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By: Daniel Teplin

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, a federal district court in California issued a decision in Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP[1], which is of great importance to former partners of dissolved law firms, holding that under California law, the unfinished business doctrine does not apply to hourly fee matters.[2] Therefore, the court concluded that the bankruptcy estate of a dissolved law firm did not retain a property interest in the hourly fee matters that were pending at the time the firm dissolved.[3] Heller Ehrman LLP (“Heller”) was a large global law firm before it dissolved in 2008.[4] After Heller defaulted on its revolving line of credit, the partners were unable to continue operating the firm and therefore voted to dissolve the firm.[5] Their dissolution plan included a “Jewel Waiver,” which waived unfinished-business claims for the profits generated by former Heller attorneys from any pending hourly fee matters.[6] After it filed for bankruptcy, the bankruptcy trustee sought to avoid the “Jewel Waiver” as a fraudulent transfer and recover the profits from the firm’s former members’ new firms for the pending hourly fee matters on two grounds. First, pursuant to California law, the trustee argued that the bankruptcy estate had a property interest in pending hourly matters, citing Jewel v. Boxer,[7] because the former members of the dissolved law firm violated their fiduciary duty “with respect to unfinished partnership business for personal gain.”[8] Second, the trustee asserted that two separate public policy considerations supported his claim.[9] The first consideration asserted by trustee was that “preventing extra compensation to law partnerships ‘prevents partners from competing for the most remunerative cases during the life of the partnership in anticipation that they might retain those cases should the partnership dissolve.’”[10] The idea being, that this would allow the firm to operate as one entity, and dissuade its individual members to act purely with their own interest in mind. The trustee argued that the second consideration was that holding that Heller had a property interest in the hourly matters would prevent former partners of firms from “seeking personal gain” by soliciting the firm’s former clients after its dissolution.[11] Ultimately, the court rejected the trustee’s arguments and granted summary judgment in favor of the defendant law firms and against the trustee.[12]

February 24 2015

By: D. Nicholas Panzarella

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Seven Counties Services, Inc.,[1] a bankruptcy court held that a Kentucky non-profit corporation designated as a community mental health center (“CMHC”) was not a “governmental unit” and therefore, was eligible to be a debtor in a chapter 11 bankruptcy case.[2] In Seven Counties, the CMHC debtor filed for bankruptcy under chapter 11 of the Bankruptcy Code after the Kentucky General Assembly raised the contribution rate for participants in a state pension system, which the debtor participated in pursuant to a state statute.[3] After filing, the CMHC debtor sought to reject its executory contract with the pension system.[4] In response, the state pension commenced an adversary proceeding seeking (1) a determination that the CMHC debtor was a “governmental unit,” and not a “person,” and thus was statutorily barred from seeking relief under chapter 11 of the Bankruptcy Code and (2) the issuance of a preliminary injunction compelling the CMHC debtor to continue contributing to the pension.[5] The Seven Counties court held that the CMHC debtor was entitled to chapter 11 relief and permitted the CHMC debtor to reject its executory contract with the pension system.[6]

February 22 2015

By: Debra March

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Syncora Guarantee Inc. v. City of Detroit,[1] a federal district court held that the exception to the automatic stay contained in section 922(d) of the Bankruptcy Code did not apply to casino tax revenues pledged to secure the debtor’s swap obligations because the court opined that the swap agreements were not the type of special revenue bonds that the statute was intended to protect, and the debtor’s swap obligation was not a form of indebtedness owed to the swap counterparties or the swap insurer.[2] In 2005, the City of Detroit (the “City”), in order to strengthen its finances and secure pensions, issued debt by forming two not-for-profit service corporations to issue Certificates of Participation (“COPs”) since state law prohibited the City from directly issuing more debt.[3] These service corporations sold the certificates and gave the capital to the City to fund its pensions.[4] The City needed to protect itself against the risk of floating interest rates of COPs[5] because if the rates increased, the amount of interest the City would owe would also increase.[6] In order to protect the City against this risk, the service corporations executed interest-rate swaps with two banks.[7] Since the City had major debt problems, however, investors would not buy the COPs and the banks would not execute the interest-rate swaps without an insurer guaranteeing the City’s obligations.[8] Syncora, a monoline insurer, promised to make payments under the certificates and the swaps if the City failed to do so.[9] After the City defaulted, Syncora allowed the City to enter into a collateral agreement with swap counterparties.[10] Pursuant to this agreement, the City gave swap counterparties an optional termination right and created a “lockbox” system the caused casino tax revenues to be paid into a designated bank account, which could be frozen if the City failed to make it swap payments.[11] The swap counterparties could access this casino tax revenue by obtaining the City’s permission.[12] In June 2013, Syncora notified the bank that the City had defaulted, and the bank froze the casino tax revenues in the account.[13] The City sued in state court to recover the funds.[14] After the state court ordered the bank to release the funds, Syncora removed the case to the federal district court.[15] The district court then transferred the case to bankruptcy court after the City subsequently filed for bankruptcy in July 2013.[16] In August 2013, the bankruptcy court decided that the casino tax revenue was property of the estate and protected by the automatic stay.[17] In April 2014, the district court sua sponte stayed Syncora’s appeal of the bankruptcy court’s decision regarding the lock box funds until the Sixth Circuit ruled on whether the City was eligible to file.[18] Subsequently, the Sixth Circuit granted Syncora’s request for a writ of mandamus and directed the district court to rule on Syncora’s appeal.[19] Ultimately, the district court affirmed the bankruptcy court’s ruling.[20]

