In the United States Bankruptcy Court for the District of Delaware, the bankruptcy court dismissed a chapter 11 case for bad faith, relying in part on an email sent by someone other than the debtor relaying to his employees and sales representatives his conversation with the debtor’s chief executive officer. This decision serves as a reminder to debtor lawyers how imperative it is to review with your client what it is saying both privately and publicly about its bankruptcy case. Because even in bankruptcy court, anything you say can and will be used against you.
In In re Derma Pen, LLC, 2014 WL 7269762 (Bankr. D. Del. Dec. 19, 2014), the debtor was a provider of FDA registered skin treatment devices. Prior to its bankruptcy filing, the debtor was involved in contentious litigation with 4EverYoung in the District of Utah over a distribution agreement and trademark rights. Shortly after the district court entered partial summary judgment in favor of 4EverYoung on several key issues, the debtor commenced its bankruptcy case.
As part of its business, the debtor’s affiliate – Medmetics – entered into a joint venture with Biopelle, Inc. After the bankruptcy filing, the CEO of Biopelle had a conversation with the debtor’s CEO to discuss the bankruptcy filing. The Biopelle CEO then sent an email to his employees and sales representatives stating the following:
“As a strategy in fighting this legal battle, the partners of Derma Pen, LLC formed a new company, Medmetics, LLC, and have transferred most of the assets of Derma Pen, LLC to this new entity, including the ownership of the [DermaPen] trademark. . . . The bankruptcy filing was just another step in this strategy.”
4EverYoung filed a motion to dismiss the debtor’s bankruptcy case arguing that it was filed in bad faith. The debtor denied the truth of the comments made by the Biopelle CEO and insisted that it filed in order to preserve the value of its assets by selling its trademark and rejecting the distribution agreement under sections 363 and 365 of the Bankruptcy Code. But the bankruptcy court rejected this argument, finding that the email was “the most honest articulation of the Debtor’s intentions.” The bankruptcy court found that the purpose of the bankruptcy filing was to stop the District of Utah litigation and move into what the debtor believed would be a friendlier forum. The bankruptcy court dismissed the debtor’s chapter 11 bankruptcy case for bad faith.
Derma Pen shows how important it is to discuss with the debtor what it is saying about its bankruptcy filing both in public statements or press releases and to its customers and business partners. While it is unclear whether the bankruptcy court would have dismissed the case absent the existence of the Biopelle email, the fact that the court relied on the email as support for its decision should reinforce the importance of establishing and unifying the debtor’s message to its constituents during the bankruptcy case.