CII Parent, Inc.

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

Tn re: Chapter 11

CIT PARENT, INC,, Case No. 22-11345 (LSS)

Debtor. Re: Docket Nos. 12 & 30

OPINION

Before me is CII’s Parent, Inc.’s (*CII” or “Debtor”) Motion to Enforce the

Automatic Stay’ and Twin Brook Capital Partner LLC’s (“Twin Brook”) Motion to

Dismiss.” Both motions implicate a corporate governance dispute over the proper boards of

non-debtor direct and indirect subsidiaries, CII asserts an underhanded exercise of

proxy rights by its primary (if not only creditor) without proper notice, which deprives CII

of the right and opportunity to restructure the debt owed by its entire corporate family. CII

characterizes Twin Brook’s actions as a “hostile takeover.” Twin Brook counters that,

prepetition, it properly exercised a contractual remedy on a defaulted loan when it exercised

a proxy right to vote the stock pledged by CII and replace the board of directors at each of

the direct and indirect subsidiaries.

The outcome of these disputes turns on interpretation of specific provisions in the

prepetition loan documents. Having reviewed the documents and entertained argument

! DI. 12 (Debtor’s Motion for Entry of an Order Enforcing the Automatic Stay and Granting

Related Relief).

? D.I. 30 (Motion of Twin Brook Capital Partners, LLC, as Agent, for an Order Dismissing or

Abstaining from Hearing the Debtor’s Chapter 11 Case ).

regarding the meaning of those provisions and applicable case law, I conclude that the

proxies were properly exercised prepetition. I also conclude that there is no indication of

postpetition lender action violative of the automatic stay. But, because the parties left

certain “Contested Issues” open, I will defer, for the moment, on ruling on the Motion to

Dismiss and hold a status conference to determine the next steps in this case.

Procedural Posture

On December 27, 2022, CII filed a voluntary petition under chapter 11 of the

Bankruptcy Code in this court. Aside from the Motion to Enforce the Automatic Stay and

the Motion to Dismiss, the only substantive filings made in the case are a motion to extend

the time to file schedules and statements and an application to retain counsel.

On February 9, 2023, I signed an Agreed Scheduling Order’ setting out dates by

which the briefing on the two motions would be completed, consolidating the two motions

into a single contested matter under Federal Rule of Bankruptcy Procedure 9014 and setting

a non-evidentiary hearing on a to-be submitted stipulated record. Specifically, the Agreed.

Scheduling Order provides:

5, The February 22 Hearing will be limited to those legal issues and

arguments set forth in the Motions that, by agreement of the Parties, the Court

can decide based upon a stipulated factual record (the “Stipulated Record”).

All other disputed factual matters, legal issues and arguments set forth in the

Motions that involve disputed material issues of fact (collectively, “Contested

Issues”) are preserved for the purpose described in paragraph 7(b).

6, The Parties must meet and confer in good faith to prepare the Stipulated

Record. The Stipulated Record must consist of: (a) the documents that the

Court may admit into evidence without objection; and (b) a statement of

uncontested material facts germane to the Motions. The Parties must file the

Stipulated Record by 12:00 p.m. ET on February 20, 2023.

3 59 (Agreed Scheduling Order).

7. The Court may, in its discretion: (a) decide either Motion solely based

upon the Stipulated Record and without consideration of the Contested Issues,

or (b) continue the Motions for a further evidentiary hearing to consider those

Contested Issues the Parties wish to present.

On February 20, the Stipulated Record’ was filed. The February 22 hearing proceeded on

the Stipulated Record and seven agreed-to exhibits. The matter was taken under

advisement.

Jurisdiction

The parties contend that I have jurisdiction over their respective motions pursuant to

11 U.S.C § 1334 and that each is core. Lagree. Further, both Debtor and Twin Brook

consent to entry of a final order by the bankruptcy court on both motions to the extent it is

later determined that the court, absent the consent of the parties, cannot enter final orders or

judgments with respect to the motions consistent with Article III of the Constitution.’

Accordingly, I can enter a final judgment on the two motions.

Background

Debtor is a Delaware corporation. It is a holding company that owns 100% of the

equity interests of non-debtor Community Investors, Inc., which, in turn, directly or

indirectly owns all the equity of the non-debtor Indirect Subsidiaries.° Debtor is indirectly

+ D.L. 70 (Stipulated Record Related to (I) Debtor’s Motion for Entry of an Order Enforcing the

Automatic Stay and Granting Related Relief and (I) Motion of Twin Brook Capital Partners, LLC,

As Agent, for an Order Dismissing or Abstaining from Hearing the Debtor’s Chapter 11 Case). The

parties did not submit a list of legal issues and arguments that the parties agree can be determined

based on the stipulated record. At argument, Debtor’s counsel stated that the turnover arguments

and equitable estoppel arguments are factual in nature so those arguments are not before me. D.I. 77

(Feb. 22, 2024 Hr’g Tr.) at 42:15-20.

5 Stipulated Record { 20.

6 The Indirect Subsidiaries are: Investors Acquisition Co., Association Voice LLC, CapSure

Acquisition Co., Real Pro Holdings, Inc., dwellingLIVE, Inc., iHomefinder Inc, and AtHomeNet,

Inc.

owned by Falcon Structured Equity Partners, LP (“Falcon”). Twin Brook is a direct

lending finance company that provides cash-flow based financing solutions to the middle

market private equity community.

Prepetition, Community Investors, as Borrower Representative, and Debtor and the

Indirect Subsidiaries, as Borrowers, certain financial institutions (“Lenders”) and Twin

Brook as Agent, executed that certain Credit Agreement’ dated as of May 15, 2019. The

Lenders’ commitment under the Credit Agreement included both a revolving loan and a

term loan (collectively, “Loan”).

As evidenced by that certain Guarantee and Collateral Agreement,’ the Loan is

secured by, among other things: (i) Debtor’s equity interest in Community Investors and (ii)

Community Investors’ equity interests in the Indirect Subsidiaries (and together with (), the

“Pledged Equity”). In connection with the Loan, Debtor, Community Investors and each

Indirect Subsidiary other than AtHomeNet also executed a separate document titled

Irrevocable Proxy Coupled with an Interest dated May 15, 2019 (“One Page Proxy”).’

7 Ex. 1 (Credit Agreement, dated May 15, 2019 among CII Parent, Inc., a Delaware corporation, as

Holdings, Community Investors, Inc., a Delaware corporation as a Borrower and the Borrower

Representative, Investors Acquisition Co., a Delaware corporation, AssociationVoice LLC, a

Delaware limited liability company, CapSure Acquisition Co., a Delaware corporation, Real Pro

Holdings, Inc., a Delaware corporation, dwellingLIVE, Inc., a California corporation, iHomefinder

Inc., a California corporation together with each other Person who becomes a Borrower hereunder

by execution of a Borrower Joint Agreement or similar acknowledgment hereto, including after

giving effect to the consummation of the Closing Date Acquisition, Caliber Software, Inc., a

Delaware corporation as Borrowers, The Lenders Party Hereto as Lenders, and ‘Twin Brook Capital

Partners, LLC, as Agent, a Lead Arranger and Bookrunner),

§ Ex, 2 (Guarantee and Collateral Agreement dated as of May 15, 2019 among Community

Investors, Inc. and the Other Parties from ‘Time to Time Party Hereto as Grantors, and Twin Brook

Capital Partners, LLC as Agent).

? Ex. 3 (collectively, each executed Irrevocable Proxy Coupled. with an Interest).

After identifying certain current and anticipated defaults under the Credit Agreement

Twin Brook, Falcon, Debtor, Community Investors and the Indirect Subsidiaries

negotiated, and on July 27, 2022 executed, that certain Forbearance Agreement.*°

On November 16, 2022, Twin Brook delivered a Reservation of Rights Letter" to

Falcon, Debtor, Community Investors and the Indirect Subsidiaries.

