By: Klevis Peshtani
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Does the equitable right of an individual, whose property has been damaged by the debtor’s pollution, to injunctive clean-up relief constitute a “claim” that may be discharged in the debtor’s Chapter 11 bankruptcy? Yes, according to the Pennsylvania Bankruptcy Court, which in Krafczek v. Exide
held that individual plaintiffs who are not exercising the state’s police and regulatory powers, cannot qualify for the narrow exclusion that allows for state enforcement actions to survive a Chapter 11 bankruptcy discharge.
By: Brian Lacoff
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In a decision of importance to Chapter 13 debtors’ attorneys, the Bankruptcy Court for the District of New Jersey ruled that an undersecured creditor, Ford Motor Credit Co., was entitled not only to adequate protection payments, but that the section 507(b)
“super-priority” status of the inadequate adequate protection provided during the case meant that the Chapter 13 plan had to pay those amounts before paying any of the debtor’s attorneys fees.
[2]
Ford Motor Credit objected to the debtor’s Chapter 13 plan for failure to provide adequate protection payments, violating 11 U.S.C. §§ 361, 1325 and 1326.
[3]
The debtor modified the plan to include adequate protection payments, but objected to the creditor’s contention that those payments had super-priority over debtor’s attorney fees.
[4]
The court agreed with Ford Motor Credit, reasoning that the creditor, having a lien on the debtor’s property, must be afforded protection against the daily depreciation of its property.
[5]
By: Joe Scolavino
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Although the Second Circuit generally treats severance payments as priority administrative expenses when employment is terminated during the employer’s bankruptcy,
early retirement benefits triggered by severance are not entitled to administrative expense treatment.
[2]
In Supplee v. Bethlehem Steel Corp. (In re Bethlehem Steel Corp.) the early retirement withdrawal penalty was waived due to the employee’s termination.
[3]
The employee argued that the extra money derived from the waived penalty constituted a severance payment that was entitled to an administrative priority in the Bethlehem bankruptcy.
[4]
The court disagreed, reasoning that that the lump-sum retirement benefits for which the employee became eligible at termination did not constitute a new benefit earned at termination, and was thus not entitled to administrative priority.
[5]
By: Robert Ryan
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Firmly adopting the “exclusive” view of claim objections, the Tenth Circuit Bankruptcy Appellate Panel in B-Line, LLC v. Kirkland
held that a claim could not be disallowed under 11 U.S.C. § 502
[2]
for failure to submit supporting documentation with a proof of claim since that is not one of the grounds expressly stated in the statute.
[3]
Although Federal Rule of Bankruptcy Procedure 3001 requires that supporting documentation be provided with a proof of claim,
[4]
neither the Rule nor the statute clearly states what to do if a creditor fails to submit supporting documentation.
[5]
The court held that section 502(b) provided an exclusive list of reasons why a claim should be dismissed, reasoning that the “shall allow … except” command in section 502(b) and the absence of an expansive term like “including” indicated that the list was exclusive.
[6]
Since the Rules cannot modify substantive rights, technical defects in the proof of claim are not grounds for objection.
[7]
By: James Lynch
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Although the Bankruptcy Abuse Protection Act of 2005 (“BAPCPA”) largely eliminated the so-called “ride through” option for security interests in personal property, the Connecticut Bankruptcy Court in In re Caraballo
held that the option remains available for liens secured by real estate. Under the ride through, a debtor whose real estate mortgage is not in default does not have to reaffirm the debt or surrender the real estate, but can retain the real estate by continuing to make the scheduled mortgage payments.
[2]
Thus, since the debtor in Caraballo was not in default, the Court disapproved the debtor’s mortgage reaffirmation agreement as not being in her best interests “because she could retain the subject real property without reaffirming the [d]ebt.”
[3]
By: Jonathan Grasso
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In Walden v. Walker (In re
the Eleventh Circuit Court of Appeals held that the bankruptcy court has the power to remove a trustee sua sponte. In
[2]
The debtor moved for removal and the trustee responded by asserting that a debtor in an insolvent estate had no pecuniary interest and thus was not a party in interest and lacked standing to challenge the trustee’s appointment.
[3]
The court found that she had lied under oath concerning her relationship with the creditor and removed her as trustee.
[4]
On appeal, the Eleventh Circuit held that bankruptcy judges possess the power to remove a trustee for lying under oath, sua sponte, after notice and a hearing.
[5]
By: Elizabeth L. Anderson
St. John's Law Student
American Bankrutpcy Institute Law Review Staff
Rejecting the Second Circuit’s Wagoner
rule and agreeing with the First, Third, Fifth, and Eleventh Circuits, United States Court of Appeals for the Eighth Circuit held that the collusion of corporate insiders with third parties to injure the corporation does not deprive the corporation’s trustee of standing to sue third parties.
[2]
However, such a situation may give rise to the defense of in pari delicto barring the trustee’s action.
[3]
By: Paola Chiarenza
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Although the “means test” added by the 2005 BAPCPA amendments
was designed to ensure that chapter 13 debtors repay creditors as much as they can afford, the Bankruptcy Court for the Southern District of New York followed a plain language approach to hold that in determining a debtor’s disposable income the proper deduction is the full amount of the rental allowance set forth in the objective IRS Standards, even though the actual rental expense is lower.
[2]
After surveying numerous approaches to addressing the section 1325 (b)(3) and section 707 (b)(2)(A)(ii)(I) directives regarding disposable income, the Court noted that there is “no clear consensus” as to whether the IRS Standard or a lower actual amount applies.
[3]
By: Elizabeth Filardi
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In Morris v. St. John National Bank,
the Tenth Circuit concluded that a bankruptcy trustee who successfully avoids a lien under the Bankruptcy Code does not automatically assume all the rights the original lienholder may have against the debtor.
[2]
Here, the debtors borrowed $3,050 from the bank, using their 1980 Pontiac Trans Am as security.
[3]
On the date the debtors filed for bankruptcy, they still owed the bank $3,237.50 on the loan, but the fair market value of the car was only $2,000.
[4]
The Trustee successfully avoided the bank’s lien on the car. While §551 preserved the lien for the benefit of the estate,
[5]
the issue was whether bankruptcy law permitted the trustee to recover the full amount owed or whether the trustee was limited to the value of the bank’s security interest in the car itself.
[6]
The Tenth Circuit concluded that a trustee who avoids a lien pursuant to 11 U.S.C §544 and preserves it under §551 is limited to the value of the lien and does not acquire the bank’s right to collect any debt amount beyond the value of the security interest.
[7]
Consequently, the trustee’s recovery was limited to the $2,000 value of the secured interest on the debtor’s car and could not recoup the full $3,237.50 value owed on the loan at the time of the bankruptcy filing.
By: Seth Meyer
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In a major expansion of the use of mandatory mediation, the Michigan Bankruptcy Court ordered mediation of nearly 1170 preference actions filed in conjunction with Collin& Aikman’s
Chapter 11 reorganization plan.
[2]
In re Collins & Aikman Corp., 376 B.R. 815 (Bankr. E.D. Mich. 2007. The court concluded that mediation “will promote the just, speedy and inexpensive resolution of these adversary proceedings.”
[3]
The court went further and both required defendants to share the costs of mediation and provided for default judgment to be entered against parties failing to engage in the mediation process.
[4]