No In the SUPREME COURT OF THE UNITED STATES IN RE SINGSONG ELECTRONICS, INC., DEBTOR, PLUM, INC., PETITIONER, SINGSONG ELECTRONICS, INC.

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 PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR THE PETITIONER 47 Counsel for Petitioner

2 QUESTIONS PRESENTED I. Did the bankruptcy court correctly dismiss Singsong Electronics, Inc. s Chapter 11 bankruptcy case because Singsong, and those purporting to act on its behalf, lacked the requisite corporate authority under the corporation s governing documents to file a voluntary petition? II. Did the bankruptcy court correctly rule that Plum, Inc. s patent infringement action against the debtor, Singsong, was not stayed because the automatic stay did not apply and, even if it did, 28 U.S.C. 959(a) is an exception to the automatic stay? i

3 TABLE OF CONTENTS QUESTIONS PRESENTED...1 TABLE OF CONTENTS...2 TABLE OF AUTHORITIES...4 OPINIONS BELOW...8 STATEMENT OF JURISDICTION...9 STATEMENT OF FACTS...1 SUMMARY OF ARGUMENT...4 ARGUMENT...6 I. THE BANKRUPTCY COURT PROPERLY DISMISSED SINGSONG S CHAPTER 11 PETITION BECAUSE SINGSONG S BOARD OF DIRECTORS LACKED THE REQUISITE AUTHORITY TO FILE A VOLUNTARY PETITION ON BEHALF OF THE CORPORATION....6 A. A Voluntary Petition Must Be Dismissed When it is Filed on Behalf of a Corporation by a Party Lacking Authority to Act Pursuant to the Corporation s Governing Documents and State Law....6 B. The Bankruptcy Court Did Not Acquire Jurisdiction over Singsong s Chapter 11 Case Because a Valid Petition Was Never Filed....7 C. The Bankruptcy Code s Anti-Waiver Provisions and Policies Are Not Applicable to the Instant Case Because They Apply Only to Individuals, Not to Corporations D. Decisions Regarding Bankruptcy Policy Should be Left to Congress E. By Permitting the Filing of Involuntary Petitions under 303, Congress Provided a Statutory Means for Aggrieved Creditors to Avail Themselves of the Bankruptcy System F. The Timing and Circumstances Surrounding Singsong s Filing of its Chapter 11 Case Suggest a Bad Faith Filing II. PLUM ACTED LAWFULLY WHEN IT SOUGHT TO ENJOIN SINGSONG S UNLAWFUL POST-PETITION CONDUCT BECAUSE THE AUTOMATIC STAY DOES NOT APPLY AND 28 U.S.C. 959(a) EXCEPTS PLUM FROM SEEKING RELIEF FROM STAY A. The Automatic Stay Does Not Apply to Plum s District Court Injunction Action Because Plum s claim arose post-petition, 362(a)(1) does not apply ii

4 2. Because Plum is not seeking to exercise control over Singsong s property, 362(a)(3) does not apply B. Even if the Automatic Stay Applies, 959(a) Creates an Independent Exception to the Stay that Permits Non-Bankruptcy Actions to be Commenced without Leave of the Bankruptcy Court CONCLUSION APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F iii

5 TABLE OF AUTHORITIES Cases Barton v. Barbour, 104 U.S. 126 (1881)... 24, 25 BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) Butner v. United States, 440 U.S. 48 (1979)... 18, 25 Local Loan Co. v. Hunt, 292 U.S. 234 (1934)... 11, 18 Perez v. Campbell, 402 U.S. 637 (1971) Price v. Gurney, 324 U.S. 100 (1945)... 6, 7, 8, 9 Russello v. United States, 464 U.S. 16 (1983) United States v. Whiting Pools Inc., 462 U.S. 198 (1983) Williams v. U.S. Fid. & Guar. Co., 236 U.S. 549 (1915)... 10, 11 A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020 (Fed. Cir. 1992) Augustine Med., Inc. v. Progressive Dynamics, Inc., 194 F.3d 1367 (Fed. Cir. 1999) Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989) Cedar Shore Resort, Inc. v. Mueller (In re Cedar Shore Resort, Inc.), 235 F.3d 375 (8th Cir. 2000) Dominic s Restaurant of Dayton, Inc. v. Mantia, 683 F.3d 757 (6th Cir. 2012)... 22, 23 E.I. Du Pont de Nemours & Co. v. MacDermid Printing Solutions, LLC, 525 F.3d 1353 (Fed. Cir. 2008)... 18, 19 Fallick v. Kehr, 369 F.2d 899 (2d Cir. 1966) Hager v. Gibson, 108 F.3d 35 (4th Cir. 1997)... 8, 9 Hazelquist v. Guchi Moochie Tackle Co., 437 F.3d 1178 (Fed. Cir. 2006) In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999) In re VistaCare Grp., LLC, 678 F.3d 218 (3d Cir. 2012)... 15, 24 In the Matter of Metro. Realty Corp., 433 F.2d 676 (5th Cir.1970) Seiko Epson Corp. v. Nu-Kote Int l, Inc., 190 F.3d 1360, 1364 (Fed. Cir. 1999) Hayhoe v. Cole (In re Cole), 226 B.R. 647 (B.A.P. 9th Cir. 1998)... 12, 13 Amplifier Research Corporation v. Hart, 144 B.R. 693 (E.D. Pa. 1992)... 22, 23 iv

