Bankruptcy Litigation

Intentional Conduct May Be Required to Prove Defalcation under Section 523(a)(4) In Certain Circuits

By: Elizabeth Vanderlinde

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The Bankruptcy Court for the Eastern District of Wisconsin in In re Mueller[1] recently concluded that a genuine issue of material fact existed as to whether the debtor had the requisite mental state required to commit defalcation under section 523(a)(4) of the Bankruptcy Code (the “Code”), and therefore summary judgment was inappropriate.[2] The debtor failed to make certain required fringe benefit contributions to the plaintiffs under certain collective bargaining agreements entered into in connection with three construction projects.[3] The plaintiffs claimed that the debtor's failure to make such contributions violated Wisconsin's theft by contract statute and supported a finding of defalcation.[4] By contrast, the debtor argued that his failure to pay was inadvertent and reflective of the problems arising in the contracted projects.[5]

Quasi-Judicial Immunity Shields Trustee from Personal Liability

 By Barry Z. Bazian

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Smith v. Silverman (In re Smith),[1] the Second Circuit held that a bankruptcy trustee could not be held personally liable for deciding not to pursue the estate’s only potential sources of recovery. In Smith, the debtor, a former president of Meadow Mechanical Corp., filed two suits in 1990: a dissolution action against the corporation’s shareholders and an action to recover on a promissory note against the corporation.[2] These actions were unresolved and had been left dormant for several years when Smith filed for bankruptcy in 1997.[3] A trustee was appointed in the case, but he decided not to prosecute the actions.[4] The debtor moved to have the Bankruptcy Court compel the trustee to pursue the claims, but the court denied the motion based on the trustee’s assertion that litigating the claims would not be worth the expense.[5] Subsequently, the bankruptcy case was closed and the trustee was discharged.[6] Over a year later, the debtor brought a motion to re-open the bankruptcy case to pursue a cause of action against the trustee, alleging that the trustee breached his fiduciary duties by negligently failing to pursue the actions.[7] The Bankruptcy Court denied the motion, and the District Court affirmed.[8]

Determining Meaning of Debtors Principal Residence Under BAPCPA

By: Patrick McBurney

St. John's Law Student

American Bankruptcy Institute Law Review Staff

            Affirming the decision of the bankruptcy court, the Bankruptcy Appellate Panel for the First Circuit in Pawtucket Credit Union v. Picchi (In re Picchi),[1] held that a debtor was allowed to modify a creditor’s secured mortgage in a multi-family dwelling because a multi-family house does not fall within section 101(13A)’s definition of a debtor’s principal residence.[2] Pawtucket, the secured creditor, held a second mortgage on the debtor’s two-family home.[3] The debtor, Picchi, resided in one of the units, and rented out the second unit.[4] Picchi’s chapter 13 plan reduced Pawtucket’s secured claim to zero because the appraised value of the property was insufficient to satisfy the secured claim of Picchi’s senior lender.[5] The bankruptcy court determined that Pawtucket’s claim could be modified by Picchi and approved the plan.[6] 

Chapter 15 Does Not Permit Relief Manifestly Contrary to U.S. Public Policy

By: Malerie Ma

St. John’s University Law Student

American Bankruptcy Institute Law Review Staff 

 

Applying the “public policy” exception of Chapter 15, the Bankruptcy Court for the Southern District of New York refused to enforce a German bankruptcy order that would have allowed the foreign representative[1] access to a chapter 15 debtor’s emails stored in the United States in In re Toft.[2]  This case represents one of the first decisions to explore the outer boundaries of the public policy exception in section 1506 of the Bankruptcy Code. This chapter 15 proceeding was brought pursuant to a German case, the foreign main proceeding,[3] in which the foreign representative was granted a “Mail Interception Order” on an ex parte basis.  The German “Mail Interception Order,” which was also recognized by the English courts,[4] allowed the foreign representative to, among other things, intercept the debtor’s postal and electronic mail without giving notice to the debtor, Dr. Toft.[5]  The Bankruptcy Court refused to grant comity to the decision of the German Court because the relief sought was “manifestly contrary” to U.S. public policy.[6]

Section 546(e) Safe Harbor Held Inapplicable to Small Private LBOs

By:  Shlomo Lazar

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re MacMenamin’s Grill Ltd.,[1] the Bankruptcy Court for the Southern District of New York held that 11 U.S.C. section 546(e)’s safe harbor for settlement payments does not apply to private leveraged buyouts (LBOs).[2]  MacMenamin’s, a closely-held corporation, funded a stock purchase agreement in the form of a LBO through a $1.15 million loan from Commerce Bank, N.A., secured by a security interest in substantially all of MacMenamin’s assets.[3] The lender transferred the loan proceeds directly to the bank accounts of three former shareholders that controlled 93% of MacMenamin’s stock.[4] The court held that the LBO payouts were not settlement payments under 546(e) and were, therefore, avoidable as constructively fraudulent.[5]

Severance Compensation is Earned on Termination for Section 507(a)(4) Priority

 

