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By: Sharon Basiratmand

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in Jonak v. McDermott,[i] a federal district court in Minnesota affirmed a bankruptcy court’s ruling that an individual and his companies functioned as bankruptcy petition preparers, regardless of what they actually called themselves.[ii] In particular, the district court affirmed the bankruptcy courts order enjoining the individual and his companies from “providing any bankruptcy assistance within the meaning of section 101(4A) to an assisted person for compensation, without giving all disclosures required by sections 527 and 528(a).”[iii] The district court also held that the bankruptcy court’s order disgorging the fees paid to the individual and his companies was proper.[iv] In Jonak, Edward Jonak was sole shareholder, president, and operating principal of Affordable Legal Services (“ALC”). [v] He advertised ALC as providing “low cost legal aid,” including services by “program attorneys.”[vi] Acting through ALC, he provided forms for clients to complete, assisted in preparing bankruptcy petitions on their behalf, answered questions about how to complete forms, and provided completed firms to a service to type into completed bankruptcy petitions and schedules.[vii] After investigating Mr. Jonak’s conduct in the underlying bankruptcy cases the United States Trustee (the “UST”) filed a complaint against Jonak and his companies, alleging that Mr. Jonak violated five provisions of section 110 of the bankruptcy code, all of which are applicable to petition preparers.[viii] The complaint also alleged that Mr. Jonak violated section 527 by failing to provide required notices and section 528 by failing to identify his company as a debt relief agency.[ix] In response, Mr. Jonak denied that section 110 applied, asserting that he did not physically prepare the bankruptcy documents and therefore was not a bankruptcy petition preparer.[x] He further contended that sections 526 to 528 did not apply, arguing that his company, ALC, was not a debt relief agency.[xi] After the UST moved for summary judgment, the bankrupty court found that Jonak and ALC functioned as bankruptcy petition preparers and that ALC qualified as a debt relief agency.[xii] Therefore, the bankruptcy court enjoined him from committing any future violations of section 110, ordered forfeiture and turnover of fees received, and awarded the UST liquidated damages.[xiii] On appeal, the district court affirmed.[xiv]

March 20 2015

Charles Lazo

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in Wells Fargo Bank, N.A. v. 804 Congress, L.L.C. (In re 804 Congress, L.L.C.),[i] the Fifth Circuit held that federal law governs an oversecured creditor’s recovery of post-petition attorneys’ fees from the proceeds from the sale of the creditor’s collateral.[ii] In In re 804 Congress, L.L.C., a bank financed the debtor’s purchase of an office building.[iii] The loan was secured by a deed of trust.[iv] The deed of trust provided, among other things, that the debtor was required to pay the bank it attorneys’ fees following a foreclosure of the property.[v] After the bank scheduled a foreclosure sale of the property, the debtor filed for bankruptcy.[vi] Subsequently, the bankruptcy court granted the bank’s motion for relief from the automatic stay in order to complete the non-judicial foreclosure sale.[vii] Following the sale, the bankruptcy court exercised jurisdiction over the sales proceeds, and therefore, the bank filed proofs of claim for the amount it was owed under the deed of trust.[viii] The debtor objected to the bank’s proofs of claims and moved to require the trustee under the deed of trust to distribute the principal and interest due the bank and a second-lien holder and to pay the remaining amount to the debtor pending resolution of the claims against those funds.[ix] The bankruptcy court ruled that (1) the second-lien holder was entitled to be paid in full, (2) the bank was entitled to full payment except for the attorneys’ fees because the bank did not file the “proper application for [the] fees” and “provided no supporting documentation or testimony that the fees were reasonable”[x] under section 506(b),[xi] and (3) the trustee was entitled to a fee in the amount equal to twenty hours at her hourly rate instead of five percent of the total sale price.[xii] On appeal, “[t]he district court remanded ‘for further proceedings with instructions that [trustee] disburse the foreclosure-sale proceeds in accordance with Texas law and the [d]eed of [t]rust.’”[xiii] On appeal to the Fifth Circuit, the bank argued that state law governed its recovery of attorneys’ and other fees from the sale proceeds or, in the alternative, that the attorney fees should be recoverable under section 502.[xiv] The Fifth Circuit reversed the district court, concluding that “[b]ased on this record, [the court could not] say that the bankruptcy court erred in finding under [section] 506(b) that the amount of attorneys’ fees [the bank] sought [were] not substantiated and therefore [were] not shown to be reasonable.”[xv] Further, since it was unclear whether the issue had been raised below, the Fifth Circuit remanded the case to the bankruptcy court to determine whether the bank was entitled to an unsecured claim for its attorneys’ fees under section 502.[xvi]

