All items from Creditors' Rights

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 9 weeks 11 hours 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 14 weeks 4 hours 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 16 weeks 5 hours 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 16 weeks 11 hours ago

On May 7, 2014, the Montana Supreme Court rendered its decision in Morrow v. Bank of America, ushering in what could be a new era of tort liability for lenders and servicers. 
The Morrows had retired to Montana in 2006 and built a home financed by Countrywide.  They lost their source of income in the downturn in 2009, and – while still current on their loan – reached out to their lender to discuss a modification of their loan.  First, the Morrows’ claim they were told by Bank of America to skip a loan payment so that they would be eligible for a modification.  Then, they were informed by a representative of Bank of America that “they were ‘locked’ for a modification with trial payments of $1,239.99” per month which the Morrows started paying in December 2009.  A few months later Bank of America sent the Morrows a notice of acceleration.  Another employee of Bank of America advised them that their account was “under review”.  They continued to make payments through February of 2011.  The Morrows were invited to apply for the Federal Home Affordable Modification Program or HAMP but the notices of acceleration continued.  On January 11, 2011, the Morrows were advised that modification of their loan under HAMP had been denied.  Their final payment was rejected by Bank of America, and a sale of the property was scheduled.

Posted 16 weeks 5 days ago

The United States Court of Appeals for the Tenth Circuit recently ruled that a chapter 7 trustee may not avoid a post-petition transfer under either § 549 or § 362, where recovery of the transfer would not benefit the estate, even though the elements for avoidance under those sections are established by the evidence.
In In the Matter of C.W. Mining, Co., 2014 WL 1424526 (10th Cir. April 15, 2014), the debtor deposited cash with its bank, and the bank issued the debtor a certificate of deposit.  On the date that an involuntary petition was filed against it, the debtor still owned the certificate of deposit, but owed the bank a debt arising from three promissory notes which exceeded the amount of the certificate.  Following the entry of an order for relief, the bank liquidated the certificate of deposit and applied the proceeds to two of the three promissory notes which the debtor owed it and for which the certificate served as security.  The bank took this action without first seeking relief from the automatic stay or other approval from the bankruptcy court for the action.  Consequently, the bank’s conduct violated the automatic stay and was an unauthorized post-petition transfer.

Posted 18 weeks 11 hours ago

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 20 weeks 11 hours 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 22 weeks 6 days 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 23 weeks 6 days 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 24 weeks 4 days ago