| February 2007 issue: Washington Hot News Private Tax Collections Still an Issue According to Taxpayer Advocate Nina Olson, private debt collectors may have a place in collecting delinquent tax debts... Your Name Here! The Bankruptcy Section is looking for volunteers to write a Case Analysis for an upcoming addition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although you can use your discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions -- especially those interpreting BAPCPA's amendments to the Code. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive here. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. CLLA 205 N. Michigan, Suite 2212, Phone: 312-240-1400 Newsletter design by: |
Sua SponteIvan J. Reich Normally I don’t write about the law in my monthly Sua Sponte column, but a recent decision out of the United States Supreme Court this last week caught my eye. The case, Marrama v. Citizens Bank of Massachusetts, __ S. Ct. __, 2007 WL 517340 (Feb. 21, 2007), on its face arises out of the context of a Debtor’s right to convert their Chapter 7 case to Chapter 13. However, the issues raised, and the manner in which the Supreme Court reached its 5-4 decision, has implications far broader than the facts of the case suggest, and should be looked at closely by bankruptcy practicioners and bankruptcy courts as providing a basis to fashion all sorts of relief on principles of equity. Case AnalysisPaula Lucas Chapter 11 pre-plan settlement distribution plan compliance with Code most important factor under 9019. Whether a pre-plan settlement's distribution plan complies with the Bankruptcy Code's priority scheme is the most important factor for a bankruptcy court to consider in approving a Rule 9019. That factor is "vital," and in most cases "dispositive." Where a lender's liens are contested, SPM does not apply, and "gifting" involves different considerations. The case is remanded for further consideration by the Bankruptcy Court as to why, if at all, deviation form the absolute priority rule is warranted. In re Iridium Operating LLC 2007 U.S. App. LEXIS 5134 (2nd Cir. Mar. 6, 2007) Case Law UpdateAbraham Brustein Commercial Tort Claims; Be Careful - One of the significant changes to secured transactions which went into effect with the adoption of Revised Article 9, effective in many jurisdictions on July 1, 2001, is the introduction of a newly defined species of collateral; the commercial tort claim. Section 9-102(a)(13) defines a commercial tort claim as any claim arising in tort which is held by an organization (i.e. a person other than an individual) or held by an individual, provided that the claim arose out of the individual’s business or profession and does not include damages for death or personal injury. Prior to the revision, the issue of whether a claim or cause of action fell within the secured party’s collateral pool was primarily a question of whether the claim was assignable by the owner/debtor. For instance, some jurisdictions prohibit the assignment of personal injury tort claims on public policy grounds. 77th Chicago MeetingApril 19th – 22nd CLLA Annual Breakfast and Education Programming Preview - NCBJ 2007We are delighted to feature Dave Barry as our breakfast speaker at the 2007 19th Annual CLLA Breakfast Dave Barry is a humor columnist. For 25 years he was a syndicated columnist whose work appeared in more than 500 newspapers, including the Miami Herald (since 1983) in the United States and abroad. In 1988 he won the Pulitzer Prize for Commentary specifically for his columns in the category of Distinguished Social Commentary. Many people are still trying to figure out how this happened. He writes about issues ranging from the international economy to exploding toilets. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteNormally I don’t write about the law in my monthly Sua Sponte column, but a recent decision out of the United States Supreme Court this last week caught my eye. The case, Marrama v. Citizens Bank of Massachusetts, __ S. Ct. __, 2007 WL 517340 (Feb. 21, 2007), on its face arises out of the context of a Debtor’s right to convert their Chapter 7 case to Chapter 13. However, the issues raised, and the manner in which the Supreme Court reached its 5-4 decision, has implications far broader than the facts of the case suggest, and should be looked at closely by bankruptcy practicioners and bankruptcy courts as providing a basis to fashion all sorts of relief on principles of equity. The Supreme Court, relying on principles of equity and the Courts power under 11 U.S.C. §105(a) , has for the first time created a common law “bad faith” exception to a chapter 7 debtor’s statutorily based “absolute right” to convert his or her case to chapter 13 (or 11 or 12). Section §706 of the Bankruptcy Code, clearly provides that “[t]he debtor may convert a case under this chapter to a case under chapter 11, 12 or 13 of this title at any time, if the case has not been converted under §1112, 1208 or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.” 