| September 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: |
Call to Action
The CLLA is seeking a pledge from you to the Bankruptcy Section. The Section
has previously committed to guarantee the full cost of programming for CLLA
sponsored events at the National Conference of Bankruptcy Judges in Orlando,
October 10- 13, 2007. This includes the afternoon educational program, attended
by over 1000, and the speaker breakfast, attended by over 400, featuring Dave
Barry. Sua SponteDeborah K. Ebner Our Nation’s Infrastructure Is Crumbling and Needs Our Help: Tell Us How to Fund Needed Changes On Wednesday August 1st I crossed the Mississippi River on my way to Davenport Iowa. Moments after my arrival I watched in horror as CNN provided footage of the bridge collapse over that same river in Minneapolis. Although a bridge collapse may seem to be a peculiar introduction to this month’s Sua Sponte, I can’t help but see the bridge collapse as a metaphor for what could possibly be in store for our bankruptcy system. Case Law UpdatePaula Lucas License cancellation extinguishes debtors interest. The FCC’s cancellation of a debtor's licenses extinguished the debtor’s interest in those licenses and the underlying spectrum. Such cancellation did not result in any traceable proceeds, and did not constitute a lien-enforcement remedy. Thus, the bankruptcy court did not err in denying the debtor's demand for recovery of the proceeds of the licenses. In re. Magnacom Wireless, LLC 2007 U.S. App. LEXIS 22151 (9th Cir. Sept. 17, 2007). Case Analysis8th Circuit Rejects Trustee’s § 542(a) Motion to Compel Turnover to the Estate the Value of Checks Written Before Filing of Bankruptcy PetitionJoshua D. Greene And in case you missed it – ALERT! Preference action in state court Assignment for Benefit of Creditors is not preempted by the Bankruptcy CodeJames. W. McNeilly, Jr. NCBJ Sponsorship OpportunitiesThe Commercial Law League of America and its bankruptcy section have sponsorship opportunities available at the National Conference of Bankruptcy Judges ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteBy Deborah K. Ebner Our Nation’s Infrastructure Is Crumbling and Needs Our Help: Tell Us How to Fund Needed Changes On Wednesday August 1st I crossed the Mississippi River on my way to Davenport Iowa. Moments after my arrival I watched in horror as CNN provided footage of the bridge collapse over that same river in Minneapolis. Although a bridge collapse may seem to be a peculiar introduction to this month’s Sua Sponte, I can’t help but see the bridge collapse as a metaphor for what could possibly be in store for our bankruptcy system. This month I will present the first of two articles. Each article addresses a serious foundational problem in our bankruptcy system. Today I will address Trustee compensation. In October we will talk about Judicial Salaries. Both of these areas demand our immediate focused attention. The Bankruptcy Reform Act of 1978 (BRA 1978) created a pilot program using United States Trustees to relieve the judiciary from administering bankruptcy cases. The United States Trustee Program (UST) evolved to appoint approximately 1,300.00 private panel trustees to administer each and every Chapter 7 case filed. Duties of these Chapter 7 Trustees are abundant and include presiding over meetings of creditors, marshalling, safekeeping and inventorying assets of the Debtor, tracing and accounting for assets, pursuing legal action to recover preferential payments fraudulent conveyances and denying the Debtor’s Discharge, cooperating with other branches of the government in investigations involving or related to the Debtor, reporting attorneys and debtors to appropriate disciplinary bodies, and keeping creditors advised of the status of the cases. (1) In October 2005, BAPCPA (2005) expanded these duties to include at least eight additional statutory obligations. 1Since BAPCPA 2005 also permits in forma pauperis filings for qualifying persons, Trustees administer in forma pauperis cases for no compensation at all. 2 The
Trustee is a fiduciary of the bankruptcy estate and to its creditors. The Trustee
is charged with the highest standard of care, which exists whether or not there
will ever be assets to administer or funds with which to pay him or her. If
there are no assets to administer, the Trustee personally funds the burden
of “system enforcer” by compelling the Debtor’s compliance
with the requirements of the Bankruptcy Code. Indeed, despite criminal penalties
under Title 18 against concealment of assets, criminal consequences frequently
do not appear to deter the activity and hence it becomes the task of the
Trustee to detect and report these abuses. Ninety-seven percent (97%)
of the Chapter 7 cases filed are closed as having no assets to administer.
