Case Doc 191 Filed 03/09/09 Entered 03/09/09 13:43:38 Desc Main Document Page 1 of 13

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1 Document Page 1 of 13 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION In re: ) Case No (BWB) ) (Jointly Administered) HARTMARX CORPORATION, ) et al., ) Chapter 11 Debtors. ) ) Hon. Bruce W. Black ) ) Hearing Date: March 19, 2009 ) Hearing Time: 2:00 p.m. NOTICE OF GOLDEN BEAR ENTITIES MOTION FOR RELIEF FROM STAY AND/OR TO COMPEL REJECTION OF NON-ASSUMABLE EXECUTORY CONTRACTS PLEASE TAKE NOTICE that on March 9, 2009, Nicklaus Marketing, Inc., (f/k/a Golden Bear Golf, Inc.) and Golden Bear Apparel International, Inc. (collectively, Golden Bear ), by their attorneys, filed with the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the Bankruptcy Court ), the annexed motion (the Motion ), pursuant to sections 362 and 365 of title 11 of the United States Code, seeking relief from automatic stay and/or to compel Debtors rejection of non-assumable executory contracts. PLEASE TAKE FURTHER NOTICE that a hearing on the Motion will be held before the Honorable Bruce W. Black, United States Bankruptcy Judge, at the United States Bankruptcy Court, for the Northern District of Illinois, Eastern Division, 219 S. Dearborn, Chicago, Illinois 60604, on March 19, 2009 at 2:00 p.m., or as soon thereafter as counsel can be heard. PLEASE TAKE FURTHER NOTICE that objections, if any, to the Motion must be made in writing, shall conform to the Federal Rules of Bankruptcy Procedure, the Local Rules of the Bankruptcy Court, and the Administrative Order entered in these Cases on January 26, 2009 and shall be filed with the Bankruptcy Court electronically by users of the Bankruptcy Court s electronic case filing system and shall be served so as to be actually received no later than 2:00 p.m. CST on March 16, 2009 by Sidley Austin LLP, One South Dearborn, Chicago, Illinois 60603, Attn: Shalom L. Kohn. IF YOU FAIL TO RESPOND IN ACCORDANCE WITH THIS NOTICE, THE BANKRUPTCY COURT MAY GRANT THE RELIEF REQUESTED BY THE MOTION WITHOUT FURTHER NOTICE OR HEARING.

2 Document Page 2 of 13 Dated: March 9, 2009 Respectfully submitted, SIDLEY AUSTIN LLP /s/ Shalom L. Kohn Shalom L. Kohn Brian J. Lohan One South Dearborn Chicago, IL Tel: (312) Fax: (312) skohn@sidley.com blohan@sidley.com 2

3 Document Page 3 of 13 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION In re: ) Case No (BWB) ) (Jointly Administered) HARTMARX CORPORATION, ) et al., ) Chapter 11 Debtors. ) ) Hon. Bruce W. Black ) ) Hearing Date: March 19, 2009 ) Hearing Time: 2:00 p.m. MOTION OF GOLDEN BEAR ENTITIES FOR RELIEF FROM STAY AND/OR TO COMPEL REJECTION OF NON-ASSUMABLE EXECUTORY CONTRACTS Nicklaus Marketing, Inc., (f/k/a Golden Bear Golf, Inc.) and Golden Bear Apparel International, Inc. (collectively, Golden Bear ), by their attorneys, seek relief from stay and/or to compel Debtors rejection of non-assumable executory contracts. In support of the Motion, Golden Bear has filed the Declaration of Andrew O Brien (Exhibit A hereto) and further states as follows: 1. The Golden Bear entities are affiliated with Jack Nicklaus, the legendary golf champion, world-renowned golf course designer, and internationally recognized businessman and philanthropist. These companies were organized and authorized to license the Jack Nicklaus, Nicklaus, Golden Bear and related trademarks (the Nicklaus Trademarks ) and Jack Nicklaus name and image for various purposes, including apparel. 2. Golden Bear is party to three agreements with one or more of the Debtors: (a) an Apparel License Agreement with Hart, Schaffner & Marx and HMX Sportswear, Inc. (the Apparel Agreement ), which licenses the Nicklaus Trademarks for Debtors use in the United States and certain other locations (b) the Jack Nicklaus Apparel International 2005 Joint Venture 3

