| January 2009 issue: 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: |
Are You Attending The Spring/Chicago Meeting?
Are you currently working on a case with a novel or difficult issue that you wish you were able to bounce off of someone? Have you ever wondered, can I ask the Bankruptcy Court for that kind of relief and if so, how do I go about doing it? Can a debtor really do that? Or such similar questions? Well, here is your opportunity. On April 17th, at 3:00 p.m., at the CLLA Spring Meeting/National Convention in Chicago, a panel of bankruptcy experts comprised of Hon. Eugene Wedoff, Robert Bernstein, Harry Greenfield and Ronald Peterson, will answer your bankruptcy-related questions at a program entitled Ask the Expert. If you submit a question in advance, there is a strong likelihood that the panel will address it during the program. Whether you are planning to attend the convention or not, we encourage your questions. Please submit your questions by email to the following address: jschatzman@schatzmanlaw.com When submitting your question(s), please indicate whether you plan on attending the Convention. If you will not be attending the Convention, your question may still be addressed by the panel, and if so, we will provide you with a copy of their response. Bankruptcy Section News Update
Steve Ungerman, Section Chair, made the following appointments:
Click here to read more about the Bankruptcy Section’s legislative work. Discussion about the cramdown issue can be found in the CLLA forums.
Audio recordings of teleseminars from Fall ’08 and conference materials from the CLLA education events at the National Conference of Bankruptcy Judges are now available for purchase online! The teleseminars include:
Please go to www.clla.org/shop to purchase these and have them shipped to your business or home. If you would like to listen to them online for CLE credit, please click here.
The CLLA is pleased to share with you information regarding the American College of Bankruptcy's program titled "Chapter 11 in the Current Meltdown: Does it Work?" to take place at Boston College of Law on April 17. The program features Professor Douglas Baird, one of CLLA's speakers at the 2009 NCBJ.
Sua Sponte Steve Ungerman On March 16-19, 2009, the Commercial Law League of America and its Bankruptcy Section will hold their Annual Meetings in Chicago along with the 79th Annual Midwest Meeting. The Seventh Annual DePaul Business & Commercial Law Journal Symposium will be held on Thursday, April 16th. The Symposium is planned by the Student Editors of the Journal with the support of the Bankruptcy Section’s Symposium Committee. The program is titled: Into the Sunset: Bankruptcy as Scriptwriter of the Scriptwriter of the De’nouement of Financial Distress. The three sessions are:
In addition at a Luncheon sponsored by Development Specialists, Inc. there will be a presentation titled: The Desperate Hours, Pro Bono Publico. The Symposium is an excellent venue to participate in a stimulating and thought-provoking CLE program. The Section would like to thank the Students and our Committee consisting of Paige Barr, Cathy Vance and Judge Judy Fitzgerald for their efforts in planning the Symposium. The Bankruptcy Section will sponsor four additional educational programs on Friday, April 17 and Saturday, April 18:
These programs are an easy way to earn CLE and to keep up-to-date in the bankruptcy arena. I hope to see many of our members at the DePaul Symposium and the 79th Chicago/Spring Meeting and the 115th National Convention on April 16-19th. From an educational and networking standpoint, it will be well worth your time. The Bankruptcy Section will have a Dinner on Thursday night, April 16, at Ditka’s in a private room after our Section Executive Council Meeting at 8:00PM. All Members and their guests are invited. Please respond to the E-mail invitation when you receive it. In addition to our Executive Council Meetings on Thursday at 6:30PM after the Welcoming Reception and on Sunday at 9:00AM, our Legislative Committee, under the leadership of Peter Califano, will meet on Saturday morning. I encourage you to attend all the educational programs, meetings and our dinner on Thursday night. Case Analysis1In re Reilly, 534 F. 3d 173 (3rd Cir. 2008) The trustee for a Chapter 7 debtor sought to include business assets in the bankruptcy estate which the debtor exempted and which the trustee failed to object to in a timely manner. The trustee argued that he was not challenging the exemption of the assets but rather the value and therefore was not subject to the objection deadline of the Federal Rules of Bankruptcy Procedure 4003. The trustee's argument was based on Taylor v. Freeland & Kronz where the United States Supreme Court held that the entire value of an asset was exempted because the debtor stated that the value of the asset was unknown and that the trustee did not investigate this red flag and object to it in a timely manner. See 503 U.S. 638 (1992). The trustee argued that since Reilly's exemption was not challengeable on its face, the trustee should have the opportunity to challenge the value of the assets exempted even after the rule 4003 time limit. The Court of Appeals for the Third