Using a Special Purpose Entity to Protect IP Assets During Bankruptcy

Companies facing potential financial distress have strategies available to protect their valuable intellectual property. One of these involves transferring IP assets such as patents, trademarks and copyrights to a special purpose entity (SPE) while the company is still solvent. This can keep IP assets immune from creditors while allowing the parent company to defend against infringement.

An SPE is a legal entity distinct from the parent company, complete with its own governance, accounting and operational structures. The primary goal of an SPE is to be bankruptcy remote, meaning it is structured to own and manage specific assets and to minimize the risk of their being included in the parent company’s bankruptcy estate. This is achieved by appointment of independent managers, maintenance of separate financial accounts and limitation of its activities, often requiring unanimous consent from all stakeholders. After transferring the IP to the SPE, the parent company may enter into a licensing agreement to continue using the IP while the SPE retains ownership.

The principal advantage of using an SPE for managing IP assets is that it provides asset protection, keeping the IP out of the reach of creditors should the parent company file for bankruptcy. This isolation of assets is important for maintaining their value and preventing them from liens and entanglements. Another benefit is that the SPE can leverage these assets to secure financing under more favorable terms, thanks to the reduced risk associated with its bankruptcy-remote status. This can enhance the financial flexibility of the SPE and, by extension, the parent company. Furthermore, the licensing agreement allows the parent company to continue utilizing the IP, ensuring that business operations are not disrupted even if bankruptcy proceedings commence. 

This arrangement also reduces the risk of automatic stays, cram-downs, or delays in asset liquidation, which are common challenges in bankruptcy cases. Additionally, the perceived stability and security of this structure can improve the creditworthiness of the entity in the eyes of investors and lenders, potentially leading to better financing options and more robust economic support.

However, the use of SPEs is not without drawbacks. Their effectiveness is contingent upon their genuine independence and legitimate purpose. Courts have the authority to consolidate the SPE into the parent company’s bankruptcy estate if they determine that the separation was merely superficial or if the SPE lacks true operational independence. Moreover, the timing of the transfer of IP assets to the SPE is critical; transfers made too close to the filing for bankruptcy can be challenged as fraudulent conveyances, designed to unlawfully shield assets from creditors.

Companies considering an SPE will benefit from advice from an experienced business bankruptcy attorney, who can ensure that the structure complies with all relevant corporate governance and bankruptcy laws. Legal oversight can ensure crafting a SPE that not only meets the strategic financial needs of the company but also withstands court scrutiny.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced bankruptcy law firms. If your company needs help with debt reorganization, call 310-271-6223 or contact us online to schedule a free consultation.