Supreme Court of the United States

Transcription

1 No IN THE Supreme Court of the United States IN RE SINGSONG ELECTRONICS, INC., Debtor. PLUM, INC. v. Petitioner, SINGSONG ELECTRONICS, INC. Respondent. On Writ Of Certiorari To The United States Court Of Appeals For The Thirteenth Circuit BRIEF FOR PETITIONER Team #: P51 Counsel for Petitioner

2 QUESTIONS PRESENTED 1. Whether a corporation may file a voluntary petition in bankruptcy, notwithstanding a provision in its governing corporate documents prohibiting such an action. 2. Whether an automatic stay applies to a suit seeking to enjoin allegedly unlawful postpetition operation of the debtor s business. i

3 TABLE OF CONTENTS QUESTIONS PRESENTED TABLE OF CONTENTS.... TABLE OF AUTHORITIES.. OPINIONS BELOW.... Page i ii iv vii STATEMENT OF JURISDICTION... viii STATUTORY PROVISIONS ix STATEMENT OF FACTS SUMMARY OF THE ARGUMENT. 3 ARGUMENT.. 5 I. THE COURT SHOULD REVERSE THE THIRTEENTH CIRCUIT S FINDING THAT PRE-PETITION BANKRUPTCY WAIVERS ARE UNENFORCEABLE... 5 A. THE THIRTEENTH CIRCUIT SHOULD HAVE HELD THAT AN AMENDMENT TO CORPORATE BY-LAWS DOES NOT CONSTITUTE A PRE-PETITION BANKRUPTCY WAIVER.. 5 B. THE THIRTEENTH CIRCUIT SHOULD HAVE ENFORCED THE PRE-PETITION BANKRUPTCY WAIVER SINCE IT WAS FREELY ENACTED AS AN AMENDMENT TO CORPORATE BY-LAWS 6 C. THE THIRTEENTH CIRCUIT S PUBLIC POLICY ARGUMENT AGAINST THE ENFORCEMENT OF PRE-PETITION WAIVERS INTRUDES UPON THE LEGISLATURE S AUTHORITY 8 II. THE COURT SHOULD REVERSE THE THIRTEENTH CIRCUIT S PRESUMPTION THAT RESPONDENT S BANKRUPTCY PETITION WAS A VOLUNTARY ACT 8 A. THE THIRTEENTH CIRCUIT SHOULD HAVE HELD THAT, PURSUANT TO ITS BY- LAWS, RESPONDENT WAS BARRED FROM FILING A VOLUNTARY PETITION IN BANKRUPTCY. 9 B. THE THIRTEENTH CIRCUIT SHOULD HAVE FOUND RESPONDENT S ACTION INVALID BECAUSE RESPONDENT WAS BOUND BY ITS OWN PROCEDURAL ii

4 REQUIREMENTS.. 10 C. THE THIRTEENTH CIRCUIT SHOULD HAVE FOUND RESPONDENT S ACTION INVALID BECAUSE IT DID NOT FILE A VOLUNTARY BANKRUPTCY PETITION UNDER SECTION III. THE COURT SHOULD REVERSE THE THIRTEENTH CIRCUIT S FINDING THAT AN AUTOMATIC STAY APPLIES TO AN ACTION SEEKING TO ENJOIN ALLEGEDLY UNLAWFUL POST-PETITION OPERATION OF THE DEBTOR S BUSINESS.. 12 A. THE THIRTEENTH CIRCUIT INCORRECTLY APPLIED SECTION 362 TO STAY A REQUEST TO ENJOIN UNLAWFUL CONDUCT.. 1. Section 362 Only Applies to Bankruptcy-Related Claims Where There is a Creditor Debtor Relationship Congress Did Not Intend Section 362 to Act as a Shield for the Continuance of Unlawful Conduct... B. THE THIRTEENTH CIRCUIT SHOULD HAVE APPLIED A SECTION 959 EXCEPTION TO THE AUTOMATIC STAY FOR SUITS PERTAINING TO POST-PETITION ACTIVITIES OF A DEBTOR S BUSINESS.. C. THE THIRTEENTH CIRCUIT SHOULD HAVE BIFURCATED AN INJUNCTION REQUEST FROM MONETARY DAMAGES IN ORDER TO FURTHER THE PRINCIPLES OF EQUITY AND ALLOW FOR THE PROTECTION OF PATENT HOLDERS CONCLUSION iii

5 TABLE OF AUTHORITIES Cases In re Autumn Press, Inc., 20 B.R. 60 (Bankr. D. Mass. 1982). Bambu Sales, Inc. v. Sultana Crackers, Inc., 683 F.Supp. 899 (1988) Page(s) 9 21 Beley v. Naphtaly, 169 U.S. 353 (1898). 17 Booth v. Clark, 58 U.S. 322 (1854) Brennan v. T&T Trucking, Inc., 396 F.Supp. 615 (N.D. Ok. 1975) 20 Catanzano by Catanzano v. Wing, 103 F.3d 223 (2d Cir. 1996). Connell v. Walker, 291 U.S. 1 (1934) Dominic s Rest. of Dayton, Inc. v. Mantia, 683 F.3d 757 (6th Cir. 2012) Fid. Mortg. Investors v. Camelia Builders, Inc., 550 F.2d 47 (2d Cir. 1976) 13, 18 Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401 (Del. 1985). 10 In re Garfinkle, 672 F.2d 1340 (11th Cir. 1982) 6 In re GSC, Inc., 453 B.R. 132 (Bankr. S.D.N.Y. 2011) 7 8 Haberern v. Lehigh & N.E. Ry. Co., 554 F.2d 581 (3d Cir. 1977). 19 Hajoca Corp. v. Sec. Trust Co., 25 A.2d 378 (Del. Super. Ct. 1942) iv

