Case 17-29073 Doc 746 Filed 06/24/20 Entered 06/24/20 17:46:27 Desc Main
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`George Hofmann (10005)
`Matthew M. Boley (8536)
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`Jeffrey Trousdale (14814)
`Cohne Kinghorn, P.C.
`111 East Broadway, 11th Floor
`Salt Lake City, Utah 84111
`Telephone: (801) 363-4300
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`Attorneys for George Hofmann, Chapter 11 Trustee
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`IN THE UNITED STATES BANKRUPTCY COURT
`DISTRICT OF UTAH, CENTRAL DIVISION
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`
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`In re:
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`VIDANGEL, INC.,
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`Debtor.
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`Bankruptcy No. 17-29073 (KRA)
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`Chapter 11
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`TRUSTEE’S OBJECTION TO CONFIRMATION OF COPYRIGHT CREDITORS’ PLAN
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`George Hofmann, in his capacity as Chapter 11 Trustee (the “Trustee”) of the
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`bankruptcy estate of VidAngel, Inc. (the “Debtor”), through counsel, OBJECTS to
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`confirmation of Studios’ Third Amended Plan of Reorganization Under Chapter 11 of the
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`Bankruptcy Code [Docket No. 681] (“Copyright Creditors’ Plan”) filed by Copyright
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`Creditors.1
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`1
`“Copyright Creditors” or, as they refer to themselves, the “Studios”, mean and refer to, collectively,
`Disney Enterprises, Inc., Lucasfilm Ltd. LLC, Twentieth Century Fox Film Corporation, Warner Bros.
`Entertainment Inc., MVL Film Finance LLC, New Line Productions, Inc. and Turner Entertainment Co.
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`INTRODUCTION
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`Copyright Creditors’ Plan is not designed to achieve the goals of chapter 11, i.e.,
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`reorganizing a debtor and maximizing the value of a bankruptcy estate. Instead, it
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`attempts to force the Debtor, together with the Debtor’s management and its
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`shareholders, into a corporate debtors’ prison. Copyright Creditors’ Plan proposes to
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`trade a false and never-to-be-realized “reduction” in Copyright Creditors’ Claims for
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`perpetual handcuffs on the Debtor’s business, which also happens to be the business
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`that Copyright Creditors engage in in. Further, Copyright Creditors’ Plan imposes those
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`same handcuffs on non-Debtor third-parties, which will remain even if the Debtor is
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`liquidated in short order. Not satisfied with repayment of the money judgment they hold—
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`i.e., the only remedy they are entitled to under non-bankruptcy law—Copyright Creditors’
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`Plan seeks to augment and rewrite copyright law in their favor, to the detriment of the
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`Debtor and its shareholders. Worse still, Copyright Creditors Plan prohibits third-parties
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`from engaging in their First Amendment rights, effectuates a hostile takeover of the
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`Debtor, and includes a “settlement” of the Debtor’s claims against them, but with no
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`agreeing counterparty to the settlement.
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`The Trustee is informed and believes that the Class 4 creditors (customers) and
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`Class 5 equity holders overwhelmingly voted against Copyright Creditors’ Plan.
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`Copyright Creditors’ Plan was not accepted by any impaired voting class. This alone
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`bars confirmation. On the other hand, the Debtor’s credit holders and investors
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`overwhelmingly voted to approve the Trustee’s Plan of Reorganization dated April 9,
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`2020 (as it may be amended, the “Trustee’s Plan”), which pays Copyright Creditors’ and
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`other creditors’ Claims in full and gives the Debtor the autonomy it needs to flourish in
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`the future. The Court should heed the preferences of the Debtor’s creditors and equity
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`holders, deny confirmation of Copyright Creditors’ Plan, and confirm the Trustee’s Plan.
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`ARGUMENT
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`Summary of Arguments
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`Code Provision
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`Summary of Objection
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`11 U.S.C. §§ 1129(a)(1) and 524(e) – Discharge of
`Non-Debtor’s Liability
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`11 U.S.C. § 1129(a)(3) – Good Faith
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`11 U.S.C. § 1129(a)(5) – Disclosure of Future
`Management
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`11 U.S.C. § 1129(a)(10) – Accepting Impaired
`Class
`11 U.S.C. § 1129(a)(11) – Feasibility
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`11 U.S.C. § 1129(b)(2)(C) – Fair and Equitable
`Treatment
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`11 U.S.C. § 1129(c) – Preferences of Creditors
`and Equity Holders
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`3
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`The Plan releases Copyright Creditors from all
`liabilities, known or unknown, as to the Debtor, the
`Trustee, the Bankruptcy Estate, and all persons
`claiming by, through, or under them. This is an
`overbroad release.
