Unsecured Trade Creditors

Broadly interpreting the forward contracts definition, the District Court for the Eastern District of Louisiana, in Lightfoot v. MXEnergy, Inc.[1] held, for the first time, that a requirements contract to provide energy to a purchaser, absent a specific quantity, was a ‘forward’ contract.[2] As a result, payments made under that contract were not avoidable as preferences pursuant to 11 U.S.C § 547[3] because they were deemed to be settlement payments[4] related to a forward contract. The issue arose under an agreement between MBS Management Services, Inc. (“MBS” or the “Buyer”), a real-estate management company and MXEnergy, Inc. (“MX” or the “Supplier”) who agreed to supply all of the energy requirements for apartments managed by MBS. Following MBS’s bankruptcy filing,[5] the court appointed trustee, Lightfoot, initiated an adversary proceeding to avoid payments made by the Buyer to the Supplier on the basis that those payments were preferences under 11 U.S.C § 547.[6] The defendants asserted that, as a forward contract merchant,[7] the payments made by MBS were settlement payments made pursuant to a forward contract and, as such, they could not be avoided under section 547 based on the limitations set forth in 11 U.S.C § 546(e).[8] The court agreed.

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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]

Do Hybrid Claims Qualify for Section 503(b)(9) Administrative Expense Treatment

By: Brendan Gage

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Courts are increasingly divided over whether so-called “hybrid” claims – those involving both goods and services transactions – can qualify as an administrative expense under section 503(b)(9) and, if so, to what extent. Claims characterized as administrative expenses are paid off first whereas claims that fail to meet section 503(b)(9)’s requirements will be deemed unsecured claims which are paid at a lower priority level and rarely in full.[1] A product of BAPCA, section 503(b)(9)[2] creates a specific type of administrative expense claim for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business.”[3] Yet despite this seemingly straightforward language, courts battle over whether goods transactions within hybrid claims can be allocated as individual section 503(b)(9) expenses or whether hybrid claims should be considered indivisible and analyzed wholesale for qualification under section 503(b)(9).[4]

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Court Holds that Administrative Claims Cannot Be Disallowed Under Section 502(d)

By: Michael Ryan Diaz

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In ASM Capital, LP v. Ames Department Stores, Inc. (In re Ames Department Stores, Inc.),[1] the Second Circuit held that section 502(d), which disallows claims of a party that has failed to return preferential transfers to the debtor,[2] does not bar payment for administrative expenses under section 503(b).[3] The debtor, Ames Department Stores, Inc. (“Ames”), filed a voluntary petition under chapter 11 of the Bankruptcy Code.[4] While in bankruptcy, Ames received a default judgment, for the recovery of preferential transfers,[5] against one of its suppliers, G & A Sales, Inc. (“G & A Sales”).[6] Also facing insolvency, G & A Sales filed a bankruptcy petition and transferred to other entities all of its assets, including two administrative claims against Ames for providing post-petition supplies.[7] These administrative claims were sold to ASM Capital, a distressed-debt investment firm. Meanwhile, Ames’ board of directors eventually decided that liquidation, rather than reorganization, would maximize value for the debtor’s estate.[8] In the midst of liquidation, Ames made distributions for administrative expenses to certain claimants, but withheld payment to ASM Capital on the ground that section 502(d) disallows administrative expense claims that were acquired from a party who had failed to return any preferential transfer or its equivalent value. ASM Capital responded by filing a motion in the bankruptcy court to order the debtor to pay ASM Capital its administrative expense claims. ASM Capital argued that section 502(d) does not apply to administrative expense claims, but the bankruptcy court rejected this argument and denied the motion.[9] Although the district court affirmed the bankruptcy court’s ruling,[10] the Second Circuit reversed and held that section 502(d) does not apply to administrative expense claims.[11]

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Consumer Debtor Not Responsible For Items Clearing Bank Account Post-Petition

By: Deanna Scorzelli

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In a novel approach, the Court uses the § 362(b)(11)

[1]

exception from the automatic stay to insulate a consumer debtor from the trustee’s attempt to require her to “turnover” the amounts reflected by pre-petition checks and debits that were paid by her bank shortly after filing bankruptcy and thus were no longer in the account at the time it was remitted to the estate. In In re Minter-Higgins

[2]

the Chapter 7 Trustee sought turnover from the debtor of money that had been in the debtor’s bank account at the instant of filing for bankruptcy. The debtor objected to the turnover, however, because she had issued checks and initiated debit transfers before filing for bankruptcy that were not honored by the bank until after the filing. If the Trustee were successful in obtaining the turnover, the debtor would be liable to the estate for the amount of those items and effectively pay twice – once when the funds in her account were used to honor the check and debit transfers and a second time in response to the turnover.

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Technical Defects in Proof of Claim Not Grounds for Disallowance

By: Robert Ryan

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Firmly adopting the “exclusive” view of claim objections, the Tenth Circuit Bankruptcy Appellate Panel in B-Line, LLC v. Kirkland

[1]

held that a claim could not be disallowed under 11 U.S.C. § 502

[2]

for failure to submit supporting documentation with a proof of claim since that is not one of the grounds expressly stated in the statute.

[3]

Although Federal Rule of Bankruptcy Procedure 3001 requires that supporting documentation be provided with a proof of claim,

[4]

neither the Rule nor the statute clearly states what to do if a creditor fails to submit supporting documentation.

[5]

The court held that section 502(b) provided an exclusive list of reasons why a claim should be dismissed, reasoning that the “shall allow … except” command in section 502(b) and the absence of an expansive term like “including” indicated that the list was exclusive.

[6]

Since the Rules cannot modify substantive rights, technical defects in the proof of claim are not grounds for objection.

[7]

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Unsecured Trade Creditors

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