By letter dated December 21, 2022 (“Proxy Notice”), win Brook informed

Debtor, Falcon, Community Investors and the Indirect Subsidiaries that it had exercised its

purported. rights under the Guarantee and Collateral Agreement and the Irrevocable Proxies

to (i) amend the applicable bylaws, operating agreements, and/or other corporate

governance documents as necessary or desirable, to, among other things, remove certain

directors and/or managers of Community Investors and the Indirect Subsidiaries; (1) adjust

the size of each board of directors and/or managers, as applicable, of Community Investors

and each Indirect Subsidiary; and (iii) appoint replacement directors and/or managers for

Community Investors and each Indirect Subsidiary (collectively, “Twin Brook’s Actions”).

Six days later, on December 27, 2022, Debtor filed for relief under chapter 11. By

letter dated December 29, 2022,'° Debtor notified Twin Brook and its counsel that CII had

filed for bankruptcy resulting in the immediate imposition of the automatic stay pursuant to

§ 362(a) of the Code. Debtor also requested that Twin Brook confirm that it would formally

10 Ex, 4 (Forbearance Agreement and Sixth Amendment to Credit Agreement).

1 Ex, 5 (Letter from Twin Brook Capital Partners, LLC, as Agent to Community Investors, Inc., as

Borrower Representative dated November 16, 2022).

2 Ex. 6 (Letter from Twin Brook Capital Partners, LLC, as Agent to All Grantors dated December

21, 2022).

3 Ex, 7 (Letter from Andrew &. Glenn to Drew Guyette, Chief Credit Officer dated December 29,

2022).

rescind T'win Brook’s Actions. Twin Brook refused to rescind Twin Brook’s Actions and.

the current board members chosen by Twin Brook continue to govern Community Investors

and each Indirect Subsidiary.

While not expressly in the Stipulated Facts, there 1s no disagreement that: □□□ events

of default existed (as documented in the Forbearance Agreement) and continue to exist

under the Credit Agreement and (ii) subject to Debtor’s equitable estoppel argument, the

agreed-upon forbearance period under the Forbearance Agreement expired on November

15, 2022 and (iti) Twin Brook exercised (or purported to exercise) its proxy rights

prepetition. Further, CI represents that it filed this chapter 11 case to “regain control of its

operating subsidiaries.” CII contends that if'Twin Brook had not been deceived, it is

“likely” that Community Investors and each of the Indirect Subsidiaries would have filed

bankruptcy petitions as well. In this way, CHI could take a “holistic” approach to a

restructuring.

Discussion

I. The Motion to Enforce the Automatic Stay

While styled as a motion to enforce the automatic stay, the Motion to Enforce the

Automatic Stay goes well beyond that seeking, in effect, multiple mandatory injunctions.

Debtor seeks an order:

(i) finding that Twin Brook’s continuing exercise of control over the Debtor’s

corporate governance rights in [Community Investors and the Indirect

Subsidiaries] [| violates the automatic stay, or alternatively, that Twin Brook is

equitably estopped from exercising remedies against the Debtor under the

circumstances;

(ii) directing Twin Brook to (a) formally rescind the amendments of the applicable

bylaws, operating agreements, and or other corporate governance documents

that purported to, among other things, remove certain directors and/or

managers, as applicable, of [Community Investors and the Indirect

Subsidiaries|{], and appoint replacement directors and/or managers for

[Community Investors and the Indirect Subsidiaries], (b) cease exercising

control over [Community Investors and the Indirect Subsidiaries]{], and (c)

immediately inform management of the foregoing; and

(ii) granting such other relief as is appropriate under the circumstances."

For its part, Twin Brook extensively briefs and argues that it properly exercised the proxies

prepetition per the unambiguous terms of the Guarantee and Collateral Agreement,

effectively asking for a declaration to that effect. Among other things, this argument leads

Twin Brook to the further conclusion that there is no stay violation because the appointment

of Twin Brook as attorney-in-fact and proxy took the voting rights outside of the property of

the estate.°

Debtor argues that Twin Brook’s actions violate subsections 362(a)(3), (4) and (6) of

the Code because (i) Twin Brook is exercising control over property of the estate, (i) Twin

Brook is blocking Debtor from exercising control over the boards of the non-debtor

companies and thus interfering with property of the estate and (iii) Twin Brook is refusing to

rescind its actions, which is an act to collect or recover on its claim.

Twin Brook counters that (i) all of its actions occurred prepetition and the mere

retention of the voting power and refusal to rescind its prepetition acts are not affirmative

acts in violation of the stay and (ii) Debtor fails to identify a post-petition act of Twin Brook

that blocks Debtor from exercising control over property of the estate and, in any event, (411)

4 Motion to Enforce the Automatic Stay at 4-5.

1S Twin Brook initially took the position that Debtor's relief required an adversary proceeding

because, among other things, Debtor seeks to extend the automatic stay to non-debtors. Objection

of Twin Book Capital Partners, LLC, as agent, to Debtor’s Motion for Entry of Order Enforcing the

Automatic Stay and Granting Related Relief (D.1. 45) (“Twin Brook Objection”) at 23-24. Twin

Brook waived this argument in the Agreed Scheduling Order.

?

the voting rights associated with the stock in Community Investors are not property of the

estate.’

A, Twin Brook has not violated § 362(a)(3) or § 362(a)(4).

Both § 362(a)(3) and § 362(a)(4) prohibit post-petition acts to exercise control over

property of the estate or to enforce a lien against property of the estate.’ Property of the

estate is interpreted broadly to include all interests the debtor has in property, both tangible

and intangible, legal and equitabie."* Federal law defines what types of property are part of

the estate while state law determines what interest a debtor has in the property.” Any

16 Twin Brook is correct that Debtor does not have voting rights in or hold the stock of the Indirect

Subsidiaries. This opinion, therefore (and for simplicity’s sake), will address Debtor's voting rights

in Community Investors. But, the analysis of Twin Brook’s appomtment as attorney-in-fact and.

proxy is the same at the Indirect Subsidiary level.

7 11 U.S.C. § 362 provides, in relevant part:

a petition filed under . . . this title . . . operates as a stay, applicable to ail entities, of —

(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;

(4) any act to create, perfect, or enforce any lien against property of the estate.

\8 United States. v. Whiting Pools, Inc., 462 U.S. 198, 205 (1983) (“Both the congressional goal of

encouraging reorganizations and Congress’ choice of methods to protect secured creditors suggest

that congress intended a broad range of property to be included in the estate.”); Westmoreland Human

Opportunities, Inc. v. Walsh, 246 T'.3d 233, 242 3d Cir. 2001) (citing 5 Collier on Bankruptcy §

541.08[4], at 541-49 (Sth ed. Rev., King et al., eds., 1996)) (“It is also settled that the expansive

nature of § 541’s property definition encompasses rights and interests arising from ordinary

contractual relationships.”).

19 Westmoreland, 246 F.3d at 242 (citing In re O'Dowd, 233 F.3d 197, 202 (3d Cir. 2000)).

operative documents as well as relevant state laws inform the determination.” A debtor's

interest in property is measured as of the petition date.”'

The parties agree that Debtor's stock in Community Investors is property of the

estate. From there, they disagree. Debtor contends that the voting interest attendant to the

stock is property of the estate while Twin Brook contends that, as of the petition date, it

controlled the right to vote the stock.

1. The Plain Language of the Loan Documents

(a) The appointment provision”

In addition to a guarantee of payment and performance of the Loan and the grant of

security interests and/or liens in identified property as collateral, the Guarantee and

Collateral Agreement contains an immediate and irrevocable grant of voting rights to Twin

Brook. In Section 7.1(a), Debtor “hereby” appoints ‘Twin Brook as Debtor’s “attorney-in-

fact and proxy” to act in Debtor’s “place and stead” for the purpose of taking numerous

enumerated acts.27 Among those acts are the right to vote the stock in Community Investors

Tn ve Lee, 524 B.R. 798, 802 (Bankr. S.D. Ind. 2014) (analyzing whether debtor’s voting rights in a

limited liability company are property of the estate by examining the relevant operating agreement

and the Indiana Business Flexibility Act.).

