Noted with Interest: The Importance of Intellectual Property Due Diligence in Bankruptcy Proceedings: The Sale of Il Mulino Restaurant Intellectual Property | Quinn Emanuel Urquhart & Sullivan, LLP

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On August 12, 2021, the U.S. Bankruptcy Court for the Southern District of New York issued a post-trial opinion regarding the iconic Il Mulino Italian Restaurants, reaffirming the rights of an acquirer (“Buyer”) to use all valuable intellectual property, including social media, domain names and websites, that Buyer has acquired in connection with ‘a “credit offer”, within the framework of the operation by the Purchaser of Il Mulino Restaurants. See BSP Agency LLC v. Katzoff (In re KG Winddown, LLC), 2021 Banking. LEXIS 2191 #20-11723 (MG) (Bankr. SDNY Aug. 12, 2021). At the intersection of bankruptcy and intellectual property law, the court’s decision reflects the protection buyers enjoy when purchasing assets under the protection of the Bankruptcy Code. The decision is also a very positive development for the Il Mulino restaurants themselves, now financially stabilized and positioned for a return to excellence.

On July 28, 2020, the debtors filed motions for receivership in the Southern District of New York; soon after, a director of restructuring was appointed. In the bankruptcy cases, the court approved the sale of substantially all of the debtors’ assets to the buyer on December 22, 2020. Under the asset purchase agreement, the buyer was awarded a license (the “Intellectual Property License”) to use valuable intellectual resources. ownership under an agreement that granted “an exclusive right and license…royalty-free to use intellectual property in connection with restaurants.” Nevertheless, following the sale, the former manager of the Debtors (“Former Manager”) threatened to withdraw the Buyer’s access to the Il Mulino domain name and all associated web and social media accounts.

The order approving the sale (“Sell Order”) provided, among other things, that “[a]All persons having claims of any kind or nature against the debtors or assets purchased shall be forever barred, barred and permanently barred from pursuing or asserting any such claims against Buyer or any of its assets, property, affiliates, successors, assigns or purchased assets. Given this broad and protective language, the court found that the former director’s threat to interfere with the buyer’s rights under the IP license was prohibited by the sale order.

The court also interpreted the IP License in the context of a separate license between two of the non-debtor entities of the Former Manager, which license was not acquired (the “Other License”). The court found that, although the two licenses did not initially conflict, a 2020 amendment to the other license, which significantly expanded the rights under it and was drafted by the former manager , conflicted with and violated the buyer’s IP License. Indeed, during the litigation, the Former Manager completely canceled the modification; thus, the court awarded only nominal damages. Going forward, the other license is to expire under its terms on September 23, 2022, and the IP license prohibits any active concurrent licensing.

The court considered the Buyer’s request for an injunction against the Former Manager in view of its violation of the IP License and the Sell Order and its “threats to strip [the Buyer] of some of the valuable assets [Buyer] acquired at the sale under Section 363.” However, after finding that an injunction was “maybe” warranted, the court declined to exercise its discretion to issue an injunction, noting that the buyer had failed to demonstrate that, with respect to future breaches, damages would be an inadequate remedy. That said, the court reprimanded the former principal, stating that if the former principal “repeated [his] madness, the hardest remedy would be in order.

Standing in the place of the Debtor, the Buyer also asserted claims against the Former Manager for breach of fiduciary duty under a “second level” controller theory (because the actual “managing member” of the Debtor was a legal person for which the Former Manager, in turn, was the manager). See In re USACafes, LP Litigation, 600 A.2d 43 (Del. Ch. 1991). The court concluded that “it is clear under Delaware law that where the individual manager [the Former Manager] of an LLC[]itself manager of another SARL [the Debtor], exercises control over the assets of the LLC-managed entity at the expense of the LLC-managed entity, the individual manager may be liable for breaches of the duty of loyalty. Nevertheless, since the former manager had an impact on the IP license, indirectly and not directly, by extending the rights of the other concurrent license, the United StatesCafes the doctrine was not satisfied.

Likewise, the court found that the fraudulent transfer claims based on the unlawful modification of the former manager of the other license were not viable because “[i]In the context of trademarks, ownership rights are transferred only under an assignment, rather than a licence” and the debtor concerned here was a mere licensee and not an owner.

Chapter 11 bankruptcy is designed to give a fresh start to viable businesses like Il Mulino. One of the means of promoting this policy consists in carrying out “free and clear” sales in accordance with article 363 of the Bankruptcy Code. In turn, the value of these sales is maximized by sell orders entered by bankruptcy courts protecting the purchased assets from disgruntled third parties. Pursuant to this decision, the value of the bankruptcy estate was maximized and Il Mulino is now positioned to prosper as a healthy, independent and reorganized company.

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