| December 2005 issue: Katrina Relief Update The CLLA would like to thank its membership for its generosity. Members contributed over $17,000 towards Katrina Hurricane Relief efforts being undertaken by the Red Cross. Thank you! Washington Hot News Attorneys Not Covered by Gramm-Leach-Bliley Act (Dec 29) The Federal Trade Commission exceeded its statutory authority by attempting to regulate attorneys in a 2000 privacy regulation issued under the Gramm-Leach-Bliley Act, the U.S. Court of Appeals for the District of Columbia Circuit said in a Dec. 6 decision (American Bar Association v. Federal Trade Commission, D.C. Cir., No. 04-5257, 12/6/05). Your Name Here! The Bankruptcy Section Newsletter Committee is looking for volunteers to write a Case Analysis for an upcoming edition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although you can use your discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions -- especially those interpreting BAPCPA's amendments to the Code.. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive here. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. Changes to your e-mail address and all other comments can be sent to sjolie@clla.org CLLA 70 East Lake Street, Suite 630 Phone: 312-781-2000 Newsletter design by: |
If you are having trouble navigating through the newsletter, the online version can be found here: We are very sorry to see Sarah Jolie leave us after many, many years of dedicated, brilliant service, but overjoyed to see her pursuing her dream of continuing her family's company. Click here to read messages from those who were blessed to have worked closely with her throughout the years. Sua Sponte Cathy Pike, Chair The New York meeting was an exciting and education-filled event. The educational programs of the Bankruptcy Section were very well attended, and featured relevant and lively discussions of issues regarding forum shopping and how to get one's case out of bankruptcy court. Case AnalysisPaige E. Barr EOP-Colonnade of Dallas v. Faulkner (In re Stonebridge Technologies, Inc.) Summary: In EOP-Colonnade of Dallas v. Faulkner (In re Stonebridge Technologies, Inc.), 2005 U.S. App. LEXIS 24024 (5th Cir. 2005), the Court held that the damages cap of 11 U.S.C. § 502(b)(6) does not apply to limit a beneficiary's entitlement to the proceeds of a letter of credit unless and until the lessor makes a claim against the estate. Case Law Update Paula Lucas Lack of excusable neglect is ground for dismissal of appeal. Debtor sought discharge of federal income tax liabilities. The bankruptcy court found the debt to be nondischargeable. Debtor appealed but failed to file a timely designation of the record and a statement of issues to be presented as required by Rule 8006. The district court found no proof of “excusable neglect," dismissed the appeal and denied motion for reconsideration. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteThe New York meeting was an exciting and education-filled event. The educational programs of the Bankruptcy Section were very well attended, and featured relevant and lively discussions of issues regarding forum shopping and how to get one's case out of bankruptcy court. The Section members enjoyed seeing old friends and making new ones, and attending the meeting was both time and money well spent. Many committee meetings occurred, and much was accomplished. The Executive Council discussed in depth the Strategic Plan for the Bankruptcy Section, and committees were charged with the task of developing action plans to implement the Strategic Plan. In order to achieve the goals established in the Strategic Plan, meetings of the various committees are occurring on a monthly basis. The Education Committee, co-chaired by WANDA BORGES and FRANK BUCKLEY, is putting the finishing touches on the educational programs for the 2006 Midwest District meeting in Chicago. Please make plans to attend the Chicago meeting, which will educate you on several interesting topics, including Assignments for the Benefit of Creditors, and Seeking Emergency Relief from the Bankruptcy Court. The outstanding panel of speakers which are scheduled to speak on these issues is not to be missed! The Marketing Committee, chaired by BRIAN BEHAR, is working diligently to help the Bankruptcy Section realize its goal of increasing membership and membership benefits. Toward that end, the Marketing Committee formed several sub-committees to focus on key aspects of member benefits, including a pictorial roster of Bankruptcy Section members and additional marketing opportunities for Bankruptcy Section members at regional meetings. The Legislative Committee of Bankruptcy Section is ending 2005 with a flurry of activity, which is indicative of the busy year which it has experienced to date. The Legislative Committee, chaired by PETER CALIFANO and vice-chaired by CATHY VANCE, has formed a subcommittee which is preparing a technical corrections paper on the new rules and forms. It is anticipated that the technical corrections paper will be submitted to Congress in early 2006. In addition, the Board of Governors has been presented with two proposals by the Bankruptcy Section. One proposal involves the Commercial Law League of America's joining in a constitutional challenge to the Bankruptcy Abuse Prevention and