PREDICTIONS FOR INTERCREDITOR ARRANGEMENTS IN 2015 AND BEYOND The Devil Really is in the Det ils

BY KATHERINE E. BELL, JENNIFER B. HILDEBRANDT AND JENNIFER S. YOUNT

Intercreditor arrangements are one of the most challenging aspects of transactions, yet they have become increasingly prevalent in recent years. Changes in law, the regulatory environ- ment, the markets, the economy, and the way that companies do business can all trigger new developments in intercreditor arrange- ments. This article examines five areas where we anticipate developments in intercreditor arrange- ments in 2015 and beyond and describes the reasons for the developments.

22 REGISTRATION IS NOW OPEN FOR CFA’S 71ST ANNUAL CONVENTION IN AUSTIN, TX WWW.CFA.COM “The devil is in the details” is appropri- assets of businesses are becoming more ate cautionary advice for anyone tasked complex – intangible asset classes like with documenting the relationships intellectual are more impor- among different lenders. tant in every business today and are Intercreditor arrangements exist in intertwined with other traditional asset circumstances where more than one classes. The foregoing raises unique group of lenders has a claim against and increasingly complex intercreditor the same parties and some or all considerations. of the lenders have a claim as secured In light of the overlapping and com- against their assets. A variety peting rights of lenders and increasingly of different types of intercreditor ar- complex intercreditor arrangements, rangements are common in the market intercreditor arrangements are – not today -- first /second lien, split col- surprisingly — one of the most chal- lateral, unitranche, senior/mezzanine lenging aspects of transactions. This and others – and they exist in every is unlikely to change. However, past market, across industries, and in both experience has shown that changes asset-based and cash-flow transactions. in law, the regulatory environment, Intercreditor agreements are designed the credit markets, the economy, and to set forth the ground rules for lenders the way that companies do business, playing in the same sandbox with the can all trigger new developments in same toys at times when the stakes are intercreditor arrangements. This article high and incentives may not be aligned. examines five areas where we anticipate With multiple claims against the same developments or changes in intercredi- loan parties and common , tor arrangements in 2015 and beyond. come overlapping and competing rights Of course, we remain in the midst of and differing incentives. As a result, change in many of these areas. each intercreditor negotiation repre- sents a series of compromises among 1) Second Lien/Junior Creditors Will competing lenders. Press for More Favorable Intercredi- Additionally, intercreditor arrange- tor Terms: ments have grown more complex in re- The U.S. loan market is in the process cent years. There are a variety of reasons of adjusting to a more restrictive for this. With supply exceeding demand, regulatory environment, with, among steep competition among lenders in the other things, increased regulatory markets has required lenders to be cre- scrutiny over banks’ leveraged loan ative in structuring deals and flexible on standards. Regulatory terms in order to win deals. Therefore, it scrutiny is expected to limit bank is common today for financing transac- lending activity compared to levels tions to involve multiple tranches of over the past several years. Nonbank , multiple and the flexibility lenders have jumped on this oppor- to fold in additional debt and liens over tunity, with a slew of new nonbank the term of the credit facility. It is also lenders raising capital and positioned more common today for asset pools and to fill the void. As a result, a greater revenue streams to be more finely sliced number of transactions will involve and diced and allocated with different nonbank lenders in one or more roles priorities among different lenders in dif- in the debt structure going forward. ferent tranches of debt. Moreover, the underlying operations of loan parties Many nonbank lenders have more have become more and more complex latitude in their underwriting approach, over the years. For example, businesses have higher cost of funds, and have are becoming increasingly global every greater risk tolerance than traditional day. This means that multiple legal banks. Consequently, the increase in the regimes may have an impact on lenders number of these players in the market is to that business. Also, the underlying likely to lead to an increase in deals in-

