No. 12-628

IN THE SUPREME COURT OF THE UNITED STATES

) ) IN RE SINGSONG ELECTRONICS INC., DEBTOR ) PLUM, INC ) Petitioner, ) ) ) v. ) ) ) ) SINGSONG ELECTRONICS, INC. ) Respondent. ) ) ) ON A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE

THIRTEENTH CIRCUIT

BRIEF FOR THE PETITIONER

P9 Counsel for Petitioner

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Questions Presented

I. Does section 301 authorize a corporation to file a petition for Chapter 11 bankruptcy

when it has previously amended its by-laws to include a provision that expressly abrogates the authority of the board of directors and the officers to voluntarily file a bankruptcy petition?

II. Does the automatic stay apply to an action seeking to enjoin patent infringement when the activity complained of takes place post-petition, constitutes a tortious use of estate property, and is committed in the course of carrying on the debtor’s business as a going concern?

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Table of Contents

page

Questions Presented .................................................................................................................... i

Table of Contents ....................................................................................................................... ii

Table of Authorities .................................................................................................................. iv

Standard of Review ................................................................................................................... vi

Opinions Below ........................................................................................................................ vi

Statement of Jurisdiction ........................................................................................................... vi

Statement of the Case ..................................................................................................................1

I. Procedural History ...............................................................................................1

II. Factual History.....................................................................................................2

Constitutional and Statutory Provisions .......................................................................................4

Summary of the Argument ..........................................................................................................4

Argument ....................................................................................................................................7

I. DEBTOR HAD NO AUTHORITY TO FILE A VOLUNTARY PETITION FOR CHAPTER 11 RELIEF, BECAUSE THAT AUTHORITY WAS RESTRICTED BY A PROVISION IN DEBTOR’S CORPORATE BY-LAWS WHICH EXPRESSLY REVOKED DEBTOR’S AUTHORITY TO FILE BANKRUPTCY. .................................................................................................7

A. Debtor Did Not Have the Requisite Authority to File a Bankruptcy Petition ..................................................................................................... 8

B. Debtor’s Filing of Bankruptcy Without the Requisite Authority Was an Ultra Vires Act and Therefore Unenforceable............................. 10

C. The Provision in Debtor’s By-laws Revoking Debtor’s Authority’s to File Bankruptcy Is Not an Unenforceable Anti-bankruptcy Provision ................................................................................................ 11

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D. Even if the New By-Laws Provision is a Waiver of the Right to File A Voluntary Petition, Waivers By Non-Individuals Should be Allowed and Enforced by Bankruptcy Courts, Preventing Those Who Have Properly Executed Waivers from Filing a Voluntary Petition ................................................................................................... 14

1. The Code does not restrict or disallow pre-petition waivers of filing a voluntary petition ........................................................ 15

2. Courts which disallow pre-petition waivers of the right to file a voluntary petition strongly rely on public policy of the fresh start of the individual debtor, a reason which does not apply to a corporate debtor .................................................... 16

II. THE AUTOMATIC STAY DOES NOT PRECLUDE AN ACTION TO ENJOIN POST-PETITION PATENT INFRINGEMENT BECAUSE SECTION 362(a)(1) APPLIES ONLY TO ACTIONS ARISING FROM PRE-PETITION CLAIMS, SECTION 362(a)(3) DOES NOT PROTECT TORTIOUS USES OF ESTATE PROPERTY, AND SECTION 959(a) MAKES A DEBTOR-IN-POSSESSION AMENABLE TO SUIT FOR UNLAWFUL ACTIVITIES COMMITTED IN CARRYING ON ITS BUSINESS POST-PETITION. ........................................ 18

A. Section 362(a)(1) Does Not Stay Plum’s Action Because the Requested Injunctive Relief Applies Only to Post-petition Acts of Infringement and Does Not Interfere With the Orderly Administration of the Bankruptcy Estate................................................. 19

B. Plum’s Action Is Not Stayed by Section 362(a)(3) Because an Injunction Does Not Deprive Debtor of Possession of or Control Over its Property and Tortious Uses of Estate Property Are Not Subject to Statutory Protection................................................................ 21

C. Fundamental Equitable Principles Support the Conclusion that Plum’s Action Should Be Allowed to Proceed Without Leave Because the Protection Afforded by the Automatic Stay Does Not Sanction Unlawful Post-petition Activities. ............................................ 24

D. Plum’s Action Can Be Brought Under Section 959(a) Because that Provision Provides Express Statutory Authorization to Bring Suit Against a Debtor-in-possession Without Leave of the Bankruptcy Court When the Debtor Engages in Unlawful Activities During the Post-petition Operation of its Business. .................................................. 25

Conclusion ................................................................................................................................ 28

Appendix: Statutory Provisions Involved: ................................................................................. 30

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Table of Authorities

page

Cases:

Accord Chamberlain Group, Inc. v. Lear Corp., 758 F. Supp. 2d 542, (N.D. Ill. 2010).............. 19 Amplifier Research Corp. v. Hart, 144 B.R. 693 (E.D. Pa. 1992)............................................... 23 B.R. 142, 2010 WL 4925811 (10th Cir. B.A.P. 2010) .................................................... 11, 12, 13 DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC), 463 Dominic’s Restaurant of Dayton, Inc. v. Mantia, 683 F.3d 757 (6th Cir. 2012) .......................... 23 F.D.I.C. v. Benson, 867 F. Supp. 512 (S.D. Tex. 1994) ............................................................. 10 Fallick v. Kehr, 369 F.2d 899 (2d Cir. 1966) ............................................................................. 17 Federal Nat'l Bank v. Koppel, 148 N.E. 379 (Mass. 1925) ......................................................... 17 Hazelquist v. Guchi Moochie Tackle Co., Inc., 437 F.3d 1178 (Fed. Cir. 2006) ..................... 5, 19 Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992 (5th Cir. 1985) .................................. 19 In re Adana Mortgage Bankers, Inc, 12 B.R. 989 (Bankr. N.D. Ga. 1980) ........................... 14, 16 In re Albion Disposal, Inc., 217 B.R. 394 (W.D.N.Y. 1997) ...................................................... 21 In re Arkco Properties., Inc., 207 B.R. 624 (Bankr. E.D. Ark. 1997) ..................................... 8, 11 In re Autumn Press, Inc., 20 B.R. 60 (Bankr. D. Mass. 1982) ...................................................... 7 In re Baptist Medical Center of New York, 80 B.R. 637 (Bankr. E.D.N.Y. 1987) ....................... 25 In re Catron, 158 B.R. 624 (Bankr. E.D. Va. 1992) ................................................................... 25 In re Continental Airlines, Inc., 61 B.R. 758 (Bankr. S.D. Tex. 1986) ............ 6, 21, 24, 25, 26, 27 In re Gen-Air Plumbing & Remodeling, Inc., 208 B.R. 426 (Bankr. N.D. Ill. 1997) ........... 7, 8, 10 In re Los Angeles Lumber Products Co., 24 F. Supp. 501 (S.D. Cal. 1938)................................ 17 In re Madison, 184 B.R. 686 (Bankr. E.D. Penn. 1995) ....................................................... 17, 18 In re Minor Emergency Ctr. of Tamarac, Inc., 45 B.R. 310 (Bankr. S.D. Fla. 1985) ................ 7, 9 In re Moni-Stat, Inc., 84 B.R. 756 (Bankr. D. Kan. 1988) ...................................................... 9, 13 In re Moss, 270 B.R. 333 (Bankr. W.D.N.Y. 2001) ................................................................... 24 In re Oceanside Properties, Inc., 14 B.R. 95 (Bankr. D. Haw. 1981) ......................................... 13 In re Prudential Lines Inc., 928 F.2d 565 (2d Cir. 1991) ........................................................... 16 In re Stavola/Manson Elec. Co., Inc., 94 B.R. 21 (Bankr. D. Conn. 1988) ................................... 9 In re Synergy Dev. Corp., 140 B.R. 958 (Bankr. S.D.N.Y. 1992)........................................... 6, 24 In re Television Studio, 77 B.R. 411, 412 (Bankr. S.D.N.Y. 1987)............................................. 27 In re Tru Block Concrete Products, Inc., 27 B.R. 486 (Bankr. S.D. Cal. 1983) .................... 11, 17 In re Weitzen, 3 F. Supp. 698 (S.D.N.Y. 1933) .................................................................... 17, 18 Jaytee-Penndel Co. v. Bloor (In re Investors Funding Corp.), 547 F.2d 13, 16 (2d Cir. 1976) ... 27 Johnson v. Kriger (In re Kriger), 2 B.R. 19 (Bankr. D. Or. 1979) .............................................. 17 Larami Ltd. v. Yes! Entm’t Corp., 244 B.R. 56 (D.N.J. 2000) ........................................ 21, 22, 23 Larami Ltd. v. Yes! Entm’t Corp., 244 B.R. 56 (D.N.J. 2000) ...................................................... 6 Matter of Giggles Rest., Inc., 103 B.R. 549 (Bankr. D.N.J. 1989) ................................................ 8 Muratore v. Darr, 375 F.3d 140 (1st Cir. 2004) ......................................................................... 26 Price v. Gurney, 324 U.S. 100 (1945).......................................................................................... 8 Schraft v. Leis, 236 Kan. 28, 686 P.2d 865 (1984) ..................................................................... 12 Seiko Epson Corp. v. Nu-Kote Int’l, Inc., 190 F.3d 1360, 1364 (Fed. Cir. 1999) ........................ 24

