IN THE Supreme Court of the United States. IN RE SINGSONG ELECTRONICS, INC., Debtor, PLUM, INC. Petitioner, SINGSONG ELECTRONICS, INC. Respondent.

Transcription

1 No IN THE Supreme Court of the United States 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 PETITIONER TEAM NUMBER P 11 COUNSEL FOR PETITIONER

2 QUESTIONS PRESENTED I. Whether a corporation s Chapter 11 petition is valid where the corporation s by-laws deny it the authority to voluntarily file for bankruptcy. II. Whether the automatic stay bars a patent holder s motion for injunctive relief filed pursuant to 28 U.S.C. 959(a) where the debtor-in-possession is committing postpetition acts of infringement. i

3 TABLE OF CONTENTS QUESTIONS PRESENTED i TABLE OF CONTENTS ii TABLE OF AUTHORITIES...v OPINION BELOW..x STATEMENT OF JURISDICTION...x STATUTORY PROVISIONS.x STATEMENT OF THE CASE 1 SUMMARY OF THE ARGUMENTS 4 ARGUMENTS.6 I. BANKRUPTCY PETITIONS ARE INVALID WHEN FILED BY CORPORATIONS THAT LACK AUTHORITY TO FILE FOR BANKRUPTCY UNDER THEIR CORPORATE DOCUMENTS 6 A. By-law Provisions Waiving Authority to File for Bankruptcy Do Not Conflict With Applicable Corporate and Bankruptcy Law 6 1. By-law provisions waiving authority to file for bankruptcy are not prohibited by the Bankruptcy Code By-law provisions waiving authority to file for bankruptcy are consistent with the Model Business Corporation Act By-law provisions waiving authority to file for bankruptcy are like the court-enforced operating agreement in In re DB Capital...9 B. Corporations Business Decisions to Preclude the Ability to File for Bankruptcy Reflect a Trend of Court-Approved Bankruptcy Limitations The justifications for refusing to enforce individual debtors pre-petition waivers do not apply to sophisticated corporations By-law provisions waiving authority to file for bankruptcy are similar to other enforceable pre-petition restrictions on corporate access to the Bankruptcy Code s protections 11 a. By-law provisions waiving authority to file for bankruptcy are like the bankruptcy-remote provisions in special purpose entities.11 b. Courts have enforced pre-petition stipulations of bad faith filing.13 ii

4 c. Courts have approved bad boy loan agreements that disincentivize bankruptcy filings.14 d. Courts have enforced pre-petition waivers of the automatic stay..14 C. Enforcing By-law Provisions That Waive Corporate Authority to File for Bankruptcy Will Not Contradict Public Policy Enforcement of by-law provisions waiving the authority to file for bankruptcy encourages out-of-court workouts and ensures debtor access to an efficient bankruptcy regime Involuntary proceedings, director and officer liability, and corporations ability to amend by-law provisions all serve as checks against the potentially widespread use of filing waivers The market and the ability to bring derivative lawsuits will protect creditors from any potential harm that may result from filing waivers..19 II. MOTIONS TO ENJOIN DEBTORS POST-PETITION INFRINGEMENT ARE NOT STAYED BY 11 U.S.C. 362 AND ARE PERMITTED BY 28 U.S.C. 959(a). 19 A. Post-Petition Infringement Gives Rise to New Causes of Action Not Stayed by Section 362(a)(1) Motions for injunctive relief should not be treated as a continuation of pre-petition litigation Motions to enjoin post-petition infringement could not have been commenced prepetition 22 B. Section 362(a)(3) Does Not Stay Injunction Motions That, If Granted, Would Not Result in Possession nor Control Over Property of the Estate Section 362(a)(3) prevents creditors from obtaining physical possession of or control over debtors property Injunctions against infringement, if granted, are a form of prospective relief that does not prevent debtors from using property of the estate for lawful purposes...24 C. Section 959(a) Permits Motions to Enjoin Debtors Post-Petition Patent Infringement to Be Filed Without Leave of the Bankruptcy Court.25 iii

5 1. Section 959(a) is a companion statute to Section 362 and should be read harmoniously to preserve the integrity of a bankruptcy filing Permitting the filing of motions to enjoin debtors post-petition infringement is consistent with Section 959(a) s language and purpose.27 a. The first sentence of Section 959(a) subjects debtors to suit for violations of nonbankruptcy law...27 b. Pursuant to the second sentence of Section 959(a), injunction motions are necessary to the ends of justice to stop debtors post-petition infringement..29 CONCLUSION..31 APPENDIX A..I APPENDIX B.II APPENDIX C III APPENDIX D.XVI APPENDIX E XXV APPENDIX F XXVIII APPENDIX G..XXIX APPENDIX H...XXXII APPENDIX I.XXXIV APPENDIX J..XXXV APPENDIX K...XL iv

6 United States Supreme Court Cases TABLE OF AUTHORITIES Barnhart v. Sigmon Coal Co., 534 U.S. 438 (2002)...8 Barton v. Barbour, 104 U.S. 126 (1881)...27 Butner v. United States, 440 U.S. 48 (1979)...6, 22, 28 Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995).24 Foust v. Munson S.S. Lines, 299 U.S. 77 (1936).30 Gillis v. California, 293 U.S. 62 (1934).28 Pierce v. Underwood, 487 U.S. 552 (1988).6 Price v. Gurney, 324 U.S. 100 (1945).6, 9 Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528 (1995)...26 Williams v. Fid. & Guar. Co, 236 U.S. 549 (1915)...11 Wolf v. Weinstein, 372 U.S. 633 (1963)...28 United States Court of Appeals Cases In re Cole, 226 B.R. 647 (B.A.P. 9th Cir. 1998).10 DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC), Nos. CO , , 2010 WL (B.A.P. 10th Cir. Dec. 6, 2010)..9 v

