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Lack of Prejudice Defeats Procedural Due Process Claim of Plaintiff Class

By: Bryant Churbuck

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In In re Motors Liquidation Co., the Bankruptcy Court of the Southern District of New York held that the class of "Pre-Closing Accident" plaintiffs would be unable to proceed with their personal injury claims against the new General Motors (“GM”), rather than the old GM , because they suffered no prejudice to support a procedural due process violation, despite the fact that the notice by publication given to the "Pre-Closing Accident" plaintiffs was insufficient. In Motors Liquidation, several classes of plaintiffs were asserting claims related to an ignition switch defect that was known by GM as far back as 2003. At least 24 GM business and in-house legal personnel employees knew about the ignition switch defect at the time of GM's 2009 chapter 11 bankruptcy case and section 363 Sale Order. On July 10, 2009, the sale of Old GM in accordance with the Section 363 Sale Order closed, forming the new GM. In the Spring of 2014, GM finally recalled the vehicles with the faulty ignition switch issue. Shortly thereafter, GM announced the ignition switch defect, resulting in several class action lawsuits.

The Government Will Get Theirs (Most of the time)

By: Clayton J. Lewis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In the case of In re Brown, the Bankruptcy Court for the Middle District of Florida held that a tax debt owed to the IRS was excepted from a hardship discharge, and accordingly was not excused from payment. The debtors in In re Brown filed for Chapter 13 bankruptcy relief and initially implemented a payment plan for 100% of their debts, including a total of $303,229 payable to the IRS. The debtors, however, were unable to meet their payment obligations and had to amend their payment plan twice. With over $155,000 still due to the IRS, the debtors offered to settle theirs debt with the IRS. The debtors and the IRS were unable to reach a settlement. The IRS nonetheless suggested that the debtors file for a hardship discharge under section 1328(b) of the Bankruptcy Code. The debtors followed this suggestion and received a hardship discharge, and their bankruptcy case was closed. The discharge order expressly noted that the debt to the IRS, however, was not discharged and was still due in full. When the IRS attempted to collect the debt, the debtors filed a complaint against the IRS in the bankruptcy court, alleging that the IRS had violated the Discharge Order.

A Debtor May Not Necessarily Have His Chapter 7 Case Dismissed

By: Shane Walsh

St. John’s Law Student

American Bankruptcy Institute Law Review

A person who files for bankruptcy may not simply change his mind and have his bankruptcy case dismissed. In In re Segal , the bankruptcy court denied a debtor’s request to dismiss his voluntary chapter 7 case because the debtor acted in bad faith, dismissal would prejudice his creditors, and the debtor would be unable to “secure a fresh start outside of bankruptcy.”[1] In this instance, the debtor filed a chapter 7 petition to avoid the imminent foreclosure sale of his apartment.[2] Four months after the chapter 7 petition was filed, the debtor filed a motion to dismiss arguing that the lack of his signature on the original petition was a “fatal defect to the filing.”[3] The court, however, denied the request, finding that the debtor filed the motion to dismiss after obtaining the benefit of the automatic stay to the detriment of his creditors.[4]

Law Firms Can Be Liable For Failing to Advise Clients of Risks Resulting From Filing for Bankruptcy

By: Nicole Strout

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Peterson v. Katten Muchin Rosenman LLP. , the Seventh Circuit held that the allegations in a legal malpractice complaint by the trustee for Lancelot Investors Fund and other entities in bankruptcy (collectively “the Funds”), was plausible on its face.[1] In Peterson , the trustee filed suit against the Funds’ law firm for failing to detect the peril and curtail the risks pertaining to the Funds.[2] The Funds loaned money to and invested in vehicles owned by Thomas Petters, which, in turn, was supposed to finance Costco’s consumer-electronics inventory.[3] The Funds’ advances were to be secured by deposits made by Costco, not Peters, into a lockbox bank account.[4] However, Costco never deposited money into the account.[5] All the money came from a Petters entity.[6] In reality, Petters never had any dealings with Costco, and the whole set up was a Ponzi scheme.[7] Once the scheme collapsed, the Funds also collapsed.[8] Consequently, the Funds filed for relief under chapter 7 of the Bankruptcy Code.[9] The chapter 7 trustee for the Funds brought a cause of action against Katten, the law firm which acted as transactions counsel for the Funds, claiming that the law firm had a duty to inform its clients that the actual arrangement posed a risk because Petters was not actually running a real business.[10] In granting the law firm’s motion to dismiss, the district court held the Funds “knowingly took the risk and cannot blame the firm for failing to give business advice.”[11] After the trustee appealed the motion to dismiss, the court of appeals reversed the district court decision, holding the firm was liable not for failing to provide business advice but for failing to inform its clients of “the different legal forms that are available to carry out the business and how risks differ with different legal forms.”[12] Clients do not have to take the advice of their attorneys, but attorneys need to advise clients.[13]

Citing Extreme Misconduct, Mississippi Bankruptcy Court Permanently Disbars Attorney

By: Maurice W. Sayeh

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Dobbs , a Mississippi bankruptcy court held that it had the authority, to sanction and to permanently disbar an attorney from practicing in its district.[1] A debtor and his wife filed a joint chapter 13 bankruptcy petition in 2013 and hired an attorney (“First Attorney”) to represent them.[2] Following dismissal of the original 2013 case, the First Attorney filed a subsequent 2015 bankruptcy petition on behalf of the debtor but not the debtor’s wife[3]. The 2015 bankruptcy petition was accompanied with a Certificate of Credit Counseling (“First Certificate”) falsely reflecting that the debtor had attended a credit-counseling course on March 26, 2015,[4] as required by Section 109 of the United States Bankruptcy (“the Code”).[5] The 2015 bankruptcy petition listed the First Attorney as the debtor’s counsel and purportedly included the debtor’s electronic signature.[6] Following the court’s approval of the First Attorney’s request to withdraw as counsel, the debtor hired a new attorney (“Second Attorney”).[7] The Second Attorney filed another Certificate of Credit Counseling (“Second Certificate”) on behalf of the debtor, which indicated the debtor actually completed credit counseling on April 8, 2015.[8]