Quarterly State Compliance Review
By now everyone is familiar with the federal legislative response to Enron and the other corporate scandals -- namely, the Sarbanes-Oxley Act. But how have the states responded? After all, the states have been, and remain, principally responsible for corporate governance. The following is a brief review of the most recent legislative responses to the corporate scandals from some of the more important incorporation states.
Nonprofit Governance Reforms
The advent of significant corporate governance reforms in response to the Sarbanes-Oxley law, as well as scandals involving several leading nonprofit institutions, has created a climate of uncertainty for the management and Boards of Directors of nonprofit organizations. Controversy has arisen as to the extent to which these entities should emulate the behavior of comparably sized public corporations, even though most of Sarbanes-Oxley does not apply to entities that do not have securities registered with the Securities and Exchange Commission.
The 'Doctrine of Necessity'
Last month, we explained that a bankruptcy court lacks "either the statutory or equitable power to authorize" the debtor's payment of pre-bankruptcy nonpriority unsecured claims, as noted in <i>Capital Factors, Inc. v. Kmart Corp. (In re Kmart Corp.)</i> We explained that the clear, no-nonsense opinions of the district court and the Court of Appeals reversed four bankruptcy court orders, and we explained why the Seventh Circuit's <i>Kmart</i> decision is noteworthy. We went on to discuss the "Doctrine of Necessity" (the Doctrine), a current justification used by some bankrtupcy courts to permit the post-petition payment of certain assertedly "essential" pre-petition claims in Chapter 11 reoganized cases. This month, we discuss Principal Judicial Precedents, Decisions Favorable to the Doctrine, Cases Rejecting the Doctrine, and The Rebirth of the "Doctrine of Necessity."
Preferential Transfers
Last month, we explained that when a once steady and reliable customer becomes delinquent in payment and eventually files for bankruptcy protection, your client becomes one of many creditors trying to recover a portion of its investment. We explained how, whenever a creditor receives a benefit from a debtor shortly before the debtor files for bankruptcy, a preferential transfer may occur. And we showed how section 547(b) of the Bankruptcy Code permits a trustee to avoid pre-bankruptcy transfers as "preferences." The first tactic we discussed for defending such preference actions was to dispute plaintiff's <i>prima facie</i> case. In this month's installment, we discuss preference avoidance by statutory exception, and the availability of a jury trial.
True Lease or Secured Financing?
In the Chapter 11 context, it is common for interested parties to challenge the characterization of a Chapter 11 debtor's obligations under an agreement styled as a lease. A Bankruptcy Court's determination as to whether a transaction is a "true" lease or a secured financing can have far-reaching consequences on the administration of a debtor's Chapter 11 case and the respective rights of each party to the agreement. As the recent decision by the Third Circuit Court of Appeals in <i>Duke Energy Royal, LLC v. Pillowtex Corp. (In re Pillowtex, Inc.)</i>, 349 F.3d 711 (3d Cir. 2003) illustrates, when faced with the question of whether a transaction constitutes a "true" lease or a secured financing, bankruptcy courts will look beyond the form to the substance of the parties' agreement.
In the Spotlight: Addressing the Dilemma of Tenant Parking
Dedicated parking spaces appurtenant to office leases, especially covered spaces, are a prized commodity, particularly in suburban markets where virtually all of a tenant's employees drive to work. A tenant may be able to negotiate an arrangement where it receives more parking passes than the actual number of cars it is permitted to park at the premises at any given time under the theory that not all employees with a parking pass will actually show up for work on any given day. The problem presented by this approach is, of course, the one day when every driver with a parking pass shows up for work and there is no room for all of their cars.
Avoid Oversights in Lease Amendments
The following scenario frequently occurs: A multi-tenant office building landlord requests its counsel to take a quick look at a proposed two-paragraph lease amendment that the landlord drafted itself. The landlord explains that the tenant has agreed to extend the lease term and establish a new base rental rate for the extended term. Very simple and straightforward, correct? In reality, if the landlord and tenant had signed the two-paragraph lease amendment, they would have made some potentially costly errors, overlooked several issues and bypassed an opportunity to capture more comprehensive provisions that, at a minimum, should have been considered for inclusion. This article will help attorneys avoid some common oversights when working on lease amendments and identify some opportunities that should be assessed during the amendment-drafting phase.
