| May 2007 issue: CLLA Breakfast with Dave Barry
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: |
Nomination deadline! KING AWARD FOR EXCELLENCE. Given to recognize that lawyer, judge, teacher or legislator who exemplifies the best in scholarship, advocacy, judicial administration or legislative activities in the field of bankruptcy. The recipient will exemplify the standards set by Professor King during a life-time of devotion to the practice and practitioners of bankruptcy. She or he will have made a lasting contribution to the improvement of commerce and to the fair and ethical treatment of debtors, creditors and the public at large. The award will recognize a career, not an event. The award will be presented at the Commercial Law League’s Annual Breakfast held at the 2007 National Conference of Bankruptcy Judges October 11, 2007 in Orlando FL. Established in 2001, this award has been presented to Professor Lawrence King (in memoriam, 2001), Professor Elizabeth Warren (2002), The Honorable Joe Lee (2003), Professor David Epstein (2004), The Honorable A. Thomas Small (2005) and George Treister (2006). Nominations are due August 15, 2007. Click here for a nomination form. Sua SponteDeborah K. Ebner As I look ahead to my term as Section Chair, I am mindful of the League's founding, its mission, and its perseverance into the twenty-first century. Just as our founding fathers miraculously crafted a document to guide our country, the League was also founded with a mission and a charge that has guided our organization into 2007. Case Law UpdatePaula Lucas Use of chapter 11 to forestall eviction denied. Dismissal of Chapter 11 bankruptcy petition seeking to invoke the automatic stay and other bankruptcy code protections in order to forestall eviction is affirmed as petitioner had filed the petition: 1) in bad faith, solely to prevent the State from evicting the debtor from the State's property; and 2) as a means to the end of tying up the State in endless, fruitless litigation. In Re. Premier Automotive 2007 U.S. App. LEXIS 14031 (4th Cir. June 18, 2007). Case AnalysisKaren J. Porter An involuntary bankruptcy proceeding proves to be an expensive collection vehicle for the petitioning creditor.In re Joseph S. Beale, 358 B.R. 744 ( Bankr. N.D. Ill 2006) Summary: In In re Joseph S. Beale, 358 B.R. 744, ( Bankr. N.D. Ill 2006), the court rejected a petitioning creditor’s attempt to recoup a portion of the attorneys fees that it incurred during the involuntary proceeding as an administrative expense claim. NCBJ Sponsorship OpportunitiesThe Commercial Law League of America and its bankruptcy section have sponsorship opportunities available at the National Conference of Bankruptcy Judges ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteWalk Into the Future By Deborah K. Ebner As I look ahead to my term as Section Chair, I am mindful of the League's founding, its mission, and its perseverance into the twenty-first century. Just as our founding fathers miraculously crafted a document to guide our country, the League was also founded with a mission and a charge that has guided our organization into 2007. On July 19, 2007 leaders of the CLLA and all those concerned with the continued applicability of our mission to today's commercial realities will meet in Orlando and discuss and implement the League's 21st century plan. We will discuss the vision of our organization. We will review our road map to ensure that the League continues to be responsive to the present and future needs of our business, our professionals and the laws within which we work. I will bring the League's strategic plan back to our section. Our Section committees shall then complete our strategic plan into which all of our goals and missions shall be woven. The finished product of the both the League and the Section shall be a dynamic road map into the future. The League and the Section road maps will most certainly continue the "watch dog" status of our legislative committee for the leagues community of interests. Most assuredly, our plans will commit nonpartisan stewardship to the leaders of our country on critical industry issues. The time is now to come forward and get involved. Since the commencement of my term, I have engaged in communication with the leaders of professional organizations around the country. These leaders are excited about the synergies between our organizations and the probability of generating positive change in our industry by working together. I