Owning a trademark registration in bankruptcy is no different than any other property ownership interest.
That is, your ownership of that registration becomes an asset of the so-called Bankruptcy Estate just as would a car, household goods, your computer, and your ownership of your business itself. Among other things.
Does that means that you are endangering your trademark registration in bankruptcy?
Possibly.
The questions for you regarding entering the bankruptcy process as a trademark registration owner will be:
- What is the value of your trademark registration?
- Are you filing for bankruptcy or is your business?
- What form of bankruptcy are you filing? Chapter 7 vs. 13 vs. 11?
- Who owns the trademark registration? You individually or your business?
- Do you own or simply license the trademark?
First, let’s discuss the bankruptcy process in the United States itself—briefly.
Trademark Registration in Bankruptcy: How Bankruptcy Works
Regardless of what form your bankruptcy filing takes, 2 things happen when you file a bankruptcy case in the United States.
The Bankruptcy Estate
First, by automatic function of law, you create what is known as the Bankruptcy Estate. This legal “estate” encompasses all property ownership interests the debtor in bankruptcy has. Everything from personal household goods to the right to sue someone for money damages is included in a personal Chapter 7 bankruptcy filing, for example.
The Bankruptcy Estate is a mechanism for transferring jurisdiction over the debtor’s assets from the filing debtor to the US Bankruptcy Court. The Court’s jurisdiction is embodied in the role of the Bankruptcy Trustee.
Even if the debtor retains possession of his, her, or its assets throughout the bankruptcy process, as is the case in Chapter 13 and Chapter 11 bankruptcies, the Court and the Trustee’s jurisdiction is primary.
In a Chapter 7 bankruptcy, for instance, this means that a Chapter 7 Trustee has the authority to seize and liquidate the assets of the Bankruptcy Estate in order to repay the resulting funds to the debtor’s creditors. This is the only mechanism by which creditors are repaid in a Chapter 7 bankruptcy.
Assets are not liquidated in a Chapter 13 bankruptcy. Nonetheless, they remain assets of the Bankruptcy Estate for the purpose of determining the amount that must be repaid to the debtor’s creditors through the Chapter 13 reorganization or payment plan process.
In a Chapter 11 reorganization, a corporate debtor likewise remains in possession of the assets of the Bankruptcy Estate. However, the value and disposition of those assets is the subjection of that often very long-term bankruptcy process.
The Bankruptcy Automatic Stay
The second thing that happens upon filing of a bankruptcy case in the US is the institution of a Federal injunction prohibiting creditor collections. This is known as the Automatic Stay Against Collections.
All creditor collections must stop when you file for bankruptcy, in other words. If they don’t, creditors are sanctioned.
Protecting Assets of the Bankruptcy Estate
In a Chapter 7 bankruptcy in particular, the question of preservation of the assets of the Bankruptcy Estate is key. That is, protecting your property is vital to the question of whether the Chapter 7 process is worth entering at all.
This includes any trademark registration in bankruptcy.
The majority of debtors in the US who file for Chapter 7 bankruptcy do not lose any property. This is true despite the fact that all property is an asset of the Bankruptcy Estate and subject to the seizure and liquidation powers of the Chapter 7 Trustee.
Bankruptcy Exemptions
This is the case because the US Bankruptcy Code provides a number of provisions allowing the debtor to “exempt,” or remove, property from the Bankruptcy Estate. These so-called “exemptions” are tailored to different types of property, to different fair-market value caps.
For example, as of this writing, the current exemption for a single automobile driven by a Chapter 7 debtor is $4,000. If a debtor’s car, owned “free and clear” is worth only, say, $3,500 in Blue Book value, it can be fully exempted. That is, it will be essentially removed from the Bankruptcy Estate by applying the automobile exemption to it in the bankruptcy petition.
The Chapter 7 Trustee has no authority to seize and liquidate fully exempted property.
There are many available exemptions, applicable to many commonly owned types of personal property. They are robust, and, thus, most Chapter 7 debtors actually lose no property. Everything owned is able to be fully exempted.