`The Plan is not proposed in good faith. Its purpose
`is not to reorganize the Debtor’s debts, its purpose
`is for Copyright Creditors to obtain relief against
`the Debtor and third-parties that they could not
`obtain in any court. “Protection of copyrights”
`and/or destruction of a competitor is not a good
`faith basis for a plan of reorganization.
`The Plan will result in the mass-resignation of the
`Debtor’s existing management. The Plan does not
`disclose the identity or affiliations of the proposed
`“Interim Manager,” and Copyright Creditors do not
`show how that person’s appointment is consistent
`with the interests of equity holders, other creditors,
`or public policy.
`There are no accepting impaired classes. Classes
`4 and 5 voted against Copyright Creditors’ Plan.
`Copyright Creditors’ Plan makes a “pipe dream”
`promise to equity holders—that they will obtain
`some benefit from the proposed “discount” of
`Copyright Creditors’ Claims. But the Debtor will be
`immediately liquidated, with most distributions
`going to Copyright Creditors. Additionally, the
`Debtor’s long-term upside is restricted by the
`“forever restrictions” in Copyright Creditors’ Plan.
`It is not “fair and equitable” to the Debtor’s equity
`interest holders to put “forever restrictions” on the
`Debtor’s ability to engage in legal business, and to
`impose a 15-year lien, without an option for
`“payoff,” which will likely result in a quick
`liquidation of the Debtor. This imposes an artificial
`cap on the Debtor’s ability to grow post-Effective
`Date.
`Classes 4 and 5 have voted to accept the
`Trustee’s Plan but have voted to reject Copyright
`Creditors’ Plan. In deference to the views of
`creditors and equity holders, the Court should
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`28 U.S.C. §§ 157 and 1334
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`11 U.S.C. §§ 1129(a)(1) & 1123(b)(3) &
`Bankruptcy Rule 9019 – No Adequate Means for
`Implementation. The Trustee has not accepted the
`compromise or settlement proposed by Copyright
`Creditors.
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`confirm the Trustee’s Plan and deny confirmation
`of Copyright Creditors’ Plan.
`Copyright Creditors’ Plan proposes terms and
`injunctions that exceed the jurisdiction and
`authority of the Bankruptcy Court to grant.
`Under the Bankruptcy Code, whether to settle or
`compromise a claim against the Estate, and
`whether to concede the Debtor’s legal rights, is
`submitted to the sound business judgment of the
`Trustee. The Bankruptcy Code does not permit the
`Bankruptcy Court to usurp the Trustee’s function,
`or to substitute its own business judgment for that
`of the Trustee. Rather, the Court is to defer to the
`Trustee’s decision and to approve agreements
`made by the Trustee if the Trustee’s actions are
`not arbitrary or capricious. Both “settlements” and
`“covenants” are bilateral, not unilateral. The
`Trustee, however, did not negotiate the terms in
`Copyright Creditors’ Plan. Where the Trustee has
`not accepted Copyright Creditors’ offer, there is no
`agreement (covenant or settlement) to approve.
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`I.
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`Non-Insider Creditors and Equity Holders Prefer the Trustee’s Plan.
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`As an initial matter, the Trustee understands that Class 4 Claims and Class 5
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`Interests under Copyright Creditors’ Plan have voted to reject Copyright Creditors’ Plan.
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`Thus, even if the Court finds that Copyright Creditors’ Plan is confirmable under
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`Bankruptcy Code §§ 1129(a) and (b), then the Court must look to Bankruptcy Code
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`§ 1129(c) to determine whether to confirm Copyright Creditors’ Plan or the Trustee’s
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`Plan. “The most significant element in choosing between two confirmable plans is the
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`statutory direction to the court to ‘consider the preferences of creditors and equity
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`security holders in determining which plan to confirm.’ The preference of creditors is
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`reflected in the voting results.” In re TCI 2 Holdings, LLC, 428 B.R. 117, 183–84 (Bankr.
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`D.N.J. 2010) (quoting 11 U.S.C. § 1129(c)).
