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St. John's Case Blog

By: Bryan Kotliar
St. John's Law Student
American Bankruptcy Institute Law Review Staff 

Recently, in In re Siler,[1] the court allowed a debtor whose monthly disposable income created the presumption of abuse under the means test to remain in chapter 7 since the creditors would not receive any distribution under a chapter 13 plan.[2] Generally, if a debtor cannot rebut the presumption of abuse, the case must be dismissed or converted to chapter 13, which is why the Bankruptcy Administrator[3] moved to dismiss.[4] However in this case, under a chapter 13 plan, the debtor would be entitled to deduct her ERISA contributions and 401(k) loan obligation repayments from her monthly disposable income—deductions not available for her CMI calculation under chapter 7.[5] Because of these deductions, creditors would not receive any distribution under an alternate chapter 13 plan.[6] Therefore, the court held that the debtor was entitled to remain in chapter 7, notwithstanding the language of 707(b), because dismissing or converting her case to chapter 13 would create absurd results contrary to Congress’s intent.[7]

December 28 2010

By: Elisa M. Pickel
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re Brubaker[1] a Florida bankruptcy court held that funds related to checks that had not cleared were property of the estate under section 541(a)(1) of the Bankruptcy Code.[2] In Brubaker, the debtors wrote several checks before filing for chapter 7 relief.[3] As of the filing date, these checks had not cleared, and therefore the funds remained in the debtors’ bank account.[4] The bankruptcy court rejected the debtors’ argument that these funds transferred on the dates that the checks were presented to the recipient, and thus were not property of the estate. Instead, the court noted that funds do not transfer until the checks are honored. Thus, the court held that funds remaining in the account were property of the estate since the debtors’ bank had not honored the checks.

December 15 2010

By: Jason L. Gould
St. John's Law Student
American Bankruptcy Institute Law Review Staff

The Seventh Circuit, in In re Altheimer & Gray,[1] held that the meaning of “partner” in a bankruptcy proceeding would be determined in accordance with the terms of the plan of reorganization, not state partnership law.[2] Altheimer & Gray filed for bankruptcy in 2003.[3] According to his contract, Mark Berens was a “Non-Unit Partner,”[4] meaning he possessed no interest in the firm’s profit-share and held no voting power, unlike the “Unit Partners.”[5] Altheimer & Gray’s reorganization plan subordinated the claims of both “Non-Unit Partners” and “Unit Partners” to those of its other creditors.[6] Berens argued that he was not a partner under the statutory definition of Illinois’ Uniform Partnership Act, and therefore, should not have his $300,000 claim subordinated.[7] Without looking to state law, the court relied on 11 U.S.C. § 1141(a), which states, “the provisions of a confirmed plan bind the debtor [and any other such entity under the plan] . . . whether or not the claim . . . is impaired under the plan.”[8]

December 1 2010

By: Corinne E. Donohue
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s Inc.),[1] the Third Circuit applied a new test for determining when a “claim” arises under the Bankruptcy Code.[2] Specifically, the Third Circuit held that a “claim” arises when an individual is exposed to a product or conduct that causes injury, and not when the injury is manifested.[3] Grossman’s involved asbestos-related tort claims.[4] The Third Circuit held that even though claimants’ injury did not manifest itself until after bankruptcy, the claim arose pre-petition when claimant was exposed to asbestos.[5] In Grossman’s the Third Circuit reconsidered and overruled its previous “accrual” test in Avellino & Bienes v. M. Frenville Co. (In re M. Frenville Co.).[6]

December 1 2010

By: MaryBeth C. Allen
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In a case of first impression, a New York bankruptcy court[1] suggested that a reduced prison term could be considered new value for purposes of the 11 U.S.C. § 547(c)(1) preference defense.[2] In Citron, the debtor pled guilty to numerous felonies after entering into a criminal plea bargain agreement, which included a $75,000 fine and a reduced prison term.[3] The debtor paid the $75,000.00 fine two days before filing chapter 13.[4] There was no dispute that the payment was preferential,[5] but the court dismissed the State’s motion to dismiss based on the affirmative defense of new value under section 547(c)(1), not because it was inapplicable, but for lack of evidence of value.[6]

December 1 2010

By: Michael J. Keane
St. John's Law Student
American Bankruptcy Institute Law Review Staff 

Recently, the In re Lehman Brothers Holdings Inc.[1] bankruptcy court held that a creditor may only exercise a “setoff” against a debt owed to a debtor when “mutuality” exists between that debt and the obligation running to the creditor from the debtor.[2] In the case, Swedbank attempted to setoff indebtedness owed by Lehman against the amount that Lehman had deposited in a Swedbank general deposit account.[3] The court held that 11 U.S.C. §§ 560[4] and 561’s[5] safe harbor exceptions to the automatic stay for swap agreements did not abrogate 11 U.S.C. § 553(a)’s “mutuality” requirement.[6] Thus, the court disallowed the setoff.

