Sua Sponte

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

When one is given the honor of the Chair of the Bankruptcy Section, it is a tradition to acknowledge the efforts of the immediate past Chair. There is good reason for such thanks. Judith Greenstone Miller served last year with distinction. She tirelessly represented our interests, testifying before Congress concerning bankruptcy legislation of the highest concern, leading Committees that furthered our reputation throughout the legal community, speaking at educational forums representing the League and our Section, and writing articles and letters that can only be characterized as exemplary. She has set a bar for me that is impossible for me to clear, and I will be satisfied if I only approach it.

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Case Analysis

Catherine E. Vance, Esq.
vance76@earthlink.net
(614) 336-3861

Third Circuit Holds § 1146(c) Transfer Tax Exemption Does Not Apply to Pre-confirmation Transfers of Assets

Summary: In Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co.), 2003 U.S. App. LEXIS 14449 (3d Cir. July 18, 2003), the Court of Appeals for the Third Circuit held that pre-confirmation transfers of assets, authorized under §§ 363 and 365, did not occur “under a plan confirmed under section 1129” as required in order to exempt such transfers from transfer and recording taxes under § 1146(c).

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Case Law Update

Catherine E. Vance, Esq.
vance76@earthlink.net
(614) 336-3861

Arbitration. Debt restructuring agreements are subject to provisions of Federal Arbitration Act despite being executed in Alabama by Alabama residents and involving alleged breach of agreement of Alabama project. Phrase “involving commerce,” as used in FAA, is functional equivalent of “affecting commerce,” words of art that ordinarily signal broadest permissible exercise of Congress’ Commerce Clause power. Citizens Bank v. Alafabco, Inc., ___ U.S. ____, 123 S. Ct. 2037, 156 L. Ed. 2d 46 (2003).

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Sua Sponte

When one is given the honor of the Chair of the Bankruptcy Section, it is a tradition to acknowledge the efforts of the immediate past Chair. There is good reason for such thanks. Judith Greenstone Miller served last year with distinction. She tirelessly represented our interests, testifying before Congress concerning bankruptcy legislation of the highest concern, leading Committees that furthered our reputation throughout the legal community, speaking at educational forums representing the League and our Section, and writing articles and letters that can only be characterized as exemplary. She has set a bar for me that is impossible for me to clear, and I will be satisfied if I only approach it.

I also want to note the efforts of the prior year’s Chair, Jay Welford. His stewardship, as Chair, as our representative on the Board of Governors, as Chair-Elect, as Co-Chair on the Legislative Committee and now as our Treasurer, help guide us during a time of great turbulence on the legislative front.

Finally, I must give tribute to all those that came before me. Robert Schatzman, Wanda Borges, Harry Greenfield, and Mary Whitmer are recent Chairs that have set a standard for all. And we must also take time to remember those who were instrumental in the formation of the Bankruptcy Section and its early successes, such as Eliot Levin and Philip Hendel.

If I have some solace in the work I have before me, it is the persons who presently occupy our Section’s officer positions, our executive committee, and the countless other members of our Section. Alan Nahmias is our Chair-Elect, Robert Bernstein is our Secretary, and Jay is our Treasurer; each provides a measure of enthusiasm and authority. Our Executive Committee continues to provide the backbone of our efforts, as each serves in some capacity as chairs of committees or otherwise providing countless hours of effort; Cathy Pike, Brian Behar, and Karen Porter are three of our executive committee members, but my failure to name all twelve should only be considered my effort to not overwhelm you. Finally, I have a Section with over one thousand members; each of you supports our Section in some way, and your contributions are appreciated in many more ways than you imagine.

Another tradition of the incoming Chair is to inform all of the Chair’s goals for the next year. Just meeting the bar set by all mentioned above could be considered enough. However, I want to add another. I would really like to dedicate the next year to the average attorney. Our organization is not an organization of attorneys from “big” firms, but rather of sole practitioners and small firms. We struggle with the every day issues and economics of a law practice. Each of you should be complimented because, as a result of your day to day efforts, you provide valuable assistance to individuals and small businesses, all the while you continue to provide for your families. “Big” firms have their role, and the “small” practice does find itself in “large” cases at times, but the sole practitioner and small firm have special needs that should be addressed. For these reasons, I would like to dedicate the next 12 months to these practices. In the coming months, I hope to outline ways to assist each of you. In the interim, if you have thoughts or interests that you believe that I or the League should address, please feel free to contact me immediately. I will do my best to address them, and support you in your day to day law practices.

