Back in the day--say, the last two decades of the twentieth century--we bankruptcy lawyers took it largely on faith that the right structural and contractual provisions purporting to confer bankruptcy-remoteness were enforceable and likely to be successful in preventing an entity from becoming, voluntarily or involuntarily, a debtor under the Bankruptcy Code. During the latter part of the first decade of the twenty-first century, however, that faith began to erode as bankruptcy court case law began to accumulate which denied motions to dismiss petitions based upon remoteness provisions. The cases were based on a variety of theories, some the application of doctrines of law of the jurisdiction of formation (usually fiduciary duty) and others that inched toward not giving full effect to the rule of Price v. Gurney. To this blogger’s knowledge, none of those cases, nor any of the cases accumulating at the same time that refused to depart from a straightforward application of state law and strict adherence to Price v. Gurney, was ever dispositively dealt with on the merits by a federal Court of Appeals.
That may be about to change.
In In re Franchise Services of North America, Inc., Bankruptcy Judge Edward Ellington granted a motion to dismiss a Chapter 11 petition that had not been approved by a preferred stockholder of the debtor whose approval was required by the debtor’s certificate of incorporation. Judge Ellington surveyed the accumulated bankruptcy case law as well as Delaware corporate law and summarized his understanding of the law that a petition-blocking shareholding position or other blocking right could be validly exercised by a holder of the debtor’s equity that was not also a creditor of the debtor, even if the holder was controlled by a creditor of the debtor. Since one of the movants to dismiss the petition was the preferred stockholder with blocking rights (and it had not approved the petition and was not itself a creditor, although its parent corporation was), Price v. Gurney required dismissal.
Then, on January 17, Judge Ellington granted the debtor’s request under 28 U.S.C. § 158(d)(2)(A) to certify the judgment of dismissal for direct appeal to the Court of Appeals for the Fifth Circuit, and, on February 8, the Court of Appeals granted the debtor’s motions for permission for a direct appeal and to expedite the appeal.