Kathryn-Rose Russotto
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In In re Gordos Restaurant Corp., the United States Bankruptcy Court for the Southern District of New York held that a trustee appointed under title 11 of the United States Code (the “Bankruptcy Code”) can recover intellectual property rights after a post-petition transfer.[1] Between 1972 and 2019, Gordon Krueger and Arthur Greason (the “Original Owners”) operated a restaurant and bar known as “Gordos.”[2] In 2006, the Original Owners sold the restaurant and related assets to two individuals (the “New Owners”).[3] The Original Owners retained title to the building and leased it to Gordos Restaurant Corp. (the “Debtor”), which was owned by the New Owners, and continued operating the establishment under the Gordos name.[4] In 2018, the Debtor defaulted on its lease, causing the Debtor to file a voluntary petition for relief under chapter 11 of the Bankruptcy Code.[5] Subsequently, the Debtor ceased operation in its original location.[6] The bankruptcy court converted the chapter 11 case to a chapter 7 case, resulting in the appointment of a Trustee for the estate of the Debtor.[7] The New Owners immediately opened a new restaurant, Gordos North, less than two miles from the original Gordos location, incorporating the Debtor’s menu items.[8] The public, through online reviews and newspaper articles, referenced Gordos North as a return of Gordos.[9] Thereafter, the Trustee filed a complaint against the New Owners alleging an unauthorized post-petition transfer under section 549(a) of the Bankruptcy Code, trademark protection under section 43(a) of the Lanham Act, New York state law violations under N.Y. Gen. Bus. L. § 349, N.Y. Gen. Bus. L. § 360–1, and the doctrine of de facto merger.[10]
Under section 549(a) of the Bankruptcy Code, “the trustee may avoid a transfer of property of the estate. . . (1) that occurs after the commencement of the case; and (2) . . . (B) that is not authorized under this title or by the court.”[11]“Property of the estate” includes intangible property interests such as trademarks and their associated goodwill.[12] A company’s trademark and associated goodwill are assets that become part of the bankruptcy estate that can be validly sold, assigned, or transferred by the estate.[13] Due to the benefit Gordos North derived from Gordos’ goodwill, the Court found it clear that the Gordos name and associated goodwill were property of Debtors estate and were obtained without authorization for purposes of section 549.[14] Thus, the unauthorized transfer should be avoided under section 549.[15]As a consequence, the Trustee may recover under section 550(a) of the Bankruptcy Code, for the benefit of the estate, the property transferred or the value of such property.[16]
Additionally, under section 43(a) of the Lanham Act, trade names are protected from misappropriation if it identifies a “business or vocation.”[17] It prohibits an individual, in the connection with goods or services, from using “any word . . . name . . . or any combination thereof” that would misrepresent the goods or services or likely cause public confusion.[18] According to the court, the Trustee established the first prong because the name “Gordos” was identified in the relevant market of customers of Gordos North with sufficiently distinctive meaning to warrant protection.[19] The court further found that the Trustee satisfied the second prong because of the strong likelihood of customer confusion due to Gordos North’s close proximity to the original Gordos, Gordos North’s customers viewing it as a revival of Gordo’s, and Gordos North’s intentional appropriation of the Gordos name to benefit from its associated goodwill. [20] Therefore, the Trustee established Gordos North’s liability under section 43(a) of the Lanham Act.[21]
In addition, the Trustee asserted claims based on New York state law. Firstly, under N.Y. Gen. Bus. L. § 349, allowing recovery for deceptive business practices, the Trustee’s claim failed because the actions of Gordos North did not harm public interest.[22] Secondly, under N.Y. Gen. Bus. L. § 360–1, pertaining to trademark dilution and injury to business reputation, the Trustee’s claim also failed because a mark must be recognized by the public at large to qualify as “distinctive” for purposes of the statute.[23] Lastly, under the doctrine of de facto merger, where a separate corporation can become liable for the debts of another, the Trustee failed to establish that Gordos North obtained a requisite continuity of ownership from the original Gordos to allow recovery.[24]
An owner of a debtor may be liable for using a debtor’s intellectual property after a bankruptcy filing. Here, the court issued a judgment against the New Owners for unauthorized transfer and infringement of Gordos’ trade name and goodwill. According to the court, the appropriate remedy was to compel the New Owners and Gordos North to cease use of the “Gordos” name, as well as a judgement for Gordos North’s net profits related to such infringement in the sum of $250,000, plus the Trustee’s costs, with post-judgment interest under 28 U.S.C. § 1961.[25] The court noted that anything more would be excessive, punitive, and against public policy, especially given the Trustee’s right to alternative relief under section 550(a) of the Bankruptcy Code if the sum was believed to be insufficient.[26]
[1] See In re Gordos Rest. Corp., No. 18-23862, 2022 WL 3108802, at *14 (Bankr. S.D.N.Y. Aug. 4, 2022).
[2] Id. at *15.
[3] Id.
[4] Id.
[5] Id.
[6] Id. at *16.
[7] Id.
[8] Id. at *16–17.
[9] Id. at *17.
[10] See generally In re Gordos Rest. Corp., 2022 WL 3108802.
[11] Id. at *19–20 (citing 11 U.S.C. § 549(a)).
[12] Id. at *21.
[13] Id.
[14] Id. at *23.
[15] Id.
[16] Id. (citing 11 U.S.C. § 550(a)(1)) (“[T]he trustee may recover, for the benefit of the estate, the property transferred, or, of the court so orders, the value of such property, from . . . the initial transferee of such transfer or the entity for whose benefit such transfer was made.”).
[17] Id. (citing 15 U.S.C. § 1127). Trade names and trademarks are equally protected under section 43(a) of the Lanham Act. Id. (citing Lang v. Retirement Living Publ’g Co., 949 F.2d 576, 578 (2d Cir. 1991)).
[18] Id. at *24 (citing U.S.C. § 1125(a)).
[19] Id. at *28.
[20] See supra note 19.
[21] See In re Gordos Rest. Corp., 2022 WL 3108802, at *31. To determine distinctiveness under section 43(a) in asking the question if “prospective purchases [would] think of the product bearing the mark if they saw the same mark on unrelated products,” the Court here says no. Id.
[22] Id. at *32 (“to be liable for deceptive acts or practices under that provision, ‘the gravamen of the complaint must be consumer injury or harm to the public interest.’”).
[23] Id. Unlike section 43(c) of the Lanham Act, § 360–1 does not require the mark to be “famous,” only that it be “distinctive.” Id.
[24] Id. at *32–33. In non-tort actions, continuity of ownership is the essence of a de facto merger. Id. (quoting Washington Mut. Bank, F.A. v. SIB Mtge. Corp., 801 N.Y.S.2d 821 (2d Dep’t 2005)).
[25] Id.
[26] Id. at *46.