THE TROUBLED COMPANY
Nightmare on AE@ Street
JOHN A. O=MALLEY
ANDREW E. ASCH
FULBRIGHT & JAWORSKI L.L.P.
865 So. Figueroa Street, 29th Floor, Los Angeles, CA 90017
(213) 892-9200
TABLE OF CONTENTS
Page
INTRODUCTION...... -1-
FAMILIAR CONCEPTS IN A NEW LANDSCAPE:
CERTAIN LICENSING CONSIDERATIONS...... -1-
OPTIONS AVAILABLE TO VENDORS:
PROVISIONAL REMEDIES AND INJUNCTIONS...... -2-
ATTACHMENTS...... -2-
CLAIM AND DELIVERY/WRIT OF POSSESSION...... -5-
RECEIVERSHIPS...... -6-
INJUNCTIONS...... -10-
BIBLIOGRAPHY...... -15-
1
INTRODUCTION
Creditors of companies facing precarious financial times have long held a suite of remedies permitting quick and fairly drastic judicial action to preserve the creditors= positions B at least before the bankruptcy petition is filed. Attachments, receivers and injunctions are part of the creditors= arsenal.
Collapse of Anew economy@ companies in the recent past focuses renewed interest in creditors= remedies B especially as they relate to assets new economy companies are likely to have. This article generally discusses creditors= remedies and some of these new assets, such as domain names, trademark and patent licensing rights, in light of the suite of creditors= remedies.
FAMILIAR CONCEPTS IN A NEW LANDSCAPE:
CERTAIN LICENSING CONSIDERATIONS
I.What are the rights of an exclusive licensor? What are the licensee=s obligations with respect to the propriety product it agreed to distribute under the license? California UCC ' 2306(b) states that a Alawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes upon unless otherwise agreed an obligation by the seller to use the best efforts to supply the goods and by the buyer to use best efforts to promote their sale.@
II.Can the exclusive licensor terminate its agreement with the troubled licensee?
A.Ordinarily, a license containing no stipulations as to revocation cannot be terminated prior to the expiration of its terms except by mutual consent or a breach of condition. See, e.g.Automatic Radio Mfg. Co. v. Hazeltine Research, Inc., 176 F.2d 799, 82 U.S.P.Q. 324 (1st Cir. 1949), aff=d, 339 U.S. 827 (1950).
B.Breach under the UCC? The UCC sets a Abest efforts@ standard as the default for exclusive dealing agreements subject to the UCC. California UCC ' 2306(b).
C.On the other hand, provisions in a license agreement which provide for termination in the event of insolvency or bankruptcy of the licensee are no longer enforceable in view of the Bankruptcy Reform Act of 1978. The act provides that an interest of the debtor in property becomes property of the estate notwithstanding any provision which restricts transfer as a result of insolvency or financial condition of the debtor. 11 U.S.C. '' 365(e), and 541(c).
III.Are the troubled company=s suppliers entitled to assurances by that company that it will perform under the parties= agreements?
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A.California UCC '2609(a) provides that a Acontract for sale imposes an obligation on each party that the other=s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurances of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.@
B.California UCC ' 2609(d) states that if assurance of performance are not received within 30 days of a justified demand, Aunder the circumstances of the particular case is a repudiation of the contract.@
IV.If the licensee is subject to patent and trademark infringement claims, can its downstream buyers demand indemnification? May the licensee seek indemnification from the licensor?
A.Where the sale of goods is involved, California UCC ' 2312(3) provides that A[u]nless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claims which arise our of compliance with the specifications.@
B.Generally, however, there is no implied warranty in a patent license agreement with respect to the indemnity or remission of payments. Whatever protection the licensee is to receive must be explicitly stated in the agreement. If disagreement arises during negotiations over the terms of a hold-harmless clause, the disagreement may be resolved by the inclusion of a liberal termination clause. Einhorn, Patent Licensing Transactions, Vol. 1, ' 2.12 (Matthew Bender & Co. 1999).
OPTIONS AVAILABLE TO VENDORS:
PROVISIONAL REMEDIES AND INJUNCTIONS
The vendors, creditors and licensor=s of distressed Anew economy@ businesses have a familiar arsenal of provisional remedies to protect their interests. Creditors may chose to (1) attach the remaining assets of failed enterprise in an attempt to secure their claims, (2) seek to establish a receivership to take over the troubled business, or (3) enjoin the troubled entity from taking actions detrimental to the interests of all involved.
ATTACHMENTS
I.Introduction
A.Attachment creates a judicial lien on the debtor=s attachable property. This protects plaintiff=s priority so that a judgment ultimately obtained will be enforceable against the attached property. Attached property is held by the levying officer until judgment, but often brings about a quick resolution of the dispute.
