Patriot Scientific
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TABLE OF AUTHORITIES
Cases
In re Bergeron
, __ WL __, 2013 WL 5874571 (Bkrtcy.E.D.N.C., 2013).................................... 24
In re G-I Holdings, Inc.
, 385 F. 3d 313 (3
rd
Cir, 2004) .................................................................. 4
In re Marvel Entertainment Group, Inc.,
140 F.3d 463 (3
rd
Cir. 1998).................................... 4, 23
In re Sundale Ltd.
, 400 B.R. 890 (Bankr. S.D. Fla. 2009).............................................................. 5
Statutes
11 U.S.C. section 1104(a)(1). ..................................................................................................
..... 10
11 U.S.C. section 1104(a)(2) ...................................................................................................
. 2, 22
11 U.S.C. section 1129(a)(11) ..................................................................................................
.... 23
11 U.S.C. section 365 ..........................................................................................................
......... 21
California Civil Code section 1622.............................................................................................
.. 15
Other Authorities
7 Collier on Bankruptc
y
¶ 1104.02[3][d][ii] ................................................................................. 23
7 Collier on Bankruptcy
Par. 1104.02[3][a] .................................................................................. 4
7 Collier on Bankruptcy
Par. 1104.02[3][b][i] ............................................................................... 3
CACI 304 Oral or Written Contract Terms .................................................................................. 15
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I.
INTRODUCTION
1. Only weeks before a vote by creditors can take place on two remarkably similar
competing plans that both call for unsecured clai
mants to take over the right to manage and
collect proceeds from the MMP Portfolio which di
ffer primarily as to who will manage the rest
of TPL post-confirmation and whether Portfolios
other than MMP are
commercialized by TPL,
the OCC
1
seeks a different end to the case. In its Motion
2
, the OCC seeks (1) appointment of a
trustee, (2) issuance of an order
to show cause re: contempt, (3) di
sclosure of (a) the details of
settlements proposed to the OCC that were d
eemed approved under the terms of this Court’s
Settlement Procedures Order
3
, (b) the status of proceeds from those approved settlements, and
(4) an injunction direc
ting sequestration of 100% of the proc
eeds of the approved settlements.
4
2. While the OCC cites both Bankruptcy Code section 1104(a)(1) and 1104(a)(2) in
its Motion, the main thrust of the
filing appears to be that the a
lleged violation of this Court’s
Settlement Procedures Order constitutes cause fo
r relief. The facts surrounding TPL’s strict
adherence to and the OCC’s disr
egard of the Settlement Proce
dures Order are straightforward
and undisputed. TPL proposed nine settlements
to the OCC under the terms of the Settlement
Procedures Order. The OCC approv
ed the first six settlements but fa
iled to exercise its rights as
to the remaining three, choosing instead to ma
ke demands for new concessions not within the
four corners of the Settlement Procedures Order,
for reasons beyond the purpose and intent of the
1
Official Unsecured Creditors’ Committee.
2
Motion Of Creditors’ Committee For Orders (1)
Directing The Appointment Of A Chapter 11
Trustee; And (2) Directing The Debtor And Dani
el E. Leckrone To Appear And Show Cause
Why They Should Not Be Held In Contempt
For Violation Of This Court’s Order.
3
Order on Motion Regarding Settlement Pr
ocedures dated May 7, 2013, docket no. 124.
4
The OCC also requested that approval of the O
CC’s disclosure statement be tracked with that
of the TPL Plan and that confirmation of both r
un parallel; the Court granted that request at a
December 18, 2013 hearing.
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procedures established in the Se
ttlement Procedures Order, th
at could not in any event be
performed without violating other c
ourt orders and causing the cessation of
TPL’s operations.
3. The OCC disregarded its obligations
under the Settlement Procedures Order
because it elected (a) within 48 hours of receiving
notification of three
settlements from TPL
conduct a call or meeting with TPL, (b) immediately following such meeting to communicate to
TPL whether it opposed the settlem
ent in a statement of positi
on, and (c) to explain in its
statement of position why the settl
ements proposed were “not in
the best interest of the
bankruptcy estate, or why Settlement Committ
ee believes a better settlement[s] could be
obtained.” As a result, all three settlements
were deemed approved under the terms of the
Settlement Procedures Order and promptly documen
ted and paid. Since the facts are undisputed,
this Court will be in a position at the Ja
nuary 23, 2014 hearing to determine which party
followed the requirements of the Settlement
Procedures Order and which did not.
