Source: https://www.lrrc.com/Strong-Arm-on-Steroids-09-01-2005
Timestamp: 2019-04-25 10:09:53+00:00

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If you have been a consumer debtor’s lawyer for any length of time you undoubtedly have had a client who needed a bankruptcy filing today, or first thing tomorrow morning, because a foreclosure sale was imminent. If you filed the case, you probably made some effort to notify the lender that a bankruptcy petition had been filed, perhaps by calling the phone number on your debtor’s payment coupons. But it is less likely that you immediately notified the trustee or sheriff who would actually conduct the sale, or that you could even find out who they were. You probably were not too worried that they would actually conduct the sale in ignorance of the bankruptcy filing, because you were confident that any such sale was void, or voidable, as a violation of the automatic stay. If you are similarly lackadaisical after October 17, 2005, you may be in for a big, ugly surprise, and possibly a malpractice suit from an angry, dispossessed former client who relied on you to save a home. Racing to the bankruptcy courthouse to beat a foreclosure sale may no longer be sufficient because you now must also race to the county recorder’s office to record the petition prior to the sale. Perhaps debtors’ counsels need a new practice protocol—to record the petition in the relevant real estate records immediately, whenever you file a bankruptcy case to stay a foreclosure. Why the sudden change? Does the Bankruptcy Abuse and Consumer Protection Act (“BAPCPA”) somehow permit foreclosure sales to be held, and be unavoidable, even after the filing of a bankruptcy case? BAPCPA was supposed to be all about credit card debt and a little about car lenders—who knew that real estate lenders, or perhaps vulture capitalists who purchase at foreclosure sales, were even at the secret kitchen table when BAPCPA was drafted? We may never know the answer to that second question, but the answer to the first is found in new Code § 362(b)(24), added by BAPCPA § 311. It provides a new exception to the automatic stay for any “transfer that is not avoidable under section 544 and that is not avoidable under section 549.” Section 544, of course, contains the strong arm clause empowering a trustee to assert creditors’ avoidance actions. Since those generally (perhaps only) apply to prepetition transfers, it is hard to understand how any such transfers ever would have been subject to the automatic stay anyway. What were the drafters thinking when they created a new exception from the automatic stay for prepetition transfers? The trap for the unwary comes in the reference to § 549, which of course permits trustees to avoid unauthorized post petition transfers. However, § 549(c) contains an exception: the trustee may not avoid a transfer of an interest in real property to a good faith purchaser who lacks knowledge of the bankruptcy case and who pays fair equivalent value, unless a copy or notice of the petition was recorded in the county recorder’s office prior to the transfer.
The new stay exception in § 362(b)(24) may mean that if a foreclosure sale is held post petition and the high bidder does not know of the filing of the bankruptcy case, the transfer to that high bidder is unavoidable under § 549, and the sale itself falls within the new exception to the automatic stay. The sale may be immunized even if the lender had some notice of the bankruptcy filing, because it is only the buyer who must lack knowledge to make the transfer unavoidable under § 549 and therefore an exception to the automatic stay under new § 362(b)(24). Third party purchasers are very likely to qualify for the “good faith purchaser” exception because they have no reason to check for bankruptcy filings, foreclosure sale auctioneers have no reason to tell them, and debtor’s lawyers have no ability to provide them notice in advance of the sale. Of course if the lender is the high credit bidder, then the lender’s knowledge of the filing might disqualify it from the § 549(c) exception. Even that conclusion is not solid because the phone call to the lender probably did not satisfy the lender’s designation of a person or subdivision for notice under the new notice requirements of amended § 342, and therefore § 342(g) may make that phone call notice not “effective.” Could BAPCPA have intended to permit lenders to commit knowing violations of the automatic stay, and yet render the sale to a third party bona fide purchaser unavoidable and immunize the lender against a damages claim under § 362(h) for knowingly proceeding with a trustee’s or sheriff ’s sale after a filing, because the purchase by a bona fide purchaser means there was no stay violation? Before attempting to answer that question, it is important to pause to emphasize a critical practice pointer. After BAPCPA, all debtor’s lawyers should make it a routine part of their filing procedures to immediately record the bankruptcy petition at the county recorder’s office. Failing to do so may permit a lender to complete a foreclosure without violating the automatic stay even after it has fully effective notice and knowledge of the filing, simply by the happenstance that unknowing, bona fide purchasers are available to bid. At a minimum, failure to record the petition invites expensive litigation and appeals if a foreclosure sale occurs post petition, either knowingly or innocently, and the purchaser lacked knowledge of the case. Not recording immediately is simply the road to malpractice. According to the Report of the House Committee on the Judiciary, the intent of BAPCPA § 311 in adding § 362(b)(24) was far more limited and benign than its potential application might suggest. H. Rep. on S.256, n.86 and accompanying text (109th Cong. April 2005). The House Report says its intent was merely to reverse the result in Thompson v.
Margen (In re McConville), 110 F.3d 47 (9th Cir. 1997).
