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

• Decision Date: 12 August 2021
• Docket Number: Case No. 20-11723 (MG) (Jointly Administered),Adv. Pro. No. 21-01006 (MG)
• Citation: 632 B.R. 448
• Parties: IN RE: KG WINDDOWN, LLC, et al., Debtors. 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, v. Gerald Katzoff, GFB Restaurant Corp., IM LLC-I, and IM LLC-II, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

632 B.R. 448

IN RE: KG WINDDOWN, LLC, et al.,¹ Debtors.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,

v.Gerald Katzoff, GFB Restaurant Corp., IM LLC-I, and IM LLC-II, Defendants.

Case No. 20-11723 (MG) (Jointly Administered)

Adv. Pro. No. 21-01006 (MG)

United States Bankruptcy Court, S.D. New York.

Signed August 12, 2021

QUINN EMANUEL URQUHART & SULLIVAN, LLP, Counsel to the Plaintiffs, 51 Madison Avenue, New York, NY 10010, 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, 63 Riverside Avenue, 7th Floor, Red Bank, NJ 07601, 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., 1201 RXR Plaza, Uniondale, NY 11556, By: William C. Heuer, Esq.

OPINION AFTER TRIAL

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Table of Contents

I. BACKGROUND...––––

A. IL MULINO'S FOUNDING ...––––

B. MR. KATZOFF AND HIS BUSINESS PARTNERS ACQUIRE IL MULINO ...––––

C. THE GFB LICENSE ...––––

D. THE IM-III LICENSE ...––––

E. SUBLICENSES FROM IM USA ...––––

F. IM USA ENTERS INTO A CREDIT AGREEMENT WITH BSP ...––––

G. THE DEBTORS ENCOUNTER FINANCIAL DISTRESS AND PREPARE FOR BANKRUPTCY ...––––

H. THE DEBTORS ENTER BANKRUPTCY AND SELL SUBSTANTIALLY ALL ASSETS TO PLAINTIFFS ...––––

I. THE POST-CLOSING LETTERS ...––––

J. THE ADVERSARY PROCEEDING ...––––

II. COUNT I: VIOLATION OF THE CRO ORDER...––––

III. COUNT II: VIOLATION OF THE SALE ORDER ...––––

A. THE POST-CLOSING LETTERS VIOLATED THE SALE ORDER ...––––

B. THE PLAINTIFFS ARE NOT ENTITLED TO ATTORNEYS’ FEES FOR MR. KATZOFF'S VIOLATION OF THE SALE ORDER ...––––

IV. COUNT III: DECLARATION OF DOMAIN NAME RIGHTS...––––

V. COUNT IV: BREACH OF THE IM-III LICENSE...––––

A. WHETHER EXTRINSIC EVIDENCE MAY BE CONSIDERED IN INTERPRETING THE LICENSES ...––––

B. THE ORIGINAL PARTIES’ INTENT SHOULD BE CONSIDERED IN INTERPRETING THE LICENSES ...––––

C. THE LICENSES CAN COEXIST WITHOUT CONFLICT ...––––

1. Scope of Exclusivity...––––

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

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

4. Domain Names...––––

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

D. THE PLAINTIFFS’ CLAIMS FOR BREACH OF THE IM-III LICENSE FAIL ...––––

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

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

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

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

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

E. PLAINTIFFS HAVE NOT PROVEN ANY DAMAGES ...––––

F. AN INJUNCTION IS NOT WARRANTED ...––––

G. PRIOR NOTICE OF THE GFB LICENSE ...––––

VI. COUNT V: INFRINGEMENT...––––

VII. COUNT VI: FRAUDULENT TRANSFER UNDER N.Y. D.C.L. §§ 273, 274, AND 276...––––

VIII. COUNT VII: FRAUDULENT TRANSFER UNDER 11 U.S.C. §§ 544, 548, AND 550...––––

IX. COUNT VIII: TORTIOUS INTERFERENCE WITH CONTRACT...––––

A. NEW YORK'S STRANGER RULE ...––––

1. Mr. Katzoff...––––

2. GFB...––––

B. DAMAGES ...––––

X. COUNT IX: FRAUD...––––

XI. COUNT X: BREACH OF FIDUCIARY DUTY...––––

XII. DEFENDANTS’ COUNTERCLAIMS...––––

A. COUNTERCLAIM FOR A DECLARATION THAT THE GFB LICENSE IS VALID ...––––

B. COUNTERCLAIM FOR BREACH OF SECTION 3.1.1 OF THE IM-III LICENSE ...––––

XIII. CONCLUSION...––––

This opinion decides issues of fact and law following trial of this adversary proceeding. BSP² 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. After the section 363 sale, the Plaintiffs own and operate other Il Mulino restaurants, some in New York City and some elsewhere.

