SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -----------------------------------------------------------------------X EATON VANCE MANAGEMENT, et al., ) Index No. 654397/2017 ) Mot. Seq. 001 Plaintiffs, ) ) -against- ) ) WILMINGTON SAVINGS FUND SOCIETY, FSB, ) as ADMINISTRATIVE AGENT and COLLATERAL ) AGENT, et al., ) ) Defendants. ) -----------------------------------------------------------------------X PLAINTIFFS SUPPLEMENTAL MEMORANDUM OF LAW IN SUPPORT OF THE PROPOSED ORDER TO SHOW CAUSE FOR ENTRY OF A TEMPORARY RESTRAINING ORDER AND FOR A PRELIMINARY INJUNCTION BROWN RUDNICK LLP Sigmund S. Wissner-Gross Robert Stark Seven Times Square New York, New York 10036 Counsel for Plaintiffs 1 of 12
TABLE OF CONTENTS Page TABLE OF AUTHORITIES... ii PRELIMINARY STATEMENT...1 STATEMENT OF THE FACTS...2 ARGUMENT...4 CONCLUSION...9 i 2 of 12
TABLE OF AUTHORITIES Page(s) Cases B.S.F. Co. v. Philadelphia Nat l Bank, 204 A.2d 746 (Del. 1964)...8 In re BankAtlantic Bancorp., Inc., 39 A.3d 824 (Del. Ch. 2012)...7 DHL Corp. & Subsidiaries v. C.I.R., 1998 WL 906788, T.C. Memo. 1998-461 (U.S. Tax Ct. 1998), aff d in relevant part and reversed on other grounds in part, 285 F.3d 1210 (9th Cir. 2002)...5 In re Eastman Kodak Company, 2013 WL 4413300 (Bankr. S.D.N.Y. Aug. 15, 2013)...5 Gimbel v. Signal Cos., Inc., 316 A.2d 559 (Del. Ch. 1974)...8 Hall v. Nettles, 2010 WL 11493784 (N.D. Ga. Jan. 7, 2010)...5 HFTP Investments, L.L.C. v. Grupo TMM, S.A., Index No. 602925/2003, 2004 WL 5641710 (N.Y. Sup. Ct. N.Y. Cnty. June 4, 2004)...6, 7 Nestle Holdings Inc. v. C.I.R., 152 F.3d 83 (2d Cir. 1998)...4, 5 Roseton OL LLC v. Dynegy Holdings Inc., C.A. No. 6689-VCP, 2011 WL 3275965 (Del. Ch. 2011)...7 Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982)...6 Thorpe v. CERBCO, Inc., Civ. A. No. 11713, 1995 WL 478954 (Del. Ch. Aug. 9, 1995), rev d in part, aff d in relevant part, 676 A.2d 436 (Del. 1996)...7 Winston v. Mandor, 710 A.2d 835 (Del. Ch. 1997)...7 ii 3 of 12
Plaintiffs Eaton Vance Management and its affiliated funds ( Eaton Vance ), and Highland Capital Management LP and its affiliated funds ( Highland, and together with Eaton Vance, Plaintiffs ), respectfully submit this supplemental memorandum of law in support of Plaintiffs Proposed Order to Show Cause (the Order to Show Cause ). PRELIMINARY STATEMENT 1 As established in the expert Affidavit of David E. Yurkerwich of Navigant Consulting, Inc., sworn to on June 26, 2017 (the Yurkerwich Affidavit ), a copy of which is annexed as Exhibit A to the Supplemental Affirmation of S. Wissner-Gross, dated June 26, 2017, the undivided 72.04% interest in certain domestic trademarks of J. Crew International, Inc., a wholly-owned indirect subsidiary of J.Crew Group, Inc. and its consolidated assets ( J.Crew Group ) that were transferred in December 2016 to J. Crew Cayman Domestic Brand, LLC, represent at such date approximately 79% of the fair market value of the J.Crew Group considered as a whole (the Company ). 2 Based on Mr. Yurkerwich s valuation of the transferred trademark interests (the IP Assets ), Plaintiffs have further established a likelihood of success on the merits of the underlying action, more than sufficient to obtain a temporary restraining order and preliminary injunction. 1 All capitalized terms not defined herein have the same definition ascribed to them in the Complaint filed herewith. Plaintiffs reserve their right to address any opposition arguments made by Defendants at the hearing scheduled in this matter on June 28, 2017. 2 The disposition also constituted a transfer of substantially all of the Collateral under the Term Loan Agreement and substantially all of the aggregate of the Guaranty, also in violation of the Term Loan Agreement. 1 4 of 12
I. Procedural History. STATEMENT OF THE FACTS Plaintiffs commenced this case by filing a Summons and Complaint on June 22, 2017 [Dkt. No. 1], alleging, inter alia, that the transfer of the IP Assets was done in violation of Section 7.04 the Term Loan Agreement because it was accomplished through a release of substantially all of the Collateral of the Company without the approval of each Term Lender in violation of Sections 10.01(e) and (f) of the Term Loan Agreement. See Wissner-Gross 6/22/17 Aff., Ex. B, 7.04, 7.05, 10.01. At the same time, Plaintiffs filed an Order to Show Cause seeking a temporary restraining order and preliminary injunction [Dkt. Nos. 2-18]. The parties appeared before the Court on June 22, 2017, at which time the Court signed the Order to Show Cause and set the matter down for a hearing on June 28, 2017 [Dkt. No. 19]. The Court did not enter the temporary restraining order, but memorialized the representation