CII Parent, Inc.
- Reporters:
- ,
- Before:
- Laurie Selber Silverstein
Before me is CII‘s Parent, Inc.‘s (“CII” or “Debtor“) Motion to Enforce the Automatic Stay1 and Twin Brook Capital Partner LLC‘s (“Twin Brook“) Motion to Dismiss.2 Both motions implicate a corporate governance dispute over the proper boards of CII‘s non-debtor direct and indirect subsidiaries. CII asserts an underhanded exercise of proxy rights by its primary (if not only creditor) without proper notice, which deprives CII of the right and opportunity to restructure the debt owed by its entire corporate family. CII characterizes Twin Brook‘s actions as a “hostile takeover.” Twin Brook counters that, prepetition, it properly exercised a contractual remedy on a defaulted loan when it exercised a proxy right to vote the stock pledged by CII and replace the board of directors at each of the direct and indirect subsidiaries.
The outcome of these disputes turns on interpretation of specific provisions in the prepetition loan documents. Having reviewed the documents and entertained argument
Procedural Posture
On December 27, 2022, CII filed a voluntary petition under chapter 11 of the Bankruptcy Code in this court. Aside from the Motion to Enforce the Automatic Stay and the Motion to Dismiss, the only substantive filings made in the case are a motion to extend the time to file schedules and statements and an application to retain counsel.
On February 9, 2023, I signed an Agreed Scheduling Order3 setting out dates by which the briefing on the two motions would be completed, consolidating the two motions into a single contested matter under Federal Rule of Bankruptcy Procedure 9014 and setting a non-evidentiary hearing on a to-be submitted stipulated record. Specifically, the Agreed Scheduling Order provides:
5. The February 22 Hearing will be limited to those legal issues and arguments set forth in the Motions that, by agreement of the Parties, the Court can decide based upon a stipulated factual record (the “Stipulated Record“). All other disputed factual matters, legal issues and arguments set forth in the Motions that involve disputed material issues of fact (collectively, “Contested Issues“) are preserved for the purpose described in paragraph 7(b).
6. The Parties must meet and confer in good faith to prepare the Stipulated Record. The Stipulated Record must consist of: (a) the documents that the Court may admit into evidence without objection; and (b) a statement of uncontested material facts germane to the Motions. The Parties must file the Stipulated Record by 12:00 p.m. ET on February 20, 2023.
7. The Court may, in its discretion: (a) decide either Motion solely based upon the Stipulated Record and without consideration of the Contested Issues; or (b) continue the Motions for a further evidentiary hearing to consider those Contested Issues the Parties wish to present.
On February 20, the Stipulated Record4 was filed. The February 22 hearing proceeded on the Stipulated Record and seven agreed-to exhibits. The matter was taken under advisement.
Jurisdiction
The parties contend that I have jurisdiction over their respective motions pursuant to
Background
Debtor is a Delaware corporation. It is a holding company that owns 100% of the equity interests of non-debtor Community Investors, Inc., which, in turn, directly or indirectly owns all the equity of the non-debtor Indirect Subsidiaries.6 Debtor is indirectly
Prepetition, Community Investors, as Borrower Representative, and Debtor and the Indirect Subsidiaries, as Borrowers, certain financial institutions (“Lenders“) and Twin Brook as Agent, executed that certain Credit Agreement7 dated as of May 15, 2019. The Lenders’ commitment under the Credit Agreement included both a revolving loan and a term loan (collectively, “Loan“).
As evidenced by that certain Guarantee and Collateral Agreement,8 the Loan is secured by, among other things: (i) Debtor‘s equity interest in Community Investors and (ii) Community Investors’ equity interests in the Indirect Subsidiaries (and together with (i), the “Pledged Equity“). In connection with the Loan, Debtor, Community Investors and each Indirect Subsidiary other than AtHomeNet also executed a separate document titled Irrevocable Proxy Coupled with an Interest dated May 15, 2019 (“One Page Proxy“).9
On November 16, 2022, Twin Brook delivered a Reservation of Rights Letter11 to Falcon, Debtor, Community Investors and the Indirect Subsidiaries.