In McConville, the debtor borrowed money post petition to conclude a prepetition contract to purchase property, and gave the lenders a deed of trust to secure the borrowing. This was done without bankruptcy court approval and without the lender’s knowledge that the debtor was even in bankruptcy. The trustee subsequently sought to avoid the deed of trust pursuant to § 549(a), and the lenders asserted the good faith purchaser defense under § 549(c). Earlier Ninth Circuit precedent had held that the creation of a lien is not a transfer of property for purposes of § 549. Phoenix Bond & Indemnity Co. v. Shamblin (In re Shamblin), 890 F.2d 123, 127 (9th Cir. 1989). In McConville, the Ninth Circuit first held that the § 549(c) defense was unavailable because the creation of a lien is not the kind of transfer to which § 549 applies. It then held that the creation of the lien was void in violation of the automatic stay. In re McConville, 97 F.3d 316 (9th Cir. 1996), opinion withdrawn and superseded, 110 F.3d 47 (9th Cir. 1997). Perhaps feeling that result to be unjust, the panel withdrew that opinion and replaced it with an opinion holding that because the unauthorized borrowing violated § 364(c)(2), the transaction should be rescinded and the lenders entitled to a lien against the property for the amount lent, but without interest because they “should get no benefit from their loan.” 110 F.3d at 50. New § 362(b)(24) probably does a fair job of reversing McConville, and the definition of “transfer” in § 101(54) has been amended by BAPCPA specifically to include “the creation of a lien.” If that is all these amendments accomplished, most bankruptcy folks would probably find the result to be unobjectionable. Indeed, most would probably agree that BAPCPA simply restored the original intent of § 549(a) and (c), to apply them to the unauthorized post petition creation of liens as well as to dispositions of fee title. Lenders and foreclosure sale purchasers will argue that the plain language goes much further. They will claim that the new stay exception in § 362(b)(24) also immunizes post petition foreclosure sales and reverses cases such as 40235 Washington Street Corp. v. Lusardi, 329 F.3d 1076 (9th Cir.), cert. denied, 540 U.S. 983, 124 S. Ct. 469, 157 L. Ed. 2d 374 (2003), and Value T Sales, Inc. v. Mitchell (In re Mitchell), 279 B.R. 839 (B.A.P. 9th Cir. 2002). The facts of these cases are similar and, indeed, the Ninth Circuit’s Lusardi opinion adopted the BAP’s analysis in Mitchell. In both cases there was a foreclosure sale shortly after the bankruptcy filing, apparently without knowledge of the filing, and in both cases a third party purchaser was the high bidder. When the debtors sought to void the sales as violations of the automatic stay, the purchasers defended that § 549(c) creates an exception to the automatic stay for innocent bona fide purchasers. Both courts held that § 549(c) is only a defense to an avoidance action brought by a trustee under § 549(a), and is not an exception to the automatic stay. Because the sale violated the stay and because under Ninth Circuit law a violation of the stay renders the action void, not voidable, the sale itself was automatically void. No avoidance action was needed, and certainly none under § 549, and therefore § 549(c) was not an available defense. Both courts went further to state that § 549 was intended to apply only to transfers initiated by the debtor, not to foreclosure sales: “The purpose of section 549, in contrast [to § 362], is to provide a just resolution when the debtor himself initiates an unauthorized postpetition transfer.” Lusardi, 329 F.3d at 1082. Section “549 protects the estate from unauthorized transfers by the debtor.” Mitchell, 279 B.R. at 843. New § 362(b)(24) certainly reverses some of the analysis of Lusardi and Mitchell. It now does make § 549(c) an exception to the automatic stay, but does it reverse either the essential analysis or the result of Lusardi and Mitchell? Perhaps not, in two important respects. First, § 549(c) merely provides that the trustee may not avoid the transfer to the bona fide purchaser. New § 362(b)(24) insulates that transfer from the automatic stay. Lusardi held that prior to the transfer to the bona fide purchaser there was another action—the foreclosure sale itself—and that action violated the stay: The post petition “tax sale, conducted to enforce the tax lien on the property, was void.... [T]herefore, Lusardi’s purchase of the property at the tax sale was without effect.” Lusardi, 329 F.3d at 1080. Wholly apart from the subsequent transfer to the high bidder (which in Arizona often occurs the next day when the bidder brings the purchase money to the trustee), the conduct of the sale by the lender was an act to enforce a lien against property of the estate, and an act to collect a debt, within the scope of § 362(a)(4), (5) and (6). It was that stay violation that rendered the sale void, and consequently voided the subsequent transfer to the high bidder. Neither opinion suggested there was a stay violation on account of the transfers to the purchasers, although the debtors might have so argued because the purchasers’ subsequent acts to obtain or exercise control over property of the estate could also be stay violations under § 362(b)(3). Nothing in either § 549(c) or new § 362(b)(24) makes the holding of the post petition foreclosure sale an exception to the automatic stay. If the intent of BAPCPA was to validate post petition foreclosure sales held in innocence of the bankruptcy filing, it would have referenced the foreclosure sale, and not just the subsequent transfer to the purchaser at the sale.
Second, Lusardi and Mitchell held that § 549 applies only to debtor-initiated sales, not to foreclosure sales. Nothing in BAPCPA or new § 362(b)(24) reverses that holding. To the contrary, the amendment is consistent with the interpretation that § 549 applies only to debtor-initiated transfers. Finally, it could also be argued that the legislative intent of § 362(b)(24) could not have been to reverse Lusardi because an identical amendment was proposed in § 311 of the 2000-2001 version of BAPCPA, H.R. 333 of the 107th Congress, long before Mitchell and Lusardi were decided. However, this argument from legislative history may not fare well in the face of plain meaning. So what is the appropriate scope and application of new § 362(b)(24)? It should apply in at least two circumstances, and perhaps in no others. First, it should apply to post petition, debtor initiated sales and creations of liens, to protect bona fide purchasers and lenders from stay violations. This protection is necessary, in addition to § 549(c), because § 549(c) only states that the trustee cannot avoid the transfer and recover the property. Because Lusardi holds that § 549(c) is not an exception to the automatic stay, but only a defense to a trustee’s avoidance action, it could still be argued that the debtor’s voluntary, unauthorized transfer violated the automatic stay. The purchase at a voluntary sale initiated by a debtor is an act to obtain possession and control of property of the estate for purposes of § 362(a)(3). Because § 549(c) provides no defense to that argument, it was necessary to add an exception from the automatic stay to fully protect the bona fide purchaser at an unauthorized postpetition sale initiated by a debtor. Thus new § 362(b)(24) performs an important function that remains consistent with the holding that § 549 only applies to debtor-initiated sales, not to foreclosure sales. Second, it may apply when there is a prepetition foreclosure sale but the transfer to the high bidder occurred after the petition. This issue has arisen in reported cases, some holding that the recording of the trustee’s deed is a ministerial act that merely gives notice to the world of what occurred prepetition and therefore does not violate the automatic stay. E.g., L. R. Partners LLC v. Steiner (In re Steiner), 251 B.R. 137 (Bankr. D. Ariz. 2000). The result may be different if the purchaser’s payment of the bid price and the delivery of the trustee’s deed also occurred post petition, because these essential acts are not ministerial. In that circumstance, the stay would prevent the completion of the sale, even though it was commenced prepetition, and the debtor may be able to cure the default under § 1322(c)(1). E.g., Capital Realty Servs. LLC v. Benson (In re Benson), 293 B.R. 234 (Bankr. D. Ariz. 2003). Perhaps § 362(b)(24) reverses cases such as Benson and validates a prepetition foreclosure sale that did not get concluded until after the filing. This analysis is consistent with its language that focuses only on the transfer to the purchaser, without mentioning the foreclosure sale itself. It is also consistent with the otherwise odd reference to § 544. The reference to § 544, which as noted above generally applies only to prepetition transactions, is probably there because the facts of McConville involved a prepetition purchase of property, financed in part by a postpetition borrowing secured by the deed of trust. Reading narrowly, new § 362(b)(24) might be limited to transactions that somehow straddle the petition date, part of which might be avoidable under § 544 and part of which might be avoidable under § 549. There was nothing essential to the result in McConville that the purchase began prepetition; the issue, analysis, and result would have been the same if the debtor had begun the purchase postpetition, but the dual reference to §§ 544 and 549 may indicate an intent to limit the application of § 362(b)(24) to transactions that occur on both sides of the petition. A prepetition foreclosure sale that is not concluded by transfer of the deed until postpetition would be one of the most common examples of a transaction to which new § 362(b)(24) might now apply. Thus postpetition foreclosure sales in violation of the automatic stay may remain avoidable, even as to bona fide third party purchasers. To avoid having to argue that, and to avoid having to convince a judge of the fine distinction between a foreclosure sale and the subsequent transfer to the successful bidder, the better lesson is to always, and immediately, record the petition at the county recorder’s office.
