The National Attorneys General Training & Research Institute

The National Attorneys General Training & Research Institute The National Attorneys General Training & Research Institute

Bankruptcy Bulletin - Aug - Sept 2016



Although it’s not fully settled yet, it looks at this point, like we will most likely be holding next year’s seminar in Savannah, Georgia from November 13-17 (a Monday to Thursday, like this year’s program, rather than our prior pattern of Sunday to Wednesday). We are working on firming up the arrangements and will have more information in the next bulletin, but this should give you a heads up for what you might be doing between Veteran’s Day and Thanksgiving! We should also have more information in the next bulletin as to whether there will be any scholarship funds available from NAGTRI. We are hopeful that we will be back in the rotation for next year, but the allocations are still being worked on. We hope to see everyone there in any event.

This year’s seminar, in Santa Fe, went very well. Even with no scholarship funding, we had approximately 130 attendees from across the United States, which is a clear indication of how important these issues are to the states and localities that have to face them every day. We at NAAG hope the training and the case information below will be helpful to you in your work. And, with the seminar over, I’ll be gearing up to work on the second edition of the Bankruptcy Manual in earnest with perhaps even a first draft by next year’s seminar.


The Supreme Court argument in the case of Czyzewski v. Jevic Holding Corp., No. 15-649, in which a number of States filed an amicus brief in support of the petitioners, is set for argument next week on December 7. It was scheduled for this month but was moved to fill a spot that opened up when an argument was canceled. The case dealt with the question of whether so-called “structured dismissals” can be based on settlements that do not follow the requirements of the “absolute priority” rule. More information next time after we listen to what the Justices say at oral argument.



In re Tracht Gut, LLC (Tracht Gut, LLC v. Los Angeles Treasurer), 836 F.3d 1146 (9th Cir. 2016). Tax sale conducted under competitive bidding procedures is conclusively excepted from fraudulent transfer provisions.

In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the Court held that a foreclosure sale that was conducted in accordance with state law that provided for competitive bidding and adequate notice was conclusively presumed to represent an exchanged for “reasonably equivalent value.” It did not pass on whether its holding would apply to sales of properties for unpaid taxes. The courts below have generally held that, if the sale resembles the mortgage foreclosure sale and the features noted by the court, it will also be treated as being for such equivalent value. If the sale, on the other hand, is not structured to obtain the highest possible price (but, rather, for instance, to reduce the amount paid so the owner can more readily redeem the property), then it will not be treated as automatically producing an equivalent value. California tax sales, the Ninth Circuit held, did qualify for the BFP exclusion.

In the Matter of Vitro Asset Corp. (United Independent School District v. Vitro Asset Corp.), 2016 U.S. App. LEXIS 14407 (5th Cir. 8/5/16) (unpublished). Lien held by creditor that failed to timely file claim for postpetition interest and penalties on taxes was properly avoided under plan.

The debtor’s plan set a 30-day period post-confirmation for filing of any requests for postpetition interest and penalties. The creditor was given notice of the deadline and knew that it had such claims, having originally included them in its proof of claim (and then amending the claim to take them out). It did not file by the deadline, however, and the Court of Appeals held that the plan language was clear as to its application to these costs but the creditor had failed to comply. Having participated in the case by filing claims and the plan providing for the termination of its lien absent the request for payment, the liens could properly be removed.

In re Nilsen (Nilsen v. Mass. Dept. of Revenue), 557 B.R. 1 (D. Mass. 2016). Late-filed return that did not meet requirements to be deemed “return” under hanging paragraph would also not qualify under Section 523(a)(1)(B) as an “equivalent report.”

If a late-filed return does not qualify as a return under the hanging paragraph, it cannot be salvaged by referring to it as an “equivalent report” under the exception; such reports must also meet the timeliness requirements.

In re Biggers (Biggers v. Internal Revenue Service), 557 B.R. 589 (M.D. Tenn. 2016). Late-filed return after date of IRS assessment may still serve a useful purpose so as to except it from discharge.

The IRS has not adopted the stringent reading of the hanging paragraph and has, instead, argued for its version of the Beard or Hindenlang test. That test looks to whether the late return purports to be an honest attempt to satisfy the debtor’s obligation and whether it serves a useful purpose. The IRS has attempted to set a bright-line rule that returns filed after the taxes have been assessed serve no useful purpose and a number of courts have accepted that position. Others, though, such as the court here, have held that, since the IRS does tend to allow such returns to be accepted and used to adjust the amounts due, then they may very well be treated as serving a useful purpose. Under that approach, each return must be separately analyzed and argued and the debtor’s subjective good faith considered. That was certainly one of the things the statutory change was trying to get away from but it has failed to accomplish that goal, especially for the IRS’ attempt to strike a middle ground.

In re Bush, 2016 U.S. Dist. LEXIS 100671 (S.D. Ind. 8/12/16). Tax penalty determination did not fall under Section 1334 jurisdiction; court could not use Section 505 power to decide issue.

Where the debtor’s estate was insufficient to pay all non-penalty claims in Chapter 7 case, and where penalties would be nondischargeable in any event, court did not have jurisdiction to decide amount of penalties under Section 505. The authority under the section still had to fall within the court’s jurisdictional powers under 28 U.S.C. 1334 and the penalties did not “arise under” the Code nor were they “related to” the case. Section 505 is a procedural mechanism, not a matter of substantive law created by the Code so “arising under” jurisdiction does not exist and where the subordinated penalties will never be paid by the estate, the determination is not “related to” the bankruptcy case.

In re Berry ( Berry v. Mass. Dept. of Rev.), 2016 Bankr. LEXIS 2460 (Bankr. D. Mass. 6/30/16). Failure to file amended state return after federal return was revised meant that debt was not discharged.

Section 523(a)(1)(B) was revised in 2005 to include a requirement that not only the original tax return but also an “equivalent report or notice” be filed in order to cover scenarios such as this. Some courts had held that the requirement to file an amended state return or other form of notice after the original federal return was altered did not trigger this exception. The amendment was included specifically to cover that situation – and applies even if the state independently received notice from the IRS and issued an assessment.


Janvey v. The Golf Channel, Inc., 834 F.3d 570 (5th Cir. 8/22/16); Janvey v. The Golf Channel, Inc., 487 S.W.3d 560 (Tex. 2016). Fifth Circuit and Texas Supreme Court’s views of what constitutes “value” under the Texas Uniform Fraudulent Transfer Act (“TUFTA”).

As part of a massive Ponzi scheme, a debtor paid $6 million to the Golf Channel to entice listeners to invest in the Ponzi scheme (although not telling them it was a scam). While the Golf Channel took the payment in good faith and ran the advertising, when the debtor later failed and was placed into receivership, the receiver sought to avoid the payments as being actually fraudulent in that they were made in furtherance of the Ponzi scheme. The receiver sued under TUFTA and the district court granted summary judgment to the Golf Channel holding that it had proven that it provided “value” for its payments. The Fifth Circuit initially reversed based on its view that TUFTA, like Section 548 of the Code, should be read to determine value from the point of view of the debtor’s creditors. Under that analysis, an expenditure that furthered the Ponzi scheme could only deplete the ultimate value of the estate because every new investment only pushed the debtor deeper into the hole. On rehearing, though, the Fifth Circuit was convinced that the Texas courts might feel otherwise and certified the issue to that court.

