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By: Adam C.B. Lanza

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Dayton Title Agency, Inc., where a title company’s bankruptcy estate sued a paid-off lender to recover a fraudulent transfer,[1] the Sixth Circuit Court of Appeals held that the funds paid out of the debtor’s trust account constituted property of the debtor at the time of transfer for purposes of avoiding a fraudulent transfer.[2] In Dayton Title, the chapter 7 trustee (“trustee”) commenced an adversary proceeding to avoid, as a constructively fraudulent transfer, a payment the debtor had made to its client’s lender from the trustee’s client trust account without waiting for a forged check to clear.[3]  The funds used to make the payment were from a provisional credit that the debtor’s bank extended to it.[4]  In response to the fraudulent transfer action, the lender argued, among other things, that the transfer was not constructively fraudulent because the money that the lender received was not property of the title agency, as the money was being held in trust for a third party.[5] The bankruptcy court entered summary judgment in favor of the trustee, holding that majority of the payment was constructively fraudulent.[6]  On appeal, the district court held that only a small portion of the payment was fraudulent.[7]  However, the Sixth Circuit reversed the district court and affirmed the bankruptcy court’s ruling.[8]

By: Aura M. Gomez Lopez

St. John’s University Law Student

American Bankruptcy Law Review Staff

In a case of first impression, in Whyte v. Barclays,[1] the United States District Court for the Southern District of New York recently held that a trustee for a litigation trust, created pursuant to a confirmed chapter 11 plan, could not use state law to avoid a swap agreement as a fraudulent conveyance.  In Whyte, SemGroup, filed for bankruptcy in 2008.[2] On October 28, 2009, the court approved the creation of a litigation trust charged with the responsibility to liquidate SemGroup’s assets.[3] Prior to filing for bankruptcy, SemGroup entered into a novation with Barclays, by which Barclays acquired SemGroup’s portfolio of commodities derivatives.[4] However, soon after the novation was completed, the portfolio became profitable.[5] As a result, the litigation trustee sought to avoid the swap agreement on the grounds that the transaction between SemGroup and Barclays was a fraudulent conveyance under New York law.[6]  The litigation trustee, however, did not attempt to avoid the swap agreement under section 544 of the Bankruptcy Code due to the safe harbor provision of section 546(g).[7] Notwithstanding the litigation trustee’s attempt to circumvent the safe harbor provision of section 546(g), the district court dismissed the trustee’s complaint and held that section 546(g) preempted the state-law fraudulent conveyance claims.[8]

By: Joshua Nadelbach

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Rejecting the majority view, in Ah Quin v. County of Kauai Dept. of Transp.,[1]  the Ninth Circuit reversed the District Court for the District of Hawaii and held that the district court applied the judicial estoppel doctrine too broadly.[2] Specifically, the Ninth Circuit held that if a plaintiff-debtor (1) claims that her failure to list a pending lawsuit in a bankruptcy schedule was due to a “mistake” or “inadvertence” and (2) seeks to reopen the bankruptcy proceeding, then the court must first examine the plaintiff-debtor’s subjective intent regarding how he or she filled out the schedule before deciding that the judicial estoppel applies.[3] The court explained that if a plaintiff-debtor’s omission occurred by accident or was made without the intent to conceal the pending lawsuit, judicial estoppel should not bar the plaintiff-debtor’s pending lawsuit.[4]

By: Raff Ferraioli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In Re Residential Capital, LLC,[1] the United States Court of Appeals for the Second Circuit remanded the case, while preserving appellate jurisdiction,[2] in order to resolve whether the automatic stay applied to non-debtors.[3]  Prior to the appeal, the District Court for the Southern District of New York denied the debtors’ motion to stay a lawsuit brought by the Federal Housing and Finance Agency (“FHFA”) against the debtors’ corporate parents and affiliates.[4] In 2011, FHFA brought an action against the debtors and certain of their corporate parents and affiliates, alleging that they made material misstatements concerning mortgage-backed securities purchased by Freddie Mac.[5]  While that suit was ongoing, the debtors filed for bankruptcy.[6]  Despite the bankruptcy filing, FHFA continued to prosecute its claims against the non-debtor defendants.[7]  The district court held that the automatic stay could not extend to non-debtor entities because they were not in bankruptcy, without determining whether the lawsuit against those entities would have immediate adverse economic consequences on the debtors’ estates.[8]On appeal, the Second Circuit remanded the case, instructing the district court to make such a determination.[9]

By: Kelly Porcelli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Mercer[1]the United States Bankruptcy Court for the Middle District of Alabama held that a pre-petition stipulation of nondischargeability entered into in connection with state court litigation did not bind the bankruptcy court in an action initiated by the creditor seeking a determination that its claim was nondischargeable.[2]  EFS, the creditor, obtained a judgment against Thomas A. Mercer, the debtor, in an Alabama state court.3  The judgment included a stipulation stating, “Mercer acknowledges that his actions constituted a knowing fraud, which would be and is non-dischargeable in the event Mercer were to file bankruptcy . . . .”4  Mercer subsequently filed for bankruptcy.5  EFS commenced an adversary proceeding seeking to except its debt from discharge pursuant to section 523(a)(2) of the Bankruptcy Code.6  EFS argued that the stipulation was sufficient evidence of fraud and that the stipulation was preclusive.7The bankruptcy court, however, held that the stipulation was not preclusive, reasoning that the resolution of the state court action was independent of the determination of the dischargeability of Mercer’s debt to EFS.8  The bankruptcy court further noted the purpose of the prior state court action was to establish the existence of a debt, whereas the purpose of the bankruptcy court action was to determine whether the debt was dischargeable.9  Ultimately, the bankruptcy court found that EFS failed to establish the elements of common law fraud, and therefore, the court denied the creditor’s motion for default judgment and dismissed its complaint with prejudice.10

 By: John Boersma

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: Aldo A. Caira III

St. John’s Law Student

By: Maurizio Anglani

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In a matter of first impression, the Court of Appeals for the Fifth Circuit refused to enforce a foreign debtor’s plan of reorganization because it discharged debts of the debtor’s non-debtor subsidiaries.[1] In 2003, Vitro S.A.B. de CV (“Vitro”), a Mexican corporation, issued various notes totaling more than $1 billion. Most of Vitro’s direct and indirect subsidiaries, including its U.S. subsidiaries, guaranteed the notes.[2] Before the notes became due, Vitro initiated an insolvency proceeding in Mexico.[3] However, many of Vitro’s U.S. subsidiaries did not participate in the insolvency proceedings.[4] In February 2012, the Mexican court approved Vitro’s reorganization plan.[5] The Mexican plan purported to extinguish the guarantees of Vitro’s debt by Vitro’s U.S. subsidiaries.[6] Vitro’s representatives then sought to recognize and enforce releases granted in the foreign case, but the Bankruptcy Court for the Northern District of Texas denied relief, holding that non-consensual, non-debtor releases are “manifestly contrary” to U.S. public policy.[7]