6 Hibbert v. Hollywood Park, Inc., 457 A.2d 339 (Del. 1983) 9 In re Holtkamp, 669 F.2d 505 (7th Cir. 1982) 14 ICC v. Baird, 194 U.S. 25 (1904) In re Powers, 170 B.R. 480 (D. Mass. 1994). 6 7 In re Singsong Elec., Inc., No (13th Cir. October 14, 2012).. passim Johnson v. Zerbst, 304 U.S. 458 (1938). 3, 6 In re Knightsbridge Dev. Co. Inc., 884 F.2d 145 (4th Cir. 1989) 12 Larami Ltd. v. Yes! Entm't Corp., 244 B.R. 56 (Bankr. D.N.J 2000) Nat'l Fed'n of Indep. Bus. v. Sebelius, 132 S. Ct (2012). 8 In re New Orleans Paddlewheels, Inc., 350 B.R. 667 (Bankr. E.D. La. 2006).. 10 In re Osteopathic Hosp. Ass'n, 191 A.2d 333 (Del. Ch. 1963). 9 Philbrook v. Glodgett, 421 U.S. 707 (1975). 15 Planned Parenthood of Se. Pa. v. Casey, 505 U.S. 833 (1992).. 7 Schneider v. Schneider, 141 F.2d 542 (D.C. Cir. 1944). 19 Seiko Epson Corp. v. Nu-Kote Int l, Inc., 190 F.3d 1360 (Fed. Cir. 1999) 13 v

7 Steak & Brew, Inc. v. Makris, No , LEXIS (D. Conn. February 14, 1973) 21 Straton v. New, 283 U.S. 318 (1931).. 13 Truck Fin. Specialists, Inc. v. W & S Leasing, Inc., 911 N.E.2d 612 (Ind. Ct. App. 2009)... 9 United States v. Am. Trucking Ass n, 310 U.S. 534 (1940). 15 United States v. Royal Bus. Funds Corp., 724 F.2d 12 (2d Cir. 1983)... 7 Statutory Provisions 11 U.S.C. 301 (2006).. passim U11 U.S.C. 362 (2006)... passim 28 U.S.C. 959 (2006).. passim Legislative Materials S. Rep. No (1978) 16 H. Rep. No (1977) Summary of Principle Recommendations of Securities and Exchange Commission on Proposed Bankruptcy Legislation: Hearings on S. 225 and S. 236 Before the Subcomm. on Improvements in Judicial Machinery of the Committee on the Judiciary, 94th Cong. 773 (1975) Other 2 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy [7] (15th ed. 2005).. 11 vi

8 OPINIONS BELOW The opinion of the United States Court of Appeals for the Thirteenth Circuit is available at In re Singsong Elec., Inc., No (13th Cir. October 14, 2012). The Thirteenth Circuit consolidated and affirmed the decisions of the United States District Court for the Western District of Washington and of the United States District Court for the District of Moot, which had reversed the United States Bankruptcy Court for the District of Moot. vii

9 STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. viii

10 STATUTORY PROVISIONS Section 301 of Title 11 of the United States Code provides: (a) A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter. (b) The commencement of a voluntary case under a chapter of this title constitutes an order for relief under such chapter. 11 U.S.C. 301 (2006). Section 362 of Title 11 of the United States Code is set out, in full, in Appendix A. Section 959 of Title 28 of the United States Code provides: (a) Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property. Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury. (b) Except as provided in section 1166 of title 11, a trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof. 28 U.S.C. 959 (2006). ix

11 BRIEF FOR PETITIONER STATEMENT OF FACTS Respondent Singsong Electronics, Inc. ( Singsong or Respondent ) is a wellestablished manufacturer of consumer electronic products, such as mobile phones and computers. In re Singsong Elec., Inc., No , at 2 (13th Cir. October 14, 2012). Petitioner Plum, Inc. ( Plum or Petitioner ), known for its sharp designs, began in the garage of its founder, Steve Works, as a small creator of personal computers. Id. at 3. Singsong is the exclusive manufacturer of all Plum products. Id. Singsong also has a provision in its by-laws that forbids the company from voluntarily seeking bankruptcy protection. That provision reads: Id. at 5. [Singsong] is not authorized to file a petition in bankruptcy... or to consent to the institution of bankruptcy, reorganization, or insolvency proceedings against it. Further, the Board of Directors... does not have authority to consider or approve a resolution to file a voluntary petition in bankruptcy and no [Singsong] Officer has any authority to sign [or file] any such petition.... After years of perfecting its designs, Plum revolutionized the personal music device market by creating the e-pod. Id. at 3. In 2011, Plum, once again, revolutionized the consumer electronic market when it designed the e-phone, a multifunctional mobile smart phone. Id. The e-phone became so popular that competing mobile phone producers, including Singsong, scrambled to introduce its own multifunctional mobile smart phones. Id. Specifically, Singsong introduced the Galactica, a device that was so similar to the e-phone that the United States District Court for the Western District of Washington declared on June 11, 2012 that the Galactica software infringed Plum s patent. Id. at 4. The United States District Court also invited 1