March 16 2015

By: Carmella Gubbiotti

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, the United States Bankruptcy Court for the Southern District of Indiana in In re Fecek,[i] partially discharged a substantial portion a debtor’s student loan debt even though the debtor was working full time and earned an income that was above the state median.[ii] In particular, the Fecek court applied section 523(a)(8) of the Bankruptcy Code’s[iii] undue hardship exception to award a partial discharge of student debt in a chapter 7 bankruptcy in which the debtor was actually utilizing her degree in a full time position.[iv] The debtor in Fecek earned professional degrees in both psychology and nursing.[v] As result financing these degrees by taking out student loans, the debtor owed nearly $280,000 to private student loan lenders in addition to almost $65,000 in federal student loan debt. Unfortunately for the debtor, the value of her loans was less than her earing potential and further, the Sallie Mae was unwilling to engage in loss mitigation negotiations.[vi] Faced with an impossible situation, in November 2012, the debtor filed for chapter 7 relief in the Southern District of Indiana. She initiated an adversary proceeding to determine whether she would be eligible for a discharge of her student loans due to undue hardship. The court ultimately found her loans to be partially dischargable.

March 5 2015

By: Adrianna R. Grancio

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in In re Asarco,[i] the Fifth Circuit held that a bankruptcy court did not abuse its discretion in authorizing fee enhancements to two law firms representing a chapter 11 debtor in connection with their remarkably successful fraudulent transfer litigation.[ii] The Fifth Circuit also agreed with the lower court decision in rejecting compensation for the defense of fee applications[iii]. In In re Asarco, Baker Botts L.L.P. (“Baker Botts”) and Jordan, Hyden, Womble, Culbreth & Holzer, P.C. (“Jordan Hyden”) served as debtor’s counsel to the chapter 11 debtor and helped the debtor confirm a plan that paid creditors in full[iv]. In connection with that representation, Baker Botts and Jorden Hyden successfully prosecuted complex fraudulent transfer claims against the debtor’s parent corporation resulting in an unprecedented judgment valued at between $7 and $10 billion.[v] While Baker Botts and Jordan Hyden were compensated pursuant to section 330(a) of the Bankruptcy Code, the bankruptcy court authorized a twenty percent fee enhancement for Baker Botts and a ten percent fee enhancement for Jordan Hyden.[vi] The bankruptcy court based the authorization of the fee enhancements on the “rare and exceptional” performance of the firms in successfully prosecuting a multi-billion dollar fraudulent conveyance action and the fact that the rates charged by Baker Botts were roughly twenty percent below market rate.[vii] On appeal to the district court, the fee enhancements were affirmed.[viii] After the parent corporation appealed again, the Fifth Circuit affirmed the lower court’s authorization of the fee enhancements.[ix] Further, the Fifth Circuit, ruling in line with the Eleventh Circuit[x] held that based on the plain meaning reading of Section 330(a) compensation for the cost counsel or professionals incur in defending fee applications is not permissible.

March 4 2015

By: Samuel Cushner

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in FDIC v. AmFin Financial Corp.,[i] the Sixth Circuit held that a tax sharing agreement between a bank holding company and its subsidiary was ambiguous as to the ownership of an income tax refund and that the district court erred in refusing to consider extrinsic evidence concerning the parties’ intent as to the ownership of the funds.[ii] In 2009, the bank holding company filed for chapter 11 bankruptcy protection.[iii] As a result, the Office of Thrift Supervision closed the bank holding company’s bank subsidiary and placed it into FDIC receivership.[iv] Later on, the bank holding company filed a consolidated 2008 federal tax return on behalf of itself and its affiliates showing a total net operating loss of $805 million, with the bank subsidiary’s losses accounting for $767 million of that total.[v] After the IRS issued a refund of approximately $195 million to the parent company, the FDIC claimed[vi] that over $170 million of that refund belonged to the bank subsidiary. Finding that the tax sharing agreement was unambiguous, the United States District Court for the Northern District of Ohio concluded that the tax sharing agreement created a debtor-creditor relationship with respect to tax refunds between the parent and its affiliates, including the subsidiary, and thus, the parent owned the refund.[vii] The Sixth Circuit reversed and remanded to the district court to determine whether the tax sharing agreement created either a debtor creditor relationship or a trust or agency relationship under Ohio law with respect to the tax refunds.