6 Bambu Sales, Inc. v. Sultana Crackers, Inc., 683 F. Supp. 899 (E.D.N.Y. 1988)... 23, 24 Furness v. Lilienfield, 35 B.R (D. Md. 1983)... 16, 18 In re Weitzen, 3 F. Supp. 698 (S.D.N.Y. 1933) In the Matter of Mahurkar Double Lumen Hemodialysis Catheter Patent Litigation, 140 B.R. 969 (N.D. Ill. 1992) Larami Ltd. v. Yes! Entm t Corp., 244 B.R. 56 (D.N.J. 2000)... 21, 22 Voice Systems & Servs., Inc. v. VMX, Inc., No. 91-C-88-B, 1992 WL (N.D. Okla. Nov. 5, 1992)... 19, 21, 24, 25 DiCello v. United States (Matter of Ry. Reorganization Estate, Inc.), 133 B.R. 578 (Bankr. D. Del. 1991) In re Arkco Props., Inc., 207 B.R. 624 (Bankr. E.D. Ark. 1997)... 6, 7, 9 In re Autumn Press, Inc., 20 B.R. 60 (Bankr. D. Mass. 1982)... 6, 7 In re Cinnabar 2000 Haircutters, Inc., 20 B.R. 575 (Bankr. S.D.N.Y. 1982)... 18, 21 In re Continental Air Lines, Inc., 61 B.R. 758 (Bankr. S.D. Tex. 1986) In re Edwards, 140 B.R. 515 (Bankr. W.D. Mo. 1992) In re HBA E., Inc., 87 B.R. 248 (Bankr.E.D.N.Y.1988) In re Kish, 41 B.R. 620 (Bankr. E.D. Mich. 1984) In re Martin, 51 B.R. 490 (Bankr.M.D.Fla.1985) In re Rook, 102 B.R. 490 (Bankr. E.D. Va. 1989) In re Sherwood Enterprises, Inc., 112 B.R. 165 (Bankr. S.D. Tex. 1989) In re Spansion, Inc., 418 B.R. 84 (Bankr. D. Del. 2009) In re Stavola/Manson Elec. Co., 94 B.R. 21 (Bankr. D. Conn. 1988)... 6, 15, 16 In re Surf City Invs., LLC, No , 2011 WL (Bankr. E.D.N.C. 2011)...8 In re Synergy Development Corp., 140 B.R. 958 (Bankr. S.D.N.Y. 1992) In re Television Studio Sch., 77 B.R. 411 (Bankr. S.D.N.Y. 1987)... 18, 24 Matter of Campbell, 13 B.R. 974 (Bankr. D. Idaho 1981)... 10, 24 Matter of Quarter Moon Livestock Co., 116 B.R. 775 (Bankr. D. Idaho 1990)...6 Taxel v. Electronic Sports Research (In re Cinematronics), 111 B.R. 892 (Bankr. S.D. Cal. 1990) v

7 Black v. Hollinger Int'l Inc., 872 A.2d 559 (Del. 2005) Fed. Nat l Bank v. Koppel, 253 Mass. 157 (1925) Hollinger Int'l, Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004) Constitutional Provisions U.S. Const. art. I, 8, cl Statutes 11 U.S.C , 11, U.S.C U.S.C , 6 11 U.S.C passim 11 U.S.C U.S.C U.S.C , U.S.C , 12, U.S.C U.S.C U.S.C. 959(a)... passim Legislative Histories 2002 Advisory Committee Note to Fed. R. Bankr. P S. Rep. No (1978), reprinted in 1978 U.S.C.C.A.N , 15 Secondary Sources 1 Treatise on the Law of Corporations 3:12 (3d ed.) Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and Law, 82 Cornell L. Rev. 301 (1997) Philippe J. Kahn, Bankruptcy Versus Environmental Protection: Discharging Future CERCLA Liability in Chapter 11, 14 Cardozo L. Rev (1993)... 11, 12 Restatement (Second) of Agency 82 (1958) vi

8 Richard M. Cieri et al., Protecting Technology and Intellectual Property Rights when a Debtor Infringes on Those Rights, 8 Am. Bankr. Inst. L. Rev. 349 (2000)... 20, 23 Thomas G. Kelch & Michael K. Slattery, The Mythology of Waivers of Bankruptcy Privileges, 31 Ind. L. Rev. 897 (1998) , 14 vii

9 OPINIONS BELOW By order and decision, the United States Bankruptcy Court for the Eastern District of Moot dismissed Singsong Electronics, Inc. s Chapter 11 case, and denied its emergency motion for injunctive relief. In doing so, the Bankruptcy Court held that: (1) Singsong lacked the requisite corporate authority to file a voluntary petition in bankruptcy, and (2) the automatic stay did not apply to Plum, Inc. s patent infringement action filed in the United States District Court for the Western District of Washington. R. at 6. On appeal, the District Court reversed both orders. R. at 6. On December 14, 2012, the United States Court of Appeals for the Thirteenth Circuit affirmed the judgment of the District Court. R. at 13. viii

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

11 STATEMENT OF FACTS Petitioner-Creditor, Plum, Inc., and Respondent-Debtor, Singsong Electronics, Inc., are major consumer electronics companies involved in the production and sale of, among other things, mobile smartphones. R. at 2. Despite being widely known for designing revolutionary consumer electronic products, Plum does little of its own manufacturing. R. at 2. Singsong, on the other hand, manufactures a wide variety of products. R. at 2. Despite being competitors, Plum and Singsong collaborated to produce Plum s e-pod, a revolutionary personal music device. R. at 2. Plum was responsible for the design and Singsong was responsible for manufacturing the device. R. at 3. Singsong and Plum entered into an exclusive manufacturing agreement in 2011, giving Singsong the right to produce all Plum products. R. at 3. As such, Singsong was the sole manufacturer of Plum s next revolutionary product, the e-phone. R. at 3. Before entering into the exclusive manufacturing agreement, at Plum s request, Singsong amended its bylaws to prohibit the corporation from filing a voluntary petition under 11 U.S.C R. at 5. The amended bylaws prohibited officers from signing a voluntary petition on behalf of the corporation, and took authority away from Singsong s board of directors to approve a resolution to that effect. R. at 5. After the bylaws were amended and the exclusive manufacturing agreement was signed, Singsong began to produce the e-phone for Plum in R. at 3. The e-phone was an immediate success and quickly sold millions of units. R. at 3. In an attempt to capitalize on the success of the e-phone and corner a share of the smartphone market for itself, Singsong developed a cheaper, competing multifunctional smartphone called the Galactica. R. at 3. Realizing the Galactica shared many attributes with its e-phone, Plum filed a patent infringement suit against Singsong in the United States District Court for the Western District of Washington. R. at 3. Believing that the cheaper Galactica would decrease the demand 1

