| In this issue: |
| Sua Sponte Annual Survey of Business Bankruptcy Case Analysis Case Law Update Nominating Committee Report Washington Hot News Member News |
| Annual Survey of Business Bankruptcy |
| The Annual Survey of Business Bankruptcy is just around the corner! Mark your calendars to participate in this important program (and, remember…you DON’T have to leave your office to attend!). Thursday, June 19, 2003 This review will cover recent cases on business bankruptcy, ranging from recent Chapter 11 cases at the circuit level to lower court cases from around the country. Click here
for full details. |
| Nominating Committee Selects Candidates |
| The Nominating Committee for the Bankruptcy Section met to select a slate of candidates for positions on the Section's Executive Council for terms beginning in July, 2003. |
| Washington Hot News |
May 23, 2003 The Senate passed the $350 billion tax cut bill 51-50 on Friday, with Vice President Cheney casting tie-breaking vote. The bill now goes to President Bush's desk. |
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Sua Sponte
Efficiency. Affordability. Quality.
Judith Greenstone Miller
Raymond & Prokop, P.C.
jmiller@raypro.com
Efficiency. Affordability. Quality. These are three words that seem to sum up our lives these days. Although time and money are at a premium, we can’t and shouldn’t give up our expectation of quality. Over these past ten months as Chair of the Bankruptcy Section, I have tried to highlight those “gems” of the CLLA that enrich our practice…and this month is no different. In that regard I offer you the following two suggestions for consideration.
On June 19, 2003, the CLLA and its Fund for Public Education will hold its
Annual Survey of Business
Bankruptcy via telephone seminar technology.
Case Analysis
Post-petition, Pre-rejection Payments Due Under Terms of Lease Entitled to Administrative Priority
Carole Friedman
Jaffe, Raitt, Heuer & Weiss
cfriedman@jafferaitt.com
Summary: In In re Palace Quality Servs. Indus., Inc., 283 B.R.
868 (Bankr. E.D. Mich. 2002), the Court held that RDK&Z Lease Company was
entitled to an administrative claim for the unpaid post-petition rents and late
fees due under the lease agreement under Section 503 of the Bankruptcy Code notwithstanding
the Chapter 7 trustee’s argument that the equipment leased was not an “actual
and necessary” expense.
Case Law Update
Catherine E. Vance, Esq.
vance76@earthlink.net
(614) 336-3861
Nondischargeability. Showing of undue hardship does not require “all or nothing” approach to discharge of student loans; bankruptcy court has equitable authority to discharge only so much of student loan that constitutes undue hardship. Saxman v. Educ. Credit Mgmt. BJR Corp. (In re Saxman), 325 F.3d 1168 (9th Cir 2003).
Sua Sponte
Efficiency. Affordability. Quality. These are three words that
seem to sum up our lives these days. Although time and money are at a premium,
we can’t and shouldn’t give up our expectation of quality. Over these
past ten months as Chair of the Bankruptcy Section, I have tried to highlight
those “gems” of the CLLA that enrich our practice…and this month
is no different. In that regard I offer you the following two suggestions for
consideration.
On June 19, 2003, the CLLA and its Fund for Public Education will hold its Annual Survey of Business Bankruptcy via telephone seminar technology. This is the epitome of maximizing efficiency, affordability and quality. In two hours you, and all of your colleagues, if you choose, can attend a comprehensive survey of the important bankruptcy cases decided in the past 12 months. Professor Bruce Markell of University of Nevada, Las Vegas School of Law, will review all major business bankruptcy cases of the last year. Topics will include recent case trends in section 363 sales, critical vendor motions and other first day orders, claims and recharacterization. This efficient summary is designed to provide you with the tools you need to keep up to date on the latest cases, and to let you know how they may affect your day-to-day practice.
Each year this program receives outstanding reviews from its attendees, both for its content and its format. In fact, 100 percent of the 100+ attendees ranked this program as “good” or “excellent” in 2002. Professor Markell’s materials also received equally high marks. For a list of the cases he will cover, click here. His materials will include case summaries and citations.
