Sua Sponte

Louis S. Robin
Fitzgerald, O'Brien, Robin & Shapiro
Email: louis.robin@prodigy.net

As Chair of the Bankruptcy Section, I have found myself with my first crisis. I speak of the decision of Cathy Vance, our Legal Writer and National Education Coordinator, to leave our fold for what is an excellent opportunity to continue her growth and professional development. Although one could construe these words with an element of jest, one cannot exaggerate the effort and contributions that Cathy has provided to the League and the Bankruptcy Section.

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Case Analysis

Paige Barr
DePaul University J.D. Candidate
paigebarr@yahoo.com

Ordinary Contract Damages vs. Nondischargeable Debts

Summary: In Williams v. Intern’l Brotherhood of Electrical Workers (In re Williams), 2003 U.S. App. LEXIS 13579 (5th Cir. July 7, 2003), the Fifth Circuit found that Section 523(a)(6) excepts from discharge debts arising out of a breach of contract where the debt arose out of a willful and malicious injury. The dischargeability of the debts depended on the intentional or certain nature of the injury the debtor inflicted.

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Case Law Update

Paige Barr
DePaul University J.D. Candidate
paigebarr@yahoo.com

Principle of Ratification Applied to Fraud. Trustee did not have standing to sue third parties where the debtor perpetrated the fraud. Under the principle of ratification, the CFO's actions were imputed to the debtor company, and therefore, the defrauded investors rather than the bankruptcy trustee were entitled to pursue the claims arising from the fraud. Imputation applied to bar the trustee, unless at least one decision maker in a management role or amongst the shareholders was innocent and could have stopped the fraud. Although there may have been innocent insiders, the court noted that each so-called independent director was powerless to actually do anything. Breeden v. Kirkpatrick Lockhart LLP (In re The Bennett Funding Group, Inc.), 2003 U.S. App. LEXIS 14154 (2d Cir. July 15, 2003).

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Sua Sponte

As Chair of the Bankruptcy Section, I have found myself with my first crisis. I speak of the decision of Cathy Vance, our Legal Writer and National Education Coordinator, to leave our fold for what is an excellent opportunity to continue her growth and professional development. Although one could construe these words with an element of jest, one cannot exaggerate the effort and contributions that Cathy has provided to the League and the Bankruptcy Section.

In what only seems like yesterday, but was at least five years ago, I remember attending an executive meeting of the Bankruptcy Section (to which everyone is invited), and we were all lamenting the monumental task before us of preparing for the barrage of legislative reports necessary for the League to provide concerning proposed bankruptcy legislation. Up to that point, various League members had performed admirably, but we realized we needed someone on a full time basis.

Just then I remember Professor Ingrid Hillinger suggesting that we contact a recent law school graduate. She had written a "wonderful" article entitled "To Debt Do Us Part" that had been published by the Buffalo Law Review, even though she was a student at Ohio State University College of Law. She, in Ingrid's words, seemed like the perfect candidate.

If one skips to today's date, we can review the accomplishments of this legal scholar. She has written countless legislative memoranda on proposed legislation and the detailed provisions, often on minutes notice. She has prepared the testimony for those who have testified before Congressional committees. She has written various articles for the Bankruptcy Section's Newsletter and the Commercial Law Journal. She has fended telephone calls and conferences at all times of the day and night, and I mean all times because these phone calls have been after midnight and just before daybreak. And she has edited nearly every article and letter that has been drafted by members of the League. I always knew that my written contributions would be edited and corrected by her, giving me the comfort that anything with my name on it would be respected, all while she complimented me and others on our work product, attempting to assure us that she made the most minor of changes (while we all knew better). All this makes me shudder when I think that this article, and future articles of mine, will not have the benefit of her polish.

We all thank her for her dedication, and wish her the best of luck (that she will not need) as she begins a new position at Bill Brandt's Development Specialists, Inc. This issue of the Newsletter contains other memories of League members as well. I hope that we will see Ms. Vance at future League and Section meetings, as her words and opinions will always be a welcome contribution.

