WHAT’S INSIDE Litigation News and Analysis • Legislation • Regulation • Expert Commentary BANKRUPTCY Westlaw Journal 41391246 VOLUME 10, ISSUE 7 / AUGUST 1, 2013 MUNICIPAL BANKRUPTCY Naming mediator brings authority to fractious Detroit bankruptcy case (Reuters) – Of all the legal maneuvers so far in Detroit’s bankruptcy case by unions or the city’s emergency manager, the one that may have the most impact was when the judge decided to name a mediator. AVOIDANCE 5 Amicus tells 4th Circuit that both spouses must seek bankruptcy to protect tenancy by entireties Alvarez v. HSBC Bank (4th Cir.) FRAUDULENT TRANSFERS 6 Fraudulent transfer not part of estate until trustee recovers it, creditor tells Supreme Court Rajala v. Lookout Windpower Holding Co. (U.S.) ASBESTOS 7 Supreme Court rejects Pfizer’s bid to block asbestos suits Pfizer Inc. v. Law Offices of Peter G. Angelos (U.S.) 7 New Jersey federal court rejects reimbursement claims against G-I Holdings U.S. Gypsum Co. v. G-I Holdings (D.N.J.) AUTOMATIC STAY 8 Collection of pre-bankruptcy attorney fees violated automatic stay In re Am. Med. Utilization Mgmt. Corp. (Bankr. E.D.N.Y.) 9 Claims against Casey Anthony must be determined by bankruptcy judge In re Anthony (Bankr. M.D. Fla.) DISCHARGE 10 No retroactive extension for nondischargeability filing, 9th Circuit says Anwar v. Johnson (9th Cir.) SOCIAL SECURITY 11 4th Circuit clarifies role of Social Security income in Chapter 13 plans Mort Ranta v. Gorman (4th Cir.) SEE PAGE 3 CONTINUED ON PAGE 15 COMMENTARY How the dismissal of a bankruptcy case impacts creditors’ actions Attorney John B. Butler III discusses the complexities of getting an automatic stay reinstated and the rules that apply after the dismissal of a bankruptcy case. REUTERS/Rebecca Cook Detroit firefighters hold signs during an informational picket about the downsizing of the fire department outside the federal courthouse during day one of the city’s municipal bankruptcy hearings July 24.
Naming mediator brings authority to fractious Detroit bankruptcy case(Reuters) – Of all the legal maneuvers so far in Detroit’s bankruptcy case by unions or the city’s emergency manager, the one that may have the most impact was when the judge decided to name a mediator.
AVOIDANCE5 Amicus tells 4th Circuit that
both spouses must seek bankruptcy to protect tenancy by entireties
Alvarezv.HSBCBank (4th Cir.)
FRAUDULENT TRANSFERS6 Fraudulent transfer not
part of estate until trustee recovers it, creditor tells Supreme Court
Rajalav.LookoutWindpowerHoldingCo. (U.S.)
ASBESTOS7 Supreme Court rejects Pfizer’s
bid to block asbestos suits
PfizerInc.v.LawOfficesofPeterG.Angelos (U.S.)
7 New Jersey federal court rejects reimbursement claims against G-I Holdings
9 Claims against Casey Anthony must be determined by bankruptcy judge
InreAnthony (Bankr. M.D. Fla.)
DISCHARGE10 No retroactive extension
for nondischargeability filing, 9th Circuit says
Anwarv.Johnson (9th Cir.)
SOCIAL SECURITY11 4th Circuit clarifies role
of Social Security income in Chapter 13 plans
MortRantav.Gorman (4th Cir.)
SEE PAGE 3
CONTINUED ON PAGE 15
COMMENTARY
How the dismissal of a bankruptcy case impacts creditors’ actionsAttorney John B. Butler III discusses the complexities of getting an automatic stay reinstated and the rules that apply after the dismissal of a bankruptcy case.
REUTERS/Rebecca Cook
Detroit firefighters hold signs during an informational picket about the downsizing of the fire department outside the federal courthouse during day one of the city’s municipal bankruptcy hearings July 24.
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TABLE OF CONTENTS
Municipal Bankruptcy: In re City of DetroitNaming mediator brings authority to fractious Detroit bankruptcy case (Bankr. E.D. Mich.) .........................1
Commentary: By John B. Butler III, Esq.How the dismissal of a bankruptcy case impacts creditors’ actions ................................................................ 3
Avoidance: Alvarez v. HSBC BankAmicus tells 4th Circuit that both spouses must seek bankruptcy to protect tenancy by entireties (4th Cir.) ...............................................................................................................5
Fraudulent Transfers: Rajala v. Lookout Windpower Holding Co.Fraudulent transfer not part of estate until trustee recovers it, creditor tells Supreme Court (U.S.) ............6
Asbestos: Pfizer Inc. v. Law Offices of Peter G. AngelosSupreme Court rejects Pfizer’s bid to block asbestos suits (U.S.) .................................................................... 7
Asbestos: U.S. Gypsum Co. v. G-I HoldingsNew Jersey federal court rejects reimbursement claims against G-I Holdings (D.N.J.) ................................. 7
Automatic Stay: In re Am. Med. Utilization Mgmt. Corp.Collection of pre-bankruptcy attorney fees violated automatic stay (Bankr. E.D.N.Y.) ...................................8
Automatic Stay: In re AnthonyClaims against Casey Anthony must be determined by bankruptcy judge (Bankr. M.D. Fla.) .......................9
Discharge: Anwar v. JohnsonNo retroactive extension for nondischargeability filing, 9th Circuit says (9th Cir.) ....................................... 10
Social Security: Mort Ranta v. Gorman4th Circuit clarifies role of Social Security income in Chapter 13 plans (4th Cir.) ............................................11
Mortgage-Backed Securities: Slater v. A.G. Edwards & SonsStock underwriters escape liability in class action (10th Cir.) ..........................................................................12
Disgorgement: In re DeanBankruptcy judge penalizes attorney for lax practices (Bankr. E.D. Cal.) .......................................................13
Exemptions: Running v. MillerSingle-premium annuity is not exempt property, trustee argues (8th Cir.) ...................................................14
News in Brief .....................................................................................................................................................16
Case and Document Index ............................................................................................................................... 17
How the dismissal of a bankruptcy case impacts creditors’ actionsBy John B. Butler III, Esq.
If your client’s bankruptcy case gets dismissed, either for failure to abide by a Chapter 13 plan or follow through with other obligations, creditors are positioned to go after the debtor’s assets, unless a stay is ordered or reinstated. The rules regarding what happens after the case is dismissed and how to obtain a stay are convoluted, however, creating traps for unwary practitioners.
For example, if your client’s Chapter 13 case was dismissed for non-payment and your client wants his case reinstated, you should know what to tell him may happen in the meantime. Say your client’s Chapter 11 case was dismissed for failure to timely file a plan, and you are filing a motion to vacate the order of dismissal. You need to know what else to do to protect the debtor’s assets.
Many questions may arise when cases are dismissed. If your client is a secured creditor and the debtor’s bankruptcy case has been dismissed, can the debtor’s car be repossessed and sold? Can foreclosure resume on the debtor’s real estate? If your client is a landlord with the debtor as a tenant, can the debtor be evicted once the case is dismissed? Is there a period of time the creditor has to wait before taking any action against the debtor? What impact does the debtor’s motion to reconsider and vacate the order of dismissal have on the rights of creditors to act against the debtor or his property?
A short examination of these issues will dispel some of the misconceptions practitioners may have about what happens when a bankruptcy case is dismissed.
procedure applicable in contested matters,1 specifically does not apply Rule 7062 in contested matters, unless the court orders otherwise.
