As Judge Shelley C. Chapman noted in a recent decision in the Southern District bankruptcy case of Innkeepers USA Trust, it is “Bankruptcy 101″ that a corporate debtor and its board of directors owe fiduciary duties to the debtor’s creditors to maximize the value of the estate.1 Judge Chapman emphasized this fundamental principle in a decision to derail Innkeepers’ pre-arranged bankruptcy plan in September 2010 because the debtors could not demonstrate that the plan was the product of a fair process that satisfied the fiduciary duties owed to their creditors.

Shortly before filing for chapter 11 protection, Innkeepers negotiated the terms of a chapter 11 plan under which Lehman ALI Inc., one of Innkeepers’ prospective DIP lenders and one of its major secured creditors, would receive 100 percent equity in the reorganized debtors in satisfaction of Lehman’s claims. Innkeepers also entered into a Plan Support Agreement that, subject to bankruptcy court approval after the petition date, committed Innkeepers to pursue and prosecute only the pre-arranged plan and prevented Innkeepers from seeking other competitive offers for the enterprise. The terms also included a variety of “Termination Events”—some resulting from circumstances out of the debtors’ control—the occurrence of which would permit Lehman to walk away from the plan and terminate the debtors’ use of its cash collateral.

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