March 4 2015

By: Nancy Bello

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in In re Parikh,[i] a bankruptcy court imposed sanctions pursuant to Rule 9011 of the Federal Rules of Bankruptcy Procedure against a debtor’s attorney who signed a chapter 7 petition that contained incomplete and incorrect information that was clearly refuted by the debtor’s previous chapter 13 petition.[ii] In Parikh, the debtor initially filed under chapter 13 of the Bankruptcy Code.[iii] Subsequently, the debtor’s chapter 13 case was dismissed for the debtor’s failure to produce documents.[iv] The debtor then filed a second bankruptcy case under chapter 7 of the Bankruptcy Code in order to stop a judgment creditor’s enforcement action in state court.[v] Although the debtor’s chapter 7 attorney could access the chapter 13 petition and schedules on PACER, there were several discrepancies between the information provided in the petition and schedules in the chapter 13 case in comparison to the information contained in the petition and schedules in the chapter 7 case.[vi] For example, the Schedule H to the chapter 13 petition indicated there were co-debtors, while the Schedule H to the chapter 7 petition did not.[vii] Further, the chapter 13 petition reflected monthly payments on the debtor’s first mortgage of $823.73, while the chapter 7 petition reflected a monthly first mortgage payment of $1,700.[viii] In addition, the chapter 7 petition failed to reveal a Citibank bank account, which the debtor disclosed in the chapter 13 petition.[ix] Subsequently, the judgment creditor commenced an adversary proceeding seeking to dismiss the chapter 7 petition as a bad faith filing, or alternatively, to deny the debtor’s discharge.[x] While the bankruptcy court refused to dismiss the case, the court did enter an order denying the debtor’s discharge.[xi] Shortly after the court entered that order, the judgment creditor moved for sanctions against the debtor and the debtor’s attorney pursuant to Rule 9011, § 707(b)(4)(C) and (D), 11 U.S.C. § 105, 28 U.S.C. § 1920, 28 U.S.C. § 1927, and the court’s inherent powers.[xii] The bankruptcy court initially denied the sanctions motion.[xiii] On appeal, however, the district court remanded the matter for further findings.[xiv] On remand, the bankruptcy court found that the debtor’s chapter 7 attorney’s conduct was sanctionable pursuant to Rule 9011(b)(3) as to the attorney and his firm.[xv] The bankruptcy court declined to impose monetary sanction; instead, the court determined that publication of its decision was an appropriate sanction against the chapter 7 attorney and his firm.[xvi]

March 4 2015

By: Crystal Lawson

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


In In re Interstate Bakeries Corp.,[i] the United States Court of Appeals for the Eighth Circuit recently held that a trademark license agreement was not an executory contract because it was part of a larger, integrated sale agreement that had been substantially performed by both parties.[ii] Accordingly, since the debtor could not reject the agreement, the Eighth Circuit did not determine whether the rejection of a trademark-licensing agreement necessarily terminates the licensee’s rights in the trademark.[iii] In 1996, Interstate Brands Corp (“IBC”), a subsidiary of Interstate Bakeries Corporation (“Interstate Bakeries”), transferred two of its brands and certain related assets to Lewis Brothers Bakeries (“LBB”) pursuant to an antitrust judgment.[iv] In connection with the sale, the parties entered into an asset purchase agreement and a trademark license agreement.[v] In 2004, Interstate Bakeries and eight of its subsidiaries, including IBC, filed for bankruptcy under chapter 11 of the Bankruptcy Code.[vi] After Interstate Bakeries disclosed that it intended to assume the trademark license agreement, LBB commenced an adversary proceeding seeking a declaration that the agreement was not an executory contract under section 365(a) of the Bankruptcy Code and therefore, was not subject to assumption or rejection.[vii] Finding that both parties owed material obligations under the trademark license agreement, the bankruptcy court held that the agreement was executory.[viii] The district court affirmed that decision.[ix] The Eighth Circuit, however, reversed, holding that the trademark license agreement was not executory because it was part of a larger, integrated contract that had been substantially performed.[x]

