| January 2008 issue: Your Name Here! The Bankruptcy Section is looking for volunteers to write a Case Analysis for an upcoming addition. 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. CLLA 70 East Lake Street, Suite 630 Phone: 312-781-2000 Newsletter design by: |
Education Opportunities and Sponsorships AvailableThe Section is again calling for member pledges to be used towards the CLLA programming at the National Conference of Bankruptcy Judges - to be held this year on September 25th in Scottsdale, AZ. This is a great way for you as a section member to make a contribution towards this outstanding programming while at the same time highlighting your firm. Sponsorships begin at a base commitment level of thirty-five ($35.00.)
which includes a listing on the morning presentation screensaver.
Sua SponteDeborah K. Ebner My Christmas & New Year's Vacation was horrible Case Law UpdateJoshua Greene Federal Rule of Bankruptcy Procedure 3001 does not impose an additional requirement for a claim to be allowed under Section 502(b). In an action by the Chapter 7 trustee to disallow a claim because supporting documentation was not attached to the proof of claim form, the Bankruptcy Appellate Panel reversed the bankruptcy court decision to disallow the claim. The BAP took the view that Section 502(b) provides the exclusive basis for disallowance of claims, thereby rejecting those decisions by other courts that hold that Federal Rule of Bankruptcy Procedure 3001 adds additional requirements that must be met in order for a claim to be approved. According to the BAP, FRBP 3001 does not modify those substantive rights set forth in Section 502 of the Bankruptcy Code. B-Line v. Kirland (In re Kirkland), 10th Cir. B.A.P., No. NM-07-021, 12/21/07. Case AnalysisPaige E. Barr Summary: Joining the other courts that have weighed in on interpreting the Lamie retainer exception, the Tenth Circuit held that Chapter 7 debtor’s attorney can not evade prohibition on compensation for his post petition services from property of the estate by relying on the “retainer” exception recognized by the Supreme Court in Lamie; and any portion of retainers that attorney had not earned by his prepetition services was still property of debtors and was included in their Chapter 7 estate. Redmond v. Clark (In re Wagers), 2007 WL 4328722 (10th Cir. Dec. 12, 2007). NCBJ Sponsorship OpportunitiesThe Commercial Law League of America and its bankruptcy section have sponsorship opportunities available at the National Conference of Bankruptcy Judges ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteMy Christmas & New Year's Vacation was horrible My phone rang in early December. It was a friend from the bankruptcy section of the League who had a business emergency and needed an immediate assist. She explained that either an Assignment for the Benefit of Creditors or a Chapter 11 was probably going to be filed in Chicago very soon, and if this happened, her client might be interested in buying the business assets. My friend did not practice in the Chicago Courts, was not familiar with Illinois Assignments, and needed me to drop everything that I was doing to help her with due diligence and a possible drafting of an acceptable offer to purchase assets. I rolled up my sleeves and started the work. Just as she suspected, an Assignment was made a few days before Christmas and shortly thereafter we tendered an offer to purchase. I closed the purchase transaction
for my new client a few days ago. In the meantime, I spent 115 hours working
feverishly on the engagement. I was able to go to Jersey Boys with my family
and was able to spend Christmas Day with family and friends, but I was not
able to get to the Darwin Exhibit at the Museum of Science and Industry, and
I missed a couple of dinner parties. Although I was not able to spend the amount
of quality time with my family that I had planned, my husband and I took a
few days off from work after my deal closed so we could spend more time with
the boys before they returned to school. Debbie Ebner Law Office of Deborah K. Ebner Case Law UpdateThe Bankruptcy Section officially welcomes new case law update author Joshua Greene. Josh has previously contributed to the Section’s endeavors as the 2006-07 Publications Editor of the DePaul Business & Commercial Law Journal. Joshua Greene Federal Rule of Bankruptcy Procedure 3001 does not impose an additional requirement for a claim to be allowed under Section 502(b). In an action by the Chapter 7 trustee to disallow a claim because supporting documentation was not attached to the proof of claim form, the Bankruptcy Appellate Panel reversed the bankruptcy court decision to disallow the claim. The BAP took the view that Section 502(b) provides the exclusive basis for disallowance of claims, thereby rejecting those decisions by other courts that hold that Federal Rule of Bankruptcy Procedure 3001 adds additional requirements that must be met in order for a claim to be approved. According to the BAP, FRBP 3001 does not modify those substantive rights