No IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM 2012 IN RE SINGSONG ELECTRONICS, INC., Debtor. PLUM, INC.

Transcription

1 No IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM 2012 IN RE SINGSONG ELECTRONICS, INC., Debtor. PLUM, INC., Petitioner, v. SINGSONG ELECTRONICS, INC., Respondent. On Writ of Certiorari to the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR RESPONDENT Team Number R 12 Counsel for the Respondent

2 QUESTIONS PRESENTED 1. Whether a creditor may enforce a corporate debtor s bylaws-restriction on that restricts that debtor s statutory right to voluntarily commence a bankruptcy case when that creditor lacks standing to enforce such a restriction under state law, such restrictions have the same effect as contractual ipso facto clauses, and when Congress has delineated a strong public policy against pre-petition waivers of bankruptcy rights? 2. Whether a creditor may evade the automatic stay under the narrowly crafted exception in Section 959(a) and enforce a judgment against a bankruptcy debtor for pre-petition activities without leave from the bankruptcy court when such a judgment will affect property of the estate, the exception is limited to instances where the suit has no effect on the property of the estate, and public policy favors empowering bankruptcy courts to make lift-stay determinations? i

3 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF CONTENTS... ii TABLE OF AUTHORITIES...v OPINIONS BELOW... xi STATEMENT OF JURISDICTION... xi STATUTORY PROVISIONS INVOLVED... xi STATEMENT OF THE CASE...1 SUMMARY OF THE ARGUMENTS...3 ARGUMENTS...5 I. Singsong s Waiver-of-Bankruptcy Provision in Its Bylaws Is Not Binding; Therefore, Singsong s Voluntary Commencement of a Bankruptcy Case Is Effective....5 A. Plum Lacks Standing to Challenge Singsong s Voluntary Commencement of a Bankruptcy Case The Board of Director s Voluntary Commencement of a Bankruptcy Case Is an Ultra Vires Action From Which a Creditor Cannot Seek Redress Plum May Not File a Derivative Suit Against the Board of Directors Characterizing An Unauthorized Voluntary Commencement of a Bankruptcy Case as Jurisdictional Does Not Grant a Creditor Additional Rights Under the Bankruptcy Code....9 B. Singsong s Bylaws are a Contract Between Singsong and Its Shareholders Contractual Provisions Conditioned on the Commencement of a Case Under Title 11 are Unenforceable C. Public Policy Disfavors Advanced Waivers of Bankruptcy Rights. 1. Allowing an Advanced Waiver of the Ability to File Bankruptcy Within a Corporation s Bylaws Runs Contrary to the Purposes of Bankruptcy Law Allowing an Advanced Waiver of the Ability to Voluntarily Commence a Bankruptcy Case Within a Corporation s Bylaws Elevates Form of Substance, Creating a Loophole For Oppressive Creditors Unilaterally Enacted Bylaws That Disadvantage Shareholders are Void D. This Court Must Find The Bankruptcy Waiver In Singsong s Bylaws to Be Unenforceable ii

4 II. Plum s Patent Infringement Action Violates the Automatic Stay Within Section 362 of the Bankruptcy Code A. Plum's Action is Stayed Under Section 362(a)(1) of the Bankruptcy Code Section 362(a)(1) Also Applies to Post-Petition Infringements Because Infringement Is a Continuous Wrong Plum's Action Is Also Stayed Under Section 362(a)(1) As a Suit To Enforce a Pre-Petition Judgment B. Plum's Action Is Stayed Under Section 362(a)(3) As An Act... To Exercise Control over Property of the Estate The Type of Injunction Plum Seeks Has Previously Been Classified As An Act To Exercise Control over Property of the Estate The Scope of the Injunction Sought is Determinative of Whether the Suit Falls Within Section 362(a)(3) C. United States Code Section 959(a) Does Not Act As An Exception To the Automatic Stay of Plum s Action Suits Stayed Under Section 362(a)(1) Are Mutually Exclusive From Suits That Can Be Brought Without Leave of the Court Under Section 959(a) Previous Claims For Infringement Have Been Stayed Under Section 362(a)(1) Without Section 959(a) Working As An Exception Unlike Plum's Suit, Only Actions Unrelated To Property of the Estate May Be Brought In a Non-Bankruptcy Forum Without Leave of the Bankruptcy Court The Bankruptcy Court May Also Stay Actions Using the "Ends of Justice" Standard From Section 959(a) For Cases Already Stayed Under Section 362, the Bankruptcy Court Should Apply the Cause Standard of Section 362 Rather Than the Ends of Justice Standard of Section 959(a) Public Policy Favors Empowering the Bankruptcy Court To Determine Whether the Automatic Stay Applies D. Plum's Suit Is Stayed and Plum Must Seek Leave of the Bankruptcy Court CONCLUSION...34 APPENDIX A... I APPENDIX B...III APPENDIX C... IV APPENDIX D... VI APPENDIX E... IX iii

5 APPENDIX F... X APPENDIX G... XI APPENDIX H... XVII APPENDIX I... XX iv

6 TABLE OF AUTHORITIES United States Supreme Court Cases Barton v. Barbour, 104 U.S. 126 (1881) Bd. of Trade of City of Chicago v. Johnson, 264 U.S. 1, 10 (1924)....6, 11, 14 C.I.R. v. Tower, 327 U.S. 280, 291 (1946) Frank Lyon Co. v. U. S., 435 U.S. 561, 573 (1978) Lewis v. Mfrs. Nat l Bank, 364 U.S. 603, 609 (1961)....10, 11, 15 Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992)....6 Ohio & M.R. Co. v. McCarthy, 96 U.S. 258, 267 (1877)....6 Price v. Gurney, 324 U.S. 100 (1945)....9, 10 Ross v. Bernhard, 396 U.S. 531, 534 (1970)....7 Salve Regina Coll. v. Russell, 499 U.S. 225, 231 (1991)....5 Williams v. U.S. Fid. & Guar. Co., 236 U.S. 549, (1915)....5, 14, 16 United States Court of Appeals Cases Chugach Forest Prods., Inc. v. Northern Stevedoring & Handling Corp., 23 F.3d 241, 246 (9th Cir. 1994) Dominic s Restaurant v. Manta, 683 F.3d 757, 761 (6th Cir. 2012) Hager v. Gibson, 108 F.3d 35, 40 (4th Cir. 1997)....10, 11, 18 In re Baldwin United Corp. Litigation, 765 F.2d 343, 349 (2d Cir. 1985) In re Investors Funding Corp., 547 F.2d 13, 15 (2d Cir. 1976)....30, 31 In re Roach, 660 F.2d 1316, (9th Cir. 1981) In re Russell, 927 F.2d 413, 417 (8th Cir. 1991)....7 In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992) v

