May 2011 issue:
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The Bankruptcy Section is looking for volunteers to write a Case Analysis for an upcoming edition. 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.
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May 2011 Bankruptcy Section Newsletter
Become An Active Member Of The League And Advance Your Career!
The Bankruptcy Section is always looking for ways to involve members and help them develop leadership roles within the section and the League. Serving on a Bankruptcy Section committee will help you to learn from your peers, make more business contacts and develop your leadership skills -- while also helping develop the section. Volunteer and leadership roles exist in many facets of the section, such as:
If you are interested in any of these opportunities, please contact Meghan Flesch at the League office (firstname.lastname@example.org, 312-240-1400).
CLLA's Bankruptcy Section Announces Programming For Its NCBJ Events In Tampa, Florida This Fall!
2011 Annual Breakfast
Featuring the presentation of the Lawrence P. King Award for Excellence in Bankruptcy and an inspirational keynote presentation from Greg Gumbel.
The Honorable Frank W. Koger Memorial Education Program:
Emerging And Complex Issues In Chapter 11: Part One
Emerging And Complex Issues In Chapter 11: Part Two
Recent Developments in Bankruptcy Ethics
Peter Califano, Bankruptcy Section chair
Students of bankruptcy ought to read a recent article published in the Spring 2011 issue of National Affairs on the General Motors and Chrysler bailouts. Professor Todd Zywicki, a law professor at George Mason University, wrote an article entitled, "The Auto Bailout and the Rule of Law" reviewing the "success" stories for both auto companies.
The article calls into question the legality of the use of funds for the funding of interim operations from the Troubled Asset Relief Program (a.k.a TARP) by both the Bush and Obama administrations, the unorthodox use of the Chapter 11 process and the actual results. Of particular note to bankruptcy practitioners was the treatment of secured creditors in the Chrysler bankruptcy being "steamrolled" into accepting 29 cents on the dollar on their loans — while the underfunded pension plans of the United Auto Workers (unsecured creditors in the case) received more than 40 cents on the dollar. A very interesting read, no matter what side of the political spectrum you associate yourself with.
The Bankruptcy Section just concluded a very successful conference in Chicago with excellent education and networking sessions. We enjoyed seeing many familiar and new faces. All of our section's committees met during the weekend and are now planning and preparing projects for the coming months. For example, our Education Committee is putting together panels for the fall New York conference; the Amicus Committee is continuing to participate in proceedings at the 5th Circuit in the Reed v. Arlington appeal and the Legislative Committee is developing comments on small business bankruptcy legislation and reviewing possible modification to the preference statute.
We would encourage you to get involved in committee work because it is a great way to meet other lawyers in the section and quickly become involved in meaningful projects. The section's committees are: Amicus, Education, Legislation, Newsletter, NCBJ, Marketing and Membership, and the Bankruptcy Academy. Please feel free to contact any of the our newly elected officers for further details: Alan Ramos (aramos@LawNRS.com); David Leigh (DLeigh@rqn.com) and Stephen Starr (email@example.com).
Court Clarifies the Definition of an "Unexpired" Lease
The United States Bankruptcy Court for the Southern District of New York and the United States District for the Southern District of New York clarified the standards for determining when a lease is "unexpired" and assumable. In re Association of Graphic Communications, Inc., 2011 U.S. Dist. LEXIS 35702 (S.D.N.Y. March 30, 2011), the bankruptcy court found that the landlord's expenses incurred in evicting the debtor from its rental property were not entitled to administrative expense priority in the bankruptcy case. In reaching its decision, the court determined that the lease at issue had expired and was not able to be assumed after the bankruptcy filing under 11 U.S.C. § 365(a) because a warrant of eviction from the premises was issued prior to the bankruptcy filing. In its ruling, the court also considered whether liquidation or reorganization was the goal of the case and whether the trustee or the debtor could or did seek to appeal the state court's issuance of a warrant of eviction after the bankruptcy filing.
The debtor, Association of Graphic Communications, Inc., was a lessee under a non-residential lease with the landlord. The aforementioned lease was set to expire on February 28, 2007. The debtor stopped paying rent in late summer or early fall 2006. The landlord thereafter made demand for rent, the debtor did not respond to the demand and a lawsuit was commenced in Civil Court of the City of New York, County of New York shortly thereafter. The debtor defaulted in that proceeding, and the landlord obtained a judgment for possession and a warrant of eviction on February 1, 2007. The debtor filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code one day later.
