2012 Commercial Law Developments

X. Other Laws Affecting Commercial Transactions

A. Bankruptcy Code

1. Automatic Stay

  • In re Michigan BioDiesel, LLC, 2012 WL 1941648 (Bankr. W.D. Mich. 2012) -- The automatic stay did not apply to a creditor that, minutes after inadvertently filing a post-petition termination statement instead of an assignment, filed a correction statement.  Consequently, the termination and correction statements stand as filed, for whatever effect they may have on the rights of the parties.

  • In re Burrell, 2012 WL 3727130 (S.D. Tex. 2012) -- A car dealer repossessed a car, provided the debtor with notification of a planned foreclosure sale, entered into contract for sale, and received payment under that contract.  The dealer had not completed the foreclosure sale because the dealer had not delivered the car to the foreclosure buyer pre-petition.  Accordingly, the debtor still had rights in the car when she filed her bankruptcy petition and the dealer was liable for both compensatory and punitive damages for violating the automatic stay by refusing to return the car upon demand.

  • In re Herbst, 469 B.R. 299 (Bankr. W.D. Wis. 2012) -- A secured party that replevied collateral prepetition violated the automatic stay by refusing to return it after the debtor filed for bankruptcy protection and demanded return of the collateral.

  • Weber v. SEFCU, 2012 WL 3553414 (N.D.N.Y. 2012) -- A secured party that lawfully repossessed the debtor's vehicle before the debtor filed for bankruptcy protection violated the automatic stay by failing promptly to return the vehicle upon learning of the bankruptcy proceedings because the vehicle became property of the estate.

  • In re Sauls, 2012 WL 1224379 (Bankr. M.D.N.C. 2012) -- A secured party that, after being informed of the bankruptcy case, refused to return automobile it had repossessed prepetition or allow the debtor access to the personal property in the car violated the stay and was liable for the debtor's attorney's fees and punitive damages which would reduce the amount of the creditor's secured claim.

  • In re Velichko, 473 B.R. 64 (Bankr. S.D.N.Y. 2012) -- A secured party that, postpetition, refused to return vehicle its had repossessed prepetition unless the debtor paid arrearages and provided proof of insurance violated the automatic stay and was liable for both compensatory and punitive damages.

  • In re McBride, 473 B.R. 813 (S.D. Ala. 2012) -- A lessor that willfully violated the automatic stay by repossessing leased vehicles post-petition was liable for compensatory damages but was not liable for punitive damages because the repossession was a one-time incident, as opposed to ongoing conduct, and there was no evidence that the creditor was motivated by malice, vindictiveness, or bad faith.

  • In re Mwangi, 473 B.R. 802 (D. Nev. 2012) -- Prior to expiration of the 30-day period for objecting to exemptions, a bank did not violate the automatic stay by refusing to release funds on deposit to Chapter 7 debtor who claimed them as exempt because the debtor had no right to possess the funds.  After expiration of the 30-day period, the funds were not property of the estate, the stay therefore did not apply to them, and thus the debtor again had no claim against the bank for violating the stay by failing to turn over the funds.  The debtor had no standing to pursue the trustee's turnover claim under Bankruptcy Code § 542.  Even if the above conclusions are incorrect, the bank still did not violate Bankruptcy Code § 362(a)(3) because a deposit account is nothing more than the bank's promise to pay and a bank does not exercise control over property of the estate when it refuses to perform its contractual obligation to pay the account owner.  The court declined to adopt analysis of In re Mwangi, 432 B.R. 812 (9th Cir. BAP. 2010).

  • In re Jernigan, 475 B.R. 535 (Bankr. W.D. Va. 2012) -- A bank did not violate the stay by placing an administrative hold on a depositor's account after receiving notice that the depositor had filed a Chapter 7 bankruptcy petition.  The bank immediately mailed a letter to the trustee inquiring what to do with account funds and released the hold promptly upon receiving a reply from trustee.  Thus the bank's actions were taken to maintain the status quo and preserve property of the estate.

  • In re Williams, 474 B.R. 604 (Bankr. N.D. Ill. 2012) -- A secured party does not violate the stay by foreclosing on collateral in which the bankruptcy debtor, as guarantor of the secured obligation, has a right to redeem.

  • In re Blixseth, 684 F.3d 865 (9th Cir. 2012) -- The termination of the stay under Bankruptcy Code § 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 just the collateral listed in the debtor's schedules as securing the claim.