4. The OCC has not otherwise met its high ev
identiary burden to establish cause for
the appointment of a trustee or established by cl
ear and convincing evidence that appointment of
a trustee is in the best interests of the esta
te under Bankruptcy Code section 1104(a)(2). TPL
believes the appointment of a trus
tee will significantly
negatively impact its Portfolios and the
revenue to be earned therefrom and s
hould not occur at this time.
II.
ARGUMENT
A.
Appointment of a Trustee Is An Extraordinary Remedy, and The
OCC’s Unsupported and Erroneous Alle
gations Do Not Fulfill Its Burden
of Proof as to Cause.
5. “The appointment of a trustee in a ch
apter 11 case is an ex
traordinary remedy.
The drafters of the Code recognized that, as a
general rule, in the absence of fraud, dishonesty,
incompetence, gross mismanagement, or similar grounds, the debtor’s management should be
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given an opportunity to propose a pl
an of reorganization for the debt
or. For this reason there is a
strong presumption that the debtor should be pe
rmitted to remain in possession absent a showing
of the need for appointment of a tr
ustee . . . .” 7 Collier on Bankruptcy
Par. 1104.02[3][b][i]
(Alan N. Resnick and Henry J. Sommer eds., 16
th
ed.) at 1104-9. As the OCC seemingly
acknowledges (Motion, 11:8-10), “’[t
]he party moving for appointment
of a trustee ... must prove
the need for a trustee ...
by clear and convincing evidence.’
See Sharon Steel,
871 F.2d at 1226.
‘
It is settled that appointment
of a trustee should be the ex
ception, rather than the rule.’
Id.
at
1225.
In the usual chapter 11 proceeding, the
debtor remains in possession throughout
reorganization because ‘current management is gene
rally best suited to orch
estrate the process of
rehabilitation for the benefit of credito
rs and other interests of the estate.’
In re V. Savino Oil &
Heating Co.,
99 B.R. 518, 524 (Bankr.E.D.N.Y.1989). Thus the basis for
the strong
presumption against appointi
ng an outside trustee
is that there is often no need for one: ‘The
debtor-in-possession is a fiduciary
of the creditors and, as a result, has an obligation to refrain
from acting in a manner which could damage the
estate, or hinder a succ
essful reorganization.’
Petit v. New England Mort. Serves.,
182 B.R. 64, 69 (D.Me.1995).
The strong presumption
also finds its basis in the debtor-in-possession's
usual familiarity with the business it had already
been managing at the time of the
bankruptcy
filing, often making it the
best party to conduct
operations during the reorganization.
See Sharon Steel,
871 F.2d at 1226. “
In re G-I Holdings,
Inc.
, 385 F. 3d 313, 319 (3
rd
Cir, 2004)(emphasis in the original),
quoting In re Marvel
Entertainment Group, Inc.,
140 F.3d 463, 471 (3
rd
Cir. 1998).
6 . “A trustee unfamiliar with the business and its creditors will usually suffer delay
and expense learning facts
and circumstances that the trustee need
s to know in orde
r to facilitate
the debtor’s reorganization. Neve
rtheless, the House Report recogni
zed that in some cases fraud,
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gross mismanagement, or other circumstances
might be present under which the benefit of a
trustee would outweigh the detriment. In view
of this expressed purpose, it would seem that a
court considering a motion to appoint a trustee sh
ould generally balance the benefit to be gained
by such an appointment against the detriment to
the reorganization effort and the rights of the
debtor that may result from such an
appointment. 7 Collier on Bankruptcy
Par. 1104.02[3][a] at
1104-8.
7 . As set forth below, the OCC has failed
to meet its high evidentiary burden to
show either cause for relief or that appointment
of a trustee is, on the eve of voting on plans of
reorganization, in the best interests of credito
rs. Significantly, the O
CC has failed to explain
what precisely a trustee would
do, other than replacing management
, and what he or she could
hope to accomplish in the few remaining weeks be
fore creditors are solicited simultaneously
with two plans voting occurs and what it would
cost in terms of fees and lost settlement
opportunities. The OCC’s plan, if
it is confirmed, will result in
the replacement of management,
the very remedy sought in the Motion – and lik
ely other employees who the OCC asserts are
overpaid, unnecessary, or both. Pr
ospective licensees have alr
eady shown their propensity to
“wait and see” what happens in this case which has made it difficult to generate revenue; the
appointment of a trustee will likely cause the
prospective licensee comm
unity to chill even
further which may limit or preclude the ability of
TPL or the OCC to proceed with any plan.
