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Licenses a Key Issue in Steve & Barry’s Bankruptcy

With the auction for an asset sale in the Steve & Barry?s bankruptcy less than two weeks away, a battle is possible for control of celebrity licenses...

With the auction for an asset sale in the Steve & Barry’s bankruptcy less than two weeks away, a battle is possible for control of the celebrity licenses held by the retailer, such as Bitten by Sarah Jessica Parker.

This story first appeared in the July 17, 2008 issue of WWD.  Subscribe Today.

Steve & Barry’s has discussed the sale of its operations with Sears Holdings Corp. and Gap Inc., but no deal has been made. The retailer even has a private equity firm conducting due diligence as a potential strategic buyer acquiring parts of the business, retail sources said.

But what’s actually for sale, or even what value is left, is the big question. After all, Steve & Barry’s couldn’t get debtor-in-possession financing because its assets already have been used as collateral for loans that are in default.

Sources familiar with the operation said many Steve & Barry’s leases are in less than ideal locations, or are overpriced for the space. And because assets are already pledged under existing loan agreements, the retailer really has no more assets that it can borrow against, according to financial and legal sources.

Lawrence Gottlieb, chair of the bankruptcy restructuring practice at the law firm of Cooley Godward Kronish, said many bankrupt companies don’t actually have the ability to reorganize. If they can get debtor-in-possesssion financing, they usually obtain it for a set period in order to conduct an orderly liquidation of the bankrupt estate and not for a reorganization, he said.

The company filed Chapter 11 on July 9 and subsequently listed assets of $693.5 million and liabilities of $638 million. Sales for the 12 months ended May 31 were $656.6 million.

A liquidation of Steve & Barry’s could initiate some high-profile jousting over the company’s celebrity licenses, Gottlieb said, although it couldn’t be determined which — if any — of the licenses would be nullified in a bankruptcy.

“Most license agreements contain a bankruptcy clause in the contract that allows the licensor to opt out of the agreement if there is a bankruptcy filing,” said Mort Gordon, a licensing agent and principal in TGL Licensing and MG Enterprises. “If that right isn’t exercised, the license is typically treated as an asset for the benefit of creditors.”

In general, bankruptcy courts have ruled the opt-out clauses to be unenforceable and treats licenses as assets of the estate, Gottlieb said.

“If there is a liquidation, the bankrupt estate will try to sell the license to another [entity],” he said. “What may be key is whether those licenses can be considered personal services contracts, and therefore not assignable. It would depend on how the agreement is written,”

The bankruptcy expert said much will hinge on how involved the celebrities are in their personal obligations under the license agreements.

Alan Behr, a partner at Alston & Bird specializing in intellectual property, said, “The licensor can try to make an issue if it is not satisfied with the proposed substitute licensee. They can claim it is hard to get the right licensee, as well as hardship to the brand, if the wrong one is given the license.”

Marcella Ballard, an intellectual property attorney at Baker & McKenzie, noted that a licensor’s approval is not automatically required for a transfer of the license in bankruptcy, pointing out that much depends on the specific provisions in the license agreements and the bankruptcy code.

Steve & Barry’s operated 276 stores in 40 states at the time of the filing.

During its expansion, the retailer diversified its business beyond licensed collegiate apparel and lifestyle brands to include private label casual apparel and accessories for men, women and children, and exclusive celebrity-branded lines of apparel, the best known of which are Parker’s Bitten and Starbury from Stephon Marbury. The company also has celebrity and media licensing arrangements with Amanda Bynes, Venus Williams and CBS Consumer Products.