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Sua Sponte

Deborah K. Ebner
Law Office of Deborah Kanner Ebner                                                                                           
11 E. Adams Street Eighth Floor                                                                            
Chicago, Illinois 60603
dkebner@deborahebnerlaw.com
 
In lieu of my standard sua sponte, I have invited Peter Califano, legislative committee chair, to share his recent Capitol Hill experience with all of us. We truly are a talented group of bankruptcy professionals who can and do make a difference.

THE CLLA GOES TO WASHINGTON

Earlier this year, members of the CLLA visited Capitol Hill to introduce its "Critical Issues 2009" white paper containing recommendations for needed amendments to the Bankruptcy Code, as modified by BAPCPA.  After nearly a year of internal CLLA debate and consensus building among the Bankruptcy, Creditors' Rights and Agency Sections, 13 proposals were proposed and well received by the Senate and House Judiciary Committees, along with other select members of Congress.  Partnering with other bankruptcy groups and bar associations are currently ongoing regarding these proposals.

Most recently, on June 8, 2009, Peter Califano and David Goch went to Capitol Hill with positions developed by the Legislative Committee (Lou Robin, Alan Ramos, Barbara Barron, Steve Sather, Jay Welford and David Leigh) on the Business Reorganization and Job Preservation Act of 2009 (H.R. 1942 introduced by Rep. Nadler, NY) and to discuss issues and growing concerns regarding bankruptcy venue in light of the recent automobile manufacturers' filings filed in NY instead of Detroit and other cases.  The meetings were very productive and the CLLA plans to follow up regarding clarification and use of Section 503(b)(9) claims (supplier's administrative claims for goods provided during the 20 days leading up to a bankruptcy petition) and to conduct research in various venues across the country regarding debtor cases that eventually were filed in New York or Delaware bankruptcy courts instead of other available venues, such as the debtor's principal place of business.

In the coming weeks, the CLLA hopes to have further news and developments regarding these and other legislative efforts.

Peter Califano, Chair
Legislative Committee

Case Law Analysis

Taken from the October 29, 2008 Teleseminar, “Bankruptcy Year-in-Review” materials. The presenters were:

  • Judge Jeffery A. Deller, Esq.,
  • Deborah Kanner Ebner, Esq.,
  • William H. Schorling, Esq. and
  • Robert Zinman, Esq.

With input from:

  • Judge Margaret Dee McGarity, U.S. Bankruptcy Court for the Eastern District of Wisconsin
    Materials Coordinator: Nissan Shah, Esq.

In re Sanders, B.R. 47 (Bankr. N.D. Ala 2006)

The Alabama Department of Human Resources (DHR), as an unsecured creditor for past due child support payments, objected to the debtor's Chapter 13 plan because the plan did not provide the proper treatment for a child support claim.  DHR argued that its first priority § 507(a)(1) claim for past due child support should be paid in full before a § 507(a)(2) administrative expense for attorneys' fees is paid. 

The Bankruptcy Court for the Northern District of Alabama held that §1322(a)(2) did not require a Chapter 13 plan to provide for full payment, in deferred cash payments, of higher priority claims before lower priority claims under § 507.  However, the court held that § 1326 required the trustee to pay administrative expenses before or contemporaneously with payments to other claimholders under the plan.  Furthermore, the court noted that § 330(a)(4)(B) attorneys' fees are an administrative expense. Since the court held that attorneys' fees should be paid contemporaneously or before payments to other claim holders, the debtor's plan did not violate the Bankruptcy Code.

DHR also argued that the debtor violated §507(a) because the plan should have limited distributions to secured creditors while DHR's claims were paid.  However, the court held that § 1322(b)(4) clearly provides a debtor with the discretion, not obligation, to pay unsecured claims concurrently with a secured claim.  The court did not find anything in the Bankruptcy Code to support the creditor's argument that the distributions should have been limited.

The Bank of Nova Scotia v. Adelphia Comm. Corp., ----  -- --- (S.D.N.Y. 2008)

Two administrative agents for two separate credit facilities for a Chapter 11 debtor, appealed a bankruptcy court's decision denying the agents' claim for interest at the higher grid interest rate based on the debtor's financial condition. The administrative agents argued that they were, as provided for in the credit agreements, entitled to the grid interest rate because the rate would have been the correct rate if the debtors had not misrepresented their financial certifications, an event of default, to the administrative agents.

The District Court of New York held that due to the way the underlying credit agreements were drafted, the administrative agents were entitled to grid interest. The court held that the credit agreements provided that remedies for events of default, such as misrepresentation in financial certificates, were not limited to default interest and that they allowed the creditors to pursue damages and any other remedy at law or equity.  This gave the administrative agents more flexibility to determine which remedies they wished to use.  In addition, the court also relied on the common law concept of expectancy damages for breach of contract and held that the creditors would be entitled to grid interest because that is what they would have expected to receive if correct financials were provided.