THE SECURED LENDER APRIL 2015 23 volving privately negotiated second lien carve-outs secured by asset classes be used in order to extract value in an term . As this occurs, we anticipate like intellectual property and other exit scenario. We expect that practi- that many of those second lien lenders intangibles. tioners and lenders will increasingly will press for greater control over the focus on these provisions to bring credit compared to the intercreditor Increased complexity in the allocations them in line with the level of sophis- arrangements that would be in place in of collateral among competing credi- tication of how intellectual property circumstances where the second lien tors invites potential battles. assets are used by businesses today. is provided through a high yield Some lenders have already placed issuance or other issuance involving provisions in split collateral intercredi- 4) Intercreditor Arrangements Will more passive investors. In addition, tor agreements which specify valuation Evolve to Address Cross-Border Con- tightening credit markets generally give methodology under certain circum- siderations: second lien and mezzanine lenders more stances, such as provisions setting The prevalence of cross-border financ- negotiating . forth the allocation of proceeds of sales ing transactions and more complex Under circumstances in the past that involve mixed collateral (meaning capital structures continues to grow. involving a greater concentration of priority collateral of both classes of Consequently, we expect that stan- privately negotiated second lien term lenders). However, many split collat- dard intercreditor agreements will loans with nonbank lenders or tighter eral arrangements do not include such evolve to address the complexities credit markets, we saw more negotiation provisions today. We expect increased raised by the overlay of different legal around restrictions relative to amend- attention and negotiation around valu- frameworks applicable to entities and ments to , caps on senior ation methods and allocations in split assets located in other jurisdictions. debt (including accordions and post-pe- collateral intercreditor arrangements Below are a few examples of provi- tition financing), and shorter standstill going forward. In addition, with the sions that we expect will become periods. This trend has already begun increase in split collateral arrangements, more prevalent in intercreditor ar- to reemerge and we anticipate more to we expect to see more litigation in split rangements: come. collateral transactions in the context of • contractual frameworks to replicate Section 363 sales and plan confirmations a two-lien structure in jurisdictions 2) There will be an Increase in Split (and the issues involved will likely be where obtaining two liens is not Collateral Intercreditor Arrange- relative to the valuation and allocation feasible, and ments and More Focus on Valuation of the collateral pools). • preservation of expectations rela- Methods: tive to the right of a junior to Over the past few years there has 3) There will be Increased Sophistica- exercise remedies after a standstill been a marked uptick in the number tion Around Access, Use and License period in jurisdictions where junior of transactions involving split-col- Rights Related to Intellectual Prop- lien creditors are not statutorily en- lateral intercreditor arrangements. erty in Split Collateral Deals: titled to such remedies while senior Fewer and more flexible covenants, The importance and value of intel- creditors are unpaid. coupled with extremely competitive lectual property in commerce today pricing, have proven attractive –- cannot be overstated. In many split 5) In Light of Recent Case Law, Senior resulting in private funds and collateral transactions, intellectual Lenders Will Negotiate For Broader borrowers seizing upon the benefits property is the priority collateral of and Clearer Chapter 11 Protections: of asset-based loan facilities. In ad- the term lenders. Yet, the asset-based At least two recent court decisions dition, the presence of flexible debt lenders very likely need access, use indicate a trend towards courts provisions (refinancing facilities and and/or license rights to realize upon, narrowly interpreting intercreditor side-car incremental provisions) and and preserve the value of, their prior- agreements’ restrictions on junior lenient covenant packages, which ity collateral. Given the importance lenders’ actions in pro- are more and more prevalent in and value of intellectual property ceedings: In re Boston Generating, market loan documentation today, today, ensuring adequate access, use, LLC, 440 BR. 302 (Bankr. S.D.N.Y. 2010) work together to make it feasible for and license rights relating to intel- (“Boston Generating”) and In re MPM borrowers to be more creative in how lectual property assets is increasingly Silicones, LLC, 518 B.R. 740 (Bankr. they use their debt and lien baskets important and requires specialized S.D.N.Y. 2014) (“Momentive”). going forward. This flexibility invites expertise. Crafting adequate access, even greater use of split collateral use, and license around intellec- In Boston Generating, the bankruptcy arrangements in the future – from tual property assets requires a real court permitted the second lien lenders traditional splits between working- understanding of what assets are in a to object to a ’s bid procedures capital assets and fixed assets, to given business and how they need to approved by the first lien lenders