Circuit rejected the trustee's argument because the fact of the debtor's exemption should be reason to investigate the exemption further and in a timely manner. The court acknowledged that this encourages gamesmanship but believed there was enough protection for the trustee from bad faith under bankruptcy and criminal law. In re Schaeffer Salt Recovery, Inc., --- F.2d ---(3rd Cir. 2008) Attorneys for a mortgagor sought attorneys' fees as a sanction, under 28 U.S.C. § 1927, against the borrower's attorney for improperly filing bankruptcy to prevent foreclosure actions from proceeding In Mary Ann Pennsiero, Inc. v. Lingle the court held that "all motions requesting Rule 11 sanctions [must] be filed in the district court before the entry of final judgment" where the motions arise out of conduct occurring prior to the final judgment. 847 F. 2f 90 (3rd Cir. 1988). However, the Court of Appeals for the Third Circuit, based on a Tenth Circuit opinion, held that the Pennsiero's supervisory rule did not apply to § 1927 because it may only be apparent that the proceedings were unreasonable and vexatiously multiplied. In addition, the attorneys' fees cannot be determined until after the close of the litigation. See Vandeventer v. Wabash Nat'l Corp., 893 F. Supp. 2d 458, 460 (N.D. Ind. 1995). The court held that a bankruptcy court, although not listed in the definition of "court of the United States" under 28 U.S.C. § 451, is a "court of the United States" because it is a unit of the district court. A district court is listed under § 451. Because the court found that a bankruptcy court is a "court of the united states[,]" the court held the bankruptcy court had the authority to impose sanctions under § 1927. The court remanded the case to determine the appropriate sanctions to apply. SLW Capital, LLC, v. Mansaray-Ruffin, --- F.3d --- (3rd Cir. 2008) A Chapter 13 debtor argued that she invalidated a creditor's lien on her property by categorizing such a lien as unsecured in a reorganization plan. The debtor argued that the invalidation was effective even though the debtor did not initiate an adversary proceeding as required by the Federal Rules of Bankruptcy, because the plan was final. The Court of Appeals for the Third Circuit held that Rule 7001of the Federal Rules of Bankruptcy requires an adversary proceeding to invalidate a lien. The court distinguished the case at hand from Cen-Pen Corp. v. Hanson, where the court held that liens pass through bankruptcy unaffected unless the debtor takes an affirmative step. See 58 F. 3d 89, 92 (4th Cir. 1995). Without much discussion, the court held that a proof of claim was not an affirmative action observing there was no authority that a proof of claim is an affirmative action. The Debtor also unsuccessfully argued that the creditor's failure to respond to notices of the plan constituted a waiver of the procedure required under Rule 7001. The court was not willing to accept such a broad waiver of an important procedural rule. The court held that a failure to adhere to rule 7001 does not invalidate
the entire plan, just that the lien would pass through the bankruptcy unaffected. In re Paramenter, 527 F. 3d 606 (6th Cir. 2008) Ford, as an automobile lessor to a Chapter 13 debtor, moved to classify lease payments for a vehicle as an administrative expense. Ford had consented to the debtor's exclusion of the car payments from his plan. The Court of Appeals for the Sixth Circuit denied Ford's motion because under
res judicata and 11 U.S.C. § 1327(a) a debtor and creditor are bound
to a Chapter 13 plan once the plan is confirmed. Since the plan at
hand was confirmed, the court turned to the plan itself to determine if Ford
had any rights and it held that the plan did not provide Ford with any rights. The
court held that it was unable to modify the confirmed plan because the circumstances
under which 11 U.S.C. § 1329(a) authorizes amendment to a plan were
inapplicable. The court also stated that it would be unfair to other
creditors dealt with in the plan if Ford's rights were increased because
the other creditors would have expectations under the agreed upon plan. Phar-Mor, Inc., v. McKesson Corp., 534 F. 3d 502 (6th Cir. 2008) A Chapter 11 debtor sought to extinguish a vendor's administrative-expense priority on the vendor's reclamation claim. The debtor argued that when goods subject to reclamation are sold and the proceeds from such sale are used to satisfy another creditor's superior claim, the vendor no longer had a right to reclaim the goods and thereby did not satisfy 11 U.S.C. § 546 (c)(2) (pre BAPCPA). The Court of Appeals for the Sixth Circuit held that 11 U.S.C. § 546(c)(2) was satisfied because the goods in question were sold in the ordinary course of business, while debtor was insolvent, the vendor had a right to reclaim the goods under state law and the seller made a timely demand for reclamation. The debtor however argued further that the Sixth Circuit Bankruptcy Appellate Panel had extinguished the reclamation right in a situation similar to the one at hand. See In re Pittsburgh-Canfield Corp., 309 B.R. 277, 287 (6th Cir. BAP 2004). The court rejected this argument because "it would certainly be unjust to subject to the payment