St. John' Case Blog

By: Alana Friedberg

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in Royal v. First Interstate Bank (In re Trierweiler),[i] the Tenth Circuit held that a mortgage granted in favor of the private electronic database Mortgage Electronic Registration Systems, Inc. (“MERS”), which “record[s] transfers of notes and mortgages,”[ii] was enforceable as to a bankruptcy trustee even though the promissory note was held by a third-party.[iii] In Trierweiler, the debtors took out a loan from and granted a mortgage to First Interstate Bank (“First Interstate”) in order to purchase a home.[iv] The mortgage identified First Interstate as the “lender,” and MERS as both the “mortgagee” and the “nominee for the lender and lender’s successors and assigns.”[v] Sometime thereafter, First Interstate assigned the note to Fannie Mae,[vi] but remained as the servicer for the loan.[vii] The debtors subsequently defaulted on the loan and filed for bankruptcy under chapter 7 of the Bankruptcy Code.[viii] The chapter 7 trustee then sought to avoid the mortgage, using his “strong arm” powers under section 544(a).[ix] In particular, the chapter 7 trustee claimed that MERS “was powerless to foreclose on the property” because it did not hold the note and instead was merely the mortgagee.[x] The trustee also claimed that while Fannie Mae held the note, it “had no ability to enforce the mortgage because it was not listed as the mortgagee in the land records . . . .”[xi] Therefore, the trustee asserted that this “combination rendered the mortgage unenforceable and void as to [him].”[xii] The bankruptcy court, however, rejected the trustee’s arguments and ruled that the mortgage was a properly recorded and enforceable security interest that could not be avoided in bankruptcy.[xiii] On appeal, the Bankruptcy Appellate Panel of the Tenth Circuit[xiv] and the United States Court of Appeals for the Tenth Circuit both affirmed.[xv]

April 2 2015

By: Michael Rich

St John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In Re Matson, the court held that a same-sex couple who filed for bankruptcy as joint debtors were “spouses” for the purpose of the Bankruptcy Code even though the petition was filed in a state that did not recognize their same-sex marriage. In Matson, the debtors were legally married in Iowa but resided in Wisconsin, which does not recognize same-sex marriages. Upon the filing of the case, a creditor moved to dismiss the bankruptcy case or, in the alternative, to bifurcate the case. The creditor argued that a joint bankruptcy case could only be commenced “by an individual that may be a debtor under such chapters and such individual’s spouse.” Further, the creditor claimed that “the definition of marriage and the regulation of marriage . . . has been treated as being within the authority and realm of the separate States.” Thus, the creditor argued that since Wisconsin did not permit or recognize same sex marriages, the debtors should not be deemed “spouses” for the purpose of a joint bankruptcy petition. In the response, the debtors relied on the Supreme Court’s holding that the federal Defense of Marriage Act, which defined marriage as a union between one man and one women, was unconstitutional because it “violate[d] basic due process and equal protection principles applicable to the Federal Government.” In particular, the debtors argued that following Windsor, the definition of marriage could no longer be restricted to “a union between one man and one woman.” Therefore, the debtors claimed that Wisconsin did not have the authority to deny a lawfully wedded couple any federal benefits, which would include same-sex couples right to file as spouses in a joint bankruptcy case. Ultimately, the Matson court denied the creditor’s motion to dismiss or, in the alternative, bifurcate the case because the court found that it was required to give full faith and credit to the Iowa marriage.