12 for its e-phone, Plum requested that the District Court enjoin Singsong s sale of the infringing Galactica. R. at 3. In the course of the patent infringement suit, Singsong admitted that if Plum had a valid patent for its software, its Galactica would infringe that patent. R. at 4. On June 11, 2012, the District Court granted summary judgment in favor of Plum on the patent infringement issue, and invited Plum to file a motion for an injunction. R. at 4. However, just two days after losing the summary judgment battle, and before Plum could file its motion for an injunction with the District Court, Singsong filed a voluntary Chapter 11 bankruptcy petition in the Eastern District of Moot. R. at 4. In contravention of its amended bylaws, Singsong s board of directors passed a unanimous resolution authorizing the filing of a Chapter 11 case, and its CEO signed the petition. R. at 5. With knowledge of Singsong s bankruptcy filing, Plum accepted the District Court s invitation from three days earlier and filed a motion in the patent infringement action seeking to prohibit Singsong from displaying, distributing, selling, or taking orders for the Galactica. R. at 4. In fact, granting the injunction would prohibit Singsong from selling almost 100 million existing Galactica phones, which would inhibit the survival of Singsong s business. R. at 6. Singsong responded by filing a motion with the bankruptcy court alleging Plum s district court motion was filed in violation of the automatic stay found in 11 U.S.C R. at 5. In its motion, Singsong requested that the bankruptcy court enjoin Plum from proceeding in its District Court patent infringement case. R. at 5. Plum then filed a motion to dismiss Singsong s bankruptcy case, arguing that the automatic stay was never implicated because Singsong s petition was filed without proper corporate authority. R. at 5-6. In the alternative, Plum asserted its motion for injunctive relief in the patent infringement suit should be allowed to proceed because 28 U.S.C. 959(a) operates as an independent exception to the automatic stay. R. at 5. 2

13 The bankruptcy court granted Plum s motion to dismiss, and denied Singsong s motion for injunctive relief. R. at 6. Singsong appealed both rulings of the bankruptcy court, and the District Court reversed both. R. at 6. The Court of Appeals affirmed the District Court and remanded to the bankruptcy court for further proceedings. R. at 13. 3

14 SUMMARY OF ARGUMENT I. The bankruptcy court properly dismissed Singsong s Chapter 11 petition because its CEO and board of directors lacked the requisite authority to file a bankruptcy petition on the corporation s behalf. Singsong never took any subsequent actions to ratify its unauthorized filing, and the bankruptcy court never acquired jurisdiction to entertain Singsong s case because bankruptcy courts only have jurisdiction over cases commenced by parties authorized to file a petition. Even if there was jurisdiction, 11 U.S.C. 1112(b) provides grounds for dismissal. In addition, the Bankruptcy Code s anti-waiver provisions and policies apply only to individuals, not corporations. The public policy concerns that have prompted various courts to find waivers unenforceable are not applicable to the instant case. Moreover, pursuant to its constitutional grant of power, Congress has already addressed the specific instances in which debtors may or may not waive bankruptcy rights. Nowhere in title 11 has Congress stated corporate actors may not decide amongst themselves to waive the right to file a voluntary petition. It would be inappropriate for the judiciary to step into a policy-making role in an area the Constitution specifically reserved for Congress. Lastly, Congress expressly enacted 11 U.S.C 303 in order to provide a statutory means for aggrieved creditors to avail themselves of the bankruptcy system in the event a would-be debtor chooses not to file. Thus, it would be inappropriate to validate the filing of Singsong s unauthorized petition because of unfairness to its creditors when there is a statutory provision specifically designed to ensure their access to the bankruptcy system. 4

15 II. Plum did not violate 11 U.S.C. 362(a)(1) because it could not have sought to enjoin Singsong s post-petition infringing acts prior to filing. Nor did Plum violate 11 U.S.C. 362(a)(3) because it did not seek to control property of the estate in its motion for an injunction. Singsong s infringing phones were not property of the estate because Singsong does not have a property interest in the tortious use of its phones. Therefore, Plum did not violate the automatic stay in seeking an injunction after the filing. 28 U.S.C. 959(a) was intended as an exception to the automatic stay in those instances where the debtor in possession is continuing its normal course of business after the filing. Plum acted properly when it sought a post-petition injunction of Singsong s post-petition patent infringement because 959(a) permits post-petition suits where the debtor in possession is continuing its normal course of business. Therefore, the bankruptcy court correctly concluded that Plum s post-petition injunction action did not violate the automatic stay and that even if it did, 959(a) acts as an exception. 5

