In re CBGB Holdings, LLC

Hillel Kristal founded and operated an influential music club, CBGB, until it closed in October 2006. After Kristal died, his estate (the Kristal estate) (creditor) executed an agreement with CBGB Holdings, LLC. (debtor) on May 18, 2008, for the purchase of all CBGB’s assets: the music club’s trademarks, copyrights, contracts, recordings, accounts receivables, inventory, property, and other assets. The Kristal estate and CBGB Holdings executed a promissory note and two security agreements. The Kristal estate took a security interest in the assets, which it perfected in June. On May 21, the Kristal estate and CBGB Holdings executed an amended note outlining the Kristal estate’s remedies upon CBGB Holdings’ default. CBGB Holdings defaulted on the amended note in February 2010. After the default, the Kristal estate and CBGB Holdings executed an agreement on March 24, with CBGB Holdings consenting to strict foreclosure of the collateral. Strict foreclosure permitted a creditor to repossess a debtor’s collateral and keep it in full or partial satisfaction of the unpaid debt. Article 9 of the Uniform Commercial Code (UCC) required that a debtor’s agreement to strict foreclosure had to come after default on an obligation. Under the parties’ agreement consenting to strict foreclosure, CBGB Holdings recognized its default, and the Kristal estate allowed CBGB Holdings a compliance period until May 18 to see if CBGB Holdings could either redeem or sell the collateral to pay the debt. CBGB Holdings agreed that the Kristal estate could foreclose on the assets if it could not meet its obligation by then. CBGB Holdings waived any further notice from the Kristal estate prior to strict foreclosure. CBGB Holdings failed to sell or redeem the collateral during the compliance period, and the Kristal estate foreclosed without additional notice. On June 10, 2010, CBGB Holdings filed for Chapter 11 bankruptcy. The Kristal estate filed a motion to have the bankruptcy case dismissed, arguing that the estate gained ownership of the assets via strict foreclosure before the bankruptcy petition was filed. CBGB Holdings argued that it did not agree to strict foreclosure after its second default, which was after the compliance period, and therefore, the strict foreclosure upon which the Kristal estate relied was not valid.