Given the procedural status of this case, no
trustee should be appoint
ed to replace current
management when two competing plans, one
from the OCC replacing management, and the
other from TPL retaining management, are about
to be set by this Court for coordinated
solicitation, voting, and confirmation.
See e.g. In re Sundale Ltd.
, 400 B.R. 890, 909 ( (Bankr.
S.D. Fla. 2009)(where the case is moving forward,
plan is on file, and
debtors’ ability to
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reorganize will be tested through the confirmation
process within next three months, lack of
confidence in management was found not
to merit appointment of trustee.)
B.
TPL Has Complied Strictly With The Terms Of The Settlement
Procedures Order, And No Cause Fo
r Appointment of A Trustee Exists.
8. TPL initially responded on December 17, 2013
to the allegations in the Motion
that it had violated the Settlement Proce
dures Order with its Statement of Position.
5
TPL
incorporates that Statement of
Position, the accompanying declaration of Heinz Binder, and the
exhibits to that declaration file
d under seal by this reference as
if set forth herein in full.
9. The OCC has noted correctly that th
e Settlement Procedures Order was the
product of a contested motion and was only entere
d after a hearing. What the OCC fails to
recount is that the approval procedure agreed
to by the OCC and TPL is streamlined because
negotiating settlements with litig
ation defendants under these facts
is incredibly time sensitive
and must be capitalized upon in real-time. TP
L explained this point in
its April 22, 2013 Reply
to Objection to Motion Regarding Se
ttlement Procedures (“Reply”):
“ Negotiating the settlement of a Patent
Action is complex, is usually done in
person, and requires the immediate auth
ority to enter into an agreement.
‘The only significant unknown element in
the Allowed Resolutions is the
amount that would be paid by the defendants. That amount cannot be
known until it is actually negotiated; this
, in turn, cannot practically occur
without the authority to do so.
Negotiations to settle TPL’s patent cases
are done in person. TPL and its licensing-services vendor, Alliacense,
require that prospective licensees come
to the table with the authority to
settle, and that expectation is mutual
.’”
Reply, 6:18-25 (emphasis added).
10. Paragraph 3 of the Settlement Proce
dures Order therefore sets forth the
accelerated 48-hour presentation and consider
ation procedure which TPL and the OCC
5
TPL’s Statement Of Position Regarding App
lication And Interpreta
tion Of Court Order
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negotiated so that settlements with defendants
could be presented and considered within a
specific and limited timeframe:
“When TPL wishes to set
tle litigation by way of the
issuance of a license or ot
herwise, it will send a notice
to the settlement Committee and the committee counsel
identifying the adverse party and the terms of the
proposed settlement. Counsel for the committee
and for TPL will then schedule a conference call
to consider the proposed settlement at a mutually-
convenient time (but in no event later than 48 hours
from the date and time of the notice) among the
Settlement Committee, committee counsel, TPL’s
bankruptcy counsel, TPL’s special litigation counsel
and the licensing director for Alliacense Limited LLC.”
11. Pursuant to paragraph 3 of the Se
ttlement Procedures Order, on November 18,
2013, TPL provided electronic notice to the OCC with
the terms of its proposed settlement with
one defendant from the Patent Cases in
accordance with the procedures above,
6
consistent with
the practice employed for the six settlements pres
ented to the Committee prior to that date. The
OCC even acknowledges that TPL “requested
a call with the Settlement Subcommittee to
discuss approval of a new settlement.” Moti
on, 3:24-26. On November 19, 2013, TPL reiterated
its request for a call on the first proposed settleme
nt and announced its desi
re to discuss a second
settlement.
7
On November 20, 2013, TPL provided electr
onic notice to the OCC with the terms
of the second proposed settlement
and requested a call to discuss it.
8
On November 26, 2013,
TPL provided the OCC with electronic notice of a
third proposed settlement and requested a call
to discuss it.
9
6
See Exhibit “C” to Declaration of Heinz
Binder in support of Statement of Position.
