St. Johns Case Blog

January 28 2013

By: Elizabeth H. Shumejda

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
Broadly construing section 105(a) of the Bankruptcy Code (the “Code”), the First Circuit, in Malley v. Agin, upheld a surcharge against the value of an otherwise exempt asset as an appropriate remedy for a chapter 7 debtor’s fraudulent concealment of assets.[1] The debtor intentionally failed to disclose $25,000 in assets, which violated his specific disclosure obligations under section 521 of the Code, as well as his general obligation to be forthright and honest with the court.[2] The bankruptcy court sanctioned the debtor by denying the debtor’s discharge pursuant to section 727 of the Code.[3] In addition, the bankruptcy court used its general equitable powers under section 105(a) to surcharge the concealed amount, plus the cost of untangling the fraud, against the value of an otherwise exempt asset—a truck used in the debtor’s business.[4] On direct appeal to the First Circuit, the debtor challenged the bankruptcy court’s surcharge order on the grounds that it exceeded the court’s equitable power under section 105(a).[5]
January 28 2013

 By: Joice Thomas

St. John’s University Law Student

American Bankruptcy Institute Law Review Staff
 
 
Adopting a textualist approach, the U.S. Supreme Court, in Hall v. United States,[1] ruled that capital gains liability resulting from the debtors’ post-petition sale of their farm was not “incurred by the estate”[2] and therefore not dischargeable under chapter 12 of the Bankruptcy Code (“Code”).[3] After filing for chapter 12 bankruptcy protection, the debtors, Lynwood and Brenda Hall, sold their farm and incurred income tax liability as a result.[4] The Halls proposed a plan of reorganization under which they classified the resulting income tax liability as a dischargeable general unsecured claim and the IRS objected. The IRS argued that the taxes were the debtors’ independent responsibilities and were neither collectible nor dischargeable in bankruptcy.[5] The Court agreed with the IRS and held that the tax is neither a collectible nor dischargeable administrative expense under a chapter 12 plan of reorganization.[6]
January 26 2013

By:  Lisa Fresolone

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

A law firm did not qualify for protection under the attorney “safe harbor” provisions of the Kansas Credit Services Organization Act (the “KCSOA”) in In re Kinderknecht, because none of the firm’s attorneys were licensed to practice in Kansas, and they were not acting in the course and scope of practicing law.[1]  In February 2009, Levi Kinderknecht (the “Debtor”), enrolled in a debt settlement program offered by the defendant, Persels & Associates, LLC (the “Law Firm”).[2]  The Law Firm assigned the case to a “field attorney,” Stan Goodwin (“Goodwin”),[3] who was an independent contractor working for the Law Firm.[4]  Goodwin called the Debtor for a “welcome call”[5] and did not speak to him again until he was sued by one of his creditors—five months later.[6]  At that time, the Debtor contacted Goodwin who advised him that he could represent himself pro se and prepared form pleadings for him.[7]  Goodwin told the Debtor that he would try to persuade the creditor to drop its lawsuit, but he never contacted the creditor.[8]  The Debtor filed for bankruptcy, and the trustee brought a lawsuit against both the Law Firm and Goodwin[9] alleging various violations of the KCSOA and the Kansas Consumer Protection Act (“KCPA”), as well as several common law claims.[10]