However, nothing is free. Over my term, I will also outline areas where I will need your assistance. The League and this Section, as noted above, find their strength in the members. True, the League and this Section must provide services; but we rely on you in many ways.

With that, I thank you all for this opportunity, and I hope to live up to the faith you have placed in me.

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

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Case Analysis

Third Circuit Holds § 1146(c) Transfer Tax Exemption Does Not Apply to Pre-confirmation Transfers of Assets

Summary: In Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co.), 2003 U.S. App. LEXIS 14449 (3d Cir. July 18, 2003), the Court of Appeals for the Third Circuit held that pre-confirmation transfers of assets, authorized under §§ 363 and 365, did not occur “under a plan confirmed under section 1129” as required in order to exempt such transfers from transfer and recording taxes under § 1146(c).

Facts: Hechinger Investment Company of Delaware, Inc. (“Debtor”) filed its petition for Chapter 11 relief in June of 1999, announcing in September of that year its intent to liquidate its assets and cease operations. One month after the announcement, the Debtor moved the Bankruptcy Court for permission to sell its interests in certain real estate pursuant to §§ 363 and 365 of the Bankruptcy Code. A similar motion was filed in November regarding a leasehold interest of the Debtor. In both motions, the Debtor proposed to make the sales prior to confirmation of a plan and the Debtor sought a declaration from the Bankruptcy Court that the sales would not be subject to state and county transfer and recording taxes. The State of Maryland and three Maryland counties (the “Taxing Authorities”) objected to the tax exemption.

The Bankruptcy Court granted the Debtor’s motion over the Taxing Authorities’ objections. With respect to the § 1146(c) tax exemption, the Bankruptcy Court held that “a transfer that is essential to or an important component of the plan process, even if it occurs prior to plan confirmation, is ‘under a plan’ within the meaning of § 1146(c).” However, the Bankruptcy Court conditioned application of § 1146(c) on eventual plan confirmation and ordered the Debtor to escrow funds sufficient to satisfy any transfer and recording taxes arising from the asset sales.

A number of the Debtor’s interests were then sold and, for reasons not explained, some transfer and recording taxes were paid to the Taxing Authorities by purchasers. The Bankruptcy Court, on motion of the Debtor, ordered the Taxing Authorities to refund these paid taxes upon confirmation of the Debtor’s plan. The Taxing Authorities appealed that order and, while the appeal was pending, the Bankruptcy Court confirmed the Debtor’s plan, which required the Debtor to transfer all of its assets to the Plaintiff, the Hechinger Liquidation Trust (the “Trust”).

The District Court affirmed the Bankruptcy Court’s order. On the question of whether § 1146(c) applied to the asset transfers at issue, the District Court held that “it is the fact of plan confirmation, rather than its timing, that is critical to a determination of whether a sale is” under a confirmed plan. In other words, “so long as a plan authorizing the sale is eventually confirmed . . . the proceeds of the sale are not subject to transfer and recording taxes.”

Discussion: The Court of Appeals for the Third Circuit reversed, determining that both the Bankruptcy Court and the District Court erred in holding that § 1146(c) exempts the real estate sales at issue from transfer and recording taxes. In order for a transfer to be made “under” a confirmed plan, that transfer must be “authorized by” that plan.

The Court first examined the language of § 1146(c). The Court reasoned that interpreting “‘under’ a confirmed plan” to mean “authorized by” that plan comports with the canon of statutory construction that “identical words used in different parts of the same act are intended to have the same meaning.” As the Court pointed out, the term “under” is used not only in other sections of the Code, but three times within § 1146(c) itself: “the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax.” According to the Court:

It is apparent that the term “under” in “confirmed under section 1129” means “confirmed pursuant to the authority granted by Section 1129.” It is similarly clear that the term “under” in “may not be taxed under any law . . .” means “may not be taxed pursuant to the authority of” any such law. Consequently, reading the first “under” in this sentence – in “under a plan confirmed” – to mean “pursuant to the authority conferred by such plan” gives the term “under” a single, consistent meaning throughout Section 1146(c).

