By: Lauren E. Stulmaker

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In a decision with important implications for public sector bankruptcies, the United States Bankruptcy Court for the Eastern District of California held that the rejection of collective bargaining agreements (“CBAs”) in chapter 9 cases is governed by § 365, rather than the enhanced standards of § 1113. [1]   However, rather than the relaxed business judgment standard normally applicable to contract rejections under § 365, the court applied the three part test established by the Supreme Court in NLRB v. Bildisco & Bildisco, before letting the City of Vallejo out of its collective bargaining agreements (“CBAs”).[2] The court in In re City of Vallejo, addressed the issue of whether chapter 9 of the Bankruptcy Code would allow a municipal debtor to reject the CBAs in place for its public sector unions.[3] After the City filed for bankruptcy under chapter 9 and sought to escape the CBAs at issue, the municipal employees sought protection under California’s state labor laws. Because the federal labor laws only govern private sector employment, the city employees attempted to rely on the state labor laws yet the court held that the state laws were entirely preempted by the Bankruptcy Code.[4] 

 

By: Michael Vanunu

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

It is not uncommon for a chapter 13 debtor to file for bankruptcy after certain assets have already been repossessed.  This leaves the courts in the position of having to decide whether a particular creditor can continue to hold the asset it has repossessed, or must return it to the bankruptcy estate. Recently, in a case of first impression for the circuit, the Seventh Circuit, in Thompson v. General Motors Acceptance Corp.,[1] was called upon to determine whether an asset lawfully seized pre-petition must be returned to the estate after debtor files for chapter 13 bankruptcy, and if so, whether the asset must be returned even without a showing by the debtor that he can adequately protect the creditor’s interest.[2] In the case, Thompson had his car repossessed by General Motors Acceptance Corp (“GMAC”), a secured creditor.  A few days later Thompson filed for chapter 13, and sought the return of his vehicle from GMAC through the automatic stay provision of § 362(a)(3), which provides that “a petition filed [for bankruptcy] . . . operates as a stay . . . of any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.”[3] GMAC refused because it claimed that Thompson could not adequately protect its interest.[4]

 

By: Jacquelyn L. Mascetti

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Recently the Fifth Circuit, in St. Paul Fire & Marine Ins. Co. v. Labuzan,[1]expanded the definition of “individual” in 362(k) to include creditors as parties able to bring an action for a violation of the automatic stay. Debtor, Contractor Technology, Ltd. (“CTL”), construction company owned by the Labuzans. St. Paul Fire & Marine Ins. Co. (“St. Paul”), the insurer, issued performance and payment bonds on behalf of CTL for its ongoing projects as insurance for the projects owners in case CTL was unable to complete construction. The Labuzans entered into an indemnity agreement with St. Paul and agreed to be held liable if St. Paul had to pay the bonds to the project owners. After facing some financial difficulty, CTL decided to reorganize and voluntarily filed chapter 11. Shortly thereafter, St. Paul contacted the owners of CTL’s current projects and threatened to reduce the bond insurance on the projects if the owners made any payments to CTL for any work done towards the completion of the project.[2] Caving to the threats, the project owners stopped sending payments to CTL, which drained its remaining assets to pay expenses, and forced the company to convert its proposed reorganization into chapter 7 liquidation.

 

By: Keith L. Abrams

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The threshold issue of standing is “an essential and unchanging part of the case-or-controversy requirement of Article III.”[1] In In re Moran,[2] the Sixth Circuit held that a third party appeal of a bankruptcy court order that allowed for abandonment of estate property lacked standing when the only basis for the third party’s appeal was one of an alleged loss of profit.[3] Shortly after declaring bankruptcy, Robert Moran, debtor and a co-shareholder of Airpack, Inc., proposed an agreement with the bankruptcy trustee where the trustee would abandon Moran’s Airpack stock retroactively to the date of the filing of the bankruptcy petition provided Moran paid off all of his creditors’ claims and the bankruptcy trustee’s fees.[4] The stock, once abandoned, pursuant to the Bankruptcy Code would return to the debtor.[5] Thomas Stark, Moran’s co-shareholder in Airpack, Inc., who offered to purchase Moran’s stock from the bankruptcy trustee, filed objections to the abandonment on the grounds that it adversely affected his financial interests.[6] The bankruptcy court approved the arrangement between Moran and the trustee, including the nunc pro tunc abandonment; subsequently, the decision was affirmed by the Bankruptcy Appellate Panel.[7]