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Watrous v. George (In re George), 15 B.R. 247 (Bankr. N.D. Ohio 1981) ................................. 17 Federal Statutes:

11 U.S.C. § 301(a) (2012) ........................................................................................................... 7 11 U.S.C. § 362(a) (2012) ...................................................................... 18, 19, 20, 21, 22, 23, 28 11 U.S.C. § 727(a)(10) (2012) ................................................................................................... 15 11 U.S.C. § 1307 (2012)...................................................................................................... 14, 15 28 U.S.C. § 959 (2012) ................................................................................ 18, 19, 25, 26, 27, 28 Other Sources: Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and Law, 82 Cornell L. Rev. 301, 302 (1997) ......................................................................... 14, 15, 16, 17

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Standard of Review

Petitioner challenges the lower court’s application of provisions of the Bankruptcy Code.

The proper application of a bankruptcy statute is a legal issue which this Court reviews de novo.

Oviawe v. INS, 853 F.2d 1428, 1431 (7th Cir. 1988).

Opinions Below

The Bankruptcy Court for the Eastern District of Moot denied Debtor/Respondent’s

emergency motion, which alleged that Petitioner’s motion to enjoin Debtor’s sales of the

“Galactica” violated the 11 U.S.C. § 362 automatic stay. The court held that Petitioner, Plum,

Inc., did not violate the automatic stay because 28 U.S.C. § 959(a) acts as an exception to the

application of section 362. Further, the court found that Debtor did not have the authority to file

a voluntary bankruptcy petition under 11 U.S.C. § 301. Record (“R.”) at 5-6. The bankruptcy

court also granted Petitioner’s motion to dismiss Debtor’s Chapter 11 case for lack of authority

to file under section 301 of the Code. R. at 6. On appeal, the District Court for the Eastern

District of Moot reversed both orders. Id. The United States Court of Appeals for the Thirteenth

Circuit affirmed the district court’s reversal of the bankruptcy court’s orders, holding that the

privilege to file bankruptcy petitions could not be waived notwithstanding a provision in a

corporation’s by-laws that eliminates its corporate authority to voluntarily file in bankruptcy, and

that section 959(a) does not operate as an exception to the section 362 automatic stay. R. at 7.

Statement of Jurisdiction

The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.

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Statement of the Case

I. Procedural History

This appeal originates from a “frenemies” business relationship between Petitioner

(Plum) and Respondent/Debtor (Singsong), two competing consumer electronics corporations. R.

at 2. Although competitors, Plum and Singsong frequently collaborated on products, specifically

the “e-Phone,” a multifunctional smartphone that Plum designed and Singsong manufactured.

After Singsong released the “Galactica,” a smartphone strikingly similar to the “e-Phone,” Plum

filed a patent infringement suit in the United States District Court for the Western District of

Washington. R. at 2-3. After the district court granted summary judgment on June 11, 2012

against Singsong on the issue of infringement, Singsong filed for Chapter 11 bankruptcy shortly

thereafter on June 13, 2012. R. at 4, 5. In an effort to enforce its exclusive patent rights in the “e-

phone” software, Plum responded by filing a motion in the Washington District Court on June

14, 2012 to enjoin Singsong from displaying, distributing, selling or taking orders for the

“Galactica.” Additionally, Plum filed a motion in the Bankruptcy Court for the Eastern District

of Moot to dismiss Singsong’s bankruptcy case based on the company’s lack of corporate

authority to file bankruptcy. R. at 4, 6. Singsong then filed an emergency motion in the

bankruptcy court, alleging that Plum violated the automatic stay imposed by 11 U.S.C. § 362 by

filing a motion in the district court during the pendency of the bankruptcy case. R. at 5. The

bankruptcy court held in favor of Plum on Singsong’s emergency motion on the grounds that 11

U.S.C. § 959(a) acted as an exception to the section 362 stay and that no automatic stay violation

occurred because Singsong did not have authority to file a voluntary Chapter 11 case. R. at 6.

Further, the court granted Plum’s motion to dismiss the Chapter 11 case, finding that Singsong

did not have authority to file voluntary bankruptcy as a result of the clause in the corporation’s

by-laws that prohibited the filing of a voluntary bankruptcy petition. Id. On appeal, the District

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Court for the East District of Moot reversed both orders. Id. The United States Court of Appeals

for the Thirteenth Circuit affirmed the district court’s reversal, holding that the right to file

bankruptcy petitions could not be waived, notwithstanding a provision in the corporation’s by-

laws that purportedly abrogated the company’s authority to file voluntarily in bankruptcy, and

that section 959(a) did not operate as an exception to the automatic stay imposed by section 362.

R. at 7. Plum subsequently petitioned this Court for a writ of certiorari. R. at 1. This Court

granted certiorari on December 14, 2012. Id.

II. Factual History

Singsong is a company that manufactures end-user electronic items, such as cell phones

and computers, for other brand name companies in the consumer electronics market. R. at 2.

After its success as a sole manufacturer, Singsong began to produce and market its own products,

becoming well known amongst consumers. Id. Eventually, Singsong entered into a business

endeavor with Plum, its largest competitor and the leader of the personalized computer segment,

to develop and produce the “e-Pod,” a portable digital music player. R. at 3. The “e-Pod”

endeavor was a success, and, as a result, the two companies teamed up again in 2011 to

collaborate on the “e-Phone,” a multifunctional smartphone that was designed by Plum and

manufactured by Singsong. By this time, Singsong had become the sole manufacturer of Plum’s

products. Id. Achieving early success, the “e-Phone” took the market by storm, receiving

millions of orders within the first days of its release. Id.

In the midst of the release of the “e-Phone,” Plum developed concerns about Singsong’s

financial difficulties and the increasing possibility that it would eventually file bankruptcy. Id.

This concern was particularly distinct in light of the fact that Singsong had become the exclusive

manufacturer of Plum’s products. To reduce the amount of risk it was exposed to, Plum

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recommended that Singsong amend its by-laws to revoke Singsong’s corporate authority to file a

voluntary bankruptcy. R. at 5. Singsong subsequently passed an amendment which provided:

“Notwithstanding any other provision to the contrary, the Corporation is not authorized to file a

petition in bankruptcy under 11 U.S.C. § 301 of the United States Bankruptcy Code or to consent

to the institution of bankruptcy . . . .” Id. Additionally, the provision revoked the authority of the

board of directors and the officers of the corporation to consider or approve a resolution to file a

voluntary bankruptcy case. Id.

Soon after the release of “e-Phone,” Singsong released the “Galactica,” a device which

had very similar features to the “e-Phone.” Id. The release of the “Galactica” caused a rift

between the sometimes business partners, as it had negatively impacted sales of the “e-Phone.”