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`If the preferences of creditors and equity holders are considered, then the Court
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`should deny confirmation of Copyright Creditors’ Plan and confirm the Trustee’s Plan.
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`II.
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`Copyright Creditors’ Plan Does Not Satisfy Bankruptcy Code § 1129(a)(10).
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`Bankruptcy Code § 1129(a)(10) requires that “[i]f a class of claims is impaired
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`under the plan, at least one class of claims that is impaired under the plan has accepted
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`the plan, determined without including any acceptance of the plan by any insider.”
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`The Court should treat Copyright Creditors as “insiders” with respect to their Plan.
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`Congress intended that an insider includes “one who has a sufficiently
`close relationship with the debtor that his conduct is made subject to closer
`scrutiny than those dealing at arms length with the debtor.” S.Rep. No. 989,
`95th Cong., 2d Sess. 25 (1978); H.R.Rep. No. 595, 95th Cong., 1st Sess.
`312 (1979), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5810, 6269
`(legislative history to 11 U.S.C. § 101(30)).
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`The rules of construction for the Bankruptcy Code specifically state that the
`terms “includes” and “including” “are not limiting.” 11 U.S.C. § 102(3). The
`use of the term “insider” at 11 U.S.C. § 101(30) provides an illustrative,
`rather than an exhaustive list of the persons or entities which may qualify
`as insiders of the debtor. In re Henderson, 96 B.R. 820, 824–25
`(Bankr.E.D.Tenn.1989).
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`In re Allegheny Int'l, Inc., 118 B.R. 282, 298 (Bankr. W.D. Pa. 1990). In Allegheny, the
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`bankruptcy court found that a creditor who was a plan proponent was an insider, in part
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`because it had “received a great volume of information that was not available to other
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`creditors, shareholders, and the general public. This delivery of information was
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`voluminous and thorough. This type of information is available only to insiders.” Id.
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`Because it had “sought and received inside information as a proponent of a plan,” the
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`Court found that the creditor was “an insider and a fiduciary for purpose of this
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`reorganization.” Id. at 299.
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`Similar to the creditor in Allegheny, Copyright Creditors have requested and
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`received substantial information that is not available to any party but an insider. They
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`have engaged in discovery with respect to every aspect of the Debtor’s business. They
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`have been provided with the Debtor’s confidential business information. They have
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`exerted an enormous level of control over the Debtor in the course of the Bankruptcy
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`Case. It was Copyright Creditors who sought and obtained appointment of the Trustee,
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`and Copyright Creditors now seek confirmation of a plan that leverages their [disputed
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`and subject to appeal] judgment in order to coerce non-bankruptcy restrictions on the
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`Debtor’s business that they could not obtain in any court or legal proceeding. At least
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`with respect to their own Plan, Copyright Creditors should be treated as insiders by the
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`Court.
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`Alternatively, to the extent that Copyright Creditors argue that they should be
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`treated as an “accepting impaired class,” Copyright Creditors are not impaired under
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`their Plan. A class of claims is unimpaired where the plan “leaves unaltered the legal,
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`equitable, and contractual rights to which such claim or interest entitles the holder of
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`such claim or interest.” As the proponents of their own plan, Copyright Creditors had the
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`right to do whatever they wanted with their Claims. They determined to unilaterally
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`“settle” their Claims for $14 million, although they retain the ability to foreclose on the full
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`amount of their [disputed and subject to appeal] Claims ($62.4 million) if the Debtor
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`defaults, and they grant themselves a lien that would give them a priority payment over
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`the Debtor’s post-petition creditors. They are not impaired because they have
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`determined their own destiny in their plan. If anything, they have augmented their
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`Claims, since they retain the right to collect against the Debtor the full amount of their
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`judgment, but now have a “super-lien” against the Debtor’s assets. To the extent that
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`they are impaired, they have artificially impaired themselves, at their own election.
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`Copyright Creditors’ Plan includes one class of impaired claims: Class 4. Class 4
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`voted to reject Copyright Creditors’ Plan. Thus, Copyright Creditors’ Plan does not meet
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`the requirement of Bankruptcy Code § 1129(a)(10), and is not confirmable as a result.