  • In re Jones, 2012 WL 5993760 (Bankr. E.D. Va. 2012) -- A secured party repossessed a debtor's motor vehicle prepetition.  The secured creditor initially refused to return the vehicle after the petition was filed.  When it did finally return the vehicle, the debtor's college textbooks and work uniforms were missing.  The secured party was liable for damages, including lost income, transportation expense, and attorney's fees, but not for tuition paid because there was inadequate proof that the loss of textbooks and temporary loss of the car were the proximate cause of debtor's withdrawal from college.

2. Substantive Consolidation

  • Thermo Credit, LLC v. Cordia Commc'ns Corp. (In re Cordia Commc'ns Corp.), 2012 Bankr. LEXIS 349 (Bankr. M.D. Fla. Feb. 2, 2012) -- The court refused to consolidate entities on grounds that they were sufficiently separate, there was insufficient allegation of creditor harm, and that it was improper to consolidate a debtor and non-debtor.  The court cited precedent both ways on the non-debtor issue and issued a strongly worded opinion that consolidation of debtors and non-debtors is inappropriate.  See also In re Pearlman, 462 B.R. 849 (Bankr. M.D. Fl. 2012), a decision by the same Judge including the same analysis and conclusion.

  • In re City Loft Hotel, LLC, 465 B.R. 428 (Bankr. D. S.C. 2012) -- The court refused to consolidate affiliates with distinct business purposes and creditors, following Augie Restivo.

  • In re It's Greek to Me, Inc., 2012 Bankr. LEXIS 1385 (Bankr. S.D.S.C. Mar. 7, 2012) -- The court ordered substantive consolidation of entities whose affairs seemed hopelessly entangled where no creditor objected and creditors were deemed to treat entities as single economic unit.

  • 760 S. Hill St., LLC v. Bank of America, N.A. (In re Meruelo Maddux Props., Inc.), 667 F.3d 1072 (9th Cir. 2012) -- The court did not consolidate entities.

  • In re SW Boston Hotel Venture, LLC, 460 B.R. 38 (Bankr. D. Mass. 2011) -- The court approved the confirmation plan including substantive consolidation on grounds that no creditors are harmed and that the only objecting creditor's claim was not reduced.

  • Hill v. Oria (In re Juliet Homes, LP), 2011 Bankr. LEXIS 5116 (Bankr. S.D. Tex. Dec. 28, 2011) -- The court refused to dismiss a "reverse veil-piercing" claim under Texas law that would allow a parent corporation to collapse its subsidiaries into itself for purposes of recovering fraudulent transfers where it was sufficiently pled that the subsidiaries were "mere tools" of the parents in a Ponzi scheme.  The court acknowledged that reverse veil piercing is a distinct concept from substantive consolidation in bankruptcy.

  • 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 that it had authority substantively to consolidate 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 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 noted that substantive consolidation is an unusual remedy.

  • In re Pearlman, 450 B.R. 219 (Bankr. M.D. Fla. 2011) -- The court overrode the 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).

3. Claims

  • In re 804 Congress, L.L.C., 2012 WL 1067566 (W.D. Tex. 2012) -- The bankruptcy court lifted the stay to allow a secured party to foreclose on real property.  The debtor's interest in the sale proceeds must be determined by reference to state law.  Accordingly, the secured party's attorney's fees and the sale commissions of the trustee under the deed of trust are to be determined under state law, not pursuant to the Bankruptcy Code.

  • In re Wallett, 2012 WL 4062657 (Bankr. D. Vt. 2012) -- A creditor holding fully secured claim is entitled to post-petition attorney's fees if such fees are authorized under its contract with the debtor.  Because the loan agreement obligated the debtor to pay the creditor's attorney fees only in the event of default, and there was no default, the creditor was not entitled to post-petition attorney's fees incurred in reviewing the plan and preparing a proof of claim.

  • In re SW Boston Hotel Venture, LLC, 2012 WL 4504251 (1st Cir. BAP 2012) -- An oversecured creditor is entitled to postpetition interest at the default rate unless equitable considerations compel a different result.  There were no such equitable considerations in this case because:  (i) there was no creditor misconduct; (ii) the application of the default rate would not harm unsecured creditors, who were to be paid in full; (iii) the default rate was not a penalty; and (iv) application of the default rate would not impair the debtor's fresh start.

