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Bankruptcy Keyed to Bussel, 12th Ed.
In re SI Restructuring, Inc.
Citation:
532 F.3d 355 (2008)Facts
John and Jeffrey Wooley were officers, directors, and the largest shareholders of Schlotzsky’s, Inc. In 2003, facing severe cash flow problems, they made two loans to the corporation: an April loan for $1 million and a November loan for $2.5 million. Both loans were secured by the company’s royalty streams from franchisees, intellectual property rights, and other intangible assets. The April loan was approved by the audit committee and board of directors as a related-party transaction and disclosed in SEC filings. The November loan was similarly approved by the board and an independent audit committee. As part of the November loan package, the Wooleys also secured their pre-existing personal guarantees of $4.3 million of company debt with the same collateral. In 2004, the Wooleys were removed as officers and resigned as directors. When Schlotzsky’s filed for bankruptcy in August 2004, the Wooleys filed secured claims relating to their loans. The committee of unsecured creditors challenged their secured status through an adversary proceeding. The bankruptcy court found that the Wooleys engaged in inequitable conduct regarding the November loan by presenting it to the board as the only option at the “eleventh hour” and by securing their pre-existing contingent liability on personal guarantees, which the court deemed an unfair advantage.
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