4 Document Page 4 of 13 Agreement with Seaford Clothing Co., one of the Debtors, (the Joint Venture Agreement, ), which forms a partnership under Florida law to conduct international sublicensing business as a licensee of the Nicklaus Trademarks, and (c) a Master Agreement with Hart, Schaffner & Marx, HMX Sportswear, Inc., and Hartmarx Corporation, which in certain respects serves as an umbrella agreement for the other relationships. Copies of each of these agreements, with applicable amendments (collectively, the Agreements ) but with selected portions redacted, are attached as Exhibit 1 through 5 to the O Brien Declaration. (The portions redacted relate to royalty rates and other terms not germane to the subject of this Motion, and which involve sensitive business and competitive information.) Each of these Agreements expires and is to be fully wound up, if not sooner terminated, on December 31, On January 26, 2009, in connection with the Debtors motion for interim approval of DIP financing, Golden Bear filed a limited objection, perhaps in an excess of caution, to be sure that the financing orders did not affect its rights. In that pleading, Golden Bear raised a number of issues related to the Agreements, noted that it had no interest in continuing in these Agreements with either the Debtors or their potential assignees, and advised the Court and parties in interest that before the petition date, it had sought to negotiate a payment to the Debtors in exchange for an agreed early termination of these agreements but to no avail. 4. In response to Golden Bear s limited objection, an appropriate reservation was inserted into the financing orders. In addition, Golden Bear sought to commence a dialogue with the Debtors with respect to a consensual termination of the Agreements. After extensive delay and repeated requests, Golden Bear was finally able to engage in a substantive discussion of the issues on February 24, 2009 at which point it became apparent to Golden Bear that a consensual resolution will not be feasible. Accordingly, Golden Bear has no alternative but to 4

5 Document Page 5 of 13 file this Motion in order to protect its interests, and particularly the valuable image and market position associated with its trademarks. 5. The purpose of this Motion is simple. As more fully set forth below, Golden Bear is party to two relationships with Debtors. One is a domestic trademark license, and the second is a partnership agreement with respect to international exploitation of Golden Bear s trademarks. Under applicable law, as set forth below, neither arrangement is assignable by the Debtors. Accordingly, inasmuch as the Debtors have announced their intention to sell their assets which as a matter of law cannot include the two arrangements with Golden Bear Golden Bear seeks the judicial relief necessary to effect an immediate termination of those arrangements in accordance with their terms. 6. The termination of the parties agreements now is appropriate for two reasons. First, given the Debtors prospective sale of their assets, which as a matter of law cannot include the Golden Bear arrangements, the Debtors will be unable to perform their obligations under their agreements through their December 31, 2010 expiration date. Further, as a company intent on selling its assets, the Debtors are currently unable to give the kind of credible assurances of future performance to Golden Bear, or to domestic customers and foreign sublicensees which are critical to maintaining the viability and value of a branded apparel business. O Brien Declaration, 7. Lead times in the apparel industry require Golden Bear and its licensees to undertake the various activities related to the design, sale and sourcing of seasonal apparel lines more than a year in advance of when sales are first made at retail. As a result, the ability of Golden Bear to have a commercially successful Spring 2010 apparel line (which represents approximately 60-70% of annual revenues) has been severely prejudiced by Debtors refusal to release the Nicklaus Trademarks so that Golden Bear can pursue an 5