Id. After realizing that a critical part of software used in the “Galactica” closely resembled the

“e-Phone’s” patented software, Plum filed a patent infringement suit in federal court against

Singsong, requesting an injunction to halt continuing sales of the “Galactica.” Id. In the patent

suit, Singsong admitted that the software used in the “Galactica” would infringe on Plum’s

patent if it were found to be valid. R. at 4. The federal district court found in favor of Plum on

the patentability of the software and granted summary judgment against Singsong on the issue of

infringement. Id. After a failed attempt to negotiate a licensing agreement with Plum, Singsong’s

Board of Directors unanimously approved a decree authorizing a bankruptcy filing and the Chief

Executive Officer signed the petition, notwithstanding the clause in Singsong’s by-laws that

prohibited the filing of a bankruptcy petition. R. at 4, 5. After receiving notice of this filing,

Plum moved to enjoin Singsong from displaying, distributing, selling or taking orders for the

“Galactica.” R. at 4. During a hearing at the bankruptcy court, testimony that was given that the

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issuance of an injunction would disrupt the sales of the “Galactica” for approximately three

months, an interruption that would seriously impede Singsong’s continued operation. Id.

Constitutional and Statutory Provisions

The pertinent portions of the constitutional and statutory provisions in this case are set

forth in the Appendix, infra, pp. 30–31

Summary of the Argument

There are two issues in this case: First, whether the Debtor’s clause incorporated into its

by-laws rescinding the Debtor’s corporate authority to file voluntary bankruptcy should be given

effect, and second, whether the section 362 automatic stay protects post-petition tortuous conduct

of Debtor.

The Debtor did not have the proper authority to file a voluntary bankruptcy petition in the

Bankruptcy Court for the Eastern District of Moot. Case law is well-settled that a bankruptcy

filing is an express act that requires an express authorization. As a state-created legal entity, a

corporate debtor receives its express authorization through statute, local laws, or the corporate

by-laws. There is no authority in the law or the Debtor’s by-laws in this case that would permit

the filing of this petition in bankruptcy. The Debtor bargained with it members to amend its by-

laws to prohibit corporate authority to file bankruptcy. The Debtor’s corporate express and

implied powers are conferred upon it by its corporate by-laws, and any act contrary to these

express and implied powers is ultra vires and void. The ultra vires doctrine applies with full force

to a corporate bankruptcy filing done without specific authority like was done in this matter. The

Debtor incorporated an express provision barring its corporation, Board of Directors, and

corporate Officers from the filing, signing, or approving any resolution authorizing bankruptcy,

and as a result the Debtor removed all its express and implied powers conferred upon it to

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authorize a bankruptcy petition. It is in error to classify the present matter as an advance

bankruptcy waiver on the right to file a voluntary bankruptcy petition, because those matters are

limited to agreements between a debtor and a third party, and do not affect provisions like the

one found in this case which is a contract between the Debtor and the corporation members to

conduct its business in a certain manner. Further, even if this Court finds that the by-laws

provision is a waiver of the right to file bankruptcy, that provision should still be enforceable,

since there is no statutory authority for finding such a clause unenforceable, and all relevant case

law exclusively relies on the public policy of the fresh start of the individual debtor, a policy

which is irrelevant to a corporate debtor.

Plum’s motion to enjoin Debtor from engaging in post-petition patent infringement is not

subject to the stay imposed by section 362(a)(1) because that provision applies only to actions

that arose from pre-petition conduct. According to its terms, section 362(a)(1) imposes a stay on

“the commencement or continuation . . . of a judicial, administrative, or other action or

proceeding against the debtor that was or could have been commenced before the

commencement of the [bankruptcy] case. . .” 11 U.S.C. § 362(a)(1). However, federal patent law

establishes that “each act of patent infringement gives rise to a separate cause of action,”

Hazelquist v. Guchi Moochie Tackle Co., Inc., 437 F.3d 1178, 1180 (Fed. Cir. 2006). Because

Plum’s motion is directed at enjoining infringing activity that has occurred after the

commencement of Debtor’s bankruptcy, it is an action that could not have been brought pre-

petition. Thus, Plum’s action is outside the scope of section 362(a)(1) and does not violate the

automatic stay.

Section 362(a)(3) likewise fails to preclude the present action because Plum’s request for

injunctive relief is not an act to “obtain possession of” or “exercise control over” estate property

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within the meaning of the statute. As courts have observed, “[s]ection 362(a)(3) [is] intended to

prevent interference with a bankruptcy court’s orderly disposition of the property of the estate, it

[is] not intended to preclude post-petition suits to enjoin unlawful conduct.” Larami Ltd. v. Yes!

Entm’t Corp., 244 B.R. 56, 59 (D.N.J. 2000). Because Plum’s action seeks only to compel

Debtor’s future compliance with the law and not to deplete or control estate property, it is not

subject to the section 362(a)(3) stay.

In addition, the equitable principles underlying bankruptcy support the conclusion that

Singsong cannot use the protection of the automatic stay to preclude an action brought to enjoin

it from unlawfully infringing Plum’s patents. As an equitable proceeding, “[b]ankruptcy does not

grant a debtor greater rights than those it would receive outside of bankruptcy.” In re Synergy

Dev. Corp., 140 B.R. 958, 959 (Bankr. S.D.N.Y. 1992) (citation omitted). Accordingly, the

protection of the automatic stay does not give Singsong the right to ignore nonbankruptcy law

and continue engaging in otherwise unlawful activity.

Finally, section 959 expressly authorizes Plum’s action against Debtor for infringement

committed during the course of Debtor’s reorganization and post-petition operation. As a

statutory exception to the blanket stays imposed by bankruptcy, a primary purpose of section 959

is “to permit actions redressing torts committed in furtherance of the bankrupt’s business

operation.” In re Continental Airlines, Inc., 61 B.R. 758, 780 (Bankr. S.D. Tex. 1986). Because

Debtor has engaged in tortious activities while carrying on its business post-petition, section 959

renders it amenable to Plum’s action without leave of the court.

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Argument

I. DEBTOR HAD NO AUTHORITY TO FILE A VOLUNTARY PETITION FOR CHAPTER 11 RELIEF, BECAUSE THAT AUTHORITY WAS RESTRICTED BY A PROVISION IN DEBTOR’S CORPORATE BY-LAWS WHICH EXPRESSLY REVOKED DEBTOR’S AUTHORITY TO FILE BANKRUPTCY.

Petitioner, Plum, Inc., urges this Court to reverse the lower court decision that Debtor

could commence a voluntary Chapter 11 bankruptcy case under section 301 of the Bankruptcy

Code even though a stipulation in the Debtor’s corporate by-laws divested the Debtor’s power to

file a voluntary petition in bankruptcy. The particular issue of whether a voluntary petition may

be filed by a corporation notwithstanding a clause in its governing corporate by-laws that

prohibits the filing of a petition in bankruptcy is one of first impression for this Court. The

statute at issue, 11 U.S.C. § 301, allows “a voluntary case under a chapter of this title to be

commenced by the filing with the bankruptcy court . . .” 11 U.S.C. § 301(a) (2012). As a general

matter a corporation is entitled to bankruptcy relief as a debtor under Chapter 11, though the

voluntary petition filed on behalf of the corporation must be authorized by the entity empowered

to file bankruptcy. In re Minor Emergency Ctr. of Tamarac, Inc., 45 B.R. 310, 311 (Bankr. S.D.

Fla. 1985). Section 301 of the Code is silent as to who has the “authority” to file a voluntary

corporate bankruptcy petition, so bankruptcy courts traditionally look to the laws of the state of

incorporation and the corporation’s controlling instruments to resolve the issue of authority to

file on behalf of the corporation. In re Autumn Press, Inc., 20 B.R. 60, 61 (Bankr. D. Mass.

1982). The Thirteenth Circuit of Appeals erred in its ruling that the Debtor was authorized to file

a voluntary bankruptcy case despite the clause in the Debtor’s corporate by-laws that terminated

the corporation’s authority to file a bankruptcy petition; thus affirming the Thirteenth Circuit’s

decision in this case would be contrary the to the rule that a corporation must have authority to

act and that authority has to come from its state corporate laws and its charter and its by-laws. In

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re Gen-Air Plumbing & Remodeling, Inc., 208 B.R. 426, 430 (Bankr. N.D. Ill. 1997). This Court

should reverse for the reasons discussed in the sections below.

