St. Johns Case Blog

January 8 2013

By: Gabriella Formosa

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
In In re Krieger,[1] the Bankruptcy Court for the Southern District of Illinois permitted a discharge of federal student loans despite the debtor’s failure to apply for an Income Contingent Repayment Plan (“ICRP”).[2] Under an ICRP, a borrower’s annual loan payments can be reduced after applying a formula that takes into account poverty guidelines and the borrower’s adjusted gross income.[3] However, if the borrower has no discretionary income, the monthly payment due will be zero.[4] Here, the debtor, a twice divorced, fifty-two year old woman had been unemployed for over ten years despite countless attempts to secure employment.[5] She lives with her elderly mother and her sole income is a monthly government assistance check for $200.[6] She is unable to afford health or dental care, a cellular phone, or her car payments.[7] The court held that application for an ICRP would be nothing more than a formality because the debtor was currently destitute, and was likely to remain that way for rest of her life.[8] As such, application was not dispositive of a good faith attempt to repay her loans.[9]
January 8 2013

By: Joseph P. Donnelly IV

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 
Adopting a narrow interpretation of the holding of Stern v. Marshall,[1] the Bankruptcy Court for the District of Delaware, in In re DBSI,[2] held that Stern does not preclude a bankruptcy court from adjudicating avoidance claims.[3] In November 2008, DBSI Inc. and several of its affiliates (the “Debtors”) filed for Chapter 11 bankruptcy protection.[4] Following confirmation of the Debtors’ liquidating plan, a litigation trustee commenced several adversary proceedings relating to, inter alia, preferential or fraudulent transfer claims.[5] Certain defendants (the “Movants”) sought to have these adversary proceedings dismissed, arguing that the bankruptcy court lacked jurisdiction under 28 U.S.C. § 157 and the United States Supreme Court’s decisions in Stern v. Marshall and Granfinanciera, S.A. v. Nordberg,[6]to adjudicate causes of action sounding in preference or fraudulent conveyance.[7]
January 7 2013

By: Steve Traditi

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re TOUSA, Inc.,[1] the Eleventh Circuit held that subsidiaries of a parent company did not receive “reasonably equivalent value” in exchange for liens granted to secure the obligations of the parent company in an attempt by the group to avoid bankruptcy.[2] The court also held that third party beneficiaries could be liable as parties “for whose benefit” the transfer was made.[3] In 2005, TOUSA, Inc., a large homebuilding company, entered into a joint venture in order to acquire homebuilding assets from Transeastern Properties, Inc., using monies borrowed from the so-called “Transeastern Lenders” to fund the acquisition.[4] When the housing market took a downturn in 2006, TOUSA defaulted and the Transeastern Lenders sued for more than $2 billion.[5] TOUSA agreed to settle the case for $421 million with money borrowed from a collection of lenders (the “New Lenders”). The New Lenders secured their loans by taking liens on the assets of certain of TOUSA’s subsidiaries (the “Conveying Subsidiaries”).[6]  After TOUSA and its subsidiaries, including the Conveying Subsidiaries, went into bankruptcy, TOUSA sought to avoid the New Lenders’ liens as fraudulent transfers arguing that the Conveying Subsidiaries did not receive reasonably equivalent value.[7] In addition, TOUSA sought to recover from the Transeastern Lenders by claiming that the Transeastern Lenders were the entities for whose benefit the transfer was made.[8]  The bankruptcy court agreed with TOUSA, but the district court reversed.[9] TOUSA then appealed to the Eleventh Circuit.

January 7 2013

By: Benjamin Yeamans

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
In In re Oliver, the Bankruptcy Court for the District of Kansas held that a debtor did not meet the threshold requirements to proceed on a claim of outrage (i.e., intentional infliction of emotional distress)[1] by alleging that a creditor had misapplied payments received from the debtor and the trustee in violation of the debtor’s chapter 13 plan.[2] Mr. and Mrs. Oliver (the “Debtors”) entered into a loan agreement with CitiCorp Trust Bank FSB (the “Creditor”) to finance the purchase of their home.[3] Roughly three years later, the Debtors filed a chapter 13 bankruptcy petition.[4] The Debtors’ confirmed chapter 13 plan stipulated that the Creditor must apply any mortgage payments to the mortgage balance immediately upon receipt as opposed to holding the payments in a suspense account.[5] The plan also required the Creditor to apply payments made by the chapter 13 trustee and the Debtors to pre-petition arrearages and post-petition claims respectively.[6] The Debtors alleged that the creditor violated the terms of its chapter 13 plan by holding partial mortgage payments in suspense accounts, which resulted in improper interest calculations.[7] Additionally, the Debtors alleged that the Creditor had also violated the plan by failing to provide complete and accurate accountings of payment received from the Debtor and the chapter 13 trustee.[8] Finally, the Debtors also claimed that the Creditor’s misapplication of payments caused the Debtors to file incorrect tax returns, and that as a result, they were denied credit or offered credit at a higher rate.[9]
January 7 2013

By: Jessica Wright

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Lovell,[1] the Bankruptcy Court for the Northern District of Iowa, held that a debtor who tithed approximately 11% of her gross income was nevertheless entitled to a hearing on whether she qualified for a hardship discharge of her student loan debt.[2] The debtor received a Chapter 7 discharge and then filed an adversary complaint for a discharge of her student loans, arguing that the loans would impose an undue hardship based on her current income and monthly expenses.[3] The debtor was gainfully employed and earned $44,255.04 per year,[4] and in her self-reported monthly expenses[5], she included charitable donations and tithes to her church amounting to nearly 11% of her gross income.[6] In assessing her expenditures, the court held that making charitable contributions and tithing is not per se unreasonable when requesting discharge of student loan debt. Instead, a fact-intensive inquiry into the appropriateness of such expenditures is required. For this reason, the court held that it was precluded from granting summary judgment to the creditor.[7]