7 Diners Club, Inc. v. Bumb, 421 F.2d 396 (9th Cir. 1970).30 Dominic's Rest. of Dayton, Inc. v. Mantia, 683 F.3d 757 (6th Cir. 2012).21 F.D.I.C. v. Prince George Corp., 58 F.3d 1041 (4th Cir. 1995).14 Fid. Mort. Investors v. Camelia Builders, Inc. (In re Fid. Mortg. Investors), 550 F.2d 47 (2d Cir. 1976). 26 E.I. du Pont de Nemours & Co. v. MacDermid Printing Solutions, L.L.C., 525 F.3d 1353 (Fed. Cir. 2008)..20 Jaytee-Penndel Co. v. Bloor (In re Investors Funding Corp. of N.Y.), 547 F.2d 13 (2d Cir. 1976).25, 29, 30 LTV Corp. v. Valley Fid. Bank & Trust Co. (In re Chateaugay), 961 F.2d 378 (2d Cir. 1992)...17 Paloian v. LaSalle Bank, N.A., 619 F.3d 688 (7th Cir. 2010).12 Seiko Epson Corp. v. Nu-Kote Intern., Inc., 190 F.3d 1360 (Fed. Cir. 1999).21 Texas Commerce Bank v. Licht (In re Pengo Indus., Inc.), 962 F.2d 543 (5th Cir. 1992)...16, 17 Trans-World Mfg. Corp. v. Al Nyman & Sons, 750 F.2d 1552 (Fed. Cir. 1984).28 United States v. Inslaw, Inc., 932 F.2d 1467 (D.C. Cir. 1991).23 United States District Court Cases Amplifier Research Corp. v. Hart, 144 B.R. 693 (E.D. Pa. 1992) 24 Cont l Air Lines, Inc. v. Hillblom (In re Cont l Air Lines, Inc.), 61 B.R. 758 (S.D. Tex. 1986)..23, 28 Larami Ltd. v. Yes! Entm't Corp., 244 B.R. 56 (D.N.J. 2000).24 vi

8 Voice Sys. & Servs., Inc. v. VMX, Inc., No. 91 C 88 B, 1992 WL (N.D. Okla. Nov. 5, 1992) 22 In re Weitzen, 3 F. Supp. 698 (S.D.N.Y. 1933) 10 United States Bankruptcy Court Cases Albion Disposal, Inc. v. Slater (In re Albion Disposal, Inc.), 217 B.R. 394 (W.D.N.Y. 1997)...23, 25 In re Aurora Invs., Inc., 134 B.R. 982 (Bankr. M.D. Fla. 1991) 13, 14 In re Autumn Press, 20 B.R. 60 (Bankr. D. Mass. 1982).6 In re Bryan Road, LLC, 382 B.R. 844 (Bankr. S.D. Fla. 2008)..14, 15 In re Citadel Props., Inc., 86 B.R. 275 (Bankr. M.D. Fla. 1988) 14 In re Club Tower, L.P., 138 B.R. 307 (Bankr. N.D. Ga. 1991)...14 In re Madison, 184 B.R. 686 (Bankr. E.D. Pa. 1995)..10, 11 In re Mkt. Ctr. E. Retail Prop., 433 B.R. 335 (Bankr. D.N.M. 2010).14 In re Orange Park S. P ship, 79 B.R. 79 (Bankr. M.D. Fla. 1987)..14 In re Telegroup, Inc., 237 B.R. 87 (Bankr. D.N.J. 1999).29 In re Television Studio Sch. of N.Y., 77 B.R. 411 (Bankr. S.D.N.Y. 1987).20, 27, 29 U. & I. Inc. v. Fitzgerald (In re Campbell), 13 B.R. 974 (Bankr. D. Idaho 1981).26 vii

9 Weymouth v. York (In re York), 13 B.R. 757 (Bankr. D. Me. 1981) 27 State Supreme Court Cases Arnold v. Soc y for Sav. Bancorp, Inc., 650 A.2d 1270 (Del. 1994)..8 N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007)..18, 19 Federal Statutes 11 U.S.C. 301 (2012) U.S.C. 362 (2012)...passim 11 U.S.C. 522 (2012) U.S.C. 704 (2012) U.S.C. 706 (2012) 7 11 U.S.C. 727 (2012)..7, U.S.C (2012) U.S.C. 959 (2012)...passim 35 U.S.C. 154 (2012) U.S.C. 283 (2012)..28 Rules Fed. R. Bank. P Fed. R. Bank. P Secondary Authorities Bruce H. White, Title 28 s Exception to the Automatic Stay: When Do You Need Relief?, Am. Bankr. Inst. J., September 2005, at Forrest Pierce, Comment, Bankruptcy-Remote Special Purpose Entities and a Business s Right to Waive Its Ability to File for Bankruptcy, 28 Emory Bankr. Dev. J. 507 (2012)..12, 13 viii

10 Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and Law, 82 Cornell L. Rev. 301 (1997)...17 Model Bus. Corp. Act 2.02 (2010)...8, 9 Model Bus. Corp. Act 2.06 (2010)...7 Model Bus. Corp. Act 8.01 (2010)...7 Model Bus. Corp. Act (2010)...19 ix

11 OPINION BELOW By order and opinion, the United States Bankruptcy Court for the Eastern District of Moot dismissed Singsong s Chapter 11 petition, holding that Singsong lacked corporate authority to file a voluntary bankruptcy petition in light of its corporate by-laws. (R. at 6.) The bankruptcy court also entered an order holding that the automatic stay does not apply to patent infringement actions. (R. at 6.) Nevertheless, the court stayed its dismissal order to give Singsong the opportunity to seek appellate review of the novel legal issue presented in this matter. (R. at 6.) On appeal, the district court reversed both orders. (R. at 6.) A divided United States Court of Appeals for the Thirteenth Circuit affirmed the District Court. (R. at 6.) STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTORY PROVISIONS The following statutory provisions are relevant to the facts of this case and are set forth in Appendices A through K: 11 U.S.C. 301; 11 U.S.C. 305; 11 U.S.C. 362; 11 U.S.C. 522; 11 U.S.C. 704; 11 U.S.C. 706; 11 U.S.C. 727; 11 U.S.C. 1141; 28 U.S.C. 959; 35 U.S.C. 154; and 35 U.S.C x