Even absent an ambiguity in § 1146(c)’s use of “under” a confirmed plan, the Court was nevertheless persuaded that the Bankruptcy and District Courts erred because of well settled principles of construction. Citing United States Supreme Court authority, the Court pointed out that “tax exemption provisions are to be strictly construed,” and that “federal laws that interfere with a state’s taxation scheme must be narrowly construed in favor of the state.” These canons of construction, according to the Court, militated against construing “under” a confirmed plan broadly and supported the court’s interpretation of the term as limiting application of § 1146(c) to transfers “authorized by” a confirmed plan.

The Court also distinguished the instant dispute from the Second Circuit’s decision in In re Jacoby-Bender, 758 F.2d 840 (2d Cir. 1985), which the Trust argued supported interpreting § 1146(c) to encompass pre-confirmation asset transfers. According to the Court, the decision in Jacoby-Bender was not whether a pre-confirmation asset transfer could be exempt from taxation, but whether the exemption was rendered inapplicable “because the plan did not mention any instrument of transfer and did not give the debtor the authority to make the specific sale.” The issue was resolved in favor of allowing the exemption because § 1146(c) “does not require that the reorganization plan include specifics” and the disputed sale was “necessary to the consummation of the plan.” The Trust’s reliance on Jacoby-Bender, according to the Court, would effectively change the Second Circuit’s test from one looking to whether the sale is necessary in consummating the confirmed plan into one that examines necessity in relation to confirming a plan.

Finally, the Court dismissed, without much discussion, the Trust’s argument that the absence of an express temporal condition in the language of §1146(c) allows that section to encompass pre-confirmation transfers. Similarly, the Trust’s policy arguments did not persuade the Court, which noted that “in disputes about the interpretation of legislation that affects the economic interests of different groups, the opposing sides both cite policies that Congress might have wished to further when it enacted the law at issue.”

With this decision, the Third Circuit joins the Fourth Circuit, see NVR Homes, Inc. v. Clerks of the Circuit Courts, 189 F.3d 442 (4th Cir. 1999), in refusing to apply the § 1146(c) tax exemptions to asset transfers that occur outside the context of a confirmed plan. Such transfers may, of course, take place because of the authority granted under § 363. Section 363 authority, combined with the promise of eventual plan confirmation, however, is insufficient to invoke the beneficial exemption provision of § 1146(c).

Catherine E. Vance, Esq.
1906 Slaton Ct.
Columbus, Ohio
(614) 336-3861
vance76@earthlink.net

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Case Law Update

Arbitration. Debt restructuring agreements are subject to provisions of Federal Arbitration Act despite being executed in Alabama by Alabama residents and involving alleged breach of agreement of Alabama project. Phrase “involving commerce,” as used in FAA, is functional equivalent of “affecting commerce,” words of art that ordinarily signal broadest permissible exercise of Congress’ Commerce Clause power. Citizens Bank v. Alafabco, Inc., ___ U.S. ____, 123 S. Ct. 2037, 156 L. Ed. 2d 46 (2003).

Property of the Estate. District court erred in holding irrevocable trust could be pierced under alter ego theory based on debtor’s misconduct because debtor’s wife was equitable owner of trust and its property; wife was not equitably estopped from asserting ownership because she played no role in debtor’s fraud, had no prior knowledge of debtor’s unlawful activities, and banks that extended funds to debtor did not rely on wife’s conduct. Babitt v. Vebeliunas (In re Vebeliunas), 332 F.3d 85 (2d Cir. 2003).

Sanctions for Bad Faith Chapter 11 Petition. Sanctions against counsel for Chapter 11 debtor affirmed where bankruptcy court found petition to be both frivolous and filed for an improper purpose. Alleged procedural errors also overruled, including bankruptcy court’s entry of findings of fact after notice of appeal was filed. Although notice of appeal normally divests lower court of jurisdiction, exception exists where lower court action aids in appellate review. Dressler v. Seeley Co. (In re Silberkraus), 2003 U.S. App. LEXIS 13836 (9th Cir. July 10, 2003).