7
See Exhibit “D” to Declaration of Heinz
Binder in support of Statement of Position
8
See Exhibit “F” to Declaration of Heinz
Binder in support of Statement of Position
9
See Exhibit “I” to Declarat
ion of Heinz Binder in support of Statement of Position
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12. The OCC failed to schedule, within 48
hours of each notification to it of any of
the three settlements, or at any later time, “
. . . a conference call to consider the proposed
settlement . . . among the Settlement Committee,
committee counsel, TPL’s bankruptcy counsel,
TPL’s special litigation counsel and the licensi
ng director for Alliacense Limited LLC.”
Following each of the three electronic notificatio
ns of settlement descri
bed in the preceding
paragraph, the OCC’s only response was to respond in an email that “[t]he committee will only
consider further proposed settlements if 20% of th
e gross settlement proceeds is deposited into a
trust account for the benefit of credito
rs.” Motion, 3:25-4:5.
13. Paragraph 5 of the Settlement Procedur
es Order specifies the actions the OCC
shall (not may) take after receiving a settle
ment proposal from TPL and how long it has to
respond.
“Immediately following a presentation described in
Paragraph 3 or 4 above [the one the OCC is required to
schedule within 48 hours of receipt
of a notice of settlement],
the Settlement Committee shall convene to discuss the
proposed settlement and decide if
it does or does not support it.
Immediately thereafter, committee counsel shall notify TPL’s
bankruptcy counsel in writing
of the Settlement Committee’s
position regarding the proposal.”
Settlement Procedures Order, Par. 5.
14. Paragraph 7 of the Settlement Procedures
Order then specifies what an objection
of the OCC to a proposed settlement, if any, must contain:
“If the Settlement Committee objects to TPL’s proposed
settlement, committee counsel will communicate such
decision in writing to TPL’s
bankruptcy counsel setting
out the basis for that opp
osition, including the reason
the Settlement Committee claims the proposed settlement
is not in the best interest of
the bankruptcy estate, or why
Settlement Committee believes a better settlement could be
obtained.”
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Settlement Procedures Order, Par. 7.
15. Paragraph 9 of the Settlement Procedur
es Order provides for deemed approval of
settlements should the OCC fail to perform its
duties under paragra
phs 3, 5, and 7:
“If TPL provides the notice described in paragraph 3,
and the Settlement Committee fails to (a) agree to a
time for a conference within 48 hours, (b) attend an
agreed-on conference, or (c) provide a written statement
of its position as described in paragraph 5 [in other words,
following the “presentation” or
conference call required in
paragraph 3], then it is deemed that the creditors committee
has not objected to the proposed
settlement, and TPL may
enter into it as described in paragraph 6.”
16. It is undisputed that the OCC did not
agree to a time for a conference within 48
hours (as required by paragraph 3) or attend an
agreed-on conference (a
s required by paragraph
5). The OCC flatly refused to meet with TPL at
all to consider any of
the proposed settlements,
all of which were several years in the making, ex
traordinarily time sensitive, and substantially
beneficial to the Portfolio being licensed owing to the size and position of the licensees in the
market.
17. The OCC asserts that its blanket refusa
ls to consider settlements (Motion, 3:25-
4:5) constituted written responses sufficient
to comply with paragraph 9 of the Settlement
Procedures Order. The OCC
is wrong for two reasons.
a. First, the prerequisite fo
r a qualifying statemen
t of position under
paragraph 5 is a
meeting or conference call
between the OCC and the specific list of parties
necessary to present a settlemen
t that the OCC could then eval
uate. (“Immediately following a
presentation described in Paragraph 3 or 4 a
bove, the Settlement Committee shall convene to
discuss the proposed settlement and decide if
it does or does not support it. Immediately
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thereafter, committee counsel shall notify TPL’s ba
nkruptcy counsel in writing of the Settlement
Committee’s position.” Settlement Pr
ocedures Order, Par. 5.).
b. Second, the text of the OCC’s blanke
t refusals to consider settlements is
deficient and cannot constitute qualifying responses.
Paragraph 7 of the Settlement Procedures
Order requires that the OCC, if it objects, set
out in the objection “ . . . the basis for that
opposition, including the reason the Settlement Committ
ee claims the proposed settlement is not
in the best interest of the bankruptcy estate
, or why Settlement Committee believes a better
settlement could be obtained.” The purpose of this
in the Order is to ensure TPL has sufficient
information to then address the OCC’s conc
erns by either supplyi
ng the OCC with more
information or restructuring the settlement.