  • In re 785 Partners LLC, 470 B.R. 126 (Bankr. S.D.N.Y. 2012) -- An oversecured creditor is entitled to prepetition interest at the default rate and debtor's appeal for equitable relief has no place under New York Law.  Post-petition interest is presumptively also at the contractual default rate, which the court may vary only if the secured creditor is guilty of misconduct, application of the rate would harm unsecured creditors or impair the debtor's fresh start, or the rate constitutes a penalty.  Because the debtor is solvent, there is even more reluctance to alter the contract rate.  The 5% increase in the interest rate due to default is not a penalty under New York law.  However, a contractual term providing for an additional 5% premium on all payments that are more than five days late is not enforceable because the debtor's obligations will be based on the confirmed plan, not the original loan agreement and, in any event, an oversecured creditor cannot receive both default-rate interest and a late payment fee.

  • In re Omega Optical, Inc., 476 B.R. 157 (Bankr. E.D. Pa. 2012) -- A secured party whose attorney filed an unsecured claim and subsequently received a Chapter 11 debtor's plan and disclosure statement classifying the claim as unsecured and providing for the secured party to terminate its financing statement and release its lien was bound by the confirmation order and could not modify its claim to assert secured status.

  • In re Furrs Supermarkets, Inc., 2012 WL 3396146 (Bankr. D.N.M. 2012) -- A supplier was not entitled to an administrative priority reclamation claim under Bankruptcy Code § 503(b)(9) because the supplier's right to reclaim goods sold under U.C.C. § 2-702 was cut off by the debtor's inventory lenders, who qualified as good faith purchasers for value and whose claims exceeded the value of that inventory.

  • In re Johnson, 2012 WL 1833890 (Bankr. D. Wyo. 2012) -- Debtors purchased a business on credit and granted a security interest in the business assets to secure the debt, which the seller did not timely perfect.  The debtors later obtained a bank loan secured by the same assets, which the bank did timely perfect.  The debtors did not cause willful and malicious injury to the seller under Bankruptcy Code § 523(a)(6) because there was no evidence that the debtors intended the bank's security interest to prime the seller's security interest.

  • In re Rabinowitz, 2012 WL 1072212 (Bankr. D.N.J. 2012) -- A debtor sold a collateralized membership interest in a LLC, failed to notify the secured party of the sale, had the proceeds deposited into his attorney's trust fund account rather than one of his own deposit accounts, and then had the attorney make disbursements to insiders who were not shown to be actual creditors.  The court held that the debtor had made transfers with the intent to hinder, delay, or defraud the secured party and thus was not entitled to a discharge.

  • In re Franceschini, 2012 WL 113337 (Bankr. S.D. Tex. 2012) -- A creditor's claim against the owner of a car dealership pursuant to guaranty of dealership's floor plan financing arrangement was nondischargeable under Bankruptcy Code § 523(a)(6) because the owner willfully and maliciously transferred over $1.6 million in proceeds of collateral to family members, affiliates, and other creditors after it became clear that the business would fail.

  • In re Martelle, 2012 WL 1833906 (Bankr. E.D. Tenn. 2012) -- A debtor received insurance proceeds for destruction of personal property collateral and used the funds to repair her home, rather than replace the collateral or repay the secured party.  The court concluded that the debtor willfully and malicious injured the secured party within the meaning of Bankruptcy Code § 523(a)(6).

  • Eaton v. Ford Motor Credit Co., 2012 WL 3579644 (M.D. Tenn. 2012) -- An owner/guarantor of automobile dealership failed to remit to the dealership's floor plan financier the proceeds of vehicles sold despite demand therefor and state court order restraining sale without the financier's consent and without remitting the sale proceeds to the financier.  The obligation was nondischargeable under Bankruptcy Code § 523(a)(6).

  • In re Leonard, 2012 WL 1565120 (Bankr. E.D. Tenn. 2012) -- A guarantor/manager of automobile dealership did not remit to the dealership's secured creditor the proceeds of vehicles sold.  The debt was not nondischargeable under Bankruptcy Code § 523(a)(4) because inclusion of language of trust in the security agreement -- without any requirement to segregate the proceeds -- was insufficient to render the relationship a fiduciary one.  However, the debt could be nondischargeable under Bankruptcy Code § 523(a)(6).

  • In re Hannan, 2012 WL 3643065 (Bankr. W.D. Pa. 2012) -- A debtor who submitted false affidavit about what happened to an item of collateral in connection with adversary proceeding.  The debtor would be denied a discharge.  Even if a discharge were granted, the claim of secured creditor would be nondischargeable under Bankruptcy Code § 523(a)(6) because the debtor, as president and majority owner of the borrower and as guarantor of the secured loan, orchestrated the sale of collateral and deposit of proceeds into the account of a family member's business.

