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Seller Beware Cash Collateral Must Be Returned

By: Brian Powers
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

Section 549(a) empowers a chapter 7 trustee to avoid unauthorized post-petition transfers of estate property.[1]  Recently, in Marathon Petroleum, Co., LLC v. Cohen (In re Delco Oil, Inc.), the court held that there is no protection for an innocent seller of goods who was unaware that the DIP was not authorized to use cash collateral to pay for the delivered good.[2] In the case, the debtor, an oil company, filed a routine first-day motion[3] and simultaneously moved for an emergency order authorizing the use of cash collateral.[4] One of the oil company’s secured creditors objected to the cash collateral motion on the ground that its security interest was not adequately protected.[5] Reserving judgment on the cash collateral motion until after a hearing, the bankruptcy court nevertheless authorized the debtor to continue its business as a DIP.[6] Before the hearing date on the cash-collateral motion, the oil company used cash collateral to purchase approximately $1.9 million of petroleum products without the court’s permission.[7] The cash-collateral motion was subsequently denied, and the oil company voluntarily converted its case to chapter 7.[8] The chapter 7 trustee then filed suit against the oil supplier, attempting to recover the funds paid to it.[9]

Court Administration

Overpaid Taxes Need Not be Turned Over to the Estate Under Section 542(a)

By: Christopher J. Rubino
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

In Weinman v. Graves (In re Graves)[1], the Tenth Circuit held that section 542(a)[2] does not permit a chapter 7 trustee to force the IRS to turnover overpaid taxes of joint debtors where the debtors elected to apply the overpayment to the next year’s tax liability.  In Graves the joint debtors elected to apply their 2006 tax refund to their 2007 tax liability.[3]  Two months after filing their tax returns, the debtors filed for bankruptcy.[4] The Tenth Circuit affirmed the bankruptcy court’s refusal to order the IRS to turnover the debtors’ 2006 tax refund under section 542(a).[5] 

Bankruptcy Taxation, Consumer Bankruptcy

The Fifth Circuit Holds Trustee Personally Liable for Failure to Remit State Sales Tax

By:  Katelyn Trionfetti
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

In Texas Comptroller of Public Accounts v. Liuzza (In re Texas Pig Stands, Inc.),[1] the Fifth Circuit considered whether a bankruptcy trustee could be held personally liable for failing to remit state sales tax pursuant to Texas Tax Code section 111.016(b).[2] In Texas Pig Stands, the state taxing authority brought an adversary proceeding against a bankruptcy trustee after the trustee failed to timely remit state sales tax, which violated a court order and a court approved reorganization plan.[3] The Fifth Circuit held that the trustee was personally liable for over $100,000[4] in taxes he failed to remit.[5]

Bankruptcy Taxation

Fraudulently Conveyed Assets Are Not Property of the Estate Until Recovered

By: Preston C. Demouchet
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Although section 541 includes within the property of the estate both equitable interests and property that is recovered pursuant to section 550, in cases where the estate’s equitable interest is based on the fact that the debtor fraudulently transferred the subject property, the estate includes only the equitable claim for its recovery and not the property itself.[1] The actual transferred asset does not become property of the estate until after the trustee successfully recovers it.[2]
 
Bankruptcy Litigation

Discharge Injunction Requires School to Issue Transcript

By: Sabihul Alam
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
In In re Moore, the United States District Court for the Eastern District of Virginia found that Novus Law School violated a discharge injunction by refusing to issue a transcript or award a degree to Moore, a law student, until he paid his outstanding tuition balance, which had been discharged in Moore’s chapter 7 proceeding.[1] Moore successfully completed a two-year juris doctor program at Novus, a non-accredited web-based private law school, yet, at the time of completion, had an outstanding balance from unpaid tuition.[2] Moore’s obligation did not arise as a result of a government loan program, but instead was part of his tuition bill which he decided not to pay as it came due.[3] In May 2008, Moore filed for chapter 7 relief on account of his over $400,000 debt, approximately $6,000 of which was owed to Novus.[4] After receiving notification of Moore’s filing, Novus sent Moore an email stating that the law school would not grant Moore a degree nor certify his graduate status to employers if his debt was discharged through bankruptcy.[5] Subsequently, the court granted Moore a bankruptcy discharge.[6] The tuition owed to the law school was among those debts discharged.[7] In keeping with its prior warning, Novus refused to issue Moore his Juris Doctor degree or a transcript.[8] Moore then filed a motion seeking contempt sanctions against Novus for violating the discharge injunction for refusing to award Moore a degree or issue a transcript.[9]
 