of the debts of their fraudulent vendee, goods [the vendee] had improperly obtained from [the aggrieved vendors], and which in equity, [the vendors] were entitled to reclaim." The court held that regardless of the sale, the vendor had a right to an administrative expense in lieu of reclamation because it had a right to reclaim the goods under state law. The court did not address UCC § 2 -702(3), which subjects the reclamation right to the rights of a buyer in the ordinary course and includes a secured creditor, and UCC §2-401(2) which provides for title to pass to the buyer on completion of delivery. Schultz v. United States, 529 F.3d 343 (6th Cir. 2008) The debtors (husband and wife who filed a joint Chapter 13 bankruptcy) challenged the constitutionality of the BAPCPA means test. They argued that because many of the calculations rely on state and county income calculations, "BAPCPA is not a 'uniform Law[] on the subject of Bankruptcies throughout the United States'" as required by U.S. CONST. art. 1, § 8, cl. 4. According to their argument, the classification scheme used to place a debtor above or below the median income level "violates the Bankruptcy Clause because it results in some debtors receiving different bankruptcy relief under federal law based solely upon [the] state or county [where they] reside." The court held that BAPCPA is uniform because "all debtors whose income is above the median family income are treated alike, as are all debtors whose income falls below." Thus, while there may be slight income-calculation variations amongst the states, the overall federal principles are uniform and apply equally to debtors throughout the United States. Further, the Bankruptcy Clause does not deny Congress the power to account for regional differences (like housing prices) when implementing laws, so slight differences are expected. Airadigm Commc'n v. FCC (In re Airadigm Commc'n Inc.), 519 F.3d 640 (7th Cir. 2008) Airadigm appealed the district court's decision that it had not properly dealt with the FCC's licenses in the original bankruptcy plan (filed in 1999). Airadigm argued that it dealt with the FCC's licenses because, after the FCC cancelled the licenses and filed an unsecured claim for $64.2 million, Airadigm laid out several contingencies to pay the unsecured claim. Airadigm's argument was predicated on the belief that the FCC validly cancelled the licenses, but in 2003, the U.S. Supreme Court held that the "FCC could not cancel a debtor's PCS licenses just because it had filed for bankruptcy." See NextWave Personal Commc'n., Inc. v. FCC, 537 U.S. 293 (2003). The court made three relevant holdings. First, the court held that because all of the parties believed the FCC licenses were cancelled during the first bankruptcy, Airadigm did not "exchange, extinguish, impair or otherwise impact" the licenses as required by § 1141(c). The plan only "dealt with" the licenses to the extent that the FCC would reinstate them. Thus, if the FCC never reinstated the licenses, the plan would never deal with them because Airadigm would not compensate the FCC. Second, the court held that "federal law precludes a private party from obtaining a superior interest to the FCC," therefore, state law will not govern because a hypothetical creditor could not have rights in the licenses that would be superior to the FCC's, and Airadigm could not avoid the FCC's interests in the licenses under § 544(a). Third, the court held that the FCC could not cancel the licenses solely because Airadigm did not pay its debt; the bankruptcy code prevails over FCC regulations and prohibits such actions. Thus, the Appeals Court for the Seventh Circuit affirmed the lower courts' decisions and approved Airadigm's second reorganization plan, which treated the FCC as a partially secured creditor. Zahn v. Fink, 526 F. 3d 1140 (8th Cir. 2008) A Chapter 13 debtor appealed the confirmation of her reorganization plan that the bankruptcy court forced her into accepting. The lower court rejected the debtor's initial plan because the plan did not include the debtor's husband's IRA income. The debtor was forced to include the income in an amended plan. The issue on appeal was whether the debtor had standing to appeal the confirmation of her own plan. The Court of Appeals for the Eighth Circuit held that the debtor was an aggrieved party because she was forced to amend her plan in order to prevent it from being dismissed. As the debtor was an aggrieved party she had standing to appeal her own amended plan. The court clarified that only the amended plan could be reviewed because it was a final order. The original plan that was rejected was not subject to appellate review because it was not a final order of the court. The case was remanded for review of the debtor's confirmed plan. Gordon v. Novastar Mortgage, Inc. (In re Hedrick) Gordon v. ABN Amro Mortgage Group. (In re Sharma), 524 F.3d 1175 (11th Cir. 2008) Under 11 U.S.C. § 547(b), a trustee for two separate Chapter 7 debtors, Hedrick and Sharma, sought to avoid refinanced security deeds in the debtors' property. The court considered each debtor's claim separately. In both cases, the refinancing lender paid off the existing loan and received a new security deed.
