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By: Craig Lutterbein

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

The Seventh Circuit, in Airadigm Communications, Inc. v. Federal Communications Comm’n. (In re Airadigm Communications, Inc.), has joined the circuits permitting the non-consensual release of a non-debtor third party from its obligations to creditors in chapter 11 reorganization.

[1]

   The case revolved around Airadigm Communication’s purchase and financing of fifteen personal communication services licenses from the FCC.

[2]

  When Airadigm began to fail the company filed for reorganization, and the FCC cancelled the licenses.

[3]

  During Airadigm’s first chapter 11 reorganization, it received financing from Telephone and Data Services (TDS), who agreed to repay the FCC the debt owed on the licenses if the FCC reinstated the licensees.

[4]

  Although the FCC did not originally reinstate the licenses, in FCC v. Next-Wave Personal Communications Inc., the Supreme Court ruled that FCC could not legally cancel licenses simply because a communication company files bankruptcy.

[5]

  Thus, the FCC was forced to reinstate Airadigm’s licenses, which caused Airadigm to file a second Chapter 11 case.

[6]

  The plan confirmed by the bankruptcy court contained a release protecting TDS from all liability “in connection with” the reorganization except willful misconduct.

[7]

  On appeal, the Seventh Circuit found that the release was necessary and appropriate because the release was narrowly drawn and TDS was making a substantial contribution that was necessary for Airadigm’s reorganization to be successful.

[8]

March 10 2009

By: Robert Griswold

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In U.S. v. White,

[1]

a debtor owed $8,922.40 to the Internal Revenue Service (“IRS”), $1,780.52 of which was considered priority debt.

[2]

  The debtor filed for chapter 13 bankruptcy in February of 2004 and claimed as exempt a $3,148 tax overpayment for the 2003 tax year.

[3]

  The IRS moved to lift the automatic stay in order to allow it to setoff the entire 2003 overpayment against its pre-petition tax claim.

[4]

  In the decision appealed from, the Pennsylvania bankruptcy court allowed the IRS to setoff only to the extent of the priority debt, requiring the remainder of the overpayment to be returned to the debtor as a tax refund.

[5]

  The district court reversed, holding that the IRS could setoff the entire 2003 overpayment.

[6]

  The court acknowledged a split of authority regarding whether the IRS’ right to setoff non-priority debt is allowed against exempt assets of the debtor or whether its right to setoff is limited to priority claims,

[7]

but found the reasoning behind the cases allowing setoff of the overpayment against entire pre-petition claim more compelling.

[8]

March 9 2009

By: Meagan Mahar

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Despite conflicting New York case law, the Delaware Bankruptcy Court in In re Atlantic Gulf Comtys. held that funds in an escrow account are not property of the estate even where the funds were deposited by the debtor.

[1]

  Only the debtor’s contingent right to recover the funds upon satisfying the escrow conditions is considered estate property.

[2]

March 5 2009

By: Jonathan Borst

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Whitehall Jewelers Holdings, Inc.,

[1]

the court held against Whitehall Jewelers Holdings, Inc. (“Debtors”), in favor of approximately 124 consignment vendors (“Consignment Vendors”), where Debtors sought an order permitting the “free and clear” sale of all of their assets and inventory, including consigned goods from Consignment Vendors.

[2]

 

March 4 2009

By: Felicia Rovegno

St. John's Law Student

American Bankrupcty Institute Law Review Staff

 

Following a growing trend, the California Bankruptcy Court in In re Valley Health System

[1]

declined to appoint a patient care ombudsman under section 333(a)(1).

[2]

  Although the “shall order the appointment … unless the court … finds” construction of section 330(a)(1) suggests that patient care ombudsmen should be the rule, courts appear to be avoiding such appointments.

[3]

  Consistent with this approach, the Valley Health opinion appears to place the burden on the proponent of the appointment to show that an ombudsman is needed because of specific problems at the facility.

[4]

  More importantly, the Court overlooked the arguments that an ombudsman functions as an advocate to warn the court if patient care is being compromised and that because financial concerns drove the facility into bankruptcy, patients are placed at a greater risk.

[5]

Instead, the Court considered the “nine non-exclusive factors”

[6]

articulated in In re Alternate Family Care

[7]

and four other factors listed

[8]

to hold that a patient care ombudsman was not needed under “the specific facts and circumstances of this case.”

[9]

  Applying the nine factor balancing test, the Court found that two factors favored appointment of an ombudsman, while seven factors weighed against the appointment.