The OCC’s demand for an economic concession and
for the set aside of funds in der
ogation of the rights of secured
parties, contingency counsel, and
in a manner not permitted by the agreed cash collateral orders in place, in no way addressed why
any of the three proposed settlements themselves
(as opposed to directi
on or re-direction of
proceeds paid after consummation) were not in th
e best interest of the estate, much less why
better settlements could be obtained. In fact,
TPL believes the settlements were in the best
interests of the estate and that no
better settlements
could be obtained.
18. The OCC consciously elect
ed to disregard the Settl
ement Procedure Order for
improper purposes. The OCC freely admits in the
Motion why it did so, and the timing of that
admission is as damning as its substance. Th
e OCC advised TPL on November 13, 2013, that “ .
. . without significant progress in the negotiations
regarding the plan, you should not expect
approval of further proposed li
censing transactions/settlements.”
Motion, 3:17-23. This was
transmitted at a time that the B.D.R.P. process
ordered by this Court to generate a consensual
plan had not yet concluded. It was not until
November 18, 2013, that
the OCC advised Judge
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Montali that a further session would “not be
productive” and unilaterally terminated the
B.D.R.P.process.
19. The fact that the OCC began sending
emails, after it had disregarded its
obligations under the Settlement Procedures Order,
is not relevant to
the question of whether
cause for relief exists under Bankruptcy Code
section 1104(a)(1). The issue is whether TPL
complied with the Settlement Procedures Order.
The OCC’s communications
subsequent to the
deemed approval of three settlements suggest only
that the OCC belatedly reviewed the terms of
the Settlement Procedures Order and realized the
consequences of its failed effort to block all
further settlements and defund the estate.
20. As set forth in paragraph 7 above,
TPL consistently followed the specific
requirements of the Settlement Procedures Order
from the date of its entry. The first six
settlements TPL proposed to the OCC were proposed in the same format, with the same
information provided, and the OCC scheduled calls promptly. TPL notified the OCC of each of
the last three settlements it negotiated in the same manner, and asked that the OCC schedule
meetings with TPL to evaluate them; there have
been no other settlements. TPL will continue to
follow the requirements of the Settlement Procedur
es Order and present all settlements to the
OCC whenever they are negotiated.
21. TPL is including with this Opposition Br
ief a declaration from its Chief Financial
Officer, Dwayne Hannah. Mr. Hannah
details the uses of funds rece
ived from the last three
settlements and $4,000,000 received. All amounts
paid were within the allowed amounts for
categories of expenses approved by this Court pu
rsuant to TPL’s Second Motion to Approve Use
of Cash Collateral (FRBP 4001(b)). It is notewo
rthy that the OCC’s allega
tions as to “wasteful
dissipation of assets” (Motion, 5:16-7:10) de
scribe expenditures in budget categories and
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amounts to which the secured creditors of this case
have stipulated and, w
ith two exceptions (the
first and last cash collateral hearings)
to which the OCC has agreed as well.
22. It is also noteworthy that the demand made by the Committee to set aside 20% of
the gross amounts of the licenses
for unsecured creditors was mathem
atically impossible in light
of TPL’s other obligations under to contingency
payment agreements with
(i) litigation counsel,
(ii) the Fast Logic Portfolio pa
rtner, and (iii) Alliacense (which
negotiated all three settlements
and whose work made them possible), as well as
the required adequate protection payments to
TPL’s secured creditors, and the carve out paym
ents to professionals demanded by the OCC if
TPL was to pay expenses and any kind of pa
yroll. TPL repeatedly informed the OCC
subcommittee that the 20% gross formula was infeasible; the explanation was apparently
ignored.
23. TPL respectfully submits that the Court
should deny the Motion to the extent that
its seeks relief based upon allegatio
ns made regarding the Settleme
nt Procedures Order, decline
to issue an order to show cause re: contempt, fi
nd that the settlements
proposed to the OCC have
been disclosed as required in the Settlement Pro
cedures Order, and decline to issue an injunction
directing sequestration of the proceeds
of current or future settlements.
C
. The Other Facts Alleged by The OCC
Are Not Sufficient as Cause for Relief
under Bankruptcy Code Section 1104(a)(1)
24. In the conclusion of the Motion, the
OCC alleges that TPL and Daniel E.