12 Plum to file a motion requesting an injunction. Id. Plum filed this motion for injunctive relief on June 14, Id. On June 13, 2012, however, Singsong voluntarily filed for Chapter 11 bankruptcy in the Eastern District of Moot, despite its by-laws provision prohibiting such action. Id. Singsong also filed an emergency motion with the bankruptcy court seeking to enjoin the patent infringement action in the Western District of Washington and, specifically, requesting to stop Plum from seeking injunctive relief against Singsong s sale of Galactica phones. Id. at 5. Singsong argued that, by voluntarily filing bankruptcy, the automatic stay of 11 U.S.C. 362 (2006) should stop all suits against it. Id. The bankruptcy court, however, disagreed and denied Singsong s motion, concluding that 28 U.S.C. 959(a) (2006) operates as an independent exception to the automatic stay and, second, that Singsong s bankruptcy was invalid because it lacked the authority to file bankruptcy under its corporate by-laws. Id. at 5 6. Singsong successfully appealed the bankruptcy court s decision to the United States District Court in the District of Moot. Id. at 6. Plum then appealed to the United States Court of Appeals for the Thirteenth Circuit, which affirmed the decision of the district court that reversed the bankruptcy court orders. Id. at 13. 2

13 SUMMARY OF THE ARGUMENT The protections of bankruptcy exist as a shelter to the helpless, not a refuge for the nefarious. While 11 U.S.C. 362 (2006) ( Section 362 ) provides a stay applicable to the commencement or continuation of a suit against the filer of a petition, it has consistently been reserved for instances which further the rationale of bankruptcy security. 362(a). Two days after a district court found Respondent was infringing Petitioner s patent, Respondent filed for bankruptcy. Rather than providing for the orderly administration of Respondent s assets, an automatic stay would delay the consequences of its illicit actions. First, a corporation may not file a voluntary petition in bankruptcy when its governing corporate documents prohibit such an action. Business entities exist as an artificial construction in the state they are incorporated in, acting only in the channels opened by applicable statute through authorization from its internal governing provisions. When Respondent enacted an amendment to its bylaws restricting its ability to seek bankruptcy protection, it was thereafter able to act only in accordance with this provision. Rather than existing as a waiver of bankruptcy rights, Respondent merely altered its internal procedure as to how a bankruptcy filing would commence. This Court explained that, A waiver is ordinarily an intentional relinquishment or abandonment of a known right or privilege. Johnson v. Zerbst, 304 U.S. 458, 464 (1938) At no point did Respondent relinquish or abandon its right as a corporate entity to file for bankruptcy, Respondent simply made the process more procedurally difficult to accomplish. Had it wished file a petition, an amendment of its by-laws to remove the provision would have sufficed to restore its ability to file. Second, an automatic stay does not apply to an action seeking to enjoin allegedly unlawful post-petition operation of the debtor s business. Respondent asserts that Section 362, 3

14 which provides it refuge from Petitioner s infringement action, has been historically confined to staying traditional creditor-debtor disputes to effectuate the orderly administration of a bankrupt entity. Respondent would have this Court authorize an automatic stay in regards to a matter that has no bearing on the ability of a bankruptcy court to handle its matters. Such an application would run counter to the purpose of bankruptcy protection and run against the intent of Congress in enacting Section 362. Even if this Court were to find that Section 362 provides a stay against Petitioner s suit, Congress has provided an alternate path of relief for victims of unlawful post-petition conduct in 28 U.S.C. 959(a) (2006) ( Section 959 ). Section 959 provides that a debtor may be sued with respect to actions taken after the filing of a bankruptcy petition. Since the relief Petitioner seeks is in the form of an injunction restricting ongoing conduct by Respondent, the filing of a bankruptcy petition necessarily served to transform the present action into a suit under Section 959. This transfer would be consistent with the principles of equity that this court has applied to legislation to effectuate the purpose of the legislation. It would also foreclose the possibility that, merely by filing a bankruptcy petition, a debtor would be able to continue unlawful conduct that would have otherwise been subject to penalty by the court. Finally, this Court should allow for a bifurcation of the present suit, permitting the motion for an injunction to continue while staying the prayer for monetary damages. This course of action would further the principles of bankruptcy law by granting the bankruptcy court full oversight over the debtor s assets while still protecting patent-holders. 4

15 ARGUMENT The Court should answer in the negative to both questions presented. First, a corporation may not file a voluntary petition in bankruptcy when its corporate by-laws prohibit such an action, because (I) pre-petition bankruptcy waivers may be enforceable when freely enacted as an amendment to corporate governing documents; and (II) a voluntary amendment to corporate by-laws does not constitute legal waiver of its privileges under the Title 11 of the United States Code ( Bankruptcy Code ). Second, (III) applying the automatic stay to actions seeking to enjoin post-petition patent infringement would allow Respondent to utilize bankruptcy as a shield to continue unlawful activity. I. THE COURT SHOULD REVERSE THE THIRTEENTH CIRCUIT S FINDING THAT PRE-PETITION BANKRUPTCY WAIVERS ARE UNENFORCEABLE. The Thirteenth Circuit erred in attempting to establish a bright-line rule that an obstacle to the ability to file bankruptcy constitutes a bankruptcy waiver and is unenforceable. As a result, this Court should reverse that error, because (A) an amendment to corporate by-laws does not constitute a pre-petition bankruptcy waiver; (B) the lower court should have enforced the pre-petition bankruptcy waiver since it was freely enacted as an amendment to corporate bylaws; and (C) the Thirteenth Circuit s public policy argument against the enforcement of prepetition waivers intrudes upon the legislature s authority. A. THE THIRTEENTH CIRCUIT SHOULD HAVE HELD THAT AN AMENDMENT TO CORPORATE BY-LAWS DOES NOT CONSTITUTE A PRE-PETITION BANKRUPTCY WAIVER. When a corporation freely enacts an amendment to its by-laws, it does not waive it rights, it simply allows the corporation to set the direction of its governance. An amendment to by-laws is a unilateral act of a corporation and does not meet the standard of waiver set by this Court. 5