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B.Attachment is statutory B therefore it is strictly construed and the party seeking the writ of attachment must be sure to follow all of the statutory requirements and applicable rules B including the local rules. See C.C.P. ' 481.010 etseq.
C.Key determinations as to whether plaintiff can bring an application for writ of attachment:
1.The claim is for money based upon a contract, express or implied; (C.C.P. ' 483.010(a))
2.The amount of the claim is either fixed or readily ascertainable, and not less than $500.00 (exclusive of costs, interest and attorneys= fees); (C.C.P. ' 483.010(a))
3.The claim is not secured by Aany interest in real property@ unless the security has become valueless through no fault of plaintiff or has Adecreased in value to less than the amount then owing on the claim.@ (C.C.P. ' 483.010(b))
4.If defendant is an individual, the claim must arise Aout of the conduct by the defendant of a trade, business or profession.@ (C.C.P. '483.010(c))
D.A right to attach order and writ of attachment may be obtained on very brief notice, or exparte, but only upon a showing Agreat or irreparable injury would result@ if the moving party were required to wait for a noticed hearing. C.C.P. ' 485.010.
E.An alternative to filing an exparte application is to seek a temporary protective order. TPO=s are designed to preserve the status quo pending a noticed hearing on plaintiff=s application form a writ of attachment, and require essentially the same showing for issuance as an exparte right to attach order: (1) that plaintiff will suffer Agreat or irreparable injury@ within the meaning of C.C.P. ' 485.010 if the TPO is not issued (C.C.P. ' 486.010(b)), and (2) that attachment is otherwise proper under the circumstances (C.C.P. ' 486.020).
F.Declarations supporting an application for a writ of attachment must be based on the declarant=s personal knowledge, and demonstrate that the plaintiff would prevail on the claim for which attachment is sought. Facts submitted in declarations must Abe set forth with particularity@ and should comply with evidence code requirements relating to competency, business records and the hearsay rule. See C.C.P. ' 482.040; Evid. Code ' 700 etseq. In addition, for exparte applications, declarant=s statement should provide a detailed account of why a noticed hearing is inappropriate.
G.Plaintiff must post a bond or undertaking to obtain a writ of attachment or TPO, Ato pay the defendant the amount the defendant may recover for any wrongful attachment by the plaintiff.@ C.C.P. ' 489.210. However, the bond is set at the statutory amount of $2,500 in limited civil cases, and $7,500 in unlimited civil cases. C.C.P. '' 85 & 489.220(a).
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H.The attachment law provides a statutory basis for bringing a wrongful attachment action. C.C.P. ' 490.010 etseq.
I.Plaintiff has no right of appeal from an order denying its attachment application. International Typographical Union v. Ad Compositors, Inc., 142 Cal. App. 3d 733, 735 (1983).
J.Bankruptcy consideration. The debtor=s filing of bankruptcy normally terminates Aa lien of a temporary protective order or of attachment if the lien was created within 90 days prior to the filing of the petition.@ C.C.P. ' 493.030. However, this is not the case if bankruptcy is filed more than 90 days after the attachment lien was created. In such cases the bankruptcy code tolls expiration of the lien and the creditor becomes a secured creditor. SeeDiamant v. Kasparian (In re So. Cal. Plastics, Inc.), 208 B.R. 178, 179 (9th Cir. 1997), rev=d on other grounds, 165 F.3d 1243 (1999).
K.Foreclosure consideration. C.C.P. ' 483.012 states that except where a deficiency judgment is forbidden under C.C.P. '' 580b and 580d, a creditor may attach a debtor=s unpledged property in an Aaction to foreclosure a mortgage or deed of trust on real property@ without violating the one-action rule of C.C.P. ' 726.
L.Security interests in personal property. C.C.P. ' 483.010(b), which prohibited bringing a writ of attachment on a claim secured by interest in personal property, including those under UCC 9101 etseq., was repealed in 1997.
M.Levy on copyrights, trademarks and patents. Unless another method of levy is provided, the levying officer attaches general intangibles by personally serving the writ of attachment on the account debtor. C.C.P. ' 488.470(a). If possible, notices and writs of attachment also should be recorded in the Copyright or Patent and Trademark Office when attaching copyrights, trademarks or patents consisting of payment rights. Cal. Practice Guide, Enforcing Judgments and Debts, '4:487.5 (The Rutter Group, 2001).