  • In re Nail, 680 F.3d 1036 (8th Cir. 2012) -- A state statute that refers to the debtor as a "trustee" of proceeds but imposes no trust-like duties such as segregation of the funds does not create a fiduciary relationship.  Thus the mortgagor's liability for a deficiency was not nondischargeable under Bankruptcy Code § 523(a)(4).

  • In re Bittar, 2012 WL 1605160 (Bankr. D.N.J. 2012) -- A debtor sold the collateralized dental equipment and used the proceeds to try to keep his business afloat.  The debt was not nondischargeable under Bankruptcy Code § 523(a)(4) because the debtor was not a fiduciary of the secured party.  The obligation was not nondischargeable under Bankruptcy Code § 523(a)(6) because the debtor was not an experienced businessman, was unrepresented when he signed the security agreement, did not initial the page containing language prohibiting sale of the collateral, used all the proceeds to try to save the business and about half to pay the secured party, and thus the debtor did not act willfully.

  • In re Devries, 2012 WL 528223 (Bankr. N.D. Iowa 2012) -- A PMSI trust loan and motorcycle loan were nondischargeable under Bankruptcy Code § 523(a)(6) because the debtor concealed the location of the vehicles from the secured party, stripped the motorcycle and stored the parts removed in a separate location, and, the evidence suggests, similarly disassembled the truck and sold it for parts.

  • In re Casper, 466 B.R. 786 (Bankr. M.D.N.C. 2012) -- A credit union's claim against debtor for failing to remit proceeds of ten repossessed vehicles that the credit union had consigned to debtor's business was nondischargeable under Bankruptcy Code § 523(a)(2) as to the first two vehicles but not as to the other vehicles consigned later because the credit union could not have justifiably relied on the debtor's representation of payment after the debtor failed to remit the proceeds of the first two vehicles.

  • In re Tayeh, 2012 WL 162033 (Bankr. C.D. Ill. 2012) -- A buyer's claim against debtor/used car dealer for failing to comply with state title law by not submitting paperwork required to transfer clear title, which resulted in the debtor's secured lender repossessing and selling the car, was nondischargeable under Bankruptcy Code § 523(a)(2)(A).

  • In re Parra, 2012 WL 4107310 (Bankr. D.N.M. 2012) -- The claim of creditor who consigned 18 vehicles for sale on debtor's used car lot was nondischargeable under Bankruptcy Code § 523(a)(2) to the extent relating to three vehicles for which the debtor provided title as a substitute for a consigned vehicle, but the substitute vehicle had already been sold and nondischargeable under Bankruptcy Code § 523(a)(6) to the extent relating to four vehicles for which the debtor obtained a duplicate title, sold the vehicle, and did not pay the creditor.

  • In re Pagnini, 2012 WL 5489032 (9th Cir. BAP 2012) -- A credit union's claim that reasonably relied on debtor's misrepresentation and concealment about the condition of the collateral when it refinanced the loan was not nondischargeable under Bankruptcy Code § 523(a)(2) because the creditor's loss was not caused by the misrepresentation and concealment.  There was no evidence that the amount the creditor received in connection with the refinancing was less than it would have collected had it enforced its security interest at that time.

  • In re KB Toys, Inc., 470 B.R. 331 (Bankr. D. Del. 2012) -- The court considered whether the purchaser of trade claims held the claims subject to the same rights and disabilities as the original holder of the claim.  The original holders of claims sold them post-petition.  At the time the trade claims were sold, the claims were subject to set offs based default judgments entered in favor of the trustee of the estate on the grounds that the original holders received preference payments from the debtor prior to its bankruptcy filing.  Thus, after the claims were transferred to the buyer by the original holders, the trustee sought to disallow the buyer's claims against the estate in accordance with Bankruptcy Code § 502(d).  That section allows the court to disallow any claim of an entity that is the transferee of a transfer avoidable under Section 547 of the Code, unless the entity or transferee returns such property to the estate.  The buyer objected to the disallowance of its claims on the grounds that Section 502(d) of the Bankruptcy Code is limited to the disallowance of claims by the original claimant.  The buyer argued that while the court can preclude the original claimant from participating in distributions from the debtor's estate, such disallowance cannot be applied to purchasers of the original holder's claim.  The court held that Section 502(d) of the Code is an affirmative defense to a claim against a debtor's estate and that defense is not destroyed by the transfer of such claim.  Similarly, the court was not persuaded by the buyer's argument that the estate still retained the ability to go after original claimants for recovery of the avoidable transfer.  Nor was it persuaded that by ruling in favor of the estate, the court's decision would undermine the confidence of purchasers participating in the market for post-petition transfers of claims.  The court noted that participants in this market are aware of the risks and uncertainties inherent in purchasing such claims (including the risk that the claim could be disallowed) and thus such purchasers are in a better position to negotiate proper indemnities covering such risk with the seller of the claim.  In fact, the court noted, the buyer did negotiate such indemnities in some, but not all of the purchase agreements it entered into with the original claimants.

