2011 Commercial Law Developments

X. Other Laws Affecting Commercial Transactions

A. Bankruptcy Code

1.  Automatic Stay

  • Laboy v. Doral Mortgage Corp. (In re Laboy) , 2011 U.S. App. LEXIS 10881 (1st Cir.) – The mortgagee failed to record a mortgage properly before the mortgagor filed for bankruptcy relief, but recorded the mortgage post-petition without court permission. The bankruptcy court held that cancelation of the mortgage was an adequate remedy for the creditor's willful violation of the automatic stay and denied the debtors' request for damages. The First Circuit reversed and instructed the trial court to conduct a hearing on damages. Section 362(h) requires an award of actual damages, and the debtors have the right to prove actual damages.
  • In re Zavala , 444 B.R. 181 (Bankr. E.D. Cal. 2011) – Debtors lacked standing to assert that bank violated automatic stay by placing administrative freeze on two deposit accounts that debtors claimed as exempt because until the time to object to the claimed exemptions expired, the deposit accounts remained property of the estate.
  • In re Heflin , 2011 WL 1656094 (Bankr. D. Conn. 2011) – Secured creditor did not violate stay by repossessing and selling collateralized car because stay had already expired because the debtor took no action other than to file his statement of intention with respect to the car. Because the creditor's letter to the debtor's attorney indicated that it would move for relief from the stay (not repossess) if the debtor failed to pay, the creditor was liable in estoppel for the value of the personal property in the car that the creditor seized during the repossession.
  • In re Castillo , 456 B.R. 719 (Bankr. N.D. Ga. 2011) – Secured party wilfully violated the stay by failing, after receiving notice of the bankruptcy filing, to release vehicle that it had repossessed prepetition. Secured party had no right wait until receiving proof of insurance; if it had legitimate concerns about the failure to provide proof of insurance, the secured party should have sought emergency relief from the stay.
  • In re Houlik , 2011 WL 4459099 (Bankr. D. Kan. 2011) – Even if the debtors did not receive their discharge at confirmation of their Chapter 11 plan, the secured party violated the § 524 injunction by – and was liable for punitive damages for – failing to properly credit the debtors' post-confirmation payments and then improperly repossessing their truck.
  • In re Butler , 2011 WL 806078 (Bankr. C.D. Ill. 2011) – Bank did not violate discharge injunction by prosecuting prepetition detinue action after the debtor received a discharge or by seeking contempt citation for the debtor's failure to comply with court order to turn over the collateral, but the bank did violate the discharge injunction by accepting payments to allow the debtor to avoid contempt after learning that the debtor no longer had the collateral.
  • In re Easter Seals Tennessee, Inc. , 2011 WL 1884169 (Bankr. M.D. Tenn. 2011) – Secured party did not violate discharge injunction by giving the debtor's employee an incorrect payoff amount when the employee called to inquire because, after being informed of the error, the secured party informed the employee that she should talk to the bankruptcy department, did not demand payment of the misquoted amount. In fact, the secured party did not demand payment of any kind and did not contact the debtor.
  • In re Johnson , 2011 WL 1983339 (E.D. Mich. 2011) – Potentially secured party did not violate discharge injunction by seeking to ascertain from counsel of debtor's former employer whether the secured party in fact had a valid lien on the debtor's disability benefits. A creditor need not prove the validity of its lien to defend its actions in attempting to determine the validity of the lien.
  • In re Blixseth , 454 B.R. 92 (9th Cir. BAP 2011) – Termination of the stay under § 362(h) for the debtor's failure to file a statement of intention with respect to collateral applies to all collateral for the secured claim, not merely the collateral listed in the debtor's schedules as securing the claim.
  • In re Southern Hosiery Mill, Inc. , 2011 WL 2651580 (Bankr. W.D.N.C. 2011) – Factor that prepetition had acquired debtor's accounts and a security interest in the debtor's credit balance to secure various obligations could not setoff against that credit balance prepetition trade debt that the factor acquired postpetition. Section 553 prohibited the setoff and sections 552, 364, and 549 prohibited the factor from claiming a security interest in the credit balance to secure the trade debt.
  • In re McKenzie , 2011 WL 6140516 (Bankr. E.D. Tenn. 2011) – Even though time for commencing avoidance action had expired, trustee could use his status as a lien creditor to successfully resist motion for relief from the stay by a creditor with an unperfected security interest.

2. Substantive Consolidation

  • In re Jennifer Convertibles, 447 B.R. 713 (Bkrtcy. S.D.N.Y. 2011) (Court generally approves substantive consolidation plan using standard analysis but notes that for a small percentage of creditors the record was inadequate as to potential harm; court requires further evidence or that those creditors be paid).
  • In re AHF Dev., Ltd. , No. 09-20703-RLJ-11, 2011 Bankr. LEXIS 3118 (Bankr. N.D. Tex. Aug. 17, 2011) – The court refused substantive consolidation as an alternative to dismissing a Chapter 11 filing by a company with no outstanding operations. The court cited key cases and noted that substantive consolidation is an unusual remedy.

