CLLA Bankruptcy Section Newsletter

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James Carville presents a timely and provocative view of Washington politics, spiced with his own unique brand of optimism and humor, just weeks prior to the Presidential elections.

James Carville, known around the world as a presidential political pundit for his shoot-from-the-hip style, will be the keynote speaker at the 16th Annual Commercial Law League of America Breakfast to be held on October 11, 2004 at the 78th Annual Meeting of the National Conference of Bankruptcy Judges. This program is presented through the generous support of The Garden City Group, Inc.

Please join us for The Honorable Frank W. Koger Memorial Current Developments in Hot & Emerging Areas of Bankruptcy Program. This program is consistently rated as one of the premier educational offerings at the National Conference of Bankruptcy Judges. Topics for 2004 include: A Look at In Re Hood, Current Issues in Consumer Credit and Financing Transactions, 2003 Supreme Court Case Review, Non-Bankruptcy Alternatives and Electronic Discovery Issues.

This program is presented through the generous support of LoisLaw, the provider of fast, accurate and affordable online legal research.

Other sponsors include Michael Fox International, the CLLA Bankrutpcy Section and CLLA Fund for Public Education.

Click here for a full list of topics and speakers.

Sua Sponte

Case Analysis

Case Law Update

Authority of District Court vs. Federal Energy Regulatory Commission. Court held a district court may authorize the rejection of an executory contract for the purchase of electricity as part of a bankruptcy reorganization. Congress did not grant the Federal Energy Regulatory Commission exclusive jurisdiction over these contracts. Matter of Mirant Corp., 2004 U.S. App. LEXIS 16108 (5th Cir. Aug. 4, 2004).

Sua Sponte

Newport, Rhode Island. Much of the time which I intended to devote to relaxing was instead spent on matters that would just not agree to be placed on hold to accommodate my schedule. Nevertheless, memories of our summer convention are already etched in my memory, none finer than the evening Mary Whitmer, a former chair of our Section, assumed the League’s presidency. This was truly both a momentous and wonderful occasion in the history of the Commercial Law League, and while Mary may be the League’s first female president, many will undoubtedly follow, several of whom can be found amongst our present ranks. Our entire section extends its sincerest congratulations to Mary, and we look forward to working with her during the upcoming year.

While summer now seems to be speeding to a close, perhaps you still find yourself lulled by the heat-induced malaise which the season seems to bring upon many of us each year. As this is likely the case for many of us, and as our minds relax ever so slightly, perhaps now is a good time to reflect briefly on two characteristics which undoubtedly make our practice more enjoyable, but which all too often are found lacking: civility and ethics.

Earlier I mentioned that I spent a good portion of this summer’s convention dealing with matters that simply could not wait for me to return to the office. While I have no problem mixing work with pleasure, especially while at a business conference, it is particularly odious to do so when all of the parties to a particular matter are constantly engaged in cantankerous wrangling, mixed with an unhealthy dose of mistrust and suspicion. While we are all charged with the duty of zealously advocating our clients’ interests, there is no reason we cannot do so in a collegial and cordial, yet professional, way. The work we do is stressful enough that representing the interests of our clients in an atmosphere contaminated by zealotry that goes beyond the bounds of the law, a lack of trust and the need for one-upmanship can at times cause us to question why we chose our particular line of work. Indeed, as Law.com reported just this past week, one judge became so exasperated with the attorneys in a case that he included the following in an order:

Our community of bankruptcy practitioners, although it at times stretches across the country, is comprised primarily of local bars. As such, many of us will continue to run across each other on different sides of a matter for many years to come. Today’s opposing counsel could be the Trustee hiring you to represent him or her tomorrow. Tomorrow’s referral source could be the lawyer or party you treated decently today. It would therefore seem that our professional lives would be far more enjoyable, not to mention potentially more lucrative, were we to always remember that upholding our ethical duties is not mutually exclusive from the practice of treating our fellow practitioners with the dignity, decency and respect with which we all wish to be treated.