12 STATEMENT OF THE CASE Respondent, Singsong Electronics, Inc. ( Singsong ), filed for bankruptcy just two days after a district court granted Petitioner, Plum, Inc. ( Plum ), summary judgment and held that Singsong was liable for infringing on Plum s patent. Singsong s corporate by-laws, however, expressly forbid the filing of a voluntary bankruptcy petition. Nevertheless, Singsong now hides behind the Bankruptcy Code s automatic stay to bar Plum s motion to enjoin future sale of Singsong s infringing Galactica phone. Accordingly, this Court must now decide whether Singsong s filing is valid notwithstanding its corporate by-laws, and whether the automatic stay bars Plum s motion to enjoin ongoing infringement. Plum is a well-known corporation, famous for its innovative and popular electronics products, such as phones, computers, and personal music devices. (R. at 2 3.) Singsong is also a well-established corporation that started as an electronics manufacturer, but eventually began producing its own competing products. (R. at 2.) The two corporations entered into a very successful joint venture to develop and manufacture the e-pod, a portable player of digitally recorded music. (R. at 3.) Following this success, Singsong and Plum considered entering another agreement to make Singsong the exclusive manufacturer of all Plum products. (R. at 3 5.) Singsong had been experiencing financial difficulties, and Plum was hesitant to enter into a long-term agreement where there was a risk that Singsong might file for bankruptcy. (R. at 4 5.) In order to secure this potentially lucrative agreement, Singsong amended its by-laws to deny itself the corporate authority to file for bankruptcy. (R. at 5.) The new by-law provision read, in pertinent part: Notwithstanding any other provision to the contrary, the Corporation is not authorized to file a petition in bankruptcy under section 301 of the United States Bankruptcy Code or to consent to the institution of bankruptcy, reorganization, or insolvency proceedings against it. Further, the Board of Directors of the 1

13 Corporation does not have authority to consider or approve a resolution to file a voluntary petition in bankruptcy and no Officer has any authority to sign any such petition or cause it to be filed. (R. at 5.) Plum and Singsong then entered into the exclusive manufacturing agreement. (R. at 5.) Several years later, Plum designed the revolutionary e-phone, which was a major success. (R. at 3 4.) Though Singsong manufactured the e-phone, it also developed and released a similar phone called the Galactica. (R. at 3.) The Galactica is priced significantly below the e-phone and thus decreases consumer demand for the e-phone. (R. at 3.) On April 15, 2012, Plum filed suit against Singsong, alleging that the Galactica software infringed the patented e-phone software. (R. at 3.) The United States District Court for the Western District of Washington agreed, granting summary judgment in Plum s favor on June 11, (R. at 3 4.) The district court also invited Plum to file a motion requesting an injunction. (R. at 4.) Acknowledging its infringement, Singsong asked Plum for a temporary license for the e-phone software while it produced a non-infringing version of the Galactica, but Plum declined. (R. at 4.) On June 13, 2012, a mere two days after the entry of summary judgment, Singsong filed a Chapter 11 bankruptcy petition under Title 11 of the United States Code ( Bankruptcy Code ) in the Eastern District of Moot. (R. at 4.) Notwithstanding the by-law provision prohibiting filing, Singsong s Board of Directors had unanimously approved a resolution authorizing the petition, which Singsong s Chief Executive Officer signed. (R. at 5.) Despite Singsong s filing, on June 14, 2012, Plum filed a motion with the district court to enjoin Singsong from displaying, distributing, selling, or taking orders for the infringing Galactica. (R. at 4.) Singsong then filed an emergency motion with the bankruptcy court, alleging that Plum s injunction motion was filed in violation of Section 362 s automatic stay and 2

14 requesting an order enjoining Plum from seeking injunctive relief against the sale of the infringing phones. (R. at 5.) Plum responded to this motion by asserting: 1) that 28 U.S.C. 959(a) gives Plum the express authority to sue, and, 2) that the automatic stay never arose because the bankruptcy petition itself was invalid, as Singsong did not have the authority to file. (R. at 5 6). Plum also filed a motion to dismiss the Chapter 11 case. (R. at 5.) The bankruptcy court heard both motions together and ruled in Plum s favor, holding that the stay did not apply to the patent infringement action, and also granting the motion to dismiss the Chapter 11 case. (R. at 5.) Singsong immediately appealed, and the district court reversed both orders. (R. at 5.) The United States Court of Appeals for the Thirteenth Circuit affirmed the district court two to one. (R. at 2 21.) The majority held broadly that advance bankruptcy waivers are never enforceable and are contrary to public policy, (R. at 7 9), and that actions to enjoin post-petition patent infringement are stayed unless the non-infringing party obtains bankruptcy court permission, despite a pre-petition judgment that infringement has occurred, (R. at 9 13). A sharp dissent from The Honorable Circuit Judge Kherzi criticized the majority s disparate treatment of debtors and non-debtors under non-bankruptcy law. See (R. at 13 21). As Judge Kherzi noted, the majority s rule suggests that, by filing for bankruptcy, corporations are not bound by their by-laws, and an infringer may commit torts that should otherwise be enjoined. See (R. at 13 21). This appeal follows. 3