As a result, courts have been consistent in finding neither the automatic stay2 of 11 U.S.C. § 362(a) nor the stay of Rule 70623 applies after dismissal of a bankruptcy case.
WHAT ACTIONS MAY CREDITORS TAKE AFTER A CASE IS DISMISSED?
Courts4 have also been uniform in finding a creditor may pursue its legal and contractual rights against a debtor whose case has been dismissed, unless the court enters a specific order staying any action against the debtor or the debtor’s property.
After dismissal of a case, creditors have proceeded with foreclosure actions,5 repossession of a car6 and eviction.7 Actions taken after reinstatement of the bankruptcy case and the concurrent reimposition of the automatic stay are, of course, violative of the automatic stay once it is reimposed.8
WHAT EFFECT DOES A MOTION TO RECONSIDER THE DISMISSAL OF THE CASE HAVE ON ANY STAY?
A motion to reconsider the dismissal of the case does not prolong any stay that may have existed while the case was pending. Neither a motion under Federal Rule of Civil Procedure 59(e) nor under Federal Rule of Civil Procedure 60(b) stays any action a creditor may take after dismissal of the case.10
A debtor who is not appealing11 the dismissal of his case but desires to protect his assets while waiting for reinstatement of his case must obtain reinstatement of the case on an emergency basis, before the creditor takes action. Otherwise, the debtor must obtain an order from the bankruptcy court specifically staying any actions until the case is reinstated.
As one court stated:
The debtors were not attempting a hollow reinstatement of their dismissed case; they were obviously attempting
John B. Butler III was law clerk to U.S. Bankruptcy Judge J. Bratton Davis, a standing Chapter 13 trustee for 15 years and an adjunct professor of bankruptcy law at the University of South Carolina School of Law. He is the author of the two-volume “Bankruptcy Handbook” published by Knowles Publishing and specializes in representing creditors in bankruptcy cases in South Carolina.
WHAT STAY APPLIES AFTER A BANKRUPTCY CASE IS DISMISSED?
The short answer to this question is that no stay applies. Once the case is dismissed, the automatic stay of 11 U.S.C. § 362(a) terminates, pursuant to 11 U.S.C. § 362(c)(2)(B). In pertinent part, 11 U.S.C. § 362(c)(2) provides:
(2) the stay of any other act under subsection (a) of this section continues until the earliest of:
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied
Some attorneys mistakenly believe a temporary stay of the dismissal order arises under Federal Rule of Bankruptcy Procedure 7062 and Federal Rule of Civil Procedure 62(a). Rule 7062 simply says Rule 62 “applies in adversary proceedings,” and Rule 62(a) says, “Except as stated in this rule, no execution may issue on a judgment, nor may proceedings be taken to enforce it, until 14 days have passed after its entry.”
Therefore, Rule 62(a) automatically applies a 14-day stay to the execution or enforcement of certain judgments in adversary proceedings. That seems straightforward enough, but does it apply to bankruptcy dismissals? Federal Rule of Bankruptcy Procedure 9014(c), which makes certain rules of civil
to “reinstate” the automatic stay. They did not seek extraordinary relief to accomplish that result. Knowing that a foreclosure sale was scheduled, the debtors’ safest course after dismissal of a chapter 13 case would have been to file an adversary proceeding and motion seeking a temporary restraining order to prevent the foreclosure sale from going forward while their reinstatement motion was pending.12
2 Fish Mkt. Nominee Corp. v. Pelofsky, 72 F.3d 4, 6 (1st Cir. 1995); In re De Jesus Saez, 721 F.2d 848, 851 (1st Cir. 1983); In re Singleton, 358 B.R. 253, 261 (D.S.C. 2006); In re Heghmann, 316 B.R. 395, 401-402 (B.A.P. 1st Cir. 2004) aff’d, 326 F. Supp. 2d 227 (D.N.H. 2004); In re Webb Mtn LLC, 414 B.R. 308, 335 (Bankr. E.D. Tenn. 2009); In re Hill, 305 B.R. 100, 104-05 (Bankr. M.D. Fla. 2003); In re Jennings, 2001 WL 1806980, at *3 (Bankr. D.S.C. 2001); In re Frank, 254 B.R. 368, 374 (Bankr. S.D. Tex. 2000); In re Weston, 101 B.R. 202, 205 (Bankr. E.D. Cal. 1989), aff’d, 123 B.R. 466 (B.A.P. 9th Cir. 1991), aff’d, 967 F.2d 596 (9th Cir. 1992).
3 Fish Mkt., 72 F.3d at 6-7; In re Heghmann, 316 B.R. 395; In re Hill, 305 B.R. 100; In re Rivera, 280 B.R. 699, 701 (Bankr. S.D. Ala.2001); In re Garcia, 2005 WL 2452122, at *1 (Bankr. S.D. Fla. 2005); In re Frank, 254 B.R. at 374; In re Weston, 101 B.R. at 205.
4 In re Singleton, 358 B.R. 253 (creditor did not violate any stay by proceeding with foreclosure sale after dismissal of Chapter 13 case); In re Heghmann, 316 B.R. 395 (creditor did not violate any stay by obtaining writ of possession after one case was filed and before the next case was filed); In re Hill, 305 B.R. 100 (creditor did not violate any stay by holding foreclosure sale after chapter 13 case was dismissed and before it was reinstated); In re Frank, 254 B.R. 368 (creditor did not violate any stay by repossessing and selling car after dismissal of Chapter 13 case and before emergency hearing was held on debtor’s motion to reinstate case; creditor, however, was liable for damages for improper notice of sale under state law).
5 In re Singleton, 358 B.R. 253; In re Hill, 305 B.R. 100; In re Johnson, 1999 WL 528653 (Bankr. W.D. Tenn. 1999).
6 In re Garcia, 2005 WL 2452122; In re Rivera, 280 B.R. 699; In re Jennings, 2001 WL 1806980; In re Frank, 254 B.R. 368.
7 In re Heghmann, 316 B.R. 395.
8 In re Diviney, 225 B.R. 762, 771 (B.A.P. 10th Cir. 1998) (“We hold that reinstatement of the third case restored the automatic stay as of August 26, 1996, so the stay was in effect on September 7, 1996, when the bank repossessed the car.”); In re Webb Mtn, 414 B.R. at 339 (“Although the automatic stay terminated by operation of law upon entry of the dismissal order, it went into effect once again when the plaintiff’s case was reinstated, following its successful appeal of the dismissal order.”); In re Jennings, 2001 WL 1806980 at *3 (“However, by reinstating debtors’ case, the court simultaneously reimposed the automatic stay from the date of reinstatement.”).
9 In re Singleton, 358 B.R. at 258 (“Accordingly, the court considers Singleton’s motion to vacate the dismissal … to determine whether Rule 60(b) authorized the bankruptcy court to vacate its dismissal order.”); In re Garcia, 434 B.R. 638, 643 (Bankr. D.N.M. 2010) (“The motion to vacate is really in the nature of a motion for reconsideration. Although the federal rules do not recognize a motion for reconsideration,
these motions are dealt with under either Rule 59 or 60.”); In re Hill, 305 B.R. at 108 (“A motion to vacate an order of dismissal of a bankruptcy case, such as the one filed by the debtor in this case, has generally been considered as a motion pursuant to Rule 9024.”); In re Johnson, 1999 WL 528653, at *2 (“The debtors’ motion is styled one to reinstate the case … but the effect of such a motion is to seek the remedy of vacating the dismissal order; essentially, this is relief under Fed. R. Bankr. P. 9024.”).