By: Eric Small

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In a case of first impression, the Fourth Circuit, in Matson v. Alarcon, held that employees terminated pre-petition “earned” their entire severance compensation upon termination.[1] The debtor, LandAmerica, offered employees severance based on each employee’s length of employment with the company.[2] Because the debtor terminated the employees within 180 days of the petition date,[3] the Fourth Circuit determined that the employees were entitled to priority treatment pursuant to section 507(a)(4) of the Bankruptcy Code up to the then statutory maximum amount: $10,950.[4] In so holding, the Fourth Circuit rejected the trustee’s view that employees should receive only a pro-rated portion of the compensation based on the amount “earned” during the 180 days prior to the bankruptcy petition.[5]

The Third Circuit Broadly Interprets Section 1128(b)s Party in Interest Standing Requirement

By: Michael A. Battema

St. John’s University Law Student

American Bankruptcy Institute Law Review Staff

           

The Third Circuit, in In re Global Industrial Technologies, Inc.,[1] recently held that insurance companies had standing to challenge the terms of the debtors’ proposed plan of reorganization (the “Plan”) because they had legally protected interests therein.[2]  In 2002, Global Industrial Technologies (“GIT”) and its subsidiary company, A.P. Green Industries, Inc., (“APG” and collectively the “debtors”), filed for chapter 11 protection in response to thousands of separate asbestos and silica-related personal injury claims filed against APG.[3]  In the Plan, the debtors sought to create two separate trusts that would assess and resolve the various claims against APG.[4]  Under the Plan’s terms, the trusts were to be funded by the proceeds of certain assigned insurance policies, which the debtors believed would fully cover all liabilities.[5]  Hartford Accident and Indemnity Company, First State Insurance Company, Twin City Fire Insurance Company, Century Indemnity Company, and Westchester Fire Insurance Company (collectively the “Insurers”) were among the insurers whose polices were assigned to the debtors’ silica-related trust.[6]  On November 14, 2007, the bankruptcy court confirmed the debtors’ Plan over the Insurers’ objections because the court determined that the Insurers lacked standing to object to the Plan.[7]

Low Threshold Adopted for Participation Sufficient to Bind a Creditor to a Chapter 11 Plan

By: Jonathan Weiss

St. John’s Law Student

American Bankruptcy Institute Law Review Staff 

In S. White Transportation, Inc.,[1]the Bankruptcy Court for the Southern District of Mississippi held that secured creditor had “participated” in the chapter 11 case and was bound by a plan voiding its lien because it received notice, even though it had not appeared or taken any action in the case.[2] The debtor, S. White Transportation, Inc. (“SWT”), had challenged the validity of a Deed of Trust with the creditor, Acceptance Loan Company, Inc. (“Acceptance”) in state court on the basis that the individuals who had signed the Deed of Trust on behalf of SWT did not have the authority to do so.[3]  Consistent with its claims in state court, SWT’s proposed chapter 11 plan classified Acceptance’s lien as a disputed claim on which no payment would be made.[4] Two weeks after SWT’s chapter 11 plan was confirmed, Acceptance objected to the plan, requesting that the court find that its lien survived the confirmation unaffected.[5] The court held that the plan voided the lien and denied motions for relief and modification of the plan, and reaffirmed the old adage that litigants must not “sleep on their rights”.[6]

Signing a Proof of Claim May Trigger Attorney Disqualification

By: Jessica E. Stukonis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff 

An attorney who signed a proof of claim on his client’s behalf narrowly avoided disqualification in In re Duke Investments.[1] In Duke, the court refused to disqualify the attorney from representing his creditor-client in the chapter 11 case because the attorney was not a “necessary witness” despite his role in preparing, signing, and filing a creditor’s proof of claim.[2] The creditor’s attorney compiled the proof of claim based on information received from the creditor’s officers.[3]  The court denied the debtor’s motion to disqualify the creditor’s attorney because the debtor failed to demonstrate that the attorney was a necessary witness. The attorney was not a necessary witness because he lacked “exclusive knowledge or understanding of the [proof of claim]. . . . [and the attorney’s] testimony would [not] be the sole source of information pertaining to the [proof of claim]”.[4]  Moreover, even if the attorney was a “necessary witness,” he would not be disqualified because the debtor failed to demonstrate that his testimony would “substantially conflict” with Amergy’s testimony,[5] and Amergy consented to the attorney’s continued representation.[6]

Adult Childs Tuition Payments Avoidable as Fraudulent Transfers

By: Gregory R. Bruno

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In Gold v. Marquette (In re Leonard),[1] the United States Bankruptcy Court for the Eastern District of Michigan held that college tuition payments could be recovered as constructively fraudulent transfers because the debtors did not receive “reasonably equivalent value” for pre-petition payments made to Marquette University (“Marquette”) on their adult son’s behalf.  In 2008, the debtors paid Marquette $21,527 to cover the rest of their son’s tuition and related expenses.[2]  The chapter 7 trustee sought to avoid and recover these payments as fraudulent transfers.[3]  Marquette moved for summary judgment on the ground, inter alia, that the debtors received reasonably equivalent value for these payments because the debtors received two benefits from such payments: (1) peace of mind in knowing that their son was receiving a quality education, and (2) the expectation that their son would become financially independent from them because of such education.[4]

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