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St. John's Case Blog

By: David Margulies

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Applying Indiana law, the Seventh Circuit firmly rejects the idea that a financial auditor has any obligation to investigate circumstances external to a company’s books and records in connection with its determination whether a going concern qualification should be included in an audit report.

[1]

The auditor must, however, consider and factor into its going concern determination information about external matters that it is “told by the firm or otherwise learns.”

[2]

 The trustee’s negligence and breach of contract claims against financial auditor Ernst & Young arose out of the collapse of Taurus Foods, a frozen meat distribution company that was involuntarily forced into bankruptcy two years after the issuance of an allegedly defective audit report.

[3]

The trustee asserted a “deepening insolvency” theory based on the auditor’s failure to include a going-concern qualification, thereby causing the managers of Taurus to refrain from liquidating immediately and losing an additional $3 million through continued operation.

[4]

April 6 2009

By: Sean Scuderi

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Recently, the United States Bankruptcy Court in the Western District of Texas gave secured lenders a new weapon to attack the discharge of debt by a debtor who sold collateral without the creditor’s knowledge and used the proceeds to pay unsecured debts.  In In re Barnes

[1]

, the Court held that the sections 727(a)(2) and (7)

[2]

fraudulent transfer grounds for objection to discharge apply to collateral dispositions where the debtor had an intent to defraud the secured creditor.  In Barnes, the debtor, through his business of Mobar, LLP, sold off his store in Guadalupe without the required approval of Franklin Bank, S.B.B. (“the Bank”), which held a security interest in it, and the Small Business Association (“SBA”).

[3]

  Not only did the debtor not receive approval, but he also failed to notify the Bank or the SBA of the sale.

[4]

  The debtor used the proceeds of the sale to pay off unsecured debtors when the money should have gone to the Bank.

[5]

  The Bank brought an adversary proceeding to determine the dischargability of its claim against the debtor and to object to the discharge.

[6]

April 2 2009

By: Christina Kormylo

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

The addition of section 1115 to the Bankruptcy Code by the 2005 BAPCPA amendments created an exception to the “absolute priority rule” for individual Chapter 11 debtors according to the bankruptcy court in In re Tegeder.

[1]

  In Tegeder, the general unsecured creditor class did not accept the Chapter 11 plan proposed by an individual debtor who was engaged in business, thereby triggering the “cram down” provisions of 11 U.S.C. § 1129(b).

[2]

 Although all other requirements for plan confirmation under section 1129(a) were met, the U.S. Trustee argued that the debtor, as a holder of interests junior to the dissenting class, could not retain any property pursuant to the absolute priority rule of section 1129(b)(2)(B)(ii).

[3]

  The absolute priority rule, as amended by BAPCPA, states, “the holder of any claim or interest that is junior to the claims of such class will not receive or retain . . . any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115.”

[4]

  Addressing the effect of the cross-reference to section 1115, the Tegeder court held that the absolute priority rule does not prevent a plan’s confirmation where both pre- and post-petition assets are retained by an individual debtor.

[5]

  The court explained that the 2005 BAPCPA amendment and the addition of section 1115 created an exception to the rule, allowing an individual debtor to retain property included in the estate.

[6]

April 1 2009

By: Klevis Peshtani

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Does the equitable right of an individual, whose property has been damaged by the debtor’s pollution, to injunctive clean-up relief constitute a “claim” that may be discharged in the debtor’s Chapter 11 bankruptcy?  Yes, according to the Pennsylvania Bankruptcy Court, which in Krafczek v. Exide

[1]

  held that individual plaintiffs who are not exercising the state’s police and regulatory powers, cannot qualify for the narrow exclusion that allows for state enforcement actions to survive a Chapter 11 bankruptcy discharge.

March 31 2009

By: Brian Lacoff

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In a decision of importance to Chapter 13 debtors’ attorneys, the Bankruptcy Court for the District of New Jersey ruled that an undersecured creditor, Ford Motor Credit Co., was entitled not only to adequate protection payments, but that the section 507(b)

[1]

“super-priority” status of the inadequate adequate protection provided during the case meant that the Chapter 13 plan had to pay those amounts before paying any of the debtor’s attorneys fees.