    Comment : The case is a helpful example of a court respecting the need to satisfy technical requirements for bankruptcy filings and refusing to order substantive consolidation out of convenience.
  • In re Pearlman , 450 B.R. 219 (Bankr. M.D. Fla. 2011) – The court overrode a trustee's desire to limit substantive consolidation to preserve “wrong payor” fraudulent transfer claims for unsecured creditors, calling the trustee's concerns “disingenuous”. The financial affairs of debtors were “inextricably interwoven”. The court noted there is no Eleventh Circuit precedent for “partial” substantive consolidation, but that the theory has limited support in other jurisdictions in cases that ordered substantive consolidation but preserved fraudulent transfers. In re Bonham , 229 F.3d 750 (9th Cir. 2000); First Nat'l Bank of El Dorado v. Giller ( In re Giller) , 962 F.2d 796 (8th Cir. 1992). Aside from the trustee, no creditor objected to substantive consolidation.
  • Kapila v. S&G Fin. Serv., LLC ( In re S&G Fin. Serv. of S. Fla., Inc.) , 451 B.R. 573 (Bankr. S.D. Fla. 2011) – The court concluded it had authority to consolidate substantively a debtor with a nondebtor and that the requisites for substantive consolidation were sufficiently pled to survive summary judgment.
  • In re The Lodge at Big Sky, LLC , 454 B.R. 138 (Bankr. D. Mont. 2011) – The court ordered substantive consolidation of a lodge owner and lodge manager based on the Augie Restivo / Bonham test, because substantially all creditors believed the entities were a single economic unit and business functions were hopelessly intertwined.
  • In re Garden Ridge Corp., 386 F. App'x 41 (3d Cir. 2010) (nonprecedential) – Rejecting setoff claim for lack of mutuality after consolidation, with a strong dissent by Owens Corning author, Judge Ambro, regarding how mutuality of obligations should be considered when entities are substantively consolidated.
  • In re SK Foods, L.P., 2010 U.S. Dist. LEXIS 136178 (E.D. Cal. 2010) – Concluding there was a likelihood of success on merits of substantive consolidation claim under Ninth Circuit precedent.
  • In re Gyro-Trac (USA), Inc., 2010 Bankr. LEXIS 4718 (Bankr. D.S.C. 2010) – Approving consolidation over objection of one creditor citing test in Derivium Capital , a 2006 South Carolina bankruptcy case, which authorized consolidation when “(1) creditors dealt with the entities as a single economic unit and did not rely on separate identities in extending creditor or (2) when the affairs of the debtor are so entangled that consolidation will benefit all creditors”. court concluded that at least one of the factors was met because lenders received guaranties and collateral from multiple affiliates.
  • In re Geo. W. Park Seed Co., Inc., 2010 Bankr. LEXIS 4632 (Bankr. D.S.C. 2010) – Approving substantive consolidation under Derivium Capital and Second Circuit tests where debtors' affairs were hopelessly entangled and consolidation would benefit creditors.
  • In re Jennifer Convertibles , 447 B.R. 713 (Bkrtcy. S.D.N.Y. 2011) – Court generally approves substantive consolidation plan using standard analysis but notes that for a small percentage of creditors the record was inadequate as to potential harm.
  • Paloian v. LaSalle Bank Nat'l Ass'n ( In re Doctors Hospital of Hyde Park, Inc.) , Bankr. No. 00B11520, 2011 Bankr. LEXIS 4745 (Bankr. N.D. Ill. Dec. 2, 2011) – The court examined the bankruptcy remoteness/separate legal existence of a financing SPV and attempted to determine whether assets sold to it were sold in a true sale. Finding insufficient evidence, the court denied motions for summary judgment and decided to proceed to trial. The court's discussion of separateness is particularly interesting – it views the 7th Circuit opinion as requiring a degree of “operational function and independence” for bankruptcy remote entities not seen in prior cases. This issue is especially intriguing because the court appears to raise the practical concept of bankruptcy remoteness to the level of a legal standard separate from alter ego or substantive consolidation theories. On true sale, the court notes that at trial the court will have to determine whether the use of a contribution structure rather than a cash purchase price negatively impacts the true sale.

3. Claims

  • Official Committee of Unsecured Creditors of Champion Enterprises, Inc. v. Credit Suisse, 2010 WL 3522132 (Bankr. D. Del. Sept. 1, 2010) – Secured bank lenders shared collateral for their loan to borrower equally and ratably with notes issued by the parent of the borrower. Borrower later amended its bank loan to avoid covenant defaults. In one amendment the parent agreed to issue new unsecured subordinated notes and use the proceeds to redeem the parent's existing secured notes and repay part of borrower's bank loan. The repayment of the parent's secured notes improved the bank lenders' position. The borrower, parent and affiliates went into Chapter 11 two years later. The unsecured creditors committee sought to equitably subordinate the banks' loan to the borrower under Section 510(c) of the Bankruptcy Code. The court held that the committee did not allege facts that, even if true, would (i) support that the lenders were insiders (and subject to a greater level of scrutiny) or (ii) rise to the level of inequitable conduct sufficient to warrant subordination. The court stated that the lenders' influence on the debtor's actions arose merely by operation of bargained for rights under the credit agreement and that the fact of contractual leverage did not indicate that dealings were not at arm's length.