21 Westmoreland, 246 F.3d at 241 (citing 11 U.S.C. §§ 301, 541).

2 While the parties did not analyze the Guarantee and Collateral Agreement on a holistic basis, I

find it useful to recognize the structure of the agreement in ascertaining its meaning.

The Agent’s Appointment as Attorney-in-Fact, ete,

(a) Each Grantor hereby irrevocably constitutes and appoints the Agent

and any officer or agent thereof, with full power of substitution, as its true and lawful

attorney-in-fact and proxy with full irrevocable power and authority in the place and

stead of such Grantor and in the name of such Grantor or in its own name, for the

purpose of carrying out the terms of this Agreement, to take any and all appropriate

action and to execute any and all documents and instruments which may be necessary

or desirable to accomplish the purposes of this Agreement or take any other remedial

action with respect to collateral otherwise described in this Agreement, the Credit

(and the Indirect Subsidiaries) on all matters in the manner in which Twin Brook deems

advisable as well as to take remedial actions authorized under the agreement. This grant

encompasses voting at shareholder meetings and by written consent.

Voting rights are specifically addressed in three subsections of the appointment

provision. These three subsections which are repetitive, but not contradictory, permit Twin

Brook to:

(v} (1) vote the Investment Property in any manner the Agent deems

advisable for or against all matters submitted or which may be submitted to a

vote of shareholders, partners or members, as the case may be, (2) transfer and

register in its name or in the name of its nominee the whole or any part of the

Investment Property, (3) receive and collect any dividend or other payment or

distribution in respect of or in exchange for the Investment Property and (4)

take all such other actions with respect to Investment Property authorized

under Section 6.3 or 6.7 of this Agreement or otherwise authorized by this

Agreement or the other Loan Documents;

(vi)... (8) vote any right or interest with respect to any Investment

Property;

... exercise the irrevocable proxy to vote the Investment Property at any and

all times, including but not limited to, at any meeting of shareholders, partners

or members, as the case may be, however called, and at any adjournment

thereof, or in any action by written consent, and may waive any notice

otherwise required in connection therewith.”

Agreement or the other Loan Documents, and, without limiting the generality of the

foregoing, each Grantor hereby gives the Agent the power and right, on behalf of such

Grantor, without notice to or assent by such Grantor, to do any or all of the following,

in each case, with respect to the Collateral: ....

4 Guarantee and Collateral Agreement Section 7.1(a) at 25-26. “Investment Property” includes

Pledged Equity. fd. Section 1.2 at 3.

10

Finally, the One-Page Proxy” also contains appointing language and addresses voting:

Subject in each case to the limitations set forth in the Guarantee and Collateral

Agreement (referred to below), (i) the undersigned hereby irrevocably

designates and appoints Twin Brook Capital Partners, LLC as administrative

agent for certain secured parties (in such capacity, the “Agent”) to represent it

at all annual and special meetings of the holders of the Equity Interests (as

defined in the Guarantee and Collateral Agreement defined below) of

COMMUNITY INVESTORS, INC., a Delaware corporation (the

“Company”), and (ii) the undersigned hereby authorizes and empowers Agent,

to vote any and all Equity Interests owned by the undersigned or standing in its

name, and do all things which the undersigned might do if present and acting

itself.

This language of the One Page Proxy is not identical to that in the Guarantee and Credit

Agreement, but, it, too, is not inconsistent with the agreement and is clearly meant to effect

the broad proxy rights granted in the main document.”

While broad, Section 7.1 also contains an express limitation on Twin Brook’s right

to vote the Pledged Equity. Twin Brook agrees that it will not exercise its power as

attorney-in-fact/proxy unless Debtor is in a continuing default:

Anything in this Section 7.1(a) to the contrary notwithstanding, Agent

agrees that it will not exercise any rights under the power of attorney provided

for in this Section 7.1(a) unless an Event of Default shall have occurred and be

continuing, and upon the direction of the Required Lenders.”’

25 The One Page Proxy is in substantially the form attached as Annex III to the Guarantee and

Collateral Agreement. Ex. 2 Annex ITI.

26 Tn addition to annexing a form of proxy to the Guarantee and Collateral Agreement, the

agreement contemplates the presentation of a separate proxy in certain circumstances:

IN ORDER TO FURTHER AFFECT [sic] THE TRANSFER OF RIGHTS WITH

RESPECT TO PLEDGED EQUITY SET FORTH IN SECTION 6.3, SECTION 6.7

OR ANY OTHER PROVISION OF THIS AGREEMENT IN FAVOR OF THE

AGENT, THE AGENT SHALL HAVE THE RIGHT, UPON THE

OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF

DEFAULT, TO PRESENT TO ANY ISSUER AN IRREVOCABLE PROXY.

Guarantee and Collateral Agreement at Section 7.1(a) at 26.

217 Guarantee and Collateral Agreement Section 7.1{a) at 27.

11

Accordingly, so long as Debtor is not in default, it continues to have the privilege to exercise

its voting rights (and to receive the economic benefits attendant to stock ownership).

(6) The remedial provisions

The Guarantee and Collateral Agreement also contains a remedial section detailing

the actions that Twin Brook may take as to different categories of collateral in the event of a

default, As it relates to the Pledged Stock and voting rights, section 6.3(b) provides that

Twin Brook may exercise Debtor’s voting rights as if it were the outright owner of the

Pledged Stock:

If an Event of Default shall occur and be continuing, (a) the Agent shall have

the right to , . . Gi) exercise or permit its nominee to exercise, any and all rights

of conversion, exchange and subscription any other rights, privileges or options

pertaining to such Investment Property as if it were the absolute owner thereof

(... and including with respect to the Pledged Equity, giving or withholding

consents of stockholders, partners or members, calling special meetings of

stockholders, partners or members and voting at such meetings) and otherwise

act with respect to the Investment Property as if Agent were the outright owner

thereof, .. . and (b) the Agent shal! have the right, substantially concurrently

with notice to the applicable Grantor, to (i) receive any and all cash dividends

and distributions, payments or other Proceeds paid in respect of the Investment

Property constituting Collateral and make application thereof to the Secured

Obligations in such order as the Agent may determine, and (ii) exercise, or

permit its nominee to exercise, all voting and other rights pertaining to such

Investment Property as a holder of such Investment Property, with full power

of substitution to do so.¥

Consistent with the appointment section, in the remedial section Twin Brook allows Debtor

to vote the Pledged Equity (and to receive distributions) if Debtor is not in default as long as

Debtor does not impair Twin Brook’s collateral. The remedial section also provides that

Twin Brook must give Debtor notice of its intent to exercise its voting rights. Section 6.3(a)

provides:

Guarantee and Collateral Agreement Section 6.3(b).

12

Unless an Event of Default shall have occurred and be continuing and the

Agent shall have given notice to the relevant Grantor of the Agent’s intent to

exercise its corresponding rights pursuant to Section 6.3(b), each Grantor shall

be permitted to receive all cash dividends and distributions paid in respect of

the Pledged Equity and all payments made in respect of the Pledged Notes, to

the extent permitted in the Credit Agreement, and to exercise all voting and

other rights with respect to the Investment Property; provided, that no vote

shall be cast or other right exercised or action taken which could impair the

Collateral or which would be inconsistent with or result in any violation of any

provision of the Credit Agreement, this Agreement or any other Loan

Document.