February 22 2015

By: Michael Benzaki

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in In re Flannery,[i] the bankruptcy court held that the earmarking doctrine was not an appropriate defense to a preference action seeking to avoid a late-filed mortgage that was granted as part of a home-loan refinancing.[ii] In Flannery, the debtors financed the purchase of their home through an initial home-mortgage loan, which was secured by a mortgage. Further, within a year of granting the first mortgage, the debtors also granted a second-priority mortgage to secure a home equity line of credit. Subsequently, a new bank acquired both loans and mortgages from the initial lender.[iii] In 2012, the debtors refinanced the initial loan with the new bank through the Home Affordable Refinancing Program (“HARP”).[iv] In connection with the refinancing loan, the debtors granted the new bank a new mortgage against their property and the new bank executed a subordination of mortgage, subordinating the home equity mortgage to the new mortgage.[v] The proceeds from the refinancing loan were used to pay off the initial loan on January 25, 2012, and a discharge of the initial mortgage was recorded on February 21, 2012.[vi] However, the new mortgage was not recorded until April 18, 2012.[vii] Subsequently, on June 28, 2012, less than ninety days later, the debtors filed for bankruptcy under chapter 7 of the Bankruptcy Code. Since the mortgage was recorded within ninety days of the bankruptcy filing, the chapter 7 trustee for the debtors sought to avoid the refinance mortgage as a preference pursuant to section 547 of the Bankruptcy Code.[viii] Ultimately, the court rejected the new bank’s argument that, given the facts of the case at hand, the earmarking doctrine successfully defended the transaction in question from being designated an avoidable preference.[ix]

February 19 2015

By: Rosa Aliberti

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, the Fifth Circuit held, in Viegelahn v. Harris (In re Harris),[i] that any funds held by a chapter 13 trustee at the time of conversion to chapter 7 should be distributed to creditors in accordance with the chapter 13 payment plan.[ii] In In re Harris, the debtor filed for bankruptcy under chapter 13 of the Bankruptcy Code.[iii] The chapter 13 plan required the debtor to make monthly payments to a trustee for distribution to secured creditors and unsecured creditors.[iv] The debtor also was required to make monthly mortgage payments directly to Chase, his mortgage lender. After failing to do so, the bank foreclosed on his home.[v] The debtor did not modify the plan and continued making the required monthly payments to the trustee for approximately a year before converting his case to chapter 7.[vi] Since Chase no longer had a claim against the debtor, the funds that were allocated for Chase under the plan began to accumulate.[vii] After the debtor converted to chapter 7, the chapter 13 trustee distributed the funds in her possession to pay the debtor’s attorneys’ fees, the remaining secured creditor, the six unsecured creditors, and her commission.[viii] The debtor moved to compel the chapter 13 trustee to return those funds, arguing that the trustee was not authorized to distribute the funds once he converted the case to chapter 7.[ix] The bankruptcy court ordered the chapter 13 trustee to return the funds to the debtor,[x] and on appeal, the district court affirmed.[xi] The trustee appealed again, and the Fifth Circuit reversed,[xii] concluding that the creditors’ claim to the undistributed funds was greater than that of the debtor.[xiii]

February 19 2015

By: Cecilia Ehresman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


In In re Chicago Construction Specialties, Inc.,[i] the United States Bankruptcy Court for the Northern District of Illinois recently held that the debtor must satisfy the requirements of section 1113 of the Bankruptcy Code, even though the debtor was liquidating under chapter 11 instead of reorganizing.[ii] In Chicago Construction, debtor, a demolition construction company, ceased operations, sold substantially all its assets outside of bankruptcy, and sent the union representing its workers a notice that it intended to reject a collective bargaining agreement[iii] before the company filed for bankruptcy.[iv] Subsequently, the debtor filed for bankruptcy under chapter 11 of the Bankruptcy Code and moved to reject its CBAs pursuant to section 1113 of the Bankruptcy Code.[v] The union objected, arguing that the debtor had unilaterally rejected the CBA by providing an ultimatum rather than a proposal for modification.[vi] The Chicago Construction court ruled in favor of the debtor, finding that there was no good reason not to allow the debtor to reject the CBA because the debtor had already liquidated and the only effect of not allowing the debtor to reject the CBA would be to elevate the union’s claims over those of the debtor’s other creditors.[vii]