10 In re Hill, 305 B.R. at 108; In re Garcia, 2005 WL 2452122 at *1.
11 With limited exceptions, a party’s appeal of an order dismissing a case deprives the bankruptcy court from hearing any matters on the case while the appeal is pending. See Cotton v. Stalzer (In re Cotton), 250 F. App’x 968, 969-70 (11th Cir. 2007) (“In this case, the bankruptcy court dismissed the Chapter 7 case while the appeal of its earlier order denying Cotton’s motion for the voluntary dismissal of the Chapter 13 case and converting it to a Chapter 7 case was pending in the district court. … [W]e hold that the bankruptcy court lacked jurisdiction to enter the order of dismissal.”); Neary v. Padilla (In re Padilla), 222 F.3d 1184, 1190 (9th Cir. 2000) (“[W]e hold that the bankruptcy court lacked jurisdiction to proceed with Padilla’s bankruptcy during the pendency of this appeal.”).
12 In re Johnson, 1999 WL 528653 at *2. See also, In re Hill, 305 B.R. at 110; In re Garcia, 2005 WL 2452122 at *2 (“Accordingly, the only stay that could have prevented Trans World from repossessing the truck between the time that the order of dismissal was entered and the time that the court reinstated the case would have been one entered by separate order of court. No such stay order had been entered as of the date of the repossession, and as discussed above, the Section 362 automatic stay was no longer in effect when Trans World repossessed the truck.”); In re Weston, 101 B.R. at 205 (“[T]his court must find that the ten-day stay within those rules was not intended to apply to orders involving the dismissal of bankruptcy petitions without a contrary order of the court.”).
13 Nicholson v. Nagel (In re Nagel), 245 B.R. 657,662 (D. Ariz. 1999); In re Hill, 305 B.R. at 104-05; In re Frank, 254 B.R. at 374; In re Jennings, 2001 WL 1806980 at *3; In re Johnson, 1999 WL 528653 at *4.
14 In re Singleton, 358 B.R. at 261 (“In this case … the court finds that the bankruptcy court had no authority to re-impose the automatic stay on property no longer included in the bankruptcy estate.”); In re Nagel, 245 B.R. at 662 (“A review of the case law provided by the parties and the court’s own research reveals no basis in law for the proposition that the automatic stay continues after dismissal of a case. A retroactive reinstatement of the automatic stay is not consistent with this conclusion.”); In re Sewell, 345 B.R. 174, 180 (B.A.P. 9th Cir. 2006) (“We also question whether retroactive imposition of the automatic stay as if it had never terminated would be appropriate in these circumstances.”).
Courts have been consistent in finding neither the
automatic stay of 11 U.S.C. § 362(a) nor the stay of
Federal Rule of Bankruptcy Procedure 7062 applies
after dismissal of a bankruptcy case.
IS THE REINSTATEMENT OF THE STAY RETROACTIVE?
Most courts hold that later reinstatement of the case does not retroactively reinstate the automatic stay during the period between when the case was dismissed and when it was reinstated.13 In fact, some courts have held it was an error for a bankruptcy court to reinstate the automatic stay retroactively on acts taken during that period.14
CONCLUSION
The dismissal of a case that a debtor wants to reinstate is a perilous situation for both the debtor’s attorney and the creditor’s attorney. Knowing the applicable law and taking quick action may well be the difference between your client retaining or losing his property. WJ
NOTES1 The Advisory Committee Note to Federal Rule of Bankruptcy Procedure 9014 elaborates on what constitutes a contested matter: “Whenever there is an actual dispute, other than an adversary proceeding, before the bankruptcy court, the litigation to resolve that dispute is a contested matter. For example, the filing of an objection to a proof of claim, to a claim of exemption, or to a disclosure statement creates a dispute which is a contested matter.”
Amicus tells 4th Circuit that both spouses must seek bankruptcy to protect tenancy by entiretiesA court-appointed amicuscuriae has asked the 4th Circuit to stop a married couple from “gaming” the system by preventing only one spouse from declaring bankruptcy and then letting the couple strip off a lien against property they hold as a single legal entity.
Alvarez et al. v. HSBC Bank USA NA, No. 12-1156, amicus brief filed (4th Cir. July 15, 2013).
The couple argues that they can pursue an avoidance action in the husband’s bankruptcy case to strip off an unsecured second mortgage on their residence.
HSBC Bank USA, which holds the second mortgage, has taken no position on the couple’s appeal before the 4th U.S. Circuit Court of Appeals.
The appeals court subsequently appointed an amicus curiae, which now has filed an opposition brief.
THE ALVAREZES TURN TO THE 4TH CIRCUIT
The couple argues in a June 3 opening brief that, under Maryland law, joinder of the non-debtor spouse in a civil case or controversy before the Bankruptcy Court is sufficient to permit a lien avoidance to proceed to judgment.
The court-appointed amicuscuriae responds in a July 15 brief that the Alvarezes are trying to “game the system by claiming bankruptcy protection to which they are not entitled.”
The brief says Maryland law and the U.S. Bankruptcy Code require that both spouses be debtors in order to put the entirety estate before the Bankruptcy Court.
“When the Alvarezes chose to make their home an entirety estate, they accepted the burdens as well as the benefits that that estate conveys,” the brief says.
The amicus says a decision reversing the Bankruptcy Court will lead to a windfall for the couple and the non-filing spouse because the couple will not have to repay the mortgage, and only the husband will have a public record showing that he filed for bankruptcy.
The 4th Circuit’s docket indicates that case is set for oral argument Sept. 17. WJ
Attorneys:Appellants: John D. Burns, Greenbelt, Md.
Amicus curiae: Lartease M. Tiffith, O’Melveny & Myers, Washington
Related Court Document:Amicus brief: 2013 WL 3563512
See Document Section A (P. 19) for the amicus brief.
“When the Alvarezes chose to make their home an entirety estate, they accepted the burdens as well as the benefits that
that estate conveys,” the amicusbrief says.
HUSBAND FILES BANKRUPTCY
Jose Alfredo Alvarez filed a Chapter 13 petition in September 2010 in the U.S. Bankruptcy Court for the District of Maryland. He lives with his wife, Meyber, and their three children in Silver Springs, Md., in a house valued in Bankruptcy Court filings at around $440,000.
The property is encumbered by a first mortgage of $440,000 held by Chase Home Finance and a second mortgage of about $75,000 held by HSBC, court records say.
Alvarez claimed the house was exempt property as a tenancy by the entirety.
When a married couple holds property in that fashion, each spouse owns the whole of it, not just a divisible share, meaning the husband and wife own it together as a single legal entity.
Because of this condition, the husband’s creditors cannot attach and sell his interest. Only creditors of both partners can seize both their interests.
No objection was filed to the exemption, and HSBC did not file a proof of claim.
Alvarez, joined by his non-debtor wife, later filed a joint adversary proceeding in the bankruptcy case to avoid HSBC’s second lien. HSBC did not answer the complaint, and the Alvarezes moved for a default judgment.
The Bankruptcy Court denied the unopposed motion, however, deciding that the couple both had to be debtors in bankruptcy for the court to avoid a lien on property held as a tenancy by the entireties.
Fraudulent transfer not part of estate until trustee recovers it, creditor tells Supreme CourtA creditor of a wind-power company has told the U.S. Supreme Court that no compelling reason exists to review a series of lower court rulings that alleged fraudulently transferred property does not become part of a bankruptcy estate until the trustee avoids the transfer and recovers the property.
Rajala v. Lookout Windpower Holding Co., No. 12-1447, opposition brief filed (U.S. July 15, 2013).
