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St. John's Case Blog

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]

January 27 2014

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]

January 27 2014

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]

January 25 2014

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] 

January 23 2014

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]

January 23 2014

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]  

January 23 2014

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.

January 14 2014

By: Jessica McCorvey

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re McKenzie, the United States Court of Appeals for the Sixth Circuit held that a chapter 7 trustee was entitled to quasi-judicial immunity because his actions, even if wrongful or improper, “[did] not equate to a transgression of his authority.”[1] Kenneth Still (“Still”) was appointed as the chapter 7 trustee for Steve A. McKenzie’s bankruptcy case.[2] Still initiated an adversary proceeding against Grant, Konvalinka & Harrison (“GKH”), seeking the turnover of documents and records alleged to be a part of the debtor’s estate.[3] GKH successfully moved to dismiss Still’s avoidance action.[4] GKH then filed two adversary proceedings against Still and his attorneys, alleging malicious prosecution and abuse of process for initiating the suit against GKH.[5] GKH also moved for leave to file an action in state court based on the same grounds as the adversary proceedings.[6] The bankruptcy court dismissed the action against the trustee and denied the motion to file a state law complaint,[7] finding that Still was protected by quasi-judicial immunity.[8]  The district court affirmed each of the bankruptcy court’s decisions in all respects.[9] GKH again appealed to the Sixth Circuit, arguing that Still was not protected by quasi-judicial immunity because (1) his actions were ultra vires and (2) that he acted without prior bankruptcy court approval.[10] The Sixth Circuit disagreed and held that Still acted within the scope of his authority and acted with prior bankruptcy approval by initiating an adversary proceeding against GKH.[11] The Sixth Circuit also disagreed with GKH’s assertion that Still’s actions were ultra vires since Still’s lawsuits were filed in an attempt to seize property that was not an asset of the estate[12] because the court found that Still was not attempting to seize the property without first obtaining a court order.[13]

January 14 2014

By: Aura M. Gomez Lopez

St. John’s University Law Student

American Bankruptcy Law Review Staff

 

In a case of first impression, in Whyte v. Barclays,[1] the United States District Court for the Southern District of New York recently held that a trustee for a litigation trust, created pursuant to a confirmed chapter 11 plan, could not use state law to avoid a swap agreement as a fraudulent conveyance.  In Whyte, SemGroup, filed for bankruptcy in 2008.[2] On October 28, 2009, the court approved the creation of a litigation trust charged with the responsibility to liquidate SemGroup’s assets.[3] Prior to filing for bankruptcy, SemGroup entered into a novation with Barclays, by which Barclays acquired SemGroup’s portfolio of commodities derivatives.[4] However, soon after the novation was completed, the portfolio became profitable.[5] As a result, the litigation trustee sought to avoid the swap agreement on the grounds that the transaction between SemGroup and Barclays was a fraudulent conveyance under New York law.[6]  The litigation trustee, however, did not attempt to avoid the swap agreement under section 544 of the Bankruptcy Code due to the safe harbor provision of section 546(g).[7] Notwithstanding the litigation trustee’s attempt to circumvent the safe harbor provision of section 546(g), the district court dismissed the trustee’s complaint and held that section 546(g) preempted the state-law fraudulent conveyance claims.[8]

January 14 2014

By: Patrick Christensen

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Reed,[1] the Bankruptcy Court of the Eastern District of Tennessee recently held that the issuance of an IRS Form 1099-C, which is used to indicate cancellation-of-debt (“COD”) income, reflected that a creditor had forgiven the related debt, and therefore, the court disallowed the creditor’s proof of claim.[2]  In Reed, the debtors defaulted on property payments, and the resulting foreclosure sale left a deficiency owed to creditors.[3]  Later, the creditors issued an IRS Form 1099-C indicating that the creditor had forgiven its deficiency claim, which the debtors relied on when filing their taxes.[4] Notwithstanding the issuance of the IRS Form 1099-C, the creditors still sought a default judgment to collect the deficiency claim (plus fees and costs).[5]  In its decision, the Reed court stated that it would be unfair to require the debtor to pay taxes on cancelled debt while still allowing the creditor to stake a claim on the debt.[6] This would equate to the debtor paying the same debt twice – first in the form of taxes on gross income (cancelled debt), and then a second time when paying the creditor’s claim. The court acknowledged that it was adopting the minority position, but opined that under the circumstances, the decision was “in the interests of justice and equity . . . [and was therefore] the proper” one.[7]

January 14 2014