By letter dated December 21, 2022 (“Proxy Notice”12), Twin Brook informed Debtor, Falcon, Community Investors and the Indirect Subsidiaries that it had exercised its purported rights under the Guarantee and Collateral Agreement and the Irrevocable Proxies to (i) amend the applicable bylaws, operating agreements, and/or other corporate governance documents as necessary or desirable, to, among other things, remove certain directors and/or managers of Community Investors and the Indirect Subsidiaries; (ii) adjust the size of each board of directors and/or managers, as applicable, of Community Investors and each Indirect Subsidiary; and (iii) appoint replacement directors and/or managers for Community Investors and each Indirect Subsidiary (collectively, “Twin Brook‘s Actions“).
Six days later, on December 27, 2022, Debtor filed for relief under chapter 11. By letter dated December 29, 2022,13 Debtor notified Twin Brook and its counsel that CII had filed for bankruptcy resulting in the immediate imposition of the automatic stay pursuant to
While not expressly in the Stipulated Facts, there is no disagreement that: (i) events of default existed (as documented in the Forbearance Agreement) and continue to exist under the Credit Agreement and (ii) subject to Debtor‘s equitable estoppel argument, the agreed-upon forbearance period under the Forbearance Agreement expired on November 15, 2022 and (iii) Twin Brook exercised (or purported to exercise) its proxy rights prepetition. Further, CII represents that it filed this chapter 11 case to “regain control of its operating subsidiaries.” CII contends that if Twin Brook had not been deceived, it is “likely” that Community Investors and each of the Indirect Subsidiaries would have filed bankruptcy petitions as well. In this way, CII could take a “holistic” approach to a restructuring.
Discussion
I. The Motion to Enforce the Automatic Stay
While styled as a motion to enforce the automatic stay, the Motion to Enforce the Automatic Stay goes well beyond that seeking, in effect, multiple mandatory injunctions. Debtor seeks an order:
(i) finding that Twin Brook‘s continuing exercise of control over the Debtor‘s corporate governance rights in [Community Investors and the Indirect Subsidiaries] [] violates the automatic stay, or alternatively, that Twin Brook is equitably estopped from exercising remedies against the Debtor under the circumstances;
(ii) directing Twin Brook to (a) formally rescind the amendments of the applicable bylaws, operating agreements, and or other corporate governance documents that purported to, among other things, remove certain directors and/or managers, as applicable, of [Community Investors and the Indirect
(iii) granting such other relief as is appropriate under the circumstances.14
For its part, Twin Brook extensively briefs and argues that it properly exercised the proxies prepetition per the unambiguous terms of the Guarantee and Collateral Agreement, effectively asking for a declaration to that effect. Among other things, this argument leads Twin Brook to the further conclusion that there is no stay violation because the appointment of Twin Brook as attorney-in-fact and proxy took the voting rights outside of the property of the estate.15
Debtor argues that Twin Brook‘s actions violate subsections 362(a)(3), (4) and (6) of the Code because (i) Twin Brook is exercising control over property of the estate, (ii) Twin Brook is blocking Debtor from exercising control over the boards of the non-debtor companies and thus interfering with property of the estate and (iii) Twin Brook is refusing to rescind its actions, which is an act to collect or recover on its claim.
Twin Brook counters that (i) all of its actions occurred prepetition and the mere retention of the voting power and refusal to rescind its prepetition acts are not affirmative acts in violation of the stay and (ii) Debtor fails to identify a post-petition act of Twin Brook that blocks Debtor from exercising control over property of the estate and, in any event, (iii)
A. Twin Brook has not violated § 362(a)(3) or § 362(a)(4).
Both § 362(a)(3) and § 362(a)(4) prohibit post-petition acts to exercise control over property of the estate or to enforce a lien against property of the estate.17 Property of the estate is interpreted broadly to include all interests the debtor has in property, both tangible and intangible, legal and equitable.18 Federal law defines what types of property are part of the estate while state law determines what interest a debtor has in the property.19 Any
The parties agree that Debtor‘s stock in Community Investors is property of the estate. From there, they disagree. Debtor contends that the voting interest attendant to the stock is property of the estate while Twin Brook contends that, as of the petition date, it controlled the right to vote the stock.
