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March 2005 issue: S. 256 Effective Date Summary The CLLA has published a summary entitled "Exceptions to the General Effective Date of S. 256, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256) As Passed by the United States Senate on March 10, 2005." Washington Hot News BREAKING NEWS: Lawrence Friedman, Executive Director of the U.S Trustee has tendered his resignation effective April 30. No further details are yet available. Once they are we will send an update. Bankruptcy Reform Update: It is currently anticipated that Bankruptcy Reform legislation will be discussed by the US House of Representatives either April 6 or 7. Bankruptcy Judgeship Opening Western District of Pennsylvania: The position is seated in Pittsburgh with associated travel. Applicants must be members in good standing of the highest court of at least one state, the District of Columbia, or the Commonwealth of Puerto Rico, and in every other bar of which they are members. Authors needed! 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. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive at www.cllabankruptcy.org. 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 Editor@cllabankruptcy.org CLLA 70 East Lake Street, Suite 630 Phone: 312-781-2000 Newsletter design by: |
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the online version can be found here: Sua Sponte Alan I. Nahmias Thomas Jefferson, Mark Twain, Walt Disney. What do these three individuals have in common other than that each contributed immensely, in their own way, to this country and are in part responsible for making it the great nation that it is today? Each, at one time or another in his life, seeking a fresh start, filed for bankruptcy protection. Could they do it under the soon-to-be-enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256), likely to be signed into law next month? If those respected most within our industry are to be believed, the answer would likely be a resounding "no". Case AnalysisKaren J. Porter Case Analysis: In re American Telecom Corp. 319 B.R. 857 ( Bankr. N.D. Ill. 2005) Summary: In In re American Telecom Corp., 319 B.R. 857 ( Bankr. N.D. Ill. 2005), a creditor won a Rule 9011 motion and recovered its legal fees from the attorney who filed a no asset chapter 7 case for an inactive corporate debtor to stay collection efforts against the two principals of the debtor rather than file an appeal bond to stay the enforcement of the underlying judgment by the state court. Case Law UpdatePaige E. Barr Government Adjustment for a Medicare Overpayment Constitutes a Recoupment. A nursing home in Chapter 11 was overpaid by Medicare because it took Medicare money for the expenses of third-party-provided services but then did not pay those third parties as required. Court found that a government adjustment for a Medicare overpayment constitutes a recoupment, and not a setoff, and therefore such an adjustment is permissible and unaffected by the bankruptcy context. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteThomas Jefferson, Mark Twain, Walt Disney. What do these three individuals have in common other than that each contributed immensely, in their own way, to this country and are in part responsible for making it the great nation that it is today? Each, at one time or another in his life, seeking a fresh start, filed for bankruptcy protection. Could they do it under the soon-to-be-enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256), likely to be signed into law next month? If those respected most within our industry are to be believed, the answer would likely be a resounding "no". After spending untold millions on elected officials, the credit card industry has finally won its battle to strip those most needy of debt relief of the ability to obtain a fresh start. Under the new laws, anyone earning in excess of an artificially low "mean" would be deemed ineligible for Chapter 7 relief and would instead be forced into Chapter 13, which upon closer look appears to offer little alternative relief. Once passed, courts will be precluded from reducing the amount most debtors will have to pay on secured claims, in addition to being forced to extend from three years to at least five the period of time for which plan payments on large ticket items such as automobiles must be repaid. Perhaps most distressing under the new law, those unable to keep up with the increased payments imposed on them by Chapter 13 will be denied any relief at all, seeing their cases dismissed with their creditors able to fully pursue their state law remedies. While few can question the lessening degree of the stigma that used to befall one who sought bankruptcy protection and the increase in the number of those seeking protection, one has to wonder if this new legislation is not so draconian as to throw the balance that should exist between the rights of debtors and their creditors back hundreds of years, causing one to question, only half-jokingly, is debtors' prison next? If so, the very lenders who send my soon-to-be-12 and 15-year old sons pre-approved credit cards on a weekly basis will hold the keys. Judges, academics and well-respected practitioners have all weighed in, almost unanimously against the majority of the provisions of this bill. If you are planning on coming to Chicago for the CLLA's Chicago Meeting