StJohns

Non-Collusive Mortgage Foreclosure Held Preferential

 By: Adam S. Cohen

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Whittle Development, Inc.,[1] the Bankruptcy Court for the Northern District of Texas held that a pre-petition foreclosure action against real property may be avoidable as a preferential transfer where the foreclosing creditor receives more than it would have in a liquidation under chapter 7 of the Bankruptcy Code, even though the action was non-collusive and complied with state law.[2] Whittle Development, Inc. (the “Debtor”) and Colonial Bank, N.A. (the “Creditor”) entered into a Development Loan Agreement on December 31, 2007 pursuant to which the Creditor loaned the Debtor $2,700,000 (the “Loan”).[3] The Creditor declared a default on the Loan, accelerated the balance due, and on September 7, 2010, foreclosed on the property that secured the loan.[4] At the pre-petition foreclosure sale, a subsidiary of the Creditor bought the property for $1,220,000.[5]  The Debtor filed for bankruptcy on October 4, 2010 under chapter 11 of the Bankruptcy Code.[6]  The Creditor filed a proof of claim for $2,855,243.29, alleging that $1,181,513.27 of the claim represents the deficiency from the foreclosure sale.[7]  The Debtor disputed the Creditor’s deficiency claim and argued that the Creditor was over secured by $1,100,000 because the property was worth $3,300,000.[8]

Second Circuit Expands Settlement Payment Defenses

By: Tianja Samuel

St. John’s Law Student

American Bankruptcy Institute Law Review Staff 

In In re Enron Creditors Recovery Corp.,^[1] the Second Circuit greatly expanded the settlement payment defenses of section 546(e) of the Bankruptcy Code (the “Code”)[2] by rejecting Enron’s attempt to avoid a repayment of debt, because the repayment was structured as a redemption.  This case stemmed from a series of transactions in which Enron used a clearing agency—that merely acted as an intermediary and never took title to the commercial paper—to retire commercial paper before the maturity date. Enron later filed bankruptcy and sought to avoid the more than $1.1 billion it paid, in the 90 days prior to its bankruptcy filing, to retire the commercial paper.[3] 

All Tolled Section 108(c) Preserves a Mortgagees Option to Commence a Foreclosure Until After the Automatic Stay is Lifted

By: Matthew W. Silverman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Shamus Holdings, LLC v. LBM Financial, LLC (In re Shamus Holdings, LLC),[1] the United States Court of Appeals for the First Circuit held that the tolling provisions of section 108(c)[2] of the Bankruptcy Code preserved a mortgagee’s right to enforce an obsolete mortgage despite failing to seek an extension available under Massachusetts state law.[3] The Massachusetts statute required holders of a mortgage, on pain of forfeiture, to take action against the mortgagor within five years after the end of the mortgage’s stated term, but granted mortgagees the right to seek an extension of that five-year period.[4] Prior to the expiration of the five-year deadline, Shamus filed a chapter 11 petition.[5] After the five year statute of limitations had expired and without having sought an extension of that period, LBM Financial, the mortgagee, took action to enforce its mortgage, relying on the tolling provisions of section 108(c) to preserve its foreclosure rights. Shamus argued that LBM Financial’s failure to seek an extension rendered the mortgage time-barred,[6] but the First Circuit found LBM Financial’s right to enforce its mortgage protected by the tolling provision of section 108(c).[7]

Intentional Conduct May Be Required to Prove Defalcation under Section 523(a)(4) In Certain Circuits

By: Elizabeth Vanderlinde

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The Bankruptcy Court for the Eastern District of Wisconsin in In re Mueller[1] recently concluded that a genuine issue of material fact existed as to whether the debtor had the requisite mental state required to commit defalcation under section 523(a)(4) of the Bankruptcy Code (the “Code”), and therefore summary judgment was inappropriate.[2] The debtor failed to make certain required fringe benefit contributions to the plaintiffs under certain collective bargaining agreements entered into in connection with three construction projects.[3] The plaintiffs claimed that the debtor's failure to make such contributions violated Wisconsin's theft by contract statute and supported a finding of defalcation.[4] By contrast, the debtor argued that his failure to pay was inadvertent and reflective of the problems arising in the contracted projects.[5]

Quasi-Judicial Immunity Shields Trustee from Personal Liability

 By Barry Z. Bazian

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Smith v. Silverman (In re Smith),[1] the Second Circuit held that a bankruptcy trustee could not be held personally liable for deciding not to pursue the estate’s only potential sources of recovery. In Smith, the debtor, a former president of Meadow Mechanical Corp., filed two suits in 1990: a dissolution action against the corporation’s shareholders and an action to recover on a promissory note against the corporation.[2] These actions were unresolved and had been left dormant for several years when Smith filed for bankruptcy in 1997.[3] A trustee was appointed in the case, but he decided not to prosecute the actions.[4] The debtor moved to have the Bankruptcy Court compel the trustee to pursue the claims, but the court denied the motion based on the trustee’s assertion that litigating the claims would not be worth the expense.[5] Subsequently, the bankruptcy case was closed and the trustee was discharged.[6] Over a year later, the debtor brought a motion to re-open the bankruptcy case to pursue a cause of action against the trustee, alleging that the trustee breached his fiduciary duties by negligently failing to pursue the actions.[7] The Bankruptcy Court denied the motion, and the District Court affirmed.[8]

