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].

By: Stephanie Y. Lin

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Old Carco,[1] the Bankruptcy Court for the Southern District of New York held that the plaintiffs’ pre-petition claims were barred by a sale order entered following a sale pursuant to section 363 of the Bankruptcy Code (a “363 Sale”) because the court found that the sale order’s “free and clear of any interest in such property” language included the plaintiffs’ claims.  The plaintiffs had filed a class action suit in Delaware state court against Chrysler Group LLC (“New Chrysler”) alleging that their vehicles, which were manufactured and sold by Old Carco LLC (“Old Chrysler”), suffered from a design flaw known as “fuel spit back.”[2]  After the case was removed to the Delaware federal district court, New Chrysler moved to dismiss the class action on the grounds that the plaintiffs’ claims were barred by the sale order that approved the sale of Old Chrysler’s assets to New Chrysler during Old Chrysler’s chapter 11 reorganization (the “Sale Order”).[3]  The Delaware district court then transferred the dispute to the New York bankruptcy court solely to determine the effect of the Sale Order on the plaintiffs’ claims.[4]  Under the Sale Order, New Chrysler assumed liability for only three types of claims that could be brought by future plaintiffs.[5]  The bankruptcy court found that while the sale order did not prevent the plaintiffs’ claims that arose under these three types of liabilities, all other claims that arose prior to the Closing Date were barred.[6]  Specifically, the bankruptcy court found that the plaintiffs or their predecessors (if the plaintiff had bought a used car) had a “pre-petition relationship” with Old Chrysler, and the “fuel spit back” design flaw existed pre-petition.[7]  Because of this, the bankruptcy court determined that the plaintiffs’ claims existed pre-petition, and thus, were barred by the Sales Order.[8]

By: Kaitlin Fitzgibbon

By: Ryan Jennings

St John’s Law Student

American Bankruptcy Institute Law Review Staff

By: Colin Coburn

St. John’s Law Student

American Bankruptcy Law Review Staff

The Arizona Bankruptcy Court recently held, in In re Sample, that the absolute priority rule does not apply to individual debtors because it was bound by the Ninth Circuit Bankruptcy Appellate Panel’s decision in P + P LLC v. Friedman (In re Friedman).[1]  Section 1129(b)(2)(B)(ii) of the Bankruptcy Code defines the absolute priority rule,[2] which mandates that under a chapter 11 plan of reorganization, a dissenting class of unsecured creditors must be paid in full before the holder of any junior claim or interest receives or retains any property on account of such junior claim or interest.[3]  In In re Friedman, the court stated that Congress, in passing BAPCPA, intended Chapter 11 individual bankruptcy to resemble Chapter 13 bankruptcy.[4]  In Friedman the court held that §1129(a)(15)(B),[5] replaced §1129(b)(2)(B)(ii) in cases involving individual debtors, thereby abrogating the absolute priority rule in individual chapter 11 cases.  Section 1129(a)(15)(B) states that a court can only confirm an individual debtor’s plan, to which an unsecured creditor objects, when, “the value of the property to be distributed . . . is not less than the projected disposable income of the debtor” for the first 5 years after payments begin.[6]  The Friedman court reasoned that this fact, combined with the plain meaning of sections 541, 1115, and 1129(b)(2)(B)(ii), dictated that the absolute priority rule does not apply to individual debtors.[7]  The Sample court disagreed with the reasoning of the Friedman opinion, but held that it was bound to follow that holding.[8]

By: James Scahill

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Adhering to the constitutional limits on a particular party’s standing to object, the Third Circuit in In re W.R. Grace & Co. affirmed the district court’s ruling and held that Garlock Sealing Technologies, LLC, (“Garlock”), did not have standing to object to W.R. Grace & Co.’s (“Grace”) proposed chapter 11 plan of reorganization.[1] Grace filed for chapter 11 bankruptcy protection after being threatened by numerous asbestos-related personal injury lawsuits.[2]  Since Garlock often purchased materials from Grace, the two companies were named as co-defendants in thousands of personal injury lawsuits.[3]  Garlock objected to Grace’s reorganization plan, alleging that as a former, current, and potential co-defendant, it had suffered injury because its contribution rights would be denied under the plan.[4]  But, the Third Circuit ruled that those future claims were insufficient to establish Article III standing because they were entirely speculative.  In particular, the court found that Garlock failed to introduce any evidence that it ever sought contribution from Grace, implied Grace in any claim, or suffered any judgment that would have entitled Garlock to assert contribution or setoff rights.[5]  Moreover, the court noted that Garlock had not even filed a claim in Grace’s bankruptcy case.[6]  The Third Circuit opined that for Garlock to have standing to assert contribution claims, the plaintiffs must either win or settle their cases, thereby giving rise to a contribution claim against Grace. Instead, the court noted that Garlock’s alleged injury was contingent on plaintiff verdicts or settlements, which made it more conjectural or hypothetical than actual or imminent, especially given that no such contribution claims had ever been asserted notwithstanding the thousands of ongoing cases involving Grace and Garlock.[7]

By:  Maria Ehlinger

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Affirming the ruling in the Unites States Bankruptcy Court for the District of Arizona, The United States Bankruptcy Appellate Panel of the Ninth Circuit, in In re RCS Capital Development, LLC, held that a debtor may setoff pre-petition claims against post-petition obligations that it owes because section 558 of the Bankruptcy Code does not contain any restrictive language confining setoffs to pre-petition obligation.[1] The court found that the setoff was valid because all of the requirements of section 558 were met. Specifically, the court found that it was a valid setoff under Nevada law because there was mutuality of claims, debts, and parties, and each party had an enforceable debt against the other.[2] The issue arose after ABC Developmental Learning Centers (U.S.A.), Inc. (“ABC”) filed a proof of claim in the jointly administered chapter 11 bankruptcy cases of RCS Capital Development, LLC (“RCS”) and ACCP LLC (“ACCP”). ABC’s claim was based on an ongoing Nevada lawsuit against ACCP and RCS.[3] RCS objected to ABC’s proof of claim and then moved for summary judgment, arguing that RCS was entitled to set off the post-petition debt it owed to ABC, arising out of the Nevada action, against a debt ABC owed to RCS arising from a separate pre-petition Arizona judgment for breach of contract.[4]  The bankruptcy court granted RCS’s motion, finding that the requirements for setoff were met.[5] On appeal, the BAP affirmed the bankruptcy court and held that the setoff was valid.[6]

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