Leckrone have “ . . . breached their fiduciary obli
gations to the estate . . . .” Motion, 11:20. The
Motion contains four categories of allegations th
at the OCC is apparently
pressing as cause for
appointment of a trustee to
support the point. Each are ad
dressed in turn below.
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Case: 13-51589 Doc# 357 Filed: 01/09/14 Entered: 01/09/14 19:00:11 Page 14 of
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OPPOSITION TO MOTION TO APPOINT TRUSTEE
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1.
Case Expenditures to Date
25. The OCC categorizes TPL’s court-approved expenditures for employee salary and
vendor payments to Alliacense
10
, all authorized for payment without objection from the OCC to
cash collateral authority requested (at leas
t until the December 4, 2013 final hearing), as
“outlandish” (Motion, 5:10) and a “wasteful di
ssipation of assets” (Motion, 5:16). The OCC
however offers no explanation of why the sala
ries paid to TPL insiders are “outlandish
11
,” and
supplies no evidence to support its position. The
OCC must be aware that its chairman, Chet
Brown, litigated this very issue in the
Brown v. TPL
trial in the Santa Clara Superior Court (case
number 1-09-CV-159452). Judge Huber’s finding, wh
ich the OCC now appare
ntly seeks to re-
litigate, is instructive:
“It is also clear that th
ere is no evidence to suggest that [Dan Leckrone’s
children] did not perform adequately
in their respective positions with the
company.....While Brown implies that the family members were well
paid, there is no evidence to suggest their remuneration was
disproportionate to job performance
or that their compensation exceeded
that of others similarly
situated in the industry.”
Statement of Decision, 3:21-26.
26. In the event that this Court does wish
to revisit Judge H
uber’s ruling and take
further evidence on the reasonableness of salaries
paid to TPL management or insiders, TPL has
retained the services of
Mr. Greg Goodere for testimony. Mr.
Goodere, an expert in the field of
human resources and salary levels
in this field and geographic lo
cation and has assisted TPL in
the past in setting compensation, has conducted
an analysis of the
qualifications of and
compensation to TPL’s employees and manageme
nt and is able to testify thereto.
10
TPL will address all issues re
lated to Alliacense at once wh
en responding to claims of a
conflict of interest.
11
The OCC also overstates the combined salari
es of three top members of management as
$630,000 rather than their actual total of $580,000.
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OPPOSITION TO MOTION TO APPOINT TRUSTEE
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27. The allegations made in the Motion (5:12-7:10) as to the duties of and
compensation to employee Janet Neal is rife with
inaccuracies and mischaracterization of prior
testimony. For example, the allega
tion that “TPL paid Ms. Neal
far more than the compensation
listed in her written consulting agreement....”
(Motion, 6:8-10) is entirely unsupported. The
only thing that the OCC did cite
is Exhibit “C” to the Kim decl
aration - a copy of Ms. Neal’s
consulting agreement - which provides no support fo
r the statement that she was paid “far more”
than in her agreement.. The OCC’s reference
to Exhibit “A” of Ms Kim’s declaration is
unavailing as well as an attempt to support their
statements, inappropriately suggested as fact,
that TPL loaned money for Ms. Neal to purchas
e her home. The Exhib
it contains nothing but
unequivocal testimony by Dwayne Hannah that TPL
did not provide any funds for Ms. Neal’s
home. [1198:16-28.] No money was ever loan
ed by TPL to Ms. Neal for her home. The
statement made by the OCC that they do not know
what Ms. Neal does is supported only by a
declaration from the OCC’s attorney, Mr. Murray,
who has never met nor worked with Ms. Neal.
TPL is prepared to refute the OCC’s remaining
attacks on its employment of Ms. Neal, point-by-
point, at an evidentiar
y hearing on the Motion.
2.
Alleged Conflicts Of Interest
28. The OCC includes section IV of its br
ief allegations regarding Mr. Leckrone’s
relationship with Alliacense, conj
ecture regarding pre-petition adva
nces and offset thereof, Mr.
Leckrone’s role on the board of PDS, and insider sa
laries. None create a c
onflict of interest that
merits the removal of TPL’s management.
a. Allegations Regarding Alliacense
29. The OCC alleges that Alliacense was,
prior to 2007, part of a “TPL Group.”
