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Benchnotes Jul/Aug 2002

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Automatic Stay Waiver

In In re Excelsior Henderson Motorcycle Mfg. Co. Inc., 273 B.R. 920 (Bankr. S.D. Fla. 2002), Bankruptcy Judge Paul Hyman addressed enforceability of the waiver of the automatic stay in a subsequent bankruptcy. In a prior bankruptcy case, the debtor confirmed a plan that specifically provided that "the reorganized debtor will waive the benefit of the automatic stay as it relates to [secured creditor] with respect to any bankruptcy proceeding commenced by or against the reorganized debtor during the first three years following the effective date." The note issued in accordance with the plan specifically provided that "[the debtor] hereby agrees that, in the event the [debtor] (by its own actions, or the actions of any of its shareholders or creditors), if applicable on or before Sept. 14, 2003, files or has filed against it (with an order for relief being entered in another case under the Bankruptcy Code) Lender shall be entitled to relief from the automatic stay...and the [debtor] hereby waives the benefits of such automatic stay and consents it agrees to raise no objection to such relief." After reviewing various decisions and arguments for and against the enforceability of "bargained-for pre-petition waiv[ing of] the automatic stay," Judge Hyman held that in circumstances where (1) the waiver was one incorporated into a plan and approved by a bankruptcy court and (2) the debtor received valuable consideration in exchange for the waiver, the court would follow the holding of In re Atrium High Point Ltd. Partnership, 189 B.R. 599 (Bankr. M.D.N.C. 1995). As a result, Judge Hyman enforced the waiver, finding that since the plan allowed the debtor the opportunity to start a new payment schedule that would prevent further action as long as the debtor made the payments, to prevent enforcement of the automatic stay waiver would be inconsistent with the policy of favoring settlement agreements.

Avoidance Impermissible in Failed Leveraged Buyouts Under §546(e)

In In re Hechinger Inv. Co. of Delaware, 274 B.R. 71 (D. Del. 2002), District Judge McKelvie addressed a number of issues relating to a failed leveraged buyout. The court held that provisions of §548 may be applied to leveraged buyouts. However, under the facts of this case, §546(e) prevented avoidance of payments paid to the debtor's shareholders made by a financial institution as proceeds from a loan facility secured by assets acquired in the leveraged buyout. The court recognized that under Delaware law, (1) directors had fiduciary duties to stockholders and corporate creditors "at the moment the corporation becomes insolvent;"(2) this increase in corporate duties does not necessarily require directors to place creditors' interests ahead of the interest of stockholders, but does require directors to maximize a corporation's "long-term wealth-creating capacity;" and (3) as a general rule, shareholders are not generally liable for the actions of a corporation unless they are controlling shareholders. In this case, the court held that the shareholders were not "controlling shareholders" under Delaware law and thus had no fiduciary duties to corporate creditors in connection with the leveraged buyout since they had entered into an irrevocable voting trust arrangement giving other parties the discretionary right to vote the shares.

Only Authorized Representative Can Appear on Behalf of Deceased Debtor

In In re Hamilton, 274 B.R. 266 (Bankr. W.D. Tex. 2001), Bankruptcy Judge Leif M. Clark addressed the consequences of the death of a debtor in the period between the initial filing of the bankruptcy petition and conversion to chapter 7. The surviving spouse filed a motion to permit her to appear on behalf of her deceased husband and to sign schedules on his behalf. The court denied the motion, noting that when a debtor dies, the only person who can appear on behalf of the debtor is a person named his official representative of the probate estate of the debtor. In Texas, the personal representative authorized to speak and act on behalf of the probate estate of a decedent is either the administrator appointed by the court or an executor appointed under valid will admitted to probate. Thus, the decedent is not "excused" from attending the meeting of creditors and signing amended schedules in a converted chapter 7 case. Instead, the personal representative is required to be appointed and testamentary letters issued.

