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Presenting a live 90‐minute webinar with interactive Q&A
Partnership and LLC Bankruptcies: Partnership and LLC Bankruptcies: Latest DevelopmentsNavigating Unique Bankruptcy Issues Involving Partner or Entity Insolvencies
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, JUNE 13, 2013
Today’s faculty features:
Kenneth L. Samuelson, Managing Member, Samuelson Law Offices, LLC, Washington, D.C.
Rosa J. Evergreen, Attorney, Arnold & Porter, Washington, D.C.
Robert N. H. Christmas, Partner, Nixon Peabody, New YorkRobert N. H. Christmas, Partner, Nixon Peabody, New York
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Partnership and LLC Bankruptcies
Kenneth L Samuelson Esq
Please download or print the PDF Reference Material document prepared by Mr. Samuelson as his presentation will follow this document. You can also access corresponding pages from the PDF Reference Material during the program on the webinar platform under the handouts tab in the Conference Material section.
Kenneth L. Samuelson, Esq.
Samuelson Law Offices
www.samuelson-law.com
202-494-0848202-494-0848
June 13, 2013
When there When there is nowhere else to go . .
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B t not But not everyone is everyone is entitled to entitled to bankruptcy bankruptcy reliefrelief.
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D h Do you have a general general partner even partner, even if he/she is not rich?
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T fil To file or not to file not to file bankruptcy -i t t interests and goals and goals may differ.
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G l General Partner: I Partner: I can make an can make an involuntary yfiling!
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Conflicts?Conflicts?
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Only admitted substitute substitute members & LP LPs may vote.vote.
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Liable even if you’re not on th the Management Management Committee?
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Guarantor Guarantor getting off.getting off.
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Real estate debtor bearing tax savings
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Partnership and LLC Bankruptcies: Unique Legal Issues Involving Partner and Member
BankruptciesBankruptcies
St ff d P bli ti CLE T l f J 13 2013Strafford Publications CLE Teleconference – June 13, 2013
Rosa J. EvergreenArnold & Porter LLP
555 Twelfth Street, NWWashington, DC 20004 -1206 R E @ [email protected]
202-942-5572
Partner/Member Bankruptcy Issues Generally Not Specifically Addressed in the Bankruptcy Code
Relationships governed by state law/agreement
Laws of agency: general partner is an agent for the partnershippartnership
“Bundle of rights”:
Rights in specific property of the partnership– Rights in specific property of the partnership
– Rights in his or her “partnership interest”
Rights to participate in management of the partnership– Rights to participate in management of the partnership
Developing body of case law
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Unique Issues Raised by the Bankruptcy Filing of Partner/Member
P t /M b b k t fili i i l l i Partner/Member bankruptcy filings raise unique legal issues, including:– What is “estate” interests/property
– Whether the bankruptcy filing leads to the dissolution of the partnership/LLC
– Whether the partner/member can retain his or her management rights after the bankruptcy filing
I t f ti 365 t hi d LLC t– Impact of section 365 on partnership and LLC agreements
– Implication of ipso facto provisions
– Ability to sell/transfer economic interests of partner/member
– Impact of bankruptcy filing on right of first refusal provisions
– Applicability of buy-out provisions
– Jurisdictional issues
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Section 541: Property of the Estate
Upon the filing of a petition in bankruptcy, a bankruptcy “estate” is created pursuant to section 541 of the Bankruptcy Code.
Section 541(c)(1)(B) states in pertinent part that “an interest of the ( )( )( ) p pdebtor in property becomes property of the estate. . . notwithstanding any provision in an agreement . . . that is conditioned . . . on the commencement of a case . . . .”
The bankruptcy “estate” consists of all equitable and legal interests the debtor has, including property and contractual rights.
In re Thadikamalla 488 B R 791 (Bankr N D Ga 2013): finding In re Thadikamalla, 488 B.R. 791 (Bankr. N.D. Ga. 2013): finding chapter 7 trustee had a property interest in debtor’s 70% of the partnership, but the partnership’s assets were not property of the estate.
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Management of the Estate
The estate is managed by the debtor itself, as a “debtor in possession” or by a trustee appointed by the court.
“The statutory and decisional authority is clear that aThe statutory and decisional authority is clear that a bankruptcy trustee is the successor to property of the debtor’s estate and is the legal representative of the estate. The Trustee succeeds to the property of the debtor’s estate.” In re Modanlo, 412 B.R. 715 (Bankr. D. Md. 2006).
The debtor in possession’s/trustee’s duty is to serve the estate for the benefit of creditors.estate for the benefit of creditors.
A general partner who becomes a debtor-in-possession assumes responsibilities to his or her creditors that may conflict with his or her responsibilities to co partnersconflict with his or her responsibilities to co-partners.
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Unique Relationships of Partners and Members
Partners and members have voluntarily associated in the business.
Partnership/LLC often formed by personal relationships.
Partnership/LLC often a closely held entityPartnership/LLC often a closely held entity.
Possibility of competing interests of management and the bankruptcy “estate” and conflicts of interest.
I H 10 B R 817 (B k D C l 1981) In re Harms, 10 B.R. 817 (Bankr. D. Colo. 1981):– “A general partner is in a fiduciary relationship with the limited partners. It is important
that he have no conflict of interest. Moreover, an agreement among partners is unique in the law. It is not only a legal relationship, but it is also a personal relation or status, somewhat as marriage is a relation or status.”
– “When the only general partner in a limited partnership becomes a debtor-in-possession, there is an inherent conflict of interest . . . [h]e is a different entity.”
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Effect on Partnership or LLC When Partner/Member Files Bankruptcy?
Applicable state law and/or the operating agreement of partnership or LLC may provide for dissolution of the partnership/LLC or that any partner or manager who files for bankruptcy withdraws from the
t hi /LLCpartnership/LLC.
Dissolution and withdrawal provisions often conflict with federal bankruptcy law principles. p y p p
Disagreement among the courts on whether dissolution and withdrawal provisions are enforceable in bankruptcy.
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Dissolution of Partnership/LLC Upon Partner or Member Bankruptcy Filing
I P b l 2011 WL 2947045 (B k E D T J l 19 2011) ff’d 2012 WL In re Prebul, 2011 WL 2947045 (Bankr. E.D. Tenn. July 19, 2011) aff’d, 2012 WL 5997927 (E.D. Tenn. Nov. 30, 2012): finding that to permit dissolution under state law “would defeat the evident purpose of §541(c)” and holding that “the statute [providing for dissolution] is rendered ineffective by §541(c)(1).”
