Section News

CLLA's Letter to House Speaker Pelosi Quoted in Article

The Dec. 23, 2008 issue of Bankruptcy Court Decisions discussed Senator Durbin's mortgage modification bill. The author quotes CLLA's letter to House Speaker Pelosi, which supports efforts to allow bankruptcy judges to modify home mortgages.

Read the sua sponte below for more information about the Section’s recent legislative activities.

 

Thank you to the blog writers at Start Fresh Today for sharing the CLLA/DePaul Symposium with their readers. Click here to view the posting.

Upcoming Bankruptcy Section Events:

Audio recordings of teleseminars from Fall ’08 and conference materials from the CLLA education events at the National Conference of Bankruptcy Judges are now available for purchase online!

The teleseminars include:

  • Bankruptcy Year in Review
  • Impact of the Subprime Meltdown: An Update, co-sponsored by the National Conference of Bankruptcy Judges
  • Understanding the Hidden Complexities in a Simple Statute: A Discussion of Bankruptcy Code Sec. 503(b)(9)

Please go to www.clla.org/shop to purchase these and have them shipped to your business or home.

If you would like to listen to them online, please click here.

Sua Sponte

Steve Ungerman
Bankruptcy Section Chair
saungerman@aol.com

The Commercial Law League and its Bankruptcy Section had its annual meeting in New York City in middle of November. The Bankruptcy Section sponsored three educational programs:  

  • Basic Bankruptcy: What to Do When Your Debtor Files a Chapter 13
  • What’s New in Prosecuting & Defending Preference Action Under BAPCPA
  • Structuring Asset Sales in and out of Bankruptcy

The programs were well attended and the speakers were informative and interesting. 

In November and December the Bankruptcy Section also sponsored three Teleseminars:

  • Bankruptcy Year in Review
  • The Impact of the Subprime Meltdown: An Update – cosponsored by the National Conference of Bankruptcy Judges
  • Understanding the Hidden Complexities in a Simple Statute: A Discussion of 503(b)(9)

These programs are an easy way to earn CLE and to keep up to date in the Bankruptcy arena.  I hope to see many of our members at the DePaul Symposium and the 79th Chicago/Spring Meeting and the 115th National Convention on April 16-19th.  From an educational and networking standpoint, it will be well worth your time.

Our Legislative Committee under the leadership of Peter Califano has been busy writing letters to the Senate and House on the issue of the subprime mortgage crisis and preparing publicity on the CLLA’s position on the issue.  You can review the letters and publicity below.

Case Analysis1

Florida Dep't of Revenue v. Piccadilly Cafeterias, Inc., 128 S. Ct. 2326 (2008)

Piccadilly, the Debtor, sought a stamp-tax exemption under § 1146(a) for assets that it transferred after it filed for Chapter 11 protection but before the court confirmed the plan.  Florida argued that to be eligible for a § 1146(a) exemption, "a transfer must be subject to a plan that has been confirmed subject to § 1129." 

The United States Supreme Court, in overruling the lower courts, held that § 1146(a) should be read literally and only apply to post-confirmation transfers.  The Court cited Congress's placement of § 1146(a) in a subchapter entitled "POSTCONFIRMATION MATTERS" as an important factor in strictly interpreting the application of the exemption.  Thus, a debtor's transfer of assets will only receive tax exempt status after confirmation of the Chapter 11 plan, regardless of the exemption's importance to the plan confirmation.

The Court was not convinced that it should construe the provision liberally to afford the debtor the best chance to restructure successfully.

Barroso-Herrans v. Lugo Mender, 524 F. 3d 341 (1st Cir. 2008)

A Chapter 7 debtor sought $100,000 that the debtors' trustee received from two lawsuits which the debtor exempted from the bankruptcy estate on the list of assets on Schedule C. The debtor exempted two suits filed for the recovery of accounts receivable, and scheduled a value of $4,000 for each suit. The trustee failed to object to the exemptions.  The Debtor appealed the Bankruptcy Court's exemption of $8,000 from the estate and sought to exempt the full $100,000 for the suits. The debtor argued that the suits were contingent assets and therefore difficult to evaluate.