Thanks to the Audio Seminar format, you can participate in the program via telephone and don’t need to leave your office. It is the perfect program when time is at such a premium! In addition, you can invite others to listen to the program with you for no additional cost. If your colleagues need CLE, they can pay a reduced CLE-only fee. Register today, by clicking here.
Another opportunity for quality programming can be found at the CLLA events held at the National Conference of Bankruptcy Judges (October 15-18, 2003 – San Diego, California). There is no better forum for networking among your colleagues nationally and having access to a wide variety of the highest quality education. For almost two decades, the CLLA has produced two of the most highly regarded programs at this annual conference – the CLLA Breakfast and the “Current Developments in Hot & Emerging Areas” Educational Program.
This year I’m pleased to announce that our educational program is being renamed “The 18th Annual Honorable Frank W. Koger Current Developments in Hot & Emerging Areas Memorial Educational Program.” This program is consistently rated as the premiere educational program at the conference and we are pleased and honored to rename it in the memory of the man whose vision both built and sustained this program. This year’s panelists include: The Honorable Alfred M. Wolin, United States District Court (Newark, NJ); The Honorable David Kennedy, Chief United States Bankruptcy Court (Memphis, TN); Selinda Melnik, Buchanan Ingersoll PC (Wilmington, DE); John Collen, Duane Morris LLP (Chicago, IL); and G. Eric Brunstad, Jr., Bingham, McCutchen LLP (Hartford, CT).
In addition to the educational program, the Annual CLLA Breakfast is a must-attend during the NCBJ conference. This year’s speaker is Larry Cunningham, a former CIA agent with an expertise in security. He will be speaking on issues regarding the Patriot Act.
The full registration brochure is available by clicking here. Please take a moment to review the breadth of programming available. You will find that this is a program that is worth the time. And, as a quick reminder – the NCBJ events and hotels fill quickly. Please take a moment to register today.
Judith Greenstone Miller
Raymond & Prokop, P.C.
26300 Northwestern Highway
4th Floor - P.O. Box 5058
Southfield, MI 48086-5058
Phone: 248-357-3010
Fax: 248-357-2720
jmiller@raypro.com
www.raypro.com
Case Analysis
Post-petition, Pre-rejection Payments Due Under Terms of Lease Entitled
to Administrative Priority
Summary: In In re Palace Quality Servs. Indus., Inc., 283 B.R. 868 (Bankr. E.D. Mich. 2002), the Court held that RDK&Z Lease Company was entitled to an administrative claim for the unpaid post-petition rents and late fees due under the lease agreement under Section 503 of the Bankruptcy Code notwithstanding the Chapter 7 trustee’s argument that the equipment leased was not an “actual and necessary” expense.
Facts: Palace Quality Services Industries, Inc. (the “Debtor”) was in the commercial laundry business. Prior to filing for relief under Chapter 11, the Debtor leased two “tunnel washer” machines from RDK&Z Lease Company (the “Lessor”) for use in its business. The Debtor filed for relief under Chapter 11 on October 9, 1998. It operated under Chapter 11 for over a year, and remained in the Chapter 11 proceeding as a non-operating entity for approximately five months. The Debtor converted its case to a Chapter 7 on November 1, 2000. The Chapter 7 trustee did not assume the Lessor’s lease; therefore, it was deemed rejected as a matter of law on December 30, 2000. Neither the Lessor nor the Chapter 7 trustee made any effort to remove the washers after the rejection of the lease.
The Lessor filed a motion seeking the allowance of an administrative expense for 1) the actual unpaid lease payments during the Chapter 11 proceeding, 2) unpaid rent for the two months of the Chapter 7 proceeding prior to the automatic rejection of the lease agreement, and 3) late fees associated with the unpaid rent.