In re Warner 480 B R 641 (Bankr N D W Va 2012): holding that the In re Warner, 480 B.R. 641 (Bankr. N.D.W. Va. 2012): holding that the bankruptcy filing of the member did not result in dissolution of the LLC.
In re Modanlo, 412 B.R. 715 (Bankr. D. Md. 2006): finding that the filing of bankruptcy by the sole member of the LLC dissolved the LLC by operation of law, but chapter 7 trustee “resuscitated” the LLC by filing an amendment to the operating agreementtrustee resuscitated the LLC by filing an amendment to the operating agreement.
In re Clinton Court, 160 B.R. 57 (Bankr. E.D. Pa. 1993): general partner’s prior filing of a bankruptcy petition did not dissolve general partnership and, therefore, did not bar non-debtor general partner from filing subsequent bankruptcy petition on behalf of the partnershipthe partnership.
In re Sawyer , 130 B.R. 384 (Bankr. E.D.N.Y. 1991): finding that under New York law, the filing of a chapter 7 case by the general partner resulted in dissolution of the partnership.
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Transferability of Debtor’s Rights
E i i ht /b fit t i ht Economic rights/benefits v. management rights:– In re Garrison–Ashburn, L. C., 253 B.R. 700 (Bankr. E.D. Va. 2000): “[t]here is no question
that the economic rights, that is the membership interest, becomes property of the estate.”
– In re Warner, 480 B.R. 641 (Bankr. N.D. W. Va. 2012): non-economic rights and economic , ( ) grights (ability to receive distributions from LLC) were included in “property of the estate.”
Transferability of debtor’s management rights depends on a variety of factors, including:
Nature of the operating agreement– Nature of the operating agreement
– Whether the agreement is an executory contract
– Whether partners and members can be compelled to accept performance from a third party and whether there are any unique aspects of partnership/LLC and/or partner/manager
– Case law precedent/jurisdiction
– Whether any party objects
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Transfer of Management RightsI J d i 2012 WL 1098544 (B k D Md M 30 2012) fi di th t th i i i In re Jundanian, 2012 WL 1098544 (Bankr. D. Md. Mar. 30, 2012): finding that the provisions in the Maryland Act providing that a person ceases to be a member of a LLC when they file bankruptcy were invalid and concluding that the management rights were estate property.
In re Pickel, 487 B.R. 289 (Bankr. D.N.M. 2013): finding that debtor’s bankruptcy filing did not diminish debtor’s membership or management rights or interests in wholly owned LLC.p g g y
In re First Protection, Inc., 440 B.R. 821 (9th Cir. BAP 2010): concluding debtor’s contractual rights and interests in LLC became property of the estate.
In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003): finding that because there were no other members in the LLC the trustee obtained all of the debtor’s rights including the rightother members in the LLC, the trustee obtained all of the debtor s rights, including the right to manage the LLC.
In re Milford Power Company v. PDC Milford Power, 866 A.2d 738 (Del. Ch. 2004): finding clause that deprived debtor minority member of its ability to participate as a member in the governance of the LLC enforceable and discussing the policy justifications for such clauses.
In re Modanlo, 412 B.R. 715 (Bankr. D. Md. 2006): finding trustee could continue to participate in management, but noting the result may have been different if there were other members.
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Ability to File Bankruptcy Petition For Partnership/LLC or Seek Dissolution
I H & W F d M t LLC 461 B R 904 (B k N D G 2011) In re H & W Food Mart, LLC, 461 B.R. 904 (Bankr. N.D. Ga. 2011): a bankruptcy petition filed on behalf of a Georgia LLC by its member (the debtor) was not authorized, as the trustee – not the debtor –had authority to file the petition.
In re A-Z Electronics, LLC, 350 B.R. 886 (Bankr. D. Idaho 2006): debtor’s managing member, who had filed for chapter 7 relief, lacked authority to file chapter 11 petition for the LLC – but the chapter 7 trustee had standingchapter 7 trustee had standing.
In re Klingerman, 388 B.R. 677 (Bankr. E.D. N.C. 2008): Chapter 11 debtor brought adversary proceeding to compel dissolution of LLC and non-debtor member moved to dismiss based on debtor’s alleged lack of standing pursuant to provision in the LLC’s operating agreement; court held the debtor’s rights and interest in the LLC were property of the estate and thus the estate has standing to ask for dissolution.
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Assumption/Rejection of Executory Contracts
Section 365 of the Bankruptcy Code permits the debtor-in-possession/trustee to assume or reject executory contracts.
Executory contracts are often defined as a contract whereExecutory contracts are often defined as a contract where material performance by both sides remains.– The term “executory contract” in the Bankruptcy Code refers to a contract
on which performance remains due to some extent on both sides. In re pMirant Corp., 440 F.3d 238 (5th Cir. 2006).
– Countryman test: an executory contract is “a contract under which the obligation of both the bankrupt and the other party are so far unperformed that the failure of either to complete performance would constitute a materialthat the failure of either to complete performance would constitute a material breach excusing the performance of the other.”
Executory contracts may include management agreements, leases operating agreements etcleases, operating agreements, etc.
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Executory Nature of Partnership Agreements & LLC Agreements
C t h diff i i f h th t hi t d Courts have differing views of whether partnership agreements and LLC agreements are executory contracts: – A number of courts have held that partnership agreements and LLC
agreements are executory contracts.agreements are executory contracts.
– Other courts have found that partnership agreements and LLC agreements are not executory contracts.
In re Warner, 480 B.R. 641 (Bankr. N.D.W. Va. 2012): “There is a , ( )lack of consensus among the courts regarding the executory nature of operating agreements of limited liability companies because “[t]here are no per se rules regarding the classification of limited liability company operating agreements . . . Factors relevant in y p y p g gevaluating a LLC operating agreement include whether the operating agreement imposes remote or hypothetical duties, requires ongoing capital contributions, and the level of managerial responsibility imposed on the debtor (internal citations omitted). p y p ( )
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Executory Nature of Partnership Agreements & LLC Agreements (Cont’d)
I P b l 2011 WL 2947045 (B k E D T J l 19 2011) ti th t In re Prebul, 2011 WL 2947045 (Bankr. E.D. Tenn. Jul. 19, 2011): commenting that “[w]here the operating agreement imposes no duties or only remote and hypothetical duties, it is not an executory contract” and “where the operating agreement both requires ongoing capital contributions and imposes management duties, it has often been deemed executory.”
