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SUA SPONTE
Judith Greenstone Miller
Raymond & Prokop, P.C.
jmiller@raypro.com

New York Conference a Huge Success!
With an excellent mixture of education, business and fun, I’m pleased to report that the New York Conference was a great success. The members of the National Education Committee outdid themselves with a wide variety of programming geared towards all levels. With over 15 hours of programming (including 2 hours of ethics credits), everyone found more than enough to satisfy both their CLE needs and their professional interests.

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CASE ANALYSIS
Eleventh Circuit Continues Trend of Adopting Broadest Interpretation of Disbursements for Determining Quarterly Fees Paid by Chapter 11 Debtors

Karen J. Porter, Esq.
Law Offices of Karen J. Porter, Ltd.
kjp@kjplaw.net

Summary: In In re Cash Cow Services of Florida, LLC., 296 F.3d 1261 (11th Cir. 2002), the court held that, in determining quarterly chapter 11 fees, the word “disbursement” must be interpreted broadly to include any payment made by the Debtor and would not be limited to payment of expenses or capital flowing from the bankruptcy estate.

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Cybergenics. Third Circuit’s controversial decision holding that creditors’ committees have no standing to pursue avoidance actions in chapter 11 cases vacated and matter set for rehearing en banc. Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 2002 U.S. App. LEXIS 23786 (3d Cir. Nov. 18, 2002). A full discussion of the vacated Cybergenics decision is available in the October 2002 edition of the Bankruptcy Section Newsletter.

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MEET YOUR EXECUTIVE COUNCIL

Brian Behar
Bankruptcy Section Executive Council Member & Newsletter Committee Co-Chair
bbehar@bgglaw.net

Brian Behar is a partner of Behar, Gutt & Glazer, P.A., a law firm with its main office in Aventura (North Miami), Florida, and a satellite office in Boca Raton, Florida. Brian earned his BA degree at Tulane University, in New Orleans, Louisiana, in 1981, and graduated from the Law School of St. John’s University in Jamaica, New York, in 1984. Brian is admitted in New York, New Jersey, and currently practices in Florida. He manages the Bankruptcy Department for the firm. That department represents all parties in a bankruptcy environment, including secured lenders, creditors committees, debtors-in-possession, Trustees, and individual debtors. Besides being active in the Commercial Law League, and serving on the Executive Council of the Bankruptcy Section, Brian is also active in the Certified Fraud Examiners, where he serves as an officer and director of the South Florida chapter.

Frederick M. Luper
Bankruptcy Section Executive Council Member
www.lnlattorneys.com

Frederick M. Luper is a partner in the Columbus, Ohio law firm of Luper, Neidenthal and Logan, where he serves as Chairman. His specializes in General Corporate and Business Law; Bankruptcy Reorganization and Litigation. He is a graduate of the Ohio State University School of Law. Mr. Luper is Board Certified in Business Bankruptcy Law by the American Board of Certification. He served as President of the Commercial Law League of America and is now a Council Member of the Bankruptcy Section and serves on the CLLA’s Fund for Public Education as a member of its Board of Directors. He has testified before the U.S. House of Representatives Subcommittee of the House Judiciary Committee on Bankruptcy Reform Legislation. Mr Luper is included in "Best Lawyers in America," Martindale Hubbell's "Bar Register of Preeminent Lawyers," "Who's Who in American Law," The Million Dollar Advocates Forum, and Columbus Monthly’s “Other Lawyers Call.” Winner of the Better Business Bureau's “Business Integrity Award.”

Karen J. Porter
Bankruptcy Section Executive Council Member & Newsletter Committee Co-Chair
kjp@kjplaw.net

Karen J. Porter is the principal of the Law Offices of Karen J. Porter, Ltd. Ms. Porter practices bankruptcy law, commercial law and tax collection law. Her firm serves a diverse client base of large companies, small companies, lending institutions and individuals in financial distress. Ms. Porter graduated from the University of Michigan Law School in 1982. She served as law clerk to United States Bankruptcy Judge Thomas James and as a staff attorney for the United States Bankruptcy Court for the Northern District of Illinois. Thereafter Ms. Porter continued in private practice representing the interests of debtors and creditors. Ms. Porter is a faculty member of the Illinois Professional Responsibility Institute which teaches law practice management to attorneys. She is also involved in many professional and community organizations in the City of Chicago. Ms. Porter is pleased to serve as the first African-American member of the CLLA Bankruptcy Section Executive Council.