N.Levy of domain names. An open question exists regarding whether domain names are subject to attachment. The first cases to consider the issue have suggested that domain names rights merely reflect Aservice contracts,@ which could not be levied. SeeDorer v. Arel, 60 F.Supp.2d 558, 560 (E.D. Va. 1999) (suggesting, though not resolving, that domain names are properly construed as contract rights in the context of a writ of fieri facias under Virginia law); seealsoLockheed Martin Corp. v. Network Solutions, Inc., 141, F. Supp.2d 648, 656 n.3 (N.D. Tex. 2001) (citing Dorer); CNN L.P. v. cnnews.com, 162 F.Supp.2d 484, 492 n. 22 (E.D. Va. 2001) (same). Likewise, in Network Solutions, Inc. v. Umbro Int=l, Inc., 259 Va. 759, 770 (Va. S. Ct. 2000), the Virginia Supreme Court, analogizing to telephone numbers and citing to Dorer, concluded that Aa domain name registration is the product of a contract for services between the registrar and registrant.@ SeealsoKremen v. Cohen, 99 F. Supp. 2d 1168, 1173 (N.D. Cal. 2000) (finding that a domain name thief could not be held liable because Aa domain name is a form of intangible property which can not serve as a basis for a conversion claim.@)
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However, other cases have reached a different result after Congress created a inrem action to recovery domain names from cybersquatters in the Anticybersquatting Consumer Protection Act. These cases have observed that there Ais no prohibition on a legislative body making something property.@ Caesars World, Inv. v. Caesars-Palace.com, 112 F.Supp.2d 502, 504 (E.D. Va. 2000); seeLucent Technologies, Inc. v. lucentsucks.com, 95 F.Supp.2d 528, 535 (E.D. Va. 2000); Healthmount A.E. Corp., v. technodome.com, 60 U.S.P.Q.2d (BNA) 2018 (E.D. Va 2000). Likewise, in Online Partners.com, Inc. v. Atlanticnet Media Corp., 2000 U.S. Dist. LEXIS 783 (N.D. Cal. 2000), the court permitted a constructive trust remedy and, though relying upon a later reversed decision, found that a Adomain name is intellectual property and may be attached under the law.@
CLAIM AND DELIVERY/WRIT OF POSSESSION
I.Introduction
A.The common law definition of a writ of possession is Aclaims and delivery.@ See C.C.P. 511.010 etseq. Claim and delivery is a provisional remedy that enables a plaintiff to recover specific, tangible personal property in the defendant=s possession pending the outcome of the case.
B.Plaintiff must show Aprobable validity@ of the merits of the claim before the court will consider a writ of possession. C.C.P. ' 512.060. AProbable validity@ means it is more likely than not that plaintiff will obtain a judgment against defendant on the claim. C.C.P. ' 511.090.
C.A writ of possession is a remedy only, ancillary to a proper cause of action. See, e.g., Sea Rail Truckloads, Inc. v. Pullman Co., 131 Cal. App. 3d 511, 514-15 (1982).
D.To obtain a writ of possession, the plaintiff must show:
1.the general basis of the claim and that plaintiff is entitled to possession of the property claims;
2.defendant=s wrongful detention;
3.a particular description of the property and a statement of its value;
4.the location of the property, according to the best knowledge, information, and belief, of the plaintiff; and
5.that the property has not been taken for a tax, assessment or fine. C.C.P. '512.010(b)(1)-(5).
E.A noticed hearing is generally necessary to obtain a writ of possession. C.C.P. '512.020. However, the writ may issue exparte if:
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1.the defendant gained possession of the property by a Afelonious taking@; or
2.the property is a credit card; or
3.the defendant acquired the property in the ordinary course of his trade or business for commercial purposes; and
a.the property is not necessary for the support of defendant or his/her family; or
b.there is an immediate danger of property being concealed, transferred or removed from the state or will become substantially impaired in value; and
c.the ex parte issuance is necessary to protect the property. C.C.P.
' 512.020(b).
4.Also, plaintiff may obtain a temporary restraining order and/or preliminary injunction to protect against transfer, either as alternative to writ of possession or adjunct remedy.
F.An undertaking twice the value of the defendant=s interest in the property, or greater, is required before a temporary restraining order or a writ of possession may issue. C.C.P. ' 515.010.
G.After plaintiff obtains possession through the writ, defendant may regain possession, if plaintiff has not yet received the property, by filing an undertaking in amount equal to plaintiff=s. C.C.P. ' 515.020.
RECEIVERSHIPS
I.Introduction
A.A receiver is an officer and representative of the court who is appointed to take possession of and protect assets for the appointing court, under that court=s control and continuous supervision, for the benefit of all persons who may have an interest in those assets. A receivership pending suit is a provisional, equitable remedy.