With that being said, I urge you all to attend the Eastern Region Meeting in New York meeting from Thursday, November 13, 2003, through, Sunday, November 16, 2003, at the Sheraton New York Hotel & Towers, at 52nd Street and 7th Avenue. Last year's move to mid-town was, at least in my opinion, a success. Although for many different reasons I would prefer to be praising the facilities and site at the prior location, there is something unique about being in the middle of New York City, just a few blocks from Times Square. Last year's educational program was first class, and this year's program will match it, if not exceed it. There will also be various receptions and opportunities to enjoy New York. But most importantly, it gives us an opportunity to continue and renew friendships we all have with our fellow League members. That, I have found, is the true strength of the League and the Bankruptcy Section.

Louis S. Robin
Fitzgerald, O'Brien, Robin & Shapiro
1200 Converse Street
Longmeadow, MA 01106
Phone: 413-567-3131
Fax: 413-565-3131
Email: louis.robin@prodigy.net

We will miss you Cathy!

The Commercial Law League of America and its Bankruptcy Section are losing a true treasure - the energy, talent, expertise, commitment and professionalism given by Cathy Vance during the last five years has been unheralded! From researching proposed legislation, preparing position papers, proposing and planning educational programs and preparing educational and marketing brochures for regional conferences - nothing has escaped Cathy's indelible mark. The League and the Bankruptcy Section have been blessed, and for all that Cathy has done we are most appreciative and grateful. We wish Cathy every success and happiness in her new endeavor with Development Specialists, Inc. - we know that she is going to be a star! We look forward to Cathy's continued and new involvement with the League as an active member of the organization - we know that she has and will continue to provide wonderful and needed insight for the organization in the future. Hats off to Cathy - many thanks and good luck as you go forth!

Judith Greenstone Miller
Jay L. Welford
Jaffe Raitt Heuer & Weiss, PC
Detroit, Michigan

Four years ago, when we were looking for a legislative assistant to help us in our lobbying efforts on Capitol Hill, we never thought we would lucky enough to have Cathy Vance work for us. We looked for help because we were at the end of our ability to respond to the exigencies of Capitol Hill with solely volunteer labor. Cathy was recommended to us by Dean Nancy Rapaport. We could not have asked for a better or more qualified person to help us beat back the bad bankruptcy legislation that has been introduced to the last several sessions of Congress. Cathy helped to put us on the Who’s Who of Prominent Bankruptcy Organizations in Washington. That we are regularly called upon to give our opinion on proposed legislation that impacts on bankruptcy issues is a testament to Cathy’s clear, persuasive prose. Now Cathy is moving up in the world, and we are cheering her on. But we will not replace her easily or perhaps at all. She has been a very special addition to us, and her subtraction makes us less than we are or would have been. Goodbye Cathy, good luck, knock ‘em dead. We are so very sorry to lose you.

Mary K. Whitmer
Vorys, Sater, Seymour and Pease LLP
Cleveland, Ohio

In addition to Cathy's talent and skill there is another aspect that we will all miss in the Section -- her kindness and compassion. I remember when I first began working on the Legislative Committee I was overwhelmed by the volume of research and position papers that had been produced by the Committee. After conference calls, Cathy would often take the additional time to walk me through the issues and made sure I had copies of all the relevant papers and documents to get me "up to speed". She didn't have to do that but she did. And anyone who read Cathy's recent article in the Law Journal understands that Cathy great compassion for the "little guy" in the complex arena of Bankruptcy Reform and has no reservations speaking about it. Cathy has a great heart that will be hard to replace.

Peter Califano
Cooper, White & Cooper, LLP
San Francisco, California

Cathy, as co-chair of the Education Committee and as a member of the Legislative Committee, I will miss your great assistance in identifying and critically analyzing topics of interest to our members. Your observations, written advocacy and succinct comments have made my tasks so much easier and have provided me with substantial help. I will miss your professionalism and guidance but I am delighted to hear that you will continue to be an interested and active League member and I look
forward to seeing you at League events. Best regards.

Alan R. Gordon
Pelino & Lentz, P.C.
Philadelphia, Pennsylvania

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Case Analysis

Ordinary Contract Damages vs. Nondischargeable Debts

Summary: In Williams v. Intern’l Brotherhood of Electrical Workers (In re Williams), 2003 U.S. App. LEXIS 13579 (5th Cir. July 7, 2003), the Fifth Circuit found that Section 523(a)(6) excepts from discharge debts arising out of a breach of contract where the debt arose out of a willful and malicious injury. The dischargeability of the debts depended on the intentional or certain nature of the injury the debtor inflicted.