16 ARGUMENT I. THE BANKRUPTCY COURT PROPERLY DISMISSED SINGSONG S CHAPTER 11 PETITION BECAUSE SINGSONG S BOARD OF DIRECTORS LACKED THE REQUISITE AUTHORITY TO FILE A VOLUNTARY PETITION ON BEHALF OF THE CORPORATION. A. A Voluntary Petition Must Be Dismissed When it is Filed on Behalf of a Corporation by a Party Lacking Authority to Act Pursuant to the Corporation s Governing Documents and State Law. An entity that may be a debtor can commence a voluntary bankruptcy case through filing a petition. See 11 U.S.C While 109(d) provides that a corporation may be a debtor in a Chapter 11 case, it does not provide any guidance as to who may file a voluntary petition on the corporation s behalf. In re Autumn Press, Inc., 20 B.R. 60, 61 (Bankr. D. Mass. 1982). Because corporations are artificial entities created under state law, they lack the ability to act for themselves and are reliant on agents to act for them. In re Arkco Props., Inc., 207 B.R. 624, 627 (Bankr. E.D. Ark. 1997). However, agents acting on behalf of a corporation cannot do so without the corporation s governing documents and state law first granting them authority. See Price v. Gurney, 324 U.S. 100, 106 (1945). While corporate governance documents commonly grant officers and directors general power and authority to make decisions on the corporation s behalf, filing a bankruptcy petition requires a specific grant of authority. See Arkco, 207 B.R. at 629 ( Authority to perform specific acts on behalf of a corporation or under a general authority to manage the day-to-day affairs of a corporation does not constitute authority to file a petition in bankruptcy. ); In re Stavola/Manson Elec. Co., 94 B.R. 21, 24 (Bankr. D. Conn. 1988) (filing a bankruptcy petition is a specific act requiring specific authorization ); Matter of Quarter Moon Livestock Co., 116 B.R. 775, 778 (Bankr. D. Idaho 1990) ( [A]uthority to file a bankruptcy petition must be found in the 1 Unless otherwise stated, all statutory references are to the Bankruptcy Code, 11 U.S.C. 6

17 instruments of the corporation and applicable state law ). The Supreme Court has ruled that when a court finds that those who purport to act on behalf of the corporation have not been granted authority by local law to institute the proceedings, it has no alternative but to dismiss the petition. Price, 324 U.S. at 106. Consistent with the Supreme Court s holding in Price, the Autumn Press court dismissed a voluntary petition filed by the corporation s sole director, because the corporation s bylaws and state law required a minimum of three directors to pass a binding board resolution. 20 B.R. at 62. Because the bankruptcy petition was filed when the corporation had only one director, the court explained that a valid board of directors had not consented to the Chapter 11 petition. Id. Similarly, the voluntary petition filed by Singsong s CEO and board of directors warrants dismissal because neither was authorized to take such action by the corporation s governing documents. In fact, Singsong s bylaws generally prohibited the corporation from filing a petition pursuant to 301 and specifically took away authority from the board to approve this type of resolution. As such, Singsong s unauthorized conduct goes a step further than that of the corporate actor in Autumn Press, where the filing of a petition could have been properly authorized had the resolution been passed by a valid board of directors. See id. In contrast, here, not only did Singsong s corporate officers lack any specific authorization to file the petition, they were specifically forbidden from doing so. See Arkco, 207 B.R. at 629. Consequently, the bankruptcy court properly dismissed Singsong s unauthorized Chapter 11 petition. B. The Bankruptcy Court Did Not Acquire Jurisdiction over Singsong s Chapter 11 Case Because a Valid Petition Was Never Filed. 28 U.S.C provides that district courts shall have original and exclusive jurisdiction of all cases under title U.S.C. 1334(a). Once a case is filed, the district court may refer any or all cases under title 11 to a bankruptcy court, to be heard and decided by a 7

18 bankruptcy judge. 28 U.S.C Thus, assuming a case is commenced through the filing of a valid petition, the bankruptcy court has jurisdiction to decide matters related to the case. However, in Price, this Court ruled that Congress did not bestow on the bankruptcy court jurisdiction to determine that those who in fact do not have the authority to speak for the corporation are entitled to be given such authority and file a petition on behalf of the corporation. 324 U.S. at 106. Although Price was decided before the Bankruptcy Code was enacted, it is still considered good law, 2 and courts have recently interpreted Price to mean that a bankruptcy court only acquires jurisdiction over a corporate debtor when the entity that commenced the proceeding had the requisite authority to do so. See Hager v. Gibson, 108 F.3d 35, 39 (4th Cir. 1997); In re Surf City Invs., LLC, No , 2011 WL , at *3 (Bankr. E.D.N.C. 2011) ( A bankruptcy court cannot establish jurisdiction over a petitioning entity where the individual instituting the proceeding lacks authority under state law and the corporate governing instruments. ) (citing Price, 324 U.S. at 106). In Hager, a single corporate director, Donald Roop, filed a voluntary petition on behalf of his corporation without the consent of the rest of the board. 108 F.3d at Twenty months later, relying on Price, the other board members filed a motion to dismiss the case on the grounds that the bankruptcy court never acquired jurisdiction to entertain the proceeding because Roop lacked authority under state law to unilaterally place the corporation into bankruptcy. Id. at 38. While the court noted the board member s reliance on Price to be valid, it ultimately held the bankruptcy court had jurisdiction because local law permitted ratification and relation back. Id. at 39. The court explained that an unauthorized filing on a corporation s behalf could be ratified through the continuing conduct of those with the power to authorize it originally. Id. at Congress recognized the continuing relevance of Price as recently as 2002, citing Price s holding to support changes made to Fed. R. Bankr. P See 2002 Advisory Committee Note to Fed. R. Bankr. P in 11 U.S.C. 8

19 Although Hager involved a dispute solely among the board of directors of a corporation and the instant case involves a challenge by a third party, Hager s reasoning is applicable and directly relevant. The Fourth Circuit recognized that under Price, had the remaining board of directors promptly disavowed Roop s unauthorized filing, the court would have dismissed the petition. Id. at 39. The bankruptcy court only acquired jurisdiction because the board s delay operated by relation back to validate the filing. Id. at 40. The court recognized that but for the ratification, jurisdiction was lacking. Roop s position prior to ratification is directly analogous to Singsong s current situation. Like Roop, Singsong s CEO did not have the requisite authority to place the corporation into bankruptcy, and the board of directors did not have the authority to give him such power. R. at 4-5. However, unlike what transpired in Hager, the record reflects no subsequent action taken by Singsong to ratify its unauthorized filing. See Arkco, 207 B.R. at 630 (finding unauthorized filing to be invalid as without even the facade of corporate authority when board of directors met two days after filing petition but did not ratify the action). As such, the bankruptcy court still has not acquired jurisdiction to entertain Singsong s unauthorized bankruptcy petition. Absent a showing by Singsong that the CEO s act was promptly ratified, the bankruptcy court properly dismissed Singsong s petition. Singsong may argue that the unanimous resolution of its board of directors approving the CEO s filing, despite knowing full well that the board lacked the authority to do so, serves as a ratification of that act. However, this argument is unpersuasive. The Restatement (Second) of Agency defines ratification as the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him. Restatement (Second) of Agency 9

