Q: Injunction Junction – What’s Your Function? A: Terminating Bankr...

On May 6, 2016, we had the occasion to observe a hearing on a motion to dismiss filed in Skybridge Spectrum Foundation’s bankruptcy case, Case No. 16-10626 (CSS).

The company, which identified itself as a developer of wireless bandwidth technology, filed for Chapter 11 protection in March. In his first-day declaration filed March 29, the company’s principal, Warren C. Havens, said the company sought court protection to preserve the going concern value of its estate.  On April 15, 2016, Dr. Arnold Leong filed the Motion to Dismiss [D.I. 55], alleging that he has been in a dispute with Mr. Havens about the ownership of the Debtor’s FCC licenses (as well as those of seven related entities) for the past 14 years.  This dispute has occurred within the California State Courts, and on November 16, 2015, the Superior Court appointed a receiver.  The Superior Court then authorized the sale of a number of FCC licenses, which Mr. Leong alleges prompted the bankruptcy filing (which occurred 14 days after the sale order was entered).

While Judge Sontchi’s order [D.I. 120] was sparse, as orders typically are when ruling on a motion, the comments made at the hearing were insightful.  When the Superior Court issued its order appointing a receiver (filed on the bankruptcy docket at D.I. 58-12), it included a provision prohibiting Mr. Havens from “doing any act that will impair the preservation of the property or plaintiff’s interest in the property” or “interfering in any way with the substitution of the Receiver as the individual responsible for the management of the FCC Licenses and Receivership Entities.”  [D.I. 58-12 p. 6].  Judge Sontchi ruled that this injunction prevented Mr. Havens from filing the bankruptcy, warranting an immediate dismissal of the case.  Following its dismissal, Judge Sontchi then denied as moot all outstanding motions in the bankruptcy proceeding.

Notably, it did not appear that Mr. Leong had raised this issue in his pleadings, but rather it was raised sua sponte by the Court.  Judge Sontchi dismissed the case without prejudice, saying that determining whether another person had authority to file a Chapter 11 petition on behalf of the Debtor was an issue for the California courts to decide.  He was clear that if anyone other than Mr. Havens was in control of the Debtor entity, the case may have proceeded.  At that point, however, Mr. Leong’s arguments concerning bad faith might become relevant, depending on how Mr. Havens transferred control of the company.

I have seen a number of cases in which management filed for bankruptcy in an effort to unseat a receiver.  In this instance, however, the order appointing the receiver was very specific in enjoining action by the one person who would have otherwise had the legal authority to file the petition – effectively eliminating this frequently used escape from a receivership.  This is an important lesson and example for person who seek to have a receiver appointed over management’s objection – injunctions can be as good for you as School House Rocks was for a generation of impressionable youths.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or [email protected].