1. The Plain Language of the Loan Documents
(a) The appointment provision22
In addition to a guarantee of payment and performance of the Loan and the grant of security interests and/or liens in identified property as collateral, the Guarantee and Collateral Agreement contains an immediate and irrevocable grant of voting rights to Twin Brook. In Section 7.1(a), Debtor “hereby” appoints Twin Brook as Debtor‘s “attorney-in-fact and proxy” to act in Debtor‘s “place and stead” for the purpose of taking numerous enumerated acts.23 Among those acts are the right to vote the stock in Community Investors
Voting rights are specifically addressed in three subsections of the appointment provision. These three subsections which are repetitive, but not contradictory, permit Twin Brook to:
(v) (1) vote the Investment Property in any manner the Agent deems advisable for or against all matters submitted or which may be submitted to a vote of shareholders, partners or members, as the case may be, (2) transfer and register in its name or in the name of its nominee the whole or any part of the Investment Property, (3) receive and collect any dividend or other payment or distribution in respect of or in exchange for the Investment Property and (4) take all such other actions with respect to Investment Property authorized under Section 6.3 or 6.7 of this Agreement or otherwise authorized by this Agreement or the other Loan Documents;
. . . .
(vi) . . . (8) vote any right or interest with respect to any Investment Property;
. . . .
. . . exercise the irrevocable proxy to vote the Investment Property at any and all times, including but not limited to, at any meeting of shareholders, partners or members, as the case may be, however called, and at any adjournment thereof, or in any action by written consent, and may waive any notice otherwise required in connection therewith.24
Subject in each case to the limitations set forth in the Guarantee and Collateral Agreement (referred to below), (i) the undersigned hereby irrevocably designates and appoints Twin Brook Capital Partners, LLC as administrative agent for certain secured parties (in such capacity, the ”Agent“) to represent it at all annual and special meetings of the holders of the Equity Interests (as defined in the Guarantee and Collateral Agreement defined below) of COMMUNITY INVESTORS, INC., a Delaware corporation (the ”Company“), and (ii) the undersigned hereby authorizes and empowers Agent, to vote any and all Equity Interests owned by the undersigned or standing in its name, and do all things which the undersigned might do if present and acting itself.
This language of the One Page Proxy is not identical to that in the Guarantee and Credit Agreement, but, it, too, is not inconsistent with the agreement and is clearly meant to effect the broad proxy rights granted in the main document.26
While broad, Section 7.1 also contains an express limitation on Twin Brook‘s right to vote the Pledged Equity. Twin Brook agrees that it will not exercise its power as attorney-in-fact/proxy unless Debtor is in a continuing default:
Anything in this Section 7.1(a) to the contrary notwithstanding, Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing, and upon the direction of the Required Lenders.27
(b) The remedial provisions
The Guarantee and Collateral Agreement also contains a remedial section detailing the actions that Twin Brook may take as to different categories of collateral in the event of a default. As it relates to the Pledged Stock and voting rights, section 6.3(b) provides that Twin Brook may exercise Debtor‘s voting rights as if it were the outright owner of the Pledged Stock:
If an Event of Default shall occur and be continuing, (a) the Agent shall have the right to . . . (ii) exercise or permit its nominee to exercise, any and all rights of conversion, exchange and subscription any other rights, privileges or options pertaining to such Investment Property as if it were the absolute owner thereof (. . . and including with respect to the Pledged Equity, giving or withholding consents of stockholders, partners or members, calling special meetings of stockholders, partners or members and voting at such meetings) and otherwise act with respect to the Investment Property as if Agent were the outright owner thereof, . . . and (b) the Agent shall have the right, substantially concurrently with notice to the applicable Grantor, to (i) receive any and all cash dividends and distributions, payments or other Proceeds paid in respect of the Investment Property constituting Collateral and make application thereof to the Secured Obligations in such order as the Agent may determine, and (ii) exercise, or permit its nominee to exercise, all voting and other rights pertaining to such Investment Property as a holder of such Investment Property, with full power of substitution to do so.28
Consistent with the appointment section, in the remedial section Twin Brook allows Debtor to vote the Pledged Equity (and to receive distributions) if Debtor is not in default as long as Debtor does not impair Twin Brook‘s collateral. The remedial section also provides that Twin Brook must give Debtor notice of its intent to exercise its voting rights. Section 6.3(a) provides:
Unless an Event of Default shall have occurred and be continuing and the Agent shall have given notice to the relevant Grantor of the Agent‘s intent to exercise its corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive all cash dividends and distributions paid in respect of the Pledged Equity and all payments made in respect of the Pledged Notes, to the extent permitted in the Credit Agreement, and to exercise all voting and other rights with respect to the Investment Property; provided, that no vote shall be cast or other right exercised or action taken which could impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document.