The Court of Appeals for the First Circuit held that only $8,000 can be exempted from the estate because that was the amount exempted on the exemption schedule.  The court stated that the debtor may have had a stronger argument to exempt all proceeds from the suit if it had valued the exempted asset as unknown or $1 because it would act as a red flag for the trustee to investigate further before approving the exemption.  The Court rejected the trustee's argument that the debtor should be limited to exempting $2,400 from the estate, the maximum amount of the exemption under the Bankruptcy Code, because the U.S. Supreme Court has held that once a trustee's 30 day period to challenge an exemption lapses, that asset, regardless of value, is beyond the trustee's grasp.  See Taylor v. Freeland & Kronz, 503 U.S. 638, 642(1992).

Geruschat v. Ernst Young LLP (In re Seven Fields Development Corp.), 505 F.3d 237 (3rd Cir. 2007)

The appellants alleged that Ernst & Young, as the debtor's accounting firm, committed professional negligence, fraud and deceit, and negligent misrepresentation.  These were state law claims, but the bankruptcy court asserted jurisdiction over the allegations, even though the case was closed for a number of years, because they were "arising in" the bankruptcy proceeding, which made them core proceedings.  The Court of Appeals would not review the lower courts' decisions relating to the "alleged procedural defects in the removal process and mandatory or permissive abstention." 

The Third Circuit first held that, under the version of § 1334 enacted in 1994, it could only review the lower courts' holdings relating to subject matter jurisdiction, not any procedural defects in the removal process.  The court held that while the 1994 amendments do not apply to bankruptcy cases commenced before 1994, they do apply to any "proceedings" commenced after 1994.  Therefore, the 1994 amended version of § 1334 applied because the appellants action was a "proceeding," not a "case" as defined by Pub. L. No. 103-394 § 702(b).  Compare In re Southmark Corp., 163 F.3d 925 (5th Cir. 1999) (holding that the court should only look to the date of the bankruptcy petition when determining which version of § 1334 to apply).

The court also upheld the jurisdictional rulings made by the bankruptcy and district courts.  Appellants argued that when a party files a case post-confirmation, the "close nexus" test applies because, at that point, the proceeding is non-core and only "related to" the original bankruptcy.  The Circuit Court, however, found that even though the action arose long after the bankruptcy court confirmed and closed the case, the state-law claims were core proceedings "arising in" the bankruptcy.  Thus, the court did not apply the "close nexus" test and affirmed the lower courts' rulings. 

In re Krebs, 527 F. 3d 82 (3rd Cir. 2008)

A Chapter 7 debtor sought to exclude an IRA account from which she was not able to draw, due to not meeting the prerequisite age.  The debtor argued that the requirements of § 522(d)(10)(E) for exemption from the estate were satisfied. Section 522(d)(10)(E) requires the debtor's right to payment (1) must be "under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract[;]" (2) "must be on account of … age[;]" and (3) may be exempted only "to the extent reasonably necessary for the support of the debtor any dependent of the debtor."
           
The Court of Appeals for the Third Circuit held that an IRA account for a person ineligible to claim payments due to age satisfies the first two requirements.  See Rousey v. Jacoway, 544 U.S. 320.  The case was remanded to determine if the IRA account must be exempted because it is reasonably necessary to support the debtor or her dependents.

Mfr. and Traders Trust v. Wyoming Sand and Stone, 223 Fed. Appx. 146, 2007 WL 397377 (3d Cir. 2007)

Debtor sought to auction various vehicles that it pledged as collateral to Manufacturers Trade and Trust ("M&T").  Manufacturers Trade and Trust voluntarily relinquished liens on the debtor's vehicles to allow the auctioneer to sell them at auction with the understanding that the debtor would use the proceeds to reduce its debt to M&T.  M&T subsequently sought to reinstate the liens on the unsold vehicles. 

The court held that, under state law, when liens are not noted on the certificates of title, they cannot be valid.  Thus, the court did not reinstate M&T's liens and upheld the district court's ruling that the liens were void.  The court did not weigh the intentions of the creditor, only the notation, or lack thereof, on the certificates of title controlled the court's reasoning.

When the liens are not noted on the certificates of title, the formerly secured party does not maintain priority to any proceeds.