Facts: Appellant Williams (“Williams”) sought to have an order of discharge entered in his Chapter 7 bankruptcy. Williams, an independent electrical contractor, was the victim of a “salting” scheme by the Appellee-Creditor, International Brotherhood of Electrical Workers Local 520 (“the union”). “Salting” schemes are achieved when Union workers purposefully fail to tell an employer of their union membership when applying for non-union jobs and then demand union-level compensation from the employer. The repercussions of the salting scheme ultimately resulted in Williams being forced, by the economics of the situation, to enter a collective bargaining agreement (“CBA”) with the Union to complete the intended project.

However, Williams experienced subsequent difficulties with the union workers and resorted to hiring non-union electricians to complete the project at hand. Resolution of the dispute was reached through an Agreed Final Judgment and Decree which was approved by the United States District Court for the Western District of Texas. Under the Agreed Judgment, Williams was required to hire electricians for commercial projects solely through the Union.

In violation of the Agreed Judgment, Williams hired non-union electricians to perform two commercial projects. As to the Union’s responsive complaint, the district court found Williams to have willfully and purposefully violated the Agreed Judgment and held him in contempt of court. Williams was ordered to pay restitution for his original breach of the CBA and his ongoing non-compliance with the Agreed Judgment, as well as the Union’s attorneys’ fees for prosecuting the contempt action. A short time after the district court entered its judgment, Williams and his wife filed a petition for relief under Chapter 13, which was later converted to a Chapter 7.

The Union sought to have the amounts owed it excepted from discharge. The United States Bankruptcy Court for the Western District of Texas held that the Union’s unsecured claim representing the restitution ordered for the first CBA violation, the claim for damages resulting from Williams’s violation of the Agreed Judgment, and the attorney’s fees awarded by the district court were all excepted from discharge. The court found that these debts were in the nature of willful and malicious injury. After the district court’s affirmation, Williams appealed to the United States Court of Appeals for the Fifth Circuit.

Discussion: The Court of Appeals for the Fifth Circuit affirmed in part and reversed in part. The court found that the obligation arising from Williams’ knowing breach of collective bargaining agreement in hiring nonunion workers for the project would not be excepted from discharge as debt for debtor's "willful and malicious injury;" but the debt arising from his contempt of court, in disregarding the Agreed Judgment requiring him to abide by terms of collective bargaining agreement and to only hire union labor for projects, was nondischargeable.

The court began its analysis by determining the guidelines for whether a debt arises from a willful and malicious injury, which would then except it from discharge under Section 523(a)(6). Applying the Supreme Court’s holding in Kawaauhau v. Geiger, 523 U.S. 57 (1998), and other Fifth Circuit Opinions, the court found that a “debtor must commit an intentional or substantially certain injury in order to be deprived of a discharge. A debt is not excepted from discharge if the debtor has committed a willful or knowing act.”

In its determination of whether Williams’ debts were dischargeable the court considered the nature of the injury Williams inflicted upon the Union through his actions. Relying on the record, which stated that when Williams hired non-union electricians in violation of the CBA, he was motivated by a desire to complete the project and to save his business, the court found that while Williams’ acts were intentional, they not intended to injure the Union. The court noted that two distinct injuries complained of, deprivation of employment and loss of wages and benefits, were suffered by the individual electricians, not the Union itself, but the electricians were not party to the lawsuit. The Union’s injury to its prestige and ability to uphold its contracts was held to be neither intended by Williams nor was he substantially certain such injury would occur. Thus, the debt arising from Williams’ breach of the CBA was dischargeable.

In contrast, the court found Williams’ violation of the Agreed Judgment to be a willful and malicious injury. The court reasoned that the fact that Williams had promised to abide by the Agreed Judgment and broke that promise to the district court and was sanctioned by the Agreed Judgment and Decree elevated the injury to one that is willful and malicious. The Agreed Judgment clearly and unambiguously informed Williams that the use of non-union employees was forbidden. Williams was aware of this prohibition under the CBA and still proceeded to violate the contract. The court concentrated on the key notion that Williams’ breach of the CBA after the entry of the Agreed Judgment was not simply a failure to honor a contractual obligation; it was a violation of the court’s order. Even if Williams did not intend to injure the Union, the Agreed Judgment made him substantially certain that his acts would inflict injury; therefore, this debt is not exempted from discharge.

