Miller v. W Licensing, LLC (In re Weed Cellars, Inc.)

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In re: Weed Cellars, Inc., Debtor.

Elissa D. Miller, Chapter 7 Trustee, Plaintiff, v. W Licensing, LLC and Meir Asher, Defendants.

No. 2:21-bk-18868-ER

Adv. No. 2:22-ap-01082-ER

United States Bankruptcy Court, C.D. California, Los Angeles Division

May 26, 2023

Date April 26, 2023

Time 10:00 a.m.

Location: Ctrm. 1568

Roybal Federal Building

255 East Temple Street

Los Angeles, CA 90012

REPORT AND RECOMMENDATION OF THE HONORABLE ERNEST M. ROBLES, UNITED STATES BANKRUPTCY JUDGE, TO THE UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA, CONTAINING PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW

[RELATES TO ADV. DOC. NOS. 26 AND 42]

Ernest M. Robles United States Bankruptcy Judge

This Report and Recommendation is submitted by the undersigned Judge of the United States Bankruptcy Court for the Central District of California (the "Court") to the United States District Court for the Central District of California (the "District Court") pursuant to 28 U.S.C. § 157(c)(1) and Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 9033, based upon the Court's determination that the Court lacks constitutional authority to enter a final judgment with respect to the matters addressed herein.^[1] W Licensing, LLC ("W Licensing") and Meir Asher ("Asher," and together with W Licensing, the "Defendants") have not consented to the entry of final judgment by the Bankruptcy Court.^[2] Absent such consent, this Court lacks constitutional authority to enter final judgment because this action involves a fraudulent transfer claim. Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553 (9th Cir. 2012).

At the above-captioned date and time, the Court conducted hearings on cross-motions for summary judgment (the "MSJs") filed by the Chapter 7 Trustee (the "Trustee") and the Defendants. At the conclusion of the hearing, the Court took the matter under submission. For the reasons in the Final Recommendation set forth below, the Court recommends that the District Court enter final judgment as follows:

1) On the first claim for relief as to W Licensing, enter declaratory judgment in favor of the Trustee, and against W Licensing, declaring that W Licensing does not possess any interests attaching directly to the Sale Proceeds^[3];

2) Dismiss the first claim for relief as to Asher based upon a lack of jurisdiction;

3) On the second claim for relief, enter summary judgment in favor of W Licensing^[4];

4) On the third claim for relief, enter summary judgment in favor of W Licensing and Asher; and

5) Find that Asher, but no other party, is entitled to the allowance of reasonable attorneys' fees as costs pursuant to Cal. Civ. Proc. Code §§ 1021 and 1033.5(a)(10), in an amount to be determined by the District Court.

Final Recommendation

I. Background

A. Procedural Background

On November 23, 2021 (the "Petition Date"), Weed Cellars, Inc. (the "Debtor") filed a voluntary Chapter 7 petition. The Debtor is not a marijuana dispensary or business. Prior to the Petition Date, the Debtor's business consisted of operating lounges for hire, distributing a line of alcoholic beverages with branding that used variations of names and logos containing the word "Weed," and obtaining intellectual property protection for its Weed-branded alcoholic beverages.

Several months prior to the Petition Date, the Debtor and W Licensing, LLC ("W Licensing") executed a Trademark License Agreement dated July 1, 2021 [Adv. Doc. No. 33, Ex. E] (the "License Agreement"). Meir Asher ("Asher") and the Debtor each hold a 50% membership interest in W Licensing. Adv. Doc. No. 33, Ex. F, p. 223 (Exhibit to Operating Agreement for W Licensing setting forth the capital contributions and membership interests in the entity).

The License Agreement authorized W Licensing to use the Debtor's Weed-related trademarks to market and sell products bearing those trademarks, except that W Licensing was prohibited from marketing or selling alcoholic or non-alcoholic beverages bearing the trademarks. See License Agreement at § 2.2(a)(i) (excluding beverages from the scope of the license granted to W Licensing).