Debtor does not argue that it did not appoint Twin Brook its proxy or that Events of Default

did not exist or were not then-continuing when Twin Brook sent the Proxy Notice,

amended Debtor’s bylaws and replaced directors and managers. Instead, Debtor argues that

(i) the Proxy Notice was not in accord with section 6.3(a) and (b); (ii) the appointment of

Twin Brook as proxy expired on May 15, 2022 (or seven months prior to the Proxy Notice);

and (iii) that the proxy appointment did not permit Twin Brook to act by written consent.

2. Delaware law”

Both parties rely on the Delaware Supreme Court’s recent Hawkins decision” that

addresses the question of whether a purchaser is bound by an irrevocable proxy

29 Like Vice Chancellor Laster noted in Hawkins v. Daniel, 273 A.3d 792, 810 (Del. Ch. 2022)

(‘Hawkins 2”) aff'd 289 A.3d 631 (Del. 2023), “a potential choice of law issue lurks in the

background. To determine the law that governs a proxy arrangement, a court ordinarily looks to the

law of the state of incorporation of the corporation whose shares are the subject of the

arrangement.” But, the parties to the proxy can select another state’s law if there is a “material

relationship” between that law and the subject of the agreement. Hawkins I, 273 A.2d at 810n, 21

(observing that the irrevocable proxy selected California law and the parties did not offer a credible

reason why that law would not govern). In this case, Community Investors is incorporated in

Delaware. Some of the Indirect Subsidiaries, however, are organized under the laws of other

jurisdictions and both the Credit Agreement and the Guarantee and Collateral Agreement identify

New York law as the governing law. Here, the focus is rightly on Community Investors because

Debtor only owns the stock of Community Investors, not the Indirect Subsidiaries, Moreover, the

parties have briefed Delaware law and. do not suggest the law of another jurisdiction should apply.

Therefore, I will follow Vice Chancellor Laster’s lead and apply Delaware law.

Daniel v. Hawkins, 289 A.3d 631 (Del. 2023) (“Hawkins £1’).

13

appointment. The Supreme Court’s decision, as well as the Chancery Court decision which

it affirmed, provide a comprehensive history of and guide to the interpretation of irrevocable

proxies. While the context is different, the basic principles are applicable here.

From a corporate governance perspective, the appointment of a proxy decouples the

economic interest in the shares from the power to vote the shares.*' If the appointment

language so provides, as it does here, the appointment is immediate.” Such arrangements

were historically viewed as suspect because of the potential misalignment of those two

interests and concerns that the outcome of a proxy arrangement was at odds with the

“Delaware model” of maximizing stockholder welfare and, therefore, maximizing social

welfare.’ This misalignment of interests is enhanced if the proxy is irrevocable because,

unlike a revocable proxy, it “frees the holder from the ‘unilateral control of the grantor.’”**

More recently, Delaware courts have relaxed their approach to proxy arrangements

consistent with their approach to vote-buying arrangements and voting trusts.”

“TT|nnovations in technology and finance have made it easier to separate the voting interests

from the financial interests of shares.”** Further, the Delaware Supreme Court has also

31 Hawkins I, 273 A.3d at 808; Hawkins I, 289 A.3d at 648. It also creates an agency relationship

(Hawkins I, 289 A.3d at 647-48), but neither party raised that concern in the context of these

motions.

32 Hawkins IT, 289 A.3d at 637, 650-51 (recognizing that the irrevocable proxy (which provided that

the stockholder “hereby” appoints the holder as its attorney-in-fact) was “[t]he vehicle for the

immediate transfer of voting power.”).

3 Hawkins I, 273 A.3d at 808-09, Hawkins I, 289 A.3d at 645-47.

Hawkins II, 289 A.3d at 648 (quoting Haft v. Haft, 671 A.2d 413, 421 (Del. Ch. 1995).

3 Id.

36 Id. at 646 (citing Crown EMAK Partners LLC, v. Kurz, 992 A.2d 377, 387-88 (citing Robert B.

Thompson & Paul H. Edelman, Corporate Voting, 62 Vand. L. Rev. 129, 153 (2009))).

14

recognized scholarship that classifies interests in stock that may be transferred and

employed those classifications in its proxy analysis, specifically:

e “formal voting rights,” which is the legal right to vote the shares, including

the right to instruct someone else how to vote;

« “economic ownership,” which are the economic returns attendant to the

shares;”’ and

e “full ownership,” which consists of both the “voting ownership plus direct

economic ownership.”

The Delaware Supreme Court has also observed that “[o]ur system of record ownership

already decouples economic ownership from formal voting rights.”

Notwithstanding this relaxed interpretation, Delaware courts still construe proxies

narrowly. Delaware courts will not turn to extrinsic evidence to resolve any ambiguities,

37 “Heonomic ownership” is more fully described as “the economic returns associated with shares,

The ownership can be achieved directly by holding shares, or indirectly by holding a ‘coupled asset,’

which conveys returns that relate directly to the return on the shares. Economic ownership can

either be positive—the same direction as the return on shares—or negative—the opposite direction

from the shares.” Crown EMAK, 992 A.2d at 391 (quoting Henry T.C. Hu & Bernard Black, Empty

Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, 61 Bus. Law. 1011,

1022 (2006)).

38 Id. A shareholder who has full ownership is owed fiduciary duties and has the right to sue to

enforce them; the right to inspect the company’s books and records; the right to present resolutions

at shareholder meetings and include resolutions in the company proxy statement under federal

securities law; the right to receive dividends; appraisal rights; and the right to be paid in the event of

liquidation after all other liabilities are paid off. Henry T.C. Hu & Bernard Black, Equity and Debt

Decoupling and Empty Voting IT: Importance and Extensions, 156 U. Pa. L.Rev. 625, 722 (2008).

“Investors, and corporations themselves, are able to unbundle these rights and obligations.” Id. at

626.

® Crown EMAK, 992 A.2d at 391 (“The record owner is typically at least two persons removed from

the economic owner of the shares. Shares held in ‘street name’ are generally held ‘of record’ by

Depository Trust Company or another securities depository, which holds the shares on behalf of

another intermediary (such as the broker-dealer or bank), which holds the shares for economic

owners.”).

15

rather, an irrevocable proxy is construed in favor of the beneficial owner of the shares.”

The court begins with the proxy’s plain language, “construing the agreement as a whole and

giving effect to all its provisions.”*!

(a) Notice requirement

Relying on Section 6.3(a) of the Guarantee and Collateral Agreement, Debtor

contends that Twin Brook did not properly exercise its proxy right because it did not

provide advance notice of its intent to exercise the right. Debtor observes that Twin Brook

simultaneously gave Debtor notice that it was no longer permitted to vote or receive

dividends and that Twin Brook had executed written consents amending operative

documents, removing directors and or managers and appointing replacements. In essence,

Debtor contends that the Guarantee and Collateral Agreement requires a two-step process:

one, the giving of a notice of intent to exercise rights and two, the subsequent exercise of

those rights.

Twin Brook argues no advance notice is necessary. It points to various provisions of

the Guarantee and Collateral Agreement as well as the Credit Agreement that address

advance notice and argues that Section 6.3(a) has no such requirement.” It concludes,

40 Hawkins If, 289 A.3d at 648.

4t Hawkins I, 273 A.3d at 810.

For example, Section 5.3 of the Guarantee and Collateral Agreement requires “10 days’ prior

written notice” before Debtor can move inventory or equipment, change its jurisdiction of

organization or name. Section 6.6 of the Guarantee and Collateral Agreement provides “[i]fany

notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall

be deemed reasonabie and proper if given at least 10 days before such sale or other disposition.”

Sections 2.2.2 of the Credit Agreement requires three (3) business days notice prior to borrowing and

Section 2,2.3(b) permits or requires same day notice or three (3) business days notice, as specified, of

conversion of loan type.