4. Bankruptcy Estate

  • In re South Side House, LLC, 474 B.R. 391 (Bankr. E.D.N.Y. 2012) -- Post-petition rents received by the debtor are property of the estate under New York law despite an assignment of rents clause in the mortgage that purports to be "absolute" because the assignment provides that the rents revert back to the debtor when the mortgage debt is satisfied.  The post-petition payments made to the mortgagee are to be applied first to the mortgagee's unsecured claim, then to the post-petition interest, fees, costs, and charges allowed under Bankruptcy Code § 506(b), and finally to principal.

  • In re Martinez, 476 B.R. 627 (Bankr. D.N.M. 2012) -- A mobile home for which secured party obtained writ of replevin prepetition but for which the secured party had not conducted a disposition or acceptance was property of the debtor's bankruptcy estate even though the replevin order, which had not been served or executed, stated that the debtor retained no interest in the mobile home.

  • Wells Fargo Bank, N.A. v. Cherryland Mall Ltd. P'ship, 295 Mich. App. 99 (Mich. Ct. App. 2011) -- A borrower obtained a mortgage loan guaranteed by one of its principals.  The underlying loan documents provided that the borrower's failure to maintain its SPE status in accordance with the terms of the underlying mortgage would trigger the loan becoming full recourse to the borrower and the guarantor.  The mortgage loan was then packaged as part of a pool of CMBS loans sold to a trust.  The borrower subsequently defaulted on the loan by failing to make a mortgage payment.  The indenture trustee foreclosed on the trust's property and sought to recover on its deficiency claim under the full recourse guaranty provided by the borrower and the guarantor.  Because the recourse obligations was triggered upon the borrower's failure to maintain its SPE status in accordance with the mortgage, the court looked to the terms of the mortgage to determine what, if any, requirements that the borrower had to maintain its SPE status.  It noted that while the mortgage itself did not define what a "single purpose entity" is, it did include what the court considered to be SPE covenants, such as the requirement that the borrower remain solvent and pay its debts and liabilities from its assets as they become due.  Thus, the court reasoned that in order to maintain its SPE status, the borrower had to remain solvent.  The borrower argued that the intention of this covenant was to prevent owners of SPEs from removing all of the assets from the SPE, thus leaving it unable to pay its debts.  According to the borrower, it was unable to make the payment due on its mortgage loan not because its parent had removed its assets, thus leaving it unable to pay its debts when due.  Rather, the non-payment on the mortgage loan was due to a downturn in the housing market.  However, the court was unpersuaded by the borrower's argument, insisting instead on a literal interpretation of the contract.  Although the court acknowledged that its holding may adversely impact the CMBS market, it reasoned that it was the job of the legislature, and not the courts, to address such public policy concerns.

    Comment:  In the wake of this case, the Michigan legislature recently passed the Non-Recourse Mortgage Loan Act which invalidates the holding in Cherryland by providing that a post-closing solvency covenant cannot be used, either directly or indirectly, as the basis for a recourse claim against a borrower or a guarantor or other surety on a nonrecourse loan.

5. Secured Parties, Set Off, Leases

  • In re Heath, 2012 WL 6042610 (Bankr. E.D. Ark. 2012) -- A chapter 12 debtor could not through a plan confirmation strip secured loans of their cross-collateralization.

  • 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.

6. Avoidance Actions

  • In re Mitchek, 2012 WL 930249 (Bankr. D. Colo. 2012) -- A bank that had perfected its security interest in vehicle in a preferential manner and later agreed to transfer title to the vehicle to the trustee in return for the right to retain prior payments.  The court held that the bank breached that agreement by accepting full payment of the debt from a non-debtor because the promised assignment of the title and of the rights in the collateral "necessarily included any payments made pursuant to the security interest after the date of the agreement." (emphasis added).

  • In re Cedar Funding, Inc., 2012 WL 1110023 (N.D. Cal. 2012) -- A transfer of fractional interests in an originator's mortgage loans occurred for preference purposes when transfers were perfected Because the transfers involved an interest in California real estate, the transfers required recording of the assignment in the real estate records.

