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The Inapplicability of Section 922(d): Interest Rate Swap Agreements Do Not Qualify as Special Revenue Bonds

By: Debra March

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Syncora Guarantee Inc. v. City of Detroit,[1] a federal district court held that the exception to the automatic stay contained in section 922(d) of the Bankruptcy Code did not apply to casino tax revenues pledged to secure the debtor’s swap obligations because the court opined that the swap agreements were not the type of special revenue bonds that the statute was intended to protect, and the debtor’s swap obligation was not a form of indebtedness owed to the swap counterparties or the swap insurer.[2] In 2005, the City of Detroit (the “City”), in order to strengthen its finances and secure pensions, issued debt by forming two not-for-profit service corporations to issue Certificates of Participation (“COPs”) since state law prohibited the City from directly issuing more debt.[3] These service corporations sold the certificates and gave the capital to the City to fund its pensions.[4] The City needed to protect itself against the risk of floating interest rates of COPs[5] because if the rates increased, the amount of interest the City would owe would also increase.[6] In order to protect the City against this risk, the service corporations executed interest-rate swaps with two banks.[7] Since the City had major debt problems, however, investors would not buy the COPs and the banks would not execute the interest-rate swaps without an insurer guaranteeing the City’s obligations.[8] Syncora, a monoline insurer, promised to make payments under the certificates and the swaps if the City failed to do so.[9] After the City defaulted, Syncora allowed the City to enter into a collateral agreement with swap counterparties.[10] Pursuant to this agreement, the City gave swap counterparties an optional termination right and created a “lockbox” system the caused casino tax revenues to be paid into a designated bank account, which could be frozen if the City failed to make it swap payments.[11] The swap counterparties could access this casino tax revenue by obtaining the City’s permission.[12] In June 2013, Syncora notified the bank that the City had defaulted, and the bank froze the casino tax revenues in the account.[13] The City sued in state court to recover the funds.[14] After the state court ordered the bank to release the funds, Syncora removed the case to the federal district court.[15] The district court then transferred the case to bankruptcy court after the City subsequently filed for bankruptcy in July 2013.[16] In August 2013, the bankruptcy court decided that the casino tax revenue was property of the estate and protected by the automatic stay.[17] In April 2014, the district court sua sponte stayed Syncora’s appeal of the bankruptcy court’s decision regarding the lock box funds until the Sixth Circuit ruled on whether the City was eligible to file.[18] Subsequently, the Sixth Circuit granted Syncora’s request for a writ of mandamus and directed the district court to rule on Syncora’s appeal.[19] Ultimately, the district court affirmed the bankruptcy court’s ruling.[20]

The Earmarking Doctrine’s Viability as a Defense to Preference Actions Involving Home-Loan Refinancing Transactions

By: Michael Benzaki

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in In re Flannery,[i] the bankruptcy court held that the earmarking doctrine was not an appropriate defense to a preference action seeking to avoid a late-filed mortgage that was granted as part of a home-loan refinancing.[ii] In Flannery, the debtors financed the purchase of their home through an initial home-mortgage loan, which was secured by a mortgage. Further, within a year of granting the first mortgage, the debtors also granted a second-priority mortgage to secure a home equity line of credit. Subsequently, a new bank acquired both loans and mortgages from the initial lender.[iii] In 2012, the debtors refinanced the initial loan with the new bank through the Home Affordable Refinancing Program (“HARP”).[iv] In connection with the refinancing loan, the debtors granted the new bank a new mortgage against their property and the new bank executed a subordination of mortgage, subordinating the home equity mortgage to the new mortgage.[v] The proceeds from the refinancing loan were used to pay off the initial loan on January 25, 2012, and a discharge of the initial mortgage was recorded on February 21, 2012.[vi] However, the new mortgage was not recorded until April 18, 2012.[vii] Subsequently, on June 28, 2012, less than ninety days later, the debtors filed for bankruptcy under chapter 7 of the Bankruptcy Code. Since the mortgage was recorded within ninety days of the bankruptcy filing, the chapter 7 trustee for the debtors sought to avoid the refinance mortgage as a preference pursuant to section 547 of the Bankruptcy Code.[viii] Ultimately, the court rejected the new bank’s argument that, given the facts of the case at hand, the earmarking doctrine successfully defended the transaction in question from being designated an avoidable preference.[ix]

Pay Me, Maybe? Creditors’ Superior Claim to Undistributed Funds After a Conversion from Chapter 13 to Chapter 7

By: Rosa Aliberti

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, the Fifth Circuit held, in Viegelahn v. Harris (In re Harris),[i] that any funds held by a chapter 13 trustee at the time of conversion to chapter 7 should be distributed to creditors in accordance with the chapter 13 payment plan.[ii] In In re Harris, the debtor filed for bankruptcy under chapter 13 of the Bankruptcy Code.[iii] The chapter 13 plan required the debtor to make monthly payments to a trustee for distribution to secured creditors and unsecured creditors.[iv] The debtor also was required to make monthly mortgage payments directly to Chase, his mortgage lender. After failing to do so, the bank foreclosed on his home.[v] The debtor did not modify the plan and continued making the required monthly payments to the trustee for approximately a year before converting his case to chapter 7.[vi] Since Chase no longer had a claim against the debtor, the funds that were allocated for Chase under the plan began to accumulate.[vii] After the debtor converted to chapter 7, the chapter 13 trustee distributed the funds in her possession to pay the debtor’s attorneys’ fees, the remaining secured creditor, the six unsecured creditors, and her commission.[viii] The debtor moved to compel the chapter 13 trustee to return those funds, arguing that the trustee was not authorized to distribute the funds once he converted the case to chapter 7.[ix] The bankruptcy court ordered the chapter 13 trustee to return the funds to the debtor,[x] and on appeal, the district court affirmed.[xi] The trustee appealed again, and the Fifth Circuit reversed,[xii] concluding that the creditors’ claim to the undistributed funds was greater than that of the debtor.[xiii]

Going Concern Sale Liquidations and the Termination of Collective Bargaining Agreements under Chapter 11

By: Cecilia Ehresman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


In In re Chicago Construction Specialties, Inc.,[i] the United States Bankruptcy Court for the Northern District of Illinois recently held that the debtor must satisfy the requirements of section 1113 of the Bankruptcy Code, even though the debtor was liquidating under chapter 11 instead of reorganizing.[ii] In Chicago Construction, debtor, a demolition construction company, ceased operations, sold substantially all its assets outside of bankruptcy, and sent the union representing its workers a notice that it intended to reject a collective bargaining agreement[iii] before the company filed for bankruptcy.[iv] Subsequently, the debtor filed for bankruptcy under chapter 11 of the Bankruptcy Code and moved to reject its CBAs pursuant to section 1113 of the Bankruptcy Code.[v] The union objected, arguing that the debtor had unilaterally rejected the CBA by providing an ultimatum rather than a proposal for modification.[vi] The Chicago Construction court ruled in favor of the debtor, finding that there was no good reason not to allow the debtor to reject the CBA because the debtor had already liquidated and the only effect of not allowing the debtor to reject the CBA would be to elevate the union’s claims over those of the debtor’s other creditors.[vii]

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