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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: Andrew Ziemianski

St. Johns Law Student

American Bankruptcy Institute Staff

In In re American Suzuki Motor Corp., the United States Bankruptcy Court for the Central District of California recently held that Florida’s dealer statute’s provisions providing a method for measuring damages after the rejection of a car dealership agreement, passed to protect local car dealerships, were impliedly preempted by section 365 of the Bankruptcy Code.[1] The debtor, a wholesaler of Suzuki cars, filed for chapter 11 bankruptcy in order to restructure its automotive division.[2] During the course of the bankruptcy case, the debtor rejected a dealership agreement it had with a Florida dealership.[3] The dealership then filed a rejection damages claim alleging damages that were calculated under the Florida Motor Vehicle Licenses Act,[4] which provided for statutory damages that were greater than the dealership’s damages would have been under common law contract damages principles, as well as treble damages and attorney’s fees.[5] The debtor objected to the dealership’s claim, arguing, among other things, that the Florida law was preempted by the Bankruptcy Code.[6] The court opined that the assessment of damages provided for in the Florida Motor Vehicle Licenses Act ran contrary to the policy of section 365, which allows debtors to reject a burdensome executory contract.[7] As such, the court held that Florida law was preempted.  Therefore, the court refused to calculate the dealership’s damages under the Florida law and instead applied common law contract damage principles when determining the amount of the dealership’s claim.[8]

 By: John Boersma

By: Michelle Nicotera

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Leitch v. Christians (In re Leitch), The Eighth Circuit Bankruptcy Appellate Panel (the “BAP”) ruled that a health savings account (“HSA”) was not excluded from a debtor’s bankruptcy estate.[1]  Kirk Leitch, a chapter 7 debtor, asserted his HSA was excluded under section 541(b)(7)(A)(ii) of the Bankruptcy Code,[2] which functions to exclude a health insurance plan regulated by state law.[3]  The chapter 7 trustee objected to the debtor proposed exclusion.[4] The bankruptcy court agreed with the trustee and held that the HSA was property of the estate.[5]  On appeal, the BAP affirmed the bankruptcy court.[6]  While the BAP noted that the Minnesota statute states that a bank can “act as a trustee of certain types of accounts, including health savings accounts,” the court found that the HSA in question did not qualify as a state regulated health insurance plan.[7]  Indeed, the beneficiary would “incur tax penalties unless the [HSA] funds are used for ‘qualified medical expenses,’ which are essentially costs of health care ‘not compensated by insurance or otherwise.’”  The BAP further reasoned that the HSA was not a state regulated health insurance plan because the debtor, as the beneficiary to the account, had “liberal access to the funds” and was “entitled to distributions from the account for any purpose.”[8].

By: Stephanie Y. Lin

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Old Carco,[1] the Bankruptcy Court for the Southern District of New York held that the plaintiffs’ pre-petition claims were barred by a sale order entered following a sale pursuant to section 363 of the Bankruptcy Code (a “363 Sale”) because the court found that the sale order’s “free and clear of any interest in such property” language included the plaintiffs’ claims.  The plaintiffs had filed a class action suit in Delaware state court against Chrysler Group LLC (“New Chrysler”) alleging that their vehicles, which were manufactured and sold by Old Carco LLC (“Old Chrysler”), suffered from a design flaw known as “fuel spit back.”[2]  After the case was removed to the Delaware federal district court, New Chrysler moved to dismiss the class action on the grounds that the plaintiffs’ claims were barred by the sale order that approved the sale of Old Chrysler’s assets to New Chrysler during Old Chrysler’s chapter 11 reorganization (the “Sale Order”).[3]  The Delaware district court then transferred the dispute to the New York bankruptcy court solely to determine the effect of the Sale Order on the plaintiffs’ claims.[4]  Under the Sale Order, New Chrysler assumed liability for only three types of claims that could be brought by future plaintiffs.[5]  The bankruptcy court found that while the sale order did not prevent the plaintiffs’ claims that arose under these three types of liabilities, all other claims that arose prior to the Closing Date were barred.[6]  Specifically, the bankruptcy court found that the plaintiffs or their predecessors (if the plaintiff had bought a used car) had a “pre-petition relationship” with Old Chrysler, and the “fuel spit back” design flaw existed pre-petition.[7]  Because of this, the bankruptcy court determined that the plaintiffs’ claims existed pre-petition, and thus, were barred by the Sales Order.[8]