Debtor does not argue that it did not appoint Twin Brook its proxy or that Events of Default did not exist or were not then-continuing when Twin Brook sent the Proxy Notice, amended Debtor‘s bylaws and replaced directors and managers. Instead, Debtor argues that (i) the Proxy Notice was not in accord with section 6.3(a) and (b); (ii) the appointment of Twin Brook as proxy expired on May 15, 2022 (or seven months prior to the Proxy Notice); and (iii) that the proxy appointment did not permit Twin Brook to act by written consent.
2. Delaware law29
Both parties rely on the Delaware Supreme Court‘s recent Hawkins decision30 that addresses the question of whether a purchaser is bound by an irrevocable proxy
From a corporate governance perspective, the appointment of a proxy decouples the economic interest in the shares from the power to vote the shares.31 If the appointment language so provides, as it does here, the appointment is immediate.32 Such arrangements were historically viewed as suspect because of the potential misalignment of those two interests and concerns that the outcome of a proxy arrangement was at odds with the “Delaware model” of maximizing stockholder welfare and, therefore, maximizing social welfare.33 This misalignment of interests is enhanced if the proxy is irrevocable because, unlike a revocable proxy, it “frees the holder from the ‘unilateral control of the grantor.‘”34
More recently, Delaware courts have relaxed their approach to proxy arrangements consistent with their approach to vote-buying arrangements and voting trusts.35 “[I]nnovations in technology and finance have made it easier to separate the voting interests from the financial interests of shares.”36 Further, the Delaware Supreme Court has also
- “formal voting rights,” which is the legal right to vote the shares, including the right to instruct someone else how to vote;
- “economic ownership,” which are the economic returns attendant to the shares;37 and
- “full ownership,” which consists of both the “voting ownership plus direct economic ownership,”38
The Delaware Supreme Court has also observed that “[o]ur system of record ownership already decouples economic ownership from formal voting rights.”39
Notwithstanding this relaxed interpretation, Delaware courts still construe proxies narrowly. Delaware courts will not turn to extrinsic evidence to resolve any ambiguities;
(a) Notice requirement
Relying on Section 6.3(a) of the Guarantee and Collateral Agreement, Debtor contends that Twin Brook did not properly exercise its proxy right because it did not provide advance notice of its intent to exercise the right. Debtor observes that Twin Brook simultaneously gave Debtor notice that it was no longer permitted to vote or receive dividends and that Twin Brook had executed written consents amending operative documents, removing directors and or managers and appointing replacements. In essence, Debtor contends that the Guarantee and Collateral Agreement requires a two-step process: one, the giving of a notice of intent to exercise rights and two, the subsequent exercise of those rights.
Twin Brook argues no advance notice is necessary. It points to various provisions of the Guarantee and Collateral Agreement as well as the Credit Agreement that address advance notice and argues that Section 6.3(a) has no such requirement.42 It concludes,
By its plain language, Section 6.3(a) does not include an advance notice requirement. It merely provides for notice of intent. The notice required under Section 6.3(a) is to inform Debtor that it is no longer permitted to vote or receive distributions; it is not some implicit and unspecified advance notice or challenge period nor does it govern when Twin Brook may exercise the proxy. Rather, Section 6.3(b) serves that function.
Section 6.3(b) provides that Twin Brook “shall have the right, substantially concurrently with notice to the applicable Grantor” to receive dividends and proceeds of the Collateral and to “exercise, or permit its nominee to exercise, all voting and other rights pertaining to such Investment Property as a holder of such Investment Property, with full power of substitution to do so.” This reference back to the notice provided in subsection (a) provides the timing of the ability to exercise the proxy: that is “substantially concurrently” with the giving of the notice of intent.43 The Proxy Notice, therefore, provided adequate notice to Debtor of Twin Brook‘s intent to exercise the proxy rights as well as its exercise of those rights.