20 82 (1958). Therefore, by definition, the unauthorized act must take place prior to ratification. Because one cannot affirm an act which has not yet taken place, unanimous approval by Singsong s board of directors cannot ratify the subsequent filing of a petition by its CEO. Moreover, Singsong passed a resolution that directly contravened an existing bylaw. R. at 5. This is at odds with the established view that Bylaws are generally thought of as having a hierarchical status greater than board resolutions, and that a board cannot override a bylaw requirement by merely adopting a resolution. Hollinger Int'l, Inc. v. Black, 844 A.2d 1022, 1080 (Del. Ch. 2004), aff'd sub nom. Black v. Hollinger Int'l Inc., 872 A.2d 559 (Del. 2005); see also 1 Treatise on the Law of Corporations 3:12 (3d ed.). Granting the relief sought by Singsong would transform corporate bylaws into formalities easily dispensed with, instead of a method of governing corporate actors. Such a holding would send a message to corporate officers that they can disregard the rules and regulations set forth to specifically govern their actions. C. The Bankruptcy Code s Anti-Waiver Provisions and Policies Are Not Applicable to the Instant Case Because They Apply Only to Individuals, Not to Corporations. The Thirteenth Circuit ruled that an advance waiver of the right to file bankruptcy by a corporation through its bylaws is unenforceable because it is contrary to public policy. R. at 7. The underlying public policy concern being that such waivers undermine the fresh start purpose of bankruptcy law, which is to give debtors a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt. See Perez v. Campbell, 402 U.S. 637, 648 (1971); see also Williams v. U.S. Fid. & Guar. Co., 236 U.S. 549, (1915) (holding distribution of assets to creditors and providing debtors with a fresh start to be main purposes of bankruptcy law). However, relevant case law, various provisions of the Bankruptcy Code, and its legislative history demonstrate that the fresh start policy underlying modern anti-waiver jurisprudence was intended to apply only to individuals, not corporations. As 10

21 such, the public policy concerns which have prompted various courts to find waivers unenforceable are not applicable to corporations. While individuals and corporations are both permitted to be debtors under 109, they are fundamentally different from one another and consequently receive different treatment under the Bankruptcy Code. Perhaps one of the most obvious differences in treatment between individuals and corporations is the right to a discharge of debt. Under 727, the court is required to grant an individual a discharge unless that individual falls into a limited number of defined exceptions. This is consistent with the fresh start policy, which attempts to give the honest but unfortunate debtor a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). Conversely, Congress chose not to give corporations and other business entities a right to a discharge. In fact, entities in Chapter 11 liquidation proceedings get no discharge at all, see 1141(d)(3)(A), and those entities involved in a reorganization can only get a discharge through a confirmed plan, see 1141(d)(1). The fundamental economic differences between individuals and corporations explain their dissimilar treatment under the Bankruptcy Code. While individuals require a discharge in order to emerge from under the weight of oppressive indebtedness, see Williams, 236 U.S. at 554, corporations and other business entities can cease to function without harm to the economy if its assets are effectively redistributed or if the business is continued by a new entity or purchaser. See Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and Law, 82 Cornell L. Rev. 301, 308 (1997); Philippe J. Kahn, Bankruptcy Versus Environmental Protection: Discharging Future CERCLA Liability in Chapter 11, 14 Cardozo L. Rev. 1999, (1993) ( the intended 11

22 beneficiary of the fresh start was the individual who, despite being bankrupt, still had to continue living, and still needed to purchase goods and services in order to survive. ); see also Douglas G. Baird Thomas, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 U. Chi. L. Rev. 97, 110 n.45 (1984) ( There may be a need to provide continuing corporations with a discharge, but the reasons for doing so have nothing to do with a fresh-start policy. ). The Senate Committee Report for the proposed 1978 Bankruptcy Code further confirms that Congress intended to treat individuals and corporations differently with respect to the fresh start policy. The report states: At the heart of the fresh start provisions of the bankruptcy law is section 727 covering discharge. The discharge provisions require the court to grant the debtor a discharge of all his debts except for very specific and serious infractions on his part. A change from current law will prevent corporations from being discharged in liquidation cases. Corporations are not in the same situation as individual debtors, and the discharge of a corporation promotes trafficking in corporate shells, a form of bankruptcy fraud. S. Rep. No , at 7 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, Congress recognized that discharges were the Bankruptcy Code s primary means of ensuring a fresh start, yet deliberately took the right to a discharge away from corporations because they were not in the same position as individuals. Thus, it is not surprising that case law supporting anti-waiver policy involves attempts by individuals to contract away their right to a discharge. See Hayhoe v. Cole (In re Cole), 226 B.R. 647, (B.A.P. 9th Cir. 1998); Fallick v. Kehr, 369 F.2d 899, 904 (2d Cir. 1966); In re Weitzen, 3 F. Supp. 698, 699 (S.D.N.Y. 1933); Fed. Nat l Bank v. Koppel, 253 Mass. 157, 159 (1925). The Thirteenth Circuit s holding is dependent upon stretching the fresh start doctrine to cover corporations and other business entities, despite the clear evidence in the Code and legislative history suggesting Congress 12