Discussion: The Lessor claimed that it should be granted Chapter 11 and Chapter 7 administrative claims for unpaid rent and late fees in the amount actually due under the lease agreement because both the Debtor and the Chapter 7 trustee benefited from the retention of the two washers, even after the Debtor ceased operations. The Court, in an exhaustive 67 page opinion, agreed that the Lessor was entitled to administrative claims under Section 503(b)(1)(A) of the Bankruptcy Code in the amounts requested.
The Court began its analysis with Section 541, explaining that “unexpired leases automatically become part of the bankruptcy estate at the inception of the bankruptcy proceeding.” The Court stated that Section 541(a)(1) only provides for the bankruptcy estate that which the debtor has as of the petition date: “Whatever right the trustee has under Section 541(a)(1) must derive from debtor. Therefore, the estate must be bound by the same lease terms [including the agreed upon rental rate] as those which bound the debtor pre-petition.” Furthermore, the Court noted that there is no other provision in the Bankruptcy Code which empowers a trustee to rewrite the terms of a lease agreement while the trustee decides whether to assume or reject the lease.
The Court reasoned that according to Section 503(b)(1), post-petition rent that accrues prior to a lease’s rejection should be allowed as an administrative expense. Given that the unexpired lease constitutes property of the estate, it follows that the actual rental payments associated with the lease agreement would be a necessary cost to preserve that particular property interest. When the lease is rejected it is no longer part of the estate; therefore, rents which accrue subsequent to the rejection are not entitled to an administrative priority.
The Court noted, however, that “[u]nfortunately, there are numerous decisions which contradict this logic.” Those cases uniformly hold that an administrative expense claim for rents during the post-petition/pre-rejection period for a lease is limited to the reasonable rental value of the property subject to the lease. However, what the Palace Quality Court discovered (and to which it devoted most of its opinion) was that all of the decisions which have espoused this rule have relied upon case law which was based upon an interpretation of the Bankruptcy Act of 1898, not the current Bankruptcy Code. Under the Bankruptcy Act, unexpired leases were not considered property of the estate until the trustee assumed the lease.
Unlike the Bankruptcy Act, under the current Bankruptcy Code a debtor’s leasehold interest becomes property of the estate upon commencement of the case. Additionally, Section 503(b)(1)(A) provides that all costs and expenses necessary for preservation of the estate are to be afforded priority as an administrative expense. Given that payment of post-petition rents under a leasehold interest are expenses necessarily incurred to preserve the interest pending the decision to assume or reject, the post-petition rents incurred prior to rejection should be granted administrative priority.
The Court concluded that RDK&Z Lease Company had an allowed administrative expense claim for unpaid rents and attendant late fees in the amount stated in the lease. The claim was divided between a Chapter 7 administrative claim and a Chapter 11 administrative claim.
The Palace Quality decision is noteworthy in that it turns the tide back in favor of equipment lessors in a thorough and well reasoned analysis.
Carole Friedman
Jaffe, Raitt, Heuer & Weiss
One Woodward Avenue, Suite 2400
Detroit, MI 48226
cfriedman@jafferaitt.com
Nondischargeability. Showing of undue hardship does not require “all or nothing” approach to discharge of student loans; bankruptcy court has equitable authority to discharge only so much of student loan that constitutes undue hardship. Saxman v. Educ. Credit Mgmt. BJR Corp. (In re Saxman), 325 F.3d 1168 (9th Cir 2003).
Lien Avoidance under § 522(f). Lender foreclosed on debtors’ property in Maine and filed lien for the deficiency against debtors’ property in Massachusetts. Debtors sought to avoid lien because it impaired their exemption. Held, debtors may avoid lien. Language of § 522(f)(2)(C) that “paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure” merely clarifies that entry of foreclosure judgment does not convert underlying consensual mortgage into a judicial lien and does not create exception for deficiency judgment. Banknorth, N.A. v. Hart (In re Hart), 2003 U.S. App. LEXIS 8674 (1st Cir. May 8, 2003).