Consumer Protection Act, to the extent it seeks to limit legal advice which can be given to a potential debtor in bankruptcy. If the proposal is approved by the Board of Governors, BILL SCHORLING will lead the charge on the constitutional challenge by drafting a paper on the Commercial Law League of America's position. The other issue currently before the Board of Governors relates to pending legislation regarding the requirement of surcharging employers for termination of employee pension plans, which surcharge will benefit the Pension Benefit Guaranty Corporation. PETER CALIFANO and PAULA LUCAS have volunteered to develop a position paper to be submitted to Congress, in the event the Board of Governors approves of such action. Cathy S. Pike Phone: 502-589-2200 Case AnalysisEOP-Colonnade of Dallas v. Faulkner (In re Stonebridge Technologies, Inc.) Summary: In EOP-Colonnade of Dallas v. Faulkner (In re Stonebridge Technologies, Inc.), 2005 U.S. App. LEXIS 24024 (5th Cir. 2005), the Court held that the damages cap of 11 U.S.C. § 502(b)(6) does not apply to limit a beneficiary's entitlement to the proceeds of a letter of credit unless and until the lessor makes a claim against the estate. Facts: The trustee (“Trustee") of the liquidating trust established under the confirmed Chapter 11 plan of Stonebridge Technologies, Inc. (“Stonebridge") brought an adversary action, as lessee, against EOP-Colonnade of Dallas Limited Partnership (“Lessor" or “EOP") in connection with the Lessor's draw on a letter of credit that was provided as security for the debtor's commercial lease obligation to the lessor. The terms of the lease required the lessee to provide a security deposit composed of cash and a letter of credit. Stonebridge filed for protection under Chapter 11 of the Bankruptcy Code on September 6, 2001. As of the Stonebridge's petition date, Stonebridge owed Lessor for miscellaneous charges and expenses and rent for the month in which it filed bankruptcy. On October 23, 2001, Stonebridge and EOP announced an agreement that the lease would be rejected no earlier than October 1 and no later than October 23, regardless of when the court entered its final order approving the rejection. Prior to the rejection announcement, EOP initiated a draw request to the bank under the letter of credit. The bank honored the letter of credit on October 30 and issued a check to EOP for the full amount of the letter of credit. The court entered an order approving the rejection of the lease on November 8 under which EOP was allowed an administrative post-petition rent claim. EOP never filed a proof of claim for its actual lease rejection damages. Thereafter the Bank sought relief from the automatic stay to institute an action for reimbursement for EOP's draw on the letter of credit. The Trustee and the Bank reached an agreement on the matter resulting in the Bank assigning its claims against EOP for the alleged wrongful withdrawal to the Trustee. Thereafter the Trustee instituted this adversary proceeding alleging, inter alia, that EOP made negligent misrepresentations to the Bank by prematurely drawing on the letter of credit and retaining an amount in excess of the § 502(b)(6) cap. The bankruptcy court found that EOP prematurely drew on the letter of credit and retained an amount in excess of the § 502(b)(6) cap. Therefore, it breached the lease and made negligent misrepresentations to the Bank that the funds were due and owing. The court reasoned that because the letter of credit was part of the security deposit, it was subject to the § 502(b)(6) cap. The court awarded the estate the difference between what EOP would have been entitled to claim under § 502(b)(6) (less a cash security deposit) and the amount the Bank collected on the certificate of deposit. EOP appealed to the district court, and the district court affirmed the bankruptcy court's ruling. Analysis: The Fifth Circuit Court of Appeals overturned the lower court's ruling. It found that the § 502(b)(6) cap only applies when a claim of the lessor is made against the estate. EOP never filed a proof of claim and therefore it never made a claim against the estate. The court rejected Stonebridge's argument that the letter of credit was part of the security deposit under the lease and therefore should fall under the §502(b)(6) damages cap. The Court held Stonebridge's argument “converts § 502(b)(6) into a self-effectuating avoiding power that would allow the trustee to bring an adversary proceeding against a lessor who exercises his rights under a letter of credit." Where the Bankruptcy Code intended to create an avoidance power, it did so expressly. No express intent is found in § 502(b)(6) and one cannot be implied. The plain language of § 502(b)(6) allows only the disallowance of the filed claim to the extent that is exceeds the statutory cap, it does not provide for the power of avoidance. Comment: Following this decision, landlords should consider the effect and benefit of not filing a proof of claim if they have a letter of credit securing lease obligations. However, as the issue of whether a letter of credit can be capped within § 502(b)(6) remains unresolved, landlords should be wary of relying on letters of credit to provide the full extent of their bargained for protection in the lessees' bankruptcy. Paige