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Inauguration is still about 2 months away, but it is not too early to begin thinking about what the Trump Administration will mean for commercial lawyers in general and bankruptcy lawyers in particular.

Bankruptcy Reform?

We are not hearing anything about a push for bankruptcy reform as part of the new administration’s agenda. Two potential exceptions are the fate of the proposed Financial Institution Bankruptcy Act of 2016, H.R. 2947, 114th Cong. (2016), which would add a new chapter to the Bankruptcy Code dealing with large financial institutions.  Another is the potential for the new administration to take a different position than the Obama administration on Czyzewski v Jevic Holding Corp., which is now pending before the United States Supreme Court.  To date, the Solicitor General has argued that the Third Circuit was wrong to affirm the Bankruptcy Court’s approval of the “structured settlement” which resolved that case.[i]  With so many other issues swirling about, it does not seem likely that bankruptcy reform per se is in the offing.  However, a number of other potential policies may impact bankruptcy practices.

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The additional “default interest” owed when a borrower defaults under a loan agreement is a technical but highly critical part of any lending arrangement. This important “default interest” was the subject of a recent Ninth Circuit decision in which the Circuit made a nearly 180 degree u-turn away from its prior precedent.  Earlier this month in a case called In re New Investments, Inc. the Ninth Circuit adopted a new rule which may significantly constrain the ability of distressed companies to reorganize by restructuring their debt.

In that case, two members of a three judge Ninth Circuit panel reversed a bankruptcy court’s decision, and ruled that the chapter 11 debtor could not cure a default under its loan agreement by paying only the contractual pre-default interest but instead must pay interest at the higher post-default rate. This ruling is contrary to the Circuit’s prior decision in In re Entz-White Lumber & Supply, Inc. 850 F. 2d 1138 (9th Cir. 1988), and represents a dramatic shift in the Bankruptcy Code’s balance of power away from debtors and towards secured creditors.  The decision makes it much more difficult for a debtor to cure a loan default as part of a plan of reorganization.

In 1988, in the Entz- White decision, the Ninth Circuit held that a debtor who proposes to cure a loan default through a plan of reorganization is entitled to avoid all consequences of the default including higher post-default interest rates.  At that time, the Court acknowledged that under the Bankruptcy Code, a plan of reorganization “shall provide adequate means for the plan’s implementation, such as curing or waiving of any default.”  The Court recognized that there was no definition of “cure” in the Bankruptcy Code, and adopted the following definition, which had been used by the Second Circuit:

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In my blog article on August 9, I focused on some of the issues that licensors need to be aware of as they license IP rights, including the concept of allowing distributors to include “damages only” clauses in the distribution agreements.

The second issue that often arises in distribution agreements related to DVD distribution rights is that the producer/licensor grants to the distributor/licensee the right to distribute a movie in various media, including, but not limited to DVD. The distributor will often pay for the cost of manufacturing the DVDs and then have the first right to recover the cost of manufacturing out of the first sales of those DVDs.  Sometimes the producer/licensor will pay for the cost of manufacturing the DVDs.  In either instance, however what happens when a distributor files a bankruptcy and holds on to the DVDs, the cost for which may have already been recouped through prior sales or which have actually been paid for by the producer.

The “automatic stay” which comes into being on the filing of a bankruptcy by the distributor, precludes the producer from immediately recovering those DVDs, and a significant question arises whether or not those DVDs become “property of the distributor’s bankruptcy estate”.

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The Issue

There has been written a plethora of articles about Bankruptcy Code §365(n) regarding the rights of parties to license agreements when the licensor files a bankruptcy and rejects a license agreement. Generally, Code Section 365(n) allows the licensee to “accept” a rejection of a license agreement by the licensor or “reject” the rejection of a license agreement and retain its rights.

However, what has not been addressed, and what seems to be of frequent concern in recent years, are the issues that affect producer/licensors when their distributor/licensees file bankruptcy. We have seen these issues arise in a significant way in the recent bankruptcy filings by Relativity which filed in the Southern District of New York, and the more recent bankruptcy filing by Our Alchemy in the District of Delaware.

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An “Assignment for the Benefit of Creditors” (an “ABC”) is an alternative to bankruptcy available under California law—as well as the laws of other states.  An ABC is often a more cost-efficient alternative to filing a bankruptcy case, and ABCs are often employed by secured lenders when speed and flexibility are required in a sale of the assets of the entity and the tools available in a bankruptcy proceeding (such as the ability to reject leases or bind certain classes of creditors) are unnecessary.  An ABC continues to be a very important tool that is routinely employed to assist in the restructuring of Southern California businesses.

In a recent decision, the United States Court of Appeals for the Eleventh Circuit decided that the assignee of an entity which had previously made a general assignment for the benefit of its creditors under Florida law could not file a bankruptcy case for the entity.  Ulrich v. Welt et al. (In re Nica Holdings, Inc.), —F.3d—, 2015 WL 9241140 (11th Cir. 2015).  The assignee, who had been accused of breach of fiduciary duty in his conduct of the assignment estate, sought to use the bankruptcy case to stop and then settle litigation by a creditor unhappy with the course of the assignment.

The 11th Circuit first made a couple of general observations regarding ABC’s, including that “[e]ntities may opt to use the ABC process because in their particular circumstance, it’s more flexible, fast, more private, and less supervised than bankruptcy.”  Id., 2015 WL 9241140 *6 (citation omitted).  The 11th Circuit also observed that, “ABCs and bankruptcies are alternative proceedings.  An entity deliberately chooses one or the other.”  Id.