March 25 2015

By: Arthur Rushforth

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Hoffman, a bankruptcy court denied confirmation of the joint debtors’ plan after the chapter 13 trustee objected to the plan, which had a three-year applicable commitment period, holding that the debtors improperly deducted ordinary and necessary business expenses when calculating their current monthly income. Instead, the court held that the debtors should have used the gross receipts from the business. In Hoffman, a married couple filed a joint petition under chapter 13 of the Bankruptcy Code. The husband was self-employed, and pursuant to Official Bankruptcy Form 22C, the debtors deducted the husband’s ordinary and necessary business expenses from his gross receipts when they calculated their current monthly income. Based on these calculations the debtors’ annualized current monthly income was lower than the applicable median family income of in Minnesota, where they resided. Accordingly, the debtors proposed a plan that provided for them to pay $175.00 for thirty-six months. The chapter 13 trustee objected, arguing that the debtors improperly deducted business expenses when calculating the husband’s current monthly income and that the debtor’s current monthly income was above-median after eliminating that deduction, thereby triggering a five-year applicable commitment plan rather than the three-year period proposed by the debtors. In particular, the trustee argued the plain language of section 1325 did not provide for the deduction of ordinary and necessary business expenses when calculating current monthly income. The debtors responded by claiming their applicable commitment calculation conformed to the calculation scheme provided for by Official Form 22C. The court ultimately agreed with the trustee and denied the confirmation of the debtor’s plan.

March 25 2015

By: Brianna Walsh

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re 56 Walker LLC, a bankruptcy court overruled a debtor’s objection a secured creditor’s proposed order providing for the distribution of the proceeds from the sale of real property that was the debtor’s sole asset pursuant to the debtor’s confirmed plan of reorganization even though the secured creditor “gifted” a portion of its recovery to a junior class because, among other reasons, the court found that the distribution scheme would not violate the absolute priority rule. In 56 Walker, the debtor pledged a six-story mixed-use building, its sole asset, as security for an $8 million mortgage loan. After the debtor defaulted one year later, the bank that had acquired the mortgage loan from an FDIC receivership commenced a foreclosure action in New York state court. Subsequently, the debtor filed for bankruptcy under chapter 11 of the Bankruptcy Code in order to stay the foreclosure proceeding. This first case was ultimately dismissed. Following dismissal of the debtor’ first chapter 11 case, the bank resumed the foreclosure action in state court and moved for summary judgment. The debtor then crossed-moved for summary judgment, arguing that the bank had not provided adequate proof that it was the assignee of the mortgage or the note and that the bank was liable for certain lender-liability claims. The state court granted the bank’s motion for summary judgment of foreclosure and denied the debtor’s cross-motion. The debtor timely filed a notice of appeal. Prior to the state court entering the bank’s proposed judgment of foreclosure, the debtor filed a second chapter 11 case. Ultimately, the debtor confirmed a consensual plan of reorganization and sold the property for $18 million. After selling the property, the debtor objected to, among others, the bank’s claim. In its decision, the court overruled the debtor’s objection and directed the bank to settle an order to provide for the distribution of the sales proceeds. The bank then filed a proposed order, providing that (i) the bank would have a distribution in the amount of $15.1 million, (ii) another mortgage lender would have a distribution in the amount of $150,000, (iii) a mechanic’s lien holder would have a distribution in the amount of $400,000, (iv) another mechanic’s lien holder would have a distribution of $350,000, (v) the debtor’s counsel would have an administrative claim for fees and expenses capped at $250,000, and (vi) the remaining funds would be distributed to the debtor’s unsecured creditors. Equity would not receive a distribution under the proposed order. The debtor objected to the proposed order, arguing, among other things, that the proposed distribution to a mechanic’s lien holder was premature because the debtor’s previous objection to the mechanic’s lien holder’s claim was still pending. The court, however, overruled the debtor’s objection to the proposed order, noting that the only reason the mechanic’s lien holder would receive anything was the bank’s willingness to forgo part of its claim and “gift” it to the junior secured creditors.