Tidewater Finance Co., v. Kenney, 531 F. 3d 312 (4th Cir. 2008)

A 910 purchase-money creditor appealed a consumer debtor's Chapter 13 plan.  The creditor sought to assert a deficiency claim under 1325(a) of the Bankruptcy Code for the unsecured debt not satisfied by the sale of the debtor's vehicle.

After considering Congressional intent, the Court of Appeals for the Fourth Circuit held that the "hanging paragraph" in 1325(a) prevents a 910 creditor from bifurcating a claim and seeking a deficiency claim under any Federal law.  However, the Court found that there was no congressional intent to exclude any state remedies.

The Court directed that on remand the lower court should review the creditor's contractual rights in conjunction with state law to determine if the creditor may seek a deficiency judgment.  For example, the court should allow the creditor to seek a deficiency judgment if the contract makes the debtor responsible for any debt that is not satisfied by the sale of the vehicle and if under governing state law, such a provision is enforceable.

Highland Capital Mgmt. v. Chesapeake Energy Corp. (In re Seven Seas Petroleum), 522 F.3d 575 (5th Cir. 2008)

The bondholders sued a secured creditor in state court alleging that the secured creditor misrepresented the financial health of the debtor Seven Seas, which induced the bondholders to purchase unsecured bonds.  Defendants invoked the bankruptcy removal statute, 28 U.S.C. § 1452, asserting that the claims were property of the bankruptcy estate that were released through the plan confirmation, and removed the claims to the District Court for the Southern District of Texas. 

The bankruptcy court and district court ruled that the claims were property of the bankruptcy estate because the bondholders asserted them during the bankruptcy.  In overruling the lower courts, the Appeals Court held that the claims were not property of the estate because the claims were unique to the bondholders - Seven Seas could not have asserted them.  See Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972).  Indeed, the court found the injury to the bondholders was not "merely derivative of an injury to Seven Seas" and it was logical to conclude that Chesapeake could have inflicted separate injuries on Seven Seas and the bondholders.

The remaining question for the court was whether the claims should be adjudicated in bankruptcy or state court.  The bankruptcy court's post-confirmation jurisdiction is limited "to matters pertaining to the implementation or execution of the plan."  The plan only released claims against Chesapeake that the estate held.  The bondholders' claims were independent of the estate; therefore, the plan did not release the claims, nor did the bankruptcy court have jurisdiction to adjudicate them because they do not affect the plan.  Thus, the court instructed the bankruptcy court to remand the action to the state court.

James Hamilton v. Alicia Herr, --- F2d ---, (Cir. 6th 2008)

The plaintiff, a debtor, argued that 11 U.S.C. § 524(a) rendered a state-court judgment void ab initio because the judgment was entered against him after the bankruptcy court discharged his dischargeable debts.  The plaintiff argued that the Rooker-Feldman doctrine, which compels federal courts to respect a state-court judgment, did not apply in this context.

The Court of Appeals for the Sixth Circuit held that the Rooker-Feldman doctrine bars claims seeking relief from injury caused by state court judgment but that it does not provide protection where Congress provides federal courts with jurisdiction.

The court held that § 524(a) did not require the debtor to raise the discharge as an affirmative defense for the protection to be available.  Relying on In re Singleton and In re Pavelich, the court held "that a state-court judgment that modifies a bankruptcy court's discharge order is void ab initio under § 524(a)."  See 230 B.R. 533 (B.A.P. 6th Cir. 1999) and 220 B.R. 777, 783-84 (B.A.P. 9th Cir. 1999), respectively.

In summary, the court held "that a state-court judgment that modifies a discharge in bankruptcy is void ab initio and the Rooker-Feldman doctrine would not bar federal-court jurisdiction over the Debtor's complaint."

Hong Kong Electro-Chemical Works, Ltd. v. Less, 539 F.3d 795 (7th Cir. 2008)

A judgment-creditor filed a motion to void a debtor's conveyance of real property as a fraudulent transfer intended to avoid creditors.

