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.”
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.