Our February 22 post (with updates on March 19, April 17 and April 25) reported on a bankruptcy court decision dismissing a voluntary corporate 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[1] that was on track for a direct and expedited appeal to the U.S. Court of Appeals for the Fifth Circuit, the first case squarely dealing with bankruptcy remoteness, in my memory, to reach a Court of Appeals on the merits.  Last night, about three weeks after oral argument, the Court issued its unanimous opinion--clear, careful, thorough, but materially more limited than the questions that were certified to it by the Bankruptcy Court--affirming the Bankruptcy Court’s dismissal of the voluntary petition.[2]

The Fifth Circuit’s opinion, written by Senior Judge Carolyn Dineen King, resisted the temptation posed by the broad certified questions to wade deeply into the weeds of the many forms of contractual and structural bankruptcy remoteness, deeming it to be a lure to issue advisory opinions.  The fundamental holding that was sufficient to affirm the Bankruptcy Court’s dismissal of the petition is this:

We hold simply that federal bankruptcy law does not prevent a bona fide equity holder from exercising its voting rights to prevent the corporation from filing a voluntary bankruptcy petition just because it also holds a debt owed by the corporation and owes no fiduciary duty to the corporation or its fellow shareholders.  A different result might be warranted if a creditor with no stake in the company held the right.  So too might a different result be warranted if there were evidence that a creditor took an equity stake simply as a ruse to guarantee a debt.  We leave those questions for another day.[3]

The Court analyzed the charter provision granting the voting right to the preferred stockholder and the Delaware[4] cases cited to it as undermining its validity.  The provision was facially valid under the Delaware corporate law statute, and, on the Court’s reading of the cases, its validity was not undermined by any Delaware judicial decisions.[5]

The Court placed no reliance on the fact that the debtor’s debt and preferred stock were held by separate entities (parent and subsidiary).  Indeed, it assumed that the creditor and the equity holder were “one and the same.”[6]  Although the Court might appear from the portion of the opinion quoted above to place reliance upon the equity holder “ow[ing] no fiduciary duty to the corporation or its fellow shareholders,”[7] it later dispensed with that point with an alternative ground for rejecting the debtor’s arguments about the equity holder’s alleged breach of fiduciary duty: 

The proper remedy for a breach of fiduciary duty claim is not to allow a corporation to disregard its charter and declare bankruptcy without shareholder consent. . . .  Even if [the preferred stockholder] had [breached a fiduciary duty], the proper remedy is not to deny an otherwise meritorious motion to dismiss the bankruptcy petition.  Instead, to the extent that [the preferred stockholder] breached any fiduciary duty owed as a controlling shareholder, [the debtor] must seek its remedy under state law.[8]

And, in Judge King’s words, all of the other questions about the validity of contractual and structural provisions and devices intended to effect bankruptcy remoteness have been left, as far as the U.S. Courts of Appeals are concerned, for another day.

[8]  Slip op. at 21-22.