Under Illinois law, "a resulting trust arises wherever the circumstances surrounding the disposition of property raise an inference, not rebutted, that the transferor does not intend that the person taking or holding the property … should have the beneficial interest therein." See Kaibab Indus. v. Family Ready Homes, Inc., 444 N.E.2d 1119, 1126 (1983). The court found that since the debtor found the home, paid the mortgage on the house in the form of lease payments to title owner, paid taxes on the home and arranged for the sale of the home as an attorney-in-fact for the titled owner, the transfer of the property created a trust in favor of the debtors.

However, the court remanded the case to determine whether the transfer was fraudulent under Illinois law. The court remanded the case because the lower court only considered one factor from a list of ten provided under IUFTA, 740 ILCS, the statute providing the standard to determine whether a transfer is fraudulent.

Clear Channel Outdoor, Inc. v Knupfer (In re PW, LLC), 391 B.R. 25 (9th Cir. BAP 2008)

A secured creditor credit-bid its debt in a §363(f) sale and sought to purchase the property free and clear of a junior, nonconsenting lien held by Clear Channel.  After confirmation of the sale free and clear of Clear Channel’s  lien, Clear Channel appealed in an attempt to reverse the sale order claiming the sale free and clear did not meet the prerequisites of §363(f)  The senior secured creditor argued that the appeal was moot under §363(m).

The BAP held that the appeal of the lien stripping under §363(f) was neither equitably or statutorily moot because, inter alia, §363(m) applies by its terms only to an authorization of a sale under §363(b) or (c) and not to the free and clear aspect of the sale under §363(f).  Thus only the request for relief relating to the transfer was moot, not the stripping of the junior lien.

The BAP further concluded that a sale free and clear could be based only on §363(f)(3) or (5).  With respect to §363(f)(3), (which allows a sale free and clear of a lien if the sale price is greater than the “aggregate value of all liens on such property”) the court found that the section required that the sale price exceed the amount of all liens on the property and, since the sale was for less that the amount of all liens on the property, a sale free and clear would not be permitted.

With respect to §363(f)(5) (which allows a sale free and clear of a lien if the interest being stripped could be “compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest”) the court found that the junior lien was an interest but rejected the bankruptcy court’s conclusion that any interest that can be satisfied by paying the money owed meets the requirements of §363(f)(5).  Rather the court found that paragraph (5) refers to the possibility of a proceeding in which the interest could be compelled to take less that the value of the claim secured by the interest.  It also rejected as circular reasoning the conclusion of some courts that the potential of a cramdown under §1129(b)(2) is a qualifying legal or equitable proceeding under paragraph (5).  As a result the BAP remanded the case for further proceedings in which the parties could “attempt to identify a qualifying proceeding under nonbankruptcy law (if one exists) that would enable them to strip Clear Channel’s lien” under §363(f)(5).

 

1Taken 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.

Case Law Update

Meghan Flesch
Education Director and Bankruptcy Section Liaison
CLLA

McGuire vs. U.S.
U.S. 9th Circuit Court of Appeals
12/24/08
Case No. 06-15812

The Tucker Act's sovereign immunity waiver is limited to suits filed in the United States Court of Federal Claims. Consequently, the district court in this case lacked jurisdiction to entertain a bankruptcy debtor's Tucker Act claims.

 

U.S. v. Bauer
U.S. 8th Circuit Court of Appeals
12/29/08
Case No. 08-1043, 08-1209

Convictions for bankruptcy fraud and money laundering are affirmed where: 1) defendants were not prejudiced by the admission of hortatory statements from the bankruptcy judge; 2) the admission of defiant and nonsensical affidavits by one defendant did not prejudice her ex-husband; and 3) substantial evidence showed that defendants knew the true value of their home when they submitted their original bankruptcy schedules, that they were aware of their obligation to disclose their IRA balances, that they expressly refused to cooperate with bankruptcy court orders, and that they converted estate funds into cash and spent or buried the proceeds.

In re Sanders
U.S. 6th Circuit Court of Appeals
12/29/08
Case No. 08-1201

Debtor who received a chapter 7 discharge less than four years ago is eligible for a chapter 13 discharge because his chapter 7 petition was filed more than four years ago. The four-year clock of 11 U.S.C. section 1328(f) runs from the date the chapter 7 petition was filed, not from the date of the discharge.