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U.S. Patents Protected in Foreign Cases: Bankruptcy

A foreign company enlisting the assistance of U.S. courts under Chapter 15 of the Bankruptcy Code is barred from terminating licenses of U.S. patents, according to an opinion by the U.S. Court of Appeals in Richmond, Virginia.

The case involved Qimonda AG, a chipmaker that initiated insolvency proceedings in 2009 in Germany. The German insolvency administrator invoked protection in the U.S. under Chapter 15 when the bankruptcy court in Alexandria, Virginia, determined that Germany was home to the foreign-main bankruptcy proceeding.

The German administrator took the position that German law allows him to terminate licenses to utilize Qimonda’s 4,000 U.S. patents. The Qimonda licenses typically were part of cross-licensing arrangements where the licensees gave Qimonda rights to use their patents.

Technology companies including Intel Corp. (INTC) and International Business Machines Corp. (IBM) objected, contending they were entitled to protection under Section 365(n) of the Bankruptcy Code, which gives a patent licensee the right to continue using a license even if it’s terminated in bankruptcy.

The bankruptcy court ultimately sided with the licensees. The German administrator took a direct appeal to the Fourth Circuit appeals court in Richmond, which upheld the lower court in a 44-page opinion on Dec. 3.

The case turned on the interpretation of Sections 1521 and 1522 of the Bankruptcy Code. Section 1521 allows the U.S. court to grant the foreign representative additional powers that would be available in an ordinary U.S. bankruptcy.

Section 1522 imposes a limitation on Section 1521 by providing that the interests of creditors must be “sufficiently protected.”

Chapter 15 isn’t a full-blown reorganization like Chapter 11. It allows a foreign company to secure protection from creditor actions in the U.S. and enables the U.S. court to assist the foreign court handling the main bankruptcy.

Employing a balancing test, Qimonda’s U.S. bankruptcy judge concluded that creditors wouldn’t be sufficiently protected unless Section 365(n) were available by allowing patent licensees to continue using licenses, regardless of German law. Circuit Judge Paul v. Niemeyer agreed with the lower court, even though imposing Section 365(n) would diminish the value of patents for the German administrator.

Niemeyer said that Section 1522 “requires the bankruptcy court to ensure the protection of both the creditors and the debtor.” That section also requires ensuring that use of Section 1521 “does not impinge excessively on any one entity’s interests,” he said.

The answer in any particular case results from “balancing the respective interests based on the relative harms and benefits,” Niemeyer said.

The bankruptcy judge also found that allowing use of German law to terminate patent licenses would violate Bankruptcy Code Section 1506 for being “manifestly contrary to the public policy of the U.S.” Niemeyer didn’t reach the issue under Section 1506.

Niemeyer said his analysis is the same as that of the U.S. Court of Appeals in New Orleans in a 2012 opinion involving Mexican glassmaker Vitro SAB. For a discussion of the Vitro opinion, click here for the Nov. 29, 2012, Bloomberg bankruptcy report.

Combined with a Chapter 15 decision this month from the U.S. Court of Appeals in New York in a case called Drawbridge, critics can argue that U.S. courts aren’t fulfilling one of the primary objectives of Chapter 15 in supporting foreign courts supervising bankruptcies of companies based abroad. For a discussion of Drawbridge, click here for the Dec. 12 Bloomberg bankruptcy report.

The German administrator filed papers in the appeals court on Dec. 17 seeking rehearing before all active judges in the circuit.

The Chapter 15 case of the Qimonda parent was running parallel to a Chapter 11 reorganization for the U.S. subsidiary Qimonda Richmond LLC. Based in Cary, North Carolina, the U.S. Qimonda company filed under Chapter 11 in February 2009 and sold most of the assets to Texas Instruments Inc. (TXN) It confirmed a liquidating Chapter 11 plan in September 2011. For details on the plan and the expected recovery by creditors, click here for the Sept. 21 Bloomberg bankruptcy report.

The appeal is Jaffe v. Samsung Electronics Co., 12-1802, U.S. Court of Appeals for the Fourth Circuit (Richmond).

The parent’s Chapter 15 case is Qimonda AG, 09-bk-14766, U.S. Bankruptcy Court, Eastern District of Virginia (Alexandria). The U.S. company’s Chapter 11 case is In re Qimonda Richmond LLC, 09-bk-10589, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Updates

Equity Powers Under Attack Again in U.S. Supreme Court

The equity powers of federal courts in lawsuits arising from bankruptcy are under attack in another case where the losing side is seeking an appeal to the U.S. Supreme Court.

In June, the law firm Mayer Brown LLP persuaded the U.S. Court of Appeals in Chicago to uphold dismissal of a lawsuit based on a theory known as judicial estoppel, barring someone from taking inconsistent positions in court.

The Seventh Circuit in Chicago ruled that judicial estoppel is “more flexible” than other equitable principles known as claim or issue preclusion and is designed for the “preservation of the judicial process.” Seeking review in the Supreme Court, the main creditor of a bankrupt company contends that when “statutory dictates are clear,” doctrines of equity like judicial estoppel “may not usurp what Congress has commanded.”

Equity powers of bankruptcy courts are already being tested in a case scheduled for argument next year in the Supreme Court. In Law v. Siegel, the high court will decide whether bankruptcy courts have general equity power to depart from statutory mandates and take otherwise exempt property away from individual bankrupts.

In the Mayer Brown case, the creditor contends it was an error to dismiss the lawsuit because the trustee never took inconsistent positions. If any, it was the creditor that took inconsistent positions.

In papers filed this month opposing an appeal, the law firm makes several arguments for why the Supreme Court shouldn’t hear the case. The firm says the circuit courts don’t have differing opinions.

