By: Robert Ryan
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Firmly adopting the “exclusive” view of claim objections, the Tenth Circuit Bankruptcy Appellate Panel in B-Line, LLC v. Kirkland
held that a claim could not be disallowed under 11 U.S.C. § 502
[2]
for failure to submit supporting documentation with a proof of claim since that is not one of the grounds expressly stated in the statute.
[3]
Although Federal Rule of Bankruptcy Procedure 3001 requires that supporting documentation be provided with a proof of claim,
[4]
neither the Rule nor the statute clearly states what to do if a creditor fails to submit supporting documentation.
[5]
The court held that section 502(b) provided an exclusive list of reasons why a claim should be dismissed, reasoning that the “shall allow … except” command in section 502(b) and the absence of an expansive term like “including” indicated that the list was exclusive.
[6]
Since the Rules cannot modify substantive rights, technical defects in the proof of claim are not grounds for objection.
[7]
By: James Lynch
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Although the Bankruptcy Abuse Protection Act of 2005 (“BAPCPA”) largely eliminated the so-called “ride through” option for security interests in personal property, the Connecticut Bankruptcy Court in In re Caraballo
held that the option remains available for liens secured by real estate. Under the ride through, a debtor whose real estate mortgage is not in default does not have to reaffirm the debt or surrender the real estate, but can retain the real estate by continuing to make the scheduled mortgage payments.
[2]
Thus, since the debtor in Caraballo was not in default, the Court disapproved the debtor’s mortgage reaffirmation agreement as not being in her best interests “because she could retain the subject real property without reaffirming the [d]ebt.”
[3]
By: Jonathan Grasso
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In Walden v. Walker (In re Walker),
the Eleventh Circuit Court of Appeals held that the bankruptcy court has the power to remove a trustee sua sponte. In Walker, the elected Chapter 7 trustee filed a verified statement claiming she had no significant connection with any party of interest and testified that she had no relationship with the second largest creditor.
[2]
The debtor moved for removal and the trustee responded by asserting that a debtor in an insolvent estate had no pecuniary interest and thus was not a party in interest and lacked standing to challenge the trustee’s appointment.
[3]
The court found that she had lied under oath concerning her relationship with the creditor and removed her as trustee.
[4]
On appeal, the Eleventh Circuit held that bankruptcy judges possess the power to remove a trustee for lying under oath, sua sponte, after notice and a hearing.
[5]
By: Elizabeth L. Anderson
St. John's Law Student
American Bankrutpcy Institute Law Review Staff
Rejecting the Second Circuit’s Wagoner
rule and agreeing with the First, Third, Fifth, and Eleventh Circuits, United States Court of Appeals for the Eighth Circuit held that the collusion of corporate insiders with third parties to injure the corporation does not deprive the corporation’s trustee of standing to sue third parties.
[2]
However, such a situation may give rise to the defense of in pari delicto barring the trustee’s action.
[3]
By: Paola Chiarenza
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Although the “means test” added by the 2005 BAPCPA amendments
was designed to ensure that chapter 13 debtors repay creditors as much as they can afford, the Bankruptcy Court for the Southern District of New York followed a plain language approach to hold that in determining a debtor’s disposable income the proper deduction is the full amount of the rental allowance set forth in the objective IRS Standards, even though the actual rental expense is lower.
[2]
After surveying numerous approaches to addressing the section 1325 (b)(3) and section 707 (b)(2)(A)(ii)(I) directives regarding disposable income, the Court noted that there is “no clear consensus” as to whether the IRS Standard or a lower actual amount applies.
[3]
By: Elizabeth Filardi
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In Morris v. St. John National Bank,
the Tenth Circuit concluded that a bankruptcy trustee who successfully avoids a lien under the Bankruptcy Code does not automatically assume all the rights the original lienholder may have against the debtor.
[2]
Here, the debtors borrowed $3,050 from the bank, using their 1980 Pontiac Trans Am as security.
[3]
On the date the debtors filed for bankruptcy, they still owed the bank $3,237.50 on the loan, but the fair market value of the car was only $2,000.
[4]
The Trustee successfully avoided the bank’s lien on the car. While §551 preserved the lien for the benefit of the estate,
[5]
the issue was whether bankruptcy law permitted the trustee to recover the full amount owed or whether the trustee was limited to the value of the bank’s security interest in the car itself.
[6]
The Tenth Circuit concluded that a trustee who avoids a lien pursuant to 11 U.S.C §544 and preserves it under §551 is limited to the value of the lien and does not acquire the bank’s right to collect any debt amount beyond the value of the security interest.