The Chapter 11 trustee for Generation Resources Holdings Co. argued in a June petition for certiorari that the 10th U.S. Circuit Court of Appeals got it wrong when it ruled earlier this year that the Bankruptcy Code’s automatic stay does not apply to protect the property from consumption prior to completion of an avoidance action.
The creditor, Lookout Windpower Holding Co., now counters in an opposition brief that “the argument advanced by [the trustee] is far outside the mainstream.”
ASSET TRANSFER
Eric C. Rajala, the trustee for GRHC, filed suit in the U.S. District Court for the District of Kansas against six individuals and numerous companies, claiming insiders fraudulently transferred its development and redemption rights in a wind power project to insider-owned companies.
The District Court ultimately granted a motion by Lookout, which is owned by certain of the alleged insiders, to release nearly $7 million of the $9 million purchase price.
The court rejected the trustee’s argument that the Bankruptcy Code’s automatic stay should have blocked the release of the funds.
GRHC’s bankruptcy estate did not include the alleged fraudulently transferred property, the District Court said, because it had not yet been recovered in the trustee’s fraudulent transfer suit.
Rajala appealed, and the 10th Circuit upheld the decision.
The panel adopted the 2nd Circuit’s holding in FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992), that held that the automatic stay does not apply to fraudulently transferred property under federal bankruptcy law, 11 U.S.C. § 541(a)(3), until the transfer is avoided and the property is recovered.
The 10th Circuit denied Rajala’s request that it adopt the 5th Circuit’s ruling in AmericanNational Bank ofAustin v. MortgageAmericaCorp.(InreMortgageAmericaCorp.), 714 F.2d 1266 (5th Cir. 1983), that held that a debtor retains an “equitable interest” in fraudulently transferred property that makes it subject to the automatic stay even before it is recovered.
TRUSTEE TURNS TO SUPREME COURT
The trustee argues in a petition for certiorari that the 5th Circuit’s reasoning should control the issue because the 10th Circuit’s decision will motivate unscrupulous debtors to make pre-bankruptcy property transfers.
Lookout Windpower counters that the majority of courts that have addressed the issue agree with the 2nd Circuit’s holding that property alleged to have been fraudulently transferred is not property of the estate until it is recovered by the trustee.
The creditor argues that the plain language of Section 541, which defines “property of the estate,” does not extend to property not yet recovered.
The opposition brief further argues that no circuit split exists because the 5th Circuit decision relied on by the trustee is factually dissimilar to this case at issue and does not support his arguments.
Lookout adds that even if a split exists, “a majority of courts reject [the trustee’s] improper construction of the statute and follow the 2nd Circuit’s decision in Colonial.”
The creditor further argues that acceptance of Rajala’s position would create an asset-freezing injunction each time a Chapter 11 debtor-in-possession or trustee files a fraudulent-transfer action, without regard to Bankruptcy Code rules governing what constitutes property of the estate and the automatic stay.
Lookout asserts that other, sufficient protections exist.
“[I]n situations where a bankruptcy trustee has a reasonable likelihood of establishing that a debtor has fraudulently transferred property to a friend, relative or shell company, a trustee has a legitimate basis for [seeking] injunctive relief, and a court may freeze such property,” Lookout says. WJ
Attorneys:Petitioner: Michael P. Healy, Lee’s Summit, Mo.
Respondent: Douglas M. Weems, Spencer Fane Britt & Browne, Kansas City, Mo.
Related Court Document:Opposition brief: 2013 WL 3773544
See Document Section B (P. 24) for the opposition brief.
REUTERS/Hannibal Hanschke
The case concerns the bankruptcy of wind-power company Generation Resources Holdings Co., which marketed wind turbines and other renewable energy products.
Supreme Court rejects Pfizer’s bid to block asbestos suitsThe U.S. Supreme Court has rejected a petition by Pfizer Inc. to stop the filing of asbestos personal injury lawsuits against the company because, the drugmaker said, a bankruptcy trust has been created to handle claims against the subsidiary that produced the asbestos-containing products at issue in the suits.
Pfizer Inc. v. Law Offices of Peter G. Angelos, No. 12-300, cert. denied (U.S. June 24, 2013).
The high court denied the petition despite having asked the U.S. solicitor general in January to file a brief expressing the United States’ view in the dispute.
Pfizer asked the Supreme Court to hear its appeal of a 2012 decision by the 2nd U.S. Circuit Court of Appeals that said suits filed by the Law Offices of Peter G. Angelos could proceed. In reQuigleyCo., 676 F.3d 45 (2d Cir. Apr. 10, 2012).
The Baltimore-based law firm represents people suing Pfizer in Pennsylvania over
injuries from exposure to Quigley Co.’s Insulag product. Quigley made the asbestos-containing insulation from the 1930s until the 1970s.
Pfizer bought Quigley in 1968, and the subsidiary filed for bankruptcy in 2004, citing an overwhelming number of asbestos claims.
The Angelos firm says Pfizer is liable for some plaintiffs’ personal injury claims because it put its logo on the product and on some advertisements for Insulag.
Pfizer has argued that claims against the trust created through the Quigley bankruptcy should be the sole remedy for people who
say they were injured by exposure to the insulation.
The U.S. Bankruptcy Court for the Southern District of New York enjoined the Angelos lawsuits in 2008. It said Pfizer’s alleged liability arose from its ownership of Quigley and that the claims must be channeled toward the trust.
The U.S. District Court for the Southern District of New York reversed the Bankruptcy Court, and the 2nd Circuit affirmed, allowing the plaintiffs to sue Pfizer.
The high court’s denial means the Circuit Court’s decision prevails. WJ
ASBESTOS
New Jersey federal court rejects reimbursement claims against G-I HoldingsFormer members of the asbestos Center for Claims Resolution have no right to force G-I Holdings Inc. to reimburse them for settlement payments the companies’ claim they made on G-I’s behalf, a New Jersey federal court has ruled.
U.S. Gypsum Co. et al. v. G-I Holdings Inc., No. 12-6933, 2013 WL 3285271 (D.N.J. June 26, 2013).
The agreement that created the CCR reserved the right for such claims to the center itself and not to individual members, the U.S. District Court for the District of New Jersey said in an unpublished opinion.
The CCR was formed by several companies facing personal injury lawsuits for alleged exposure to their asbestos-containing products. The organization resolved lawsuits according to a formula under which member companies paid an agreed-upon proportion of settlements, the opinion said.
Following G-I’s filing for bankruptcy protection in the U.S. Bankruptcy Court for the District of New Jersey in 2001, several
former CCR member companies said they began to make contributions to settlements that covered G-I’s share toward the resolutions.
Those companies, U.S. Gypsum Co., Pfizer Inc. and Quigley Co., filed a claim against G-I in the Bankruptcy Court to recover those amounts.
G-I successfully moved for summary judgment.
The Bankruptcy Court found that under the agreement that created the CCR, its former members waived their right to seek indemnity from other members for asbestos-related claims.
The former members appealed the ruling to the District Court.
U.S. District Judge Dennis M. Cavanaugh agreed with the Bankruptcy Court.
He said a primary goal of contract interpretation is “to fulfill the reasonable shared expectations of parties at the time they” made the agreement.
The contract that created the CCR said gave the organization “the exclusive right to seek collection from a member that did not make a payment required under the … agreement,” the judge noted.
He concurred with G-I’s assertion in a brief filed with the District Court that a clear purpose of the agreement that created the CCR was to avoid this type of litigation among its members. WJ
A lawyer violated a bankruptcy stay by diverting money owed to a bankrupt health care services company to cover fees for work he did for the company before it filed for reorganization under Chapter 11, a federal judge in New York has ruled.
In re American Medical Utilization Management Corp., No. 11-43573, 2013 WL 3359301 (Bankr. E.D.N.Y. July 2, 2013).