In re Allentown Ambassadors, Inc., 361 B.R. 422 (Bankr .E.D. Pa. 2007): providing that “[i]n this inquiry, the four corners of the parties’ agreement are examined to determine whether both parties have material, unperformed obligations as of the commencement of the bankruptcy case” and finding that the operating agreement was an executory agreement because members had continuing duties to manage the LLC and to make g g gadditional cash contributions.
In re Tsiaoushis, 383 B.R. 616 (Bankr. E.D. Va. 2007) aff’d 2007 WL 2156162 (E.D. Va. July 19, 2007): “[t]he analysis used to determine whether a particular limited liability company operating agreement is an executory contract under Bankruptcy Code §365(e)(1) is clear [t]here is no per se rule [e]ach operating agreement is separately analyzed ”is clear . . . [t]here is no per se rule . . . [e]ach operating agreement is separately analyzed.
In re Ehmann, 319 B.R. 200 (Bankr. D. Ariz. 2005): noting that courts consider, in deciding whether the agreement is executory, whether there is “some material obligation owing to the company by the member;” finding that the agreement was not executory and thus the LLC was not subject to contractual limitations in the operating agreement. j g g
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Section 365(c)(1)
Section 365(c)(1) provides that a trustee is unable to assume or assign an agreement if applicable nonbankruptcy law excuses the nondebtor party from accepting performance p y p g pfrom an “entity other than the debtor or debtor in possession.”
The classic example is “personal services” contracts, which contracts courts generally agree cannot be assignedcontracts courts generally agree cannot be assigned.
State law – i.e., applicable nonbankrupcty law – often prohibits the assignment of a partner’s/member’s p g pmanagement agreement.
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Differing Tests Under Section 365(c)(1)
“Hypothetical Test”: non-consensual assumption of an executory contract or unexpired lease barred where applicable nonbankruptcy law would prevent assignment to a pp p y p ghypothetical third party.
“Actual test”: nonconsensual assumption of an executory contract or unexpired lease prohibited only where applicablecontract or unexpired lease prohibited only where applicable nonbankruptcy law precludes the assignment of such agreement and the debtor actually intends to assign it.
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Applying Section 365(c)(1)
C t i th “f t d i t ” ith f th t f Courts examine the “facts and circumstances,” with a focus on the type of partner/manager and partnership/LLC at issue.
In re Antonelli, 148 B.R. 443 (D. Md. 1992): “[a]pplication of the rule, however, calls for a particularized, practical approach . . . the question of whether or not management power in a partnership is assignable turns not upon the status whichmanagement power in a partnership is assignable turns not upon the status which ‘applicable law’ generally accords to partnership agreements but upon the materiality of the identity of the partners to the performance of the obligations remaining to be performed under the partnership in question” (emphasis added).
JD Factors LLC v Freightco LLC 2009 WL 3401965 (N D Ind Oct 16 2009): JD Factors, LLC v. Freightco, LLC, 2009 WL 3401965 (N.D. Ind. Oct. 16, 2009): finding that a members service as a vice-president pursuant to the operating agreement was non-assignable due to the personal service contract provisions and “considering that Indiana law governing limited liability companies provides that, unless otherwise provided in the company’s operating agreement, no person can become a member without the consent of all the members ”become a member without the consent of all the members.
In re Soderstrom, 484 B.R. 874 (M.D. Fla. 2013): finding where applicable law allows members of an LLC not to consent to a new managing member, bankruptcy trustee could not assume the management interest and only the economic interest was available for sale.
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Section 365(e)(1): Ipso Facto Provisions
P i i f t th t dif i ht d d ti l l Provisions of agreements that modify rights and duties solely on account of a bankruptcy proceeding are generally unenforceable as ipso facto provisions under section 365(e)(1) of the Bankruptcy Code.
Provisions of agreements that cause a partnership/LLC to dissolve or that trigger buy-out options solely on account of a bankruptcy proceeding of the partner/member are often held to be unenforceable ipso facto clausesunenforceable ipso facto clauses.
Exceptions exist to section 365(e)(1) in the Bankruptcy Code. 365(e)(2)(A)(i): “applicable law excuses a party, other than the
debtor to s ch contract or lease from accepting performance fromdebtor, to such contract or lease from accepting performance from or rendering performance to the trustee or to an assignee of such contract or lease, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties.”
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Ipso Facto Clauses in Partner/Member Bankruptcy Filings
LaHood v. Covey, 437 B.R. 330 (Bankr. C.D. Ill. 2010): concluding that the provisions of the operating agreement purporting to place limitations or restrictions on the member’s interest as a result of his bankruptcy filing were unenforceablebankruptcy filing were unenforceable.
In re Dixie Management & Inv., Ltd. Partners, 2011 WL 1753971 (Bankr. W.D. Ark. May 9, 2011): finding provision of LLC statute and operating agreement specifying that dissociation results from theoperating agreement specifying that dissociation results from the bankruptcy filing of a member conflicted with federal bankruptcy law and was ineffective and therefore such provision did not prevent debtor’s 62% membership interest in investment group from being i l d d i t f th t tincluded in property of the estate.
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Ipso Facto Clauses in Partner/Member Bankruptcy Filings (Cont’d)
In re Tsiaoushis, 383 B.R. 616 (Bankr. E.D. Va. 2007) aff’d, 2007 WL 2156162 (E.D. Va. July 19, 2007): – Chapter 11 trustee filed adversary complaint against LLC of which debtor
b d ht t f th i i f LLC' tiwas a member and sought to enforce the provisions of LLC's operating agreement that provided that the LLC would be dissolved upon the bankruptcy of a member and that, upon dissolution, members could proceed to sell or liquidate LLC's property.
– LLC’s manager opposed the trustee’s request, asserting that the operating agreement was an executory contract and that the provision for automatic dissolution was an unenforceable ipso facto clause.
The court concluded that the operating agreement was not an executory– The court concluded that the operating agreement was not an executory contract and that therefore section 365(e)(1) of the Bankruptcy Code was not applicable.
– The operating agreement was valid and enforceable.p g g
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Transfer of Economic Interests in Partnership/LLC
The interest of a general partner/manager in the partnership/LLC (i.e., profits and surplus) is property of the estate under section 541 of the Bankruptcy Code.