16 A waiver is ordinarily an intentional relinquishment or abandonment of a known right or privilege. Johnson, 304 U.S. at 464. Waiver requires (1) the existence at the time of the waiver [of] a right, privilege, advantage, or benefit which may be waived; (2) the actual or constructive knowledge thereof; and (3) an intention to relinquish such right, privilege, advantage or benefit. In re Garfinkle, 672 F.2d 1340, 1347 (11th Cir. 1982). Respondent s amendment to its corporate by-laws was unilateral and freely enacted. The by-laws provide: Notwithstanding any other provision to the contrary, the Corporation is not authorized to file a petition in bankruptcy under 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 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 to cause it to be filed. In re Singsong Elec., Inc., No , at 5. This amendment should not be construed as a waiver of its right to file bankruptcy, because the board did not intend to indefinitely relinquish a right or privilege to file bankruptcy. It simply set a standard for the corporation that a voluntary bankruptcy would not be filed, barring further amendment to the by-laws. This freely enacted amendment to Respondent s by-laws is not an indefinite waiver of rights, but rather a preference to avoid voluntary bankruptcy. B. THE THIRTEENTH CIRCUIT SHOULD HAVE ENFORCED THE PRE-PETITION BANKRUPTCY WAIVER SINCE IT WAS FREELY ENACTED AS AN AMENDMENT TO CORPORATE BY-LAWS. Even though the Thirteenth Circuit was quick to dismiss the pre-petition bankruptcy waiver as unenforceable, some courts have enforced the relinquishment of other pre-petition bankruptcy rights. See, e.g., In re Powers, 170 B.R. 480 (D. Mass. 1994) (enforcing a pre- 6

17 petition waiver of an automatic stay). In the event that this Court finds this provision to be a prepetition bankruptcy waiver, this Court should still enforce it due to extenuating circumstances. On a de novo review, this Court has the ability to enforce a pre-petition bankruptcy waiver when it is freely entered into by an amendment of corporate by-laws without any undue influence and is not part of a contractual provision. Liberty finds no refuge in a jurisprudence of doubt. Planned Parenthood of Se. Pa. v. Casey, 505 U.S. 833, 844 (1992). This Court has the opportunity to provide clarity to a murky area of bankruptcy law in finding that a noncoerced, voluntary amendment of corporate by-laws is enforceable. Without this standard set, lower courts will be left to their own devices to enforce widely varying interpretations of the same statute. While it is true that pre-petition bankruptcy waivers in contractual previsions have been generally deemed unenforceable, Respondent s by-law was a freely enacted amendment of its corporate governing provisions, approved without any undue influence and not part of a contractual obligation. Without this Court providing clarity as to the permissibility of such a provision, it leads to inconsistent treatment in courts and uncertainty in the business community. For instance, while the Thirteenth Circuit indicated a bright-line rule that all pre-petition bankruptcy waivers are invalid, the Second Circuit abstained from making such an assertion. Rather, the court provided a detailed examination of a pre-petition bankruptcy waiver in an effort to gain a better understanding of the circumstances before deciding whether to enforce the provision. See In re Singsong Elec., Inc., No , at 8 (stating all pre-petition bankruptcy waivers are invalid); United States v. Royal Bus. Funds Corp., 724 F.2d 12, 15 (2d Cir. 1983) (examining the circumstances surrounding a pre-petition bankruptcy waiver); see also In re GSC, 7

18 Inc., 453 B.R. 132, 164 n.47 (Bankr. S.D.N.Y. 2011) (stating that pre-petition bankruptcy waivers are not invalid per se). Upholding pre-petition bankruptcy waivers when they are freely enacted as an amendment to corporate by-laws and are not part of any contractual agreements would clarify the murky jurisprudence surrounding the issue and provide certainty for the business community. C. THE THIRTEENTH CIRCUIT S PUBLIC POLICY ARGUMENT AGAINST THE ENFORCEMENT OF PRE-PETITION WAIVERS INTRUDES UPON THE LEGISLATURE S AUTHORITY. The Thirteenth Circuit intruded into the terrain of the legislature when it declared that public policy rejected the propriety of pre-petition bankruptcy waivers. As Chief Justice Roberts noted in the opinion of the Court, the judiciary has the authority to interpret the law; but, [it] possesses neither the expertise nor the prerogative to make policy judgments. Those decisions are entrusted to our... elected leaders.... Nat'l Fed'n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566, 2579 (2012). The Chief Justice concluded, It is not [a court's] job to protect the people from the consequences of their political choices. Id. It is not for the court to decide whether, as a policy matter, pre-petition Bankruptcy waivers should be valid. The Thirteenth Circuit s attempt to draw on public policy concerns usurps the policy-making function of the legislature. II. THE COURT SHOULD REVERSE THE THIRTEENTH CIRCUIT S PRESUMPTION THAT RESPONDENT S BANKRUPTCY PETITION WAS A VOLUNTARY ACT. The Thirteenth Circuit erred in finding that Respondent s bankruptcy petition was a voluntary act of the corporation. In so holding, the lower court ignored the following: (A) pursuant to its by-laws, Respondent was barred from filing a voluntary petition in bankruptcy; (B) Respondent was bound by its by-laws; and (C) Respondent s action was invalid since it did not file a voluntary bankruptcy petition under Section