15 SUMMARY OF THE ARGUMENTS This Court is presented with two issues: 1) whether a corporation s Chapter 11 petition is valid where the corporation s by-laws deny it the authority to voluntarily file for bankruptcy; and 2) whether the automatic stay bars a patent holder s motion for injunctive relief filed pursuant to 28 U.S.C. 959(a) where the debtor-in-possession is committing post-petition acts of infringement. This Court should hold that Singsong s petition is invalid because Singsong s by-law provision denies the board of directors the authority to file for bankruptcy. First, this by-law provision is consistent with the Bankruptcy Code and Moot corporate law, and it is therefore enforceable. Sophisticated corporations, like Singsong, should be permitted to use their business judgment to limit access to bankruptcy. Second, Singsong s by-law provision follows the trend of court-approved pre-petition corporate limitations on access to bankruptcy. And, third, enforcing Singsong s by-law provision is consistent with the public policies encouraging out-ofcourt workouts and the choice of an efficient bankruptcy regime. Moreover, legal and economic safeguards will prevent lenders from requiring a waiver in every transaction and will protect creditors from loss. Even if this Court holds that Singsong s bankruptcy is valid, this Court should nevertheless hold that Plum s motion to enjoin post-petition infringement is not barred by the Bankruptcy Code s automatic stay and that Plum can proceed in the district court without leave pursuant to Section 959(a). First, Section 362(a)(1) of the Bankruptcy Code only stays prepetition causes of action and does not stay motions like Plum s that seek to enjoin a debtor s unlawful post-petition conduct. Second, Section 362(a)(3) of the Bankruptcy Code stays actions seeking to acquire possession of or exercise control over property of the estate, but Plum s 4

16 motion merely seeks to enjoin Singsong s unlawful use of the infringing Galactica. And, third, Plum s motion to enjoin Singsong s post-petition infringement is permitted by Section 959(a) of the Judicial Code. Section 959(a) works in harmony with Section 362(a) of the Bankruptcy Code to guarantee that a debtor s unlawful post-petition business operations are subject to suit without first requiring leave of the bankruptcy court. Notwithstanding its bankruptcy filing, Singsong is still amenable to suit for its post-petition acts of infringement, and therefore, Plum s district court motion may proceed. This Court should reverse the decision of the Thirteenth Circuit and hold that 1) Singsong s corporate documents deny it the requisite authority to file a bankruptcy petition, and thus Singsong s filing is invalid; and 2) Plum s injunction motion is not barred by the automatic stay and is expressly authorized by Section 959(a) of the Judicial Code. 5

17 ARGUMENTS In a civil appeal, this Court engages in a de novo review of the decisions of bankruptcy courts on conclusions of law and utilizes a clear error standard when reviewing findings of fact. Pierce v. Underwood, 487 U.S. 552, 558 (1988). Neither party challenges the lower court's findings of facts, so this Court should review the questions of law de novo. Id. I. BANKRUPTCY PETITIONS ARE INVALID WHEN FILED BY CORPORATIONS THAT LACK AUTHORITY TO FILE FOR BANKRUPTCY UNDER THEIR CORPORATE DOCUMENTS This Court should reverse the Thirteenth Circuit s decision and determine that Singsong lacked the authority to file for bankruptcy. First, pursuant to Moot corporate law, Singsong validly amended its by-laws with a provision prohibiting its board of directors from filing for bankruptcy. The by-law provision is consistent with the Bankruptcy Code and reflects the policy of deference to business judgment. Second, recent lower court decisions have enforced similar limitations on corporate access to bankruptcy. And, third, enforcing Singsong s by-law provision would not contravene public policy. A. By-law Provisions Waiving Authority to File for Bankruptcy Do Not Conflict With Applicable Corporate and Bankruptcy Law. Singsong s bankruptcy petition is invalid because, under its corporate documents, Singsong had no authority to file for bankruptcy. The authority to file a petition is not found in the Bankruptcy Code. Rather, the authority to file for bankruptcy is determined by substantive state law. See Price v. Gurney, 324 U.S. 100, 106 (1945); see also Butner v. United States, 440 U.S. 48, (1979) (holding that where Bankruptcy Code is silent, substantive state law governs); In re Autumn Press, 20 B.R. 60 (Bankr. D. Mass. 1982) (holding that corporate action resulting in voluntary filing must comply with state corporate law). Consequently, Singsong s authority to file is determined by the laws of Moot. 6

18 Singsong lacked authority to file for bankruptcy under Moot corporate law. In the State of Moot, corporate law is governed by the Model Business Corporation Act ( MBCA ). (R. at 5 n.5.) The MBCA provides that all corporate authority is vested in a company s board of directors and governed by a company s articles of incorporation. See Model Bus. Corp. Act 8.01 (2010). A board of directors authority may be supplemented by enacting by-laws, which may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the [company s] articles of incorporation. See Model Bus. Corp. Act 2.06(b) (2010). Here, nothing in the record suggests that the by-law provision conflicts with Singsong s articles of incorporation. Therefore, Singsong s by-law provision is valid unless it is inconsistent with law here, the Bankruptcy Code and the MBCA. Because the by-law provision is consistent with the Bankruptcy Code and the MBCA, the by-law provision is valid, and therefore, Singsong did not have authority to file for bankruptcy. 1. By-law provisions waiving authority to file for bankruptcy are not prohibited by the Bankruptcy Code. The Bankruptcy Code does not prohibit a corporation from waiving the authority to file for bankruptcy. Congress contemplated waivers when it enacted the Bankruptcy Code and addressed them in multiple provisions. For example, Congress expressly outlined the treatment of post-petition discharge waivers. See 11 U.S.C. 727(a)(10), 1141(d)(4) (2012). Furthermore, the Bankruptcy Code plainly forbids waiver in two instances: first, a debtor cannot waive exemptions in favor of unsecured creditors, see 11 U.S.C. 522(e) (2012); and second, a debtor cannot waive the right to convert from Chapter 7 to Chapter 13 or vice-versa, see 11 U.S.C. 706(a), 1307(a) (2012). Congress could have included a similar provision prohibiting voluntary filing waivers under Section 301, but did not do so. See 11 U.S.C. 301 (2012). 7

