In re AIWA Corp.

630 B.R. 494

IN RE: AIWA CORPORATION, Debtor.

Case No: 21-07702

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed July 28, 2021

Jeremy C. Kleinman, FrankGecker LLP, Chicago, IL, for Debtor.

MEMORANDUM OPINION

Honorable Deborah L. Thorne, United States Bankruptcy Judge

This matter comes before the court on the motion for relief from the automatic stay filed by Aiwa Holdings, LLC ("Holdings"). Holdings seeks to return to the District Court for the 44th Judicial District, Dallas County, Texas ("Texas Court") for clarification in the Aiwa Corporation ("Aiwa") receivership case. For the reasons stated below, the motion is denied.

BACKGROUND

Aiwa was once a well-known Japanese brand of consumer audio equipment. At some point it no longer manufactured electronic equipment but was regarded as a valuable trademark and brand name. In 2015, the intellectual property was acquired by investors and Aiwa Corporation was created. The attempt to re-launch the brand to sell a variety of consumer audio products was not as successful as anticipated and by January 2021 the failure to regain brand recognition and market share was apparent. Aiwa defaulted on its debt to its senior secured lenders, Fairlane Fund One, LP and Fairlane Fixed Income Fund LLC ("Fairlane Funds").

To work out the default, Aiwa and its senior lenders entered into a forbearance agreement and executed an agreed order appointing a receiver ("Agreed Order") which was held by the senior lenders in the event the default was not cured by February 5, 2021. Aiwa failed to cure the default, the Agreed Order was filed with the Texas Court and on February 8, 2021, the Texas Court appointed the receiver.

The Agreed Order expressly authorized the receiver to market Aiwa's assets for the highest and best value which the receiver attempted to do. No specific parameters for the sale were included in the Agreed Order. Unfortunately, there was not significant interest in the brand and its associated intellectual property, and no formal offers were made. As a result, the receiver canceled the planned auction and instead decided to sell the assets to Holdings, an entity formed when Aiwa's secured creditors, the Fairlane Funds sold their claims to an interested buyer.

During the same period, Aiwa attempted to market the assets on its own and eventually, unknown to the receiver, entered into an agreement with Sakar International, an Aiwa competitor.

On June 3, just as the receiver was finalizing the Asset Purchase Agreement with Holdings and Aiwa was entering into an agreement with Sakar, the Texas court held a status conference during which time the receiver reported on the two potential sales and allegedly stated that he was inclined to accept Holding's offer if he became comfortable with its legal terms. In response, the Texas Court stated that everything appeared to be progressing appropriately and the court would be available if any issues arose.¹

Shortly after the June 3 hearing, the receiver accepted Holding's offer, executed and delivered the required documents to consummate the sale. The Asset Purchase Agreement expressly provided for the sale to take effect immediately upon execution of the relevant documents. Holdings tendered cash to the receiver and filed documents with the U.S. Patent and Trademark Office. It also ordered $1 million worth of Aiwa-branded products.

Three days after the closing of the sale to Holdings, Aiwa filed an emergency motion requesting the Texas court to set aside and vacate the asset sale and to discharge the receiver. The Texas Court declined to hear the motion on an emergency basis and set it for hearing on June 23, 2021. The receiver and Holdings both filed responses to Aiwa's motion. In addition, the receiver filed a motion for approval of the sale. Prior to the Texas Court having an opportunity to rule on the motion for approval of the sale, Aiwa filed this chapter 11 case.

Holdings filed the motion to modify the automatic stay to allow it to ask the Texas Court whether the sale to Holdings was final.² Aiwa opposes the motion, arguing that the sale was not final under Texas law and therefore the assets were not legally transferred to Holdings. The court has reviewed the pleadings filed by the parties and heard the arguments of counsel on July 22, 2021. It is now ready to rule on the Motion to Modify the Stay.