But, even if some unspecified amount of advance notice is required, the Proxy Notice served as that notice such that the voting rights are not property of the estate. The appointment of Twin Brook as attorney-in-fact and proxy vested Debtor‘s voting rights in Twin Brook immediately, albeit Twin Brook agreed to permit Debtor to vote the Pledged
(b) Durational limits
The Loan documents, including the Guarantee and Collateral Agreement and the One Page Proxy, were executed on or as of May 15, 2019. Delaware law provides that a proxy expires three (3) years from the date of grant “unless the proxy provides for a longer period.”45 Thus, absent such language, the proxy expired on May 15, 2022, or prior to its exercise as manifest in the Proxy Notice.
The parties dispute whether the appointment language in the Guarantee and Collateral Agreement provides for a period longer than three years. Once again, applicable language is found in more than one section of the agreement. Section 7.1(a) provides, in relevant part:
THE POWER-OF-ATTORNEY AND PROXY GRANTED HEREBY IS COUPLED WITH AN INTEREST AND SHALL BE VALID AND IRREVOCABLE UNTIL THE SECURED OBLIGATIONS HAVE BEEN PAID IN FULL (AS DEFINED IN THE CREDIT
AGREEMENT) . . .SUCH APPOINTMENT OF THE AGENT AS PROXY AND ATTORNEY-IN-FACT SHALL BE VALID AND IRREVOCABLE AS PROVIDED HEREIN NOTWITHSTANDING ANY LIMITATIONS TO THE CONTRARY SET FORTH IN THE CERTIFICATE OF INCORPORATION, CERTIFICATE OF FORMATION, ARTICLES OF ORGANIZATION, BY-LAWS, LIMITED LIABILITY COMPANY AGREEMENTS OR OTHER ORGANIZATIONAL DOCUMENTS OF ANY GRANTOR OR ISSUER OR CORPORATE OR LIMITED LIABILITY COMPANY LAW, AS APPLICABLE, OF THE STATE OF DELAWARE, THE STATE OF CALIFORNIA, THE STATE OF GEORGIA, OR ANY OTHER STATE OF ORGANIZATION OF ANY GRANTOR OR ISSUER.
The One Page Proxy is more succinct:
This proxy is an irrevocable proxy coupled with an interest. The undersigned recognizes that Agent, has a security interest in said Equity Interests to secure certain obligations incurred by the undersigned to Lenders and, to the extent permitted by law, this proxy shall continue in full force and effect until the Secured Obligations are Paid in Full notwithstanding any time limitations set forth in the bylaws or other organizational documents of the Company or the general corporation law of the State of Delaware.46
Debtor argues, perhaps alternatively, that (i) there is no durational language and (ii) to the extent there is, it applies to the irrevocability and, perhaps, the validity of the proxy, but not the durational limit of the proxy. Twin Brook counters that the plain language of the Guarantee and Collateral Agreement and One Page Proxy provides the durational term: the proxy lasts—or is valid—until the secured obligations are paid in full. Debtor responds that it does not know what “valid” means but that “validity” “irrevocability” and “duration” are distinct concepts, and the proxy is silent as to its duration.47
Debtor is correct that revocability and duration are separate concepts. Revocability addresses whether the grantor can revoke the proxy during its term, but, by itself, “the act of
Moreover, a grantor can create a proxy of any length, but the default period under Delaware law is three years.51 While duration can be expressed in terms of days, months or years, it can also be expressed or measured more generally, such as the proxy “shall expire on the latest date permissible under such applicable law”52 or by events, such as the satisfaction of a judgment.53
Here, the clearest expression of duration is in the One Page Proxy, which specifically provides that the proxy ”shall continue in full force and effect until” the debt is Paid in Full. “Until” is a durational term. And the point in time when the secured obligations are paid in full is a determinable event.54 As it is undisputed that the Loan has not been Paid in Full, the proxy was still in effect when Twin Brook exercised it.
This conclusion is also consistent with the entire thrust of this commercial transaction, which is that the Collateral, including the Pledged Equity, secures Debtor‘s repayment obligations. Prior to an Event of Default, Debtor remains the master of its fate, entitled to both vote its stock and receive the economic benefit of ownership. Once an Event of Default occurs, however, Twin Brook is entitled to protect its loan position, by, among other things, providing notice to Debtor that Debtor‘s ability to vote the Pledged Equity and receive distributions no longer exists. Debtor can avoid Twin Brook‘s exercise of remedies by curing any default (such that there is not a continuing default) or can pay the obligations in full. But, it did neither prior to the Proxy Notice.