16

therefore, that the lack of such language in Section 6.3({a) together with the “substantially

concurrently with notice” language in 6.3(b) means there is no two-step process or advance

notice requirement.

By its plain language, Section 6.3(a) does not include an advance notice requirement.

It merely provides for notice of intent. ‘The notice required under Section 6.3(a) is to inform

Debtor that it is no longer permitted to vote or receive distributions; it is not some implicit

and unspecified advance notice or challenge period nor does it govern when Twin Brook

may exercise the proxy. Rather, Section 6.3(b) serves that function.

Section 6.3(b) provides that Twin Brook “shall have the right, substantially

concurrently with notice to the applicable Grantor” to receive dividends and proceeds of the

Collateral and to “exercise, or permit its nominee to exercise, all voting and other rights

pertaining to such Investment Property as a holder of such Investment Property, with full

power of substitution to do so.” This reference back to the notice provided in subsection (a)

provides the timing of the ability to exercise the proxy: that is “substantially concurrently”

with the giving of the notice of intent.” The Proxy Notice, therefore, provided adequate

notice to Debtor of Twin Brook’s intent to exercise the proxy rights as well as its exercise of

those rights.

But, even if some unspecified amount of advance notice is required, the Proxy

Notice served as that notice such that the voting rights are not property of the estate. The

appointment of Twin Brook as attorney-in-fact and proxy vested Debtor's voting rights in

Twin Brook immediately, albeit Twin Brook agreed to permit Debtor to vote the Pledged

43 Concurrently means: “operating or occurring at the same time” Concurrent, Merriam-

Webster.com, https://www-.merriam-webster.com/dictionary/concurrent (last visited April 7,

2023).

17

Equity while not in default.“ As the Proxy Notice was sent December 21, 2022, Debtor's

ability to vote the Pledged Equity ended on that date—six (6) days prior to the filing of the

petition. Thus, as of the petition date, Debtor was no longer permitted to vote the Pledged.

Stock, The notice-——not the exercise of the proxy——is the operative event.

(b) Durational limits

The Loan documents, including the Guarantee and Collateral Agreement and the

One Page Proxy, were executed on or as of May 15, 2019. Delaware law provides that a

proxy expires three (3) years from the date of grant “unless the proxy provides for a longer

period.”® Thus, absent such language, the proxy expired on May 15, 2022, or prior to its

exercise as manifest in the Proxy Notice.

The parties dispute whether the appointment language in the Guarantee and

Collateral Agreement provides for a period longer than three years. Once again, applicable

language is found in more than one section of the agreement. Section 7.1(a) provides, in

relevant part:

THE POWER-OF-ATTORNEY AND PROXY GRANTED

HEREBY IS COUPLED WITH AN INTEREST AND SHALL BE VALID

AND IRREVOCABLE UNTIL THE SECURED OBLIGATIONS HAVE

BEEN PAID IN FULL (AS DEFINED IN THE CREDIT

4 Guarantee and Collateral Agreement Section 7.1(a) at 24 (“Each grantor hereby . . . appoints the

Agent . . . as its true and lawful attorney-in-fact and proxy. ...”). Indeed, Debtor does not argue

that the proxy was not immediately granted and such a position would be inconsistent with Debtor's

argument that the proxy expired (see infra). See also In re Town Center Flats, LLC, 855 F.3d 721, 723

(6th Cir. 2017) (“The agreement purported to be a ‘present, absolute and executed grant of the

powers herein granted to Assignee,’ while simultaneously granting a license to Town Center to

collect and retain rents until an event of default”).

% 8 Del, C. § 212(b) provides:

Each stockholder entitled to vote at a meeting of stockholders or to express consent or

dissent to corporate action in writing without a meeting may authorize another person

or persons to act for such stockholder by proxy, but no such proxy shall be voted or

acted upon after 3 years from its date, unless the proxy provides for a longer period.

18

AGREEMENT)....SUCH APPOINTMENT OF THE AGENT AS

PROXY AND ATTORNEY-IN-FACT SHALL BE VALID AND

IRREVOCABLE AS PROVIDED HEREIN NOTWITHSTANDING ANY

LIMITATIONS TO THE CONTRARY SET FORTH IN THE

CERTIFICATE OF INCORPORATION, CERTIFICATE OF

FORMATION, ARTICLES OF ORGANIZATION, BY-LAWS, LIMITED

LIABILITY COMPANY AGREEMENTS OR OTHER

ORGANIZATIONAL DOCUMENTS OF ANY GRANTOR OR ISSUER

OR CORPORATE OR LIMITED LIABILITY COMPANY LAW, AS

APPLICABLE, OF THE STATE OF DELAWARE, THE STATE OF

CALIFORNIA, THE STATE OF GEORGIA, OR ANY OTHER STATE OF

ORGANIZATION OF ANY GRANTOR OR ISSUER.

The One Page Proxy is more succinct:

This proxy is an irrevocable proxy coupled with an interest. The

undersigned recognizes that Agent, has a security interest in said Equity

Interests to secure certain obligations incurred by the undersigned to Lenders

and, to the extent permitted by law, this proxy shall continue in full force and

effect until the Secured Obligations are Paid in Full notwithstanding any time

limitations set forth in the bylaws or other organizational documents of the

Company or the general corporation law of the State of Delaware.”

Debtor argues, perhaps alternatively, that (i) there is no durational language and (ii) to the

extent there is, it applies to the irrevocability and, perhaps, the validity of the proxy, but not

the durational limit of the proxy. Twin Brook counters that the plain language of the

Guarantee and Collateral Agreement and One Page Proxy provides the durational term: the

proxy lasts—or is valid—until the secured obligations are paid in full. Debtor responds that

it does not know what “valid” means but that “validity” “irrevocability” and “duration” are

distinct concepts, and the proxy is silent as to its duration.’

Debtor is correct that revocability and duration are separate concepts. Revocability

addresses whether the grantor can revoke the proxy during its term, but, by itself, “the act of

46 Ex, 3,

47 DI. 62 (Reply in Further Support of Debtor’s Motion for Entry of an Order Enforcing the

Automatic Stay and Granting Related Relief) {27 citing to Hawkins I, 273 A.3d at 816-17).

19

making a proxy irrevocable does not say anything about the duration of the proxy.””

Duration means how long the proxy arrangement lasts.” The duration of a proxy, by itself,

says nothing about whether it is revocable.”

Moreover, a grantor can create a proxy of any length, but the default period under

Delaware law is three years.*’ While duration can be expressed in terms of days, months or

years, it can also be expressed or measured more generally, such as the proxy “shall expire

on the latest date permissible under such applicable law” or by events, such as the

satisfaction of a judgment.™

Here, the clearest expression of duration is in the One Page Proxy, which specifically

provides that the proxy “shall continue in full force and effect until” the debt is Paid in Full.

“Until” is a durational term. And the point in time when the secured obligations are paid in

full is a determinable event,** As it is undisputed that the Loan has not been Paid in Full,

the proxy was still in effect when Twin Brook exercised it.

48 Hawkins I, 273 A.3d at 816.

Td,

Id. at 817.

32 Hawkins I, 273 A.3d at 816.

533 Mainiero v. Microbyx Corp., 699 A.2d 320, 326 (Del. Ch. 1996) (recognizing a proxy that provides

that the agreement survives “until the judgement is satisfied.”).