7 Muratore v. Darr, 375 F.3d 140, 143 (1st Cir. 2004) Safety Kleen, Inc. v. Wyche, 274 F.3d 846, (4th Cir. 2001) Seiko Epson Corp. v. Nu-Kote Int'l, Inc., 190 F.3d 1360, 1362 (Fed. Cir. 1999)....27, 28, 30 Taylor v. Meirick, 712 F.2d 1112, 1119 (7th Cir. 1983)....22, 27 United States Bankruptcy Appellate Panel DB Capital Holdings, LLC v. Aspen HH Ventures, LLC, Nos. CO , , 2010 WL , at *3 (B.A.P. 10th Cir. 2010) United States District Court Cases In re Am. Associated Systems, Inc., 373 F.Supp. 977, 979 (E.D. Ky. 1974) Andrews Farms v. Calcot, Ltd., 258 F.R.D. 640, 648 (E.D. Cal. 2009) CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 239 (Del. 2008) Galaviz v. Berg, 763 F. Supp. 2d 1170, 1174 (N.D. Cal. 2011).... passim In re Gov't Sec. Corp., 111 B.R. 1007, 1011 (S.D. Fla. 1990) In re Robert L. Helms Constr. & Dev. Co., Inc., 139 F.3d 702, (9th Cir. 1998) In re Weitzen, 3 F. Supp. 698, 698 (S.D.N.Y. 1933)....13, 15, 17 Stolow v. Greg Manning Auctions Inc., 258 F.Supp. 2d 236, 249 (S.D.N.Y. 2003) United States Bankruptcy Court Cases Advanced Computer Services v. MAI Sys. Corp., 161 B.R. 771, (Bankr. E.D. Va. 1993)....23, 25, 27 Amplifier Research Corp. v. Hart, 144 B.R. 693, 694 (E.D. Pa. 1992) Farmers & Merchants Bank & Trust v. Trail West, Inc., 28 B.R. 389 (Bankr. D. S.D. 1983)....31, 32 In re Alberto, 119 B.R. 985, 994 (Bankr. N.D. Ill. 1990) vi

8 In re Cinematronics, 111 B.R. 892, 895 (Bankr. S.D. Cal.1990)....24, 29, 33 In re Clark, 49 B.R. 704, 707 (Bankr. D. Guam 1985) In re Club Tower L.P., 138 B.R. 307, 311 (Bankr. N.D. Ga. 1991) In re Cohoes Industrial Terminal, Inc, 62 B.R. 369, 378 (Bankr. S.D. N.Y. 1986) In re Continental Air Lines, 61 B.R. 758, 779 (Bankr. S.D. Tex. 1986) In re Forty-Five Fifty-Five, Inc., 111 B.R. 920, 922 (Bankr. D. Mont. 1990) In re Frye, 320 B.R. 786, 789 (Bankr. D. Vt. 2005) In re Jefferson County, 2012 WL (Bankr. N.D. Ala. 2012) In re Jester, 344 B.R. 331 (Bankr. E.D. Pa. 2006) In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig., 140 B.R. 969, 977 (N.D. Ill. 1992)....19, 22 In re Meinke, Peterson & Damer, P.C., 44 B.R. 105, 107 (Bankr. N.D. Tex. 1984) In re National Shoes, 18 B.R. 507, 509 (Bankr. D. Me. 1982) In re Revere Copper and Brass, Inc., 32 B.R. 725, 728 (Bankr. S.D. N.Y. 1983) In re Rook, 102 B.R. 490, 493 (Bankr. E.D. Va. 1989) In re Spansion, Inc., 418 B.R. 84, 91 (Bankr. D. Del. 2009)....21, 31, 33 In re Television Studio School of New York, 77 B.R. 411, 412 (Bankr. S.D. N.Y. 1987)....21, 30 In re Wallingford s Fruit House, 30 B.R. 654, 659 (Bankr. D. Me. 1983)....19, 20 Larami Ltd. v. Yes! Entm't Corp., 244 B.R. 56, 59 (Bankr. D. N.J. 2000)....24, 25, 29 State Courts Haberman v. Washington Pub. Power Supply Sys., 744 P.2d 1032, 1061 (Wash. 1987)....8 N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, (Del. 2007)....8 vii

9 Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 782 (Del. Ch. 2004)....9 State v. Johnson, 287 P.2d 425, 429 (Idaho 1955) United States Constitution U.S. Const. art. I, 8, cl Federal Statutes Fed. R. Civ. P 12(h)(3) U.S.C passim 11 U.S.C passim 11 U.S.C , U.S.C U.S.C U.S.C passim Restatements Restatement (Second) of Contracts 17(1) (1981)....12, 13 Encyclopedias 43 C.J.S., Injunctions, Secondary Authorities Harry Perrin & Justin Toth, Litigating the Motion for Relief from the Automatic Stay, 4 J. Bankr. L. & Prac. 459, 493 (1995) James W. Day & Marc E. Hirschfield, The Barton Doctrine: Still Kicking After 130 Years, 31- AUG Am. Bankr. Inst. J. 22, 23 (August, 2012) King & Spalding, Public Company Advisor: Practical Insights for Public Company Counsel 2 (May 10, 2012) viii

