| July 2008 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: |
Sua SponteSteve Ungerman Our next major programs will take place at the National Conference of Bankruptcy
Judges in Scottsdale. On Thursday, September 25, 2008. We will have
our Annual CLLA Breakfast featuring Herb Cohen, Internationally Renowned
Negotiator and Author. In the afternoon we will present our 23rd Annual
Educational Program. We have various sponsorship opportunities available. The
sponsorships are an excellent way for you or your firm to obtain visibility
with bankruptcy and insolvency professionals and Judges and also help the
CLLA to provide outstanding educational programs for the bankruptcy community. Please
contact me or Meghan
Cook at the CLLA office for further information. Case AnalysisAlan C. Hochheiser and Staff Case Law UpdateMeghan Cook "[U]ndue hardship" determinations, whereby bankruptcy courts decide whether student loans qualify for discharge, can be ripe in a Chapter 13 case substantially in advance of plan completion. In the Matter of Coleman, 9th Circuit Court of Appeals, No. 06-16477, 8-1-08. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteSteve Ungerman Our next major programs will take place at the National Conference of Bankruptcy Judges in Scottsdale. On Thursday, September 25, 2008. We will have our Annual CLLA Breakfast featuring Herb Cohen, Internationally Renowned Negotiator and Author. In the afternoon we will present our 23rd Annual Educational Program. We have various sponsorship opportunities available. The sponsorships are an excellent way for you or your firm to obtain visibility with bankruptcy and insolvency professionals and Judges and also help the CLLA to provide outstanding educational programs for the bankruptcy community. Please contact me or Meghan Cook at the CLLA office for further information. At the Annual CLLA Breakfast we will present the 2008 Lawrence P. King Award for Excellence in Bankruptcy. Nominations were due August 1, 2008; the King Award Committee is now evaluating the candidates. The recipient will exemplify the best in scholarship, advocacy, judicial administration or legislative activities in bankruptcy. The recipient lives up to the standards set by Professor King during a life-time of devotion to the practice and practitioners of bankruptcy, making a lasting contribution to the improvement of commerce and to the fair and ethical treatment of debtors, creditors and the public at large. The award recognizes a career and not an event. The various committees of our Section are active and if you wish to serve on a committee, please contact me. Case AnalysisAlan C. Hochheiser and Staff Two Circuit Courts Join the Majority on Surrendering in Full Satisfaction Two Circuit Courts, the Fourth Circuit and the Tenth Circuit, recently issued rulings that debtors are not permitted to surrender vehicles in full satisfaction where the vehicles were purchased within 910 days of the bankruptcy filing. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), debtors are not permitted to cram down motor vehicle loans that were incurred within 910 days of the bankruptcy filing (the "hanging paragraph"). The provision removes these debts from bifurcation under 11 U.S.C. §506(a) and requires debtors to pay the full balance of the loan. The hanging paragraph did not address what happens to a deficiency balance if a debtor surrenders a vehicle purchased within 910 days of the bankruptcy filing. A majority of bankruptcy courts have ruled that removing the provisions of 11 U.S.C. §506(a) also removes a creditor’s right to collect a deficiency balance after the vehicle is sold. The Tenth Circuit, in In re: Ballard, 526 F3d 634 (10 Cir. 2008), and the Fourth Circuit, in Tidewater Finance Company v. Kenney, 2008 U.S. App. LEXIS 13377 (4th Cir. 2008) recently joined the growing number of circuit courts that are reaching the opposite conclusion. In both cases, the courts determined that 11 U.S.C. §506(a) is not the only source of recovery for a creditor’s deficiency balance. The Bankruptcy Code does not expressly disallow the recovery of an unsecured deficiency claim. The courts held that in the absence of a federal rule, state law and the underlying contract dictate whether a creditor may recover a deficiency balance. In both cases, state law and