This is the next post in Plan Proponent’s series on the confirmation-related recommendations in the ABI Commission Report. Click here for the Introduction. Over the next 2 months, Plan Proponent will dig into the Exiting the Case piece of the Report. Part A is titled “General Authority of Debtor in Possession and its Board of Directors.” The first section of Part A (and this post) addresses the authority of the debtor, generally, and in the plan process, specifically.

Generally, the Bankruptcy Code defers to state law and entity governance documents on the issue of corporate authority for a Chapter 11 debtor’s board of directors, officers, and managers. However, the scope of that deference is not always clear. Therefore, the Commission evaluated that deference in 3 contexts: (1) annual shareholder meeting demands; (2) Section 363 sales; and (3) Chapter 11 plan proposals under Section 1123(a)(5) of the Code.  The issue:

To what extent does or should the Bankruptcy Code preempt corporate governance under state law, either expressly or practically?

Put another way, assume that the above annual meeting snapshot depicts the typical shareholder scene at an annual meeting. What role does Chapter 11 give those shareholders, if any, in administering a Chapter 11 case? Does the Bankruptcy Code, without anything further, preempt their state law authority to determine corporate policy?

With annual shareholder meetings, the issue is whether shareholders have a right in Chapter 11 to shareholder meetings that might otherwise be required outside of Chapter 11. The Commission observes that bankruptcy courts usually do not interfere with a shareholders’ rights to demand annual meetings, elect directors, and, thus, control corporate policy unless their exercise of those rights amounts to a “clear abuse” of the process or is at odds with the bankruptcy estate’s interests. Although the Commission recognizes the potential for abuse, additional expense, and delay in respecting meeting demands, it recommends that those demands be left to the courts on a case-by-case basis.

With Section 363 sales, the issue is whether the Bankruptcy Code preempts or should preempt any state law or organizational document requiring shareholder approval for sales of all or substantially all of a debtor’s assets. Bankruptcy courts commonly authorize Section 363 sales without requiring shareholder approval, primarily to avoid delay, uncertainty, and shareholder abuse. Additionally, the Commission points out that shareholders can object under Section 363 and Section 1109 (which provides all parties-in-interest the “right to be heard” on any issue in Chapter 11). The Commission concludes that the Bankruptcy Code should preempt state entity governance law for Section 363 sales (among other transactions), such that a debtor can pursue Section 363 sales without first obtaining shareholder approval. (But see discussion below regarding “first day” corporate resolutions.)

With plan proposals under Section 1123(a)(5), the issue is the extent to which Section 1123(a)(5) preempts nonbankruptcy law. Section 1123(a)(5) provides that “[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . .  provide adequate means for the plan’s implementation. ” It then goes on to list ten illustrative (but nonexclusive) examples of plan implementation mechanisms. As a threshold matter, the Commission reminds us that the use of “nothwithstanding” in the Code usually indicates Congress’ intent that the Code expressly preempt some other area of law.

It then observes that many courts have read Section 1123(a)(5)’s preemptive scope broadly. Indeed, the alternatives set out in Section 1123(a)(5) are “self-executing–that is, the plan may propose such actions notwithstanding nonbankruptcy law or agreements.” 7-1123 Collier on Bankruptcy P 1123.01.  However, the Commission acknowledges that in Pacific Gas & Electric. Co., the Ninth Circuit limited Section 1123(a)(5)’s preemptive scope by linking it to Section 1142(a). Section 1142(a),  which deals with implementing Section 1123 proposals after plan confirmation, provides that “[n]otwithstanding any otherwise applicable nonbankruptcy law, rule, or regulation relating to financial condition, the debtor and any entity organized or to be organized for the purpose of carrying out the plan shall carry out the plan and shall comply with any orders of the court.” Simply put, the Ninth Circuit held that, like Section 1142(a), Section 1123(a)(5) preempts nonbankruptcy law relating to financial condition (only).

Ultimately, the Commission concludes that Section 1123(a)(5) should not be linked to and, thus, limited by Section 1142(a). Rather, the Commission recommends that Sections 1141 and 1142 be amended, accordingly, to clarify Section 1123’s broad preemptive scope.

Plan Proponent notes that Weil’s Bankruptcy Blog addressed this Circuit-level split back in 2010. It concluded that the “result is that, outside of the Ninth Circuit, where the limits of section 1123(a), are broader but less defined, debtors whose plans are premised on preemption of nonbankruptcy law must continue to tread those proverbial waters carefully.”

That warning, coupled with the Commission’s recent observations regarding the authority of a debtor’s management to approve Chapter 11 transactions without stakeholder approval, raises another question:

Is it even necessary to include broad authority provisions in the corporate resolution authorizing a Chapter 11 filing?

To be sure, most first day corporate resolutions authorize the filing and provide broad, ongoing authority for boards and officers. For example, the corporate resolution authorizing Radio Shack’s February 5, 2015 Chapter 11 filing designates certain officers (Designated Officers) who are authorized to act on Radio Shack’s behalf in its Chapter 11. In pertinent part, the resolution (presumably pursuant to state law and Radio Shack’s organizational documents) provides those Designated Officers sweeping authority to act in the Chapter 11 without seeking additional authority, including the authority to sell assets, effectuate restructuring transactions, and even propose a Chapter 11 plan:

Without express preemption under Section 363 and with murky preemption, at best, under provisions like Section 1123 and Section 1142, an exhaustive authority resolution on the front-end of a case, if it can be obtained, is probably a good idea, even if the Code supplies board and officer authority as a matter of law.

Finally, we’ll plant a hypothetical for future discussion: If a debtor proposes a statutory, state law merger via Section 1123(a)(5), then does Section 1123(a)(5) preempt state law so broadly that it excuses a debtor from complying with the state law requirements, including filing requirements, for effectuating the merger? If you’re interested in Georgia law, like we are, then does Section 1123(a)(5) excuse a debtor from Georgia’s merger requirements under O.C.G.A. § 14-2-1101, et seq.? Or, for those of you who are Delaware-minded, does Section 1123(a)(5) excuse a debtor from Delaware’s merger requirements under Del. Code Ann. tit. 8, § 251?

Plan Proponent submits that the answer is “No”–but that is an issue for another post.

[Note: With the Federal-Mogul asbestos saga finding itself back in the news this month with the First Circuit’s February 15 decision (an interesting decision, in its own right, regarding Section 108 and time-barred claims), it is worth noting that prior iterations of Federal-Mogul in the Third Circuit contributed significantly to the Section 1123(a)(5) preemption debate. This Norton link traces the debate extensively, case-by-case, in the contract assignment context.]

In our next post, we’ll address the second section in Part A: the Role of the Debtor in the Plan Process.

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