6 Document Page 6 of 13 acceptable successor. O Brien Declaration, Further delay will only cause further short and long term damage to the value of Golden Bear s licensing business with no corresponding benefit to the Debtors. Moreover, even before and apart from the proposed asset sale, the retention by the Debtors of these trade-mark arrangements is contrary to the majority rule (discussed more fully below) that a debtor cannot assume contracts which it does not have the right to assign. Accordingly, Golden Bear seeks an order compelling the Debtors to reject those agreements forthwith. The Domestic Trademark License 8. Under the Apparel Agreement, HSM was licensed through December 31, 2010 to manufacture goods using the Golden Bear trademarks. Among other things, HSM is required to pay a percentage royalty on all goods sold. In addition, HSM is required to pay a minimum royalty of $600,000 per year, payable in two installments, on January 1 and July 1, Under the Apparel Agreement, the minimum royalty was the minimum consideration due to Golden Bear for refraining from licensing its trademarks to anyone else. O Brien Declaration, 9. The minimum royalty for the current period has not yet been paid, although due in advance on January 1, and Golden Bear has received no other payments on account of post-petition royalties. Id. Despite this, Debtors continue to sell goods emblazoned with Golden Bear s trademarks. 9. Debtors have announced their intention to sell substantially all their assets, and on information and belief, are conducting a formal sales process. Under no circumstances is the Apparel Agreement capable of being sold or assigned to that prospective buyer. The reason is simple. As a matter of non-bankruptcy law, trademark licenses are not assignable and accordingly, they equally cannot be assigned under 365(f). E.g. In re N.C.P. Marketing Group, 6

7 Document Page 7 of 13 Inc., 337 B.R. 230 (D. Nev. 2005) (trademark licenses, like copyrights and patents, cannot be assigned under 365 absent licensor consent.) The Debtors here have made no secret of their intention to sell their businesses, although they have sought to seal the document containing the particulars of the proposed sales process. Thus, the retention of the Apparel License is inconsistent with the Debtors announced plans for this proceeding. 10. The fact that the Debtors intend to sell their businesses, in addition, means that the Debtors are not in a position to provide Golden Bear or retailers with any credible assurance of their ability to perform under the Apparel Agreement even with respect to the Fall, 2009 season let alone as to Indeed, given the timing of the sales cycle and current market conditions in the apparel sector, the Debtors would need to be aggressively involved in selling and sourcing goods now for such Fall, 2009 sales. As noted above, the Debtors also need to be doing preparatory design and other work for the Spring, 2010 season. It is unlikely that Debtors are doing such work given their current situation, and even if they were, completion of the proposed sale process as scheduled would prevent Debtors from completing the necessary sourcing, sales, manufacturing and distribution cycles and leave Golden Bear with no product on store shelves during this critical period. O Brien Declaration, In sum, the current situation, as far as can be determined, is that the Debtors are pursuing a sales process while holding onto a trademark license which as a matter of law cannot be assigned, without even having paid the royalties required as a condition of the current exercise of their license rights, and without any reasonable likelihood that they will continue in business as currently structured to complete the performance of their obligations under such license. As a result, the valuable Golden Bear trademarks, and the opportunity to exploit those marks in a highly seasonal and competitive market, are being irreparably damaged. 7

8 Document Page 8 of 13 It is very difficult, and certainly very costly, for a brand to regain its position after a hiatus of the sort which Debtors actions are likely to cause here. O Brien Declaration, 11. The only way to mitigate this damage is to require HSM to reject the Apparel Agreement forthwith so Golden Bear can make alternative licensing and distribution arrangements in an effort to salvage its marks Even if for some reason the proposed sale does not occur and at least on the public record, there has been so suggestion that the Debtors can viably reorganize absent an asset sale there is an issue whether the Debtors can retain their trademark license. As this Court is doubtless aware, there is a split among the circuits as to whether a debtor may retain agreements which it cannot assign. Compare In re West Electronics, Inc., 852 F.2d 79, 83 (3d Cir. 1988) (adopts so-called hypothetical test, and holds assumption to be impermissible); RCI Tech. Corp. v. Sunterra Corp. Inc., 361 F.3d 257 (4 th Cir. 2004) (same); In re Catapult Entm t, Inc., 165 F.3d 747 (9th Cir. 1999) (debtor cannot assume a patent license because federal patent law makes nonexclusive patent licenses personal and non-delegable), with In re Mirant Corp., 440 F.3d 238 (5th Cir. 2006) (adopts actual test and permits debtor s retention of otherwise non-assignable licenses); Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir.), cert. denied, 521 U.S (1997). 13. Research to date has not revealed controlling authority in this jurisdiction. Accordingly, Golden Bear submits that this Court should apply the rule adopted by the majority of the Courts of Appeals, and which accords with the plain language of the statute, and hold that the trademark license embodied in the Apparel Agreement is not subject to assumption by the Debtors. Under such circumstances, the remedy adopted by the courts is either to grant relief 1 Subsequent to such rejection, Golden Bear will file its rejection proof of claim and its motion for payment of administrative expense. 8