Mr. Feinstein and Debra Grassgreen of Pachulski, Stang were the lead attorneys in the Tyson case. In August of 2003, boxer Mike Tyson filed for Chapter 11 relief in the Southern District of New York. My law firm, Pachulski, Stang, Ziehl, Young, Jones & Weintraub, P.C., served as debtor’s counsel. The case culminated in the Fall of 2004 with the confirmation of a consensual plan of reorganization supported by the debtor, the official creditors’ committee, Mr. Tyson’s ex-wife, the Internal Revenue Service, and Don King— an unlikely group of allies. After confirmation, we and other retained professionals filed applications for final allowance of compensation and reimbursement of expenses. At that point, Mr. Tyson hired an attorney who filed an omnibus objection to virtually all of the fee applications. Before a ruling was issued on our application, an article appeared in the February 2005 edition of the Norton Bankruptcy Law Adviser entitled Let’s Get Ready to Rumbllllllllllle! The Gloves Come Off in the Tyson Fee Fest, by Michael Schreiber, that all but convicted us of engaging in billing excesses. Indeed, the term “Fee Fest” in the title reflected a false factual premise—that our firm and others charged excessive fees for our services in the case. We have refrained until now from responding to the article because our final application was sub judice. On June 3, 2005, the Honorable Allan M. Gropper, the bankruptcy judge presiding over the case, issued an opinion on our final application calling the case a “knockout success” and awarding 100% of the fees and 100% of the expenses we requested. The court approved a settlement of the fee objections that included payment of a $50,000 fee enhancement to our firm. The confirmed plan, in Judge Gropper’s view, resulted in a meaningful return to unsecured creditors and a fresh start for Mr. Tyson after years of financial chaos. Rejecting the contention that our fees were excessive, the court had this to say about the value of our services: The real concern regarding Pachulski’s fees... is that top dollar was paid for first class counsel to handle a case that involved an individual with limited assets and estates that were unable to support a large distribution to unsecured creditors. In certain circumstances it might be appropriate to reduce... fees accordingly. The principal factor justifying... the awards here is that there might have been no distribution at all if less skilled counsel had been involved.... The Court will not rule on the basis that Tyson should have hired less expensive but less skilled professionals to assist in a critical endeavor that will hopefully help him straighten out his life. (Op. at 11.) Let’s Get Ready to Rumble was a slipshod effort to make a scholarly point relying on factual premises that do not withstand scrutiny, particularly in light of Judge Gropper’s ruling. Mr. Schreiber relied uncritically on unsubstantiated allegations in a pleading that was later partially disavowed in open court for factual accuracy and that otherwise misstated and distorted the facts. What Mr. Schreiber apparently did not know is that the objection was interposed in an effort to resolve a dispute over the magnitude of the fee enhancement Mr. Tyson agreed to pay the firm from his future boxing income, and that the reasonableness of our time charges was never seriously in dispute. Casting us as both avaricious and arrogant, the article mischaracterized the purpose to be served by the fee enhancement, which was to compensate for the assumption of enormous financial risk. At the time of the bankruptcy filing, Mr. Tyson had no liquid assets and faced myriad legal and financial problems. Because his bankruptcy estate consisted almost entirely of encumbered real estate and disputed litigation claims, the prospects for recovering professional fees as debtor’s counsel was dependent upon: (i) a successful resolution of Mr. Tyson’s pending litigation against Don King, a formidable and well funded adversary; and (ii) Mr. Tyson’s willingness and ability to resume his professional boxing career. It is an understatement that not every law firm would have taken on such a client in what would surely be a complicated, high-profile Chapter 11 case. The payment risk presented by such a client and case was so great that the firm requested, and Mr. Tyson agreed in writing, to the payment of a fee enhancement solely out of non-estate assets, i.e., future boxing income. In addition to taking on this risk, we also agreed to defer payment of a retainer of $250,000 (which was never paid) and wrote-off over $100,000 of prepetition fees incurred in preparing for the Chapter 11 filing. Mr. Schreiber made no mention of fee risk in his article. To advance his thesis that bankruptcy lawyers routinely gouge their clients, Mr. Schreiber implied that the fee enhancement was based on an arrogant assumption at the beginning of the case that the results would be exceptional. To quote Mr. Schreiber, “before the bankruptcy case was one day old, Tyson’s professionals had determined they were entitled to a 100% bonus for their services rendered.” He added caustically, “[w]ould that all firms representing insolvent debtors were entitled to such handsome rewards for not yet having done anything.” The article did not the reason for the fee enhancement, nor the fact that when the article went to press this supposedly avaricious law firm had worked intensely for nearly a year-and-a-half in a complex case, and advanced over a quarter of a million dollars on Mr. Tyson’s behalf for expenses, without payment. Mr. Schreiber’s article is rife with factual errors. For example, repeating from the objection, the article states with alarm that the firm sent four attorneys to attend a negotiating session with Don King, which was untrue, as the author of the objection was forced to acknowledge in open court. Mr. Schreiber got it wrong when he expressed surprise that the proposed fee enhancement payable from future earnings was not questioned by the United States Trustee, the committee or any party in interest. In fact, at the outset of the case we conferred with the Office of the United States Trustee and the committee and, as a result of those discussions we submitted agreed-upon retention order providing that payment of any fee enhancement from Mr. Tyson’s future earnings would be subject to bankruptcy court approval, notwithstanding case authorities holding that a bankruptcy court may not have jurisdiction over an agreement by an individual debtor to use non-estate assets to pay fees. The tone and content of Mr. Schreiber’s article create the impression that our side of the story, which is never told, was not to be credited. The thrust of his article is not whether we engaged in misconduct, but whether this misconduct is endemic in the industry. He asserts, as if we had been convicted of billing abuses, that “[t]he Tyson case is a paradigm of what occurs daily in Chapter 11 cases throughout the country.” He asks the loaded question “[a]re the abuses alleged by the parties in this case an aberration or standard operating procedure?” While we are aware that Mr. Tyson, whom we continue to represent, has been routine fodder for sensationalized and sometimes inaccurate accounts in tabloid journals, we never thought we would see such fare targeting his counsel. Mr. Schreiber started out with a thesis to prove—that bankruptcy lawyers (like us, he thinks) routinely gouge their clients— and then produced a distorted rendition of the “facts” to prove his point. Starting with a conclusion and finding research to support one’s thesis—researching from a conclusion instead of to a conclusion—is an intellectually bankrupt endeavor. So is drawing wild conclusions from a faulty set of data. Similar criticism was leveled recently (and fairly so, in my humble opinion) against UCLA Professor Lynn LoPucki, whose book “Courting Corruption” scurrilously accuses bankruptcy judges sitting in the Southern District of New York and Delaware of corruption, based on a questionable database of selected cases and the willingness to draw sensational but flawed conclusions from these “facts.” Given Mr. Schreiber’s sensational subject and tone, his populist resort to lawyer- bashing, and his rush to an incorrect judgment about our professionalism, one has to wonder whether Mr. Schreiber is just as guilty of academic excess as Mr. LoPucki. It is unfortunate that Mr. Schreiber would attempt to make his academic mark at the expense of our reputation.
