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The BAP affirmed. Under F.R.B.P. 4001(c), a court is only permitted to enter a final order authorizing credit terms after a hearing on at least 15 days' notice. Until that time credit may only be authorized on an interim basis. Here, the original order was entered before the passage of 15-day notice period so the order could only have been entered on an interim basis. Therefore, the lender was only entitled to priority on those sums advanced during initial the 15-day window. The BAP also found that the modification of the interim order, granting the lender priority status ahead of all claims except those for Chapter 7 administrative expenses, was within its discretion. Section 364(c)(1) expressly authorizes a court to permit borrowing with a priority over “any or all” administrative expenses. Following the conversion of the case, it was proper for the bankruptcy court to amend its interim order to assure payment to the professionals who liquidate the estate.

Compulsory Arbitration Provision Can Be Set Aside in Bankruptcy

The District Court for the Eastern District of Pennsylvania has ruled that bankruptcy courts may refuse to compel arbitration in a case where the outcome of arbitration could adversely affect administration of the bankrupt estate. In such cases, the bankruptcy court's power to decide bankruptcy issues supercedes the statutory preference for arbitration expressed in the Federal Arbitration Act. Matter of Mintze, No. 03-2113 (Nov. 12).

In reaching its decision, the court looked at Third Circuit case law where the courts balanced the preference for arbitration in the Federal Arbitration Act with the language of the Bankruptcy Code, which grants bankruptcy court judges jurisdiction over bankruptcy matters (including the power to refuse to compel arbitration). The court noted that “arbitration is generally not on the same level of importance as bankruptcy, because bankruptcy proceedings are essential 'to the smooth functioning of the nation's commercial activities.' ” Therefore, a bankruptcy court must exercise its “ sound discretion” in deciding whether the enforcement of the arbitration clause would adversely affect the purposes of the Bankruptcy Code.

Section 16(b) Action Not Subject to Automatic Stay

The District Court for the Southern District of New York has ruled that a shareholder's short-swing profits suit brought under Section 16(b) of the 1934 Securities Exchange Act is not a true derivative action as it belongs to the shareholder, and therefore is not subject to the automatic stay provisions of ' 362 of the Bankruptcy Code. Schaffer v. CC Investments LDC , No. 99 Civ. 2821 (VM), (Oct. 6).

The court found that while most shareholder derivative actions are part of the bankruptcy estate and stayed by the filing of a corporate bankruptcy, 16(b) actions are different. Although they are described as “derivative” actions, they are not “derivative actions in the way that a typical shareholder derivative action is.” A 16(b) action is owned by the shareholder and does not include estate property. It “is not a derivative or secondary right grounded on rights and interests possessed primarily by the corporation and emanating from the common law.” Rather, a 16(b) action “amounts to an enforcement right that, if successful, enables a corporation to gain from the redistribution of insiders' illicit profits to which the corporation had no right of recovery under common law causes of action.”

Super Priority Financing Limited to Interim Period

The Bankruptcy Appellate Panel for the Eighth Circuit has ruled that where a debtor failed to secure a final order establishing permanent super priority status, it was not entitled to rely on an interim order allowing a Chapter 11 debtor to incur post-petition debt on a super priority basis. In re Visionaire Corp., No. 03-6021EM (Oct. 9).

The debtor filed a motion to incur up to $250,000 in unsecured debt from the lender on a super priority basis, which was approved by the bankruptcy court pursuant to Section 503(b). The lender was given administrative priority with respect to the loan proceeds with priority over all other administrative expense claims other than professional fees of counsel for the Debtor, counsel for the committee and the U.S. Trustee. The lender then made a series of advances to the debtor within 15 days of the bankruptcy court's order and another $85,000 at a later date. The lender filed a proof of claim, seeking payment of principal and interest as a priority administrative expense claim pursuant to Section 364(c)(1). The case was converted to Chapter 7, however, and the Chapter 7 trustee filed a motion to amend or clarify the bankruptcy court's earlier order. The bankruptcy court found that exceptional circumstances necessitated relief from judgment and entered a final order holding that the lender's 364(c)(1) priority administrative expense claim was subordinate to Chapter 7 administrative expenses.

The BAP affirmed. Under F.R.B.P. 4001(c), a court is only permitted to enter a final order authorizing credit terms after a hearing on at least 15 days' notice. Until that time credit may only be authorized on an interim basis. Here, the original order was entered before the passage of 15-day notice period so the order could only have been entered on an interim basis. Therefore, the lender was only entitled to priority on those sums advanced during initial the 15-day window. The BAP also found that the modification of the interim order, granting the lender priority status ahead of all claims except those for Chapter 7 administrative expenses, was within its discretion. Section 364(c)(1) expressly authorizes a court to permit borrowing with a priority over “any or all” administrative expenses. Following the conversion of the case, it was proper for the bankruptcy court to amend its interim order to assure payment to the professionals who liquidate the estate.

Compulsory Arbitration Provision Can Be Set Aside in Bankruptcy

The District Court for the Eastern District of Pennsylvania has ruled that bankruptcy courts may refuse to compel arbitration in a case where the outcome of arbitration could adversely affect administration of the bankrupt estate. In such cases, the bankruptcy court's power to decide bankruptcy issues supercedes the statutory preference for arbitration expressed in the Federal Arbitration Act. Matter of Mintze, No. 03-2113 (Nov. 12).

In reaching its decision, the court looked at Third Circuit case law where the courts balanced the preference for arbitration in the Federal Arbitration Act with the language of the Bankruptcy Code, which grants bankruptcy court judges jurisdiction over bankruptcy matters (including the power to refuse to compel arbitration). The court noted that “arbitration is generally not on the same level of importance as bankruptcy, because bankruptcy proceedings are essential 'to the smooth functioning of the nation's commercial activities.' ” Therefore, a bankruptcy court must exercise its “ sound discretion” in deciding whether the enforcement of the arbitration clause would adversely affect the purposes of the Bankruptcy Code.

Section 16(b) Action Not Subject to Automatic Stay

The District Court for the Southern District of New York has ruled that a shareholder's short-swing profits suit brought under Section 16(b) of the 1934 Securities Exchange Act is not a true derivative action as it belongs to the shareholder, and therefore is not subject to the automatic stay provisions of ' 362 of the Bankruptcy Code. Schaffer v. CC Investments LDC , No. 99 Civ. 2821 (VM), (Oct. 6).

The court found that while most shareholder derivative actions are part of the bankruptcy estate and stayed by the filing of a corporate bankruptcy, 16(b) actions are different. Although they are described as “derivative” actions, they are not “derivative actions in the way that a typical shareholder derivative action is.” A 16(b) action is owned by the shareholder and does not include estate property. It “is not a derivative or secondary right grounded on rights and interests possessed primarily by the corporation and emanating from the common law.” Rather, a 16(b) action “amounts to an enforcement right that, if successful, enables a corporation to gain from the redistribution of insiders' illicit profits to which the corporation had no right of recovery under common law causes of action.”