Georgia Bankruptcy Blog

This is post is obviously way off-topic, but the United States Supreme Court held, for the first time, that the Second Amendment includes an individual's right to bear arms, at least to some extent.  Although most people believe the right was already there, it really was not according to many lower court cases over the years because of the reference to the militia:  A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

The Supreme Court finally answered the question, in a 5-4 decision in District of Columbia v. Heller.  Read the analysis at the Supreme Court Blog.

By: Scott B. Riddle, Esq.

In Schultz v. United States, 2008 WL 2229495 (6th Cir. June 12, 2008) (pdf opinion here), the debtor argued that the Means Test violates the United States Constitution because the test is reliant on state and local income standards and deductions.

Because of these deductions, eligibility under the new regime is calculated at least in part based on the state and county where the debtor resides. The housing expense deduction, for example, is governed by the county where the debtor resides. Id. § 5.15.1.7(4)(A). Although the national standards, which identify amounts for “food, housekeeping supplies, apparel and services, and personal care products and services,” and a fixed miscellaneous” amount, id. § 5.15.1.7(3), are mostly uniform throughout the United States, the local standards, which define amounts for housing and transportation, vary greatly. 

...the Schultzes brought a separate suit against the United States, which challenges the five sections of the BAPCPA that employ the “means test”-Sections 707(b)(7), 707(b)(2), 704(b), 1325(b)(3), and 1325(b)(4)-under one central theory: because median-income calculations are based, at least in part, on the state and county in which the debtor resides, the BAPCPA is not a “uniform Law[ ] on the subject of Bankruptcies throughout the United States.” U.S. Const. art. 1, § 8, cl. 4   

The District Court granted the United States' summary judgment motion and the debtor appealed. The Sixth Circuit affirmed.

We turn to the central issue in this case: Is the BAPCPA a uniform law on the subject of bankruptcy? The Bankruptcy Clause of the Constitution grants Congress the power to “establish ... uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const. art. I, § 8, cl. 4. What distinguishes these “peculiar terms” from the other Article I powers is the concept of uniformity, which, as Chief Justice Marshall noted nearly two centuries ago, “deserve[s] notice. Congress is not authorized merely to pass laws, the operation of which shall be uniform, but instead to establish uniform laws on the subject throughout the United States.”

Over the last century, the Supreme Court has wrestled with the notion of geographic uniformity, ultimately concluding that it allows different effects in various states due to dissimilarities in state law, so long as the federal law applies uniformly among classes of debtors. In Moyses, one of the first cases dealing with the validity of a bankruptcy statute, the Court upheld the incorporation of varying state exemptions into the 1898 Bankruptcy Act. 186 U.S. at 189-90, 22 S.Ct. 857. Geographic uniformity in this context, the Court observed, was satisfied “when the trustee takes in each state whatever would have been available if the bankrupt law had not been passed. The general operation of the law is uniform although it may result in certain particulars differently in different states.” Id. at 190, 22 S.Ct. 857. In 1918, the Court reaffirmed the Moyses principle in a case involving the Bankruptcy Act's incorporation of varying state fraudulent conveyance statutes, despite the fact that the laws “may lead to different results in different states.” Stellwagen v. Clum, 245 U.S. 605, 613, 38 S.Ct. 215, 62 L.Ed. 507 (1918). See also Vanston, 329 U.S. at 172, 67 S.Ct. 237 (explaining that the Bankruptcy Clause “does not mean wiping out the differences among the forty-eight States” and holding that state tort and contract law may determine the validity of creditors' claims).

Nearly sixty years later, the Supreme Court, applying Moyses, held that Congress may enact non-uniform laws to deal with geographically isolated problems as long as the law operates uniformly upon a given class of creditors and debtors. Blanchette v. Connecticut General Ins. Corps., 419 U.S. 102, 95 S.Ct. 335, 42 L.Ed.2d 320 (1974). ...The Court ultimately concluded that the “uniformity provision does not deny Congress power to take into account differences that exist between different parts of the country, and to fashion legislation to resolve geographically isolated problems,” id. at 159, 67 S.Ct. 237, so long as the law “appl[ied] equally to all creditors and debtors,” id. at 160, 67 S.Ct. 237. See also Leidigh Carriage Co. v. Stengel, 95 F. 637, 646 (6th Cir.1899) (holding that the Bankruptcy Clause “imposes no limitation upon congress as to the classification of persons who are to be affected by such laws, provided only the laws shall have uniform operation”).

From the Atlanta Business Chronicle -

Discount clothing retailer Goody's Family Clothing Inc. has filed for Chapter 11 bankruptcy protection blaming pressures from tightening credit markets, strain on merchandise flow and dozens of underperforming stores in the chain.

Knoxville, Tenn.-based Goody's said it will close 69 underperforming stores, consolidate distribution centers by closing one facility in Russellville, Ark., which will shrink expenses.

Goody's has 17 stores in Georgia, but will close stores in Kennesaw, Conyers, Newnan, Austell, Cumming, Gainesville, Hiram, Tucker and South Augusta.

The Chapter 11 cases (including 19 related cases)  was filed in the District of Delaware.  The New York Post also has an article about the filing.

Obviously not bankruptcy related, but former North Carolinians will be interested in Cheerwine coming back to Atlanta (the article incorrectly says it is making its debut - it was sold in Atlanta grocery stores a few years ago).

Tar Heels, rejoice! Cheerwine, one of our state's indigenous delicacies, is now available in the ATL."Our first ship date to Atlanta was early to mid-May. It's now starting to appear on shelves," said Tom Barbitta, vice president of marketing for the Salisbury, N.C.-based company. "We're thrilled we're going to be moving into Atlanta."

Even though this is Coca-Cola's back yard, the brand's hoping Atlantans will be thrilled right back at welcoming the cherry-flavored soft drink into their midst. Founded in 1917 and still family-owned, the brand has a quirky, devoted following. Nothing bonds two Cackalacky transplants like a cold Cheerwine — especially one cracked open next to a barbecue sandwich with vinegar-based sauce and slaw on top. And road trips north often involve a stop to stock up.
...

Barbitta, who's a New Yorker but sounds pleasant enough nonetheless, says the nectar of the Old North State is being stocked in metro Atlanta Wal-mart, Kroger, Publix, Ingles, and Food Lion stores, with plans to roll out in smaller convenience stores next. Cheerwine is available in 20 states, including California but mostly east of the Mississippi, Barbitta said.

 

From the Delaware Bankruptcy Blog, comes the case of  Miller v. McCown De Leeuw & Co., Inc. (In re Brown Schools), No. 05-10841, Adv. No. 06-50861 (Bankr. D. Del. April 24, 2008).

Duty of care violations more closely resemble causes of action for deepening insolvency because the alleged injury in both is the result of the board of directors’ poor business decision. To defeat such an action, a defendant need only prove that the process of reaching the final decision  was not the result of gross negligence. Therefore, claims alleging a duty of care violation could be viewed as a deepening insolvency claim by another name. 