the underlying contracts between the debtors and creditors permitted the creditors to recover deficiency balances resulting after sale of the vehicle. The Fourth Circuit and Tenth Circuit join the Sixth, Seventh, Eighth, and Ninth Circuits in holding that the provisions of the hanging paragraph do not permit debtors to surrender vehicles in full satisfaction of the debt. The other five circuits have not issued rulings on this issue yet; however, a clear trend is emerging that surrender in full satisfaction is not an option for debtors under BAPCPA. Chapter 13 Plan May Not Invalidate a Mortgage Lien The Third Circuit has joined the Fourth, Sixth, Seventh, and Ninth Circuits and held that an adversary proceeding is mandatory to invalidate a mortgage lien. Due process concerns trump the finality of a confirmed Chapter 13 plan. In SLW Capital, LLC v. Janica Mansaray-Ruffin, 2008 U.S. App. LEXIS 13351; Bankr. L. Rep. (CCH) P81,265 (June 2008), the debtor listed SLW’s mortgage lien as "disputed" on her schedules and provided in her original plan that she would file an adversary proceeding to rescind or avoid the lien.(*) When SLW failed to file a claim, the debtor amended her plan to provide that she would file a claim on its behalf in the amount of $1,000, that upon confirmation the claim would be fixed as a $1,000 unsecured claim, and that upon discharge, the creditor would be bound to release its lien. The debtor proceeded to file a claim on the creditor’s behalf per the plan with the notation of "alleged mortgage-RESCINDED," and the plan was confirmed without objection. Post-confirmation, the creditor continued to send monthly statements to the debtor, and the debtor sent the creditor two letters stating it had an unsecured claim in the amount of $1,000. The creditor never objected to debtor’s proof of claim or filed one of its own, all the while having actual knowledge of the bankruptcy and plan. Creditor then filed an adversary proceeding under Bankr. Rule 7001(2) seeking to determine the secured status of its lien. Debtor filed a motion to dismiss claiming that the confirmation of the plan was the final determination of the status of the claim. The bankruptcy court denied the motion to dismiss and issued an order stating that the creditor’s lien is secured. The district court affirmed, and the debtor appealed to the Third Circuit. The Third Circuit affirmed both decisions. Invoking the venerable and oft-cited Long v. Bullard, 11 U.S. 617, 6 S. Ct. 917, 29 L. Ed. 1004 (1886), the court reiterated that liens pass through bankruptcy unaffected. The court discussed that Rule 7001(2) is the proper Rule to determine the validity of creditor’s lien and the general rule that confirmation of a plan is binding on the rights of the parties. However, a plan is not free to disregard the Bankruptcy Rules. While substantive rights are defined by the Bankruptcy Code, the process by which those rights are affected are defined in the Bankruptcy Rules. The Rules require an adversary be filed to determine the validity of a lien. Imbedded in the Rules is the constitutional requirement of due process and due process must be "appropriate to the case." (Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 313, 70 S.Ct. 652, 94 L. Ed. 865 (1950). Due process provides the procedural protections of a complaint and service of summons. Because a lien is a property right, the lienholder is due due process. A confirmation hearing does not provide due process "appropriate to the case" when the plan seeks to invalidate a lien. An objection to confirmation is considered a "contested matter" under Rule 9014 and does not provide the procedural protections of a complaint and summons. A lienholder does not waive its due process rights by failing to object to confirmation even with actual knowledge of the bankruptcy case. Due process rights trump the finality of confirmation. Therefore, because the debtor did not follow the Bankruptcy Rules in her attempt to invalidate the creditor’s lien, the creditor was deprived of due process, and the confirmation of the plan had no effect on the validity of the creditor’s lien. Note: The court distinguished this plan from plans having "line-stripping" or "cram-down" provisions. Valuation is the key issue in modifying these secured claims. Recent U.S. Supreme