STRONG-ARM ON STEROIDS— APPLYING OR INJECTING “RIGHTS AND POWERS” UNDER 11 U.S.C. § 544(a)?
• The debtor made a $2.9 million tax overpayment to the defendants in 1996 that was never returned.
• The debtor paid $2.3 million in May 1997 to buy out the interest of the debtor’s CEO, far in excess of the value of his stock holdings in an insolvent corporation.
• The debtor paid $3.6 million from 1995 to 1999 as an “acquisition fee” and as “management fees.” The acquisition fee provided no apparent benefit to the debtor and the management fees were based on an earnings formula that disregarded the massive debt incurred to generate earnings. Collins II, 325 B.R. at 422.
The defendants moved to dismiss, citing the statute of limitations. They argued that the discovery rule did not apply “because the Debtor’s secured creditors (who assigned their claims to the trustee) had an opportunity to discover the Debtor’s true financial condition.” Collins II, 325 B.R. at 422.
The bankruptcy court found that the trustee adequately alleged self-dealing for profit by fiduciaries and concluded that limitations of such actions were tolled by Delaware law. Even if the creditors could have discovered the debtor’s true financial condition prior to the running of the statute of limitations, it was irrelevant—only “actual knowledge” would prevent equitable tolling under Delaware law and there was no actual knowledge in this case. The bankruptcy court then found support for the trustee’s position in § 544(a)(2). It held that the “rights and powers” of a “hypothetical creditor” vested in a trustee under § 544(a)(2) include standing to bring actions that could be brought by those who did not become creditors until after the wrong occurred. Further, the ability to stand in the shoes of a “hypothetical creditor” allowed the trustee to avoid common problems that arise when a trustee sues a third party in the shoes of the debtor—for example, piercing the corporate veil and in pari delicto. Finally, the court held that a trustee standing in the shoes of a hypothetical creditor “without regard to any knowledge of a trustee or any creditor” realized another advantage—there may be no statute of limitations for those actions.
There are many circumstances when it is advantageous for a trustee to stand in the shoes of a debtor. After all, that is how a trustee has the power to perform the duties in 11 U.S.C. §§ 1106 and 1108. It empowers a trustee to assert a debtor’s causes of action that belong to the estate pursuant to 11 U.S.C. § 541 and to avoid transfers of the debtor under 11 U.S.C. §§ 547 and 548. There are also occasions when it is important for a trustee to slip out of the shoes of the debtor and into the shoes of a hypothetical or actual creditor—this is the import of§ 544. Section 544(a) provides:The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or any creditor, the rights and powers of, or may avoid any transfer of property by the debtor or any obligation incurred by the debtor that is voidable by... a creditor... whether or not such a creditor exists[.] 11 U.S.C. § 544(a).
Official Committee of Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 158 (2d Cir. 2003) (quoting 34 TEX. JUR.3d Equity, at § 31 (2002)).
There are other problems for trustees that do not necessarily come with the debtor’s dirty shoes, such as piercing the corporate veil in states where only a creditor can pierce the corporate veil, the “insured versus insured” exclusion under D&O insurance policies, and ratification.5 Trustees are always searching for ways to bring a debtor’s causes of action without facing the difficult defenses that may be asserted when the trustee is suing in the shoes of a debtor.
(3) a creditor who upon the date of bankruptcy obtained a lien by legal or equitable proceedings upon all property, whether or not coming into possession or control of the court, upon which a creditor of the bankruptcy upon a simple contract could have obtained such a lien, whether or not such a creditor exists.
Those remedial rights which accrue to the judgment creditor with an execution returned unsatisfied were sheared off by the amendment of the subdivision in 1950. A creditor seeking equitable relief in connection with the avoidance of a transfer— discovery, injunction, receivership, levy on an equitable asset, or reformation or cancellation of a writing—may be required by state law to show that he had exhausted his remedy at law by obtaining a judgment with an execution returned unsatisfied.... [I]t was an inadvertence to deprive the trustee of any advantage given by nonbankruptcy law to a judgment creditor with an execution unsatisfied, and the amendment restores to him whatever rights inhere in this status.
Frank R. Kennedy, The Bankruptcy Amendments of 1966, 1 GA. L. REV. 149, 169 (1967). Professor Kennedy’s initial description of the trustee’s powers under § 70c indicates that a trustee’s powers are limited to those instances where relief is being sought “in connection with the avoidance of a transfer.” Thus, a trustee may have rights and powers over and above “avoidance” powers, but those powers may only be used as procedural tools to enable the trustee to avoid transfers. However, his final comment—that § 70c gives the trustee “any advantage” and “whatever rights” a § 70c creditor has—is very broad indeed and would presumable entail more than mere avoidance powers. At least one court, Western World, has recognized a trustee’s broad powers under § 544(a). Henderson v. Buchanan (In re Western World Funding, Inc.), 52 B.R. 743, 773 (Bankr. D. Nev. 1985). In that case, the trustee sued the defendants for breach of fiduciary duty. The defendants argued that state law did not permit creditors to sue for breach of fiduciary duty and that the court should dismiss the action because the trustee did not hold greater rights than a creditor acting under state law. The court agreed, but said that the cases cited by the defendants were not applicable for two reasons: (1) those cases only held that a single creditor may not bring a breach of fiduciary duty action on his own behalf, i.e., such an action leaves the defendants vulnerable to multiple liability; and (2) to avoid these problems, such actions must be brought in the name of the corporation for the benefit of all those who were wronged. This, the court said, is exactly the nature of the trustee’s action: “In his capacity as a creditor under § 544(a), he [the trustee] may bring a ‘creditors’ bill’ to reach choses in action belonging to the debtor.” 52 B.R. at 773.
Collins II adopts the reasoning of Western World that a trustee can in fact stand in the shoes of a hypothetical creditor under § 544(a) to bring a creditors’ bill asserting a cause of action belonging to the debtor.
Having recognized that the trustee in Collins II does not want to be re-saddled with the debtor’s causes of action that were dismissed in Collins I, the bankruptcy court said: “[T]he intent behind § 544(a)(2) to make a creditors’ bill available to trustees is nevertheless very significant because it demonstrates that some kind of affirmative damages can be asserted under § 544(a)(2), not just avoidance of secret liens.” Collins II, 325 B.R. at 425. The question, of course, is what “some kind of affirmative damages” entails. To this point, the court says: Probably most kinds of affirmative relief that a trustee might seek would not be available under § 544(a)(2), because a creditor who extends credit on the date of petition will always have become a creditor after the wrong complained of. Consequently, the kinds of actions that trustee might be able to bring under § 544(a)(2) will always be limited to those for which remedies are available to subsequent creditors, and these may be rare.
