All items from Creditors' Rights

The Ninth Circuit Court of Appeals recently rendered its decision in the Mwangi case, dealing whether a debtor can assert a claim against his bank for placing an administrative freeze on his bank account pending a determination of the debtor’s exemption claim as to the funds in the account.
Eric Mwangi and his wife filed a chapter 7 bankruptcy petition.  They had several bank accounts at Wells Fargo Bank.  Following the bankruptcy filing, Wells Fargo placed an administrative freeze against the accounts and requested the trustee advise the bank on how he wanted the bank to pay the funds.  The bank informed the trustee that it would maintain the hold on the accounts until it received instructions from him, or until 31 days following the section 341 meeting of creditors.  After the bank’s action, the debtors amended their Schedule C to assert an exemption in the accounts.  Promptly after filing their amended Schedule C, the debtors requested that Wells Fargo lift the hold on their accounts so the debtors could access the funds, contending that their claiming of the exemption removed the accounts from the bankruptcy estate.  The bank refused, and the debtors filed a motion for sanctions against the bank.  After an adverse ruling against them on remand, the debtors filed an adversary class action against the bank, alleging violations of the automatic stay.

Posted 6 days 34 min ago

If a creditor violates the automatic stay by seizing property of the estate and fails to cure that violation before the debtor files an action under sec. 362(k), may the debtor recover his attorney’s fees for prosecuting the stay violation under sec. 362(k)?  The Ninth Circuit Court of Appeals recently ruled that, in these circumstances, attorney’s fees incurred in prosecuting a stay violation are recoverable by a debtor against the creditor committing the violation.
In Snowden v. Check into Cash of Washington, Inc. (In the Matter of: Rupanjali Snowden), 769 F.3d 651 (9th Cir. 2014), the debtor obtained a payday loan from Check into Cash of Washington (“CIC”), giving CIC a post-dated check to repay the loan.  Before the loan came due, the debtor stopped payment on the check and advised CIC that she would be filing bankruptcy.  Following this information, and after the debtor filed bankruptcy, CIC engaged in harassing conduct—calling her at work numerous times each day even after she told them to stop, and requiring the debtor to call CIC’s offices every day or it would call her “references” and give them embarrassing information about her.  After the debtor filed bankruptcy, CIC successfully used an electronic funds transfer to debit the debtor’s account for the amount of the loan, causing the debtor’s account to be overdrawn and for the debtor to incur bank charges.

Posted 2 weeks 5 days ago

Citing Ninth Circuit precedent from cases under the Bankruptcy Act, , the Ninth Circuit BAP reluctantly held that a pre-petition state court civil contempt proceeding is exempt from the automatic stay of sec. 362 of the Bankruptcy Code.  The decision of the BAP is Yellow Express, LLC v. Mark Dingley (In re: Dingley), 514 B.R. 591 (9th Cir. BAP 2014).

Posted 4 weeks 5 days ago

In a split decision, the Sixth Circuit Court of Appeals in its opinion in Sunshine Heifers, LLC v. Citizens First Bank (In Re: Lee H. Purdy), 763 F.3d 513 (6th Cir. 2014) held a long term lease of livestock extending beyond the economic life of the individual leased livestock can still be a true lease and not a disguised security interest.  
The dispute arose over competing claims to the debtor’s herd of dairy cattle.  The debtor borrowed money from Citizens Bank, securing it with a lien on his herd of dairy cattle.  The bank properly perfected its security interest.  Subsequently, the debtor decided to increase the size of his herd, and entered into a series livestock leases with Sunshine Heifers under which the debtor leased a total of 435 cattle for fifty months.  The leases prohibited the debtor from terminating the leases, and the debtor was required to return the cows to Sunshine at the end of the lease term without an option to purchase.  In addition, the leases provided that the debtor would replace any cows that were culled from the herd during the lease term.  The debtor executed a security agreement to Sunshine, which was filed with the state.

Posted 6 weeks 5 days ago

Recreational marijuana is legal in two states—Washington and Colorado—and medical marijuana is legal in another twenty-one states.  Colorado alone has over 500 marijuana dispensaries and that number is on the rise.  However, as the marijuana industry continues to grow, federal law still prohibits the use of marijuana.  So what happens when a marijuana business becomes insolvent? Does it have the right to avail itself of the protections of the Bankruptcy Code?
The United States Bankruptcy Court for the District of Colorado (the “Court”) says no.  In In re Arenas, 2014 Bankr. LEXIS 3642 (Bankr. D. Colo. Aug. 28, 2014), a husband and wife filed for chapter 7 bankruptcy.  The husband engaged in the business of producing and distributing marijuana on the wholesale level in Colorado. The husband carried on his business operations in one unit of a commercial building owned by the debtors.  The debtors also leased another unit in the building to another marijuana dispensary.  The wife was not involved in the business and her income derived solely from disability payments. 

