Benchnotes Sep 2003
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<h3>Pre-petition Liability Policy</h3>
<p>In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Allied Products Corp.,</i> 288 B.R. 533 (Bankr. N.D. Ill. 2003)</a>, Chief Bankruptcy Judge <b>Eugene R. Wedoff</b> 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.
</p><h3>Oversecured Creditor Bears Burden of Proof on Reasonableness</h3>
<p>In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Bridge Information Systems Inc.,</i> 288 B.R. 556 (Bankr. E.D. Mo. 2002)</a>, 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.
</p><h3>Assignability of Exclusive Distribution Agreement</h3>
<p>In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Nedwick Steel Co. Inc.,</i> 289 B.R. 95 (Bankr. N.D. Ill. 2003)</a>, 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 <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U… §2-210(2)</a>, which provides
that
</p><blockquote>
(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.
</blockquote>
<p>Relying on <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8… Beauty Co. Inc. v. Nexxus Products Co. Inc., 801 F.2d 1001 (7th Cir. 1986)</i></a><i></i>, the court held that
<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U… §2-210(2)</a> 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 <i>Sally Beauty,</i> 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.
</p><h3>Compensation for Special Counsel</h3>
<p>In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Molten Metal Technology Inc.,</i> 289 B.R. 505 (Bankr. D. Mass. 2003)</a>, Bankruptcy Judge <b>Carol J. Kenner</b> 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.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re M Capital Corp.,</i> 290 B.R. 743 (9th Cir. Bankr. 2003)</a> (burden of proof is on the party asserting that a
purchaser acted in good faith and "good faith" could not be presumed once challenged);
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Kent Funding Corp.,</i> 290 B.R. 471 (Bankr. E.D.N.Y. 2003)</a> (chapter 11 case that was dismissed before it
was fully administered could not be "reopened");
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Metromedia Fiber Network Inc.,</i> 290 B.R. 487 (Bankr. S.D.N.Y. 2003)</a> (secured creditor must turn over
possession of property of the debtor's estate, even without assurance of adequate protection payments under §542);
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Lason Inc.,</i> 290 B.R. 504 (Bankr. D. Del. 2003)</a> (a chapter 11 debtor-employer that rejected its executory
employment agreements in its reorganization plan could not enforce the covenants not to compete);
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Grand Eagle Companies Inc.,</i> 288 B.R. 484 (Bankr. N.D. Ohio 2003)</a> (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);
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… v. IMBS Inc.,</i> 288 B.R. 524 (N.D. Ill. 2003)</a> (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);
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Integrated Health Services Inc.,</i> 289 B.R. 32 (Bankr. D. Del. 2003)</a> (excellent discussion of challenges that
can be successfully made to expert testimony);
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re E-Z Serve Convenience Stores Inc.,</i> 289 B.R. 45 (Bankr. N.D.N.C. 2003)</a> (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);
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Beyond.com Corp.,</i> 289 B.R. 138 (Bankr. N.D. Cal. 2003)</a> (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
</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re The Academy Inc.,</i> 289 B.R. 230 (Bankr. M.D. Fla. 2003)</a> (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).
</li></ul>
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