While I am not naive enough to believe that all lawyers can put down their verbal daggers and permanently replace them with olive branches, the practice of law would become more pleasant, not to mention more respected in the public’s eye, were this to occur to at least a small degree.

The Bankruptcy Section of the Commercial Law League will continue to do its part toward achieving these and related goals. At November’s conference in New York, we will once again offer what promises to be an intriguing panel on ethics along the lines of last year’s highly successful program. This year’s panel, for which we have Alan Gordon and Cathy Pike to thank, will include Judge Judith Fitzgerald, Howard Brod Bronstein and M. Stephanie Wickouski. As always, it will be proactive and worth your time. Click here for more information and registration form.

Alan I. Nahmias
Plotkin, Rapoport & Nahmias
16633 Ventura Boulevard, Suite 800,
Encino, CA 91436-1836
Phone: 818-995-2555
Fax: 818-907-9261

Case Analysis

Summary: The First Circuit Court of Appeals in Muratore v. Darr, 2004 U.S. App. LEXIS 14836 (1st Cir. July 19, 2004), held that the “Barton doctrine,” which bars suits against receivers in courts other than the court charged with the administration of the estate, also prohibits suits against bankruptcy trustees in federal district courts without the prior permission of the bankruptcy court. The First Circuit also narrowly construed the statutory exception to the Barton doctrine--codified in 28 U.S.C. § 959(a)--by limiting it to acts and transactions of the trustee taken solely in furtherance of the debtor’s business. Thus, actions by the trustee which are part of his statutory obligations as a Chapter 11 trustee, such as liquidating property and filing tax returns, while arguably in furtherance of the debtor’s business, may not serve as the basis for avoiding the requirement that a plaintiff first seek leave of the bankruptcy court before suing a trustee in district court.

Facts: Plaintiff was the controlling shareholder of Columbus Mortgage Company, Inc. (“Columbus”). On February 15, 1991, Columbus filed a Chapter 11 bankruptcy petition. On December 23, 1991, the bankruptcy court granted the U.S. Trustee’s application to employ defendant-appellee, Stephen Darr, as trustee. On July 18, 1996, the bankruptcy court entered an order confirming the Debtor’s Plan of Reorganization. Approximately four years later, the bankruptcy court entered orders granting the trustee’s application for final decree and approving his application for final compensation. Plaintiff filed objections to both of these applications, which the bankruptcy court overruled.

In September 2002, Plaintiff sued the trustee in federal district court. In Count I of his complaint, Plaintiff alleged that the trustee “did not faithfully perform the duties of his office and committed acts of misfeasance and/or malfeasance in the performance of his duties.” Specifically, Plaintiff alleged that the trustee made improper liquidations of the debtor’s property, failed to file tax returns and pay taxes, and allowed the purchase of trust property with illegal funds. In Count II, Plaintiff alleged that the trustee committed abuse of process by committing waste so egregious that his advisors used Chapter 11 protection procedures to put the Plaintiff out of business rather than to assist in reorganizing his business. In Count III, Plaintiff alleged that the trustee was negligent because he breached his duty to protect the assets of the estate and to serve the estate with diligence. In Count IV, Plaintiff alleged that the purchase of certain trust property was financed either directly or indirectly through funds obtained from the illegal interests and enterprises of a notorious crime family, in violation of federal criminal statutes.

Plaintiff did not obtain leave of the bankruptcy court prior to commencing the action against the trustee in federal district court. Citing Plaintiff’s failure to obtain such authority, the trustee moved to dismiss the action for lack of subject matter jurisdiction. The district court granted the motion, and entered an order dismissing the lawsuit.

Discussion: On appeal, the First Circuit considered whether the district court lacked subject matter jurisdiction to hear the suit against the trustee because of the plaintiff’s failure to obtain leave from the bankruptcy court to pursue that action in federal district court. In Barton v. Barbour, 104 U.S. 126 (1881), the Supreme Court declared that the common law barred suits against receivers in courts other than the court charged with the administration of the estate. Although Barton involved a receiver in state court, the First Circuit noted that other Circuit courts have extended the Barton doctrine to lawsuits against bankruptcy trustees. See Carter v. Rodgers, 220 F.3d 1249, 1252 (11 th Cir. 2000). The First Circuit did not question the soundness of that doctrine or its rationale. Rather, the main issue presented by the instant case was whether the lawsuit against the trustee could nonetheless be maintained in federal district court pursuant to 28 U.S.C. § 959(a).

