Authority to Initiate Filing

In In re Country Estates Nursing Home Inc., 268 B.R. 316 (Bankr. D. Mass. 2001), Bankruptcy Judge Joan N. Feeney addressed a motion to dismiss a chapter 11 allegedly due to lack of corporate authority to initiate filing. Pre-petition, a creditor had received a pledge of stock in a closely held corporation, the owner of the stock filed personal bankruptcy, the creditor exercised its rights under the pledge and voted to remove the director, and then the owner initiated the corporate chapter 11. The court found that the removal of the debtor was both an attempt to wrest control of the corporation from the debtor and an act to enforce a lien against property of the estate (the stock), both of which were in violation of the automatic stay. Thus, the court held that the attempt to remove the debtor as director was void. As a result, the debtor had the authority to file the bankruptcy petition on the corporation's behalf.

Letter of Credit to Secure Lease Obligations

In In re Metrobility Optical Systems Inc., 268 B.R. 326 (Bankr. D. N.H. 2001), Chief Bankruptcy Judge Mark W. Vaughn found core jurisdiction to enjoin a lessor from drawing on a letter of credit issued to secure a debtor's lease obligations. The letter of credit provided that "until a lease is terminated by the lessor for default...[the lessor] will not draw down the entire amount of the letter of credit." There were no defaults on the obligations under the lease, but the lessor invoked the bankruptcy ipso facto clause in order to declare a default and made demand on the letter of credit. The court found that the injunction was appropriate as the Bankruptcy Code invalidates an ipso facto bankruptcy filing as a basis for default, and thus, as a matter of federal bankruptcy law, the debtor was not in default under the terms of this lease. As a result, the lessor did not have a basis for issuance of the notices that were a condition precedent to drawing on the letter of credit. The court also found that pursuant to §362(a), since the notices of default and termination of lease were issued after the filing of the petition without relief from the automatic stay, the notices were void. The court also found that the debtor would suffer irreparable injury because it had not yet decided whether to assume or reject the unexpired lease. Further, to the extent the letter of credit was drawn upon, the court found that a security interest granted to a third-party bank would be funded.

Charitable Remainder Unitrust

In In re Mack, 269 B.R. 392 (Bankr. D. Minn. 2001), Bankruptcy Judge Nancy C. Dreher addressed issues relating to a self-settled charitable remainder unitrust (CRUT). As is typical with a CRUT, it named the debtor as the income beneficiary for the term of his life. He also retained the right to remove and replace the trustees and to amend the trust to protect its tax benefit status. The issues before the court were (1) who gets the income the trust is required by law and by its terms to distribute annually to the debtor, and (2) whether the chapter 7 trustee can step into the debtor's shoes as income beneficiary and control who manages the trust assets. The CRUT provided that it was to be controlled by Minnesota law except to the extent there was a conflict in federal law, in which case federal law would control. In answering these questions, the court analyzed the CRUT in question, as well as the state and federal laws dealing with CRUTs, noting that a CRUT is a "legal device pursuant to which a taxpayer can transfer assets to a trust, take an immediate charitable tax deduction on his personal income taxes, insure a guaranteed stream of income generated by the trust assets (on which he must pay income taxes), defer the taxes on the transactions by and accumulations in the trust, control the manner in which trust assets are invested, and control who gets the remainder interest in the trust assets when the taxpayer and named future income beneficiary die. The only hitch is that at some point down the line, when the settlor and all individuals whom he has named to follow him as income beneficiaries leave this earth, what's left in the trust must go to a qualified charitable organization. To make sure that this happens, in order to qualify for favorable tax treatment, a CRUT must be irrevocable and is subject to rigid rules of operation. It goes without saying that a CRUT is a tax-planning tool for the rich. CRUTs are legitimate and, indeed, sound in the sense that a charity gets something." The debtor had initially funded the CRUT by contributing 100,000 shares of stock, which were sold by the CRUT for an amount in excess of $1.6 million. The court refused to accept the invitation to essentially create a new form of unlimited exemption for a settlor's retained non-charitable interest in a self-settled trust, holding that the trustee was entitled to be paid all post-petition distributions from the CRUT to the debtor. Further, the interest income of the debtor in the trust was property of the estate, as was the power to appoint or discharge the trustee and to amend the trust to preserve its tax qualified status and such powers were to remain with the trustee for, in essence, the lifetime of the debtor.