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`Copyright Creditors have “reserved their right” to argue that Class 4 is unimpaired
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`under their plan. But Class 4 is impaired. Outside of bankruptcy, the Debtor’s “Credit
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`Holders” were entitled to receive a cash refund for their unused customer credits with the
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`Debtor. Under Copyright Creditors Plan they receive a credit for services. If the Debtor is
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`forced into liquidation (which is the most likely scenario under Copyright Creditors’ Plan),
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`Class 4 Claim holders will receive a cash refund from “proceeds of the estate” only after
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`Copyright Creditors’ attorneys’ fees and costs are paid in full. Credit Holders will likely
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`receive nothing.
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`Additionally, if Copyright Creditors’ Plan is confirmed, then the Debtor’s ability to
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`offer any filtering service will be severely limited. Presumably, the availability of the
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`Debtor’s services is important to Credit Holders, as shown by the fact that Credit Holders
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`overwhelmingly voted to accept the Trustee’s Plan. By limiting their ability to enjoy the
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`Debtor’s services, Copyright Creditors’ Plan impairs the Credit Holders’ “legal, equitable,
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`and contractual rights.” Without an accepting impaired class, Copyright Creditors’ Plan
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`does not meet the requirement of Bankruptcy Code § 1129(a)(10) and is rendered
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`unconfirmable.
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`Copyright Creditors’ Plan Does Not Comply With Bankruptcy Code
`§ 1129(a)(5).
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`As a condition of confirmation, Bankruptcy Code § 1129(a)(5) provides in relevant
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`III.
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`part:
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`(A)(i) The proponent of the plan has disclosed the identity and
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`affiliations of any individual proposed to serve, after confirmation of the
`plan, as director, officer, or voting trustee of the debtor, an affiliate of the
`debtor participating in a joint plan with the debtor, or a successor to the
`debtor under the plan; and
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`the appointment to, or continuance in, such office of such
`(ii)
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`individual, is consistent with the interests of creditors and equity security
`holders and with public policy.
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`Section 5.10 of Copyright Creditors’ Plan purports to reinstate the Debtor’s existing
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`management, but it is no secret that the Debtor’s existing management will resign
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`immediately if Copyright Creditors’ Plan is confirmed. According to Copyright Creditors’
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`Plan, “[i]f no replacement can be timely identified to assume the CEO and/or CMO
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`positions, [Copyright Creditors] will appoint and disclose a replacement CEO and
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`experienced management team (the “Interim Manager”) at least ten (10) business days
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`prior to the Confirmation Hearing.” Copyright Creditors must disclose the identity and
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`affiliations of their proposed replacement CEO and management team, or their plan
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`simply does not comply with the Bankruptcy Code.
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`Copyright Creditors also must establish that the appointment of their proposed
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`“Interim Manager” is “consistent with the interests of creditors and equity security holders
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`and with public policy.” Bankruptcy Code § 1129(a)(5) (emphasis added). To meet this
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`requirement, at a minimum, Copyright Creditors should establish that: (i) the ouster of a
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`competitor’s management; (ii) so that Copyright Creditors can institute their own, insider
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`management team; (iii) in a company that was built on “social impact” investing by
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`investors who share certain (often faith-based) beliefs with the Debtor’s existing
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`management; and (iv) which will likely result in a liquidation of the Debtor, leaving
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`investors with nothing; is consistent with the interests of creditors, equity security
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`holders, and public policy. The Debtor’s equity class and impaired creditor class have
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`already voiced their belief that Copyright Creditors’ Plan is not consistent with their
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`interests. The Court should give their votes particular deference in this determination.
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`Copyright Creditors have an uphill battle to show that their actions are consistent
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`with public policy. For example, 15 U.S.C. § 18 provides that a person or company may
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`not “acquire the whole or any part of the assets of one or more persons engaged in
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`commerce . . . where . . . the effect of such acquisition . . . may be substantially to lessen
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`competition, or to tend to create a monopoly.” In Utah, the Legislature has enacted laws
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`“to safeguard the public against the creation or perpetuation of monopolies and to foster
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`and encourage competition, by prohibiting unfair and discriminatory practices by which
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`fair and honest competition is destroyed or prevented.” Utah Code Ann. § 13-5-17. By
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`instituting their own team of managers, Copyright Creditors may be engaging in anti-
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`competitive actions, which are clearly inconsistent with public policy.2 Copyright
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`Creditors’ Plan fails to satisfy Bankruptcy Code § 1129(a)(5) and cannot be confirmed.
