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By:  Christian Corkery

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Applying Washington law, the United States Bankruptcy Court for the Western District of Washington in In re Huber held that prepetition transfers of the debtor’s assets to a self-settled trust created under Alaska state law were void under Washington law.[1]  The matter before the court involved a debtor who created a self-settled trust in Alaska to protect his assets from creditors.  Because Washington state law does not recognize self-settled trusts, the debtor created the trust in Alaska under Alaska state law, which permits self-settled trusts.  The trust agreement included a choice-of-law provision which stated that Alaska state law would govern all legal disputes.[2]  After the trust was created, the debtor filed for bankruptcy.[3]  The chapter 7 trustee brought an adversary proceeding seeking to recover the assets that the debtor transferred to the self-settled trust and to deny the debtor a discharge.[4]  The court declined to apply Alaska law because Washington had a public policy interest against self-settled trusts, and Alaska did not have a substantial relation to the trust.[5]  The debtor was not domiciled in Alaska, his assets were not located in Alaska, and the trust’s beneficiaries were not domiciled in Alaska.[6]  The court found that Alaska’s only connections were that it was the location of where the trust was to be administered and the location of one of the trustees.[7]  As such, the court applied Washington state law which states that transfers made to self-settled trusts are void as against existing or future creditors, and therefore, the trustee was able to recover the assets.[8]

By: Kimberly Tracey

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Clark, the Court of Appeals for the Seventh Circuit adopted a new approach to the treatment of non-spousal inherited IRAs in bankruptcy cases.  The court reversed the decision of the District Court and found that a debtor could not exempt a non-spousal inherited IRA.[1]  In Clark the debtor sought to exempt an IRA she inherited from creditors’ claims under section 522(b)(3)(C) and (d)(12) of the Bankruptcy Code.[2]  The bankruptcy court held that the inherited IRA was not exempt because the account did not represent retirement funds in the hands of the debtor.[3]  The district court reversed, adopting the view that since the inherited IRA constituted “retirement funds” in the debtor’s mother’s hands, the account must be treated the same way in the debtor’s hands.[4]  Reversing the district court, the Seventh Circuit distinguished a non-spousal inherited IRA as “a time-limited tax-deferral vehicle, but not a place to hold wealth for use after the new owner's retirement.”[5]  Specifically, the Seventh Circuit noted that under the Internal Revenue Code, a non-spousal inherited IRA is subject to mandatory distribution that must begin within a year of the original owner’s death and be completed in no less than five years.[6]  Furthermore, no new contributions may be made to the account.[7]  Consequently, the Seventh Circuit opined that the non-spousal inherited IRA was not a “retirement fund” under the Bankruptcy Code in the hands of the debtor, and as a result, the court held that the non-spousal inherited IRA was not exempt.[8]  In reaching such a holding, the Court declared that “to treat this account as exempt under [section]522(b)(3)(C) and (d)(12) [of the Bankruptcy Code] would allow the debtor to shelter from creditors a pot of money that can be freely used for current consumption.”[9] 

By: Sarah Roe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 Recently, in Ranta v. Gorman (In re Ranta), the United States Court of Appeals for the Fourth Circuit held “that the plain language of the Bankruptcy Code excludes Social Security income from the calculation of ‘disposable income,’ but that such income nevertheless must be considered in the evaluation of a [chapter 13] plan’s feasibility.”[1]   In Ranta, the chapter 13 trustee objected to the debtor’s proposed plan, arguing that the debtor failed to properly calculate his “projected disposable income” under section 1325(b)(1)(B) of the Bankruptcy Code because he inflated his expenses, improperly reducing his disposable income.[2]  While the debtor acknowledged that his expenses were overstated, he argued that his plan nevertheless complied with section 1325(b)(1)(B) since his Social Security income was excluded from his “disposable income,” and therefore, he argued that his disposable income was negative even after adjusting his expenses downward because his expenses still exceeded his non-Social Security income.[3]  As such, the debtor argued that he was not required to make any payments to his unsecured creditors under section 1325(b)(1)(B).[4] The bankruptcy court ruled in favor of the chapter 13 trustee, holding that the debtor’s plan was not feasible.  The bankruptcy court reasoned that if the debtor’s Social Security income was not included in the projected disposable income calculation, then the court could not consider those funds when determining whether the plan was feasibile.[5]  The district court affirmed.[6]  The Fourth Circuit, however, reversed, holding that although the Social Security income was excluded from the “projected disposable income” calculation, if the chapter 13 debtor proposed to use Social Security income to finance a plan, the bankruptcy court must consider the debtor’s Social Security income when examining a plan’s feasibility.[7]

By: Carly S. Krupnick

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Faulkner, the Bankruptcy Court for Central District of Illinois held that a lien release provision in a debtor’s chapter 13 plan only released a secured creditor’s lien as to the debtor’s interest, and did not require the secured creditor to release its lien and surrender title to the debtor’s vehicle until the remaining deficiency balance was paid in full by a non-filing co-debtor.[1]  In Faulkner, a secured creditor held a lien on an SUV that the debtor co-owned with a non-filing debtor.[2]  Under the debtor’s chapter 13 plan, the secured creditor’s claim was bifurcated.[3]  The plan also stated that “secured creditors shall retain their liens upon their collateral until they have been paid the value of said property.”[4]  After the debtor completed her plan and received her discharge, however, the secured creditor refused to return the certificate of title to the debtor’s SUV because the non-filing debtor had not satisfied the remaining deficiency balance in full.[5]  The debtor responded by filing an adversary proceeding alleging that the secured creditor violated the discharge injunction.[6]  The court found that “there is nothing in [section] 524 that prevent[ed the secured creditor] from asserting its rights against the non-filing co-debtor for the deficiency balance,”[7]  and therefore, the secured creditor was not barred from bringing action against a non-filing co-debtor once the case was closed.[8]  Thus, the court concluded that “the debtor’s plan, no matter how clear and conspicuous, can only serve to release [the secured creditors]’s lien as to the debtor’s interest in the vehicle. . . [and the secured creditor]’s lien remains in place and can be enforced against the non-filing co-debtor’s interest in the vehicle” until the entire amount owed under the contract was paid in full.[9]  

By: Chris Bolz

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The United States Bankruptcy Court for the Southern District of New York held in In Re Hawker Beechcraft that the debtors were permitted under section 365 of the Bankruptcy Code to assume master agreements and some purchase orders while rejecting other purchase orders because such orders were divisible contracts.[1]  The debtors were aircrafts manufactures that purchased some of their parts from a supplier.[2] In connection with these purchases, the debtors and the supplier also entered into two master agreements.[3]  Under the master agreements, while the supplier agreed to manufacture parts, the debtor was not obligated to purchase any of the manufactured parts.[4]  The debtors commenced their chapter 11 bankruptcy cases and ultimately confirmed a joint plan of reorganization.[5]  Under the plan, the debtors would assume the master agreements and 395 purchase orders while rejecting 928 purchase orders.[6]  The supplier objected to this plan, arguing that the master agreements and all of the purchase orders constituted a single indivisible contract that must be assumed or rejected cum onere.[7] The bankruptcy court, however, overruled the supplier’s objection and held that the master agreements were divisible contracts and that the purchase orders were distinctly separate contracts from one another.