next week, you can hear from several of our members, each well respected in the bankruptcy community, The Honorable Eugene Wedoff, Jay Welford, Judy Miller, and Cathy Vance, previewing, in detail, both the consumer and business aspects of this ill-conceived legislation. The program will be held on Friday, April 8, 2005 from 1:30 p.m. - 3:30 pm. Each of these speakers has been deeply involved with this legislation since it was first introduced over seven years ago. If you are not registered for the meeting, but would like to attend this program and the program entitled "E-Discovery: What You Can't See CAN Hurt You", you can attend for a fee of $95. Both of these programs are being offered by the CLLA Fund for Public Education. You can register by clicking here. Our Section will also be sponsoring the following additional educational programs:
Also, as I've discussed in my past columns, next Thursday the Section will be undertaking its Future Planning Conference. If you are able to participate in the session on Thursday, April 7 from 9:00 a.m. until 3 p.m., we still have a few spaces available.This will be a small, intensive working session as we map out the short and long term goals of our Section. If you would like to participate, please contact Sarah Jolie at 312-275-1500 or via email at sjolie@clla.org I'll see you in Chicago. Don't forget to bring your credit cards. Alan I. Nahmias Email: anahmias@prnlaw.com Case AnalysisCase Analysis: In re American Telecom Corp. 319 B.R. 857 ( Bankr. N.D. Ill. 2005) Summary: In In re American Telecom Corp., 319 B.R. 857 ( Bankr. N.D. Ill. 2005), a creditor won a Rule 9011 motion and recovered its legal fees from the attorney who filed a no asset chapter 7 case for an inactive corporate debtor to stay collection efforts against the two principals of the debtor rather than file an appeal bond to stay the enforcement of the underlying judgment by the state court. Factual Background: Siemens Information and Communications Network ("Siemens") obtained a $173,000.00 judgment against American Telecom Corporation ( ATC") for patent and copyright infringement in federal district court in Georgia. Siemens also obtained a summary judgment defeating ATC's antitrust claims against it. ATC and several other codefendant's appealed the summary judgment ruling. However, ATC did not post an appeal bond with the 11th Circuit. Therefore, the enforcement of the money judgment against ATC was not stayed. After registering the judgment in Illinois, Siemens began enforcement actions by issuing a citation to discover assets against ATC and filing suit against ATC's two principals to pierce the corporate veil. ATC brought two motions to stay the actions against the principals pending a resolution of the appeal. Both motions were denied and the state court set the alter ego actions for trial. Four days before the trial, ATC filed a chapter 7 bankruptcy case. ATC had virtually no assets. ATC had not engaged in business activity for the last two years. ATC listed Siemens as its only creditor. ATC argued to the state court that the alter ego actions against the principals could only be prosecuted by the chapter 7 trustee. The state court stayed the trial to permit the issues to be decided by the bankruptcy court. Siemens immediately moved for a modification of the automatic stay or, in the alternative a dismissal of the chapter 7 case for "cause" as a bad faith filing. The bankruptcy court dismissed the chapter 7 case with prejudice. See, In re American Telecom Corp., 304 B.R. 867 ( Bankr. N. D. Ill 2004) The court's rationale included that this was essentially a dispute between two parties and that corporate chapter 7 cases have the very limited purpose of providing a fair and orderly liquidation of corporate assets for the benefit of creditors. If the antitrust claims the Debtor argued would be assets of the estate materialized as viable causes of action, the parties did not need the bankruptcy court to distribute those assets. The court concluded that the filing of the chapter 7 case was "an unfair litigation tactic used to delay the alter-ego lawsuit against nondebtors in state court" Id at 873. " '[C]ause' for dismissal is established because this dispute presents no legitimate reason consistent with the U.S. Bankruptcy Code for being conducted in the form of a chapter 7 liquidation case. Id. at 875 The court later denied ATC's motion for reconsideration of the dismissal with prejudice. Siemens moved under Bankruptcy Rule 9011 to recover its legal fees from ATC's attorney. The court awarded Seimen $4825.00 for approximately 17 hours of legal work at $275.00 per hour. Discussion: In In re American Telecom Corp., 319 B.R. 857 ( Bankr. N.D. Ill. 2005), before imposing a sanction, the bankruptcy court noted that the dismissal of a chapter 7 case under 707(a) as a bad faith filing does not automatically mean the court will impose sanctions upon the filing attorney. Id. at 865. When Rule 11 has been violated, the court has discretion and sanctions are not mandatory. Id. at 873 The court examined the circumstances before it and concluded that the filing of ATC's chapter 7 petition was sanctionable because it violated both prongs of a Rule 9011 analysis: it was frivolous (the objective component) and it was filed for an improper purpose (the subjective component). The court found the filing of the petition was frivolous