In these cases, the Trustee is paid $60.00, which is funded from the filing
fee paid by the Debtor upon case filing. (3) Concepts for funding an increase range from increasing the filing fee for the Debtor, imposing a surcharge upon amounts collected by the Office of United States Trustee in Chapter 11 cases, to surcharging the creditors in asset cases. Each concept creates its own level of complication. The National Association of Consumer Bankruptcy Attorneys (NACBA) has voiced strong objection in Congress for the imposition of additional fees upon the Debtors, the Office of UST (itself a division of the Justice Department) will express concern over surcharging its method of self- funding, and of course creditors are not thrilled with the thought of funding the administration of a Trustee’s administration. The Bankruptcy Section is presently investigating these and other methods of funding an increase in Trustee compensation and would like your opinion. Your thoughts are needed. Please click here to participate in our on-line informal survey addressing funding sources for Trustee compensation. 13 Am. Bankr. Inst. L. Rev. 5,
280 Am. Bankr. L.J. 147,
NEXT MONTH: League Support of "Federal Judicial Salary Restoration Act of 2007"The immediate need for adequate compensation for our judiciary
to ensure the best and the brightest on our Bankruptcy Benches.
Law Office of Deborah K. Ebner Case Law UpdateLicense cancellation extinguishes debtors interest. The FCC’s cancellation of a debtor's licenses extinguished the debtor’s interest in those licenses and the underlying spectrum. Such cancellation did not result in any traceable proceeds, and did not constitute a lien-enforcement remedy. Thus, the bankruptcy court did not err in denying the debtor's demand for recovery of the proceeds of the licenses. In re. Magnacom Wireless, LLC 2007 U.S. App. LEXIS 22151 (9th Cir. Sept. 17, 2007). Plain language of the Illinois Securities Law (1953) covers both purchasers and sellers of stock. In a dispute over the sale of shares in a closely held corporation back to the corporation, summary judgment for defendant-corporation is affirmed where the plain language of the Illinois Securities Law of 1953 encompasses both purchasers and sellers of stock such that plaintiff's lawsuit was barred by the law's statute of repose. Klein v. George G. Kerasotes 2007 U.S. App. LEXIS 22062 (7th Cir. September 17, 2007). A bankruptcy discharge eliminates the debtor's personal liability for a debt, but not the debt itself. The court erred in finding that a debtor's discharge prevented the debtor's trustee from being able to prove any malpractice damages against the law firm that represented the debtor pre-petition. Stanley v. Trinchard 2007 U.S. App. LEXIS 21937 (5th Cir. Sept. 17, 2007). Court to rely on Federal Rule of Civil Procedure 60(b)(6) to ensure Code compliance. The bankruptcy court did not err when it relied upon Federal Rule of Civil Procedure 60(b)(6) in limiting its prior order to ensure that the order complied with the Bankruptcy Code. In re. Int’l Fibercom, Inc. 2007 U.S. App. LEXIS 21826 (9th Cir. Sept. 12, 2007). Court must balance the likelihood of success in reorganization against the relative hardship of the parties. When a bankruptcy debtor applies for a 11 U.S.C. section 105(a) preliminary injunction to stay a proceeding in which the debtor is not a party, the bankruptcy court must balance the debtor's likelihood of success in reorganization against the relative hardship of the parties, as well as consider the public interest if warranted. Solidus Networks, Inc. v. Excel Innovations, Inc. 2007 U.S. App. LEXIS 21459 (9th Cir. September 10, 2007). A oversecured creditor may be entitled to collect bargained-for prepayment penalties as the functional equivalent of unsecured debt. In a bankruptcy dispute over a commercial lender's right to receive a bargained for prepayment penalty from a solvent debtor, judgment for debtor is reversed where, regardless of reasonableness, an oversecured creditor may be entitled to collect bargained-for prepayment penalties as the functional equivalent of unsecured debt. The matter is remanded to the bankruptcy court to determine whether the prepayment penalties are enforceable under section 502 of the Bankruptcy Code In Re. Louis A. Gencarelli 2007 U.S. App. LEXIS 20751 (1st Cit. Aug.30, 2007). Debtor bears the burden of establishing that creditor has knowledge of the automatic stay. In order to demonstrate a violation of an automatic stay of 11 U.S.C. section 362(k)(1) in bankruptcy proceedings, the debtor bears the burden of establishing, by a preponderance of the evidence, that the creditor knew of the automatic stay and intended the actions that constituted the violation; no specific intent is required. A determination that defendant-dealership willfully violated an automatic stay of 11 U.S.C. section 362 by repossessing a pickup truck after a Chapter 13 bankruptcy petition had been filed is affirmed where: 1) the determination by a preponderance of the evidence that defendant willfully violated the automatic stay was proper; 2) a Retail Installment Contract and Security Agreement was not an executory contract; and 