24 REGISTRATION IS NOW OPEN FOR CFA’S 71ST ANNUAL CONVENTION IN AUSTIN, TX WWW.CFA.COM despite the terms of an intercreditor Senior lenders and their counsel are acquisition financings and ), agreement which gave the first lien aware of the Boston Generating and asset-based finance transactions, multi- lenders the “exclusive right to…make Momentive decisions (as well as many tranche and multi-lien transactions, and determinations regarding the…sale” of other recent decisions that are sugges- restructurings. In particular, Jennifer has the collateral. In its decision, the court tive of the same trend) and are likely extensive experience representing lenders in found that the intercreditor agreement to increase their focus on intercreditor two lien deals, unitranche transactions, and did not expressly preclude the second documentation in order to tailor them to bank-bond deals. In addition, Jennifer has lien lenders from objecting to bid address these concerns. experience in various business sectors and in procedures and thus the court permit- cross-border transactions. Ms. Hildebrandt ted the second lien lenders to object to Conclusion was ranked in Chambers USA (California the bid procedures. In Momentive, the This article provides insight into changes Banking and Finance) in 2013 and 2014. bankruptcy court rejected the first lien on the horizon in the intercreditor arena lenders’ efforts to recoup their losses by and identifies several of the key factors Jennifer S. Yount is the chair of the Paul obtaining a recovery from Momentive’s driving the evolution. Several of the Hastings Global Finance and Restructuring second lien lenders under an intercredi- developments that we discussed above practice. Ms. Yount has been ranked in tor agreement that (a) prohibited the will present themselves as changes to Chambers USA in the area of Banking & second lien lenders from receiving any intercreditor agreements that may ap- Finance for California from 2007 through recovery from the “common collateral” pear on their face to be subtle. How- 2014 for her “expertise on intercreditor until the first lien lenders are “paid ever, as we previously cautioned – the agreements”. Chambers USA noted that in full in cash” and (b) permitted the devil really is in the details in areas as Ms. Yount possesses a “vast knowledge second lien lenders to “exercise rights complex as intercreditor arrangements base” and highlighted that she is “really and remedies as an unsecured creditor”. and subtle changes can have significant good at leading the team and understanding The bankruptcy court dismissed the first consequences. TSL the complex issues”. Ms. Yount was also lien lenders’ primary claims, holding selected as a winner of M&A Advisor’s that (i) the equity distributed to second Katherine E. Bell is a partner in the Finance 40 Under 40 Recognition Award. Her lien lenders under the plan of reorgani- and Restructuring practice of Paul Hastings practice primarily consists of representing zation did not constitute “proceeds” of LLP and is based in the firm’s Orange banks, alternative lenders, and specialty common collateral and (ii) the second County office. Her practice focuses lenders in asset-based lending facilities, lien lenders’ actions in intervening in the on commercial and corporate finance cash flow facilities, working capital make-whole dispute and supporting the transactions, including asset-based loans financings, acquisition financings, bank/ ’ cramdown plan did not violate and cash flow loans. Ms. Bell regularly bond transactions, restructurings, DIP, and the intercreditor agreement because represents commercial banks, investment exit financings. Ms. Yount has significant the second lien lenders were acting as banks, BDCs, finance companies, other expertise with first lien/second lien, split unsecured creditors and disputing the lenders, and borrowers in working capital collateral, and unitranche facilities. She amount of the first lien lenders’ claims financings, acquisition financings, and other has negotiated numerous intercreditor and and the adequacy of their proposed leveraged finance transactions. She has subordination agreements and agreements distribution, not their entitlement to extensive experience negotiating intercreditor among lenders. collateral. relationships for creditors from both the The courts’ holdings in the Boston senior and junior capital perspectives across Generating and Momentive decisions a broad range of transaction structures, mean that overly broad waivers of junior including unitranche facilities, split collateral lenders’ rights and/or overly broad arrangements, and first lien/second lien language preserving junior lenders’ structures. Ms. Bell has been recognized by rights to participate in the bankruptcy Chambers USA in its ranking of the leading proceedings as “unsecured creditors” banking and finance attorneys in the United can negate the effectiveness of restric- States in 2011, 2012, 2013, and 2014. tions on actions by junior lenders in bankruptcy proceedings. Therefore, Jennifer B. Hildebrandt is of counsel in to preserve prohibitions on actions by the Finance and Restructuring practice of junior lenders, senior lenders must ne- Paul Hastings and is based in the firm’s gotiate and contract for broad and clear Los Angeles office. Ms. Hildebrandt bankruptcy protections which prohibit represents banks and alternative lenders in junior lenders from taking positions in commercial and corporate finance matters, opposition to senior lenders’ interests. leveraged finance transactions (including

THE SECURED LENDER APRIL 2015 25 BORROWERS AS DISTRIBUTORS OF TRADEMARKED INVENTORY: SUGGESTIONS FOR THE ASSET-BASED LENDER

BY ANTHONY CIANCIOTTI

Distributors of inventory frequently sell products bearing a third party’s trademark. Trademark law and the distributor’s agreement with the trademark owner may limit the sale of trademarked inventory after termination of the distribution agreement. An asset-based lender should understand both when considering financing trademarked inventory.