The creditor who’s asking the Supreme Court to hear the case didn’t have the right to appeal, the firm says. In its own court rules, the Supreme Court says that it rarely takes case alleging the misapplication of properly stated law.

Judicial estoppel kicks in to halt a lawsuit when the same party has taken an inconsistent position previously in a different legal dispute. The Mayer Brown case boils down to a question of whether the doctrine also applies when the inconsistency is between positions previously taken by the creditor and later by the trustee.

The law firm told the Supreme Court in its papers that federal appeals courts permit use of judicial estoppel when inconsistent positions were taken by different parties. Conceivably, the Supreme Court could accept the case to rule on whether the same party must be involved for judicial estoppel to take hold.

The Supreme Court is yet to set a conference date when the justices will meet and decide whether to allow an appeal.

To read about the decision in the Chicago appeals court, click here for the June 24, Bloomberg bankruptcy report. For other discussion of Law v. Siegel, click here and here for the June 19 and June 27 Bloomberg bankruptcy reports.

The Mayer Brown case in the Supreme Court is Spehar Capital LLC v. Mayer Brown Rowe & Maw LLP, 13-619, U.S. Supreme Court (Washington).

The appeal in the appeals court was Grochocinski v. Mayer Brown Roe & Maw LLP, 10-2057, U.S. Court of Appeals for the Seventh Circuit (Chicago). The case in district court was Grochocinski v. Mayer Brown Roe & Maw LLP, 06-cv-05486, U.S. District Court, Northern District of Illinois (Chicago).

Versace Mansion’s Owner Files Full-Payment Plan

Owners of the former Versace Mansion on Ocean Drive in Miami Beach, Florida, sold the property in October and filed a liquidating Chapter 11 plan designed for full payment to remaining creditors.

Owners of Jordache Enterprises Inc. paid $41.5 million for the property. The sale left more than $5.5 million after secured claims were paid.

Of the remaining claims slightly in excess of $11 million, $10 million is the claim by the entity that operated the property before bankruptcy. The mansion’s owners say the claim is completely invalid because the operator violated its lease and failed to pay $1.35 million in real estate taxes.

The disclosure statement explaining the plan, filed on Dec. 27, says that all creditors will be paid in full so long as the former operator’s claim is reduced to no more than $3.5 million.

The buyer, VM South Beach LLC, had acquired a $34.5 million secured claim and paid most of the purchase price by surrendering the mortgage debt. VM includes the Nakash family, which owns the Hotel Victor next door.

The home was owned by fashion designer Gianni Versace, who was murdered on the doorstep in 1997. Built in 1930, the mansion was designed to resemble Christopher Columbus’ home in Genoa.

The current owner, Casa Casuariana LLC, filed for Chapter 11 protection on July 1 in Miami. Until his Ponzi scheme fell apart in 2009, Scott Rothstein had controlled the company that owned the property.

The property’s owner filed formal lists showing a value of $75 million. Total debt was previously listed as being $31.6 million, including a secured claim of $30.4 million.

The case is In re Casa Casuariana LLC, 13-bk-25645, U.S. Bankruptcy Court, Southern District of Florida (Miami).

Advance Sheets

Inpatient Services Not Required for Having Ombudsman

A medical facility isn’t required to provide inpatient services before the appointment of a patient ombudsman is required, according to U.S. Bankruptcy Judge Michael Lynn in Fort Worth, Texas.

The bankruptcy reorganization of a “health care business” requires appointment of an “ombudsman” to represents patients’ interests unless the appointment “is not necessary for the protection of patients,” according to Section 333 of the Bankruptcy Code.

Lynn parted company with courts requiring that the institution provide inpatient services before an ombudsman is mandatory.

The case involved a chain of 19 clinics providing routine outpatient dental services. In his Dec. 18 opinion, Lynn differed with the U.S. Trustee, who advocated a line of cases taking the position that an institution must have inpatient services before an ombudsman kicks in.

Lynn said the statute contains no requirement about inpatient services. Otherwise, the clinics “likely” were a “health care business,” he said.

The judge didn’t actually decide the inpatient issue because he went on to conclude that an ombudsman wasn’t required on other grounds.

Lynn said that bankruptcy was the result of weak cash flow stemming from falling reimbursement rates. The business had no record of malpractice complaints and thus no need for an ombudsman.

The case is In re Smiley Dental Arlington PLLC, 13-bk-44805, U.S. Bankruptcy Court, Northern District of Texas (Fort Worth).

State Judgment Precludes Reexamination of Claim

A bankruptcy judge doesn’t always have the ability to determine the value of a claim, according to the U.S. Court of Appeals in Chicago.

After three-year marriage, the former wife was awarded about $60,000 in state divorce court. When the former husband didn’t pay, she sued in Georgia state court and won several judgments, the last for about $75,000. The husband never appealed.

After the last judgment, the husband filed in Chapter 13, where he contested the amount of the debt, saying the state court hadn’t given him credit for payments he’d made.

The wife unsuccessfully argued in bankruptcy court that attacking the amount of the debt was barred by the doctrine of issue preclusion since the claim was supported by a final state-court judgment.

The district court upheld the bankruptcy court’s ruling and also said the amount of the outstanding debt could be recalculated.

The Seventh Circuit appeals court in Chicago reversed in an opinion written on Dec. 27 by Circuit Judge David F. Hamilton.

Whether the claim could be recalculated was governed by the state-law doctrine of issue preclusion, known in Georgia as collateral estoppel.

Hamilton said the state-court judgment satisfied all the requirements for collateral estoppel. Consequently, the bankruptcy court had no power to look behind the state judgment.

Hamilton said that the former husband’s arguments were all rejected in state court.

The case is Adams v. Adams, 13-1636, U.S. Court of Appeals for the Seventh Circuit (Chicago).

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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