The Second Circuit Announces the Standard for Determining Whether the Automatic Stay Applies to Non-Debtor Entities

By: Raff Ferraioli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In Re Residential Capital, LLC,[1] the United States Court of Appeals for the Second Circuit remanded the case, while preserving appellate jurisdiction,[2] in order to resolve whether the automatic stay applied to non-debtors.[3]  Prior to the appeal, the District Court for the Southern District of New York denied the debtors’ motion to stay a lawsuit brought by the Federal Housing and Finance Agency (“FHFA”) against the debtors’ corporate parents and affiliates.[4] In 2011, FHFA brought an action against the debtors and certain of their corporate parents and affiliates, alleging that they made material misstatements concerning mortgage-backed securities purchased by Freddie Mac.[5]  While that suit was ongoing, the debtors filed for bankruptcy.[6]  Despite the bankruptcy filing, FHFA continued to prosecute its claims against the non-debtor defendants.[7]  The district court held that the automatic stay could not extend to non-debtor entities because they were not in bankruptcy, without determining whether the lawsuit against those entities would have immediate adverse economic consequences on the debtors’ estates.[8]On appeal, the Second Circuit remanded the case, instructing the district court to make such a determination.[9]

State Court Judgments Not Preclusive in Dischargeability Proceedings

By: Kelly Porcelli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Mercer[1]the United States Bankruptcy Court for the Middle District of Alabama held that a pre-petition stipulation of nondischargeability entered into in connection with state court litigation did not bind the bankruptcy court in an action initiated by the creditor seeking a determination that its claim was nondischargeable.[2]  EFS, the creditor, obtained a judgment against Thomas A. Mercer, the debtor, in an Alabama state court.3  The judgment included a stipulation stating, “Mercer acknowledges that his actions constituted a knowing fraud, which would be and is non-dischargeable in the event Mercer were to file bankruptcy . . . .”4  Mercer subsequently filed for bankruptcy.5  EFS commenced an adversary proceeding seeking to except its debt from discharge pursuant to section 523(a)(2) of the Bankruptcy Code.6  EFS argued that the stipulation was sufficient evidence of fraud and that the stipulation was preclusive.7The bankruptcy court, however, held that the stipulation was not preclusive, reasoning that the resolution of the state court action was independent of the determination of the dischargeability of Mercer’s debt to EFS.8  The bankruptcy court further noted the purpose of the prior state court action was to establish the existence of a debt, whereas the purpose of the bankruptcy court action was to determine whether the debt was dischargeable.9  Ultimately, the bankruptcy court found that EFS failed to establish the elements of common law fraud, and therefore, the court denied the creditor’s motion for default judgment and dismissed its complaint with prejudice.10

Section 365 of the Bankruptcy Code Preempts Florida Dealer Statutes

By: Andrew Ziemianski

St. Johns Law Student

American Bankruptcy Institute Staff

In In re American Suzuki Motor Corp., the United States Bankruptcy Court for the Central District of California recently held that Florida’s dealer statute’s provisions providing a method for measuring damages after the rejection of a car dealership agreement, passed to protect local car dealerships, were impliedly preempted by section 365 of the Bankruptcy Code.[1] The debtor, a wholesaler of Suzuki cars, filed for chapter 11 bankruptcy in order to restructure its automotive division.[2] During the course of the bankruptcy case, the debtor rejected a dealership agreement it had with a Florida dealership.[3] The dealership then filed a rejection damages claim alleging damages that were calculated under the Florida Motor Vehicle Licenses Act,[4] which provided for statutory damages that were greater than the dealership’s damages would have been under common law contract damages principles, as well as treble damages and attorney’s fees.[5] The debtor objected to the dealership’s claim, arguing, among other things, that the Florida law was preempted by the Bankruptcy Code.[6] The court opined that the assessment of damages provided for in the Florida Motor Vehicle Licenses Act ran contrary to the policy of section 365, which allows debtors to reject a burdensome executory contract.[7] As such, the court held that Florida law was preempted.  Therefore, the court refused to calculate the dealership’s damages under the Florida law and instead applied common law contract damage principles when determining the amount of the dealership’s claim.[8]

The Reciprocal Duty of Good Faith Negotiations Under Chapter 9

 By: John Boersma

The Eighth Circuit BAP Holds that Health Savings Accounts are Not Excluded From the Bankruptcy Estate

By: Michelle Nicotera

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Leitch v. Christians (In re Leitch), The Eighth Circuit Bankruptcy Appellate Panel (the “BAP”) ruled that a health savings account (“HSA”) was not excluded from a debtor’s bankruptcy estate.[1]  Kirk Leitch, a chapter 7 debtor, asserted his HSA was excluded under section 541(b)(7)(A)(ii) of the Bankruptcy Code,[2] which functions to exclude a health insurance plan regulated by state law.[3]  The chapter 7 trustee objected to the debtor proposed exclusion.[4] The bankruptcy court agreed with the trustee and held that the HSA was property of the estate.[5]  On appeal, the BAP affirmed the bankruptcy court.[6]  While the BAP noted that the Minnesota statute states that a bank can “act as a trustee of certain types of accounts, including health savings accounts,” the court found that the HSA in question did not qualify as a state regulated health insurance plan.[7]  Indeed, the beneficiary would “incur tax penalties unless the [HSA] funds are used for ‘qualified medical expenses,’ which are essentially costs of health care ‘not compensated by insurance or otherwise.’”  The BAP further reasoned that the HSA was not a state regulated health insurance plan because the debtor, as the beneficiary to the account, had “liberal access to the funds” and was “entitled to distributions from the account for any purpose.”[8].