10 Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and Law, 82 Cornell L. Rev. 301, (1997)....15, 17 Richard M. Cieri, Neil P. Olack, Joseph M. Witalec, Protecting Technology and Intellectual Property Rights When a Debtor Infringes on Those Rights, 8 Am. Bankr. Inst. L. Rev. 349, 385 (2000) Robert C. Yan, The Sign Says "Help Wanted, Inquire Within" But It May Not Matter If You Have Ever Filed (or Plan to File) for Bankruptcy, 10 Am. Bankr. Inst. L. Rev. 429 (2002)....5 Uniform Codes and Model Acts U.C.C (12) (1977) Model. Bus. Corp. Act 2.06 (1979) Model Bus. Corp. Act 3.04 (1979).... passim Model Bus. Corp. Act 7.41 (1979)....8 Model Bus. Corp. Act 8.01(b) (1979)....11, 12 Model Bus. Corp. Act (1979) Model Bus. Corp. Act (1979) OPINIONS BELOW By order and decision, the United States District Court for the Western District of Washington granted summary judgment against Singsong on the issue of infringement and invited Plum to file a motion requesting an injunction. (R. 3-4). Singsong then filed Chapter 11 bankruptcy in the Eastern District of Moot. (R. 4). Thereafter, Plum filed a motion with the Washington District Court to enjoin Singsong. (R. 4). Singsong responded by filing an emergency motion of violation of the automatic stay and requested an order enjoining Plum from seeking injunctive relief. (R. 5). The bankruptcy court denied Singsong s motion and granted Plum s motion to dismiss the chapter 11 case. (R. 6). On appeal from the district ix

11 court s review of the bankruptcy court s decision, the United States Court of Appeals for the Thirteenth Circuit affirmed the decision of the district court that reversed the bankruptcy court orders below. (R. 7). STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTORY PROVISIONS INVOLVED The relevant statutory provisions in this case are: U.S. Const. art. I, 8, cl. 4; Fed. R. Civ. P. 12(h)(3); 11 U.S.C. 362a, 362d, 365(e)(1)(B), 507(a), 541, 727; 28 U.S.C. 959, which are reproduced in Appendices A through H. x

12 STATEMENT OF THE CASE The underlying facts present a complicated problem. A rival smartphone company is trying to interfere with a bankruptcy court s proceedings. This Court is presented with two issues: whether the bankruptcy court can hear a voluntary bankruptcy case filed in opposition the company s governing documents, and whether a party can circumvent the power of the bankruptcy court through a 28 U.S.C. 959(a) suit. Plum and Singsong, two frenemy electronic companies, share a common manufacturing past. (R. 2). After years of rivalry, the two companies joined together to manufacture the successful e-phone. (R. 3). Designed by Plum, but manufactured by Singsong, the e-phone was a worldwide hit. (R. 3). Looking to capitalize on the growing smartphone market, Singsong produced its own smartphone, the Galactica. (R. 3). After Plum noticed similarities between the Galactica and e-phone, Plum filed a patent infringement suit against Singsong, claiming the Galactica software infringes on Plum s patent. (R. 3). Singsong contests the validity of such a claim against that type of software. (R. 4). The district court entered a summary judgment against Singsong on the infringement claim. (R. 4). Before Plum could enforce the infringement judgment, Singsong filed Chapter 11 bankruptcy. (R. 4). Regardless, Plum filed a motion to enjoin Singsong from displaying, distributing, selling, or taking orders for the Galactica. (R. 4). Disputing Singsong s ability to file a voluntary bankruptcy, Plum filed a motion to dismiss the chapter 11 case. (R. 4). Previously, at Plum s insistence, Singsong amended its corporate by-laws to deny corporate authority to file bankruptcy. (R. 5). Therefore, Plum believes Singsong cannot filed bankruptcy for lack of corporate authority. (R. 6). In response, Singsong filed an emergency motion with the bankruptcy court, asserting a violation of the 1

13 automatic stay. (R. 5). Plum s response claimed independent authority to enforce the injunction under 28 U.S.C. 959(a). (R. 5). The bankruptcy court denied Singsong s emergency motion and granted Plum s motion to dismiss, but stayed that order so Singsong could seek review from the district court. (R. 6). The district court heard the appeal and reversed the bankruptcy court s orders. (R. 6). Plum appealed to the Thirteenth Court of Appeals, which affirmed the district court s overruling of the bankruptcy court. (R. 7). The appeal to the Supreme Court followed. 2

14 SUMMARY OF THE ARGUMENT This case presents the Court with two issues: (1) whether creditors can determine whether corporation s can file bankruptcy, and (2) whether creditors can violate the automatic stay through 28 U.S.C. 959(a). A corporation s creditor is not entitled to decide whether that corporation may voluntarily commence a bankruptcy case under Section 301. That decision is best left with the men and women the corporation has put onto its board of directors. Furthermore, as an individual may change course, a corporate debtor may choose to voluntarily commence a bankruptcy case when it had previously stated in its bylaws that it would not. This proposition is not a novel concept as it has roots in state law, federal law, and the public policy that Congress delineated when it enacted the Bankruptcy Code. Three alternative reasons support the Thirteenth Circuit s endorsement of debtor autonomy. First, a creditor does not have standing to invalidate an ultra vires action under state law. Second, even if this Court finds that creditor to have standing, a corporation s bylaws are a contract between that corporation and its shareholders; therefore, any limitation on the ability to file bankruptcy is void. Third, if this Court does not characterize the bylaws of a corporation as a contract, the bylaws provision is void because Congress has delineated public policy that disfavors prepetition bankruptcy waivers because of the economic harm that is associated with such waivers. Creditors cannot violate the automatic stay and circumvent bankruptcy law through a Section 959(a) filling. Plum violated the automatic stay when it attempted to enforce the injunction against Singsong. Under Section 362(a)(1), Plum s suit for injunctive relief qualifies as the continuation of a judicial proceeding against the debtor that could have been commenced before the commencement of the bankruptcy case. Plum s action against Singsong could have 3

