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Funds Transferred From a Client Trust Account Can Be Property of the Debtor That Is Subject to a Fraudulent Transfer Claim

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]

Should Post-Confirmation Review of the Debtors Disposable Income Analysis Be a Basis for an Upward Modification

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]

A Pre-Conversion Superpriority Claim Has Priority Over Post-Conversion Administrative Expenses

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]
 

Residency for the Purposes of Applying State Exemption Laws Must Be Analyzed as it Existed on the Petition Date

By:  Christopher McCune

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Recently, in In the Matter of Willis, the Bankruptcy Court for the Western District of Wisconsin decided that under section 522(b)(3) of the Bankruptcy Code, a debtor must be domiciled in a given state at the time of filing a bankruptcy petition in order to access—or be bound by—that state’s exemption laws.[1]  In Willis, the debtors claimed the federal exemptions in their bankruptcy petitions, rather than attempting to assert any state exemptions.[2]  The debtors resided in two different states during the 730-day period immediately preceding the filing of their bankruptcy petitions; they were domiciled in Illinois first, and then moved to Wisconsin.[3]  Going back further, the debtors were domiciled solely in Illinois (an “opt out” state) during the 180 days prior to the aforementioned 730-day period.[4]  However, the debtor’s were domiciled in Wisconsin at the time that they filed their petitions.  Due to that fact, the court ruled that Illinois’ exemption laws did not apply, notwithstanding all of the time the debtors spent domiciled there.[5]  However, since the debtors also had not been domiciled in Wisconsin for the requisite number of days prior to filing the petition, they also could not invoke the state exemption laws of their current residence, even if they wished to.[6]  Faced with no applicable state law exemptions, the Willis court found that the debtors were therefore necessarily entitled to claim the federal exemptions.[7]

Translating Section 362(c)(3) What Gets Terminated

By: Michael C. Aryeh

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Adopting the majority approach, in In re Williford, the Bankruptcy Court for the Northern District of Texas held that the plain meaning of the phrase “with respect to the debtor,” found in section 362(c)(3)(A) of the Bankruptcy Code, limits the termination of the automatic stay to the debtor and the debtor’s property, and the automatic stay does not terminate the stay with respect to the property of the estate.[1]  In Williford, the debtor and his wife executed a deed of trust to a secured creditor, placing a lean on their real property.[2]  At some point, the debtor defaulted on the note, the secured creditor served the debtor with a notice of acceleration and foreclosure.[3]  In response, the debtor filed for bankruptcy under chapter 7, but the case was subsequently dismissed due the debtor’s failure to file certain information with the bankruptcy court.[4]  Following the dismissal, the creditor again began serving the debtor with foreclosure notices.[5] The debtor then filed for bankruptcy under chapter 11 within a year of the dismissal of his previous chapter 7 case. [6] The debtor, however, failed to file a motion to extend the automatic stay within the 30-day window provided for in section 362(c)(3)(A).[7] Thirty-five days after the debtor filed his second case, the creditor moved to confirm that the automatic stay was “terminated.”[8] The next day the debtor moved to extend the stay.[9]  The court denied the debtor’s motion.[10] The court, however, agreed with the debtor that section 362(c)(3) did not terminate the entire automatic stay and, instead, only terminated the stay with respect to the “debtor’s property.”[11]

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