United States: Opinion Rules That Shareholder Meetings Continue During Bankruptcy

In an 19 page opinion issued April 1, 2015 in the SS Body Armor I, Inc. Bankruptcy (10-11255), Judge Sontchi held that an action to compel a shareholder meeting is not barred by the automatic stay of 11 U.S.C. 362.  The Opinion is Available Here.

Background

This case if full of drama; the Debtors' former CEO was found guilty of fraud, and his brother is the shareholder who is pushing for the shareholders' meeting to be held.  While the drama is addressed in the Opinion, it does not appear to affect the final ruling, so it won't be addressed in this blog post.  The pertinent facts are simple:  SS Body Armor (the "Debtors") filed for bankruptcy in April, 2010;  The Debtors last held a shareholder meeting in 2009.  The Movant (Jeffrey Brooks) is seeking a court order allowing him to commence an action in Chancery Court to force a shareholders' meeting to occur.

The Opinion

The Movant argues that the automatic stay does not bar an action to compel a meeting of shareholders, and the Debtors agreed that, as a general ruled, shareholders have the right to compel a shareholders' meeting.  Opinion at *11.  The Debtors add the caveat that in the event of "clear abuse" the shareholders lose that right.

The Court begins its analysis with the subject heading "The Automatic Stay Is Not Applicable to an Action in the Chancery Court to Summarily Order a Shareholder Meeting."  Opinion at *12.  This heading summarizes the Court's ruling in this case.  The Court cited to a number of cases in its decision, primarily Manville Corp. v. Equity Security Holders Committee (In re Johns-Manville Corp.), 801 F.2d 662 (2d Cir. 1935), In re Potter Instrument Co., 593 F.2d 470 (2d Cir. 1979), Official Bondholder Committee v. Chase Manhatten [sic] Bank (In re Marvel Entm't Grp., Inc.), 209 B.R. 832 (D. Del. 1997), and Minter v. Directors of Concrete Products (Matter of Concrete Products, Inc.), 110 B.R. 997 (Bankr. S.D. Ga. 1989).

The Opinion adopts the holdings of Johns-Manville and Marvel Entertainment.  Opinion at *17.  Judge Sontchi held that the right of a shareholder to compel a shareholder's meeting . . . continues during bankruptcy and the automatic stay is inapplicable.  Opinion at *17.  The Bankruptcy Court may, however, enjoin the shareholder meeting when there is a "clear abuse."  Clear abuse is determined to occur when there is a showing of delay and real jeopardy to a debtor's reorganization.  Opinion at *18.

While Judge Sontchi held that there is an argument that clear abuse is present in this case, Rule 7001 requires that a proceeding to obtain an injunction or other equitable relief is an adversary proceeding.  Opinion at *18.  Because the Debtors did not initiate an adversary proceeding to enjoin the Movant's requested relief, their opposition was procedurally improper and the Motion would be granted.

My $.02

Bankruptcy Rule 7001 provides tight bounds around what relief can be requested in a main bankruptcy case.  When dealing with a Judge who has been known to require parties to strictly adhere to the Rules, it is best to keep in mind the mantra of many lawyers and act out of an "abundance of caution".

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