In the Texas case, the Texas Supreme Court noted that the “Ponzi scheme presumption” that assumes that all transfers pursuant to the scheme are automatically fraudulent creates great difficulty for unknowing vendors who are left with no defenses despite their good faith. It noted, though, that the TUFTA has a specific definition of “value” that includes “a transfer . . . that is within the range of values for which the transferor would have sold the assets in an arms-length transaction.” It analyzed the Fifth Circuit’s original opinion which turned on the view that facilitating the Ponzi scheme could never benefit creditors no matter the objective value of the services provided but contrasted that with TUFTA’s definitions, which defined “value” broadly as the exchange of property to satisfy an obligation, and then includes the definition of “reasonably equivalent” value cited above.

The Court then stated that the evaluation of “value” is made as of the time of the transaction, and held that, in light of the broad definition of value in the TUFTA (which largely tracks that in Section 548), the services of the Golf Channel had objective value even if the debtor was insolvent at the time. The trustee had argued that the definition in the “reasonably equivalent” section was more directed at the “equivalency” part of the definition, than the concept of “value,” as such. The court noted, though, that the statute was intended to protect both parties to the transaction and that the comments to the UFTA state that, if a reasonable equivalent has been given, the transferee should have a complete defense regardless of the debtor’s intent.

The court further noted that even the basic definition of “value” excluded some promises not made in the ordinary course of businesses implied that, conversely, transfers in the ordinary course were treated as value. The court held that some form of value had to be provided to the debtor directly (as opposed to benefits to a third party or transfers that provide merely subjective benefits such as “love and affection”). The consideration, though, need not to be a tangible item that the debtor can retain and sell; providing consumable goods and services provides value, even though nothing is left that can later be sold. Paying for those services is protected even if the debtor had no lasting benefit therefrom. The determination of value is separate from the question of whether the debtor was insolvent or became so because of the transfer. Putting all of that together, the court held, value existed when the debtor paid for objectively valuable services or goods in an arms-length transaction at market rates. It noted that the Ponzi scheme presumption could not serve to invalidate all transactions with the debtor, including those where objectively reasonable payments were made for services actually provided. Doing so would eliminate the good-faith defense in all Ponzi scheme cases without any evidence of that distinction in the law. The court viewed its position as consistent with that in Finn v. Alliance Bank, 860 N.W. 2nd 638 (Minn. 2015), which similarly refused to rely on various “presumptions” in its fraudulent transfer cases, rather than looking at the precise facts of each. Thus, it held, the question of “value” would apply in the same way in a Ponzi scheme case as in any other – if the transfer was for a valuable good or service at a fair price that ended that inquiry. The trustee might still show the transferee did not take in good faith or that the consideration paid was illegal, but not simply that the item purchased was used in an illegal scheme. On that basis, the transfer here was not avoidable.

On remand to the Fifth Circuit, it accepted the Texas court’s analysis of what TUFTA meant but tried to limit the opinion to applying only to the Texas law on the basis of the Texas’ court’s reference to the unique aspect of the TUFTA in giving a definition of “reasonably equivalent” value as tied to the marketplace. However, in reading the opinion as a whole (and noting the other cases it cites to, including the Minnesota opinion), it seems clear that the Texas court is not relying on that definition to decide the issue but rather is taking a broader view of “value” that rejects the general view that transfers in a Ponzi scheme can never have value for the estate. While the state courts cannot force the federal courts to read the federal statute akin to the way the states read their laws, the strong resemblance between Section 548 and the UFTA means that the federal courts may need to consider those issues again in their cases. It also means that transferees being sued under state law (for transfers prior to the 2-year limitations period in Section 548) should consider pushing back against the “Ponzi scheme presumption” being utilized under their laws.

In re Callas (Desmond v. American Express Centurion Bank, Inc., 557 B.R. 647 (Bankr. N.D. Ill. 2016). Bank gave value when it accepted payment made by wife from funds transferred to her by husband; no basis for bank to have been put on inquiry notice about transaction.

The debtor’s wife opened a bank account on day one and on day two, he received a $266,000 payment for his business operations, $265,000 of which he transferred to her account. The next day, she transferred $40,000 to pay off most of what her husband owed to American Express and three weeks later he filed bankruptcy. The trustee sought to avoid the payments to American Express but without success. American Express was a subsequent transferee with respect to the husband’s funds and as such was protected if it gave value in good faith and without knowledge of the voidability of the transaction. It gave value by reducing the husband’s debt; no value had to be given to the wife as transferor. As to good faith, the court held an “inquiry notice” standard applied – but only if the information that would have been received from a reasonable inquiry would have in fact given actual knowledge of the voidability of the transfer. If it would not do so, the court would not impute knowledge from the failure to carry out the inquiry. The court did not place any weight on the fact that the payment was being received from the wife rather than the debtor directly since that did not carry any necessary implication of false dealing. Moreover, treating such a circumstance as inherently suspicious would put an enormous burden on the creditor in light of the large number of transactions it handles and the wide variety of payments it receives. Nothing else in the case showed bad faith or knowledge by the creditor. The case is useful for the realistic view it took of the nature of what an inquiry would reveal and what should be viewed as a “red flag.”

In re Kipnis (Mukamal v. Kipnis), 2016 Bankr. LEXIS 3197 (Bankr. S.D. Fla. 8/31/16). Trustee may use IRS 10-year SOL as basis for bringing Section 544(b) avoidance actions.

Although virtually all cases assume that the trustee will step into the shoes of a creditor acting under state law, the court here (and a few prior cases) take the position that there is nothing in the statute that forbids the trustee from stepping into the shoes of the IRS and using the 10-year statute of limitations period in 26 U.S.C. Section 6901(1)(A)(i) to avoid prior transfers, despite a much shorter period in state law (and the mere 2-year limitation in Section 548). And the court held, that is true even though the IRS must rely on a state law to establish the substantive right to avoid the transfer. Most other courts that have considered the issue have come to the same result even though this would seem to make a major change in avoidance law in view of the multitude of cases in which the IRS is a creditor that triggers this extended limitations period. The court here conceded that the result might well not be what Congress had intended but held that the statute was clear on its face and it was up to Congress to change the law if necessary.

In re NewPage Corp. (Pirinate Consulting Group, LLC v. Md. Dept. of Envir.), 2016 Bankr. LEXIS 2925 (Bankr. D. Del. 8/4/16). Environmental permit operating fees were not preferences.

The State collected three different types of fees for the debtor’s operations and had done so for several years. When the debtor filed bankruptcy, the trustee sought to avoid them as preferential transfers. The court denied the complaint for several reasons. First, as to one fee, where the debtors paid prior to the termination date of the existing license (since the license would automatically terminate if the fee was unpaid on the expiration date), there was no preference to begin with because there was no antecedent debt. The new obligation did not accrue until the new permit year began. That was true even if the state sent an invoice/reminder notice before the end of the year. Because the payments were made prior to the start of the case, the court held they were not administrative expenses (even if they covered the period during the case). On the other hand, the court held that they would fall under the “ordinary course of business” defense. While there were not a large number of transactions (since these were one-time annual payments), there was evidence of payments made on the same basis over a number of years, the fee amounts were either the same or were based on the same formula, and the payments for each type of fee were paid on a consistent timeline and one that was consistent with the time limits set under the invoices for payment. The court also found that the payment of the fees and the extension of the debtor’s licenses created a contemporaneous exchange for new value. The court did agree that all of the transfers should be aggregated for purposes of the Section 547(c)(9) de minimis exception. The court also held that Section 525(a) would have precluded the state from denying the debtor the right to continue to operate had it not paid the fees prepetition – so it turns out the state was lucky that it did indeed obtain payment before the case commenced.