Louis S. Robin
Bankruptcy Section Chair-Elect
Louis.Robin@Prodigy.net

Louis S. Robin is a partner in the Springfield, Massachusetts area law firm of Fitzgerald, O’Brien and Robin. He is a graduate of the Fordham University School of Law. In the early 1980’s he served as a law clerk for Bankruptcy Judge Harold Lavien, Boston, Massachusetts; earlier he served as the student law clerk for Bankruptcy Judge Roy Babitt of the Southern District of New York. He is a contributing author for the Matthew Bender’s Commercial Law and Practice Guide, and an editor of the Commercial Law League of America Law Journal. He is currently the Chair-Elect of the Bankruptcy Section of the CLLA. Attorney Robin has also testified before the Committee on the Judiciary for the U.S. House of Representatives. As a partner at Fitzgerald, O’Brien and Robin, he heads their bankruptcy department, which represents a variety of clients, including debtors, unsecured and secured creditors and trustees.

SUA SPONTE

New York Conference a Huge Success!

With an excellent mixture of education, business and fun, I’m pleased to report that the New York Conference was a great success. The members of the National Education Committee outdid themselves with a wide variety of programming geared towards all levels. With over 15 hours of programming (including 2 hours of ethics credits), everyone found more than enough to satisfy both their CLE needs and their professional interests.

At the Annual Brunch, Professor Elizabeth Warren addressed the attendees as the 2002 recipient of the Lawrence P. King Award for Excellence in Bankruptcy. Once again, she was an eloquent speaker who embodies the spirit of the late Professor King. She thanked the Commercial Law League for its consistent focus on the fair and just practice of bankruptcy, even in the face of highly politicized proposed legislation. She also reminded us that it is in the true spirit of Professor King to strive for fair and just practice in all our endeavors. We were honored both by her remarks and her passion for our shared profession.

Your Executive Council was also hard at work. The Council met on Thursday and again on Sunday to discuss the business of the Section. I’m pleased to report the following decisions:
- The Council recommended that the recipient of the Lawrence P. King Award for Excellence in Bankruptcy be awarded Honorary Life Membership in both the CLLA and the Bankruptcy Section. The Board of Governors of the CLLA approved the recommendation. In addition, the planning committee will be accepting nominations for 2003 this spring. The application will be included in a future edition of the newsletter.
- Our fabulous Newsletter Committee (that is responsible for this electronic version) recommended to the Council a new design that will allow for less scrolling and a more eye catching look. In addition, they will be adding a Member News column. You are encouraged to submit announcements for publication (i.e. Honors, firm changes, publications, speaking engagements). To make this as easy as possible, you can do so by clicking here! Look for these enhancements in January, 2003!
- The Council was pleased to report that the League’s programming at the National Conference of Bankruptcy Judges was extremely well received, with education and breakfast programs receiving excellent evaluations. The planning committee is already working on the 2003 program. Look for details in the coming months.
- The Alternative Dispute Resolution committee announced the launch of their Mediation seminars scheduled for Summer, 2003 in Atlanta and Denver.

During the Thursday Council meeting we listened as the House of Representatives voted down the proposed Rules that would allow them to vote on proposed H.R. 333. We breathed a collective sigh of relief when the votes failed to pass the rule change. As we convened the educational program the next morning, we were greeted with the news that the House had worked overtime to both pass the rules and the legislation so that the Senate could take up their discussion. While we waited for the Senate to introduce what business they planned to undertake on their last full day, the National Education and Government Affairs Committees were busily working to prepare a 3 hour educational seminar to be held on Saturday, should the Senate pass the proposed legislation…outlines were prepared, legislative documents downloaded and meeting rooms set. We were ready. But, as we hoped would happen, the Senate adjourned, leaving bankruptcy reform for the next session. While we anticipate that the bankruptcy legislation is not yet dead, maybe this time, in light of the economy and the three failed attempts at passage, the legislature will take the time to fully review the proposed legislation before it is reintroduced next session so that it provides a fairer and more balanced approach to the treatment of both debtors and creditors.