Court Ruling Affects Real Estate Transfers in Chapter 11 On June 16, 2008, The United States Supreme Court issued a ruling striking down the "stamp tax" exemption for asset transfers made prior to the confirmation of a Chapter 11 plan. This ruling directly impacts sales of assets, including real estate, made pursuant to 11 U.S.C. §363 and which are not explicitly made part of a confirmed Chapter 11 plan. Such sales will now be subject to state real estate transfer taxes. The Court in Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 128 S. Ct. 2326 (2008), held that 11 U.S.C. §1146(a), which provides a stamp tax exemption for any asset transfer under a plan confirmed under Chapter 11 of the Bankruptcy Code, does not apply to transfers made before a plan is actually confirmed by a court under Chapter 11. In Piccadilly, the Chapter 11 debtor sold substantially all of its assets to a third party purchaser for $80 million and the sale was confirmed by the Bankruptcy Court. One month later, the debtor filed its initial Chapter 11 plan and the state of Florida objected, claiming it was entitled to stamp taxes of $39,200 related to debtor’s transfer of assets. Debtor argued successfully to the Bankruptcy Court that, while the sale itself technically occurred prior to confirmation of the plan, the sale of Piccadilly’s assets was a transfer under a confirmed plan pursuant to 11 U.S.C. §1146(a), because the sale was necessary to consummate the plan itself. After unsuccessfully appealing the issue to the District Court and then the Eleventh Circuit Court of Appeals, the state of Florida appealed the matter to the United States Supreme Court, which sided with Florida and reversed the lower court’s ruling. Justice Thomas wrote the majority opinion and held that "the most natural reading of §1146(a)’s text, the provision’s placement within the Code, and the applicable substantive canons all lead to the same conclusion: Section 1146(a) affords a stamp-tax exemption only to transfers made pursuant to a Chapter 11 plan that has been confirmed. Because Piccadilly transferred its assets before its Chapter 11 plan was confirmed by the Bankruptcy Court, it may not rely on §1146(a) to avoid Florida’s stamp taxes." Accordingly, buyers and sellers of real estate and other assets through Chapter 11 would be wise to examine the tax implications of any proposed sale and should seek to include such transfers as part of a Chapter 11 plan if at all possible. Phar-Mor, Inc. v. McKesson Corporation, 2008 U.S. App. LEXIS 15176 (July 17, 2008 (6th Cir.)) The Sixth Circuit upheld the district court’s decision that a vendor’s administrative-expense priority on its reclamation claim is not extinguished when goods subject to the reclamation are sold and the proceeds are used to satisfy a secured creditor’s superior claim. Specifically, the Sixth Circuit upheld the denial of Phar-Mor’s request to reclassify the reclamation claims to general unsecured claims. During Phar-Mor’s bankruptcy proceeding, vendors were granted an administrative-expense priority claim pursuant to 11 U.S.C. § 546(c) (prior to the section being amended by BAPCPA). The issue before the Sixth Circuit was whether the vendor had a statutory or common-law right pursuant to Ohio law that would allow the vendor to reclaim the goods. If the Sixth Circuit is able to find that the vendor has a right to reclaim the goods and such right was denied, the Court can uphold the bankruptcy court’s obligation to grant the vendor a priority on its claim by way of the administrative-expense priority in the amount of the goods. In analyzing Ohio Rev. Code §1302.76, the Sixth Circuit found that the Ohio statute provided the vendor a right to reclaim the goods. However, Phar-Mor argued that the Ohio Revised Code does not provide the vendor with the "ability" to reclaim the goods. Without the ability to reclaim the goods, the Court can not hold that the vendor had a right to reclaim the goods under statutory law. While the Ohio Revised Code afforded a party the right to reclaim goods, the statute limited a party’s "ability" to reclaim the goods by stating that, "[t]he seller’s right to reclaim under division (B) of this section is subject to the rights of a buyer in ordinary course or other good faith purchaser or lien creditor under section 1302.44 of