9 Document Page 9 of 13 from the stay to permit contract termination, or to direct the debtor to reject the contract. E.g., In re West Electronics, Inc., supra (relief from the stay to terminate); In re N.C.P. Marketing Group, Inc., supra (order compelling rejection). The same results should apply here, where Debtors pursuit of a sale process has created a fatal uncertainty in the market regarding their ability to distribute Golden Bear s products for the next three apparel seasons which cannot be cured by a later disavowal of their intent to sell their business. 14. It is worth emphasizing that the rejection or termination of the Apparel Agreement will not saddle the Debtors with licensed goods from the current Spring 2009 selling season or prohibit them from selling these goods off in the normal course of business. Under the Apparel Agreement, 12(b)(iii), Debtors would be able to continue to sell any products to which a trademarked label was affixed for a Sell-Off Period of up to 9 months (subject, of course, to payment of the required royalties). Thus, the Debtors will not be prejudiced by the relief sought by Golden Bear. By contrast, Golden Bear continues to be prejudiced by Debtors continued retention of a trademark license which they do not intend to use in the future, and which under the majority rule they have as no right to use now, but are nonetheless using without making any payment to licensor. The International Trademark Partnership Agreement 15. In addition to the domestic trademark arrangement embodied in the Apparel Agreement, Golden Bear and Debtors via debtor Seaford Clothing Co. ( HSM Sub ) formed a partnership for the international exploitation of the Golden Bear trademarks. See Jack Nicklaus Apparel International 2005 Joint Venture Agreement (as amended, the Joint Venture Agreement ) (attached as Exhibit 3 to the O Brien Declaration). 16. The Joint Venture Agreement is, by its terms, a partnership agreement 9

10 Document Page 10 of 13 governed by Florida law, which expressly provides Golden Bear with a right to dissolution in the event of the bankruptcy of HSM Sub. Specifically, Florida has enacted the Uniform Partnership Act, which provides that the bankruptcy of a partner is an automatic dissociation of that partner from the partnership. Florida Revised Uniform Partnership Act ( FRUPA ) (6)(a), Florida law further authorizes the remaining partners to dissolve the partnership within 90 days. Id., (2)(a). Following the authorization of the Florida Statute, the Joint Venture Agreement provides the mechanism for termination of the partnership upon the bankruptcy of one of the partners. It allows for the commencement of a Wind-Up Period 30 days after notice (Joint Venture Agreement, 15, last paragraph, at 12), and sets forth elaborate procedures for the parties respective rights and responsibilities during the Wind-Up Period ( 16). 17. Courts in this jurisdiction have upheld partnership dissolution provisions, as against a challenge that they are impermissible under federal bankruptcy law. In re Sable v. Morgan Sangamon Partnership, 280 B.R. 217 (N.D. Ill. 2002) (under Illinois law, ipso facto clause dissolving partnership on bankruptcy is enforceable as personal service contract and general partnership rights are not assignable.) 18. Because state law as to partnership dissolution is applicable even in bankruptcy, the Joint Venture Agreement is not the type of agreement which the Debtor may retain, even apart from the question of whether this court should follow the majority rule that a debtor cannot assume a contract which it would not have the right to assign. But in any event, under the majority rule, the fact that HSM Sub cannot assign the contract equally leads to the conclusion that this is a non-assumable agreement. E.g., In re Catron, 158 B.R. 629 (Bankr. E.D.Va. 1993). Accordingly, as is the case for the domestic trademark license, this Court should either grant relief from the stay to allow termination of the Joint Venture Agreement, or direct 10