Judge Carla Craig of the U.S. Bankruptcy Court for the Eastern District of New York found lawyer C. Steve Okenwa in contempt for getting a state court to direct a state health agency to send the money directly to him, and then refusing to ask the court to vacate the order.
Although Okenwa did not have notice of the bankruptcy at the time he obtained the state-court judgment and order, the bankruptcy trustee for American Medical Utilization Management Corp. subsequently notified him by telephone, Judge Craig said in the ruling.
The fact that Okenwa did not seem to believe what he was told, or that he was on vacation in Florida at the time, did not excuse his failure to ask the state court to vacate the order in question, the judge said.
He also refused to provide an email address or fax number where proof of the bankruptcy could be sent to him, she noted.
Okenwa’s recalcitrance forced the trustee to ask the Bankruptcy Court to order the agency,
the New York Department of Health, to pay the money to American Medical despite the state court’s order.
COSTS AND FEES
The judge awarded the trustee compensatory damages, costs and “reasonable” attorney fees related to litigating Okenwa’s violation of the automatic bankruptcy stay.
Okenwa also made a motion for Judge Craig to recuse herself, saying that the judge had indicated she believed Okenwa had violated the automatic stay even before she heard evidence on the matter.
Judge Craig found the motion to be untimely, but also unconvincing on the merits.
Her statements that a failure to vacate the state court’s order would be a violation of
Although the lawyer did not have notice of the bankruptcy at the time he obtained the state court
judgment and order, the bankruptcy trustee subsequently notified him by telephone, the judge said.
However, she denied the trustee’s request for about $2,000 in additional attorney fees and costs on behalf of American Medical’s post-petition lender.
The parties’ financing agreement, which the Bankruptcy Court approved, did not provide for compensation to the lender for its attorney fees in this dispute, the judge said.
She also declined to award punitive damages, finding that Okenwa’s actions did not rise to the necessary level of particularly egregious creditor misconduct.
the automatic stay, and that compensatory damages for such a violation included attorney fees, were simply restatements of well-established principles of law. She found that the statements did not reflect the necessary “high degree of favoritism or antagonism” that would warrant recusal. WJ
Attorney:Trustee: Avrum J. Rosen, Huntington, N.Y.
Claims against Casey Anthony must be determined by bankruptcy judgeBy Lisa Uhlman, Senior Content Writer, Westlaw Daily Briefing
Two putative creditors seeking to pursue personal-injury defamation law-suits against Casey Anthony in Florida state court must first go through the claims allowance process in Anthony’s Chapter 7 case, a bankruptcy judge has determined.
In re Anthony, No. 13-922, 2013 WL 3326023 (Bankr. M.D. Fla. July 1, 2013).
The potential burden to Anthony, who was acquitted in 2011 of murdering her 2-year-old daughter, if the cases were allowed to proceed in state court would be greater than the burden the creditors would face if the automatic stay were not lifted, U.S. Bankruptcy Judge K. Rodney May of the Middle District of Florida said.
Acquitted murder suspect Casey Anthony REUTERS/Red Huber/Pool
core questions of discharge eligibility, claims allowance and exception from discharge.
In addition, the creditors’ claims are personal-injury tort claims, which, if a trial is required to settle disputed questions of fact, must be tried before a federal district court in accordance with the U.S. Supreme Court’s ruling in Stern v. Marshall, 131 S. Ct. 2954, 2606 (2011), the judge said.
claim that she had no assets or income, neither defamation case is set for imminent trial, and there would be little prejudice to the creditors if their claims were adjudicated within the Chapter 7 case.
“The potential burden on the debtor, if the stay is lifted, is greater than the burdens on Mr. Kronk or Ms. Gonzalez, if the stay remains in place and the claims adjudication process proceeds in this case,” the judge said.
Even if the creditors were successful in state court, they would have to return to the Bankruptcy Court for determinations of the dischargeability of their claims, which would likely require a second round of litigation, the judge said.
He therefore denied Kronk and Gonzalez’s motions for relief from the stay and granted them 21 days to file their claims, object to Anthony’s discharge and object to the dischargeability of their claims. WJ
Trustee: Allan C. Watkins, Watkins Law Firm, Tampa, Fla.
Related Court Documents:Opinion: 2013 WL 3326023
See Document Section C (P. 34) for the opinion.
The creditors’ claims involve disputes over their validity, amount and dischargeability that must be resolved by the
Bankruptcy Court, the judge said.
STERN V. MARSHALL
Anthony, whose assets were depleted following her arrest and trial, filed for Chapter 7 protection in January seeking a discharge from the claims of Ray Kronk and Zenaida Gonzalez, who had sued her in state court alleging she defamed them during her trial.
Judge May noted that Kronk’s suit was in its beginning stages when the bankruptcy was filed and has not progressed, while Gonzalez’s case had moved through discovery and summary judgment. However, trial on Gonzalez’s last remaining claim was postponed to an indefinite date, the opinion says.
The judge first said any damages for which Anthony may be liable to the creditors are claims under the Bankruptcy Code and that the U.S. Bankruptcy Court for the Middle District of Florida has jurisdiction over the
Until a trial is necessary, however, the creditors’ claims involve disputes over their validity, amount and dischargeability that must be resolved by the Bankruptcy Court, Judge May said.
DENYING THE MOTIONS
Attempting to satisfy the so-called totality-of-the-circumstances test for used to determine whether an automatic stay should be lifted, Kronk and Gonzalez argued that Anthony would face no hardship in defending herself in state court because she has counsel and that the parties and witnesses are closer to the state court.
Further, they said, the state court is already familiar with the cases, and it would be more efficient to litigate the matters there.
Rejecting those arguments Judge May said there was nothing to disprove Anthony’s
No retroactive extension for nondischargeability filing, 9th Circuit saysBy Keith Harris, Senior Content Writer, Westlaw Daily Briefing
A bankruptcy court has no discretion to retroactively extend the deadline for filing complaints seeking to have debts declared nondischargeable in a Chapter 7 case, a federal appeals court has affirmed.
Anwar et al. v. Johnson et al., No. 11-16612, 2013 WL 3306327 (9th Cir. July 2, 2013).
The Federal Rules of Bankruptcy Procedure require claimants to request extensions before the deadline expires, regardless of extenuating circumstances or local bankruptcy rules, a panel of the 9th U.S. Circuit Court of Appeals said, affirming a district court decision.
In 2009 D. Lee Johnson and David Vergeyle each filed individual Chapter 7 petitions in the U.S Bankruptcy Court for the District of Arizona. Johnson and Vergeyle were the founders, principal shareholders and officers of Xperex Corp., which previously had filed for Chapter 7 relief.
Amina Anwar and David C. McClanahan, former employees of Xperex, asked the court to extend the deadline for filing a complaint challenging the discharge of debts. The court granted the motion, setting a new deadline for April 13, 2010.
The Bankruptcy Court had established a mandatory electronic filing system and required nondischargeability complaints to be filed by midnight local time on the deadline date.
The employees’ attorney attempted to file on the evening of April 13, but technical
The employees’ attorney attempted to file on the
evening of April 13, 2010, but technical problems
prevented him from electronically filing the
complaints until after the midnight deadline.
problems prevented him from electronically filing the complaints until after the midnight deadline.
The bankruptcy judge granted the debtors’ request to dismiss the complaints as untimely and denied Anwar’s request for a retroactive extension.
On appeal, the U.S District Court for the District of Arizona affirmed the Bankruptcy Court decision.
The 9th Circuit affirmed the lower court decisions, saying bankruptcy courts may not grant equitable relief from the nondischargeability complaint deadline after it has passed.