23 intended otherwise. It makes no sense to apply the anti-waiver policy to corporations when it was designed to protect an individual s right to a discharge. Corporations have no right to a discharge in the first place and do not benefit from a fresh start. As such, the application of the anti-waiver principle should be limited to individuals as Congress intended. D. Decisions Regarding Bankruptcy Policy Should be Left to Congress. The Constitution gives Congress the power to establish national bankruptcy laws. U.S. Const. art. I, 8, cl. 4. This grant of power was given specifically to Congress, not to the judiciary. Congress has chosen to exercise this power by enacting title 11, and with respect to waivers of various bankruptcy rights, Congress has defined specific instances in which debtors are permitted and prohibited to waive their rights. The fact that Congress has addressed certain types of waivers, but has been silent with regard to others, weighs against a rule prohibiting enforcement of waivers. Thomas G. Kelch & Michael K. Slattery, The Mythology of Waivers of Bankruptcy Privileges, 31 Ind. L. Rev. 897, 902 (1998). For instance, the Code provides only two methods for a debtor to waive its right to a discharge post-petition. Cole, 226 B.R. at (noting that 727(a)(10) and 524(c) allow for a debtor to waive the discharge of all debts or the dischargeability of specific debts ). In Cole, the court explained that Congress' failure to authorize prepetition waivers of discharge, while at the same time authorizing certain postpetition waivers of discharge pursuant to 524(c) and 727(a)(1), must be viewed as intentional. Id. On the opposite end of the spectrum, in 365(e), Congress specifically prohibited the enforcement of ipso facto clauses in executory contracts, unexpired leases, or applicable law, which purport to terminate, limit or otherwise modify a debtor's interest in its property upon the filing of a bankruptcy petition. DiCello v. United States (Matter of Ry. Reorganization Estate, Inc.), 133 B.R. 578, 582 (Bankr. D. Del. 13

24 1991). Other than in these contractual provisions which affect the debtor s interest in property under state law, Congress has not said that waivers are unenforceable anywhere else in title 11. See Kelch & Slattery, supra, at 902. [I]t is generally presumed that Congress acts intentionally and purposely when it includes particular language in one section of a statute but omits it in another. BFP v. Resolution Trust Corp., 511 U.S. 531, 537 (1994) (internal quotations omitted); Russello v. United States, 464 U.S. 16, 23 (1983). This rule of statutory interpretation applies with equal force to the Bankruptcy Code and Congress s inclusion and exclusion of rules governing waivers. Congress knew what it was doing when it chose to regulate certain types of waivers and not others. If Congress deemed it necessary to preclude corporations from waiving the right to file a voluntary petition through the adoption of corporate bylaws to that effect, it could have done so. Furthermore, because the Constitution specifically granted the authority to Congress to establish bankruptcy law, it would be inappropriate for the Court in this instance to step into a policy-making role. E. By Permitting the Filing of Involuntary Petitions under 303, Congress Provided a Statutory Means for Aggrieved Creditors to Avail Themselves of the Bankruptcy System. In addition to providing a fresh start for individuals, courts have recognized the equitable distribution of the debtor s assets among its creditors as the second main purpose of bankruptcy law. See BFP, 511 U.S. at 563. Consequently, Singsong may argue that enforcement of an advance waiver of the right to file bankruptcy deprives the corporation s creditors of a chance to benefit from the court s equitable distribution of the debtor s assets. In particular, that the waiver would allow a single creditor and the debtor to opt out of the collective remedy of bankruptcy to the detriment of the debtor's other creditors. See Kelch & Slattery, supra, at

25 However, Congress specifically enacted 303 to address this very issue. 303 provides the rules for creditors to bring an involuntary petition. When Congress is drafting legislation, it is presumed to act with knowledge of the existing law and judicial concepts. In re VistaCare Grp., LLC, 678 F.3d 218, 226 (3d Cir. 2012). Thus, in enacting 303, Congress was aware that would-be debtors may choose not to file a bankruptcy petition for various reasons, leaving their creditors to fend for themselves in state court proceedings. Allowing creditors to protect their own interests was the means Congress chose to deal with this problem. The Senate Committee Report for the proposed 1978 Bankruptcy Code confirms that 303 was enacted for the benefit of creditors: Because the assets of an insolvent debtor belong equitably to his creditors, the bill permits involuntary cases in order that creditors may realize on their assets through reorganization as well as through liquidation. S. Rep. No , at (1978), reprinted in 1978 U.S.C.C.A.N. 5787, By granting creditors the ability to file an involuntary petition, Congress intentionally provided a means for creditors to protect their own interests. Moreover, in doing so, Congress supported the second purpose of bankruptcy law by giving creditors a way to secure the equitable distribution of the debtor s assets in situations where the debtor refused to file. As such, validating the filing of Singsong s unauthorized petition because of unfairness to its creditors would be inappropriate, when there is a statutory provision specifically designed to grant them access to the bankruptcy system. See Stavola/Manson, 94 B.R. at 25. In Stavola/Manson, a shareholder of the debtor-corporation filed a motion to dismiss the bankruptcy case on the grounds that the corporation s president lacked the requisite authority to file the petition on behalf of the corporation. 94 B.R. at 23. The court granted the motion to dismiss and refused to entertain the debtor s argument that because the requisite number of 15

26 creditors were available to file an involuntary petition, that the case commenced by the unauthorized filing should not be dismissed. Id. at 25. Affirming the bankruptcy court s dismissal, the District Court aptly summarized [i]f the requisite support for an involuntary petition exists, it should be filed. Parties should not be allowed to bootstrap their way into an involuntary case through an improperly filed voluntary petition. Id. Likewise, here, Singsong s Chapter 11 case is not invulnerable simply because there may be creditors who could file an involuntary petition. The availability of an involuntary petition is not a sufficient justification for avoiding dismissal. F. The Timing and Circumstances Surrounding Singsong s Filing of its Chapter 11 Case Suggest a Bad Faith Filing. Under 1112(b), a bankruptcy court may dismiss a Chapter 11 petition for cause. While the Code does not contain an express good faith requirement, various courts have found cause for dismissal to exist where a filing was made in bad faith. Cedar Shore Resort, Inc. v. Mueller (In re Cedar Shore Resort, Inc.), 235 F.3d 375, 379 (8th Cir. 2000); In re SGL Carbon Corp., 200 F.3d 154, 162 (3d Cir. 1999); Carolin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir. 1989). Filing a petition solely to hinder the efforts of a creditor or to delay pending litigation is evidence of bad faith warranting dismissal. In re Sherwood Enterprises, Inc., 112 B.R. 165, 168 (Bankr. S.D. Tex. 1989) (recognizing the good faith standard prevents abuse of the Code by debtors seeking only to delay creditors); In re HBA E., Inc., 87 B.R. 248, (Bankr.E.D.N.Y.1988). See also Furness v. Lilienfield, 35 B.R. 1006, 1009 (D. Md. 1983) ( The automatic stay was not intended to grant defendants a last-minute escape chute out of pending civil litigation. ). Cause for dismissal exists in the instant case because Singsong had no valid reorganizational purpose and their petition was filed solely to avoid the enforcement of an injunction. 16