(c) Actions by written consent
Next, Debtor argues that if the court credits the durational language in the One Page Proxy to conclude that the proxy had not expired prior to its exercise, the court may not then look to the appointment language in the Guarantee and Collateral Agreement to permit action by written consent. Debtor maintains that the proxy appointment in the Guarantee and Collateral Agreement is separate and distinct from the One Page Proxy and that the One Page Proxy does not allow actions by written consent. Twin Brook counters that the One Page Proxy is to be read together with the Guarantee and Collateral Agreement, and that, even standing alone, the One Page Proxy enabled Twin Brook to act by written consent.57
I do not agree with Twin Brook that the One Page Proxy, standing alone, provides that the Agent may act by written consent. The One Page Proxy provides, in relevant part:
Subject in each case to the limitations set forth in the Guarantee and Collateral Agreement (referred to below), (i) the undersigned hereby irrevocably designates and appoints Twin Brook Capital Partners, LLC as administrative agent for certain secured parties (in such capacity, the ”Agent“) to represent it at all annual and special meetings of the holders of the Equity Interests (as defined in the Guarantee and Collateral Agreement defined below) of COMMUNITY INVESTORS, INC., a Delaware corporation (the “Company“), and (ii) the undersigned hereby authorizes and empowers Agent, to vote any and all Equity Interests owned by the undersigned or standing in its name, and do all things which the undersigned might do if present and acting itself. (Emphasis added.)
This conclusion, however, is not fatal. As I have already ruled, the One Page Proxy, while a separate document is not to be read in isolation from the Guarantee and Collateral Agreement. Further, it is not a limitation on the appointment of Twin Brook as attorney-in-fact and proxy in the Guarantee and Collateral Agreement. It is simply another manifestation of the proxy.
Several sections of the Guarantee and Collateral Agreement provide that Twin Brook may exercise its proxy rights by way of written consent:
6.3 Investment Property.
(b) If an Event of Default shall occur and be continuing, (a) the Agent shall have the right to. . . (ii) exercise . . . any other rights, privileges or options pertaining to such Investment Property as if it were the absolute owner thereof (. . . and including with respect to the Pledged Equity, giving or withholding written consents of stockholders, partners or members, calling special meetings of stockholders, partners or members and voting at such meetings) and otherwise act with respect to the Investment Property as if Agent were the outright owner thereof . . . and (b) the Agent shall have the right, substantially concurrently with notice to the applicable Grantor, to . . . (ii)
exercise, or permit its nominee to exercise, all voting and other rights pertaining to such Investment Property as a holder of such Investment Property, with full power of substitution to do so.59 7.1 The Agent‘s Appointment as Attorney-in-Fact, etc.
(a) Each Grantor hereby irrevocably constitutes and appoints the Agent and any officer or agent thereof . . . to do any or all of the following, in each case, with respect to the Collateral:
. . . .
(v) . . . (4) take all such other actions with respect to Investment Property authorized under Section 6.3 or 6.7 of this Agreement or otherwise authorized by this Agreement or the other Loan Documents; and
(vi) . . . (8) vote any right or interest with respect to any Investment Property;60
. . . .
. . . The Agent, as proxy, will be empowered and may exercise the irrevocable proxy to vote the Investment Property at any and all times, including but not limited to, at any meeting of shareholders, partners or members, as the case may be, however called, and at any adjournment thereof, or in any action by written consent, and may waive any notice otherwise required in connection therewith.61
The Proxy Notice accurately referenced the above sections and attached resolutions amending the constituent documents and appointing new directors. Assuming, therefore, that these actions were required to be taken prepetition to remove the voting rights from the property of the estate, Twin Brook‘s Actions were properly taken.