Comment: The principle distinction between the dischargeable and nondischargeable debts in the Williams case is the existence of the Agreed Judgment. Otherwise, the debts are identical. The same conduct – violation of the CBA – gave rise to the damages; it was only Williams’ promise to a court of law not to breach the CBA that rendered §523(a)(6) applicable. Moreover, while the court found it decisive that the electricians themselves were not parties to the litigation with respect to the breach of the CBA, their absence appeared to be of no consequence with respect to Williams’ violation of the Agreed Judgment. As a more general matter, the court’s discussion of the electricians’ damages resulting from the violation of the CBA would seem to conflict with Geiger. Although dicta, the court indicated that Williams was substantially certain the injury would occur as a result of his intentional violation of the CBA; thus the debt might not have been dischargeable had the electricians been parties to the proceeding. However, this is the result Geiger forbids because Section 523(a)(6) encompasses only intentional injuries, not intentional acts that result in injury.

Paige Barr
DePaul University J.D. Candidate
200 N. Dearborn St., Apt. 4101
Chicago, IL 60601
(312)782-4428
paigebarr@yahoo.com

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Case Law Update

Principle of Ratification applied to Fraud. Trustee did not have standing to sue third parties where the debtor perpetrated the fraud. Under the principle of ratification, the CFO's actions were imputed to the debtor company, and therefore, the defrauded investors rather than the bankruptcy trustee were entitled to pursue the claims arising from the fraud. Imputation applied to bar the trustee, unless at least one decision maker in a management role or amongst the shareholders was innocent and could have stopped the fraud. Although there may have been innocent insiders, the court noted that each so-called independent director was powerless to actually do anything. Breeden v. Kirkpatrick Lockhart LLP (In re The Bennett Funding Group, Inc.), 2003 U.S. App. LEXIS 14154 (2d Cir. July 15, 2003).

Consent Orders Modifying the Automatic Stay. A consent order between the debtor and an automobile distributor modifying the automatic stay permitted the termination of the dealership relationship between them. The bankruptcy court interpreted the phrase "notice of termination" in the parties' consent order in light of the dealership agreement and determined that the phrase contemplated an actual termination of the dealership relationship after the requisite notice period. Charlie Auto Sales, Inc. v. Mitsubishi Motor Sales (In re Charlie Auto Sales, Inc.), 2003 U.S. App. LEXIS 14355 (1st Cir. July 17, 2003).

Recharacterization of a Debt to Equity. Bankruptcy courts have the authority to recharacterize debts as equity, distinct from equitable subordination, as a valid cause of action. Recharacterization and equitable subordination serve different functions and the extent to which a claim is subordinated under each process may be different. The recharacterization of a debt as equity involves a factual determination as to whether or not the asserted debt is in fact debt or is instead an equity contribution disguised as debt. In comparison, equitable subordination is an equitable remedy applied against a legitimate creditor who has acted inequitably. Thus, bankruptcy courts can utilize recharacterization as a valid action separate from the equitable subordination action. Outboard Marine Corp. v. Quantum Indust. Partners (In re Outboard Marine Corp.), 2003 U.S. Dist. LEXIS 12564 (N.D. Ill. July 21, 2003).

Dischargeability of Student Loans. Eleventh Circuit joins the Second, Third, Fourth, Sixth, Seventh, and Eighth Circuits in holding Brunner test is proper standard for determining “undue hardship” to discharge student loans. Debtor must establish: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans. Hemar Ins. Corp. v. Cox (In re Cox), 2003 U.S. App. LEXIS 14710 (11th Cir. July 23, 2003).

Willful Violation of the Automatic Stay. Debtor's failure to include in its disclosure statement known claims that it had against creditor for its alleged willful violation of automatic stay, in order to minimize its assets so that its creditors would be more willing to compromise their claims, was sufficient to judicially estop debtor from later pursuing such claims, even though, at time disclosure statement was prepared, such claims had not been accepted by court, and though debtor promptly moved to amend its disclosure statement once its omission was discovered. Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. General Motors Corp., 2003 U.S. App. LEXIS 14965 (3d Cir. July 28, 2003).