In re Caffey, 384 B.R. 297 (Bankr. S.C. Ala. 2008)

A Chapter 11 debtor sought damages and an injunction of certain state court orders due to the ex-wife creditor’s, violation of the automatic stay under §362(k).  The debtor asserted that a post petition order for civil contempt and incarceration for past-due child support should have been stayed by the creditor once the creditor knew of the debtor's bankruptcy filing.
The Bankruptcy Court for the Southern District of Alabama agreed with the debtor's argument and, based on the Eleventh Circuit's law, acknowledged that the automatic stay stops all actions that are not within a limited group of stay exceptions, the writ of arrest and collection of support from property of the bankruptcy estate were in violation of the stay, and were void ab initio.  The court also agreed that the debtor was entitled to damages under §362(k) if the creditor or her attorneys acted willfully to violate an automatic stay.  The court found that the creditor and her attorneys acted willfully because they were sent five forms of notice but still proceeded with action against the automatic stay.  Since the creditor and her attorneys acted willfully, the debtor was entitled to damages.

Miller v. McCown De Leeuw & Co. (In re The Brown Schools), 386 B.R. 37 (Bankr. D. Del. 2008)

The trustee alleged breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraudulent transfers, aiding and abetting fraudulent transfers, deepening insolvency, and civil conspiracy against the debtor's majority shareholder and its affiliates.  Specifically, the trustee argued that McCown De Leeuw & Co. ("MDC") used its power as the majority and controlling shareholder to prolong the existence of the debtors and continue to profit from the relationship.  MDC responded that the trustee's claims relied on a theory of deepening insolvency, and in Trenwick Am. Litig. Trust v. Billett, 2007 Del. LEXIS 357, at *1 (Del. 2007), the Delaware Supreme Court "held that Delaware does not recognize a cause of action for deepening insolvency."

The court held that these claims were not pretenses for a deepening insolvency claim and allowed the trustee to proceed.  It distinguished Trenwick by stating that the case does not "mandate dismissal of the Trustee's claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, corporate waste, and civil conspiracy," all of which the trustee alleged. 

The bankruptcy court reached a similar outcome to the Ario case and considered complementary analysis when reviewing the deepening insolvency claim defenses.


In re Philips, --- B.R. --- (Bankr. N.D. Ill. 2008)

This decision involves two consolidated cases. The first case is administratively insolvent and the final distribution that will be issued is a pro-rata distribution to Chapter 7 administrative creditors; in the second case only secured creditors will receive a distribution of 49%. There will not be a distribution to general unsecured creditors in either case. In both cases, the Chapter 7 Trustee seeks to “comp” on amounts distributed pursuant to the distribution formulas at 11 USC Section 326. 

The Chapter 7 trustee argued that he was entitled to the maximum compensation allowed under 11 U.S.C. § 326(a) and that this compensation was reasonable pursuant to 11 U.S.C. § 330(a)(7), thereby removing the need for Lodestar analysis. The Trustee bases his position on newly implemented §330(a)(7) which appears to mandate that compensation to trustees  be treated as commission computed under § 326.

The court rejected the trustee's arguments by holding that although 11 U.S.C. § 326(a) established a maximum cap on Trustee compensation, 11 U.S.C. § 330(a)(1) still requires the court to consider the reasonableness of compensation of a Chapter 7 Trustee. The court further stated that since the BAPCPA amendments prohibit use of  330(a)(3) factors for determination of reasonableness of a Chapter 7 Trustee fee, the court could use only those Johnson factors that are not recited at 330(a)(3). (See Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 5th Cir., 1974).

The court held that BAPCPA left §326(a) unchanged thereby making pre-BAPCPA case law still applicable. Pre-BAPCPA, § 326(a) set a cap on compensation to trustees but gave courts the discretion to determine the appropriate fee.  This same interpretation was upheld by the court.

The court held that §330(a)(7) mandates compensation to trustees to be treated as commission computed under § 326. The court clarified that the commission is still subject to the court's discretion because there is no statutory language stating that the commission is presumptively appropriate.

Borrego Springs Bank, N.A. v. Skuna River Lumber, LLC, 381 B.R. 211 (N.D. Miss. 2008)

Borrego had a perfected security interest in the real and personal property of Skuna's lumber mill.  Skuna filed for Chapter 11 bankruptcy protection and established bidding procedures to sell the mill's assets. 

Borrego credit-bid on all of Skuna's real property, machinery, and equipment.  The bankruptcy court then ordered Borrego to pay the auction company's fees.  Borrego objected to paying the surcharges because: (1) the auction occurred outside of the bankruptcy, (2) Borrego won the auction because of its credit bid amount, not through traditional auction procedures, and (3) the bankruptcy court lacked jurisdiction under § 506(c) to surcharge the assets. 

The court must find three elements to charge a secured creditor with administrative expenses under § 506(c): "(1) the expenditure was necessary, (2) the amounts expended were reasonable, and (3) the creditor benefited from the expenses."  The district court held that Borrego should pay the fees associated with the sale because Borrego benefited from the auction company's services.  Indeed, the auction company helped generate bids and establish market values for the auction items.  Finally, it did not matter that Borrego received the assets in conjunction with the credit bid instead of a traditional auction; the auctioneer still rendered value-adding services.