The trustee generally will be authorized to transfer partner/member economic interests – e.g., interests in profits – although, the transfer generally remains subject g g y jto the terms and conditions of the agreement and/or applicable non-bankruptcy law.
In re Soderstrom, 484 B.R. 874 (M.D. Fla. 2013): finding bankruptcy trustee could sell debtor’s economic interest in LLC.
In re A F Evans Co Inc 2009 WL 2821499 (Bankr N D Cal June 23 2009): In re A.F. Evans Co., Inc., 2009 WL 2821499 (Bankr. N.D. Cal. June 23, 2009): concluding that “there is legal authority to support the proposition that a prohibition on assignment is not enforceable in the context of a bankruptcy filing where the identity of the contracting party is not material to the contract, i.e., where only an economic interest is being assigned” (internal citations omitted).
Baldwin v. Wolff, 690 N.E. 2d 632 (1st Dist. 1998): finding bankruptcy trustee could assign limited partner’s right to distributions.
In re Dean, 174 B.R. 787 (Bankr. E.D. Ark. 1994): finding that the restrictions contained in agreement related to the transfer of interests were not invalidated by g yany provision of Bankruptcy Code.
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Right of First RefusalRi ht f fi t f l ll f bl l t i d b th b k t Rights of first refusal are generally enforceable unless triggered by the bankruptcy.
In re The IT Group, Inc., Co., 302 B.R. 483 (D. Del. 2003):
– Applicable law did not excuse members from rendering economic performance to an assignee, therefore, the court concluded that section 365(e)(2)(A) did not apply and the default provision in
f fthe agreement was an unenforceable ipso facto provision.
– The court concluded, however, that the right of first refusal was not an ipso facto clause; instead, the right of first refusal was triggered by any transfer of interest and not by the member filing for bankruptcy.
Accordingly assumption and assignment of the debtor’s economic interest was subject to the other– Accordingly, assumption and assignment of the debtor s economic interest was subject to the other members’ right of first refusal.
In re Capital Acquisitions & Management Corp., 341 B.R. 632 (Bankr. N.D. Ill. 2006): finding the agreement was not an executory contract and concluding that the non-debtor LLC members’ right of first refusal was not an invalid ipso facto provision.
In re Strata Title, LLC, 2013 WL 1773619 (Bankr. D. Ariz. Apr. 25, 2013): finding that the bankruptcy filing was the “purchase option” trigger and the purchase option was an unenforceable ipso facto clause; exercising the purchase option would be a violation of the automatic stay.
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Buy-Out Provisions
There is disagreement among the courts whether agreed buy-out provisions may be non-enforceable ipso facto clauses.
Courts generally have concluded buy out provisions cannot Courts generally have concluded buy-out provisions cannot be abrogated in bankruptcy, unless agreement would operate to effect “a forfeiture, modification, or termination.”
In re Catron, 158 B.R. 629 (E.D. Va. 1993), aff’d. mem. 25 F.3d 1038 (4th Cir. 1994): holding that section 365(e)(1) did not invalidate the provision in the partnership agreement p p p gpermitting the non-bankrupt partners to buy out the debtor’s interest upon the debtor’s filing for bankruptcy.
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Buy-Out Provisions (Cont’d)
C ll N th t h Hill A (I M i ) 831 F 2d 205 (10th Connally v. Nuthatch Hill Assocs. (In re Manning ), 831 F.2d 205 (10th Cir. 1987):
– Partners entitled under the partnership agreement to buy-out the debtor general partner’s interest in the partnership for a “discount” – i.e., 75% of the value of the d bt ’ it l t hi h l th d bt ’ h f th l fdebtor’s capital account – which was less than debtor’s share of the value of partnership.
– The Tenth Circuit remanded to the bankruptcy court to examine, among other things, whether there were any ipso facto provisions in the agreement related to the buy-out.
– According to the Tenth Circuit, if “the partners, in fact, did intend to allow a severe penalty upon dissolution by bankruptcy,” ipso facto provisions would likely be implicated.
– Given the “discount,” the court found that the buy-out provision may also be prohibited under sections 363(1) and 541(c) as a “modification” of estate propertyunder sections 363(1) and 541(c) as a modification of estate property.
– The Tenth Circuit noted that “valuing the bankrupt’s interest, not at appreciated fair market value, as is typically done upon the death or incompetency of a partner, but instead at book value produces not only a modification but has the added effect of requiring [the debtor] to virtually forfeit his interest ….” q g [ ] y
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The Buy-Out Price
B t i b bj t t hi h d b tt ff Buy-out price may be subject to higher and better offers. In re Cutler, 165 B.R. 275 (Bankr. D. Ariz. 1994): buyout
restriction at predetermined price was unenforceable; trustee ld ll th t t ’ i t t t th hi h t biddcould sell the estate’s interest to the highest bidder.
In re Grablowsky, 180 B.R. 134 (Bankr. E.D. Va. 1995): “While the partnership agreements in the case sub judice are notWhile the partnership agreements in the case sub judice are not punitive in that they provide for the purchase of the debtor’s interest at the fair market value, they are limiting in derogation of the Bankruptcy Code by purporting to preclude the sale of the interests by the Trustee to third parties who may be willing to pay the estate more than the fair market value for the interests. The estate is entitled to any bonus that may arise from the freedom to sell such interests to any willing purchaser; only in that way can the Trustee realize the greatest value ofpurchaser; only in that way can the Trustee realize the greatest value of the assets for the estate.”
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Jurisdictional Issues
I M di i 2013 WL 1855751 (B k D C l M 1 2013) fi di In re Mordini, 2013 WL 1855751 (Bankr. D. Colo. May 1, 2013): finding that the court lacked jurisdiction over claims asserted against debtor’s wholly owned LLC and noting that “the economic effect of litigation on the value of a separate non-debtor entity in which a debtor owns an equity interest is insufficient to create such jurisdiction ”equity interest is insufficient to create such jurisdiction.
In re Thadikamalla, 488 B.R. 791 (Bankr. N.D. Ga. 2013): finding that the court had “related to jurisdiction” over issues regarding the wind up of the partnership as such issues “undeniably impact the estate and the p p y padministration of the estate” and “[a]n action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate” (i t l it ti itt d)(internal citations omitted).
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Preference Issues
In re Lull, 2008 WL 3895561 (Bankr. D. Hawai’i Aug. 22, 2008):
– The debtor-member had been removed from his status as a member of the LLC.member of the LLC.