For breach of the duty of loyalty claims, on the other hand, the plaintiff need only prove that the defendant was on both sides of the transaction. Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (“When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate  their utmost good faith and the most scrupulous inherent fairness of the bargain.”). The burden then shifts to the defendant to prove that the transaction was entirely fair. Id. This burden is greater than meeting the business judgment rule inherent in 5 MDC cites Paragraph 65 of the Second Amended Complaint which reads: “During the period that Defendants wrongfully perpetuated [the Debtors’] operations and existence, the insolvency of [the Debtors] increased by more than $22 million.” (Second Am. Compl. ¶ 65.) MDC also cites Paragraph 71 which reads: “As a result of the Defendants’ breach of their fiduciary duties, [the Debtors] suffered the damages previously alleged.” (Id. at ¶ 71.)  duty of care cases. Further, duty of loyalty breaches are not  indemnifiable under the Delaware law. 8 Del. C. § 102(b)(7). 

Therefore, the Court concludes that the Trustee’s claims for  breach of the fiduciary duty of loyalty in the form of self dealing are not deepening insolvency claims in disguise.  Consequently, the Trenwick and Radnor decisions are not  controlling.

The opinion also addresses deepening insolvency as a measure of damages, fraudulent transfers, aidding and abetting fraudulent transfers, and the in pari delicto defense.

By: Scott B. Riddle, Esq.

From Conglomerate (and now the Wall Street Journal) comes the recent decision in National City Bank v. Hill (In re Hill), Adv No. 07-4106, Ch. 7 Case No. 07-41137 (Bankr. C.D. Ca. May 23, 2008) (click here for .pdf of opinion).  Here, the debtors had previously submitted a materially false loan application to the Bank in order to obtain a secured residential loan.  The false representations at issue included fairly significant inflated income for both of the debtors.  However, the loan program was a "stated income" loan, or "liar loan," which was not subject to independent verification by the lender, as long as other conditions were met.  After default and foreclosure by a senior lender, the Bank filed a complaint to determine dischargeability, arguing that the debt was nondischargeable pursuant to §523(a)(2)(B)  based upon the false representations made by debtors in the loan applications.

Here are the basic facts:

• Debtors joint income was modest - at most, $65,000 combined.
• Debtors owned their home almost 20 years, frequently refinancing first and second mortgages  as the value increased.  As of the petition date, total secured debt was $683,000.
• For several years, Debtors had used the services of a mortgage broker.  In April 2006 the Broker assisted Debtors in getting a $200,000 equity line from the Bank.  The application signed by Debtors falsely indicated they had combined income of $145,716.  The Broker testified he obtained this information from Debtors to place in the application, and he sent the application for the Debtors to sign.  Debtor Mrs. Hill testified she did not provide the figures and that Debtors had never read this, or any other, loan application.
• In October 2006, Debtors needed more cash and contacted the Bank directly.  The new application signed by Debtors reflected a combined income of $190,800, or about triple the actual number.  Again, Debtors denied providing this number.
• The Loans made by the Bank were stated income loans, which  required verification of employment, but not income.  However, the guidelines entered as evidence did reveal that there should be an evaluation of the reasonableness of the stated income based on the type of job, tenure, location, etc.  There was no evidence of such a review by the Bank.  The last loan was also apparently supported by an inaccurate appraisal, but that was apparently conducted by, or on behalf of, the Bank.
• After foreclosure by the senior lender, the Bank filed the adversary proceeding against Debtors, arguing the debt should be determined nondichargeable based upon the materially false financial statements signed and submitted by Debtors.

 The Court ruled against the Bank, stating it had not met it burden under §523(a)(2)(B).

• For reasons more thoroughly discussed in the Opinion, the Court did find that Debtors knew that the representation concerning income was false when made, and that the Debtors made the representation with the intent to deceive the Bank.  Basically, the Court apparently did not find Debtors to be credible on any issue about which they testified.  This is something that should not be lost in the holding. 
• Conversely, the Court held that the Bank did not meet its burden of proving that it reasonably relied on the false representations when making the loan.  Its own guidelines were not followed as far as employment verification and self-employment verification, and it ignored a "red flag" as far as the disparity in stated income for the April and October 2006 loans. The appraisal performed on behalf of the Bank was apparently inflated, and thus the Bank's reliance was in part on its own vendor.

I do not find this opinion particularly remarkable.  The Court starts off by stating that the proceeding is "a poster child for some of the practices that have led to the current crisis in the housing market."   That is probably correct, and notably, the opinion does not distinguish which face is on that poster.  It appears that the Court simply applied the evidence to the statute in a rather straightforward manner, and aptly held that the Bank did not meet the burden of proof on one of the elements.   It certainly could be a big problem for lenders who choose to object to discharge when they have not followed their own guidelines and standards, or have otherwise acted "unreasonably."

Since drafting this, I have already seen a couple of other posts in other bankruptcy forums touting this as a "victory" for debtors over the lenders, or "restoring the balance to the equation."  It is not.  It is a loss for a lender that did not make its case, and should have lost.   The Debtors fortuitously escaped liability as the Court obviously thought they were inherently dishonest and had the intent to deceive the Bank. 

From the Delaware Litigation Blog comes the case of  Nelson v. Emerson, 2008 WL 1961150 (Del. Ch., May 6, 2008) (the opinion is linked from the Delaware Litigation Blog), where the one major secured creditor alleged the directors of the corporation breached their fiduciary duty to the creditor by filing a Chapter 11 petition and paying themselves excessive compensation.

The same claims had apparently been rejected by the Bankruptcy Court in In Re Repository Tech, Inc., 363 B.R. 868 (Bankr. N.D. Ill 2007) (read this opinion here). 

The problem with Nelson's claims is that he is seeking a second chance to win the same game.Nelson made the same arguments he raises in this case to the Bankruptcy Court for the Northern District of Illinois when he sought to have Repository's bankruptcy filing dismissed as being filed in bad faith or, alternatively, due to gross mismanagement of the Company. The Bankruptcy Court, despite dismissing Repository from Bankruptcy because it could not reorganize
successfully, explicitly found that “the bankruptcy filing cannot be held to be in bad faith” and that there had not been “any mismanagement of [Repository's] assets and business.” Satisfied with the dismissal of  Repository's bankruptcy, but unhappy with the Bankruptcy Court's ruling that the bankruptcy had not been brought in bad faith, Nelson appealed to the District Court for the Northern District of Illinois and
argued that the Bankruptcy Court's findings on the bad faith issue were dicta. In essence, Nelson was attempting to preserve his ability to present his bad
faith argument to another tribunal in the hope that a new court might find the argument more substantial. The District Court rejected Nelson's argument, ruling
that the bad faith determination was an essential part of the Bankruptcy Court's holding because Nelson himself had advanced the argument that the bankruptcy filing was made in bad faith.

Francis Pileggi's more thorough review of the opinion is found here. 

From the Wall Street Journal Legal Blog -

Tax firm Caplin & Drysdale was appointed national counsel for the asbestos claimants’ committee in the bankruptcy of Babcock & Wilcox, a maker of boilers and generators. The firm sought about $6.3 million in fees and costs for it services, and charged its full hourly-rate for travel time. The bankruptcy trustee objected to paying the full hourly rate for travel time not spent working, and the bankruptcy judge agreed, awarding attorney’s fees at 50% for those hours — trimming $135,685.80 from Caplin & Drysdale’s tab. The district and appellate courts agreed.