In re Palladino (DeGiacomo v. Sacred Heart Univ.), 2016 Bankr. LEXIS 2938 (Bankr. D. Mass. 8/10/16). Tuition payments made by operators of Ponzi scheme for daughter’s college bills were neither constructively nor actually fraudulent.

When the operators of a Ponzi scheme operators paid some $65,000 for their daughter’s college tuition (on top of scholarships and loans), the trustee sought to recover those funds from the college after they were caught and filed bankruptcy. The court first rejected the trustee’s argument that the payments were actually fraudulent under the Ponzi scheme presumption, finding that the payments were not in furtherance of the scheme but just payments in the normal course of life. Only those payments that actually related to the Ponzi scheme were avoidable even if made from funds obtained from the scheme. The court also held that the payments were not constructively fraudulent even though the parents had no duty to support their child and did not receive anything concrete back from the payments. The court accepted the debtors’ argument that sending the child to college – and paying the costs for her to attend – would allow her to emerge as a financially self-sufficient person that they wouldn’t have to support in the future and that provided value to them. The court held that a payment could “enhance the financial well-being of the child which in turn will confer an economic benefit on the parent.” It is not clear if the court is suggesting that the benefit is the fact that the child won’t be moving back home into the basement or rather that the parent is setting the child up as an investment that the parent can collect from in the future when they retire and can’t live on their fixed income. It appears to be primarily the former, since the judge quotes the mother as saying that if the child didn’t graduate, she would move back home or the mother would have to pay for her to live elsewhere. Either, though, appears to be problematic as a rationale since the parent has no legal obligation to provide either form of support after the child turns 18. It is not clear why spending money to avoid an obligation that one voluntarily takes on provides “value” and certainly not to other creditors. (Cf. the Janvey case.) At a minimum, though, this case should hearten college administrators faced with similar suits.


In re Rivera (Rivera v. Orange County Probation Department), 832 F.3d 1103 (9th Cir. 2016). Debt owed by parent to county for costs incurred due to incarceration of son were not excepted from discharge as domestic support obligation.

Ironically, when juxtaposed with the Milan case, below, the Ninth Circuit held that the parent’s obligation for costs imposed for the support of a child that had been incarcerated were not a DSO because they were actually punitive and did not benefit the child. While the court recognized that the costs were for the direct food and lodging of the child, they held that was insufficient because a credit card company could not, for instance, assert a priority for the costs incurred to pay for food that was supplied to a child. (That ignores, of course, that a credit card company is not designated as a party to whom a DSO can be owed, unlike the government which is a designated beneficiary of the provision.) The court’s primary approach, though, was based on its view that this type of claim was not beneficial to the child and the family and, hence, could not have been part of what Congress intended to authorize to receive a priority. The court relied in large measure on In re Platter, 140 F.3d 676 (7th Cir. 1998) which had barred a county from having such debt excepted from discharge pre-BAPCPA because the debt was not owed to the child. However, the Ninth Circuit ignored the language in Platter that stated, “If government entities like DFCS do not wish to be left providing room and board to juvenile delinquents without a means of collecting against bankrupt parents, then they may lobby Congress for another amendment to § 523(a)(5),” which is, of course, exactly what the states did in the BAPCPA which expanded the definition of a DSO to include payments owed directly to the state. While the court’s concern with the struggles of the parent is understandable, it is not at all clear that its action is consistent with the amendment to the Code (albeit the county, which has discretion to collect or not collect the fee might choose to exercise that discretion here.)

In re Residential Capital, LLC (Rescap Liquidating Trust v. PHH Mortgage Corp.), 588 B.R. 77 (S.D. N.Y. 2016). Claim for attorneys’ fees against debtor for alleged breach of contract was right that arose when contract was signed prepetition so claim was discharged at confirmation.

The debtor properly preserved its right to sue various contractual parties for alleged violations of their contracts; those parties, in turn, tried to raise counterclaims against the debtor for their costs of defending that litigation based on the theory that the debtor was violating their contract in bringing those suits. While the debtor agreed that such rights could be raised by way of setoff to an award against the defendant, it disagreed that they could be raised as independent counterclaims. The bankruptcy court had used an analysis based on the case of In re Ybarra, 424 F.3d 1018 (9th Cir. 2005) to allow the suits but the district court reversed, holding that the suits were covered by the normal rule that contingent liabilities arising out of prepetition contracts were prepetition, dischargeable claims (and noted that the Ninth Circuit had narrowed Ybarra).

Financial Casualty & Surety Co, Inc. v. Thayer, 2016 U.S. Dist. LEXIS 136604 (D.N.J. 9/30/16). Surety for bail bondsman equitably subrogated to state’s claim for forfeiture of bond for absconding defendant; debt excepted from discharge under Section 523(a)(7).

In Dobrek v. Phelan, 419 F.3d 259 (3rd Cir. 2005), the Circuit Court held that a debt for a bail bond forfeiture owed directly to the state fell within Section 523(a)(7), in large part because of the important role played by bail in the criminal justice system and the need to ensure that those offering bonds to those charged with crimes retained an incentive to ensure that the bailees did appear in court. This case extended the same principle to a debt held by a surety that paid the state in order to remain on the state’s approved list and then sought indemnification from the bail bondsman that actually was responsible for producing the bailee. The court held that the surety could use equitable subrogation to stand in the state’s shoes and use the rights under Section 523(a)(7). The court also held that the parties’ contract made the bondsman as a fiduciary to the surety with respect to the payments received and the failure to properly account for them was a defalcation under Section 523(a)(4) that made the surety’s attorneys’ fees nondischargeable.

Michigan Unemployment Insurance Agency v. Andrews, 2016 Dist. LEXIS 114468 (E.D. Mich. 8/24/16). Penalties imposed for fraud are nondischargeable in Chapter 13 under the fraud exception even though penalties, as such, are dischargeable.

While Chapter 13 does not include penalties under Section 523(a)(7) as one of the discharge exceptions, a debt may be nondischargeable under more than one section. A debt incurred due to fraud (i.e., falsely representing one’s employment status) is still excepted under Section 523(a)(2), even if the debt is for a penalty that can also fall under Section 523(a)(7).

In re Milan (Milan v. County of Dakota), 556 B.R. 922 (8th Cir. BAP 2016). Room and board fee charged to inmates was not excepted from discharge under Section 523(a)(7).

Although any form of criminal sentence is excepted from discharge under this section, and this fee is only charged to prisoners, the court found that it was not part of the penalty imposed on the prisoner. It was not imposed by the court, was not part of the criminal code (but rather was an administrative provision), was charged (and the amount set) at the discretion of the sheriff’s office, and could be waived if it would be a hardship. Accordingly, the court held this was more in the nature of a simple pecuniary claim rather than a criminal penalty.

In re Thompson (Hatfield v. Thompson), 2016 Bankr. LEXIS 3055 (10th Cir. BAP 8/19/16). Debt incurred by party who failed to live up to commitments to State about nursing home operations resulting in injury to patient could be excepted from discharge.

