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The Third Circuit affirmed. The court noted that indemnification of financial advisers against their own negligent conduct 'is becoming a common market occurrence.' However, the court added that just because indemnification provisions such as this are now common in the marketplace, this does 'not automatically make them 'reasonable' under ' 328.' In examining the reasonableness of the indemnification provision, the court was guided by Delaware corporate law, noting that it offered 'time-tested insights' on how courts should best evaluate similar issues. Under Delaware law, officers and directors may obtain indemnity for their own ordinary negligence if their actions were made in good faith and in the best interests of the corporation. But the question of what is ordinary negligence as opposed to gross negligence is not always so clear in the context of corporate governance. In resolving this issue with respect to financial advisers in bankruptcy cases, the appeals court looked to the business judgment rule adopted by the Delaware courts. Under this rule, courts 'do not interfere with advice by financial advisers when they 1) have no personal interest, 2) have a reasonable awareness of available information after prudent consideration of alternative options, and 3) provide that advice in good faith.' Under this standard, the court found that the district court did not abuse its discretion by finding the retention agreement's indemnification provision to be reasonable.

Bankruptcy Court Has No Jurisdiction to Rule on Non-Debtor Taxes





The Fifth Circuit has ruled that a bankruptcy court may not enjoin the Internal Revenue Service from assessing and collecting taxes from a non-debtor officer of a corporate debtor. In the Matter of Prescription Home Health Care Inc., No. 02-50132.





When the debtor corporation filed its Chapter 11 bankruptcy petition it owed approximately $600,000 in back taxes, including unemployment and payroll 'trust fund' taxes withheld from its employees. The bankruptcy court confirmed a reorganization plan which provided that the president and sole owner of the corporation would retain his interest in the business upon payment of $15,000, and that plan payments would go to trust fund liabilities first. The confirmed plan also enjoined the IRS from assessing or collecting any employment taxes from the president as a responsible person under the law. The IRS objected and the district court affirmed the bankruptcy court's order.


The Fifth Circuit reversed and remanded. The court held that the bankruptcy court exceeded its jurisdiction by adjudicating the president's tax liability at all, because the bankruptcy court's jurisdiction extents only to the tax liabilities of the debtor and the estate.





Rejected: Debtor's Wish to Extend Deadline on Unexpired Leases





The District Court for the Northern District of Illinois has ruled that an order extending the deadline of a debtor to assume or reject unexpired leases of nonresidential property is not a final and appealable order because it did not ultimately determine all the parties' issues in the bankruptcy proceeding. Key Plaza I Inc. v. Kmart Corp., Nos. 02-C-4086, 02-C-4087 (Jan 13, 2003).





The debtor filed a motion to extend the deadline to assume or reject its unexpired nonresidential leases, and approximately 120 landlords objected. At a hearing, witnesses for the debtor testified that the extension was 'necessary to an intelligent decision-making process with respect to the disposition of [the debtor's] leasehold interests.' The debtor needed more time to examine its operations and make overall strategic decisions on where to concentrate its future business efforts. The bankruptcy court agreed, noting that this retail bankruptcy is very large and complex case and that the debtor would need more time to properly assess the viability of its stores. Further, that the landlords have not shown a particular prejudice to them that outweighs the reasons to grant the extension.


The district court dismissed the appeal, stating that the extension order was not a final and appealable order. It did not resolve all contested issues on the merits and would not lead to a final distribution of assets. The court found that that the extension order also did not ultimately determine the lessors' positions in the bankruptcy proceeding. The extension order did not dispose of the leases, but only extended the time in which the debtor could decide whether to assume or reject the leases. Moreover, the extension order did not 'mark the conclusion of the equivalent of a stand-alone suit. The decision whether to extend a deadline is not the sort of issue that would be the basis of an independent lawsuit against [the debtor].'




The Fifth Circuit has ruled that a bankruptcy court may not enjoin the Internal Revenue Service from assessing and collecting taxes from a non-debtor officer of a corporate debtor. In the Matter of Prescription Home Health Care Inc., No. 02-50132.



When the debtor corporation filed its Chapter 11 bankruptcy petition it owed approximately $600,000 in back taxes, including unemployment and payroll 'trust fund' taxes withheld from its employees. The bankruptcy court confirmed a reorganization plan which provided that the president and sole owner of the corporation would retain his interest in the business upon payment of $15,000, and that plan payments would go to trust fund liabilities first. The confirmed plan also enjoined the IRS from assessing or collecting any employment taxes from the president as a responsible person under the law. The IRS objected and the district court affirmed the bankruptcy court's order.


The Fifth Circuit reversed and remanded. The court held that the bankruptcy court exceeded its jurisdiction by adjudicating the president's tax liability at all, because the bankruptcy court's jurisdiction extends only to the tax liabilities of the debtor and the estate.The District Court for the Northern District of Illinois has ruled that an order extending the deadline of a debtor to assume or reject unexpired leases of nonresidential property is not a final and appealable order because it did not ultimately determine all the parties' issues in the bankruptcy proceeding. Key Plaza I Inc. v. Kmart Corp., Nos. 02-C-4086, 02-C-4087 (Jan 13, 2003).

Indemnifying Proposed Financial Adviser Held 'Reasonable'

The Third Circuit has held that a Chapter 11 debtor's retention agreement with a proposed financial adviser, which indemnified the adviser from liability for ordinary negligence, was a 'reasonable' condition for the employment of a professional pursuant to Section 328(a) of the Bankruptcy Code. United Artists Theatre Co. v. Walton, No. 01-1351 (Jan. 9, 2003).