from counsel for the J. Crew Defendants that full consummation of transactions sought to be enjoined was subject to conditions that would not occur until after the date of the hearing. The resolution of the underlying litigation, as it applies to the instant Order to Show Cause, turns, in part, on whether the value of the IP Assets constitutes all or substantially all of the value of the Collateral under the Term Loan Agreement, or the aggregate value of the Guaranty, such that the transfer of the IP Assets that occurred in December 2016, considered independently or together with the transfer of the remaining undivided interest in the IP Assets required the approval of each Term Lender. Plaintiffs contend in the Memorandum of Law in Support of Order to Show Cause for Preliminary Injunction and Temporary Restraining Order [Dkt. No. 14], that at this stage of the litigation (where no discovery has been conducted) and where there is demonstrable irreparable 2 5 of 12
harm, it is not required for Plaintiffs to establish a likelihood of success on the merits. Nevertheless, the enclosed initial expert report (prepared without the benefit of any discovery from J. Crew Company or information that was not otherwise publicly available), confirms a compelling likelihood of success on the merits. II. Relevant Provisions of the Term Loan Agreement. Section 10.01 strictly limits amendments to the Term Loan Agreement and provides that no amendment, waiver or consent shall (e) other than in a transaction permitted under 7.04 or Section 7.05, release all or substantially all of the Collateral in any transaction or series of related transactions, without the written consent of each Lender or (f) other than in a transaction permitted under Section 7.04 or Section 7.05, release all of substantially all of the aggregate value of the Guaranty, without the written consent of each Lender. Id. 10.01(e), (f). Pursuant to Section 7.04 of the Term Loan Agreement, J. Crew Group and Holdings B shall not and shall not permit any Restricted Subsidiary to: [m]erge, dissolve, liquidate, consolidate with or into another Person, or Dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any person.... See Wissner-Gross 6/22/17 Aff., Ex. B, 7.04. There are certain exceptions to Section 7.04, including that any Restricted Subsidiary may Dispose of all or substantially all of its assets... to the Borrower or another Restricted Subsidiary; provided that if the transferor in such a transaction is a Loan Party, then... (iii) such Investment must be a permitted Investment in a Restricted Subsidiary which is not a Loan Party.... Id. 7.04(c). A permitted Investment includes investment under a certain amount to Unrestricted Subsidiaries. Defendants contend that up to $277 million of assets may be transferred under Section 7.04 and argue that the transfer of the IP Assets transferred in December (the Disposed 3 6 of 12
Trademark Collateral ) had a value of $250 million. As shown in the Yurkerwich Affidavit, the actual fair market value of the Disposed Trademark Collateral was approximately $971 to $1,086 million, with a mid-value of $1,028 million. And, because the total enterprise value of the Company was within the range of $1,216 to $1,444 million, with a mid-value of $1,307 million, the release of the Disposed Trademark Collateral constituted substantially all of such Collateral. ARGUMENT I. Law Governing Ownership of Trademarks. The valuation prepared by J. Crew s valuation advisor, Ocean Tomo, is based on the notion that the fair market value a trademark is equal to its book value and that the value of an undivided interest in a trademark can be calculated based on the proportion to the whole of that undivided interest. This notion relies on a complete misapprehension of the fundamentals of trademark law and the valuation of trademarks. It is fundamental to trademark law that a trademark owner controls the power to determine when and where a mark may be used, or moving a mark into or out of product lines. Nestle Holdings Inc. v. C.I.R., 152 F.3d 83, 88 (2d Cir. 1998) ( ownership [of a trademark] carries with it the power and incentive both to put the mark to its most valued use and to increase its value. ). Since with respect to a particular trademark, these rights can only be exercised by one person or entity, the concept of undivided interests in a trademark has no practical meaning. Accordingly, an undivided interest in a trademark cannot be valued based on the percentage of the rights that such interest supposedly represents. Of two supposed owners, one with an undivided majority interest and one with an undivided minority interest, only one can determine when and where a mark may be used. Presumably, that would be the majority owner and the rights of the minority owners would be non-existent or de minimis. 4 7 of 12