3) defendant was properly denied its post-petition attempt to perfect its lien. Johnson v. Smith 2007 U.S. App. LEXIS 20688 (10th Cir. Aug. 28, 2007). Creditor required to return pre-petition claim. Where a critical vendor/creditor received payment of its pre-petition claim, and then later breached its critical contract with the debtor, the creditor was required to return the funds representing its pre-petition claim pursuant to the critical vendor agreement. In re. Meridian Automotive Systems (BKR. DE August 27, 2007). Paula Lucas Case Analysis: A Bar Date is a Bar8th Circuit Rejects Trustee’s § 542(a) Motion to Compel Turnover to the Estate the Value of Checks Written Before Filing of Bankruptcy PetitionJoshua D. Greene Summary In Brown v. Pyatt (In re Pyatt), 486 F.3d 423 (8th Cir. 2007), the Eighth Circuit Court of Appeals affirmed a Bankruptcy Appellate Panel ruling rejecting a Chapter 7 trustee’s Section 542(a) motion to compel the debtor to turn over to the estate the value of several checks written shortly before the filing of the bankruptcy petition, but honored by the bank after filing, finding that the preference provisions of the Bankruptcy Code were a better vehicle to recover the property. Factual Background The debtor filed for Chapter 7 relief on October 4, 2004 and reported that he had $300 in his checking account as of the date of the bankruptcy filing. At the meeting of creditors the trustee discovered that the debtor actually had $1,938.76 in his checking account when he filed his petition. The debtor had written several checks to creditors that had not been honored by the bank before filing, but were honored after the bankruptcy petition was filed. The debtor had simply subtracted the amount of the outstanding checks from the value of his checking account on the date of filing, which the parties apparently agreed was not fraudulent. The Chapter 7 trustee subsequently filed a motion under Section 542(a) of the Code to compel the debtor to turn over to the estate the value of the checks that had not been honored as of the date of the filing. The bankruptcy court granted the trustee’s motion, finding that since the assets represented by the checks were still in the debtor’s bank account on the date of the bankruptcy filing, they were property of the estate subject to turnover under Section 542(a). The Bankruptcy Appellate Panel reversed, concluding that the trustee was in a better position to recover the property from the creditors who received the checks under its Section 549 avoidance powers. Pyatt v. Brown (In re Pyatt), 348 B.R. 783 (B.A.P. 8th Cir. 2006). A concurring opinion noted that the trustee may not use the turnover provisions of Section 542(a) because the debtor no longer had control of the account funds at the time the trustee demanded them. Discussion The Eighth Circuit began its analysis by recognizing that the funds transferred by the checks were property of the estate. Under Section 541(a)(1), property of the estate is defined as “all legal and equitable interests of the debtor in property as of the commencement of the case.” Since the debtor had a legally recognized interest in his checking account, the account balances were property of the estate when the petition was filed. Next, the Court found that anytime before the checks were honored, the funds represented by the checks were within the “possession, custody, or control” of the debtor under Section 542(a). The real issue was whether the debtor could be forced to turn over the value of the funds when he did not have “possession, custody, or control” over the funds when the trustee’s motion to compel turnover was filed. The debtor argued that he could not be forced to turn over the property when he had no control over it. In response, the trustee argued that a motion to compel turnover may be brought if the debtor had control over the property sometime after the petition was filed even though he may not have control over the funds at the time the motion to compel turnover was brought. The Court first examined the language of Section 542(a). It noted that while the language of Section 542(a) imposes an obligation on a party who comes into “possession, custody, or control” of property after the bankruptcy petition is filed to deliver the property to the trustee, it says nothing about whether that obligation continues after the custody or control over the property ceases, or whether the entity lacking control may be subject to turnover. In addition, the Court noted that Section 542 did not address what turnover remedies are available to the trustee. Because of this apparent lack of guidance from Section 542(a), the Court looked to case law preceding the enactment of the 1978 Bankruptcy Code. In Maggio v. Zeitz (In re Luma Camera Service, Inc.), 333 U.S. 56 (1948), the United States Supreme Court held that turnover proceedings are permissible only when the evidence satisfactorily establishes the existence of the property or its proceeds, and possession thereof by the defendant at the time of the proceeding. Citing this case, the Eighth Circuit found that before the modern Bankruptcy Code was enacted, turnover motions would be granted only if the entity