19 A. THE THIRTEENTH CIRCUIT SHOULD HAVE HELD THAT, PURSUANT TO ITS BY- LAWS, RESPONDENT WAS BARRED FROM FILING A VOLUNTARY PETITION IN BANKRUPTCY. This Court should further the principles of Model Business Corporation Act by holding Respondent responsible for the actions that its Board of Directors took. Any action taken by the corporation in violation of its by-laws is, by definition, invalid. The governing instruments, such as by-laws, of a corporation and the laws of the state of its incorporation generally determine the validity of a corporate act. See generally In re Autumn Press, Inc., 20 B.R. 60 (Bankr. D. Mass. 1982). When interpreting corporate documents, analysis starts with the principle that the rules which are used to interpret statutes, contracts, and other written instruments are applicable when construing corporate charters and by[-]laws. Hibbert v. Hollywood Park, Inc., 457 A.2d 339, (Del. 1983); see also Truck Fin. Specialists, Inc. v. W & S Leasing, Inc., 911 N.E.2d 612, 615 (Ind. Ct. App. 2009) ( When interpreting corporate documents, as with any contract, the intention of the parties is controlling. ). However, if the by-laws are unambiguous in its language, courts need not proceed to interpret it or to search for the parties' intent behind the by[-]law. In re Osteopathic Hosp. Ass n, 191 A.2d 333, 343 (Del. Ch. 1963). Respondent s by-laws indicated that it was not authorized to file a petition in bankruptcy under 301. In re Singsong Elec., Inc., No , at 5. Moreover, the Board of Directors of the Corporation does not have authority to consider or approve a resolution to file a voluntary petition in bankruptcy. Id. Based on the plain reading of Respondent s by-laws, the amendment was intended to prevent the corporation from voluntarily filing for bankruptcy. This Court should interpret the by-laws as written, giving language which is clear, simple, and unambiguous the force and effect required. Hajoca Corp. v. Sec. Trust Co., 25 A.2d 378, 383 9

20 (Del. Super. Ct. 1942). Since the by-laws prohibited such a filing, the voluntary petition was not properly approved and is void under 11 U.S.C. 301 (2006) ( Section 301 ). B. THE THIRTEENTH CIRCUIT SHOULD HAVE FOUND RESPONDENT S ACTION INVALID BECAUSE RESPONDENT WAS BOUND BY ITS OWN PROCEDURAL REQUIREMENTS. This Court should hold that a corporation is bound by procedural requirements it has imposed on itself to make the corporation a more attractive investment. Respondent had ample opportunity to abide by the boundaries set in place in its by-laws, but it chose to work outside of its authority and, consequently, the petition filed was invalid. By-laws govern the management of a corporation s internal structure. The by-laws may contain any provision managing a corporation s affairs that is not inconsistent with the law or the articles of incorporation. See generally Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985). In the event a board seeks to make revisions to its governing documents, by-laws may be, amended or repealed. See generally In re New Orleans Paddlewheels, Inc., 350 B.R. 667, 682 (Bankr. E.D. La. 2006). In the present case, Respondent was free to amend its by-laws. A corporation cannot merely pass a resolution inconsistent with its governing documents. The corporation must first amend those governing documents to allow for the passage of such a resolution. This can be analogized to Congress attempting to amend the United States Constitution by mere resolution. Even if the resolution garnered sufficient support to pass an actual amendment, it would be without legal force unless the proper procedural steps were followed. Similarly, Respondent is unable to file a voluntary petition in bankruptcy until it re-amends its governing documents, since its by-laws specifically preclude such an action. 10

21 Without first taking this procedural step, any action by the corporation purportedly filing a voluntary petition in bankruptcy is void. This Court should hold that Respondent is bound by the procedural mechanisms it put into place. C. THE THIRTEENTH CIRCUIT SHOULD HAVE FOUND RESPONDENT S ACTION INVALID BECAUSE IT DID NOT FILE A VOLUNTARY BANKRUPTCY PETITION UNDER SECTION 301. The filing of a bankruptcy petition and initiation of a bankruptcy case is governed by the Bankruptcy Code. In order to file a voluntary petition in bankruptcy, certain procedural actions must be taken. Without taking those necessary actions, any bankruptcy petition would be invalid. Section 301 defines a voluntary petition for bankruptcy as being filed by a proper entity. The Code does not establish other prerequisites for filing applicable to this case. When the debtor is a corporation... questions may arise as to who... possesses the requisite authority to verify and file a voluntary petition in the debtor's name. 2 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy [7] at (15th ed. 2005). If a board of directors, by its own doing, does not have the requisite authority to file a petition in bankruptcy in the corporation s name, then such a petition cannot be valid. Here, Respondent clearly had a provision in its by-laws that precluded it from seeking a voluntary bankruptcy petition. Since they did not have this authority to file a petition on behalf of Respondent, a proper entity never filed a voluntary petition. Procedurally, the Board of Directors did not have the authority to file bankruptcy. Respondent did not procedurally take the requisite steps to restore its ability to file for bankruptcy. Consequently, the petition filed was invalid. 11

22 III. THE COURT SHOULD REVERSE THE THIRTEENTH CIRCUIT S FINDING THAT AN AUTOMATIC STAY APPLIES TO AN ACTION SEEKING TO ENJOIN ALLEGEDLY UNLAWFUL POST-PETITION OPERATION OF THE DEBTOR S BUSINESS. When a debtor files a petition for bankruptcy, the Bankruptcy Code allows an automatic stay of certain judicial actions and proceedings against that debtor, so long as those judicial actions or proceedings could have been brought before the filing of the petition for bankruptcy. See 11 U.S.C. 362 (2006) ( Section 362 ). The Thirteenth Circuit, however, incorrectly applied Section 362 to Petitioner s patent infringement dispute. First, the automatic stay of Section 362 was never meant to apply to patent infringement suits, because those actions are entirely outside the confines of the traditional debtor creditor relationship seen in bankruptcy. Second, even if the Court finds Section 362 does apply to patent infringement actions, the postpetition activities taken by a debtor are not immune from suit. See 28 U.S.C. 959 (2006) ( Section 959 ). A. THE THIRTEENTH CIRCUIT INCORRECTLY APPLIED SECTION 362 TO STAY A REQUEST TO ENJOIN UNLAWFUL CONDUCT. This Court has said, [b]ankruptcy proceedings do not, merely by virtue of their maintenance, terminate an action already pending in a non-bankruptcy court, to which the bankrupt is a party. Connell v. Walker, 291 U.S. 1, 5 (1934). The automatic stay of Section 362 exists to provide creditors with an orderly and equitable process to seek a claim against the debtor. See In re Knightsbridge Dev. Co. Inc., 884 F.2d 145, (4th Cir. 1989). Section 362 does not, however, reach a request for an equitable enjoinment of patent infringement. The Thirteenth Circuit incorrectly applied Section 362 to Petitioner s motion for an injunction because (1) Petitioner s patent infringement claim does not reach the bankruptcy court s area of oversight; and (2) legislative history confirms that Section 362 was not intended to act as a shield for the continuance of unlawful conduct, such as patent infringement. 12

