Sponsor the CLLA Events at NCBJ

This Fall, the CLLA will once again play a major role at the National Conference of Bankruptcy Judges - and we need your support! As you know, the Leagues' ability to obtain sponsorships for our programming is an important factor in our continued efforts to provide quality bankruptcy education. In addition, it provides your company with exposure among a prestigious group of bankruptcy professionals. Click here to read more about the sponsorship opportunities.

  • Nominate a bankruptcy judge, professor or attorney for the Lawrence P. King Award, which will be presented at the CLLA breakfast during the National Conference of Bankruptcy Judges on October 19. Nominations are due July 1, 2009.

Join the CLLA groups on LinkedIn and Facebook!

This is another way to network, contribute to member discussions and stay informed about current CLLA events.

Sua Sponte

Deborah K. Ebner
Law Office of Deborah Kanner Ebner                                                                                           
11 E. Adams Street Eighth Floor                                                                            
Chicago, Illinois 60603
dkebner@deborahebnerlaw.com
 
Our Obligation

Steve Ungerman and Peter Califano invited me to return to the helm of the Bankruptcy Section after my one-year term on the Board of Governors. I am honored by the invitation and am happy to be back as Section Chair. There is much to be done.

I return to lead the Bankruptcy Section at a time when our members are busier than ever in the midst of the worst economic downturn in decades. Our workloads are keeping us in our offices much longer than we'd like; because of the tremendous demand for our professional services, we, as individual bankruptcy professionals, are at the center of the current economic crisis. We spend our days identifying the causes of our clients' financial distress and using the tools that the law provides to problem solve.

Because we are at the center of this crisis, we carry the most knowledge about the problem and have the most to offer as far as a cure is concerned. To our credit, our Section and the League continue to be recognized as one of the sole organizations committed to non-partisan change. Over the past year we have continued our role as industry leader in shaping commercial law and bankruptcy policy in the United States. Our Section is addressing the mortgage crisis and its impact on credit markets. Our efforts were cited in the December 2008 issue of Bankruptcy Court Decisions and continue to be leading the way in national and local publications. Our newest Executive Council member, Barbara Barron of Austin Texas has personally urged Congress to support a modernization of fair debt collection practices to keep pace with technologies, which are now a part of our daily lives by co-authoring a White Paper submitted to Congress on the subject.

With knowledge and position comes obligation. We are the leaders in our industry. We are obligated to help our nation embark upon an exit strategy from this unprecedented global economic disaster.

Role up your sleeves and help. We will be meeting from August 6th through August 9th at Hyatt Regency Baltimore, Baltimore, MD at a strategic planning conference. That meeting will probably be preceded by visits to Capital Hill. The purpose of the meeting is to continue to develop strategies to keep the League at the cutting edge of our industry so that we will be able to continue as industry leaders for many years to come. 

Keep in touch, There is plenty to do.

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 Weaver, 50 BCD 156 (1st Cir. 2008)
An appeal under 28 U.S.C. § 158(d)(2) was before the Court of Appeals for the First Circuit after a bankruptcy court transmitted its certification to appeal to the First Circuit. The court issued an order to show cause why the appeal should not be dismissed because no authorization of appeal was sought from the court as required under § 158(d)(2) and no timely notice of appeal was filed as required under Interim Bankruptcy Rule 8001(f)(2).

The court rejected the defendants' argument that the bankruptcy court's certification for appeal was the equivalent of filing for timely notice because a "certification of a direct appeal under section 158(d)(2) does not become effective until a timely appeal has been taken to the bankruptcy appellate panel under sections 158(b) and (c)." The court noted that cause could be shown if the procedural requirements were claims-processing rules, however the court never determined whether they were or not.

Rather, the court exercised its discretion under § 158(d)(2) to deny the appeal because of the fact that many cases in bankruptcy court were raising the same issue which could be heard on appeal and that because there was a high chance that the procedural requirements may be jurisdictional thereby not allowing the appeal to stand.

Wright v. Santander Consumer USA, Inc. (In re Wright), 492 F.3d 829 (7th Cir. 2007)

The debtors purchased a vehicle within 910 days of filing bankruptcy, so the hanging paragraph in § 1325(a)(5) applied.  The hanging paragraph states that, in a Chapter 13 plan, § 506 does not apply to certain secured loans.  Thus, the question was whether the creditor's claim is satisfied if the debtors surrender the car to the creditor, or does the claim bifurcate, with the unsecured portion owed partially through the plan.

