Supreme Court Says Rejection of Trademark License Does Not Extinguish Rights

Reuel Ash

Ulmer & Berne, LLP

Cincinnati, Ohio

In an important ruling, the Supreme Court held earlier this week that a trademark licensee can continue to use a bankruptcy debtor’s trademark license even where the debtor-licensor rejects the license. Mission Product Holdings, Inc. v. Tempnology, LLC, 2019 Westlaw 2166392 (U.S. May 20, 2019)   This decision should be welcome news to the business community, because the decision will provide a uniform standard governing a licensee’s right to use a rejecting debtor’s trademark license, which is especially significant given the rapid growth of intellectual property’s role in the domestic economy over the past several years. 

The ruling puts trademark licensees in bankruptcy on equal footing with non-debtor licensees of users of patents, copyrights, and trade secrets, which since 1988 have enjoyed continued use of that intellectual property even where the bankruptcy debtor owner of the intellectual property rejects those contracts.  Congress codified such continued use by amending the Bankruptcy Code in 1988 to add Section 365(n), in response to the Fourth Circuit’s decision of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4^th Cir. 1985).  That case held that a debtor’s rejection of a license agreement terminated the licensee’s rights to use the intellectual property and provided only money damages to the licensee.  Such a result was consistent with Code Section 365(g)(1), which provides the non-debtor party solely with pre-petition damages for breach of contract when the debtor rejects that contract.  Congress’ enactment of Section 365(n) fixed that problem for non-debtor holders of patents, copyrights, and trade secrets whose licenses are rejected in bankruptcy. Congress’ 1988 fix, however, did not extend to trademark licensees, since only patents, copyrights, and trade secrets came within the ambit of the Bankruptcy Code's definition of intellectual property in Code Section 101(35A), which excluded trademarks. 

The Supreme Court’s 8-1 decision, authored by Justice Elena Kagan, reversed the First Circuit and resolved a circuit split by providing trademark licensees with the same protection under the Bankruptcy Code as the other licensees of intellectual property.  The Supreme Court restored the licensee’s rights under the license, explaining that the debtor’s rejection of the license agreement constituted a breach, but not a recission or termination of the agreement.  The Supreme Court explained that a debtor has no greater rights in bankruptcy than outside of bankruptcy, and that the result of a breach in bankruptcy is the same as it is under non-bankruptcy law, which does not give the debtor a unilateral right to vitiate the licensee’s rights under the agreement.  According to the Supreme Court, the licensee, Mission Product, could continue to use the license as provided under the agreement, which would have been the result had the debtor breached the license agreement outside of bankruptcy.

Fifth Circuit Resolves Multi-State Perfection Puzzle

Stephen W. Sather

Barron & Newburger, P.C.

Austin, TX  

ssather@bn-lawyers.com

In a lesson that the Uniform Commercial Code is not always uniform between various states, the Fifth Circuit resolved a lien priority dispute pertaining to a Texas debtor who brought agricultural products in Oregon, Michigan and Tennessee.    The opinion in a valuable primer in choice of law issues in UCC cases as well as how failure to strictly comply with state statutes can lead to loss of lien priority.   Fishback Nursey, Incorporated v. PNC Bank, National Association, Case No. 18-10090 (5th Circuit 4/10/19).

What Happened

 BFN Operations, LLC was a wholesale grower of trees, shrubs, and other plants, with headquarters in Texas and offices in Michigan, Oregon and Tennessee.   

PNC held a blanket lien in the debtor's assets which pre-dated the claims of two vendors to the debtor, Fishback and Surface.

Fishback sold agricultural products to the debtor and filed UCCs in Oregon, Michigan and Tennessee.   It listed the debtor as BFN Operations, LLC abn Zelenka Farms.  It also filed a notice of lien in Oregon.

Surface filed a UCC in Michigan using the name "BFN Operations, LLC abn Zelenka Farms.

When BFN filed chapter 11, PNC extended debtor-in-possession financing which would outrank other liens "subject and junior only to . . . valid, enforceable, properly perfected, and unavoidable pre-petition liens."

Fishback and Surface filed suit against PNC in the U.S. District Court for the Northern District of Texas seeking a declaration that their liens were superior to those of PNC.

The District Court ruled that applicable choice of law rules dictated that the law of the states where the agricultural products were shipped should govern the lien perfection and priority dispute.  It then found that PNC had the prior lien because Fishback and Surface had failed to properly perfect.

The Court's Ruling

The first thing that the Fifth Circuit had to do was decide whether the District Court correctly determined that the law of the states where the agricultural products were shipped would apply.  The Court noted that choice of law could be applied based upon either the law of the forum state or under federal choice-of-law rules.   This is an open question in the Fifth Circuit.  The District Court found that it did not have to pick a side because both answers pointed to the states where the ag products were shipped.   The Fifth Circuit agreed.   Under the Texas UCC, if farm products are located in a jurisdiction, the local law of that jurisdiction applies to perfection, the effect of perfection and the priority of an agricultural lien on farm products.   Tex.Bus.&Com. Code Sec. 9.302.   Federal law relies on the Restatement (Second) of Conflicts of Law Sec. 251(2) which provides that absent "effective choice of law by the parties" the court should give "greater weight . . . to the location of the chattel at the time that the security interest attached."

Fishback argued that Oregon law should apply because its contracts contained a choice of law provision selecting Oregon law.  However, those provisions were included in a contract between the Debtor and Fishback.  As a result, they were not binding on PNC.