In re Babcock & Wilcox, Inc., Case No. 07-30377 (5th Cir. May 1, 2008).

A warning for firms that have unpaid pre-petition fees  when they represent a Chapter 11 debtor.  From Law.com - 

In a stinging 38-page decision, Southern District of New York Bankruptcy Judge Arthur J. Gonzalez denied Windels Marx Lane & Mittendorf any compensation for its work on the bankruptcy of hip-hop media company Source Enterprises Inc.

The New York firm had sought around $526,000 in fees for the five months from September 2006 to February 2007 it acted as debtor's counsel to Source, publisher of The Source magazine. But Gonzalez said the "manner in which Windels represented the Debtor and the firm's eventual singular concentration on fees, as opposed to its role as counsel, caused harm to the Debtor sufficient to support a denial of all fees sought."

The judge said Windels Marx had a conflict of interest in representing Source in its bankruptcy proceeding because the law firm was itself a creditor and had a bill outstanding with the debtor company of as much as $200,000 even before the bankruptcy filing.

"Simpson's continued representation of the Debtor under this strained relationship was at odds with his ethical obligations and was detrimental to the estate," the judge wrote in In re Source Enterprises Inc., 06-11707. "Rather than seeking to rectify his concerns regarding the Debtor, Simpson turned his efforts to securing an avenue for getting his firm's legal fees paid despite having agreed to defer them." ...

The judge said Windels Marx's desire to be paid may have influenced the proceeding in other ways. Noting that the firm had taken no steps to include affiliated entities of Source in the bankruptcy, Gonzalez said he found it compelling that Windels Marx was a creditor of at least one of these affiliates, whose debt it intended to pursue.

From the Bankruptcy Prof Blog -

Miller v. Cameron (In re Miller)  ---- B.R. ----, 2008 WL 754809 (10th Cir. Mar. 2008) (click here for opinion). 

Issue: Is a debtor's pay stub containing year-to-date income totals “other evidence of payment” sufficient to meet the filing requirements of payment advices for the previous 60 days?

Holding: Yes 

Under the bankruptcy court's interpretation, a debtor would not only need to provide a separate piece of documentary evidence for each pay period during the sixty days prepetition, he would also have to ensure that each piece of evidence was created by his employer.” “[T]he bankruptcy court's interpretation makes the ‘other evidence of payment’ option effectively non-existent. This stretches the statutory language too far.” “[Y]ear-to-date payment information may be credible ‘other evidence of payment received,’ even though the evidence is not technically in the form of separate payment advices for each relevant pay period.” “In reaching this conclusion, it is important to emphasize that we are not holding that year-to-date income information per se satisfies the filing requirements of § 521(a)(1)(B)(iv). Whether year-to-date figures or some ‘other evidence of payment’ presented by a debtor satisfies the statute will depend on the particular facts and circumstances of any given case.”

In a post on February 29, 2008, I discussed the adversary complaint filed against Countrywide by the United States Trustee in the Northern District of Georgia.  Since then, others have picked up on the case, including the New York Times.

Countrywide now faces more troubles.  On Wednesday, April 2, 2008, Judge Thomas Agresti of the Bankruptcy Court for the Western District of Pennsylvania entered this Opinion and Order in the case of In re Countrywide Home Loans, Inc., Misc. No. 07-00204 TPA.  In this case, the U.S. Trustee sought, via a Rule 2004 examination and subpoena, information from Countrywide.  (See the broad list by clicking here).

Several months ago the Chapter 13 Trustee for this District filed substantially identical motions entitled Trustee’s Motion to Compel Countrywide Home Loans, Inc./ f/k/a Countrywide  Funding Corp. to Provide Loan Histories and for Sanctions in 293 separate cases in which Countrywide was a creditor. On October 18, 2007, the Court entered a consolidation order which consolidated all of these separate motions for administrative purposes at Misc. No. 07-00203. 

Subsequently, in 10 of those 293 cases the UST (“context cases”) filed substantially identical documents entitled Notice of Examination Under Fed.R.Bankr.P. 2004 and Service of Subpoena  (Duces Tecum) (“Notice of Examination”).3 In each of these 10 cases, the UST identified actions engaged in by Countrywide that she claims were questionable or raised issues going to the integrity of the bankruptcy system.  On November 2, 2007, the Court entered another consolidation order, this one  consolidating the 10 cases in which the UST had filed the Notices of Examination under Misc. No. 07-00204. Since the 10 Notices of Examination were substantially identical, the Court further  ordered the UST to file a single Notice of Examination (with an attached Subpoena Duces Tecum (“Subpoena”)) by November 7, 2007, with such single Notice of Examination to then have effect in all of the context cases....

The Notice of Examination, which the UST says was filed pursuant to Fed.R.Bankr.P.
2004(c) and 9016, indicates that the UST seeks to examine the “corporate representative” of Countrywide regarding “its bankruptcy procedures as they relate to the Debtors’ financial affairs, the administration of their estate, and the impact of Countrywide’s bankruptcy procedures on the integrity of the bankruptcy process in the Western District of Pennsylvania.” The Subpoena Duces Tecum (“Subpoena”) component of the Notice of Examination directs Countrywide to produce a variety of documents,and Countrywide is further directed to produce an authorized representative  of the company to be examined on a variety of topics.

 (bold emphasis added).

 The Court's Opinion reviews the history of the U.S. Trustee's office, the statutory language, and case law supporting a broad view of the US Trustee's authority.

The Court has little difficulty concluding that the UST has met her initial burden of
sufficient “good cause” to proceed with the Countrywide Rule 2004 exam and obtain receipt of the documentation sought by her in advance of the examination in Categories 5-12. There are a number  of reasons for this conclusion. Most importantly, the UST has shown sufficient proof of a “common  thread” running throughout the context cases sufficient to at least raise the possibility of a systemic  problem worthy of the UST’s attention. That is to say, the UST has not simply randomly chosen  cases and demanded documentation from Countrywide.

As an initial matter, the documents at issue relate very precisely to the specific debtors’ loans, the interaction between Countrywide and each debtor, and the interaction between  Countrywide and this Bankruptcy Court. These are not documents that will implicate any private  business affairs or strategies of Countrywide, and there is no question that they would be discoverable  in traditional litigation between the debtor and Countrywide over the respective loan if the proceeding  had been brought as an adversary proceeding or contested matter. Thus, because turning over the documents will not subject Countrywide to an unfair intrusion into its private business affairs, the UST’s burden of demonstrating good cause to obtain them is a modest one....

More broadly and as noted, the UST has sufficiently identified a common thread among the context cases to warrant some inquiry on her part. Viewed collectively as a group, the  context cases appear to reflect a common pattern, thread, or theme that runs through them involving  the manner in which Countrywide, generally, calculates and determines the extent of its bankruptcy  claims....

Questions surely arise as to why Countrywide fails to honor the terms of the respective discharge orders or the orders approving the Trustee’s final account which, in this District, specifically state that all payments are current as of the date of the Trustee’s last distribution payment. How is notice of these particular orders handled internally by the staff person(s) receiving the notice? How are they posted on the respective accounts? It might be argued that many of these same questions will also arise in and most likely be answered in the Hill contested matter....