The debtor made a number of commitments to the State about how operations at nursing homes he owned would be conducted. He allegedly failed to live up to them (and never intended to) and, as a result, a patient at the facility was injured and died. The court held that the fraudulent representations did not have to be made to the creditor directly (the husband of the patient) nor did the debtor have to have received any money personally from the creditor to have the debt excepted under Section 523(a)(2). It was enough that the State paid him based on the statements he made to them and that those statements were false and caused the injury. It was also irrelevant that the underlying judgment in the state court case was not for fraud, so long as the creditor could prove up the elements before the bankruptcy court.

In re Wine (State of Colorado v. Wine), 558 B.R. 438 (Bankr. D. Col. 2016). Penalties and fees accompanying debtor for fraudulent overpayment of benefits are also nondischargeable.

The debtor fraudulently received unemployment compensation benefits while he was actually working. The court found that not only the overpaid benefits, but also the associated penalties and collection costs assessed in connection therewith, were also excepted from discharge under Section 523(a)(2), based on Cohen v. de la Cruz, 523 U.S. 213 (1998) which held that all debts arising from the fraudulent action were excepted. It is irrelevant that such penalties might also be covered under Section 523(a)(7) – and might not be excepted from discharge under Chapter 13 under that section. The same conduct can trigger more than one discharge exception but each stands on its own.

In re Kirwan (Cordeiro v. Kirwan), 558 B.R. 9 (Bankr. D. Mass. 2016). Fraudulent transfers by debtor did not make underlying judgment nondischargeable.

The debtor was held liable for failing to have his company pay the applicable wages required under his contracts with the state. When the employees sought to collect the judgment, he created an alleged alter ego and transferred the business to the new company. While such an action might be a fraudulent transfer and the employees might be able to seek to pursue a remedy against the new entity, the court held that the debtor’s actions did not create the underlying debt, nor did fraudulent efforts to avoid paying that debt make the debt itself nondischargeable.

In re Sinclair, 556 B.R. 801 (Bankr. S.D. Tex. 2016). Pending charge of statutory rape is sufficient to bar entry of discharge under Section 522(q)(1)(B)(iv); state courts have held such crimes to be inherently crimes of violence even if no force is used.

In the BAPCPA, Congress added a provision barring entry of a discharge if it appeared that the debtor would be held liable for several types of debts, including ones for “criminal act(s) . . . that caused serious physical injury or death.” In this case, the debtor “groomed” a minor child into believing that she should be his girlfriend and take care of him and had sex with her. While his conduct did not involve threats or use of force, the court relied on state law which had found that violations of that law were inherently “crimes of violence,” because of the potential for harm from the sexual conduct itself (such as risk of venereal disease or pregnancy) or the use of force by the defendant if his wishes were thwarted. The court relied on that characterization to find that the charges against the debtor met the standard for denial of the discharge. (It is not altogether clear from the statute but this presumably an interim denial and the debtor could be given the discharge at a later date if found innocent of the charges.)

In re Ramirez (Labor Commissioner v. Ramirez), 2016 Bankr. LEXIS 3156 (Bankr. N.D. Cal. 8/26/16). Making false excuses for failing to pay wages to keep employee working was fraud; action was not “willful and malicious,” since employer did not pay because he was running out of money himself.

The debtor promised to pay the employee but continually shorted his check; he convinced the employee to keep working by falsely claiming that he was not being paid timely by the owner. The court found that those statements were intended to keep the employee working rather than quitting to find another job and that, at least from the time when the employer knew he did not have funds coming in, his statements were fraudulent under Section 523(a)(2). The court did not find that Section 523(a)(6) applied because it concluded that the debtor was no longer obtaining new work and was running out of money to pay the employee. Thus, it was a case of “can’t pay,” rather than “won’t pay” which excused the violation even if the debtor clearly intended its action and knew the harm it would cause.

In the Matter of Swenson (Swenson v. Swenson), 2016 Bankr. LEXIS 3117 (Bankr. W.D. Wis. 8/23/16). Obligation of child to pay off home loan taken out by parent to pay off child’s student loan was not itself a student loan and was dischargeable.

Bottom line for dad: he and daughter co-sign student loan; he takes out home equity loan to pay off student loan for daughter and she verbally agrees to repay him; she stops paying and files bankruptcy. The court held that the loan did not qualify under any of the provisions of Section 523(a)(8) as any of the nondischargeable student loans and his (presumably estranged) daughter could walk away leaving him to pay off the home loan while she retained her diploma. The moral: think twice about signing loans for your child.

In re Orly (Cocoletzi v. Orly), 2106 Bankr. LEXIS 2936 (Bankr. S.D N.Y. 8/10/16). Discussion of pleading standards for complaint alleging 523(a)(6) exception for wage and hour violations.

This case is similar to Ramirez, above, but is dealing with the complaint stage of the case. It does find that violations of wage and hour laws can fall under this category although it indicates that there generally will need to be a showing of “violations plus.” Either the victims will have to be able to rebut a claim by the employer that he just didn’t pay the amounts because he was too broke to do so, or show that there was some form of direct animus to them, or, as in this case, be able to show that the employer engaged in ancillary conduct designed to conceal the violations. Deliberately and knowingly violating the law in order to make money is apparently not enough standing alone to necessarily create a discharge exception. Here, the “plus” conduct was alleged to be actions such as disguising the workers’ duties in the records to put them in the wrong payment category, disguising the number of hours worked to eliminate the right to overtime, failing to record tips, paying in cash, and so forth. The court held those allegations were enough to state a viable claim for the discharge exception.


New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group, PLC, 2016 U.S. Dist. LEXIS 121620 (S.D. N.Y. 9/2/16). Court in which action is pending can determine applicability of stay; stay does not extend to non-debtor defendants simply due to possibility of later indemnity claims against debtors.

The debtors were part of a group of defendants being sued on related, but separable claims. When the debtors filed bankruptcy, they asserted that the suit could not continue against the other defendants based on vague assertions that it would adversely impact their case. The court first found that it could decide the applicability of the stay and then held that the stay did not apply. The debtors had not provided any clear evidence of burden from allowing the litigation to proceed; the mere possibility of indemnity claims did not support application of the automatic stay, and, similarly, the possibility that a party could argue for collateral estoppel against the debtors based on findings against the other defendants (which would likely not be granted) would also not warrant finding that the stay applied.

In re City of San Bernardino (Newberry v. City of San Bernardino), 558 B.R. 321 (C.D. Cal. 2016). Automatic stay can apply to postpetition injunctive request because salaries of debtor’s employees are property of estate and injunction can control their actions.

The City was conducting general searches of apartments postpetition based on mere inspection warrants, and not search warrants which probably violated the Fourth Amendment. Plaintiffs sought relief from the stay to seek an injunction against such actions. The bankruptcy court would not grant the stay but enjoined such activities but only with respect to the plaintiffs themselves and not generally citywide, even though the city insisted it intended to continue such searches. On appeal, the district court agreed that Section 362(a)(3) applied to the postpetition action in a) employee salaries are part of the city’s estate and barring them from carrying out their job duty would exercise control over that money and b) barring these (possibly illegal) searches might mean the city would have to spend money in other ways to fight crime. Those readings do seem rather strained (particularly if applied outside the context of Chapter 9 with its extreme solicitude for the rights of municipal debtors). The district court also looked to the fact that the debtor could be burdened by multiple suits – without taking note of the fact that the plaintiffs were seeking a city-wide injunction so multiple suits would not be necessary. Finally, the court held that the plaintiffs could simply have brought an adversary action in the bankruptcy court instead (without noting that such a possibility would likely involve the same amount of cost and burden that it was concerned about with respect to suit outside the bankruptcy court.)