Each of the laws of the forum states had some quirky provisions.   In  Michigan and Tennessee, a UCC must be filed based on the debtor's name exactly as it appears on the public documents creating the entity.  In this case, the company's legal name was BFN Operations, LLC, not BFN Operations, LLC abn Zelenka Farms.   This may seem like a trivial distinction given that the name given was correct but added extra verbiage.   However, the Court found that it was "undisputed that, under the strict search logics in these states, searching with BFN’s correct name would not uncover the incorrectly named liens."    While this seems foolish, the states set out their search logic in regulations adopted to implement the UCC and that search logic would not catch the longer name.

Oregon was a different matter.  Agricultural liens in Oregon are automatically perfected until 45 days after the debt is due.  After that date, the party must file an extension supported by an affidavit.  Fishback did file an extension but it was not within the 45 day window so that PNC's lien jumped in front of its.  Fishback argued that its UCC filing met the requirement for the affidavit, but the Fifth Circuit found that it lacked the requisite information and would be misleading as an affidavit.

Takeaways

As bankruptcy lawyers, we are usually called in after the filings have been made and the lien perfection facts have been established.   Therefore, the biggest lesson for bankruptcy lawyers is that when dealing with multi-state perfection issues, there may be room to look for strategies to upset other parties' lien expectations.   

When dealing with the front end of a transaction, it makes good sense to consult with a local lawyer to find out the quirks in local lien law, whether it is the UCC or mechanics liens or real property mortgages.  One consequence of our federal system is that despite the efforts to draft uniform laws, states are perfectly free to implement traps for the unwary.

Mooting a Circuit Split

Hon. Judith K. Fitzgerald (Ret.)

JFitzgerald@tuckerlaw.com

Tucker Arensberg, P.C.

www.TuckerLaw.com

A case of interest to those who sell or purchase property in bankruptcy came down recently.  In Trinity 83 Development LLC v. ColFin Midwest Funding LLC, 2019 WL 987902 (7th Cir. March 1, 2019), the Court of Appeals for the Seventh Circuit overturned prior precedent by ruling that 11 U.S.C. § 363(m) does not moot appeals from sale orders.  A panel of the Court had previously decided In re Sax, 796 F.2d 994 (7th Cir. 1986), which stood for the proposition that any dispute that fell within the scope of § 363(m) was moot.  More recently in In re River West Plaza-Chicago, LLC, 664 F.3d 668 (7th Cir. 2011), § 363(m) was determined to prevent efforts to set aside the sale and, relying on Sax, to prohibit the court from putting the sale proceeds back into the estate.  Because Trinity 83 Development LLC was also a panel decision, its author, Judge Easterbrook, circulated the opinion to all active circuit judges but none asked for en banc review. 

Trinity 83 Development LLC involved a situation where, prepetition, a mortgagee erroneously satisfied a mortgage and when the mistake came to light, was corrected.  The Court of Appeals described the facts as follows:  In 2006 Trinity 83 Development borrowed about $2 million from a bank, giving in return a note and a mortgage on certain real property. In 2011 the bank sold the note and mortgage to ColFin Midwest Funding. ColFin relied on Midland Loan Services to collect the payments. In 2013 Midland recorded a document (captioned “satisfaction”) stating that the loan had been paid and the mortgage released. But the loan was still outstanding, and Trinity continued paying. In 2015 ColFin realized Midland's mistake and recorded a document cancelling the satisfaction. Soon afterward Trinity stopped paying, and ColFin filed a foreclosure action in state court.

Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, No. 18-2117, 2019 WL 987902, at *1 (7th Cir. Mar. 1, 2019)

Trinity filed bankruptcy, which stopped the foreclosure.  After Trinity filed its bankruptcy, it sued ColFin, arguing that the release extinguished the debt and security interest.  The Bankruptcy Judge, later affirmed by the District Court, disagreed, and ruled that the release was a unilateral error that could be rectified unilaterally—and, as no one else had recorded a security interest between those two events, ColFin retained its original rights.  ColFin appealed but before the appeal was heard, the property was sold under the bankruptcy court's auspices.  ColFin contended that § 363(m) mooted the appeal.

The Seventh Circuit decided, inter alia, that the appeal was not constitutionally moot.  Section 363(m), deals with sales orders that have not been stayed and, as there is a live controversy regarding who should get the sales process, does not concern mootness at all.  Moreover, § 363(m) “does not say one word about the disposition of the proceeds of a sale or lease. The text is straight-forward: ‘The reversal or modification on appeal of an authorization ... of a sale or lease of property does not affect the validity of a sale or lease ... to an entity that purchased or leased such property in good faith’. What should be done with the proceeds is a subject within the control of the bankruptcy court.”   Trinity 83 Dev., LLC, supra, 2019 WL 987902, at *2.  Thus, the appellate court decided, a bankruptcy court is not prevented from deciding what to do with sales proceeds when its sale order has not been stayed.  This ruling brings the Seventh Circuit into line with other courts that have addressed this issue including, as noted by Judge Easterbrook, In re Hope 7 Monroe Street L.P., 743 F.3d 867, 872–73 (D.C. Cir. 2014); In re ICL Holding Co., 802 F.3d 547, 554 (3d Cir. 2015); and In re Brown, 851 F.3d 619, 623 (6th Cir. 2017).