By: Deanna Scorzelli
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In a novel approach, the Court uses the § 362(b)(11)
exception from the automatic stay to insulate a consumer debtor from the trustee’s attempt to require her to “turnover” the amounts reflected by pre-petition checks and debits that were paid by her bank shortly after filing bankruptcy and thus were no longer in the account at the time it was remitted to the estate. In In re Minter-Higgins
[2]
the Chapter 7 Trustee sought turnover from the debtor of money that had been in the debtor’s bank account at the instant of filing for bankruptcy. The debtor objected to the turnover, however, because she had issued checks and initiated debit transfers before filing for bankruptcy that were not honored by the bank until after the filing. If the Trustee were successful in obtaining the turnover, the debtor would be liable to the estate for the amount of those items and effectively pay twice – once when the funds in her account were used to honor the check and debit transfers and a second time in response to the turnover.
By: Christpher J. Hunker
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The Ninth Circuit Court of Appeals has ruled that a voluntary Chapter 13 bankruptcy filed by above-median income debtor with no “projected disposable income” is not subject to the “applicable commitment period” prescribed by 11 U.S.C. § 1325.
In so ruling, the Court agreed with the Trustee’s interpretation of “applicable commitment period” as mandating a temporal requirement.
[2]
Nevertheless, the Court found that the “applicable commitment period” is inapplicable where the debtor can show a negative or zero “projected disposable income” as calculated on Form B22C.
[3]
Thus, an above-median income debtor can escape the required five-year “applicable commitment period” if, at the time of filing for Chapter 13 bankruptcy, the debtor can prove that his “projected disposable income” would be zero or a negative number.
By: Peter Doggett, Jr.
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Rejecting a per se rule, the Second Circuit Court of Appeals in Motorola Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC)
attempted to balance the need for flexibility with the Bankruptcy Code’s priority scheme
[2]
by holding that compliance with the Code's priority rules is the “most important factor” to consider in approving a pre-plan settlement under Bankruptcy Rule 9019
[3]
where the settlement distributes assets.
[4]
By: Devin Sullivan
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The federal courts are currently split on the issue of whether the functional definition of "fiduciary" used in ERISA constitutes a “fiduciary” for purposes of the section 523(a)(4) discharge exception when the ERISA fiduciary fails to comply with ERISA obligations. At stake in two recent cases was the status of a corporate officer's liability where employee contributions withheld by the corporate employer were not remitted to the pension and welfare funds. In In re Mayo,
the Vermont Bankruptcy Court sided with those courts finding that being an ERISA fiduciary makes a debtor a fiduciary under the Code. As a result, the owner of a steel erection company, when declaring personal bankruptcy, was barred from discharging the $181,000 debt his company owed under a collective bargaining agreement to the employee benefit funds. Meanwhile, the Sixth Circuit in In re Bucci
[2]
went the other way in permitting a company president to discharge his liability for the debt his company owed to a multiemployer pension fund, holding that his status as an ERISA fiduciary was not sufficient to trigger the bankruptcy discharge exception.
[3]
By: David Margulies
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Applying
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]
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
, 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]
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.
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]
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
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.
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)
“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]
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,
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]