    Comment:  This decision seems to disregard UCC § 9-203(g).

  • In re Patterson, 2012 WL 1292642 (Bankr. N.D. Ga. 2012) -- A trustee who was able to avoid creditor's lien on real property because of a substantial delay in perfection was entitled to a monetary judgment for the value of the property as of the date the trustee would have sold it had the creditor acquiesced in the sale, if such value can reliably be determined.

  • In re Brooke Corp., 2012 WL 3066706 (Bankr. D. Kan. 2012) -- A bankruptcy trustee abandoned its interest in a debtor's wholly owned subsidiary and allowed the secured party to conduct a strict foreclosure against the debtor's interest in the subsidiary.  The trustee could later maintain a $8.6 million avoidance action against the subsidiary and its successor even though the trustee had asserted that the debtor's interest had no value to the estate and the successor later allegedly invested substantial sums to resurrect the subsidiary's business.

  • In re Mollison, 463 B.R. 169 (Bankr. D. Mass. 2012) -- Property encumbered by an unperfected security interest is removed from the estate and becomes free of the automatic stay 30 days after the first date set for the Bankruptcy Code § 341 meeting if the debtor does not file a proper statement of intent to surrender, reaffirm, or redeem.  However the trustee retains the power to avoid the security interest.  While the avoided lien cannot be preserved for the benefit of the estate under Bankruptcy Code § 551 if the collateral itself is no longer property of the estate, the trustee can recover under Bankruptcy Code § 550 the value of the property transferred.

  • In re Quebecor World (USA) Inc., 2012 WL 4477247 (S.D.N.Y. 2012) -- The repurchase for $376 million of privately placed notes shortly before bankruptcy was a "settlement payment" because it was to a financial institution serving as trustee for the noteholders, even though the financial intermediary did not take a beneficial interest in the notes during the course of the transaction and thus the transaction did not implicate the systemic risks that prompted Congress to enact Bankruptcy Code § 546(e).  Because the transaction was structured as a repurchase, rather than redemption, of the notes, it was also insulated from avoidance by Bankruptcy Code § 546(e) as a "transfer . . . in connection with a securities contract."

  • In re QuVIS, Inc., 469 B.R. 353 (D. Kan. 2012) -- A secured party that re-perfected its own security interest after a 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's managing director served 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 have a duty to inform the other creditors of the lapse.  Indeed, the secured party had actually argued in court, albeit unsuccessfully, that the re-filings benefitted all the creditors, not merely those who re-filed.

  • Geltzer v. Mooney (In re MacMenamin's Grill Ltd.), 450 B.R. 414 (Bankr. S.D.N.Y. 2011) -- After a failed LBO, the court rejected the argument that fraudulent transfer claims related to the LBO were precluded by the Bankruptcy Code § 546(e) safe harbor.

  • 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 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).

  • MC Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corp.), 675 F.3d 530 (5th Cir. 2012) -- A trustee has standing to pursue avoidance actions even after unsecured creditors are paid in full, if avoidance will benefit the estate.  The court applied New York law, not Georgia law, to fraudulent transfer claim because New York law had broader coverage of guaranty claims.

  • In re LGI Energy Solutions, Inc., 482 B.R. 809 (8th Cir. BAP 2012) -- Utility companies that provided services to customers who paid their bills through a payment processor were creditors of the payment processor because:  (i) they were beneficiaries of a trust created by the agreements between the customers and the payment processor and became creditors when the payment processor violated the trust by using the funds provided without paying the utilities' invoices; and (ii) they were third-party beneficiaries of the agreements between the customers and the payment processor.  As a result, the utilities had preference liability in the payment processor's bankruptcy.  However, the utilities were entitled to a "new value" defense under Bankruptcy Code § 547(c)(4) for both the utility services they provided and the funds the customers provided to the payment processor after the payment processor's transfers to the utilities.

  • In re MBS Management Services, Incorporated, No. 11-30553 (5th Cir. 2012) -- Payments made to reimburse a party for supplying electricity to apartment complexes were "forward contracts" under the preference provisions of Bankruptcy Code § 546(e).  Court says a requirements contract with no specific quantity or delivery date can be a forward contract.

7. Executory Contract

  • Sunbeam v. Chicago American Manufacturing, LLC, No. 11-3920 (7th Cir. 2012) -- A debtor's rejection of an agreement as licensor does not eliminate the licensee's rights.