The debtors plan proposed to surrender the car and pay nothing on the difference.  The bankruptcy court did not approve the Chapter 13 plan because it did not propose to pay anything on the unsecured difference. 

The Court of Appeals for the Seventh Circuit held that by knocking out § 506, the hanging paragraph leaves the parties to their contractual obligations, and state law determines these obligations.  See Butner v. United States, 440 U.S. 48 (1979).  The debtors' contract created an ordinary secured loan with recourse against them.  Thus, the secured lender was entitled to an unsecured deficiency for the difference between the collateral value and the loan balance.  The debtors gave their creditor the full market value of the collateral and any "shortfall must be treated as an unsecured debt."  The debtor does not have to pay the unsecured claim in full, but the debtor must pay the claim at the same rate as the other unsecured creditors' claims.

General Elec. Capital Corp. v. Future Media Prod. Inc., ---- F.3d ----, 2008 WL 2610459 (9th Cir. July 3, 2008)

General Electric, as party to a Loan Agreement with Future Media, sought repayment of its oversecured loan, including interest payments at the default rate that were triggered when an event of default occurred.  The Official Committee of Unsecured Creditors argued that General Electric could only collect interest at the loan agreement's pre-default rate.  See In re Entz-White Lumber and Supply, Inc., 850 F.2d 1338 (9th Cir. 1988) (holding that "an oversecured creditor was not entitled to interest at the default rate where its claim was paid in full pursuant to the terms of a Chapter 11 plan").

The Court of Appeals for the Ninth Circuit held that the Debtor could be forced to pay the default rate of interest because Future Media paid off the loan through a § 363 asset sale, not a Chapter 11 plan, which distinguished this case from Entz-White.  The court did not find that § 363 asset sales "cured" events of default; therefore, the Committee's argument that the asset sale should return General Electric to its pre-default interest rate was incorrect. 

Further, the court, on remand, should apply state, not bankruptcy law, when determining what interest rate Future Media should pay on General Electric's principal loan.
In re Ballard, 526 F. 3d 634 (10th Cir. 2008)

Certain 910 creditors objected to the Chapter 13 debtors' plans to return motor vehicles to the creditors as full accord and satisfaction of purchase money loans. The creditors sought to claim the deficiency that existed between the market value of the vehicles and the amount due under the loan.  The debtors argued that the surrender of a vehicle under § 1325(a)(5)(c) satisfies the creditor's entire claim.

The Court of Appeals for the Tenth Circuit held, consistent with the Fourth Circuit's opinion in Tidewater (as discussed above), that 910 creditors may assert a deficiency claim for the unsecured portion of the claim if authorized by state law. The court held that the hanging paragraph in § 1325(a)(5)(c) did not prevent a 910 creditor from asserting this right.  The court observed that the creditor did not have a federal right to claim the deficiency.

Chase Manhattan Mortgage Corp. v. Shapiro (In re Lee), 530 F.3d 458 (6th Cir. 2008)

Lender held a loan secured by a mortgage on the debtor’s property.  On October 6, 2003, the debtor refinanced that loan with the same lender; the lender satisfied the original loan with the proceeds of the refinanced loan; and the debtor granted the lender a new mortgage.  The new mortgage was recorded on December 17, 2003 (72 days after the refinancing transaction closed), and the discharge of the original loan was recorded on January 16, 2004.  Debtor filed in Chapter 7 bankruptcy on March 4, 2004.  The Court found that the refinancing mortgage could be avoided as a preferential transfer. 

The lender argued:

(i) the old mortgage was not discharged of record until after the recording of the new mortgage.  As a result, any purchaser from the borrower would be on “notice” of the lender’s security interest in the property and no “bona fide purchaser” under §547(e)(1)(a) could have taken priority.  Thus the transfer occurred on the date of the closing, not the date of the recording of the new mortgage.  The Court rejected this argument because purchaser would only have had notice that a mortgage existed in the past, not that one existed at that time.  It is not clear whether the question of whether the old mortgage would have served as “inquiry” notice, an issue which figured in the Hedrick decision in the 11th Circuit, was raised.

(ii) the judicially-created "earmarking doctrine" was an exception to the trustee's ability to avoid the lender’s mortgage.  The Court stated that property is earmarked if: (a) the agreement is between a new creditor and the debtor for the payment of a specific antecedent debt; (b) the agreement is performed according to its terms; and (c) the transaction does not result in a diminution of the debtor's estate. 