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`2 For example, it is not inconceivable that a manager appointed by Copyright Creditors could intentionally
`cause the Reorganized Debtor to default under Copyright Creditors’ Plan, thus triggering the enforcement
`of Copyright Creditors’ all-assets lien and the liquidation of the Reorganized Debtor’s assets. It is hard to
`see how that is consistent with the interests of public policy or equity interest holders.
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`IV.
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`Copyright Creditors’ Plan is Not Feasible, Unless the Plan’s Embrace of a
`Potential Future Liquidation Satisfies Feasibility.
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`Both Copyright Creditors Plan and the Trustee’s Plan propose a potential
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`liquidation, with a lien on all of the Debtor’s assets for the benefit of creditors, which may
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`be triggered if the Debtor does not make the payments proposed under the respective
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`plan. Both Copyright Creditors and the Trustee suggest that this treatment satisfies the
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`requirements of Bankruptcy Code § 1129(a)(11), because the potential for a future
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`“liquidation or reorganization is proposed in the plan.” Assuming the Court accepts the
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`premise that is advanced by both the Trustee and Copyright Creditors, then both plans
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`are de facto feasible, and the Trustee generally agrees that Copyright Creditors’ Plan is
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`“feasible.” See e.g., In re Nite Lite Inns, 17 B.R. 367, 370 (Bankr. S.D. Cal. 1982) (“[I]n
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`the event the debtors defaulted on the payment schedule of the plan, a subsequent sale
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`would provide the creditors with all sums promised to them. The liquidation provisions,
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`therefore, bring the plan in compliance with 11 U.S.C. s 1129(a)(11) and render the plan
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`feasible.”).
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`The Trustee is cognizant that some courts find that the presence of a drop-dead
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`clause does not automatically make a plan feasible. See In re Inv. Co. of The Sw., Inc.,
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`341 B.R. 298, 317 (B.A.P. 10th Cir. 2006) (“[I]nclusion of the drop-dead clause may
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`result in a creditor not losing as much—because it can more quickly liquidate the
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`remaining collateral upon default—but it does not, on the front end, support a finding that
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`a plan, itself, is not likely to be followed by the liquidation of, or the need for further
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`financial reorganization by, the debtor.” But there is nuance to the general statement
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`made by the Tenth Circuit Bankruptcy Appellate Panel (the “BAP”). For example, as is so
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`often the case, the BAP was concerned about feasibility from the perspective of a
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`secured creditor. In a “feasibility” analysis, “[i]t is particularly important that a secured
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`creditor be protected. This is no doubt tied to the constitutional ramifications raised when
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`a secured creditor’s interest in property is affected. . . . It can even be argued that some
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`leeway be provided regarding a debtor’s prospects so long as the secured creditors are
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`protected.” In re Geijsel, 480 B.R. 238, 272-73 (Bankr. N.D.Tex. 2012).
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`Here, there are no secured creditors. Copyright Creditors’ Claims are entirely
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`unsecured. With respect to the treatment of Copyright Creditors’ Claims, an appropriate
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`“feasibility analysis” should be limited to whether it is feasible for the Debtor to pay
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`Copyright Creditors at least what they would get in a chapter 7 liquidation as of the
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`Effective Date. Such an analysis would appropriately consider the relative risks of
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`liquidation versus a plan reorganization for an unsecured creditor. Because the Trustee’s
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`Plan still provides Copyright Creditors with the benefit of an all-assets lien, and because
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`it is likely that the Debtor will be able to pay Copyright Creditors at least what they would
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`receive in a liquidation, the Trustee’s Plan is well within the bounds of “feasible.”
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`Moreover, Class 4 Credit Holders and Class 5 Equity Interests have accepted and
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`embraced any risks that exist under the Trustee’s Plan.
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`On the contrary, Copyright Creditors’ Plan extends a false “carrot,” particularly to
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`equity holders, that the Debtor will be able to pay off $14 million much more easily than it
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`will be able to pay off $62.4 million, thus improving the Debtor’s and its equity holders’
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`position. But without the Debtor’s management and key employees, all of whom will
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`resign if Copyright Creditors’ Plan is confirmed, it is highly unlikely that the Debtor will be
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`able to make the payments proposed by Copyright Creditors’ Plan, and it is highly likely
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`that Copyright Creditors’ will enforce their lien in an amount of $62.4 million (plus all of
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`their attorneys’ fees), resulting in a liquidation of the Debtor. Thus, from the perspective
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`of Class 5 Equity Interest holders and Class 4 Credit Holders, Copyright Creditors’ Plan
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`is not feasible. It will not result in any value being retained for Equity Interest holders. It
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`will only result in Copyright Creditors obtaining control of the Debtor’s business and
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`intellectual property in a liquidation. And, both Credit Holders and Equity Interest holders
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`voted to reject Copyright Creditors’ Plan.