set forth in Section 502 of the Bankruptcy Code. B-Line v. Kirland (In re Kirkland), 10th Cir. B.A.P., No. NM-07-021, 12/21/07. Debtor not a party to proceeding. In civil contempt proceeding against an officer of Chapter 11 debtor who refused to turn over key to certain coded records, the court of appeals reversed a bankruptcy court ruling holding the officer in contempt. She was not properly served with process and did not appear by counsel at the contempt hearing. Therefore, she was not a party to the proceeding and the bankruptcy court lacked the power to hold her in contempt. In re Teknek, 2007 U.S. App. Lexis 29856 (7th Cir. Dec. 28, 2007). Enabling loan exception does not apply where notation on automobile lien is not made by the Secretary of State until after the preference period. In a pre-BAPCPA preference action filed by a Chapter 7 trustee to avoid an automobile lien, the Bankruptcy Appellate Panel held that the enabling loan exception to Section 547(c)(3) did not apply. While the security interest would have been “deemed” to be perfected under the applicable Kentucky statute when it attached, which would have been within the 20 day period set forth in the Bankruptcy Code, the notation of the lien on the vehicle’s certificate of title was made by the Secretary of State more than 20 days after the creation of the security interest. Interpreting the U.S. Supreme Court case of Fidelity Financial Services v. Fink, 522 U.S. 211, 216 (1998), the BAP said that the “timing” of perfection for preference purposes is governed by the federal law, rather than state law. Brock v. Branch Banking & Trust (In re Johnson), 6th Cir. B.A.P., No. 06-8055, 12/21/07. Homestead limitation of Section 522(p)(1) not applicable if debtor acquires title to property before the statutory period. The court of appeals held that the homestead limitation of Section 522(p)(1) enacted as part of BAPCPA did not apply where the debtor acquired title to property through an inheritance over ten years before her bankruptcy was filed, but after a divorce claimed the property as her homestead only one year before her bankruptcy filing. The 5th Circuit affirmed the bankruptcy and district court rulings, finding that in order for the limitation of Section 522(p)(1) to apply, the debtor must acquire a vested economic interest in property, such as title, and not merely a homestead interest within the time period set forth in the statute. Wallace v. Rogers (In re Rogers), 2008 U.S. App. Lexis 129 (5th Cir. Jan. 4, 2008). Automatic stay terminates after 30 days only with respect to the debtor. Where a new chapter 13 case was filed after a previous chapter 13 case had been dismissed within the same year, the Bankruptcy Appellate Panel reversed a bankruptcy court ruling, finding that under Section 362(c)(3)(A) the automatic stay terminates after 30 days only as to the debtor and the debtor’s property, and not as to property of the estate. Holcomb v. Hardeman (In re Holcomb), 10th Cir. B.A.P., No. 07-084, 1/7/08. 506(c) claims waived. Where law firm had previously rendered services for debtor in possession by negotiating financing, and the appointed trustee thereafter negotiated new financing for the debtor which included an amount to be paid to the trustee for its services, the appellate court affirmed a bankruptcy court ruling that the law firm had no valid reason to object when the trustee moved to augment its administrative fund in order to pay itself. Earlier agreements negotiated by the firm said that “neither the bank nor any of the collateral shall at any time be subject to surcharge or assessment whether pursuant to Bankruptcy Code § 506(c) or otherwise.” According to the court, this waiver was comprehensive and applied at any time, thus waiving any 506(c) claims the law firm had. Weinstein, Eisen & Weiss (In re Cooper Commons, LLC.), 2008 U.S. App. Lexis 32 (9th Cir. Jan. 3, 2008). Projected disposable income may deviate from current disposable income. A bankruptcy court decision denying a chapter 13 trustee’s objection to the plan was affirmed by the bankruptcy appellate panel. The panel held that “projected disposable income” pursuant to Section 1325(b)(1)(B) may deviate from “current disposable income” determined by Form 22B in where the debtor could present evidence of special circumstances requiring such a deviation. Lanning v. Hamilton (In re Lanning), 10th Cir. B.A.P., No. 07-067, 12/13/07. Joshua Greene Case AnalysisPaige E. Barr Summary: Joining the other courts that have weighed in on interpreting the Lamie retainer exception, the Tenth Circuit held that Chapter 7 debtor’s attorney can not evade prohibition on compensation for his post petition services from property of the estate by relying on the “retainer” exception recognized by the Supreme Court in Lamie; and any portion of retainers that attorney had not earned by his prepetition services was still property of debtors and was included in their Chapter 7 estate. Redmond v. Clark (In re Wagers), 2007 WL 4328722 (10th Cir. Dec. 12, 2007). Factual