- Weathering the Storm: Intellectual Property Rights in Bankruptcy - Everything is for Sale
- March 27, 2009
- Law Firm: Haynes and Boone, LLP - Fort Worth Office
Problem: A long-standing competitor is caught by the credit crunch and now cannot refinance its maturing debt. Out of options and trying to save its operations and brand names, your competitor files a Chapter 11 petition to buy time to work with its creditors. What does this mean for you?
In short, it means that you might have the chance to acquire one or more of your competitor’s assets, including its product lines or brands1.
A company operating under Chapter 11 surrenders much of its self-determination in exchange for the protection it receives from its creditors. In short, almost everything that a debtor company owns is for sale. Sometimes, a Debtor tries to sell assets at the beginning of its case. In other situations, it may hold onto all of its assets hoping that the value increases.
Regardless of whether a Debtor really wants to sell or not, being in Chapter 11 means that both the Debtor and its assets are “in play” and are subject to being sold. A debtor-in-possession has the duty to maximize the value of its assets and operations. That sometimes requires selling the assets it spent many years developing.
Both tangible and intangible assets can be sold in bankruptcy. Importantly, most asset sales in bankruptcy are “free and clear” of all liens, claims and encumbrances (11 U.S.C. § 363). This allows for sales that could never have occurred outside of a bankruptcy case. For example, if the liens against an asset exceed the asset’s value, it could be sold free from those liens if the lienholder (a) consented to the sale and (b) agreed to release their liens. The Bankruptcy Court can approve a sale for less than the amount of all liens because it has all liens, claims and encumbrances attached to the proceeds of the sale while allowing the asset being sold to pass free from the same.
Procedurally, the Bankruptcy Rules of Procedure generally require 20 days notice before a Bankruptcy Court can approve a sale free and clear of liens (unless that time is shortened by the Court). That period allows parties the opportunity to object to the sale (including price, terms or both) and even allows other parties the chance to offer a higher price. If you know that your competitor is selling one of its brands, this gives you some time to participate in the process.
If, on the other hand, the competitor does not intend to sell the brand, you have not run out of options. Companies interested in purchasing assets from a debtor-in-possession are not shut out of the process. Approaching the “major players” in the case with your proposal might encourage them to suggest that the Debtor give more serious consideration to your proposal. Those major players include the Official Creditors Committee, the largest secured creditors and even the United States Trustee. It is possible that, with encouragement from its primary constituents, the Debtor might look more favorably upon selling to you.
There are a number of variables when the asset being offered is a right granted by a contract. Generally, intangible assets in the form of rights under various contracts may also be sold by a Debtor. However, the specific rights being sold will determine whether those rights are generally assignable, assignable only through confirming a plan of reorganization or are not assignable at all.
The “bottom line” is that assets owned by companies in bankruptcy cases are for sale or might become available for purchase in a myriad of ways. If you want to buy any tangible or intangible assets that find themselves involved in a bankruptcy, we can help you evaluate the options that are available to accomplish the sale.
1 Generally, this article will discuss the sale of assets where the right to sell the asset is not being disputed. Some assets are not easily sold – including patent licenses, which at least one Circuit Court has determined to be not subject to being assumed and assigned to a buyer. Also, it does not address whether any potential sale might be subject to other limitations, including a “Hart-Scott-Rodino” filing.