Benchnotes Jul/Aug 2002
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<h3>Automatic Stay Waiver</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Excelsior Henderson Motorcycle Mfg. Co. Inc.,</i> 273 B.R. 920
(Bankr. S.D. Fla. 2002)</a>, Bankruptcy Judge Paul Hyman addressed
enforceability of the waiver of the automatic stay in a subsequent bankruptcy. In
a prior bankruptcy case, the debtor confirmed a plan that specifically provided that
"the reorganized debtor will waive the benefit of the automatic stay as it relates to
[secured creditor] with respect to any bankruptcy proceeding commenced by or against the
reorganized debtor during the first three years following the effective date." The note
issued in accordance with the plan specifically provided that "[the debtor] hereby agrees
that, in the event the [debtor] (by its own actions, or the actions of any of its
shareholders or creditors), if applicable on or before Sept. 14, 2003, files
or has filed against it (with an order for relief being entered in another case under
the Bankruptcy Code) Lender shall be entitled to relief from the automatic
stay...and the [debtor] hereby waives the benefits of such automatic stay and consents
it agrees to raise no objection to such relief." After reviewing various decisions
and arguments for and against the enforceability of "bargained-for pre-petition waiv[ing
of] the automatic stay," Judge Hyman held that in circumstances where (1) the
waiver was one incorporated into a plan and approved by a bankruptcy court and (2)
the debtor received valuable consideration in exchange for the waiver, the court would
follow the holding of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Atrium High Point Ltd. Partnership,</i> 189 B.R.
599 (Bankr. M.D.N.C. 1995)</a>. As a result, Judge Hyman enforced the
waiver, finding that since the plan allowed the debtor the opportunity to start a new
payment schedule that would prevent further action as long as the debtor made the
payments, to prevent enforcement of the automatic stay waiver would be inconsistent with
the policy of favoring settlement agreements.
</p><h3>Avoidance Impermissible in Failed Leveraged Buyouts Under §546(e)</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hechinger Inv. Co. of Delaware,</i> 274 B.R. 71 (D.
Del. 2002)</a>, District Judge McKelvie addressed a number of issues relating to
a failed leveraged buyout. The court held that provisions of §548 may be applied
to leveraged buyouts. However, under the facts of this case, §546(e) prevented
avoidance of payments paid to the debtor's shareholders made by a financial institution
as proceeds from a loan facility secured by assets acquired in the leveraged buyout.
The court recognized that under Delaware law, (1) directors had fiduciary duties
to stockholders and corporate creditors "at the moment the corporation becomes
insolvent;"(2) this increase in corporate duties does not necessarily require directors
to place creditors' interests ahead of the interest of stockholders, but does require
directors to maximize a corporation's "long-term wealth-creating capacity;" and (3)
as a general rule, shareholders are not generally liable for the actions of a
corporation unless they are controlling shareholders. In this case, the court held
that the shareholders were not "controlling shareholders" under Delaware law and thus
had no fiduciary duties to corporate creditors in connection with the leveraged buyout
since they had entered into an irrevocable voting trust arrangement giving other parties
the discretionary right to vote the shares.
</p><h3>Only Authorized Representative Can Appear on Behalf of Deceased Debtor</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hamilton,</i> 274 B.R. 266 (Bankr. W.D. Tex. 2001)</a>,
Bankruptcy Judge <b>Leif M. Clark</b> addressed the consequences of the death of a debtor
in the period between the initial filing of the bankruptcy petition and conversion to
chapter 7. The surviving spouse filed a motion to permit her to appear on behalf
of her deceased husband and to sign schedules on his behalf. The court denied the
motion, noting that when a debtor dies, the only person who can appear on behalf
of the debtor is a person named his official representative of the probate estate of
the debtor. In Texas, the personal representative authorized to speak and act on
behalf of the probate estate of a decedent is either the administrator appointed by
the court or an executor appointed under valid will admitted to probate. Thus, the
decedent is not "excused" from attending the meeting of creditors and signing amended
schedules in a converted chapter 7 case. Instead, the personal representative is
required to be appointed and testamentary letters issued.