15 occurred before Singsong filed bankruptcy, but because it occurred after the filing, Section 362(a)(1) clearly bars Plum s actions. According to Plum, Singsong infringed on its rights before petition. This infringement should be seen as a continuing wrong, one that continued past the voluntary filing. Distinguishing between pre-petition and post-petition infringement is arbitrary and is simply an attempt to circumvent the protection of the automatic stay. Section 959(a) is not an exemption designed to diminish the protection of the automatic stay. Section 959(a) only applies to completely post-petition activity. The section is inapplicable to pre-petition activity, such as the alleged infringement at issue. Section 959(a) should be construed so as to not interfere with the trustee s control and management of the estate. The injunction Plum seeks would establish control over property of the estate, the infringed Galactica phones. Suits for control over the property of the estate must receive leave of the bankruptcy. Furthermore, uniformity is key to the understanding and application of the automatic stay. The automatic stay is one of the most foundational elements that undergird the whole bankruptcy system. The bankruptcy courts must not remove such a structural element, but must retain the power to manage property of the estate. 4

16 ARGUMENTS I. Singsong s Waiver-of-Bankruptcy Provision in Its Bylaws Is Not Binding; Therefore, Singsong s Voluntary Commencement of a Bankruptcy Case Is Effective. The first issue before this Court is whether a corporation s board of directors may reverse course and voluntarily commence a bankruptcy case when it had previously chosen not to. Bankruptcy proceedings are an integral part of The United States economic environment. Robert C. Yan, The Sign Says "Help Wanted, Inquire Within" But It May Not Matter If You Have Ever Filed (or Plan to File) for Bankruptcy, 10 Am. Bankr. Inst. L. Rev. 429, 430 (2002) (stating bankruptcy proceedings are necessary during periods of economic depression and prosperity). Indeed, bankruptcy proceedings were so important to the founders of our country that they specifically granted Congress the power to pass uniform laws regarding bankruptcy. U.S. Const. art. I, 8, cl. 4. Throughout the five incarnations of bankruptcy law in our country, two overarching goals have persisted: (1) to provide the debtor with a fresh start; and (2) to provide her creditors with an equal footing to collect their claims. Williams v. U.S. Fid. & Guar. Co., 236 U.S. 549, (1915). Plum, through its motion to dismiss and subsequent appeals, asks this Court to deprive Singsong of its fresh start, 1 to disadvantage its brother and sister creditors, and to usurp the Singsong s decision-making power. Neither party challenges the lower court s factual determinations; the only questions that remain are questions of law. (R. 7). When considering questions of law, an appellate court must utilize de novo review. Salve Regina Coll. v. Russell, 499 U.S. 225, 231 (1991). Utilizing de novo review, this Court should affirm the Thirteenth Circuit s decision on three alternative points: (1) Plum lacks standing to challenge Singsong s voluntary commencement of a bankruptcy case; (2) Singsong s bylaws are a contract between Singsong and its shareholders 1 Singsong would not be eligible for a discharge because it is not an individual; however, Singson may craft a plan of reorganization under Chapter 11. See 11 U.S.C. 727(a)(1) (2006); 11 U.S.C

17 and contractual provisions limiting a debtor s ability to file bankruptcy are unenforceable; and (3) public policy disfavors advanced waivers of bankruptcy rights. A. Plum Lacks Standing to Challenge Singsong s Voluntary Commencement of a Bankruptcy Case. A plaintiff must have the requisite standing before she may file a lawsuit. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). In some cases, whether a plaintiff has standing is determined by a constitutionally-required three-part test. Id. at In others, standing is conferred by statute. See Model Bus. Corp. Act 3.04(b) (1979). Whether Plum has standing to challenge Singsong s voluntary commencement of a bankruptcy case is determined by statute. 1. The Board of Director s Voluntary Commencement of a Bankruptcy Case Is an Ultra Vires Action From Which a Creditor Cannot Seek Redress. Plum s main contention is that Singsong s board of directors did not have the authority to voluntarily commence a bankruptcy case. In doing so, Plum has invoked the doctrine of ultra vires. One of the earliest definitions of ultra vires in Supreme Court jurisprudence defined the term as an action beyond the scope of the power of the corporation. Ohio & M.R. Co. v. McCarthy, 96 U.S. 258, 267 (1877). Important to the application of the doctrine are two questions: (1) what is the effect of an ultra vires act; and (2) who may challenge an ultra vires act? See Model Bus. Corp. Act First, the proper law must be chosen. This Court will find the answers to these questions in state law. Bd. of Trade of City of Chicago v. Johnson, 264 U.S. 1, 10 (1924). Although found to exist by operation of federal law, property in a bankruptcy estate is given its characteristics by operation of state law. Johnson, 264 U.S. at 10. In this case, the property at issue is Singsong s 6

18 right to decide if bankruptcy is in the corporation s best interests. 2 The property is given its characteristics by the laws of its state of incorporation, Moot. See Id. In this case, Singsong has incorporated within Moot and Moot has adopted the Model Business Corporation Act (MBCA). (R. 5). After the proper source of law is determined, the Court may answer the two questions. In answering the first question, the Court will find that the validity of corporate action cannot be challenged on the grounds that the corporation lacks... power to act. Model Bus. Corp. Act 3.04(a). The basic purpose of section is to eliminate all vestiges of the doctrine of inherent incapacity of corporations. Id cmt. 1. The MBCA makes it clear that the general rule favors the validity of a corporate act regardless of corporate authority. See Id. 3.04(a). Unless Plum qualifies for an exception to this rule, Singsong s voluntary commencement of a bankruptcy case cannot be challenged. This Court will find the answer to the second question within the limited exception the MBCA has to its general rule against invalidating unauthorized corporate action. The MBCA allows for shareholders, the corporation itself, or the state attorney general to challenge the validity of an unauthorized corporation act. Id 3.04(b). Plum is not a shareholder, the corporation, or the state attorney general; therefore, Plum cannot challenge Singsong s corporate action regardless of any limitation on Singsong s corporate powers within its bylaws. Id. 2. Plum May Not File a Derivative Suit Against the Board of Directors. Plum might insist that it is authorized to file a derivative action on behalf of Singsong to enforce Singsong s rights under Section Plum is mistaken. Derivative suits have a basis in both common law and statute. See Id ; Ross v. Bernhard, 396 U.S. 531, 534 (1970) 2 The Bankruptcy Code defines property broadly and includes decision making power. See 11 U.S.C. 541(a)(1); In re Russell, 927 F.2d 413, 417 (8th Cir. 1991) (characterizing a corporation s right to elect different types of tax treatment as property in an avoidance action). 7