    Comment : The Champion court distinguished In re Exide Technologies , 299 B.R. 732 (Bankr. D. Del. 2003) where the lender had dictated which of the debtor's affiliates would commence bankruptcy cases and when those cases would be commenced.
  • American Consolidated Transportation Companies, Inc. v. RBS Citizens N.A., 433 B.R. 242 (Bankr. N.D. Ill. 2010) – Lender's conduct did not support equitable subordination. Debtors could have refused lender's demands and allowed it to purse its remedies under the loan documents and lender did not induce the borrowers to enter into a forbearance agreement that obligated borrower to take actions (including retaining a restructuring consultant chosen by lender) against their wishes. Borrowers chose to agree to lender's terms. The restructuring consultant was limited to advising and assisting in business decisions and did not have the power to make any business decisions unilaterally. The court provided examples of when sufficient lender control may exist, including a lender with a legal right to a controlling interest in the borrower's stock, termination of all employees except those needed to liquidate the business, determining which creditors are paid or telling a corporate officer that he can resign if he does not agree with lender's actions.
  • In re Innkeepers USA Trust, 448 B.R. 131 (Bkrtcy. S.D.N.Y. 2011) (Concluding that a CMBS certificateholder did not have the direct ability to intervene in bankruptcy proceedings where a special servicer was appointed to represent its interests).
  • In re Bank of New England Corporation, 646 F.3d 90 (1 st Cir. 2011) (Where Indenture and Subordination Agreement did not explicitly provide that subordinated creditors were subordinate to senior creditors with respect to interest payments owing post-insolvency/post-petition, there was no subordination. The Court cited an internal Davis Polk drafting manual for indentures as evidence that there was “institutional knowledge” of the “Rule of Explicitness” requiring post-petition interest payments to be expressly prioritized).
  • HSBC Bank USA v. Bank of New York Mellon Trust Co. (In re Bank of New England Corp.) , 2011 U.S. App. LEXIS 12701 (1st Cir.) – See also under IV. “Guaranties Lender and Borrower Liability” (below) – In the 1970's, several courts articulated the “ Rule of Explicitness ” for subordination agreements, which permitted senior creditors to recover post-bankruptcy interest only if the subordination agreement explicitly states that the junior creditor assumes the risk for such payment. In 2004, the First Circuit reversed a bankruptcy court order directing payment to the junior creditors under the Rule of Explicitness and ruled that the enactment of the Bankruptcy Code in 1978 extinguished the Rule. HSBC Bank USA v. Branch (In re Bank of New England Corp.) 364 F.3d 355 (1st Cir. 2004). On remand, the bankruptcy court held evidentiary hearings to determine whether the senior creditors or junior creditors would receive the disputed funds. The bankruptcy court determined that the junior creditors did not intend the senior creditors to get post-petition interest prior to payment of the junior debt. In this most recent decision, the First Circuit affirmed the bankruptcy court because its factual findings were sufficient to support its legal conclusion.
  • Stern v. Marshall , 131 S.Ct. 2594 (U.S. 2011) – The debtor was the widow of a billionaire. She accused her late husband's son of fraudulently inducing her late husband to cut her out of his estate plan. After the widow filed for bankruptcy, the son filed a proof of claim for defamation and sought a judgment that his claim was non-dischargeable under 11 U.S.C. § 523(a). The debtor counterclaimed for tortuous interference with her expected gift. The bankruptcy court granted the widow's motion for summary judgment on the son's complaint and entered judgment in her favor on the tortuous interference claim. The U.S. Supreme Court held that the bankruptcy court lacked the Constitutional power to adjudicate the counterclaim. Generally, the judicial power of the United States is vested in so-called “Article III” courts, where judges serve during good behavior, and their compensation cannot be reduced. The exception to this rule is the “public rights” exception, involving federal regulatory schemes. In Northern Pipeline Constr. Co. v. Marathon Pipe Line Co. , 458 U.S. 50 (1982), the U.S. Supreme Court had held that Congress could not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of the litigants, and subject only to ordinary appellate review. In response to Northern Pipeline , Congress conferred jurisdiction on bankruptcy courts for so-called “core” matters, including “counterclaims by the estate against persons filing claims against the estate.” 28 U.S.C. § 157(b)(2)(C). In Granfinanciera, S.A. v. Nordberg , 492 U.S. 33 (1989), the Court held that a fraudulent conveyance action against a non-creditor did not fall within the public rights exception, because fraudulent conveyance actions were quintessentially suits a common law that more nearly resemble state law contract claims than they do creditors' claims to a share of the bankruptcy estate. However, the public rights exception would permit resolution of a state law claim that is necessarily resolved by a ruling on a creditor's proof of claim. In this case, however, the widow's counterclaim was “independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor's proof of claim in bankruptcy.”
  • Cesar Castillo, Inc. v. Fundacion Dr. Manuel de la Pila Iglesias, Inc. , 2011 Bankr. LEXIS 953 (Bankr. 1st Cir.) – The debtor-in-possession had 30-day terms with its vendor. The debtor's pan provided for various types of administrative-priority claims to be paid from particular funds, but the plan did not specify the consequences if these funds were not sufficient to pay the claims in full. The vendor voted for the plan, and the funds were not sufficient to pay the vendor's claim in full. The court held that the plan terms superseded the post-petition, pre-confirmation contract terms. In dictum, the court stated that, even if the vendor had not waived the claim, the administrative payment clause in the plan did not preserve the pre-confirmation contract terms.