had control over the property at the time the motion to compel is brought. The trustee argued that the Maggio decision is no longer good law since Section 542(a) allows the trustee to demand “the value” of the property rather than the property itself. According to the trustee, if present possession were required, Section 542 would only allow the trustee to demand turnover of the property itself. The Court disagreed, saying that Maggio allowed turnover “of the property or its proceeds,” so if the debtor transfers the property and receives value for it, the trustee may compel the debtor to turn over the value of the property since he still has control over the proceeds. Thus, according to the Court, the Maggio decision was preserved under the modern Bankruptcy Code. The trustee also argued that the Court’s interpretation of the statute
renders Section 542(c) superfluous. That section says that an entity
which lacks actual knowledge or notice of the bankruptcy is allowed to transfer
property of the estate. According to the trustee, this is an affirmative
defense to a turnover action, which would not be necessary if an entity was
required to be in present possession of property before the trustee could move
to compel turnover. Again, the Court disagreed, saying that “the
function of Section 542(c) is to limit the turnover duty created in Section
542(a), rather than limit the possible defendants in a turnover proceeding … An
entity can thus fall outside the exemption of Section 542(c) and be subject
to the turnover duty, but still not be a proper defendant in a turnover proceeding.” Applying
its reasoning to the case at hand, the Court said that Pyatt would have had
the duty to turn over the money in his checking account before the checks were
honored, but the trustee could not now compel him to do so since the funds
are no longer in his control. Practice Pointer In light of the ruling in this case, an avoidance action in the Eighth Circuit pursuant to Section 549 is clearly the better procedure for a trustee to recover checking account funds when the debtor writes checks shortly before the petition is filed. In addition, counsel for debtor should advise their clients not to issue checks immediately before filing and request that all transactions clear the bank before filing. Given the fact that the Eighth Circuit specifically disagreed with the Seventh Circuit’s holding, it should be interesting to see how other appellate courts address this issue. Joshua D. Greene And in case you missed it – ALERT! Preference action in state court Assignment for Benefit of Creditors is not preempted by the Bankruptcy CodeJames. W. McNeilly, Jr. Summary In Ready Fixtures Company, Michael Polsky, Receiver, v. Stevens Cabinets, d/b/a Stevens Industries, Inc., 488 F. Supp. 2d 787; 2007 U.S. Dist. LEXIS 41664 (U.S. District Court, W.D. WI 2007), the court denied a creditor’s motion to dismiss an action to collect a preference under Wisconsin’s Assignment for Benefit of Creditors statutes. The creditor argued that the state statute was preempted by the United States Bankruptcy Code. Factual Background Plaintiff, a Wisconsin citizen, was appointed by the state court as receiver for the assets of Ready Fixtures Company. Defendant is a Delaware corporation, with its principal place of business in Illinois. Plaintiff’s Complaint alleges that between January 13, 2005 and March 9, 2005, during which time Ready Fixtures was insolvent, Ready Fixtures made a total of $79,874.85 in payments to Stevens Cabinets on invoices which had become due between December 13, 2004 and January 30, 2005. On May 13, 2005, Ready Fixtures filed an Assignment for Benefit of Creditors with the circuit court of Washburn County, Wisconsin. That day, the court appointed Plaintiff, Michael Polsky, receiver of Ready Fixtures’ assets. Polsky later brought suit against Stevens Cabinets in state court, alleging that the payments to Stevens constituted preferences under Wisconsin’s insolvency preference statute. Stevens removed the suit to federal district court and moved to dismiss, arguing that the state court insolvency preference statute (Wis. Stats. §128.07) was preempted by the federal bankruptcy code preference statute (11 U.S.C. §547). Discussion The court began its discussion with the statement that if Ready Fixtures had actually filed a bankruptcy petition, the Wisconsin preference statute could not have been used to recover any alleged preferential transfers, as it would have been preempted by the Bankruptcy Code preference statute. Even though no bankruptcy petition had been filed, the court then considered the creditor’s argument that the state preference statute was preempted by the Bankruptcy Code. The court held that the creditor bore the burden of showing that the state statute conflicted with federal law, by proving either that it was impossible to comply with both laws, or that the state law obstructed the “accomplishment and execution of the full purposes and objectives of Congress.” Defendant Stevens conceded that there were no grounds to find preemption under the first prong of the test, because the state preference statute did not conflict with the Bankruptcy Code preference