II. Valuation Principles Applicable to Trademarks. The dominant and widely recognized method for valuation of trademarks is the relief from royalty approach, which is used by Mr. Yurkerwich in his Affidavit. In the Second Circuit, the relief from royalty method of valuing brands and trademarks is a commonly accepted method of valuation. See DHL Corp. & Subsidiaries v. C.I.R., 1998 WL 906788, T.C. Memo. 1998-461, *48 (U.S. Tax Ct. 1998), aff d in relevant part and reversed on other grounds in part, 285 F.3d 1210 (9th Cir. 2002) (analyzing trademark valuations where experts all relied on a relief-from-royalty analysis and rejecting case law opposing the method); see also In re Eastman Kodak Company, 2013 WL 4413300, *5 (Bankr. S.D.N.Y. Aug. 15, 2013) (describing relief from royalty as an accepted methodology of [estimating ] the value of the brand today ); Hall v. Nettles, 2010 WL 11493784, *9 (N.D. Ga. Jan. 7, 2010) (noting expert agreement on reliability of methodology). Importantly, the relief from royalty method of brand and trademark valuation is considered a conservative estimate of value, because it does not capture the value of all of the rights of ownership and [i]t does not even capture the economic benefit in excess of royalty payments that a licensee generally derives from using a mark. Nestle, 152 F.3d at 88. As discussed in the Yurkerwich Affidavit, the value of the Disposed Trademark Collateral under the relief from royalty approach was approximately $971 to $1,086 million, with a mid-value of $1,028 million. III. All or Substantially All of the Assets. The transfer of the IP Assets in December 2016 was not permitted pursuant to Section 7.04 or Section 7.05 of the Term Loan Agreement. And, because the Disposed Trademark 5 8 of 12
Collateral was released as collateral during the course of the December 2016 transaction, and because the Disposed Trademark Collateral constituted substantially all of the Collateral of the Company, its release was not permitted without the consent of each Term Lender. The proposed Amendments, which purport to ratify the transfer of the Disposed Trademark Collateral and pave the way for the transfer of the Remaining Trademark Collateral, are amendments that purport to irrevocably deny the non-consenting Term Lenders any remedy for the Company s breach of the Term Loan Agreement. See Wissner-Gross 6/22/17 Aff., Ex. B, 10.01(e)(f). When determining whether the IP Collateral consists of all or substantially all of the collateral of the Company, 3 this court must may consider related contexts involving the disposition of substantially all assets. See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1049 (2d Cir. 1982) (observing that the words all or substantially have been used in a variety of statutory and contractual provisions related to transfers of assets and have been given meaning in light of the particular context and evident purpose. ) To give meaning in light of contractual purpose, in determining whether less than all assets constitute substantially all, courts consider a wide variety of both quantitative and qualitative factors. HFTP Investments, L.L.C. v. Grupo TMM, S.A., Index No. 602925/2003, 2004 WL 5641710 (N.Y. Sup. Ct. N.Y. Cnty. June 4, 2004) (Under New York law, a determination as to whether there has been a sale of all or substantially all of an entity s assets requires an inquiry into both the quantitative and qualitative aspects of the sale in question. ). Qualitative factors that courts have considered when determining whether a particular sale is of all or substantially all of an entity s assets are: that the sale substantially changed the nature or character of the entity s business; that the sale involved primarily the entity s operating 3 If the IP Assets are all or substantially all of the assets of the Company, then it would necessarily also be all or substantially all of the Collateral under the Term Loan Agreement. 6 9 of 12
