602 B.R. 798
1st Cir. BAP2019Background
- Debtor Old Cold, LLC (Tempnology) licensed IP and exclusive distribution rights to Mission; relationship soured and Debtor rejected the contract in chapter 11. Mission pursued §365(n) rights and appeals, including cert to the Supreme Court.
- S & S was Debtor's pre- and postpetition lender, obtained perfected first-priority liens, became stalking-horse bidder and purchased substantially all assets in a §363 sale; certain cash, inventory, and A/R were excluded from the sale and left in the estate (the "Excluded Assets").
- Sale order and APA did not contain any express release or waiver of S & S’s liens on the Excluded Assets; DIP and sale orders and financing documents confirmed S & S’s liens and established challenge periods that expired without timely challenges.
- Mission repeatedly acknowledged (in hearings and filings) that S & S had liens on remaining estate assets but later, for the first time in 2018, argued S & S either recontributed the Excluded Assets free and clear or waived its lien.
- After Mission filed for cert on §365(n), S & S moved for relief from stay under 11 U.S.C. §362(d)(2) to pursue its lien rights over remaining cash (~$527,292); bankruptcy court granted relief, Mission appealed to the BAP.
Issues
| Issue | Plaintiff's Argument (Mission) | Defendant's Argument (S & S) | Held |
|---|---|---|---|
| Whether filing a petition for certiorari divested the bankruptcy court of jurisdiction to rule on the stay-relief motion | Filing the cert petition (and pending Supreme Court appeal on §365(n)) divested the court because stay relief would "drain" estate assets and impermissibly interfere with Mission's pending appeal | Petition for certiorari does not automatically divest the lower court; the stay-relief question was not "closely related" to the §365(n) question | Court: Filing a cert petition does not automatically divest jurisdiction; issues were not closely related and divestiture did not apply (jurisdiction proper) |
| Whether S & S waived its liens or "recontributed" Excluded Assets free and clear | At the auction and in the sale process S & S (through conduct and bidding) implicitly waived liens or recontributed assets so Excluded Assets were unencumbered | No express waiver in APA, Sale Order, DIP orders, UCC filings; record (pleadings, examiner, status hearings) shows S & S consistently reserved lien rights; waiver cannot be inferred from ambiguous auction dialog | Court: No express or clear implied waiver; Mission’s belated theory unsupported; S & S has a colorable lien claim |
| Whether S & S met §362(d)(2) burden (no equity and not necessary for reorganization) | Mission argued the estate had equity in the cash because S & S had waived liens | S & S relied on scheduled secured claim amount, financing and sale orders, and the small remaining cash balance showing secured claims exceed asset value; Debtor assented that assets were not needed for reorg | Court: S & S met its burden (no equity); Debtor assented so property not necessary for reorganization; stay relief proper |
| Whether bankruptcy court abused discretion by denying Mission limited discovery before ruling | Mission sought targeted discovery into principals’ beliefs about encumbrance status | S & S argued record was extensive and discovery unnecessary under summary nature of stay-relief proceedings | Court: Denial of discovery not an abuse; stay-relief is a summary proceeding, local rules limit discovery, and the record sufficed to find a colorable claim |
Key Cases Cited
- Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019) (Supreme Court construed §365(n): rejection equals breach and cannot rescind previously granted license rights)
- Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26 (1st Cir. 1994) (stay-relief hearings are summary proceedings to determine whether creditor has a colorable claim)
- In re Old Cold, LLC, 879 F.3d 376 (1st Cir. 2018) (affirming bankruptcy sale to S & S and §363 protections for the purchaser)
- In re Tempnology, LLC, 879 F.3d 389 (1st Cir. 2018) (appellate decision concerning Mission’s rights under §365(n))
- Griggs v. Provident Consumer Discount Co., 459 U.S. 56 (1982) (notice of appeal divests lower court of jurisdiction as to matters involved in the appeal)
- Kontrick v. Ryan, 540 U.S. 443 (2004) (waiver defined as intentional relinquishment of a known right)