It has certainly not been proven that Countrywide did anything wrong in any of these cases and the Court specifically is not making any finding in that regard by this Opinion. The Court merely finds that the UST has made a showing of a common thread of potential wrongdoing in each of the cases that is sufficient to meet the general standard of good cause necessary for her to proceed under Rule 2004.

Jonathan Hayes at the BankruptcyProf Blog discusses the employment applications in the Sharper Image Chapter 11 case filed recently in Delaware.   

The Weil Gotshal firm disclosed that it received a $400,000 retainer of which about $376,000 was used up prepetition.  (Sharper Image had $700,000 in the bank the day it filed the petition)  The hourly rates for the Weil firm run from $650 to $950 per hour for partners and $355 to $595 for associates ($595 per hour for an associate?).  The Womble, Carlyle firm, the local Delaware lawyers, received a $40,000 prepetition retainer.  The new chief executive, Robert P. Conway and his firm will receive $150,000 per month plus 1% of any new money or any sales of assets.

I have never been a Sharper Image shopper, but apparently not as many other people are these days.  The company filed a Chapter 11 petition in Delaware. 

Litigation involving Sharper Image's Ionic Breeze air purifiers resulted in ``negative publicity'' and a decrease in total revenue, according to court papers. The company has lost money in 11 of the past 13 quarters. Sales plunged 11 percent in comparable store sales and 23 percent in total company sales for the month of January versus 2007.

The company plans to close about 90 non-performing stores. Sharper Image said it is currently in negotiations for the sale of the stores and inventory.

The Womble Carlyle Construction Industry Blog reports a landmark decision in North Carolina, in which the N.C. Supreme Court held that arbitration clauses in consumer loan agreements are unconscionable and unenforceable.  The case is Tillman et al v. Commercial Credit Loans, Inc. et al, No. 360A06 (January 25, 2008).

From the Womble Blog -

Specifically, the Court was troubled by findings that the provision:

1. Allowed the credit companies to bring certain claims in court while precluding customers from bringing any claims in court;

2. Contained a cost-shifting/loser pays provision that is triggered after the first eight hours of arbitration (because the cost of the second day of an arbitration proceeding could exceed most or all of disputed amount);

3. Effectively precluded the customer from obtaining a lawyer to pursue a claim in arbitration because lawyers would not agree to represent individual customers in an arbitration setting where the amount in controversy is so low (e.g. an average of $4,500); and

4. Precluded consumers joining their claims together for arbitration and precluded class actions.

The Blog also describes the analysis of the Court -

The principal opinion adopted a new approach, contemplating that a party claiming unconscionability must prove both procedural unconscionability, a/k/a “bargaining naughtiness,” and substantive unconscionability, arising from oppressiveness or one-sidedness in the terms. The Court also institutes a new “sliding scale” approach in which the more one-sided the clause is, the less bargaining naughtiness is required to establish unconscionability. The disagreeing Justices criticize this approach because the facts relied upon in the principal opinion to demonstrate “bargaining naughtiness” (e.g. being rushed through the closing process and not specifically discussing the arbitration provision) are not particularly unique. Thus, while superficially appearing to raise the bar, the new analysis in the principal opinion probably lowers the hurdle that plaintiffs must clear to avoid arbitration and bring class actions in court.

 While this opinion does not bind Georgia Courts, it likely does apply to any consumer loan agreements that are governed by North Carolina law. 

The Delaware Corporate and Commercial Litigation Blog discusses the case of Fogel v. U.S. Energy Systems, Inc., 2008 WL 151857 (Del. Ch., Jan. 15, 2007) -

The Chancery Court cited to a decision of the U.S. Court of Appeals for the Second Circuit--which in turn relied on a Delaware Supreme Court decision, that asserted the "well-settled rule that the right to compel a shareholders' meeting for the purpose of electing a new board subsists during reorganization proceedings." Moreover, the Chancery Court relied on a U.S. Supreme Court decision for the principle that: "a corporation in Chapter 11 reorganization continues to owe duties to its shareholders and that 'the passage into bankruptcy does not sound the death knell for the shareholders' role in corporate governance.'"

You can download a copy of the decision from the Delaware Litigation Blog.

For a case where Judge Mullins in the Northern District of Georgia refused to compel a shareholders meeting until the debtor company complied with SEC regulations, see this post about the case of In re Allied Holdings, Inc, et al., Case No. 05-12525, 2007 Bankr. LEXIS 1598 (Bankr. N.D. Ga. April 20, 2007)(Mullins)

In a prior post, I discussed the Supreme Court case Travelers Casualty & Surety v. Pacific Gas & Electric (05-1429), (opinion available here) wherein the Supreme Court reversed the Ninth Circuit and held that the Bankruptcy Code does not forbid a claim for attorneys fees where such fees are provided for in a contract, even where the fees were generated in litigating Bankruptcy issues.

Left open was the question of whether unsecured creditors could recover, as part of their unsecured claims, post-petition attorney's fees incurred during the bankruptcy case.  The 9th Circuit BAP has recently answer the question with a "yes," in the case of In re SNTL Corp., BAP No. 06-1350-MoDK, 2007 WL 4625246 (9th Cir. BAP December 19, 2007) (pdf. available here).

Bob Eisenbach has written a thorough analysis of the SNTL on the Business Bankruptcy Blog, so please head over there to read his summary and comments.  

The bottom line of these cases is that unsecured creditors will (and probably should) include attorneys fees as part of their claim, at least until the other Circuit Courts rule on the issue.

By: Scott B. Riddle, Esq.

The latest casualty in the subprime world is Delta Financial, which filed a Chapter 11 petition in Delaware yesterday. 

Delta stopped originating loans and fired 1,300 of its 1,350 workers since August, according to papers filed with the U.S. Bankruptcy Court in Delaware.

Delta will consider reorganization but will likely end up liquidating its assets, the papers say. ...

This year's panic over mortgage-related assets caused Delta's key source of financing -- institutional investment in bumdled mortgages -- to dry up. In September, chief executive Hugh Miller writes in his affidavit, Delta resold $900 million of mortgage loans but took a $56.2-million loss.

Still, Delta, continued originating loans -- albeit fewer than before. It wasn't until November that the company laid off half of its remaining workers and further scaled back lending.

That month, the company's lenders began demanding repayment of some of its debts. Delta responded by negotiating "standstill agreements" while it attempted to secure additional financing.

On Nov. 21, Delta "tested the securitization market" by trying to resell the $534.3 million of loans still on its books. When that didn't work, the lenders terminated standstill atgreements and declared Delta to be in default of its agreements.

It is common for corporate lawyers in Georgia (and all other states) to provide legal advice to entities incorporated in Delaware.  Often that advice leads to corporate documents being filed with the Delaware Secretary of State.  Does that advice lead to the out of state lawyer being subject to personal jurisdiction in Delaware? The answer may be "yes."

See Francis Pileggi's analysis of the case of Sample v. Morgan, 2007 WL 4207790 (Del. Ch., Nov. 27, 2007), decided by the Chancery Court.

By: Scott B Riddle, Esq.

Thompson v. Greenwood, 2007 Fed. App. 0445P,  2007 WL 3286743 (6th Cir. Nov. 8, 2007).  "This case presents a single issue on appeal: whether a bankruptcy court may retain a case filed in an improper venue under 28 U.S.C. § 1408 over a timely objection by an interested party, if it determines that retention is in the interests of justice or for the convenience of the parties."  The Court of Appeals held that it cannot.