February 19 2015

By: Garam Choe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in Crawford v. LVNV Funding, LLC, the Eleventh Circuit held that the creditor violated the Fair Debt Collection Practices Act (“FDCPA”) by filing a proof of claim to collect a debt that was unenforceable because the statute of limitations had expired.[i] In Crawford, a third-party creditor acquired a debt owed by the debtor from a furniture company.[ii] The last transaction on the account occurred in October 2001.[iii] Accordingly, under Alabama’s three-year statute of limitations, the debt became unenforceable in October 2004.[iv] On February 2, 2008, the debtor filed bankruptcy under chapter 13 of the Bankruptcy Code.[v] The third-party creditor then filed a proof of claim for the time-barred debt during the debtor’s bankruptcy proceeding.[vi] Neither the debtor nor the bankruptcy trustee objected the claim.[vii] Rather, the trustee distributed the pro rata portion of the claim from the plan payments to the creditor.[viii] In May 2012, the debtor commenced an adversary proceeding against the third-party creditor alleging that the third-party creditor filed a proof of claim for a time-barred debt in violation of the FDCPA.[ix] The bankruptcy court dismissed the adversary proceeding in its entirety, and district court affirmed.[x] In affirming the bankruptcy court’s dismissal, the district court found that the third-party creditor did not attempt to collect a debt from the debtor because filing a proof of claim is “merely ‘a request to participate in the distribution of the bankruptcy estate under court control.’”[xi] Furthermore, the district court found that, even if the third-party creditor was attempting to collect the debt, the third-party creditor did not engage in abusive practices.[xii] On appeal, the Eleventh Circuit reversed, holding that the third-party creditor violated the FDCPA by filing a stale claim in the bankruptcy court.[xiii]

February 19 2015

By: Adam C.B. Lanza

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Dayton Title Agency, Inc., where a title company’s bankruptcy estate sued a paid-off lender to recover a fraudulent transfer,[1] the Sixth Circuit Court of Appeals held that the funds paid out of the debtor’s trust account constituted property of the debtor at the time of transfer for purposes of avoiding a fraudulent transfer.[2] In Dayton Title, the chapter 7 trustee (“trustee”) commenced an adversary proceeding to avoid, as a constructively fraudulent transfer, a payment the debtor had made to its client’s lender from the trustee’s client trust account without waiting for a forged check to clear.[3]  The funds used to make the payment were from a provisional credit that the debtor’s bank extended to it.[4]  In response to the fraudulent transfer action, the lender argued, among other things, that the transfer was not constructively fraudulent because the money that the lender received was not property of the title agency, as the money was being held in trust for a third party.[5] The bankruptcy court entered summary judgment in favor of the trustee, holding that majority of the payment was constructively fraudulent.[6]  On appeal, the district court held that only a small portion of the payment was fraudulent.[7]  However, the Sixth Circuit reversed the district court and affirmed the bankruptcy court’s ruling.[8]

January 27 2014

By:  Steven Ching

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Joining the majority of courts, in In re Salpietro, the United States Bankruptcy Court for the Eastern District of New York held that a post-petition review of the debtor’s net disposable income was not required under the Bankruptcy Code and did not provide the basis for an upward modification under section 1329(a).[1]  There, the debtors confirmed joint chapter 13 plan that provided that the “future earnings of the debtor [were to be] submitted to the supervision and control of the trustee.”[2]  After making timely payments for five years, the debtors moved to approve a loan modification that would essentially reduce their monthly mortgage expenses by approximately $970.[3]In response, the chapter 13 trustee cross-moved to increase the debtors' payments under their plan on the grounds that the decrease in the debtors’ expenses constituted “future earnings,” and therefore, under the plan, were to be “submitted to the supervision and control of the trustee.”[4]  However, the court disagreed and denied the trustee’s motion for upward modification, holding that: (1) section 1325(b)’s projected disposable income test does not apply to modifications under section 1329, and (2) section 1322(a)(1) did not provide a basis for upward modification because the reduction of the debtor’s mortgage expenses did not constitute additional income or earnings.[5]

January 27 2014

By: Michael Foster

St. John’s Law Student
 
American Bankruptcy Institute Law Review Staff
 
 
Following the conversion of the bankruptcy case from chapter 11 to chapter 7, the Bankruptcy Court for the Southern District of Florida, in In re National Litho, LLC, recently held that a DIP lender’s pre-conversion superpriority claim had priority over any and all post-conversion administrative expenses.[1]  In National Litho, the debtor initially filed its bankruptcy case under chapter 11 of the Bankruptcy Code.  In its motion to approve the post-petition financing, the debtor requested the authority to grant the DIP lender a superpriority claim under section 364(c)(1), which would have priority over “any and all administrative expenses.”[2]  Two days after the court approved the DIP financing, the court converted the case from chapter 11 to chapter 7. [3] The chapter 7 trustee subsequently objected to the DIP lender’s motion to allow its superpriority claim.[4]   The court found that the phrase “any and all administrative expenses” included any and all chapter 7 administrative expenses.[5]  Therefore, the court opined that the conversion of a bankruptcy case under chapter 7 did not impact the priority of a pre-conversion superpriority claim granted under section 364(c)(1).[6]  Accordingly, the court held that the DIP lender’s claim had priority over the post-conversion administrative expenses.[7]
 
January 27 2014