26 REGISTRATION IS NOW OPEN FOR CFA’S 71ST ANNUAL CONVENTION IN AUSTIN, TX WWW.CFA.COM In today’s world of off-shore manufac- upon the producer by the Lanham Act.”4 its resale. Any physical modification of turing, an asset-based lender’s portfo- This limitation preserves competition, the Trademarked Inventory should raise lio of borrowers most likely includes which would otherwise be stymied if a potential “red flag,” as the fact-specific entities that purchase finished goods the trademark owner could dictate the analysis used to determine whether the for resale. Some of these borrowers may terms of subsequent resales of a trade- Trademarked Inventory is genuine could purchase goods on the open market. marked product. prevent a lender from having a clear Others may be authorized distributors of Genuine Goods. A reseller of goods answer whether the borrower’s actions a manufacturer (the “supplier”) who sup- bearing a trademark owner’s trademark might support a claim of trademark plies goods bearing the supplier’s trade- can avail itself of the first sale doctrine infringement. mark (the “Trademarked Inventory”). only if the goods are “genuine.” In the Severe consequences can result if a In such cases, the parties’ relationship distributor context, questions can arise first sale has not occurred or the bor- typically is memorialized in a distribu- as to whether goods are “genuine” if rower’s actions are found to result in tion agreement, which agreement may they have been repackaged or otherwise the sale of materially different goods. contain an express grant of a license to modified prior to resale. Courts ad- A court could order injunctive relief use the supplier’s trademark in con- dressing the issue examine whether the prohibiting further sales of the Trade- nection with the marketing, promotion goods sold by the reseller are “materi- marked Inventory. If the Trademarked and sale of the Trademarked Inventory. ally different” from the goods sold by Inventory constituted primary collateral Lending against Trademarked Inventory the trademark owner. Materiality is not supporting the lender’s asset-based involves questions of trademark law and based on the size or number of changes. loans, an injunction could transform the contract interpretation. It is important Instead, the analysis is a fact-based, lender’s secured loan to an unsecured for the lender to understand whether case-by-case examination that aims loan. applicable law or the underlying con- to determine whether the changes Holding Out as an “Authorized” Dis- tract restricts the borrower’s ability to generate consumer confusion about the tributor. Distribution agreements may sell the Trademarked Inventory if the source and quality of the goods in ques- also contain a license authorizing the agreement is terminated. The lender tion.5 For example, the removal of batch use of the trademark owner’s trade- should consider any limitations that codes or other markings from packag- marks in connection with the marketing, may exist when it evaluates whether it ing could be sufficient to find that the sale and promotion of the Trademarked will extend loans against the value of packaged goods are not genuine.6 In Inventory. Although the contract’s the Trademarked Inventory.1 addition, repacking the Trademarked language regarding the license will vary Inventory or splitting the Trademarked by agreement, the provisions typically Trademark Law Inventory into smaller lots or compo- require that the licensee cease using The Lanham Act2 is the applicable fed- nents could also be deemed to render the trademarks upon termination of the eral law governing federally registered the goods to be materially different.7 distribution agreement and that the trademarks. One of the primary objec- Due Diligence. The lender should licensee return all promotional material tives of the Lanham Act is to protect first review the underlying distribution to the trademark owner. A license of this trademark owners against third parties, agreement to determine whether the type raises the question whether the creating confusion among consumers first sale doctrine shields the borrower termination of the license restricts the regarding the origin of a product bearing from claims of trademark infringement. borrower’s ability to sell the goods. a registered trademark.3 However, such