With respect to Hedrick, the trustee argued that although the closing of the refinancing occurred more than 90 days before bankruptcy, the transfer took place on the recording of the new security deed within the 90-day period under § 547(e)(2). The bankruptcy court applied state equitable subrogation law and held, inter alia, that the transfer of the security deed was made at the closing, which was outside the 90-day preference period. The Eleventh Circuit accepted the bankruptcy court determination but held further that under § 547(e)(1)(A) a transfer of real property occurs “when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee." In determining perfection under applicable law, the Court again looked to state law, which recognizes the principle of “inquiry notice.” Since the old security deed remained of record until after the recording of the new security deed, it put any purchaser from the debtor during that period on inquiry notice, which would have prevented such purchaser from acquiring rights superior to the refinancing lender. Thus, the court held that the new security deed was perfected at the time the new lender paid the previous lender at closing, which was outside of the 90 day window under § 547. Sharma Sharma differed from Hedrick because the closing took place within the 90-day preference period, so that the § 547(b) could apply even if the transfer took place on closing. The Court, however, considered whether the transfer fit within the §547(c)(1) exception for substantially contemporaneous exchanges. On this issue, the 1st and 6th Circuits applied a bright line rule imported from §547(e)(2). The Court rejected this view, holding that "substantially contemporaneous" is a flexible standard that "requires an examination of all the facts and circumstances." The court found that courts should, among other factors, consider the "objective reasonableness of the time taken to perfect the interest, the cause of any delay, and the motivations for it." Applying the law to Sharma's case, the court held that the creditor's exchange was "substantially contemporaneous" because the creditor perfected its interest without delay on the first business day after the federal rescission period for refinancing had ended. The court also found no evidence of bad faith on the creditor's part. 1Taken from the October 29, 2008 Teleseminar, “Bankruptcy Year-in-Review” materials. The presenters were:
With input from:
Materials Coordinator: Nissan Shah, Esq. Case Law UpdateMeghan Flesch Overbaugh v. Household Bank N.A. U.S. 2nd Court of Appeals In a bankruptcy action, district court's denial of plaintiffs' motion to reclassify a claim of defendant from secured to unsecured is affirmed where: 1) a Chapter 13 trustee has standing to object to a motion to reclassify a claim; and 2) plaintiffs' motion to reclassify defendant's secured claim was properly denied as defendant had perfected a purchase money security interest in the secured claim pursuant to the terms of New York's UCC. CIT Small Bus. Lending Corp. v. Kendrick U.S. 6th Circuit Court of Appeals In an action to avoid a mortgage as a preferential transfer, Defendant's appeal is dismissed for lack of jurisdiction, where the District Court had remanded the matter to the Bankruptcy Court to determine the preferential transfer issue and thus there was no final order. Ennis v. Green Tree Servicing, LLC U.S. 4th Circuit Court of Appeals On appeal from a sustained objection to a Chapter 13 bankruptcy plan, the Bankruptcy Court's order is reversed, where Debtors' mobile home was not "real property" under 11 U.S.C. section 1322(b)(2) and Creditor's secured claim on it thus could be modified. |