  • In re Interstate Bakeries Corp., 690 F.3d 1069 (8th Cir. 2012) -- A prepetition agreement by which Chapter 11 debtor granted to a licensee a perpetual, royalty-free, exclusive license its trademarks in a specified geographic area was an executory contract that the debtor could reject.

8. Plan

  • In re Loop 76, LLC, 465 B.R. 525 (9th Cir. BAP 2012) -- The fact that unsecured claim is supported by a third-party guaranty is a relevant consideration in determining whether claims are substantially similar.

  • In re Reid Park Properties L.L.C., 2012 WL 2934001 (Bankr. D. Ariz. 2012) -- An undersecured senior claim could not be put in same class as wholly under-water subordinated claim "secured" by the same collateral.

  • In re Coastal Broadcasting Systems, Inc., 2012 WL 2803745 (Bankr. D.N.J. 2012) -- A clause in subordination agreement authorizing senior lender to vote the claims of the subordinated creditors was enforceable in bankruptcy.  Because the senior creditor approved the plan and would be deemed to have voted the claims of subordinated creditors, the plan could be confirmed even though it extinguished the subordinated creditors' claims.

  • In re Windmill Durango Office, LLC, 473 B.R. 762 (9th Cir. BAP 2012) -- A creditor that purchased a claim after the original claimant had voted in favor of the debtor's reorganization plan but before the ballot deadline did not have cause under Rule 3018 to change the vote.

  • In re Bataa/Kierland, LLC, 476 B.R. 558 (Bankr. D. Ariz. 2012) -- Even if the debtor's purpose for incurring a small, prepetition secured debt was to create a class that would likely satisfy Bankruptcy Code § 1129(a)(10) and therefore render the plan confirmable, such a motive is not a basis for redesignating the claimant's vote.

  • In re 4th Street East Investors, Inc., 2012 WL 1745500 (Bankr. C.D. Cal. 2012) -- Because the existence of a third-party guaranty is an insufficient basis to classify a secured party's deficiency claim separately from other unsecured claims, there was no reasonable possibility that the debtor could cram down a plan.  Therefore, the secured party was entitled to relief from the stay.

  • In re Lichtin/Wade, LLC, 2012 WL 6589794 (Bankr. E.D.N.C. 2012) -- A consulting company that provided services to the debtor (one of its largest clients) and which purchased secured claims one day before votes on the debtor's plan were due was a non-statutory insider and therefore ineligible to vote.  The company's sole purpose was to help out the debtor's principal, it purchased the claims at his request without ever reviewing any documentation and without exercising any independent business judgment.

  • RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (2012) -- In this recent 8-0 decision, the Supreme Court resolved under the cramdown provisions of Bankruptcy Code § 1129(b), a debtor can confirm a Chapter 11 plan over the objection of a secured party in three circumstances, if: (i) the secured claimholder retains its liens on the property and receives deferred cash payments satisfying this claim; (ii) the secured property is sold, free and clear of the claimant's liens, under the procedure described in Bankruptcy Code § 363(k), which allows credit bidding; or (iii) the secured party receives the "indubitable equivalent" of its claim.  The debtor in this case argued that the "or" between those three options allowed it to choose any of those three options.  It chose number three: an asset sale, free and clear of the bank's liens, which would not allow the secured party to credit bid (as mandated by option two), but would instead (it argued) satisfy the "indubitable equivalent" requirement of option three. 

    The Court, described the debtors' reading of Bankruptcy Code § 1129(b)(2)(A) as "hyperliteral and contrary to common sense."  The court relied heavily on the rule of statutory construction dictating that specific language governs general language in holding that these three options are not universally available.  Plans of a specific type must follow the rules outlined in whichever subsection of Bankruptcy Code § 1129(b)(2)(A) is relevant:  (i) is the rule for plans under which the creditor's lien remains on the property, (ii) is the rule for plans under which the property is sold free and clear of the creditor's lien, and (iii) is a residual provision covering dispositions under all other plans . . . [t]hus, debtors may not sell their property free of liens under Bankruptcy Code § 1129(b)(2)(A) without allowing lienholders to credit-bid, as required by clause (ii).


    In other words, option three—providing the creditor with the "indubitable equivalent" of its claim—simply does not apply when the debtor's proposed plan includes an asset sale free and clear of the secured creditor's lien.  Option two's rules control for all free-and-clear sales of collateral.