March 25 2015

By: Sally A. Profeta

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Abraham, a bankruptcy court held that debtors living in Iran could not claim the federal homestead exemption for their real property located in New Jersey because the property did not qualify as their “residence” under section 522(d)(1) of the Bankruptcy Code. In Abraham, the married debtors moved to Tehran, Iran from New Jersey in 2011, seeking employment after the husband’s business income started to decline. Their children, however, continued to occupy the debtor’s New Jersey home, making payments for the mortgage, utilities, and the general maintenance of the property. In 2012, the debtors filed for bankruptcy in New Jersey and claimed an exemption for the New Jersey property. In their original Schedule C, the debtors claimed a $10,505.76 exemption in the New Jersey property. Subsequently, the debtors amended their Schedule C and claimed a $43,250 exemption in the property. The chapter 7 trustee objected to the debtors’ proposed exemption. The trustee argued that the property did not qualify as their residence, and the debtors filed their amended exemption in bad faith. In the husband’s certification, he indicated that, while the debtors lived and worked in Iran, they intended to return to the New Jersey property in the future. Yet this assertion contradicted the debtors’ previously filed certification in support of a motion to compel abandonment of the property, where they stated they did not intend to return to the United States in the near future. In addition to the husband’s certification, the husband offered his New Jersey driver’s license as proof of residency during a section 341 meeting of creditors. Therefore, the debtors argued that the New Jersey property was their “residence” under section 522(d)(1) of the Bankruptcy Code. Ultimately, the bankruptcy court agreed with the trustee and denied the homestead exemption.

March 22 2015

By: Ashraf Mokbel

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in National Heritage Foundation Inc. v. Highbourne Foundation, the Fourth Circuit held that a non-debtor release provision in a chapter 11 reorganization plan was not warranted by the circumstances of the case because the court found that the bankruptcy case would not be adversely affected if the provision was not included in the plan.

March 22 2015

By: Christopher J. Pedraita

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Reversing the bankruptcy court, in In re City of San Bernardino, a district court recently held that the Eleventh Amendment barred a chapter 9 debtor’s claims against certain state agencies. In San Bernardino, the City of San Bernardino (the “City”) sought to protect funds, which the State of California (the “State”) demanded that the City remit to the State. The funds at issue in San Bernardino had been parceled out to the City’s redevelopment agency (“RDA”) and earmarked for redeveloping urban neighborhoods. In light of the fiscal emergency experienced by State in 2011, however, its legislature supplanted the existing RDAs with “successor agencies” to conclude all remaining matters of the RDAs, including returning the funds to the county auditor-controller that the RDAs had not already been committed to a project. As part of this process, the State ordered the City’ successor agency to return millions of dollars in tax revenues to the State’s Department of Finance (the “DOF”). If the successor agency failed to remit the funds to the DOF, the State warned that it could withhold tax revenue from the successor agency or the City. The warning prompted the City to commence adversary proceedings against the various state agencies seeking injunctive and declaratory relief to, among other things, prevent the State agencies from withholding tax revenue from the successor agency (and the City itself). The State agencies moved to dismiss the City’s complaint on several grounds, including that claims were barred under the Eleventh Amendment. While the bankruptcy court granted the State agencies’ motion to dismiss with leave to amend, believing that the City could show imminent injury if the state agencies withheld the tax money, the court rejected the state agencies’ Eleventh Amendment defense. In particular, the bankruptcy court ruled that when the subject of litigation was unquestionably within the court’s control state sovereign immunity could not prevent the adversary proceeding. On appeal, the district court reversed the bankruptcy court holding the Eleventh Amendment to apply in order to protect the State’s rights to run its own finances.

March 22 2015

By: Sophie Tan

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Adelphia Recovery Trust v. Goldman Sachs & Co., the Second Circuit held that a fraudulent conveyance claim brought by a litigation trust, created to recover assets for the benefit of unsecured creditors of Adelphia Communications Corp. (“ACC”), was barred by the doctrine of judicial estoppel because the funds at issue were transferred from an account that the plaintiff’s predecessor-in-interest scheduled as an asset of one of the predecessor’s subsidiaries, not the predecessor itself. The litigation trust commenced a fraudulent conveyance claim against Goldman, Sachs & Co. under sections 548(a)(1)(A) and 550(a) of the Bankruptcy Code to recover certain payments made to Goldman from a concentration account held in the name of Adelphia Cablevision Corp. (“Adelphia Cablevision”), a subsidiary of ACC. Goldman later moved for summary judgment on the grounds that (1) the plaintiff lacked standing to assert the fraudulent conveyance claim because the payments were not transfers of ACC's property; and (2) the plaintiff failed to raise a material issue of fact as to whether the payments were made with an actual intent to hinder, delay or defraud ACC's creditors. In response, the litigation trust argued that “ACC was the real owner of, and payor from, the Concentration Account” because ACC exercised complete control over the collective cash of ACC and its subsidiaries in the concentration account. While the district court recognized that the money in the concentration account may have been attributed to ACC prior to the bankruptcy proceedings, the district court ruled that “the easy attribution of money to whatever entity may at the moment be convenient stopped with the bankruptcies.” Therefore, the district court granted Goldman’s motion for summary judgment, stating that “it [wa]s admitted by [the litigation trust’s] own revised pleading that the margin loan payments were not made by ACC but by Adelphia Cablevision LLC, an ACC subsidiary on whose behalf [the litigation trust] does not have standing to sue.” The Second Circuit affirmed, holding that the litigation trust did not have standing to sue because it was judicially estopped from arguing now that ACC owned the account.