  • Buckeye Retirement Co. v. Busch , 2011 WL 846687 (Ohio Ct. App. 2011) – Creditor's loss of motion challenging the dischargeability of debt owed by corporate president and majority stockholder who guaranteed corporate debt and participated in scheme to issue false borrowing base certificates was not res judicata as to claim against corporate CFO who signed the false certificates because the CFO was not in privity with the president.
  • In re Wolverine, Proctor & Schwartz, LLC , 447 B.R. 1 (Bankr. D. Mass. 2011) – Secured creditor's $1.9 million claim would not be re-characterized as equity even though the debtor was undercapitalized and the creditor voluntarily agreed to subordinate the debt because: (i) to evidence the debt the debtor executed a promissory note that contained a fixed maturity date, a fixed interest, rate of interest, and a default rate of interest; (ii) the debtor made all the required payments; and (iii) the debtor treated the funds advanced as a loan in its business records.
  • In re Moll Industries, Inc. , 454 B.R. 574 (Bankr. D. Del. 2011) – Claims of secured lenders, who also held equity interests in the debtor, would not be re-characterized as debt merely because the loans accrued interest at a variable rate and lacked a sinking fund and the lenders repeatedly declined to declare a default, extended additional credit, and wrote off a portion of the debt.
  • In re Bank of New England Corp. , 646 F.3d 90 (1st Cir. 2011) – Intercreditor agreement that subordinated junior unsecured loans to “all principal . . . and interest due or to become due” on senior unsecured loans applied to principal and prepetition interest, but was not intended to subordinate the junior loans to post-petition interest on the senior loans.
  • In re Premier Golf Properties, LP , 2011 WL 4352003 (Bankr. S.D. Cal. 2011) – Prepetition security interest in accounts and revenues generated by debtor's golf courses, including membership initiation fees, green fees, and driving range fees, did not extend to post-petition receipts because they were not proceeds of prepetition collateral.
  • In re Bailey , 2011 WL 6141644 (6th Cir. 2011) – Reaffirmation agreement that bank and debtors executed and court approved was voidable for mutual mistake because it was based on the false assumption that the bank held secured claims in real property and a truck, but the truck was later stolen and the bank settled an action to avoid mortgage, thereby waiving its lien.
  • In re Asbury , 2011 WL 44911 (Bankr. W.D. Mo. 2010) – Debt of debtor-wife to bank was nondischargeable because bank reasonably relied on borrowing base certificate signed by husband indicating that couple owned 4,667 head of cattle when, in fact, they owned no more than 2,000 head of cattle. The couple were partners in the cattle business and the wife should have known of the misrepresentation given that she signed the note and security agreement, which included a representation that she owned the collateral.
  • In re Ferris , 447 B.R. 516 (Bankr. E.D. Va. 2011) – Used car dealer who presented certificates of title to lender when each loan was consummated thereby represented that he was in possession of the vehicles and would not transfer them without first obtaining the certificates from the lender and repaying the amount owed. The dealer knew these representations were false as to 72 vehicles; the debtor had a history and practice of falsely representing online to the DMV that the dealer had the certificates, so that the dealer could transfer record title to buyers and sell the vehicles out of trust. Thus the dealer's debt was nondischargeable under § 523(a)(2).
  • In re Chachula , 2011 WL 2551187 (Bankr. N.D. Ill. 2011) – Because bank's security agreement with car dealer expressly provided that proceeds from any disposition of collateral “shall be held in trust,” not commingled with other funds, and immediately paid to the bank, dealer's failure to remit proceeds to the bank could be both fraud in a fiduciary capacity and embezzlement, rendering the obligation nondischargeable under § 523(a)(4).
  • In re Goldstein , 2011 WL 5240335 (Bankr. N.D. Ill. 2011) – Even though lender's security agreement expressly provided that the debtor car dealership held proceeds of inventory in trust for the lender, the debtor's failure to remit the proceeds of vehicles to the lender did not render the debt nondischargeable under § 523(a)(4). Inclusion of trust language in a security agreement does not change the debtor-creditor relationship into a fiduciary one and In re Strack , 524 F.3d 493 (4th Cir. 2008), is unpersuasive on this point. Even if a fiduciary relationship could be created, the agreement here did not require the debtor to segregate the vehicle proceeds and turn them over to the lender; it merely required the debtor to pay down the secured obligation within 48 hours of a sale of collateral.
  • In re Mills , 2011 WL 4055169 (Bankr. N.D. Miss. 2011) – Debtor's intentional refusal to remit insurance proceeds of collateral to secured party was willful and malicious, rendering the debt nondischargeable.
  • In re Doughty , 2011 WL 4368689 (Bankr. S.D. Ind. 2011) – Debt was nondischargeable under § 523(a)(6) because the debtor concealed the collateral, lied under oath about what he did with it, and then sold the collateral without the creditor's consent and without remitting the proceeds to secured party in accordance with the security agreements.
  • In re White , 2011 WL 4368390 (Bankr. D.C. 2011) – Debtor's resistance to repossession efforts after lifting of automatic stay did not warrant dismissal of bankruptcy case.