9. Other

  • In re Lehigh Coal and Navigation Co., 2012 WL 27465 (Bankr. E.D. Pa. 2012) -- Because a lienor was not adequately protected by allowing sale free and clear with lien to attach to the sale proceeds, given that post-petition lender with superpriority was allowed to credit bid and thus there were no sale proceeds, the lien will remain on the property sold.

  • In re PBBPC, Inc., 467 B.R. 1 (Bankr. D. Mass. 2012) -- A sale of assets under Bankruptcy Code § 363(f) free and clear of all claims and interests, including claims under an successor liability theory, meant that the buyer acquired the debtor's assets free of the debtor's experience rating and contribution rate to the state's unemployment compensation fund.

  • Grumman Olson Industries, Inc., 467 B.R. 694 (S.D.N.Y. 2012) -- Although bankruptcy court's order approving a Bankruptcy Code § 363 sale expressly provided that the buyer of the debtor's assets took the assets free of successor liability, due process requires that future claimants -- who do not suffer injury until after the bankruptcy case is closed -- receive notice and an opportunity to participate in the proceedings before their rights are affected.  Accordingly, the buyer's motion to dismiss the action brought by such a claimant was properly denied.

  • Pusser's (2001) Ltd. v. HMX, LLC, 2012 WL 1068756 (N.D. Ill. 2012) -- Bankruptcy court order authorizing the sale of the debtors' trademark free and clear of encumbrances precluded the prior owner from bringing an action to cancel the trademark due to abandonment, fraudulent renewal, and transfer in gross on the basis of the debtors' conduct prior to the sale.

  • In re Jundanian, 2012 WL 1098544 (Bankr. D. Md. 2012) -- A debtor's membership and distribution rights in a Maryland LLC became part of his bankruptcy estate but nothing in the Bankruptcy Code overrode the restrictions on transfer of the membership rights.  Thus the trustee's sale to the debtor included only the distribution rights and the debtor did not re-acquire rights as member to participate in the management of the LLC.

  • In re Blixseth, 2012 WL 6562839 (9th Cir. BAP 2012) -- For venue purposes, the debtor's principal assets -- intangible interests in LLCs -- were located in the jurisdiction of organization because that is where collection efforts must be pursued, even though for UCC purposes the assets would be located at the jurisdiction of the debtor's residence.


  • 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 concludes that there should be a degree of "operational function and independence" for bankruptcy remote entities not seen in prior cases.  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.

  • In re Linda Rose Whitaker, No. 12-6004 (8th Cir. BAP 2012) -- Native American tribes are protected from suit in bankruptcy by their sovereign immunity because Congress did not specifically abrogate the sovereign immunity of Native American tribes in Bankruptcy Code § 106.  A captive finance subsidiary formed by the tribe was an arm of agency of the tribe also enjoying sovereign immunity.

B. Consumer Law

  • Mkhitaryan v. U.S. Bancorp, 2012 WL 6204840 (D. Nev. 2012) -- Although the enforcement of a security interest does not normally qualify as debt collection under the Fair Debt Collection Practices Act, an effort to collect repossess collateral in a manner that breaches the peace -- and thus in a manner not authorized by law -- is actionable under the FDPCA.  Because the facts were in dispute about the nature of the debtor's protest to the repossession effort and the role police played upon arriving to the scene after being called by the debtor, summary judgment was inappropriate.

  • Burling v. Windsor Equity Group, Inc., 2012 WL 5330916 (C.D. Cal. 2012) -- A debtor had not shown that the company that helps its clients locate collateral in which they have a security interest, and to do so made phone calls to the debtor and the debtor's family, was a "debt collector" under the Fair Debt Collection Practices Act because enforcement of a security interest is not debt collection.  However, the debtor was entitled to further discovery to determine if the company was otherwise engaged in debt collection activities.

C. Professional Liability

  • Clark v. Harmon, 2012 WL 6675008 (Ohio Ct. App. 2012) -- Trial court improperly granted summary judgment in legal malpractice case in favor of defendant who failed to: (i) inquire about getting security from the buyer of the clients' assets; (ii) inform the clients of the refusal to provide security; and (iii) inform the clients of the risk of accepting an unsecured note for a substantial portion of the purchase price.

  • In re MF Global Inc., 478 B.R. 611 (Bankr. S.D.N.Y. 2012) -- A clause in an accounting firm's engagement letter with its client that prohibited the client from assigning any rights or claims "arising under this engagement letter" and declared any assignment in violation of this restriction as void did not restrict SIPC, which succeeded to the client's rights, from assigning a malpractice claim against the accounting firm because that claim arose in tort, not under the engagement letter.