Bankruptcy Litigation

Here the Anthem Doth Commence Determination of Commencement of the Case in Cross-Border Insolvency

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]

LLC Members are Insiders

By: Matthew Donoghue
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently in Longview Aluminum, L.L.C. v. Brandt (“Longview”),[1] an Illinois district court held that a member of a limited liability corporation (“LLC”) is an “insider” under 11 U.S.C. § 101(31) of the Bankruptcy Code (“the Code”) regardless of the member’s control over the LLC.[2] The court reached this conclusion by analogizing a member of an LLC to a director of a corporation,[3] which is listed as a per se “insider” under section 101.[4]

Fraud Not So Ordinary A Look into the Ordinary Course of Business Defense to Preference Actions

By: Samantha Aster
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re Computer World Solution Inc.,[1] a bankruptcy court in Illinois held that the ordinary course of business defense to a preference claim does not apply to a debtor engaged in a fraudulent Ponzi scheme.[2] In 2006, an electronics distributor who was allegedly running a Ponzi scheme, obtained a $2.2 million loan from its lender.  The day before the loan was to mature, the loan was modified to extend the repayment period.[3] Shortly after the lender obtained a state-court judgment against the debtor it made the disputed payments. The estate sought to avoid these three payments made to the lender as preferences under section 547 of the Bankruptcy Code.[4] Even though the lender was unaware of the fraud, and thus not at fault, the court held that the ordinary course of business defense is inapplicable when the debtor engages in fraudulent conduct.[5] 

Fraudulently Conveyed Assets Are Not Property of the Estate Until Recovered

By: Preston C. Demouchet
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Although section 541 includes within the property of the estate both equitable interests and property that is recovered pursuant to section 550, in cases where the estate’s equitable interest is based on the fact that the debtor fraudulently transferred the subject property, the estate includes only the equitable claim for its recovery and not the property itself.[1] The actual transferred asset does not become property of the estate until after the trustee successfully recovers it.[2]
 

A Creditor May Recover Damages for Stay Violation

By: Jacquelyn L. Mascetti
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Recently the Fifth Circuit, in St. Paul Fire & Marine Ins. Co. v. Labuzan,[1]expanded the definition of “individual” in 362(k) to include creditors as parties able to bring an action for a violation of the automatic stay. Debtor, Contractor Technology, Ltd. (“CTL”), construction company owned by the Labuzans. St. Paul Fire & Marine Ins. Co. (“St. Paul”), the insurer, issued performance and payment bonds on behalf of CTL for its ongoing projects as insurance for the projects owners in case CTL was unable to complete construction. The Labuzans entered into an indemnity agreement with St. Paul and agreed to be held liable if St. Paul had to pay the bonds to the project owners. After facing some financial difficulty, CTL decided to reorganize and voluntarily filed chapter 11. Shortly thereafter, St. Paul contacted the owners of CTL’s current projects and threatened to reduce the bond insurance on the projects if the owners made any payments to CTL for any work done towards the completion of the project.[2] Caving to the threats, the project owners stopped sending payments to CTL, which drained its remaining assets to pay expenses, and forced the company to convert its proposed reorganization into chapter 7 liquidation.
 

Sixth Circuit says Alleged Profit Loss is Not Enough for Standing

By: Keith L. Abrams
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
The threshold issue of standing is “an essential and unchanging part of the case-or-controversy requirement of Article III.”[1] In In re Moran,[2] the Sixth Circuit held that a third party appeal of a bankruptcy court order that allowed for abandonment of estate property lacked standing when the only basis for the third party’s appeal was one of an alleged loss of profit.[3] Shortly after declaring bankruptcy, Robert Moran, debtor and a co-shareholder of Airpack, Inc., proposed an agreement with the bankruptcy trustee where the trustee would abandon Moran’s Airpack stock retroactively to the date of the filing of the bankruptcy petition provided Moran paid off all of his creditors’ claims and the bankruptcy trustee’s fees.[4] The stock, once abandoned, pursuant to the Bankruptcy Code would return to the debtor.[5] Thomas Stark, Moran’s co-shareholder in Airpack, Inc., who offered to purchase Moran’s stock from the bankruptcy trustee, filed objections to the abandonment on the grounds that it adversely affected his financial interests.[6] The bankruptcy court approved the arrangement between Moran and the trustee, including the nunc pro tunc abandonment; subsequently, the decision was affirmed by the Bankruptcy Appellate Panel.[7]

