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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.

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Greenberg Glusker Fields Claman & Machtinger LLP partner Brian Davidoff was quoted in an article that ran in the Los Angeles Daily Journal on July 31st about current predictions that the bankruptcy industry will soon see a spike in bankruptcy cases as a result of the state’s ongoing drought.

According to Davidoff, the bankruptcy industry has seen several years of declining filings as a result of high filing costs, low interest rates and a market that has been in recent years financially sound.

With the agricultural industry struggling from years of drought, many are predicting the next cycle of bankruptcies is on the horizon.

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The rapper Curtis James “50 Cent” Jackson III filed a voluntary chapter 11 bankruptcy petition in Connecticut bankruptcy court on Monday, July 13, 2015.  Jackson rose to prominence with songs like In Da Club and P.I.M.P. from his 2003 album Get Rich or Die Trying (also the name of his 2005 film biopic) and has starred in many film and television projects, including the Starz show Power and the upcoming movie Southpaw.

“This filing for personal bankruptcy protection permits Mr. Jackson to continue his involvement with various business interests and continue his work as an entertainer, while he pursues an orderly reorganization of his financial affairs,” Jackson’s attorneys said in a statement.

The chapter 11 filing was made the same day a jury was scheduled to determine whether Jackson is liable for punitive damages in a 2010 lawsuit filed by Lastonia Leviston.  Just days prior to the filing, the same jury awarded Leviston $5 million in compensatory damages, after she alleged that Jackson violated her privacy by posting a sex tape of her online without her permission.  Jackson’s attorneys are disputing the damages award.  As a result of the bankruptcy filing, the proceedings in the sex tape lawsuit are stayed, meaning that Leviston cannot try to enforce or collect her $5 million award, or obtain a finding from the state court jury on the amount of punitive damages, without first obtaining relief from the automatic stay in the bankruptcy case.

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The Fifth Circuit Court of Appeals recently issued a decision that should make defendants in Ponzi cases shiver in their boots.  The court said that the defendant, the Golf Channel, had to return nearly $6 million and that it could not take advantage of a commonly-invoked “reasonably equivalent value” defense.  Even though the Golf Channel had aired advertisements promoting the business, which would normally have been “reasonably equivalent value,” the Fifth Circuit held that by airing advertisements promoting the Ponzi scheme, the Golf Channel did nothing to help the Ponzi scheme’s creditors.  But how was the Golf Channel supposed to know that it was dealing with a Ponzi scheme?  For more on the case, and what it means for merchants, read on. Continue reading