The landlord then brought a motion to lift the automatic stay in the bankruptcy case, which was not opposed by the debtor. As a result, the landlord was permitted to continue with his eviction of the debtor from the premises and action to take legal possession of the property. The marshal executed on the warrant of eviction on April 24, 2007, and retained certain items of the debtor left behind after the eviction. The landlord then sought payment of administrative expenses incurred in relation to the eviction, while the debtor's Chapter 7 trustee moved for summary judgment in opposition. In order to reach that decision, the court had to determine whether the lease was expired when the Chapter 7 case was filed. The court concluded that the lease was terminated before the Chapter 7 case was filed and could not be assumed. The decision was affirmed by the United States District Court for the Southern District of New York.
The court was primarily concerned with whether the lease was expired prior to the filing of the bankruptcy. If the lease was "unexpired" when the case was filed, it could be assumed and the landlord might be entitled to administrative expenses pursuant to 11 U.S.C. 365(a) and 365(d)(3).
In this case, the court concluded that under New York law, the mere issuance of a warrant of eviction is enough to cancel the lease and annul the relationship between the landlord and the tenant. Even more, it found that the mere existence of an unexercised right of redemption does not render the lease unexpired. The decision upheld a similar line of reasoning in In re Hudson Transfer Group, Inc., 245 B.R. 456, 459 (Bankr. S.D.N.Y. 2000).
The decision by the Association case court distinguishes two other cases, In re P.J. Clarke's Restaurant Corp. 265 B.R. 392, 398 (Bankr. S.D.N.Y. 2001) and In re Sweet N Sour 7th Avenue Corp., 431 B.R. 63 (Bankr. S.D.N.Y. 2010), in which the bankruptcy court had allowed the assumption of a lease even though a warrant of eviction or equivalent state court decision was issued before the bankruptcy case was filed.
In PJ Clarke's, prior to filing for bankruptcy, a state court found that the debtor's lease had been violated and terminated. P.J. Clarke's 265 B.R. 392, 399. The landlord then brought a motion for relief from the automatic stay to continue the state court proceeding, which was denied. Thereafter, the debtor brought a motion to lift the stay to appeal the adverse state court determination. The court granted the debtor's motion and determined that the state court order finding the lease terminated was equivalent to a warrant of eviction. However, the court also determined that the lease was not expired upon the bankruptcy filing because the debtor could appeal the state court order and potentially obtain a decision that reinstated the landlord-tenant relationship.
Similarly, in Sweet N Sour, a warrant of eviction was issued before the debtor filed for bankruptcy. The landlord sought relief from the automatic stay to evict the debtor. However, the debtor sought to assume the lease. The court denied the landlord's lift stay motion but did lift the stay to permit the debtor to challenge the state court decision terminating the landlord tenant relationship. The court determined the warrant of eviction terminated the landlord tenant relationship but the debtor would be entitled to assume the lease if the state court reversed the issuance of the warrant of eviction.
In the present case of Association, the court distinguished PJ Clarke's and Sweet N Sour on the grounds that both debtors in the previous two decisions were Chapter 11 cases and the debtors were attempting to reorganize as opposed to the debtor in Association, who filed a Chapter 7 liquidation case.
In addition, and perhaps, more importantly, the Association court noted that both of the debtor's in PJ Clarke's and Sweet N Sour could assume the lease if their appeals were successful and reversed the state court's issuance of warrants of eviction. It should be noted that the debtor in PJ Clarke's sought to lift the stay for the purpose of appealing the decision. The debtor in Sweet N Sour did not seek a lift stay to appeal, instead arguing it should be allowed to assume the lease despite issuance of a warrant of eviction. However the Sweet N Sour court granted a lift stay for the limited purpose of allowing the debtor to appeal the decision issuing the warrant of eviction in state court. Finally, the Association court pointed out that the debtor only had three weeks left on the lease at the time of the bankruptcy filing, the debtor was out of business, and that neither the debtor nor the trustee had challenged the lift stay motion of the landlord in this case.
There is mildly conflicting law within the Second Circuit, specifically the Southern District of New York, regarding assumption of a lease after the issuance of a warrant of eviction. Some courts have held that the issuance of a warrant of eviction without execution is enough to terminate the landlord tenant relationship, rendering the lease expired, while others have held that because the debtor may appeal such a decision, the lease may be assumed after a favorable decision in state court.
In this case, the court has added additional considerations. First the court emphasized that cases allowing assumption of leases acknowledged that favorable appeals in state court were a possibility and that the cases were Chapter 11 reorganizations. Surely, a Chapter 11 debtor is more likely to assume a lease after issuance of a warrant of eviction under state law than a corporate Chapter 7 debtor. It should be noted that because the type of bankruptcy was not essential to the court's decisions in Association, PJ Clarke's and Sweet N Sour but merely a factor cited for additional support, this position might be dictum. It will be interesting to see if this position will be followed and clarified in future cases.