19 When Congress includes certain prohibitions in one section of a statute but omits [them] in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. See, e.g., Barnhart v. Sigmon Coal Co., 534 U.S. 438, 452 (2002) (internal citations omitted). Considering the express treatment of and prohibition against waivers elsewhere in the Bankruptcy Code, Congress silence with regard to filing waivers is assumed to be intentional. See id. at Reading an additional prohibition here would venture beyond the realm of the judiciary and into the province of Congress. See id. at 462 ( We will not alter the text in order to satisfy the policy preferences of the Commissioner. These are battles that should be fought among the political branches and the industry. Those parties should not seek to amend the statute by appeal to the Judicial Branch. ). Thus, if a prohibition against voluntary filing waivers should be included in the Bankruptcy Code, that determination should be made by Congress, not this Court. 2. By-law provisions waiving authority to file for bankruptcy are consistent with the Model Business Corporation Act. Moot law contains no statutory provision specifically addressing a corporation s power to file bankruptcy. (R. at 5 n.5.) Moot, however, has adopted the MBCA, which generally permits a corporation to use its discretion in structuring its governing documents. For instance, articles of incorporation may contain provisions: [E]liminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except liability for (A) the amount of a financial benefit received by a director to which he is not entitled; (B) an intentional infliction of harm on the corporation or the shareholders; (C) a violation of section 8.33 [dealing with unlawful distributions]; or (D) an intentional violation of criminal law. See Model Bus. Corp. Act 2.02(b)(4) (2010); see also Arnold v. Soc y for Sav. Bancorp, Inc., 650 A.2d 1270, 1287 (Del. 1994) (interpreting articles exculpatory provision under Delaware 8

20 law, which contains provisional replica of MBCA Section 2.02(b)(4), to protect directors from liability for breach of fiduciary duty). Moreover, the comment to MBCA Section 2.02(b)(4) notes that shareholders should be permitted to allocate the economic risk of the director s conduct as they choose. See Model Bus. Corp. Act 2.02 cmt. i. This Court should similarly defer to Singsong s decision to enact the by-law provision, which divested its board of directors of the authority to file for bankruptcy. 3. By-law provisions waiving authority to file for bankruptcy are like the courtenforced operating agreement in In re DB Capital. A decision by this Court enforcing Singsong s by-law provision, consistent with the Bankruptcy Code and the MBCA, would parallel the Tenth Circuit BAP s decision to enforce an LLC s filing waiver in its governing documents. See DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital), Nos. CO , , 2010 WL at *5 (B.A.P. 10th Cir. Dec. 6, 2010). In DB Capital, like in the present case, a debtor-llc filed for bankruptcy even though its operating agreement prohibited voluntary filing. Id. at *2. The debtor argued that the operating agreement should not be enforced on public policy grounds because it was executed at the demand, and for the sole benefit of the debtor s main secured creditor. Id. at *3. The Tenth Circuit BAP, however, enforced the operating agreement and dismissed the case because the court found no case law standing for the proposition that members of an LLC cannot agree among themselves not to file bankruptcy, and that if they do, such agreement is void as against public policy.... Id. Like the debtor in DB Capital, Singsong had no authority to file for bankruptcy because its governing documents prohibit voluntary filing. (R. at 5.) This Court should adopt the cogent reasoning of the Tenth Circuit BAP and reverse the Thirteenth Circuit s decision. Cf. Price, 324 U.S. at 106 ( If the District Court finds that those who purport to act on behalf of the corporation 9

21 have not been granted that authority by local law to institute the proceedings, it has no alternative but to dismiss the petition. ). B. Corporations Business Decisions to Preclude the Ability to File for Bankruptcy Reflect a Trend of Court-Approved Bankruptcy Limitations. Singsong is a sophisticated entity that should be bound by its business decision to waive the authority to file for bankruptcy. Despite a historical hesitance to permit restrictions on bankruptcy access, courts have begun to approve bankruptcy limitations in the corporate context. Corporations may limit the availability of bankruptcy, though consumers may not, because corporations contemplate and understand the potential risks and benefits. Singsong's by-law provision is comparable to other bargained-for corporate restrictions on bankruptcy, and should therefore be enforced. 1. The justifications for refusing to enforce individual debtors pre-petition waivers do not apply to sophisticated corporations. The Thirteenth Circuit erred in holding that any and all agreements promising not to file bankruptcy or prospectively waiving bankruptcy rights are unenforceable because of the strong public policy favoring access to bankruptcy relief. (R. at 8.) Notably, each of the cases cited for this proposition deals with consumers. See In re Weitzen, 3 F. Supp. 698, 699 (S.D.N.Y. 1933) (dealing with individual debtor under Bankruptcy Act); see also In re Cole, 226 B.R. 647, 649 (B.A.P. 9th Cir. 1998) (dealing with Chapter 7 consumer debtor); In re Madison, 184 B.R. 686, 687 (Bankr. E.D. Pa. 1995) (dealing with Chapter 13 debtor). 1 In fact, even the case that is meant to support the Thirteenth Circuit s application of the anti-waiver principle to corporations, 1 Additionally, In re Weitzen and In re Cole both deal with waivers of discharge. See Weitzen, 3 F. Supp. at 698 (finding waiver of discharge under Section 17 of Bankruptcy Act unenforceable); Cole, 226 B.R. at 654 (finding waiver of discharge unenforceable). Plum does not seek a determination by this Court validating a waiver of discharge; it seeks a decision enforcing Singsong s corporate decision to amend its by-laws. It is conceded that a potential debtor cannot waive discharge without court approval. See 11 U.S.C. 727(a)(10). 10