However, there are types of property that have no exemption available to protect them.
These types of property include:
- Cash
- Bank balances
- Wages earned but not yet paid
- Earned but not yet received tax refunds
- Business ownership interests
- The right to sue a third party for damages
- Firearms
- Sports equipment
- Hobby equipment
- Collectibles
- Antiques
- Intellectual property ownership interests
Yes, that last one is the one we’re focusing on here. Intellectual properties owned such as patent registrations, copyright registrations, and trademark registrations in bankruptcy are not protected with any Federal exemption.
Non-Exempt Assets in Chapter 7 vs. Chapter 13 Bankruptcy
Non-exempt assets, including any owned trademark registration in bankruptcy, are seized and liquidated in Chapter 7 bankruptcies.
In Chapter 13 bankruptcies, this is not the case. A Chapter 13 bankruptcy is, as noted, a reorganization rather than liquidation process.
A Chapter 13 bankruptcy is a 3-5-year process through which the debt individual (non-business) debtor makes a monthly payment to the Chapter 13 Trustee assigned to the case instead of his or her creditors.
The Trustee takes that payment, deducts the debtor’s Michigan bankruptcy attorney’s fees and the Trustee’s own fees, and then disburses the remaining balance to the debtor’s creditors. The creditors are paid in a priority order mandated by the Bankruptcy Code. Creditors are repaid according to the type of debt held: secured first, priority tax and other debts next, lease and executory contract payments third, then, finally, unsecured debt in last priority.
Unsecured creditors receive only what is left over after everyone else is paid. Whatever they get is all that they get, any remaining debt owed to them “on paper” being totally discharged as it is in a Chapter 7.
Normally, there is no fixed minimum amount that the non-priority unsecured creditors must receive.
However, if the debtor holds non-exempt assets, the dollar value of these non-exempt assets or equity do require that unsecured creditors, as a class, receive that same amount of money from the Chapter 13 payment plan. The monthly plan payment must, therefore, be large enough to result in this required distribution.
Ownership of Trademark Registration in Bankruptcy Processes
Given all of this, the question you need to ask when considering entering the bankruptcy process as an owner of one or more trademark registrations is whether you will still be the owner of those registrations afterward.
This will depend upon a number of different considerations, as noted above.
However, let’s first review who may or may not own a trademark registration in the United States.
Trademark Registration Ownership: Use in Commerce
Use in commerce is one of the most basic requirements of US trademark registration. It requires that the registrant use and continue to use the business name, product name, slogan, or logo in commerce in relation to the product or service described in the trademark registration application.
A party who is not using the trademark in commerce cannot register a trademark.
What is use in commerce?
“Use in commerce” means that you display your business name, logo, product name, or slogan to consuming public in the US across state lines in association with the product or service in question—and that you have transacted that product or service.
The use can’t be theoretical, in other words. It also must be legitimate, not relying on straw sales or good-hearted mothers-in-law.
Without commerce across a state line, the US Federal government has no jurisdiction to offer the benefits that a trademark registration with the US Patent and Trademark Office (USPTO) confers.
It is worth noting that questions of trademark registration in bankruptcy are also Federal questions. Bankruptcy is also a Federal process and not a question or process of Michigan or any other state’s law.
All this to say, if you are not the party using the mark in commerce, you have no legal right to register the trademark—or to renew that registration later on.
This explained, back to our original trademark registration in bankruptcy questions.
What Is the Value of Your Trademark Registration In Bankruptcy?
There is no exemption available to protect your trademark registration in bankruptcy. Thus, valuation is crucial if you personally own or a business in which you hold an ownership interest owns a trademark registration.
Unfortunately, this is not always easy to accomplish.
The value of a trademark lies in particular with its associated consumer goodwill. That is, what consumers think of your business with which they associate that trademark on sight.
Third party forensic trademark valuation experts are often required to arrive at a specific dollar-value number. The review of the mark’s value will consist of an analysis of its future earning power, premised upon the business income history earned in conjunction with the mark.