because it was not warranted under existing law. The court first noted that several of the arguments offered in opposition to sanctions were based on the faulty premise that a corporate chapter 7 debtor is eligible for a discharge. The court then discussed the absence of Seventh Circuit precedent interpreting "cause" under section 707(a). However, the court concluded, if legal research was conducted, it would have predicted that filing a chapter 7 petition for an inactive corporate debtor with only one creditor who was not an insider on the eve of trial as a litigation tactic for the primary benefit of the debtor's principals and to the detriment of the primary creditor was not warranted under existing federal law. The court was unpersuaded by ATC's legal arguments that the filing of the petition constituted an "extension modification or reversal of existing law or the establishment of new law." ATC argued that Siemens did not have standing to litigate the alter ego claims in state court because the chapter 7 trustee would be the only party with standing until the trustee abandoned the alter-ego claims. ATC further argued that the automatic stay imposed by the chapter 7 filing could replace the appeal bond in its collection dispute with Siemens to prevent Siemens from executing on the antitrust claims. The court found that neither of ATC's legal positions was a sufficient justification for federal intervention in what was essentially a two party dispute. Id at 867 to 872 In addition, to file the chapter 7 case for the purposes of allowing ATC to prosecute an appeal without posting an appeal bond and to benefit the insiders from delay and forum shopping "is an abuse of a legal privilege for the purpose of gaining tactical advantages in nonbankruptcy litigation." Id at 871 The bankruptcy court also quickly found the filing the petition met the second prong of the Rule 9011 test since the motive was to delay, frustrate and cause Siemens expense. The court looked to objectively ascertainable circumstances to support an inference that the motive was improper; direct evidence of intent was not required. The court again discussed that it found the circumstances surrounding the filing of the chapter 7 problematic. The debtor strategically filed a chapter 7 before a significant legal event to delay Siemens and possibly find a more favorable forum for the alter ego suits against the principals. Id at 872 to 873. "[T]he problem is not that ATC's insiders want to entirely avoid trial, . . . . the problem is that they want a delayed trial . . . in a potentially more favorable bankruptcy forum without presenting a factual scenario that truly implicates the policies justifying use of the alternative forum." Id at 872.(citations omitted) In imposing sanctions upon ATC's attorney, the court was apparently influenced by several other factors. ATC appeared to use the bankruptcy process to improperly impose the automatic stay rather than avail itself of existing state law procedures and obtain an appeal bond. ATC's principals had the opportunity to legitimately invoke the automatic stay by filing individual bankruptcy cases. Siemens offered ATC the opportunity to use the "safe harbor" of Rule 9011 and voluntarily dismiss the chapter 7 filing but ATC elected to proceed with the chapter 7 case. ATC attempted to amend its petition to add non-insider creditors in what appeared to be an effort to provide after-the- fact justifications for the filing of the petition. The court also expressed its concern that a bankruptcy case is too often viewed by general and nonbankruptcy practitioners as " a panacea for state court litigation that has gone awry". Id at 874. Comment: This decision adds to the arsenal of lawyers for creditors and offers a cautionary tale to those counseling litigants to flee to the bankruptcy court. Many of us may take exception to the court's narrow view of a legitimate corporate chapter 7 filing and hold to the view that there are legitimate reasons beyond the orderly liquidation of the corporation's assets for the benefit of creditors. However, the court's detailed analysis of the type of circumstances that will give rise to a dismissal of a petition with prejudice and the potential of a Rule 9011 sanction should prove to be helpful tool for attorneys. Counsel for debtors and creditors can refer to In re American Telecom Corp when considering the implications of transferring a dispute from the state court to the bankruptcy court. Karen J. Porter Case Law UpdateGovernment Adjustment for a Medicare Overpayment Constitutes a Recoupment. A nursing home in Chapter 11 was overpaid by Medicare because it took Medicare money for the expenses of third-party-provided services but then did not pay those third parties as required. Court found that a government adjustment for a Medicare overpayment constitutes a recoupment, and not a setoff, and therefore such an adjustment is permissible and unaffected by the bankruptcy context. The Court held that the government was able to recover the overpayments to the nursing home and put them back into Medicare and the nursing home's estate was not entitled to the funds for distribution to its creditors. Slater Health Center, Inc. v. U.S. (In re Slater Health Center, Inc.), 2005 U.S. App. LEXIS 2663 (1st Cir. Feb. 16, 2005). Judicial Lien Impairs Debtor's Statutory Exemption to the Extent of the Value of All