The Court first held that the "earmarking doctrine" did not apply here because the creditor refinanced its own mortgage and therefore was not a "new creditor" as required in (a).  Second, the Court, relying on In re Lazarus, 478 F.3d 12 (1st Cir. 2008), reasoned that the refinancing must be viewed as multiple transfers and that the earmarking doctrine does not protect the late filing of the new mortgage from preference exposure.  The Court stated that considering the refinancing as a unitary transaction would ignore the plain meaning of the term “transfer” in the Bankruptcy Code. Also, the court noted that the application of earmarking to a transfer of a lien interest, as opposed to the transfer of funds, extends the earmarking doctrine beyond its logical limits.  Furthermore, the lender failed to establish that the transaction does not diminish the debtor’s estate as required in (c), above.  
Finally the Court rejected the lender’s policy argument on the ground that the lender could readily have prevented the harsh result by recording promptly, noting that in an equitable subrogation defense in a similar case, the Court had noted that the sophisticated creditor’s problem was one of its own making. 

Adelphia Recovery Trust v. Bank of America, N.A., 390 B.R. 64 (S.D.N.Y. 2008) (Summary of bankruptcy related portion of the case)

In the bankruptcy of the Adelphia companies, Adelphia Recovery Trust (ART) assumed some debt of various Adelphia companies.  In adversary proceedings against certain bank lenders, ART claimed that due to the bank lenders' improper dealings, primarily violations of the Bank Holding Act and fiduciary duties, with the management of the Adelphia companies, the court should equitably disallow or equitably subordinate, under Section 510(c) of the Bankruptcy Code, the claims of bank lenders. The bankruptcy court denied the bank lenders' motion to dismiss the claims and the bank lenders appealed.

The District Court acknowledged that the Bankruptcy Code does not explicitly provide for equitable disallowance.  However, it held that the Code does not have to explicitly provide authority for a remedy.  The court reasoned that if Congress intended to disallow a judicially created concept, it would have made that intent clear and specific in the legislation.  Furthermore, the court observed that case law has implied that equitable disallowance and equitable subordination are within the equitable powers of a bankruptcy court. See United States v. Noland, 517 U.S. 535, 539 (1996)and Pepper v. Litton, 308 U.S. 295, 60 (1939). The District Court affirmed the lower court's holding that "equitable disallowance is permissible under Pepper" and rejected the bank lender's motion to dismiss ART's claims.

In re Buffets Holdings, Inc., 387 B.R. 115 (Bankr. D. Del. 2008)

The debtors sought to assume, assign, and reject unexpired leases of non-residential real property.  FP, who owned the leases, asserted that the individual leases were actually part of a master lease, and Buffets Holdings must either assume or reject it in toto. 

The debtors cited the individuality of each lease (any of the individual leases could be assigned or substituted for another by the debtors, with FP's consent) to support its claim that it could evaluate each lease separately.  FP cited the interdependency of the leases (if the debtors defaulted on one lease, the master lease could be called due and the ground leases could only be extended if the master lease was extended) to support its position.

The court, interpreting state law, held that each individual lease was indeed part of the master lease because FP would only have entered into the leases if they were grouped as one, and Buffets Holdings needed FP's financial help more than FP needed Buffets Holdings' property.  Specifically, FP had no interest in the individual leases; its interest "was in the total package."  Thus, it entered into the sale/leaseback agreement whereby FP agreed to pay Buffets Holdings a large sum of money in exchange for one master lease, which would restrict the exercise of rights by individual tenants.

Calyon New York Branch v. American Home Mortg. (In re American Home Mortg.), 379 B.R. 503 (Bankr. D. Del. 2008)

Calyon filed an adversary preceding seeking a declaratory judgment that its contract with American Home Mortgage ("AHM") was a repurchase agreement under § 559 such that it was not stayed, avoided, or otherwise limited by AHM's bankruptcy filing. 

The court held that: (1) under the plain meaning of § 101(47), the contract for the sale and repurchase of mortgage loans was a repurchase agreement and the safe harbors of §§ 555 and 559 applied; (2) the servicing of mortgage loans is not protected under the safe harbor provisions; and (3) the Debtors did not have to transfer the right to service the mortgage loans to the estate. 

The court applied the terms of the contract to the plain meaning of § 559 and found that because the contract allowed for the transfer of one or more mortgage loans or interests, the contract was a repurchase agreement.  Section 555 applied because Calyon is a financial institution (a commercial bank and a subsidiary of Credit Agricole CIB) and, under § 741, the contract is a securities contract. 

The court found that the Bankruptcy Code does not protect the servicing of mortgage loans under §§ 555 or 559 because the mortgage servicing portion of the contract is severable.  Further, the mortgage servicing portion is neither a repurchase agreement nor a securities contract. 