There are a number of different accounting approaches that valuators utilize in determining the value of a trademark. These include:
- The income approach;
- The market approach;
- The cost approach;
- The royalty calculation approach.
The royalty calculation approach applies to licensed trademark registrations as opposed to those that you or your business are using in commerce directly.
See more regarding licensed trademark registrations below.
The bottom line here is that it is not cheap to retain a forensic accountant to value your trademark registration in bankruptcy. But it may be cheaper than losing the ownership of the mark. This is particularly true if you are considering filing for Chapter 7 bankruptcy.
Remember: there is no exemption for your trademark registration in bankruptcy.
Thus, it will be up to a Chapter 7 bankruptcy Trustee to decide whether or not your trademark registration is property that is worth seizing and (attempting to) liquidate or whether to abandon it and let you keep it.
An experienced bankruptcy attorney with intellectual property understanding will need to be consulted.
Personal vs. Business Ownership of a Trademark Registration in Bankruptcy
If you own your trademark registration personally, a Chapter 7 Trustee will have direct jurisdiction over that asset of your Bankruptcy Estate.
If you own, in full or in part, a business that, in turn, owns the trademark registration, the value of the trademark property will feed into the question of the fair market value of your ownership interest in that business.
Like a trademark registration in bankruptcy, a business ownership interest also has no available exemption to protect it from liquidation by a Chapter 7 Trustee.
Thus, if you own 50% of an enterprise with a $100,000 net asset value, including a trademark registration, in bankruptcy, that interest is an asset of the Bankruptcy Estate worth $50,000.
What Form of Bankruptcy to File with Trademark Registration Ownership
If your trademark registration in bankruptcy has any particular value, it is likely not the best idea to file a Chapter 7 bankruptcy. However, this will vary depending upon specific circumstances. It is always best to seek the advice of an experienced bankruptcy attorney when considering that option.
A Detroit bankruptcy attorney, for instance, will know in advance the likelihood of the specific Chapter 7 Trustees likely to be assigned to your case.
It may be that, if personal bankruptcy is required due to your personal debt burden, a Chapter 13 bankruptcy may be preferred. A Chapter 13 bankruptcy does not, as explained above, require the liquidation of any asset, trademark registration or otherwise.
If your business is the “person” suffering from unmanageable liability, Chapter 7 liquidation and Chapter 11 reorganization are the available options.
Chapter 11 must be discussed with an experienced corporate bankruptcy attorney. The value of intellectual property assets will carry great weight in the outcome of that sort of reorganization.
What If You Simply License the Trademark Registration?
If you don’t own the trademark registration but, instead, license it for your use, this is a different question than valuation and liquidation.
A license is an executory contract, and executory contracts are treated differently in bankruptcy than assets owned.
A Chapter 7 Trustee has the first right to reject or “assume” executory contracts in Chapter 7 proceedings, for instance.
There are serious questions as to the extent of a Chapter 7 Trustee to reject or assume a license to utilize a trademark registration as opposed to a patent or copyright registration.
In-depth consideration of this issue is outside the scope of this Article, but see this Article for an excellent analysis of the questions involved.
Long story short, if you license a trademark for your business use and are considering filing for bankruptcy, seek the counsel of an experienced bankruptcy attorney.
Trademark Registration in Bankruptcy: The Bottom Line
The bottom line is that, if you own or license a trademark registration and are considering filing either individual or business bankruptcy in Michigan or elsewhere, you need to consult an experienced bankruptcy attorney with specific intellectual property expertise to fully explore your options.
Noble Path Trademark Law is a boutique US law practice located in Metro Detroit and assisting entrepreneurs, solopreneurs, artists, musicians, start-ups, and larger enterprises with robust intellectual property portfolios, and others in all industries with trademark registration, trademark renewal, and Office Action refusal response matters.
We offer virtual consultations, premium customer service, and the expertise you need to maximize your odds of trademark registration success.