A. Debtor Did Not Have the Requisite Authority to File a Bankruptcy Petition

Debtor had no authority within its corporations’ instruments to file a voluntary Chapter

bankruptcy petition. The relevant provision in Debtor’s corporate by-laws reads as follows:

Notwithstanding any other provision to the contrary, the Corporation is not authorized to file a petition under section 301 of the United States Bankruptcy Code or to consent to the institution of bankruptcy . . . Further, the Board of Directors of the Corporation does not have authority to consider or approve a resolution to file a voluntary petition in bankruptcy and no Officer has authority to sign any such petition or to cause it to be filed.

(R. at 5.) Pursuant to the clause within the by-laws neither Debtor’s Board of Directors nor its

CEO had the requisite authority to file; additionally the Board of Directors had no had authority

to consider or approve a resolution for the CEO to file a voluntary petition in bankruptcy, and

therefore the filing of a voluntary petition for Chapter 11 relief was improper and Debtor’s

Chapter 11 case should be dismissed. See In re Arkco Properties., Inc., 207 B.R. 624, 627–28

(Bankr. E.D. Ark. 1997) (the court dismissed a Chapter 11 case where the petition was filed

without requisite corporate authority under corporate by-laws or state law). This Court stated that

in “absence of federal incorporation authority finds its source in local law . . . [and] it is not

enough that those who seek to speak for the corporation may have the right to obtain that

authority.” Price v. Gurney, 324 U.S. 100, 106 (1945). Other courts have expressed “in the

absence of [by-laws] to the contrary . . . the power to file a voluntary petition in bankruptcy on

behalf of a corporation rests with the Board of Directors.” Matter of Giggles Rest., Inc., 103 B.R.

549, 553 (Bankr. D.N.J. 1989). Thus for Debtor to have had authority to file, that authority must

have been bestowed either by statute, local laws, or corporate by-laws. Price, 324 U.S. at 106;

Matter of Giggles Rest., Inc., 103 B.R. at 553. The Debtor in this case had not been granted

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authority by statute, local laws, or Debtor’s corporate by-laws. Instead Debtor’s by-laws

specifically forbid any commencement of a voluntary bankruptcy proceeding. Also the by-laws

removed authority from the corporate officers to file and forbid any resolution by the Board of

Directors to authorize the filing of a bankruptcy petition. Hence any filing of voluntary

bankruptcy relief by Debtor in this case would have been done without valid requisite authority.

This is similar to cases which are on point that found that a debtor’s board of directors or CEO

did not have the specific authority to file bankruptcy. See In re Stavola/Manson Elec. Co., Inc.,

94 B.R. 21, 24 (Bankr. D. Conn. 1988) (citation omitted) (“The president of a corporation is

usually found to be without the authority to file a voluntary bankruptcy petition on behalf of the

corporation unless specifically authorized by the [directors] through powers vested in the board

by instruments governing the corporation”); See In re Moni-Stat, Inc., 84 B.R. 756, 757 (Bankr.

D. Kan. 1988) (“There is no authority to file bankruptcy where a director with 50 percent interest

files although both state law, the articles of incorporation, and the corporation by-laws require a

majority of the board to act”). These cases demonstrate that a corporate debtor officers and

directors must have specific authority to file for bankruptcy and that authority is found within the

corporation’s organic documents, such as, the corporation’s by-laws. Id.; In re Stavola/Manson

Elec. Co., Inc., 94 B.R at 24. Likewise the facts here show that Debtor’s by-laws entrusted no

specific authority to its Board of Directors to authorize the CEO’s signing of the bankruptcy

petition, and that Debtor’s by-laws expressly revoked specific authority from the Board of

Directors to consider or approve any resolutions to file a voluntary bankruptcy proceeding under

section 301, therefore the filing was in error. In re Minor Emergency Ctr. of Tamarac, Inc., 45

B.R. at 311.

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B. Debtor’s Filing of Bankruptcy Without the Requisite Authority Was an Ultra Vires Act and Therefore Unenforceable

Debtor’s clause in its by-laws that read “the Board of Directors of the corporation does

not have authority to consider or approve a resolution to file a bankruptcy proceeding and no

Officer has authority to sign any such petition,” made the filing of the this Chapter 11

bankruptcy ultra vires and void. Ultra vires acts by a corporation are “acts beyond the scope of

express or implied powers conferred upon the corporation by the charter or articles of

incorporation and the laws in the state of incorporation.” F.D.I.C. v. Benson, 867 F. Supp. 512,

521 (S.D. Tex. 1994) (quoting Gearhart Indus., Inc. v. Smith Int’l., Inc., 741 F.2d 707, 719 (5th

Cir. 1984)). Bankruptcy courts have found acts to be “ultra vires” and void in the context of

bankruptcy filing without proper authority. See In re Gen-Air Plumbing & Remodeling, Inc.,

208 B.R. at 430 (The court held the filing of Chapter 11 bankruptcy to be an “ultra vires” act and

void, because the corporate secretary filed the bankruptcy petition not “pursuant to a resolution

passed at a board meeting by a majority of directors present,” and therefore without valid

authority). That court also adopted the general rule that, “in the absence of corporate by-laws to

the contrary, a corporation may only file a voluntary petition filed pursuant to a resolution passed

. . .” Id. (quoting In re Dearborn Process Serv., Inc., 149 B.R. 872, 878 (Bankr. N.D. Ill. 1993)).

However, the rule that “a corporation may . . . file a voluntary petition pursuant to a resolution

passed,” does not apply to this case since Debtor’s by-laws expressly prevented the Board of

Directors from considering or approving a resolution to file bankruptcy. Id. Thus neither

Debtor’s Board of Directors nor its CEO had any express or implied powers to institute any

bankruptcy proceedings pursuant to Debtor’s clause in its by-laws “removing corporate authority

to file,” and any act purporting authority to file voluntary bankruptcy was an “ultra vires” act and

void. In re Gen-Air Plumbing & Remodeling, Inc., 208 B.R. at 430. So when Debtor’s Board of

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Directors passed a resolution to file a voluntary petition it committed a void act and the same is

true for Debtor’s CEO, who acted contrary to the corporation’s by-laws by signing the

bankruptcy petition. Accordingly there was no proper authority to file, and the case should

therefore be dismissed. See In re Arkco Properties., Inc., 207 B.R. at 627–28.

C. The Provision in Debtor’s By-laws Revoking Debtor’s Authority’s to File Bankruptcy Is Not an Unenforceable Anti-bankruptcy Provision

Debtor’s by-law provision that read “ . . . the Corporation is not authorized to file a

petition in bankruptcy under section 301 of the United States Bankruptcy Code . . .” is not an

unenforceable anti-bankruptcy provision,” because advance bankruptcy waivers are only

unenforceable when a debtor and a third party agree to waive its right to file in bankruptcy

whereas this case involves an executed business agreement amongst the Debtor’s members to

divest corporate authority to file bankruptcy. As the lower court dissent states a “waiver is an

agreement with a third party that gives the third party control over the debtor’s decision making.”

(R. at 15.) See, e.g., In re Tru Block Concrete Products, Inc., 27 B.R. 486, 487–91 (Bankr. S.D.

Cal. 1983) (The court found a contractually negotiated agreement between a corporate debtor

and creditor “that contained a covenant to dismiss any petition that may be filed either

voluntarily or otherwise . . .” to be an advanced bankruptcy waiver and unenforceable as against

public policy).

However in this case, the amended provision “restricting the right to file bankruptcy” was

not a contract between Debtor and Plum, but instead was a contract between Debtor and the

corporation’s members not to subject itself to the bankruptcy process, and as such is not an

unenforceable bankruptcy waiver. The DB Capital Holdings case also supports this conclusion,

that when a debtor amends its by-laws with a provision forbidding the filing of bankruptcy it is

not unenforceable bankruptcy waiver. In that case the court found that a LLC did not have

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authority to file pursuant to the “Operating Agreement’s” express restriction “barring the filing

of a bankruptcy.” DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital

Holdings, LLC), 463 B.R. 142, 2010 WL 4925811 at *3 (10th Cir. B.A.P. 2010). The LLC’s

members and the managers formally amended the provision that read: “The Company . . . will

not . . . consent to the institution of bankruptcy . . . or file a petition seeking, or consent to,

reorganization or relief under any applicable federal or state law relating to bankruptcy . . .” Id.