also reach out to all of you as individuals. Now is the time to come forward and make a difference. Call me or write me. Join me in Orlando to create the fabric of the League's vision into the future. Law Office of Deborah K. Ebner Case Law UpdateUse of chapter 11 to forestall eviction denied. Dismissal of Chapter 11 bankruptcy petition seeking to invoke the automatic stay and other bankruptcy code protections in order to forestall eviction is affirmed as petitioner had filed the petition: 1) in bad faith, solely to prevent the State from evicting the debtor from the State's property; and 2) as a means to the end of tying up the State in endless, fruitless litigation. In Re. Premier Automotive 2007 U.S. App. LEXIS 14031 (4th Cir. June 18, 2007) A bankruptcy trustee is not entitled to a preliminary injunction. Trustee sought injunction to prevent shareholder plaintiffs from settling with a D&O insurance carrier. The subject policy is not property of the estate. The trustee's real concern is that payment of defense costs may affect his rights as a plaintiff seeking to recover from the D&O policy rather than as a potential defendant seeking to be protected by the D&O policy. In this way, trustee is no different than any third party plaintiff suing defendants covered by a wasting asset. In re. World Health Alternatives Inc. (Bankr. DE June 12, 20007) CLICK HERE for case Discharge of student loan debts allowed. An order discharging Chapter 7 bankruptcy debtor's student loan debts on the basis of "undue hardship" pursuant to 11 U.S.C. section 523(a) is affirmed where: 1) the debtor was not required to provide expert medical evidence to establish that the circumstances underlying his inability to repay would likely continue for a substantial portion of the repayment period; and 2) in light of the significant tax consequences of enrolling in an Income Contingent Repayment Plan (ICRP) due to his inability to repay, debtor's decision to forgo the ICRP was reasonable and was not grounds for finding bad faith. In re. Barrett 2007 U.S. App. LEXIS 13297 (6th Cir. June 8, 2007) Recovery of preferential transfers. In bankruptcy proceedings in which the debtor filed a complaint against its creditor to avoid and recover preferential transfers from the creditor, a judgment rejecting defendant's defenses and motion for an adverse inference is vacated in part and remanded where the bankruptcy court erred in holding that the fact that the parties had a credit relationship precluded, as a matter of law, a finding that the debtor intended the transfers to be part of a contemporaneous exchange for new value. Denial of the debtor's request for prejudgment interest is also vacated and remanded where the district court failed to explain its reasons for the denial. In re: Hechinger Inv. Co. of Delaware, Inc. 2007 U.S. App. LEXIS 13155 (3rd Cir. June 7, 2007) Proof of bad faith necessary to prevent Chapter 11. In a suit attempting to prevent a lessee from reorganizing under Chapter 11 and reopening as a food market on the landlord's property, denial of a motion to dismiss the Chapter 11 petition is affirmed where appellant made no prima facie showing that appellee submitted its chapter 11 petition in bad faith. Fields Station LLC v. Capitol Food Corp. 2007 U.S. App. LEXIS 13028 (1st Cir. June 7, 2007) Avoidance of preferential transfers denied. A bankruptcy debtor's title of "director emeritus" of defendant-company does not make the company a "per se insider" of the debtor, for purposes of a bankruptcy trustee's power to avoid preferential transfers to it under 11 U.S.C. section 547 (b) of the Bankruptcy Code. A person with a relationship designated in section 101(31)(A) of the Bankruptcy Code should be treated as an insider because of the high potential for control inherent in such relationships, and other persons may be found to be insiders in particular cases, based on the specific facts. In re. Kunz 2007 U.S. App. LEXIS 12943 (10th Cir. June 7, 2007) 12(b)6) dismissal denied. Exculpation and the business judgment rule are affirmative defenses, and thus that cannot be used to obtain dismissal through a 12(b)(6) motion. In pleading a fraudulent transfer case, a trustee must specify the particular transfers, transferees and amounts received by the debtor in exchange for the transfers. The state of Delaware may or may not recognize a cause of action for aiding and abetting fraudulent transfers. In. re, The Brown Schools (Bankr. DE June 7, 2007) CLICK HERE for