19 (finding 19th Century courts sitting in equity first recognized shareholder derivative suits). Like in the ultra vires context, only a small class of plaintiffs may bring a derivative suit on behalf of a corporation. The MBCA specifies that only shareholders may bring derivative lawsuits on behalf of a corporation. Model Bus. Corp. Act Section 7.41 goes on to limit that class of plaintiffs by requiring the shareholder: (1) to have been a shareholder at the time of the act; and (2) to be acting in the best interests of the corporation. Id. In this case, Plum is a not a shareholder and will not be able to maintain a derivative suit. Because Plum is not a shareholder, this Court need not wrestle with what might or might not be in the best interests of the corporation. 3 Plum might argue that it may maintain a derivative suit under Moot s common law. Although Moot s common law is unavailable, a look at two other jurisdiction s laws show that Plum is unable to bring a derivative suit under common law. Washington law is clear and to the point on whether a creditor may sue derivatively. A creditor has no equitable standing to sue derivatively. Haberman v. Washington Pub. Power Supply Sys., 744 P.2d 1032, 1061 (Wash. 1987) amended on other grounds by, 750 P.2d 254 (1988). If Moot follows Washington s lead, Plum will have no standing to challenge Singsong s decision to voluntarily commence a case in bankruptcy. Delaware, on the other hand, has allowed a narrow avenue for creditors of insolvent corporations to bring derivative actions against that corporation s decision makers for breach of fiduciary duty. N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, (Del. 2007). Delaware corporations are insolvent when there is: (1) a deficiency of assets below liabilities with no reasonable prospect that the business can be successfully 3 It can be inferred that Singsong s best interests are to voluntarily commence a bankruptcy case and enjoy the benefits that the Bankruptcy Code offers to debtors. The Board of Directors unanimously voted to voluntarily commence a bankruptcy case. R. 5. 8

20 continued in the face thereof; or (2) an inability to meet maturing obligations as they fall due in the ordinary course of business. Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 782 (Del. Ch. 2004) (citations omitted). Moot imposes a duty of care and a duty of loyalty on corporate directors. Model Bus. Corp. Act 8.31 cmt. Note on Directors Liability. It is true that Singsong s business could not survive such a lengthy interruption in its delivery of multifunction smart phones if Plum enjoins Singsong from selling the Galactica phone. (R. 4). However, a creditor must also prove the directors breached a fiduciary duty. Gheewalla, 930 A.2d at Delaware has found that a corporation s directors have discharged their duties if they, in good faith, pursued a less risky business strategy precisely because they feared that a more risky strategy might render the firm unable to meet its legal obligations to creditors and other constituencies. Prod. Res. Group, L.L.C., 863 A.2d at 788. When Singsong s directors chose to voluntarily commence a bankruptcy case, they exercised that good faith judgment because, in the absence of a bankruptcy case, Singsong could not survive. (R. 4). Additionally, Singsong s directors have been loyal, neither usurping corporate opportunity nor engaging in self-dealing. See Generally R. (not mentioning any such conduct). Therefore, Plum does not have standing to bring a derivative suit because of its status as a creditor and this Court should uphold Singsong s petition. 3. Characterizing An Unauthorized Voluntary Commencement of a Bankruptcy Case as Jurisdictional Does Not Grant a Creditor Additional Rights Under the Bankruptcy Code. Plum may also urge this Court to adopt a view that lack of corporate authority to voluntarily commence a bankruptcy case is an issue of subject-matter jurisdiction that this Court may tackle sua sponte. Fed. R. Civ. P 12(h)(3). This view has its basis in one this Court s decisions. Price v. Gurney, 324 U.S. 100 (1945). In Price, this Court noted that in the absence of 9

21 authority to voluntarily commence a bankruptcy case under state law, a court must dismiss a corporate debtor s petition. Id. at 106. Singsong has no quarrel with this Court s holding or reasoning in Price. However, a blind reliance on Price s language will yield an irreconcilable result in this case. It is universally recognized that property in bankruptcy is given its characteristics by operation of state law. Johnson, 264 U.S. at 10. It is also universally recognized that a party may not experience a windfall merely by reason of the happenstance of bankruptcy. Lewis v. Mfrs. Nat l Bank, 364 U.S. 603, 609 (1961). Such a windfall would occur if this Court were to dismiss Singsong s petition for lack of subject-matter jurisdiction given Plum s inability to challenge Singsong s decision in state court. See Model Bus. Corp. Act 3.04; Gheewalla, 930 A.2d at Even if this Court were of the opinion that subject-matter jurisdiction were lacking, Singsong s out-of-court activities have ratified the act and provided the bankruptcy court with jurisdiction. This line of authority is best represented by the Fourth Circuit s decision in Hager v. Gibson. Hager v. Gibson, 108 F.3d 35, 40 (4th Cir. 1997). In Hager, Roop, a fifty-percent owner of corporation sent notice of a shareholder s meeting to the other fifty-percent owner, Hager. Id at 37. That meeting was specifically called in order to vote on whether to voluntarily commence a case in bankruptcy. Id. At the shareholder s meeting, Roop resolved that the absent Hager was precluded to vote because of his status as a secured creditor of the corporation. Id. Hager opposed the bankruptcy petition, citing Roop s lack of authority to voluntarily commence a bankruptcy case. Id. at 38. The Fourth Circuit held that ratification by the persons who could have initially authorized the corporate action was sufficient to provide the bankruptcy court with subject-matter jurisdiction. Id. at 41. The court explained that ratification does not violate the 10