Posted 13 weeks 2 days ago

On August 26, 2014, the Ninth Circuit Court of Appeals held that Wells Fargo (the “Bank”) did not violate the automatic stay by placing a temporary administrative hold on a chapter 7 debtor’s bank accounts.  See In re Mwangi, 2014 WL 4194057 (9th Cir. 2014).  Holland & Hart represented the Bank in this significant victory.
The United States Supreme Court long ago held that a bank may impose an administrative hold on a debtor’s bank account to preserve the bank’s setoff rights.  See Citizen’s Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).  The Ninth Circuit’s Mwangi decision builds on the Strumpf holding and establishes that an administrative hold may be proper even if its purpose is not to preserve setoff rights.
The Mwangis, chapter 7 debtors, held four accounts at the Bank with an aggregate balance of $52,000.  When the Bank became aware of the Mwangis’ bankruptcy filing, it placed an administrative hold on all four accounts, and sent two letters: one to the chapter 7 trustee requesting instructions as to how to dispose of the account funds, and one to the Mwangis’ counsel informing him of the administrative hold that would last until the Bank received instructions from the Trustee or until 31 days after the meeting of creditors.

Posted 16 weeks 3 days ago

In its opinion in Clark v. Rameker, 573 U.S. ____ (2014), the United States Supreme Court ruled that inherited IRA accounts are not exempt under 11 U.S.C. § 522(b)(3)(C), and are subject to payment of creditor claims in a chapter 7 case.
In Clark, the debtor inherited an IRA from her mother.  On filing bankruptcy, the debtor asserted an exemption in the IRA under 11 U.S.C. §  522(b)(3)(C).   The debtor was a resident of Wisconsin and asserted exemptions under its exemption statute, pursuant to 11 U.S.C. §  522(b)(3)(A).  However, because Wisconsin law does not provide an exemption for inherited IRA accounts, the debtor asserted an exemption for that account under 11 U.S.C. § 522(b)(3)(C), which provides an exemption for “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation” the recited sections of the Internal Revenue Code.  The trustee objected to the exemption, and the bankruptcy court denied the exemption.  The district court reversed, and was reversed in turn by the Seventh Circuit Court of Appeals.  The Supreme Court granted certiorari in light of the conflict between the Seventh Circuit’s opinion and the opinion of the Fifth Circuit in In re Chilton, 674 F.3d 486 (5th Cir. 2012).

Posted 25 weeks 5 days ago

A nightmare scenario for a lender: you lend $1.2 million to a debtor to purchase equipment; you take a first priority security interest in the equipment; one day another company calls to tell you it purchased the equipment at a bankruptcy auction you never knew about, for 10-20% of what you’re owed; you try to overturn the sale, but cannot, because the sale is consummated and your appeal is now “statutorily moot.”  Could this happen?  It happened in a recent Oregon case.
In In re Pacific Cargo Services, LLC, 2014 WL 2041821 (D. Ore. May 9, 2014), the debtor conducted a public auction for its assets under Bankruptcy Code § 363.  Among the assets it sold were 11 specialized industrial trucks, which were General Electric’s collateral, and against which General Electric had loaned $1.2  million.  They were purchased at the auction for $180,000.  General Electric claimed that it first learned about the auction more than a week later, when the purchaser called to obtain titles thereto. 

Posted 30 weeks 4 days ago

The Bankruptcy Code impairs lenders’ rights in various ways.  Accordingly, lenders have long attempted to devise methods of preventing borrowers from filing for bankruptcy protection.  Such attempts generally have not been successful -- courts hold that as a general matter, a borrower’s pre bankruptcy waiver of the right to file bankruptcy is against public policy and is void.  See, e.g., Klingman v. Levinson,831 F.2d 1292, 1296 n.3 (7th Cir. 1987) (“For public policy reasons, a debtor may not contract away the right to a discharge in bankruptcy.”).  Courts have rejected such waiver provisions in many forms.  See, e.g., In re Madison, 184 B.R. 686, 688 (Bankr. E.D. Pa. 1995) (refusing to enforce debtor’s oral bankruptcy waiver made on the record in prior bankruptcy case); In re Tru Block Concrete Prods. Inc., 27 B.R. 486, 492 (Bankr. S.D. Cal. 1983) (refusing to enforce bankruptcy waiver provision in forbearance agreement); In re Peli, 31 B.R. 952, 956 (Bankr. E.D.N.Y. 1983) (refusing to enforce bankruptcy waiver provision in personal injury settlement agreement).    

Posted 32 weeks 4 days ago

In addition to their full-time jobs, many individuals have their own “side businesses” which generate some income but not enough to enable them to give up their “day job.”  Many of these side businesses require assets in order for the individual to deliver the goods or services to his customers.  When that individual has to file for bankruptcy, may he or she claim a “tools of the trade” exemption in the assets used in the side business?  The Tenth Circuit Bankruptcy Appellate Panel in held a debtor may assert such an exemption in appropriate circumstances, in its decision in Larson v. Sharp (In re Sharp), 2014 WL 1400073 (10th Cir. BAP April 11, 2014).

Posted 32 weeks 5 days ago