Benchnotes Mar 2002

<h3>Authority to Initiate Filing</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Country Estates Nursing Home Inc.,</i> 268 B.R. 316 (Bankr.
D. Mass. 2001)</a>, Bankruptcy Judge Joan N. Feeney addressed a motion to dismiss
a chapter 11 allegedly due to lack of corporate authority to initiate filing.
Pre-petition, a creditor had received a pledge of stock in a closely held
corporation, the owner of the stock filed personal bankruptcy, the creditor exercised
its rights under the pledge and voted to remove the director, and then the owner
initiated the corporate chapter 11. The court found that the removal of the debtor
was both an attempt to wrest control of the corporation from the debtor and an act
to enforce a lien against property of the estate (the stock), both of which were
in violation of the automatic stay. Thus, the court held that the attempt to remove
the debtor as director was void. As a result, the debtor had the authority to file
the bankruptcy petition on the corporation's behalf.

</p><h3>Letter of Credit to Secure Lease Obligations</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Metrobility Optical Systems Inc.,</i> 268 B.R. 326 (Bankr. D.
N.H. 2001)</a>, Chief Bankruptcy Judge <b>Mark W. Vaughn</b> found core jurisdiction to
enjoin a lessor from drawing on a letter of credit issued to secure a debtor's lease
obligations. The letter of credit provided that "until a lease is terminated by the
lessor for default...[the lessor] will not draw down the entire amount of the letter
of credit." There were no defaults on the obligations under the lease, but the lessor
invoked the bankruptcy <i>ipso facto</i> clause in order to declare a default and made demand
on the letter of credit. The court found that the injunction was appropriate as the
Bankruptcy Code invalidates an <i>ipso facto</i> bankruptcy filing as a basis for default,
and thus, as a matter of federal bankruptcy law, the debtor was not in default under
the terms of this lease. As a result, the lessor did not have a basis for issuance
of the notices that were a condition precedent to drawing on the letter of credit.
The court also found that pursuant to §362(a), since the notices of default and
termination of lease were issued after the filing of the petition without relief from
the automatic stay, the notices were void. The court also found that the debtor would
suffer irreparable injury because it had not yet decided whether to assume or reject
the unexpired lease. Further, to the extent the letter of credit was drawn upon,
the court found that a security interest granted to a third-party bank would be
funded.

</p><h3>Charitable Remainder Unitrust</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Mack,</i> 269 B.R. 392 (Bankr. D. Minn. 2001)</a>,
Bankruptcy Judge <b>Nancy C. Dreher</b> addressed issues relating to a self-settled
charitable remainder unitrust (CRUT). As is typical with a CRUT, it named the
debtor as the income beneficiary for the term of his life. He also retained the
right to remove and replace the trustees and to amend the trust to protect its tax
benefit status. The issues before the court were (1) who gets the income the trust
is required by law and by its terms to distribute annually to the debtor, and (2)
whether the chapter 7 trustee can step into the debtor's shoes as income beneficiary
and control who manages the trust assets. The CRUT provided that it was to be
controlled by Minnesota law except to the extent there was a conflict in federal law,
in which case federal law would control. In answering these questions, the court
analyzed the CRUT in question, as well as the state and federal laws dealing with
CRUTs, noting that a CRUT is a "legal device pursuant to which a taxpayer can
transfer assets to a trust, take an immediate charitable tax deduction on his personal
income taxes, insure a guaranteed stream of income generated by the trust assets (on
which he must pay income taxes), defer the taxes on the transactions by and
accumulations in the trust, control the manner in which trust assets are invested,
and control who gets the remainder interest in the trust assets when the taxpayer and
named future income beneficiary die. The only hitch is that at some point down the
line, when the settlor and all individuals whom he has named to follow him as income
beneficiaries leave this earth, what's left in the trust must go to a qualified
charitable organization. To make sure that this happens, in order to qualify for
favorable tax treatment, a CRUT must be irrevocable and is subject to rigid rules
of operation. It goes without saying that a CRUT is a tax-planning tool for the
rich. CRUTs are legitimate and, indeed, sound in the sense that a charity gets
something." The debtor had initially funded the CRUT by contributing 100,000
shares of stock, which were sold by the CRUT for an amount in excess of $1.6
million. The court refused to accept the invitation to essentially create a new form
of unlimited exemption for a settlor's retained non-charitable interest in a self-settled
trust, holding that the trustee was entitled to be paid all post-petition distributions
from the CRUT to the debtor. Further, the interest income of the debtor in the
trust was property of the estate, as was the power to appoint or discharge the
trustee and to amend the trust to preserve its tax qualified status and such powers
were to remain with the trustee for, in essence, the lifetime of the debtor.