In re Privett (Innerwood & Co. v. Privett), 557 B.R. 580 (S.D. Ohio 2016). Stay did not protect debtor who was no longer party to suit from being required to give deposition testimony.

The automatic stay protects the debtor from liability on claims against her but, where the debtor was removed from the suit and liability determinations were proceeding only against her co-defendants, the bankruptcy court erred in refusing to allow her deposition to be taken. The automatic stay did not apply since no liability was being asserted against her and there was no factual support for the bankruptcy court’s statement that merely attending the deposition would be so burdensome as to adversely affect her case or the payments to other creditors.

In re Hanlon (Sato v. Hanlon), 2016 Bankr. LEXIS 2955 (Bankr. D. Ore. 8/10/16). Heterosexual couple that had common-law domestic partnership/marriage but had failed to formalize relationship were not “spouses” within meaning of DSO exception to stay.

The intersection of marriage and bankruptcy continues to evolve. While the Defense of Marriage Act was on the books, bankruptcy courts generally found that they could not recognize a same-sex relationship, even if it qualified as a domestic partnership/civil union/marriage under state law. While that statute was on the books, the number of states providing for such a status for same-sex couple continued to grow and culminated in the Supreme Court ruling that struck down DOMA and required recognition of same-sex marriages. The laws passed during that period generally only spoke to same-sex couples and did not purport to deal with heterosexual couples that had long-term relationships but had not chosen to formally marry – the traditional “common law marriage” scenario. The court here concluded that such couples continued to be governed by state law – if it recognized such a relationship (however names) as being a marriage equivalent, then the bankruptcy court would too. But if, as here, the state extended those rights only to “registered” domestic partners and the couple here merely lived together without meeting that formal status, then they could not access the DSO provisions that only apply to “spouses.”

Central Miss. Credit Corp. v. Vaughn, 2016 U.S. Dist. LEXIS 102200 (M.D. Ala. 8/4/16). Even if initial violation is inadvertent, failure to correct immediately warrants actual/punitive damages.

In the “you can’t make these things up” category, the creditor intended to garnish the wages of Peggy Vaughan, who owed it $665 and was employed by First Student Management, but, due to a typo in the court case that was carried over to the garnishment notice, actually garnished the wages of Peggy Vaughn, who did not owe it money, was also employed by First Student Management, and, most importantly, was in bankruptcy at the time. Although the initial mistake might have been excusable, the creditor failed to take steps to promptly terminate the garnishment and return the funds to Ms. Vaughn, waiting until after an adversary proceeding was filed in the matter. The district court agreed that the order imposing actual damages of $1500, punitive damages of $50,000 and attorneys’ fees (which reached almost $30,000) was justified in light of the creditor’s dilatory efforts to resolve the problem it had caused, but that the amount of punitive damages was excessive in that the creditor’s conduct was primarily negligent rather than a blatant act to defy the stay.

FTC v. 4 Star Resolution, LLC, 2016 U.S. Dist. LEXIS 102640 (W.D. N.Y. 8/4/16). Receiver may obtain stay order granting protections similar to those in automatic stay.

After the FTC and the State of New York brought an action against the defendants, they obtained a preliminary injunction appointing a receiver, imposing an asset freeze, and barring any efforts by other parties to sue the defendants, except to file (but not pursue) a complaint where needed to toll any statute of limitations. Two plaintiffs, though, sued and obtained default judgments against the defendants despite being advised of the stay and then sought to collect thereon. The court agreed with the receiver that the actions were barred and that the Anti-Injunction Act did not apply to bar the entry of the stay. That Act, the court noted, has long been held not to apply to the actions of the federal government to implement a federal law in federal court even if that requires that a pending state action be enjoined. The court also held that the All Writs Act gave the federal court sufficient power to bind non-parties to the blanket receivership stay so long as they received notice of the stay, particularly when they filed claims against and sought payment from the receivership estate.

In re Roth, 2016 Bankr. LEXIS 3381 (Bankr. M.D. Fla. 9/16/16). “Informational statement” sent post-discharge by secured creditor did not violate injunction.

The Code bars efforts to collect claims post-discharge but also allows debtors to make voluntary payments. A secured creditor is also entitled to exercise its in rem rights by foreclosing on a property and keeping the value thereof up to the amount of its loan, so long as it does not seek payment of any deficiency balance. As a way of reconciling these rights, the courts have concluded that the transmission of an “informational statement” that references the amount of the outstanding balance and the secured lender’s foreclosure rights but that affirmatively makes clear that payment is not required is lawful. The lender’s statement here made that point clear and notified the debtor that the statements would be discontinued upon request, and no other efforts were made to collect on the loan. The court found no violation had occurred.


In re Packaging Systems LLC, 2016 Bankr. LEXIS 3597 (Bankr. D. N.J. 9/30/16). Superpriority claim under Section 364(c)(1) retains priority over Chapter 7 trustee costs in converted case.

While the Code does not clearly answer the question, the court here concluded that, as between the superpriority claim awarded to a party providing debtor-in-possession financing in a Chapter 11 case versus the later Chapter 7 fees incurred by the trustee after conversion, the Section 364 costs would be superior. However, the court also held, for equitable reasons, that the Chapter 7 trustee’s decision to spend funds to pursue Chapter 5 avoidance action recoveries that would benefit only the superpriority claimant would be treated as a carve out from the recoveries before the balance was turned over to that claimant.

In re Trigee Foundation, Inc. (Trigee Foundation, Inc. v. Lerch, Early & Brewer, Chtd.), 2016 Bankr. LEXIS 3456 (Bankr. D. D. Col. 9/23/16). Malpractice claims against bankruptcy counsel must be raised before their fee applications are approved and paid.

The debtor asserted all manner of nonfeasance and bad advice from his bankruptcy counsel that resulted in its being required to accept worse terms to resolve its case than should have occurred – but it did not raise those issues (although known to it at the time) when counsel filed their fee application which was approved without objection. That approval was res judicata of the value of the services when the debtor later filed a malpractice action some two years later.

DMJ Associates, L.L.C. v. Capasso, 2016 U.S. Dist. LEXIS 130083 (E.D. N.Y. 9/22/16). Party did not have prepetition claim where statute under which such right was created did not yet exist, or where the case law did not hold that the right existed.

Although the law (CERCLA) existed as of the confirmation date in 1985, every court of appeals that had decided a case had had that a party situated like the plaintiff here could not bring a private suit to recover its clean-up costs from another private party. It was not until a Supreme Court decision in 2007 issued that found that such a right existed that any party could have contemplated that it did have a right to payment from the debtor. As such, the parties did not have a prepetition claim that could have been discharged under the debtor’s 1985 plan.

In the Matter of Masterson, 2016 Bankr. LEXIS 3283 (Bankr. N.D. Ind. 8/4/16). Reconsideration of claim under Section 502(j).