January 24 2013

By: Andrew Richmond

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
In In re Heritage Highgate, Inc.,[1] the Third Circuit held that the fair market value of property as of the confirmation date controls whether or not a lien is fully secured.[2]  Additionally, the court held that lien stripping is permissible in a chapter 11 reorganization.[3] The debtors, Heritage Highgate and Heritage-Twin Ponds II, were real-estate developers working on a project that was financed by a group of banks (the “Bank Lenders”) and other entities collectively known as Cornerstone Investors (“Cornerstone”).[4]  Both the Bank Lenders and Cornerstone secured their investments with liens on substantially all of the debtors’ assets but Cornerstone’s claims were contractually subordinated to the Bank Lenders’.[5] After selling a quarter of the project’s planned units, the debtors filed a chapter 11 petition.  The debtors’ joint proposed plan of reorganization proposed paying secured claims in full and paying 20% of the unsecured claims with funds obtained through the sale of the project’s remaining units.[6]  These estimated recoveries were based on the debtors’ appraisal, which valued the project at $15 million.[7] During the course of the case, the debtors continued to build and sell units and, with the consent of its secured lenders, used the sale proceeds to fund ongoing operating losses.[8] As a result, the fair market value of the project was reduced to approximately $9.54 million as of the time of plan confirmation, which was less than the Bank Lender’s $12 million secured claim.[9] Cornerstone argued their $1.4 million claim should still be fully secured and to hold otherwise would constitute impermissible lien stripping.[10] The bankruptcy court disagreed and determined that the proper method of valuing Cornerstone’s secured claim was the fair market value of the project as of the time of plan confirmation.[11]  Therefore, Cornerstone’s claim was unsecured.[12]
January 14 2013

By: Gabriella B. Zahn

St. John's Law Student

American Bankruptcy Institute Law Review Staff
 
 
Adopting a limited view of the “Ponzi scheme presumption,” the Bankruptcy Court for the Southern District of Florida[1] rejected the trustee’s contention that payments made for groceries were avoidable fraudulent transfers because the purchase of groceries was in furtherance of the Ponzi scheme.[2]  In In re Phoenix Diversified Investment, the debtor purchased $43,384.37 worth of groceries and other personal items over a four-year period from Publix – a grocery store chain.[3] The trustee sought to avoid the transfers under both state fraudulent transfer law[4] and section 548(a) of the Bankruptcy Code (the “Code”).[5] The trustee argued that the so-called “Ponzi scheme presumption” applied.[6]  The presumption allows the court to assume a transfer was made with the “actual intent to hinder, delay, or defraud” if the transfer was made in order to perpetuate a Ponzi scheme or was necessary to the continuance of the scheme.  In its classic application, the presumption allows the trustee to recover payments made to early investors in a Ponzi scheme on the theory that those payments kept the scheme hidden. Publix argued that the Ponzi scheme presumption was not applicable.[7]
January 14 2013

By: Andrew Serrao

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In the first appellate decision on the issue, the Fourth Circuit in In re Maharaj[1] held that the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) did not abrogate the absolute priority rule’s applicability to individual Chapter 11 debtors.[2] Ganess and Vena Maharaj (the “Debtors”) accumulated a significant amount of debt while owning and operating an auto body repair shop.[3] The Debtors filed a voluntary petition under Chapter 11 in bankruptcy court, and subsequently filed a plan of reorganization (the “Plan”),[4] pursuant to section 1121(a).[5] The Plan provided that the Debtors would continue to own and operate their auto body business, using income from the business to pay general unsecured claims.[6] The Plan also separated creditors into four classes[7]. Class 3 (general unsecured claims) voted to reject the Plan,[8] and the Debtors sought a cram down.[9] If BAPCPA had abrogated the absolute priority rule, the Debtors could have retained their auto body business and crammed down the Plan.[10] However, the Fourth Circuit held that the absolute priority rule had not been abrogated by BAPCPA.[11]

January 8 2013

By: Kathleen Mullins

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Lee[1] the United States Bankruptcy Appellate Panel for the Sixth Circuit (the “BAP”) held that the bankruptcy court properly dismissed the debtor’s Chapter 11 bankruptcy petition because the debtor’s filing was abusive.[2] The debtor defaulted on her mortgage loan with Chase Home Finance (“Chase”) on one of her investment properties.[3] Chase sought to foreclose on the property, and the debtor filed bankruptcy, staying the foreclosure action.[4] This case was dismissed and Chase sought to foreclose a second time.[5] Once again, however, the debtor filed bankruptcy.[6] After the case was dismissed and Chase again attempted to foreclose, the debtor filed bankruptcy a third time.[7] This time Chase made a motion to dismiss the case, asserting that the debtor was acting in bad faith and was abusing the bankruptcy process in order to evade foreclosure by filing bankruptcy petitions whenever Chase made progress in the foreclosure action.[8] The bankruptcy court found that the debtor had been filing bankruptcy petitions “as a buffer to prevent the foreclosure proceedings from going forward” and it dismissed her case for acting in bad faith, which the court determined constituted sufficient “cause” under section 1112(b).[9]