case. Request to compel arbitration denied. A creditor's request to compel arbitration was properly denied where: 1) the creditor waived its right to arbitrate by waiting eleven months to assert the right and acted inconsistently with its right to arbitrate by engaging in judicial proceedings and serving discovery requests; and 2) the debtor was prejudiced by the late assertion of the right. Rhonda J. Lewallen v. Green Tree Servicing 2007 U.S. App. LEXIS 12849 (8th Cir. June 5, 2007) Trustee not “opposing party.” Bankruptcy trustee was determined not to have been an "opposing party" when he brought preference action that belonged to bankruptcy estate and not to debtor, but counterclaim alleged causes of action that could have been brought against debtor prior to bankruptcy filing. In re. AdBox 2007 U.S. App. LEXIS 12865 (9th Cir. June 5, 2007) Creditor due equitable remedy under the code. Under section 109(e) of the Bankruptcy Code a security interest in a debtor's property is a "noncontingent, liquidated, secured debt.” In re. Glance 2007 U.S. App. LEXIS 12622 (6th Cir. June 4, 2007) Concealment of assets leads imposition of restitution order. A restitution order, imposed following defendant's conviction for concealing assets in a bankruptcy proceeding, is vacated where: 1) the district court erred when it ordered that defendant pay restitution for losses caused by conduct other than the conduct for which he was convicted; 2) the error was plain; and 3) the error affected defendant's substantial rights and the fairness, integrity, or public reputation of judicial proceedings. U.S. v. Maturin 2007 U.S. App. LEXIS 12740 (5th Cir. June 4, 2007) Paula Lucas Case AnalysisKaren J. Porter An involuntary bankruptcy proceeding proves to be an expensive collection vehicle for the petitioning creditor.In re Joseph S. Beale, 358 B.R. 744 ( Bankr. N.D. Ill 2006) Summary: In In re Joseph S. Beale, 358 B.R. 744, ( Bankr. N.D. Ill 2006), the court rejected a petitioning creditor’s attempt to recoup a portion of the attorneys fees that it incurred during the involuntary proceeding as an administrative expense claim. Factual Background: On March 5, 2004 an involuntary chapter 7 case was commenced against Joseph S. Beale. The three petitioning creditors were represented by the same law firm, Freeborn & Peters. Of the three petitioning creditors, Revolution Portfolio, LLC was the largest creditor with a 7.3 million dollar judgment claim against the Debtor. Freeborn & Peters represented Revolution prior to the involuntary proceeding and conducted an investigation into the financial affairs of the Debtor and his related entities. Freeborn & Peters also represented the largest creditor in a related bankruptcy. Freeborn & Peters conducted voluminous amounts of discovery regarding the Debtor and his entities during the related bankruptcy case. An interim trustee was appointed in Beale’s involuntary chapter 7 case. The trustee moved to employ Freeborn & Peters as his special counsel regarding the investigation and recovery of assets for the estate. The trustee indicated that the firm should not be disqualified due to its representation of a creditor. However two creditors objected to the employment of the firm based upon the actual conflict of interest created by the firm’s representation of the largest creditor of the estate. As one objector noted, “Levin’s interest is still adverse to that of the estate because of his irreparable prior attempt to use the bankruptcy process for the sole benefit of his clients and primarily Revolution Portfolio LLC.” Preliminary Objection of Gould & Ratner to Trustee’s Motion to Employ Special Counsel, In re Joseph Beale, No 04 B 8748 (Bankr. N. D. Ill). The court denied the trustee’s motion. Freeborn & Peters was not employed as special counsel. Freeborn & Peters cooperated with the chapter 7 trustee while continuing its representation of Revolution. It was undisputed that Freeborn & Peters assisted the trustee in recovering a minimum of $7,200,000.00 for the estate. Revolution also incurred legal fees and expenses in excess of $1 million dollars between the March 4, 2004, petition date and August 4, 2004. The settlement agreement with the trustee provided that Revolution could seek a $575,000.00 administrative expense claim. Therefore, Freeborn & Peters filed a motion requesting that Revolution be awarded an administrative expense claim under 11 U.S.C. §503(b)(3)(B). That section allows such a claim for “a creditor that