– The court found that the non-bankrupt member received more because of removal of the debtor-member than he would have as an unsecured creditor (the court reserved for judgment anyas an unsecured creditor (the court reserved for judgment any finding on the amount of the preference).
– LLC may be an “insider” of the member-debtor for purposes of preference analysis.
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Partnership and LLC BankruptciesUnique Legal IssuesUnique Legal Issues
Robert N H ChristmasRobert N. H. Christmas
Nixon Peabody LLP
Recent increase in use of SPEs
• The past decades have seen a dramatic increase in the use of special-purpose entities (SPEs) in a variety of contexts, including throughout real estate finance, project finance, structured finance and securitization markets. SPEs, usually created p ojec a ce, s uc u ed a ce a d secu a o a e s S s, usua y c ea edin the form of LLCs or limited partnerships, are also sometimes referred to as "single-purpose entities" or "bankruptcy remote entities."
• Borrowers and their lenders have believed that using SPEs can provide more credit security to the lender – resulting in lower interest rates to the borrower.
• By using an SPE, an organization seeks to separate cash-producing portions of its business from other, riskier portions of the larger business by transferring the financial assets to an SPE.
• The primary purpose of the isolation and transfer of financial assets to an SPE is toThe primary purpose of the isolation and transfer of financial assets to an SPE is to insulate the lender or investors from the insolvency and bankruptcy risks of the original borrower or originator that formed the SPE.
• How?
4545
Typical SPE organizational provisionsTypical SPE organizational provisions
SPE organizational documents contain provisions intended to isolate SPE assets from risk associated with the assets, liabilities and performance of the
t l t i h lparent or larger enterprise as a whole.
Restrictions may include the ability of the SPE to:
– Engage in any activity other than owning, operating and/or acquiring a g g y y g, p g q gspecified asset or collection of assets;
– Enter into mergers, consolidations or dispositions of the asset(s);
– Commingle assets including cash flows and other revenue generated byCommingle assets, including cash flows and other revenue generated by the asset(s);
– Incur any debt or guaranty other than the subject loan or trade debt strictly related to it;
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[continued]
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• SPE org. documents restrict filing for bankruptcy protection without the consent of independent directors.
i. SPE organizational documents frequently require that the board of directors include at least one independent director.
ii. SPE organizational documents may also require that the independent director consider the interests of an SPE lender; however, such a provisiondirector consider the interests of an SPE lender; however, such a provision may be limited “to the extent permitted by law.”
iii. For example, directors of a Delaware corporation must be cognizant that direct fiduciary duties are owed to the company, not its creditors. See N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).
Result: Reduction in the overall cost of borrowing for the originator, on the basis that the use of an SPE (as generally assumed by lenders and investors) lowers the risk of insolvency and therefore lowers the credit risk
47
investors) lowers the risk of insolvency and therefore lowers the credit risk.
But is this true?
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GENERAL GROWTH PROPERTIES
I. The business:I. The business:
• General Growth, the second-largest U.S. mall owner, owned and managed more than 200 U.S. malls. It filed for Chapter 11 bankruptcy protection in April, 2009 with $27 billion in debt.
• the filing included 166 SPEs (each an individual mall owner) in the bankruptcy filing.
• independent directors who sat on the SPE boards were dismissed on the eve of the filingeve of the filing– at the mall/property level, the documents had the standard language
requiring independent director approval of a bankruptcy filing.
– the documents did not require notice of dismissal of the director
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the documents did not require notice of dismissal of the director
– the new directors voted in favor of the filing
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II. The first battle – the bad faith motion. Lenders to approximately 20 SPEs filed motions seeking dismissal of their borrowers’ bankruptcy cases on the
d th t th b k t fili i “b d f ith” Th L d ’grounds that the bankruptcy filings were in “bad faith”. The Lenders’ principal arguments were:
• The cases were filed prematurely because the SPEs were not in any immediate financial distressimmediate financial distress
• The SPEs failed to negotiate with the lenders prior to filing for bankruptcy
• General Growth improperly replaced the independent managers of the S fSPEs with new managers on the eve of bankruptcy
• The SPE debtors cannot confirm a plan over the lenders’ objections
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The decision: In August, 2009, the bankruptcy court issued a decision denying the motions to dismiss. In re General Growth Properties Inc., 409 B.R. 43 (Bankr. S.D.N.Y. 2009)
• Judge Gropper rejected the “prematurity” argument on legal grounds (id at 57)Judge Gropper rejected the prematurity argument on legal grounds (id. at 57), holding that SGL Carbon, 200 F.3d 154 (3d Cir. 1999), and other cases cited by the lenders are not relevant because they involve litigation claims and liability itself was speculative
• Judge Gropper also rejected the prematurity argument on factual grounds (id. at 58)g pp j p y g g ( )
– Although the SPEs were current on debt service and none of the loans had a maturity prior to March 2010, Judge Gropper found that the SPEs were in varying degrees of financial distress due to
• Cross defaults to other financings• Cross defaults to other financings
• Guarantees of other financings
• High loan-to-value ratios
U t i t t th t f fi i
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• Uncertainty as to the prospects for refinancing
– declined to establish an “arbitrary rule” that a debtor cannot file a Chapter 11 petition if the debt it is seeking to restructure is not due within one, two or three years
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• On bad faith, the court applied a two-prong test which looks to (i) objective futility in pursuing a bankruptcy filing, and (ii) bad faith in filing the petition
– Citing decisions in U.I.P Engineered Products, 831 F.2d 54 (4th Cir. 1987), and In re Mirant Corp., 2005 Bankr. LEXIS 1686, 2005 WL 2148362 (Bankr. N.D. Tex. Jan. 26, 2005), Judge Gropper applied a “family filing” standard
• “Whether to file a Chapter 11 petition can be based in good faith on considerations of the [corporate] group as well as the interests of the individual debtor” 409 B.R. at 63.
• Making frequent reference to General Growth’s reliance on cash flow from the SPE J d G l d t h i th i t f thSPEs, Judge Gropper placed greater emphasis on the importance of the subsidiaries to the health of the bankrupt parent than on the benefits flowing to the subsidiaries from the relationship. Id., at 62-63.
• But what about the directors? Were they not required to look to the
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interests of creditors – under applicable Delaware law on fiduciary duty in insolvency?
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No -- these mall owners were solvent. So, the directors owed duties to the shareholders.
