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Noncompetition Agreements Not Subject to §362 Automatic Stay Where Provisions Are Found Not To Be "Claims" Under The Code

By: James Duckham

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Hurvitz,[1] the Bankruptcy Court for the District of Massachusetts granted Blue Grace Franchise (“Blue”) relief from an automatic stay because Blue’s right to enforce the noncompetition and nonsolicitation provisions in its franchise agreement were not claims under section 101(5) of the United States Bankruptcy Code (the “Code”).[2] In February 2015, Blue and Carl Hurvitz entered into a franchise agreement that gave Hurvitz a nonexclusive and limited license to use Blue’s services and technology.[3] This agreement contained restrictive covenants that prohibited Hurvitz from competing or soliciting business away from Blue for two years after the agreement was terminated.[4] In January 2016, Blue terminated the agreement and Hurvitz began to work for Freight Management Company (Freight), a direct competitor of Blue.[5] In April 2016 Blue filed suit in Massachusetts Superior Court, and in May 2016 Blue was granted a temporary restraining order that enjoined Hurvitz from continued employment at Freight and from soliciting or contacting Blue’s former, current, or perspective clients.[6] On May 16, 2016, Hurvitz filed a petition for relief under chapter 7 of the Code, which pursuant to section 362 of the Code, resulted in an automatic stay of the restraining order.[7] Blue then made a motion to the bankruptcy court requesting relief from the automatic stay.[8] Ultimately, the bankruptcy court granted relief from the automatic stay finding that the franchise agreement’s provisions were not considered claims under the Code.[9]

Court Invalidates the Use of Blocking Directors as Against Public Policy

By: Samantha Guido

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The use of a blocking director is a common practice by creditors looking to mitigate the risk of a debtor’s bankruptcy filing.[1] In In re Lake Michigan Beach Pottawattamie Resort LLC,[2] the United States Bankruptcy Court for the Northern District of Illinois held that a blocking director provision was invalid because it impermissibly eliminated the fiduciary duty owed by the creditor to the debtor.[3] In interpreting Michigan corporate governance law, the court reasoned that the use of blocking directors is generally permissible. The provision in this case, however, contracted away the fiduciary duty on the part of the blocking director, and that is impermissible.[4] The debtor granted a mortgage and assignment of rents to BCL – Bridge Funding (“BCL”) to secure a loan and a line of credit given by BCL to the debtor.[5] The debtor defaulted on his payment and created a Third Amendment establishing BCL as a “Special Member” with the right to approve or disapprove any material action by the debtor.[6] The provision requires the debtor to obtain BCL’s consent, which can be withheld for any reason, before filing for bankruptcy.[7] The agreement also contained a waiver of the fiduciary duty owed by the special member to the debtor by stating that BCL was not obligated to consider any interests but their own and has no obligation to give any consideration to the debtor’s interests.[8] When the debtor filed for bankruptcy, four out of five creditors voted in favor of the filing, with BCL withholding its vote.[9] BCL, in its motion to dismiss the debtor’s chapter 11 case, argued that the debtor was not authorized to file for Chapter 11 bankruptcy because the debtor did not have the consent of the blocking director.[10]

Bankruptcy Courts Lack Authority to Involuntarily Substantively Consolidate Debtor with Nonprofit Non-Debtor

By: Eileen Ornousky

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Although bankruptcy courts have broad equitable powers, including the power to substantively consolidate debtors, these powers cannot be used to circumvent other sections of the Bankruptcy Code. Substantive consolidation pools separate legal entities’ assets and liabilities and allows each entity’s liability to be satisfied out of the common pool of assets.[1] In In re Archdiocese of Saint Paul and Minneapolis,[2] the United States Bankruptcy Court for the District of Minnesota held that it lacked the authority to substantively consolidate the debtor Archdiocese with over 200 Catholic nonprofit, non-debtor entities.[3] Additionally, the Court stated that even if it had the authority to do so, the Archdiocese and the other entities were not sufficiently interrelated to warrant consolidation.[4]

Maybe the U.K. was the Proper Forum After All

By: Tyler Levine

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Hellas[1] the United States Bankruptcy Court for the Southern District of New York stayed an adversary proceeding on the ground of forum non-conveniens.[2] Plaintiffs, the [liquidators of] Hellas Telecommunications (Luxembourg) II SCA (“Hellas II”), filed a complaint in the Bankruptcy Court following recognition of the foreign liquidators of Hellas II under Chapter 15 of the Bankruptcy Code. The plaintiffs sought to avoid and recover an initial transfer from Hellas II to its parent’s entity of approximately $1.57 billion and also to avoid and recover $973.7 million that was later transferred to several named defendants and an unmanned class of transferees.[3] Initially, the court denied the forum non-conveniens motion because it had the jurisdiction to adjudicate the claims under Sections 213 and 423 of the U.K. Insolvency Act.[4] Thereafter, plaintiffs commenced a similar action under U.K. law, in the U.K., against nine dismissed defendants.[5] In response to this new avoidance action filed in the U.K., the defendants filed another forum non-conveniens motion on January 19, 2016, and the court concluded that in light of this new U.K. action it is now best to litigate all the claims in one forum.

Bankruptcy Plan Record Date Trumps FINRA Ex-Date

By: Derek Piersiak

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re: Arctic Glacier International, Inc v. Arctic Glacier Income Fund, the United States Bankruptcy Court for the District of Delaware ruled that distributions would be made to unitholders as of the bankruptcy plan’s “Unitholder Distribution Record Date,” and not to the persons who held the units as of FINRA’s ex-date, which fell after the record date.[1] The ex-date is the date on and after which a security is traded without a specific dividend or distribution.[2] Under Arctic Glacier’s reorganization plan, “any distribution, no matter its size, must be made to those who [held] units as of the Unitholder Distribution Record Date, which must be at least 21 days prior to the date on which the distribution is actually paid out, i.e., the payable date.”[3] The plaintiffs purchased units after the plan’s record date.[4] When Arctic Glacier made distributions to those who held units as of the record date, the plaintiffs sued Arctic Glacier, alleging that under U.S. securities laws, Arctic Glacier should have made distributions to the plaintiffs.[5]

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