11 U.S.C. §706(a). However, the right is limited by the following: “Notwithstanding any other provision of [§706], a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.” Id. at §706(d). It is this author’s opinion that the Supreme Court in attempting to punish dishonest debtors, has greatly expanded the equitable powers of bankruptcy courts everywhere, in broadening the use of §105(a). By using principles of equity to fly in the face of clear statutory language under §706 affording a debtor what had been heretofore an absolute right to convert, the Supreme Court may have opened the flood gates for bankruptcy courts to fashion equitable remedies in all manner of contexts, even when language contrary to the relief sought to be imposed clearly limits or otherwise denies such relief. See you in Chicago. Ivan Ivan J. Reich Case Law UpdateChapter 11 pre-plan settlement distribution plan compliance with Code most important factor under 9019. Whether a pre-plan settlement's distribution plan complies with the Bankruptcy Code's priority scheme is the most important factor for a bankruptcy court to consider in approving a Rule 9019. That factor is "vital," and in most cases "dispositive." Where a lender's liens are contested, SPM does not apply, and "gifting" involves different considerations. The case is remanded for further consideration by the Bankruptcy Court as to why, if at all, deviation form the absolute priority rule is warranted. In re Iridium Operating LLC 2007 U.S. App. LEXIS 5134 (2nd Cir. Mar. 6, 2007) Section 546 amenable to “plain Language” analysis. In the context of the statute of limitations on avoiding powers in bankruptcy cases, section 546(a)(1)(B) of the Bankruptcy Code is amenable to a "plain language" analysis, and the circuit court declines to read section 701, relating to interim trustees, into the specific statutory provisions delineated therein. In re: Am. Pad & Paper Co. 2007 U.S. App. LEXIS 4792 (3rd Cir. Mar. 2, 2007) Trustee stipulation for waiver and release of claim affirmed. Trustee’s order, arising out of a bankrupt company's fraudulent transfer is affirmed where: 1) creditors only have standing to pursue claims for fraudulent conveyance during bankruptcy proceedings when a trustee or debtor in possession unjustifiably fails to pursue the claim, which was not the case here; 2) there is no breach of fiduciary duty to creditors that is not derivative of a breach to the corporation; and 3) fraudulent conveyance claims pursued against an alter ego or successor corporation are derivative in nature, and therefore the property of the bankruptcy estate In Re: Ontos, Inc. 2007 U.S. App. LEXIS 4663 (1st Cir. Mar. 1, 2007) No automatic conversion right. Where a Chapter 7 petition has been filed in bad faith, as is the case where the debtor concealed assets, there is no automatic right to convert to Chapter 13. Marrama v. Citizens bank of Massachusetts 2007 U.S. LEXIS 2651 (S.Ct. Feb. 22,2007) Projected disposable income not to be based upon Form B22C. The court found that the income and expenses represented are to be calculated according to Schedules I and J, rather than by the outcome of Official Form B22C which is used to calculate "current monthly income." The Court reasoned that Congress intended the term "projected disposable income" for below-median income debtors to be forward-looking and reality-based and not grounded in blind adherence to any artificial formulation. In re. Kibbe CLICKHERE for case (1st Cir. BAP Feb. 22, 2007) Discharge exception does not apply. Reversal of bankruptcy court's determination that a judgment debt defendant owes plaintiff was not dischargeable in bankruptcy is affirmed. Since defendant did not obtain money, property, services, or an extension, renewal, or refinancing of credit via her fraud on plaintiff, the exception to discharge does not apply. Nunnery v. Rountree 2007 U.S. App. LEXIS 4258 (4th Cir. Feb. 27, 2007) Software-provider may qualify as bankruptcy petition preparer. In an appeal arising from an adversary proceeding initiated by the U.S. Trustee in a bankruptcy case, a judgment against a seller of web-based software that prepares bankruptcy petitions is affirmed where the bankruptcy appellate panel correctly found that the seller had committed fraudulent, unfair, or deceptive conduct, and had engaged in the unauthorized practice of law. In a question of first impression in the Ninth Circuit, a software-provider may qualify as a bankruptcy petition preparer under 11 U.S.C. section 110(a)(1). In re. Reynoso 2007 U.S. App. LEXIS 4256 (9th Cir. Feb. 27 Single exemption to be shared by domestic partners. Registrants under California’s statutory scheme defining the economic rights and liabilities of qualifying domestic partners are subject to the same rule as are married persons: that is, that a single exemption must be shared between them In re. Rabin CLICKHERE for case (9th Cir. BAP Feb. 27, 2007)