The passage of is a logical reference Although a license may assist the protections have limits. Case law inter- as to when a first sale has occurred.8 borrower in its conduct as an autho- preting the Lanham Act provides that a Ideally, the terms of the agreement set rized distributor, the termination of the trademark owner’s right to control the forth when title to the Trademarked license (and the rights granted pursuant sale of licensed products ceases after Inventory passes from the supplier to to it) should not prevent the borrower a “first sale” of “genuine goods” has the borrower. Assuming that title passes from continuing to sell the Trademarked occurred. no later than the time the Trademarked Inventory on the grounds of trademark First Sale. The “first sale” doctrine pro- Inventory is received by the borrower, infringement. As noted earlier, once a vides that the trademark owner’s right the supplier would be hard-pressed to “first sale” has occurred, the first sale to control the distribution of a product assert that a first sale has not occurred doctrine dictates that the borrower bearing its trademark does not extend upon the borrower’s receipt of the Trade- should be able to resell freely the Trade- beyond the first sale of its product. In marked Inventory. marked Inventory in an unaltered state other words, “a purchaser who does no A lender’s due diligence should also without restriction. more than , display, and resell a include confirming whether the Trade- The license allows the borrower to producer’s product under the producer’s marked Inventory purchased by the bor- use the supplier’s trademark to hold trademark violates no right conferred rower is altered in any manner prior to itself out as the supplier’s authorized

THE SECURED LENDER APRIL 2015 27 distributor in its promotional material. adjust its advance rates if its recovery adversely impacted. In this limited context, the borrower would be adversely impacted by lim- What if the agreement is silent should alter its promotional mate- its placed on the markets into which regarding post-termination sales? A rial and cease to represent itself as an the Trademarked Inventory can be number of courts have examined this authorized distributor. The failure to do sold. issue when the prospective seller is a so could constitute both a breach of con- 2. Contract Termination: Does the distri- manufacturer – not a distributor – of tract as well as trademark infringement, bution agreement contain minimum Trademarked Inventory. Several federal based on possible confusion among purchase requirements or must the court decisions have held that silence consumers regarding the supplier’s per- borrower satisfy financial covenants? regarding post-termination sales should ceived endorsement of the borrower as If so, has the borrower satisfied those be interpreted to prohibit post-termina- a seller of the Trademarked Inventory.9 requirements and covenants histori- tion sales of previously manufactured cally and what is the likelihood of goods.10 The general focus of these Due Diligence satisfying them in the future? A track decisions is that a “first sale” has not oc- In addition to the passage of title and record of poor performance may raise curred when a manufacturer is involved, trademark license considerations noted the possibility that the supplier could and that allowing future sales by the previously, the lender’s review should terminate the contract during the manufacturer would be akin to a de also include an examination of the distri- term of the lender’s financing to the facto extension of the license, the effect bution agreement provisions regarding borrower. of which would be to render the license’s the agreement’s term and the parties’ 3. Repurchase Obligation/Right: Is the termination date irrelevant. rights upon termination. Restrictions supplier obligated (or does it have the An important distinction exists on post-termination sales can arise as right) to repurchase the Trademarked when the borrower is a distributor of a result of an agreement between the Inventory upon termination or expira- the Trademarked Inventory, and not a parties. Understanding what restrictions tion of the license? If so, how is the manufacturer. A first sale would have exist, if any, will assist the lender in purchase price calculated and could already