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]
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.
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]
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]
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]
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]
By: Daniel J. Opisso
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Recently, in In re Visteon, the Third Circuit held that a chapter 11 debtor had to follow section 1114 of the Bankruptcy Code when terminating a retiree benefit plan, notwithstanding the terms of an existing collective bargaining agreement (“CBA”) that permitted unilateral termination.[1] At the time Visteon filed for chapter 11, the CBA provided that retired employees would receive medical benefits until death.[2] However, the CBA gave Visteon the discretionary power to unilaterally terminate or modify any retiree benefits at any time.[3] Despite Visteon’s apparent reservation of the right to terminate retiree benefits, the Third Circuit held that Visteon could not do so in its bankruptcy case without complying with section 1114, which sets forth a specific procedure for termination or modification of retiree benefits.[4]
By: Justin Zaroovabeli
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Recently, in In re Reiman,[1] a Michigan bankruptcy court held that a trustee could not revoke abandonment of property that he later discovered to have additional value.[2] The Reimans, the debtors, listed both their house’s value and a secured claim above their house’s value on their chapter 7 schedules.[3] After the trustee filed his no-asset report, the bankruptcy case closed and the debtors received a discharge.[4] The property eventually foreclosed at a bid price below the house’s fair market value and the trustee moved to re-open the case to recover any additional value in the house.[5] Although the court re-opened the case,[6] the court denied the trustee’s motion to revoke abandonment because the trustee’s no asset-report was not influenced by an unforeseeable change or mistake of law.[7] The court also noted that policy considerations typically favored finality in bankruptcy cases.[8]
By: David Wohlstadter
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In AASI Creditor Liquidating Trust v. Raymond James & Associates, Inc. (In re All American Semiconductor, Inc.),[1] a bankruptcy court held that res judicata barred creditors from objecting to a final fee order because the creditors had notice of the prior hearing regarding the fee application and should have objected to the specific fees then. The liquidating trustee challenged pre-petition fees paid to a financial advisor for his efforts to sell various assets owned by the debtor.[2] The bankruptcy court overruled the trustee’s objection because the creditor’s committee and United States Trustee had already objected unsuccessfully during the final fee hearing.[3]
By: Deirdre E. Burke
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Recently in O’Sullivan v. Loy (In re Loy),[1] a Virginia district court held that although a bankruptcy proceeding is ancillary to a foreign main proceeding, a chapter 15 “case” was commenced upon the filing of the petition for recognition in a United States bankruptcy court and not on the date of commencement of the foreign insolvency proceeding.[2] Certain chapter 15 provisions authorize relief after the “commencement of the case.”[3] Chapter 15, however, does not define the date commencement is considered to have occurred. As a result, determining whether these statutes refer to the date the foreign proceeding commenced or the date of the foreign representative’s petition for recognition in U.S. bankruptcy courts can have significant ramifications.[4] In this case, an English Trustee was unable to avoid the debtor’s transfer of United States property as a post-petition transfer under sections 1520 and 549 of the Code, because the transfer took place before the English Trustee filed the petition for recognition in U.S. bankruptcy court.[5]