On March 21, 2022, the Court authorized the Chapter 7 Trustee (the "Trustee") to sell the estate's intellectual property assets (the "Assets") to Weed Holdings, LLC ("Weed Holdings") for $725,000. Bankr. Doc. No. 85 (the "Sale Order"), Bankr. Doc. No. 80 (final ruling authorizing the sale, referred to hereinafter as the "Sale Ruling"), and Bankr. Doc. No. 92 (Trustee's report stating that the sale had closed and the estate had received a payment of $725,000). The Assets sold included both the trademarks that had been licensed to W Licensing, as well as the rights to use the trademarks in connection with beverage sales that had been excluded from the scope of the License Agreement. Pursuant to § 363(f)(4), Weed Holdings acquired the Assets free and clear of any liens, claims, interests, or encumbrances asserted by W Licensing, with any such liens, claims, interests, or encumbrances to attach to the proceeds of the sale (the "Sale Proceeds"). In so approving the sale, the Court found that the Trustee had demonstrated the existence of a bona fide dispute as to whether the License Agreement had terminated prior to the Petition Date. Sale Ruling at 5-6. The Court took care to emphasize that it was not making a finding that the License Agreement had terminated; instead, the Court's ruling was limited to a finding that the Trustee had demonstrated the existence of a bona fide dispute regarding the alleged prepetition termination of the License Agreement. Id.

In connection with the sale, the Court authorized the Trustee to reject both the License Agreement and an Operating Agreement for W Licensing LLC [Adv. Doc. No. 33, Ex. F] (the "Operating Agreement") between the Debtor and Asher. Rejection of the License Agreement and the Operating Agreement was effective as of February 23, 2022, the date of the filing of the Trustee's motion seeking authorization to reject the agreements. See Bankr. Doc. No. 86 (the "Rejection Order"). The Court entered the Rejection Order in the form proposed by the Trustee. The Rejection Order did not specify a deadline for W Licensing or Asher to file a claim for rejection damages pursuant to Bankruptcy Rule 3002(c)(4).

The deadline for creditors to file proofs of claim in the Debtor's case was May 2, 2022. Bankr. Doc. No. 35. The Clerk of the Court (the "Clerk") gave notice of the claims bar date to W Licensing and Asher on January 29, 2022 using a standard court-approved form of notice. Id. The notice of the claims bar date (the "Claims Bar Date Notice") stated that it was issued in accordance with Bankruptcy Rule 3002(c)(5). The Claims Bar Date Notice made no reference to any deadline for the filing of claims arising from the rejection of an executory contract under Bankruptcy Rule 3002(c)(4). W Licensing and Asher have not filed either a rejection damages claim or a general unsecured claim against the estate.

On April 7, 2022, the Trustee filed a complaint [Adv. Doc. No. 1] (the "Complaint," and the adversary proceeding commenced by the filing of the Complaint, the "Adversary Proceeding") asserting three claims for relief against W Licensing and Asher (collectively, the "Defendants").

In the first claim for relief, asserted against W Licensing and Asher, the Trustee seeks a "judicial declaration … that the Licensing Agreement is a void and unenforceable illusory contract due to lack of consideration and that neither of the Defendants have any rights against the Debtor or the Debtor's Trademarks thereunder." Complaint at ¶ 56. In support of the first claim for relief, the Trustee alleges that "[n]either the Licensing Agreement nor the Operating Agreement identifies any consideration flowing from W Licensing to the Debtor in exchange for the Debtor's grant of an exclusive worldwide license to use the Debtor's Trademarks for the Licensed Products," resulting in a "failure of consideration that is fatal to the formation of a valid contract …." Id. at ¶¶ 50 and 52.

In the second claim for relief, asserted against W Licensing only, the Trustee alleges that the "Debtor received less than a reasonably equivalent value in exchange for the transfer of its interest in the Trademarks under the Licensing Agreement," and that accordingly the transfer is avoidable as constructively fraudulent pursuant to § 548(a)(1)(B). Id. at ¶¶ 60 and 62.

In the third claim for relief, asserted against W Licensing and Asher, the Trustee alleges that prior to the Petition Date, W Licensing committed a non-curable breach of the Licensing Agreement by failing to carry the insurance required thereunder. Id. at ¶ 67. The Trustee seeks "a determination that the Licensing Agreement was terminated before the Petition Date by its own terms," id. at ¶ 72, as well as "actual and compensatory damages" from the alleged breach, id. at ¶ 74.

B. Summary of Papers Filed in Connection with the Motions for Summary Judgment

The Trustee moves for partial summary adjudication, only as to W Licensing, on the first claim for relief. The Trustee intends to seek dismissal of the balance of the claims in the Complaint if the requested relief is granted. See Adv. Doc. No. 62, p. 6 at n. 2. The Trustee argues that she is entitled to entry of summary judgment declaring that W Licensing holds no liens, claims, interests, or encumbrances or rights to the Sale Proceeds because (1) W Licensing does not hold a security interest in the Assets; (2) W Licensing breached the License Agreement prepetition and therefore has no right to the Sale Proceeds; (3) the License Agreement and Operating Agreement were rejected prior to the sale; and (4) W Licensing...