St. Johns Case Blog

January 6 2016

By: Bryant Churbuck

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In In re Motors Liquidation Co., the Bankruptcy Court of the Southern District of New York held that the class of "Pre-Closing Accident" plaintiffs would be unable to proceed with their personal injury claims against the new General Motors (“GM”), rather than the old GM , because they suffered no prejudice to support a procedural due process violation, despite the fact that the notice by publication given to the "Pre-Closing Accident" plaintiffs was insufficient. In Motors Liquidation, several classes of plaintiffs were asserting claims related to an ignition switch defect that was known by GM as far back as 2003. At least 24 GM business and in-house legal personnel employees knew about the ignition switch defect at the time of GM's 2009 chapter 11 bankruptcy case and section 363 Sale Order. On July 10, 2009, the sale of Old GM in accordance with the Section 363 Sale Order closed, forming the new GM. In the Spring of 2014, GM finally recalled the vehicles with the faulty ignition switch issue. Shortly thereafter, GM announced the ignition switch defect, resulting in several class action lawsuits.

January 6 2016

By: Clayton J. Lewis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In the case of In re Brown, the Bankruptcy Court for the Middle District of Florida held that a tax debt owed to the IRS was excepted from a hardship discharge, and accordingly was not excused from payment. The debtors in In re Brown filed for Chapter 13 bankruptcy relief and initially implemented a payment plan for 100% of their debts, including a total of $303,229 payable to the IRS. The debtors, however, were unable to meet their payment obligations and had to amend their payment plan twice. With over $155,000 still due to the IRS, the debtors offered to settle theirs debt with the IRS. The debtors and the IRS were unable to reach a settlement. The IRS nonetheless suggested that the debtors file for a hardship discharge under section 1328(b) of the Bankruptcy Code. The debtors followed this suggestion and received a hardship discharge, and their bankruptcy case was closed. The discharge order expressly noted that the debt to the IRS, however, was not discharged and was still due in full. When the IRS attempted to collect the debt, the debtors filed a complaint against the IRS in the bankruptcy court, alleging that the IRS had violated the Discharge Order.

January 5 2016

By: Shane Walsh

St. John’s Law Student

American Bankruptcy Institute Law Review

A person who files for bankruptcy may not simply change his mind and have his bankruptcy case dismissed. In In re Segal , the bankruptcy court denied a debtor’s request to dismiss his voluntary chapter 7 case because the debtor acted in bad faith, dismissal would prejudice his creditors, and the debtor would be unable to “secure a fresh start outside of bankruptcy.”[1] In this instance, the debtor filed a chapter 7 petition to avoid the imminent foreclosure sale of his apartment.[2] Four months after the chapter 7 petition was filed, the debtor filed a motion to dismiss arguing that the lack of his signature on the original petition was a “fatal defect to the filing.”[3] The court, however, denied the request, finding that the debtor filed the motion to dismiss after obtaining the benefit of the automatic stay to the detriment of his creditors.[4]

January 5 2016

By: Nicole Strout

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Peterson v. Katten Muchin Rosenman LLP. , the Seventh Circuit held that the allegations in a legal malpractice complaint by the trustee for Lancelot Investors Fund and other entities in bankruptcy (collectively “the Funds”), was plausible on its face.[1] In Peterson , the trustee filed suit against the Funds’ law firm for failing to detect the peril and curtail the risks pertaining to the Funds.[2] The Funds loaned money to and invested in vehicles owned by Thomas Petters, which, in turn, was supposed to finance Costco’s consumer-electronics inventory.[3] The Funds’ advances were to be secured by deposits made by Costco, not Peters, into a lockbox bank account.[4] However, Costco never deposited money into the account.[5] All the money came from a Petters entity.[6] In reality, Petters never had any dealings with Costco, and the whole set up was a Ponzi scheme.[7] Once the scheme collapsed, the Funds also collapsed.[8] Consequently, the Funds filed for relief under chapter 7 of the Bankruptcy Code.[9] The chapter 7 trustee for the Funds brought a cause of action against Katten, the law firm which acted as transactions counsel for the Funds, claiming that the law firm had a duty to inform its clients that the actual arrangement posed a risk because Petters was not actually running a real business.[10] In granting the law firm’s motion to dismiss, the district court held the Funds “knowingly took the risk and cannot blame the firm for failing to give business advice.”[11] After the trustee appealed the motion to dismiss, the court of appeals reversed the district court decision, holding the firm was liable not for failing to provide business advice but for failing to inform its clients of “the different legal forms that are available to carry out the business and how risks differ with different legal forms.”[12] Clients do not have to take the advice of their attorneys, but attorneys need to advise clients.[13]

