All items from Creditors' Rights

The definition of a family famer under § 101(18)(A) of the Bankruptcy Code is convoluted at best:  a family farmer is a farmer whose aggregate noncontingent, liquidated debts arising out of his farming operation make up not less than 50% of his debts; however, the farmer’s debt “for” his principal residence is excluded in making this calculation unless the debt also “arises out of” his farming operation, in which event it is included in making the calculation.    In its opinion in First National Bank of Durango v. Woods (In re Woods), 743 F.3d 689 (10th Cir. 2014), the Tenth Circuit tackled the question of when a debt “for” a principal residence does, and does not, “arise out of” the debtor’s farming operations.
The facts in Woods were straightforward.  The debtors purchased and operated a farm several years before filing chapter 12.  During that time the debtors incurred debts, some of which were related to their farming operations and some of which were not.  The debt in question involved a loan obtained from First National Bank of Durango, some of which was used to pay for the construction of the debtors’ principal residence located on the farmland.  The debtors and bank disagreed whether this construction loan “arose out of” the debtors’ farming operations.  If it did, then the debtors qualified to file a chapter 12 petition.  If it did not, then the debtors would likely have to proceed under chapter 11.

Posted 1 week 2 days ago

Holland & Hart obtained a seminal decision from a federal court in Nevada on a recent controversial deficiency law. Nevada Revised Statute 40.459(1)(c) applies to creditors who did not originate a mortgage. This law purports to reduce an assignee-mortgage holder’s ability to obtain a deficiency judgment to the “consideration” it paid to obtain the loan. As a result of Holland & Hart’s efforts, a Nevada federal court has ruled that this provision violates the Contract Clause of the U.S. Constitution when it is applied to mortgages that were assigned before the law’s enactment in 2011.
The case (Eagle SPE NV I, Inc. v. Kiley Ranch Communities) involves a set of four loans that passed from a failed bank through the FDIC to Branch Banking & Trust Co., who then transferred the loans to its wholly owned subsidiary, Eagle, in 2010.  After foreclosing, Eagle filed suit for a $35 million deficiency judgment in 2012. The defendants claimed under NRS 40.459(1)(c)’s “consideration” restriction that Eagle could recover nothing. In turn, Eagle filed a motion to dismiss this defense, which Judge Robert Jones granted in the attached 32-page decision.  Download Kiley Ranch Decision

Posted 4 weeks 1 day ago

In a case of first impression at the circuit level, the Court of Appeals for the Seventh Circuit addressed a murky legal issue arising from a common commercial context—the entry into interrelated agreements between a franchisee and its franchisor—and held that a real property sublease between the franchisor and franchisee of premises where the franchisee conducts business pursuant to their franchise agreement may not be subject to the earlier assumption/rejection periods of § 365(d)(4), but instead may be subject to the more permissive timeframes of § 365(d)(2).  A&F Enterprises, Inc. v. IHOP Franchising, LLC (In re A&F Enterprises, Inc.), 2014 WL 494856 (7th Cir. 2014).  The Seventh Circuit did not decide the ultimate outcome in the dispute, as its opinion was issued in the context of the debtor’s motion for a stay pending appeal from an adverse ruling by the bankruptcy court.  However, the opinion contains insights which every franchisor should know.

Posted 5 weeks 1 day ago

A central purpose of bankruptcy is to grant debtors a fresh start – in bankruptcy terms, a “discharge” of existing debts.  But not all debts are dischargeable.  Bankruptcy Code § 523(a)(2)(A), for example, prevents the discharge of debts resulting from “false pretenses, a false representation, or actual fraud . . . .”  What if a principal incurs a large debt based not on his own fraud, but on the fraud of his agent?  Is that debt dischargeable?  That was the question addressed recently by the Ninth Circuit Bankruptcy Appellate Panel in In re Huh, BAP No. CC-12-1633, 2014 WL 936803 (9th Cir. B.A.P. March 11, 2014). Download In re Huh 2014 WL 936803 9th Cir BAP 2014.
Benjamin Huh was a real estate broker who ran a real estate and business brokerage business as a sole proprietor.  He hired an agent, Jay Kim, who did not hold a brokerage license of his own and so relied on Huh’s brokerage license.  Kim sold a shopping market (the “Market”) to an out-of-country investor looking for a profitable investment that required minimal personal involvement.  It turned out that the Market was quite unprofitable and required substantial personal involvement.  Its gross sales were significantly lower than Kim represented, and it was subject to so many code violations that its business license was revoked. 

Posted 5 weeks 6 days ago

Stephen Law filed a chapter 7 petition in California.  His only valuable asset was his home, which he scheduled at a value of $363,348.  Washington Mutual Bank held a lien against the home to secure a loan in the amount of $156,929.  Law asserted a homestead exemption under California law of $75,000.  In order to prevent the bankruptcy trustee from selling his home, Law fabricated a second lien against his home which consumed his entire equity, and obtained the cooperation of a Chinese national named Lili Lin to assert that she was actually owed money by the debtor.  The bankruptcy trustee brought an adversary proceeding to avoid the lien, an action which Law and Lin vigorously opposed.  In what some might call a poor financial decision, the bankruptcy trustee incurred $500,000 in legal fees overcoming Law’s fraudulent misrepresentations regarding his $363,000 home.  The bankruptcy court approved a surcharge of the debtor’s $75,000 homestead exemption to pay a portion of the trustee’s legal fees, a holding which was affirmed by the Ninth Circuit BAP and the Ninth Circuit.