By: Paul Clancy

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Recently, the United States Bankruptcy Court for the District of Delaware held that the Bankruptcy Code does not permit triangular setoff of debts, notwithstanding pre-petition contracts among parties that contemplate such an exchange.[1]   In In re Semcrude, L.P., Chevron Products Company (“Chevron”), the creditor, had entered into separate petroleum-related contracts with three affiliated debtors: Semcrude, L.P., SemFuel, L.P., and SemStream, L.P.[2] Each contract expressly allowed the parties to setoff debts related to the contract or to any other contract between the parties and their affiliates.[3] At the time of the debtors’ bankruptcy filings, Chevron owed a debt to Semcrude, L.P., and was owed a debt from each of SemFuel, L.P. and SemStream, L.P.[4] Chevron moved for relief from the automatic stay to effect a triangular setoff of the debts among itself and the debtors, arguing that the terms of the contracts permitted such a setoff.[5] The court denied Chevron’s motion and held that, regardless of the contract language at issue, section 553 plainly does not allow triangular setoff.[6] The court determined that the contract arrangement did not satisfy the section 553 requirement that debts be mutual in order to be setoff, and that no exception existed that would allow parties to contract around the mutuality requirement.[7]

 

By: Leslie M. Hyatt

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Recently, in In re Egebjerg, the United States Court of Appeals for the Ninth Circuit dismissed, as abusive, a debtor’s chapter 7 petition because it found that the payments owed to the debtor’s 401(k) were not debt and thus, the debtor had excess disposable monthly income.[1] In 2004, the debtor borrowed money from his 401(k) to keep up with financial obligations and personal expenses. To repay the money owed to his 401(k), the debtor had his employer deduct $733.90 from his monthly paycheck. In 2006, the debtor had $31,000 in unsecured consumer debt and filed for chapter 7.[2]

 

By: Yana Knutson

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The question of whether a debtor can obtain an exemption under 11 U.S.C. § 1146(a) from having to pay stamp or similar tax in a pre-confirmation asset transfer was decisively answered in the negative by the United States Supreme Court last year.[1] However, whether the exemption applies to a pre-confirmation sale that closed post-confirmation remains an issue with which courts must continue to struggle. 

By: Tracy Keeton

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In the case of Tate v. Bolen (In re Tate),[1] the Fifth Circuit held that for the purposes of calculating monthly income deductions under the “means test,”[2] a chapter 7 debtor may deduct a transportation ownership expense for a vehicle that is not encumbered by any debt or lease. In January 2007, the Tates sought to file for Chapter 7 bankruptcy. After filing, they were subject to the “means test” added to the Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The purpose of the means test is to determine whether debtors have sufficient disposable income to repay a portion of their debt to creditors, which was at least $166.67 a month (or at least $10,000 over 5 years) at the time of the Tates’ bankruptcy filing, and if so, a chapter 7 proceeding is presumptively abusive.[3] 

 

By: Richard C. Solow

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Determining exactly which parties have the right to request relief from the automatic stay in bankruptcy has long been a challenging and contentious issue for the courts. Recently, in In re Jacobson,[1] the Bankruptcy Court for the Western District of Washington held that a “servicing agent” was not a “real party in interest” for the purpose of filing a section 362(d) motion, which when granted entitles a party to relief from an automatic stay. Substantiated evidence proving standing in bankruptcy court is necessary to allow parties to bring such motions. In denying UBS AG's (“UBS”) motion, the court upheld important notions of prudential standing, which require, even within the context of a federal bankruptcy forum, strict adherence and awareness of pertinent state requirements.[2]