Business Reorganization

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]

By: Colleen Angus-Yamada

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Almost thirty years after the Bankruptcy Court for the Southern District of New York confirmed the Chapter 11 plans of Johns-Manville Corporation (“Manville”) and Manville Forest Products (“MFP”), pursuant to which creditors were enjoined from pursuing asbestos claims against them, a plaintiff sought to recover from Graphic Packaging International (“Graphic”), a purported successor of MFP. In In re Johns-Manville Corp.,[1] the Bankruptcy Court enjoined Ms. Berry from pursuing asbestos claims arising from her exposure to asbestos on her husband’s work clothes.[2] According to the Bankruptcy Court, because Graphic is a successor of MPF, a bankruptcy debtor and a wholly-owned subsidiary of Manville, Ms. Berry must first pursue her asbestos claims against the Manville Personal Injury Trust (the “Trust”) in accordance with the Chapter 11 Plan (the “Manville Plan”).[3]

By: Todd Kingston Plummer

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Medpoint Management , the United States Bankruptcy Court for the District of Arizona held that cause existed under Section 707(a) of the United States Bankruptcy Code (“Bankruptcy Code”) to dismiss an involuntary chapter 7 petition filed against a bankrupt medical marijuana distributor.[1] Although Arizona permits its Department of Health Services to register dispensaries “operated on a not-for-profit basis” for the legal sale of marijuana,[2] the drug remains a Schedule I substance under the federal government’s Controlled Substances Act (“CSA”).[3] Because Arizona law requires dispensaries to maintain a nonprofit nature, there has been a “proliferation of dispensary-management entities which serve as repositories of dispensary revenues.”[4] When Medpoint Management LLC, a marijuana dispensary, defaulted on several loans and obligations, a group of creditors filed an involuntary chapter 7 petition against Medpoint.[5] The petitioning creditors’ claims against Medpoint included unpaid amounts under two promissory notes, unpaid fees arising under two distinct consulting agreements, and over $500,000 in outstanding loans.[6] Medpoint moved to dismiss arguing that the “unclean hands doctrine” prevents not only any marijuana-related business but also any of their creditors from seeking relief from the federal bankruptcy courts.[7] At a hearing on Medpoint’s motion, the United States Trustee voiced staunch concern regarding a trustee’s ability to administer a bankruptcy estate consisting of substances that are illegal under federal law: “So, you’re going to ask a trustee to look at a management contract for illegal activities, essentially. So what is that trustee going to do?”[8] The court agreed with Medpoint and the United States Trustee and dismissed the involuntary petition.[9]

By: Lindsay Lersner


St. John’s Law Student


American Bankruptcy Institute Law Review Staff


The culmination of a chapter 11 case is typically a plan that provides for payment to creditors in accordance with the priority scheme in Section 507 of the United States Bankruptcy Code (“Code”).[1] In In re Jevic Holding Corp. , the Third Circuit held that in certain rare circumstances, bankruptcy courts have the discretion to approve structured dismissals, which do not comply with Section 507 of the Code.[2] A structured dismissal is a settlement proposed to the court that provides for the distribution of the debtor’s assets to creditors.[3] In In re Jevic , the debtor proposed a structured dismissal after reaching a consensus with a majority of its creditors.[4] The Jevic truck drivers (“Drivers”), former employees of Jevic with a Worker Adjustment and Retraining Notification (“WARN”) claim,[5] however, did not agree to the settlement.[6] In opposing bankruptcy court approval of the settlement and the structured dismissal, the Drivers argued that (1) the Code does not allow for structured dismissals and (2) the settlement paid the creditors with claims junior to the Drivers’ WARN claims and therefore violated the priority scheme established under Section 507.[7] Bankruptcy settlements generally follow the absolute priority rule, which requires that creditors be paid in the order of their priority under Section 507.[8] The bankruptcy court overruled the Drivers’ objection and approved the settlement providing for the dismissal of the debtor’s chapter 11 case upon payment of certain administrative and tax expenses which were lower in priority than the Drivers’ claims.[9] On appeal, the district court affirmed the bankruptcy court’s decision.[10] The Drivers appealed again, and the Court of Appeals for the Third Circuit also affirmed.[11]