</p><h3>Conversion of Chapter 11 to 7 Based on Non-statutory Grounds</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re V Cos.,</i> 274 B.R. 721 (Bankr. N.D. Ohio 2002)</a>,
Bankruptcy Judge Pat Morgenstern-Clarren addressed the criteria for determining a
motion filed by the U.S. Trustee to convert chapter 11 cases to chapter 7 or
dismissal. The court held that pursuant to §1112(b), cause can be established
by (1) proving that the bankruptcy estate is suffering diminution of value—<i>e.g.,</i>
that the debtor has incurred losses or maintained a negative cash flow after entry
of the order for relief, (2) the inability to effectuate a plan that is usually
determined by the debtor's failure to file an acceptable plan after a reasonable period
of time, and (3) unreasonable delay by the debtor that is prejudicial to the
creditors, which can include a debtor's failure to provide meaningful information at
any stage of the proceeding. In addition, a finding of cause can be established
by the non-statutory grounds, which can include the debtor's failure to file required
operating reports, the filing of materially inaccurate operating reports, and
dereliction of fiduciary duty to creditors, which includes the obligation to treat
all parties fairly, abiding by court orders and acting in a fiduciary duty.
</p><h3>Section 558 Governs Debtor Setoff Right</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re PSA Inc.,</i> 277 B.R. 51 (Bankr. D. Del. 2002)</a>,
Bankruptcy Judge <b>John C. Akard</b> addressed the right of setoff under §553 where
the right of setoff was being asserted by the debtor seeking to offset a
pre-petition claim against a post-petition administrative claim. The court held that
where it was not the creditor but debtor asserting the right of setoff in order
to avoid making a payment on a post-petition administrative expense claim, the right
to setoff was governed not by the bankruptcy setoff provisions of §553, but by
§558, which provides that the estate shall generally have the benefit of any
defense available to the debtor. The court held that the ability to assert such
defenses gave the debtors the right to assert the right of setoff under Georgia
law and thus enabled the debtors to assert setoff in order to avoid making any
payment on a post-petition administrative expense claim without regard to whether
claims were both pre-petition or post-petition.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Stanley,</i> 273 B.R. 907 (Bankr. N.D. Fla. 2002)</a>
(having waived its Eleventh Amendment immunity by allowing proofs of claim for student
loans to be filed on its behalf, state agency could not "reinstate" its immunity by
simply withdrawing the proofs of claim);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cox,</i> 274 B.R. 13 (Bankr. D. Maine 2002)</a> (analysis of
the effects of the intersection of state law property division components of a divorce
decree and the Bankruptcy Code);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Reis,</i> 274 B.R. 46 (Bankr. D. Mass. 2002)</a> (as only
student loans funded by government and non-profit organizations are entitled to
non-dischargeability protection, educational loan by grandparents constituted a general
unsecured claim);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. v. Le Bar Bat Inc.,</i> 274 B.R. 66 (S.D.N.Y.
2002)</a> (EEOC actions to enforce its police or regulatory power by preventing
employment discrimination is not subject to the automatic stay, and EEOC is entitled
to discovery on matters that might be relevant to its request for injunctive relief
against discriminatory employment practices);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Telegroup Inc.,</i> 281 F.3d 133 (3rd Cir. 2002)</a> (claim
for breach of provision in stock purchase agreement requiring the issuer/debtor to use
its "best efforts" to register its stock and to ensure that stock is freely tradeable
arises from the purchase of stock and thus must be subordinated pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §510(b)</a>);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Nelson,</i> 274 B.R. 789 (Bankr. 8th Cir. 2002)</a> (chapter
7 debtor's undistributed interest in ex-wife's ERISA-qualified retirement plan was
excluded from the property of the estate even though debtor's interest derived from
qualified domestic-relations order establishing debtor as alternate payee); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Skipper,</i> 274 B.R. 807 (Bankr. W.D. Ark. 2002)</a> (IRA
and college savings account from which debtor had used funds for son's college education
were not exempt as "debtor's right to payment under pension, annuity or similar plan
or contract," pursuant to §522(d)(1)(10)(E)).
</li></ul>
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