</p><h3>Appeal Dismissal Settled via BAP</h3>

<p>During the pendency of an appeal in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re FBI Distribution Corp.,</i> 267
B.R. 655 (1st Cir. 2001)</a>, an agreement was reached to dismiss the appeal
and to seek approval of a settlement. The agreement to dismiss the appeal presented
no issue, and the clerk of the BAP could have entered an order dismissing the
appeal pursuant to Fed. R. Bankr. P. 8001(c)(2). However, the parties
could not have filed by motion for approval of the settlement in the bankruptcy court
as that court had been divested of jurisdiction to consider the settlement by the
filing of a timely sufficient notice of appeal. The BAP noted that consideration of
the settlement would require notice to the parties who were not parties to the appeal,
that there was a potential need to develop the factual record, and that there was
the necessity for a court to make necessary findings of fact and conclusions of law.
As such, the BAP held that consideration of the settlement was more appropriately
made at the trial court level. Therefore, the BAP remanded the settlement to the
bankruptcy court for its consideration. When the bankruptcy court order approving or
disapproving the settlement became final, the appellant was directed to file a
certificate to that effect with the BAP panel. Subject to the further order of the
panel, the appeal was stayed.

</p><h3>Joint-defense Doctrine and Attorney-client Privilege</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Indian Town Realty Partners Ltd.,</i> 270 B.R. 532 (Bankr.
S.D. Fla. 2001)</a>, Bankruptcy Judge Paul Hyman Jr. addressed a debtor's motion
for turnover by counsel of books, records and bank accounts that purportedly belonged
to the debtor. Pre-petition, counsel had jointly represented (1) the debtor, (2)
its general partner, (3) the individual who served as the president of the former
general partner and (4) a limited partner of the debtor and the sole member of the
LLC, which was a limited partner of the debtor. Counsel sought to avoid the
production by first asserting that the documents were subject to the attorney/client
privilege. Relying on the relevant Florida statute, the court noted the counsel
jointly represented the debtor and others in matters relating to the debtor. Thus,
while the documents may be privileged as to third parties, they were not privileged
as to the debtor, which had waived any privilege. Counsel then attempted to raise
the joint defense doctrine as a bar to production. The court rejected that argument,
noting that under this exception to the doctrine of waiver of privilege, clients and
their respective attorneys may exchange information without fear that such exchange will
forfeit the protection of the privilege. However, the doctrine requires the existence
of multiple parties and the existence of multiple counsel. In this case, there was
only one attorney sharing information with multiple clients. Therefore, the joint-defense
doctrine did not apply. Counsel were equally unsuccessful in raising the argument of
work-product privilege, as this privilege protects an attorney's trial preparation from
an opposing party but does not protect such document production to their own counsel.
This case was noted as an example of "pitfalls of joint representation," and while
the use of just one attorney may appear both economical and pragmatic at times, it
is not always in the best interest of the parties.

</p><h3>Miscellaneous</h3>

<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Concord Marketing Inc.,</i> 268 B.R. 415 (Bankr. D. N.J.
2001)</a> (court approval is necessary in order to enforce an assignment of trustee's
§506(c) rights to surcharge secured creditor's collateral as such an assignment is
outside the ordinary course of business);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re M Group Inc.,</i> 268 B.R. 896 (Bankr. D. Del. 2001)</a>
(employee discharged post-petition was not entitled to administrative claim for
severance based on a "termination without cause" provision since the employee became
eligible for severance in a pre-petition agreement, although payment was contingent upon
post-petition termination); and

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… v. Medicap Pharmacies,</i> 267 F.3d 493 (6th Cir. 2001)</a>
(pre-petition injunction to prevent further violation of covenant not to compete is not
a "claim" and consequently could not be discharged in bankruptcy).