23 1. Section 362 Only Applies to Bankruptcy-Related Claims Where There is a Creditor Debtor Relationship. The automatic stay of Section 362 is designed to prevent a chaotic and uncontrolled scramble for the debtor s assets in a variety of uncoordinated proceedings in different courts. Fid. Mortg. Investors v. Camelia Builders, Inc., 550 F.2d 47, 55 (2d Cir. 1976). The stay prevents conflicting judgments and harmonizes all of the creditors interests with one another. Id. If there is no creditor debtor relationship between disputing parties, however, Section 362 has no purpose and effect. Section 362 should be read as an equitable solution for handling actions between creditors and debtors in order to effectuate a streamlined process for administering the debtor s assets, not for claims involving non-creditor debtor disputes. The Court should continue to confine the automatic stay to the traditional purpose of bankruptcy law: providing an orderly process for creditors seeking a claim against the bankrupt estate. See Straton v. New, 283 U.S. 318, 321 (1931). Claims that do not threaten to deplete the debtor s assets should be allowed to continue unfettered. See Seiko Epson Corp. v. Nu-Kote Int l, Inc., 190 F.3d 1360, 1364 (Fed. Cir. 1999) ( proceedings that do not threaten to deplete the assets of the debtor need not be stayed ). The Sixth Circuit specifically addressed this issue when allowing a tort proceeding to continue against a debtor that filed a petition in bankruptcy. See Dominic s Rest. of Dayton, Inc. v. Mantia, 683 F.3d 757 (6th Cir. 2012). There, the court stated: Because this [proceeding] involves [the debtor s] use of the [business] to commit a tort, specifically the tort of trademark... infringement, application of the automatic stay would permit [the debtor] to continue to commit this tort. [The debtor s] commission of a tort is not protected by the Bankruptcy Code. Therefore, [the debtor s] petition for bankruptcy does not stay [the tort] proceeding. 13

24 Id. at 761. This interpretation would limit the protection of an automatic stay to monetary suits seeking to substantively alter the assets of a bankrupt entity where there is a traditional debtor creditor relationship. A patent infringement action does not impede or alter proceedings between Respondent and any pending claim against it from a creditor. All efforts seeking Respondent s assets would continue to proceed in bankruptcy court, while Petitioner s unrelated action seeking an injunction for patent infringement would proceed in the traditional forum. A patent infringement action does not deplete the assets of Respondent; rather, it is confined strictly to preventing the continuation of unlawful conduct. This does not affect the ability of Respondent to organize its affairs with respect to its creditors. As the Sixth Circuit noted in Dominic s Restaurant of Dayton, the Bankruptcy Code does not allow the commission of unlawful conduct. 683 F.3d at 761; see also In re Holtkamp, 669 F.2d 505, 508 (7th Cir. 1982) ([when] the pending action is neither connected with nor interfering with the bankruptcy proceeding, the automatic stay in no way fosters [Bankruptcy] Code policy ). Here, Respondent is attempting to use the bankruptcy court to allow it to continue violating Petitioner s patent. Further, a patent infringement suit does not require specialized knowledge of a bankruptcy court. Applying a Section 362 stay to a patent dispute would enable any party to significantly alter pending actions against it merely by filing for bankruptcy. This is not the intention of bankruptcy protection and this Court should not allow such conduct to continue. The Thirteenth Circuit majority asserts that an injunction on the sale of a product would be akin to exercising control over property and fall under the automatic stay requirement of Section 362. This argument was rejected in a similar suit over the patent of a squirt-gun design. See Larami Ltd. v. Yes! Entm t Corp., 244 B.R. 56 (Bankr. D.N.J 2000). There, the court 14

25 reasoned that the patent infringement suit was not an attempt to directly exercise control over the business entity s assets, but rather was an attempt to prevent... unlawful conduct.... Id. at 59. Petitioner does not seek to exercise control over the infringing product. Instead, Petitioner simply seeks to prevent continued unlawful conduct. Enjoining unlawful conduct does not run afoul of Section 362 and should not be stayed. By applying the automatic stay of Section 362 to only bankruptcy-related claims where there is a creditor debtor relationship, the Court allows for an equitable solution for both parties. Respondent continues in a bankruptcy court to orderly administer their assets, while Petitioner is able to seek an enjoinment of unlawful conduct. 2. Congress Did Not Intend Section 362 to Act as a Shield for the Continuance of Unlawful Conduct. The Court should reverse the Thirteenth Circuit and interpret Section 362 the way Congress intended by keeping a patent dispute in district court separate from a bankruptcy petition in bankruptcy court. Allowing unlawful conduct to continue, even temporarily, due to the staying of an ongoing suit seeking an injunction, would allow bankruptcy courts to be used as a shield to continue illicit conduct rather than the intended reorganization protection. This Court has long held that a statute should be interpreted the way Congress intended. See Philbrook v. Glodgett, 421 U.S. 707, 713 (1975) ( our objective... is to ascertain the congressional intent and give effect to the legislative will. ); United States v. Am. Trucking Ass n, 310 U.S. 534, 542 (1940) ( in the interpretation of statutes, the function of the courts is... to construe the language so as to give effect to the intent of Congress ); ICC v. Baird, 194 U.S. 25, 38 (1904) ( the object of construction... is to ascertain the legislative intent... [in order] to effectuate the purposes of the lawmakers ). Analyzing legislative intent allows the laws duly passed by the legislature to be enforced and interpreted in furtherance of their objectives. 15

