution rights, but reversed the Bankruptcy Court’s determination that Mission no longer had protectable rights in Tempnology’s trademarks and trade names.  First Circuit Decision, 879 F.3d at 395; see also Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 559 B.R. 809, 825 (B.A.P. 1st Cir. 2016).  In doing so, the BAP followed the Seventh Circuit’s ruling in Sunbeam, holding that because section 365(g) of the Bankruptcy Code deems the effect of rejection to be a breach of contract, and a licensor’s breach of a trademark agreement outside the bankruptcy context does not necessarily terminate the licensee’s rights, rejection of a trademark license under section 365(g) likewise does not necessarily eliminate those rights.  First Circuit Decision, 879 F.3d at 395; see also Sunbeam, 686 F.3d at 377 (“[N]othing about this process implies that any rights of the other contracting party have been vaporized.”).

First Circuit Decision

The First Circuit reversed the BAP and affirmed the Bankruptcy Court’s decision, thereby endorsing Lubrizol and disagreeing with Sunbeam.  The court focused in large part on the fact that rejection was designed to free a debtor of “executory obligations,” and the “residual enforcement burden” associated with the continuation of the trademark license would degrade the debtor’s “fresh start options.”  First Circuit Decision, 879 F.3d at 402-04 (observing that effective trademark licensing requires the owner to monitor and exercise control over the quality of the goods sold to the public under cover of the trademark).  In doing so, the court rejected Sunbeam’s “unstated premise that it is possible to free a debtor from any continuing performance obligations under a trademark license even while preserving the licensee’s right to use the trademark.”  Id. at 402.  Moreover, the court pointed to Congress’s decision to not include trademark licenses within the “protective ambit” of section 365(n) as evidence that such licenses should not be exempt from section 365(a) rejection.  Id. at 401 (stating that Congress “postpone[d]” action on trademark licenses “to allow the development of equitable treatment of this situation by bankruptcy courts”); see also Sumbeam, 686 F.3d at 375 (“According to the Senate committee report on the bill that included § 365(n), the omission was designed to allow more time for study, not to approve Lubrizol.”).  Accordingly, the First Circuit declined to protect trademark licenses from court-approved rejection “unless and until Congress should decide otherwise.”  First Circuit Decision, 879 F.3d at 404.

Outlook

Fortunately for trademark licensees whose license agreements may be subject to First or Fourth Circuit jurisprudence and whose licensors are in, or may be on the verge of, bankruptcy, they may not have to wait for Congress to amend the Bankruptcy Code to benefit from Sunbeam’s conclusions (to the extent Congress ever chooses to do so).  If the Supreme Court reverses the First Circuit and adopts the reasoning in Sunbeam, those licensees, including Mission, will be able continue using their licensed trademarks through the conclusion of the underlying agreement, notwithstanding the exclusion of trademarks from the Bankruptcy Code’s definition of “intellectual property” and the corresponding benefits of section 365(n).

According to SCOTUSblog, oral arguments in the Mission Product case are expected to occur this winter and a decision likely will be issued by late June of 2019.

Egalet Corporation (OCTQX: EGLT), along with two of its affiliates and subsidiaries, has filed a petition for relief under chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 18-12439).  Egalet, based in Wayne, Pennsylvania, is a specialty pharmaceutical company that develop and manufactures pain-relief medications.  According to the First Day Declaration, Egalet began exploring strategic restructuring options after challenges in monetizing its products.  The First Day Declaration further discloses that Egalet has determined that the acquisition of Iroko Pharmaceuticals Inc., a pharmaceutical company based in Philadelphia, PA, presented the most viable restructuring option for Egalet and Egalet enters chapter 11 having entered into an agreement to acquire certain assets and liabilities of Iroko.  Egalet has filed a Joint Plan of Reorganization and intends to pay its unsecured creditors in full.  The Disclosure Statement can be found here.  No claims or noticing agent has been proposed.  The cases have been assigned to the Honorable Brendan Linehan Shannon.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.