Federal Rule of Bankruptcy Procedure 4007(c), which sets a mandatory deadline
for nondischargability complaints of 60 days after the first creditors’ meeting, allows a party in interest to move for an extension only “before the time has expired,” the panel said.
The finality of this requirement is reinforced by the fact that other deadlines in the Bankruptcy Code explicitly permit retroactive extensions for “good cause or excusable neglect,” according to the panel.
The panel said neither the Arizona Bankruptcy Court’s electronic filing requirement nor the fact that the attorney missed the deadline by less than an hour entitled Anwar to an exception from the deadline.
Nor did Arizona’s Local Rule of Bankruptcy Procedure 5005-2(n), which allowed for “appropriate relief” when electronic filing is untimely, grant the Bankruptcy Court discretion to approve the employees’ motion, since it was in conflict with the federal rule, the panel concluded. WJ
Attorneys:Plaintiffs: Mark C. McClanahan, Portland, Ore.
Debtors: Randy Nussbaum, Nussbaum Gillis & Dinner, Scottsdale, Ariz.
4th Circuit clarifies role of Social Security income in Chapter 13 plansBy Keith Harris, Senior Content Writer, Westlaw Daily Briefing
A Chapter 13 debtor’s Social Security benefits are not considered “projected disposable income” but must be taken into account when examining a debtor’s ability to make proposed plan payments, a federal appeals court has ruled, vacating a district court opinion.
Mort Ranta v. Gorman, No. 12-2017, 2013 WL 3286252 (4th Cir. July 1, 2013).
In a 2-1 ruling, a panel of the 4th U.S. Circuit Court of Appeals said a debtor is not required to make Social Security income available to creditors but a bankruptcy court must acknowledge the availability of such funds when determining a plan’s feasibility.
PLAN CONFIRMATION DENIED
Robert D. Mort Ranta filed for Chapter 13 relief in the U.S. Bankruptcy Court for the Eastern District of Virginia in August 2012.
Mort Ranta was $20,000 in arrears on his home mortgage. He owed nearly $13,000 in individual credit card debt and $8,000 in joint credit card debt with his wife.
plan to commit all projected disposable income toward the payment of unsecured claims.
The Bankruptcy Court denied confirmation, saying the plan was not feasible. According to the court, Mort Ranta could not exclude the benefits from his disposable income figure and still claim that he would use them to make plan payments.
After the Bankruptcy Court refused to grant him an interlocutory appeal, Mort Ranta appealed to the U.S. District Court for the Eastern District of Virginia, which affirmed the Bankruptcy Court’s decision.
CIRCUIT COURT VACATES LOWER COURT RULINGS
On appeal the 4th Circuit vacated the District Court’s decision and remanded Mort Ranta’s case.
As a preliminary matter, the panel determined it had jurisdiction to consider
the appeal because bankruptcy proceedings allow for a “flexible finality” standard of review, which permits appellate courts to review discrete bankruptcy court decisions.
The panel said Social Security benefits are not a part of a debtor’s projected disposable income because that figure is derived from “current monthly income” from which the Bankruptcy Code explicitly excludes such benefits.
However, for his plan to be feasible under Section 1325(b)(1)(B) of the Bankruptcy Code, 11 U.S.C.A. §1325(b)(1)(B), Mort Ranta need not show he had sufficient disposable income, only that his net income could cover the payments, the panel said. WJ
Attorneys:Debtor: Daniel M. Press, Chung & Press, McLean, Va.
Trustee: Eva Choi, Office of the Chapter 13 Trustee, Alexandria, Va.
Related Court Document:Opinion: 2013 WL 3286252
The 4th Circuit said Social Security benefits are not a
part of a debtor’s projected disposable income.
Mort Ranta reported his “current monthly income” as $3,000 but listed an additional $3,300 in Social Security income. After subtracting his monthly expenses from his combined average monthly income, Mort Ranta’s monthly net income was $525.
Under his proposed plan, Mort Ranta would pay $525 per month for five years, paying off his mortgage arrears and joint credit card debt entirely, but paying less than 1 percent of his individual credit card debt.
Trustee Thomas Patrick Gorman objected to the plan, saying Mort Ranta should have included his Social Security benefits in his calculation of his “projected disposable income.”
Section 1325(b)(1)(B) of the Bankruptcy Code, 11 U.S.C.A. §1325(b)(1)(B), requires a debtor’s
Stock underwriters escape liability in class actionThe underwriters for the stock offering of a mortgage company with a portfolio of risky mortgage-backed secu-rities had no duty to disclose those holdings to investors, a federal appeals court has ruled.
Slater et al. v. A.G. Edwards & Sons, Inc. et al., No. 11–2170, 2013 WL 3390038 (10th Cir. July 9, 2013).
The 10th U.S. Circuit Court of Appeals affirmed a lower court’s ruling that dismissed claims against the underwriters of residential mortgage lender Thornburg Mortgage Inc.’s stock offering for allegedly misrepresenting Thornburg’s investments in mortgage-backed securities.
The investors’ claims failed because at the time the stock offering was made, it was not well known that investments in mortgage-backed securities would be disastrous, the appeal court panel said.
A mortgage-backed security is a financial instrument backed by pools of mortgage loans whose principal and interest payments are distributed to investors with varying maturity dates, cash flows and default risks.
Although Thornburg said it possessed a “significant chunk” of MBS, it did not disclose in the financial information provided that it possessed $2.9 billion of purchased MBS, the opinion says.
The mortgage market began to decline in early 2008 and from Feb. 27, 2008, to March 6, 2008, Thornburg’s stock dropped by more than 90 percent, the opinion says.
Thornburg shareholders sued the company, its officers and the stock offering underwriters in the U.S. District Court for the District of New Mexico.
The suit said the underwriters had a duty to inform investors of the company’s MBS investments because the investors believed the large MBS portfolio had caused Thornburg’s collapse, the opinion says.
The District Court granted the underwriters’ motion to dismiss, and the plaintiffs appealed. InreThornburgMortgageSec.Litig., 683 F. Supp. 2d 1236 (D.N.M. 2010).
Judge Timothy M. Tymkovich, writing for the three-judge panel, said the offering documents, when analyzed in the context of the mortgage market in 2007 and 2008, did not contain material misrepresentations or omissions.
Absent a significant sign that the mortgage industry was on the verge of collapse, Thornburg’s investment in MBS “does not darken the marginally optimistic picture painted” by the offering documents, the opinion says.
“At the time, few economists or investment professionals foresaw the timing and breadth of the downturn,” Judge Tymokovich wrote.
Additionally, the offering documents had disclosures and warnings that informed potential investors Thornburg was sensitive to the MBS market, the judge said. WJ
Related Court Document:Opinion: 2013 WL 3390038
REUTERS/Lucas Jackson
The mortgage market began to decline in early 2008 and from Feb. 27 to March 6,
2008, Thornburg Mortgage’s stock dropped by more than 90 percent.
The underwriters sued included A.G. Edwards & Sons, BB&T Capital Markets, Citigroup Global Markets, Oppenheimer & Co., Bear Stearns and UBS Securities.
Thornburg Mortgage was an originator and purchaser of home mortgage loans. The company also bought and sold MBS, the court’s opinion says. Thornburg filed for Chapter 11 bankruptcy protection May 1, 2009.
Prior to bankruptcy, the company had been having trouble obtaining financing from its usual sources so it made several public stock offerings in 2007 and 2008.
The defendants underwrote the stock offerings for Thornburg, which consisted of prospectuses and the company’s quarterly, annual and current financial reports.
