Be careful when you sell intellectual property (“IP”) in return for future royalty payments. You may think your contract is airtight, guaranteeing you a future annuity on the sales of product relating to your IP, but that might not be the case if your buyer files for bankruptcy.

You ship goods to a customer that is having financial difficulties. The customer sends you a check for the goods. What do you do?

Cash it and potentially be sued for a preference after the customer files for bankruptcy

or

Don’t cash it, and have a claim in the ensuing bankruptcy

In a recent opinion – In re Heritage Home Group LLC, et al., Case No. 18-11736 (KG), 2018 WL 4684802 (Bankr. D. Del. Sept. 27, 2018) – the Delaware Bankruptcy Court addressed the longstanding issue of which professional persons must be retained under section 327(a) of the Bankruptcy Code.

A fundamental tenet of chapter 11 bankruptcies is the absolute priority rule. Initially a judge-created doctrine, the absolute priority rule was partially codified in section 1129(b)(2)(B)(ii) of the Bankruptcy Code. Under section 1129, plans must be “fair and equitable” in order to be confirmed.

Background: Professionals’ Fees in Chapter 11 cases