Motion, 12:13-14, but does not arti
culate any significance to this
characterization, and further
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OPPOSITION TO MOTION TO APPOINT TRUSTEE
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misstates Alliacense’s corporate history. Alli
acense was formed as a Nevada corporation on
January 4, 2005, and it operated under that name
until it was merged into an existing Delaware
LLC (named Alliacenes LLC) on December 31, 2008, which was then renamed Alliacense
Limited LLC. The “TPL Group” referenced
by the OCC was a marketing denomination for
services rendered by separate entities and does
not describe a legal re
lationship. Alliacense has
always been maintained and operated as a free
standing entity to provi
de essential Licensing
Program services to TPL.
30. The OCC’s central argument as to c
onflict of interest is that both TPL and
Alliacense are “ . . . owned and managed by Mr.
Leckrone as its sole shareholder and sole
member,” (Motion, 7:15-17), in a manner that re
sulted in “self dealing” (Motion, 8:16). The
authority cited for the claim of not only owners
hip but control is to a motion filed by TPL dated
April 15, 2013. TPL believes that
no conflict exists between Mr.
Leckrone’s in his role as
responsible individual for TPL and
his ownership of Alliacense for
the reasons set forth in TPL’s
Response to Objection
12
:
. . . Until June 2013, Dan Leckrone was the
sole owner and manager of Alliacense
and Mac Leckrone, his son, was the Pres
ident. In June 2013, Mr. Leckrone
resigned as manager of the company and ha
s not participated in the management
of Alliacense since that time. Corporat
e formalities are strictly observed. TPL
does not believe there is a
conflict for Mr. Leckrone be
cause (1) he no longer is
the manager of the company; (2) even
prior to his formal resignation, Mac
Leckrone handled the day-to-day operati
ons of the company as President and (3)
TPL is confident that it is being charged
at or below market rates for the services
provided. TPL does not believe any conflic
t arises due to the common ownership
between the companies, and the Committee ha
s not identified an actual conflict to
which TPL can respond.
Response to Objection, 11:3-11.
12
Response By Debtor To Objection Of Offi
cial Committee Of Unsecured Creditors To
Debtor’s Disclosure Statement Re: TPL Plan
Of Reorganization (D
ecember 9, 2013)(the “TPL
Response to Objection”).
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31. The OCC alleges that pre-petition payments to Alliacense occurred under an
earlier version of the Services Agreement that ha
d not been reduced to writing and later, when it
was, had not been signed. Motion, 7:17-19. Ca
lifornia Civil Code sec
tion 1622 provides that a
contract need not be in writing to be enforceable
: “[a]ll contracts may be
oral, except such as are
specially required by stat
ute to be in writing.”
See also
, CACI 304 Oral or Written Contract
Terms [Contracts may be written or
oral. Oral contracts are just as
valid as written contracts;];
Cal. Jury Inst. 10.57 [A contract may be oral, writte
n, or partly oral and partly written. An oral,
or a partly oral and partly written contract, is
as valid and enforceable as a written contract.]
32. TPL’s Disclosure Statement discusses in
substantial detail th
e history of TPL’s
relationship with Alliacense as well as the hi
story of the agreements. Counter to the
misstatements in the OCC’s Motion that there wa
s not a written agreement, there has been a
written agreement between the pa
rties since 2007 and Mr. Hannah une
quivocally testified to this
in the
Brown v. TPL
case; in fact, the testim
ony is found in Exhibit A to
Ms. Kim’s declaration at
page 1158, lines 21-28. The 2007 Services Agreemen
t was also provided to the OCC by TPL on
April 30, 2013.
33. The OCC theorizes, without any eviden
tiary support, that
that amounts paid by
TPL to Alliacense were “ . . . to enhance revenues flowing to Mr. Leckrone and other insiders
while maintaining liabilities in TPL and to di
vert revenues from TPL by
allowing licensing fees
to be paid from TPL, who was
responsible for licensing the MMP
Portfolio, to Alliacense.”
Motion, 7:20-23.
In fact, Alliacense is paid for services it
renders to TPL, which are essential to
the successful commercialization of its Portfoli
os. In fact, TPL has not been responsible for
licensing the MMP Portfolio since
July 2012. The issues the OCC
has with the licensing of the
MMP Portfolio, which TPL disputes
virtually in their entirety,
are at any rate not currently
relevant to the issue of the appointment of a
trustee since TPL has not
been responsible for
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OPPOSITION TO MOTION TO APPOINT TRUSTEE
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licensing MMP since July 2012. The OCC fails to
suggest how a trustee would have any impact
with respect to licensing the MMP Portfolio give
n that TPL does not manage the MMP Portfolio
licensing effort. Since TPL’s Plan calls for th
e OCC to appoint a repr
esentative to the PDS
management committee to take over any remaini
ng involvement TPL has in the MMP Portfolio,
even the prospective effect of appointing a tr
ustee to address this concern is negligible.
