Bankruptcy law

Reggie McFlintock is deeply divided about what to do. A year ag0 he was alast-rising star in the electronics industry when he was offered the job of CEO of XKX Capital. XKX is a large publicly owned consumer electronics company that survived the brutal shakeout of 2008, but only by a hair. He knew there was a serious risk that XKX was beyond saving, so he asked for a $2 million signing bonus and a $500,000 salary with big performance incentives added. The XKX board was deeply divided by his demand.

Bill Finley, a nonmanagement board member, said, "Given a little time to get our new products to market, this company will be worth easily $150 million but Reggie is the only guy who can do it." However, Ethel Cinchley, another independent director, thought such compensation for a CEO of a deeply troubled company made no sense and that the company should accept a recent offer from Maximum Cap, Inc. of $50 million for all its

assets, "which would pay all our debts and leave something for the share-holders." Bill carried the day, and Reggie got the job. Ethel and her supporters resigned. Now, a year later, they both appear to have been right. The first of the new products has gone to market and is doing very, very well. On the other hand, overall revenue is down and losses are mounting. It is not clear if the company is solvent on a balance sheet basis, although it is paying its bills.

Recently, Maximum has made a new offer of $20 million for all the XKX assets, tying the lower price to the continued decline in XKX's financials. The $20 million would pay all creditors in full but the shareholders would get nothing. Maximum also promised to take over Reggie's contract and make him the head of its new XKX division, although Reggie notes that Maximum executives don't seem to have much job security. Bill Finley is firmly opposed to the offer, telling Reggie that a turnaround is just ahead,

"although we on the board will support whatever decision you finally make, even though it will be a terrible disappointment to the shareholders if you sell and you will be giving up a lot personally under your contract incen-tives." Reggie agrees there is a good chance of recovery, but XKX's bank lenders are pressing him hard to accept the deal so they will be paid off. Because of revenue problems, XKX might miss a payment and face default anytime in the next six months, likely forcing the company to go into Chapter 11 to hold off the banks and other creditors.

Reggie got a call this morning from the lawyer for the bank lenders emphasizing his fiduciary duty to creditors and urging him "not to take any stupid risks when you've got $20 million on the table in front of you." Now Reggie has called you as the company's outside counsel. He wants to know what legal considerations should affect his decision. Especially, he wants you to explain to him whose interests he is supposed to put first. 503(c), 548(a)(1), 1121(d)(2).