Literal application of § 522(f)(2)(A) proper even where position of junior lienholder is enhanced through avoidance of lien; result is compelled by unambiguous statutory language and result is not demonstrably at odds with the intent of the drafters. Kolich v. Antioch Laurel Veterinary Hosp., Inc. (In re Kolich), 2003 U.S. App. LEXIS 8375 (8th Cir. May 2, 2003) aff’g Kolich v. Antioch Laurel Veterinary Hosp., Inc. (In re Kolich), 273 B.R. 199 (8th Cir. B.A.P. 2002).
Fraudulent Transfers. Federal appellate court certified to the Florida Supreme Court the question of whether, under the Florida Uniform Fraudulent Transfer Act, there is a cause of action for aiding and abetting a fraudulent transfer when the alleged aider-abettor is not a transferee. Freeman v. First Union Nat’l., 2003 U.S. App. LEXIS 8666 (11th Cir. May 7, 2003).
Sovereign Immunity. Suit against United States trustee alleging it acted negligently and fraudulently in connection with appointment and supervision of examiner is a suit against the United States which may not be maintained because the United States has not waived sovereign immunity. Balser v. Dept. of Justice, 2003 U.S. App. LEXIS 8084 (9th Cir. Apr. 29, 2003).
Avoidance of Postpetition Transfer. Trustee alleged law firm received payment for representation in nonbankruptcy proceeding from trust in which debtor held beneficial interest. Held, trustee’s notice to law firm of possible avoidability of payments did not impose on law firm an affirmative duty to investigate source of funds for payment and firm’s knowledge that trustee was conducting investigation was not of itself probative of whether firm had reason to believe it was being paid from estate assets. Wasserman v. Bressman (In re Bressman), 2003 U.S. App. LEXIS 7932 (3d Cir. Apr. 25, 2003).
Sale Free and Clear of Interests. Sale order issued under § 363, which purports to authorize transfer of debtor’s property “free and clear of all liens, claims, encumbrances, and interests,” operates to extinguish a lessee’s possessory interest in the property notwithstanding terms of § 365(h), which operate to preserve that possessory interest. Precision Indus. v. Qualitech Steel SBQ, LLC, 2003 U.S. App. LEXIS 7612 (7th Cir. Apr. 23, 2003).
Rejection Damages. Casualty value provisions of rejected lease, although labeled as liquidated damages, were unenforceable penalty provisions. A lessee may not convert it hopes or expectations of a favorable lease renewal at the end of a lease term into a right that it did not possess as an entitlement by reason of its status as a lessor, to whom the lessee had the unfettered right simply to return the equipment at lease end. Reorganized Debtors Montgomery Ward & Co., Inc. v. Meridian Leasing Corp. (In re Montgomery Ward Holding Corp.), 2003 U.S. App. LEXIS 7050 (3d Cir. Apr. 14, 2003).
Catherine E. Vance, Esq.
Columbus, Ohio
614-336-3861
vance76@earthlink.net
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JAFFE RAITT HEUER & WEISS and KILPATRICK & ASSOCIATES FORM OF COUNSEL RELATIONSHIP
Detroit-based Jaffe Raitt Heuer & Weiss, P.C. and Auburn Hills-based Kilpatrick & Associates, P.C. announced that they have established a formal of counsel relationship. The announcement was made by Jaffe Raitt CEO Rick Zussman and Kilpatrick & Associates Managing Partner Richardo Kilpatrick.
“We are excited about the opportunities that this affiliation presents,” said Zussman. “Richardo and his team of talented attorneys have an outstanding reputation both regionally and nationally. This of counsel relationship gives Kilpatrick & Associates the opportunity to draw from the full range of corporate legal services offered by Jaffe Raitt and gives our firm the opportunity to align ourselves with an outstanding partner.”
Kilpatrick & Associates is a certified Michigan Minority Business Enterprise and practices in the areas of insolvency and creditors rights, immigration and naturalization, commercial litigation, commercial collection and foreclosure activities, and recovery of collateral. The firm serves as regional collection counsel for Sears and Ford Motor Credit, and also represents BankOne and Wayne County.