26 Congress intended to apply the Section 362 automatic stay protection only to suits within the confines of a traditional creditor debtor relationship. See S. Rep. No at (1978). In explaining the addition of Section 362, Congress stated that: The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy. Id. This statement shows that the fundamental principle behind enacting Section 362 was to provide a stay on actions that could substantively impede the ability of a bankruptcy court to oversee an orderly reorganization of a bankrupt entity. Congress did not intend to give a bankruptcy court jurisdiction over all matters against a bankrupt entity simply by virtue of that entity filing a bankruptcy petition. This contention was furthered in the recommendations of the Securities and Exchange Commission, as published in the November 5, 1975 U.S. Senate Subcommittee on Judicial Machinery Report. Summary of Principle Recommendations of Securities and Exchange Commission on Proposed Bankruptcy Legislation: Hearings on S. 225 and S. 236 Before the Subcomm. on Improvements in Judicial Machinery of the Committee on the Judiciary, 94th Cong. 773 (1975) ( Senate SEC Report ). The Senate SEC Report stated that Section 362 could not be used as a reprieve from a pending suit seeking to halt unlawful conduct. 1 Id. The Senate SEC Report further stated that, businesses operated in reorganization proceedings involve the full range of ordinary litigation personal injury, collections, patents, and a host of other transactions. Id. (emphasis added). The Senate SEC Report was unequivocal in its assertion that those types of actions were not to be left to the determination of a bankruptcy court. Id. 1 In order to avoid confusion, it should be noted that Section 362 was originally designated as Section

27 Trying such matters in the reorganization courts is inconsistent with the concept of a specialized bankruptcy court. Id. Crafters of Section 362 not only intended, but also vocalized their purpose that certain actions, such as personal injury and patent infringement, would not be subject to the automatic stay. Overseeing those actions would conflict with the prerogative of bankruptcy courts. This would allow bankruptcy courts to exercise control over matters unrelated to the administration of a bankrupt corporation. B. THE THIRTEENTH CIRCUIT SHOULD HAVE APPLIED A SECTION 959 EXCEPTION TO THE AUTOMATIC STAY FOR SUITS PERTAINING TO POST-PETITION ACTIVITIES OF A DEBTOR S BUSINESS. Even if the Court determines that Section 362 applies to a request to enjoin unlawful activity, Section 959 provides an independent avenue for relief for all suits involving the debtor s continued acts or transactions in carrying on business. 959(a). If, after filing a petition in bankruptcy, a debtor that continues unlawful conduct in carrying on a business may be sued under Section 959. The Court should apply Section 959 to Petitioner s request to enjoin Respondent s patent infringement. If an ongoing legal action is seeking to enjoin a debtor s continued business activities, then, at the time of a bankruptcy filing, that suit should automatically be construed as continuing under the Section 959 exception to the automatic stay. The Court has altered the reach of statutes where the principles of equity render such construction appropriate. See generally Beley v. Naphtaly, 169 U.S. 353, 360 (1898) ( In some cases the letter of a legislative act is restrained by an equitable construction; in others, it is enlarged; in others, the construction is contrary to the letter. ); Booth v. Clark, 58 U.S. 322, 326 (1854) ( Remedial statutes have been made to extend, by an equitable construction, to other persons, to other things, to other places, and to other times than those expressly mentioned in the statute. ). Both bankruptcy and injunctions are based on 17

28 principles of equity. Construing a request for an injunction as a Section 959 exception to the automatic stay is consistent with these principles of equity. Section 959 ensures that debtors continue to be responsible for following applicable law and are not exempted from legal obligations merely because their course of unlawful conduct began prior to filing a petition in bankruptcy. The Second Circuit explained, [Section] 959 makes debtors[] suable for the routine occurrences which arise from efforts to continue carrying on business after the [bankruptcy] petition is filed. Fid. Mortg., 550 F.2d at 56 (citing Section 959). At the point Respondent filed for bankruptcy, Petitioner s suit should have been construed to continue under the authority of Section 959. This allows the injunction to enjoin Respondent s post-petition activities. Holding that Section 362 would stay an action even though the tortious conduct is ongoing would provide an avenue for a debtor to continue with unlawful activities merely by filing of a bankruptcy petition. Section 959 allows suits against a debtor s ongoing business operation precisely to prevent a debtor from using the automatic stay as a shield. Without transforming Petitioner s motion for an injunction to a Section 959 exception, Respondent is able to skirt the equitable laws of bankruptcy and use an automatic stay for an improper purpose. The Thirteenth Circuit argues that Congress intended Section 959 to act as a balancing factor in the consideration of an automatic stay. Congress, however, said the exact opposite. Congress was fully aware that Section 959 operated as a separate entity and was intended to provide an avenue for relief in traditional forums in the event that unlawful conduct was occurring by a debtor. In enacting Section 362 into law, the House of Representatives stated that certain suits relating to ongoing acts by a bankrupt entity are not subject to the automatic stay. See H. Rep. No , at 44 (1977) ( certain categories of litigation against the trustee can be 18

