Retail insolvency: consumer protection, pre-payments and changes to the Sale of Goods Act

Example Buy Now ButtonWe are yet to see the true impact of Christmas trading in the retail industry although HMV is already a victim of the tough conditions for retailers. Additionally, Boots has announced a fall in sales and the launch of a “transformational costs management program” to save more than $1 billion and Next has confirmed that profits in store have fallen and although online sales are up, the uncertainty about the UK economy after Brexit makes forecasting difficult. Only one thing is clear – consumers remain at risk in the event of a retail business entering administration.

There has been much talk of late about the failing UK high street, the change in consumer habits and how retailers are having to adapt and change their traditional business models to meet the evolving needs of consumers. However, what protections do consumers actually have if they have ordered and paid for goods online or paid a deposit but the business then fails? Continue Reading

State Marijuana Laws vs. Bankruptcy: The Tension Grows

In prior posts, we examined whether state-licensed marijuana businesses, and those doing business with marijuana businesses, can seek relief under the Bankruptcy Code.  As we noted, the Office of the United States Trustee (the “UST”) has taken the position that a marijuana business cannot seek bankruptcy relief because the business itself violates the Controlled Substances Act 21, U.S.C. §§ 801, et seq. (the “CSA”), notwithstanding their state licenses. The UST has also taken the position that those leasing commercial space to a state-licensed marijuana business are themselves precluded from accessing bankruptcy courts because the CSA makes no distinction between a seller or grower of marijuana and those renting space to the seller or grower.  Now, in an opinion issued on December 14, 2018, a bankruptcy court held that businesses selling horticultural supplies to both marijuana businesses and other customers is not eligible for bankruptcy protection.

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When is a decision to declare an interim dividend a decision?

It is often common practice for small businesses to structure payments to a director (who is also a shareholder) through a combination of dividend payments and salary, in order to minimize PAYE liabilities and reduce tax.  Consequently, rather than be paid a salary, a director is “remunerated” by dividend payments.  This works when the company declaring the dividend has sufficient distributable reserves – but when it does not, those payments are unlawful and can be clawed back under s847 of the Companies Act 2006.

It is also often the case that a director is paid by monthly interim dividend payments, albeit that at the time of payment it is not yet known whether there will be sufficient distributable reserves to justify the payment. If at the end of the financial year it turns out that the company did not have sufficient distributable reserves, the payment is re-characterised as salary and PAYE will be accounted for at that point.  This payment structure can work (although the original payment to the director is illegal), but what happens where there is an intervening insolvency that occurs before the payments are reversed? Continue Reading

Third Circuit Confirms There’s No Wiggle Room With Jurisdictional Limitations

A precedential decision issued on November 28, 2018 by the U.S. Court of Appeals for the Third Circuit highlights the limits of bankruptcy judges’ authority to transfer non-core proceedings to other courts.  The Third Circuit’s opinion in In re IMMC Corp. f/k/a Immunicon Corp., et al., Case No. 18-1177, also emphasizes the importance of choosing the right forum for filing post-confirmation litigation.

The facts of the eight-year long jurisdictional dispute are procedurally complex, but are crucial to understanding the potential significance of the Third Circuit’s ruling.  In 2008, IMMC Corporation (the “Debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.  Roberto Troisio (the “Trustee”) was appointed liquidating trustee of the Debtor’s estate pursuant to the Debtor’s confirmed plan of liquidation.

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The Fifth Circuit Reminds Buyers To Beware Of Buying “Deemed Rejected” Contracts

The recent decision by the Fifth Circuit Court of Appeals in In re Provider Meds, L.L.C. is a stark reminder to chapter 7 trustees that they have an affirmative obligation to examine a debtor’s assets.  A trustee’s failure to conduct a sufficient and timely examination may deprive the estate of significant value.

The issue before the Court in Provider Meds was whether the assumption and assignment of an intellectual property license agreement (the “License Agreement”) conveyed any intellectual property rights since the Agreement had not been timely assumed by the trustee.  The facts were not in dispute.  Multiple related debtors filed chapter 11 cases, and those cases were later converted to chapter 7.  None of the debtors listed the License Agreement in their bankruptcy schedules.  The License Agreement had been executed as part of a settlement of a 2010 patent litigation in which Tech Pharmacy Services, LLC (“Tech Pharm”) had alleged that multiple defendants, including several of the debtors (pre-petition), had infringed its patent.  Under the License Agreement, all but one of the debtors obtained a non-exclusive perpetual license to use Tech Pharm’s patent.  Following conversion of their cases to chapter 7, RPD Holdings, L.L.C. (“RPD”) purchased all of the assets of three of the debtors under section 363 of the Bankruptcy Code.  The orders approving the sales provided that to the extent that any of the subject property was an executory contract, the contract was assumed by the estate and immediately assigned to RPD under section 365 of the Bankruptcy Code.

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Did Jevic Doom Future Chapter 11 Recovery Efforts By Unsecured Creditors?

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Can a senior secured creditor, who credit bid for substantially all of a debtor’s assets, contribute non-estate property to a litigation trust for the benefit of general unsecured creditors without following the absolute priority rule?  In the recent Constellation Enterprises case, the Bankruptcy Court for the District of Delaware ruled that, as a result of the Supreme Court’s Jevic decision, it cannot and on that basis refused to approve a settlement which would have provided a significant recovery to unsecured creditors. The court’s decision resulted in a multi-million dollar windfall for the senior secured creditors with whom the creditors’ committee in that case had negotiated a favorable settlement.

