By: Jon H. Ruiss, Jr., CPA
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re South Beach Securities, Inc., the Seventh Circuit affirmed the old adage that a bankruptcy court could not confirm a chapter 11 plan when the plan’s sole purpose is designed to make use of the debtor’s net operating losses (NOLs) as a tax benefit for the creditor.[1] The plan intended to obtain a tax deduction for the debtor’s sole creditor through the plan.[2] In a scolding opinion by Judge Posner, the court held that the plan violated of section 1129(d), and therefore, was proposed in bad faith.[3]  Section 1129(d) states that a plan cannot be confirmed when its principal purpose is tax avoidance.[4]

By: Mark Sicari
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In S.E.C. v. Byers[1], the Second Circuit determined that the district court had the equitable authority to enter an anti-litigation injunction that prohibited creditors from filing an involuntary bankruptcy petition against a debtor that is in an SEC receivership.[2] Responding to a $250 million Ponzi scheme perpetrated by the debtor companies, the SEC requested immediate injunctive relief from the district court.[3] The court appointed a receiver and entered an anti-litigation injunction.[4] Specifically, the injunction prevented creditors from filing an involuntary bankruptcy petition.[5] The Second Circuit affirmed the injunction, explaining that the district court’s equitable powers enabled it to keep the receivership assets out of bankruptcy.[6]

By: Shintaro Kitayama
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In a case of first impression, the Fifth Circuit, in Condor Insurance Limited v. Petroquest Resources, Inc. (In re Condor Insurance Limited),[1]held that foreign representatives in a chapter 15 proceeding can assert an avoidance action under foreign law in a United States bankruptcy court.[2] The case was initiated when a foreign insurance company’s creditors filed a winding up petition, which is similar to a U.S. chapter 7 proceeding, in Nevis, [3] a small Caribbean island that is part of the Federation of Saint Kitts and Nevis. The Nevis liquidators filed a chapter 15 bankruptcy proceeding in Mississippi and sought to recover the assets under Nevis avoidance law. [4]  The Fifth Circuit held that section 1521(a)(7) allows a U.S. bankruptcy court to offer avoidance relief under foreign law.[5]

By: Bryan Kotliar
St. John's Law Student
American Bankruptcy Institute Law Review Staff 

Recently, in In re Siler,[1] the court allowed a debtor whose monthly disposable income created the presumption of abuse under the means test to remain in chapter 7 since the creditors would not receive any distribution under a chapter 13 plan.[2] Generally, if a debtor cannot rebut the presumption of abuse, the case must be dismissed or converted to chapter 13, which is why the Bankruptcy Administrator[3] moved to dismiss.[4] However in this case, under a chapter 13 plan, the debtor would be entitled to deduct her ERISA contributions and 401(k) loan obligation repayments from her monthly disposable income—deductions not available for her CMI calculation under chapter 7.[5] Because of these deductions, creditors would not receive any distribution under an alternate chapter 13 plan.[6] Therefore, the court held that the debtor was entitled to remain in chapter 7, notwithstanding the language of 707(b), because dismissing or converting her case to chapter 13 would create absurd results contrary to Congress’s intent.[7]

By: Elisa M. Pickel
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re Brubaker[1] a Florida bankruptcy court held that funds related to checks that had not cleared were property of the estate under section 541(a)(1) of the Bankruptcy Code.[2] In Brubaker, the debtors wrote several checks before filing for chapter 7 relief.[3] As of the filing date, these checks had not cleared, and therefore the funds remained in the debtors’ bank account.[4] The bankruptcy court rejected the debtors’ argument that these funds transferred on the dates that the checks were presented to the recipient, and thus were not property of the estate. Instead, the court noted that funds do not transfer until the checks are honored. Thus, the court held that funds remaining in the account were property of the estate since the debtors’ bank had not honored the checks.

By: Jason L. Gould
St. John's Law Student
American Bankruptcy Institute Law Review Staff

The Seventh Circuit, in In re Altheimer & Gray,[1] held that the meaning of “partner” in a bankruptcy proceeding would be determined in accordance with the terms of the plan of reorganization, not state partnership law.[2] Altheimer & Gray filed for bankruptcy in 2003.[3] According to his contract, Mark Berens was a “Non-Unit Partner,”[4] meaning he possessed no interest in the firm’s profit-share and held no voting power, unlike the “Unit Partners.”[5] Altheimer & Gray’s reorganization plan subordinated the claims of both “Non-Unit Partners” and “Unit Partners” to those of its other creditors.[6] Berens argued that he was not a partner under the statutory definition of Illinois’ Uniform Partnership Act, and therefore, should not have his $300,000 claim subordinated.[7] Without looking to state law, the court relied on 11 U.S.C. § 1141(a), which states, “the provisions of a confirmed plan bind the debtor [and any other such entity under the plan] . . . whether or not the claim . . . is impaired under the plan.”[8]

By: Corinne E. Donohue
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s Inc.),[1] the Third Circuit applied a new test for determining when a “claim” arises under the Bankruptcy Code.[2] Specifically, the Third Circuit held that a “claim” arises when an individual is exposed to a product or conduct that causes injury, and not when the injury is manifested.[3] Grossman’s involved asbestos-related tort claims.[4] The Third Circuit held that even though claimants’ injury did not manifest itself until after bankruptcy, the claim arose pre-petition when claimant was exposed to asbestos.[5] In Grossman’s the Third Circuit reconsidered and overruled its previous “accrual” test in Avellino & Bienes v. M. Frenville Co. (In re M. Frenville Co.).[6]

By: MaryBeth C. Allen
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In a case of first impression, a New York bankruptcy court[1] suggested that a reduced prison term could be considered new value for purposes of the 11 U.S.C. § 547(c)(1) preference defense.[2] In Citron, the debtor pled guilty to numerous felonies after entering into a criminal plea bargain agreement, which included a $75,000 fine and a reduced prison term.[3] The debtor paid the $75,000.00 fine two days before filing chapter 13.[4] There was no dispute that the payment was preferential,[5] but the court dismissed the State’s motion to dismiss based on the affirmative defense of new value under section 547(c)(1), not because it was inapplicable, but for lack of evidence of value.[6]

By: Michael J. Keane
St. John's Law Student
American Bankruptcy Institute Law Review Staff 

Recently, the In re Lehman Brothers Holdings Inc.[1] bankruptcy court held that a creditor may only exercise a “setoff” against a debt owed to a debtor when “mutuality” exists between that debt and the obligation running to the creditor from the debtor.[2] In the case, Swedbank attempted to setoff indebtedness owed by Lehman against the amount that Lehman had deposited in a Swedbank general deposit account.[3] The court held that 11 U.S.C. §§ 560[4] and 561’s[5] safe harbor exceptions to the automatic stay for swap agreements did not abrogate 11 U.S.C. § 553(a)’s “mutuality” requirement.[6] Thus, the court disallowed the setoff.

By: Patrick James Kondas
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Innovative Communication Corp. v. Prosser (In re Innovative Communication Corp.),[1] a Pennsylvania bankruptcy court held that under section 509, a claim was extinguished when a co-lessee purchased it from a creditor.[2] The co-lessee claimant co-leased a motor vehicle lease with a chapter 11 debtor corporation, which he owned and controlled at the time the lease was executed.[3] Later, the claimant purchased all rights to the claim and attempted to assert the claim against the corporation’s bankruptcy estate.[4] The court found the claim was extinguished by the claimant’s purchase of it.[5]