Blogs

By: Aura M. Gomez Lopez

St. John’s University Law Student

American Bankruptcy Law Review Staff

In a case of first impression, in Whyte v. Barclays,[1] the United States District Court for the Southern District of New York recently held that a trustee for a litigation trust, created pursuant to a confirmed chapter 11 plan, could not use state law to avoid a swap agreement as a fraudulent conveyance.  In Whyte, SemGroup, filed for bankruptcy in 2008.[2] On October 28, 2009, the court approved the creation of a litigation trust charged with the responsibility to liquidate SemGroup’s assets.[3] Prior to filing for bankruptcy, SemGroup entered into a novation with Barclays, by which Barclays acquired SemGroup’s portfolio of commodities derivatives.[4] However, soon after the novation was completed, the portfolio became profitable.[5] As a result, the litigation trustee sought to avoid the swap agreement on the grounds that the transaction between SemGroup and Barclays was a fraudulent conveyance under New York law.[6]  The litigation trustee, however, did not attempt to avoid the swap agreement under section 544 of the Bankruptcy Code due to the safe harbor provision of section 546(g).[7] Notwithstanding the litigation trustee’s attempt to circumvent the safe harbor provision of section 546(g), the district court dismissed the trustee’s complaint and held that section 546(g) preempted the state-law fraudulent conveyance claims.[8]

By: Patrick Christensen

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Reed,[1] the Bankruptcy Court of the Eastern District of Tennessee recently held that the issuance of an IRS Form 1099-C, which is used to indicate cancellation-of-debt (“COD”) income, reflected that a creditor had forgiven the related debt, and therefore, the court disallowed the creditor’s proof of claim.[2]  In Reed, the debtors defaulted on property payments, and the resulting foreclosure sale left a deficiency owed to creditors.[3]  Later, the creditors issued an IRS Form 1099-C indicating that the creditor had forgiven its deficiency claim, which the debtors relied on when filing their taxes.[4] Notwithstanding the issuance of the IRS Form 1099-C, the creditors still sought a default judgment to collect the deficiency claim (plus fees and costs).[5]  In its decision, the Reed court stated that it would be unfair to require the debtor to pay taxes on cancelled debt while still allowing the creditor to stake a claim on the debt.[6] This would equate to the debtor paying the same debt twice – first in the form of taxes on gross income (cancelled debt), and then a second time when paying the creditor’s claim. The court acknowledged that it was adopting the minority position, but opined that under the circumstances, the decision was “in the interests of justice and equity . . . [and was therefore] the proper” one.[7]

By: Andrew Reardon

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Debenedetto[1] the Bankruptcy Court for the Northern District of New York held that a debtor could not modify the interest rate on tax liens on his property that had been purchased by a creditor from the City of Schenectady, NY (the “City”) because the creditor was the holder of a “tax claim” that cannot be modified under section 511(a) of the Bankruptcy Code.[2]  In Debenedetto, the creditor, American Tax Funding, LLC (“ATF”), purchased a tax lien from the City and claimed that the debtor owed a rate of 21 percent per annum on the lien, which was the interest rate imposed by statute for delinquent real property tax payments owed to the City.[3]  The debtor objected to ATF’s claims, arguing that ATF was not the holder of a “tax claim” under section 511(a) and was therefore not entitled to receive the anti-modification protection afforded by that section. Thus, the debtor argued that the interest rate on AFT’s secured claim was subject to modification  pursuant to the methodology set forth by the Supreme Court in Till v. SCS Credit Corp.,[4] which would likely result in the creditor receiving a significantly lower interest rate on the liens. To determine whether ATF had a “tax claim,” the court looked to two factors: (1) whether the payment by the private purchaser to the government entity extinguished the underlying debt[5] and (2) whether there was a “continuity of rights between the original holder . . . and the private purchaser.”[6] When applying the first factor, the court found that “the underlying tax debt was not extinguished upon payment . . . to the City . . .” because ATF was not required to pay the full face amount of the tax lien.[7]  Furthermore, the court also reasoned that the underlying debt was not extinguished by the sale because the City was entitled to repurchase the tax liens from ATF.[8]  With respect to the second factor, the court concluded that there was a continuity of rights between the City and ATF because by the terms of the Purchase and Sale Agreement, the City assigned its right of claim on the delinquent tax debt to ATF. Thus, the court concluded that ATF, as a secured creditor, held a valid “tax claim” and was entitled to the applicable interest rate as determined by state law.

By: Joshua Nadelbach

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Rejecting the majority view, in Ah Quin v. County of Kauai Dept. of Transp.,[1]  the Ninth Circuit reversed the District Court for the District of Hawaii and held that the district court applied the judicial estoppel doctrine too broadly.[2] Specifically, the Ninth Circuit held that if a plaintiff-debtor (1) claims that her failure to list a pending lawsuit in a bankruptcy schedule was due to a “mistake” or “inadvertence” and (2) seeks to reopen the bankruptcy proceeding, then the court must first examine the plaintiff-debtor’s subjective intent regarding how he or she filled out the schedule before deciding that the judicial estoppel applies.[3] The court explained that if a plaintiff-debtor’s omission occurred by accident or was made without the intent to conceal the pending lawsuit, judicial estoppel should not bar the plaintiff-debtor’s pending lawsuit.[4]

By: Raff Ferraioli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In Re Residential Capital, LLC,[1] the United States Court of Appeals for the Second Circuit remanded the case, while preserving appellate jurisdiction,[2] in order to resolve whether the automatic stay applied to non-debtors.[3]  Prior to the appeal, the District Court for the Southern District of New York denied the debtors’ motion to stay a lawsuit brought by the Federal Housing and Finance Agency (“FHFA”) against the debtors’ corporate parents and affiliates.[4] In 2011, FHFA brought an action against the debtors and certain of their corporate parents and affiliates, alleging that they made material misstatements concerning mortgage-backed securities purchased by Freddie Mac.[5]  While that suit was ongoing, the debtors filed for bankruptcy.[6]  Despite the bankruptcy filing, FHFA continued to prosecute its claims against the non-debtor defendants.[7]  The district court held that the automatic stay could not extend to non-debtor entities because they were not in bankruptcy, without determining whether the lawsuit against those entities would have immediate adverse economic consequences on the debtors’ estates.[8]On appeal, the Second Circuit remanded the case, instructing the district court to make such a determination.[9]