| July 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: |
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Sua SponteDeborah K. Ebner THE CLLA IS OFF TO THE SUPREME COURT Last month I happily turned the spotlight on Peter Califano and our legislative committee. Just as noteworthy is our Amicus Committee whose efforts deserve special mention. For those of you who missed the year in review discussion, Milavetz, Gallop & Milavetz, P.A., v. U.S.A., --- F.3d --- (8th Cir. 2008), involves the following: Plaintiffs, a law firm and two of its clients, sought a declaratory judgment that attorneys and law firms did not fall within the term "debt relief agency[,]" and if they did, that 11.U.SC. §§ 526(a)(4), 528(a)(4) and (b)(2) are unconstitutional as applied to attorneys. The Court of Appeals for the Eighth Circuit referred to the definition of "debt relief agency" in 11 U.S.C. § 101 (12A) and the definitions of other terms therein to hold that Congress intended to include attorneys and law firms in “debt relief agency." The court based its holding on the fact that law firms and attorneys were not one of the five exclusions specifically listed §101(12). Furthermore, the court held that the use of "any person who provides bankruptcy assistance to an assisted person" in the definition is broad and sweeping enough to include law firms and attorneys. The plaintiffs argued that § 526(a)(4)'s prohibition on attorneys advising an assisted or prospective assisted person to incur more debt in contemplation of bankruptcy is unconstitutional as it violates the First Amendment. The court was not concerned with which standard of scrutiny applied because the language was "not narrowly tailored, nor necessarily narrowly limited, to restrict only that speech that the government ha[d] an interest in restricting." The language was too broad because it prevented attorneys from advising clients to take on debt to restructure and to avoid bankruptcy. The court held that § 526(a)(4) as applied to attorneys was unconstitutional because it was not narrowly tailored to prevent abuse of the bankruptcy system. The plaintiffs also argued that the disclosure requirements in § 528(a)(4) and (b)(2) regarding the required advertisement for bankruptcy relief assistance are unconstitutional because they compel speech in violation of the First Amendment. Sections 528(a)(4) and (b)(2) require debt relief agencies to include in advertisements a disclosure statement similar to: "we are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." The court held that since the purpose of § 528 is to prevent deceptive advertising, a rational basis test must be applied to determine the constitutionality of the section. The rational basis test requires the disclosure to be reasonably related to the government's interest in preventing the deception of consumer debtors. The court held that attorneys were only required to disclose in advertisements "somewhat more information than they might be otherwise inclined to present." Therefore, the court held that the statute was constitutional because the burden was small on the attorneys and the required statement prevented false advertising as it clarified what services were provided. Bill Schorling, who presented the Milavetz decision in our December 2008 year in review and who led the committee with the drafting of an Amicus in the United States Court of Appeals for the Eighth Circuit is presently preparing another Amicus on Milavetz to be submitted to the United States Supreme Court in September, subject to the approval of the National Government Affairs Committee and Board of Governors. In addition to recognizing a need to submit an Amicus in Milavetz, our committee also determined that In re Reilly, 534 F. 3d 173 (3rd Cir. 2008), also before the Supreme Court this term, is worthy of Amicus participation. The Reilly trustee sought to include business assets in the bankruptcy estate which the debtor exempted. 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. Our committee also acknowledges that the third Circuit decision invites gamesmanship. If the Third Circuit decision stands, more cases will be declared as “no asset” cases hence diminishing and even eliminating distributions to unsecured creditors. The League membership is largely representatives of unsecured creditors; our involvement supports our membership. We have offered to join the National Association of Bankruptcy Trustees with their Supreme Court Amicus Brief in support of the Chapter 7 Trustee. Finally, hats off to Manny Newberger of the Creditor Rights Section who has agreed to take the lead in writing an Amicus for the League in the sixth circuit case of Jerman vs. Carlisle, for which the Supreme Court also granted certiorari. The case involves the issue of whether the FDCPA’a bona fide error defense applies to mistakes of law. The issue was one of first impression in the Sixth Circuit; the Courts of the other circuits are split. Congratulations to our talented members! Thank you for your efforts! We do need more talent. Please call! Case Law AnalysisPeter Califano, Esq. Creditor Entitled to Enhanced Default Interest Rate in Bankruptcy Asset Sale BACKGROUND On August 13, 2004, General Electric Capital Corporation (“GECC”) and Future Media Productions, Inc. (“Debtor”) entered into a written Loan and Security Agreement (the "Agreement”) secured by all assets of the Debtor. The Agreement provided for of an additional 2% per annum of interest upon an occurrence of an event of