occurred from the supplier to evaluating whether the Trademarked In- the payment be reduced by amounts the borrower. Any trademark license ventory is a suitable asset against which owing by the borrower to the sup- from the supplier to the borrower would the lender can advance loans. plier? Repurchase obligations can likely be in connection with the bor- Contract Review: Distribution agree- be an effective method for a lender rower holding itself out an authorized ments come in all shapes and sizes. to unwind its relationship with the distributor of the supplier. As a result, In their most basic form, distribution borrower after a . However, silence regarding post-termination sales agreements will address (a) the goods the purchase price should not be should not preclude future sales so long subject to the agreement, (b) the bor- lower than the lender’s advance rate as the borrower ceases to refer to itself rower’s distribution territory, and (c) the against the Trademarked Inventory. as an authorized distributor, removes circumstances under which the agree- The lender should also monitor the such references from its marketing ma- ment can be terminated by either the amount of payables owing to the sup- terials, and otherwise complies with the borrower or the supplier. More detailed plier to determine what effect, if any, post-termination requirements under distribution agreements may also ad- the supplier’s right to offset amounts the distribution agreement.11 dress (i) potential minimum purchase could have on the net purchase price Agreement between Supplier and obligations or performance standards to to be paid by the supplier in the event Lender. The lender may still have a which the borrower must adhere, (ii) the it repurchases any Trademarked sound credit basis to lend against the supplier’s right or obligation to repur- Inventory. Trademarked Inventory even if the distri- chase (or the borrower’s right to require 4. Post-Termination Sales: Does the dis- bution agreement contains unfavorable the supplier to repurchase) the Trade- tribution agreement expressly permit terms regarding post-termination sales marked Inventory upon the expiration the borrower to sell the Trademarked or the supplier’s rights after termination. or termination of the agreement, and/ Inventory after termination or expira- The lender can address such terms or ad- or (iii) the borrower’s ability to sell the tion of the agreement? If so, does verse rights by pursuing an agreement Trademarked Inventory after termina- the agreement set forth a specific directly with the supplier. Although the tion or expiration. time period during which sales may scope of the lender’s agreement will When reviewing the possible contract occur? If post-termination sales are depend on the terms of the underlying terms, the lender should consider: permitted within a stated period, the distribution agreement, common com- 1. Distribution Territory: Is the stated lender should confirm that its liquida- ponents of such an agreement with the distribution territory consistent with tion timetable is no longer than the supplier include: the lender’s liquidation plan? If it allotted period; otherwise, its ability 1. Acknowledgment and Consent: The is not, then the lender may need to to realize on the collateral could be supplier’s acknowledgement of, and

28 REGISTRATION IS NOW OPEN FOR CFA’S 71ST ANNUAL CONVENTION IN AUSTIN, TX WWW.CFA.COM consent to, the borrower’s grant of a Anthony Cianciotti is vice president-legal where bottle was not visibly altered). interest to the lender in the counsel at First Capital, an asset-based 7. Enesco Corp. v. Price/Costco Inc., 146 borrower’s rights under the distribu- lender providing secured credit facilities F.3d 1083, 1087 (9th Cir. 1998) (repack- tion agreement and the Trademarked to small and middle-market companies. ing of porcelain figurines without Inventory. He provides legal support to underwriters, disclosing they had been repackaged 2. Term: The supplier’s agreement that credit officers and other business personnel constituted trademark infringement); the lender has the right to sell the regarding deal structure, potential third- Softman Products Co., LLC v. Adobe Trademarked Inventory after termina- party creditor claims and collateral issues, Systems, Inc., 171 F.Supp. 2d 1075, tion of the