22 rules against jurisdiction-by-consent or that jurisdiction is determined at the time a law suit is filed. Id. As to the first hurdle, the court explained that ratification occurs through objective, outof-court actions by one party, whereas consent is litigation-specific conduct. Id. As for the second hurdle, the court explained that, as a judicially created rule, exceptions based on efficiency, finality, and fairness are warranted. Id. In applying the law to the facts of the case, the court determined that Hager ratified Roop s commencement of a bankruptcy case by his abstention from attending the called shareholder s meeting. Id. In the present case, the group of persons authorized to act on behalf of Singsong are its Board of Directors. Model Bus. Corp. Act 8.01(b). Notwithstanding a clause in Singsong s bylaws prohibiting a voluntary commencement of a case in bankruptcy, the Board of Directors unanimously approved a resolution authorizing such a commencement. (R. 5). This unanimous resolution is analogous to Hager s purposeful absence from the shareholder s meeting. See Hager, 108 F.3d at 37. The Board s unanimous approval is exactly the sort of out-of-court conduct that the court in Hagar found to be sufficient to confer subject-matter jurisdiction on the bankruptcy court. Id. at 41. Therefore, the bankruptcy court has subject-matter jurisdiction over Singsong s bankruptcy case and this Court should not dismiss its petition. B. Singsong s Bylaws are a Contract Between Singsong and Its Shareholders. This Court may also look at a second, alternative reason to allow Singsong s voluntary commencement of a bankruptcy case. This line of reasoning turns on this Court s characterization of a corporation s bylaws. To reiterate, property is given its characteristics by operation of state law so that parties may not experience a windfall by the mere happenstance of bankruptcy. Lewis, 364 U.S. at 609; Johnson, 264 U.S. at

23 In this case, Moot s substantive corporate law is derived from the MBCA. (R. 5). The MBCA does not, in itself, characterize a corporation s bylaws as a contract or otherwise. See Model. Bus. Corp. Act In the absence of statutory guidance, several courts have characterized a corporation s bylaws as a contract between that corporation and its shareholders. Galaviz v. Berg, 763 F. Supp. 2d 1170, 1174 (N.D. Cal. 2011); Stolow v. Greg Manning Auctions Inc., 258 F.Supp. 2d 236, 249 (S.D.N.Y. 2003); CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 239 (Del. 2008). These cases alone are persuasive enough for this Court to characterize a corporation s bylaws as a contract between it and its shareholders. This Court may base its decision on more than precedent. The Uniform Commercial Code defines a contract as the total legal obligation that results from the parties' agreement as determined by [the Uniform Commercial Code] as supplemented by any other applicable laws. U.C.C (12) (1977). A contract is formed when there is a manifestation of mutual assent to the exchange and a consideration. Restatement (Second) of Contracts 17(1) (1981). In the corporate context, the corporation and its shareholders are the parties to the contract. The exchange is the shareholder s grant of decision-making power to the corporation (through its board of directions) in exchange for that decision-making power to be exercised in a fiduciary capacity. Model Bus. Corp. Act 8.01(b) (granting the corporation s decision-making power to corporate directors as opposed to its shareholders); Id (imposing certain duties upon a director); Id. 8.30(a) cmt. 1 (describing those duties as fiduciary duties). The manifestation of assent could be one of three things. It could be found when the owners of an existing or proposed business elect to incorporate. Id It could be when the corporation s board of director s is named. Id Finally, it could be when a shareholder first takes ownership of her shares. Id. 6.21, 6.27 (the latter provision providing for the transferability of shares). 12

24 Whether this Court opts to adhere to precedent or formulate its own line of reasoning, the decision will be the same. Singsong s bylaws are a contract between it and its shareholders. 1. Contractual Provisions Conditioned on the Commencement of a Case Under Title 11 are Unenforceable. The relief that bankruptcy provides debtors is universal and unqualified in terms. In re Weitzen, 3 F. Supp. 698, 698 (S.D.N.Y. 1933) (quotations omitted). This unqualified access to relief is grounded in statutory language. When determining what constitutes property of the bankruptcy estate, Congress expressly excluded any provision in an agreement... that is conditioned on the... commencement of a case under [Title 11 U.S.C.] 11 U.S.C. 541(c)(1)(B). Additionally, Congress expressly excluded any clause from an executory contract or unexpired lease that is conditioned on... the commencement of a case under [Title 11 U.S.C.] 11 U.S.C. 365(e)(1)(B). These provisions have served as mechanisms for bankruptcy trustees to invalidate myriad contractual provisions. E.g., In re Gov't Sec. Corp., 111 B.R. 1007, 1011 (S.D. Fla. 1990) aff'd, 972 F.2d 328 (11th Cir. 1992) (automatic termination provision within a bond); In re Robert L. Helms Constr. & Dev. Co., Inc., 139 F.3d 702, (9th Cir. 1998) (re-purchase option in a real estate transaction that is terminable upon commencement of a bankruptcy case). In the present case, Singsong s bylaws are a contract between itself and its shareholders. See Galaviz, 763 F. Supp. 2d at 1174; Restatement (Second) of Contracts 17(1). The clause in the bylaws that states [Singsong] is not authorized to file a petition in bankruptcy under section 301 is interpreted as a contractual provision. Andrews Farms v. Calcot, Ltd., 258 F.R.D. 640, 648 (E.D. Cal. 2009). This clause is undisputedly one conditioned on... the commencement of a case under [Title 11 U.S.C.] 11. U.S.C. 365(e)(1)(B), 541(c)(1)(B). Therefore, the clause in Singsong s bylaws is unenforceable in a bankruptcy proceeding. 13