E. Barr Case Law UpdateLack of excusable neglect is ground for dismissal of appeal. Debtor sought discharge of federal income tax liabilities. The bankruptcy court found the debt to be nondischargeable. Debtor appealed but failed to file a timely designation of the record and a statement of issues to be presented as required by Rule 8006. The district court found no proof of “excusable neglect," dismissed the appeal and denied motion for reconsideration. Court of appeals found no abuse of discretion in district court's dismissal of appeal and stated that, “If a party fails to file a Designation and Statement on time, and an untimely filing is disallowed because no excusable neglect has been shown, the appeal has to be at an end." Lynch v. United States (In re Lynch) 2005 U.S. App. LEXIS 25608 (2nd Cir. Nov. 28, 2005). Attorney's fees denied where attorney's actions are adverse to debtor client. Secured creditor not obligated to keep track of the domiciles of its debtors. Creditor extended auto financing to debtor filing in the jurisdiction where the debtor resided. Shortly after, debtor moved to another jurisdiction, neither creditor nor debtor filed the lien in the new jurisdiction. Several years later debtor filed petition for Chapter 7 relief. The trustee challenged the validity of the lien arguing that the creditor's failure to re-perfect its security interest in debtor's jurisdiction effectively voided the lien. Court held there to be no duty to re-perfect simply because a debtor moves. Resop v. Primus Fin. Servs. (In reBaker) 2005 U.S. Dist. LEXIS 26543 (7th Cir. Dec. 6, 2005). No post-petition fees without court approval. Attorney does not violate the Bankruptcy Code or rules of professional conduct where attorney uses $2,000 deposit paid up front by each client rather than placing the deposit in trust fund account. However, charges and payments for services post-petition, without order of the court, are in violation of the Code and rules of conduct. Barron v. Countryman, 2005 U.S. App. LEXIS 26640 (5th Cir. Dec. 7, 2005). Creditor may specify post-petition loan uses. Trustee negotiated agreements with principal lender/creditor for continued financing. The court found the post-petition financing to have been negotiated in good faith with any credit extended to have been extended in good faith in an arrangement that was fair and reasonable and would increase the overall estate value. Therefore that post petition loans may specify or limit the manner in which funds are spent. Weinstein Eisen & Weiss LLP v. Gill (In re. Cooper Commons, LLC) 2005 U.S. App. LEXIS 26642 (9th Cir. Dec. 7, 2005). Trustee disposition of debtor rights called into question. The trustee determined that the sale of certain contractual rights of debtor was more beneficial to bankruptcy estate than lenders' offer to pay trustee to perform debtor's contractual obligations. Court of appeal affirmed bankruptcy court's approval of trustee's proposed sale, citing legal impossibility of lenders' proposal. Matter of Resource Technology Corp. 2005 U.S. App. 26904 (7th Cir. Dec. 9, 2005). Upfront payments deemed deposits. Debtor business owner agreed to perform work on home for which the homeowner paid up front. Debtor filed for bankruptcy months into the project leaving the work partially completed. Homeowner filed asking the court for secured status. The court found the payment made to be a “deposit" under 11 U.S.C. § 507(a)(6) and granted the homeowner priority status in an amount substantially lower than the work left incomplete. Upon appeal the Ninth Circuit affirmed the BAP holding that congressional intent and the plain meaning of “deposit" under the statute to include upfront payments. Salazar v. McDonald (In re Salazar) 2005 U.S. App. LEXIS 26475 (9th Cir. Dec. 10, 2005). State law tort actions for damages preempted. Creditor filed multiple involuntary bankruptcy petitions against two individuals. All petitions were dismissed. Individuals' daughters filed tort claims against creditor in state court and creditor removed action to bankruptcy court, which held the state law claims to be preempted by § 303(i). Court dismissed claims because daughters had no standing to seek damages for bad faith involuntary petition under § 303(i). Court of Appeals affirmed. Miles v. Okun (In re Miles) 2005 U.S. App. LEXIS 27085 (9th Cir. Dec. 12, 2005). Summary judgment reversed where written agreement misinterpreted. Court reversed summary judgment in adversary proceeding where appellant sought recovery of Medicare overpayments in conjunction with cost reimbursements where the lower court erred as a matter of law, in its interpretation of the written agreement between the principals. Suncrest Healthcare Ctr. LLC v. Omega Healthcare Investors Inc. (In re Raintree) 2005 U.S. App. LEXIS 27273 (9th Cir. Dec. 14, 2005). IRS tax debt is non-dischargeable where debtor's return filed after IRS assessment of liability. Debtor filed tax return years after IRS investigation and liability assessment. Because the return was untimely and determined to be an unreasonable attempt to comply with tax obligations, which were held nondischargeable. United States v. Payne (In re Payne) 2005 U.S. App. LEXIS 27243 (7th Cir. Dec. 14, 2005). Adequate notice required to discharge student loan. Court order discharging student loan debt vacated where debtor failed to provide student loan creditor with adequate notice of attempt to discharge student loan debt under a Chapter 13 filing. Debtor may not obtain “discharge by declaration" via terms of plan, but must initiate adversary proceeding and serve creditor with summons. Whelton v. Educational Credit Management Corp. 2005 U.S. App. LEXIS 27417 (2nd Cir. Dec. 15, 2005). Emotional Distress awards barred. Sovereign Immunity serves as a bar to damages for emotional distress even where the federal government willfully violates the discharge injunction under Bankruptcy Code §. 