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`Similarly, even if the Debtor’s management stays (they say they will not), and
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`even if the Debtor makes the payments provided for under Copyright Creditors’ Plan,
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`Copyright Creditors’ Plan is not feasible because of the coerced, permanent nature of
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`the injunctions set forth in Sections 7.1, 7.2, and 7.3 of the Plan. These injunctions are
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`perpetual, and will remain in place forever, irrespective of changes in related laws
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`including the Copyright Act and the Family Movie Act. Under Copyright Creditors’ Plan,
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`it would not matter if applicable law changed, or if the Supreme Court ruled that the
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`Debtor’s actions were legal. Copyright Creditors want to impose limits on the Debtor’s
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`long-term ability to conduct business that are not contemplated or permitted by
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`applicable state or federal law. This hardly seems consistent with the idea of
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`“reorganization.” It makes the Debtor a prime candidate for a future “liquidation” or
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`restructuring, because it so severely limits the Debtor’s ability to provide the services that
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`its customers desire.3 Copyright Creditors’ Plan does not satisfy Bankruptcy Code
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`§ 1129(a)(11) and cannot be confirmed.
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`V.
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`Copyright Creditors’ Plan is Not “Fair and Equitable” to Equity Interest
`Holders.
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`With respect to a non-accepting class of interests, Bankruptcy Code
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`§ 1129(b)(2)(C) requires that a proposed plan treat such holders in a “fair and equitable”
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`manner. Copyright Creditors’ Plan is not fair and equitable to the Debtor’s equity interest
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`holders, because the coerced, perpetual “Restrictive Covenants” in sections 7.1, 7.2, and
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`7.34 act as a perpetual (and needless) cap on the Debtor’s future value. This argument is
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`especially true if the Court finds that the Trustee’s Plan is confirmable, because the
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`Trustee’s Plan gives the Debtor the opportunity to pay Copyright Creditors’ Claims in full
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`and preserves the Debtor’s ability to run its business as it (and its shareholders) see fit.
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`Put another way, if a plan exists that will pay Copyright Creditors in full and preserve
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`value for equity holders, than that plan is fair and equitable, both to Copyright Creditors
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`and equity holders. Such a plan exists—the Trustee’s Plan. Copyright Creditors’ Plan,
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`viewed in light of the alternative option, is not “fair and equitable,” and does not satisfy
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`Bankruptcy Code § 1129(b)(2)(C).
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`Copyright Creditors’ Plan Includes Improper Restrictions on Third-Party
`Conduct.
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`VI.
`
`
`
`
`
`3 To be clear, Copyright Creditors “15 year Compliance Lien” does not necessarily limit Copyright
`Creditors’ ability to enforce the injunctions in Sections 7.2(a), 7.2(b) or 7.3, because the Plan has no “Plan
`Period.” Although the default remedies “under the Plan” may be limited to 15 years, it is not inconceivable
`that Copyright Creditors could seek other remedies if the Debtor chooses to make legal business decisions
`even after the Compliance Lien goes away and all payments are made under the Plan.
`
`
`
`A.
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`Restrictions on the Harmons
`
` 4
`
` The term “Restrictive Covenants” is a misnomer, as the Trustee explains below. There is no “covenant”
`without a second party that agrees to the covenant. Really, Sections 7.1, 7.2, and 7.3 are better described
`as “Coerced Injunctions.”
`{00495037.DOCX / 2}
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`13
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`Case 17-29073 Doc 746 Filed 06/24/20 Entered 06/24/20 17:46:27 Desc Main
`Document Page 14 of 42
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`Copyright Creditors’ Plan requires Neal Harmon and Jeffrey Harmon, two of the
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`Debtor’s founders, to sign non-compete agreements in order to continue as the Debtor’s
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`managers. Specifically, Copyright Creditors’ Plan provides:
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`The Confirmation Order shall provide that for Neal Harmon and Jeffrey
`Harmon to remain in management positions, as a condition of their
`employment, each shall execute in favor of the Reorganized Debtor a one-
`year covenant not to compete.
