Mission Product Holdings, Inc. v. Schleicher & Stebbins Hotels, L. L.C.

• Citation: 602 B.R. 798
• Decision Date: 18 June 2019
• Docket Number: BAP NO. NH 18-048,Bankruptcy Case No. 15-11400-CJP
• Parties: OLD COLD, LLC, Debtor. Mission Product Holdings, Inc., Appellant, v. Schleicher & Stebbins Hotels, L.L.C., and Old Cold, LLC, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit

602 B.R. 798

OLD COLD, LLC, Debtor.Mission Product Holdings, Inc., Appellant,

v.Schleicher & Stebbins Hotels, L.L.C., and Old Cold, LLC, Appellees.

BAP NO. NH 18-048

Bankruptcy Case No. 15-11400-CJP

United States Bankruptcy Appellate Panel of the First Circuit.

June 18, 2019

Robert J. Keach, Esq., and Lindsay Z. Milne, Esq., on brief for Appellant.

Christopher M. Candon, Esq., on brief for Appellee, Schleicher & Stebbins Hotels, L.L.C.

No brief filed by Appellee, Old Cold, LLC.

Before Lamoutte, Godoy, and Finkle, United States Bankruptcy Appellate Panel Judges.

Lamoutte, U.S. Bankruptcy Appellate Panel Judge.

Mission Product Holdings, Inc. ("Mission"), an unsuccessful bidder for the debtor's assets and a party to one of the debtor's rejected executory contracts, appeals from the bankruptcy court's order granting the motion for relief from the automatic stay (the "Stay Relief Order") filed by creditor, Schleicher & Stebbins Hotels, LLC ("S & S"). In the motion, S & S, the pre- and post-petition secured lender to the debtor and the successful purchaser of the majority of the debtor's assets in a § 363 sale, sought relief from the automatic stay under § 362(d)(2) "to pursue its rights and remedies as a holder of a valid, perfected, first-priority security interest" in all of the debtor's remaining assets."¹ Mission opposed the motion, arguing that: (1) the bankruptcy court was divested of jurisdiction to consider it given the pendency of a petition for writ of certiorari before the U.S. Supreme Court (the "Supreme Court") relating to Mission's purported post-rejection rights under a license agreement pursuant to § 365(n);² and (2) S & S was not entitled to stay relief because, as part of its winning bid for the debtor's assets, S & S waived its lien on certain assets excluded from the sale which remained in the bankruptcy estate. Rejecting both arguments, the bankruptcy court granted S & S's request for relief from stay.

For the reasons set forth below, we AFFIRM .

INTRODUCTION ³

Prior to the bankruptcy filing, Old Cold, LLC, formerly known as Tempnology, LLC (the "Debtor"), made specialized products—such as towels, socks, headbands, and other accessories—designed to remain at low temperatures even when used during exercise. S & S, an investment holding company, owned a majority interest in the Debtor and was the Debtor's pre-petition lender.

Three years before the petition date, the Debtor and Mission entered into an agreement, whereby the Debtor granted Mission a non-exclusive license to use the Debtor's intellectual property as well as certain exclusive product distribution rights. In the three years that followed, the Debtor experienced "multi-million dollar losses," which it blamed on the agreement with Mission. Eventually, Mission's relationship with the Debtor soured and, in 2014, Mission exercised its contractual right to terminate the license agreement.

The parties' contentious relationship spawned several strands of litigation in the Debtor's bankruptcy case. One related to the Debtor's rejection of the license agreement and Mission's assertion of post-rejection rights under that agreement pursuant to § 365(n). Another related to the Debtor's 2015 sale to S & S of primarily all its assets—with the exception of cash, inventory, and accounts receivable—which the bankruptcy court approved over the objection of Mission, who was the unsuccessful bidder for those assets. Disagreeing with the outcomes in those contested matters, Mission appealed to both the Panel and the First Circuit and, with respect to its alleged post-rejection rights under the license agreement, to the Supreme Court. None of the appeals have been successful (with the exception of the single issue addressed by the Supreme Court, as discussed later). Despite the finality of the bankruptcy court's order approving the sale, Mission remains dissatisfied with the Debtor's sale of its assets to S & S. When S & S requested relief from the automatic stay to exercise its rights as the holder of a security interest in the assets remaining in the bankruptcy estate, Mission objected, asserting for the first time that S & S had waived its lien on those assets as part of the § 363 sale, although no such waiver was expressed in the sale order or the asset purchase agreement. Mission also argued that the bankruptcy court was divested of jurisdiction to consider the stay relief motion because stay relief would "impermissibly interfere" with the § 365(n) rights Mission was asserting in its petition to the Supreme Court. The bankruptcy court, finding no evidence in the extensive record that S & S had waived its lien, rejected both arguments and granted S & S relief from stay. Mission appealed. Although it sought a stay pending appeal from both the bankruptcy court and the Panel, neither court granted the request. Thereafter, the Debtor distributed the remaining estate asset—approximately $ 500,000 in cash—to S & S.