22 Williams v. Fidelity & Guaranty Co., actually addresses the discharge of an individual partner s indemnity obligation to a surety company. See 236 U.S. 549, 552 (1915). Therefore, Williams, just as all the other cases cited by the decision below, applies to an individual, not a business. Individual debtors are readily distinguishable from corporate entities with regard to bargaining power. In the case of an individual debtor, lenders may impose unconscionable terms that the debtor, due to its position, may be forced to accept. Cf. In re Madison, 184 B.R. at (warning of a slippery slope ). Conversely, a sophisticated corporation like Singsong, with competent legal representation, is able to negotiate a waiver in exchange for some benefit. Therefore, while it is proper for a court to intervene to protect the powerless individual debtor, this Court should enforce Singsong s bargained-for by-law provision. 2. By-law provisions waiving authority to file for bankruptcy are similar to other enforceable pre-petition restrictions on corporate access to the Bankruptcy Code s protections. Singsong is not unique in limiting its access to certain bankruptcy benefits. In fact, many corporations impose similar restrictions on themselves, and these restrictions have been met with both industry and court approval. Indeed, special purpose entities ( SPE ) are commonly used and accepted by the securitization industry because of their bankruptcy-remote status. Furthermore, courts have enforced pre-bankruptcy stipulations of bad faith, bad boy loan provisions, and waivers of the automatic stay, where the corporations bargained for these restrictions in exchange for some benefit. Following this trend, this Court should also enforce Singsong s by-law provision. a. By-law provisions waiving authority to file for bankruptcy are like the bankruptcy-remote provisions in special purpose entities. Singsong s by-law provision is a pre-bankruptcy corporate limitation similar to the bankruptcy-remote provisions in an SPE s governing documents. See Forrest Pierce, Comment, 11

23 Bankruptcy-Remote Special Purpose Entities and a Business s Right to Waive Its Ability to File for Bankruptcy, 28 Emory Bankr. Dev. J. 507, 521 (2012). SPEs are widely used in the securitizations industry, see id., and are instrumental in mak[ing] corporate reorganization more a matter of contract and less a matter of judicial discretion. Paloian v. LaSalle Bank, N.A., 619 F.3d 688, 695 (7th Cir. 2010). One appealing aspect of an SPE is that a lender can reduce the risk that the borrower will file bankruptcy. See Forrest Pierce, supra, at 521 (internal citations omitted). An SPE is comprised of assets (usually a single piece of collateral) transferred from a parent corporation and organized with a specific purpose or project in mind. Id. at Thus, the lender financing the project no longer needs to deal with the parent corporation, which is burdened by other creditors. Id. at 522 Instead, the lender can simply extend a loan to the SPE with the assurance that the SPE is structured to be bankruptcy-remote. Id. at 524. Bankruptcy-remote provisions are generally included in an SPE s organizational documents. Id. These documents often provide: 1) that the borrower will continue operating as a single-purpose entity; and 2) that the SPE will appoint to its board an independent director, who will take the lender s interest into account in any decision to file bankruptcy. 2 Id. The end result is designed to ensure that the SPE does not find itself in a position where it would need to file for bankruptcy, i.e., it does not incur debt besides debt it owes to the one lender. Id. Singsong s by-law provision resembles the bankruptcy-remote provisions that prevent SPEs from filing for bankruptcy. Here, instead of appointing an independent director, Singsong 2 SPE Loan Documents may also prohibit the following: 1) engaging in business other than to operate the collateral; 2) owning property other than the collateral; 3) merging with another entity or acquiring any subsidiary; 4) incurring other debt (with exceptions of ordinary course trade payables and equipment financing); 5) co-mingling assets with affiliates; and 6) guaranteeing the debt of an affiliate or pledging its assets to secure the debt of another... [The covenants may also] 7) require with regard to any affiliates that the borrower maintain separate books and records, bank accounts, and maintain a separate office. Id. 12

24 included a provision restricting the corporation s authority to file for bankruptcy. (R. at 5.) For both the average SPE and Singsong, the bankruptcy-remote provisions reflect the most financially beneficial means of operating the business. For instance, because of its bankruptcyremote status, an SPE is able to borrow at lower interest rates and accomplish its business purpose at a lower bottom line. See Forrest Pierce, supra, at 524. Likewise, the by-law provision allowed Singsong to benefit from an exclusive manufacturing agreement with Plum. (R. at 5.) In sum, this Court should enforce Singsong s by-law provision as consistent with the commonly used bankruptcy-remote provisions in SPE documents. b. Courts have enforced pre-petition stipulations of bad faith filing. Corporations that stipulate to bad faith filing in advance are often held to that stipulation if they file for bankruptcy. In In re Aurora Investments, Inc., for example, the debtor agreed to stipulate to bad faith as part of a pre-bankruptcy foreclosure settlement. 134 B.R. 982, 984 (Bankr. M.D. Fla. 1991). Under the settlement, the creditor agreed to delay foreclosure so that the debtor could attempt to refinance the loan. Id. In exchange for the delay, the debtor stipulated that any voluntary bankruptcy petition would be filed in bad faith. Id. Despite the stipulation, when the debtor failed to refinance the loan, the debtor filed for bankruptcy. Id. In the ensuing action, the court enforced the stipulation even though it effectively denied the debtor access to bankruptcy. Id. at 986. The court found that the stipulation had been validly bargained for, and granted the debtor a benefit in the time given to refinance. Id. Because the debtor had bargained for and received the benefits of the stipulation, it could not now escape its legal consequences. Id.; see also In re Orange Park S. P ship, 79 B.R. 79, 83 (Bankr. M.D. Fla. 1987) (enforcing a similar bad-faith stipulation). Therefore, the court dismissed the bankruptcy. 13