Section 959(a) provides for a limited exception to the Barton doctrine, permitting suits against trustees, receivers, or managers of any property, without leave of the court appointing them, with respect to any of their “acts or transactions in carrying on business connected with such property.” Therefore, the First Circuit was required to ascertain whether the Plaintiff’s claims related to the trustee’s “acts or transactions in carrying on business connected with” the Columbus estate such that the lawsuit could be heard in district court.

The First Circuit observed that there was very little case law exploring the parameters of the Section 959(a) exception, but that courts in other jurisdictions have interpreted the phrase “acts or transactions in carrying on business connected with” the bankruptcy estate to mean acts or transactions in conducting the debtor’s business in the ordinary sense of the word or in pursuing that business as an operating enterprise. See, e.g., Melvin v. Klein, 49 Misc.2d 24, 266 N.Y.S.2d 533, 536-37 (N.Y. Spec. Term 1965); Vass v. Conron Bros., 59 F.2d 969, 971 (2d Cir. 1932). As interpreted by these courts, Section 959(a) “is intended to ‘permit actions redressing torts committed in furtherance of the debtor’s business, such as the common situation of a negligence claim in a slip and fall case where a bankruptcy trustee, for example, conducted a retail store.’” Carter, 220 F.3d at 971 (quoting Lebovitz v. Scheffel, 101 F.3d 272, 296 (2d Cir. 1996)). On the other hand, courts have concluded that the Section 959(a) exception does not apply to suits against trustees for administering or liquidating the bankruptcy estate. Thus, merely holding and collecting estate assets, and taking steps for the care and preservation of the property, do not constitute “carrying on business.” See Vass, 59 F.2d at 971; Austrian v. Williams, 216 F.2d 278, 285 (2d Cir. 1954); In re Kalb & Berger Mfg. Co., 165 F. 895-896-97 (2d Cir. 1908). Likewise, actions taken in the mere continuous administration of property under order of the court do not constitute an “act” or “transaction” in carrying on business connected with the estate. See Field v. Kansas City Refining Co., 9 F.2d 213, 216 (8 th Cir. 1925); In re DeLorean Motor Co., 991 F.2d 1236, 1241 (6 th Cir. 1993).

Applying this narrow definition, the First Circuit concluded that the Section 959(a) exception did not apply because the allegations of the complaint concerned the trustee’s actions in the fulfillment or non-fulfillment of his fiduciary responsibilities as trustee, as opposed to acts or transactions in the furtherance of the debtor’s business. The actions at issue in the complaint, such as the accounting for and sale of real property, the filing of tax returns, and the payment of taxes, were among the trustee’s statutory responsibilities and powers as a Chapter 11 trustee. See 11 U.S.C. §§ 363 & 1106. Since the Plaintiff based his complaint on the trustee’s alleged misconduct in liquidating and administering the estate’s property--which are chief among his statutory responsibilities as a Chapter 11 trustee--and not on any tortious acts committed in furtherance of the debtor’s real estate business, Section 959(a) did not apply. Accordingly, the First Circuit affirmed the lower court’s dismissal of the lawsuit for lack of subject matter jurisdiction.

Comments: As the foregoing case reveals, the phrase “carrying on business” contained within 28 U.S.C. § 959(a) is interpreted narrowly by the federal courts. Therefore, a suit against a bankruptcy trustee in federal district court will be viable without leave of court only if it relates to the actions of a trustee committed in furtherance of the debtor’s business, as opposed to the mere discharge of his fiduciary obligations under Chapter 11. The “carrying on business” exception is intended to permit actions redressing torts committed in furtherance of the debtor's business, such as a common negligence claim.