The court refused to classify this provision as unenforceable, adopting a similar view to the

Thirteenth Circuit’s dissenting opinion in this matter. Id. The court did not find that the cases,

which had invalidated bankruptcy waivers, applied to the facts, because those cases involved

prepetition bankruptcy bans between a debtor and a third-party creditor, whereas DB Capital

involved a provision within the companies “Operating Agreement” which governed the rights

and duties of the managers. Id. Also the court declined to accept Debtor’s argument that the

“Operating Agreement” provision should be invalidated because it was it was executed at the

request of a secured creditor, since there was no evidence of coercion. Id.

The present case involves the same type of situation as the DB Capital Holdings case.

This case also involves members of a corporation exercising their rights to prohibit corporate

authority to file bankruptcy through formal amendment procedures of its governing documents.

Like DB Capital the cases that invalidated anti-bankruptcy provisions do not apply to the facts in

this case, because this amended provision is not a prepetition agreement between Debtor and

third-party creditor to ban Debtor’s access to bankruptcy, but instead was a provision adopted by

Debtors’ members that governed the authority of Debtor’s corporation and Board of Directors

and Officers in the bankruptcy forum. See Schraft v. Leis, 236 Kan. 28, 686 P.2d 865 (1984). (“A

by-law is a self-imposed rule, resulting from an agreement or contract between the corporation

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and its members to conduct the corporate business in a particular way”). And the facts here do

not bring about suspicion that Debtor was coerced by Plum to add the provision within its by-

laws. Instead the facts show that Plum requested the Debtor amend its by-laws to protect Plum’s

business interest, and Debtor willingly amended its by-laws in order to continue its business

relationship with Plum. This was not coercion but was smart business by Plum and the Debtor.

Thus the Debtor’s provision in its by-laws “barring filing” should be given effect, and this case

should be dismissed for lack of corporate authority. DB Capital Holdings, 463 B.R. 142, 2010

WL 4925811 at *3.

As the court also explained there was no support to find that the LLC provision in the

“Operating Agreement” was void against public policy. Id. “[D]ebtor has not cited any cases

standing for the proposition that members of an LLC cannot agree among themselves not to file a

bankruptcy, and that if they do, such agreement is void as against public policy, nor has the court

located any.” Id. Similarly in the present case, there are no cases available that propose the

Debtor’s Corporation cannot among its members decide not to file a bankruptcy, and that such an

agreement is void against public policy. Id. The case law actually suggests the opposite

conclusion to be true. “[T]he law is clear that the decision of whether or not a corporation should

file bankruptcy is a business decision to be made . . . by the board of directors.” In re Moni-Stat,

Inc., 84 B.R. at 757. Moreover courts are reluctant to find by-law provisions to be void and

unenforceable unless they are contrary to statutes or articles of incorporation. In re Oceanside

Properties, Inc., 14 B.R. 95, 105–06 (Bankr. D. Haw. 1981). There are no facts that suggest the

Debtor’s by-law provision is inconsistent with any statute of the State of Moot or with the

articles of incorporation, and accordingly the Debtor’s by-laws are not void against public policy

and unenforceable.

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D. Even if the New By-Laws Provision is a Waiver of the Right to File A Voluntary Petition, Waivers By Non-Individuals Should be Allowed and Enforced by Bankruptcy Courts, Preventing Those Who Have Properly Executed Waivers from Filing a Voluntary Petition

Even assuming, arguendo, that this Court holds that the provision in Debtor’s corporate

documents is a waiver, the waiver is still enforceable, rendering Debtor’s filing of a voluntary

petition in this case void.

First, the Bankruptcy Code does not restrict or disallow, either implicitly or explicitly, a

debtor corporation from executing a pre-petition waiver of the right to file a voluntary petition

for bankruptcy relief. Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory,

Practice, and Law, 82 Cornell L. Rev. 301, 302 (1997). It does disallow other kinds of

bankruptcy waivers, such as invalidating any waiver of the right to convert a Chapter 13 case to

Chapter 7, and so the silence of the Code on waivers of the right to file bankruptcy is

meaningful. See 11 U.S.C. § 1307(a). Since the Code disallows waivers in some respects, but

does not restrict or disallow a waiver of the right to file bankruptcy, it can be implied that

Congress chose to allow debtors to execute a waiver of the right to file bankruptcy.

Some courts have held that waivers of the right to file bankruptcy are void as being

against public policy. See, e.g., In re Adana Mortgage Bankers, Inc, 12 B.R. 989 (Bankr. N.D.

Ga. 1980). However, those courts heavily relied on the public policy goal of the “fresh start” of

the individual debtor, which is not relevant with a corporate debtor filing for Chapter 11, as is

present in this case. See, e.g., id. Therefore, these cases cannot be relied on as precedent in this

case, as the Debtor argues.

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Debtor’s Chapter 11 case should be dismissed, since even if the provision in its by-laws

is a waiver of the right to file a voluntary petition for bankruptcy relief, the waiver should still

be enforced.

1. The Code does not restrict or disallow pre-petition waivers of filing a voluntary petition

The Bankruptcy Code is completely silent on this specific issue of whether a debtor,

corporate or individual, may execute a pre-petition waiver of the right to file a voluntary petition.

The Code’s disallows or limits bankruptcy waivers in several other respects, both implicitly and

explicitly. First, the Code grants an absolute right to convert a Chapter 13 case to Chapter 7 at

any time, and explicitly states that “[a]ny waiver of the right to convert under this subsection is

unenforceable.” 11 U.S.C. § 1307(a). The same section similarly explicitly makes any waiver of

the right of the debtor to dismiss a Chapter 13 case at any time unenforceable. 11 U.S.C. §

1307(b). The Code also only allows a written waiver of discharge which is approved by the

bankruptcy court, and which the debtor executes after the beginning of the case. See 11 U.S.C. §

727(a)(10).

In contrast to these numerous restrictions on other types of waivers in the Code, there is

no statutory authority which either explicitly or implicitly restricts or disallows pre-petition

waivers of the right to file a voluntary petition. Tracht, supra, at 302.

Congress is clearly aware of waivers in the bankruptcy context and specifically

disallowed debtors from executing a pre-petition waiver of the bankruptcy discharge, or a waiver

of the right to dismiss a Chapter 13 case at any time, or a waiver of the right to convert a Chapter

13 case to a Chapter 7 case at any time. See 11 U.S.C. § 727(a)(10), 11 U.S.C. § 1307(a)–(b).

Congress has made it clear that it is aware of other kinds of waivers and specifically restricted

them, yet has not restricted waivers of the right to file bankruptcy.

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Since there is no provision in the Code which implicitly or explicitly disallows or restricts

a debtor’s ability to file for bankruptcy, despite restrictions on other kinds of waivers, Congress

has made its intent clear: there should be no restrictions on a debtor’s ability to waive the right to

file bankruptcy. Therefore, waivers of a debtor’s right to file a voluntary petition should be

allowed, unless some public policy mandates otherwise.

2. Courts which disallow pre-petition waivers of the right to file a voluntary petition strongly rely on public policy of the fresh start of the individual debtor, a reason which does not apply to a corporate debtor

Some courts, acknowledging the congressional silence on the issue of pre-petition

waivers of the right to file bankruptcy, have sought public policy reasons for voiding waivers.

They have invalidated debtors’ waivers of the right to file a voluntary petition as being against

public policy. See, e.g., In re Adana Mortg. Bankers, Inc, 12 B.R. 989 (Bankr. N.D. Ga. 1980).

Those courts have relied exclusively upon arguments and cases about the fresh start of the

individual debtor. Tracht, supra, at 307. For example, the Adana Mortgage court voided a waiver

of the right to file for bankruptcy by a corporate debtor, in part because “the fresh-start purpose

of the Bankruptcy Code would be thwarted” if the debtor corporation’s waiver was allowed. In

re Adana, 12 B.R. at 1008.