Debtor‘s argument on
B. Twin Brook has not violated § 362(a)(6).
Next, Debtor relies on
Debtor argues Twin Brook is refusing to stop collection efforts because Twin Brook continues to exercise control over Debtor‘s corporate governance rights in Community Investors and the Indirect Subsidiaries and refuses to reverse its prepetition actions and return control of corporate governance to Debtor.66 Debtor argues that Twin Brook is required to take affirmative action post-bankruptcy “to stop its collection efforts, dismantle the Twin Brook Board and return control of the operating subsidiaries to the Debtor.”67 When pressed at argument for specific actions that Twin Brook is taking post-petition to collect its debt, Debtor‘s counsel said Twin Brook is talking to the board68 and it is blocking
Twin Brook responds that
Community Investors also weighed in on the Motion to Enforce the Automatic Stay on its own behalf and on behalf of the Indirect Subsidiaries.70 Community Investors reminds the parties and the court that neither it nor the Indirect Subsidiaries are part of this
While it is fair to say, as Debtor does, that Twin Brook‘s Actions were an attempt to collect or recover on its Loan,72 those actions happened pre-bankruptcy. As discussed above, pre-bankruptcy Debtor appointed Twin Brook as its attorney-in-fact and proxy and the Proxy Notice solidified Twin Brook‘s ability to exercise the proxy. As of the petition date, therefore, Debtor did not have the right to vote the Pledged Equity.
In arguing that Debtor is currently being deprived of its right to manage/govern Community Investors and the Indirect Subsidiaries, Debtor misunderstands its rights as a stockholder of a Delaware corporation. The Delaware General Corporation Law has placed the authority to manage a corporation‘s day-to-day operations in the hands of directors while reserving for stockholders “the more elemental but remote power to elect directors, to alter and repeal bylaws, and to vote upon the most fundamental of corporate
Here, Debtor gave away its right to vote the Pledged Equity, and with it the right to choose the directors of Community Investors (and the Indirect Subsidiaries). Although
During colloquy with the court, counsel for CII argued that there is a fundamental difference between a debtor owning shares of stock in a publicly traded company and owning the equity of a wholly owned subsidiary. Counsel points out the practical impact of 100% ownership on the ability to set management priorities. While I am not insensitive to the difference, CII points to no provision of the Delaware General Corporation Law that makes this distinction in the rights of stockholders. Nor has CII pointed to any provision of Community Investors’ charter that gives it more rights as a stockholder to control the day-to-day operations of its subsidiary. Accordingly, CII has no direct management rights.
What CII does have is the value of its equity in Community Investors. It still owns the stock and has all rights attendant to ownership (except the ones it gave away), which may include, for example, the ability to sell the stock or otherwise dispose of it. As the stockholder, it may also be owed fiduciary duties by the directors of Community Investors, which, if breached, may give rise to claims.76
The purpose behind
II. Motion to Dismiss
Twin Brook moved to dismiss CII‘s bankruptcy case asserting it was filed in bad faith. The parties’ briefing addresses the traditional factors courts in this circuit and district use to examine that question, including (1) whether the petition serves a valid bankruptcy purpose, e.g., by preserving a going concern or maximizing the value of the debtor‘s estate, and (2) whether the petition is filed to obtain a tactical litigation advantage.”78 The parties also briefed the Primestone factors.79
Based on my denial of the Motion to Enforce and my determinations that Twin Brook properly exercised its authority as proxy and that the Proxy Notice ended Debtor‘s ability to vote the Pledged Equity, I am tempted to dismiss the case for the simple reason that CII cannot obtain the relief that it sought by filing the petition. As counsel for CII
But, the parties agreed to leave open the Contested Issues, which include (at least) the equitable estoppel and turnover arguments (see supra n. 4). While I am skeptical based on a review of the filings that Debtor will be successful in pressing these arguments, skepticism cannot replace evidence. Accordingly, I will hold in abeyance my ruling on the Motion to Dismiss and will instead hold a status conference to discuss with the parties the appropriate path forward.
Dated: April 12, 2023
Laurie Selber Silverstein
United States Bankruptcy Judge
Notes
a petition filed under . . . this title . . . operates as a stay, applicable to all entities, of—
(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.
(a) Each Grantor hereby irrevocably constitutes and appoints the Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact and proxy with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement or take any other remedial action with respect to collateral otherwise described in this Agreement, the Credit Agreement or the other Loan Documents, and, without limiting the generality of the foregoing, each Grantor hereby gives the Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following, in each case, with respect to the Collateral: . . . .