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Published in the Daily Journal on January 27, 2016

Greenberg Glusker partner Brian Davidoff, was quoted in a January 27, 2016, article by Daily Journal reporter Steve Creighton on the opportunities for litigation funding of adversary cases in bankruptcy.  The article discusses the current bankruptcy climate, the looming increase of bankruptcies and how litigation funders can be a viable option for bankruptcy trustees.

Davidoff, commenting on the impending increase in bankruptcy filings, noted that funders who are positioning themselves in the industry now are in a very good place to capitalize later:

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Published in the Los Angeles Business Journal on January 18, 2015

Imaging3, Inc., a Burbank-based medical technology developer, emerged from Chapter 11 bankruptcy in 2013 after the reorganization plan that would convert the company’s debt to equity was approved by the court. The company faced several setbacks when a minority shareholder opposed the plan and appealed multiple times.  On December 17, 2016, a three-judge panel in the Ninth Circuit Court of Appeals rejected the dissenting shareholder’s argument and granted Imaging3’s request to move forward.

Greenberg Glusker partner Brian Davidoff, who represented Imaging3 was interviewed by the Los Angeles Business Journal on January 18, 2016, “He [minority shareholder] has been very persistent and notwithstanding.  Three courts have ruled against him.  It’s not that typical but obviously you do see it happen.”

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It’s a new year, and we have a new law affecting debtors and creditors in California.  Effective January 1, 2016, California’s Uniform Voidable Transactions Act (UVTA) has replaced California’s Uniform Fraudulent Transfer Act (UFTA). The full text of the new UVTA can be found here.  While the UVTA is similar to the UFTA in most respects, certain important changes and key aspects of the new law are discussed below.

Title of the Act

The title of the Act has been changed to the “Uniform Voidable Transactions Act.”  The use of the word “voidable” rather than “fraudulent” is intended to prevent confusion, since the UVTA (like with the UFTA before it) does not require fraud, in the normal sense of the word, for certain transactions to be voidable.  Also, the use of “transactions” rather than “transfers” is consistent with the law historically covering the incurrence of obligations in addition to transfers of property.

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On July 30, 2015, Relativity Media, along with 144 of its affiliates, filed a Chapter 11 bankruptcy.  The multi-million dollar entertainment company, which produced films such as The Social Network, The Fighter, Limitless, and others, is headquartered on Beverly Blvd. in Beverly Hills.  As of the date of the bankruptcy, according to its court filings, Relativity and its affiliates had approximately 89 full- and part-time employees and approximately 760 temporary production personnel in the film and television side of the business.

Lead bankruptcy counsel for Relativity are Rick Wynne, Bennett Spiegel, and Lori Sinanyan, three well-known Los Angeles bankruptcy lawyers.  The most recent hearing in the case on August 25 was an all-day affair to consider Relativity’s request for debtor-in-possession financing and for approval of procedures so that it can sell all of its assets within the next six weeks.  At that hearing, Relativity’s lenders — who are owed $350 million on account of pre-petition obligations and another approximately $50 million which they have advanced or committed to advance since the filing and who are also the proposed buyers of all of the assets for a credit bid of approximately $250 million — were represented by Mark Shinderman, another prominent Los Angeles bankruptcy practitioner.   At that same Court hearing, Mr. Wynne and Mr. Shinderman sparred for hours with Evan Jones, another noted Los Angeles bankruptcy attorney, who represents a hedge fund that had also advanced money to Relativity.

Others making appearances at the Court hearing were veteran Los Angeles bankruptcy attorneys Joseph Kohanski, representing the directors’, screen actors’ and writers’ guilds, and Ted Stoleman, on behalf of a licensor of the film Act of Valor.  A review of the case docket shows notices of appearance in the case by many other Los Angeles bankruptcy lawyers including Brian Davidoff of our office, Peter Gilhuly, Pamela Webster, Sam Newman and others, representing a variety of Los Angeles-based production companies, talent, or other creditors or contract parties of Relativity.

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In a surprise move, the Fifth Circuit vacated its recent, controversial Golf Channel opinion, potentially giving the Golf Channel a second chance in a case that seemed lost.  As I discussed in my previous post, the Fifth Circuit recently held that the Golf Channel had to return over $5.9 million in payments it had received from Ponzi schemer Allen Stanford’s Stanford International Bank, pursuant to a fraudulent transfer action initiated by the bank’s receiver.  The Golf Channel had asserted a “reasonably equivalent value” defense, saying that it had aired advertisements having value reasonably equivalent to the over $5.9 million in payments that the Golf Channel had received.  However, the Fifth Circuit held that this defense does not apply in Ponzi scheme cases, since advertisements promoting a Ponzi scheme do not benefit a Ponzi scheme’s creditors and may actually hurt them.

After this decision, the Golf Channel filed a petition for a panel rehearing, citing a lack of Texas case law on the issue.  The Fifth Circuit granted the Golf Channel’s petition, vacated the original opinion, and certified a question to the Supreme Court of Texas regarding the proper interpretation of “value” and “reasonably equivalent value” in the context of a good faith transferee of a Ponzi scheme under the Texas Uniform Fraudulent Transfer Act (a copy of the Fifth Circuit’s new opinion is here).  The Supreme Court of Texas has accepted the certified question and requested briefs on the merits from the parties, but a date for oral argument has not yet been set.

So, it appears that, for the moment at least, all is not lost for the Golf Channel.