assets, rather than its liquid assets; and that the sale was one not in the normal and regular course of the entity s business. HFTP Investments, L.L.C., 2004 WL 5641710, at * 3-4. The quantitative analysis generally focuses on the economic value and number of assets to be transferred in comparison to the assets retained. Roseton OL LLC v. Dynegy Holdings Inc., C.A. No. 6689-VCP, 2011 WL 3275965 (Del. Ch. 2011). When comparing the value of the transferred assets to the assets of the company as a whole, experts and the court do not rely only on published financial statements of the company; instead, courts look to calculations other measurements of value and calculations of assets prepared by experts. See HFTP Investments, L.L.C., 2004 WL 5641710, at * 3; see also Stan Bernstein, Susan H. Seabury, Jack F. Williams, Admitting Expert Valuation Evidence Before the U.S. Bankruptcy Courts, American Bankruptcy Institute, 2017, p. 106 (internal citations omitted) ( Generally, GAAP-based current liabilities are estimated based on their carrying value, and long-term liabilities need a careful review for proper adjustment, if necessary. Courts have noted that accounting values may not be reflective of fair market value or a fair valuation... For many of these assets and liabilities, the debtor s books and records are an important first step; however, the GAAP standards upon which these accounts are most likely based do not govern the valuation. Often, a deeper review is necessary.... ). Courts have found that transfers of 60% or more of a company s assets constitute a sale of substantially all of the assets of a company. In re BankAtlantic Bancorp., Inc., 39 A.3d 824, 842 (Del. Ch. 2012) (transfer of assets comprising 85-90% or assets of the company can constitute a transfer of substantially all); Winston v. Mandor, 710 A.2d 835, 843 (Del. Ch. 1997) (assets comprising 60% of net asset value might be substantially all assets for pleading purposes in situation when they allegedly constituted the only income-generating assets ); Thorpe v. 7 10 of 12
CERBCO, Inc., Civ. A. No. 11713, 1995 WL 478954, at *9 *10 (Del. Ch. Aug. 9, 1995) (assets that were held likely to constitute substantially all the assets comprised at least 68% of corporation's assets and were the corporation's primary income-generating asset[s] ), rev d in part, aff d in relevant part, 676 A.2d 436 (Del. 1996); B.S.F. Co. v. Philadelphia Nat l Bank, 204 A.2d 746, 749 (Del. 1964) (finding a sale of substantially all assets where sale constituted in excess of 75% of the total assets and was the only substantial income producing asset); Gimbel v. Signal Cos., Inc., 316 A.2d 559, 607 (Del. Ch. 1974) (sale where the stock being sold constituted only 26% of total assets and produced only about 15% of total revenues and earnings did not constitute a sale of all or substantially all assets). As demonstrated by Mr. Yurkerwich, the Disposed Trademark Collateral constitutes at least 79% of the assets of the Company. This valuation strongly supports a finding that (i) the transfer of the Disposed Trademark Collateral was not permitted by the Term Loan Agreement, and (ii) the release of the Disposed Trademark Collateral constituted a release of substantially all of the Collateral of the J.Crew Group. As further explained in Mr. Yurkerwich s affidavit, the qualitative aspects of the IP Assets provide further support that the Disposed Trademark Collateral constitutes substantially all of the assets of the Company. As set forth below, J. Crew Group, in public filings issued prior to the current dispute, also has explained that the profitability of its business is dependent on the value of its marks: If we fail to maintain the value of our brands and protect our trademarks, our sales are likely to decline. Our success depends on the value of the J.Crew and Madewell brands and our corporate reputation. The J.Crew and Madewell names are integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brands will depend largely on the 8 11 of 12
success of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. Our brands could be adversely affected if we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative publicity through traditional or social media platforms. Any of these events could result in decreases in sales. The J.Crew and Madewell trademarks and variations thereon, such as crewcuts and J.Crew Mercantile, are valuable assets that are critical to our success. We intend to continue to vigorously protect our trademarks against infringement, but we may not be successful in doing so. The unauthorized reproduction or other misappropriation of our trademarks would diminish the value of our brands, which could reduce demand for our products or the prices at which we can sell our products. CONCLUSION For all the foregoing reasons and the reasons previously set forth by Plaintiffs, it is respectfully requested that this Court grant Plaintiffs Order to Show Cause seeking a temporary restraining order and preliminary injunction. Dated: New York, New York June 26, 2017 62810109 Respectfully submitted, By: /s/ Sigmund S. Wissner-Gross Sigmund S. Wissner-Gross Robert Stark BROWN RUDNICK LLP Seven Times Square New York, NY 10036 (212) 209-4800 Counsel for Plaintiffs 9 12 of 12