The Bankruptcy Hotline

The bankruptcy judge agreed with Enron, noting that the automatic stay applies “to all entities regarding the commencement or continuation of judicial proceedings against the debtor.” The objective is to have a centralized means of processing all claims by fairly and efficiently distributing the assets among creditors rather than allowing competing suits to spring up across the nation. California argued that its claim qualified for an exception that allows governments to file separate actions to protect consumers or police wrongdoing. The bankruptcy court disagreed, stating that “even if a government action is a proper exercise of the police power, the collection of a money judgment is barred.” Further, the court opined that although consumer protection law under which California sought state court relief does have a dual purpose, the primary one was monetary redress. “The request for injunctive relief … is an attempt to portray the [lawsuit] as a police and regulatory action when it is in fact solely brought in furtherance of the State of California's pecuniary interest.” Moreover, the court categorized the state's action as an “exercise in forum shopping.”

Fear of Adverse Judgment Not Proper Grounds for Bankruptcy Filing

The District Court for the Northern District of New York has ruled that a corporation's fear that a possible adverse judgment would drive it to insolvency is not a valid rationale for seeking bankruptcy court protection. Financial Composite Services Inc. v. Karczewski, 5:03-CV-1432 (Sept 22).

The debtor corporation claimed it filed bankruptcy because of anticipated future financial distress, although it was solvent, profitable and current on all obligations at the time its Chapter 11 petition was filed. The court stated that while a “debtor need not be in extremis to file a Chapter 11 petition, it must, at least, be experiencing a level of financial difficulty that, if it did not file at that time, it would likely need to file in the future.” Here, the Chapter 11 filing was both premature and in bad faith. Further, it was designed to delay and frustrate an ongoing state court action. The court found the main reason the debtor failed the good-faith test was that it was solvent and profitable at the time of the filing. The court stated that “the mere possibility that a debtor may have to file for Chapter 11 protection in the future does not establish grounds for finding that the debtor filed its petition in good faith.”

Out-of-State Claims Against Enron To Be Heard in NY

The Bankruptcy Court for the Southern District of New York has ruled that the State of California must adjudicate its claims against the Enron Corp arising from that state's energy crisis in the SDNY bankruptcy court. In re Enron Corp., No. 01-16034 (Sept. 29).

California filed a separate state court action in California similar to one filed in the SDNY bankruptcy matter. The suit alleged that from May 2000 to June 2001, California's residents suffered from rolling blackouts and unusually high electricity prices because Enron participated in or caused an energy crisis at the expense of consumers. Enron asked the bankruptcy court to stop the parallel suit in California.

The bankruptcy judge agreed with Enron, noting that the automatic stay applies “to all entities regarding the commencement or continuation of judicial proceedings against the debtor.” The objective is to have a centralized means of processing all claims by fairly and efficiently distributing the assets among creditors rather than allowing competing suits to spring up across the nation. California argued that its claim qualified for an exception that allows governments to file separate actions to protect consumers or police wrongdoing. The bankruptcy court disagreed, stating that “even if a government action is a proper exercise of the police power, the collection of a money judgment is barred.” Further, the court opined that although consumer protection law under which California sought state court relief does have a dual purpose, the primary one was monetary redress. “The request for injunctive relief … is an attempt to portray the [lawsuit] as a police and regulatory action when it is in fact solely brought in furtherance of the State of California's pecuniary interest.” Moreover, the court categorized the state's action as an “exercise in forum shopping.”

Fear of Adverse Judgment Not Proper Grounds for Bankruptcy Filing

The District Court for the Northern District of New York has ruled that a corporation's fear that a possible adverse judgment would drive it to insolvency is not a valid rationale for seeking bankruptcy court protection. Financial Composite Services Inc. v. Karczewski, 5:03-CV-1432 (Sept 22).

The debtor corporation claimed it filed bankruptcy because of anticipated future financial distress, although it was solvent, profitable and current on all obligations at the time its Chapter 11 petition was filed. The court stated that while a “debtor need not be in extremis to file a Chapter 11 petition, it must, at least, be experiencing a level of financial difficulty that, if it did not file at that time, it would likely need to file in the future.” Here, the Chapter 11 filing was both premature and in bad faith. Further, it was designed to delay and frustrate an ongoing state court action. The court found the main reason the debtor failed the good-faith test was that it was solvent and profitable at the time of the filing. The court stated that “the mere possibility that a debtor may have to file for Chapter 11 protection in the future does not establish grounds for finding that the debtor filed its petition in good faith.”