Bankruptcy judge penalizes attorney for lax practicesBy Keith Harris, Senior Content Writer, Westlaw Daily Briefing
An attorney failed to adequately represent his clients in two unrelated Chapter 7 cases, supplying the debtors with insufficiently detailed fee agreements and misrepresenting that they had signed their bankruptcy filings, a California bankruptcy judge has ruled.
In re Dean et al., No. 12-14498; In re Searcy, No. 12-12576, 2013 WL 3306418 (Bankr. E.D. Cal. June 28, 2013).
U.S. Bankruptcy Judge W. Richard Lee of the Eastern District of California required attorney Gregory Blevins to disgorge his clients’ fees and to submit so-called “wet signature” pages along with any documents filed in the Bankruptcy Court.
THE DEAN AND SEARCY BANKRUPTCIES
Blevins electronically filed Chapter 7 petitions for Leslie Searcy in March 2012 and for David and Kelli Dean in May 2012. The filings purported to bear electronic signatures from the debtors.
These debtors had signed one-page fee agreements that specified no legal services beyond a single statement: “The attorney agrees to represent client in Chapter 7 bankruptcy filing.” They paid Blevins flat fees.
In both bankruptcy matters, Blevins supplied the trustee with incomplete documents, which required Searcy and the Deans to schedule a second creditors’ meeting. Blevins failed to appear for two of Searcy’s creditors’ meetings and at least one of the Deans’.
Despite these setbacks and inconveniences, each set of debtors received a discharge, and both cases were subsequently closed.
DEBTORS SEEK DISGORGEMENT
With the assistance of new counsel, the debtors reopened their cases and sought
Judge Lee ordered Blevins to disgorge his attorney fees to Searcy and the Deans.
Blevins’ duty to advise and represent his clients was not delegable, and he violated local bankruptcy rules by sending his assistant to the creditors’ meetings when he was listed as attorney of record, the judge said.
In both bankruptcy matters, attorney Gregory Blevins supplied the trustee with incomplete documents, which required his
clients to schedule a second creditors’ meeting.
disgorgement of Blevins’ attorney fees for exceeding the value of the services provided, pursuant to Section 329(b) of the Bankruptcy Code, 11 U.S.C.A. § 329(b).
The debtors said they had not met Blevins prior to their case filings and that the only legal advice they received came from Blevins’ assistant, Jeffrey Boggs.
The debtors also said they did not remember signing their petitions and schedules. When they requested hard copies of the original documents, Blevins admitted the debtors did not sign any of their bankruptcy filings.
Moreover, Blevins’ fee agreement did not satisfy the requirement in Bankruptcy Code Section 528(a) that bankruptcy attorneys provide clients with a written contract “clearly and conspicuously” explaining services and fees, according to Judge Lee.
The judge also required Blevins to accompany any electronic filings with the Bankruptcy Court for the next two years with a physical “wet signature” page, proving that his clients reviewed and agreed to the documents. WJ
Single-premium annuity is not exempt property, trustee arguesA Chapter 11 trustee has asked the 8th Circuit to reverse a bankruptcy court’s conclusion that funds in a debtor’s single-premium annuity are exempt from the reach of creditors because the annuity meets the Internal Revenue Code’s definition of a non-taxable retirement account.
Running v. Miller; In re Miller, No. 13-6026, appellant’s brief filed (8th Cir. July 8, 2013).
A single-premium annuity does not meet the standards for an individual retirement annuity under the IRC, 26 U.S.C. § 408(b), the trustee says in papers filed with the 8th U.S. Circuit Court of Appeals, because the statute requires multiple, annual premiums.
Terri A. Running, a Chapter 11 trustee in Minnesota, objected when debtor Joseph M. Miller sought to exempt an annuity valued at over $236,000 from his bankruptcy estate.
Miller purchased the annuity in 2009 with a single payment using funds rolled over from an existing individual retirement account, court records say.
The annuity agreement calls for Miller to receive annual income payments of about $40,000 a year for eight years. It also allows Miller to make a one-time withdrawal of up to 75 percent of the value of any remaining payments.
As part of his bankruptcy case, Miller claimed the annuity was exempt under 11 U.S.C. § 522(b)(3)(C). The Bankruptcy Code provision removes from the reach of creditors retirement funds kept in accounts that are exempt from taxation under certain provisions of the IRC.
Miller claimed the funds were in a tax-exempt individual retirement annuity as defined by IRC Section 408(b), according to the trustee’s brief.
Running objected on the ground that Section 408(b) requires flexible, annual premiums.
The U.S. Bankruptcy Court for District of Minnesota overruled the objection. It found that even though Section 408(b) contemplates annual premiums, the single-payment annuity qualifies because Miller bought it with funds from an existing tax-exempt individual retirement account.
The trustee has now turned to the 8th Circuit, arguing that the Bankruptcy Court improperly interpreted Section 408(b) to include single-premium annuities.
“The Bankruptcy Court relied upon erroneous factors that have no basis in law and ignored the unanimous voice of other courts from multiple jurisdictions on this issue,” the trustee says.
Running claims the 9th Circuit Bankruptcy Appellate Panel and bankruptcy courts in Georgia and Wisconsin have interpreted Section 408(b) to exclude single-premium annuities.
The trustee also argues the annuity does not qualify under Section 408(b) because it does penalize Miller for making an early withdrawal.
“Penalizing early withdrawals is a common characteristic of individual retirement annuities that fall within the definition at IRC Section 408(b),” Running says.
She closes her brief by challenging the Bankruptcy Court’s conclusion that the annuity fits within Section 408(b) because Miller purchased it with funds rolled over from a tax-exempt individual retirement account.
“The Bankruptcy Court is essentially recharacterizing the annuity as having been purchased over a period of time with multiple flexible premiums because funds used to purchase [it] came from the sale of an asset that was purchased over a period of time with multiple payments,” the trustee says.
“There is no statutory basis for this consideration,” she says. WJ
Attorneys:Trustee: Michael S. Dove, Gislason & Hunter, New Ulm, Minn.
Debtor: Thomas H. Olive, Olive & Taber, Minneapolis
Related Court Document:Appellant’s brief: 2013 WL 3554318
WESTLAW JOURNAL
BANK & LENDER LIABILITY
The litigation reporter provides coverage of ongoing proceedings involving banks and other financial institutions as well as news of the most important appellate, dis-trict, and state court cases affecting the industry. The publication also features coverage of the multitude of issues affecting bank-ing since the passage of the Gramm-Leach-Bliley Act that took down the walls between com-mercial and investment banking.
In re City of Detroit, No. 13-53846, arbitrator appointed (Bankr. E.D. Mich. July 23, 2013).
In a July 23 filing in U.S. Bankruptcy Court, Judge Steven Rhodes said he would appoint another federal judge, Gerald Rosen, as a mediator.
A mediator would be an authoritative voice for compromise in a contentious, messy case, the biggest-ever municipal bankruptcy filing in U.S. history. Detroit, which filed July 18, has more than $18 billion in debt and 100,000 creditors ranging from retired city workers to Wall Street bond investors.
“I think that’s going to be the key move in the case, in terms of getting it toward a solution,” Christopher Klein, a bankruptcy judge in Sacramento, Calif., said. Klein, who is overseeing the bankruptcy of the town of Stockton, spoke recently on a panel organized by the American Bankruptcy Institute.
Rosen, a Republican, is chief district judge of the U.S. District Court for the Eastern District of Michigan. With a long career in Michigan politics and as a member of the conservative-libertarian Federalist Society, he brings a unique perspective to a case that touches on the subjects of states’ rights and property rights.
Judge Rhodes in his court filing deemed a mediator “necessary and appropriate” but did not specify which issues he feels should be mediated.