27 Good faith implies an honest intent and genuine desire on the part of the petitioner to use the statutory process to effect a plan of reorganization and not merely as a device to serve some sinister or unworthy purpose. In the Matter of Metro. Realty Corp., 433 F.2d 676, 678 (5th Cir.1970) (internal quotations omitted). The debtor in Metropolitan Realty created a corporation only to obtain Chapter 11 relief, which the court held precluded a finding of good faith. Id. at 679. Like the debtor in Metropolitan Realty, Singsong did not file its petition with an honest and genuine desire to reorganize. Singsong s board of directors approved the filing notwithstanding the amended bylaws that specifically stripped them of such authority. R. at 5. Singsong filed the unauthorized petition just two days after the district court in Washington granted summary judgment in favor of Plum and had invited a motion for an injunction. R. at 4. Rather than filing in order to reorganize, Singsong s only motivation for the unauthorized filing was to prevent Plum from obtaining the injunctive relief it was entitled to. Numerous courts have held this to be an impermissible purpose. See In re Edwards, 140 B.R. 515, (Bankr. W.D. Mo. 1992) (finding bankruptcy filed to avoid an injunction against wrongful conduct indicates a bad faith filing); In re Martin, 51 B.R. 490, 495 (Bankr.M.D.Fla.1985) (Chapter 11 filings seeking to frustrate other judicial processes are inconsistent with congressional intent). The timing and circumstances surrounding Singsong s filing of its Chapter 11 case suggest a bad faith filing. Singsong filed its petition just days after losing a summary judgment motion by corporate actors lacking proper authorization, and in direct contravention of Singsong s bylaws. R. at 5. Plum acknowledges this requires additional fact finding. In the event this Court is otherwise inclined to remand, Plum respectfully requests an opportunity to seek dismissal for cause. 17

28 II. PLUM ACTED LAWFULLY WHEN IT SOUGHT TO ENJOIN SINGSONG S UNLAWFUL POST-PETITION CONDUCT BECAUSE THE AUTOMATIC STAY DOES NOT APPLY AND 28 U.S.C. 959(a) EXCEPTS PLUM FROM SEEKING RELIEF FROM STAY. A debtor does not receive greater rights in bankruptcy than those he would outside of it. Butner v. United States, 440 U.S. 48, 57 (1979). Bankruptcy is not a shelter for unlawful conduct that violates another party s rights and which will weaken those rights if the conduct continues behind the shield of the automatic stay. In re Cinnabar 2000 Haircutters, Inc., 20 B.R. 575, 577 (Bankr. S.D.N.Y. 1982). Congress intended bankruptcy to be a refuge for the honest but unfortunate debtor, not the tortious debtor. See Hunt, 292 U.S. at 244. Singsong is a tortious debtor that should not be allowed to continue selling patent infringing products post-petition or hide behind the automatic stay to protect itself against an injunction. See In re Cinnabar 2000 Haircutters, Inc., 20 B.R. at 577. See also Furness v. Lilienfield, 35 B.R. at A. The Automatic Stay Does Not Apply to Plum s District Court Injunction Action. 1. Because Plum s claim arose post-petition, 362(a)(1) does not apply. The filing of a bankruptcy petition stays 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 commencement of the case. 11 U.S.C. 362(a)(1). Under patent law, each infringing act is a separate tort creating a separate cause of action. E.I. Du Pont de Nemours & Co. v. MacDermid Printing Solutions, LLC, 525 F.3d 1353, 1362 (Fed. Cir. 2008); see also In re Television Studio Sch., 77 B.R. 411, 412 (Bankr. S.D.N.Y. 1987) (holding post-petition infringement claims not stayed by 362). Here, Plum could not have brought its underlying claims before the filing because they did not arise until after Singsong filed its petition. 18

29 Where a debtor infringes a patent post-petition, each infringing act is a separate cause of action that arises at the moment of infringement. Hazelquist v. Guchi Moochie Tackle Co., 437 F.3d 1178, 1181 (Fed. Cir. 2006). In Hazelquist, a debtor continued to sell infringing fishing lures after receiving a discharge of his debts. Id. at The Federal Circuit held that a bankruptcy discharge does not serve as an injunction against a cause of action that arises after the date of discharge. Id. Relying on clear case law providing that each infringing act creates a separate cause of action, the court held the patent holder properly brought the infringement suit against the debtor for post-discharge infringing acts. Id. at (citing Augustine Med., Inc. v. Progressive Dynamics, Inc., 194 F.3d 1367, 1371 (Fed. Cir. 1999); A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020, 1031 (Fed. Cir. 1992)). For purposes of 362(a)(1), post-petition and prepetition patent infringement are independent, even if the patent holder sues the debtor-infringer prepetition. Voice Systems & Servs., Inc. v. VMX, Inc., No. 91-C-88-B, 1992 WL , at *10-11 (N.D. Okla. Nov. 5, 1992). In Voice Systems, a patent holder sued the debtor-infringer for prepetition patent infringement and an injunction. Id. at *1, *9. The court held that 362 did not stay the motion for injunctive relief, reasoning that the patent holder had sought only to enjoin post-petition infringement, not prepetition infringement. Id. at * Like the patent holder in Voice Systems, Plum began its patent infringement action against Singsong prepetition, but then continued it by seeking an injunction after the filing. In addition, like the corporate debtor in Hazelquist that continued to sell infringing products postdischarge, Singsong continued to infringe Plum s patents with the Galactica phone post-petition. These post-petition infringing acts were not prepetition torts. E.I. Du Pont de Nemours, 525 F.3d at Because the underlying claims at issue did not exist when Singsong filed its petition, the 19