Income received prior to the filing of a bankruptcy petition is not included as part of bankruptcy estate. As such, no person may be convicted of violating 18 U.S.C. Section 152(1), for fraudulent concealment of estate property, for failing to disclose such income. US v. Mitchell CLICKHERE for case (8th Cir. Feb. 6, 2007) Specific intent required under 18 U.S.C. Sec. 157. The crime of bankruptcy fraud under 18 U.S.C. section 157 requires a specific intent to defraud an identifiable victim or class of victims of the identified fraudulent scheme. Defendant’s conviction and sentence for bankruptcy fraud is reversed as the evidence presented was insufficient to sustain the verdict US v. Milwit CLICKHERE for case (9th Cir. Feb 6. 2007) Paula Lucas Case AnalysisCommercial Tort Claims; Be Careful One of the significant changes to secured transactions which went into effect with the adoption of Revised Article 9, effective in many jurisdictions on July 1, 2001, is the introduction of a newly defined species of collateral; the commercial tort claim. Section 9-102(a)(13) defines a commercial tort claim as any claim arising in tort which is held by an organization (i.e. a person other than an individual) or held by an individual, provided that the claim arose out of the individual’s business or profession and does not include damages for death or personal injury. Prior to the revision, the issue of whether a claim or cause of action fell within the secured party’s collateral pool was primarily a question of whether the claim was assignable by the owner/debtor. For instance, some jurisdictions prohibit the assignment of personal injury tort claims on public policy grounds. Clearly, commercial tort claims can form a significant and valuable part of the collateral pool securing an obligation. However, practitioners must take particular care in understanding how a security interest in a commercial tort claim is effectively created and perfected and how to realize the benefits of this species of collateral. The starting point in effectively dealing with a commercial tort claim is the understanding that a commercial tort claim is not a subset of general intangibles. Section 9-102(a)(42) expressly excludes commercial tort claims from the definition of general intangible. However, a “payment intangible”, also a newly defined species of collateral (Section 9-102(a)(61)), is a subset of general intangible. Prior to settlement or judgment, a claim or cause of action is a commercial tort claim, not a general intangible. Upon settlement or judgment, the right to payment becomes a payment intangible. It is no longer a commercial tort claim. In documenting a secured transaction, that distinction must be kept in mind. The steps which must be taken to effectively create and enforce a security interest in commercial tort claims differs from the requirements which are applicable to general intangibles. In drafting transaction documents, it is critical that the secured party pay particular attention to Sections 9-108 and 9-204 of the UCC. While Section 9-108(a) provides that it is generally permissible to describe collateral in general terms (e.g. goods, inventory, general intangibles, etc.), there is an exception for commercial tort claims. However, Section 9-108(e) creates an exception to the general rule applicable to commercial tort claims. Use of the term “commercial tort claims” or “all commercial tort claims” in the description of the collateral in a security agreement is legally insufficient. Section 9-204, which addresses after-acquired collateral clauses, also treats commercial tort claims differently from other types of collateral. While the general rule, provided for in Subsection (a) validates the use of an after-acquired property clause in describing collateral, there is an exception for commercial tort claims. “A security interest does not attach under a term constituting an after-acquired property clause to... a commercial tort claim” (Section 9-204(b)(2)). A security interest in a commercial tort claim can only become enforceable where the claim is in existence as of the date of the grant of the security interest and the security agreement describes the claim with more particularity than a general reference to the type of collateral. As noted in Official Comment (5) to Section 9-108, “Subsection (e) does not require a description to be specific. For example, a description such as ‘all tort claims arising out of the explosion of debtor’s factory’ would suffice....” An after-acquired clause will not bring a commercial tort claim which comes into the existence after the execution of the initial security agreement into the collateral pool. Rather, an amendment to the security agreement would be needed to capture an after-acquired commercial tort claim. The careful draftsman will advise secured lenders to engage in some investigation to determine whether any commercial tort claims exist as of the funding date. Further, a cautious lender would periodically update its file as to the existence of commercial tort claims because after acquired property clauses are ineffective to cause