January 8 2013

By: Brendan A. Bertoli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The Bankruptcy Court for the Southern District of New York held that courts have discretion to appoint an independent examiner in cases where the debtor’s fixed debts exceed five million dollars, but the facts of In re Residential Capital, LLC[1] warranted appointment.[2] Berkshire Hathaway (“Berkshire”), joined by the Trustee, sought the appointment of an independent examiner to investigate certain pre-petition transactions between the debtor, GMAC, Ally and Cerebus Capital.[3] Berkshire claimed that appointment was mandatory pursuant to section 1104(c)(2) of the Bankruptcy Code.[4] The Official Committee of Unsecured Creditors (“the Committee”) objected to appointment, arguing that its own investigation obviated the need for an independent examiner.[5] The court held that appointment was not mandatory because section 1104(c)’s mandatory language is qualified by the phrase “as is appropriate.”[6] However, the court held that the Committee’s concurrent investigation, by itself, was not enough to render an independent examiner’s appointment inappropriate.[7]

January 8 2013

 By: Brett Joseph

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Greenwich Sentry, L.P.,[1] the Bankruptcy Court for the Southern District of New York held that section 1111(a) of the Bankruptcy Code did not prevent the court from requiring all interest holders to file proofs of interest.[2] In 2010, Greenwich Sentry Partners, L.P. (“the Debtor”) filed a petition for Chapter 11 relief.[3] The Debtor also filed its schedules and a statement of financial affairs,[4] which listed Christopher McLoughlin Keough, Quantum Hedge Strategies Fund, LP, and SIM Hedged Strategies Trust (the “Purported Limited Partners”) as interest holders. The Purported Limited Partner’s interests were listed on the Debtor’s schedules, but were not listed as disputed, contingent, or unliquidated.[5] The court issued an amended bar date order requiring all interest holders to file proofs of interest, even if their interests were not listed as disputed, contingent, or unliquidated.[6] Despite receiving a copy of the amended bar date order, the Purported Limited Partners did not file proofs of interest by the bar date. Nevertheless, the Purported Limited Partners sought a declaration from the court that they were holders of allowed limited partner interests, entitled to distribution.[7] The court denied the motion, holding that the Purported Limited Partners were required to submit proofs of interest in accordance with the amended bar date order and that they had failed to do so.[8]

January 8 2013

By: Robert Garafola

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In Jendusa-Nicolai v. Larsen, the Seventh Circuit held that section 523(a)(6) of the Bankruptcy Code prevented the debtor, David Larsen, from discharging his debt from a civil judgment stemming from the attempted murder of his former wife, Teri Jendusa-Nicolai.[1] Larsen savagely beat Jendusa-Nicolai with a baseball bat, sealed her in a snow-filled trash can, and left her to die in a storage facility.[2] Jendusa-Nicolai miraculously survived, but she lost all of her toes to frostbite and suffered a miscarriage.[3]  Larsen was sentenced to life imprisonment for his crimes and lost a civil action to Jendusa-Nicolai and her family, who were awarded a judgment in excess of $3.4 million.[4] Larsen attempted to discharge the debt from the judgment by filing for bankruptcy under Chapter 7. Larsen argued that his debt should be discharged because he did not willfully injure his ex-wife within the meaning of section 523(a)(6) since he did not specifically intend to cause his ex-wife to lose her unborn child and toes.[5]  However, the court found that the statute did not require that the debtor intend to cause specific injuries and that a broader analysis of the debtor’s intended results is proper.[6]