Collins II, 325 B.R. at 426.6 Put more plainly, Collins II holds that a trustee may not only stand in the shoes of a hypothetical creditor under § 544(a) to assert a debtor’s causes of action, but a trustee may also assert a hypothetical creditor’s causes of action under § 544(a), whatever they may be. This interpretation of § 544(a) may run into some historical problems simply because it involves a “trustee” suing on a “creditor’s” action. 7 In drafting the Bankruptcy Code, the House of Representatives Committee of the Judiciary included a subparagraph to section 544 that would have allowed the trustee to enforce a claim that any individual creditor or class of creditors had against a third party. See H.R. REP. NO. 95-595, at 370-71 (1977). This was added in response to the Supreme Court’s comment in Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 92 S. Ct. 1678, 32 L. Ed. 2d 195 (1972), that Congress should decide the standing of a trustee in bankruptcy reorganizations to bring claims against an indenture trustee on behalf of debenture holders. In explaining this history, one circuit court observed: As originally proposed by the House, Section 544 was to contain a subsection (c), which was intended to overrule Caplin. It is extremely noteworthy, however, that this provision was deleted before promulgation of the final version of Section 544. Because subsection (c), as a part of Section 544, would have applied to both reorganization and liquidation trustees, and because Congress refused to enact subsection (c), we believe Congress’ message is clear—no trustee, whether a reorganization trustee as in Caplin or a liquidation trustee as in the present case, has power under Section 544 of the Code to assert general causes of action, such as the alter ego claim, on behalf of the bankrupt estate’s creditors.
Adam Furniture Indus., Inc.), 191 B.R. 249 (Bankr. S.D. Ga. 1996). This interpretation of Caplin and the legislative history of § 544 casts some doubt on whether § 544(a) was intended as a vehicle to bring general causes of action on behalf of the estate’s “hypothetical creditors.” See Ozark, 816 F.2d at 1230 n.12 (questioning the validity of the Western World holding based on § 544(a)(2)).
Barnett v. Stern, 93 B.R. 962 (N.D. Ill. 1988), rev’d, 909 F.2d 973 (7th Cir. 1990).
Another import of § 544(a)(2) is the ability of a trustee to stand in the shoes of a hypothetical creditor “without regard to any knowledge of the trustee or of any creditor” as of the petition date. “Consequently, if the limitations on such an action is subject to a discovery rule, such as the discovery rule for actual fraudulent transfers, the action is assertable on behalf of the hypothetical creditor who is hypothesized to have had no knowledge of the wrongdoing.” Collins II, 325 B.R. at 426-27. This means that the secured creditor’s ability to have known the debtor’s true financial condition is irrelevant because a “hypothetical creditor” is not burdened with such knowledge. Presumably this is true even if actual creditors had actual knowledge, thus tolling the statute of limitations indefinitely. Some courts have interpreted the term “knowledge” under § 544(a) more narrowly than Collins II. In the context of avoiding transfers, it has been said that “knowledge” refers only to actual and not to constructive knowledge that a trustee (via the debtor) or a creditor possesses. In other words, even though a trustee is relieved of any actual knowledge relating to a lien, vulnerability remains to a charge of constructive knowledge.
Alaska, N.A. v. Erickson (In re Seaway Exp.
McCannon v. Marston, 679 F.2d 13 (3d Cir.
These decisions have little effect on Collins II, though, because the court also held that constructive notice was not sufficient to stop the tolling of the statute of limitations under Delaware law.
Another issue—left untouched by this opinion because it was not yet ripe—is damages. When the trustee sues in the shoes of a known creditor or a known debtor, the harm is quantifiable. When the trustee sues in the shoes of an unknown creditor that may or may not exist, the harm is much harder to measure. It is, perhaps, in this context, that the trustee is most like the steroid user who finds new strength, but limited ability to use it. A simple approach to this issue is that the trustee is asserting the corporation’s causes of action through a hypothetical creditor— approximately what happens on a creditors’ bill. The amount of the particular creditor’s claim does not matter. Instead, the trustee is asserting the corporation’s causes of action through the hypothetical creditor, recovering whatever amount the corporation is entitled to recover, and all that comes into the estate gets distributed according to the priorities. This approach, though, may be letting the trustee have his cake and eat it, too, especially, as in Collins II, when the court has expressly forbidden the trustee to pursue certain claims that belong to the debtor. In other words, it would allow the trustee to stand in the shoes of creditors to assert claims and avoid dismissal problems, but then step into the shoes of the debtor for purposes of recovering damages.
It may also be that the kinds of claims that can be brought on behalf of a hypothetical creditor may be limited to those where damages or the resulting judgment would be something other than based on the amount of the hypothetical creditor’s claim. For example, in the context of piercing the corporate veil, the parent is liable for all of the debts of the subsidiary and the amount of the plaintiff’s claim is irrelevant. Deepening insolvency may be similar if the defendant owes the estate “x” amount of dollars based on how much more insolvent the debtor became after it should have been put into bankruptcy. Again, the amount of damages would be unrelated to the hypothetical creditor’s claim.
rights of the trustee under § 70e(1)—the predecessor to 11 U.S.C. § 544(b)—were not limited to those of the creditor whose rights were asserted by the trustee. The Second Circuit has held that a creditor owed a relatively small amount enabled the trustee to avoid and recover or the benefit of all creditors a mortgage securing $65,000. Zamore v. Goldblatt, 194 F.2d 933 (2d Cir. 1952). The Sixth Circuit likewise held that a trustee was able to assert the rights of a single creditor having a claim of $10 to avoid a mortgage on property worth $2,300. Sears, Roebuck & Co. v. Bissell (In re Plonta), 311 F.2d 44 (6th Cir. 1962). Congress continued the rule of Moore v. Bay in § 544(b). See Gerald K. Smith, Avoiding Powers of Trustee, in Practicing Under the Bankr. Reform Act 121 (Brody et al. eds, CRR Pub. Co. 1977). The problem, of course, is that the hypothetical creditor under § 544(a) is just that— hypothetical, and it does not have a claim, not even $1. Another problem is that if the trustee is relying on the amount of a specific claim of a specific creditor, then the trustee may run afoul of Caplin. A potentially more complicated question is whether and to what extent a trustee is entitled to prejudgment interest when a hypothetical creditor’s credit is not extended under § 544(a) until “the time of the commencement of the case.” It may be that a trustee is not entitled to prejudgment interest in that situation, or it may be that a trustee is able to make out some sort of unjust enrichment claims that allow recovery of interest.
II for fertile ideas about bulking up actions to enhance the bankruptcy estate.
1. The steroid saga in baseball was revealed by TomVerducci, Baseball’s Worst Kept Secret, SPORTS ILLUSTRATED(May 28, 2002) (“Steroids are changing the game and making a mockery of the record book.”).
