St. Johns Case Blog

By: Justin W. Curcio

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The Sixth Circuit recently held that an assignee of a bankruptcy claim has the right to stand in the shoes of the original creditor and assert that the debt was  non-dischargeable under section 523(a)(2)(B) of the Bankruptcy Code.[1]In Pazdzierz v. First American Title Insurance Co. (In re Pazdzierz), the debtor allegedly procured loans from the original creditor based on false statements regarding his income, assets, and employment.[2] The debtor eventually defaulted and filed for bankruptcy.[3]After the original creditor assigned its claim, the assignee commenced an adversary proceeding seeking a determination that the debt owed under the assigned claim was non-dischargeable because of the debtor’s alleged fraud in obtaining the loans underlying the assigned claim.[4]The debtor moved for summary judgment, arguing that the assignee’s complaint was asserting a simple fraud claim, which the assignee could not assert because fraud claims cannot be assigned under Michigan Law.[5] The bankruptcy court granted the debtor’s motion.[6] The district court reversed, holding that assignee was pursuing a non-dischargeability claim, which was not a naked fraud claim that .[7] The Sixth Circuit affirmed, stating that assignee’s claim arose from the promissory notes, not a naked claim of fraud.[8]  Accordingly, the Sixth Circuit held that the rule barring the assignment of fraud claims did not apply because the assignee’s complaint sought to enforce the assignee’s rights under the promissory notes, which only depended on a showing of fraud incidentally.[9]

By: Alexandra Hastings

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Finding that a public relations firm did not qualify as a bankruptcy “professional” within the meaning of section 327(a) of the Bankruptcy Code, the United States Bankruptcy Court for the Western District of Kentucky, in In re Seven Counties Services, Inc.,[i] authorized a debtor to retain the firm under section 1108 to assist with the general operation of its post-petition business.  In Seven Counties Services, the debtor sought to retain a public relations firm, which had been working with the debtor prior to the bankruptcy case, to participate in “lobbying, third party advocacy and support of [the d]ebtor’s efforts in restructuring its retirement plans and media relations.”[ii]  The court found that although the firm’s representatives were “professional persons” within the context of section 327(a), the firm was “not performing any tasks of the [d]ebtor enumerated in 11 U.S.C. § 1107,” nor was it “involved in formulating the [d]ebtor’s plan of reorganization or the administration of the estate.”[iii]  Moreover, the firm’s work for the debtor did not “involve any part in negotiating the plan, adjusting debtor/creditor relationships, disposing or acquiring assets or performing any duty required of the [d]ebtor under the Code.”[iv]  Thus, the firm did not qualify as a bankruptcy “professional” for purposes of section 327.[v]

By: Aldo A. Caira III

St. John’s Law Student

By:  Brian J. Adelmann

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Rivera,[1] the Bankruptcy Appellate Panel of the First Circuit held that the debtor was prohibited from filing a second bankruptcy case within 180 days of voluntarily dismissing his first case.[2]  The debtor filed his first chapter 13 bankruptcy case on the eve of foreclosure of real property that he owned, which was encumbered by a mortgage.[3]  The secured creditor moved for relief from the automatic stay on the grounds that the debtor failed to make post-petition mortgage payments.[4]  After the debtor failed to file a timely response to the motion, the bankruptcy court granted the secured creditor relief from stay.[5]  Subsequently, the debtor voluntarily dismissed his bankruptcy case.[6]  On the same day that he dismissed his first case, the debtor filed a new chapter 13 case.[7]  The bankruptcy court granted the creditor’s motion to dismiss the second petition pursuant to section 109(g)(2) of the Bankruptcy Code, which provides that no individual may be a debtor in a bankruptcy case if such individual voluntarily dismissed a bankruptcy case within the preceding 180 days.[8]  The Bankruptcy Appellate Panel of the First Circuit affirmed the bankruptcy court.[9]