The argument that a waiver is void for public policy reasons because of the importance of

the fresh start purpose of the Code is completely inapplicable in the context of a corporate

debtor, as we have here with Singsong Electronics, Inc. See Tracht, supra, at 307. The fresh start

of the individual debtor may well be a reason to void an individual debtor’s waiver of the right to

file bankruptcy, but is an argument which is irrelevant to an entity in Chapter 11. See In re

Prudential Lines Inc., 928 F.2d 565, 573 (2d Cir. 1991) (“The fresh start policy, therefore, does

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not apply to corporate debtors.”) The logic makes sense: “A person must be freed from debt to

have an incentive to re-enter the economy in a productive capacity, but a business entity can

cease to function without loss to the economy if its assets are effectively redeployed or if the

very same business is continued by a new entity or purchaser.” Tracht, supra, at 308.

The only two other cases on point similarly erroneously rely on cases about the fresh start

of the individual as a policy reason for invalidating waivers of the right to file bankruptcy. In Tru

Block Products, Inc., the court dealt with a corporate debtor’s waiver of the right to file

bankruptcy. In its decision, the Tru Block court cited the “well settled principal [sic] that an

advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as

against public policy.” 27 B.R. 486, 492 (Bankr. S.D. Cal. 1983). In support of this holding that

waivers are against public policy, the Tru Block court cited four cases, all of which held that an

individual cannot waive the right to file bankruptcy: Fallick v. Kehr, 369 F.2d 899 (2d Cir.

1966); Watrous v. George (In re George), 15 B.R. 247 (Bankr. N.D. Ohio 1981); Johnson v.

Kriger (In re Kriger), 2 B.R. 19 (Bankr. D. Or. 1979) and In re Weitzen, 3 F. Supp. 698

(S.D.N.Y. 1933). The only other case on point was pre-Code, In re Los Angeles Lumber

Products Co., which also relied on Weitzen as well as Federal Nat'l Bank v. Koppel, 148 N.E.

379 (Mass. 1925), both of which were cases dealing with waivers by an individual. 24 F. Supp.

501, 516 (S.D. Cal. 1938).

Since all of the cases which deal with this issue deal with waivers by an individual and

not a corporation, or cite only cases which were waivers by an individual, the case law is not

binding or even persuasive as to the issue of a corporate debtor executing a waiver of the right to

file bankruptcy. The majority in the Thirteenth Circuit rested on In re Weitzen and In re

Madison, 184 B.R. 686, 690 (Bankr. E.D. Penn. 1995) for its holding that the right to file

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bankruptcy could not be waived in advance. R. at 7–8. Both of those cases dealt with an

individual debtor’s waiver, which are inapplicable in this case. See In re Weitzen, 3 F. Supp. at

699; In re Madison, 184 B.R. at 690. There are no cases which hold that a corporate debtor’s

execution of a waiver should be void for public policy without relying exclusively on cases

which dealt with individual debtors. Therefore, the case law does not support the “strong public

policy favoring access to bankruptcy relief” that the Thirteenth Circuit relied upon in its majority

opinion in this case. R. at 7–8.

There is neither statutory authority, nor case law, nor public policy which justifies

restricting a corporate debtor, through its officers, from deciding to waive its right to file a

voluntary petition for bankruptcy relief. Therefore, even if this Court finds that the clause in

Debtor’s by-laws is a waiver of the right to file bankruptcy, it should be found enforceable,

leading to a dismissal of the Debtor’s bankruptcy case.

II. THE AUTOMATIC STAY DOES NOT PRECLUDE AN ACTION TO ENJOIN POST-PETITION PATENT INFRINGEMENT BECAUSE SECTION 362(a)(1) APPLIES ONLY TO ACTIONS ARISING FROM PRE-PETITION CLAIMS, SECTION 362(a)(3) DOES NOT PROTECT TORTIOUS USES OF ESTATE PROPERTY, AND SECTION 959(a) MAKES A DEBTOR-IN-POSSESSION AMENABLE TO SUIT FOR UNLAWFUL ACTIVITIES COMMITTED IN CARRYING ON ITS BUSINESS POST-PETITION.

Prior to this appeal, the United States Court of Appeals for the Thirteenth Circuit

affirmed the decision of the district court, holding that the automatic stay prohibits Plum’s patent

infringement action and that section 959 does not operate as an exception to the section 362 stay.

The appellate court’s holding should be reversed because neither section 362(a)(1) nor section

362(a)(3) is applicable to an action seeking to enjoin unlawful activities committed by a debtor

after the commencement of the bankruptcy case. Additionally, the equitable principles upon

which bankruptcy is founded lead to the conclusion that a debtor is not permitted to preclude an

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action to redress tortious post-petition conduct by invoking the protection of the automatic stay.

Finally, section 959 provides express statutory authorization to bring suit against a trustee or

debtor-in-possession for post-petition acts, especially those which constitute torts committed in

furtherance of the debtor’s business.

A. Section 362(a)(1) Does Not Stay Plum’s Action Because the Requested Injunctive Relief Applies Only to Post-petition Acts of Infringement and Does Not Interfere With the Orderly Administration of the Bankruptcy Estate.

The automatic stay imposed by section 362(a)(1) does not apply in the present case

because that provision enjoins only those actions that could have been brought pre-petition while

Plum’s action relates exclusively to post-petition activity. By its own terms, the statute imposes a

stay on “the commencement or continuation . . . of a judicial, administrative, or other action or

proceeding against the debtor that was or could have been commenced before the

commencement of the [bankruptcy] case. . .” 11 U.S.C. § 362(a)(1). Reiterating the limited scope

of the statute, the courts have stated that “[t]he [section 362 automatic] stay simply does not

apply to post-bankruptcy events.” Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 996

(5th Cir. 1985). Additionally, federal patent law establishes that “each act of patent infringement

gives rise to a separate cause of action.” Hazelquist v. Guchi Moochie Tackle Co., Inc., 437 F.3d

1178, 1180 (Fed. Cir. 2006); Accord Chamberlain Group, Inc. v. Lear Corp., 758 F. Supp. 2d

542, 548 (N.D. Ill. 2010) (“These [post-petition sales] constitute distinct acts of alleged

infringement, each of which gives rise to independent causes of action for patent infringement.”).

Because Plum’s motion to enjoin Debtor addresses only post-petition acts of

infringement, it is an action that could not have been brought pre-petition and thus is not stayed

by section 362(a)(1). Although the infringement suit was pending before Debtor filed for

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bankruptcy, Plum’s motion for injunctive relief was not filed until after the commencement of

the bankruptcy case as a result of the patent law requirement that a finding of infringement be

entered before injunctive relief becomes available. Given the post-petition filing of Plum’s

motion, an injunction would affect only post-petition infringement committed by Debtor in

carrying on its business as a going concern. However, the post-petition operation of Debtor’s

business is beyond the reach of section 362(a)(1) since that provision is limited to staying actions

arising from pre-petition conduct. Moreover, because injunctive relief is purely prospective in

nature, the issuance of an injunction would not have the potential to violate the stay by

redressing any unlawful pre-petition activity. Plum is not seeking retroactive relief in the form of

damages for any pre-petition infringement. Rather, Plum has limited its desired remedy to

enjoining Debtor from committing post-petition acts of infringement in violation of the law and

Plum’s statutory rights. Therefore, the action does not involve any pre-petition activity and is not

stayed by section 362(a)(1).

As a matter of federal patent law, Debtor’s acts of post-petition infringement are each

distinct torts which give rise to separate causes of action. Accordingly, Plum’s action pertains to

claims that could not have been brought in a pre-petition suit. Despite the fact that Debtor’s post-

petition activity may resemble similar acts of pre-petition infringement or even represent a

continuation of its routine practice of engaging in such unlawful conduct, each post-petition act

of infringement nevertheless remains a discrete claim that only gives rise to a post-petition cause

of action. Thus, the important question is not when the infringing activity first began, but rather

when the particular acts of infringement that the aggrieved party seeks to redress occurred. As

evidenced by its request for an injunctive remedy, Plum is concerned only about preventing

future post-petition acts of infringement and not with redressing prior pre-petition acts.

