Dec. 31 (Bloomberg) -- 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. and International Business Machines Corp. 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. 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).
Milagro Oil Defaults on Second-Lien Note Payment
Milagro Oil & Gas Inc. didn’t make a Nov. 15 interest payment on $250 million in 10.5 percent second-lien notes due in 2016.
The Houston-based oil and gas production and development company didn’t cure the payment default during the 30-day grace period, according to Standard & Poor’s.
Default on the second-lien notes was an event of default under the company’s credit facility, S&P said.
Moody’s Investors Service said this month it expects Milagro will file for bankruptcy or complete a “distressed exchange” as a consequence of the payment default.
In May, Milagro announced a tender offer for the second-lien notes where, for each old $1,000 note, holders could receive $750 in cash or $500 in new Class A units and $500 in a new note on much the same terms, except that half the interest would have been paid with more notes.
Expiration of the exchange offer was extended several times until it was finally terminated on Oct. 31.
Milagro’s production is mostly onshore in Texas and Louisiana.
The $250 million in 10.5 percent second-lien notes last traded in May for 82.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
In the first half of 2013, Milagro reported operating income of $9.6 million on revenue of $65.5 million. After preferred dividends, the net loss for the half year was $25.9 million.
For 2012, Milagro reported a $65.3 million net loss on revenue of $135.5 million. In 2011, the $42.2 million net loss resulted from revenue of $153.8 million. The 2012 loss included $31.9 million in preferred dividends.
Wanxing Joins with Creditors to Bid for Fisker
The Fisker Automotive Inc. creditors’ committee found an alternative buyer and mounted new opposition yesterday to the company’s reorganization plan up for approval on Jan. 3.
The committee has consistently opposed the company’s Chapter 11 plan based on a so-called private sale of the business to Hybrid Tech Holdings LLC, which paid $25 million to buy the $168.5 million secured loan made by the U.S. Department of Energy. If Fisker’s plan were to go through, no other prospective buyer would have been able to bid against Hybrid.
Saying from the outset that the Hybrid sale has nothing for unsecured creditors, the committee signed an agreement for a U.S. affiliate of China’s Wanxiang Group Corp. to buy the Fisker business for $25.75 million cash. In a court filing yesterday, the committee proposed that the U.S. Bankruptcy Court in Delaware set up a traditional auction and sale procedures.
The key to the committee’s proposal is a $25 million limitation on Hybrid’s ability to make a credit bid, where a buyer uses secured debt rather than cash to purchase assets. The committee contends that the government’s auction process established that the loan was worth no more than $25 million, given the underlying value of the assets.
If the bankruptcy judge goes along with the idea, bids would be due Jan. 28, followed by an auction on Jan. 31 and a Feb. 3 hearing to approve sale.
Pending sale, Wanxiang is offering to provide substitute financing to pay off the loan provided by Hybrid.
If Wanxiang wins, creditors will retain the ability to bring lawsuits, with Wanxiang sharing some of the proceeds.
Wanxiang is no stranger to U.S. bankruptcy auctions. It beat out Johnson Controls Inc. and bought the business belonging to A123 Systems Inc., a developer of automotive lithium-ion batteries.
Committee opposition isn’t Fisker’s only problem at next week’s confirmation hearing. There are $3.8 million in unresolved claims filed on behalf of workers who were fired without the 60 days’ notice required in labor law. The bankruptcy judge refused to allow Fisker to hold a hearing next week and attempt to knock out the workers’ claims.
Fisker said there isn’t enough cash to confirm a plan unless the workers’ priority claims are extinguished.
As part of Fisker’s reorganization plan filed together the Chapter 11 petition on Nov. 22, Hybrid Tech would buy the assets in exchange for $75 million of the government loan. It would also supply $725,000 in cash for distribution to creditors under the liquidating plan. In addition, Hybrid would waive the $8 million loan to finance bankruptcy.
Founded in 2007, Fisker sold only 1,800 of its Karma plug-in hybrid sedans. Production halted last year.
Fisker’s plan has a projected 1 percent recovery for unsecured creditors with about $320 million in claims. The cash would be provided by Hybrid, although only if the class votes for the plan. Similarly, Hybrid will waive its unsecured deficiency claim only if the class votes “yes.”
The disclosure statement, approved tentatively this month, doesn’t specify the percentage recovery by Hybrid Tech.
Financial problems for Anaheim, California-based Fisker began following a two-year delay in bringing the Karma to market, at prices ranging from $100,000 and $120,000. Production halted last year, never to resume, with the bankruptcy of A123, the sole supplier of the cars’ lithium-ion batteries. Hurricane Sandy in October 2012 destroyed the entire U.S. inventory of 338 unsold vehicles.
Fisker said total debt is $500 million. It listed the assets as being worth more than $100 million.
The case is In re Fisker Automotive Holdings Inc., 13-bk-13087, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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).
LightSquared Given Permission to Proceed with Revised Plan
LightSquared Inc., the developer of a satellite-based wireless communications system, emerged from a hearing yesterday with permission from the bankruptcy judge to move ahead with the company’s plan that was modified on Dec. 24, after creditors were already voting on four competing reorganization plans.
LightSquared’s new plan is supported by Philip Falcone’s Harbinger Capital Partners LLC, JPMorgan Chase & Co., Fortress Investment Group LLC, and Melody Capital Advisors LLC. It would pay most creditors in full to avoid having the business taken over under a competing plan where Charles Ergen’s Dish Networks Corp. would buy LightSquared for $2.2 billion.
For the time being at least, Harbinger is postponing consideration of its plan. For Bloomberg coverage of yesterday’s hearing, click here.
The confirmation hearing for approval of one of the competing plans begins Jan. 9.
LightSquared filed for bankruptcy reorganization in May 2012, listing assets of $4.48 billion and debt of $2.29 billion. U.S. regulators blocked the service after makers and users of global positioning system devices, including the U.S. military and commercial airlines, said LightSquared’s signals would disrupt navigation systems.
The case is In re LightSquared Inc., 12-bk-12080, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Mediators Support Approval of Revised Swap Termination
Detroit won the support of two federal judges who are recommending that a third judge approve a revised settlement where the city will pay $165 million rather than $230 million to terminate a swap agreement.
Originally, the city was to borrow $350 million to pay of the swap, using the remainder for infrastructure improvements. Midway through a hearing for approval of the loan and swap payoff, U.S. Bankruptcy Judge Steven Rhodes suspended the hearing and sent the parties to mediation.
The chief mediator is U.S. District Judge Gerald Rosen from Detroit, assisted by U.S. Bankruptcy Judge Elizabeth L. Perris from Portland, Oregon. Together, they filed a court paper yesterday recommending that Rhodes approve the settlement allowing Detroit to invest $120 million in infrastructure while reducing a loan from $350 million to $285 million. For other Bloomberg coverage, click here.
Rosen summoned Detroit, bond insurers and bondholders to continued mediation sessions on Jan. 6 and Jan. 7 in New York.
Detroit began the country’s largest-ever Chapter 9 municipal bankruptcy in July with $18 billion in debt, including $5.85 billion in special revenue obligations, $6.4 billion in post-employment benefits, $3.5 billion for underfunded pensions, $1.13 billion on secured and unsecured general obligations, and $1.43 billion on pension-related debt, according to a court filing. Debt service consumes 42.5 percent of revenue.
The city has 100,000 creditors and 20,000 retirees.
The case is City of Detroit, Michigan, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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).
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