4. Bankruptcy Estate

  • In re Buttermilk Towne Center, LLC , 428 B.R. 700 (Bankr. E.D. Ky. 2010) – Assignment of leases and rents governed by Kentucky law stated that it was an “absolute transfer and assignment . . . given to secure” the debtor's obligations under a loan. Debtor filed for bankruptcy and asserted the rents remained property of the estate eligible for use as cash collateral. The bankruptcy court noted that courts different on their assessment of an assignment of rents and leases. The court concluded that the assignment was security for the loan, and not an absolute assignment, given the reference in the agreement to it being given to secure the debtor's loan repayment obligations and provided that the assignment would be void upon the fulfillment of the debtor's obligations under the loan.
  • In re Bryant Manor, LLC , 422 B.R. 278 (Bankr. D. Kan. 2010) – Post-petition rents are property of the debtor's bankruptcy estate.
  • BNP Paribas v. Olsen's Mill, Inc., 2011 Wisc. 61 (Wi 2011) (Evaluating appropriateness of non-consensual transfer of Lender's collateral under assignment for the benefit of creditors law).
  • In re Orange Rose, LLC , 446 B.R. 543 (Bankr. M.D. Fla. 2011) – Fleet of mobile homes that the debtor purchased but which the debtor never had re-titled in its name were not property of the estate because the Florida certificate of title statute requires compliance for the buyer to have marketable title.
  • In re Lewis , 2011 WL 5282604 (Bankr. E.D. Ky. 2011) – Automobiles titled in the name of “Lewis Auto Sales” were property of the individual debtor, not a partnership, even though the debtor had agreed to share the net profit from the sale of certain vehicles with the party that had financed the purchase of those vehicles. The debtor paid all expenses of the business and did not share profits generally. As a result, the select sharing of profits on a few vehicles was not an association of persons to carry on a business for profit but merely a creative arrangement to finance the purchase of the vehicles.
  • In re AE Liquidation, Inc. , 444 B.R. 509 (Bankr. D. Del. 2011) – Prepaying buyers of aircraft to be manufactured by debtor may have an equitable interest in the uncompleted aircraft and related parts. The fact that the buyers had not recorded their interests with the FAA was immaterial because the FAA registration statute does not apply to aircraft in production that are not capable of flight.
  • In re Soho 25 Retail, LLC , 2011 WL 1333084 (Bankr. S.D.N.Y. 2011) – Mortgage providing that assignment of rents was “unconditional and not as an assignment for additional security only,” and that, before a default, the debtor had a revocable license in the rent but after default the license is revoked and full rights to the rent are returned to the Lender, prevented the rents from becoming part of the debtor's bankruptcy estate.
  • In re McCombs , 2011 WL 4458893 (Bankr. D. Ala. 2011) – Under Alabama law, because the parties' mortgage expressly provided that “Borrower absolutely and unconditionally assigns and transfers to Lender all the rents and revenues,” the assignment was absolute and not merely a security interest, and thus post-petition rents were not property of the borrower's bankruptcy estate, even though the assignment terminates upon the extinguishment of the mortgage debt.
  • In re Biedermann Mfg. Industries, Inc. , 453 B.R. 802 (Bankr. E.D.N.C. 2011) – Secured party that prepetition had instructed account debtors to pay it directly but had not yet received payment did not thereby become the owner of the accounts; thus the accounts remained property which the debtor could use during its reorganization proceeding, subject to the rules on cash collateral.
  • In re Siskey Hauling Co., Inc. , 456 B.R. 597 (Bankr. N.D. Ga. 2011) – Accounts were property of the estate; the debtor's prepetition sale was in fact a collateralized loan, not a true sale, because the purchaser could charge back any receivable that remained unpaid after 90 days, held a reserve of 10% of the purchase price on each receivable against non-collection, and could charge the debtor for any deficiency on an account, and thus the transaction lacked the allocation of risk typically associated with a true sale.
  • Garcia v. Cage , 2011 WL 1337109 (S.D. Tex. 2011) – Chattel paper generated by used car dealers remained property of the estate despite purported prepetition transfer to “pool investors” because: (i) the investors were not licensed under Texas law and thus the transfers were void; (ii) the agreement does purport to transfer chattel paper, it merely indicates an intent to transfer chattel paper in the future; (iii) there is no evidence of an actual transfer of any particular chattel paper because the debtors did not endorse any, they did not modify the vehicle titles, the vehicle owners were never informed, the investors did not file a financing statement to perfect their security interests; and there was no servicing agreement yet the debtors continued to service the chattel paper; and (iv) the debtors retained the risk of because they were obligated to substitute chattel paper if an account debtor defaulted and paid the investors a fixed amount regardless of the sums collected. Therefore prepetition payments to the pool investors were avoidable preferences. See also Strange v. Cage , 2011 WL 1337130 (S.D. Tex. 2011) (same).
  • In re Holiday Tree and Trim, Co. , 2011 WL 1885688 (Bankr. D.N.J. 2011) – Deposit account that the debtor voluntarily created and escrowed prepetition to contain 40% of the net proceeds of stock sale that judgment creditor had a contractual right to receive remained property of the estate even though the judgment creditor levied on the deposit account prepetition. The contract did not make 40% of the sale proceeds the creditor's property or give the creditor a security interest. No discussion of whether the escrow created a security interest.
  • In re Ruiz , 455 B.R. 745 (10th Cir. BAP 2011) – Funds on deposit with bank at the time the depositor's petition is filed – not merely the bank's obligation to the depositor – are estate property and trustee has a § 542 claim against the debtor for the amount of checks written prepetition but honored postpetition.
  • In re Moore , 448 B.R. 93 (Bankr. N.D. Ga. 2011) – Cars that the debtor had pawned prepetition but for which redemption period had not expired were property of the estate when the petition was filed. However, when the redemption period expired, the cars automatically became the property of the pawnbroker and were no longer property of the estate. The pawnbroker's subsequent repossession of the vehicles was, therefore, not an act to obtain possession of property of the estate. While the repossession might nevertheless be an act to obtain property from the estate, the pawnbroker was entitled to retroactive annulment of the stay.