Appeal Dismissal Settled via BAP

During the pendency of an appeal in In re FBI Distribution Corp., 267 B.R. 655 (1st Cir. 2001), an agreement was reached to dismiss the appeal and to seek approval of a settlement. The agreement to dismiss the appeal presented no issue, and the clerk of the BAP could have entered an order dismissing the appeal pursuant to Fed. R. Bankr. P. 8001(c)(2). However, the parties could not have filed by motion for approval of the settlement in the bankruptcy court as that court had been divested of jurisdiction to consider the settlement by the filing of a timely sufficient notice of appeal. The BAP noted that consideration of the settlement would require notice to the parties who were not parties to the appeal, that there was a potential need to develop the factual record, and that there was the necessity for a court to make necessary findings of fact and conclusions of law. As such, the BAP held that consideration of the settlement was more appropriately made at the trial court level. Therefore, the BAP remanded the settlement to the bankruptcy court for its consideration. When the bankruptcy court order approving or disapproving the settlement became final, the appellant was directed to file a certificate to that effect with the BAP panel. Subject to the further order of the panel, the appeal was stayed.

Joint-defense Doctrine and Attorney-client Privilege

In In re Indian Town Realty Partners Ltd., 270 B.R. 532 (Bankr. S.D. Fla. 2001), Bankruptcy Judge Paul Hyman Jr. addressed a debtor's motion for turnover by counsel of books, records and bank accounts that purportedly belonged to the debtor. Pre-petition, counsel had jointly represented (1) the debtor, (2) its general partner, (3) the individual who served as the president of the former general partner and (4) a limited partner of the debtor and the sole member of the LLC, which was a limited partner of the debtor. Counsel sought to avoid the production by first asserting that the documents were subject to the attorney/client privilege. Relying on the relevant Florida statute, the court noted the counsel jointly represented the debtor and others in matters relating to the debtor. Thus, while the documents may be privileged as to third parties, they were not privileged as to the debtor, which had waived any privilege. Counsel then attempted to raise the joint defense doctrine as a bar to production. The court rejected that argument, noting that under this exception to the doctrine of waiver of privilege, clients and their respective attorneys may exchange information without fear that such exchange will forfeit the protection of the privilege. However, the doctrine requires the existence of multiple parties and the existence of multiple counsel. In this case, there was only one attorney sharing information with multiple clients. Therefore, the joint-defense doctrine did not apply. Counsel were equally unsuccessful in raising the argument of work-product privilege, as this privilege protects an attorney's trial preparation from an opposing party but does not protect such document production to their own counsel. This case was noted as an example of "pitfalls of joint representation," and while the use of just one attorney may appear both economical and pragmatic at times, it is not always in the best interest of the parties.

Miscellaneous

• In re Concord Marketing Inc., 268 B.R. 415 (Bankr. D. N.J. 2001) (court approval is necessary in order to enforce an assignment of trustee's §506(c) rights to surcharge secured creditor's collateral as such an assignment is outside the ordinary course of business);
• In re M Group Inc., 268 B.R. 896 (Bankr. D. Del. 2001) (employee discharged post-petition was not entitled to administrative claim for severance based on a "termination without cause" provision since the employee became eligible for severance in a pre-petition agreement, although payment was contingent upon post-petition termination); and
• Kennedy v. Medicap Pharmacies, 267 F.3d 493 (6th Cir. 2001) (pre-petition injunction to prevent further violation of covenant not to compete is not a "claim" and consequently could not be discharged in bankruptcy).