Consumer Bankruptcy

Sixth Circuit Affirms Bankruptcy Courts Retroactive Conversion Order

By: Brandi Sinkovich
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
The Sixth Circuit recently held that a bankruptcy court had the equitable power under section 105(a) of the Bankruptcy Code (the “Code”) to retroactively convert a chapter 11 case to chapter 7.[1] In Mitan v. Duval (In re Mitan), debtor Kenneth Mitan filed a chapter 11 petition in the Bankruptcy Court for the Central District of California that unsecured creditors, which had been awarded judgments against debtor in connection with a fraudulent business scheme the debtor operated, successfully moved to transfer to the Bankruptcy Court for the Eastern District of Michigan, where debtor resided and several creditors’ businesses were located.[2] After none of the parties appeared at either the status conference or the subsequent hearing to show cause why the case should not be dismissed or converted to chapter 7, the court dismissed the case. Later the court granted the creditors’ reconsideration motion in which the creditors argued that their absence was inadvertent while debtor's absence was calculated to result in dismissal of the case, which had been previously denied to the debtor.[3] At the hearing on the reconsideration motion, the bankruptcy court reopened the case and sua sponte converted it to chapter 7 after finding that it was necessary for a trustee to investigate debtor’s affairs in light of debtor’s alleged scheme to avoid his obligations and abscond with assets hidden overseas.[4]
 
Business Reorganization

Putting the Brakes on Ride-Through in the Ninth Circuit

By: Robert J. Guidotti
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Recently, in Dumont v. Ford Motor Credit Company (In re Dumont),[1] the Ninth Circuit reversed the rule established in McClellan Fed. Credit Union v. Parker (In re Parker)[2] by holding that the implied right of ride-through is no longer available to chapter 7 debtors who do not attempt to reaffirm debts on secured personal property. In this case, the debtor-plaintiff, Dumont, entered into a secured loan agreement with the creditor-defendant, Ford, for the purchase of a personal automobile. Three years after entering into the agreement, Dumont filed a petition for chapter 7 relief.[3]
 

RCRA Clean-Up Injunction Is Not Dischargeable in Bankruptcy

By: Christopher J. Palmese
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
The Federal Resource Conservation and Recovery Act (the “RCRA”) allows the government and private citizens to force parties responsible for the “handling, storage, treatment, transportation or disposal of any solid waste or hazardous waste” to take appropriate action to prevent the potential dangers posed by materials that may “present an imminent and substantial endangerment to health or the environment”.[1] In 2008, the district court for the Southern District of Illinois awarded the Environmental Protection Agency an injunction under section 6973 of the RCRA that ordered Apex Oil Corp. Inc. (“Apex”) to mitigate groundwater contamination at a site where Apex’s corporate predecessor had caused millions of gallons of oil to be trapped underground.
 
Business Reorganization

Do Hybrid Claims Qualify for Section 503(b)(9) Administrative Expense Treatment

By: Brendan Gage
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
Courts are increasingly divided over whether so-called “hybrid” claims – those involving both goods and services transactions – can qualify as an administrative expense under section 503(b)(9) and, if so, to what extent. Claims characterized as administrative expenses are paid off first whereas claims that fail to meet section 503(b)(9)’s requirements will be deemed unsecured claims which are paid at a lower priority level and rarely in full.[1] A product of BAPCA, section 503(b)(9)[2] creates a specific type of administrative expense claim for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business.”[3] Yet despite this seemingly straightforward language, courts battle over whether goods transactions within hybrid claims can be allocated as individual section 503(b)(9) expenses or whether hybrid claims should be considered indivisible and analyzed wholesale for qualification under section 503(b)(9).[4]
 
Unsecured Trade Creditors

Its Never Too Late to Deal with Unscheduled Assets

By: Krystiana L. Gembressi
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Recently, in In re Dunning Brothers Co.,[1] the United States Bankruptcy Court for the Eastern District of California affirmed the longstanding tenet that unscheduled assets remain property of the bankruptcy estate indefinitely. The court held that a bankruptcy case that was closed more than seventy years ago could be reopened following the later discovery of certain unscheduled assets.
 
Real Estate