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By: Kimberly Tracey

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Clark, the Court of Appeals for the Seventh Circuit adopted a new approach to the treatment of non-spousal inherited IRAs in bankruptcy cases.  The court reversed the decision of the District Court and found that a debtor could not exempt a non-spousal inherited IRA.[1]  In Clark the debtor sought to exempt an IRA she inherited from creditors’ claims under section 522(b)(3)(C) and (d)(12) of the Bankruptcy Code.[2]  The bankruptcy court held that the inherited IRA was not exempt because the account did not represent retirement funds in the hands of the debtor.[3]  The district court reversed, adopting the view that since the inherited IRA constituted “retirement funds” in the debtor’s mother’s hands, the account must be treated the same way in the debtor’s hands.[4]  Reversing the district court, the Seventh Circuit distinguished a non-spousal inherited IRA as “a time-limited tax-deferral vehicle, but not a place to hold wealth for use after the new owner's retirement.”[5]  Specifically, the Seventh Circuit noted that under the Internal Revenue Code, a non-spousal inherited IRA is subject to mandatory distribution that must begin within a year of the original owner’s death and be completed in no less than five years.[6]  Furthermore, no new contributions may be made to the account.[7]  Consequently, the Seventh Circuit opined that the non-spousal inherited IRA was not a “retirement fund” under the Bankruptcy Code in the hands of the debtor, and as a result, the court held that the non-spousal inherited IRA was not exempt.[8]  In reaching such a holding, the Court declared that “to treat this account as exempt under [section]522(b)(3)(C) and (d)(12) [of the Bankruptcy Code] would allow the debtor to shelter from creditors a pot of money that can be freely used for current consumption.”[9] 

By: Sarah Roe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 Recently, in Ranta v. Gorman (In re Ranta), the United States Court of Appeals for the Fourth Circuit held “that the plain language of the Bankruptcy Code excludes Social Security income from the calculation of ‘disposable income,’ but that such income nevertheless must be considered in the evaluation of a [chapter 13] plan’s feasibility.”[1]   In Ranta, the chapter 13 trustee objected to the debtor’s proposed plan, arguing that the debtor failed to properly calculate his “projected disposable income” under section 1325(b)(1)(B) of the Bankruptcy Code because he inflated his expenses, improperly reducing his disposable income.[2]  While the debtor acknowledged that his expenses were overstated, he argued that his plan nevertheless complied with section 1325(b)(1)(B) since his Social Security income was excluded from his “disposable income,” and therefore, he argued that his disposable income was negative even after adjusting his expenses downward because his expenses still exceeded his non-Social Security income.[3]  As such, the debtor argued that he was not required to make any payments to his unsecured creditors under section 1325(b)(1)(B).[4] The bankruptcy court ruled in favor of the chapter 13 trustee, holding that the debtor’s plan was not feasible.  The bankruptcy court reasoned that if the debtor’s Social Security income was not included in the projected disposable income calculation, then the court could not consider those funds when determining whether the plan was feasibile.[5]  The district court affirmed.[6]  The Fourth Circuit, however, reversed, holding that although the Social Security income was excluded from the “projected disposable income” calculation, if the chapter 13 debtor proposed to use Social Security income to finance a plan, the bankruptcy court must consider the debtor’s Social Security income when examining a plan’s feasibility.[7]

By: Carly S. Krupnick

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Faulkner, the Bankruptcy Court for Central District of Illinois held that a lien release provision in a debtor’s chapter 13 plan only released a secured creditor’s lien as to the debtor’s interest, and did not require the secured creditor to release its lien and surrender title to the debtor’s vehicle until the remaining deficiency balance was paid in full by a non-filing co-debtor.[1]  In Faulkner, a secured creditor held a lien on an SUV that the debtor co-owned with a non-filing debtor.[2]  Under the debtor’s chapter 13 plan, the secured creditor’s claim was bifurcated.[3]  The plan also stated that “secured creditors shall retain their liens upon their collateral until they have been paid the value of said property.”[4]  After the debtor completed her plan and received her discharge, however, the secured creditor refused to return the certificate of title to the debtor’s SUV because the non-filing debtor had not satisfied the remaining deficiency balance in full.[5]  The debtor responded by filing an adversary proceeding alleging that the secured creditor violated the discharge injunction.[6]  The court found that “there is nothing in [section] 524 that prevent[ed the secured creditor] from asserting its rights against the non-filing co-debtor for the deficiency balance,”[7]  and therefore, the secured creditor was not barred from bringing action against a non-filing co-debtor once the case was closed.[8]  Thus, the court concluded that “the debtor’s plan, no matter how clear and conspicuous, can only serve to release [the secured creditors]’s lien as to the debtor’s interest in the vehicle. . . [and the secured creditor]’s lien remains in place and can be enforced against the non-filing co-debtor’s interest in the vehicle” until the entire amount owed under the contract was paid in full.[9]  

By: Chris Bolz

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The United States Bankruptcy Court for the Southern District of New York held in In Re Hawker Beechcraft that the debtors were permitted under section 365 of the Bankruptcy Code to assume master agreements and some purchase orders while rejecting other purchase orders because such orders were divisible contracts.[1]  The debtors were aircrafts manufactures that purchased some of their parts from a supplier.[2] In connection with these purchases, the debtors and the supplier also entered into two master agreements.[3]  Under the master agreements, while the supplier agreed to manufacture parts, the debtor was not obligated to purchase any of the manufactured parts.[4]  The debtors commenced their chapter 11 bankruptcy cases and ultimately confirmed a joint plan of reorganization.[5]  Under the plan, the debtors would assume the master agreements and 395 purchase orders while rejecting 928 purchase orders.[6]  The supplier objected to this plan, arguing that the master agreements and all of the purchase orders constituted a single indivisible contract that must be assumed or rejected cum onere.[7] The bankruptcy court, however, overruled the supplier’s objection and held that the master agreements were divisible contracts and that the purchase orders were distinctly separate contracts from one another.