Effect of Post-Confirmation Default on Bifurcated Secured Claim. In case of first impression at federal appellate level, court holds that bifurcation of a creditor’s claim into secured and unsecured portions is not annulled by the mere act of granting relief from the automatic stay based on post-confirmation default. In so holding, court rejected creditor’s argument that such relief from stay nullifies earlier lien-stripping order, mends the bifurcation, and restores lien on the collateral to its original shape. Carvalho v. Fed. Nat’l Mortg. Assoc. (In re Carvalho), 2003 U.S. App. LEXIS 13824 (1st Cir. July 9, 2003).

Ordinary Course Exception to Preferential Transfers. Trustees in over 100 cases sought to avoid as preferential transfers defendant bank’s receipt of debtors’ income tax refunds within 90 days of debtors’ petition dates, deposited with bank pursuant to Refund Anticipation Loan agreements. Transactions were “ordinary” within the tax refund loan industry and as between bank and debtors with whom it entered into RALs in prior years. As for debtors in first time RAL transaction, lack of history of dealing, although strong factor, is not absolutely necessary; rather, ordinary course may be established by terms of parties’ agreement until agreement is somehow or other modified by actual performance. Kleven v. Household Bank, F.S.B., 2003 U.S. App. LEXIS 13228 (7th Cir. June 30, 2003).

Tax Treatment of Chapter 11 Professionals’ Fees. Capitalized bankruptcy costs, or costs expended on the hiring of outside professionals during bankruptcy proceedings, were not “specified liability losses” under § 172(f) of the Internal Revenue Code and, thus, did not qualify for special ten-year net operating loss carryback provided in § 172(b). Debtor’s costs incurred to meet its obligations under the Bankruptcy Code are too attenuated to meet “arise under” standard required for specified liability loss. Major Paint Co. v. United States, 2003 U.S. App. LEXIS 13193 (Fed. Cir. June 27, 2003).

Trustee as Class Action Representative. Shortly after seeking Chapter 7 protection, debtor sued collector on behalf of herself and others similarly situated for violations of federal Fair Debt Collection Practices Act. Upon discovering suit, trustee substituted himself as plaintiff and sought class certification, which was granted. Held, certification vacated; although court declined to establish per se rule, trustee’s interest in FDCPA suit conflicted with his fiduciary duty to debtor’s unsecured creditors. Dechert v. Cadle Co., 2003 U.S. App. LEXIS 12746 (7th Cir. June 24, 2003).

Catherine E. Vance, Esq.
Columbus, Ohio
614-336-3861
vance76@earthlink.net


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Member News

Milton Goldfarb, Past Bankruptcy Section Chair, is pleased to announce the formation of The Business Law Group, LLC. This new firm focuses on all aspects of corporate and business law for established and growing companies. Joining Mr. Goldfarb will be Douglas S. Teasdale, Attorney Licensed in Missouri and Illinois, Patrick J. Murphy, Attorney and Certified Public Accountant, and Elizabeth A. Finkelstein, Attorney. The firm’s contact information is: The Business Law Group, LLC, 8000 Maryland Avenue, 6th Floor, St. Louis, MO 63105. Phone: 314-754-7300 Fax: 314-754-7301 Web: www.tblg.net

Judith Greenstone Miller has joined Detroit-based Jaffe Raitt Heuer & Weiss as a partner in the Firm's Bankruptcy and Insolvency Group. Jaffe Raitt CEO Rick Zussman made the announcement. Prior to joining Jaffe Raitt, Ms. Miller was a shareholder at Southfield-based Raymond & Prokop, P.C. where she focused on bankruptcy and insolvency, creditors' rights and commercial litigation.

Her practice at Jaffe Raitt will include representation of debtors, secured and unsecured creditors, creditors' committees and trustees in bankruptcy proceedings, primarily involving Chapter 11 reorganizations. She also represents parties in litigation of complex commercial disputes. Ms. Miller is a 1975 cum laude graduate of the University of Michigan, where she was recognized as a Horace B. Angell Honor Student and served as a member of the Academic Judiciary for the College of Literature, Science and Arts. Ms. Miller is a 1978 cum laude graduate of the Wayne State University School of Law where she received the Creditors' Rights Book Award. A frequent speaker and author, Ms, Miller is a member of the Commercial Law League of America and its Bankruptcy and Creditors' Rights Sections, American Bankruptcy Institute, State Bar of Michigan, American Bar Association, Federal Bar Association and Detroit Bar Association. Ms. Miller is admitted to practice before all Michigan courts, the U.S. District Court for the Eastern District of Michigan and the U.S. Court of Appeals for the Sixth Circuit.