a security interest to attach to a claim which arises after the original grant. Certainly, an amendment to the security agreement would have to be executed in those instances in which a commercial tort claim comes into existence subsequent to the grant of the original security interest. A recent bankruptcy court decision exemplifies how i attention to detail can result in an ineffective or unenforceable lien on a commercial tort claim. In re Sarah Michaels, Inc., 2007 WL 103000 (Bankr. N.D. Ill. Jan. 11, 2007). Prior to entering into the secured lending transaction with the bank (“Lender”), CPC (“Borrower”), a creditor of the bankruptcy debtor, had experienced property damage and business interruption damages due to an electrical fire at one of its plants. After adoption of the revised UCC, the Lender prepared an amended security agreement which, in the definition of collateral, included “commercial tort claims listed on Schedule B hereto”. However, no claims were listed on Schedule B. Approximately three months before the execution of the amended loan and security agreement, the Borrower had filed suit against its insurance broker claiming negligence in failing to obtain appropriate insurance coverage for the premises at which the fire damage occurred (“Broker Suit”). The Chapter 7 Trustee for the estate of Sarah Michaels, Inc. filed an action to recover a voidable preference against the Borrower and obtained a default judgment in excess of $2.1 million dollars. The Trustee served a citation to discover assets under applicable Illinois law upon the Borrower, thereby fixing a judgment lien under applicable Illinois law. Shortly thereafter, (i) the Broker Suit settled for $100,000.00. and (ii) the Borrower filed suit against the utility company seeking damages in excess of $2,000,000.00, claiming negligence in maintaining the power lines which caused property damage and business interruption(“Utility Suit”). The Utility Suit remains pending. About a month later the Lender, having validly declared a default, conducted a UCC sale under Section 9-610 to Acquisition Corp, which was set up for the purpose of acquiring the assets of the Borrower at the code sale. The Acquisition Corp took title to the Borrower’s assets free and clear of the liens which were subordinate to the security interest of the secured party, but not free and clear of liens of a higher priority. See, Section 9-617. The Sarah
Michaels court had to determine whether the Trustee or the Acquisition
Corp. had priority in the $100, 000 recovered in the Broker Suit and the
amounts to be recovered in the Utility Suit, In order to make that determination,
the court had to evaluate relative rights of the (i) bankruptcy trustee,
as the holder of a perfected judgment lien; (ii) the Lender, as the
holder of a security interest; and (iii) the Acquisition Corp as purchaser
of the assets at a properly conducted UCC sale. To the extent the interest
of the Trustee in the amounts recovered or to be recovered in the two litigations
was subordinate to the interest of the Lender, the Acquisition Corp acquired
the right to those recoveries free and clear of the claims of the trustee. The court rejected the Acquisition Corp’s contention that the amount recovered in the Broker Suit was proceeds of the damaged tangible personal property on which Lender’s security interest attached prior to the date the Trustee obtained her judgment lien. The Broker Suit was not based upon conduct which caused damage to the collateral. It was not recovery of an insurance payment for damage to the collateral. Rather, the suit against the insurance broker was professional negligence claim; a commercial tort claim. The analysis on how to properly categorize the claims which were the subject of the Utility Suit was somewhat more complex. The court determined that to the extent the Borrower was seeking compensation from the utility for damages to its tangible personal property directly caused by the utility’s negligence, that component of the claim was the proceeds of the tangible personal property within the Lender’s collateral pool. The security interest of het Lender had priority over the judgment lien of the Trustee. Therefore, that recovery was purchased by ther Acquisition Corp free of the interest of the Trustee. However, the remainder of the claim against the utility, which sought recovery of business interruption damages caused by the utility’s negligence was a commercial tort claim, not proceeds from the loss or destruction of tangible personal property. The Acquisition Corp urged the court to look to parol evidence to establish that the parties actually intended to grant a security interest in the two specific commercial tort claims by invoking the common law “composite documents rule”. Relying upon In re Outboard Marine Corp., 300 B.R. 308 (Bankr. N.D. Ill. 2003 and In re Sabol, 337 B.R. 195 (Bankr. C.D. Ill. 2006). the acquisition company argued that the court could look at the Lender’s loan file for evidence of a sufficient grant of a