Georgia Bankruptcy Blog

Cagle's Farms filed Chapter 11 Petitions in the Northern District of Georgia on October 19, 2011.  The related cases are In re Cagle's, Inc. (dba Integrated Poultry Company), Ch. 11 Case No. 11-80202 and In re Cagle's Farms, Inc., Ch. 11 Case No. 11-80203.  The cases are jointly administered under Cagle's Inc.  Click here for the skeletal Chapter 11 Petition and the 30 Largest Unsecured Creditors.

The Atlanta Journal has an article about the case, and the declining poultry business in Georgia:

It was the latest bad sign for the industry, worth $4.2 billion to Georgia farmers. Production prices have increased as prices for chicken have dropped. As Georgia producers lower their output to get in balance with demand, employment in processing plants has dropped.

Cagle's, which began 60 years ago as a chicken shop in downtown Atlanta, listed $92 million in assets and $62.9 million in debts in papers filed Wednesday in the U.S. Bankruptcy Court in the Northern District of Georgia. Chapter 11 bankruptcy protects a company's assets while a business continues to operate and work out payments with creditors.

It is the 21st largest producer in the U.S., according to the U.S. Poultry and Egg Association.

One creditor has already filed a Notice of Reclamation to recover distiller's grain received by Cagle's just prior to the filing.  Creditors and other parties who provided goods to the Debtor just prior to the filing of the Chapter 11 petition need to act quickly to serve notices of reclamation in order to receive the goods or a priority claim.  More information on reclamation is found in this prior post.

In CML V, LLC v. Bax, No. 735, 2010 (Del. Supr. Sept. 2, 2011) (click here for .pdf of opinion), the Delaware Supreme Court addressed the questions of whether a creditor can file a derivative action against a limited liability company.   Plaintiff CML asserted the following derivative claims against the present and former members of JetDirect Aviation Holdings, LLC:

(1) the individual defendants breached their duty of care by approving the late 2007 acquisitions (of other entities) without informing themselves of JetDirect’s true financial condition,

(2) the individual defendants acted in bad faith by consciously failing to implement and monitor an adequate system of internal controls and—with respect to one specific individual defendant—hiding critical information from the board, and

(3) certain individual defendants breached their duty of loyalty by benefitting from self interested asset sales upon JetDirect’s asset liquidation in 2008.

 The defendant managers sought dismissal of the derivative claims on the grounds that CML, as a creditor, did not have standing.  The Court of Chancery dismissed the claims and CML appealed.  On appeal, the Delaware Supreme Court affirmed.

The central provision at issue is 6 Del. C. § 18-1002, entitled “Proper plaintiff.” That provision reads:

In a derivative action, the plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action and:
(1)  At the time of the transaction of which the plaintiff complains;
or
(2)  The plaintiff’s status as a member or an assignee of a limited liability company interest had devolved upon the plaintiff by operation of law or pursuant to the terms of a limited liability company agreement from a person who was a member or an assignee of a limited liability company interest at the time of the transaction.

This provision is unambiguous on its face; therefore, its plain language controls...

Because section 18-1002 is unambiguous, is susceptible of only one reasonable interpretation, and does not yield an absurd or unreasonable result, we apply its plain language. Only LLC members or assignees of LLC interests have derivative standing to sue on behalf of an LLC—creditors do not. Therefore, section 18-1002 precludes CML from suing derivatively, and the Vice Chancellor properly granted the motion to dismiss.

The Delaware Court was not persuaded that LLCs should be compared with corporations:

CML contends that this result is absurd because, given the policy underlying derivative standing, there should be no difference between LLCs and corporations. CML argues that unless the Court of Chancery can vest creditors of insolvent LLCs with derivative standing in equity, there will exist no stakeholders with incentive to enforce fiduciary duties through legal action. CML may be correct that in insolvency creditors become the ultimate risk bearers in LLCs. But, the General Assembly is free to elect a statutory limitation on derivative standing for LLCs that is different than that for corporations, and thereby preclude creditors from attaining standing. The General Assembly is well suited to make that policy choice and we must honor that choice. In this respect, it is hardly absurd for the General Assembly to design a system promoting maximum business entity diversity. Ultimately, LLCs and corporations are different; investors can choose to invest in an LLC, which offers one bundle of rights, or in a corporation, which offers an entirely separate bundle of rights.

Professor Larry Ribstein has a thorough analysis of the case at his Truth on the Market Blog. 