[10]

March 3 2009

By: Renton Persaud

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In a decision of importance to chapter 13 debtors, the Bankruptcy Appellate Panel for the Ninth Circuit in In Re Lopez

[1]

held that chapter 13 debtors are permitted to pay post-petition mortgage payments directly to creditors outside of the plan even though the plan cures and reinstates the mortgage.  According to the court, the new provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) do not change the law with respect to such direct payments.

[2]

  The court drew a distinction between claims “impaired” by the debtor’s plan, which must be made through the chapter 13 trustee, and unimpaired claims, which need not be.

[3]

 The court bifurcated the mortgage debt between the cure payments and the regularly scheduled payments accruing post-petition.  Under the court’s view, only the cure amount was impaired and must be paid through the plan.

[4]

  The importance of the decision to debtors is that it avoids the chapter 13 trustee’s fee on the regular mortgage payment, an amount that was $308 per month in this case.

[5]

  Of special interest in light of the currently pending legislation that could permit modification of home mortgages in chapter 13, the court distinguishes Fulkrod v. Barmettler (In re Fulkrod)

[6]

and indicated that, where the mortgage is reamortized, as in chapter 12 cases, the payments must be made through the plan.

[7]

 

March 2 2009

By: Thomas Szaniawski

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In a case of first impression that addressed the intersection of cyberspace and bankruptcy, the Ninth Circuit, in Reynoso v. United States (In re Reynoso),

[1]

held that a provider of web-based bankruptcy software was a bankruptcy petition preparer (“BPP”)

[2]

under 11 U.S.C. section 110(a)(1),

[3]

and that, under California law, the features of the petition preparing software went beyond mere typesetting and constituted the unauthorized practice of law.

[4]

February 25 2009

By: Ian Park

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In the first appellate court decision on the issue that favors the debtor, the Sixth Circuit Court of Appeals splits with the Fourth and Eleventh Circuits and holds that the repossession of collateral under UCC Article 9 does not alter the debtor’s property rights or remove the collateral from the estate.

[1]

  The effect of this ruling is that the debtor may retain the collateral by paying its value to the creditor and is not limited to the state law redemption rights, which require payment in full of the secured obligation. 

February 25 2009

By: Timothy Fox

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In Nichols v. Birdsell,

[1]

the Ninth Circuit held that a taxpayer’s pre-bankruptcy irrevocable election to apply a tax refund as a credit for the following tax year was not a bar to the bankruptcy trustee’s turnover claim under section 542, i.e. the credit was property of the estate.  In Nichols, the debtors filed their 2001 tax return two weeks before filing their Chapter 7 bankruptcy and, pursuant to sections 6402(b) and 6513(d) of the Tax Code, irrevocably elected to apply their anticipated refund to the 2002 tax year. The following year, the debtors used nearly the entirety of the 2001 credit to satisfy their 2002 income tax obligation.  The trustee instituted the suit against the debtors to recover the 2001 overpayment, advancing theories under sections 542(a) and 548(a)(1) of the Bankruptcy Code.

[2]

  Analogizing the present case to its previous decision in Feiler v. Sims (In re Feiler),

[3]

the Ninth Circuit rejected debtors’ argument that the irrevocable nature of the election and their resulting inability to access the funds was a bar to the assertion by the trustee that the tax credit was property of the estate.

[4]


February 25 2009

By: Christine Knoesel

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In an expansive reading of the homestead cap added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the First Circuit Court of Appeals, in Larson v. Howell, held that criminal negligence is sufficient to trigger the cap.

[1]

  The BAPCPA provision, section 522(q)(1)(B)(iv) of the Bankruptcy Code, applies a $136,875 cap on the homestead exemption where the “debtor owes a debt arising from any . . . criminal act, intentional tort, or willful or reckless misconduct.”

[2]

  In Larson, the debtor was driving her van in Massachusetts and took a shortcut through a parking lot, striking the oncoming motorcycle of Howell.  Howell’s wife, a passenger, died as a result of the accident.  In the criminal case, the judge found facts sufficient to find Larson guilty of negligent vehicular homicide.

[3]

  In the bankruptcy proceeding, the Court of Appeals reasoned that use of the word “or” in the section 522(q)(1)(B)(iv) list of triggering acts indicates that criminal acts are separate triggers to the subsection, independent of any intent or recklessness.

[4]

 The court also determined that the debtor need not be convicted of the crime, holding that section 522(q)(1)(B)(iv) applies “wherever the debtor’s debt arises from . . .  any criminal act.”

[5]

 Therefore, the provision is triggered whenever one admits to facts sufficient for a finding of guilt, as Larson did.  The court concluded that the cap on the homestead exemption applies to Larson because her act was a crime of negligence and her debt to Howell arose from that criminal act.

 

February 25 2009