2. Tom Verducci, Baseball’s Worst Kept Secret, Sports Illustrated (May 28, 2002); see also Anita Manning, Steroids Can Build Muscles, Shrink Careers, USA TODAY (July 7, 2002) at http:// www.usatoday.com/sports/baseball/stories/2002- 07-08-steroids-focus.htm#more.
3. See, e.g., William Bates III, Deepening Insolvency: nto the Void, 24-2 AM. BANKR. INST. J. 1 (2005); see also Jo Ann J. Brighton, Deepening Insolvency— Secured Creditors and Professionals Beware: It Is Not Just for Officers and Directors Anymore, 23-3 AM. BANKR. INST. J. 34 (2004) (hereinafter “Brighton, Deepening Insolvency”); Jo Ann J. Brighton, Secured Creditors Beware: Latest Tool in the Creditors’ Committee Toolbox: Aiding and Abetting in the Breach of Fiduciary Duty, 23-8 AM. BANKR. INST. J. 36 (2004).
4. See, e.g., Brighton, Deepening Insolvency (suggesting that if the current trend continues, secured creditors become conservative about working with borrowers to reorganize their businesses).
5. See, e.g., Collins II, 325 B.R. at 426 (addressing the problem of piercing the corporate veil) (citations omitted); David M. Hillman and Jeffrey S. Sabin, Will D&O Insurance Be Available When Angry Creditors Come Calling?, 44-10 BANKR. CT. DEC. (Mar. 29, 2005) (addressing the problems relating to the “insured v. insured exclusion”); Henderson v. Buchanan (In re Western World Funding, Inc.), 52 B.R. 743, 775 (Bankr. D. Nev. 1985), aff ’d in part, rev’d in part on other grounds, 131 B.R. 859 (D. Nev. 1990), rev’d, 985 F.2d 1021 (9th Cir. 1993).
6. Western World recognized this limitation as well, but was not too troubled by it: “The fact that the trustee becomes a creditor subsequent to the misconduct complained of, does not impair his standing, for the creditor may complain of past misconduct which impaired the corporation’s assets.” 52 B.R. at 774 n.10.
7. A thorough review of this history was provided by Gerald K. Smith, Avoiding Powers of Trustee, in Practicing Under the Bankr. Reform Act 113 (Brody et al. eds., CRR Pub. Co. 1977). This history does not indicate in any way that a trustee could assert affirmative actions on behalf of hypothetical creditors under § 544(a).
8. The bankruptcy court relied on A.R. Teeters & Associates, Inc. v. Eastman Kodak Co., 172 Ariz. 324, 333, 836 P.2d 1034, 1043 (Ct. App. Div. 1 1992) (“When a corporation becomes insolvent, its directors and officers become fiduciaries of the corporate assets for the benefit of creditors.”), for this proposition. It should be noted that A.R. Tetters never says that duty actually shifts to the creditors.
WHEN A SOLVENT DEBTOR FILES FOR REORGANIZATION, IS THE FILING “PER SE” BAD FAITH?
In their article, Courts Reign in Solvent Debtor Bankruptcies by Handing Landlords Significant Victories, 5 NORTON BANKR. L. ADVISER 3 (2005), John D. Fredericks and Eric E. Sagerman argue that In re Liberate Technologies, 314 B.R. 206 (Bankr. N.D. Cal. 2004), and NMSBPCSLDHB, L.P. v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 384 F.3d 108 (3d Cir. 2004), cert. denied, 2005 WL 544094 (June 6, 2004), reflect a trend away from prior cases that allowed solvent debtors to reorganize. As explained here, these recent decisions depart from a long line of cases holding that a debtor’s good faith should be determined from a “totality of circumstances”—including solvency of the debtor—but not determined exclusively by the debtor’s solvency. Further, this excessive focus on the debtor’s solvency creates an additional eligibility requirement not found in 11 U.S.C. § 109(d) or (e). It is too soon to declare that the courts have shifted away from or abandoned the “totality of circumstances” approach and instead adopted the holdings in Liberate and Integrated.
11); In re Love, 957 F.2d 1350, 1357 (7th Cir. 1992) (rejected by, In re Lilley, 91 F.3d 491 (3d Cir. 1996) (Chapter 13)); Winslow v. Williams Group (In re Winslow), 949 F.2d 401 (10th Cir. 1991) (Chapter 11).
Chapter 11 or Chapter 13?
It is well established that a debtor need not be insolvent before filing for bankruptcy protection. SGL Carbon, 200 F.3d at 163. The Code does not require specific evidence of insolvency for a voluntary Chapter 11 filing. In re Mid-Valley, Inc., 305 B.R. 425, 430 (Bankr. W.D. Pa. 2004). In the past, courts have considered a debtor’s solvency as a factor in determining whether or not a petition is filed in good faith. See, e.g., SGL Carbon, 200 F.3d at 163. Recently, two courts have abandoned the “totality of circumstances” test and focused on a debtor’s solvency exclusively to determine whether or not a petition is filed in good faith.
In the case of Liberate Technologies, the debtor had over $212 million of unrestricted cash on hand at the time it filed its Chapter 11 petition. The debtor sought to cap a landlord’s claim at $8 million from the $45 million scheduled claim pursuant to § 502(b)(6). The court, analyzing whether the petition was filed in good faith, stated that the most conspicuous prerequisite for obtaining Chapter 11 bankruptcy relief is that the debtor need Chapter 11 relief. Liberate, 314 B.R. at 211. It further held that a case could not be found to have been filed in good faith if the sole purpose of the solvent debtor’s filing was to take advantage of a particular section of the Code (here, § 502(b)(6)).
Liberate, 314 B.R. at 216.
The Third Circuit reached a similar conclusion in Integrated Telecom. In that case, the debtor had over $105 million in cash which exceeded its liabilities by over $70 million. Again, the debtor sought to cap a landlord’s claim under § 502(b)(6), reducing the claim from $26 million to $4.3 million. The Third Circuit found that the bankruptcy filing was in bad faith because the debtor did not have any financial distress; it was solvent.
Integrated Telecom, 384 F.3d at 122. The court further based its conclusion on the fact that the filing of the petition did not maximize value for creditors as a whole, but instead facilitated dissolution on terms favorable to equity interests. Integrated Telecom, 384 F.3d at 126. Lastly, the court stated “[t]o be filed in good faith, a petition must do more than merely invoke some distributional mechanism in the Bankruptcy Code. It must seek to create or preserve some value that would otherwise be lost—not merely distributed to a different stakeholder— outside of bankruptcy.” Integrated Telecom, 384 F.3d at 129.Solvency is a Factor in Determining Good Faith, but Not a Bar to Filing The Liberate and Integrated Telecom decisions remain the minority decisions, with other courts continuing to allow solvent debtors to seek bankruptcy protection to reorganize under the Code.