December 1 2010

By: Patrick James Kondas
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Innovative Communication Corp. v. Prosser (In re Innovative Communication Corp.),[1] a Pennsylvania bankruptcy court held that under section 509, a claim was extinguished when a co-lessee purchased it from a creditor.[2] The co-lessee claimant co-leased a motor vehicle lease with a chapter 11 debtor corporation, which he owned and controlled at the time the lease was executed.[3] Later, the claimant purchased all rights to the claim and attempted to assert the claim against the corporation’s bankruptcy estate.[4] The court found the claim was extinguished by the claimant’s purchase of it.[5]

December 1 2010

By: Marissa T. Kovary
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Hastings State Bank v. Stalnaker (In re EDM Corp.),[1] the Eighth Circuit BAP held that a UCC-1 financing statement containing the debtor’s “doing business as” name did not properly perfect the lender’s lien. A search of the Nebraska Secretary of State’s Uniform Commercial Code (“UCC”) records using the office’s standard search logic did not reveal the financing statement.  As a result, the lender lost its priority in the collateral. In this case, Hastings filed a financing statement identifying the debtor as “EDM Corporation d/b/a EDM Equipment.”[2] Two subsequent lenders searched the UCC records for “EDM Corporation,” but the standard search logic did not reveal Hastings’s financing statement.[3] Both filed financing statements listing the debtor as “EDM Corporation.”[4] After EDM filed its chapter 7 petition, the three lenders each asserted a lien against the proceeds of the collateral, raising the issue of priority.[5]

December 1 2010

By: Amanda L. Lewis
St. John's Law Student
American Bankruptcy Institute Law Review

In Mwangi v. Wells Fargo Bank, N.A., (In re Mwangi)[1] the Ninth Circuit BAP recently held that an automatic freeze of the bankruptcy debtors’ accounts, which was unrelated to a right of setoff, constituted an exercise of control over estate property in violation of the automatic stay.[2] The chapter 7 debtors had four bank accounts at Wells Fargo, which was also a creditor of the debtors.[3] Upon learning of the debtors’ bankruptcy filing, Wells Fargo froze the debtors’ accounts.[4] The freeze was implemented, not to assert any right of setoff that Wells Fargo had, but rather pursuant to the bank’s policy to freeze accounts of all customers that file a bankruptcy petition.[5] Wells Fargo refused to release 75% of the funds, the portion that debtors had claimed as exempt.[6] 

December 1 2010

By: David P. Griffin
St. John's Law Student
American Bankruptcy Law Review Staff

Recently, in Weisel v. Dominion Peoples Gas Company (In re Weisel),[1] a Pennsylvania district court held that a utility company could terminate a chapter 13 debtors’ gas service after the debtors defaulted on their post-petition contract, without seeking either leave of the court or relief from the automatic stay.[2] The debtors listed in their schedules an unsecured debt owed to the gas utility company for pre-petition services.[3] As a result of the bankruptcy petition, the utility company closed the debtors’ pre-petition account.[4] At the same time the utility opened a new post-petition account for the debtors, after the debtors posted a deposit.[5] The utility continued to provide service under the contract until the debtors amassed a post-petition delinquency.[6] After the post-petition default, the utility company provided proper notice to the debtors pursuant to state law and terminated gas utility services, without first seeking court approval.[7] The bankruptcy court held that the gas company had not violated section 362(d) of the Bankruptcy Code by terminating debtors’ post-petition gas service without obtaining relief from the automatic stay because the debtors had failed to provide adequate assurance of payment within the twenty day period set forth in section 366(b).[8] On appeal, the district court held that the gas utility company was permitted to terminate service, albeit for different reasons than the bankruptcy court. Specifically, the district court allowed the utility to unilaterally terminate gas service because section 366 allows a utility to terminate service to debtors who have posted adequate assurance, but have subsequently failed to make post-petition payments on the utility service.[9]

December 1 2010