How does this case apply in Georgia, if at all, since Georgia and most other states look to decisions of Delaware Courts for corporate matters?  The rule is essentially the same in Georgia. O.C.G.A. § 14-11-801  (2011) provides the following:

A member may commence a derivative action in the right of the limited liability company to recover a judgment in its favor if all of the following conditions are met:

(1) Either management of the limited liability company is vested in a manager or managers who have the sole authority to cause the limited liability company to sue in its own right or management of the limited liability company is vested in the members but the plaintiff does not have the authority to cause the limited liability company to sue in its own right under the provisions of the articles of organization or a written operating agreement;

(2) The plaintiff has made written demand on those managers or those members with such authority requesting that such managers or such members take suitable action;

(3) Ninety days have expired from the date the demand was made unless the member has earlier been notified that the demand has been rejected by the limited liability company or unless irreparable injury to the limited liability company would result by waiting for the expiration of the 90 day period;

(4) The plaintiff (A) is a member of the limited liability company at the time of bringing the action, and (B) was a member of the limited liability company at the time of the transaction of which he or she complains, or his or her status as a member of the limited liability company has devolved upon him or her by operation of law from a person who was a member at the time of the transaction; and

(5) The plaintiff fairly and adequately represents the interests of the limited liability company in enforcing the right of the limited liability company.

(emphasis added).  See also Ledford v. Smith, 274 Ga. App. 714 (Ga. Ct. App. 2005) (company that was not member did not have derivative standing).

The Seventh Circuit Court of Appeals has issued the first published Circuit Court opinion on the question of whether trademarks are assignable in a Bankruptcy case.  The opinion, authored by Judge Posner, is in the case of In re XMH Corp., Nos. 10-2596, 10-2597, 10-2598, 10-2599,  2011 U.S. App. LEXIS 15372 (7th Cir. July 26, 2011) (click here for .pdf of opinion). 

The holding of the case is not a surprise:

Section 365(c)(1) of the Bankruptcy Code limits the assignment of an executory contract of the debtor if “applicable law” authorizes the other party to the contract to refuse to accept performance from an assignee “whether or not such contract . . . prohibits or restricts assignment.”  ...[T]rademark law is applicable law.

...

None of this matters, though, because as far as we’ve been able to determine, the universal rule is that trademark licenses are not assignable in the absence of a clause expressly authorizing assignment. Miller v. Glenn Miller Productions, Inc., 454 F.3d 975, 988 (9th Cir. 2006) (per curiam); In re N.C.P. Marketing Group, Inc., 337 B.R. 230, 235-36 (D. Nev. 2005); 3 McCarthy on Trademarks § 18:43, pp. 18-92 to 18-93 (4th ed. 2010). “The purpose of a trademark, after all, is to identify a good or service to the consumer, and identity implies consistency and a correlative duty to make sure that the good or service really is of consistent quality, i.e., really is the same good or service. If the owner of the trademark has broken off business relations with a licensee he cannot ensure the continued quality of the (ex-)licensee’s operation, whose continued use of the trademark is therefore a violation of trademark law.” Gorenstein Enterprises, Inc. v. Quality Care USA, Inc., 874 F.2d 431, 435 (7th Cir. 1989).

Bob Eisenbach has written an excellent summary of the opinion on In the (Red) Business Bankruptcy Blog, as has Pamela Chestek in the Property, intangible Blog.

It is not uncommon for financially distressed businesses to get behind on payroll taxes, especially when the company does not have a payroll service that handles the payment of all taxes and automatically deducts the full amount from the company's bank accounts.  Chapter 11 cases often have significant unpaid payroll taxes scheduled as a priority claim, after using the funds to pay other bills to stay afloat.

What happens when a company goes out of business (in or out of bankruptcy) and leaves behind unpaid federal withholding taxes (commpnly known as "trust fund taxes")?  The Fourth Circuit addressed that question in an opinion entered Wednesday.  See Erwin v. United States, No. 08-1564 (4th Cir. January 13, 2010) (click here for opinion). 

Mack Sperling has summarized this opinion in his North Carolina Business Litigation Blog.   He summarizes the situation where individuals can become liable for unpaid taxes:

• Employers are required to withhold social security and federal excise taxes from employee wages.
• Those withheld funds are held in trust for the United States, and are often referred to as "trust fund taxes."
• Once in the hands of the employer, those funds are held for the exclusive use of the government, not the employer.
• Even if the employer needs the withheld tax money to pay suppliers and vendors to keep the business operating as a going concern, it can't, because "the government cannot be made an unwilling partner in a floundering business."
• The Internal Revenue Code imposes personal liability for payroll tax on the officers and agents of an employer who are (1) responsible for "the employer's decisions regarding withholding and payment of the taxes" and (2) who willfully fail to see that the taxes are paid. 

You do not have to be an owner, officer or director to be a "responsible person" who has personal liability for these taxes.  If you have sufficient control over the company's payroll, which creditors to pay or not pay, the day-to-day business affairs and who to hire and fire, you could be liable. 

Click here to read Mack's detailed analysis of this opinion and individual liability for taxes.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.