11 Document Page 11 of 13 HSM Sub to cause the Joint Venture Agreement to be rejected forthwith. 19. Further, inasmuch as HSM Sub is to perform extensive duties under the Joint Venture Agreement, the fact that it is automatically dissociated from the partnership as a matter of Florida law, and the fact that Debtors will in any case not have the necessary personnel to perform under the Joint Venture Agreement after their proposed asset sale, are a further basis for the appropriateness of the relief from stay to allow termination of the Joint Venture Agreement. As noted above, the Debtors will be unable to fulfill their requirements under the Trademark License to maintain a viable domestic apparel program for the remainder of the Trademark License term. The same constraints will likely have a similar impact upon HSM Sub s ability to provide adequate design, sourcing and technical support to foreign licensees for the Fall 2009, Spring 2010 and Fall 2010 Seasons, as these activities have historically run in parallel with the development, sourcing and marketing of the domestic lines. 2 O Brien Declaration, As with the domestic trademark license, the termination of the Joint Venture Agreement will involve no prejudice to the Debtors estate. Under 16(d) of the Joint Venture Agreement, Golden Bear has the obligation to pay HSM Sub its share of the value of any of the licensing agreements which are to be conveyed to Golden Bear on account of such termination. This price, if agreement cannot be reached, will be determined under a pre-agreed 2 The Joint Venture Agreement provides Golden Bear with a limited opportunity under 16 to mitigate damages suffered by Golden Bear in the event of HSM Sub s future nonperformance during the wind up period by distributing sublicense agreements out to Golden Bear at a reduced valuation rate due to a poor relationship between HSM Sub and the licensee, in which case HSM Sub would not further need to fulfill the HSM Sub Responsibilities under such agreements. At the moment, however, and subject to obtaining the relief sought herein, Golden Bear has been unable to make alternative arrangements to mitigate the damages the Joint Venture is likely to suffer in the event of any failure by HSM Sub to perform which affects the pending Fall 2009 and 2010 seasons. Further delay will only exacerbate such damages and diminish the value of any ultimate distributions available to Debtors from the ultimate liquidation of the Joint Venture. 11

12 Document Page 12 of 13 formula with reference to the actual share of net profits to which HSM Sub otherwise would have been entitled through December 10, 2010 the current termination date as and when such payments will be received from the licensees. Accordingly, termination under the Joint Venture Agreement, in accordance with its terms and applicable Florida law, fully protects the estate s economic interests, while protecting the right of Golden Bear not to be subject to an involuntary personal services contract and to plan for the international licensing of its valuable trademarks in a post-hartmarx era. Moreover, allowing Golden Bear the opportunity to make viable alternative arrangements to provide support services to cover the wind up period as soon as possible will reduce the likelihood that constraints upon HSM Sub s performance of its future obligations will result in sublicensee termination or damage claims that would further reduce the proceeds available to the parties including Debtors, based on its share of international licensing revenues from a prompt and orderly liquidation of the Joint Venture. Conclusion 21. Particularly because of the impending December 31, 2010 deadline for termination under each of the parties agreements, and in light of the less-than-satisfactory performance by the Debtors under the Agreements in recent years, Golden Bear has no interest in continuing in these Agreements with either the Debtors or their potential assignees. The longer the process of separation is delayed, the greater the prejudice to Golden Bear, without any corresponding benefit to the estate. Indeed, the longer the Debtor holds onto these agreements, the less Golden Bear s ability to mitigate damages to reduce its administrative claim against these estates, and the less the potential economic recovery for Debtors with respect to international licensing revenues. 22. Accordingly, for all the reasons set forth herein, Golden Bear prays that it 12

13 Document Page 13 of 13 be granted relief from stay to terminate the Agreements, or in the alternative, that the Debtors be directed to reject the Agreements forthwith, and for such other and further relief as this Court may deem appropriate. Dated: March 9, 2009 Respectfully submitted, SIDLEY AUSTIN LLP /s/ Shalom L. Kohn Shalom L. Kohn Brian J. Lohan One South Dearborn Chicago, IL Tel: (312) Fax: (312) CH v.3 13

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION NOTICE OF FIRST DAY HEARING

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION In re: HARTMARX CORPORATION, et al., Debtors. 1 Case No. 09-02046 (BWB (Joint Administration Pending Chapter