Contributed by Andrea Saavedra
When is an asset of a debtor’s non-bankrupt affiliate also an asset of the debtor’s estate? The latest answer to this question comes to us from the District Court for the Western District of Texas (Waco Division) in In re Simons Broadcasting, LP. And it presents us with a fact pattern that’s bigger than Dallas!
The Simons saga begins with the prepetition relationship among (i) the debtor, Simons Broadcasting, LP, (ii) its non-profit affiliate, Promiseland Television Network, Inc., and (iii) their shared founder, manager, and principal (one individual). Simons owned and operated KTAQ, a television station in the Dallas-Fort Worth area. Promiseland’s main purpose involved promoting and selling airtime to religious organizations and commercial advertisers, as well as distributing programming via satellite and internet channels. Several years before Simons’ bankruptcy, Promiseland and Simons became parties to a lease whereby Promiseland, in exchange for monthly payments, was given the exclusive right to lease all of the airtime on KTAQ. The sole signatory to the lease agreement was their shared principal in his respective capacity for each entity. Shortly before Simons filed for bankruptcy, the principal amended the lease agreement so as to reduce the payment amounts due by Promiseland to Simons (although the reduction was never put in writing).
Simons filed for chapter 11 in 2008. As part of Simons’ confirmed chapter 11 plan, the bankruptcy court appointed a plan administrator to manage Simons’ assets and operations, and to conduct an orderly liquidation. Although the Promiseland lease agreement was terminated, the plan administrator and its principal (who also still served as the debtor’s president) decided for administrative reasons that Promiseland could continue to accept customer payments for airtime on KTAQ on behalf of the debtor’s estate so long as it remitted such payments to the plan administrator. A dispute subsequently ensued over Promiseland’s principal’s decision to deduct a portion of the customer payments as reimbursement to Promiseland for serving as intermediary to the estate, and his refusal to provide a detailed accounting of such deductions.
In June 2010, the plan administrator sold KTAQ to a group of the debtor’s secured lenders. In October 2010, he and an employee of the purchaser-creditor went to Promiseland’s headquarters, without the principal’s knowledge or permission, and accessed a computer that permitted them to download the traffic and billing information of the customers that purchased airtime through Promiseland.
In March 2011, the plan administrator filed an adversary proceeding against Promiseland and its principal requesting an accounting and turnover of all amounts held back. In their answer, the defendants asserted a host of counterclaims, arguing that, by downloading Promiseland’s customer list, the plan administrator and the purchaser-creditor improperly stole Promiseland’s trade secret information and should be found liable for conversion, trespass to personalty, and violations of various other tort, contract, and statutory laws.
Because the parties would not consent to a jury trial before the bankruptcy court, the case was removed to the district court. However, after hearing the testimony of the plan administrator and the principal, the district court determined that there was no conflict in substantial evidence that merited trial. It promptly dismissed the jury and issued judgment in favor of the plan administrator and his co-defendants.
In so doing, the district court found that Promiseland’s principal, by virtue of the holdback, was in violation of the confirmation order’s provisions requiring that all KTAQ generated revenues be paid directly into the estate.
The district court then easily disposed of the counterclaims asserted against the plan administrator and the purchaser-creditor. At the outset, the district court held that they were entitled to immunity as a matter of law. First, the district court reasoned that the plan administrator and purchaser-creditor were immune by virtue of the plan’s exculpation provisions. Specifically, the plan contained releases by holders of claims and interests as to any claims (other than gross negligence or willful misconduct) they could assert against, among others, the plan administrator and the purchaser-creditor on account of the administration of the debtor’s chapter 11 case. Second, the plan administrator was entitled to “derived judicial immunity” on account of his court-appointed status as an estate fiduciary. Because the defendants had not shown that the plan administrator’s taking of the customer information (nor assistance from the purchaser-creditor’s employee to do so) was gross negligence, willful misconduct, or outside the scope of his authority under the plan, the district court found that he and the purchaser-creditor were properly immune.
The district court then dismissed all remaining claims based on its ultimate finding that the customer list was actually property of the estate. The district court reached this conclusion on two bases. First, it held that the lease between Simons and Promiseland purporting to give Promiseland exclusive control of the client information was not an enforceable contract as, essentially, it was an agreement entered into between the principal and himself, and therefore was not an arms’ length transaction
Second, the court pierced the corporate veil to find that Promiseland and the debtor were mere alter egos of each other. Recognizing that veil piercing theory is normally utilized in cases where corporate formalities are inappropriately used to shield assets from liabilities, the district court reasoned that it could also pierce the corporate veil when an entity has been used as “part of a basically unfair devise to achieve an inequitable result.” Here, the principal primarily controlled both Promiseland and the debtor. Further, the entities shared the same offices, and clients would mail tapes to Promiseland to be broadcast on KTAQ, just across the hall. Therefore, the client information was freely accessible to both entities by means of the principal. Given this lack of meaningful boundaries between the entities, the court determined that it was appropriate to deem Promiseland’s customer list to constitute estate assets.
Accordingly, as an asset of the estate, it was wholly appropriate for the plan administrator to request and review the customer list. Further, because the plan administrator, in the discharge of his rights and duties as plan agent, had an obligation to collect and account for all funds being transferred to Promiseland for the benefit of the estate, it was proper for him to review the client list so as to determine what amounts had been paid to the estate and what amounts were still owed.
While the result in Simons may be very fact specific, it will be interesting to see whether future litigants will try to take the alter ego theory a bit further – to make it as big as Texas – in trying to bring in non-debtor affiliate’s assets into a bankruptcy estate. We at the Weil Bankruptcy Blog will be on the watch!