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Accordingly, it is not conceivable for Plum to have brought an action for Debtor’s post-petition

acts of infringement prior to the commencement of the bankruptcy case, as these claims had not

materialized in the pre-petition period. Instead, because pre-petition and post-petition claims

generate separate and independent causes of action, they must be bifurcated for purposes of

applying section 362(a)(1). Insofar as Plum’s request for an injunction relates only to Debtor’s

post-petition acts, the action must be considered separately from any pre-petition claims. Thus,

the action is not subject to the automatic stay imposed by section 362(a)(1) and must be allowed

to proceed as a post-petition action.

B. Plum’s Action Is Not Stayed by Section 362(a)(3) Because an Injunction Does Not Deprive Debtor of Possession of or Control Over its Property and Tortious Uses of Estate Property Are Not Subject to Statutory Protection.

Section 362(a)(3) does not impose an automatic stay in the present case because Plum

seeks neither to obtain possession of nor to exercise control over estate property by enjoining

Debtor’s unlawful conduct. “Although the definition of property for purposes of the Code is

broad, . . . subsection 362(a)(3) does not bar every proceeding hostile to a debtor’s claimed

interest in property.” In re Continental Airlines, Inc., 61 B.R. 758, 778 (Bankr. S.D. Tex. 1986).

In fact, “a post-petition cause of action against the debtor is generally not encompassed by

subsection 362(a)(3), even when a substantial claim adverse to the debtor’s claimed interest in

property is asserted which might ultimately establish that the estate has no legal or equitable

interest in that claimed property.” Id. Finally, “section 362(a)(3) does not stay acts that reduce

the value of property of the estate; it stays acts to exercise control over estate property.” In re

Albion Disposal, Inc., 217 B.R. 394, 405 (W.D.N.Y. 1997).

The present dispute closely resembles Larami, a case which also involved a debtor’s

attempted post-petition sale of patent-infringing inventory. In that case, Larami, the manufacturer

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of “Super Soaker” water guns, instituted proceedings against a bankrupt competitor, Yes!

Entertainment, for infringing patented product design technology. The court held that section

362(a)(3) did not impose a stay on the action because the injunctive relief sought by Larami did

not constitute an act to obtain possession of or exercise control over Yes!’s inventory. According

to the court, “at its core, plaintiff’s suit [was] an attempt to prevent allegedly unlawful conduct,

not an attempt to directly exercise control over the property of the bankruptcy estate.” Larami

Ltd. v. Yes! Entm’t Corp., 244 B.R. 56, 59 (D.N.J. 2000). The court found that “Larami [sought

only] to prevent Yes! from infringing on its patented water gun design, . . . not . . . to seize

control of any of Yes!’s inventory or equipment.” Id. Because “Yes! [would] remain in

possession of the existing inventory and . . . be free to modify the water guns in order to avoid

future infringement,” the court held that section 362(a)(3) did not preclude Larami’s suit. Id.

Similarly, section 362(a)(3) is not applicable to Plum’s action in the present case because

an injunction is not an act to obtain possession of or exercise control over Debtor’s property.

Plum is not attempting to divest Debtor of estate property by executing a money damage award

or by seizing Debtor’s inventory. Instead, Plum seeks merely to enjoin Debtor from engaging in

unlawful activities that infringe its valid patent rights. If an injunction were issued, Debtor, like

the debtor in Larami, would retain possession of and control over its inventory with the only

exception being that it could not use its property to commit unlawful or tortious acts. Debtor

would also retain the ability to modify its phones in order to avoid infringement or find some

way to use the components in a non-infringing manner. For instance, Debtor could sell the

phones after installing non-infringing software, sell the phones without the software, or

dismantle the phones and liquidate the individual components. The fact that uses other than

selling the phones with the infringing software might decrease the value of the estate’s property

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is of no legal significance and does not change the fact that Debtor retains possession of and

control over its property. Debtor is merely prohibited from using its inventory for unlawful

purposes, a restriction that would exist regardless of the bankruptcy case. Therefore, because

injunctive relief does not result in Plum obtaining possession of or exercising control over any

property belonging to Debtor, section 362(a)(3) does not stay Plum’s action to enjoin Debtor

from committing infringement.

Finally, the section 362(a)(3) stay does not prohibit Plum’s action because tortious uses

of property are outside the scope of the statutory protection. As a general matter, the

“commission of a tort is not protected by the Bankruptcy Code.” Dominic’s Restaurant of

Dayton, Inc. v. Mantia, 683 F.3d 757, 761 (6th Cir. 2012). More specifically, the function of

section 362(a)(3) is to “protect[] interests in a debtor’s property, not tortious uses of that property

by the debtor.” Amplifier Research Corp. v. Hart, 144 B.R. 693, 695 (E.D. Pa. 1992). In other

words, “[s]ection 362(a)(3) [is] intended to prevent interference with a bankruptcy court’s

orderly disposition of the property of the estate, it [is] not intended to preclude post-petition suits

to enjoin unlawful conduct.” Larami Ltd. v. Yes! Entm’t Corp., 244 B.R. 56, 59 (D.N.J. 2000).

In the present case, Plum’s requested injunction seeks to control Debtor’s future conduct

only to the extent necessary to ensure that its post-petition activities comply with the law. In this

way, Plum’s action is not an attempt to affirmatively exercise control over Debtor’s property, but

rather an attempt to prohibit a single unlawful use as a means of constraining Debtor’s behavior.

Because patent infringement constitutes a tortious use of estate property, section 362(a)(3)

simply does not function as a stay on Plum’s action to enjoin Debtor’s post-petition misconduct.

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C. Fundamental Equitable Principles Support the Conclusion that Plum’s Action Should Be Allowed to Proceed Without Leave Because the Protection Afforded by the Automatic Stay Does Not Sanction Unlawful Post-petition Activities.

The equitable considerations and underlying principles which serve as the foundation of

bankruptcy law support the conclusion that Plum’s action is not subject to the automatic stay and

should be allowed to proceed without leave of the bankruptcy court. The proposition that

“[b]ankruptcy does not grant a debtor greater rights than those it would receive outside of

bankruptcy” is regarded as axiomatic given that bankruptcy is a proceeding based upon equity.

In re Synergy Dev. Corp., 140 B.R. 958, 959 (Bankr. S.D.N.Y. 1992) (citing Butner v. United

States, 440 U.S. 48, 55 (1979)). Accordingly, “[t]he protections afforded by the Bankruptcy

Code, such as the automatic stay, operate as a shield and not a sword.” In re Moss, 270 B.R. 333,

342 (Bankr. W.D.N.Y. 2001). In other words, while “[t]he automatic stay provision is one of the

fundamental procedural protections afforded to debtors by the Code, . . . ‘[it] is designed to be a

defensive shield, . . . not . . . to be an offensive weapon.’” In re Continental Airlines, Inc., 61

B.R. 758, 775–76 (Bankr. S.D. Tex. 1986) (quoting Turner Broadcasting System, Inc. v. Sanyo

Electric, Inc., 33 B.R. 996 (N.D. Ga. 1983)). Finally, it must be observed that “proceedings that

do not threaten to deplete the assets of the debtor need not be stayed.” Seiko Epson Corp. v. Nu-

Kote Int’l, Inc., 190 F.3d 1360, 1364 (Fed. Cir. 1999).

As a procedural protection, the automatic stay does not grant Debtor more rights than it

would otherwise have outside of bankruptcy. The district court has already established in the

infringement action that Debtor has no right outside of bankruptcy to sell phones containing

software that infringes Plum’s patent. Accordingly, Debtor cannot use the stay to preclude an

action brought by Plum to enforce its patent rights in accordance with the ruling of the district

court. The filing of a bankruptcy petition does not entitle Debtor to hide behind the shield of the

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automatic stay while simultaneously using this protection as a sword to commit ongoing torts

against Plum. Moreover, the action does not threaten to deplete the assets of the estate since only

injunctive relief, not a damage award, has been requested. It has been said that “[t]he mantle of

bankruptcy shall not be used to cloak the debtor so completely as to shelter those interests which

the debtor has no legal right to retain.” In re Catron, 158 B.R. 624, 629 (Bankr. E.D. Va. 1992).