statute. However, Stevens argued that because the state statute differed from the federal statute, it conflicted with the goals of the Bankruptcy Code. The court detailed two of the ways in which the Wisconsin preference statute differs from the federal statute: 1) the state court preference look-back period is four months, as opposed to ninety days; and 2) according to the creditor, the state statute, unlike the Bankruptcy Code preference statute, does not afford a creditor a defense to nor an exemption from, a preference action. Stevens relied on a single case in making its argument: Sherwood Partners, Inc. v. Lycos, Inc., 395 F.3rd 1198 (9th Cir. 2005). In Sherwood, the Ninth Circuit found the California preference statute (which is similar to the Wisconsin statute) was preempted by the Bankruptcy Code. The court summarized the Ninth Circuits decision in Sherwood as follows. While the Ninth Circuit relied on several grounds in making its decision, its main concern was that the differences between the state and federal statutes “might affect the incentives of various parties to avail themselves of the bankruptcy laws.” The court in Sherwood emphasized that the Code had two “ideals:” 1) providing the debtor with a “fresh start” by granting a discharge, and 2) equitably distributing assets among competing creditors.” The Sherwood court, noting that all state discharge statutes are preempted because they conflict with the first goal, found that because the California preference statute had a different distribution scheme than that set forth in the Code, it violated the latter goal. The court herein, citing several articles which severely criticized the Sherwood decision, then went on to say that the “Ninth Circuit erred by placing the importance of discharge on a par with the goal of equitable distribution.” The court found that the primary purpose of the Bankruptcy Code was to provide the debtor with a “fresh start” for the “honest but unfortunate debtor,” and that the equitable distribution to creditors was a secondary purpose. The court further stated that the Code does not guarantee a particular distribution of assets. The court also noted that state insolvency proceedings existed long before the enactment of the Bankruptcy Code, and that the Bankruptcy Code had adopted many of the procedures contained in those proceedings. Furthermore, the court stated that the Bankruptcy Code specifically recognizes parallel state remedies such as fraudulent conveyance statutes, and explicitly permits a trustee to use those state statutes to recover assets for the bankruptcy estate. The court found itself unable to distinguish between the state law fraudulent conveyance rights and the avoidance of preferences under state law, insofar as preemption is concerned, even though the Bankruptcy Code does not specifically incorporate state statutes providing for the recovery of preferences as it does state statutes providing for the recovery of fraudulent conveyances. The court then went on to discuss how Wisconsin insolvency proceedings provide an efficient, inexpensive way to liquidate assets and distribute the proceeds equitably among creditors. The court found that the Wisconsin Assignment of Benefits of Creditors statutes provide for an equitable distribution to creditors, and that it did not matter that the state court distribution scheme differed from that in the Code. The court further stated that “(t)o find that the state statute is preempted, would force insolvent debtors always to file for bankruptcy, even when simpler, less expensive state proceedings are available to them. The result is ahistorical and, if anything, undermines the bankruptcy code’s focus on protecting (rather than exploiting) the debtor.” The court concluded its analysis with a discussion of a 1933 Supreme Court case, Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 52 S. Ct. 262, 778 L. Ed. 469 (1933), in which the Supreme Court held that Wisconsin’s Chapter 128, which contains the Assignment for Benefit of Creditor statutes, was not preempted by the Bankruptcy Codes equivalent of the day, the National Bankruptcy Act. Practice Pointer Be aware of the provisions of state court Assignments for Benefits of Creditors so that you may take advantage of those provisions when they impact your client more favorably than those contained in the Bankruptcy Code. James. W. McNeilly, Jr. NCBJ Sponsorship opportunitiesThe Commercial Law League of America and its bankruptcy section have sponsorship opportunities available at the National Conference of Bankruptcy Judges:
Copyright © 2007 Commercial Law League Bankruptcy Section Except as otherwise provided, the CLLA Bankruptcy Section newsletter permits any individual or organization to photocopy any article, comment, note, or other piece in this publication, provided that: (1) copies are distributed at or below cost; (2) the author and the CLLA Bankruptcy Section seal are prominently identified on the first page; (3) proper notice of copyright is affixed to each copy; and (4) all other applicable laws and regulations are followed. The CLLA Bankruptcy Section reserves all other rights. |
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.