• Judge Gropper held that the directors and managers of the SPEs were obligated to consider the interests of the shareholder, General Growth in determining whether to authorize a bankruptcy filing. 409 B.R. at 64-65.
• Delaware corporate law provides that the directors of a solvent corporation have fiduciary duties to shareholders, even in the “zone of insolvency”. Id. At 64 (citing N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007)).G ee a a, 930 d 9 ( e 00 ))
• The decision discounts modifications to the fiduciary duties of directors and managers contained in the SPEs’ operating agreements and authorized by §18-1101 of the Delaware Limited Liability Co. Act. (Id.)
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What are the lessons from the General Growth bad faith motion?
• Better documentation– Creditors should receive advance notice when an independent director is replaced.
– To reduce opportunities for director shopping – and to avoid relationships that might suggest a conflict of interest – independent directors should come from nationally recognized companies that provide such individuals to similar corporationsg p p p
– Require independent directors to have independent advisors
– Spell out the fiduciary duties of independent directors
– Given the court’s note of approval on GGP’s selection of replacement directors who pp pwere familiar with restructuring, a parent/sponsor may be unable to justify removing an already well-qualified independent director with relevant experience and exposure to insolvency.
• Review the context in which SPE operates
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– Financial health of parent
– type of assets and whether they are central/have great importance to parent
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III. The second battle – cash collateral/adequate protection.
The structure:The structure:
• GGP commingled SPE funds in its own account, then used this account to pay all expenses of the SPEs, including those of cash-flow negative ones.
E ti ll it l l d d i t l N tit• Essentially it regularly made unsecured intercompany loans. No entity guaranteed the intercompany loans, and recipients could benefit from the liquidity without providing any collateral.
• However many of the SPE loan documents for SPE debtors in GGP• However, many of the SPE loan documents for SPE debtors in GGP contained “cash-trap” provisions providing that after an event of default, the SPE could no longer upstream some or all of its cash to GGP’s centralized operating account. Instead, the funds would be transferred directly from a lockbox account according to a specific payment hierarchy set forth in the
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lockbox account according to a specific payment hierarchy set forth in the credit agreement.
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The motion:
At the beginning of its chapter 11 case, GGP sought to continue its existing cash management system including upstreaming cash from property level entities into a centralized operating accountsystem, including upstreaming cash from property-level entities into a centralized operating account.
– Since this constituted a use of the SPE lenders’ cash collateral, the property-level SPEs offered the lenders several types of adequate protection, including first priority liens on the intercompany claims for upstreamed cash and the excess cash in the main operating account and second priority liens on certain DIP financing collateral.
The objections:
Many of the SPE lenders objected, claiming that the use of cash generated from their respective SPEs was a violation of the “cashtrap” provisions.
The decision (412 B.R. 609, 610-11 (Bankr. S.D.N.Y. 2009)):– permitted GGP to upstream cash from the property-level entities to the parent
– conditioned the lending of money from one debtor estate to another debtor estate based on providing (a) adequate protection to the lenders of the debtor transferor, and (b) adequate protection from the debtor transferee to the debtor transferor.
Ad t t ti t k th f f i t t t t l d t f ti
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– Adequate protection took the form of interest payments to lenders, payment of operating expenses for the properties, and replacement liens for the lenders.
– Notably, it held the cash-trap provisions did not entitle lenders to receive additional protections to those already afforded by the Bankruptcy Code, and that the SPE lenders’ protection need only be adequate, not identical to protections fixed by prepetition contracts.
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Lessons learned on GGP cash collateral: -- Practitioners should focus on provisions that preserve separation.
SPE d th i ffili t d th i l d h ld f ll l k t h fl d– SPEs and their affiliates, and their lenders, should carefully look at cash flow and other structures that might lead a court to disregard an SPE’s separateness covenants.
– Practitioners can rebut the appearance of inextricable connections by drafting procedures for control of SPE incomeprocedures for control of SPE income.
– all SPE income should pass through a creditor-controlled hard lockbox.
– Debt service and other SPE expenditures paid from lock bock according to a specific priority structure.
– Assuming the SPE continues to generate income, the lockbox mechanism should provide that the cash available from the lockbox will be applied first toward SPE debt obligations in event of parent insolvency.
– The SPE entity itself should have final priority, allowing income to be upstreamed to the parent only after satisfying all ongoing SPE obligations
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the parent only after satisfying all ongoing SPE obligations
(continued)
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Cross-default provisions
– corporate separation is undermined if the loan documents provide that the– corporate separation is undermined if the loan documents provide that the parent’s bankruptcy or insolvency automatically triggers an event of default for an SPE.
– When GGP determined which of its SPEs should enter bankruptcy, these cross-default provisions helped justify the Chapter 11 filings of the solvent SPEs. (See also GGP, 409 B.R. at 57-58).
• Post-GGP provisions should describe a parent’s bankruptcy or insolvency as a possible event of default to be decided at the sole discretion of the creditor Such apossible event of default, to be decided at the sole discretion of the creditor. Such a provision protects creditors against an affiliate’s insolvency but allows them to decide if, and when, an affiliate’s insolvency would negatively impact its investment in an SPE.
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General Growth showed that bankruptcy remote is not bankruptcy proof
Th GGP PlThe GGP Plan
• Ultimately, the lenders gained greater control over the SPEs
– at least two independent directors not affiliated with the SPE, and approved by the lenders, were required
– lenders obtained the right to consent to any new or replacement independent director if not employed by a corporate service provider
– for possible future bankruptcy filings for an SPE, the organizational documents utilized provisions under the Delaware Limited Liability Company Act (18-1101 et. seq.) which narrowed the scope of a director’s fiduciary dutiesnarrowed the scope of a director s fiduciary duties
• Independent directors were required (i) to consider only the interest of the SPE as a standalone entity; and (ii) to consider the interests of creditors of the SPE and not consider the interest of the member or any direct or indirect beneficial owner of the member.
– lenders provided advance relief from the automatic stay under section 362 of the Bankruptcy C d i th t f b t b k t filiCode in the event of a subsequent bankruptcy filing.