Background: The Debtors in this case hired the appellants’ law firm in 2003 for advice on their financial situation. The Debtors initially paid the law firm a $5,000 cash retainer. Subsequently, the Debtors executed an assignment to the law firm of whatever tax refunds they might receive as an additional retainer. One day later the Debtors filed for protection under chapter 7 of the Bankruptcy Code. The Debtors received tax refunds post-petition exceeding $50,000. The refunds were delivered to the law firm and deposited into its trust account pursuant to the assignment. The law firm incurred approximately $13,000 in post petition fees. The Trustee filed an adversary proceeding against the law firm seeking recovery of all retainer funds not applied to pre-petition services because 11 U.S.C. § 330(a)(1), as interpreted by Lamie v. United States Trustee, 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004), only allows compensation of a debtor’s counsel for post-petition services if they were employed under § 327. The Bankruptcy Court allowed the law firm to pay its post-petition fees from the retainers because it found the Debtors’ assignment had transferred full ownership of the retainers to the Firm, subject only to the Debtors’ contingent right of reversion. Therefore, the Court reasoned, the retainer funds were neither the Debtors’ property nor part of their estate. As such, the Bankruptcy Court ruled that payment of the law firm’s post-petition fees was governed by § 329 and not § 330. On appeal by the Chapter 7 Trustee, the Bankruptcy Appellate Panel reversed the Bankruptcy Court. On appeal by the attorneys, the Tenth Circuit agreed with the BAP and held (i) an attorney could not evade the prohibition on compensation of Chapter 7 debtor’s attorney for his post-petition services from property of the estate by relying on the “retainer” exception recognized by the Supreme Court in Lamie; and (ii) any portion of retainer that the law firm had not earned by its pre-petition services was still property of debtors and was included in their Chapter 7 estate. Discussion: In Lamie the Supreme Court created what has since been referred to as the “retainer exception” to § 330’s payment restrictions: It appears to be routine for debtors to pay reasonable fees for legal services before filing for bankruptcy to ensure compliance with statutory requirements. So our interpretation accords with common practice. Section 330(a)(1) does not prevent a debtor from engaging counsel before a chapter 7 conversion and paying reasonable compensation in advance to ensure that the filing is in order. Indeed, the Code anticipates these arrangements. See e.g., § 329 (debtor’s attorneys must disclose fees they receive from a debtor in the year prior to its bankruptcy filing and the courts may order excessive payments returned to the estate). As written it would appear the retainer exception would apply to all pre-petition retainers. However, several courts have held that money paid pre-petition to secure payment of attorneys’ fees remains property of the client until earned by provision of services. In fact, one court stated that the retainer exception only applies to flat fee retainers are they become attorney’s property when paid. Morse v. Gray (In re CK Liquidation Corporation), 343 B.R. 376 (D. Mass. 2006). The problem with this interpretation is that bankruptcy counsel are placed in a difficult position of choosing between performing fiduciary obligations to clients despite the potential for non-payment and risking professional malpractice claims. In order to avoid this situation, the law firm in this case could have taken an absolute right of assignment. The fatal fact that made the assignment they received property of the estate was that it was not an absolute assignment, rather it was only as assignment to the extent work was performed and therefore the estate had a revisionary right. This strategy mirrors the holding of CK Liquidation Corp. However, in practice, flat fee retainers are not always an option and attorneys are left stuck between the risk of non-payment and fiduciary duties. Paige E. Barr Upcoming Education Programs:
February
19th Bankruptcy May NOT Be the End of Your Recovery Efforts…
May 1st – 4th The 78th Chicago Meeting Thursday
Friday
Saturday
NCBJ Sponsorship OpportunitiesThe Commercial Law League of America and its bankruptcy section have sponsorship opportunities available at the National Conference of Bankruptcy Judges:
Copyright © 2007 Commercial Law League Bankruptcy Section Except as otherwise provided, the CLLA Bankruptcy Section newsletter permits any individual or organization to photocopy any article, comment, note, or other piece in this publication, provided that: (1) copies are distributed at or below cost; (2) the author and the CLLA Bankruptcy Section seal are prominently identified on the first page; (3) proper notice of copyright is affixed to each copy; and (4) all other applicable laws and regulations are followed. The CLLA Bankruptcy Section reserves all other rights. |