5. Secured Parties, Set Off, Leases

  • In re Enron Creditors Recovery Corp. , 2011 U.S. App. LEXIS 13177 (2d Cir. 2011) (Payments by Enron to redeem commercial paper prior to redemption were protected settlement payments under 546(e) of the Bankruptcy Code and could not be avoided; the redemptions were “the delivery and receipt of funds and securities”. Enron redeemed the commercial paper by drawing on its standby revolver. In reaching its conclusion, the Court determined that “settlement payments” as defined in the Bankruptcy Code did not include only transactions in which securities changed hands and were acquired by another investor. The court also concluded settlement payments need not be of the sort that were common in the securities industry. The decision includes a strong dissent).
  • In re River Road Hotel Partners, LLC , 2011 U.S. App. LEXIS 13131 (7th Cir. 2011) (Contrary to the recent Philadelphia Newspaper and Pacific Lumber cases, 7th Circuit holds that secured creditor has a right to credit bid in a bankruptcy proceeding).
  • In re Namco Capital Group, Inc. , 2011 WL 2312090 (C.D. Cal. 2011) – The Ninth Circuit BAP decision in Clear Channel is unpersuasive; appeal of a bankruptcy court order authorizing a sale of assets free and clear of a creditor's lien under § 363(f) is moot after the sale is consummated.
  • In re Bailey , 2011 WL 6141644 (6th Cir. 2011) – Reaffirmation agreement that bank and debtors executed and court approved was voidable for mutual mistake because it was based on the false assumption that the bank held secured claims in real property and a truck, but the truck was later stolen and the bank settled an action to avoid mortgage, thereby waiving its lien.
  • In re Asbury , 2011 WL 44911 (Bankr. W.D. Mo. 2010) – Debt of debtor-wife to bank was nondischargeable because bank reasonably relied on borrowing base certificate signed by husband indicating that couple owned 4,667 head of cattle when, in fact, they owned no more than 2,000 head of cattle. The couple were partners in the cattle business and the wife should have known of the misrepresentation given that she signed the note and security agreement, which included a representation that she owned the collateral.
  • In re Indian Capitol Distributing, Inc. , 2011 WL 4711895 (Bankr. D.N.M. 2011) – Debtor's unauthorized use of cash collateral to pay vendor for goods sold post-petition was not avoidable because there was no injury and thus no case or controversy for the court to have jurisdiction over. Disagrees with In re Delco Oil, Inc. , 599 F.3d 1255 (11th Cir. 2010).
  • In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V. , 651 F.3d 329 (2d Cir. 2011) – Debtor's early redemption of short-term commercial paper through a financial intermediary at significantly above-market price were “settlement payments” under § 546(e) even though not conducted in the ordinary course of business and even though there may not have been a purchase or sale of the commercial paper. The commercial paper qualified as a “security” under the Bankruptcy Code, even though it was not a “security” under the 1934 Act, and the redemption was a “transaction” in securities.
  • In re Quebecor World (USA) Inc. , 453 B.R. 201 (Bankr. S.D.N.Y. 2011) – Given the binding nature of the Second Circuit's decision in Enron Creditors Recovery Corp. , the repurchase of redemption of privately placed notes that was made to a financial institution acting as agent for the noteholders was a “settlement payment” even though the transaction created no settlement risk.
  • In re MacMenamin's Grill Ltd. , 450 B.R. 414 (Bankr. S.D.N.Y. 2011) – Funds wired directly from lender to three shareholders' bank accounts in connection with stock purchase transaction that allegedly qualified as a constructively fraudulent transfer was not insulated from avoidance by § 546(e). Despite the broad language of the definition of “settlement payment,” § 546(e) does not apply to a private stock sale that has little relationship with the provision's goal of reducing systemic risk to financial intermediaries and the financial markets. Section 546(e) also does not apply to the loan incurred by the debtor in connection with the transaction.
  • In re QuVIS, Inc. , 446 B.R. 490 (Bankr. D. Kan. 2010) – Secured party that re-perfected its own security interest after financing statement filed on behalf of multiple secured creditors had lapsed would not be equitably subordinated to the other, now unperfected, creditors. Although the secured party appointed its managing director to serve as a director of the debtor, that did not make the secured party an insider of the debtor. Moreover, the secured party's actions with the debtor were all done at arm's length. While the secured party did re-file to protect its own interest, the secured party did not orchestrate the lapse or have a duty to inform other creditors of the lapse. Indeed, several other creditors re-filed before the secured party did and the secured party had actually argued in court, albeit unsuccessfully, that the re-filings benefitted all the creditors, not merely those who re-filed.
  • In re Lehman Bros, Inc. , No. 08-01420, 2011 Bankr. LEXIS 3714 (Bankr. S.D.N.Y. Oct. 4, 2011) – The court refused to permit post-bankruptcy a SemCrude -style triangular setoff pursuant to which parties agreed to allow setoff against sums owed to affiliates. The feature fails in bankruptcy due to the lack of mutuality required by Bankruptcy Code § 553. Further, citing Swedbank , 433 B.R. 101 (Bankr. S.D.N.Y. 2010), the court concluded that the safe harbors in Bankruptcy Code §§ 560 and 561 do not override the requirement of mutuality.
  • In re Lehman Brothers Holdings Inc. (Swedbank AB v. Lehman Brothers Holdings Inc.) , 2011 U.S. Dist. LEXIS 10973 (S.D.N.Y. 2011) – Upholding Bankruptcy Court decision rejecting swap counterparty's attempt to set off post-petition assets in bank account against pre-petition swap agreement obligations under the Bankruptcy Code's safe harbor provisions. The safe harbor provisions do not create an exception to Bankruptcy Code § 553's limitation of setoff rights to prepetition collateral.
  • In re Enron Creditors Recovery Corp. , 2011 U.S. App. LEXIS 13177 (2d Cir. 2011) – Payments by Enron to redeem commercial paper prior to redemption were protected settlement payments under Bankruptcy Code § 546(e) and could not be avoided. The redemptions were “the delivery and receipt of funds and securities”. Enron redeemed the commercial paper by drawing on its standby revolver. In reaching its conclusion, the court determined that “settlement payments” as defined in the Bankruptcy Code did not include only transactions in which securities changed hands and were acquired by another investor. The court also concluded settlement payments need not be of the sort that were common in the securities industry.
  • In re River Road Hotel Partners, LLC , 2011 U.S. App. LEXIS 13131 (7th Cir. 2011) – Contrary to the recent Philadelphia Newspaper and Pacific Lumber cases, Seventh Circuit holds that secured party has a right to credit bid in a bankruptcy proceeding.
  • Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co. ( In re Quebecor World (USA) Inc.) , 453 B.R. 201 (Bankr. S.D.N.Y. 2011) – Following Enron Creditors Recovery Corp. v. Alfa , 651 F.3d 329 (2d Cir. 2011), the court concluded that repayments made on notes during the preference period were “settlement payments” qualifying for safe harbor treatment under the Bankruptcy Code § 546(e) and transfers to or for the benefit of a financial institution in connection with a securities contract under Bankruptcy Code § 741(7).