29 commenced in a court other than the bankruptcy court... ). The House further stated that Section 959 specifically allows such suits because, [debtors] engaged in carrying on business... [are] suable without leave of the court appointing them. Id. at n Courts have agreed, stating that Section 959 establishes a clear exception to blanket stays entered by a reorganization court. Haberern v. Lehigh & N.E. Ry. Co., 554 F.2d 581, 585 (3d Cir. 1977). A judicial action seeking an injunction can now only enjoin actions conducted postpetition after Respondent s bankruptcy filing. This filing automatically transformed Petitioner s suit into a Section 959 action. A contrary reading would allow unlawful conduct on the part of a debtor to continue unfettered so long as it began before the filing of a bankruptcy petition. C. THE THIRTEENTH CIRCUIT SHOULD HAVE BIFURCATED AN INJUNCTION REQUEST FROM MONETARY DAMAGES IN ORDER TO FURTHER THE PRINCIPLES OF EQUITY AND ALLOW FOR THE PROTECTION OF PATENT HOLDERS. Allowing a patent infringement suit, which is interrupted by a bankruptcy filing, to proceed on a bifurcated basis allows for equitable relief for the patent holder and furthers the equitable purpose of both the automatic stay and the bankruptcy petition. A patent suit should be permitted to proceed solely on the issue of an injunction. This would further the purpose of shielding the bankrupt entity s assets, while preserving the patent by refusing to allow a patent violation to continue merely by virtue of a bankruptcy filing. In compliance with the principle of ubi jus ibi remedium ( where there is a right there is a remedy ), the Court should bifurcate an equitable request for an injunction from a demand for monetary damages. See Catanzano by Catanzano v. Wing, 103 F.3d 223, 229 (2d Cir. 1996) (following the principle of ubi jus ibi remedium); see also Schneider v. Schneider, 141 F.2d 542, 544 (D.C. Cir. 1944) ( where a duty exists equity will provide a remedy for its violation ). If a court of law has duly found an entity to be in violation of the law, equity must provide for a remedy to the violation. 19

30 The lower court found Respondent to be in violation of Petitioner s patent. Respondent has a duty to cease its violation of those patents. Petitioner simply seeks the Court to enjoin the continued violation of its rights, not immediate monetary damages for past violations. Bifurcating the request for an injunction with a demand for past monetary damages and allowing the injunction request to proceed is the only equitable solution. Here, there is a right: Petitioner s right not to have its patent infringed. Under the Thirteenth Circuit s interpretation, however, there is no remedy. Other courts have allowed for a bifurcation of past monetary damages with a request to enjoin future unlawful conduct in bankruptcy cases in order to provide for a remedy. This allows for both a preservation of the entity for creditors and debtors and the protection of an existing patent by a holder. While Section 362 does halt suits pertaining to debt liabilities, [t]he Bankruptcy Act is silent as to the staying of an action where the relief sought is in the form of an injunction. Brennan v. T&T Trucking, Inc., 396 F.Supp. 615, 618 (N.D. Ok. 1975). Such silence is in accord with the purpose of an automatic stay. An injunction does not interfere with the bankruptcy court s administration of a debtor s assets and functions entirely separately from creditors seeking payment. The Thirteenth Circuit stated that the pre-petition and post-petition claims cannot logically be bifurcated. In re Singsong Elec., Inc., No , at 12 (13th Cir. October 14, 2012). That logic asserts it is not possible to separate pre-petition and post-petition actions due to the ongoing nature and, consequently, determines that the injunction request should have been brought before the bankruptcy. However, this reasoning does not take into account that Respondent is attempting to utilize bankruptcy as a shield to continue unlawful activity. Bankruptcy should not be exploited in this manner and courts have previously dealt with this by bifurcating the injunction request from the prayer for monetary damages. 20

31 For example, in Bambu Sales, Inc. v. Sultana Crackers, Inc., the Eastern District of New York faced a dispute between a trademark holder and a trademark infringer. 683 F.Supp. 899 (1988). After the trademark holder filed suit seeking monetary damages for past infringement and an injunction against future infringement, the trademark infringer filed bankruptcy and argued that Section 362 should enjoin the trademark holder from proceeding. Id. at 917. The court disagreed and bifurcated the request for past monetary damages from the request for an injunction against future harms. Id. This allowed the injunction action to proceed as to liability [in order to obtain] equitable relief. Id. The court reasoned that the automatic stay stood as an entirely separate issue from the sanctity of a trademark. Id. at 916. The court stated that the trademark holder is not... a creditor of the [trademark infringer], nor is the injunctive relief which it seeks predicated upon any indebtedness. Id. at 917 (quoting Steak & Brew, Inc. v. Makris, No , LEXIS 14907, at *7 8 (D. Conn. February 14, 1973)). By allowing a patent infringement suit to proceed solely on the basis of an injunction against future wrongs, separated from the issue of monetary damages for past harms, the Court can provide a remedy for Petitioner s right. 21

32 CONCLUSION The judgment of the United States Court of Appeals for the Thirteenth Circuit should be reversed for the foregoing reasons. January 28, 2013 Respectfully submitted, Team #: P51 Counsel for Petitioner 22

33 APPENDIX A Section 362 of Title 11 of the United States Code provides: 362. Automatic stay (a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and (8) the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title. (b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay (1) under subsection (a) of this section, of the commencement or continuation of a criminal action or proceeding against the debtor; (2) under subsection (a) (A) of the commencement or continuation of a civil action or proceeding