25 C. Public Policy Disfavors Advanced Waivers of Bankruptcy Rights. This Court may also look at a third, alternative reason to allow Singsong s voluntary commencement of a bankruptcy case. This line of reasoning turns on this Court s determination of the public policy surrounding bankruptcy waivers. Plum will argue that a burgeoning trend toward recognizing contractual waivers of bankruptcy rights should be expanded to include a general waiver of all of the protections the Bankruptcy Code gives to debtors. In re Club Tower L.P., 138 B.R. 307, 311 (Bankr. N.D. Ga. 1991) (enforcing a pre-petition waiver of the automatic stay in regards to one creditor); In re Frye, 320 B.R. 786, 789 (Bankr. D. Vt. 2005) (listing other courts that have enforced the same). However, Plum s argument will fail because: (1) Congress has already delineated public policy that disfavors pre-petition waivers; (2) finding a distinction between contractual waivers and waivers found in a corporation s bylaws elevates form over substance; and (3) bylaws that a corporation s board of directors unilaterally enact are void. 1. Allowing an Advanced Waiver of the Ability to File Bankruptcy Within a Corporation s Bylaws Runs Contrary to the Purposes of Bankruptcy Law. Throughout the five incarnations of bankruptcy law in our country, Congress has sought to achieve two main purposes: (1) to provide the debtor a fresh start; and (2) to provide the debtor s creditors with an equal footing to realize their claims. Williams, 236 U.S. at ; See 11 U.S.C (creating many bankruptcy-specific provisions such as the automatic stay, avoidance powers, ability to assume, assign, or reject executory contracts, reorganization plans, distribution to creditors, and discharge). These policies have guided this Court when it has broadly construed the Bankruptcy Code and its predecessor s protections. Johnson, 264 U.S. at 10 (broadly construing the definition of property ). These policies have also guided lower courts in their findings that contractual waivers of bankruptcy are against public policy. E.g., In 14

26 re Weitzen, 3 F. Supp. at These same policies must also guide this Court in its decision that the bankruptcy waiver within Singsong s bylaws is ineffective. One of the most advantageous benefits of the Bankruptcy Code is the automatic stay. 11 U.S.C. 362; Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and Law, 82 Cornell L. Rev. 301, (1997) (lamenting a commercial world governed by grab law in the absence of the automatic stay). The automatic stay and the availability of reorganization are the corporate debtor s fresh start. See 11 U.S.C. 362, ; 11 U.S.C. 727 (limiting the availability of discharge to individuals). Additionally, the automatic stay, availability or reorganization, and priority system equalize and unify creditors within a bankruptcy proceeding. See 11 U.S.C. 362, 507, These protections serve the debtor as well as the debtor s creditors. Tracht, supra, at (recognizing that all of the debtor s stakeholders, creditors included, are benefited by maintaining the debtor as a going concern). Without this protection, the only definite outcome is that many stakeholders will sacrifice value outside of bankruptcy. Id. Additionally, disregarding a waiver provision within a corporation s bylaws will serve as a bright-line rule so that neither debtors nor creditors are surprised at the outcome of a dispute. This bright-line rule dovetails with the logic behind the MBCA s ultra vires section. The official comment to Section 3.04 states that the corporation or a third party may not use corporate limitations on power as a sword or a shield. Model Bus. Corp. Act 3.04 cmt. 1. This reasoning creates both predictability and the required similarity of result in both state and bankruptcy courts. Lewis, 364 U.S. at 609 (prohibiting windfalls in bankruptcy court). 2. Allowing an Advanced Waiver of the Ability to Voluntarily Commence a Bankruptcy Case Within a Corporation s Bylaws Elevates Form of Substance, Creating a Loophole For Oppressive Creditors. 15

27 Several courts have taken the position that bankruptcy waivers within a corporation s bylaws should be respected unless they were influenced by a third party 4. DB Capital Holdings, LLC v. Aspen HH Ventures, LLC, Nos. CO , , 2010 WL , at *3 (B.A.P. 10th Cir. 2010). As the Thirteenth Circuit pointed out, this approach is untenable. (R. 8). Whether a bylaws waiver was insisted upon by a third-party will, in all likelihood, be a fact intensive determination. See State v. Johnson, 287 P.2d 425, 429 (Idaho 1955) (stating testimonial evidence, circumstantial evidence, and the objective actions of the parties is admissible to prove intent). Defending a motion that requires a fact-intensive inquiry will invariably diminish the bankruptcy estate. See 11 U.S.C. 507(a) (payment of administrative expenses is given ultimate priority when the debtor is an entity). This unwarranted depletion of the bankruptcy estate does not serve the purposes of bankruptcy or assist the debtor s creditors in their attempt to obtain payment of their debt. See Williams, 236 U.S. at If this Court were to enforce a bankruptcy waiver within a corporation s bylaws but not enforce contractual bankruptcy waivers, it would elevate form over substance. This Court has repeatedly looked to the economic realities of a transaction when determining that transaction s legal effect. Frank Lyon Co. v. U. S., 435 U.S. 561, 573 (1978) (citing cases). Furthermore, this Court has never looked to the simple expedient of drawing up papers to determine those legal effects. C.I.R. v. Tower, 327 U.S. 280, 291 (1946). Regardless of whether a bankruptcy waiver in a corporation s bylaws was inserted at the insistence of a creditor, whether that waiver was found in a contract, or whether that waiver was independently placed within the corporate bylaws by the board of directors, the economic realities are the same. The debtor s shareholders, employees, customers, and even its creditors may be disadvantaged because the procedural 4 Even if this Court were to adopt the Bankruptcy Appellate Panel of the Tenth Circuit s reasoning, the outcome would still be the same. Both parties agree that Singsong adopted the bylaws provision at Plum s insistence. R

28 protections of the automatic stay, avoidance powers, ability to assume, assign, or reject executory contracts, and reorganization plans will be unavailable. See 11 U.S.C Plum may argue that those stakeholders will be able to resort to state law receiverships, out-ofcourt workouts, or other protections. However, this would render an entire federal statutory scheme ineffective. In re Weitzen, 3 F. Supp. at Rendering that scheme ineffective will result in financial waste and deplete the bankruptcy estate. Tracht, supra, at (discussing the financial waste that accompanies grab law associated with business failure if bankruptcy were unavailable). When looking to the substance of this economic transaction, this Court must find that bankruptcy waivers within a corporation s bylaws, no matter how they were included, run contrary to the public policy surrounding bankruptcy. 3. Unilaterally Enacted Bylaws That Disadvantage Shareholders are Void. Outside of the bankruptcy context, courts have begun to recognize that corporate shareholders interests are best served by invalidating bylaws that have been unilaterally amended by the corporation s board of directors. Galaviz, 763 F. Supp. 2d at This contention is based upon the principal that unilateral amendments to an agreement already in force are invalid. Id. at In Galaviz, a corporation s board of directors unilaterally amended the corporation s bylaws to include a forum selection clause for derivative suits. Id. at When shareholders attempted to file a derivative suit in a different jurisdiction, the board moved to dismiss the suit for improper venue. Id. at The district court did not grant the board s motion to dismiss for improper venue because it found the forum selection clause to be invalid based upon contractual principles. Id. at In light of the unilateral nature of the amendment, the district court found it immaterial that the board had the authority to unilaterally amend the bylaws under corporate law. Id. Within the same vein, pending cases in Delaware have attacked unilaterally 17