Hence, the automatic stay must not be misconstrued as a weapon which permits Debtor to ignore

the requirements of nonbankruptcy law and continue selling infringing devices, a course of

action which Debtor has no legally cognizable right to pursue.

D. Plum’s Action Can Be Brought Under Section 959(a) Because that Provision Provides Express Statutory Authorization to Bring Suit Against a Debtor-in-possession Without Leave of the Bankruptcy Court When the Debtor Engages in Unlawful Activities During the Post-petition Operation of its Business.

Section 959(a) expressly permits Plum to bring its action for post-petition infringement

because it operates as a limitation on the scope of the automatic stay, rendering a debtor-in-

possession amenable to suit for post-petition misconduct committed in the course of carrying on

its business. The statute states that “[t]rustees, . . . including debtors in possession, may be sued,

without leave of the court appointing them, with respect to any of their acts or transactions in

carrying on business connected with such property.” 28 U.S.C. § 959(a). “By allowing suits

against trustees, . . . [section] 959(a) provides an express statutory exception to the blanket stays

inherent to the bankruptcy process.” In re Baptist Medical Center of New York, 80 B.R. 637, 643

(Bankr. E.D.N.Y. 1987) (citations omitted). In particular, the section 959 exception “is intended

to permit actions redressing torts committed in furtherance of the bankrupt’s business operation.”

In re Continental Airlines, Inc., 61 B.R. 758, 780 (Bankr. S.D. Tex. 1986). By carving out this

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statutory exception, “Congress has explicitly expressed its intention that a debtor is not to have

carte blanche authority to ignore nonbankruptcy law.” Id.

Plum’s infringement action against Debtor can proceed under section 959(a) because it

seeks to enjoin tortious uses of estate property committed in furtherance of Debtor’s business.

Courts generally interpret “‘acts or transactions in carrying on business connected with’ the

bankruptcy estate to mean acts or transactions in conducting the debtor’s business in the ordinary

sense of the words or in pursuing that business as an operating enterprise.” Muratore v. Darr,

375 F.3d 140, 144 (1st Cir. 2004). Debtor’s post-petition infringement falls within this notion of

“carrying on business” because the post-petition sale of infringing products is not an activity

incidental to administration of the bankruptcy estate, but rather a course of conduct designed to

facilitate Debtor’s reorganization and advance the operation of its business as a going concern.

Toward this end, Debtor is attempting to invoke the protection of the automatic stay to preclude

the action to enjoin its ongoing infringement so that it can continue to engage in this unlawful

behavior indefinitely while Plum is forced to seek leave from the bankruptcy court. However,

section 959(a) was designed to prevent precisely this kind of stratagem by making the debtor-in-

possession amenable to suit without leave for unlawful post-petition activities, especially tortious

acts committed in carrying on the debtor’s business. Essentially, the statute provides a means for

holding a debtor-in-possession accountable for its post-petition misconduct notwithstanding the

blanket stays inherent to the bankruptcy process. In this way, section 959(a) exists to ensure that

debtors cannot abuse the protection afforded by the automatic stay in such a way as to authorize

their complete disregard for the laws outside of bankruptcy. Therefore, section 959(a) authorizes

Plum’s suit against Debtor for the infringing activity it engages in while carrying on its business

post-petition.

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When applying section 959(a), the presumption is that an action pertaining to post-

petition conduct should be allowed to proceed unless extraordinary circumstances dictate

otherwise. “The first sentence [of section 959(a)] is intended to render debtors-in-possession

amenable to suit in a non-appointing forum on causes of action arising in the ordinary activities

of the company in reorganization.” In re Television Studio, 77 B.R. 411, 412 (Bankr. S.D.N.Y.

1987). On the other hand, “[t]he policy behind the second sentence . . . is to limit the . . . power

to bring suit against a debtor-in-possession, where to do so would significantly interfere with the

orderly administration of the debtor’s estate.” Id. In order to reconcile these ostensibly

conflicting objectives, courts have generally held that an “action against reorganization trustees

relating to business activities of the bankrupt . . . may proceed [under section 959(a)] unless the

bankruptcy court, exercising sound discretion, finds that the action would embarrass, burden,

delay or otherwise impede the reorganization proceedings.” Jaytee-Penndel Co. v. Bloor (In re

Investors Funding Corp.), 547 F.2d 13, 16 (2d Cir. 1976). Nevertheless, it remains essential that

most of these suits be allowed to proceed without leave. Television Studio, 77 B.R. at 412. Thus,

while “the reorganization court unquestionably retains discretion to enjoin suits filed pursuant to

[section 959], Congressional intent is to be given effect unless compelling equitable

considerations support injunctive relief.” In re Continental Airlines, Inc., 61 B.R. 758, 780

(Bankr. S.D. Tex. 1986).

The court should not require Plum to seek leave to bring its action against Debtor because

an injunction would not interfere significantly with the administration of the bankruptcy estate.

As discussed above, Plum does not seek to diminish the estate by recovering damages for any

acts of infringement. Instead, Plum is simply attempting to prohibit Debtor from engaging in

unlawful activity during the post-petition operation of its business. Moreover, Plum’s action to

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enjoin Debtor’s post-petition infringement does not deprive Debtor of possession of or control

over any estate property. Debtor retains the right to use its property in any manner that does not

violate the law. Additionally, the rights of Debtor’s other creditors remain protected, as they

retain the same interest and priority status with respect to all of the assets in which the estate has

a legitimate interest. Plum is not an opportunistic creditor simply trying to advance its interests at

the expense of other creditors or to devour assets of the estate; instead, Plum is a tort victim who

seeks only to enforce its statutory rights by enjoining Debtor from engaging in future unlawful

conduct. In this way, Plum’s action does not significantly impede the orderly administration of

the bankruptcy estate or hinder the reorganization plan. Because the present case lacks any

compelling equitable considerations which favor barring Plum’s action, the court should give

effect to legislative intent as embodied in section 959(a) and permit the action to proceed without

leave of the bankruptcy court.

For the above reasons, this court should find that the section 362 automatic stay does not

apply to Plum’s action or, alternatively, that section 959 permits Plum to bring the action without

leave of the court.

Conclusion

For all the foregoing reasons, the Petitioner respectfully requests that this court reverse

the judgment of the United States Court of Appeals for the Thirteenth Circuit.

Dated: January 27, 2013

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Respectfully Submitted, PLUM, INC. PETITIONER

P9 Counsel for Petitioner

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Appendix: Statutory Provisions Involved:

Statutory Provisions:

11. U.S.C. § 301 provides:

(a) A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy

court of a petition under such chapter by an entity that may be a debtor under such chapter.

(b) The commencement of a voluntary case under a chapter of this title constitutes an order for

relief under such chapter.

11 U.S.C. 362(a) provides, in pertinent part:

Except as provided in subsection (b) of this section, a petition filed under section 301, 302,

or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor

Protection Act of 1970, operates as a stay, applicable to all entities, of—

(1) the commencement or continuation, including the issuance or employment of process,

of a judicial, administrative, or other action or proceeding against the debtor that was or

could have been commenced before the commencement of the case under this title, or to

recover a claim against the debtor that arose before the commencement of the case under

this title; […]

(3) any act to obtain possession of property of the estate or of property from the estate or

to exercise control over property of the estate;

11 U.S.C. § 727(a)(10) provides:

The court shall grant the debtor a discharge, unless— […] the court approves a written waiver of

discharge executed by the debtor after the order for relief under this chapter;

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11 U.S.C. § 1307(a) provides:

The debtor may convert a case under this chapter to a case under chapter 7 of this title at any

time. Any waiver of the right to convert under this subsection is unenforceable.

11 U.S.C. § 1307(b) provides:

On request of the debtor at any time, if the case has not been converted under section 706, 1112,

or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to

dismiss under this subsection is unenforceable.

28 U.S.C. § 959(a) provides:

Trustees, receivers or managers of any property, including debtors in possession, may be sued,

without leave of the court appointing them, with respect to any of their acts or transactions in

carrying on business connected with such property. Such actions shall be subject to the general

equity power of such court so far as the same may be necessary to the ends of justice, but this

shall not deprive a litigant of his right to trial by jury.