4 Credit Agreement Section 1.1 at 21.

“Paid in Full”, “Pay in Full” or “Payment in Full” means, with respect to any

Obligations, (a) the payment in full in cash of all such Obligations (other than

contingent indemnification obligations to the extent no claim giving rise thereto has

been asserted), (b) the termination or expiration of all of the Revolving Loan

Commitments and (c) in connection with the termination or expiration of the

Revolving Loan Commitment, either (i) the cancellation and return to Agent of all

20

Debtor argues that Twin Brook cannot rely on the One Page Proxy because it did not

specifically reference it in the Proxy Notice. This argument flies against the principal that I

interpret the documents as a whole. The One Page Proxy, which clearly references both the

Guarantee and Collateral Agreement and the Credit Agreement is part and parcel of the

Loan documentation and the pledge of the Pledged Stock. Moreover, the capitalized

language in Section 7.1 quoted above also contains the durational language “until” payment

in full of Debtor’s obligations, with the language qualifying both the irrevocability of the

proxy and its validity (i.e., its binding effect). Read as a whole, therefore, the plain

language of the proxy extends the term of the proxy to the time when the “secured

obligations are paid in full.”

This conclusion is also consistent with the entire thrust of this commercial

transaction, which is that the Collateral, including the Pledged Equity, secures Debtor’s

repayment obligations. Prior to an Event of Default, Debtor remains the master of its fate,

entitled to both vote its stock and receive the economic benefit of ownership. Once an

Event of Default occurs, however, Twin Brook is entitied to protect its loan position, by,

among other things, providing notice to Debtor that Debtor’s ability to vote the Pledged.

Equity and receive distributions no longer exists. Debtor can avoid Twin Brook’s exercise

of remedies by curing any default (such that there is not a continuing default) or can pay the

obligations in full. But, it did neither prior to the Proxy Notice.

Letters of Credit or (ii) the cash collateralization of all Letters of Credit (in an amount

equal to one hundred and three percent (103%) of the Stated Amount of such Letters

of Credit) in a manner reasonably acceptable to Agent.

5 Valid means “legally sufficient; binding.” Valid, Black’s Law Dictionary (11th ed, 2019).

21

The default provision of 8 Del.C. § 212(b) is overcome; the proxy provides for a

different (and, as it turns out, longer) period.”

(c) Actions by written consent

Next, Debtor argues that if the court credits the durational language in the One Page

Proxy to conclude that the proxy had not expired prior to its exercise, the court may not

then look to the appointment language in the Guarantee and Collateral Agreement to

permit action by written consent. Debtor maintains that the proxy appointment in the

Guarantee and Collateral Agreement is separate and distinct from the One Page Proxy and

that the One Page Proxy does not allow actions by written consent. Twin Brook counters

that the One Page Proxy is to be read together with the Guarantee and Collateral

Agreement, and that, even standing alone, the One Page Proxy enabled Twin Brook to act

by written consent.”’

I do not agree with Twin Brook that the One Page Proxy, standing alone, provides

that the Agent may act by written consent. The One Page Proxy provides, in relevant part:

Subject in each case to the limitations set forth in the Guarantee and Collateral

Agreement (referred to below), (ij) the undersigned hereby irrevocable

designates and appoints Twin Brook Capital Partners, LLC as administrative

agent for certain secured parties (in such capacity, the “Agent”) to represent it

at all annual and special meetings of the holders of the Equity Interests (as

defined in the Guarantee and Collateral Agreement defined below) of

COMMUNITY INVESTORS, INC., a Delaware corporation (the

Company”), and (ii) the undersigned hereby authorizes and empowers Agent, to vote

any and all Equity Interests owned by the undersigned or standing in its name, and do

all things which the undersigned might do if present and acting itself.

(Emphasis added.)

56 See Mainiero, 699 A.2d at 325 (refusing to recognize as valid a proxy that, by its terms, expired

prior to the record date.)

5? Twin Brook Objection at 19 (“each Standalone Proxy went so far as to separate out into two

distinctly labelled clauses the independent rights of Agent to (i) represent the Debtor and other

holders of Pledged Equity at shareholder meetings AND (ii) vote any and all Pledged Equity owned

by the Debtor or other Loan Parties, including by written consent.”).

22

Twin Brook argues that the italicized language is not confined to actions at an annual or

special meeting, but can include written consents. Such an interpretation is a strained.

reading of this language. Indeed, the natural reading of the One Page Proxy is that it is

intended to be used at meetings of stockholders as it specifically provides that Agent may do

all things which the grantor could do if present at a shareholder meeting. ‘This “short form”

proxy is exactly the type of uncomplicated document an inspector of elections could easily

interpret to determine who is entitled to vote at a shareholder meeting™ and, as explained

supra, this was contemplated in the Guarantee and Collateral Agreement.

This conclusion, however, is not fatal. As I have already ruled, the One Page Proxy,

while a separate document is not to be read in isolation from the Guarantee and Collateral

Agreement. Further, it is not a limitation on the appointment of Twin Brook as attorney-in-

fact and proxy in the Guarantee and Collateral Agreement. It is simply another

manifestation of the proxy.

Several sections of the Guarantee and Collateral Agreement provide that Twin

Brook may exercise its proxy rights by way of written consent:

6.3 Investment Property.

(b) ‘If an Event of Default shall occur and be continuing, (a) the

Agent shall have the right to. . . (ii) exercise .. . any other rights, privileges or

options pertaining to such Investment Property as if it were the absolute owner

thereof (. . . and including with respect to the Pledged Equity, giving or

withholding written consents of stockholders, partners or members, calling

special meetings of stockholders, partners or members and voting at such

meetings) and otherwise act with respect to the Investment Property as if Agent

were the outright owner thereof... and (b) the Agent shall have the right,

substantially concurrently with notice to the applicable Grantor, to .. . Gi)

58 See e.g., Crown EMAK, 992 A.2d at 395; Mainero, 699 A.2d at 327 (“Neither election inspectors nor

corporate boards should be required to scrutinize additional documents offered in support of proxies.

23

exercise, or permit its nominee to exercise, all voting and other rights pertaining

to such Investment Property as a holder of such Investment Property, with full

power of substitution to do so.”

7.1 The Agent’s Appointment as Attorney-in-Fact, etc.

(a) Each Grantor hereby irrevocably constitutes and appoints the

Agent and any officer or agent thereof. . . to do any or all of the following, in

each case, with respect to the Collateral:

(v)...(4 take all such other actions with respect to Investment

Property authorized under Section 6.3 or 6.7 of this Agreement or otherwise

authorized by this Agreement or the other Loan Documents; and.

(vi)... (8) vote any right or interest with respect to any Investment

Property;™

... The Agent, as proxy, will be empowered and may exercise the irrevocable

proxy to vote the Investment Property at any and all times, including but not

limited to, at any meeting of shareholders, partners or members, as the case

may be, however called, and at any adjournment thereof, or in any action by

written consent, and may waive any notice otherwise required in connection

therewith.®

The Proxy Notice accurately referenced the above sections and attached resolutions

amending the constituent documents and appointing new directors. Assuming, therefore,

that these actions were required to be taken prepetition to remove the voting rights from the

property of the estate, Twin Brook’s Actions were properly taken.

Guarantee and Collateral Agreement Section 6.3(b).

69 Guarantee and Collateral Agreement Section 7.1(a)(v), (vi) at 25.

61 Guarantee and Collateral Agreement Section 7.1(a) at 26.

24

Debtor’s argument on 8§ 362(a)(3) and (a)(4) depends on the contention that Twin

Brook did not properly exercise its proxy. As, I have concluded to the contrary, this is a

further reason to find no violation of the stay. □

B. Twin Brook has not violated § 362(a)(6).

Next, Debtor relies on 11 U.S.C. § 362(a)(6) to show a stay violation. This

subsection prohibits “any act to collect, assess or recover a claim against the debtor that

arose before the commencement of the case.” Section 362’s application can be broad and

“prohibits any action that amounts to pressure on a debtor to pay a debt subject to the

automatic stay, even if there is no direct demand for payment.”® Typical scenarios that

® This conclusion is also consistent with rulings made by other courts upholding the prepetition

exercise of proxy rights in various contexts. See In re Tominaga, 325 B.R. 653 (Bankr. M.D. Fila.

