By: Melanie Lee
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
At the Constitutional Convention, the States agreed not to assert any sovereign immunity defense “in proceedings pursuant to ‘Laws on the subject of Bankruptcies.’”[1] The agreement was made to “prevent competing sovereigns’ interference with discharge[ing]…” debts. [2] The Seventh Circuit, in In re Bulk Petroleum , held that Kentucky could not assert sovereign immunity as a defense to a debtor’s request to an excise tax refund.[3] There, Bulk Petroleum Corp., prior to filing its chapter 11 petition, had lost its license as a “gasoline and special fuels dealer” in the state of Kentucky.[4] As a gasoline and special fuels supplier, the debtor, pre-petition, was entitled to a refund for the excess fuel taxes it paid.[5] The loss of the license did not require the debtor to cease business in Kentucky or permit the debtor to ignore its tax obligations.[6] However, according to the Kentucky Department of Revenue (“KDOR”), only a “taxpayer” within the meaning of the statute was entitled to a refund.[7] The KDOR refused to refund the fuel taxes to the debtor because the debtor “was unlicensed” and therefore, not a ’taxpayer.’[8] The Seventh Circuit disagreed and found that while the debtor was unlicensed, the debtor was still required to pay the fuel taxes to its upstream suppliers.[9] The suppliers were authorized to add the fuel tax to the debtor’s invoices because of their capacity as “trust officer[s] of the state” under Kentucky Revised Statute 138.280.[10] Because this statute required suppliers to collect, hold, and turn over the tax collected to Kentucky, the court held that the debtor had paid the fuel tax, via its suppliers, despite being unlicensed.[11] Consequently, the debtor was entitled to any excess tax paid on the gasoline, which ended up being sold outside of Kentucky.[12] Despite having not been raised by either party, the Seventh Circuit considered the possibility of Kentucky asserting sovereign immunity, under the Eleventh Amendment, as a defense to the state having to issue the refund.[13] According to the Seventh Circuit, that defense would have failed because the States “agreed in the plan of the [Constitutional] Convention not to assert any sovereign immunity defense they might have had in proceedings brought pursuant to ‘Laws on the subject of Bankruptcies.’”[14]
By: Aaron Z. Leaf
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
For over a decade, courts have struggled with how to reconcile sections 363 and 365(h) of the United States Bankruptcy Code (the “Code”). While neither statute working alone in bankruptcy cases presents much challenge, when invoked together some courts have found them to be incompatible. A court cannot simultaneously allow a trustee to sell property “ free and clear of any interest in such property” and allow a lessee to retain all rights that are “appurtenant to the real property for the balance of the term.” The United States Bankruptcy Court for New Jersey recently addressed sections 363 and 365(h) in In re Reval. After years of poor financial performance, Revel AC, Inc. and its partners, filed petitions under chapter 11 of the Code. Debtors subsequently filed a motion under section 365(a) to reject lease agreements with its tenants. In response, IDEA Boardwalk and other lessees gave a notice of their intent to continue to exercise their “possessory leasehold rights under section 365(h).” Upon the debtor’s request, the court thereafter approved a sale of the debtors’ property to Polo North under section 363 of the Code. After finding that the agreement between the Debtors and Tenants were true leases, the court addressed how the sale would affect Tenants section 365(h) possessory rights. The court held that the tenants possessory rights under section 365(h) eviscerates a debtor’s right under section 363of the Code to sell its property free and clear of any interest.