January 5 2016

By: Maurice W. Sayeh

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Dobbs , a Mississippi bankruptcy court held that it had the authority, to sanction and to permanently disbar an attorney from practicing in its district.[1] A debtor and his wife filed a joint chapter 13 bankruptcy petition in 2013 and hired an attorney (“First Attorney”) to represent them.[2] Following dismissal of the original 2013 case, the First Attorney filed a subsequent 2015 bankruptcy petition on behalf of the debtor but not the debtor’s wife[3]. The 2015 bankruptcy petition was accompanied with a Certificate of Credit Counseling (“First Certificate”) falsely reflecting that the debtor had attended a credit-counseling course on March 26, 2015,[4] as required by Section 109 of the United States Bankruptcy (“the Code”).[5] The 2015 bankruptcy petition listed the First Attorney as the debtor’s counsel and purportedly included the debtor’s electronic signature.[6] Following the court’s approval of the First Attorney’s request to withdraw as counsel, the debtor hired a new attorney (“Second Attorney”).[7] The Second Attorney filed another Certificate of Credit Counseling (“Second Certificate”) on behalf of the debtor, which indicated the debtor actually completed credit counseling on April 8, 2015.[8]

January 5 2016

By: Matthew Repetto

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Franklin v. Puerto Rico , the First Circuit held that Puerto Rico’s effort to restructure the debt of its public utilities through the enactment of its own municipal bankruptcy law, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (“Recovery Act”), was preempted by Section 903(1) of the United States Bankruptcy Code.[1] Amid the most serious fiscal crisis in its history, Puerto Rico’s public utilities are currently at risk of becoming insolvent.[2] Unlike states, Puerto Rico is a territory and “may not authorize its municipalities . . . to seek federal bankruptcy relief under chapter 9 of the U.S. Bankruptcy Code.”[3] Thus, the Recovery Act was Puerto Rico’s attempt to “fill the gap” by providing relief on its own.[4] The Recovery Act was enacted to mirror chapter 9 and chapter 11 of the United States Bankruptcy Code.[5] Those in favor of the Recovery Act argued that preemption would leave Puerto Rico with no means of relief.[6] However, the First Circuit disagreed, and noted that Puerto Rico could, as it had already, seek relief directly from Congress.[7]

January 5 2016

By: Todd Kingston Plummer

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Medpoint Management , the United States Bankruptcy Court for the District of Arizona held that cause existed under Section 707(a) of the United States Bankruptcy Code (“Bankruptcy Code”) to dismiss an involuntary chapter 7 petition filed against a bankrupt medical marijuana distributor.[1] Although Arizona permits its Department of Health Services to register dispensaries “operated on a not-for-profit basis” for the legal sale of marijuana,[2] the drug remains a Schedule I substance under the federal government’s Controlled Substances Act (“CSA”).[3] Because Arizona law requires dispensaries to maintain a nonprofit nature, there has been a “proliferation of dispensary-management entities which serve as repositories of dispensary revenues.”[4] When Medpoint Management LLC, a marijuana dispensary, defaulted on several loans and obligations, a group of creditors filed an involuntary chapter 7 petition against Medpoint.[5] The petitioning creditors’ claims against Medpoint included unpaid amounts under two promissory notes, unpaid fees arising under two distinct consulting agreements, and over $500,000 in outstanding loans.[6] Medpoint moved to dismiss arguing that the “unclean hands doctrine” prevents not only any marijuana-related business but also any of their creditors from seeking relief from the federal bankruptcy courts.[7] At a hearing on Medpoint’s motion, the United States Trustee voiced staunch concern regarding a trustee’s ability to administer a bankruptcy estate consisting of substances that are illegal under federal law: “So, you’re going to ask a trustee to look at a management contract for illegal activities, essentially. So what is that trustee going to do?”[8] The court agreed with Medpoint and the United States Trustee and dismissed the involuntary petition.[9]

