Default Interest Rates Apply to Section 363 Sales

By: Caitlin Cline

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Drawing a distinction between Chapter 11 plans and section 363 sales, the Ninth Circuit Court of Appeals held in General Electric Capital Corp. v. Future Media Productions, Inc.

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that when an oversecured creditor is paid off through a section 363 sale, it is entitled to enforce a default interest rate provision and is not limited to the pre-default rate.  In contrast, if payment is made through a confirmed plan, the debtor may “cure” the default under section 1124 and avoid the default interest rate.

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In re Bursztyn and the Issue of Search and Seizure of Debtor Assets

By: Craig Kavanagh

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Recently, the New Jersey Bankruptcy Court, in In re Bursztyn,

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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 United States Marshals Service and the trustee served the order upon the debtor at her residence, and proceeded to search her bedroom and closets.

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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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Free and Clear Sale Power Limited

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)

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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.

Means Test Does Not Apply to Individual Chapter 11 Cases

By: Steven Saal

St. John's Law Student

American Bankruptcy Institute Law Review Staff

The case of In re Roedemeier

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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.

Consumer Debtor Not Responsible For Items Clearing Bank Account Post-Petition

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)

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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

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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.