By: Jessica McCorvey

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re McKenzie, the United States Court of Appeals for the Sixth Circuit held that a chapter 7 trustee was entitled to quasi-judicial immunity because his actions, even if wrongful or improper, “[did] not equate to a transgression of his authority.”[1] Kenneth Still (“Still”) was appointed as the chapter 7 trustee for Steve A. McKenzie’s bankruptcy case.[2] Still initiated an adversary proceeding against Grant, Konvalinka & Harrison (“GKH”), seeking the turnover of documents and records alleged to be a part of the debtor’s estate.[3] GKH successfully moved to dismiss Still’s avoidance action.[4] GKH then filed two adversary proceedings against Still and his attorneys, alleging malicious prosecution and abuse of process for initiating the suit against GKH.[5] GKH also moved for leave to file an action in state court based on the same grounds as the adversary proceedings.[6] The bankruptcy court dismissed the action against the trustee and denied the motion to file a state law complaint,[7] finding that Still was protected by quasi-judicial immunity.[8]  The district court affirmed each of the bankruptcy court’s decisions in all respects.[9] GKH again appealed to the Sixth Circuit, arguing that Still was not protected by quasi-judicial immunity because (1) his actions were ultra vires and (2) that he acted without prior bankruptcy court approval.[10] The Sixth Circuit disagreed and held that Still acted within the scope of his authority and acted with prior bankruptcy approval by initiating an adversary proceeding against GKH.[11] The Sixth Circuit also disagreed with GKH’s assertion that Still’s actions were ultra vires since Still’s lawsuits were filed in an attempt to seize property that was not an asset of the estate[12] because the court found that Still was not attempting to seize the property without first obtaining a court order.[13]

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: Patrick Christensen

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Reed,[1] the Bankruptcy Court of the Eastern District of Tennessee recently held that the issuance of an IRS Form 1099-C, which is used to indicate cancellation-of-debt (“COD”) income, reflected that a creditor had forgiven the related debt, and therefore, the court disallowed the creditor’s proof of claim.[2]  In Reed, the debtors defaulted on property payments, and the resulting foreclosure sale left a deficiency owed to creditors.[3]  Later, the creditors issued an IRS Form 1099-C indicating that the creditor had forgiven its deficiency claim, which the debtors relied on when filing their taxes.[4] Notwithstanding the issuance of the IRS Form 1099-C, the creditors still sought a default judgment to collect the deficiency claim (plus fees and costs).[5]  In its decision, the Reed court stated that it would be unfair to require the debtor to pay taxes on cancelled debt while still allowing the creditor to stake a claim on the debt.[6] This would equate to the debtor paying the same debt twice – first in the form of taxes on gross income (cancelled debt), and then a second time when paying the creditor’s claim. The court acknowledged that it was adopting the minority position, but opined that under the circumstances, the decision was “in the interests of justice and equity . . . [and was therefore] the proper” one.[7]

By: Andrew Reardon

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Debenedetto[1] the Bankruptcy Court for the Northern District of New York held that a debtor could not modify the interest rate on tax liens on his property that had been purchased by a creditor from the City of Schenectady, NY (the “City”) because the creditor was the holder of a “tax claim” that cannot be modified under section 511(a) of the Bankruptcy Code.[2]  In Debenedetto, the creditor, American Tax Funding, LLC (“ATF”), purchased a tax lien from the City and claimed that the debtor owed a rate of 21 percent per annum on the lien, which was the interest rate imposed by statute for delinquent real property tax payments owed to the City.[3]  The debtor objected to ATF’s claims, arguing that ATF was not the holder of a “tax claim” under section 511(a) and was therefore not entitled to receive the anti-modification protection afforded by that section. Thus, the debtor argued that the interest rate on AFT’s secured claim was subject to modification  pursuant to the methodology set forth by the Supreme Court in Till v. SCS Credit Corp.,[4] which would likely result in the creditor receiving a significantly lower interest rate on the liens. To determine whether ATF had a “tax claim,” the court looked to two factors: (1) whether the payment by the private purchaser to the government entity extinguished the underlying debt[5] and (2) whether there was a “continuity of rights between the original holder . . . and the private purchaser.”[6] When applying the first factor, the court found that “the underlying tax debt was not extinguished upon payment . . . to the City . . .” because ATF was not required to pay the full face amount of the tax lien.[7]  Furthermore, the court also reasoned that the underlying debt was not extinguished by the sale because the City was entitled to repurchase the tax liens from ATF.[8]  With respect to the second factor, the court concluded that there was a continuity of rights between the City and ATF because by the terms of the Purchase and Sale Agreement, the City assigned its right of claim on the delinquent tax debt to ATF. Thus, the court concluded that ATF, as a secured creditor, held a valid “tax claim” and was entitled to the applicable interest rate as determined by state law.

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]