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`Copyright Creditors’ Plan at § 7.1. According to the Proprietary Information, Non-
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`Competition, and Non-Solicitation Agreement attached as Exhibit 5.a (for Neal Harmon)
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`and 5.b (for Jeffrey Harmon) (collectively, the “Non-Compete Agreements”), the
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`Harmons will be prohibited from, among other things, the following:
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`Employee agrees that during the course of his employment and for a
`period of twelve (12) months immediately following the termination of his
`employment with the Company for any reason, whether with or without
`cause, at the option either of the Company or Employee, with or without
`notice, Employee will not, without the prior written consent of the Company:
`(i) serve as a partner, principal, licensor, licensee, employee, consultant,
`officer, director, manager, agent, affiliate, representative, advisor,
`promoter, associate, investor, or otherwise for (except for passive
`ownership of one percent (1%) or less of any entity whose securities have
`been registered under the Securities Act of 1933, as amended, or Section
`12 of the Securities Exchange Act of 1934, as amended); (ii) directly or
`indirectly, own, purchase, organize or take preparatory steps for the
`organization of; or (iii) build, design, finance, acquire, lease, operate,
`manage, control, invest in, work or consult for or otherwise join, participate
`in or affiliate himself with, any business whose business, products or
`operations are in any respect involved in the Covered Business. For
`purposes of this Agreement, “Covered Business” shall mean any
`business in which the Company is engaged or in which the Company has
`taken steps to be engaged, or any service that the Company provides or
`has taken steps to provide. The foregoing covenant shall cover Employee’s
`activities in every part of the Territory. For purposes of this Agreement,
`“Territory” shall mean: (i) all states of the United States of America; and (ii)
`any other countries in which the Company maintains non-trivial operations
`or facilities, provides goods or services, has customers, or otherwise
`conducted business at any time during the two-year period prior to the date
`of the termination of Employee’s employment with the Company. Should
`
`{00495037.DOCX / 2}
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`Case 17-29073 Doc 746 Filed 06/24/20 Entered 06/24/20 17:46:27 Desc Main
`Document Page 15 of 42
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`Employee obtain other employment during his employment with the
`Company or within twelve (12) months immediately following the
`termination of Employee’s employment with the Company, Employee
`agrees to provide written notification to the Company as to the name and
`address of Employee’s new employer, the position that Employee expects
`to hold, and a general description of Employee’s duties and responsibilities,
`at least three (3) business days prior to starting such employment.
`
`The Non-Compete Agreements violate Tenth Circuit law. More specifically, the Tenth
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`Circuit Court of Appeals has expressed serious concerns with the idea of permanently
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`enjoining non-party actors from engaging in legal, non-bankruptcy related actions. In
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`discussing the propriety of a permanent injunction, the Tenth Circuit stated:
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`The second and more serious problem with the injunction is its explicitly
`permanent nature. The injunction was not issued merely to limit and
`simplify the legal entanglements of the debtor during development and
`evaluation of a reorganization plan, but also clearly to control in perpetuity
`the post-confirmation status of Abel's claim against PSO. . . . The
`significance of LDP's partial obligation in this regard is limited solely to the
`question of the bankruptcy court's authority to issue a temporary injunction
`against Abel to protect the debtor and the bankruptcy process until
`confirmation of a reorganization plan.
`
`In re W. Real Estate Fund, Inc., 922 F.2d 592, 600 (10th Cir. 1990), modified sub
`
`nom. Abel v. West, 932 F.2d 898 (10th Cir. 1991). The Bankruptcy Court for the District
`
`of Colorado has extrapolated further on this concept:
`
`Based on its review of factors examined by other courts, the Court is
`guided by the following relevant, although not exclusive, principles. First,
`and foremost, whether a release is appropriate and permissible should be
`determined on a case-by-case basis. Secondly, the Court must parse out
`exactly who is releasing whom from what. It is appropriate for the Court's
`analysis to distinguish between the Debtors' release of non-debtors and
`third-parties' release of non-debtors. The Court must also find the release
`to be necessary for the reorganization and appropriately tailored to apply
`only to claims arising out of or in connection with the reorganization itself,
`and not to matters which would have no effect upon the estate. Otherwise,
`the releases in question may be beyond the jurisdiction of