Liens and Encumbrances Against the Property. Applying the statutory formula in 11 U.S.C. § 522(f)(2)(A) to determine the extent of impairment, the Court ruled that the value of all liens and encumbrances against property, and not simply the value of liens that were senior to the judgment lien that debtor sought to avoid must be included in the determination. The Court found that refusing to apply the statutory formula as written "may result in denying deserving debtors the fresh-start advantage § 522(f) was enacted to provide." Brinley v. LPP Mortgage (In re Brinley), 2005 U.S. App. LEXIS 4606 (6th Cir. Mar. 22, 2005). Claim for Unpaid Workers' Compensation Insurance Premiums Given Priority. The Court ruled that a claim by the insurance company against the estate of the debtor for unpaid workers' compensation insurance premiums is to be given priority under § 507(a)(4) of the Bankruptcy Code. Aligning with the Ninth Circuit, the Court found the statute to be plain and unambiguous. Relying on the statute's plain meaning, § 507(a)(4) accords priority status to such claims as "contributions to an employee benefit plan arising from services rendered" under the statute. Howard Delivery Service, Inc. v. Zurich American Ins. Co. (In re Howard Delivery Service, Inc.), 2005 U.S. App. LEXIS 4816 (4th Cir. Mar. 24, 2005). Parochial School Tuition is not a Reasonable Expense or Charitable Contribution. Debtors were not able to convince the Court that their children's attendance of parochial schools was a reasonably necessary expense under their Chapter 13 plan. Debtors did not demonstrate any educational necessities or special circumstances why their children needed to attend parochial school instead of public school. "The only reason advanced by the debtors is preferential, i.e., their children have always attended parochial school because of the family's strong religious ties …. Allowing these Debtors to pay parochial school tuition which over the life of the Plan will exceed the amount distributed to creditors, is to require general creditors to fund the private education of the Debtors' kids." Watson v. Boyajian (In re Watson), 2005 U.S. App. LEXIS 4857 (1st Cir. Mar. 25, 2005). Debtors May Claim Homestead Exemption on a Contractually-Binding Deposit with a Builder for Improvements. Applying the doctrine of equitable conversion, the Court found that a Kansas debtor who enters into a valid contract with a builder prior to the filing of an involuntary bankruptcy petition against the debtor, secured by a deposit placed with a builder prior to the petition being filed, may claim under the Kansas homestead exemption any amount of the deposit actually spent on improvements to the homestead. The deposit is said to be equitably converted into construction at the moment the contract is executed and the not-yet-complete construction is equitably converted into an exempt asset. Therefore, the Court found that the deposit is "part and parcel of the homestead and is exempt to the extent that the debtor actually uses it to improve the homestead." Notably, the Court, ruling on an issue of first impression, applied equitable conversion to a deposit with a builder since the "equitable conversion doctrine is not actually limited to sales contracts. It may be invoked in any case in which a party is under a legal duty to convey." Finally, the Court made note that "[i]f this rule (the ruling of the case) reinforces inequities between debtors in Kansas and debtors in other states, such inequities are the wages of Kansas' unlimited homestead exemption. The ability of Kansas debtors to put down deposits prior to involuntary petitions being filed against them is consistent with Kansas' legislative choice to enact an unlimited and debtor-friendly bankruptcy exemption scheme." Jenkins v. Hodes (In re Hodes), 2005 U.S. App. LEXIS 4860 (10th Cir. Mar. 25, 2005). Paige E. Barr Phone: (312) 558-6444 U.S. BANKRUPTCY JUDGESHIP VACANCY - Western District of PennsylvaniaBankruptcy judges are appointed to 14-year terms pursuant to 28 United States Code §152. Current salary is $149,132 per annum. The position is seated in Pittsburgh with associated travel. Applicants must be members in good standing of the highest court of at least one state, the District of Columbia, or the Commonwealth of Puerto Rico, and in every other bar of which they are members. Applicants should have engaged in the active practice of law for at least five years; demonstrate outstanding legal ability and competence, and a commitment to equal justice under the law; and indicate by their demeanor, character and personality that they would exhibit judicial temperament if appointed. Qualified candidates will be considered equally and without regard to race, sex, age, disability, religious affiliation or national origin. An extensive background in bankruptcy practice is not required. The name of the candidate selected for the position will be published for public comment prior to appointment. The application process is entirely automated; the application form may be viewed at www.ca3.uscourts.gov. No paper applications or attachments will be accepted. To apply, e-mail your request for an application. Applications are due by noon, Thursday, April 7, 2005. After reviewing the applications, the Selection Committee plans to conduct interviews on selected candidates on or about May 3, 2005. Theresa L. Burnett |