Jaffe Raitt is a Detroit-based, full service business law firm with more than 80 attorneys and offices in Detroit, Ann Arbor, Port Huron and Birmingham. The firm’s practice areas include appellate, aviation, bankruptcy, business, criminal, e-business, electronic banking, labor, environmental, estate planning, family, financial services, insurance, intellectual property, litigation, mergers & acquisitions, mortgage banking, public finance, real estate, securities and tax law.
Jay L. Welford, Bankruptcy Section Member and Past Chair
Jaffe, Raitt, Heuer & Weiss
One Woodward Avenue Suite 2400
Detroit, MI 48226
Phone: 313-961-8380
Fax: 313-961-8358
jwelford@jafferaitt.com
FORMER FINLEY KUMBLE PARTNER GARY L. BLUM TO HEAD BECKER & POLIAKOFF’S BANKRUPTCY PRACTICE
Becker & Poliakoff, P.A., a Florida-based, statewide and international
commercial law firm, appointed Gary L. Blum to head the firm’s growing Bankruptcy
& Financial Restructuring Group. In that capacity, Mr. Blum will work closely
with Ivan Reich and Jason Burnett, who oversee the bankruptcy group’s two
main offices in Fort Lauderdale and Jacksonville, respectively.
A former partner in the well-known New York law firm Finley Kumble, Mr. Blum has
concentrated his law practice exclusively in the area of bankruptcy and insolvency
law for over 40 years and has been lead counsel in numerous high profile bankruptcy
and reorganization cases throughout the country. His work includes serving as
counsel to the Equity Committee in the Allegheny International Corp. cases, with
its complex valuation and legal issues and extensive corporate governance contests,
which produced the first successful public company stockholders' proxy fight in
Chapter 11.
Ivan Jac Reich, Bankruptcy Section Member
Becker & Poliakoff, PA
3111 Stirling Road PO Box 9057
Fort Lauderdale, FL 33310-9057
Phone: 954-985-4135
Fax: 954-985-4176
NOMINATING COMMITTEE SLATES CANDIDATES
The Nominating Committee for the Bankruptcy Section met to select a slate of candidates for positions on the Section's Executive Council for terms beginning in July, 2003. Section bylaws specify that any section member may submit a nominating petition for a position on the Executive Council. Each petition must have signatures of at least ten Section members and be submitted to Harry Greenfield, Nominating Committee Chair, with a copy to Sarah Jolie at the CLLA Office at least five days before the Section's Annual Meeting in July.
Elections will be held on July 12, 2003 at the general membership meeting of the Bankruptcy Section during the National Convention at the Fairmont Orchid at Mauna Lani, Island of Hawaii.
Members of the Nominating Committee are: Harry Greenfield (Buckley, King, Cleveland, OH), Elizabeth Doucet (Elizabeth H. Doucet & Associates, Co., LPA, Columbus, OH), Joseph Braunstein (Riemer & Braunstein, Boston, MA), Brian Behar (Behar, Gutt & Glazer, PA, Aventura FL) and Milton Goldfarb (Milton P. Goldfarb, LLC., St. Louis, MO)
Harry Greenfield, Nominating Committee Chair, announced the following candidates:
Officers (1 year term: 2003-2004
Chair - Louis Robin, Fitzgerald, O'Brien, Robin & Shapiro, Longmeadow,
MA
Chair-Elect– Alan I. Nahmias, Plotkin, Rapoport & Nahmias, Encino, CA
Secretary – Robert S. Bernstein, Bernstein Law Firm, Pittsburgh, PA
Officer (2 year term: 2003-2005)
Treasurer – Jay L. Welford, Jaffe, Raitt, Heuer & Weiss, Detroit, MI
Executive Council (three year terms: 2003-2006)
Peter Califano, Cooper, White & Cooper, LLP, San Francisco, CA
Cathy Pike, Weber and Rose, Louisville, KY
Jeffrey N. Schatzman, Schatzman & Schatzman, PA, Miami, FL
William H. Schorling, Klett, Rooney, Lieber & Schorling, PC, Philadelphia,
PA
Executive Council (one year term, 2003-2004) to complete unexpired term of resigned Council member.