[7]
Consequently, the trustee’s recovery was limited to the $2,000 value of the secured interest on the debtor’s car and could not recoup the full $3,237.50 value owed on the loan at the time of the bankruptcy filing.
By: Seth Meyer
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In a major expansion of the use of mandatory mediation, the Michigan Bankruptcy Court ordered mediation of nearly 1170 preference actions filed in conjunction with Collin& Aikman’s
Chapter 11 reorganization plan.
[2]
In re Collins & Aikman Corp., 376 B.R. 815 (Bankr. E.D. Mich. 2007. The court concluded that mediation “will promote the just, speedy and inexpensive resolution of these adversary proceedings.”
[3]
The court went further and both required defendants to share the costs of mediation and provided for default judgment to be entered against parties failing to engage in the mediation process.
[4]
By: Matthew McNamara
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The Delaware district court has affirmed a bankruptcy court decision extending the settlement payment exception to the trustee’s avoiding powers to insulate from attack a leveraged buyout (“LBO”) involving a non-public company in Brandt v. B.A. Capital LP (In re Plassein International Corporation).
The Plassein trustee sought to avoid transfers to the selling shareholders under Delaware fraudulent transfer law and section 544 of the Bankruptcy Code.
[2]
Section 546(e), however, states that a settlement payment falls under an exemption to section 544 and thus the trustee may not void the transfer.
[3]
Plassein follows and expands upon a line of cases adopting a broad interpretation of the term “settlement payment”. The Third Circuit has adopted an extremely broad interpretation of the term, noting that it encompasses “almost all securities transactions”.
[4]
Earlier decisions imposed policy based limitations on the section 546(e) settlement payment exemption in order to exclude payments made to shareholders as part of an LBO.
[5]
The court in In re Resorts International
[6]
, however, made it clear that “a payment for shares during an LBO is obviously a common securities transaction, and [the court] therefore [held] that it is also a settlement payment for the purposes of section 546(e)”.
[7]
The shares in question in In re Resorts, however, were securities of a publicly traded company. The court failed to specify whether the settlement payment exemption in an LBO was limited to shares of publicly traded companies or might also protect LBO’s involving non-public companies.
By: Michael Maffei
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In a good news, bad news decision for prime brokers, the District Court in In re Manhattan Investment Fund v. Gredd
held that a prime broker is an initial transferee of funds held in a customer’s margin account, but recognized a “robust” good faith defense to transferee liability. In this appeal from an award of summary judgment,
[2]
Bear Sterns had receive approximately $141 million to cover margin calls for a hedge fund that, in reality, was a “Ponzi” scheme. In a holding that spells trouble for prime brokers, the Court rejected the argument that a prime broker is a “mere conduit” and lacks “dominion and control” over the funds in a margin account. Applying the Second Circuit’s “nuanced” approach, the Court rejects the narrow view that a party must have unfettered control over funds in order to be an initial transferee.
[3]
Since Bear Sterns could use the margin funds to protect itself against possible losses, it did not qualify as a mere conduit. Further, the discretionary authority given it as prime broker to close out positions, which was standard in the industry, was sufficient “control” to trigger transferee status.
By: Craig Lutterbein
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The Seventh Circuit, in Airadigm Communications, Inc. v. Federal Communications Comm’n. (In re Airadigm Communications, Inc.), has joined the circuits permitting the non-consensual release of a non-debtor third party from its obligations to creditors in chapter 11 reorganization.
The case revolved around Airadigm Communication’s purchase and financing of fifteen personal communication services licenses from the FCC.
[2]
When Airadigm began to fail the company filed for reorganization, and the FCC cancelled the licenses.
[3]
During Airadigm’s first chapter 11 reorganization, it received financing from Telephone and Data Services (TDS), who agreed to repay the FCC the debt owed on the licenses if the FCC reinstated the licensees.
[4]
Although the FCC did not originally reinstate the licenses, in FCC v. Next-Wave Personal Communications Inc., the Supreme Court ruled that FCC could not legally cancel licenses simply because a communication company files bankruptcy.
[5]
Thus, the FCC was forced to reinstate Airadigm’s licenses, which caused Airadigm to file a second Chapter 11 case.
[6]
The plan confirmed by the bankruptcy court contained a release protecting TDS from all liability “in connection with” the reorganization except willful misconduct.
[7]
On appeal, the Seventh Circuit found that the release was necessary and appropriate because the release was narrowly drawn and TDS was making a substantial contribution that was necessary for Airadigm’s reorganization to be successful.
[8]