Chapter 13 For a Week Pulling an End-Run Around the Applicable Commitment Period

By: Christpher J. Hunker

St. John's Law Student

American Bankruptcy Institute Law Review Staff

The Ninth Circuit Court of Appeals has ruled that a voluntary Chapter 13 bankruptcy filed by above-median income debtor with no “projected disposable income” is not subject to the “applicable commitment period” prescribed by 11 U.S.C. § 1325.

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  In so ruling, the Court agreed with the Trustee’s interpretation of “applicable commitment period” as mandating a temporal requirement.

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  Nevertheless, the Court found that the “applicable commitment period” is inapplicable where the debtor can show a negative or zero “projected disposable income” as calculated on Form B22C.

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  Thus, an above-median income debtor can escape the required five-year “applicable commitment period” if, at the time of filing for Chapter 13 bankruptcy, the debtor can prove that his “projected disposable income” would be zero or a negative number.

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)

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attempted to balance the need for flexibility with the Bankruptcy Code’s priority scheme

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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

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where the settlement distributes assets.

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Denial of Discharge for ERISA Fiduciaries

By: Devin Sullivan

St. John's Law Student

American Bankruptcy Institute Law Review Staff

The federal courts are currently split on the issue of whether the functional definition of "fiduciary" used in ERISA constitutes a “fiduciary” for purposes of the section 523(a)(4) discharge exception when the ERISA fiduciary fails to comply with ERISA obligations.  At stake in two recent cases was the status of a corporate officer's liability where employee contributions withheld by the corporate employer were not remitted to the pension and welfare funds.  In In re Mayo,

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the Vermont Bankruptcy Court sided with those courts finding that being an ERISA fiduciary makes a debtor a fiduciary under the Code.  As a result, the owner of a steel erection company, when declaring personal bankruptcy, was barred from discharging the $181,000 debt his company owed under a collective bargaining agreement to the employee benefit funds.  Meanwhile, the Sixth Circuit in In re Bucci

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went the other way in permitting a company president to discharge his liability for the debt his company owed to a multiemployer pension fund, holding that his status as an ERISA fiduciary was not sufficient to trigger the bankruptcy discharge exception.

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Narrowing the Scope of Auditor Duties

By: David Margulies

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Applying Indiana law, the Seventh Circuit firmly rejects the idea that a financial auditor has any obligation to investigate circumstances external to a company’s books and records in connection with its determination whether a going concern qualification should be included in an audit report.

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The auditor must, however, consider and factor into its going concern determination information about external matters that it is “told by the firm or otherwise learns.”

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 The trustee’s negligence and breach of contract claims against financial auditor Ernst & Young arose out of the collapse of Taurus Foods, a frozen meat distribution company that was involuntarily forced into bankruptcy two years after the issuance of an allegedly defective audit report.

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The trustee asserted a “deepening insolvency” theory based on the auditor’s failure to include a going-concern qualification, thereby causing the managers of Taurus to refrain from liquidating immediately and losing an additional $3 million through continued operation.

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A New Weapon for Creditors to Protect Their Security Interests from Discharge

By: Sean Scuderi

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Recently, the United States Bankruptcy Court in the Western District of Texas gave secured lenders a new weapon to attack the discharge of debt by a debtor who sold collateral without the creditor’s knowledge and used the proceeds to pay unsecured debts.  In In re Barnes

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, the Court held that the sections 727(a)(2) and (7)

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fraudulent transfer grounds for objection to discharge apply to collateral dispositions where the debtor had an intent to defraud the secured creditor.  In Barnes, the debtor, through his business of Mobar, LLP, sold off his store in Guadalupe without the required approval of Franklin Bank, S.B.B. (“the Bank”), which held a security interest in it, and the Small Business Association (“SBA”).

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  Not only did the debtor not receive approval, but he also failed to notify the Bank or the SBA of the sale.

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  The debtor used the proceeds of the sale to pay off unsecured debtors when the money should have gone to the Bank.

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  The Bank brought an adversary proceeding to determine the dischargability of its claim against the debtor and to object to the discharge.

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