Pre-petition Liability Policy

In In re Allied Products Corp., 288 B.R. 533 (Bankr. N.D. Ill. 2003), Chief Bankruptcy Judge Eugene R. Wedoff addressed an interesting tactic to limit liability under pre-petition liability policies. The chapter 11 debtor/insured moved for leave to sell such policies back to the insurers in a sale, free and clear of any competing interests. There was objection by parties with claims against the debtor that were allegedly covered by the policies. The court held that a party injured as a result of debtor's conduct could not maintain a direct cause of action against the debtor's liability carrier until they obtained a judgment against the debtor. However, this did not mean that the parties did not have an interest in the policies of the kind that would have to be protected in a §363 sale. Thus, the court held that while the debtor could sell its insurance policies back to the insurer, it could do so only if it provided protection for those interests.

Oversecured Creditor Bears Burden of Proof on Reasonableness

In In re Bridge Information Systems Inc., 288 B.R. 556 (Bankr. E.D. Mo. 2002), a prepayment penalty claimed by an oversecured creditor was held to be qualified as "reasonable" only if it accurately measured creditor's actual damages from the prepayment, noting that the oversecured creditor bears the ultimate burden of proof on the issue of reasonableness. Chief Bankruptcy Judge David P. McDonald held that the oversecured creditor seeking a prepayment penalty failed to demonstrate that a penalty based on the return on short-term Treasury securities accurately measured the creditor's actual damages from the prepayment, given the lack of evidence as to market rate of interest that the creditor might have earned by again loaning funds that were prepaid. As a result, the court refused to allow the prepayment penalty as an addition to creditor's claim. The court also held that even if the prepayment is reasonable as an accurate measurement of damages, the court must also determine whether the equities favor allowance of a prepayment penalty. The court found that, in this case, equities did not allow an oversecured creditor to cover a contractual fee payment penalty where the creditor had already collected approximately $50,000 in default interest and its attorney's fees and where allowing the creditor an additional prepayment penalty would substantially harm junior lienholders.

Assignability of Exclusive Distribution Agreement

In In re Nedwick Steel Co. Inc., 289 B.R. 95 (Bankr. N.D. Ill. 2003), Bankruptcy Judge Jack B. Schmetterer addressed issues relating to the assignability of an exclusive distribution agreement to a direct competitor without the consent of the contracting party. The court analyzed UCC §2-210(2), which provides that

(2) Except as otherwise provided...unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance.

Relying on Sally Beauty Co. Inc. v. Nexxus Products Co. Inc., 801 F.2d 1001 (7th Cir. 1986), the court held that UCC §2-210(2) is an applicable non-bankruptcy statute that should be considered in determining whether such a contract can be assigned pursuant to §365(f)(1). Where the express terms of the contract would require the assignee to use his "best effort" to promote, market and sell products and to fully cooperate and where the objecting party would be required to fully cooperate with the proposed assignee by sharing information on customer contracts, on the marketing and pricing, strategic planning and product development engineering, the "risk of an unfavorable outcome is too great, and not one which the law can force an obligee to take." The court also refused to substitute its judgment for those of the objecting party noting that while the contract specifically provides that neither party may unreasonably withhold agreements to assignments, the court's decision was not based on the reasonableness of the assignment. Instead, under Sally Beauty, an exclusive distributorship cannot be assigned to a competitor or potential competitor without consent because the obligee has a substantial interest in not accepting its competitor as a delegate under the contract. The court refused to substitute its judgment regarding reasonableness in opposing assignment.

Compensation for Special Counsel

In In re Molten Metal Technology Inc., 289 B.R. 505 (Bankr. D. Mass. 2003), Bankruptcy Judge Carol J. Kenner addressed a final application for compensation for special counsel to the debtor. Prior to the bankruptcy, the special counsel had represented the debtor with respect to certain investigations being conducted by the Inspector General of the U.S. Department of Energy. In furtherance of that representation, the firm had entered into a confidentiality and joint defense agreement with the debtor, the debtor's co-counsel, three of the debtor's officers and directors and their respective counsel. In the agreement, the parties undertook certain obligations of confidentiality as to disclosure of information. The existence of the confidentiality and joint defense agreement was not disclosed to the court at the time of the application to employ special counsel. Subsequent to the order approving special counsel, a chapter 11 trustee was appointed, who brought suit against certain of the debtor's officers and directors, including those that were parties to the confidentiality agreement. Citing its obligations under the confidentiality agreement, special counsel refused to produce documents requested by the chapter 11 trustee. The court noted that, while special counsel is not required to be disinterested as required by §327(a), §327(e) mandates that counsel "not represent or hold any interest adverse to the debtor or the estate with respect to the matter on which such attorneys is to be employed." The court held that the confidentiality agreement was relevant to the employment decision and, particularly without disclosure, was a disqualifying adverse interest. As such, the court denied all compensation to special counsel for the work performed due to their failure to disclose.

Miscellaneous

• In re M Capital Corp., 290 B.R. 743 (9th Cir. Bankr. 2003) (burden of proof is on the party asserting that a purchaser acted in good faith and "good faith" could not be presumed once challenged);
• In re Kent Funding Corp., 290 B.R. 471 (Bankr. E.D.N.Y. 2003) (chapter 11 case that was dismissed before it was fully administered could not be "reopened");
• In re Metromedia Fiber Network Inc., 290 B.R. 487 (Bankr. S.D.N.Y. 2003) (secured creditor must turn over possession of property of the debtor's estate, even without assurance of adequate protection payments under §542);
• In re Lason Inc., 290 B.R. 504 (Bankr. D. Del. 2003) (a chapter 11 debtor-employer that rejected its executory employment agreements in its reorganization plan could not enforce the covenants not to compete);
• In re Grand Eagle Companies Inc., 288 B.R. 484 (Bankr. N.D. Ohio 2003) (at best, §546(e) provides an affirmative defense against a fraudulent conveyance action seeking to recover funds received in a sale of privately held stock where the actual funds were received from a financial institution which then took a lien on all the assets of the company being acquired);
• Randolph v. IMBS Inc., 288 B.R. 524 (N.D. Ill. 2003) (dismissal of action under Fair Debt Collection Practices Act for collection activity that allegedly violated the bankruptcy stay as the Bankruptcy Code offers an adequate remedy and to do otherwise would interfere with the Code's comprehensive bankruptcy scheme);
• In re Integrated Health Services Inc., 289 B.R. 32 (Bankr. D. Del. 2003) (excellent discussion of challenges that can be successfully made to expert testimony);
• In re E-Z Serve Convenience Stores Inc., 289 B.R. 45 (Bankr. N.D.N.C. 2003) (lessor's bargained-for right of first refusal would be enforced where provision did not restrict or burden assignment of lease in that it required lessor to equal or better terms of competing offer);
• In re Beyond.com Corp., 289 B.R. 138 (Bankr. N.D. Cal. 2003) (court refused to approve "free wheeling" liquidating plan that altered the Bankruptcy Code "in derogation of the notice provisions that provide fundamental protection for creditors and because its thrust was to avoid judicial supervision unless it was convenient to the debtor or its professionals"); and
• In re The Academy Inc., 289 B.R. 230 (Bankr. M.D. Fla. 2003) (having consented to the jurisdiction of the bankruptcy court by filing proofs of claim, creditors could not destroy that jurisdiction and prevent the bankruptcy court from adjudicating the debtor's compulsory counter-claim simply by withdrawing proofs of claim).