January 7 2013

By: Colleen E. Spain

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
Weighing in on a three-way circuit court split, the Sixth Circuit recognized a non-statutory exception to the automatic stay, in Dominic’s Restaurant of Dayton, Inc. v. Mantia, and allowed a civil contempt proceeding to continue against a debtor.[1] In 2007, the Mantia family closed their family-run restaurant, Dominic’s, but continued to market certain food products under the name “Dominic’s Foods of Dayton.”[2] Soon after the restaurant closed, Christie Mantia sold her interest in the original Dominic’s Restaurant and planned with Reece Powers and Harry Lee to open a restaurant, name it Dominic’s Restaurant, Inc., and use the old Dominic’s recipes.[3] The owners of the original Dominic’s Restaurant (“Plaintiffs”) brought trademark infringement and trademark dilution claims against Mantia, Powers, and Lee (“Defendants”).[4] The district court issued a TRO and then a preliminary injunction (the “Injunctions”) directing Defendants to cease using the Dominic’s name and graphics.[5] After Plaintiffs filed a series of contempt motions against Defendants based on Defendants’ violation of the Injunctions, the district court granted a default judgment and the contempt motion against Defendants.[6] Although Powers filed for personal bankruptcy in the midst of this, the district court declined to stay the judgments against him.[7]
January 7 2013

By: Kathryn Swimm

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
In a case of first impression, the Seventh Circuit in Sunbeam Products, Inc. v. Chicago American Manufacturing held that a trademark licensee is entitled to the contracted-for rights to that trademark even after a chapter 7 trustee rejects the trademark license as an executory contract.[1]  Lakewood Engineering & Manufacturing Co. (the “Licensor”) entered into a contract with Chicago American Manufacturing (the “Licensee”) giving the Licensee the right to sell fans bearing the Licensor’s trademark.[2]  It also provided that the Licensee could continue to use the trademark for the period of the contract even if the Licensor breached.[3]  Three months later, the Licensor was forced into an involuntary chapter 7 bankruptcy proceeding in which the trustee rejected the licensing agreement as an executory contract.[4]  When Sunbeam Products, Inc. (the “Purchaser”) acquired the Licensor’s assets, including the trademark, it demanded that the Licensee cease using the trademark.[5]  The Licensee refused, and the Purchaser sought an injunction to prevent the Licensee from producing and selling fans bearing the Licensor’s trademark.[6]  The bankruptcy court held for the Licensee on equitable grounds.[7]  On a direct appeal, the Seventh Circuit held for the Licensee, but did so on different grounds.[8]
January 7 2013

By: Melanie Spergel

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
In an interesting twist, the Third Circuit in Wright v. Owens Corning[1] held that the Court’s change in its interpretation of what constitutes a claim meant that the notice given to parties who held claims under the revised interpretation but not under the one applicable at the time of notice would deprive those claimants of due process; therefore their claims were not dischargeable.[2] The debtor, Owens Corning, manufactured the allegedly defective roofing shingles that were installed on the two plaintiffs’ homes.[3]  The debtor twice published notice in several local and national newspapers in an attempt to reach unknown holders of claims against the estate.[4] The debtor’s confirmed chapter 11 reorganization plan (“the Plan”) purported to extinguish all claims that arose prior to the confirmation date, including claims held by parties who only received publication notice.[5] Several years later, the plaintiffs discovered cracks in their roofing shingles, which one plaintiff had installed pre-petition and the other had installed post-petition but pre-confirmation.[6] The plaintiffs sued the reorganized debtor, and claimed that the Plan could not have discharged their claims because the plaintiffs were not claim holders at the time notice of Plan confirmation was published.[7] As such, the plaintiffs claimed that they had not received constitutionally adequate notice.[8]  The Third Circuit agreed that the plaintiffs were deprived of due process but recognized that the deprivation was a result of the Third Circuit’s change in standards for when a claim arises.[9]
April 18 2012

By: Andrew J. Zapata

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In a matter of first impression, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) in In re Fairfield Sentry Ltd.[1] held that the tolling provisions of section 108 of the Bankruptcy Code (the “Code”) become automatically available to “Foreign Representatives”[2] under section 103(a) in chapter 15 cases.[3]  Fairfield Sentry Ltd. was a feeder fund that invested its assets with Bernard Madoff, and was placed into liquidation proceedings in the British Virgin Islands after Mr. Madoff’s fraudulent activities were uncovered.[4] The Bankruptcy Court recognized the British Virgin Islands proceedings as a foreign main proceeding on July 22, 2010, and held that the joint liquidators were the foreign representatives of the debtor.[5] The foreign representatives sought to have the section 108 tolling provision applied from July 22, 2010 in order to have at least an additional two years to investigate and commence actions.

April 10 2012


By: Samantha M. Tusa

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The Bankruptcy Court for the Eastern District of Michigan held, in In re Piccinini[1], that bankruptcy courts have exclusive jurisdiction over attorneys’ fees incurred in bankruptcy proceedings because of the “restrictive language” of section 329 of the Bankruptcy Code (the “Code”). [2]  The issue arose after the debtor terminated his original attorney who then filed a suit against the debtor in state court to collect his fees.[3]  The bankruptcy court stayed the state court collection action pending the bankruptcy court’s resolution of the fee dispute. [4]