29 enacted forum selection clauses as impermissibly impinging upon federal court s jurisdiction. King & Spalding, Public Company Advisor: Practical Insights for Public Company Counsel 2 (May 10, 2012). In this case, Singsong s Board of Directors unilaterally amended its bylaws to limit the Board of Director s ability to voluntarily commence a bankruptcy case. (R. 5). Just as in Galaviz, this unilaterally enacted amendment to an agreement already in force will not be enforceable, regardless of whether Singsong had the ability to amend the bylaws. See Model Bus. Corp. Act 10.20; Galaviz, 763 F. Supp. at The Delaware shareholder s argument is also persuasive. A bankruptcy waiver will, by implication, require the debtor corporation or its creditor s to seek redress in state courts or out-of-court workouts. (R. 17, Kherzri, J, dissenting). This is the converse to the rule against jurisdiction-by-consent outlined in Hager. Hager, 108 F.3d at 41. Even though slightly different, this limitation on jurisdiction it will have a more injurious effect upon the business community and justice system because it eviscerates the bankruptcy-created protections that debtors rely upon. 5 D. This Court Must Find The Bankruptcy Waiver In Singsong s Bylaws to Be Unenforceable. This issue has come down to one of choice: whether a corporation may reverse course and voluntarily commence a bankruptcy case when it had previously indicated that it would not. First, Singsong has shown that Plum lacked standing under the laws of Moot to challenge Singsong s corporate decision. Second, Singsong has shown that the bylaws of a corporation are a contract between that corporation and its shareholders causing any limitation on its power to voluntarily commence a bankruptcy case unenforceable. Finally, Singsong has shown that public 5 These protections include the automatic stay, avoidance powers, ability to assume, assign, or reject executory contracts, reorganization plans, and discharge. See 11 U.S.C

30 policy disfavors a provision in a corporation s bylaws that limits that corporation s ability to voluntarily commence a bankruptcy case. These alternative reasons provide ample support for this Court to affirm the Thirteenth Circuit and hold that a corporation s board of directors do have that choice. II. Plum s Patent Infringement Action Violates the Automatic Stay of Section 362 of The Bankruptcy Code. Section 362 stays certain actions by creditors and other entities, which would affect the debtor, debtor s property or property of the estate. Chugach Forest Prods., Inc. v. Northern Stevedoring & Handling Corp., 23 F.3d 241, 246 (9th Cir. 1994). The purpose of the stay is to preserve the status quo of the bankruptcy estate. Id. at 243. The stay takes effect as soon as voluntary or involuntary bankruptcy is filed. See In re Meinke, Peterson & Damer, P.C., 44 B.R. 105, 107 (Bankr. N.D. Tex. 1984). The stay took effect for Singsong s estate on June 13, (R. 4). The stay does not grant Singsong the right to infringe on Plum s patents but only requires that Plum seek the stay be lifted by the bankruptcy court before pursuing its action in another forum. See 11 U.S.C. 362(d)(1) (2012); see also, In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig., 140 B.R. 969, 977 (N.D. Ill. 1992) ( None of this implies that debtors in bankruptcy may violate federal law with impunity, selling patented products ). This ensures the bankruptcy court s continued control over the debtor s estate. The Section 362 automatic stay is applicable to Plum s infringement action filed on June 14, Section 959(a) of the United State Code does not work as an exception to the stay in this case. A. Plum's Action Is Stayed Under Section 362(a)(1) of the Bankruptcy Code. The automatic stay of Section 362 is applicable to Plum s action through two separate provisions. The court in Wallingford s Fruit House stated that the automatic stay of Section 19

31 362(a) is extremely broad in scope. In re Wallingford s Fruit House, 30 B.R. 654, 659 (Bankr. D. Me. 1983). Aside from limited exceptions, the stay should apply to almost any type of formal or informal action against the debtor or property of the estate. Id. Plum s action is stayed under Section 362(a)(1) as a suit that could have been commenced pre-petition, as a suit filed after the plaintiff had notice of the bankruptcy filing, as a suit to enjoin a continuous wrong, and as a suit to enforce a pre-petition judgment. Plum s suit is also stayed under Section 362(a)(3) as a broad injunctive action to exercise control over the property of the estate. First, under Section 362(a)(1), Plum s suit for injunctive relief is the commencement or continuation of a judicial proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case within the plain language of the statute. 11 U.S.C. 362(d)(1). Section 362(a)(1) clearly applies because Plum sought injunctive relief in the April 16th suit before Singsong filed for bankruptcy. (R. 4) Thus, a judicial proceeding for the same relief was commenced before the commencement of the case. When the court issued summary judgment against Singsong for patent infringement on June 11th, the court did not grant injunctive relief. (R. 4) The court invited Plum to file a new motion for injunctive relief. (R. 4) Plum had several days between the summary judgment order and commencement of Singsong s bankruptcy filing to commence another suit seeking injunctive relief. Thus, Plum s suit could have been commenced before Singsong filed for bankruptcy. Plum s suit for an injunction was or could have been commenced before the commencement of the [bankruptcy] case and as such is stayed under Section 362(a)(1). Also, when a creditor knows that a debtor has filed for bankruptcy but continues a suit for injunctive relief, then Section 362(a)(1) applies to the suit and the debtor may be entitled to damages. See generally, In re Jester, 344 B.R. 331 (Bankr. E.D. Pa. 2006), aff'd, 2007 WL 20