With Judge Rhodes yet to lay out how mediation will be used, Rosen’s role is unclear. He could be asked to help broker a deal resolving the initial objections to Detroit’s filing under Chapter 9 of the U.S. Bankruptcy Code, which governs municipal cases. Alternately, his services could be reserved for the more substantive fights over pay back.
COMPLEX ISSUES
Retirees have turned to Michigan state court to try to block Detroit’s U.S. Bankruptcy Court filing, saying the state constitution protects their pensions. Websteretal. v.Stateetal., No. 13-734, 2013 WL 3815679 (Mich. Cir. Ct., Ingham County July 19, 2013).
Creditors have also argued that Detroit Emergency Manager Kevyn Orr failed to negotiate with them in good faith to try to avoid the bankruptcy filing.
On July 27 Michigan Attorney General Bill Schuette, a Republican, said he would defend retirees who risk losing public pensions because of Detroit’s bankruptcy. This put him at odds with emergency manager Orr, who was appointed by Gov. Rick Snyder, a fellow Republican.
But legal experts say that, ultimately, the case is likely to be resolved in bankruptcy court.
If that happens, a mediator will have a disproportionate impact.
Bankruptcy judges have much less power in Chapter 9 municipal bankruptcies than they do in corporate bankruptcies filed under Chapter 11 of the U.S. Bankruptcy Code. For instance, a judge in Chapter 9 cannot remove municipal officials or tell cities what to do with their property.
DetroitCONTINUED FROM PAGE 1
A mediator in Chapter 9 bankruptcies plays a central role, acting in settlement talks behind closed doors, unifying disparate creditors and advising them on the realities of the law.
Marc Levinson, a partner at Orrick Herrington & Sutcliffe who represents Stockton, Calif., in its bankruptcy, said municipal bankruptcies feature less-sophisticated creditors who can benefit from a mediator to walk them through the process.
A mediator can help discourage extreme positions and help bitter adversaries find common ground, said James Spiotto, a Chapter 9 expert and bankruptcy lawyer at Chapman & Cutler.
“It’s a reality test,” Spiotto said. “Are they in the zone of reality or do they have no real basis for what they’re saying?”
CANDIDATE-TURNED-JUDGE
Rosen was a partner at Detroit-based law firm Miller Canfield in 1990, when President George H.W. Bush named him to the federal bench.
In the 1970s Rosen was a legislative assistant to Sen. Robert Griffin, a Michigan Republican, then ran for Congress in 1982, losing to Democrat Sandy Levin. He has served on the board of the Michigan chapter of the Federalist Society, which emphasizes states’ rights and strict adherence to the original meaning of the U.S. Constitution.
Some of the most critical disputes in Detroit’s case involve states’ rights, namely whether Michigan’s state Constitution allows the city to cut the pensions of its retirees. But by the time the mediation comes to Rosen,
Break down of the major components of Detroit’s $18.5 billion of liabilities.
Detroit’s liabilities
Source: City of Detroit Proposal for Creditors, June 14, 2013F. Chan, 21/07/2013
* Other Post Employment Benefits
Special revenue bondsIncludes $2.82 billion in sewage bonds and $2.52 billion in water supply bonds, among other issues
Pensionliabilities
Unlimited and limited tax generalobligation bonds liabilities$1.13 bln
Pension-related certificates$1.43 bln
Swap liabilities$343.6 mln
Other liabilities$300 mln
Unfunded OPEB* liabilitiesIncluding retiree health care costs
any question of states’ rights may already have been decided. The case is also subject to Chapter 9 of the U.S. Bankruptcy Code.
“Reality trumps policy, reality should trump politics, and sometimes reality even trumps the law,” said Patrick Darby of Bradley Arant Boult Cummings, who represents Jefferson County, Ala., in its Chapter 9 bankruptcy. “And the reality in Detroit is, there’s not enough money.”
USE HIM WISELY
According to Darby, mediation works best when there is a clear issue and a limited number of parties.
“When there are two positions on a continuum, the mediator can help find middle ground,” he said.
Mediation has had mixed results in Chapter 9. A mediator was unable to help the city of Vallejo, Calif., reach new labor terms with two of its unions. In Stockton, Calif., mediation sessions prior to the city’s bankruptcy filing helped settle some labor disputes, while other issues remain in mediation.
Sessions typically start with parties together in a conference room presenting their sides, then splitting off into separate rooms, with the mediator shuttling between conferences with each side. It is less formal than court hearings — while mediators are often judges, they don’t wear robes, Spiotto said.
“Guys are usually in shirt sleeves,” he said.
Mediators try to relate openly and honestly to parties.
“They say, ‘I’m a federal judge, and here’s how I think your argument is going to fare in court,’” Darby said.
It Detroit’s case, with many creditors battling over a limited amount of money, the process is not so cut-and-dried.
“The best mediator is still going to find it extremely difficult to broker a settlement,” Darby said. WJ
U.S. TRUSTEE PROGRAM, CITIGROUP SETTLE CONSUMER INFO SUIT
The U.S. Trustee Program has unsealed a settlement with Citigroup Inc. that requires the financial giant to redact proofs of claim filed in bankruptcy cases nationwide that contained personal information, including Social Security numbers and birthdates, of nearly 150,000 consumer debtors and third parties. According to a July 15 statement by the Justice Department’s U.S. Trustees office, the information had not been properly redacted. Citigroup also has agreed to notify all affected consumers and offer them one year of free credit monitoring, the Trustees say. A New York federal bankruptcy court approved the settlement last year, but it remained sealed “to prevent potential wrongdoers from learning of the breach and seeking to victimize the affected consumers,” the Trustees’ office said in a statement.
In re Citi Replacement Filings, No. 11- 00405, settlement unsealed (Bankr. S.D.N.Y. July 15, 2013).
GROUP LED BY ACTOR CLOSES SALE ON COFFEE CHAIN
TC Global Inc., the Chapter 11 debtor that operates as Tully’s Coffee Shops, has announced completion of a sale of substantially all its assets to an investment group led by actor Patrick Dempsey. The group, Global Baristas, won a bankruptcy court auction for the assets earlier this year with a bid of $9 million. Seattle-based TC Global, which filed for bankruptcy last October, operated nearly 50 company-owned stores in Washington and California, plus additional licensed locations throughout the Western United States. The company said in a statement that it closed 19 stores in the wake of the bankruptcy. Global Baristas says it plans to continue to operate the remaining stores. According to TC Global, the sale does not impact the wholesale and online Tully’s Coffee business, which Green Mountain Coffee Roasters Inc. purchased in 2009.
In re TC Global Inc., No. 12-20253, notice of closing of sale filed (Bankr. W.D. Wash. July 1, 2013).
SUPREME COURT LEAVES $500K DISGORGEMENT ORDER INTACT
A Florida real estate agent has failed to convince the U.S. Supreme Court to review a series of federal court rulings that require him to return nearly $500,000 in commissions he received through the sale of a Chapter 11 debtor’s marina property. The 11th U.S. Circuit Court of Appeals last fall upheld a bankruptcy court’s finding that agent Christopher Denison had an undisclosed, presale relationship with the buyer. Denison allegedly received an offer to manage the marina property after closing. The 11th Circuit rejected his arguments that the Bankruptcy Court erred in finding an improper relationship existed and that the debtor’s confirmed plan released all claims against professionals. One of the debtor’s creditors, who opposed Denison’s petition for certiorari, countered that bankruptcy courts may review compensation paid to court-appointed professionals. The Supreme Court denied Denison’s petition without comment.
Denison v. Marina Mile Shipyard Inc., No. 12- 1249, cert. denied (U.S. June 17, 2013).
