By: Craig Kavanagh
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Recently, the New Jersey Bankruptcy Court, in In re Bursztyn,
held that Fourth Amendment limitations applied to a trustee’s conduct in seeking to search a debtor’s residence with the intention of seizing undisclosed assets. However, the Court reasoned that, by filing bankruptcy, the debtor had reduced her reasonable expectations of privacy
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and the Court held that the trustee’s actions did not exceed the Fourth Amendment standards of reasonableness.
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In Bursztyn, based on an investigation of court records of the debtor's recent divorce, the trustee suspected that the debtor was hiding valuable jewelry and artwork that was not listed in the debtor’s bankruptcy petition or financial affairs statements.
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The trustee requested from the Court, ex parte, an order allowing her to search the debtor’s home with the hopes of obtaining the art and jewelry that now belonged to the estate.
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The Court granted authorization, and the
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The search uncovered nearly two hundred pieces of fine jewelry and ten works of art, valued at nearly $250,000.
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Claiming that the search and seizure violated her Fourth Amendment rights, the debtor sought to suppress all evidence uncovered by the trustee’s search.
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By: Thomas Scappaticci Jr.
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The decision in Clear Channel Outdoor, Inc. v. Knupfer (In re PW)
cast doubt on the ability of a senior secured creditor to take title free and clear of junior liens under section 363(f) of the Bankruptcy Code. In Clear Channel, the Ninth Circuit Bankruptcy Appellate Panel held that “[s]ection 363(f) of the Bankruptcy Code [does not] permit a secured creditor to credit bid its debt and purchase estate property, taking title free and clear of valid, non consenting junior liens.”
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The Court noted the split in cases interpreting the section 363(f)(3) ground for free and clear sales, but followed the more restrictive line that limits such sales to situations where the sale proceeds exceeded the face amount of all liens,
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thus making it unavailable in cases where the junior liens are undersecured. The Court’s interpretation section 363(f)(5) was more novel in nature, holding that a “cram down” is not a legal proceeding under that provision.
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The truly novel aspect of the opinion, however, was its holding that the section 363(m) statutory mootness provision applied only to the sale itself, and did not shield the section 363(f) free and clear aspect of the sale.
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This holding seems to allow a junior lien creditor to attack, post sale, virtually any sale that does not fully satisfy its claim.
By: Steven Saal
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The case of In re Roedemeier
holds that the section 707(b) “means test” expense allowances are not incorporated into the calculation of disposable income for individual chapter 11 debtors.
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Instead, a chapter 11 debtor’s “projected disposable income” under section 1129(a)(15) is calculated by the court through “a judicial determination of the expenses that are reasonably necessary for the support of the debtor and his or her dependents.”
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Since the means test applies to the calculation of “projected disposable income” in chapter 13 cases, this decision creates a difference between the two chapters. Use of the “means test” involves a stricter formula of determining income that in many cases would require the debtor to contribute more income to funding the plan, thus creating an incentive for debtors to file chapter 11 in order to use the more flexible judicial calculation.
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.
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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.
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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
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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
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where the settlement distributes assets.
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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
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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.
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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.”
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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.
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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.
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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)
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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”).
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Not only did the debtor not receive approval, but he also failed to notify the Bank or the SBA of the sale.
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The debtor used the proceeds of the sale to pay off unsecured debtors when the money should have gone to the Bank.
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The Bank brought an adversary proceeding to determine the dischargability of its claim against the debtor and to object to the discharge.
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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).
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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).
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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.”
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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.
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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.
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