The Unenforceability of Flip Clauses in Swap Agreements

By: Piergiorgio Maselli

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In Lehman Bros. Special Financing, Inc. v. Ballyrock (In re Lehman Bros. Holdings Inc.),[1] the United States Bankruptcy Court for the Southern District of New York held that a so-called “flip clause” in a swap agreement, which reordered the payment priorities in a collateralized debt obligation (“CDO”) transaction,[2] was an unenforceable ipso facto[3] clause of the type that is not protected by the safe harbor provisions of the Bankruptcy Code (the “Code”).[4] Lehman and Ballyrock’s swap agreement[5] provided that in the event of a party’s default, the non-defaulting party was entitled to terminate the agreement and alter the priority of payments under the agreement.[6] Since bankruptcy was an element of default, Lehman’s bankruptcy filing triggered the flip clause and placed it below CDO noteholders in the “waterfall” of termination payments. The flip clause, if enforced, would have eliminated Lehman’s right to receive funds that it would have received if not for its bankruptcy, and thus Ballyrock claimed that Lehman’s bankruptcy filing effectively deprived it of its right to collect termination payments.[7]

Determining Meaning of Debtors Principal Residence Under BAPCPA

By: Patrick McBurney

St. John's Law Student

American Bankruptcy Institute Law Review Staff

            Affirming the decision of the bankruptcy court, the Bankruptcy Appellate Panel for the First Circuit in Pawtucket Credit Union v. Picchi (In re Picchi),[1] held that a debtor was allowed to modify a creditor’s secured mortgage in a multi-family dwelling because a multi-family house does not fall within section 101(13A)’s definition of a debtor’s principal residence.[2] Pawtucket, the secured creditor, held a second mortgage on the debtor’s two-family home.[3] The debtor, Picchi, resided in one of the units, and rented out the second unit.[4] Picchi’s chapter 13 plan reduced Pawtucket’s secured claim to zero because the appraised value of the property was insufficient to satisfy the secured claim of Picchi’s senior lender.[5] The bankruptcy court determined that Pawtucket’s claim could be modified by Picchi and approved the plan.[6] 

Third Circuit Holds Post-petition Pension Fund Withdrawals Liability Is Entitled to Administrative Expense Priority Under Sectio

By: Brian Bergin
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

            In a case of first impression, In re Marcal Paper Mills, Inc.,[1] the Third Circuit prorated the debtor’s pension fund withdrawal liability and gave administrative expense priority only to that portion related to the post-petition period. After filing its chapter 11 bankruptcy petition, Marcal Paper Mills, Inc. (“Marcal”) entered into a Memorandum of Understanding (the “MOU”) with certain unionized employees. The MOU required Marcal to continue making contributions to the union’s pension fund (the “Fund”) and required those unionized employees to continue working for Marcal. When Marcal sold its assets and terminated its distributing operation, Marcal’s ceased making contributions to the Fund.[2] The Fund filed an administrative claim against Marcal for $5,890,128 in withdrawal liability[3] on the basis of the Fund’s determination that Marcal had made a “complete withdrawal” [4] from the Fund under the meaning of Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”),[5] as amended by the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”).[6]  After Marcal objected to its claim, the Fund amended its claim and sought administrative priority for only the portion of the withdrawal liability attributable to post-petition services provided by the unionized employees.[7]

Chapter 15 Does Not Permit Relief Manifestly Contrary to U.S. Public Policy

Applying the “public policy” exception of Chapter 15, the Bankruptcy Court for the Southern District of New York refused to enforce a German bankruptcy order that would have allowed the foreign representative[1] access to a chapter 15 debtor’s emails stored in the United States in In re Toft.[2]  This case represents one of the first decisions to explore the outer boundaries of the public policy exception in section 1506 of the Bankruptcy Code. This chapter 15 proceeding was brought pursuant to a German case, the foreign main proceeding,[3] in which the foreign representative was granted a “Mail Interception Order” on an ex parte basis.  The German “Mail Interception Order,” which was also recognized by the English courts,[4] allowed the foreign representative to, among other things, intercept the debtor’s postal and electronic mail without giving notice to the debtor, Dr. Toft.[5]  The Bankruptcy Court refused to grant comity to the decision of the German Court because the relief sought was “manifestly contrary” to U.S. public policy.[6]

Section 546(e) Safe Harbor Held Inapplicable to Small Private LBOs