2005) (reviewing the operative agreement and relevant state law and determining that, upon default,

lender was entitled to vote shares of stock; therefore prepetition corporate resolutions replacing

directors were valid and debtor was not entitled to a ruling preventing newly appointed directors

from acting as such nor to resume control of corporate entities.); In re Lake County Grapevine Nursery

Operations, 441 B.R. 653, 655 (Bankr. N.D. Cal. 2010) (recognizing that “[t]he issue here is whether

a pledge of an equity interest is selfexecuting as to voting rights or whether state law regarding

formal transfer of voting rights must be followed [and i]n the absence of a specific state law requiring

further proceedings to obtain the voting rights, courts generally conclude that the occurrence of a

default is sufficient to trigger the transfer of voting rights to the pledgee.”). See also In re Town Center

Flats, LLC, 855 F.3d 721 (6th Cir. 2017) (Prepetition, debtor “irrevocably, absolutely and.

unconditionally” transferred its right to rent as security for the repayment of a loan. The court held

that the rents were not property of the estate because Michigan “treat[s] a completed assignment of

rents as a change of ownership and the assignor of those rents does not retain residual property rights

in the assigned rents” even though under the agreement the assignor had the ability to cure a default

and start collecting rents again. id. at 727. In so holding the Court of Appeals recognized the policy

concern that “excluding the assigned rents from the estate would effectively foreclose Chapter 11

relief for companies like [the debtor] that own a single property and receive their sole stream of

revenue from rents of that property. [citation omitted]. We recognize the concern of [debtor]—and.

the bankruptcy court—that single-asset real estate entities may have limited options under Chapter

11 in this situation. Michigan law, however, is clear on the matter and governs despite other policy

concerns.”). Jd. at 728.

83 In re Malloy, 572 B.R. 551, 556 (Bankr. E.D. Pa. 2017).

25

judges opine on include letters or phone calls to debtors,” payroll deductions, garnishments,

setoff and withholding student transcripts.

Debtor argues Twin Brook is refusing to stop collection efforts because Twin Brook

continues to exercise control over Debtor's corporate governance rights in Community

Investors and the Indirect Subsidiaries and refuses to reverse its prepetition actions and

return control of corporate governance to Debtor. Debtor argues that Twin Brook is

required to take affirmative action post-bankruptcy “to stop its collection efforts, dismantle

the Twin Brook Board and return control of the operating subsidiaries to the Debtor.”®’

When pressed at argument for specific actions that Twin Brook is taking post-petition to

collect its debt, Debtor’s counsel said Twin Brook is talking to the board® and it is blocking

6 The legislative history of § 362 states: “[p]aragraph (6) prevents creditors from attempting in any

way to collect a prepetition debt. Creditors in consumer cases occasionally telephone debtors to

encourage repayment in spite of bankruptcy. ... This provision prevents evasion of the purpose of

the bankruptcy laws by sophisticated creditors.” H.R. Rep. No. 95-595, at 392. See 3 Collier on

Bankruptcy 4] 362.03 (16th 2023).

65 3 Collier on Bankruptcy { 362.03[8][a] (16th 2023). One judge in this district has opined that a

violation of subsection (a)(6) requires a post-petition affirmative act against property of the

estate. Pardo v. Nylcare Health Plans, Inc. (In re APF Co.), 274 B.R. 408, 416 (Bankr. D, Del. 2001).

Motion to Enforce the Automatic Stay { 33.

8? Motion to Enforce the Automatic Stay 441.

68 Feb, 22, 2023 Hr’g Tr. 25:5-19,

MR. GLENN: Maybe it did; maybe it didn’t. I don't think it matters because the

automatic stay analysis is: Are they doing something, are they acting or are they

exercising control —

THE COURT: Who is the “they”?

MR. GLENN: Twin Brook.

THE COURT: Okay. And what is Twin Brook doing today?

MR. GLENN: They’re talking to the board, they’re talking to the management every

single day.

THE COURT: They can’t talk - a creditor can’t talk -- if a creditor talks to

management, is that a violation of the stay?

MR, GLENN: If it’s an act to control. And that's the whole point. Okay.

26

Debtor from governing its subsidiaries by refusing to permit Debtor to change the board.”

Debtor’s real grievance is that it disagrees with the direction the new board is taking and its

day-to-day decisions,

Twin Brook responds that § 362(a)(6) requires a post-petition affirmative act and that

Twin Brook’s refusal to rescind its prepetition actions cannot be a violation of the stay.

Twin Brook further asserts that Debtor cannot point to any affirmative act, including any

post-petition collection efforts, taken by Twin Brook to collect on its prepetition debt. Twin

Brook argues that the Board, once in place at Community Investors, is independent and

performing its duties as a board.

Community Investors also weighed in on the Motion to Enforce the Automatic Stay

on its own behalf and on behalf of the Indirect Subsidiaries.” Conamunity Investors

reminds the parties and the court that neither it nor the Indirect Subsidiaries are part of this

® Feb. 22, 2023 Hr’g Tr. 29:13-25; 30:16-21.

THE COURT: Tell me again what's the violation of the stay. What actions is Twin

Brook taking today, not what they did pre-bankruptcy -- would you agree with me that

actions they took pre-bankruptcy, Twin Brook took prebankruptcy, are not violations

of the stay?

MR. GLENN: By definition, I have to.

THE COURT: Okay. So what actions -- and you can go to your car example. I’ve got

Denby-Peterson open in front of me. What’s the action that -- to put in action,

exercise, (0 put in action, What is the action that Twin Brook is taking today that

violates the stay.

MR. GLENN: They are blocking us from exercising control over the board.

THE COURT: So the action that Twin Brook is taking that’s a violation of the stay,

give that to me again.

MR. GLENN: They are blocking our ability to govern the company by changing the

board, controlling management, and all of the other perquisites of being a shareholder.

70 T).1. 44, (Response of Community Investors, Inc. and Certain of its Subsidiaries to Debtor’s

Motion for Entry of an Order Enforcing the Automatic Stay and Granting Related Relief).

27

bankruptcy case and that CII’s sole asset is its direct ownership interest of 100% of the stock

of Community Investors. It also asserts that neither Community Investors nor any of its

management are subject to the automatic stay.”

While it is fair to say, as Debtor does, that Twin Brook’s Actions were an attempt to

collect or recover on its Loan,” those actions happened pre-bankruptcy. As discussed

above, pre-bankruptcy Debtor appointed Twin Brook as its attorney-in-fact and proxy and

the Proxy Notice solidified Twin Brook’s ability to exercise the proxy. As of the petition

date, therefore, Debtor did not have the right to vote the Pledged Equity.

In arguing that Debtor is currently being deprived of its right to manage/govern

Community Investors and the Indirect Subsidiaries, Debtor misunderstands its rights as a

stockholder of a Delaware corporation. The Delaware General Corporation Law has

placed the authority to manage a corporation’s day-to-day operations in the hands of

directors while reserving for stockholders “the more elemental but remote power to elect

directors, to alter and repeal bylaws, and to vote upon the most fundamental of corporate

Id, at 4 (citing Equity Broad. Corp. v. Shubert (In re Winstar Commc'ns, Inc.), 284 B.R. 40, 51

(Bankr. D. Del. 2002) (holding that a lawsuit against a non-debtor subsidiary does not violate the

automatic stay, even if such lawsuit may impact the value of the stock that the parent-debtor owns,

as it does not “alter the Bankruptcy estate's right, liabilities, options or freedom of action” and that

“ownership of all of the outstanding stock of [the subsidiary] by the [parent-debtor] does not confer

jurisdiction on the Bankruptcy Court to decide disputes involving [the subsidiary’s] assets.”); Kreisler

y. Goldberg, 478 F.3d 209, 211 n.1, 215 (4th Cir. 2007) (holding that where a debtor-parent owns all

of the shares of a non-debtor, the property of the non-debtor subsidiary is not property of the estate);

In re Calvert, 135 B.R. 398, 402 (Bankr. S.D. Cal. 1991) (holding that a debtor’s non-debtor

subsidiary is a separate legal entity that may “act through its duly constituted board and officers,

even though those actions may have an effect on the value of shares of stock held by the estates of

debtors... .[therefore,] the automatic stay does not apply to actions of the board of the [subsidiary].

