BSP Agency LLC v. Katzoff (In re KG Winddown, LLC)

Decision Date12 August 2021
Docket NumberAdv. Pro. 21-01006 (MG),20-11723 (MG)
PartiesIn re: KG WINDDOWN, LLC, et al., [1] Debtors. v. Gerald Katzoff, GFB Restaurant Corp., IM LLC-I, and I M LLC-II, Defendants. BSP Agency LLC, Providence Debt Fund III L.P., Benefit Street Partners SMA-C L.P., Benefit Street Partners SMA LM L.P., Providence Debt Fund III Master (Non-US) Fund L.P., Benefit Street Partners SMA-C SPV L.P., Manager IM Rest, LLC, 60th Street IM Rest, LLC, Asset Co IM Rest, LLC, Atlantic City IM Rest, LLC, Boca IM Rest, LLC, Franchise IM Rest, LLC, Gram Trib IM Rest, LLC, Long Island Opco IM Rest, LLC, Long Island Propco IM Rest, LLC, Miami IM Rest, LLC, Products IM Rest, LLC, Soho Prime IM Rest, LLC, Central IM Rest, LLC, and Receivables IM Rest, LLC, Plaintiffs,
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Chapter 11

QUINN EMANUEL URQUHART & SULLIVAN, LLP Counsel to the Plaintiffs By: Rachel Epstein, Esq. Benjamin Finestone, Esq. Mario O. Gazzola, Esq. Donald John Reinhard, II, Esq.

Zachary R. Russell, Esq. MARKS & KLEIN, LLP Counsel to the Defendants By: Brent M. Davis, Esq. Justin M. Klein, Esq.

WESTERMAN BALL EDERER MILLER ZUCKER & SHARFSTEIN, LLP Counsel to Defendants Gerald Katzoff and GFB Restaurant Corp. By: William C. Heuer, Esq.

OPINION AFTER TRIAL

MARTIN GLENN UNITED STATES BANKRUPTCY JUDGE

Table of Contents
I. BACKGROUND ........................................................................................................................................... 3

A. Il Mulino's Founding ........................................................................................................................................ 3

B. Mr. Katzoff and His Business Partners Acquire Il Mulino ................................................................................. 4

C. The GFB License ............................................................................................................................... .................. 4

D. The IM-III License ............................................................................................................................... ............... 6

E. Sublicenses from IM USA .................................................................................................................................. 8

F. IM USA Enters into a Credit Agreement with BSP ............................................................................................. 8

G. The Debtors Encounter Financial Distress and Prepare for Bankruptcy ............................................................ 9

H. The Debtors Enter Bankruptcy and Sell Substantially All Assets to Plaintiffs ................................................. 10

I. The Post-Closing Letters ................................................................................................................................ 10

J. The Adversary Proceeding .............................................................................................................................. 11

II. COUNT I: VIOLATION OF THE CRO ORDER ................................................................................................. 13
III. COUNT II: VIOLATION OF THE SALE ORDER ............................................................................................... 15

A. The Post-Closing Letters Violated the Sale Order ........................................................................................... 15

B. The Plaintiffs Are Not Entitled to Attorneys' Fees for Mr. Katzoff's Violation of the Sale Order ................... 16

IV. COUNT III: DECLARATION OF DOMAIN NAME RIGHTS ............................................................................... 20
V. COUNT IV: BREACH OF THE IM-III LICENSE ................................................................................................ 23

A. Whether Extrinsic Evidence May Be Considered in Interpreting the Licenses .................................................... 23

B. The Original Parties' Intent Should Be Considered in Interpreting the Licenses ................................................ 24

C. The Licenses Can Coexist Without Conflict ...................................................................................................... 24

1. Scope of Exclusivity ............................................................................................................................... .... 24

2. The "Restaurants" in the IM-III License .................................................................................................... 25

3. The Territorial Restriction in the GFB License ........................................................................................... 28

4. Domain Names ............................................................................................................................... .......... 30

5. Sharing the Use of the Domain Names ..................................................................................................... 32

D. The Plaintiffs' Claims for Breach of the IM-III License Fail ............................................................................... 34

1. Grant and Continuation of the Original GFB License ................................................................................ 35

2. Representation and Warranty Regarding Prior Licenses .......................................................................... 36

3. Extensions and Amendments to the GFB License ..................................................................................... 36

4. Refusal to Cooperate with Prosecution of an Infringement Claim ............................................................ 39

5. Anticipatory Breach by the Post-Closing Letters ....................................................................................... 40

E. Plaintiffs Have Not Proven Any Damages ....................................................................................................... 40

F. An Injunction Is Not Warranted ..................................................................................................................... 43

G. Prior Notice of the GFB License ....................................................................................................................... 47

VI. COUNT V: INFRINGEMENT ........................................................................................................................ 49
VII. COUNT VI: FRAUDULENT TRANSFER UNDER N.Y. D.C.L. §§ 273, 274, AND 276 ...................................... 49
VIII. COUNT VII: FRAUDULENT TRANSFER UNDER 11 U.S.C. §§ 544, 548, AND 550 ........................................ 52
IX. COUNT VIII: TORTIOUS INTERFERENCE WITH CONTRACT .......................................................................... 55

A. New York's Stranger Rule .............................................................................................................................. 56

1. Mr. Katzoff ................................................................................................................................................ 58

2. GFB ............................................................................................................................... ............................ 61

B. Damages ............................................................................................................................... .......................... 63

X. COUNT IX: FRAUD .................................................................................................................................... 64
XI. COUNT X: BREACH OF FIDUCIARY DUTY .................................................................................................... 64
XII. DEFENDANTS' COUNTERCLAIMS .......................................................................................................... 71

A. Counterclaim for a Declaration that the GFB License Is Valid ......................................................................... 71

B. Counterclaim for Breach of Section 3.1.1 of the IM-III License ....................................................................... 71

XIII. CONCLUSION ....................................................................................................................................... 75

This opinion decides issues of fact and law following trial of this adversary proceeding. BSP[2] was the pre-petition secured creditor of the chapter 11 debtors, and acquired the debtors' assets with a credit bid in a section 363 sale. Among the valuable assets acquired was a license of a tradename, trademark, and related intellectual property. But precisely what license rights were acquired under the asset purchase agreement and sale order is very much in dispute. Both sides seek a declaration of their rights, and the Plaintiffs also seek damages and injunctive relief against at least some of the Defendants on a variety of legal theories.

The disputes stem from two licenses that grant "exclusive" rights to two different parties. The first is the license dated September 23, 2002, between defendant IM LLC-I ("IM-I") and defendant GFB Restaurant Corp. ("GFB"). ("GFB License," ECF Doc. # 35-1; Pls. Ex. 6.) GFB owns and operates the "original" Il Mulino Italian restaurant in New York City. The second is the license dated March 5, 2004, between IM-I and IM LLC-III ("IM-III"). ("IM-III License," ECF Doc. # 6-3; Pls. Ex. 18.)[3] The IM-III License was assigned to debtor Il Mulino USA, LLC ("IM USA") the same day as it was executed (March 5, 2004). (Pls. Ex. 18 at 13-16.)

The IM-III License was among the assets acquired by the Plaintiffs in the section 363 sale....

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