When the debtor objects to a creditor’s claim, the proper step following the objection is not to file an amended claim. The creditor must either appeal the objection decision or must seek reconsideration under Section 502(j). The court noted that the losing party’s mere disagreement with the merits of the allowance order is not enough to justify reconsideration. The party must first establish “cause” and mere disagreement with the decision on allowance be enough. Nor, would an argument about the amount of the claim that has already been rejected in the state court support a finding that it would be “equitable” to change the amount of the claim.

In re City Sports, Inc., 2016 Bankr. LEXIS 2884 (Bankr. D. Del. 8/4/16). Gift cards do not have priority status as claims.

Massachusetts sought to assert a claim to determine that gift card holders in this case had priority status and to establish a process for recognizing and filing such claims. The bankruptcy court engaged in a lengthy (and not entirely factually correct) review of the history of the provision providing the consumer priority and concluded that, while it may protect lay-away deposits, for instance, it does not protect gift cards because once one has bought the card, one has received what one paid for; i.e., the piece of plastic and a promise to honor it. The state initially planned to appeal the decision but after it was issued, the debtor filed motions indicating it would have no money to pay priority claims in any event, so that the issue would be moot as to these cards. The state has, accordingly, requested that the court vacate the decision because the mootness makes it impossible for the appellate courts to offer relief. They are still awaiting decision on that motion.


In re Berkeley Delaware Court, LLC (Adeli v. Barclay), 2016 U.S. App. LEXIS 15441 (9th Cir. 8/23/16). Settlement of estate claim treated as Section 363 sale, appeal mooted by 363(m).

After the trustee arranged to settle the estate’s claims against one of its largest creditors based on a small amount of cash and the waiver of the creditor’s claims, the court treated the settlement (which included a right to others to overbid the creditor) as a sale of the claims under Section 363. After the court approved the settlement, the debtor’s appeal was rejected as moot under Section 363(m) which bars attempts to overturn good-faith sales that were not stayed before being implemented.

In re Porrett (Porrett v. Hillen), 2016 U.S. Dist. LEXIS 119448 (D. Idaho 9/1/16). Settlement payment received postpetition arising out of prepetition misconduct was property of estate.

Wells Fargo settled charges by the government relating to its overcharging consumers for their mortgage loans with a consent decree with a non-admissions clause. The debtors here were one of the victims and eventually received a restitution payment. None of those facts were known at the time of the debtor’s bankruptcy, but the loan itself that gave rise to the payment was entered into pre-bankruptcy. The court gives a good explanation of what is property of the estate (including the provisions in Section 541(a)(6) and (7) for “proceeds” and “after-acquired” property as a basis for its determination that the status of the payment depended on whether the claim arose pre- or postpetition. The district court agreed with the bankruptcy court that the debtors had acquired a claim when the loan was taken out even though they did not know of the wrongdoing at the time. As such, the claim would be treated as prepetition property of the estate and the subsequent payments qualified as property of the estate under both Section 541(a)(6) and (7). The fact that Wells Fargo had not admitted its wrongdoing was not sufficient to show that no claim existed against Wells Fargo at the time or that the debtor’s right to payment arose from a purely gratuitous decision of Wells Fargo to make payments after the government suits were filed. Rather, the debtors would only obtain the funds if they specifically released Wells Fargo from the alleged violations. The court distinguished a case where it did appear that a defendant had simply chosen to make payments to all potential borrower plaintiffs rather than proceed with litigation and there was no proof of actual wrongdoing or requirement to provide a release.

In re HHH Choices Health Plan, LLC, 2016 Bankr. LEXIS 3091 (Bankr. S.D. N.Y. 2016). Analysis of factors relevant to decision on competing plans to buy non-profit residential continuing care facility.

As part of the BAPCPA amendments, a number of provisions were put in place to ensure that proposals to sell non-profit entities did not disregard existing state law applicable to such sales. This decision is one of the few that actually analyze whether such a sale should be allowed and does so in the fact of two competing proposals: one by a non-profit entity that would maintain (but in a more cost-effective mode) the existing model of residential units combined with health care services for retirees, and the other that would maintain the living facilities but largely terminate the health care services and substitute a payment for the cost of obtaining care. The court began by noting one provision not codified in the Code but contained in the BAPCPA language, namely, Section 1221(e), which states that “Nothing in this section shall be construed to require the [bankruptcy] court to remand or refer any proceeding . . . to any other court or to require the approval of any other court for the transfer of property.” The court read that provision not just as providing it with discretion not to abstain in favor of other courts designated to decide such issues under state law but as an actual bar on referring the matters to such courts. That may be too strong of a reading of the section because it can be read grammatically to simply preserve the bankruptcy court’s discretion on the issue, not to preclude the use of the state courts. In any event, the court does an extensive analysis of what consideration should be given to the views of the different parties in the case – the creditors, the Board of Directors, and the beneficiaries of the non-profit’s mission and how much deference each was entitled to. He noted that the Board had not appeared to give significant weight to considering the interests of the unsecured creditors so he downplayed the deference to which its opinion (in favor of the non-profit) might otherwise be entitled. However, in the end, after concluding that the non-profit’s projections were realistic and could, in the end, pay roughly the same amount as the other bidder and that it would better preserve the non-profit’s mission, he did side with the former’s bid.

In re Flour City Bagels, LLC, 557 B.R. 53 (Bankr. W.D. N.Y. 9/2/16). Section 362 sale not allowed where party conducting sale was too conflicted to adequately assess offers.

The debtor, a franchisee, obtained loans from two lenders to try to renovate its operations. When the debtor defaulted, the junior lender took over control of the business and tried to stem the losses. It made some progress but not enough and stopped making franchise payments which triggered a demand by the franchisor to turn over the operations. The debtor (as directed by the junior lender) filed bankruptcy and sought to sell the business under a Section 363 sale. Two bids were considered – the bid of the junior lender that was primarily a credit bid (using the loan amount owed to the senior lender) with only enough cash included to pay the estimated administrative costs versus a somewhat lower, but all-cash bid by the franchisor. The debtor selected the junior lender’s bid but the bankruptcy court refused to approve the sale. It found the debtor had not produced sufficient evidence of the value of the assets to evaluate the fairness of the sales price, particularly when part of what was being sold were potential claims against the lenders; it was unclear that the cash portion would be sufficient to pay all administrative claims; it was not clear that any exigent circumstances forced a speedy sale; the involvement of the lenders on both sides of the deal precluded a fair consideration of the bids; and there was a lack of disclosure of certain terms (including a proposed “gift” payment to unsecured creditors. The court also found that the debtor’s vague claim that all creditors were subject to one or more conditions under Section 363(f) did not establish that fact – failure of a lender to object was not consent to having its lien disregarded and the sales price was well under the totality of the face value of the liens and no other criteria applied

In re Catton, 2016 Bankr. LEXIS 2953 (Bankr. S.D. Cal. 8/9/16). Application of “cure” provisions to default interest rates after asset sale.

The Code provides in Section 1123(a)(5) that a plan may “cure” any default. The courts are somewhat split as to what that means with respect to default interest rates for interest on secured loans that accrue pre- or postpetition. In Entz-White Lumber & Supply, Inc., 850 F.3d 1338 (9th Cir. 1988), the court held that when a plan “cures” a default, the debtor is entitled to avoid all consequences of the default. That is a very broad statement but, at least read in the context of the case and other decisions, the “cure” must take place at confirmation, not be a long-term payout scenario. In other words, the default prior to and during the plan period is essentially waived, but cannot continue postconfirmation. This case dealt with another scenario, where the cure was effectuated through a preconfirmation asset sale and applied a later decision, General Electric Capital Corp. v. Future Media Productions, Inc., 547 F.3d 956 (9th Cir. 2008). That case held that there was no similar “cure” provision with respect to asset sales so the debtor could not wipe out a default by payments received from such a sale. Here, the court held that the later adoption of a plan that paid some small remaining balances left after the sale (on which the creditor was only charging the normal interest rate) could not be used to require the creditor to disgorge the default interest payments it had already received.