2.2”).

Tn re Marvel Entertainment Group, Inc., 209 B.R. 832, 838-39 (D. Del. 1997) (discussing the

difference between stockholders exercising their corporate governance rights, which persist in

bankruptcy cases, and creditors gaining control of a debtor's estate through the exercise of proxies).

28

transactions ....”” Itis through their voting rights, not the mere fact of stock ownership,

that stockholders have a say in a corporation’s management. Ifa corporation seeks to

change the balance between directors and stockholders, it may do so in its charter.”

Here, Debtor gave away its right to vote the Pledged Equity, and with it the right to

choose the directors of Community Investors (and the Indirect Subsidiaries). Although

3 Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate & Commercial Practice in the Delaware

Court of Chancery § 11.01 (2d ed. 2022) (citations omitted). As the authors explain:

Coursing near the center of many of the great controversies that shape the law of

corporate governance is an unrelenting tension between the respective spheres of

influence of stockholders and directors. Arising from each stockholder’s equity

investment in the enterprise is the understandable desire to influence the corporate

policy so as to ensure the protection and enhancement of that investment. Yet

considerations of practical efficiency at the heart of the corporate concept itself dictate

the need for centralized decision making. The power to manage the collective capital

investment for the common good is therefore routinely vested in the board. When

disagreements arise between these two constituencies, it becomes the task of the

corporate law to resolve them. That resolution is not to be based upon the Court’s

assessment as to the substantive policy that best serves the corporation’s business

interests, for that is a task for which the courts are ill-equipped. The judicial function

is instead to ascertain that point on the decisional continuum at which the power of

the investor must yield to the managerial prerogative of the board.

The Delaware General Corporation Law, the statutory spine of Delaware’s vast

body of corporate jurisprudence, has sought to strike an appropriate balance in this

regard by expressly vesting in the board of directors the authority to manage the daily

business and affairs of the corporation, while reserving to the stockholders the more

elemental power to elect directors, to alter and repeal bylaws, and to approve or

disapprove the most fundamental of corporate transactions, such as mergers, sales of

substantially all of the corporation’s assets, charter amendments, and

dissolutions. Moreover, it provides the entity with the flexibility to alter this

presumptive balance of power through the inclusion of charter provisions that enhance

the influence of the stockholders over corporate strategy, whether by expanding the

roster of matters and transactions for which their approval is required, or by hiking the

percentage of approving votes necessary to confer that approval, or by subjecting the

board’s power to specified internal checks and balances.

Id.

29

Twin Brook allowed CII to vote the Pledged Equity while it was not in default, the Proxy

Notice, sent pre-bankruptcy, withdrew that permission.”

During colloquy with the court, counsel for CII argued that there is a fundamental

difference between a debtor owning shares of stock in a publicly traded company and

owning the equity of a wholly owned subsidiary. Counsel points out the practical impact of

100% ownership on the ability to set management priorities. While I am not insensitive to

the difference, CII points to no provision of the Delaware General Corporation Law that

makes this distinction in the rights of stockholders. Nor has CII pointed to any provision of

Community Investors’ charter that gives it more rights as a stockholder to control the day-

to-day operations of its subsidiary. Accordingly, CII has no direct management rights.

What CII does have is the value of its equity in Community Investors. It still owns

the stock and has all rights attendant to ownership (except the ones it gave away), which

may include, for example, the ability to sell the stock or otherwise dispose of it. As the

stockholder, it may also be owed fiduciary duties by the directors of Community Investors,

which, if breached, may give rise to claims.”

% To the extent Debtor implicitly argues that simply owning the stock as of the petition date of

necessity means the right to vote it and thus influence or control management, Debtor is wrong. As

discussed previously, Delaware law recognizes that the right to vote the stock may be separated from

the economic interest in the stock. Hawkins IT, 289 A.3d at 663 (describing “the fundamental nature

of a proxy as an instrument that divides the economic rights and voting rights that attach to share

ownership.”).

% 1 make no findings or conclusions of law as to whether these duties exist and if so whether they

have been waived.

30

Conclusion ,

The purpose behind § 362, generally, is to maintain the status quo at the time of the

filing of the bankruptcy case.” Twin Brook’s Actions were taken pre-bankruptcy, not post-

bankruptcy. Here, the status quo at the time of the filing of the case is maintained by

denying the Motion to Enforce the Automatic Stay.

Il. Motion to Dismiss

Twin Brook moved to dismiss CIl’s bankruptcy case asserting it was filed in bad

faith. The parties’ briefing addresses the traditional factors courts in this circuit and district

use to examine that question, including (1) whether the petition serves a valid bankruptcy

purpose, e.g., by preserving a going concern or maximizing the value of the debtor’s estate,

and (2) whether the petition is filed to obtain a tactical litigation advantage.”” The parties

also briefed the Primestone factors.”

Based on my denial of the Motion to Enforce and my determinations that Twin

Brook properly exercised its authority as proxy and that the Proxy Notice ended Debtor's

ability to vote the Pledged Equity, I am tempted to dismiss the case for the simple reason

that CII cannot obtain the relief that it sought by filing the petition. As counsel for CIT

APF, 274 B.R. at 417 (creditor who refused to turnover funds seized prepetition did not violate the

automatic stay as “these creditors are in effect complying with the spirit of the § 362 freeze by

maintaining the seized property in the status it enjoyed pre-petition”).

8 In ve Integrated Telecom Express, Inc., 384 F.3d 108, 119-20 Gd Cir. 2004).

78 Ty re Primestone, 272 B.R. 554, 557 (D. Del. 2002). These factors include: “a. Single asset case; b.

Few unsecured creditors; c. No ongoing business or employees; d. Petition filed on the eve of

foreclosure; e. Two party dispute which can be resolved in pending state court action; f. No cash or

income; g. No pressure from non-moving creditors; h. Previous bankruptcy petition; i. Prepetition

conduct was improper; j. No possibility of reorganization; k. Debtor formed immediately

prepetition; 1. Debtor filed solely to create automatic stay; and m. Subjective intent of the debtor.”

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explained, CII filed the bankruptcy case to obtain a ruling from this court that it, and not

Twin Brook, can control the fate of how Community Investors and the Indirect Subsidiaries

are restructured.” In order to do that, CII needed me to rule that it, and not Twin Brook,

has the right to choose and/or replace the directors at Community Investors and the

Indirect Subsidiaries.

But, the parties agreed to leave open the Contested Issues, which include (at least)

the equitable estoppel and turnover arguments (see supra n. 4). While I am skeptical based

on a review of the filings that Debtor will be successful in pressing these arguments,

skepticism cannot replace evidence. Accordingly, I will hold in abeyance my ruling on the

Motion to Dismiss and will instead hold a status conference to discuss with the parties the

appropriate path forward.

A i é

OPE OE 8 6 Ag Pee bg bp if for

Dated: April 12, 2023 oe VEEL RLAAES Abd. LIE i

“Laurie Selber Silverstein

United States Bankruptcy Judge

8 Feb, 22 Hr’g Tr. 21:21-25.

MR, GLENN: --... And what the [Debtor-appointed former] directors of the company decided

was that the company was in need of restructuring. And so, ultimately, if we had known what

[Twin Brook was] going to do, then the likely outcome would have been we would have filed all

the cases before the Court. And that's really what we're here about is who controls whether the

subsidiaries -- how the subsidiaries are restructured, what happens in that restructuring. And

that's what was taken away, and that's why the automatic stay is so important going forward.

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