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Establishing the Requirements Necessary in order to Enforce Setoff in Bankruptcy Proceedings

By:  Maria Ehlinger

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Affirming the ruling in the Unites States Bankruptcy Court for the District of Arizona, The United States Bankruptcy Appellate Panel of the Ninth Circuit, in In re RCS Capital Development, LLC, held that a debtor may setoff pre-petition claims against post-petition obligations that it owes because section 558 of the Bankruptcy Code does not contain any restrictive language confining setoffs to pre-petition obligation.[1] The court found that the setoff was valid because all of the requirements of section 558 were met. Specifically, the court found that it was a valid setoff under Nevada law because there was mutuality of claims, debts, and parties, and each party had an enforceable debt against the other.[2] The issue arose after ABC Developmental Learning Centers (U.S.A.), Inc. (“ABC”) filed a proof of claim in the jointly administered chapter 11 bankruptcy cases of RCS Capital Development, LLC (“RCS”) and ACCP LLC (“ACCP”). ABC’s claim was based on an ongoing Nevada lawsuit against ACCP and RCS.[3] RCS objected to ABC’s proof of claim and then moved for summary judgment, arguing that RCS was entitled to set off the post-petition debt it owed to ABC, arising out of the Nevada action, against a debt ABC owed to RCS arising from a separate pre-petition Arizona judgment for breach of contract.[4]  The bankruptcy court granted RCS’s motion, finding that the requirements for setoff were met.[5] On appeal, the BAP affirmed the bankruptcy court and held that the setoff was valid.[6]

Assignee Can Stand in the Shoes of the Assignor and Assert the Original Assignors Reliance

By: Justin W. Curcio

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The Sixth Circuit recently held that an assignee of a bankruptcy claim has the right to stand in the shoes of the original creditor and assert that the debt was  non-dischargeable under section 523(a)(2)(B) of the Bankruptcy Code.[1]In Pazdzierz v. First American Title Insurance Co. (In re Pazdzierz), the debtor allegedly procured loans from the original creditor based on false statements regarding his income, assets, and employment.[2] The debtor eventually defaulted and filed for bankruptcy.[3]After the original creditor assigned its claim, the assignee commenced an adversary proceeding seeking a determination that the debt owed under the assigned claim was non-dischargeable because of the debtor’s alleged fraud in obtaining the loans underlying the assigned claim.[4]The debtor moved for summary judgment, arguing that the assignee’s complaint was asserting a simple fraud claim, which the assignee could not assert because fraud claims cannot be assigned under Michigan Law.[5] The bankruptcy court granted the debtor’s motion.[6] The district court reversed, holding that assignee was pursuing a non-dischargeability claim, which was not a naked fraud claim that .[7] The Sixth Circuit affirmed, stating that assignee’s claim arose from the promissory notes, not a naked claim of fraud.[8]  Accordingly, the Sixth Circuit held that the rule barring the assignment of fraud claims did not apply because the assignee’s complaint sought to enforce the assignee’s rights under the promissory notes, which only depended on a showing of fraud incidentally.[9]

Professional May Not Be a Professional Person for Purposes of Section 327(a)

By: Alexandra Hastings

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Finding that a public relations firm did not qualify as a bankruptcy “professional” within the meaning of section 327(a) of the Bankruptcy Code, the United States Bankruptcy Court for the Western District of Kentucky, in In re Seven Counties Services, Inc.,[i] authorized a debtor to retain the firm under section 1108 to assist with the general operation of its post-petition business.  In Seven Counties Services, the debtor sought to retain a public relations firm, which had been working with the debtor prior to the bankruptcy case, to participate in “lobbying, third party advocacy and support of [the d]ebtor’s efforts in restructuring its retirement plans and media relations.”[ii]  The court found that although the firm’s representatives were “professional persons” within the context of section 327(a), the firm was “not performing any tasks of the [d]ebtor enumerated in 11 U.S.C. § 1107,” nor was it “involved in formulating the [d]ebtor’s plan of reorganization or the administration of the estate.”[iii]  Moreover, the firm’s work for the debtor did not “involve any part in negotiating the plan, adjusting debtor/creditor relationships, disposing or acquiring assets or performing any duty required of the [d]ebtor under the Code.”[iv]  Thus, the firm did not qualify as a bankruptcy “professional” for purposes of section 327.[v]

Equity Wont Save Your Tardy Filing Of a Nondischargeability Complaint

By: Aldo A. Caira III

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
In Anwar v. Johnson, the Ninth Circuit held that the the Federal Rules of Bankruptcy Procedure do not afford a bankruptcy court discretion to retroactively extend the deadline for filing nondischargeability complaints when an attorney’s computer problems cause him to miss the electronic filing date.[1]  In Anwar, two former employees of a corporate debtor sought to file nondischargeability complaints against the two founders, principal shareholders and officers of that corporation who each filed a chapter 7 case.[2] Federal Rule of Bankruptcy Procedure 4007(c) mandates a strict, 60-day time limit for filing a non-dischargeability complaint.[3] On the eve of the deadline, counsel for the former employees did not begin the two-step filing electronic filing process until 9:00 p.m.[4] Due to computer issues, the employees’ attorney did not complete the filing process until after the deadline had passed. The bankruptcy court dismissed the complaints as untimely, finding that it lacked the discretion to grant a retroactive extension under Rule 4007(c).[5] The district court and the Ninth Circuit both affirmed.[6]

No Second Chances Debtors Prohibited from Filing a Second Petition within 180 Days

By:  Brian J. Adelmann

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Recently, in In re Rivera,[1] the Bankruptcy Appellate Panel of the First Circuit held that the debtor was prohibited from filing a second bankruptcy case within 180 days of voluntarily dismissing his first case.[2]  The debtor filed his first chapter 13 bankruptcy case on the eve of foreclosure of real property that he owned, which was encumbered by a mortgage.[3]  The secured creditor moved for relief from the automatic stay on the grounds that the debtor failed to make post-petition mortgage payments.[4]  After the debtor failed to file a timely response to the motion, the bankruptcy court granted the secured creditor relief from stay.[5]  Subsequently, the debtor voluntarily dismissed his bankruptcy case.[6]  On the same day that he dismissed his first case, the debtor filed a new chapter 13 case.[7]  The bankruptcy court granted the creditor’s motion to dismiss the second petition pursuant to section 109(g)(2) of the Bankruptcy Code, which provides that no individual may be a debtor in a bankruptcy case if such individual voluntarily dismissed a bankruptcy case within the preceding 180 days.[8]  The Bankruptcy Appellate Panel of the First Circuit affirmed the bankruptcy court.[9]

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