In re Rexford Properties, LLC, 558 B.R. 352 (Bankr. C.D. Cal. 2016). Condition that claimants would do business with debtor on existing terms for one season as condition to being paid 100% at confirmation was sufficient change in conditions to make claims “impaired;” debtor could separately classify at least some trade creditors apart from other unsecured creditors.

As a legal matter, the court held that it could allow separate classification of certain trade claims if the debtor established sufficient business justification for doing so somewhat along the lines of what would justify paying certain critical vendors early in the case. The court held that, at least for classification purposes (as opposed to deciding later whether the plan did not discriminate unfairly) that it would not require proof that the claims were absolutely “necessary” in the sense that the vendor would not continue doing business otherwise, although it did use a fairly stringent standard in analyzing the debtor’s justifications. It also held that the mere requirement for the creditors to continue doing business with the debtor on the same terms in order to be paid was a sufficient change in the creditors’ rights as to constitute them as an impaired class (that could then be the basis for cram down).

In re Yahweh Center, Inc., 2016 Bankr. LEXIS 3525 (Bankr. E.D. N.C. 9/28/16). Court appointed separate committee to represent interests of priority wage claimants.

Where no general creditors’ committee was appointed and where there were some 65 employees with priority claims with little sophistication about how to file or process claims, the court agreed it would be more economical and beneficial for adequate treatment of the interests of those creditors to allow them to form a committee and have a retained attorney to counsel and assist them in the process. The opinion is helpful in recognizing that filing a claim is only the beginning of the process and that small creditors may often need more help (a recognition that is often lacking in dealing with requests for class action status.)

In re Olympic 1401 Elm Associates, LLC, 2016 Bankr. LEXIS 3164 (Bankr. N.D. Tex. 8/26/16). Structured dismissal that respects absolute priority rule and pays all creditors in full was allowed.

Although the topic of “structured dismissals;” i.e., those that provide for various steps to be taken beyond simply dismissing the case, are controversial, this case illustrates an example when such a dismissal is perfectly proper. The debtor sold its assets for more than the amount owed to all creditors, arranged to pay them in full, and resolved its administrative claims. Under those circumstances, there was no reason to require the debtor to go to the time and expense of confirming a plan when all parties were receiving what they would have under such a plan in a shorter period of time with less cost.


In re Gonzalez (Florida Dept. of Revenue v. Gonzalez), 832 F.3d 1251 (11th Cir. 2016). Exception of collection activities for DSOs from automatic stay does not override controlling effect of plan under Section 1327.

While the automatic stay exception in Section 362(b)(2) provides substantial leeway for domestic support obligation creditors up through the date of confirmation, Section 1327 has independent application and requires that creditors follow the terms of the plan after confirmation. Because there are requirements that the plan must pay DSO claims in full and the case may be converted or dismissed if the debtor does not stay current, those provisions should ensure proper treatment of the claims if the creditor reviews the plan to be sure that it follows the law and monitors it thereafter. Accordingly, if the plan provides for full payments, the DSO creditor cannot use other steps to attempt to collect more quickly or from other assets.

In re Curwen (Curwen v. Whiton), 2016 U.S. Dist. LEXIS 114608 (D. Conn. 8/26/16). Chapter “20” debtor may strip off wholly unsecured second lien even where it cannot obtain discharge.

There is a deep split among the courts as to whether the new provisions in Section 1325(a)(5)(B)(i)(I) are meant to preclude the debtor from avoiding the lien of a creditor where the asset values are too low to provide any equity to that creditor – even where it is clear that the debtor cannot obtain a discharge. It has long been settled that a debtor may avoid a wholly unsecured lien in Chapter 13 but the cases here arise in a scenario where the new language added to the Code precludes the debtor from obtaining a Chapter 13 discharge for several years after obtaining a Chapter 7 discharge. The question is whether those cases remain good law where there is language that says a creditor with a “secured claim” must retain its lien unless the debt is paid in full. Some courts read the reference to a “secured claim” in the same way that the Supreme Court did in Dewsnup v. Timm, 502 U.S. 410 (1992) – i.e., any claim for which a security interest exists, regardless of the status of the underlying equity. The growing majority, though, in Chapter 13, read it as only referring to those claims that meet the definition of “secured” in Section 506(a); i.e., those with existing equity. For those courts (and the court here), a claim without equity is not secured at all and, hence, the new limitation is irrelevant.

In re Cochran, 555 B.R. 892 (Bankr. M.D. Ga. 2016). Plan that has periodic payments may still include a balloon payment at the end despite new language about “equal monthly amounts.”

BAPCPA changed the provisions for payment of secured claims and included a provision that if the claim was to be distributed in the form of “periodic payments,” they must be in “equal monthly amounts.” Most courts have read that as prohibiting balloon payments, but the court here held that, at least where the debtor made payments at a level sufficient to provide adequate protection to the creditor (and roughly the same amount paid prior to the bankruptcy), that the plan could provide for such payments for a year at the end of which time, the debtor and his wife would refinance the property and pay off the balance of the loan as a balloon payment. The court found that the plan was feasible and would not prejudice the creditor. It read the statutory language as mandating the structure of the periodic payments but as being simply inapplicable to the issue of whether a balloon payment could also be used. The court held that, as long as the plan was feasible, there was no bar on including a balloon – it is not clear that the court would even require adequate protection payments during the period before a balloon is paid. Thus, under the court’s view, the only purpose served by this provision would be to bar plans from having flexibility to use variable payments over their term, but did mean to allow debtors to still retain the much greater flexibility to use balloon payments, subject only to the need to convince the court that the creditor would not be harmed thereby.

In re Scarver, 2015 Bankr. LEXIS 3112 (Bankr. M.D. Ala. 8/23/16). Debtor may seek to modify plan/reconsider claim under Section 502(j) post-confirmation by surrendering asset and treating deficiency claim as unsecured, even though plan agreed to pay original secured claim in full.

There is a deep split in the courts as to whether debtors may move to modify their plans after confirmation to surrender an asset to the creditor (either voluntarily, or by repossession, or if the asset is destroyed) and then treat any deficiency in payments as an unsecured claim, rather than the secured claim that was promised to be paid in full. While the Sixth Circuit has rejected such an approach (along with two district courts and a number of bankruptcy courts), a somewhat larger group of bankruptcy courts and one district court have concluded that the debtor may do so. Those courts believe that the Sixth Circuit has too narrowly construed the scope of what a modification may do and/or that the court did not give sufficient scope to the power of the debtor to use Section 502(j) to “reconsider” the original allowance of the claim based on the subsequent events in the case (i.e., an accident that totaled the car). The Sixth Circuit held that Section 502(j) was meant to apply to the allowance of a claim, not its reclassification, but the court here viewed the priority status of a claim as part of what was being “allowed” so that it too could be reconsidered. The court viewed any potential abuses by debtors seeking to shift the risk of loss onto the creditor after confirmation as matters to be dealt with in applying the “good faith” requirement for a plan modification.