105(a). Sovereign Immunity is not waived by § 106. United States v. Torres (In re. Torres) 2005 U.S. App. LEXIS 27768 (1st Cir. Dec. 16, 2005). Paula Lucas Phone: 312.781.2000 Washington Hot NewsAttorneys Not Covered by Gramm-Leach-Bliley Act (Dec 29) The Federal Trade Commission exceeded its statutory authority by attempting to regulate attorneys in a 2000 privacy regulation issued under the Gramm-Leach-Bliley Act, the U.S. Court of Appeals for the District of Columbia Circuit said in a Dec. 6 decision (American Bar Association v. Federal Trade Commission, D.C. Cir., No. 04-5257, 12/6/05). "[R]ather simply we cannot hold that Congress has directly and plainly granted the Commission the authority to regulate practicing attorneys as the Commission attempts," court said. The case grew from a request by the American Bar Association and the New York State Bar Association for a declaratory judgment that the FTC exceeded its statutory authority by deciding that attorneys engaged in the practice of law were covered by the Gramm-Leach-Bliley Act. The FTC issued its regulation under the GLB Act, which requires financial institutions to protect the security and confidentiality of customers' "nonpublic personal information". The federal district court agreed with the bar associations, stating Congress did not intend for the statute's privacy provisions to apply to attorneys providing legal services in real estate settlement, tax planning, and tax preparation. The appellate court affirmed. In ruling against the FTC, the court closely questioned the agency's basis in the statute for including attorneys in its regulation. Under Gramm-Leach-Bliley, the FTC has enforcement authority over financial institutions or persons not subject to the jurisdiction of other agencies or authorities under the law, the court said. The law defined "financial institution" as any "institution the business of which is engaging in financial activities as described in section 1843(k) of Title 12," part of the Bank Holding Company Act of 1956. The section provided exceptions to the Act's limiting the ability of bank holding companies to hold interests in nonbanking organizations, for companies engaged in certain activities that were "financial in nature," such as lending, insuring against loss, providing financial or investment advisory services, issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly, and underwriting securities, the court said.
Deficit Reduction Bill Recommends Bankruptcy Fee Increase (Dec. 21) On December 21, the Senate passed S. 1932, the Deficit Reduction Omnibus Reconciliation Act of 2005, by a 51-50 vote, with Vice President Cheney casting the deciding vote. The budget reconciliation measure, however, must return to the House because the Senate did not pass the legislation in a form identical to the House passed version. The Senate failed to overturn a Democratic point of order against the bill that changes the legislation. The bill would restrain the growth of Medicaid, Medicare and student loans. In the conference report for S. 1932, conf report: 109-362, the Deficit Reduction Omnibus Reconciliation Act of 2005 (which, on 12/19/2005, the House agreed to by the Yeas and Nays: 212 – 206), there is a bankruptcy fee increase. CLLA Opposes Pension Termination Surcharge (Dec 9) The Commercial Law League of America (CLLA) submitted a position paper to Congress on December 7, 2005 in agreement with letters recently circulated by the National Bankruptcy Conference (“NBC"), the American Federation of Labor and Congress of Industrial Organizations ("AFL-CIO") and the International Union, United Automobile, Aerospace & Agricultural Implement Workers of America (“UAW") [attached] opposing the pension termination surcharge provision contained in the recently passed S. 1932 Deficit Reduction Omnibus Reconciliation Act of 2005 and in the corresponding provisions now pending in the House in H.R. 4241, entitled Deficit Reduction Act of 2005. While the CLLA acknowledges the legislative attempt to improve the solvency of the Pension Benefit Guaranty Corporation (“PBGC"), the proposed surcharge will have a disastrous impact on debtor-companies attempting to undergo reorganization and thus, also on retirees, employees and creditors. The CLLA urged Congress to consider the possible consequences of this proposal. Under H.R. 4241, a surcharge of $1,250 per defined benefit plan participant for three years will be assessed on companies that terminate their pension plans during the pendency of bankruptcy. The CLLA concluded by urging members of congress to vote no. The position paper and letters from the NBC, AFL-CIO and UAW can be downloaded here. |