By: Kaitlin Fitzgibbon

By: Ryan Jennings

St John’s Law Student

American Bankruptcy Institute Law Review Staff

By: Colin Coburn

St. John’s Law Student

American Bankruptcy Law Review Staff

The Arizona Bankruptcy Court recently held, in In re Sample, that the absolute priority rule does not apply to individual debtors because it was bound by the Ninth Circuit Bankruptcy Appellate Panel’s decision in P + P LLC v. Friedman (In re Friedman).[1]  Section 1129(b)(2)(B)(ii) of the Bankruptcy Code defines the absolute priority rule,[2] which mandates that under a chapter 11 plan of reorganization, a dissenting class of unsecured creditors must be paid in full before the holder of any junior claim or interest receives or retains any property on account of such junior claim or interest.[3]  In In re Friedman, the court stated that Congress, in passing BAPCPA, intended Chapter 11 individual bankruptcy to resemble Chapter 13 bankruptcy.[4]  In Friedman the court held that §1129(a)(15)(B),[5] replaced §1129(b)(2)(B)(ii) in cases involving individual debtors, thereby abrogating the absolute priority rule in individual chapter 11 cases.  Section 1129(a)(15)(B) states that a court can only confirm an individual debtor’s plan, to which an unsecured creditor objects, when, “the value of the property to be distributed . . . is not less than the projected disposable income of the debtor” for the first 5 years after payments begin.[6]  The Friedman court reasoned that this fact, combined with the plain meaning of sections 541, 1115, and 1129(b)(2)(B)(ii), dictated that the absolute priority rule does not apply to individual debtors.[7]  The Sample court disagreed with the reasoning of the Friedman opinion, but held that it was bound to follow that holding.[8]

By: James Scahill

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Adhering to the constitutional limits on a particular party’s standing to object, the Third Circuit in In re W.R. Grace & Co. affirmed the district court’s ruling and held that Garlock Sealing Technologies, LLC, (“Garlock”), did not have standing to object to W.R. Grace & Co.’s (“Grace”) proposed chapter 11 plan of reorganization.[1] Grace filed for chapter 11 bankruptcy protection after being threatened by numerous asbestos-related personal injury lawsuits.[2]  Since Garlock often purchased materials from Grace, the two companies were named as co-defendants in thousands of personal injury lawsuits.[3]  Garlock objected to Grace’s reorganization plan, alleging that as a former, current, and potential co-defendant, it had suffered injury because its contribution rights would be denied under the plan.[4]  But, the Third Circuit ruled that those future claims were insufficient to establish Article III standing because they were entirely speculative.  In particular, the court found that Garlock failed to introduce any evidence that it ever sought contribution from Grace, implied Grace in any claim, or suffered any judgment that would have entitled Garlock to assert contribution or setoff rights.[5]  Moreover, the court noted that Garlock had not even filed a claim in Grace’s bankruptcy case.[6]  The Third Circuit opined that for Garlock to have standing to assert contribution claims, the plaintiffs must either win or settle their cases, thereby giving rise to a contribution claim against Grace. Instead, the court noted that Garlock’s alleged injury was contingent on plaintiff verdicts or settlements, which made it more conjectural or hypothetical than actual or imminent, especially given that no such contribution claims had ever been asserted notwithstanding the thousands of ongoing cases involving Grace and Garlock.[7]

By:  Maria Ehlinger

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Affirming the ruling in the Unites States Bankruptcy Court for the District of Arizona, The United States Bankruptcy Appellate Panel of the Ninth Circuit, in In re RCS Capital Development, LLC, held that a debtor may setoff pre-petition claims against post-petition obligations that it owes because section 558 of the Bankruptcy Code does not contain any restrictive language confining setoffs to pre-petition obligation.[1] The court found that the setoff was valid because all of the requirements of section 558 were met. Specifically, the court found that it was a valid setoff under Nevada law because there was mutuality of claims, debts, and parties, and each party had an enforceable debt against the other.[2] The issue arose after ABC Developmental Learning Centers (U.S.A.), Inc. (“ABC”) filed a proof of claim in the jointly administered chapter 11 bankruptcy cases of RCS Capital Development, LLC (“RCS”) and ACCP LLC (“ACCP”). ABC’s claim was based on an ongoing Nevada lawsuit against ACCP and RCS.[3] RCS objected to ABC’s proof of claim and then moved for summary judgment, arguing that RCS was entitled to set off the post-petition debt it owed to ABC, arising out of the Nevada action, against a debt ABC owed to RCS arising from a separate pre-petition Arizona judgment for breach of contract.[4]  The bankruptcy court granted RCS’s motion, finding that the requirements for setoff were met.[5] On appeal, the BAP affirmed the bankruptcy court and held that the setoff was valid.[6]