Founded in 1968 and based in Michigan, Jaffe Raitt Heuer & Weiss is recognized throughout the nation as a highly qualified, full service business law firm. With an outstanding reputation for providing sophisticated legal services to entrepreneurial-minded businesses, family owned enterprises and individuals, Jaffe Raitt has more than 80 attorneys and offices in Detroit, Ann Arbor, Port Huron and Birmingham. Among the firm's practice areas are appellate, aviation, bankruptcy, business, criminal, e-commerce, electronic banking, labor, environmental, estate planning, family, financial services, insurance, litigation, mergers & acquisitions, mortgage banking, public finance, real estate, securities and tax law.

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WASHINGTON HOT NEWS

July 24, 2003
New FDCPA bill?

It is rumored that Reps. Garrett (R-NJ) and Andrews (D-NJ) will be introducing in the near future legislation to clarify ambiguous areas of the Fair Debt Collection Practices Act (FDCPA). If you recall, in the past, Andrews, who is not a member of the Financial Services Committee, although Garrett is, has introduced what was considered fairly broad sweeping FDCPA reform bills that ultimately did not go very far.
The legislative language will be distributed when it becomes available.

July 23, 2003
Senate WorldCom Bankruptcy Hearing presents opposing views.

On July 22nd, the Senate Judiciary Committee held a hearing on corporate bankruptcy issues specifically arising in the WorldCom case. Senate Judiciary Chair Hatch (R-UT) stated the hearing allowed for an examination of the "implications of a reorganized MCI emerging from bankruptcy on competition in the telecommunications market." Although the views presented by witnesses were at times diametrically opposite, they were not unanticipated in light of the party's identified position.
The testimony from the July 22, 2003 is available here.

The SEC recently announced that the Court overseeing the WorldCom bankruptcy had approved a $500 million settlement on accounting fraud charges with an agreement that WorldCom would also pay an additional $250 million in common stock to a distribution fund for victimized investors after merging from bankruptcy. Rival telecommunication companies felt this moderately low penalty resulted in WorldCom having a competitive advantage.

Former Attorney General Thornburgh, the bankruptcy examiner in the WorldCom case, indicated his investigation uncovered enormous accounting fraud, a complete disregard for corporate governance and a corporate culture of deceit. He also concluded that the governance failures, including no discussion by the Board regarding the company's acquisitions, no checks and balances over the CEO (Bernard Ebbers) and CFO (Scott Sullivan) by the Board of Directors, served to compound the fraud.

Verizon Communications Executive VP and General Counsel William Barr characterized the federal government's handling of the case as "shameful;" the case involving the largest fraud in the United States with the involved party subsequently increasing its business with the government. Barr emphasized that the bankruptcy process is not, by itself, enough to resolve the case (in satisfying creditors) but use of the criminal system should be invoked as well. (Barr suggested MCI be stripped of all illegally received games, providing restitution, and being assessed punitive damages.) Barr characterized the $750 million fine imposed by the SEC as "a paltry disposition," with MCI retaining up to 95% of the gains from the fraud.

Speaking on behalf of MCI, Nicholas Katzenbach, also a former US Attorney General, stated MCI's new management has evolved beyond the past practices with the company being "reformed, restructured, realigned." Katzenbach suggested that MCI's competitors wish to hurt MCI for their own competitive advantage.
Marcia Goldstein, MCI's Chapter 11 attorney, stated MCI filed for Chapter 11 to aid creditors and preserve value for them. Forcing MCI to liquidate, when it was a viable concern, would merely benefit competitors and possibly cause detriment to creditors.

Morton Bahr, the President of the Communications Workers of America, also emphasized how WorldCom victimized many via a continued practice of fraud, "lies and false financial reports." He also predicted that perhaps at more meaningful penalties, WorldCom's bankruptcy may send the entire "telecommunications industry into a tailspin."

Finally, the Vice Chair of the National Bankruptcy Conference, Douglas Baird, emphasized that liquidation is not the answer since the company's assets could still be put to productive use which would promote competition. He did suggest, however, that individuals involved should somehow otherwise be punished.
Surprisingly, or maybe not so in light of the spirited debate, very little discussion was directed towards H.R. 975, the Bankruptcy Reform Bill.

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