default. Subsequently, an event of default occurred and therefore the Debtor’s outstanding obligation began to bear interest at the enhanced default rate. The Debtor eventually filed a voluntary bankruptcy petition for relief under Chapter 11 of the Bankruptcy Code. Thereafter, GECC and the Debtor entered into a stipulation for the Debtor’s use of cash collateral (the "Stipulation") for its post-petition operations while it prepared to auction off its remaining assets. The Official Committee of Unsecured Creditors (the "Committee”) objected to the Stipulation, and after a series of negotiations and hearings, the parties agreed to pay GECC's obligation in full (including the default rate of interest), without prejudice to the right to assert any objections at a later date. Subsequently, the Committee objected to the rate of interest that GECC was paid, and the Bankruptcy Court agreed with the Committee and ordered GECC to return to the Debtor the differential between the contractual and the default rate of interest.** DISCUSSION The case revolved around the interpretation of the rule stated in Entz-White Lumber and Supply Inc., 850 F.2d 1338 (9th Cir. 1988), that held an oversecured creditor was not entitled to interest at the default rate when its claim was paid in full pursuant to a Chapter 11 plan. Since the present case concerned an asset sale outside of a plan, the Ninth Circuit was unwilling to apply the Entz-White rule. The Ninth Circuit began its analysis by noting that the U.S. Supreme Court recently stated, “[c]reditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor’s obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code”. Travelers Casualty & Surety Company of America v. Pacific Gas & Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 1204-05, 167 L.Ed.2d 178 (2007). Thus, the default rate contained in the Agreement should be enforced subject only to the substantive law governing the Agreement, unless a provision of the Bankruptcy Code provided otherwise. Id., p. 973. In Entz-White, the court articulated such “qualifying or contrary provision” was contained in Section 1124(2)(A) of the Bankruptcy Code which authorizes the nullification of all consequences of a default through a plan of reorganization. Case law has interpreted this to eliminate provisions requiring the payment of higher interest penalties upon default. [Citation omitted]. However, the Ninth Circuit noted that Section 363 sales are not conducted under a plan of reorganization and therefore the rule articulated in Entz-White was inapplicable. The Court was unpersuaded by the Committee’s attempts to extend the Entz-White rule to Section 363 sales. However, the Ninth Circuit remanded the issue whether or not the default rate under the Agreement was enforceable under applicable non-bankruptcy law and rejected GECC's request to establish a “bright line rule” that a 2% default interest rate enhancement was "per se" reasonable. Id. at p. 975.*** COMMENT GECC received approximately $330,000 in additional interest (contractual and default interest) on its claim in the Debtor’s bankruptcy case. In hindsight, from the Debtor’s perspective, it may well have been worth the additional time and effort to conduct its asset sale pursuant to a plan instead of as a Section 363 sale. Additionally, in light of this case, creditors ought to consider adding language for reasonable enhanced default interest in their loan agreements. This provision should be enforceable if the debtor liquidates through a Section 363 sale. Given the growing difficulty in securing debtor-in-possession financing, it is expected that more and more debtors will be using this procedure in their Chapter 11 cases.
Case Law UpdateAvailable at: www.lp.findlaw.com U.S. 6th Circuit Court of Appeals In an appeal from the Bankruptcy Court's order converting Debtor's bankruptcy case from Chapter 11 to Chapter 7 nunc pro tunc, the order is affirmed, where the equitable powers granted to the Bankruptcy Court under 11 U.S.C. section 105(a) include the power to enter such a conversion order. U.S. 7th Circuit Court of Appeals Bankruptcy court judgment sustaining the objection to creditor Avnet, Inc.'s untimely claim against the estate of MarchFIRST in a bankruptcy proceeding is affirmed where: 1) the court properly rejected Avnet's argument that MarchFIRST should have accepted the faxed submission of its proof of claim forms, as the bankruptcy notice was sufficiently clear that submission by mail or by hand were the only permissible methods of transmittal; and 2) the court did not abuse its discretion in declining to deem Avnet's claim timely under Federal Rules of Bankruptcy Procedure 5005(c), as Avnet did not offer convincing justification or explanation for its untimely filing. Tech. Lending Ptnrs. LLC v. San Patricio Cty. Cmty. Action Agency U.S. 5th Circuit Court of Appeals District court's dismissal of creditors' appeal of a bankruptcy court's approval of a settlement order is reversed where the district court improperly applied the doctrine of equitable mootness because the relief requested would not affect the success of the plan or the rights of parties not before the court. U.S. 10th Circuit Court of Appeals In an appeal from a bankruptcy court's disallowance of creditor's claim in a Chapter 13 bankruptcy case, Bankruptcy Appellate Panel's judgment reversing the bankruptcy court ruling is reversed where the creditor failed to provide documentation in support of its claim, and thus it was properly disallowed. |