By: Kristen Lasak
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re SemCrude L.P., the U.S Court of Appeals for the Third Circuit found that the claims of breach of fiduciary duty, negligent misrepresentation, and fraud set forth by limited partners against the co-founder and former President and CEO of SemCrude L.P. were derivative of the claims held by SemCrude’s Litigation Trust. SemCrude L.P. is an Oklahoma-based oil and gas company co-founded by Thomas Kivisto, who allegedly drove the company into bankruptcy due to self-dealing and speculative trading strategies. In July 2008, SemCrude, along with its parent company and certain subsidiaries, filed petitions for relief under chapter 11 with the United States Bankruptcy Court for the District of Delaware. On October 28, 2009, the bankruptcy court issued an order confirming SemCrude’s plan of reorganization, which established a Litigation Trust. The plan specifically transferred the claims belonging to SemCrude’s bankruptcy estate to the Litigation Trust and authorized the Litigation Trust to pursue SemCrude’s claims and distribute any money attained to SemCrude’s creditors. The Litigation Trust asserted thirty claims, including breach of fiduciary duty, breach of contract, fraudulent transfer, and unjust enrichment, against Kivisto and certain Semcrude officers. On November 19, 2010, the bankruptcy court approved a $30 million settlement agreement, which also incorporated a mutual release of all claims. Particularly, the Litigation Trust released Kivisto and the other officers from being accountable to any party for “contribution or indemnity relating to the released claims.”
By: Justin A. Klingenberg
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In Boellner v. Dowden, the Eighth Circuit held that it is within the discretion of the bankruptcy court to order substantive consolidation of spouses’ bankruptcy estates when they file separate petitions for chapter 7 bankruptcy. In Boellner, the debtors, Samuel and Marilyn Boellner, who were married and living separately, each filed their own petition for chapter 7 bankruptcy on the same day. James Dowden was assigned as trustee in their respective cases. In addition to living apart and having individual credit card debt, the debtors “had separate insurance policies, separate interests in business, separate annuities, and separate IRAs….” However, the debtors shared a checking account, several credit cards, a leased car, and had jointly withdrawn funds from IRAs. Additionally, the debtors shared obligations for state and federal taxes and attorney’s fees from a previous civil case. The trustee filed a motion for joint administration and substantive consolidation, arguing that the debtors’ “assets, liabilities, and handling of financial affairs were substantially the same,” and permitting them to “maintain separate bankruptcy estates would prejudice the creditors.” The debtors disagreed and argued that they should be permitted to maintain separate bankruptcy estates because it would allow Samuel, the husband, to choose federal exemptions and Marilyn, the wife, to choose state exemptions. After comparing the schedules filed by each spouse, the bankruptcy court ruled in favor of the trustee, and ordered substantive consolidation. The debtors appealed to the Bankruptcy Appellate Panel and the trustee removed the appeal to the district court, which affirmed the bankruptcy court’s order. Subsequently, the debtors appealed to the Eighth Circuit, contending that the substantive consolidation order was an abuse of the bankruptcy court’s discretion. In determining whether substantive consolidation was appropriate, the Eighth Circuit adopted a two-prong factor test articulated by the Eleventh Circuit that considered “(1) whether there is a substantial identity between the assets, liabilities, and handling of financial affairs between the debtor spouses; and (2) whether harm will result from permitting or denying consolidation.” In assessing the first factor, the Eighth Circuit found that the bankruptcy court’s reliance on the debtor’s statements of financial affairs and bankruptcy schedules was appropriate. In concluding the first factor had been fulfilled and, thus, substantial identity had been established, the Eighth Circuit emphasized the bankruptcy court’s finding it peculiar that Marilyn claimed ownership of the home while Samuel claimed ownership of the household’s goods. In its analysis of the second factor, the Eight Circuit affirmed the bankruptcy court’s finding that the evidence was sufficient to establish harm to creditors, particularly because the debtor’s “separate estates would have significantly less value than if their cases were substantively consolidated and [they] were forced to choose either federal or state exemptions.” Ultimately, the Eighth Circuit held that, since substantial identity had been established and separate estates would greatly prejudice the debtor’s creditors, the bankruptcy court was within its discretion in ordering substantive consolidation.