But what rights does each license grant? As part of an uneasy truce on negotiated terms set forth in a stipulation and order dated February 5, 2021 (the "Stipulation," ECF Doc. # 24), GFB and BSP currently "share" (i) the "Il Mulino" tradename for their respective restaurants, (ii) a common website accessed using the "ilmulino.com" domain name, and (iii) use of the "ilmulino.com" domain name as part of their email addresses.

The central issue is whether the GFB License and the IM-III License conflict, or whether they can coexist. For the reasons explained below, the Court finds that the licenses do not conflict with each other, and the licenses can coexist. While the Court also finds that IM-I breached the IM-III License, the Plaintiffs are entitled to only nominal damages.

With respect to the Plaintiffs' other claims, the Court concludes that (1) certain postclosing letters from Defendants' counsel did not violate the CRO Order entered on August 14, 2020,⁴ but did violate the Sale Order entered on December 22, 2020⁵ (but the Plaintiffs are not entitled to attorneys' fees), and (2) the Plaintiffs' claims for fraudulent transfer, tortious interference, and breach of fiduciary duty all fail. The Court also concludes that the Plaintiffs should not be granted injunctive relief.

With respect to the Defendants' counterclaims against the Plaintiffs, the Court finds and concludes that the Defendants are entitled to a declaration that the GFB License is valid and can coexist with the IM-III License, but they are not entitled to a declaration that the IM-III License is void.

I. BACKGROUND ⁶

The Plaintiffs are the buyers and designees of substantially all of Debtors' assets in a section 363 sale. (See Sale Order.)

The Defendants are Gerald Katzoff and three entities he controls: GFB, IM-I, and IM LLC-II ("IM-II"). Defendants GFB, IM-I, and IM-II were not debtors in the bankruptcy case.⁷ Mr. Katzoff was the manager of the Debtors and was in control of the Debtors until this Court appointed Mackinac Partners, LLC, as chief restructuring officer ("CRO"). See In re K.G. IM, LLC , 620 B.R. 469 (Bankr. S.D.N.Y. 2020). Craig Boucher performed the duties of CRO on behalf of Mackinac.

The dispute concerns the scope of the intellectual property rights that the Plaintiffs acquired in the section 363 sale. The Plaintiffs describe those rights as "[t]he most valuable asset Plaintiffs acquired from the Debtors." ("Pls. Br.," ECF Doc. # 74, at 11.)⁸

A. Il Mulino's Founding

In 1981, brothers Giovanni and Fernando Masci founded the original Il Mulino restaurant on West 3rd Street (the "Original Restaurant") in the Greenwich Village neighborhood of Manhattan. ("Stipulated Facts," ECF Doc. # 78 Ex. A, ¶ 1.) Giovanni and Fernando Masci owned the Original Restaurant through their company GFB. (Id. ¶ 2.) Since its founding in 1981, the Il Mulino brand has grown to encompass four distinct Il Mulino concepts—Il Mulino New York, Trattoria Il Mulino, Il Mulino Prime, and Bistecca by Il Mulino. (Id. ¶ 3.) Currently, there are fifteen restaurants operating under one of these four Il Mulino concepts across the continental United States and Puerto Rico. (Id. ¶ 4.)

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

In 2002, Mr. Katzoff and his business partners created two entities, IM-I and IM-II. (Id. ¶ 5.) On September 12, 2002, IM-II acquired 80% of the shares of GFB, and IM-I acquired all rights, title, and interests in the intellectual property relating to the Original Restaurant (the "Intellectual Property").⁹ (Id. ¶¶ 6–7; Pls. Exs. 1–2.) The Intellectual Property was, and remains, IM-I's only material asset. (Stipulated Facts ¶ 7.)

C. The GFB License

IM-I granted the GFB License on September 23, 2002. The GFB License is governed by New York law. (GFB License ¶ 19.)

The GFB License granted GFB:

an exclusive license (the "License") during the term of this Agreement to use Licensor's trade name of Il Mulino for the restaurant located at 86 West Third Street, New York, New York.

(Id. ¶ 3.) The GFB License contains a territorial restriction: the "License ... may be used only in the Territory." (Id. ) The Territory is defined as "the restaurant located at 86 West Third Street, New York, New York." (Id. )

The GFB License originally included a licensing fee of 15% of gross sales,¹⁰ which was reduced to 5% in an amendment dated as of January 1, 2005. (Id. ¶ 6; "2005 Amendment," Pls. Ex. 22, ¶ 2.)

The term of the GFB License is as follows:

4. Term of Agreement – Extensions. The term of this Agreement shall be ten years commencing with the date of this

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