Servicing Agents Forewarned Becoming a Real Party in Interest when Filing 362(d) Motions

By: Richard C. Solow
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Determining exactly which parties have the right to request relief from the automatic stay in bankruptcy has long been a challenging and contentious issue for the courts. Recently, in In re Jacobson,[1] the Bankruptcy Court for the Western District of Washington held that a “servicing agent” was not a “real party in interest” for the purpose of filing a section 362(d) motion, which when granted entitles a party to relief from an automatic stay. Substantiated evidence proving standing in bankruptcy court is necessary to allow parties to bring such motions. In denying UBS AG's (“UBS”) motion, the court upheld important notions of prudential standing, which require, even within the context of a federal bankruptcy forum, strict adherence and awareness of pertinent state requirements.[2]

Bankruptcy Code Trumps State Law For Time Provision of Trustees Claim

By: Lauren Kiss
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Federal and state authority sometimes conflict with each other. This was illustrated in Stanley v. Trinchard (In re Hale), in which the Fifth Circuit held that 11 U.S.C. § 108(a), which grants a bankruptcy trustee a time extension to commence suit on behalf of the debtor, superseded Louisiana’s peremption period for legal malpractice claims.[1] In April 2002, Hale’s bankruptcy trustee filed suit in federal court in Louisiana against Trinchard, alleging that Trinchard had committed malpractice in its mishandling of the settlement negotiations. Trinchard argued the claim was time barred under Louisiana law.[2]  In 1991, Gerald Burge (“Burge”) filed a civil rights action against the St. Tammany Parish Sheriff, the former Sheriff’s Deputy Hale (“Hale”), and their insurer, Northwestern National Insurance Company of Milwaukee, Wisconsin (“NNIC”).  In May 1995, NNIC appointed Trinchard, Trinchard, & Trinchard LLC (“Trinchard”) to represent the sheriff and Hale.  In November 2000, a settlement was reached between Trinchard, NNIC’s counsel, and Burge’s counsel, which fully released NNIC from liability, but only partially released the sheriff and Hale from liability. In January 2001, Hale consented to the settlement.  In May 2001, judgment was entered against the sheriff and Hale in the amount of $4,075,000 on Burge’s remaining claims. In October 2001, Burge brought suit against Hale to collect the entire judgment in Mississippi and Hale was forced into bankruptcy on October 15, 2001.
 

Breach of Pre-petition Contract Claims Not Immune From Core Jurisdiction


By: Matthew S. Smith
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Recently, the United States Bankruptcy Court for the Southern District of New York in In re Charter Commc’ns held that a creditor’s adversary proceeding for an alleged pre-petition breach of contract was one over which the bankruptcy court could exercise its “core” jurisdiction.[1] In deciding whether the creditor’s claims fell within its core jurisdiction, the court was guided by 28 U.S.C. § 157,[2] which provides a list of matters that are characterized as “core proceedings.”[3]  The creditor, JPMorgan, alleged that debtor, Charter, had committed non-curable, nonmonetary pre-petition defaults under a pre-petition contract, which would prevent Charter from being able to take additional loans as originally provided in their Credit Agreement.[4] Since JPMorgan refused to consent to adjudication in the bankruptcy court, the court focused on “the close interconnection between the adversary proceeding [at issue] and the bankruptcy process.”[5] The court found that the nature of plaintiff JPMorgan’s proceeding directly affected the confirmation of debtor Charter’s chapter 11 bankruptcy plan – a core administrative function of the bankruptcy court – and thus held that the matter came within the court’s core jurisdiction.[6]
 

Pre-Plan Settlements May Reorder Priorities

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)

[1]

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]

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