March 22 2015

By: Thomas Sica

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Delphi Automotive Systems, LLC v. Capital Community Economic/Industrial Development Corporation, the Supreme Court of Kentucky held that a governmental-entity creditor must comply with Article 9 of the UCC’s perfection requirement in order to ensure that such creditor’s lien has priority over subsequent security interests. In Delphi, a governmental-entity creditor and a manufacturer entered into a “lease” covering certain equipment, which provided that the manufacturer would own the equipment upon making the final payment. A private creditor subsequently extended credit to the manufacturer and perfected a security interest in all of the manufacturer’s personal property to secure the loan. After the manufacturer defaulted on the loan, the private creditor filed an action to enforce its lien against all of the manufacturer’s personal property, including the “leased” equipment. First, the governmental creditor argued that the manufacturer did not own the equipment because it was leased. The court, however, swiftly dismissed this argument because the governmental creditor’s interest in the equipment was better defined as a security interest than an ownership interest. Second, the governmental creditor opposed the private creditor’s action, arguing that KRS § 355.9-109(4)(q) excused them from perfecting their security interest because the statute excluded “a transfer by a government or governmental subdivision or agency.” In response, the private creditor argued that KRS § 355.9-109(4)(q) did not excuse the governmental-entity creditor’s compliance with Article 9’s perfection requirements because that statute only applied to situations where the governmental unit was the debtor or borrower. The trial court ruled in favor of the governmental creditor and the intermediate appellate court affirmed. The Supreme Court of Kentucky, however, reversed and directed a verdict for the private creditor.

March 22 2015

By: Kyle J. TumSuden

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Pugh, the Bankruptcy Court for the Eastern District of Wisconsin modified the automatic stay to allow the IRS to offset the debtor’s post-petition claim for tax overpayment against the debtor’s pre-petition tax liability due to the IRS. In Pugh, the chapter 13 debtor confirmed her plan, which provided that she would be able to keep any federal or state tax refunds received during the term of the plan. Sometime after the debtor had filed, the IRS audited her pre-petition tax returns and discovered a tax liability for 2011. The debtor then filed a proof of claim on behalf of the IRS for the tax liability for 2011, and the IRS subsequently filed an amended proof of claim. In early 2014, the debtor filed her 2013 federal income tax return, claiming a refund based on an overpayment. The IRS did not remit the refund to the debtor and instead moved for an order modifying the automatic stay to allow the IRS to offset the debtor’s post-petition claim to a tax overpayment against pre-petition tax liabilities. The debtor responded that, pursuant to section 541(a)(7) of the Bankruptcy Code, the right to the refund was property of the estate because the 2013 tax refund did not exist at the time of the bankruptcy filing. In addition, the debtor argued that the 2011 tax obligation arose post-petition because, at the time of filing, she did not owe any taxes for 2011. The IRS, however, maintained that the overpayment for 2013 was not property of the debtor or the estate because under section 6402 of the Internal Revenue Code, the IRS was entitled to offset such funds against the tax liability for 2011. Therefore, the IRS argued that the debtor was entitled to a refund only if there was a net amount remaining after offset. Ultimately, the court granted the IRS’ order modifying the automatic stay, thereby allowing the IRS to offset the debtor’s post-petition tax overpayment for 2013 against the debtor’s pre-petition 2011 tax liability.

March 22 2015

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