distribution agreement. including issues arising with respect to 1093 (C.D. Cal. 2001) (repackaging of 3. Territory: The supplier’s agreement trademarked inventory. Prior to joining First Adobe-brand software in manner that regarding the territory into which the Capital, he was of counsel in the commercial omitted registration card and invali- Trademarked Inventory may be sold. finance practice of Parker, Hudson, Rainer dated software support constituted a 4. Notice and Cure Right: The supplier’s & Dobbs LLP in Atlanta, Georgia. Cianciotti material difference). agreement to provide notice to the received his J.D. from the University of Penn- 8. Italverde Trading, Inc. v. Four Bills lender of any default by the borrower sylvania. He can be reached at acianciotti@ of Lading, 485 F. Supp. 2d 187, 210 under, or termination by the supplier firstcapital.com. (E.D.N.Y. 2007); McDonald’s Corp. v. of, the distribution agreement, and Shop at Home, Inc., 82 F. Supp. 2d 801, the lender’s right to cure the default, 1. It is unclear whether a lender’s right 812 (M.D. Tenn. 2000). if the lender elects to do so. to sell the Trademarked Inventory 9. Bel Canto Design, 837 F. Supp. 2d at 5. Repurchase Right: The supplier’s is derivative of the borrower’s right. 221-222 (S.D.N.Y. 2011); Stormor, a Divi- agreement to repurchase the Trade- The most conservative approach for sion of Fuqua Indus., Inc. v. Johnson, marked Inventory. The lender may the lender is to assume that its right 587 F. Supp. 275, 280 (W.D. Mich. 1984). also want to specify the methodology is derivative, and make a decision 10. See, e.g., Bill Blass, Ltd. v. SAZ Corp., used to calculate the purchase price regarding lending against such inven- 751 F.2d 152 (3d Cir. 1984); Ryan v. and to obtain the supplier’s agree- tory accordingly. Volpone Stamp Company, 107 F. Supp. ment to pay the purchase price direct- 2. 15 U.S.C. § 1401 et seq. (2006). 2d 369 (S.D.N.Y. 2000). ly to the lender without offset of any 3. Bel Canto Design, Ltd. v. MSS HiFi, 11. See, e.g., Citizens of Humanity, LLC v. amounts owing by the borrower to Inc., 837 F. Supp. 2d 208, 222-23 (S.D.N.Y. Costco Wholesale Corp., 89 Cal. Rptr. the supplier. 2011). 3d 455, 464-65 (Cal. App. 2009) (manu- Whether a lender can obtain the sup- 4. Sebastian Int’l, Inc. v. Longs Drug facturer’s ability to preclude post-ter- plier’s agreement on all or some of these Stores Corp., 53 F.3d 1073, 1074 (9th mination sales by distributor must be points will depend on a number of fac- Cir. 1995), cert. denied, 516 U.S. 914 based on contractual restrictions, not tors, including the relative negotiating (1995). trademark law), disapproved on other power of the borrower and the supplier 5. Societe Des Produits Nestle, S.A. v. grounds, Kwikset Corp. v. Superior Ct. as well as the potential costs and delays Casa Helvetia, Inc., 982 F.2d 633, 638 of Orange Cty., 120 Cal. Rptr. 3d 741 associated with pursuing an agreement. (1st Cir. 1992). (Cal. 2011). The lender should first examine the 6. See, e.g., Davidoff & CIE, SA v. PLD Int’l borrower’s business to confirm whether Corp., 263 F.3d 1297, 1242 (11th Cir. the borrower is merely a purchaser and 2001) (removal of batch code from reseller of the Trademarked Inventory. bottom of fragrance bottle created The lender should then review the dis- a material difference where removal tribution agreement to confirm whether left a small etching on bottle); John the agreement limits the borrower’s Paul Mitchell Sys. v. Pete-N-Larry’s right to sell the Trademarked Inventory Inc., 862 F. Supp. 1020, 1027 (W.D.N.Y. after termination, or grants the supplier 1994) (removal of batch codes from the right to repurchase the Trademarked bottles constituted a material differ- Inventory under circumstances that ence where removal left noticeable undermine the loans that the lender marks on the bottles and erased may have made against the value of the certain printed information). But Trademarked Inventory. If such limits or see Graham Webb Int’l Ltd. P’ship v. adverse rights exist, the lender has the Emporium Drug Mart, Inc., 916 F. Supp. option to pursue an agreement directly 909, 916 (E.D. Ark. 1995) (removal of with the supplier to address those con- batch codes from hair care products cerns to the lender’s satisfaction. TSL did not constitute infringement

THE SECURED LENDER APRIL 2015 29