25 c. Courts have approved bad boy loan agreements that disincentivize bankruptcy filings. Debtors are also able to hinder their ability to file for bankruptcy through the use of bad boy loan guarantees. See F.D.I.C. v. Prince George Corp., 58 F.3d 1041, 1047 (4th Cir. 1995); see also In re Mkt. Ctr. E. Retail Prop., 433 B.R. 335, 345 n.3 (Bankr. D.N.M. 2010) (using the term bad boy to describe the provision). Under a bad boy guaranty, a loan document may provide for personal liability against the borrower, usually a principal or director of a company, upon certain triggering acts, such as filing for bankruptcy. See Mkt. Ctr. E. Retail Prop., 433 B.R. at 345 n.3. The lender is willing to forgo a deficiency judgment in exchange for the borrower s decision not to stand in the way of foreclosure proceedings, making the loan nonrecourse so long as the borrower company does not voluntarily file for bankruptcy. While bad boy guarantees would appear to run contrary to the policy of encouraging access to bankruptcy, courts nonetheless enforce these provisions even though they disincentivize filing. See, e.g., F.D.I.C., 58 F.3d at 1047 (enforcing bad boy loan provision). d. Courts have enforced pre-petition waivers of the automatic stay. Additionally, courts are willing to enforce pre-petition waivers of the automatic stay. See In re Bryan Road, LLC, 382 B.R. 844, 855 (Bankr. S.D. Fla. 2008); see also In re Citadel Props., Inc., 86 B.R. 275, 276 (Bankr. M.D. Fla. 1988); In re Club Tower L.P., 138 B.R. 307, 311 (Bankr. N.D. Ga. 1991). In Bryan Road, for instance, the Bankruptcy Court for the Southern District of Florida enforced a stay waiver in a single asset real estate ( SARE ) case. See Bryan Road, 382 B.R. at 855. The debtor in Bryan Road developed and owned a condominiumized dry boat storage facility secured by a mortgage. Id. at 845. After the debtor defaulted on the mortgage, the lender instituted state court foreclosure proceedings on the facility. Id. at 847. The 14

26 state court entered judgment in the lender s favor, and the lender set a date for the foreclosure sale. Id. Prior to the foreclosure sale, however, the debtor and lender entered into a forbearance agreement granting the debtor additional time to pay off the entirety of the defaulted loan. Id. at 848. As part of the forbearance agreement, the debtor agreed that the lender should be granted relief from the automatic stay if the debtor filed for bankruptcy. Id. The court enforced the agreement and granted the lender relief from the automatic stay. Id. at 855. In supporting its holding, the court looked at a number of factors. Id. at Specifically relevant here, however, is the weight given by the court for both the sophistication of the parties, and the consideration received in exchange for the debtor s waiver. Id. Similarly, Singsong is a sophisticated party and, in exchange for its by-law provision, received a cognizable benefit the exclusive manufacturing agreement. Moreover, because Bryan Road dealt with a single piece of property, the court s enforcement of the stay waiver meant that the lender could foreclose on the company s sole asset, and thereby, the debtor s ability to reorganize. Therefore, this Court should enforce Singsong s by-law provision notwithstanding its effect on Singsong s ability to file. The use of bankruptcy-remote provisions in SPEs, bad faith stipulations, bad boy loan agreements, and waivers of the automatic stay all illustrate a growing trend of debtors successfully limiting access to the Bankruptcy Code. In each of these examples, courts approved the pre-bankruptcy limitations because the debtors benefited from their business decisions. Similarly, here, Singsong s by-law provision allowed the company to receive the benefits of the exclusive manufacturing agreement. (R. at 5.) In light of this trend and the policy deferring to the 15

27 business judgment of corporations, this Court should reverse the decision of the Thirteenth Circuit and determine that Singsong lacked authority to file for bankruptcy. C. Enforcing By-law Provisions That Waive Corporate Authority to File for Bankruptcy Will Not Contradict Public Policy. Singsong s by-law provision is legally enforceable and, furthermore, complies with public policy. In fact, although the Thirteenth Circuit referred to a general public policy against bankruptcy waiver, the decision below did not address more specific policies such as encouraging out-of-court workouts and ensuring an efficient bankruptcy regime that support permitting corporations to limit access to the Bankruptcy Code. See, e.g., Texas Commerce Bank v. Licht (In re Pengo Indus., Inc.), 962 F.2d 543, 549 (5th Cir. 1992). The Thirteenth Circuit s opinion also fails to consider important legal checks, such as involuntary proceedings and director and officer liability, which discourage the widespread use of by-law provisions like Singsong s. Additionally, corporations are always able to amend bylaw provisions, allowing them to reinstate authority to file when necessary. Moreover, even if companies decide to implement bankruptcy-remote provisions in corporate documents, creditors may protect themselves by charging higher interest rates or instituting derivative proceedings to recover damages resulting from delayed bankruptcy filings. Thus, creditors will be able to protect themselves from the harm associated with a company s inability to file. 1. Enforcement of by-law provisions waiving authority to file for bankruptcy encourages out-of-court workouts and ensures debtor access to an efficient bankruptcy regime. The Thirteenth Circuit s reference to a general public policy discouraging the by-law provision does not consider other more specific policies encouraging the by-law provision s enforcement. For example, regardless of the availability of bankruptcy to a debtor, there is an overwhelming Congressional policy favoring out-of-court workouts. See Pengo Industries,

28 F.2d at 549 ( We strongly disfavor a judicial interpretation of the Bankruptcy Code that contravenes the substantial Congressional policy favoring out-of-court consensual workouts. ); see also LTV Corp. v. Valley Fid. Bank & Trust Co. (In re Chateaugay), 961 F.2d 378, 382 (2d Cir. 1992) (referencing the strong bankruptcy policy in favor of the speedy, inexpensive, negotiated resolution of disputes, that is an out-of-court or common law composition ). Here, enforcement of Singsong s by-law provision encourages workouts because future companies would utilize similar bankruptcy-remote provisions in their efforts to avoid bankruptcy altogether. In this manner, a by-law provision can be used as a bargaining chip in negotiations, leading to better workout terms for debtors and allowing businesses to continue as going concerns. Enforcement of the by-law provision will also allow troubled companies to choose the most efficient way to deal with debt. This policy follows what has been described as a contractual theory of bankruptcy. Under a contractual theory of bankruptcy, it is sometimes economically efficient for companies to waive access to bankruptcy. 3 See Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and Law, 82 Cornell L. Rev. 301, (1997). The decision to waive, however, is driven by the market, not the corporation. Id. If a bankruptcy filing creates the best chance of recovery for creditors, they will not extend lending terms encouraging a troubled company to waive its right to file. Id. Under a contractual theory of bankruptcy, therefore, the market dictates whether a company should waive its right to file, thus allowing corporations to choose the most efficient regime to address their outstanding debt. Id. 3 The Bankruptcy Code itself recognizes that bankruptcy might not always be the most favorable option for both parties. See 11 U.S.C. 305(a)(1) (2012) (granting judicial discretion to abstain if interests weigh against bankruptcy). 17