January 5 2016

By: Naffie Lamin

St John’s University Law Student

American Bankruptcy Institute Law Review Staff

In In re Nortel Inc. , the Bankruptcy Court denied a motion filed by former Canadian employees of the debtor Nortel Networks’ Canadian affiliates (the “Canadian Employees”) seeking leave to file proofs of claim after the expiration of the final date to file a proof of claim in the United States (the “Bar Date”).[1] On January 14, 2009, the United States Nortel affiliates (the “U.S. Debtors”) filed voluntary petitions of relief under chapter 11 of the Bankruptcy Code.[2] On the same day, the Canada affiliates (the “Canadian Debtors”) filed insolvency proceedings under Canada's Companies' Creditors Arrangement Act (“CCCAA”).[3] Pursuant to the rules of the CCCAA, the Ontario Superior Court appointed Ernst & Young Inc. (the “Monitor”) as monitor and Koskie Minsky, LLP (“Koskie Minsky”) as the law firm to represent the interests of all former employees of the Canadian Debtors, including the Canadian Employees.[4]

January 5 2016

By: Corey Trail

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Monticello Real Estate Investments, LLC, a bankruptcy court held that a creditor did not act in bad faith when it purchased unsecured debt from another creditor in order to have the votes necessary to veto a debtor’s reorganization plan. In Monticello, the debtor was a realty investor that took out a $1.185 million loan to finance the purchase of an office center. After the debtor failed to satisfy the loan by its five year maturity date, the bank and the debtor entered into two loan modifications that extended the maturity date of the loan. The debtor soon failed to adhere to the loan modifications and the bank began foreclosure proceedings. In response, the debtor filed a chapter 11 bankruptcy petition and requested authority to use cash collateral. The court granted the debtor’s request and instructed the parties to submit an agreed upon order authorizing the use of cash collateral that set forth a tentative agreement to restructure the bank’s debt. As part of the agreement, the bank required the debtor to sign two promissory notes that it claimed contained “standard loan documents.” However, the debtor rejected the standard loan forms and responded with a modified loan agreement, which the bank rejected. The debtor filed the new agreement (“the Plan”) without the required new loan documents. The court issued a second cash collateral order, which was again dependent on the execution of new loan documents. Subsequently, the court scheduled a hearing to confirm the Plan. Both the bank and a credit card company filed claims against the debtor. In order to ensure that the debtor’s Plan was not able to acquire the requisite amount of votes, the bank purchased the claim from the credit card company to obtain enough votes to block the Plan’s confirmation. The bank explained that had the Plan been confirmed, the FDIC would negatively rate the debt. The debtor moved to have the bank’s ballots designated pursuant to 11 U.S.C. section 1126(e), stating that the bank’s desire to dictate the terms of the new loan documents, the cessation of negotiation on the new terms before the expiration deadline, and the purchasing of other claims exhibited a lack of good faith required by the statute. The court however, disagreed, finding that because the execution of a new loan agreement on the bank’s terms was crucial to protecting the bank’s interests, the purchase of other claims to ensure that the Plan would not receive the necessary votes was not in bad faith.

January 5 2016

By: Joanna Matuza

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Pavers & Road Builders District Council Welfare Fund v. Core Contracting of NY, LLC, the Eastern District Court of New York exercised its discretion with regard to automatic stays in its holding that a corporation’s alter ego status does not permit an automatic stay for non-debtors. In Pavers & Road Builders District Council Welfare Fund, administrators of an Employee Retirement Income Security Act (“ERISA”) pension fund brought suit against four related corporate defendants for “delinquent contributions and shifting of assets to avoid having to pay workers.” Canal Asphalt, the defendant-debtor, filed a voluntary petition for chapter 11 relief in the Southern District of New York. Thus, the cause of action was automatically stayed against the debtor, pursuant to section 362(a)(1) of the Bankruptcy Code. The other defendants argued in a letter to the District Court of Eastern District of New York that because they are alter egos of one another, the automatic stay arising in the debtor’s case should prevent the action from proceeding against all defendants. The Eastern District court disagreed, and instead, issued an order stating that the automatic stay only enjoined actions against debtors or their property.