Venue in a Title 11 case is governed by 28 U.S.C. § 1408, which reads, in pertinent part:

[A] case under title 11 may be commenced in the district court for the district ... in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the one hundred and eighty days immediately preceding such commencement....

28 U.S.C. § 1408 (2006). Under this standard, the debtors concede that venue is not proper in the Western District of Tennessee, or, at least, not “technically” proper. Appellants' Br. at 9. Improperly venued cases are governed by 28 U.S.C. § 1406, which is headed “Cure or waiver of defects” and instructs:

(a) The district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.

(b) Nothing in this chapter shall impair the jurisdiction of a district court of any matter involving a party who does not interpose timely and sufficient objection to venue.

...  Although this section does not specifically mention Title 11 bankruptcy cases, its broad language plainly encompasses all improperly venued cases of whatever variety. Presumably, since bankruptcy judges “constitute a unit of the district court,” 28 U.S.C. § 151 (2006), this includes Title 11 cases.  Therefore, under § 1406, if a case is brought in an improper venue and an interested party FN3 timely objects, a district court has only two options: (1) dismiss the case, or (2) transfer the case to a jurisdiction of proper venue, if it be in the interest of justice.

The Court cited Judge Drake's opinion in In re Sporting Club of Illinois Center, 132 B.R. 792 (Bankr. N.D. Ga. 1991), in support of the majority position. 

The statute which governs change of venue for bankruptcy proceedings is 28 U.S.C. § 1412. FN11 As is evident, this statute does not expressly address cases in which venue is improper. Pick, 95 B.R. at 715. However, when Rule 1014, which does address improperly venued cases, was amended in 1987, the advisory committee added an explanation:

FN11. 28 U.S.C. § 1412 states:
A district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.

Both paragraphs 1 and 2 of subdivision (a) are amended to conform to the standard for transfer in 28 U.S.C. § 1412. Formerly, 28 U.S.C. § 1477 authorized a court either to transfer or retain a case which had been commenced in a district where venue was improper. However, 28 U.S.C. § 1412, which supersedes 28 U.S.C. § 1477, authorizes only the transfer of a case. The rule is amended to delete the reference to retention of a case commenced in the improper district. Dismissal of a case commenced in the improper district as authorized by 28 U.S.C. § 1406 has been added to the rule. If a timely motion to dismiss for improper venue is not filed, the right to object to venue is waived.

Fed.R.Bankr.P. 1014 (Advisory Committee Note 1987). Section 1477(a),  which was superceded by § 1412, was similar to the current § 1412, except that it expressly applied to improperly venued cases. Thus, when § 1477 was not enacted, there was no statute which dealt specifically with improperly venued cases. Pick, 95 B.R. at 715. This Court agrees with the court in Pick that when Congress failed to enact § 1477, they intended that improperly venued cases be treated the same as all other federal civil actions under § 1406, and that upon the motion of a party in interest, the case must either be dismissed or transferred. Id. This view is consistent with both Rule 1014(a) and the advisory committee notes..... Thus, the only situation in which the Court may retain an improperly venued case is where no party in interest files a timely objection. 

FN12. 28 U.S.C. § 1477, enacted in 1978, but later superseded, stated in pertinent part:   (a) The bankruptcy court of a district in which is filed a case or proceeding laying venue in the wrong division or district may, in the interest of justice and for the convenience of the parties, retain such case or proceeding, or may transfer, under section 1475 of this title, such case or proceeding to any other district or division.

The Court is aware that other courts have reached the opposite conclusion. Lazaro, 128 B.R. at 175; In re Leonard, 55 B.R. 106 (Bankr.D.D.C.1985); In re Boeckman, 54 B.R. 110 (Bankr.D.S.D.1985). However, this Court respectfully disagrees with the holdings of these cases. Accordingly, since venue in this case is improper, the only alternatives are to dismiss the proceedings or transfer them to the proper district.

Two interesting points about the Sporting Club case, which was before the Court during my clerkship with Judge Drake.  Debtor and the secured lender moving for transfer were represented by future Bankruptcy Judges.  Second, the case was one of clear venue shopping -

The only connection that either of the Clubs has in this district is a lease for office space in Peachtree City, Georgia, the address stated on the petitions of both the Illinois and Boca Raton Clubs. However, the evidence strongly indicates that this space was leased by the Illinois and Boca Raton Clubs, along with the Atlanta Club, for the sole purpose of obtaining venue in this district. The office space was jointly leased, on a month-to-month basis, on May 6, 1991, or shortly before the bankruptcy petitions were filed. No records of any value were kept in the office, and little, if any, business was conducted from the office. Additionally, the only mail received at the office was bank statements for accounts set up concurrently with the lease.

In re Perrotta, 2007 WL 3307256 (Bankr. D. N.H., November 7, 2007).  The United States Trustee sought a Rule 2004 Order in order to determine, through an "informed decision," whether the debtor's case should be "presumed abuse" pursuant to §707(b).  The Court denied the request, concluding that the UST should rely upon existing information (i.e., pay advice, tax returns, schedules, etc.) to make the initial determination under §704. 

As stated by Chief Judge Gregory F. Kishel of the United States Bankruptcy Court for the District of Minnesota,

There is no reference [in the Bankruptcy Code] to materials to be obtained from the debtor or third-party sources via formal discovery, informal exchange, or independent investigation. There is certainly no newly-created right in the UST to compel the production of documents or any other information from a debtor on an expedited basis, or to obtain them in any way other than those under generally-applicable law. So, in doing the statutorily-mandated early evaluation of a case for the prospect of a presumption of abuse, the UST ultimately is relegated to relying on what the debtor “filed” in the case. The statute seems to contemplate that this will present sufficiently-reliable information on which to make an evaluation-at least when the debtors and their counsel have complied with the newly-heightened duties of verification as to accuracy that BAPCPA has imposed.

BAPCPA put in place very short time limits for the UST to make a determination as to whether a debtor's case should be presumed to be an abuse and then to file a motion seeking dismissal under § 707(b)(2). BAPCPA further instituted new requirements that debtors produce additional financial information including pay advices and tax returns as well as the information set forth in the Means Test Form. 11 U.S.C. § 521(a)(1)(B)(iv), (a)(1)(B)(v), and (e)(2)(A)(i). Taken together, this Court concludes that Congress could not have contemplated that the UST would undertake exhaustive research or discovery before filing a motion to dismiss. Rather, the UST would only be required to review the information filed with the Court as contemplated by § 704(b)(1)(A). Thus, BAPCPA did not place any burden on the UST to engage in extensive discovery in order to determine whether a debtor's case is a substantial abuse and thus subject to dismissal.FN2 The UST is required to file a statement of her determination of abuse under § 707(b). If she finds the filing to be presumptively abusive, she must then file a motion to dismiss within thirty days or file a statement as to why dismissal is not being sought. Upon the filing of the motion, the formal discovery rules of Part VII of the Federal Rules of Bankruptcy Procedure are then applicable pursuant to the contested matter rule of Rule 9014(c). The statutory framework and deadlines can only lead to the conclusion that Congress intended the UST to file first and investigate beyond the documents submitted by the debtor later. In the context of the statutory mandate, the UST can satisfy her obligations under Rule 9011 by making the determinations required under § 704(b)(2) on the documents in the file and provided to the chapter 7 trustee and, if a motion is filed, by pursuing discovery as contemplated by Rule 9014 in prosecuting such motion.