March 1 2015

By: Pamela Frederick

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Notwithstanding a debtor’s high income and ability to pay creditors, in In re Snyder,[i] a bankruptcy court in New Mexico recently refused to dismiss the debtor’s chapter 7 bankruptcy case because the court found that the debtor did not act in bad faith when filing the case.[ii] The debtor, a 63-year-old doctor with an annual salary of $290,000, filed for bankruptcy under chapter 7 of the Bankruptcy Code in order to discharge a $170,000 debt.[iii] In response, the debtor’s sole creditor moved to dismiss the case, or alternatively, to convert the case to one under chapter 11, arguing that the debtor filed the case in bad faith.[iv] In support of its motion under section 707(a), the creditor argued that the debtor’s high income, ability to repay, failure to try to repay, failure to schedule his wife’s jewelry, use of his historical average expenses on his Schedule J, and the fact that the movant was the debtor’s only unsecured creditor were all indicia of the debtor’s bad faith.[v] The debtor responded that he did not file his chapter 7 case in bad faith, arguing that his age, lack of retirement savings, lack of a lavish lifestyle, and compliance with the Bankruptcy Code all indicated that he filed his petition in good faith.[vi] The court ultimately denied the creditor’s motion, concluding that despite the existence of unfavorable factors and the debtor’s high income, the debtor’s desire to save for retirement was “consistent with good faith.”[vii] Likewise, the court denied the creditor’s motion to convert because the evidence relied upon to support a conversion under section 706(b) was “identical” to the evidence in support of the motion to dismiss under section 707(a).[viii]

February 26 2015

By: Shantel M. Castro

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in In re The Great Atlantic & Pacific Tea Company, Inc.,[i] the District Court for the Southern District of New York upheld a bankruptcy-court order enforcing an abatement provision in a lease.[ii] The case involved a twenty-year lease between a commercial landlord and a grocery store.[iii] Under the terms of the lease, the grocery store was to construct its own building on the leased premises, and the landlord would pay the grocery store a $1.9 million construction allowance within ninety days of the grocery store opening to the public.[iv] A provision in the lease stated that if the landlord failed to pay the construction allowance, the grocery store’s obligation to pay fixed rent and other charges would abate until the allowance was paid with interest.[v] The lease further provided that the grocery store would have title to the building until such time. [vi] A subsequent section of the lease entitled “Landlord default” detailed the remedies available to the grocery store in the event of a default by the landlord.[vii] After the grocery store opened, but just prior to the deadline for payment of the construction allowance, the grocery store filed for bankruptcy under chapter 11 of the Bankruptcy Code.[viii] The landlord’s financing for the construction allowance was conditioned on the grocery store assuming the lease.[ix] The lease was not assumed prior to the payment deadline for the construction allowance, therefore the landlord could not close on its financing.[x] Consequently, the landlord did not pay the construction allowance on time.[xi] Therefore, the grocery store withheld rent payments and property taxes due under the lease until the construction allowance was paid nine months later.[xii] The landlord commenced an adversary proceeding to collect the rent and filed a cure claim after the grocery store assumed the lease.[xiii] The bankruptcy court dismissed the adversary proceeding and denied the cure claim.[xiv] On appeal, the district court affirmed.[xv]

February 26 2015

Michael Vandermark

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Madoff Securities, the United States District Court for the Southern District of New York recently held that section 550(a)(2) of the Bankruptcy Code does not apply extraterritorially.[1] There, the SIPA trustee sought to recover both funds transferred from Madoff Securities in New York to several Madoff-related foreign feeder funds[2] and, more specifically, subsequent transfers made by those feeder funds to their foreign investors.[3] The trustee argued that because the defendants had allegedly received several million dollars in fraudulent subsequent transfers from the feeder funds, he was entitled to reclaim those funds under section 550(a)(2) of the Bankruptcy Code.[4] In response, Defendants’ argued that section 550(a)(2) does not apply extraterritorially and therefore does not reach those subsequent transfers made from one foreign entity to another.[5] Ultimately, the Madoff Securities court held that section 550(a)(2) cannot be applied against the foreign defendants on an extraterritorial basis.[6]

February 24 2015