The United States Trustee had objected to a provision in the debtor's engagement letter with its proposed financial adviser that sought to indemnify the adviser for claims of negligence related to its services, except for 'any losses that are finally judicially determined to have resulted from the gross negligence, bad faith, willful malfeasance, or reckless disregard of its obligations or duties.' The Trustee argued that this agreement was unreasonable, and in violation of Sections 327(a) and 328(a) of the Bankruptcy Code. The district court disagreed and approved the application.

The Third Circuit affirmed. The court noted that indemnification of financial advisers against their own negligent conduct 'is becoming a common market occurrence.' However, the court added that just because indemnification provisions such as this are now common in the marketplace, this does 'not automatically make them 'reasonable' under ' 328.' In examining the reasonableness of the indemnification provision, the court was guided by Delaware corporate law, noting that it offered 'time-tested insights' on how courts should best evaluate similar issues. Under Delaware law, officers and directors may obtain indemnity for their own ordinary negligence if their actions were made in good faith and in the best interests of the corporation. But the question of what is ordinary negligence as opposed to gross negligence is not always so clear in the context of corporate governance. In resolving this issue with respect to financial advisers in bankruptcy cases, the appeals court looked to the business judgment rule adopted by the Delaware courts. Under this rule, courts 'do not interfere with advice by financial advisers when they 1) have no personal interest, 2) have a reasonable awareness of available information after prudent consideration of alternative options, and 3) provide that advice in good faith.' Under this standard, the court found that the district court did not abuse its discretion by finding the retention agreement's indemnification provision to be reasonable.

Bankruptcy Court Has No Jurisdiction to Rule on Non-Debtor Taxes





The Fifth Circuit has ruled that a bankruptcy court may not enjoin the Internal Revenue Service from assessing and collecting taxes from a non-debtor officer of a corporate debtor. In the Matter of Prescription Home Health Care Inc., No. 02-50132.





When the debtor corporation filed its Chapter 11 bankruptcy petition it owed approximately $600,000 in back taxes, including unemployment and payroll 'trust fund' taxes withheld from its employees. The bankruptcy court confirmed a reorganization plan which provided that the president and sole owner of the corporation would retain his interest in the business upon payment of $15,000, and that plan payments would go to trust fund liabilities first. The confirmed plan also enjoined the IRS from assessing or collecting any employment taxes from the president as a responsible person under the law. The IRS objected and the district court affirmed the bankruptcy court's order.


The Fifth Circuit reversed and remanded. The court held that the bankruptcy court exceeded its jurisdiction by adjudicating the president's tax liability at all, because the bankruptcy court's jurisdiction extents only to the tax liabilities of the debtor and the estate.





Rejected: Debtor's Wish to Extend Deadline on Unexpired Leases





The District Court for the Northern District of Illinois has ruled that an order extending the deadline of a debtor to assume or reject unexpired leases of nonresidential property is not a final and appealable order because it did not ultimately determine all the parties' issues in the bankruptcy proceeding. Key Plaza I Inc. v. Kmart Corp., Nos. 02-C-4086, 02-C-4087 (Jan 13, 2003).





The debtor filed a motion to extend the deadline to assume or reject its unexpired nonresidential leases, and approximately 120 landlords objected. At a hearing, witnesses for the debtor testified that the extension was 'necessary to an intelligent decision-making process with respect to the disposition of [the debtor's] leasehold interests.' The debtor needed more time to examine its operations and make overall strategic decisions on where to concentrate its future business efforts. The bankruptcy court agreed, noting that this retail bankruptcy is very large and complex case and that the debtor would need more time to properly assess the viability of its stores. Further, that the landlords have not shown a particular prejudice to them that outweighs the reasons to grant the extension.


The district court dismissed the appeal, stating that the extension order was not a final and appealable order. It did not resolve all contested issues on the merits and would not lead to a final distribution of assets. The court found that that the extension order also did not ultimately determine the lessors' positions in the bankruptcy proceeding. The extension order did not dispose of the leases, but only extended the time in which the debtor could decide whether to assume or reject the leases. Moreover, the extension order did not 'mark the conclusion of the equivalent of a stand-alone suit. The decision whether to extend a deadline is not the sort of issue that would be the basis of an independent lawsuit against [the debtor].'




The Fifth Circuit has ruled that a bankruptcy court may not enjoin the Internal Revenue Service from assessing and collecting taxes from a non-debtor officer of a corporate debtor. In the Matter of Prescription Home Health Care Inc., No. 02-50132.



When the debtor corporation filed its Chapter 11 bankruptcy petition it owed approximately $600,000 in back taxes, including unemployment and payroll 'trust fund' taxes withheld from its employees. The bankruptcy court confirmed a reorganization plan which provided that the president and sole owner of the corporation would retain his interest in the business upon payment of $15,000, and that plan payments would go to trust fund liabilities first. The confirmed plan also enjoined the IRS from assessing or collecting any employment taxes from the president as a responsible person under the law. The IRS objected and the district court affirmed the bankruptcy court's order.


The Fifth Circuit reversed and remanded. The court held that the bankruptcy court exceeded its jurisdiction by adjudicating the president's tax liability at all, because the bankruptcy court's jurisdiction extends only to the tax liabilities of the debtor and the estate.The District Court for the Northern District of Illinois has ruled that an order extending the deadline of a debtor to assume or reject unexpired leases of nonresidential property is not a final and appealable order because it did not ultimately determine all the parties' issues in the bankruptcy proceeding. Key Plaza I Inc. v. Kmart Corp., Nos. 02-C-4086, 02-C-4087 (Jan 13, 2003).