6. Avoidance Actions

  • Banco Bilbao Vizcaya Argentaria v. Wiscovitch-Rentas (In re Net-Velazquez) , 625 F.3d 34 (1st Cir. 2010) – Within 90 days before the debtor filed bankruptcy, a creditor garnished funds in an account in the name of a corporation wholly owned by the debtor and his wife. At trial, the creditor asserted that depositing personal funds into a corporate account converted the funds from a personal asset to a corporate asset. However, if successful this argument would mean the creditor had garnished funds from someone who owed it no money. The creditor raised other arguments on appeal, but the First Circuit held the creditor had waived the arguments by not raising them at trial.
  • In re J. Silver Clothing, Inc. , 453 B.R. 518 (Bankr. D. Del. 2011) – Security interest perfected 28 days after loan was made was substantially contemporaneous even though outside the ten-day period then provided for in § 547(e) because the delay was due to inadvertent error – the initially submitted financing statement was rejected for failure to properly list the debtor's address but a second financing statement was promptly filed after receipt of the rejection letter – and there was no prejudice to third parties.
  • In re Carter , 2011 WL 5080153 (Bankr. N.D. Iowa 2011) – Creditor that obtained judicial lien on a vehicle and then, in order to conduct a sheriff's sale, paid off the bank with a security interest in the vehicle, was subrogated to the bank's rights and thus held both a judicial lien and a security interest. Accordingly, the debtor could not use § 522(f)(1)(A) to avoid the creditor's security interest and claim an exemption in the vehicle.
  • In re Billesbach , 2011 WL 3295299 (Bankr. D. Neb. 2011) – Trustee could avoid lien on truck that was perfected by notation on certificate of title eight days after the bankruptcy petition was filed and one day after expiration of the 30-day period provided for in §§ 362(b)(3) and 547(e)(2)(A). The section 547(c)(1) defense for a substantially contemporaneous exchange does not apply to post-petition transfers.
  • In re C.W. Mining Company , 2011 WL 4597443 (Bankr. D. Utah 2011) – Bank that, post-petition, liquidated collateralized certificate of deposit and applied proceeds to secured loan could be liable for amount of the transfer but would have a security interest in the funds returned, making avoidance rather pointless in a Chapter 7 case.

7. Executory Contract

  • In re Exide Technologies , 607 F.3d 957 (3d Cir. 2010) – Agreement was not executory where one party had no unperformed material obligations that would excuse other party from performance.