Nigel Hamer, The Hamer Group, Sherman Oaks, CA
May 23, 2003
Senate passes tax relief bill without private tax collections, bill goes
to President.
The Senate passed the $350 billion tax cut bill 51-50 on Friday, with Vice President Cheney casting tie-breaking vote. The bill now goes to President Bush's desk.
House hearing on bankruptcy judgeships
At the House Judiciary Committee Commercial and Administrative Law Subcommittee hearing on May 22, several members of the bench, both bankruptcy and appellate, testified that the bankruptcy systems resources have been "strained for many years", with no new bankruptcy judgeships being created in over 10 years.
Addressing HR 1428, which creates 36 additional judgeships in 22 judicial districts, support for the legislation appeared to be unanimous. Witnesses did acknowledge that HR 975, the bankruptcy reform bill, has similar language but stated that the judges should already be in place to feel the immediate "effect of the legislation."
Tax relief bill moves without private tax collections
HR 2, the tax relief bill, appears to be on the fast track towards passage with the House agreeing to the conference report on the bill (produced earlier that day) by a vote of 231-200. The conference report, which only amounts to approximately half of what President Bush asked for is claimed to be the third largest tax cut in history, is closer to the House's original version of the bill, and does NOT contain language authorizing the use of private collection professionals by the government for unpaid taxes.
It is likely the Senate will address the bill today. Pres. Bush has indicated
he will sign the bill once it reaches his desk.
May 19, 2003
Hearing Rescheduled
The full Banking committee rescheduled a hearing to examine the Fair Credit Reporting Act and issues presented by the reauthorization of the expiring preemption provisions for May 20th at 2 p.m. in SD-538.
May 15, 2003
Tax Cut Reconciliation Legislation.
On May 9th, the House passed H.R. 2, its version of the tax cut reconciliation legislation (with the House providing for a $550 billion tax cut). The bill passed by a vote of 222 to 203, with almost unanimous Democratic opposition.
The Senate began consideration of its version, S. 2, which provides $441 billion in tax cuts on Tuesday. It is likely a vote will occur this week.
Differences in the bills will have to be ironed out in conference.
Currently, the Senate proposal includes language permitting private debt collection professionals to collect tax debts. Pursuant to the description of the proposal contained in the Senate version of the bill, the following procedure occurs:
First, the private debt collection company contacts the taxpayer by letter. If the taxpayer's last known address is incorrect, the private debt collection company searches for the correct address. The private debt collection company is not permitted to contact either individuals or employers to locate a taxpayer.
Second, the private debt collection company telephones the taxpayer to request full payment. If the taxpayer cannot pay in full immediately, the private debt collection company offers the taxpayer an installment agreement providing for full payment of the taxes over a period of up to three years. If the taxpayer is unable to pay the outstanding tax liability in full over a three-year period, the private debt collection company obtains financial information from the taxpayer and will provide this information to the IRS for further processing and action by the IRS.
The proposal specifies several procedural conditions under which the proposal would operate. First, provisions of the Fair Debt Collection Act apply to the private debt collection company. Second, taxpayer protections that are statutorily applicable to the IRS are also made statutorily applicable to the private sector debt collection companies. Third, the private sector debt collection companies are required to inform taxpayers of the availability of assistance from the Taxpayer Advocate.
The proposal creates a revolving fund from the amounts collected by the private debt collection companies. The private debt collection companies are paid out of this fund. Their compensation would be "based upon a number of factors, including quality of service, taxpayer satisfaction, and case resolution, in addition to collection results."
Previously, there has been some debate about the likelihood of success of such a program if the government composes "licensing" requirements nationwide.
In other news, last week several pieces of legislation were introduced of interest: