Blogs

By: MaryBeth C. Allen
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In a case of first impression, a New York bankruptcy court[1] suggested that a reduced prison term could be considered new value for purposes of the 11 U.S.C. § 547(c)(1) preference defense.[2] In Citron, the debtor pled guilty to numerous felonies after entering into a criminal plea bargain agreement, which included a $75,000 fine and a reduced prison term.[3] The debtor paid the $75,000.00 fine two days before filing chapter 13.[4] There was no dispute that the payment was preferential,[5] but the court dismissed the State’s motion to dismiss based on the affirmative defense of new value under section 547(c)(1), not because it was inapplicable, but for lack of evidence of value.[6]

By: Michael J. Keane
St. John's Law Student
American Bankruptcy Institute Law Review Staff 

Recently, the In re Lehman Brothers Holdings Inc.[1] bankruptcy court held that a creditor may only exercise a “setoff” against a debt owed to a debtor when “mutuality” exists between that debt and the obligation running to the creditor from the debtor.[2] In the case, Swedbank attempted to setoff indebtedness owed by Lehman against the amount that Lehman had deposited in a Swedbank general deposit account.[3] The court held that 11 U.S.C. §§ 560[4] and 561’s[5] safe harbor exceptions to the automatic stay for swap agreements did not abrogate 11 U.S.C. § 553(a)’s “mutuality” requirement.[6] Thus, the court disallowed the setoff.

By: Patrick James Kondas
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Innovative Communication Corp. v. Prosser (In re Innovative Communication Corp.),[1] a Pennsylvania bankruptcy court held that under section 509, a claim was extinguished when a co-lessee purchased it from a creditor.[2] The co-lessee claimant co-leased a motor vehicle lease with a chapter 11 debtor corporation, which he owned and controlled at the time the lease was executed.[3] Later, the claimant purchased all rights to the claim and attempted to assert the claim against the corporation’s bankruptcy estate.[4] The court found the claim was extinguished by the claimant’s purchase of it.[5]

By: Marissa T. Kovary
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Hastings State Bank v. Stalnaker (In re EDM Corp.),[1] the Eighth Circuit BAP held that a UCC-1 financing statement containing the debtor’s “doing business as” name did not properly perfect the lender’s lien. A search of the Nebraska Secretary of State’s Uniform Commercial Code (“UCC”) records using the office’s standard search logic did not reveal the financing statement.  As a result, the lender lost its priority in the collateral. In this case, Hastings filed a financing statement identifying the debtor as “EDM Corporation d/b/a EDM Equipment.”[2] Two subsequent lenders searched the UCC records for “EDM Corporation,” but the standard search logic did not reveal Hastings’s financing statement.[3] Both filed financing statements listing the debtor as “EDM Corporation.”[4] After EDM filed its chapter 7 petition, the three lenders each asserted a lien against the proceeds of the collateral, raising the issue of priority.[5]

By: Amanda L. Lewis
St. John's Law Student
American Bankruptcy Institute Law Review

In Mwangi v. Wells Fargo Bank, N.A., (In re Mwangi)[1] the Ninth Circuit BAP recently held that an automatic freeze of the bankruptcy debtors’ accounts, which was unrelated to a right of setoff, constituted an exercise of control over estate property in violation of the automatic stay.[2] The chapter 7 debtors had four bank accounts at Wells Fargo, which was also a creditor of the debtors.[3] Upon learning of the debtors’ bankruptcy filing, Wells Fargo froze the debtors’ accounts.[4] The freeze was implemented, not to assert any right of setoff that Wells Fargo had, but rather pursuant to the bank’s policy to freeze accounts of all customers that file a bankruptcy petition.[5] Wells Fargo refused to release 75% of the funds, the portion that debtors had claimed as exempt.[6]