By: Maurizio Anglani

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In a matter of first impression, the Court of Appeals for the Fifth Circuit refused to enforce a foreign debtor’s plan of reorganization because it discharged debts of the debtor’s non-debtor subsidiaries.[1] In 2003, Vitro S.A.B. de CV (“Vitro”), a Mexican corporation, issued various notes totaling more than $1 billion. Most of Vitro’s direct and indirect subsidiaries, including its U.S. subsidiaries, guaranteed the notes.[2] Before the notes became due, Vitro initiated an insolvency proceeding in Mexico.[3] However, many of Vitro’s U.S. subsidiaries did not participate in the insolvency proceedings.[4] In February 2012, the Mexican court approved Vitro’s reorganization plan.[5] The Mexican plan purported to extinguish the guarantees of Vitro’s debt by Vitro’s U.S. subsidiaries.[6] Vitro’s representatives then sought to recognize and enforce releases granted in the foreign case, but the Bankruptcy Court for the Northern District of Texas denied relief, holding that non-consensual, non-debtor releases are “manifestly contrary” to U.S. public policy.[7]  

By:  Guillermo Martinez

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Two recent New York District Court cases disagree whether the principle established in the famous California Jewel v. Boxer[1] case applies to hourly matters upon the dissolution of New York law firms.

In Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld, LLP, et al.,[2] the United States District Court for the Southern District of New York held that unfinished client matters pending on the date of law firm’s, Coudert Brothers LLP (the “Firm”), dissolution remain property of the estate.[3] The Firm dissolved on August 16, 2005 and the remaining equity partners authorized the Firm’s executive board to sell all of its assets.[4] A number of the Firm’s partners were hired by other law firms, and subsequently took their unfinished hourly matters with them.[5] Development Specialists, Inc., the administrator of the Firm’s bankruptcy estate (the “Administrator”), sued a number of firms that had hired ex-Coudert Brothers partners in an attempt to recover the profits those firms made on unfinished Coudert client matters.[6] The court agreed with the Administrator and ordered the defendant law firms to turnover profits earned on old Firm matters.

By: Lauren Michalski

St. John’s Law Student

American Bankruptcy Law Review Staff

In In re Dunbar, the United States District Court for the District of Montana held that a creditor was not substantially justified in objecting to the debtor’s discharge where the creditor could not demonstrate that the debtor had acted in bad faith by incurring the debt in the first instance. Dunbar, the debtor, obtained a $9,000 cash advance against a credit card issued by FIA, which he used to pay off other credit card debt.[1] Later that year, Dunbar filed a Chapter 7 petition, and sought to discharge more than $43,000 in credit card debt, including the debt owed to FIA.[2]  FIA objected to the discharge of Dunbar’s debt pursuant to section 523(a)(2) of the Bankruptcy Code, arguing Dunbar had procured the loan under false pretenses because he never intended to repay FIA.[3] Dunbar counterclaimed for attorney’s fees and costs under section 523(d), claiming that FIA’s position was not substantially justified.[4] FIA’s complaint was dismissed and the court awarded Dunbar $5,595 in attorney’s fees and costs.[5] FIA appealed, alleging that it should not be forced to pay Dunbar’s attorney’s fees because (i) its position was substantially justified, and (ii) special circumstances existed that should bar the award. In the alternative, FIA argued that Dunbar had failed to mitigate his costs and therefore any attorney fee award should be reduced as a result.[6] The District Court disagreed with FIA and affirmed the bankruptcy court’s ruling.[7]

By: Shane Malone

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Despite failing to apply for an income-based loan repayment plan, the Bankruptcy Court for the Western District of New York (the “Court”) held in In re Bene[1], that Donne Bene (the “Debtor”) satisfied the “undue hardship”[2] test and discharged her student loans.  The Debtor was an elderly Chapter 7 debtor who owed $57,298.70 to Educational Credit Management Corp., a student loan lender (the “Lender”), for loans she took out between 1981 and 1987. The Debtor voluntarily withdrew from school in 1987 before earning a degree or any professional license in order to care for her incapacitated parents.[3]  Although she had recently received a termination notice from her employer,[4] at the time of her discharge, she worked—as she had for the last 12 years—on an assembly line earning $10.67 per hour.[5] Her impending job loss and minimal level of education left her with little hope of improving her financial situation.[6]  The Debtor had no other debts, and had made good faith efforts to repay her student loans, but those payments only totaled $2,400.[7]  The Lender argued that the Debtor should be ineligible for a discharge of her student loan debt because she had not enrolled in income-based repayment plans for which she was eligible, such as the William D. Ford Program (the “Program”).[8]

By: Erin Dempsey

St. John's Law Student

By: Erin Rieu-Sicart

St. John’s Law Student