– The ultimate parent of the SPE agreed to provide a “non-recourse carve-out guarantee” (also known as a “bad boy” guarantee) that would, in addition to customary recourse provisions (i.e., fraud, misappropriation, misapplication, etc.) provide the lenders with full recourse to the parent entity if the SPE (i) files a subsequent voluntary bankruptcy case; (ii) fails to have an i l t b k t di i d ithi 180 d (iii) k i t f th
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involuntary bankruptcy case dismissed within 180 days; (iii) makes an assignment for the benefit of creditors; (iv) admits that it is insolvent or cannot pay its debts as they become due; or (v) intentionally interferes with the lender exercising remedies after an event of default.
– (continued)58
• In re Zais Investment Grade Ltd. VII, 455 B.R. 839 (Bankr D N J 2011)(Bankr. D.N.J. 2011)– a Cayman Islands-based SPE that issued notes in a
collateralized debt obligation (“CDO”) transaction. Zais used th t d t b iti d l d d ththe note proceeds to buy securities and pledged the securities as collateral for its obligations to the noteholders.
– Held: case filed in good faith, and CDO structured to be bankruptcy proof/SPV may be debtor under the Bankruptcy Code.
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Delaware does not follow General Growth• Since General Growth, the Bankruptcy Court in Delaware has ruled in the opposite
direction on a number of grounds, in In re JER/Jameson Mezz Borrower II LLC, 461 B.R. 293 (Bankr. D. Del. 2011).
– Jameson Mezz Borrower II LLC (“Mezz II”) was subject to a UCC auction for Mezz II’s only asset – its membership interest in JER/Jameson Mezz Borrower I, LLC (“Mezz I”). Prior to the Chapter 11, Mezz II’s sole lenders issued a notice of intention to Mezz I. The notice was preceded by the maturity date of Mezz II’s loan, when it became apparent that Mezz II was unable to repay its debt.
– Mezz II was created to acquire a chain of 103 hotels known as the Jameson Inns and Signature Inns for approximately $400 million.
Th i ti l t t f th d bt i l d d t i ti i th t– The organizational structure of the debtors included certain operating companies that owned real estate and four affiliates known as the mezzanine borrowers, formed for the sole purpose of borrowing additional funds: (i) Mezz I, the sole member of the operating companies; (ii) Mezz II, the sole member of Mezz I; (iii) Mezz III, the sole member of Mezz II; and (iv) Mezz IV the sole member of Mezz IIImember of Mezz II; and (iv) Mezz IV, the sole member of Mezz III.
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• The junior lenders replaced the non-independent directors of the debtors, and instructed the sole non-independent director of Mezz II to file a
l t h t 11 titi ( th f th ti ) M I III d IVvoluntary chapter 11 petition (on the eve of the auction). Mezz I, III and IV filed petitions about a week later.
• The Motion: Days after Mezz II filed its petition but before Mezz I and the operating companies filed theirs Mezz II’s lenders moved to dismiss Mezzoperating companies filed theirs, Mezz II s lenders moved to dismiss Mezz II’s petition and to obtain stay relief to foreclose on their collateral. They sought to dismiss Mezz II’s petition with prejudice pursuant to sections 1112(b) and 349(a) of the Code, arguing that the petition was filed in bad faith as a litigation tactic designed to forestall the foreclosure Mezz IIfaith as a litigation tactic designed to forestall the foreclosure. Mezz II contended, however, that the petition was filed in good faith with an honest intent to reorganize its affairs and maximize its value for its constituents.
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• Holding: case dismissed with prejudice– The court considered many of the same factors as the GGP court, but concluded
that the case had been filed for an improper purpose: Mezz II (i) had only one asset (the interest in Mezz I); (ii) had few, if any unsecured creditors who, if they existed, were not pressuring Mezz II before the filing; (iii) had no ongoing business operations or employees; (iv) filed the petition on the eve of foreclosure, solely to
bt i th t ti t ( ) h d h i d ( i) h d t it fobtain the automatic stay; (v) had no cash or income; and (vi) had no opportunity of reorganization because its sole lenders would oppose any plan of reorganization.
– The case was a two-party dispute between Mezz II’s lenders and lenders to Mezz II’s affiliate. The court also found compelling a statement by Mezz II’s sole non-independent director, who admitted that the Mezz II bankruptcy petition was filed to p , p y pstop its lenders’ UCC sale and that the primary beneficiaries of the bankruptcy filing were its affiliates’ lenders.
– While the bankruptcy court concluded that it should (as Mezz II argued) consider the debtors as a group, absent substantive consolidation, Mezz II had no chance of confirming a plan over its lenders’ objection because the lenders were its onlyconfirming a plan over its lenders objection because the lenders were its only creditors. There would be no accepting class of any plan it proposed. Further, Mezz II presented no evidence that more value would be realized in bankruptcy.
– Absent good faith and a legitimate purpose, there was cause under section 349(a) to dismiss with prejudice. In addition, the Mezz II lenders were entitled to relief from the automatic stay under section 362(d)(1) as their interests were not adequately protected, and under section 362(d)(2) that the lenders’ collateral was not necessary for an effective reorganization – as one was not possible.
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• There were some differences in the facts:
– The timing of the filing of the petition. In GGP, the SPE debt had not yet matured and the debtors had extensively investigated restructuringmatured and the debtors had extensively investigated restructuring options. In Mezz II, the debt had matured and creditors were in the process of foreclosing before the filing.
Therefore, while GGP seems to encourage the filing of a chapter 11 petition sooner rather than later Mezz II illustrates the dangers ofpetition sooner rather than later, Mezz II illustrates the dangers of filing too late.
– Unlike GGP, Mezz II only had one creditor and one asset, and therefore could not cram down a plan over the Mezz II lenders’ objections. In GGP t f th i l d t ll k l d d th t thGGP, two of the moving lenders actually acknowledged that there was a reasonable likelihood that the debtors could successfully reorganize.
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Other potential issues• Substantive consolidation/true sale grey areas.
– In re Central European Industrial Development Company LLC, 288 B.R. 572 (Bankr. N.D. Calif. 2003), first case to directly consider the substantive consolidation of a SPE, the court declined to apply it.y
– The Seventh Circuit appears to be of the view that SPEs are not just in the eyes of the beholder. In other words, lender reliance was not enough and instead, the court suggests, the reliance must be reasonable -- the SPE cannot be a non-independent “shell”. Paloian v. LaSalle Bank, N.A., 619 F.3d 688 (7th Cir. 2010). See also In re Doctor’s Hospital of Hyde Park Inc 463 B R 93 (Bankr N D IllSee also In re Doctor’s Hospital of Hyde Park, Inc., 463 B.R. 93 (Bankr. N.D. Ill. 2011) (proceedings on remand).