8. Plan

  • In re DBSD North America, Inc. , 634 F.3d 79 (2d Cir. 2011) – Plan that called for senior creditors to gift shares and warrants to interest holders could not be confirmed over the objection of junior creditors. The gift was “under the plan” and was at least partly “on account of the interest holders' equity. Bankruptcy court properly rejected and re-designated the vote of competitor that purchased the first lien debt not to obtain payment but to enter into a strategic transaction with the debtor.
  • River Road Hotel Partners, LLC v. Amalgamated Bank , 651 F.3d 642 (7th Cir.), cert. granted , 2011 WL 3499633 (2011) – Plan that calls for sale of collateral without allowing the secured party to credit bid cannot be confirmed over the secured party's objection under § 1129(b)(2)(A)(iii); the right to the proceeds of such a sale is not the “indubitable equivalent” of the secured claim.
  • In re Tribune Co. , 2011 WL 5142420 (Bankr. D. Del. 2011) – Absent substantive consolidation, confirmation requirement that proposed plan must be accepted by at least one impaired class had to be satisfied on a debtor-by-debtor basis, as to each debtor in the joint plan.
  • In re SW Boston Hotel Venture, LLC , 2011 WL 5520928 (Bankr. D. Mass. 2011) – Portion of subordination agreement granting senior lender the right to vote the junior lender's claim in bankruptcy was unenforceable.
  • In re Croatan Surf Club, LLC , 2011 WL 5909199 (Bankr. E.D.N.C. 2011) – Portion of subordination agreement granting senior lender the right to vote the junior lender's claim in bankruptcy was unenforceable.
  • In re Weeks , 2011 WL 144141 (Bankr. E.D. Okla. 2011) – Sole shareholder of corporation could dissolve the corporation, become owner of its equipment, and then modify the secured claim of the equipment lender in the shareholder's Chapter 13 bankruptcy. Because the equipment lender was adequately protected, relief from the stay was not appropriate.

9. Other

  • In re Ran , 607 F.3d 1017 (5th Cir. 2010) – Court concluded that an Israeli proceeding could not be considered a “main” proceeding under Chapter 15; recognition as a main proceeding requires that the debtor carry out non-transitory activity in a location.
  • In re Metcalfe & Mansfield Alternative Investments , 421 B.R. 685 (Bankr. S.D.N.Y. 2010) – Canadian proceedings to restructure failed Canadian ABCP facilities were foreign main proceedings under the Bankruptcy Code and principles of comity. The opinion includes an interesting review of the causes and resulting restructuring strategy for Canadian ABCPs after the market failed in 2007.
  • Bank of America v. Colonial Bank , 604 F.3d 1239 (11th Cir. 2010) – Collateral for an asset-based commercial paper program was held by a custodian under an arrangement with the program's trustee. The custodian failed and the FDIC was appointed its receiver. The court rejected trustee's argument that because the assets were being held in a custodial capacity, they were not part of the custodian's receivership estate and that the courts had jurisdiction over their disposition. Rather, the trustee's claim with respect to the collateral had to be adjudicated through the FDIC's receivership process.
  • In re RMAA Real Estate Holdings, LLC, 54 Bankr. Ct. Dec. 19 (Bankr. E.D. Va. 2010) – Sanctioning attorney who filed misleading involuntary petition on behalf of a subset of LLC's members against the LLC; stating that LLC's are to be treated as corporations in bankruptcy. The LLC's operating agreement stated it could not file for bankruptcy without its managers' consent. One of its managers was a subsidiary of a key creditor.
  • In re Innkeepers USA Trust , 448 B.R. 131 (Bkrtcy. S.D.N.Y. 2011) – Concluding that a CMBS certificateholder did not have the direct ability to intervene in bankruptcy proceedings where a special servicer was appointed to represent its interests.
  • Meoli v. The Huntington Nat'l Bank ( In re Teleservices Group, Inc.) , 456 B.R. 318 (Bankr. W.D. Mich. 2011) – The court discussed how the Supreme Court's Stern decision applies to determination of what Bankruptcy Courts can hear: “[m]y frustration with Stern is that it offers virtually no insight as to how to recalibrate the core/non-core dichotomy so that I can again proceed with at least some assurance that I will not be making the same constitutional blunder with respect to some other aspect of Authority Section 157(b)(2)”.

B.Consumer Law

C. Professional Liability

  • In re Colusa Mushroom, Inc. , 2011 WL 4433595 (Bankr. N.D. Cal. 2011) – Members of unsecured creditors committee had no cause of action against committee's attorney for failure to perfect security interest that debtor retained when it sold assets to a third party because any negligence was on the part of the debtor's counsel, not the creditors committee's counsel, who did not have the right or power to file a financing statement.
  • Buckner v. Gebhardt , 2011 WL 4842371 (Cal. Ct. App. 2011) – Former bail bondsman's legal malpractice claim against his attorneys for failure to advise him to retain a security interest in the business he sold was time barred because the cause of action accrued not after default when the buyer's other lender perfected its security interest but when the agreements were signed because the plaintiff was an experienced businessman who had recommended the other lender to the buyers and knew the other lender would require a security interest as a condition of making the loan.
  • Schultze v. Chandler , 2011 WL 6778823 (N.D. Cal. 2011) – Attorney for unsecured creditors committee did not owe a duty to individual creditors outside his role as attorney for the committee and was therefore not liable for professional malpractice for failing to make sure that debtor's attorney filed financing statement in connection with a credit sale of the debtor's assets, a transaction in which the attorney for the creditors committee was not involved.

D. Other

  • Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc., Mortgage Pass-Through Certificates, Series 1999‑C-1 v. Love Funding Corporation , 591 F.3d 116 (2d Cir. 2010) – The acquisition of litigation rights under a mortgage purchase agreement does not constitute illegal champerty.

Back to Table of Contents