Conversion of Chapter 11 to 7 Based on Non-statutory Grounds

In In re V Cos., 274 B.R. 721 (Bankr. N.D. Ohio 2002), Bankruptcy Judge Pat Morgenstern-Clarren addressed the criteria for determining a motion filed by the U.S. Trustee to convert chapter 11 cases to chapter 7 or dismissal. The court held that pursuant to §1112(b), cause can be established by (1) proving that the bankruptcy estate is suffering diminution of value—e.g., that the debtor has incurred losses or maintained a negative cash flow after entry of the order for relief, (2) the inability to effectuate a plan that is usually determined by the debtor's failure to file an acceptable plan after a reasonable period of time, and (3) unreasonable delay by the debtor that is prejudicial to the creditors, which can include a debtor's failure to provide meaningful information at any stage of the proceeding. In addition, a finding of cause can be established by the non-statutory grounds, which can include the debtor's failure to file required operating reports, the filing of materially inaccurate operating reports, and dereliction of fiduciary duty to creditors, which includes the obligation to treat all parties fairly, abiding by court orders and acting in a fiduciary duty.

Section 558 Governs Debtor Setoff Right

In In re PSA Inc., 277 B.R. 51 (Bankr. D. Del. 2002), Bankruptcy Judge John C. Akard addressed the right of setoff under §553 where the right of setoff was being asserted by the debtor seeking to offset a pre-petition claim against a post-petition administrative claim. The court held that where it was not the creditor but debtor asserting the right of setoff in order to avoid making a payment on a post-petition administrative expense claim, the right to setoff was governed not by the bankruptcy setoff provisions of §553, but by §558, which provides that the estate shall generally have the benefit of any defense available to the debtor. The court held that the ability to assert such defenses gave the debtors the right to assert the right of setoff under Georgia law and thus enabled the debtors to assert setoff in order to avoid making any payment on a post-petition administrative expense claim without regard to whether claims were both pre-petition or post-petition.

Miscellaneous

  • In re Stanley, 273 B.R. 907 (Bankr. N.D. Fla. 2002) (having waived its Eleventh Amendment immunity by allowing proofs of claim for student loans to be filed on its behalf, state agency could not "reinstate" its immunity by simply withdrawing the proofs of claim);
  • In re Cox, 274 B.R. 13 (Bankr. D. Maine 2002) (analysis of the effects of the intersection of state law property division components of a divorce decree and the Bankruptcy Code);
  • In re Reis, 274 B.R. 46 (Bankr. D. Mass. 2002) (as only student loans funded by government and non-profit organizations are entitled to non-dischargeability protection, educational loan by grandparents constituted a general unsecured claim);
  • E.E.O.C. v. Le Bar Bat Inc., 274 B.R. 66 (S.D.N.Y. 2002) (EEOC actions to enforce its police or regulatory power by preventing employment discrimination is not subject to the automatic stay, and EEOC is entitled to discovery on matters that might be relevant to its request for injunctive relief against discriminatory employment practices);
  • In re Telegroup Inc., 281 F.3d 133 (3rd Cir. 2002) (claim for breach of provision in stock purchase agreement requiring the issuer/debtor to use its "best efforts" to register its stock and to ensure that stock is freely tradeable arises from the purchase of stock and thus must be subordinated pursuant to 11 U.S.C. §510(b));
  • In re Nelson, 274 B.R. 789 (Bankr. 8th Cir. 2002) (chapter 7 debtor's undistributed interest in ex-wife's ERISA-qualified retirement plan was excluded from the property of the estate even though debtor's interest derived from qualified domestic-relations order establishing debtor as alternate payee); and
  • In re Skipper, 274 B.R. 807 (Bankr. W.D. Ark. 2002) (IRA and college savings account from which debtor had used funds for son's college education were not exempt as "debtor's right to payment under pension, annuity or similar plan or contract," pursuant to §522(d)(1)(10)(E)).

Bankruptcy Rule: 
Journal Date: 
Monday, July 1, 2002

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