recovers, after the court’s approval, for the benefit of the estate any property transferred or concealed by the debtor.” The trustee agreed that the information Revolution provided was valuable and supported Revolution’s motion to the extent of a $575,000.00 administrative expense claim. The United States Trustee objected to Revolution’s motion. Discussion: The court found that the question before it was straightforward. However, it raised an issue of first impression in the Seventh Circuit. It was undisputed that property concealed by the debtor was recovered for the benefit of the estate. The court was required to decide if Revolution met the other two requirements of section 503(b)(3)(B): “(1) does Revolution qualify as a ‘creditor the recovers’? and (2) what effect does the phrase ‘after the court’s approval’ have on its claim’?” Id. at 745. The court concluded that Revolution did not meet the first requirement. Revolution was not “a creditor that recovers” for the purposes of 503(b)(3)(B). The court noted that the two cases relied upon by Revolution did not address the issue of whether it was the trustee or another party that actually recovered property for the benefit of the estate. The court was persuaded by the authority offered by the United States Trustee, In re Blount, 276 B.R. 753 (Bankr. M.D. La. 2002), which found that a creditor must have prior court approval to become a “creditor that recovers”. The court followed the reasoning in Blount and concluded that court approval is required to grant a creditor the standing to recover property for the estate. Without a grant of derivate standing from the court, the creditor cannot act on behalf of the estate, and cannot be a “creditor that recovers” for the purposes of section 503(b)(3)(B). The second requirement “after the court’s approval” was fatal to Revolution’s claim. The court noted that it previously denied the trustee’s motion to appoint Revolution’s attorneys as special counsel to the estate. The court found: “Revolution is now, for all intents and purposes, attempting to circumvent that order.” Id at 747. The court adopted a plain meaning interpretation of section 503(b)(3)(B). It found that a creditor who did not obtain prior court approval could not be granted an administrative expense claim. The court was not persuaded by case law from other jurisdictions that allowed administrative expense claims to creditors who failed to obtain court approval based upon the equitable consideration that it is unfair not to reimburse a creditor whose actions benefited the estate. The court also rejected Revolution’s policy arguments: “I do not believe denying Revolution’s Motion will ‘have a chilling effect upon creditor participation within a bankruptcy proceeding’. ” Id. at 749. Revolution did receive a distribution from the estate in the amount of $2,940,000.00. Individual Estate Property Record and Report Asset Cases In re Joseph Beale, No 04 B 8748 (Bankr. N.D.Ill). However, Revolution did not receive an additional $575,000.00 as an administrative expense claim to buffer the $1,000,000.00 bill it received from its attorneys. Practice Pointer: It is often suggested that filing an involuntary proceeding can serve as an effective vehicle for a large creditor to continue its collection efforts with the added bite of the bankruptcy court and a trustee. The Beale case is a reminder that attorneys recommending an involuntary must weigh all the factors, including the expense of the proceeding. A creditor considering an involuntary must be prepared to foot the bill for a recovery that goes into the estate and is then distributed to all creditors. There may be instances when a creditor’s individual collection efforts are actually more cost effective than an involuntary proceeding and result in a greater payment of the creditor’s claim. Karen J. Porter NCBJ Sponsorship opportunitiesThe Commercial Law League of America and its bankruptcy section have sponsorship opportunities available at the National Conference of Bankruptcy Judges:
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A Pulitzer prize-winning commentator whose laugh-out-loud humor has resulted in several books, Dave Barry is an equal opportunity mocker. On subjects ranging from politics to parenting to money matters, he expertly highlights the irony and absurdity in everyday life. In our interview, Barry talks about his early days as a columnist, what it's like to win the Pulitzer, and how he's honed his humor over time.