Finally, I would like to encourage you to attend the 2003 Winter Conference in New Orleans. The Bankruptcy Section will be meeting. There will be a large selection of educational programming which you can review by clicking here. And, finally…the FUN. If there is one place where you can have no doubt that you will have FUN..New Orleans is the place! So, mark your calendars for February 20 – 23, 2003. It will be a great time!

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

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CASE ANALYSIS

Eleventh Circuit Continues Trend of Adopting Broadest Interpretation of Disbursements for Determining Quarterly Fees Paid by Chapter 11 Debtors

Summary: In In re Cash Cow Services of Florida, LLC., 296 F.3d 1261 (11th Cir. 2002), the court held that, in determining quarterly chapter 11 fees, the word “disbursement” must be interpreted broadly to include any payment made by the Debtor and would not be limited to payment of expenses or capital flowing from the bankruptcy estate.

Synopsis: The Debtor, Cash Cow, was engaged in the business of making short-term high interest loans to consumers. Cash Cow made two types of loans. The first type, “title loans,” was secured by the customer’s bailment of a certificate of title to a motor vehicle. The second type of loan was referred to as a “check cashing loan.” The consumers gave Cash Cow checks and received a lesser amount of cash. Cash Cow delayed resentment of the check for two weeks and the consumer would redeem the check for its face value or Cash Cow would cash the check.

Cash Cow filed a chapter 11 case. During the chapter 11 proceedings, and before confirmation of a plan of reorganization, Cash Cow was required to pay the quarterly fees imposed upon chapter 11 debtors by 28 U.S.C. § 1930. The statute requires that chapter 11 debtors pay a fee to the United States Trustee (“UST”) each quarter on a graduated scale determined by the amount of the debtor’s “disbursements” for the quarter. The statute imposes the quarterly fee for each quarter the debtor is in chapter 11 (or fraction thereof) until the chapter 11 case is converted or dismissed.

Cash Cow paid $4,250.00 and $8,000.00 for two installments of its 1999 quarterly fees. However, Cash Cow excluded the amounts of the title and check cashing loans that it made to its customers during the quarters when it calculated the quarterly fees due to the UST. If Cash Cow included the loans as disbursements for the purposes of 28 U.S.C. § 1930, an additional $57,250.00 would be due to the UST for the two quarters in dispute.

Cash Cow argued that the loans to its customers were not “disbursements” because they were not payments for an expense, but a retail exchange of its product
(cash) for a customer’s payment (title or check). Cash Cow also argued that the quarterly fee calculation should be limited to capital flowing from the bankruptcy estate. The bankruptcy court rejected Cash Cow’s analysis and found Congress meant disbursement to mean any and all funds paid out by the chapter 11 debtor. The district court reversed, finding that a loan was not a disbursement and Congress did not intend the quarterly fees to be based on the gross volume of Cash Cow’s business.

The Eleventh Circuit reversed the district court and held that based upon the plain meaning of “disbursement” and 28 U.S.C. § 1930, the loans were disbursements subject to the UST fees. The court found there was no authority for the proposition that the UST fee calculation should be limited to payments or capital flowing from the bankruptcy estate. The court followed its reasoning in In re Jamko, 240 F.3d 1312 (11th Cir. 2001), and found that disbursements for the purposes of calculating UST fees include all payments from the bankruptcy estate, including those made in the ordinary course of the chapter 11 debtor’s business.