Ivan J. Reich
Daniel L. Wallach
Becker & Poliakoff, P.A.
3111 Stirling Road
Fort Lauderdale, Florida 33312
(954) 987-7550

Case Law Update

Settlement of All Unsecured Creditors Did Not Extinguish Bankruptcy Estate as a Legal Entity Nor Administrative Claims. Court held that the “bankruptcy ‘estate’ is not synonymous with the concept of a pool of assets to be gathered for the sole benefit of unsecured creditors.” Even though the unsecured creditors settled all claims against the estate on the eve of trial, the court held it proper for the lower court to award trustee’s and attorneys’ fees. The fact that unsecured creditors settle on the eve of trial does not extinguish the bankruptcy estate as a legal entity, nor does it extinguish other claims on the assets of the estate, such as administrative claims. Stalnaker v. DLC, 2004 U.S. App. LEXIS 15168 (8th Cir. July 22, 2004).

Consensual and Nonconsensual Liens Treated the Same Under § 506(d). Court held that the decision of the Supreme Court in Dewsnup v. Timm, 502 U.S. 410 (1992) prevents the "stripping off" of an allowed, nonconsensual lien by a Chapter 7 debtor pursuant to § 506 where the underlying claim is secured in the ordinary sense under state law in that it is backed up by a security interest in the property, but the value of the property is insufficient to cover the claim. Court held that consensual and nonconsensual liens should be treated the same under § 506(d) and thus, an allowed, judicial (nonconsensual) lien may not be voided under § 506(d) even where it appears that there is no equity in the debtor’s property to which the lien is attached with which to cover the underlying claim. Boring v. Promistar Bank (In re Boring), 2004 U.S. Dist. LEXIS 15198 (W.D. Pa. Aug. 5, 2004).

Substantial Compliance not Sufficient to Satisfy Rule 3001(c). While substantial compliance with Rule 3001(a) is sufficient, it is not sufficient to satisfy 3001(c). Under Rule 3001(c) only a claim that was “executed and filed in accordance with [the] rules shall constitute prima facie evidence of the validity and amount of the claim.” However, upon failure to comply with Rule 3001(c), creditor should be allowed to amend his proof of claim to comply with the requirements of the Rule, provided that other creditors would not be harmed by the belated completion of the filing. In re Blue, 2004 U.S. Dist. LEXIS 14771 (N.D. Ill. July 30, 2004).

Subsequent New Value Defense Does Not Require “New Value” Advanced Remain Unpaid. Court held that the bankruptcy court erred in rejecting creditor’s § 547(c)(4) subsequent new value defense because the “new value” was repaid. Requiring that the new value remain unpaid would discourage creditors from having any dealings with a financially troubled debtor. Furthermore, such a rule is antithetical to the policy of the bankruptcy code. Chrysler Credit Corp. v. Hall, 2004 U.S. Dist. LEXIS 15334 (E.D. Va. July 20, 2004).

Law In Force At Time of Discharge Governs. Court held that a petition in bankruptcy is merely an application for discharge and “prior to receiving a discharge, a debtor has no ‘vested right in having the law remain as it was at the time he filed his petition.’” Determinations of whether or not a debtor is entitled to a discharge in bankruptcy of any given debt are governed by the law in force at the time the judge passes on the question of the discharge of that debt. In re Gibbons, 2004 U.S. Dist. LEXIS 13275 (S.D.N.Y. July 16, 2004).

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

Washington Hot News

Report Finds No Actionable IRS Fair Debt Collection Practices Violations in 2003

According to its July 29th report, the Treasury Inspector General for Tax Administration’s review of administrative and civil actions related to Fair Debt Collection Practices Act, specifically, violations of tax code Section 6304, found none of the 55 "possible" cases resulted in a reportable administrative action (no monetary settlements by the Government) against an Internal Revenue Service employee.

The IRS Restructuring and Reform Act of 1998 requires TIGTA to include in its semiannual reports to Congress information on administrative/civil actions related to violations of fair debt collection practices.

The report, Fair Tax Collection Practices Did Not Result in Administrative or Civil Action (2004-40-143), is available here .