Posted 7 weeks 1 day ago

The need for careful drafting of participation agreements between banks was brought home by the Utah Supreme Court’s ruling in Holladay Bank & Trust v. Gunnison Valley Bank, 2014 UT App 17, 2014 WL 266289 (Utah App. 2014).  In Holladay Bank, Gunnison Valley Bank and Holladay Bank entered into a participation agreement relating to a substantial loan extended by Gunnison for the construction of a luxury home.  The participation agreement provided that Gunnison fund its portion of the loan first, and Holladay fund its portion last.  Gunnison foreclosed following the borrower’s default, and a dispute arose between the banks over the allocation of the sales proceeds which were insufficient to cover the loan.  Litigation between the banks ensued.  The participation agreement provided in one section that, “as the Borrower repays the loan,” Holladay would receive all principal payments pursuant to the “last in, first out” provisions of the agreement, until its principal was paid in full, with Gunnison to receive principal payments thereafter.  Another section of the agreement provided that, after payment of collection costs to Gunnison, all amounts received were to be divided between the banks in accordance with their respective percentages of ownership interest in the loan.

Posted 7 weeks 2 days ago

The Idaho Supreme Court recently has been called upon to decide two cases that could have important implications for agricultural lenders.  The first is already decided; the second has been briefed and will likely be decided this summer.
Cows Gobble Up Commodity Lien
In Farmer’s National Bank v. Green River Dairy, LLC, 2014 WL 268643 (Jan. 24, 2014), the Court held that an agricultural commodity lien on diary feed did not extend to the livestock that eventually consumed the feed. 
In Green River, Farmer’s National Bank (“Bank”) held a properly attached and perfected security interest in the dairy cows of Green River Dairy (“Dairy”).  Certain commodity sellers (“Feed Providers”) sold hay and wheat products to Dairy for use as feed.  Dairy defaulted on its payments to Bank.  Bank foreclosed on the cows and sold them at auction.  Bank and the Feed Providers each claimed a priority interest in the proceeds of the sale. 
Bank claimed priority pursuant to general U.C.C. Article 9 principles.  See Idaho Code § 28-9-101, et. seq.  According to such principles, conflicting security interests and liens generally rank “according to priority in time of filing or perfection,” and a prior perfected security interest has priority over a conflicting unperfected interest.  See Idaho Code § 28-9-322.

Posted 7 weeks 2 days ago

The Sixth Circuit in its recent opinion in Grant, Konvalinka & Harrison, P.C. v. Still (In re McKenzie), 737 F.3d 1034 (6th Cir. 2013) recently addressed two questions of first impression in the circuit:  (1) as between the creditor and the bankruptcy trustee, who bears the burden under § 362(g) to prove the validity (or non-validity) of the creditor’s lien and (2) if the trustee’s action to avoid the lien as a preference is barred by limitations under § 546, may the trustee nevertheless use the preference to defeat the secured creditor’s motion for relief?  The Sixth Circuit held the secured creditor bears the burden to prove the validity of its lien under § 362(g) and the trustee may use a preference claim defensively to defeat a motion for relief.

Posted 9 weeks 2 days ago

Section 1121(e)(1) of the Bankruptcy Code provides a 180-day exclusive period for a small business debtor to file a plan, unless this period is extended by the court.  Section 1121(e)(2) provides “the” plan and a disclosure statement (if any) shall be filed no later than 300 days after the order for relief.  Section 1121(e)(3) provides that the deadlines in 1121(e)(1) and (e)(2) may be extended only if the debtor demonstrates that it is more likely than not that the court will confirm a plan within a reasonable period of time. These time periods in section 1121(e), and any extension of them, differ from the times periods in sections 1121(b) and (c) and the procedure in section 1121(d) for extending them. 
In the context of a small business chapter 11 case, then, is a creditor prohibited from filing a plan more than 300 days following the order for relief (the deadline contained in sec. 1121(e)), or may the creditor still file a plan if it otherwise meets the provisions of section 1121(c)?  In ruling that the provisions of section 1121(e) apply only to small business debtors, the Tenth Circuit BAP held that creditors of a small business debtor may file plans of reorganization more than 300 days following the order for relief.  Thurner Industries, Inc. v. Gunnison Energy Corporation (In re Riviera Drilling & Exploration Company), 2013 WL 6623647 (10th Cir. BAP 2013). 

Posted 11 weeks 2 days ago

When a chapter 7 bankruptcy case is filed, a trustee is appointed to gather and sell the debtor’s assets.  To aid in this effort, the trustee is empowered to avoid certain transfers pursuant to Bankruptcy Code sections 544 - 550.  The trustee also is empowered, pursuant to Bankruptcy Code § 542, to seek turnover of assets belonging to the estate.  The Ninth Circuit Court of Appeals recently held that a party may be required to turnover estate property even if the party is no longer in possession of such property.  See Shapiro v. Henson, 2014 WL 68998 (9th Cir. Jan. 9, 2014). 
Henson filed chapter 7 bankruptcy with approximately $7,000 in her bank account.  She had written several checks drawn on the account before the bankruptcy petition, but the bank did not honor the checks until after the petition.  After Henson spent the money, the chapter 7 trustee sent a letter, and then filed a motion, seeking turnover of the funds under Bankruptcy Code § 542(a).  The bankruptcy court denied the motion because Henson no longer had possession of the funds.  The district court affirmed. 
On appeal, the Ninth Circuit reversed.  It held that the trustee could recover the funds even though Henson no longer had them at the time the trustee filed his turnover motion.  The Ninth Circuit based its decision on the text of § 542(a).  That section provides, in relevant part:

Posted 12 weeks 2 days ago