By: James M. Kerins
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In Pensco Trust Co. v. Tristar Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), the U.S. Court of Appeals for the Ninth Circuit held that a creditors claim, based upon a debtor’s failure to pay an arbitration award, must be subordinated pursuant to section 510 (b) of the Bankruptcy Code. In Tristar, Jane O'Donnell purchased a minority membership interest in Tristar, a limited liability company, and exercised her right to withdraw her membership interest. Subsequently, debtor filed a chapter 11 bankruptcy petition and commenced an adversary proceeding against O'Donnell seeking to subordinate her claims under section 510 (b) of the Bankruptcy Code. O'Donnell insisted that section 510 (b) of the Bankruptcy Code did not apply because the claim was “not for damages, but for a fixed, admitted debt.” Additionally, O'Donnell claimed that section 510 (b) should not apply because the claim “does not arise from the purchase or sale of securities” because she converted her equity interest to a debt claim before debtor filed its bankruptcy petition. The bankruptcy court rejected O'Donnell’s arguments and held that the subordination clause of section 510 (b) “sweeps broadly.” Consequently, the bankruptcy court “broadly interpreted” the phrase “arises from” to mandate subordination whenever there is a “causal relationship between the claim and the purchase” or sale of securities. Furthermore, although O'Donnell did not “enjoy the benefits of equity ownership on the date of the petition,” according to the bankruptcy court, since O'Donnell bargained for an equity position she therefore, “embraced the risks that position entails.” On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit[xiii] and the United States Court of Appeals for the Ninth Circuit both affirmed.
By: Anthony J. Ienna
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re Bayou Shores SNF, LLC, a district court found that a bankruptcy court lacked subject matter jurisdiction to thwart the regulation of Medicare and Medicaid funds of a non-compliant debtor. In particular, the district court, siding with the majority view, determined that 42 U.S.C. 405(h) bars bankruptcy courts from interfering with decisions made by the Centers for Medicare and Medicaid Services (“CMS”) relating to Medicare and Medicaid.
By: Micaela Manley
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re Northshore Mainland Services, Inc. , the Bankruptcy Court for the District of Delaware dismissed Bahamian companies’ chapter 11 cases, relating to the construction of the Baha Mar Resort, under the abstention provision of the United States Bankruptcy Code (the “Code”), and refrained from dismissal of the Delaware companies’ chapter 11 case.[1] Construction of the Baha Mar Resort, which included four new hotels, a Las Vegas style casino, and a premier Jack Nicklaus Signature 18-hole golf course, broke ground in February 2011 with completion estimated by November 20, 2014.[2] By 2013 it was clear that the contractors were not going to meet the planned schedule.[3] Almost two years later, the Baha Mar Resort remained incomplete.[4] Subsequently, the debtors filed chapter 11 petitions under the Code with the Delaware bankruptcy court.[5] In addition, the debtors requested recognition of the chapter 11 cases in the Bahamas.[6] The Bahamian Attorney General opposed the debtors’ request for recognition and asked the Bahamian court to issue an order winding up of all the Bahamian debtors’ business.[7] The Bahamian court concluded that subordinating the local proceedings to the Delaware proceedings where the locale had little connection to the debtors would not be equitable.[8] The Bahamian Court thereafter dismissed the winding up proceedings for certain debtors and appointed joint provisional liquidators to seven others.[9] In the meantime, two of the debtors filed motions in the bankruptcy court to dismiss their chapter 11 cases.[10] According to the debtors, the best interests of the debtors and creditors would be served by dismissal of the chapter 11 cases and the continuation of proceedings in the Bahamas.[11] Ultimately, the United States bankruptcy court dismissed the cases of the Bahamian debtors under Section 305(a) of the Code.[12] The bankruptcy court, however, refused to dismiss the chapter 11 case filed by Northshore Mainland Services, Inc., a Delaware corporation.[13]
By: Christopher Atlee F. Arcitio
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In general, a debtor may, subject to court approval, retain and pay professionals, including attorneys, under section 327 of the chapter 11 Bankruptcy Code. It is unclear, however, who is responsible for paying a professional retained by a debtor’s professional. The United States Bankruptcy Court for the District of Idaho held in a chapter 11 bankruptcy case that a court-approved accountant can be statutorily barred from recovering legal fees from the debtor. Debtor, Walker Land & Cattle, L.L.C., filed for chapter 11 bankruptcy and requested permission to use cash collateral. Upon the request of Creditor, Wells Fargo Bank, the court required the debtor to provide audited financial statements. The court approved the employment of accountant Judith K. Bower (“Bower”) to conduct the audit. Bower conducted the audit within five months. After the audit, the creditor issued a notice to depose Bower. The creditor subsequently issued a subpoena for Bower to testify at the debtor’s confirmation hearing. Bower retained counsel for both the deposition and hearing. Bower subsequently sought $7,735 for reimbursement of her attorney’s fees from the debtor. The court denied the request, finding that Bower did not prove the legal fees were necessary expenses under section 330 of the Bankruptcy Code. Therefore, Bower could not recover such fees as reimbursement expenses.