B.Los Angeles Superior Court Local Rule 9.52(e):
AThe receiver is an agent of the court, not of any party to the litigation, and as such:
(1)is neutral;
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(2)acts for the benefit of all who may have an interest in the receivership property;
(3)holds assets for the court, not the plaintiff nor the defendant; and
(4)may not directly or indirectly agree to enter a contract, arrangement, or understanding with any party, or agent, or assignee thereof, about 1) the receiver=s role with respect to the property following a trustee=s sale or termination of the case, without specific court permission, 2) how the receiver will administer the receivership or how the receiver will charge for services or pay for services to appropriate and/or approved third parties hired to provide services, 3) who the receiver will hire, or seek approval to hire, to perform necessary services to administer the receivership, 4) making expenditures for any capital improvements to the property.@
C.Appointment of a prejudgment receiver is an expensive and time-consuming remedy. Statutes, case law and court rules require the moving party to show that the appointment is genuinely necessary, and that no lesser remedy would protect the party=s interest. For this reason, consider alternatives such as injunctive relief and the appointment of a provisional director. However, a receiver may be appropriate where, for example, an injunction regulating the conduct of the going business will not be effective.
II.When is a Receiver Available?
A.A receiver may be appointed only when authorized by statute or equity. C.C.P. '564(a); Turner v. Superior Court, 72 Cal. App. 3d 804, 811 (1977).
1.C.C.P. ' 564 is the primary statutory authorization. The most commonly relied upon provisions are the following:
(b)(1). Where it is shown that a party has a Aprobable@ right or interest in property, and Awhere it is shown that the property or fund is in danger of being lost, removed, or materially injured.@
(b)(3). To enforce or collect a judgment.
(b)(4). To dispose of real property according to a judgment, or to preserve it during the pendency of an appeal; or, after sale of real property following a decree of foreclosure, to operate the property during the redemption period.
(b)(6) AWhere a corporation is insolvent or in imminent danger of insolvency, or has forfeited its corporate rights.@
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(b)(9) AIn all other cases where necessary to preserve the property or rights of any party.@
(b)(11) By a secured lender for Aspecific performance of an assignment of rents provision. . . .@
2.There are many other specific statutory authorizations throughout the Codes. Examples include:
a.Bus. & Prof. Code '' 17203 and 17535 (in statutory unfair competition and false advertising cases).
b.C.C.P. ' 564(c) (to enable a secured lender to inspect real property security for hazardous substances).
c.C.C.P. ' 565 (to oversee the dissolution of any corporation).
d.C.C.P. ' 712.060 (to enforce a judgment for possession or sale of property).
e.Corp. Code ' 1803 (relating to involuntary dissolution of corporation).
f.Corp. Code ' 15028 (to charge a partnership interest for collection of judgment).
III.Who may be a Receiver?
A.The Code defines those eligible for the appointment as a receiver in negative terms. Thus, a receiver may not be a Aparty, or attorney of a party, or person interested in the action, or related to any judge of the court by consanguinity or affinity within the third degree,@ without the written consent of the parties. C.C.P. ' 566(a).
B.While virtually any individual may be appointed as a receiver, in apparently large or complex receiverships, some judges are hesitant to appoint individuals with whom they are unfamiliar.
IV.What are the Receiver=s powers and duties?
A.The receiver=s powers are those designated by statute and set out in the court=s appointing orders. Los Angeles Superior Court Rule 9.52(d).
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1.By statute, the receivers powers include the Apower to bring and defend actions in his own name, as receiver; to take and keep possession of the property, to receive rents, collect debts, to compound for and compromise the same, to make transfers, and generally to do such acts respecting the property as the Court may authorize.@ C.C.P. ' 568.
2.The powers of a receiver appointed by a state court are limited to property within the state=s borders. SeeTaylor v. Taylor, 192 Cal. 71, 76 (1923).
B.The primary source of the receiver=s powers are the court=s appointment orders. Because the appointing order is so significant, it should be carefully drafted so as to anticipate the powers and instructions that the receiver may require.
C.The following provisions should be considered for inclusion in the appointing order:
1.A provision that the receiver may sell real or personal property of the estate. See C.C.P. ' 568.5.
2.A provision authorizing the receiver to borrow funds.
3.The receiver=s power to enter into contracts or leases. Generally, a receiver may not borrow money, encumber property or enter into any material contract affecting the receivership without court approval. SeeNulaid Farmers Association v. LaTorre, 252 Cal.App. 2d 788, 791-793 (1967).