[2]

Ford Motor Credit objected to the debtor’s Chapter 13 plan for failure to provide adequate protection payments, violating 11 U.S.C. §§ 361, 1325 and 1326.

[3]

  The debtor modified the plan to include adequate protection payments, but objected to the creditor’s contention that those payments had super-priority over debtor’s attorney fees.

[4]

  The court agreed with Ford Motor Credit, reasoning that the creditor, having a lien on the debtor’s property, must be afforded protection against the daily depreciation of its property.

[5]

March 30 2009

By: Joe Scolavino

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Although the Second Circuit generally treats severance payments as priority administrative expenses when employment is terminated during the employer’s bankruptcy,

[1]

early retirement benefits triggered by severance are not entitled to administrative expense treatment.

[2]

  In Supplee v. Bethlehem Steel Corp. (In re Bethlehem Steel Corp.) the early retirement withdrawal penalty was waived due to the employee’s termination.

[3]

  The employee argued that the extra money derived from the waived penalty constituted a severance payment that was entitled to an administrative priority in the Bethlehem bankruptcy.

[4]

  The court disagreed, reasoning that that the lump-sum retirement benefits for which the employee became eligible at termination did not constitute a new benefit earned at termination, and was thus not entitled to administrative priority.

[5]

 

March 26 2009

By: Robert Ryan

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Firmly adopting the “exclusive” view of claim objections, the Tenth Circuit Bankruptcy Appellate Panel in B-Line, LLC v. Kirkland

[1]

held that a claim could not be disallowed under 11 U.S.C. § 502

[2]

for failure to submit supporting documentation with a proof of claim since that is not one of the grounds expressly stated in the statute.

[3]

  Although Federal Rule of Bankruptcy Procedure 3001 requires that supporting documentation be provided with a proof of claim,

[4]

neither the Rule nor the statute clearly states what to do if a creditor fails to submit supporting documentation.

[5]

 The court held that section 502(b) provided an exclusive list of reasons why a claim should be dismissed, reasoning that the “shall allow … except” command in section 502(b) and the absence of an expansive term like “including” indicated that the list was exclusive.

[6]

  Since the Rules cannot modify substantive rights, technical defects in the proof of claim are not grounds for objection.

[7]

 

March 25 2009

By: James Lynch

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Although the Bankruptcy Abuse Protection Act of 2005 (“BAPCPA”) largely eliminated the so-called “ride through” option for security interests in personal property, the Connecticut Bankruptcy Court in In re Caraballo

[1]

held that the option remains available for liens secured by real estate.  Under the ride through, a debtor whose real estate mortgage is not in default does not have to reaffirm the debt or surrender the real estate, but can retain the real estate by continuing to make the scheduled mortgage payments.

[2]

  Thus, since the debtor in Caraballo was not in default, the Court disapproved the debtor’s mortgage reaffirmation agreement as not being in her best interests “because she could retain the subject real property without reaffirming the [d]ebt.”

[3]

 

March 24 2009

By: Jonathan Grasso

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In Walden v. Walker (In re Walker),

[1]

the Eleventh Circuit Court of Appeals held that the bankruptcy court has the power to remove a trustee sua sponte.  In Walker, the elected Chapter 7 trustee filed a verified statement claiming she had no significant connection with any party of interest and testified that she had no relationship with the second largest creditor.

[2]

 The debtor moved for removal and the trustee responded by asserting that a debtor in an insolvent estate had no pecuniary interest and thus was not a party in interest and lacked standing to challenge the trustee’s appointment.

[3]

  The court found that she had lied under oath concerning her relationship with the creditor and removed her as trustee.

[4]

  On appeal, the Eleventh Circuit held that bankruptcy judges possess the power to remove a trustee for lying under oath, sua sponte, after notice and a hearing.

[5]

March 23 2009

By: Elizabeth L. Anderson

St. John's Law Student

American Bankrutpcy Institute Law Review Staff

 

Rejecting the Second Circuit’s Wagoner

[1]

rule and agreeing with the First, Third, Fifth, and Eleventh Circuits, United States Court of Appeals for the Eighth Circuit held that the collusion of corporate insiders with third parties to injure the corporation does not deprive the corporation’s trustee of standing to sue third parties.

[2]

However, such a situation may give rise to the defense of in pari delicto barring the trustee’s action.

[3]

March 19 2009