Summer 2008 • Issue 29, page 7

Bay Area Bankruptcy Forum & San Francisco Bar Assn. Review 2007's Key Business Bankruptcy Case Decisions

By Montali, Honorable Dennis, Dumas, Cecily & Oliner, Ron*

(This is the second of a two-part article – Ed.)

“Recent Developments in Business Bankruptcy” was the subject of panel presentations by the Bay Area Bankruptcy Forum and the San Francisco Bar Association Commercial Law and Business Section for attorneys from throughout the greater Bay Area and San Jose in November 2007.

The authors, panelists and presenters at the annual evening programs – The Honorable Dennis Montali, United States Bankruptcy Judge; Cecily A. Dumas, Esq., (a partner in the firm Friedman Dumas & Springwater LLP); and Ron Mark Oliner, Esq. (a partner in the firm Duane Morris LLP) – have excerpted the facts and law from some of the most important cases reported on for readers of the Receivership News.

Cap on Claim for Lost Rent is Based on Time, Not Money.
Under Bankruptcy Code § 502(b)(6)(A), a landlord’s claim for unpaid rent under a terminated lease is limited to “the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease” (emphasis added). Some courts have concluded that “15 percent” means 15 percent of the rent still due, rather than 15 percent of the time left on the lease—a significant difference, for example, in situations where the lease provides for periodic rent increases. Based on this conflict in interpretation, the bankruptcy court deemed the statutory language to be ambiguous. The court nevertheless found, based on legislative history, that Congress meant “15 percent” to refer to time rather than money. The court also concluded that any amount a landlord is able to recover on his own—in this case, by drawing on a security-deposit letter of credit—must be applied dollar-for-dollar against the capped claim, rather than (as the landlord wished) against the total rent that would be due before the cap is applied.
In re Connectix Corp., 372 B.R. 488 (Bankr. N.D. Cal. 2007).

Creditors Have No Direct Claim for Breach of Fiduciary Duty by Directors of an Insolvent or Near-Insolvent Corporation.
Corporate directors generally owe a fiduciary duty to the corporation and its shareholders. Courts have recognized that when a corporation is insolvent (or in the less clearly defined “zone of insolvency”), the corporation’s creditors also have standing to enforce the directors’ fiduciary duty by way of a derivative lawsuit. See Production Resources Group v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004). Observing that an individual shareholder may also bring a direct lawsuit for a breach of fiduciary duty that injures her specifically, the court in Production Resources suggested in dicta that such a remedy may also be available to an individually-harmed creditor of an insolvent or near-insolvent corporation. The Delaware Supreme Court has now repudiated that suggestion, holding that a creditor may enforce a corporate director’s fiduciary duty only derivatively and never directly, no matter how individualized the harm, whether the corporation is in the zone of insolvency or insolvent outright. (Such a creditor may, of course, bring a direct claim for any contractual or other nonfiduciary violation.) When a corporation is in bankruptcy, therefore, any claim for breach of fiduciary duty belongs to the estate, rather than to any individual creditor, even though the claim may be brought by the creditor derivatively.
North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).

Assignee for the Benefit of Creditors Not Liable for Attorneys Fees Under Prevailing Party Clause in Lease.
Plaintiff and Appellant, Sherwood Partners, Inc. is an assignee for the benefit of creditors of a tenant under a lease. In 2002 the assignee sued to recover a security deposit, contending that the landlord violated California law by drawing upon a security deposit. The trial court ruled in favor of the assignee; the court of appeal reversed in favor of the landlord. On remand the landlord recovered attorneys’ fees from the assignee and the tenant. On the second appeal the assignee contended that it was not liable for the fees.

In reversing the trial court and relieving the assignee of the requirement to pay the landlord’s attorneys’ fees under a “prevailing party” principle, the court relied on Credit Managers’ Assn. v. Brubaker, 285 Cal. Rptr. 417 (Cal. Ct. App. 1991). In that case the court refused to impose damages on an assignee for the benefit of creditors since the assignee did not assume the liabilities of the assignor. The court characterized the assignee for the benefit of creditors as a disinterested third party who liquidates and distributes assets. It concluded that the beneficial procedure of an assignment for the benefit of creditors would be impossible to use if the assignee had to assume the liabilities of the insolvent business.

Relying on Brubaker, the Sherwood court pointed out that the assignment did not include an assumption by Sherwood of the tenant’s underlying contractual liabilities, including the attorneys’ fees provision in a written lease.
Sherwood Partners, Inc. v. EOP-Marina Business Center, LLP, 62 Cal. Rptr. 3d 896 (Cal. Ct. App. 2007).

*The Hon. Dennis Montali is a United States Bankruptcy Judge sitting in the San Francisco Division of the Northern District of California.

*Cecily A. Dumas, Esq. is a partner in the firm Friedman Dumas & Springwater LLP.

*Ron Mark Oliner, Esq. is a partner in the firm Duane Morris LLP.