In re Johnson, 2008 WL 553221 (Bankr. M.D.N.C. 2008)

The ex-wife of a Chapter 13 debtor objected to the debtor's plan which sought to discharge payments for a second mortgage from Wachovia on the ex-wife's house.  She argued that the agreement relating to second mortgage payments in the separation agreement between herself and debtor bound the debtor to make payments on the mortgage and that obligation was a domestic support obligation ("DSO") that is not dischargeable pursuant to § 523(a)(5).  The ex-wife argued that the mortgage payment was a form of childcare because the house was intended as their daughter's residence.  The debtor argued that such payment was not a DSO, but merely a property settlement, which is dischargeable in the Chapter 13. 

The Bankruptcy Court for the Middle District of North Carolina agreed that § 523 prevents a debtor from discharging a DSO.  This left the court with the question of whether the mortgage payments can be considered a DSO for the purposes of the Bankruptcy Code.  The court determined that the payments can be analogous to a DSO if the obligation (1) is owed to or recoverable by the ex-wife; (2) is in the nature of alimony, maintenance or support; (3) was established before bankruptcy; and (4) has not been assigned. The court found only the first two requirements were at issue.  The court found that part (1) was satisfied because according to the separation agreement, if the ex-wife was forced to pay the mortgage, then the debtor would be liable to his ex-wife.  The court, based on a factual analysis, determined that part (2) was satisfied because the payments were to maintain shelter, the debtor stated he would do whatever it takes to take care of his daughter and the debtor agreed to hold his ex-wife harmless on the second mortgage debt.

The Court found that the second mortgage obligation was in the nature of support and therefore a nondischargeable 523 (a)(5) debt was intended. Accordingly, the mortgage had to be paid in full for confirmation to occur pursuant to 11 USC Section 1322(a)(2).

This case illustrates the absence of 523(a) (15) creditors from 11 USC Section 523(c) under BAPCPA such that creditors no longer have to file adversary complaints to determine the dischargeability of an (a)(15) debt.

In re Orawsky, 387 B.R. 128 (Bankr. E.D. Pa. 2008)

The Chapter 13 trustee filed a motion to dismiss the bankruptcy case on the grounds that the debtor violated 11 U.S.C. § 1325(b) because she did not use all of her projected disposable income for the payment of unsecured creditors.

The Bankruptcy Court for the Eastern District of Pennsylvania held that the failure to use all of the debtor's projected disposable income was not grounds for dismissal because it was not a circumstance provided for in 11 U.S.C. § 1307(c)(1) through (11) as grounds for dismissal.  However, the court assumed that the trustee intended to seek dismissal of the case based on § 1303(c)(1), for unreasonable delay, because the proposed plan was inconsistent with § 1325(b).  The court determined that this motion would only be granted if the confirmation of the plan was denied. Ultimately, the court approved the plan by finding there was no unreasonable delay.

Even though the motion to dismiss failed, the court considered the trustee's claim as an objection of the confirmation of the plan. In evaluating the objection, the court considered whether the debtor conformed with § 1325(b) by using all of her projected disposable income ("PDI") for the payment of unsecured creditors. The court observed that a debtor's PDI is determined by using Form 22C as a starting point, but any changes in the debtor's circumstances must also be considered. A debtor may show changes to the income in Form 22C by providing extrinsic evidence to that effect. The court held that changes in circumstances are not limited solely to Schedules I and J to determine changes in income and expenses.

The court determined that the debtor's PDI was correctly calculated based on the information provided in various schedules. For this reason the court held that there was no unreasonable delay on the part of the debtor. The motion to dismiss the case on the grounds of unreasonable delay for failing to comply with § 1325(b) was denied.

Case Law Update

Available at www.lp.findlaw.com

In re Harvard Industries, Inc.
U.S. 3rd Circuit Court of Appeals
6/17/09
Case no. 07-3006

In the IRS's appeal from an order allowing a carry-back for certain of Debtor's claimed expenses, the order is affirmed in part, where a distributor's inability to resell a defective product does not qualify as "damage to or loss of the use of property" under I.R.C. section 172(f)(4)(A); but reversed in part, where the Debtor's pension plan payments qualified as specified liability losses.

Jafari v. Wynn Las Vegas, Inc.
U.S. 7th Circuit Court of Appeals
6/17/09
Case no. 08-3994

In an appeal from the Bankruptcy Court's order allowing Creditors' claims against Debtors based on gambling debts, the order is affirmed where: 1) Wisconsin courts, applying their forum's choice-of-law analysis, would apply Nevada law to govern the claims; and 2) the claims were enforceable under Nevada law.

In re Kim
U.S. 11th Circuit Court of Appeals
6/17/09
Case no. 08-16105

In an appeal from the Bankruptcy Court's order allowing the Trustee to use his strong arm power to avoid the lien created by Debtor's security deed, the order is reversed where the affidavit submitted by the closing attorney attested to the execution of the security deed at issue.