Guarantee and Collateral Agreement at Section 7.1(a) at 26.IN ORDER TO FURTHER AFFECT [sic] THE TRANSFER OF RIGHTS WITH RESPECT TO PLEDGED EQUITY SET FORTH IN SECTION 6.3, SECTION 6.7 OR ANY OTHER PROVISION OF THIS AGREEMENT IN FAVOR OF THE AGENT, THE AGENT SHALL HAVE THE RIGHT, UPON THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, TO PRESENT TO ANY ISSUER AN IRREVOCABLE PROXY.
Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after 3 years from its date, unless the proxy provides for a longer period.
”Paid in Full“, ”Pay in Full” or ”Payment in Full” means, with respect to any Obligations, (a) the payment in full in cash of all such Obligations (other than contingent indemnification obligations to the extent no claim giving rise thereto has been asserted), (b) the termination or expiration of all of the Revolving Loan Commitments and (c) in connection with the termination or expiration of the Revolving Loan Commitment, either (i) the cancellation and return to Agent of all
MR. GLENN: Maybe it did; maybe it didn‘t. I don‘t think it matters because the automatic stay analysis is: Are they doing something, are they acting or are they exercising control—
THE COURT: Who is the “they“?
MR. GLENN: Twin Brook.
THE COURT: Okay. And what is Twin Brook doing today?
MR. GLENN: They‘re talking to the board, they‘re talking to the management every single day.
THE COURT: They can‘t talk — a creditor can‘t talk — if a creditor talks to management, is that a violation of the stay?
MR. GLENN: If it‘s an act to control. And that‘s the whole point. Okay.
THE COURT: Tell me again what‘s the violation of the stay. What actions is Twin Brook taking today, not what they did pre-bankruptcy — would you agree with me that actions they took pre-bankruptcy, Twin Brook took prebankruptcy, are not violations of the stay?
MR. GLENN: By definition, I have to.
THE COURT: Okay. So what actions — and you can go to your car example. I‘ve got Denby-Peterson open in front of me. What‘s the action that — to put in action, exercise, to put in action. What is the action that Twin Brook is taking today that violates the stay.
MR. GLENN: They are blocking us from exercising control over the board.
. . . .
THE COURT: So the action that Twin Brook is taking that‘s a violation of the stay, give that to me again.
MR. GLENN: They are blocking our ability to govern the company by changing the board, controlling management, and all of the other perquisites of being a shareholder.
Coursing near the center of many of the great controversies that shape the law of corporate governance is an unrelenting tension between the respective spheres of influence of stockholders and directors. Arising from each stockholder‘s equity investment in the enterprise is the understandable desire to influence the corporate policy so as to ensure the protection and enhancement of that investment. Yet considerations of practical efficiency at the heart of the corporate concept itself dictate the need for centralized decision making. The power to manage the collective capital investment for the common good is therefore routinely vested in the board. When disagreements arise between these two constituencies, it becomes the task of the corporate law to resolve them. That resolution is not to be based upon the Court‘s assessment as to the substantive policy that best serves the corporation‘s business interests, for that is a task for which the courts are ill-equipped. The judicial function is instead to ascertain that point on the decisional continuum at which the power of the investor must yield to the managerial prerogative of the board.
The Delaware General Corporation Law, the statutory spine of Delaware‘s vast body of corporate jurisprudence, has sought to strike an appropriate balance in this regard by expressly vesting in the board of directors the authority to manage the daily business and affairs of the corporation, while reserving to the stockholders the more elemental power to elect directors, to alter and repeal bylaws, and to approve or disapprove the most fundamental of corporate transactions, such as mergers, sales of substantially all of the corporation‘s assets, charter amendments, and dissolutions. Moreover, it provides the entity with the flexibility to alter this presumptive balance of power through the inclusion of charter provisions that enhance the influence of the stockholders over corporate strategy, whether by expanding the roster of matters and transactions for which their approval is required, or by hiking the percentage of approving votes necessary to confer that approval, or by subjecting the board‘s power to specified internal checks and balances.
MR. GLENN: -- -- . And what the [Debtor-appointed former] directors of the company decided was that the company was in need of restructuring. And so, ultimately, if we had known what [Twin Brook was] going to do, then the likely outcome would have been we would have filed all the cases before the Court. And that‘s really what we‘re here about is who controls whether the subsidiaries -- how the subsidiaries are restructured, what happens in that restructuring. And that‘s what was taken away, and that‘s why the automatic stay is so important going forward.