security interest. Finding that the composite documents rule is generally applied where there is no security agreement, the court declined to permit use of the composite documents doctrine in this case because a formal, express security agreement had been executed by the parties. The court declined to look beyond the security agreement because that document appeared to be complete and unambiguous. In a final effort to claim an interest in a portion of the settlement proceeds of the Broker Suit, the Acquisition Corp claimed that the Lender’s perfected security interest in payment intangibles gave it priority over the Trustee’s judgment lien. The court acknowledged that a payment intangible is a subset of general intangibles and that the settlement of the Broker Suit had the effect of converting the collateral at issue from a commercial tor claim to a payment intangible. However, this circumstance did not materially benefit the Acquisition Corp. The substance of the Broker Suit was a chose in action to which the judgment lien attached pursuant to the Illinois statute governing enforcement of judgments (735 ILCS 5/2-1402(m)). The Trustee’s judgment lien came into being and was perfected before the settlement was reached. Therefore, the Trustee’s judgment lien attached to the claims which are the subject of the two lawsuits prior to the payment intangible coming into existence. By the time the Lender’s security interest attached to the payment intangible, the security interest was subordinate to the judgment lien. For the past six years, since the promulgation of revised Article 9, some lenders may have nearly added “commercial tort claims” to the laundry list of collateral, without taking the extra steps required to obtain the benefits of that new species of collateral. However, use of the phrase “commercial tort claims”, without more, does not effectively create a security interest in the debtor’s commercial tort claims. Instead, such claims will be outside of the collateral pool until they are settled, at which time the lender may be able to claim a security interest in the right to settlemen payment as a “payment intangible”. A prudent lender may consider the following:
The Sarah Michaels decision is a wake up call to lenders to revisit the issue of how to effectively obtain a security interest in a valuable class of collateral. The protective steps are relatively easy, even for relatively small lenders. All references are to revised Article 9 of the UCC. Abraham Brustein 77th Chicago MeetingThe Chicago Meeting is almost here… April 19th – 22nd Don’t Miss Out …
2007 DePaul Symposium
77th Chicago Meeting
Speakers:
Moderator: Honorable Judith K. Fitzgerald, U.S. Bankruptcy Court, Western District, PA 1:30 p.m. – 3:30 p.m. • In the creation of these security interests • With other legally protected property rights and • Liens, that can impair or eliminate the priority of a secured lender’s security interest. Conflicting liens are not always immediately apparent from the public records used to determine the perfection and priority of a security interest. Panelists will examine the various legal issues confronting secured creditors competing for priority in the assertion of lien rights and security interests in personal property under the UCC and other state and federal laws. Speakers:
Co-Sponsored by the Creditors’ Rights Section Saturday April 21st Speakers:
For pricing, registration and more information please go to www.clla.org or call the CLLA office at (800)978.CLLA
CLLA Annual Breakfast and Education Programming Preview - NCBJ 2007CLLA Annual Breakfast and Education
Dave Barry is a humor columnist. For 25 years he was a syndicated columnist whose work appeared in more than 500 newspapers, including the Miami Herald (since 1983) in the United States and abroad. In 1988 he won the Pulitzer Prize for Commentary specifically for his columns in the category of Distinguished Social Commentary. Many people are still trying to figure out how this happened. He writes about issues ranging from the international economy to exploding toilets. Taking prosaic ideas to incongruous extremes, he writes things like: "With the federal deficit running at several hundred billion dollars per year, Congress passed a transportation bill that, according to news reports, includes $30 million for a 'hightech' moving sidewalk in Altoona, which happens to be in the district of Rep. 'Bud' Shuster, the ranking Republican on the surface transportation subcommittee. The Pulitzer Prize judges gave Barry the award for commentary in 1988 "for his consistently effective use of humor as a device for presenting fresh insights into serious concerns." 22nd Annual Educational Program Preemption and Federalism Issues in Bankruptcy Panelists:
Statutory Construction and Section 105 Uses (and Misuses) Panelists:
Constitutional Issues Posed by BAPCPA Panelists:
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We are delighted
to feature Dave
Barry as our breakfast speaker at the 2007
19th Annual CLLA Breakfast.