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
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
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
*Cecily A. Dumas, Esq. is a partner in the firm Friedman Dumas &
*Ron Mark Oliner, Esq. is a partner in the firm Duane Morris LLP.