Finally, since the servicing of the mortgage loans does not qualify for the safe harbor provisions, "there is no basis to require the Debtors to transfer property of the estate (i.e., the right to service of the mortgage loans under the contract) to Calyon."  Thus, only part of the contract qualified under the safe harbors.

Calyon New York Branch v. American Home Mortg., 383 B.R. 585 (Bankr. D. Del. 2008)

Calyon sought reconsideration of the bankruptcy court's holding that the mortgage service portion of the contract was not severable.  Calyon argued that AHM sold the mortgage loans servicing released, not servicing retained.  Accordingly, the service portion of the contract could not be severed.

The court held that the mortgages were sold on a servicing retained basis (the debtors retained the right to appoint a servicer) because AHM "expressly retained to the mortgage loans for the purpose of servicing them."  Thus, the court should not amend the bankruptcy court's initial decision. 

Indeed, the court found that if the debtor had sold the mortgages servicing released, it still would have found that the servicing rights are severable from the sale and repurchase of mortgage loans.

In re Quezada, 368 B.R. 44 (Bankr. S.D. Fla. 2007)

A Chapter 7 trustee objected to a homestead exemption claimed by a debtor, and moved for authority to sell the property to satisfy a domestic support obligation ("DSO").  The trustee argued that recent BAPCPA amendment to §522(c)(1) allowed the Trustee to administer exempt property to the extent of a DSO claim.  The Bankruptcy Court held that the Trustee is authorized only to administer property of the estate as per 11 USC Section 704. 

The trustee argued that § 507(a)(1), which states that "the administrative expenses of the trustee … shall be paid before payment of [DSO claims], to the extent that the trustee administers assets otherwise available for the payment of DSO claims," authorizes the trustee to sell exempt property because the assets covered by § 522(c)(1) can be liable for DSO payments.  The court rejected the argument because § 704(a)(1), prevents a trustee from selling exempt property.

In re Williams, 385 B.R. 468 (Bankr. S.D. Ga. 2008)

A Chapter 13 debtor's attorney filed a motion to compel payments for attorneys' fees as per the plan, and if necessary an order requiring the trustee to recover sums previously paid for child support to pay for the attorneys' fees.  The attorney argued that the child support payments were made improperly before the payment of administrative expenses such as attorneys' fees. 

The Bankruptcy Court for the Southern District of Georgia held that 11 U.S.C. § 1326(b)(1) required the debtor to pay administrative expenses, including attorneys' fees, under §507(a)(2), before, or concurrently with, payments to child support creditors.  However, the court did not require the debtor to recover funds paid for child support because since the filing, the debtor was current on payments to the attorneys.

The court held that under § 1325(a)(5), the debtor's periodic payments to the secured creditor, Wells Fargo, should have been in equal monthly payments and that the payment should not have been "less than an amount sufficient to provide the holder of such claim adequate protection during the period of the plan."  The court held that attorneys who receive fees through the plan must construct the plan so that distributions to attorneys do not threaten the availability of funds to pay lienholders.

Case Law Update

Available at www.lp.findlaw.com

U.S. 1st Circuit Court of Appeals
Colonial Surety Co. v. Weizman
05/06/09
Case no. 08-1065

In a breach of contract action, district court's judgment against defendant is affirmed where the discharge of liability from defendant's earlier bankruptcy discharge did not include plaintiff's claims against defendant, as defendant failed to list plaintiff's claim and Bankruptcy Code sec. 523(a)(3) makes listing the claim a condition of discharge.

U.S. 9th Circuit Court of Appeals
Consolidated Freightways Corp. v. Aetna, Inc.
05/06/09
Case no. 07-56720

In an appeal from the Bankruptcy Court's order granting priority to Creditor's claims arising out of contributions to Debtor's employee benefit plan, the order is affirmed in part, where the recovery cap under 11 U.S.C. section 507(a)(5) is to be treated as an aggregate cap, but reversed in part, where individuals who did not render services within a 180-day period preceding bankruptcy are not to be counted in determining the number of employees under Section 507(a)(5).

U.S. 7th Circuit Court of Appeals
United Air Lines, Inc. v. Regional Airports Improvements Corp.
05/05/09
Case no. 08-2736

In a bankruptcy action involving the repayment and calculation of a secured loan for improvements to an airline terminal, district court judgment is reversed where: 1) the court did not properly calculate the annual rental rate for airport terminal space and the the appropriate discount rate; and 2) the calculation for the rental rate was too low and the discount rate too high.