FN2. Of course, nothing prevents the UST from engaging in informal discovery or making requests to a debtor's counsel in order to clarify one or more points which may bear on the filing of a motion to dismiss under § 704(b)(2). However, the BAPCPA amendments to the Bankruptcy Code do not require such efforts, formally or informally.

From the Wall Street Journal Law Blog, The Legal Implications of Throwing Eggs -

• Theft: Stealing candy from another person, or a location, is classified as “robbery.” Use a real or fake weapon in the commission of this robbery, and the stakes get even greater with possible felony-level re-classification as a “violent” crime for which penalties get gravely serious. So, trick-or-treaters should wield that pirate’s sword judiciously.
• Vandalism: Throwing eggs or any other item at cars, homes or other personal property, smashing mailboxes, putting shaving cream on cars or garage doors can all cause permanent damage, and are considered more than just a prank by police. Retribution can include community service or repaying monetary damages that can add up to thousands of dollars.
• Criminal Mischief: “Toilet papering” trees or other personal property, smashing pumpkins and other seemingly innocuous pranks are also unlawful, and can result in fines to cover property damages and other forms of civil law punishment.
  

In In re Lilliefors, 2007 WL 2903803* (E.D. Va. October 3, 2007), the debtor certified, under oath, that he had obtained the credit counseling prior to filing his Bankruptcy petition, as required by §109(h)(1). In fact, he had not obtained the counseling.  However, the Court applied judicial estoppel and prohibited the debtor from taking an inconsistent position in his pleadings to obtain a benefit or advantage.  Thus, the debtor could not falsely claim that he had obtained counseling, then seek a dismissal on the grounds that the requirement was not met.  The Court commented that Congress enacted §109(h)(1) to prevent abuse, and not create another avenue of abuse by debtors.   The debtor was, therefore, deemed to have satisfied the credit counseling requirement and the case was not dismissed.

The Court relief heavily on Judge Diehl's opinion in In re Parker.

* I am doing a trial with Westlaw, hence the WL citations. 

By: Scott B. Riddle, Esq.

In re Moorman, 2007 Bankr. LEXIS 3269 (Bankr. C.D. Illinois, September 28, 2007).  The issue before the Court was -

... whether Chapter 13 debtors, calculating their disposable income pursuant to §1325(b)(2) and (b)(3) and §707(b)(2), may claim an ownership deduction for a vehicle they own free and clear of liens and for which they make no secured debt payment. This issue, which arises under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), has divided courts. At least 41 courts have issued written opinions on this issue or on the related issue involving the availability of the deduction under similar facts for the Chapter 7 means test calculation. Twenty-four courts have allowed the deduction while 17 courts, including two district courts, have denied the deduction. After considering many thoughtful, well-reasoned, and well-written opinions on both sides of the issue, this Court finds that the deduction should be allowed.

 The conclusions is as follows -

In view of these cases, this Court finds that a debtor's "applicable" deductions are those that correspond to the debtor's date of filing, family size, geographic location, number of vehicles, or other factors set forth in the Standard tables. In determining whether a debtor has properly claimed his "applicable" deductions, a Court must determine whether the debtor has correctly navigated through the tables. How a debtor's actual expenditures correspond to the amount of a Standard deduction is not relevant in determining whether such Standard deduction is "applicable."

If Congress had wanted to limit vehicle ownership deductions to the amount actually expended for secured debt payment as the IRS does, albeit with a cap, it could have done so by allowing the secured debt payment in full and eliminating the ownership deduction altogether. But, Congress did not do that. Instead, the statute specifically provides for the deduction of both a secured debt payment and the balance of the related Standard to the extent that the secured debt payment does not exceed the Standard. A debtor can deduct a minimal secured debt payment - presumably as little as $ 1.00 - from the Standard vehicle ownership deduction, and then still receive the balance of the Standard as a deduction. Thus, with even the smallest of secured debt payments, the Standard deduction is still "applicable" regardless of a debtor's actual ownership expenses. It does not logically follow that, if a debtor has no secured debt payment to deduct from the Standard, the Standard, for some reason, becomes no longer "applicable." In re Wilson, B.R. , 2007 Bankr. LEXIS 2530, 2007 WL 2199021 *5 (Bankr. W.D. Ark.). To the contrary, following the statutory formula, a debtor with no secured debt payment should receive the entire Standard deduction.

This Court is cognizant of the concerns expressed in In re Ross-Tousey, 368 B.R. 762 (E.D. Wis. 2007). There, the district court opined that, if a full ownership deduction is available to a debtor who has no secured debt payment on a vehicle, a debtor could claim the deduction even for an old, inoperable vehicle rusting away in the backyard. Id. at 768. This leads to the concern that a debtor might purchase such a vehicle for a few dollars for the purpose of qualifying for the deduction. Although that is certainly possible, it may be just as likely that a debtor faced with receiving no ownership deduction for a vehicle owned free and clear of liens would obtain a modest loan against the vehicle solely for the purpose of qualifying for the Standard deduction. Both scenarios are problematic, but that is the challenge of the required use of a Standard expense deduction rather than the actual, provable vehicle ownership expenses of a debtor. The remedy, if any is needed for this perceived problem, is legislative, not judicial.

Bob Eisenbach at the Business Bankruptcy Blog discusses the recent 9th Circuit case of In re El Toro Materials Company, wherein the Court held that the cap on a landlord's damages for lease rejection does not apply to the landlord's tort claims. Bob summarizes the facts  - "the debtor was a mining company that leased property from the Saddleback Community Church, paying $28,000 per month in rent. After the lease was rejected, Saddleback brought an adversary proceeding against El Toro for $23 million in damages alleging that El Toro left a million tons of wet clay "goo," mining equipment, and other materials on the property. "

The Court commented -

The cap applies to damages “resulting from” the rejection of the lease. 11 U.S.C. § 502(b)(6). Saddleback’s claims for waste, nuisance and trespass do not result from the rejection of the lease—they result from the pile of dirt allegedly left on the property. Rejection of the lease may or may not have triggered Saddleback’s ability to sue for the alleged damages.But the harm to Saddleback’s property existed whether or not the lease was rejected. A simple test reveals whether the damages result from the rejection of the lease: Assuming all other conditions remain constant, would the landlord have the same claim against the tenant if the tenant were to assume the lease rather than rejecting it? Here, Saddleback would still have the same claim it brings today had El Toro accepted the lease and committed to finish its term: The pile of dirt would still be allegedly trespassing on Saddleback’s land and Saddleback still would have the same basis for its theories of nuisance, waste and breach of contract. The million-ton heap of dirt was not put there by the rejection of the lease—it was put there by the actions and inactions of El Toro in preparing to turn over the site.

Head over to Bob's post for a thorough discussion of the case, and a copy of the opinion, that he believes changes the landscape of landlord/tenant relations in Bankruptcy in the 9th Circuit.