30 stay did not apply to the claims against Singsong for infringement that occurred after the petition was filed. See Richard M. Cieri et al., Protecting Technology and Intellectual Property Rights when a Debtor Infringes on Those Rights, 8 Am. Bankr. Inst. L. Rev. 349, 376 (2000) ( [T]he intellectual property holder s cause of action against the [post-petition] infringement could not have been commenced prepetition since it is separate from the holder s cause of action against the prepetition infringement and section 362(a)(1) does not apply. ). Singsong may argue that Plum s injunction is more akin to the injunction sought in In the Matter of Mahurkar Double Lumen Hemodialysis Catheter Patent Litigation, 140 B.R. 969 (N.D. Ill. 1992). That case involved the prepetition sale of infringing catheters, which continued after the petition was filed. Id. at 975. The catheters were subject to a prepetition patent infringement suit, and the patent holder requested that the district court issue an injunction against any ongoing post-petition manufacture or sales. Id. The court held that the continuation of prepetition wrongful conduct after the petition was filed was an action that was or could have been commenced before the commencement of the case. Id. at 976 (internal quotations omitted). Noting the action actually was commenced before the petition was filed, the court applied the plain meaning of 362(a)(1) and held the post-petition request for an injunction was barred by the automatic stay. Id. at Singsong may argue that Plum s injunction is similar to the injunction requested in Mahurkar because it sought to enjoin a continuation of the use, sale and manufacture of 100 million Galactica phones that began prepetition. R. at 4. However, such an analysis is inconsistent with generally accepted principles of patent law, which provide that each new infringing act is an independent tort and a new cause of action. 3 In addition, Congress did not 3 Under patent law, this represents potentially 100 million causes of action. See E.I. Du Pont Nemours, 525 F.3d at

31 intend the protection afforded by the automatic stay to operate as a shield for debtors hoping to avoid complying with other laws, including patent law. See In re Cinnabar 2000 Haircutters, Inc., 20 B.R. at 577. As the court in Voice Systems pointed out, if the patent holder is not granted relief to enjoin unlawful infringement, then the patent holder s rights will be greatly diminished. Voice Systems & Servs., Inc., 1992 WL , at *10. Moreover, other patent holders will be discouraged from investing in research and development in the future and that the public interest favors protection of valid patent rights in order to encourage and reward innovation. Id. The policy of protecting patents outweighs any policy behind treating infringing conduct as one continuous wrong for purposes of the automatic stay. 2. Because Plum is not seeking to exercise control over Singsong s property, 362(a)(3) does not apply. The filing of a bankruptcy petition stays 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. 11 U.S.C. 362(a)(3). Property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. 541(a)(1). Courts construe this definition broadly. United States v. Whiting Pools Inc., 462 U.S. 198, 203 (1983). However, Section 362(a)(3) does not stay commencement of proceedings based upon a post-petition cause of action against the debtor. In re Continental Air Lines, Inc., 61 B.R. 758, 778 (Bankr. S.D. Tex. 1986). Where, as here, the core of an injunction suit against a debtor is to prevent allegedly unlawful conduct, then the suit is not one seeking to directly exercise control over property of the estate in violation of 362(a)(3). Larami Ltd. v. Yes! Entm t Corp., 244 B.R. 56, 59 (D.N.J. 2000). In Larami, without seeking relief from the automatic stay, a patent holder sought an injunction against the debtor-corporation that was allegedly infringing its patent post-petition. Id. 21

32 at The court held that the patent holder did not violate 362, reasoning that because the injunction sought only to prevent the debtor from infringing a patent and did not seek to seize control of any inventory or equipment, the injunction did not violate 362(a)(3). Id. at 59. Similarly, here, Plum did not seek to exercise control over property of the estate in its injunction suit against Singsong; rather, the suit was to prevent unlawful conduct. R. at 4. The Larami court relied on Amplifier Research Corporation v. Hart, 144 B.R. 693 (E.D. Pa. 1992) when it held that Congress did not intend 362(a)(3) as a bar on post-petition suits seeking to enjoin unlawful conduct. Larami, 244 B.R. at 59. In Amplifier Research, a plaintiff sued the debtor for defamation. 144 B.R. at 694. The court held the injunction did not seek to exercise control over property of the estate, but instead sought control over future unlawful conduct. Id. As such, the debtor had no property right in the distribution of the defaming newsletter (the property) and that the stay only protects the debtor s property interests, not tortious uses of that property by the debtor. Id. at 695; see also Dominic s Restaurant of Dayton, Inc. v. Mantia, 683 F.3d 757, 760 (6th Cir. 2012). Likewise, Singsong did not have an interest in manufacturing, distributing, selling, or marketing its infringing phones because the stay does not protect such tortious uses of property. Like the debtors in Larami and Amplifier, Singsong has been tortiously using its property, the Galactica phone, because the phone s software infringes on Plum s patent. Plum s injunction seeks to prevent Singsong from infringing its software patent. In addition, Plum s injunction also seeks to control future unlawful conduct, like the injunction sought in Amplifier Research. Therefore, Plum s injunction does not violate 362(a)(3) because Plum is not seeking direct control over or possession of Singsong s property, but rather the unlawful use of the property, in which Singsong does not have a property interest. 22