By: Lindsay Lersner
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
The culmination of a chapter 11 case is typically a plan that provides for payment to creditors in accordance with the priority scheme in Section 507 of the United States Bankruptcy Code (“Code”).[1] In In re Jevic Holding Corp. , the Third Circuit held that in certain rare circumstances, bankruptcy courts have the discretion to approve structured dismissals, which do not comply with Section 507 of the Code.[2] A structured dismissal is a settlement proposed to the court that provides for the distribution of the debtor’s assets to creditors.[3] In In re Jevic , the debtor proposed a structured dismissal after reaching a consensus with a majority of its creditors.[4] The Jevic truck drivers (“Drivers”), former employees of Jevic with a Worker Adjustment and Retraining Notification (“WARN”) claim,[5] however, did not agree to the settlement.[6] In opposing bankruptcy court approval of the settlement and the structured dismissal, the Drivers argued that (1) the Code does not allow for structured dismissals and (2) the settlement paid the creditors with claims junior to the Drivers’ WARN claims and therefore violated the priority scheme established under Section 507.[7] Bankruptcy settlements generally follow the absolute priority rule, which requires that creditors be paid in the order of their priority under Section 507.[8] The bankruptcy court overruled the Drivers’ objection and approved the settlement providing for the dismissal of the debtor’s chapter 11 case upon payment of certain administrative and tax expenses which were lower in priority than the Drivers’ claims.[9] On appeal, the district court affirmed the bankruptcy court’s decision.[10] The Drivers appealed again, and the Court of Appeals for the Third Circuit also affirmed.[11]
By: Megan Kuzniewski
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
11 U.S.C. Section 523 lists certain debts that may not be discharged by a debtor’s bankruptcy.[1] In particular, 11 U.S.C. Section 523(a)(2)(A) (“Section 523(a)(2)(A)”) provides that a debtor who files a bankruptcy will not be discharged of debts that were obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”[2] False representations, such as those described in Section 523(a)(2)(A), carry a scienter requirement which requires that it be shown that an individual knowingly made false statements or representations.[3] In In re Bocchino , the Court of Appeals for the Third Circuit found that gross recklessness satisfies the scienter requirement of Section 523(a)(2)(A).[4] In S.E.C. v. Bocchino , the Securities and Exchange Commission (the “SEC”) filed a lawsuit against Bocchino, a stockbroker, in the District Court of the Southern District of New York.[5] The district court found Bocchino civilly liable for “inducing investors via high pressure sales tactics and material misrepresentations” and entered a judgment against him totaling $178,967.55, including disgorgement of fees, interest, and civil penalties.[6] Thereafter, Bocchino filed for chapter 13 bankruptcy protection.[7] The SEC petitioned the bankruptcy court for a judgment declaring the judgments against Bocchino nondischargeable under Section 523(a)(2)(A).[8] The SEC argued that Bocchino had obtained the funds “by… false pretenses, a false representation, or actual fraud.”[9] Bocchino had sought investors for two ventures that turned out to be fraudulent.[10] He began seeking out investments without doing any independent research into the ventures, despite there being cause for suspicion.[11] The bankruptcy court found that, although “Bocchino did not knowingly make any false statements,” the scienter requirement of Section 523(a)(2)(A) “may be satisfied by grossly reckless behavior.”[12] The bankruptcy court discharged the civil penalty portion of the judgment but concluded that the remaining portions of the judgment were nondischargeable under Section 523(a)(2)(A).[13] Bocchino appealed this finding.[13] On appeal, the district court affirmed the bankruptcy court’s decision,[15] and thereafter, the Third Circuit also affirmed the lower court.[16]