As an aside, the landlord in the case, Saddleback Community Church, is the home church of Rick Warren, author of the popular best-seller, "The Purpose Driven Life."

By: Scott B. Riddle, Esq.

Thanks to the Fresno Bankruptcy Blog for noting this.

In Jones v. Wells Fargo Home Mortgage, Adv. No. 06-01093 (Bankr. E.D. La. August 29, 2007) (click here for pdf. of opinion), the Court found Wells Fargo guilty of violating the automatic stay by improperly assessing post-petition charges in a Chapter 13 case, and diverting payments made by the Chapter 13 trustee to satisfy claims not authorized by the Chapter 13 plan or the Court.  Further, the Court found that this conduct was the normal court of business for Wells Fargo in perhaps thousands of consumer cases.

The Court awarded attorneys fees and expenses of $67,202.45 and considered a multi-million dollar punitive damages award due to the apparent widespread misconduct.  However, Wells Fargo proposed changes (noted below, after the jump) in the way it does business in lieu of sanctions.  Further, Wells Fargo agreed to memorialize its proposal into an order of the Court, "enforceable in any case pending or subsequently filed before any court in the country."

The Court agreed that this was an appropriate result and would enter an order setting forth this agreement, such that the Court could continue oversight over Wells Fargo's implementation of the agreement.

The agreement Wells Fargo proposed is as follows  (after the jump)--

By: Scott B. Riddle, Esq.

Bob Eisenbach at the Business Bankruptcy Blog summarizes the 9th Circuit case of Sigma Micro Corp. v. Healthcentral.com,  No. 04-17565 (9th Cir. Sep. 21, 2007), which involves the right to a jury trial in a preference action. Although the issue at hand involves the interpretation of a local rule in California, Bob provides a good general summary of the right to jury trial in preference actions, and the opinion may be relevant in other districts.

The theory of deepening insolvency as a separate tort has had mixed results.  It has never been truly recognized in Georgia, as noted by a Texas court.  Other courts have held that it is a theory of damages rather than a cause of action.

In a big strike against its viability, the Delaware Chancery Court said it was not even a "coherent concept."  What would the Delaware Supreme Court say?  We just found out.  Apparently, they also agreed that it was not a coherent concept so they entered a two page order affirming the Chancery Court decision, and the reasons therefore. Trenwick America Litigation Trust v. Billett, No. 495, 2006 (Del. August 14, 2007).

Thanks to Bob Eisenbach at the Business Bankruptcy Blog for the tip, and some additional analysis. 

On July 5, 2007, the Seventh Circuit held that the "hanging paragraph" of 11 U.S.C. §1325 meant that the secured creditor may assert a deficiency claim after the surrender and liquidation of a "910 vehicle."  This is generally known as the minority position (and the one followed in the ND Ga). See this post for the discussion of In re Wright, and also see Steve Jakubowski's take at the Bankruptcy Litigation Blog.  

It seems that on the same day, the 10th Circuit Bankruptcy Appellate Panel decided to go the other way, following the majority position that the surrender of the 910 vehicle constitutes full satisfaction of their claim.  See In re Quick; In re Ballard,  BAP No. 07-025, No. 07-026, 2007 Bankr. LEXIS 2175 (10th Cir. BAP June 5, 2007) (opinion not yet available on the court's website).

The BAP initially concluded that §1325 was not ambiguous -

Chrysler urges this Court to adopt the minority position allowing under-secured creditors to assert unsecured claims for deficiencies resulting from sales of collateral. ... However, such a holding would require this Court to first determine that the hanging paragraph is ambiguous, thereby necessitating an examination of legislative history. This we decline to do.

Although Chrysler asserts that the purpose behind enactment of the hanging paragraph must be examined in order to interpret it, the cases relied upon do not support its position. For example, in Griffin v. Oceanic Contractors, Inc., 458 U.S. 564 (1982), the Court first acknowledged that "[t]here is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes," and then noted that "in rare cases the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters, and those intentions must be controlling." Id. at 571 (emphasis added; internal quotation marks omitted). Moreover, an unambiguous statute may not be "interpreted" to match a court's determination of what Congress "meant" to say. Bracewell v. Kelley (In re Bracewell), 454 F.3d 1234, 1243 (11th Cir. 2002), cert. denied, 127 S. Ct. 1815 (2007).

In this case, the language of the hanging paragraph is neither ambiguous, nor does literal application of its terms lead to a result that is demonstrably at odds with the apparent intentions of its drafters. Significantly, this Court is not persuaded that the sparse legislative history of the amendment of § 1325 supports Chrysler's assertion that the hanging paragraph was enacted solely for the benefit of secured creditors. In any event, Congress easily could have specified that the hanging paragraph applies only to §1325(a)(5)(B), but it did not.

 The Court then held as follows:

We therefore hold that the hanging paragraph unambiguously precludes application of 11 U.S.C. 506 to the entirety of  §1325(a)(5) and no bifurcation of allowed secured claims may be effected in the exercise of any of a 910 debtor's three options under §1325(a)(5). The effect of this elimination of bifurcation in 910 cases has been described as follows:

The effect of the hanging paragraph is that a debtor no longer has this bifurcation tool at his or her disposal. If a creditor files a secured claim relating to 910 property and that claim is allowed under § 502, the debtor must treat the claim as fully secured. In a sense, a fiction arises that the 910 collateral is worth the exact amount of the proof of claim. So when a debtor proposes to retain the collateral, the debtor must propose to pay the entire claim as filed. Likewise, where the debtor proposes to surrender the collateral, the fiction created by the hanging paragraph serves to render the secured claim completely satisfied.

In re Durham,361 B.R. 206, 209 (Bankr. D. Utah 2006) Thus, post-BAPCPA, 910 debtors may no longer retain collateral and cram down their loans, and 910 creditors may not recover deficiencies when collateral is surrendered.

The Court expressly declined the state law argument that the Seventh Circuit found persuasive in Wright (after the jump)-

In In re Racing Services, Inc., 363 B.R. 911, 47 Bankr. Ct. Dec. 246 (8th Cir. BAP, March 9, 2007) (No. 06-6058), the Eighth Circuit Bankrptcy Appellate Panal addressed the issue of who may have derivative standing to act on behalf of a Bankruptcy estate.  Thanks to Split Circuits Blog for the tip.

The Court left some wiggle room by holding that a party other than the trustee requires court approval to pursue the §548 claims on behalf of the estate, and that was not done in this case. However, it was clear that the BAP did generally approve of derivative standing.

Every circuit, including the Eighth Circuit, which has addressed the issue has recognized the possibility of derivative standing to pursue avoidance actions on behalf of a bankruptcy estate under certain circumstances. Nangle v. Lauer (In re Lauer), 98 F.3d 378, 388 (8th Cir. 1996); Scott v. Nat’l Century Fin. Enter. Inc. (In re Baltimore Emergency Services II Corp.), 432 F.3d 557 (4th Cir. 2005); Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3rd Cir. 2003); Commodore Int’l Ltd v. Gould (In re Commodore Int’l Ltd.), 262 F.3d 96 (2nd Cir. 2001); Fogel v. Zell, 221 F.3d 995 (7th Cir. 2000); Avalanche Maritime, Ltd. v. Parekh (In re Parmetex, Inc.), 199 F.3d 1029 (9th Cir. 1999); Canadian Pac. Forest Prod. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d 1436 (6th Cir. 1995); Louisiana World Exposition v. Fed. Ins. Co., 858 F.2d 233 (5th Cir. 1988); Unsecured Creditors Committee v. Noyes (In re STN Enter.), 779 F.2d 901 (2nd Cir. 1985).