Cases discussing a solvent Chapter 11 debtor’s good faith are not limited to instances where the debtor seeks to utilize § 502(b)(6). The Ninth Circuit in Platinum Capital, Inc. v. Sylmar Plaza, L.P. (In re Sylmar Plaza, L.P.), 314 F.3d 1070 (9th Cir. 2002), cert. denied, 538 U.S. 1035, 123 S. Ct. 2097, 155 L. Ed. 2d 1065 (2003), ruled in favor of a debtor and held it was not per se bad faith to file a bankruptcy plan solely to use the cure and reinstatement provisions of § 1124(2).The debtor owned a shopping center that was subject to a secured loan. The debtor ultimately defaulted on the loan. The debtor sold the shopping center free and clear of the bank’s lien. The secured lender objected to the debtor’s plan that allowed the debtor to pay the lender’s claim at the nondefault interest rate. The Ninth Circuit found that insolvency is not a prerequisite to a finding of good faith, and that a creditor’s contractual rights are adversely affected by a bad faith filing. Sylmar Plaza, 314 F.3d at 1074-75.
Chapter 13 debtors may also take advantage of particular Code sections that may adversely a single creditor. Consider the following hypothetical. A Chapter 13 debtor owns real estate which is not his primary residence. He is current on the mortgage obligation on the property and has no other debt either secured or unsecured). The value of the property is less than the amount of the mortgage. The debtor files Chapter 13 for the sole purpose of bifurcating his mortgage under § 506(a) into secured and unsecured portions with the intent of paying the secured portion and paying a percentage of the unsecured portion over the of the Chapter 13 plan. Would this filing be a good faith filing? Under the holdings of PPI, Chameleon and Sylmar Plaza, the hypothetical case would survive a good faith inquiry because the debtor was using the Code “for a purpose for which it was intended.” The Liberate and Integrated Telecom courts would reach a different result. Which result is correct? As stated previously, courts have held that solvency is not a prerequisite to filing either a Chapter 11 or 13 petition. The Liberate and Integrated Telecom courts have become gatekeepers, preventing a certain class of debtors, namely those that are solvent, from filing petitions to reorganize. However, it is unclear what section of the Code these courts rely on to reach a determination that solvency is a barrier to a good faith filing and why they have abandoned a “totality of the circumstances” test. Clearly, they are not relying on § 109 that governs a debtor’s eligibility. Eligibility Under § 109 Section 109(d) states: Only a railroad, a person that may be a debtor under Chapter 7 of this title (except a stockbroker or a commodity broker), and an uninsured State member , or a corporation organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor under 11 of this title. 11 U.S.C. § 109(d). Section 109(e) states: Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $307,675 and noncontingent, liquidated, secured debts of less than $922,975, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $307,675 and noncontingent, liquidated, secured debts of less than $922,975 may be a debtor under Chapter 13 of this title. 11 U.S.C. § 109(e). Solvency is conspicuously absent as a factor to determine a debtor’s eligibility under Chapter 11 or 13. By requiring a debtor to be insolvent, the Liberate and Integrated Telecom courts are adding an additional requirement of eligibility that is not found in the Code. If Congress had intended solvency to be a requirement for filing Chapter 11 or Chapter 13, it would have written it into § 109(d) or (e). Indeed, Chapter 9 eligibility requires that a debtor under that chapter be insolvent. 11U.S.C. § 109(c)(3).
Based upon a literal reading of the Code, if a debtor meets the eligibility requirements found in § 109, it should be able to attempt to propose a plan of reorganization. Courts should employ a “totality of the circumstances” test to each case to determine whether a particular debtor has filed its petition in bad faith, considering a debtor’s solvency as a factor (not the only factor). As stated earlier, Fredericks and Sagerman’s article which heralded a shift from the “totality of circumstances” may be premature. Further, the holdings in Liberate and Integrated Telecom ignore the plain language of § 109(d) and (e) which allow a solvent debtor to file a petition to reorganize. As the Supreme Court has held in United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989), when a statute is unambiguous on its face, it must be read literally.
The mere fact that a debtor is solvent should not cause a case to lack good faith “per se.” A debtor may file for the sole purpose of taking advantage of certain Code sections such as § 502(b)(6) or § 506(a). To preclude a solvent debtor from filing for reorganization when it seeks to take advantage of certain sections of the Code creates an additional requirement of eligibility. If Congress had intended that debtors seeking reorganization be insolvent, it would have drafted such language into § 109(d) or (e), as it did in § 109(c). In its present form, that language is not included in § 109 and this author believes that the courts seeking to add this additional eligibility requirement are thwarting congressional intent by limiting Chapter 11 or Chapter 13 filings to insolvent debtors.
Inc.), 410 F.3d 100 (1st Cir. 2005). In the context of a liquidating plan of reorganization, court’s related-to jurisdiction does not diminish post confirmation to the same degree it would in a viable, reorganized debtor case.
Hannigan v. White (In re Hannigan), 409 F.3d 480 (1st Cir. 2005). Debtor cannot amend schedules to take full advantage of homestead exemption when debtor intentionally undervalued his home.
JP Morgan Chase Bank v. Altos Hornos De Mexico, S.A. De C.V., 412 F.3d 418 (2d Cir. 2005). A bona fide dispute regarding ownership of property that is the subject of a foreign bankruptcy case may be heard in a U.S. court despite principles of comity, because ownership must be determined before distribution of the property can be addressed in the foreign court (the Koreag comity exception). Because bona fide dispute existed regarding ownership of funds in a collection account, the district court properly dismissed the creditor’s U.S. litigation to determine ownership, in deference to the debtor’s pending bankruptcy case in Mexico.
Dairy Mart Convenience Stores, Inc. v.
Stores, Inc.), 411 F.3d 367 (2d Cir. 2005). Eleventh Amendment immunity was not implicated by the tolling, pursuant to 11 U.S.C. § 108, of the debtor’s deadline for filing an application for reimbursement from the State of Kentucky for environmental cleanup costs.
Ex parte Young entitled debtor to injunctive relief against state agents to compel them to accept the application as timely filed, because the injunction did not directly cause disbursement of state funds.
Sovereign Bank v. Schwab (In re Kirby), 414 F.3d 450 (3d Cir. 2005). Rent was not property= of the estate because creditor had foreclosed, taken title to the rental properties and notified tenants that it would begin directly collecting rent pre-petition. That a state court had appointed the creditor as receiver of the properties as part of the foreclosure did not change the analysis because § 543 requires only the turnover of property that belongs to the debtor; here the rents belonged to the creditor.
Joubert v. ABN AMRO Mortgage Group, Inc. (In re Joubert), 411 F.3d 452 (3d Cir. 2005). Neither § 105(a) nor § 506(b) of the Bankruptcy Code entitled debtor to private right of action for secured creditor’s allegedly improper assertion of postpetition attorney’s fees.
the trustee stood in the shoes of the victimized creditors, not the wrongdoing debtor.
claim when debtor made subsequent payments on account of the new value, even though trustee did not seek to avoid subsequent payments. Although the statute of limitations had run on avoidance of the subsequent payments, the trustee nonetheless could have avoided the payments, so they are “otherwise unavoidable” under § 547(c)(4)(B). The court also held that § 547(b)(5) refers to state law to determine whether a creditor was paid out of the creditor’s collateral and, thus, contains no “tracing” requirement unless one exists in state law.