34. OCC Chairman Brown’s efforts in
litigation yielded a
critical finding in
December, 2012, with regard to the relationshi
p between Alliacense and TPL and the value of
Alliacense’s services. Judge Huber stated in hi
s Statement of Decision, th
at “[i]n the case of
Alliacense, a contract existed which paid that company 15 percent of licensing recovers [sic] as a
service fee. No evidence has been introduced
to suggest that Alliacense did not provide
appropriate services for the amount of income th
ey received. To the extent that money was
provided to Alliacense over and above the 15 per
cent, to keep them in operation, those monies
were treated as either a distribution to Leckr
one or an intercompany transfer; if the latter
Alliacense owes that amount to TPL. [¶] The ev
idence demonstrates that the work performed by
Alliance was necessary to the well-being of TPL.
The Court has seen no evidence of excessive
expense or that Alliacense did anything improper
with the funding it received under its contract
or loans for additional operating expenses receive
d from TPL.” Statement of Decision, 4:23-5:5.
35. The OCC inaccurately asserts that TP
L made a $15 million “loan” to Alliacense;
TPL’s Disclosure Statement and that te
stimony of Mr. Hannah. Motion, 7:25-26. The
statements in the Motion mischaracterize Mr.
Hannah’s testimony as review of the transcript
pages cited by the OCC will s
how. As TPL explained in
its Disclosure Statement
13
“ . . . the
advances made by TPL to Alliacense from 2006 to 2012 totaled approximately $15 million; in
13
Disclosure Statement Re: TPL Plan
Of Reorganization (December 23, 2013)
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addition, the hourly time and expense calculation
for the Alliacense Litiga
tion Support services
and Prosecution and Maintenance services totale
d $16.3 million for that period.” Disclosure
Statement, 72:10-13. Moreover, the $15 million wa
s not forgiven (Motion, 8:11), as the OCC
incorrectly alleges, it was offset as a negotiated term of the Amended Services Agreement in
March, 2012, a fact which TPL has openly disclosed
from the outset of this case. It is worth
noting that Alliacense would, had the offset not o
ccurred, retained offset and recoupment rights
of its own; under such circumstances, and th
e collectability of $15 million from Alliacense
would have been a doubtful proposition at best.
In any event, both the OCC and TPL plans
preserve the right to pursue Alliacense for any av
oidance claims that may exist for pursuit by a
CreditorTrust Trustee in
the case of the TPL Plan and the O
CC under its own proposal. In either
case, the obligation to investigate and, if necessar
y, prosecute claims against Alliacense has been
preserved, and two-year statute
of limitations is nowhere near running. TPL has therefore
fulfilled its fiduciary obligations with respect to claims against Alliacense.
b. Claims Regarding L
eckrone Role On PDS Board
36. The OCC references Mr. Leckrone’s
disagreement with the other PDS board
members on appointment of a third member of
the board, though it does not explain exactly how
alleged conflicts as board member of that non-deb
tor entity that has resulted in an inability to
make decisions (Motion, 8:28-9:3) automatically tr
anslate to a conflict in
this bankruptcy case.
There is merely an unspecified allegation that
Mr. Leckrone “places Alliacense’s interests ahead
of PDS’s or TPL’s interests in
communications with PDS.” Th
e facts are worth reviewing as
they show that any discontinuity of decision-
making results not from inaction by Mr. Leckrone
but the PDS Board’s inexplicable refusal to impl
ement the contractual remedy available to it to
fill the third board seat.
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37. The vacancy arose under the following circumstances: during the course of
rancorous litigation initiated
by PTSC Directors Felcyn and Johnson against TPL in April of
2010, the five-year term of the Independent Memb
er of the PDS Management Committee Robert
Neilson expired, and PTSC’s Directors (not TPL)
refused to reengage his services on the
financial basis he was proposing. The Independent Member position has remained vacant ever
since with no effort by PTSC Directors to ex
ercise their right under Article 4 of the PDS
Operating Agreement to cause the appointment of an Independent Member by employing an
Arbitrator to make the selection.
38.
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