Discussion: With the Cash Cow decision, there are now two Court of Appeals decisions holding that the quarterly fees must be paid by chapter 11 debtors on any and all payments made by the debtor before confirmation of a plan (Cash Cow) and after confirmation (In re Jamko). The efforts of the lower courts to limit the extraction of quarterly fees from chapter 11 debtors by the government to finance the UST have once again been curtailed. (See also, In re Pettibone, 251 B.R. 335 (N.D. Ill. 2000)). The Cash Cow case is also another example of the “plain meaning” analysis being pivotal to the court’s decision. The Eleventh Circuit cites nine dictionaries in its discussion of the word “disbursement.” Litigants in bankruptcy proceedings may find the courts less receptive to arguments based upon the ambiguity of statutory language. On a final and more practical note, when debtors and creditors are analyzing the feasibility of chapter 11 reorganizations, it will be important to include the payment of the UST quarterly fees until the case is converted, dismissed or closed in the analysis.

Karen J. Porter
Law Office of Karen J. Porter, Ltd.
11 E. Adams Street Suite 1100
Chicago, IL 60603-6303
Phone: 312-673-0333
Fax: 312-673-0334
Email: kjp@kjplaw.net

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CASE LAW UPDATE

Cybergenics. Third Circuit’s controversial decision holding that creditors’ committees have no standing to pursue avoidance actions in chapter 11 cases vacated and matter set for rehearing en banc. Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 2002 U.S. App. LEXIS 23786 (3d Cir. Nov. 18, 2002). A full discussion of the vacated Cybergenics decision is available in the October 2002 edition of the Bankruptcy Section Newsletter.

Amendment to Schedules. Order denying debtor’s attempt to amend Schedule C to claim exemption in legal malpractice claim two years after involuntary case was commenced against debtor reversed. Evidence did not show debtor acted in bad faith, but that debtor was unaware of claim, and debtor acted promptly upon learning of potential malpractice claim against his attorney in a state court action. Kaelin v. Bassett (In re Kaelin), 308 F.3d 885 (8th Cir. 2002).

Subordination of Tax Liens. “Tax lien,” as used in § 724(b) of the Code, means a statutory tax lien; term does not embrace a judicial lien securing an underlying tax obligation. Because tax lien in question was not a statutory lien, claim would not be subordinated to priority unsecured claims. Barstow v. United States (In re Markair, Inc.), 308 F.3d 1057 (9th Cir. 2002).

Express text of § 724(b) subordinates interests of tax lienholders to that of priority unsecured creditors, but only up to the total amount of the tax lien. Remaining proceeds must be distributed first to junior lien claimants, next to tax lienholders and, finally, to debtor’s estate. North Slope Borough v. Barstow (In re Markair, Inc.), 308 F.3d 1038 (9th Cir. 2002).

Chapter 13 Filed in Bad Faith. Bankruptcy court did not err in dismissing Chapter 13 petition as having been filed in bad faith where debtor’s deposition testimony on the whole demonstrated she did not qualify as an “honest, forthcoming, truthful and frank debtor.” Alt v. United States (In re Alt), 305 F.3d 413 (6th Cir. 2002).

Trustee Compensation. Court rejected applicability of common fund theory for determining appropriate trustee compensation. Services performed by the trustee, although beneficial to the estate were not sufficiently analogous to those applicable to attorneys and litigants whose efforts warrant compensation under the common fund theory. Connolly v. Harris Trust Co. (In re Miniscribe Corp.), 2002 U.S. App. LEXIS 22700 (10th Cir. Oct. 31, 2002) aff’g Connolly v. Harris Trust Co. (In re Miniscribe), 257 B.R. 56 (D. Colo. 2000).

Redemption. Defendant’s practice of sending redemption agreements to individual debtors after their bankruptcy cases had closed did not violate the § 524 discharge provisions. Defendant was merely exercising its lien rights in property; agreements expressly stated that debtors would have no personal liability if they surrendered the collateral. Court rejected plaintiffs' argument that defendant’s collateral valuations exceeded fair market value of property and, by consistently awaiting closure of bankruptcy cases to take action with respect to property, defendant was attempting to collect discharged debt in violation of the Code. Arruda v. Sears, Roebuck & Co., 2002 U.S. App. LEXIS 22574 (1st Cir. Oct. 30, 2002) aff’g Arruda v. Sears, Roebuck & Co., 273 B.R. 332 (D.R.I. 2002).