Baker Hughes Oilfield Operations, Inc. v. Cage (In re Ramba, Inc.), No. 04-20807, 2005 WL 1581076 (5th Cir. July 7, 2005). Payment to a petitioning creditor in an involuntary bankruptcy case to obtain an agreed dismissal of the case was an avoidable preference when, two months later, debtor filed a voluntary Chapter 7. Dismissal of the involuntary case was not a recognized category of new value under § 547(a)(2).
Jethroe v. Omnova Solutions, Inc., 412 F.3d 598 (5th Cir. 2005). Debtor was judicially stopped to pursue Title VII claim against former employer because she failed to mention the claim in her previous Chapter 13 case. The judicial estoppel requirement that the omission not be inadvertent was satisfied because she knew of the claim. Debtor’s assertion that the omission was an innocent error was irrelevant.
Cadle Co. v. Pratt (In re Pratt), 411 F.3d 561 (5th Cir. 2005). Bankruptcy court did not err in overruling creditor’s objections to discharge when it found insufficient evidence that the debtor’s failure to disclose assets was the result of fraudulent intent.
Bank of Montreal v. American HomePatient, Inc. (In re American HomePatient, Inc.), 414 F.3d 614 (6th Cir. 2005). Damages for breach of executory stock purchase contract were properly calculated as of the bankruptcy petition date pursuant to §§ 365(g)(1) and 502(g). Plain language of § 502(g) that the claim be “determined” as if it had arisen prepetition defeated creditor’s argument that claim could arise prepetition but be calculated postpetition.
Made in Detroit, Inc. v. Official Comm. of Unsecured Creditors (In re Made in Detroit, Inc.), 414 F.3d 576 (6th Cir. 2005). Debtor’s appeal of confirmation of creditor’s liquidating plan was moot because stay pending appeal was denied and debtor’s property was sold to a good faith purchaser. A finding that a purchaser did not take in good faith requires proof of the purchaser’s fraud or collusion or an attempt by the purchaser to take grossly unfair advantage of other bidders. No such proof existed in this case.
Ruehle v. Educational Credit Mgmt. Corp. (In re Ruehle), 412 F.3d 679 (6th Cir. 2005).
(6th Cir. 2005). The debtor did not establish an undue hardship that would allow discharge of student loans. The debtor did not prove that her current lack of income would continue long-term; her evidence of physical and psychological problems was unaccompanied by any evidence that these problems prevented her from working or that these problems would persist. The debtor had not made a good faith effort to repay the loans; she had not applied for an Income Contingent Repayment Plan and, in almost 20 years, she had repaid only 5% of the amount owed while earning more than $27,000 in some years.
(4) at the end of the “lease” the creditor’s interest in the property would terminate and the debtor would receive its full interest in the property without additional payment; and (5) if the debtor prepays, the creditor’s interest in the property would terminate and the debtor would receive its full interest in the property.
Belda v. Marshall (In re Belda), No. 04- 3820, 2005 WL 1743791 (7th Cir. July 26, 2005). An appeal to determine the validity of a Chapter 13 plan was moot. While the appeal to the circuit court was pending, the bankruptcy court dismissed the case because the debtor was in substantial default on his required payments and there was no replacement plan before the bankruptcy court.
In re UAL Corp., 411 F.3d 818 (7th Cir. 2005). United’s unilateral mistake in miscalculating amounts owed on aircraft leases, leading to a misinformed decision to retain the leases, constituted “excusable neglect” justifying relief pursuant to Rule 60(b).
In re UAL Corp., 412 F.3d 775 (7th Cir. 2005).
Bankruptcy court’s injunction against sale of debtor’s stock by Employee Stock Ownership Plan should have provided stockholders adequate protection of their interests or required debtor to post a bond against lossin stock value. No party requested this security, and none was provided. When the Internal Revenue Service changed the rules governing ESOPs and the debtor terminated the ESOP, the ESOP trustee distributed the ESOP’s shares to the stockholders, who then became entitled to sell the shares. On appeal, the trustee of the terminated ESOP sought damages on behalf of the stockholders for the loss in stock value between the date of the injunction and the date of the distribution of the shares. The court held that the appeal was moot based on the dissolution of the ESOP and held that the trustee could not recover damages in the absence of an injunction bond.
2005). Debtor’s prepetition attorney seeking to have fee owed for legal services held nondischargeable under § 523(a)(2)(A) failed to show that his reliance on the debtor’s false statements was justifiable. Debtor had promised not to request discharge of the debt, and the attorney claimed that he provided services based on this promise. In light of the attorney’s knowledge and expertise, the attorney failed to prove that he could justifiably rely on this promise. Moreover, the attorney failed to prove that he provided anyof his services after the promise.
502 is ambiguous as to the application of security deposits, yet Congress explicitly embraced Oldden in the legislative history. Pilate v. Burrell (In re Burrell), 415 F.3d 994 (9th Cir. 2005). A creditor’s appeal of a dischargeability judgment became moot when the bankruptcy trustee obtained a separate determination of the debt’s nondischargeability on other grounds.
Scott v. United States Trustee (In re Doser), 412 F.3d 1056 (9th Cir. 2005). Document preparer franchisee engaged in deceptive practice in violation of 11 U.S.C. § 110 by advertising the availability of an attorney who was not authorized to render legal advice and by offering printed booklets explaining bankruptcy law erroneously. The court did not reach the question whether the franchisee engaged in the unauthorized practice of law. Court rejected multiple constitutional challenges to § 110.
Cossu), 410 F.3d 591 (9th Cir. 2005). The debtor’s undisclosed moonlighting resulted in indemnification obligation to former employer that was nondischargeable under § 523(a)(2)(A).
Muegler v. Bening, 413 F.3d 980 (9th Cir. 2005). Prebankruptcy determination in federal district court that debtor committed intentional fraud under Missouri law collaterally estops debtor from re-litigating fraud in § 523(a)(2) proceeding.
(10th Cir. 2005). Bankruptcy court properly determined that the failure to comply with the deadline for the filing of a notice of appeal due to the press of other business was not excusable neglect and, thus, properly denied Rule 8002(c) motion for extension of time.
Jaurdon v. Cricket Commc’ns., Inc., 412 F.3d 11567 (10th Cir. 2005). Plaintiff ’s race discrimination and retaliation claim against Chapter 11 debtor was discharged upon confirmation of plan.
Alderete v. Educational Credit Mgmt. Corp.
(In re Alderete), 412 F.3d 1200 (10th Cir. 2005). Debtors did not establish undue hardship that would allow discharge of student loans, and bankruptcy court does not have equitable power to partially discharge student loans in the absence of undue hardship.

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