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Receiver in Bankruptcy Permitted to Sell Trademarked Goods Despite Opposition from Trademark Owner

On August 25, 2014, Justice Gouin of the Quebec Superior Court released his Reasons for Judgment in 185107 Canada Inc. (Groupe de companies Bennett Little ltee—Bennett Little Group of Companies).

As part of a bankruptcy proceeding, the receiver in bankruptcy, Ernst & Young Inc. brought a motion before the Quebec Superior Court, seeking permission to sell certain trademarked goods that belonged to the Debtor. The goods at issue were school and office supplies that were sold wholesale to school boards and government institutions. These school and office supplies were manufactured under trademarks owned by Canadian HIP Industries of North America (“CHINA”).

The Debtor had entered into a trademark licensing agreement with CHINA to allow them to sell products carrying their marks. However, this license was terminated by CHINA after the Debtor went into bankruptcy. E&Y claimed that since the Agreement was silent with respect to the liquidation of products carrying CHINA’s trademarks (either in the event of a bankruptcy or if the Agreement was terminated), they had the authority to sell these assets in the best interests of the Debtor’s creditors. CHINA attempted to block the sale of these assets on the basis of the license agreement and the Bankruptcy and Insolvency Act, arguing that the Debtor was not permitted to sell any property carrying their trademarks.

The essential issue was how to deal with these trademarked assets in light of the unique circumstances of the case. Ultimately, the Court granted the motion and E&Y was allowed to proceed with the sale, relying upon the following three considerations:

(1) The special circumstances of the case – The President and principal shareholder of CHINA, and was also the President and largest shareholder of the Debtor. As a result, he was effectively negotiating against himself in this dispute, creating an apparent conflict of interest that was troubling to the Court.

(2) The silence of the license agreement upon the termination or bankruptcy – According to CHINA the fact that the agreement was silent with respect to this matter meant that the Debtor and E&Y lacked the authority to dispose of the products that were subject to the trademarks. The Court held that this was an absurd result. To follow this logic, it would mean that should CHINA decide to terminate the trademark agreement then the debtor would be forced to abandon their interest in any property using the trademarked brands. Furthermore, the license allowed for a retroactive termination, and the Court opined that if they followed CHINA’s line of reasoning then a retroactive termination would result in the sale of any trademarked goods, to be deemed an illegal sale. In the Court’s opinion this was an absurd result, and could not be what the parties intended. Since the agreement is silent, the Court presumed that the parties would have intended for a reasonable, convenient and beneficial outcome for all parties should circumstances arise, such as those in the case at bar.

(3) The fact that this would be a reasonable, convenient, and beneficial outcome for the stakeholders – E&Y pursued a reasonable sale process that was respectful of the trademark owner’s interest in the brands. The longer they waited to sell the goods, the lower their value would be. In considering all the relevant factors, the Court felt that it was reasonable and practicable to go ahead with the sale.

A copy of the Court’s decision, in French, may be found here.