• The determination of whether a transfer of assets to an SPE constitutes a “true sale” is critical to transactions that depend on the bankruptcy remoteness of SPEs If a transfer of assets from a corporation to an SPEremoteness of SPEs. If a transfer of assets from a corporation to an SPE can be recharacterized as a secured loan rather than a true sale, the benefits of remoteness will be lost. Traditionally, courts conducting a true-sale analysis have focused on whether the risks and benefits of ownership were actually transferred to the SPE. In Paloian, the court focused more on whether the SPE and the related borrower (Doctors Hospital) were actually
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whether the SPE and the related borrower (Doctors Hospital) were actually separate corporate entities.
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Related Issues
• There is a developing rule that confirmation is debtor by debtor, not by Plan. In the Tribune cases, the court denied confirmation of two competing p gplans of reorganization because, among other things, the plans did not satisfy section 1129(a)(10) of the Bankruptcy Code. Under one of the plans, only two of 111 debtors had an impaired consenting class and under an alternative plan only 72 of 111 debtors had an impaired consentingan alternative plan, only 72 of 111 debtors had an impaired consenting class. Judge Carey’s ruling, relying largely on statutory interpretation, highlights that section 1129(a)(10), in the absence of substantive consolidation, must be satisfied on a per debtor basis and not on a per plan basis. In re Tribune Co., 464 B.R. 126 (Bankr. D. Del. 2011).
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The “Bad Boy” or “Non-Recourse” Guaranty
Although most CMBS loans are non-recourse parties commonly carveAlthough most CMBS loans are non-recourse, parties commonly carve out indemnification and guaranty provisions for losses resulting from the particularly egregious acts of the SPE and its sponsors
– certain acts -- including a voluntary bankruptcy filing or a failure to g y p y gmaintain SPE status, triggers the guaranty
– the guaranty provides additional security for a mortgage loan by ensuring that a lender’s expectations are met or, if the expectation is broken that the lender will have a remedy and be adequatelyis broken, that the lender will have a remedy and be adequately compensated
– particularly with a creditworthy guarantor that is itself unwilling to enter bankruptcy, the “bad boy” guaranty deters the Chapter 11
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enter bankruptcy, the bad boy guaranty deters the Chapter 11 filing of an SPE and prevents actions that could generate significant liabilities for the guarantor
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“Bad Boy” guarantees may be jurisdictionally complicated to enforce …
• In re Extended Stay Inc., 418 B.R. 49 (Bankr. S.D.N.Y.2009) – Chapter 11 filing triggered the non-recourse carveout, and purchasers of the
mezzanine debt sought to enforce the guaranty – in state court.
– The guarantors argued that because the state court contract action derived from the bankruptcy, it was a “core” proceeding that should be addressed by the bankruptcy court.
– The court disagreed, finding that “a claim by a non-debtor against a non-g , g y gdebtor involving guarantees…is external to the bankruptcy process.” The mere fact that bankruptcy was the contingent triggering event did not convert the claim into one “arising under” federal law.
– Because the plain language of the guaranty agreement allowed no right of p g g g y g goffset or indemnity against the borrower, ESH as debtor was isolated from any financial harm relating to the guarantors’ liability. As a result, the court concluded that the bankruptcy estate would be unaffected by the state court action.
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• Also – there are obvious conflicts if a director is also a “bad boy” guarantor
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-- but they are enforced• Bank of Am v Lightstone Holdings LLC 32 Misc 3d 1244[A] 2011 N Y• Bank of Am. v. Lightstone Holdings, LLC, 32 Misc. 3d 1244[A], 2011 N.Y.
Misc. LEXIS 4412, 2011 NY Slip Op 51702[U] (Sup. Ct., New York Cty., 2011)(Extended Stay principal and developer liable on guaranty that made guarantors liable upon the borrower's bankruptcy filing).
• UBS Commercial Mortg. Trust 2007-FL1 v. Garrison Special Opportunities Fund L.P., 33 Misc. 3d 1204[A], 2011 N.Y. Misc. LEXIS 4634, 2011 NY Slip Op 51774[U] (Sup. Ct. N.Y. Cty. 2011) (same judge and holding as Lightstone -- guaranty that made guarantors liable upon the borrower's bankruptcy filing).
• Wells Fargo Bank, N.A. v. Cherryland Mall L.P. and Schostak, 295 Mich App. 99, 2011 Mich. App. LEXIS 2360 (Ct. App. 2011) (court enforced springing recourse provisions based on failure to maintain SPE status and SPE’s solvency). -- Note, the decision was retroactively overturned by the legislature while the lender has promised a legal battle over itslegislature, while the lender has promised a legal battle over its constitutionality. (Footnote: the bad boy’s brother was state-wide GOP chairman, but legislative leaders disclaimed his involvement in the bill’s passage.)
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• GGP is not the first case involving independent directors and bankruptcy. GGP built on prior case law, which shows that the existence of an independent director(s), in and of itself will not “protect” an SPE’s secured lender(s) against the SPE filing forand of itself, will not protect an SPE s secured lender(s) against the SPE filing for bankruptcy (or being involuntarily put into bankruptcy).
• Kingston Square, 214 B.R. 713 (Bankr. S.D.N.Y. 1997)
– Secured creditor commenced foreclosure action against eleven debtor SPEs, geach of which held real estate and was controlled by a common principal.
– The independent director appointed by the secured creditor had been general uninvolved in operations and refused to consent to approve a bankruptcy filing against the creditor’s position
– In order to protect the unsecureds and limited partners (all likely wiped out in foreclosure), the debtors’ principal solicited creditors of the SPEs to file involuntary cases
– Lender moved to dismiss the cases as collusive and in bad faith, designed toLender moved to dismiss the cases as collusive and in bad faith, designed to neutralize the independent director
Held:
– No illegal collusion or bad faith because (i) the debtors were eligible for relief and (ii) no court order restricted their access to such relief
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(ii) no court order restricted their access to such relief.
– Decision suggests that the independent director had breached fiduciary duty to the SPEs by refusing to consent to a voluntary Chapter 11 petition.
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Robert N. H. ChristmasPartner
Nixon Peabody LLP437 Madison Avenue
New York, New York 10022Tel.: +1 (212) 940-3000
Direct Ext.: +1(212) 940-3103Mobile: +1 (917) 842-2036
e-mail: [email protected]
© 2013 Robert N. H. Christmas
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