As an understanding of the course of proceedings before the bankruptcy court is relevant to the merits of this appeal, we begin with a detailed discussion of the relevant pre- and postpetition events.

BACKGROUND

I. Pre-Petition Events

In 2012, the Debtor and Mission entered into a Co-Marketing and Distribution Agreement (the "Mission Agreement"), which granted Mission a non-exclusive, perpetual license to use the Debtor's intellectual property and an exclusive distributorship for certain manufactured products of the Debtor.

In the spring of 2013, the Debtor obtained a line of credit from People's United Bank ("People's") pursuant to a note in the original principal amount of $ 350,000 (the "LOC Note"). To secure its obligations under the LOC Note, the Debtor granted to People's a security interest in all of the Debtor's assets and executed a UCC financing statement which was filed with the New Hampshire Secretary of State.

The Debtor also borrowed money from S & S. In August 2013, the Debtor executed a term note of up to $ 6,000,000 (the "Term Note"), and S & S loaned millions of dollars to the Debtor under the Term Note on an unsecured basis. Then, in July 2014, S & S purchased the LOC Note, along with People's "first position security interest in the Debtor's assets." S & S increased the loan limit from $ 350,000 to $ 4,000,000, and rolled some of its unsecured debt into the secured LOC loan. Another UCC financing statement, assigning to S & S all of People's rights and interests under the original UCC financing statement, was filed with the New Hampshire Secretary of State. (All of these documents are collectively referred to as the "Loan Documents").

On June 30, 2014, Mission exercised its contractual right to terminate the Mission Agreement without cause, triggering a two-year wind-down period during which time the Mission Agreement remained in full force. The Debtor responded by seeking to terminate the Mission Agreement for cause, claiming a breach by Mission. As a result of the dispute, the parties entered into a two-phase arbitration with each party claiming breach by the other. The arbitrator found that the Debtor's attempted termination for cause was improper, potentially entitling Mission to damages for the Debtor's failure to abide by the Mission Agreement leading up to arbitration. The hearing to determine the amount of these damages was stayed by the Debtor's bankruptcy filing.

II. The Bankruptcy Proceedings⁴

A. The Bankruptcy Filing

The Debtor filed a chapter 11 petition on September 1, 2015. On the petition date, S & S formally became a stalking horse bidder by signing an agreement to purchase the Debtor's assets for $ 6.95 million, composed almost entirely of forgiven pre-petition debt owed by the Debtor to S & S.⁵

On its bankruptcy schedules, the Debtor listed S & S as its only secured creditor with a claim in the amount of $ 5,550,000 for pre-petition "advances" made by S & S. Additionally, the Debtor listed Mission as an unsecured creditor with a contingent, unliquidated, disputed claim in the amount of $ 0, and identified the Mission Agreement as one of its executory contracts.

The Debtor also filed a number of motions at the outset of the case, including: (1) a motion seeking authority to obtain post-petition debtor-in-possession financing from S & S and to use S & S's cash collateral (the "DIP Financing Motion"); (2) a motion to establish procedures for the sale of substantially all of its assets (the "Sale Motion"); and (3) a motion to reject executory contracts, including the Mission Agreement (the "Rejection Motion"). Mission filed a single objection to all three motions, and extensive litigation between the parties ensued.

B. The DIP Financing Motion

Three days after the bankruptcy filing, the bankruptcy court issued an order (the "First Interim DIP Order") granting the DIP Financing Motion on an interim basis and authorizing the Debtor to borrow up to $ 500,000 from S & S (the "DIP Facility"). The First Interim DIP Order acknowledged that S & S's pre-petition liens on the Debtor's assets were "valid, binding, enforceable, and perfected first-priority liens ...." Thereafter, the bankruptcy court entered additional orders approving the DIP Facility on an interim basis on the same or similar terms and conditions as set forth in the First Interim DIP Order.

In December 2015, after a hearing, the bankruptcy court entered a final order approving the DIP Facility (as amended, the "Final DIP Order"), authorizing the Debtor "to incur debt" of up to $ 1,450,000 secured by "first priority perfected liens ... on property of the Debtor's estate ...." (the "DIP Liens"). The Final DIP Order indicated that the Debtor's pre-petition debt to S & S was approximately $ 5,500,000 under the LOC Note and that S & S would have "replacement security interests and liens in the Collateral ... with the same validity as existed on the petition date ...." It further provided:

This Order shall be sufficient and conclusive evidence of the validity, perfection, and

...