the Revised Code. " Phar-Mor argued that the vendor’s reclamation rights are "subject to" the DIP Lenders because the DIP Lenders were "good faith purchasers". Phar-Mor reasoned that because the vendor’s reclamation rights are subject to the DIP Lenders’ security interest and because Phar-Mor sold the reclamation goods to satisfy the secured claims, the vender was unable to reclaim goods. Continuing on it its reasoning, Phar-Mor argued that if the vender was unable to reclaim goods then the vendor was no longer able to have an administrative priority claim. The Sixth Circuit rejected such argument. "A priority in bankruptcy should not depend for its existence upon the contingency of whether specific assets are within the bankruptcy’s estate." Going further, the Sixth Circuit reiterated that, "[i]t 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." See In re Mel Golde Shoes, Inc., 403 F.2d 658, (6th Cir. Ky. 1968). In its opinion, the Court found the holdings like those in In re Dana Corp., 367 B.R. 409 (Bankr. S.D.N.Y. 2007) (analyzing Section 546 as amended by BAPCPA) and In re Dairy Mart Convenience Stores, Inc., 302 B.R. 128 (Bankr. S.D.N.Y. 2003) among others were "unavailing", "not practical" and "not compelling." Also, the court found In re Pittsburgh-Canfield Corp., 309 B.R. 277. 287 (B.A.P. 6th Cir. 2004) to be non-binding and non- persuasive. Thus, going forward the prior lien defense will be an issue in the Sixth Circuit.
* Prior to the filing of the Chapter 13 case, debtor, through counsel, sent a letter to the original lienholder claiming TILA violations. Case Law UpdateMeghan Cook "[U]ndue hardship" determinations, whereby bankruptcy courts decide whether student loans qualify for discharge, can be ripe in a Chapter 13 case substantially in advance of plan completion. In the Matter of Coleman, 9th Circuit Court of Appeals, No. 06-16477, 8-1-08. In a suit alleging fraud in a bankruptcy proceeding by co-owners of debtor's property, dismissal of claims is reversed where the bankruptcy court had subject-matter jurisdiction over the complaint, but erred in dismissing plaintiff-debtor's claims on various theories of preclusion. In re: Mullarkey, 3rd Circuit Court of Appeals, No. 05-4081, 05-4651, 7-31-08. In a dispute between competing bidders in the acquisition of debtor's production facilities during bankruptcy proceedings, an appeal from a protective order limiting the disclosure of the bidders' respective trade secrets during discovery is dismissed for lack of appellate jurisdiction where the order was neither final nor appealable under the limited scope of the collateral order doctrine. In re: Carco Elec., 3rd Circuit Court of Appeals, No. 07-1009, 7-29-2008. In an adversary proceeding brought by former debtors after a bankruptcy discharge claiming that defendant violated a discharge injunction via a state court action, an order sanctioning defendant and enjoining her from pursuing the state court litigation is reversed where neither the bankruptcy court's findings, nor the facts of record on which they are based, demonstrated that defendant's facially permissible actions violated the discharge injunction. In re: Paul, 10th Circuit Court of Appeals, No. 07-1395, 7-28-2008. Bankruptcy Section MembersThe Section is again calling for member pledges to be applied towards the CLLA programming at the National Conference of Bankruptcy Judges - to be held this year on September 25th in Scottsdale, AZ. This is a great way for you as a section member to make a contribution towards this outstanding programming while at the same time highlighting your firm. Sponsorships begin at a base commitment level of thirty-five ($50.00.) which includes a listing on the morning presentation screensaver.
Copyright © 2012 Commercial Law League Bankruptcy Section Except as otherwise provided, the CLLA Bankruptcy Section newsletter permits any individual or organization to photocopy any article, comment, note, or other piece in this publication, provided that: (1) copies are distributed at or below cost; (2) the author and the CLLA Bankruptcy Section seal are prominently identified on the first page; (3) proper notice of copyright is affixed to each copy; and (4) all other applicable laws and regulations are followed. The CLLA Bankruptcy Section reserves all other rights. |