DISCUSSION

The Bankruptcy Code permits modification of the Automatic Stay for "cause." 11 U.S.C. § 362(d)(1). Although the Code lists examples of cause, the list is not exclusive, and no clear definition is provided. The Seventh Circuit has instructed that the determination of what constitutes cause is left to the discretion of the bankruptcy court but has set forth several guidelines to assist in the determination. In re Fernstrom Storage & Van Co. , 938 F.2d 731, 735 (7th Cir. 1991) ; See also In re C&S Grain Co. , 47 F.3d 233, 238 (7th Cir. 1995) (court may grant a party relief from the stay if it finds the moving party's interest in the property can be better protected or for any other cause the court finds to be worthy).

Under Fernstrom , a court should consider (1) whether any great prejudice will result to either the bankruptcy estate or to the debtor from continuation of the civil suit, (2) whether the hardship to the non-debtor party by maintenance of the stay considerably outweighs the hardship of the debtor, and (3) whether the creditor has a probability of prevailing on the merits. Fernstrom , 938 F.2d at 735. Holdings has not demonstrated that it can prevail under any of the Fernstrom prongs and, as a result, the stay should not be modified.

Probability of Prevailing on the Merits

Texas has long held that receiver sales should be confirmed by the court. Although the confirmation requirement is not expressly set forth in the Texas receivership statute, the Texas Supreme Court and Texas appellate courts are consistent in requiring confirmation prior to the receiver sale becoming final. The Texas Supreme Court in Baumgarten v. Frost , 143 Tex. 533, 539, 186 S.W.2d 982 (1945) held that "a sale of property in the custody of the district court by a receiver is a species of judicial sale. That such a sale, in order to be valid, must be confirmed by the receivership court cannot be doubted." Baumgarten v. Frost , 143 Tex. 533, 539, 186 S.W.2d 982 (1945).

In an earlier case, Miesch v. Anderson , 90 S.W. 2d. 314 (Tex. Civ. App. 1936), the Texas Court of Civil Appeals explained that an order confirming a receiver sale was required. That court stated that the statute:

express[es] the power of the court to regulate the terms of sale, from which it is held the legislative intent that confirmation be required may be inferred. The failure of the statute to expressly provide that confirmation be required does not raise the implication of the legislative intent to dispense with that requirement. It is the established practice generally, where the rule has not been modified by positive statutory enactment, to require an order of confirmation before a sale through a receiver becomes effective.

Miesch , 90 S.W. 2d. at 316-317.

The sale in this case was never confirmed by the Texas Court and did not meet the requirement long held by the Texas courts. Holdings argues that the stay should be modified for the parties to seek clarification from the Texas court as to the meaning of its orders and comments. That is unnecessary. This court can easily look to the orders entered on the Texas Court docket and see that no order was entered confirming the sale. Amling v. Harrow Indus. LLC , 943 F.3d 373, 376 (7th Cir. 2019) (courts can take judicial notice of another court's docket). The Texas Court did not enter any order after April 29, 2021, and the motion made by the receiver to confirm the sale was never granted. The Agreed Order authorized the marketing and sale of the collateral but did not provide specific requirements for that sale which would have provided the authority for finality. The Agreed Order merely charged the receiver with marketing and selling the collateral but did not specify terms.

Holdings relies upon, Yount v. Fagin , 244 S.W. 1036, 1041 (Tex. Civ. App. 1922) to support its position that the sale was final even though there was no order entered by the Texas Court. The facts of Yount do not support this position but support the requirement that an order confirming a sale is required if the court has not previously approved the specific terms. The receiver in that case reported to the court the exact terms of the recommended sale and the court in a written judgment stated that the receiver was authorized and instructed to make the sale and execute documents conveying all the right title and interest to the purchaser. In reviewing the receivership court on appeal, the Texas Court of Civil Appeals stated that:

[i]t is the general rule that where a receiver is directed or ordered in general terms to make a sale of property, the sale must, be confirmed by the court making the order before it can have full validity and be binding;

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