Administrative Expense Priority Claims. Plain language of § 507(a)(1) required that litigation costs incurred by defendants in fraudulent transfer action be paid from estate as administrative expense priority. Brandt v. Lazard Freres & Co., LLC (In re Healthco Int’l, Inc.), 2002 U.S. App. LEXIS 21919 (1st Cir. Oct. 21, 2002).

Fraudulent Transfers: Jury Demand, Defenses. Where trustee amended fraudulent transfer complaint three months after filing, adding count for additional liability in excess of $1 million, defendant’s right to demand jury trial was revived and could be asserted in answer to amended complaint. Despite defendant’s participation in apparent Ponzi scheme, defendant was not barred as a matter of law from asserting affirmative defense that she received funds “for value and in good faith.” Orlick v. Kozyak (In re Fin. Federated Title & Trust, Inc.), 2002 U.S. App. LEXIS 22000 (11th Cir. Oct. 21, 2002).

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

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Washington Hot News

November 20, 2002
Another bankruptcy round for Senate Republicans?

Sen. Hatch (R-Utah), the Senate Judiciary Committee Chairman, again has indicated that he plans to push for bankruptcy legislation next year similar to the failed conference report from the 107th Congress. Hatch plans to work closely with Sen. Grassley (R-Iowa), the primary author of the Senate legislation in the 105th, 106th and 107th Congresses, to revive the legislation.

Some Senators, including Sen. Biden (D-De), also a member of the Committee, say they are reluctant to work on the issue next year due to their disappointment over the collapse of support in the House for the H.R. 333 conference report.

But other Democrats, like the junior Senator from Delaware, Sen. Carper (D-De), say they are willing to work with Republicans to try and cut a deal.

Of great importance is whether Sen. Schumer (D-NY), going into his own election cycle, will continue to press for restricting bankruptcy filings by abortion protesters who commit crimes. Schumer has been quoted as saying he thinks" it needs to be done."

November 18, 2002
Bankruptcy Killed for the Year.

On November 15, 2002, the House passed a version of bankruptcy reform legislation H.R. 333 that lacked disputed language opposed by the conservative wing of the Republican Party, but this destined the bill to fail in the Senate.

Senate Majority Leader Daschle (D-SD), said the bill will not be considered by his chamber because it does not have a provision that would block abortion protesters from filing for bankruptcy to avoid paying court-ordered fines and judgments. This guaranteed the reform bill would not pass this year.

"The House Republicans killed bankruptcy for the year," Daschle said. "It´s as simple as that. We had a compromise that was the result of years of work. Even if I wanted to take it up, it would never pass. It would be subject to a filibuster."

Several hours after the House rejected the rule for a conference report on bankruptcy legislation H.R. 333 by a vote of 172-243, House GOP leaders brought up another method to move the bill to the Senate. Their plan focused on removing the abortion provision from the bill.

Leaders introduced a new bill that contained most of the language from the conference agreement but without the abortion provision. They then amended H.R. 333 with the text of that new bill H.R. 5745 and pushed the legislation through the House. The new version of the bill was adopted by members just before 2:00 a.m. Friday, by a vote of 244-116.

The amended bill practically mirrors the conference report, except that in addition to removing the abortion language, it excludes a provision authorizing 28 new bankruptcy judges.

The rejection of the rule was an unusual setback for the Republican leadership and a defeat for Majority Whip DeLay (R-TX), who had been trying to win votes by circulating among members on the floor. About 20 minutes after the vote began, Speaker Hastert (R-IL) brought it to a tie of 204-204, which was the closest Republican leaders got to winning on the rule.

After House leaders acknowledged the rule was going to fail, Republicans rushed to change their votes. So many members switched from "aye" to "nay" that the clerk´s office had to double and triple count the numbers.

After the defeat, Republican leaders regrouped and decided to push forward with a "clean" bill, one which did not contain the disputed provision.

David Goch
Washington Legislative Counsel, CLLA
Webster, Chamberlain & Bean
150 North Michigan Avenue, Suite 600
Chicago, IL 60601
dgoch@wc-b.com

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©2002, Commercial Law League of America