29 2. Involuntary proceedings, director and officer liability, and corporations ability to amend by-law provisions all serve as checks against the potentially widespread use of filing waivers. The Thirteenth Circuit s concern that by-law provisions like Singsong s would make bankruptcy filings impossible ignores three important checks against delayed bankruptcy filings: involuntary proceedings, director and officer liability, and the ability of corporations to amend by-law provisions. While Singsong s by-law provision does not allow the company to consent to an involuntary petition, (R. at 5), it does not foreclose all other options available for involuntary filings. See Fed. R. Bankr. P. 1011(a) (authorizing debtor named in an involuntary case to contest the petition); see also Fed. R. Bankr. P. 1013(b) (providing for default judgment against debtor that is unresponsive to involuntary petition). Therefore, even assuming this Court s approval of Singsong s by-law provision, creditors would still be able to force a debtor into bankruptcy. The most powerful check against a corporation s decision not to file for bankruptcy, however, is found in director and officer liability under state corporate law. Under Delaware law, directors and officers of a corporation owe fiduciary duties to creditors regarding insolvency. See N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007). The Supreme Court of Delaware has explained: It is well settled that directors owe fiduciary duties to the corporation. When a corporation is solvent, those duties may be enforced by its shareholders, who have standing to bring derivative actions on behalf of the corporation because they are the ultimate beneficiaries of the corporation's growth and increased value. When a corporation is insolvent, however, its creditors take the place of the shareholders as the residual beneficiaries of any increase in value. Id. (emphasis in original). The potential liability for directors and officers once a company nears or enters insolvency limits the risk resulting from an approval of a waiver like Singsong s by-law provision. Directors and officers will be wary to encourage or implement by-law provisions prohibiting bankruptcy filings at the risk of one day becoming personally liable for failing to file. 18

30 Furthermore, if by-law provisions are implemented, the fiduciary obligations owed by directors and officers to the corporation will force action to limit any damages resulting from a failure to file. Under the MBCA, corporations may implement or amend by-law provisions at any time. See Model Bus. Corp. Act (2005). Nothing prevents a corporation that has implemented a by-law provision like Singsong s from amending its by-laws to permit bankruptcy filings if needed. Singsong could have taken the necessary steps to amend its by-laws to grant the board of directors the authority to file, but did not. 3. The market and the ability to bring derivative lawsuits will protect creditors from any potential harm that may result from filing waivers. In addition to the checks limiting the use of filing waivers, certain procedures also exist to protect creditors of corporations that have taken steps to limit access to bankruptcy. Should the use of bankruptcy remote by-law provisions become more widespread, creditors and businesses will be able to compensate for any risks posed by charging higher interest rates and costs of doing business. The market, however, is not the only protection afforded to creditors that may be damaged by a corporation s inability to file for bankruptcy. Once a corporation becomes insolvent, creditors have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties. Gheewalla, 930 A.2d at 101. The same liability that serves as a check against delayed bankruptcy filings by corporations, therefore, also serves as a potential means of recovery for injured creditors. II. MOTIONS TO ENJOIN DEBTORS POST-PETITION PATENT INFRINGEMENT ARE NOT STAYED BY 11 U.S.C. 362 AND ARE PERMITTED BY 28 U.S.C. 959(a). Even if this Court determines that Singsong had authority to file for bankruptcy, the automatic stay does not bar Plum s district court motion to enjoin Singsong s infringement on Plum s software patent. See 11 U.S.C. 362 (2012). First, each act of distribution or sale of the 19

31 Galactica constitutes an actionable post-petition infringement that is beyond the scope of Section 362(a)(1) s stay on pre-petition causes of action. Second, Section 362(a)(3) does not stay Plum s motion because Plum does not seek to control property of the estate, but rather seeks to prevent Singsong s future unlawful conduct. And, third, 28 U.S.C. 959(a) expressly permits Plum s district court motion. See 28 U.S.C. 959(a) (2012). That is, Section 959(a) works in harmony with Section 362 to permit suit without leave of the bankruptcy court when the suit arises out of the debtor s post-petition business operations. Because Singsong s sale, display, and distribution of the Galactica constitute post-petition infringement, Plum may move for injunctive relief without bankruptcy court leave. A. Post-Petition Infringement Gives Rise to New Causes of Action Not Stayed by Section 362(a)(1). Section 362(a)(1) does not stay Plum s injunction motion because Plum seeks to enjoin post-petition torts. Indeed, Section 362(a)(1) only stays actions that w[ere] or could have been commenced before the bankruptcy filing. 11 U.S.C. 362(a)(1). Under federal patent law, each act of infringement constitutes an independent cause of action. E.I. du Pont de Nemours & Co. v. MacDermid Printing Solutions, L.L.C., 525 F.3d 1353, 1362 (Fed. Cir. 2008). Therefore, postpetition acts of infringement should be bifurcated from any pre-petition acts. See In re Television Studio Sch. of N.Y., 77 B.R. 411, 412 (Bankr. S.D.N.Y. 1987) ( [A] post-petition infringement claim, by definition, is not protected by 11 U.S.C ). For purposes of the automatic stay, a pre-petition lawsuit for pre-petition infringement is unrelated to post-petition suits to enjoin postpetition infringement of the same kind. Thus, even though the district court previously held that Singsong s sale of the Galactica constitutes infringement, the motion to enjoin future sales is not stayed because the post-petition acts are to be treated separately. 20