The court emphasized that an actual challenge or request to litigate the warrant of eviction in state court must be made in a bankruptcy court before a lease can be found to be potentially "unexpired". For example, in PJ Clarke's, the debtor moved to lift the stay to litigate the appeal. In Sweet N Sour, the debtor, although it did not move itself, did oppose a lift stay motion, arguing that the lease could be assumed. In the present case, the trustee merely opposed a motion for administrative expenses by the landlord. In fact, neither the trustee nor the debtor ever sought to assume the lease or claimed a right to appeal the warrant of eviction in state court. It should be noted that this requirement would be easily met in most scenarios in practice because any motion to assume a lease or to lift the stay to appeal the warrant of eviction would satisfy this element.
As a result, because Association distinguishes PJ Clarke's and Sweet N Sour on the basis of the chapter of the bankruptcy and whether the debtor actually presented a desire to reverse a warrant of eviction, a Chapter 11 debtor still could seek to lift the stay to appeal the issuance of a warrant of eviction and thereafter assume the lease if the debtor's appeal was successful. This area of the law is very specific, and there is not much law on the subject. Most courts do agree that some level of finality of a lease termination is achieved upon issuance of a warrant of eviction. It will be interesting to see how other courts handle the issue regarding potential appeals of lease termination in state court.
Congressional Research Service Examines Legislation Exempting Firearms Under Bankruptcy
A May 2nd Congressional Research Service report examines HR 1181, the "Protecting Gun Owners in Bankruptcy Act of 2011," and its goal of exempting firearms under the Bankruptcy Code. H.R. 1181, has 23 co-sponsors and has been referred to the House Committee on the Judiciary.
According to the report, the Supreme Court's decisions on the Second Amendment and the right to "keep and bear arms" has raised the question as to whether firearms are protected from the reach of creditors under federal or state laws.
While a number of states have provisions shielding firearms from creditors' claims, there is no such provision in the Bankruptcy Code. According to the report, there is a great variety in the protection states provide for firearms with most states providing no explicit protection. Of the states that provide explicit protection, the conditions for providing protection vary. Some states limit the exemption by both the number and value of the firearms; other states specify the type of firearms that can be exempted. In most states that allow an exemption for firearms, the exemption is not dependent on the way in which the firearm is used; however Ohio, Oklahoma, and Wisconsin, exempt guns for personal use only, and Louisiana requires that the firearm be used for business purposes. Both Montana and Nevada exempt "all arms … required by law to be kept by any person" in addition to the one gun, selected by the debtor, the report states.
Section 2 of the bill amends Code Section 522(d) adding an exemption for the debtor's aggregate interest, up to a value of $3,000, "in a single, shotgun, or pistol or any combination thereof." The exemption would not reduce the amount allowed for any other type of exemption under Section 522. Further, the bill also amends Code Section 522(f)(4)(A) to include firearms in the definition of "household goods." This provision would apply to any number or combination of rifles, shotguns, and pistols as long as the aggregate value was no more than $3,000.
FDIC Examines Lehman Failure as Case Study In Liquidation Versus Bankruptcy
According to a report by the Federal Deposit Insurance Corporation (the "FDIC") released on April 18, 2011, the Dodd-Frank Act's non-bank orderly liquidation authority powers would have allowed the FDIC to recover substantially more for creditors from the Lehman Brothers Holding Company failure in 2008 than the bankruptcy proceedings without additional taxpayer cost.
The report examined and concluded that the FDIC could have structured an orderly resolution of Lehman, under Title II of the Dodd-Frank Act allowing the FDIC to act to preserve asset value and structure a transaction to sell Lehman's operations to interested buyers.
The report, drawing on publicly available information, will be published in the upcoming FDIC Quarterly (Volume 5, No 2) due to be released in June. A preprint of the Lehman study is available on the FDIC's Web site.
IRS's Chief Counsel Issues Memorandum on Bankruptcy in Tax Assessments
In early April, the IRS released a chief counsel advice memorandum on tax assessments stating that "[t]here is no legal requirement to address the effect of bankruptcy in the body of the notice of deficiency," otherwise known as a 90-day letter. This letter is sent after an audit and notifies the recipient of a discrepancy or error in the individual's taxes.
Fed Seeks Comment on Bankruptcy of Financial Firms Under Dodd-Frank
The Federal Reserve Board, in conjunction with the Administrative Office of the United States Courts, will seek comment on two Dodd-Frank required bankruptcy-related studies to determine whether bankruptcy laws should be modified in light of potential financial institution failures.
According to the proposal, one study will focus on whether changes are needed to Chapters 7 and 11 of the Bankruptcy Code, and the other study will analyze whether more international coordination is needed when the matter involves interconnected firms with operations around the globe.
Comments are due 30 days following the publication of the proposal in the Federal Register.A copy of the proposal is can be found here.