The Eighth Circuit Court of Appeals concluded that creditors cannot bring avoidance actions under Section 548 of the Bankruptcy Code absent evidence that the trustee cannot be relied upon to assert such claims. Nangle v. Lauer (In re Lauer), 98 F.3d 378, 388 (8th Cir. 1996). In order for a creditor to assert standing under Section 548, the creditor must establish that the trustee was unable or unwilling to pursue the claims on behalf of the bankruptcy estate. Id.

 The Court continued -

In a case that was a direct appeal to the Seventh Circuit Court of Appeals, pursuant to 28 U.S.C. §158(d)(2)(A), the Court held that the "hanging paragraph" of 11 U.S.C. §1325 left lenders with a deficiency claim after surrender of the "910 vehicle."   The Court rejects the majority (?) view that Congress "accidentally gave debtors a break" in §1325 (see the bottom of the post for the audio of the oral argument).

In In re Wright, (click for .pdf), Case No. 07-1483, 2007 U.S. App. LEXIS 15843 (7th Cir. July 5, 2007), the Chapter 13 debtors proposed a plan that would result in surrendering their "910 vehicle," but making no provision for paying the difference in the value of the vehicle and the amount of their debt.

The question we must decide is what happens when, as a result of the hanging paragraph, §506 vanishes from the picture. The majority view among bankruptcy judges is that, with §506(a) gone, creditors cannot divide their loans into secured and unsecured components. Because §1325(a)(5)(C) allows a debtor to surrender the collateral to the lender, it follows (on this view) that surrender fully satisfies the borrower’s obligations. If this is so, then many secured loans have been rendered nonrecourse, no matter what the contract provides. See, e.g., In re Payne, 347 B.R. 278 (Bankr. S.D. Ohio 2006); In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 2006); In re Kenney, 2007 Bankr. LEXIS 1646 at *16-17 (Bankr. E.D. Va. May 11, 2007) (collecting cases). The minority view is that Article 9 of the Uniform Commercial Code plus the law of contracts entitle the creditor to an unsecured deficiency judgment after surrender of the collateral, unless the contract itself provides that the loan is without recourse against the borrower. See, e.g., In re Particka, 355 B.R. 616 (Bankr. E.D. Mich. 2006); In re Zehrung, 351 B.R. 675 (W.D. Wis. 2006). That unsecured balance must be treated the same as other unsecured debts under the Chapter 13 plan.

Like the bankruptcy court, we think that, by knocking out §506, the hanging paragraph leaves the parties to their contractual entitlements. True enough, §506(a) divides claims into secured and unsecured components...Yet it is a mistake to assume, as the majority of bankruptcy courts have done, that §506 is the only source of authority for a deficiency judgment when the collateral is insufficient. The Supreme Court held in Butner v. United States, 440 U.S. 48 (1979), that state law determines rights and obligations when the Code does not supply a federal rule. See also, e.g., Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., 127 S. Ct. 1199 (2007); Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15 (2000). ...

By surrendering the car, debtors gave their creditor the full market value of the collateral. Any shortfall must be treated as an unsecured debt. It need not be paid in full, any more than the Wrights’ other unsecured debts, but it can’t be written off in toto while other unsecured creditors are paid some fraction of their entitlements.

(emphasis added)

Hechinger Investment Company of Delaware, Inc. v. Universal Forest Products, Inc., Nos. 06-2166, 06-2229, 2007 U.S. App. LEXIS 13155 (3rd Cir. June 7, 2007).   The issue was whether preferential transfers may be protected by the contemporaneous exchange defense of §547(c)(1).  Bob Eisenbach comments on the case at the Business Bankruptcy Blog, so I will just include a couple excerpts from the opinion.

The Bankruptcy Court found that the disputed transfers were not intended by the parties to be contemporaneous exchanges because the transfers were credit transactions. In reaching this result, the Court relied upon several factually distinguishable cases, none of which stand for the proposition that parties can never intend credit transactions to be contemporaneous exchanges under § 547(c)(1)(A). We disagree with the Bankruptcy Court’s conclusion. Indeed, it  would appear that § 547(c)(1) covers little other than credit transactions. The § 547(c)(1) defense applies only to transfers that the debtor has shown are payments on an “antecedent debt” under § 547(b). See 11 U.S.C. § 547(b)(2) (definition of  avoidable transfers). If there is no delay between when the debt arises and payment of the obligation, then the transfer is outside the scope of § 547(b), and § 547(c)(1) is not implicated. The existence of a delay between the creation of a debt and its payment is a hallmark of a credit relationship, which is, by definition, a relationship in which the creditor entrusts the debtor with goods without present payment. OXFORD ENGLISH DICTIONARY (2d ed. 1989) (defining “credit” as “[t]rust or confidence in a buyer’s ability and intention to pay at some future time, exhibited by entrusting him with goods, etc. without present payment.”). ...

The inquiry still remains: even if a credit relationship was intended, was it nonetheless their intent that the ongoing payments would be contemporaneous exchanges for new value? A court may find the parties intended a contemporaneous exchange for new value even when the transaction is styled as a “credit” transaction. See In re Payless Cashways, Inc., 306 B.R. 243 (8th Cir. BAP 2004), aff’d, 394 F.3d 1082 (8th Cir. 2005). The question is one of intent, and although a delay between the incurrence of the debt and its payment can evidence that the exchange was not intended to be contemporaneous, the passage of time does not necessarily negate intent. In In re Payless Cashways, for example, the debtor generally paid the creditor for specific shipments some time after the goods were shipped, but before or at the time that the shipments arrived at the debtor’s facility. Id. at 247. The court concluded that the parties intended the transfers to be part of a contemporaneous exchange for new value. The court noted that the debtor and creditor agreed to credit terms that would match up the date of the actual delivery of the goods purchased by the debtor with the date of the debtor’s obligation to wire payment for the goods to the creditor. Id. at 246. The court also put great weight on the fact that the contracts were “destination contracts,” meaning that the creditor could have refused to deliver the goods if the debtor had failed to make payment before the delivery arrived. Id. at 250, 254.

This case comes courtesy of an email from Jennifer Gronwaldt of the Media Relations firm of Hellerman Baretz Communications LLC, apparently sent to other bankruptcy blogs as something of a press release (it apparently worked!).

The case is In re Cygnus Oil and Gas Corp., f/k/a Coffee Exchange, Inc., f/k/a Touchstone Resources, LLC, Case No. 07-32417 (Bankr. S.D. Texas).  The issue is whether the law firm of Bracewell & Giuliani is "disinterested" pursuant to §101(14) and §327 of the Code, notwithstanding the fact that a member of the firm was a shareholder of the debtor, held an unsecured claim against the debtor, and served as a director until about three months before filing.

Sounds like an easy call, right?  No....  Judge Marvin Igsur, in this opinion, ruled that the firm was disinterested in spite of the lawyer's interest --