In an article published in the Journal of Corporate Renewal, the official publication of the Turnaround Management Association, entitled “Did Jevic Doom Future Chapter 11 Recovery Efforts by Unsecured Creditors?,” Squire Patton Boggs Restructuring & Insolvency Group partners Norman Kinel and Nava Hazan examine Constellation Enterprises and its potential ramifications on efforts by creditors’ committees to obtain recoveries for their constituents in the chapter 11 cases of highly overleveraged companies.

Black Friday- risks and opportunities for UK retailers

You may have noticed from the emails flooding into your inbox (even in this post-GDPR world) that this Friday 23 November is “Black Friday”. The event, originating in the US, takes place the day after Thanksgiving and is now synonymous with heavy discounting by retailers, especially those online.

Less than a decade ago, this would have been an utterly unremarkable shopping day in the UK. The UK’s shoppers understood that, whilst the retailers were fiercely competing with each other to secure consumers’ spending in the run-up to Christmas, November and December were not months in which retailers would slash their prices as a means to generate sales. The UK public had to wait until Boxing Day for the retailers to cut prices in order to sell their excess Christmas stock, with the leading news story on Boxing Day often consisting of shoppers (both from the UK and overseas) flocking to the UK’s department stores to try to obtain the best bargains.

That changed with the increased adoption of Black Friday discounting by the UK’s retailers approximately five years ago, (although Amazon had offered UK consumers Black Friday deals from 2010). Black Friday firmly came on the UK’s radar in 2014, when the headlines featured shoppers at several UK supermarkets coming to blows in a bid to purchase heavily discounted televisions.

So what will be the effect of Black Friday on the retail sector in 2018, in the context of the current challenging market, with a number of well-known retailers releasing profit warnings and others proposing CVAs and/or entering administration? In recent years, Black Friday has undoubtedly had an impact on consumers’ shopping habits during the key trading period prior to Christmas, meaning that retailers have had to react. Continue Reading

The Supreme Court May Finally Give Guidance On Trademark Protections In Bankruptcy

In prior posts, we discussed the perplexing issue of how and whether a trademark licensee is protected when the trademark owner/licensor files a bankruptcy petition and moves to reject the trademark license in accordance with section 365 of the Bankruptcy Code.

In January of this year, the First Circuit Court of Appeals issued its ruling in Mission Product Holdings, Inc. v. Tempnology, LLC, 879 F.3d 389 (2018), holding that a trademark licensee was not permitted to continue to utilize the trademark after the rejection of the license agreement. In so holding, the First Circuit disagreed with the Seventh Circuit Court of Appeals’ decision in Sunbeam Prods. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (2012), where the Seventh Circuit held that a non-debtor’s right to continue to use a trademark license is based upon section 365(g) of the Bankruptcy Code which provides that a rejection of an executory contract (such as a trademark license agreement) simply constitutes a prepetition breach of that contract — it neither acts as a contract rescission nor termination.  Instead, the court held that rejection leaves in place the licensee’s right to continue to use the licensed trademark notwithstanding the contract’s rejection.

In what could only be considered as good news for trademark licensees and licensors, as well as bankruptcy professionals advising them, on October 26, 2018, the U.S. Supreme Court granted certiorari in the Mission Product Holdings, Inc. v. Tempnology, LLC case.  This means that parties may finally get guidance as to what happens to a trademark license when the trademark licensor rejects the trademark license agreement. Do trademark licensees have any protections like those afforded licensees of intellectual property under section 365(n)?  Is the Seventh Circuit’s approach in Sunbeam appropriate, or, as held by the First Circuit, is it up to Congress to clarify the status of trademark rights post-rejection? Only time will tell. 

We will keep our readers informed as to all developments in this incredibly important case.

HMRC, Insolvency and Post-Budget Preferential Status

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Following the Enterprise Act 2002, the preferential status which HMRC had enjoyed in an insolvency was abolished, rendering HMRC the same as any other unsecured creditor. The effect of this was to swell the pot of assets available to be applied to all unsecured creditor claims.

Philip Hammond announced in Monday’s budget that HMRC’s preferential status is to be restored. What does this mean for HMRC and unsecured creditors? Continue Reading

What Value is Cryptocurrency to a Bankruptcy Estate?

In their article published by the IBA Insolvency and Restructuring International Magazine titled “Russia: Cryptocurrency and Bankruptcy Estate”, Sergey Treshchev and Elena Malevich of Squire Patton Boggs, Moscow analyse recent decisions in the Russian courts considering whether cryptocurrencies are an asset which form part of the bankruptcy estate.

Given the speed at which cryptocurrency has grown as a concept, it is of no surprise that bankruptcy and insolvency legislation has yet to catch up and define just what cryptocurrency is and therefore how it should be treated in a debtor’s bankruptcy or corporate insolvency. Not just in Russia but internationally.

As courts worldwide grapple with the concept of whether cryptocurrency should be treated as an asset or currency, there is no uniform view. In the U.S., for example, some bankruptcy courts concluded that they should be treated as currency: HashFast Technologies, LLC v. Lowe (In re HashFast Technologoes, LLC), Bankr. Case No. 14–30725DM, Adv. Pro. No. 15-3011DM (Bankr. N.D. Cal. Feb 19, 2016).  In the EU, Member States are split on the position.

Sergey and Elena discuss their thoughts on the findings of the Russian courts.  If you would like to read the full article, please click here.