Purchasers of Delinquent Property Taxes. Acknowledging the considerable confusion the relationship between Illinois property tax collection and bankruptcy law has caused within case law, court held that under bankruptcy law a purchaser of delinquent property taxes is a “creditor” with a “claim” in the property owner’s bankruptcy. Since the purchaser has a right against the debtor’s property, it then has a “claim” against the debtors and is a “creditor” in the debtor’s bankruptcy. In re Commings, 2003 Bankr. LEXIS 87 (Bankr. N.D. Ill. July 31, 2003).

Bifurcation of Secured Creditor’s Claim/Compelling Release of Lien. Because unsecured portion of creditor’s bifurcated claim is in same category as all other unsecured claims, there is no basis for requiring that creditor’s lien remain intact until unsecured component of the creditor’s original claim is paid, it is consistent with the Bankruptcy Code for the debtor’s plan to require the creditor to release its lien upon the debtor’s payment in full of the allowed secured portion of the claim. However, debtor’s Chapter 13 plan must articulate any early lien release treatment in a way that is clear, conspicuous and consistent with the Bankruptcy Code. In re Rheaume, 2003 Bankr. LEXIS 905 (Bankr. D. Vt. Aug. 5, 2003).

Paige Barr
DePaul University J.D. Candidate
200 N. Dearborn St., Apt. 4101
Chicago, IL 60601
(312)782-4428
paigebarr@yahoo.com

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Washington Hot News

August 19, 2003
California Financial Privacy Bill Passes

On August 19th, California lawmakers passed the compromise S.B. 1, the financial privacy bill, through three Assembly committees and on the floors of both the Assembly and Senate in 24 hours, sending it to Governor Davis (D) for his signature just in time to beat the deadline set for a more restrictive ballot initiative.

With Davis signing the bill, which he has indicated he will, California will now have the strictest privacy laws in the country (stricter than the Federal GLB). Privacy advocates, not being satisfied, have indicated they will now focus on Washington, desiring to make S.B. 1 the standard for the country.

S.B. 1 creates a hybrid privacy system requiring opt-in from consumers before institutions could share their information with nonaffiliated third parties, and opt-out for sharing among affiliates. The bill contains an exception allowing affiliate sharing without consumer permission/notification, a "no-opt," if four criteria regarding corporate structure and lines of business are met. By comparison, GLB requires opt-out for nonaffiliated party sharing and allows institutions to share information freely among affiliates.

Passage of the bill was made possible due to recent negotiation, and agreement upon several amendments, including:

• simplify the notice institutions would be required to send to consumers and providing a safe harbor for institutions using the notice specified in the bill;
• restoring language deleted earlier in the year allowing broker/dealers to share information among affiliates;
• in addition to requiring institutions include a self-addressed envelope in their privacy notice mailings to customers, only require pre-paid postage if institutions do not otherwise offer two free ways to respond to the notice; and
• removing the district attorneys authority to enforce the law, leaving it in the hands of the state attorney general.

Despite the lack of opposition to S.B. 1, it is possible that financial institutions may sue to block the law. S.B. 1 would take effect July 1, 2004.

August 19, 2003
Personal bankruptcy filings continue to rise, business filings fall

Bankruptcy filings continued to increase with the 12 month period ending June 30, 2002, showing a 10 percent increase in personal filings (1,613,097 cases filed). Business bankruptcy filings, on the other hand, fell 5.2 percent (37,182 cases filed).

August 15, 2003
District Court Rejects FTC/GLB Regulation of Attorneys

On August 11, a federal district court rejected the FTC's claims that the GLB privacy requirements for financial businesses apply to attorneys. American Bar Association v. Federal Trade Commission, D.D.C., No. 02-1883 (RBW), 8/11/03; New York State Bar Association v. Federal Trade Commission, D.D.C., No. 02-810 (RBW), 8/11/03).

The ABA said the next day it will seek a final judgment invalidating the FTC's interpretation, since the court was ruling on the FTC's motion to dismiss the complaints.

In a 60-page opinion, Judge Reggie B. Walton said, "It does not appear that Congress intended for the GLBA's privacy provisions to apply to attorneys."

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