In re Dubois (Dubois v. Atlas Acquisitions LLC), 2016 U.S. App. LEXIS 15682 (4th Cir. 8/25/16). Filing time-barred proof of claim does not violate Fair Debt Collection Practices Act.

Contributing to an ongoing split in the courts, the Fourth Circuit held that filing a proof of claim for a time-barred debt, while indeed an act to collect on a claim, was not sufficient to establish a violation of the FDCPA. Although a time-barred debt does make the claim subject to disallowance under Section 502(b)(1), the debt does still literally exist (albeit it cannot be enforced under state law), so the claim is not false. Moreover, recent rules changes require more information to be included in the claim form about when the debt was incurred and when the last payment was made (for revolving charge accounts) so that it is relatively simple for the debtor’s counsel or the trustee to determine that a claim is time-barred and objectionable. The court also noted that if a claim were not scheduled (and listed as disputed), it might not be subject to discharge so filing the claim at least definitively resolves the issue. A dissent in the case strongly argued that filing a claim the creditor knew was time-barred (and here the proof of claim admitted as much) has no real purpose except to hope that it will slip through without objection and be paid when there is no legal basis therefor. At best, filing the claim wastes the time of the trustee; at worst, he does not catch the problem and the claim is allowed. The dissent also argued that, if the FDCPA did apply, it should not found to be preempted by the Code (a topic as to which the courts are also split).

Owens v. LVNV Funding, LLC, 2016 U.S. App. LEXIS (7th Cir. 8/10/16). Filing time-barred proof of claim does not violate Fair Debt Collection Practices Act.

This case follows much the same analysis as in Dubois, including having a 2-1 split on the opinion. The one wrinkle in this case is that the court appeared to limit its holding in the case to instances where the debtor is represented by counsel and no significant problems were created by the filing of the stale claims. The majority left open what result might occur if either of those factors did not appear in later cases. The dissent, as in Dubois, saw no reason to protect those filing clearly time-barred claims (as compared to one where a true issue existed).


In re Narnett (Rescia v. Eastern Connecticut State Univ.), 558 B.R. 655 (Bankr. D. Ct. 2016). Abrogation of state immunity in Section 106(a) allows suit under Section 544(b) even if no creditor could sue state outside of bankruptcy.

This is another in a line of cases raising the issue of how to apply the sovereign immunity abrogation in Section 106(a) to the provisions of Section 544(b), which allow the trustee to assert the rights of a creditor that could have sued the debtor under nonbankruptcy law prepetition. There is no dispute that no such creditor does exist but most (but by no means all, with the Seventh Circuit being the most notable exception) courts conclude that the Code simply eliminates that problem even without making any change to Section 544(b). This issue is currently before the Ninth Circuit and may well make its way to the Supreme Court if that court chooses to break with the Seventh Circuit.

In re Greektown Holdings, LLC (Buchwald Capital Advisors, LLC v. Papas), 2016 Bankr. LEXIS 3605 (Bankr. E.D. Mich. 9/29/16). Where held that Indian tribe was not covered by Section 106(a) abrogation, court found no waiver by tribe so as to allow fraudulent transfer suit.

In a prior decision, the district court had held that the reference to “other domestic governments” in Section 106(a) was not sufficient to find that the section was applicable to Indian tribes. The case was remanded to find if there was any other basis to find waiver by the tribe. The court first found that, as a general principle, the tribe’s governing laws precluded waiver by anything other than a tribal resolution. Even if that were not sufficient, the court held that the alleged conduct, which included filing numerous claims, and substantial involvement in the bankruptcy was not enough to create a general waiver so as to allow affirmative litigation. Filing a claim would only be a waiver as to counterclaims directly related to the subject of the claims, which this action was not. Nor did the court find that the arguments that the tribes were so involved with the debtors’ filing that they should be treated as if they had filed the bankruptcy themselves (and therefore broadly waived their own immunity) convincing. The tribes did not themselves file bankruptcy so any waiver caused by the filing would not relate to them in any event.


Deocampo v. Potts, 836 F.3d 1134 (9th Cir. 2016). Section 1983 suit brought against city employees personally did not create liability for city (Vallejo) that could be discharged in its Chapter 9 case.

While some courts have taken a broader view as to the extent that liabilities against third parties can be deemed to be brought into and discharged (or at least released) by a debtor’s case, the Ninth Circuit has always taken a fairly stringent view that Section 524(e) should be read to preclude such third party discharges. See In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995). While Section 524(e) does not literally apply in a Chapter 9 case, the court applied the same logic to find that the judgment against the police officers was not a liability of the city that was discharged under its plan. Rather, the officers themselves had right to indemnity from the city – while that right might normally be a claim that would be subject to the city’s discharge, the court held that under the facts here, the indemnity rights did not arise until the city chose to defend the officers post-confirmation meaning that their claim was not subject to the discharge.

Rosenberg v. DVI Receivables XVII, 2016 U.S. App. LEXIS 15923 (3rd Cir. 8/29/16). Code provision on damages for involuntary petition does not preempt added state law tort claims.

Section 303(i) allows the court to award damages to a debtor that has been the subject of an unsuccessful involuntary petition but does not provide for damages to any other party that might have been injured as well. The court found that the section did not implicitly preclude those parties from relying on a state tortious interference claim. The inclusion of a remedy for debtors was not sufficient to conclude that that remedy was meant to exclude all other remedies under other laws; i.e., the Code did not establish field preemption in this area. The silence of the Code and the Congressional record was not sufficient to show a clear intent to preempt other remedies.

American Insurance Service Co. v .WGIN Enterprises, LLC, 2016 U.S. Dist. LEXIS 131810 (N.D. Ill. 9/27/16). Bad faith to file case solely to impede litigation of primary creditor and dismissal was proper.

While it may be proper to file a bankruptcy case in order to obtain a “breathing spell” from litigation where there are numerous creditors and assets whose value may be preserved, filing a case when there is essentially only one creditor of any significance in order to impede litigation brought by that creditor and the debtor had no other assets or business to preserve does not meet the requirements of good faith. The bankruptcy court did not err in dismissing the case.

Firefighters’ Retirement System v. Citco Group Limited, 2016 U.S. Dist. LEXIS 125991 (M.D. La. 9/15/16). Nationwide service of process allowed if party has minimum contacts with U.S.

Under federal law, if nationwide service of process is authorized, the plaintiff must merely prove that the defendant has sufficient contacts with the United States as a whole to satisfy due process, not necessarily with the state in which the litigation is being brought. A foreign entity may be sued in any state where its affiliations are so “’continuous and systematic’ as to render [it] essentially at home in the forum state.” And, for these purposes again, the “forum state” is the United States as a whole. However, where, as here, the defendant, Grant Thornton International Ltd. (“GTIL”), was merely an umbrella organization headquartered in London with no contacts with the United States or with Louisiana beyond the sole act of maintaining a registered agent, the court held that was not sufficient to allow the exercise of general jurisdiction over GTIL. Nor did the court find that GTIL’s involvement was sufficient for limited jurisdiction over it; rather the allegations were that a subsidiary produced the allegedly deficient reports and GTIL was not involved in their preparation or the operations of the subsidiary. Thus, only the subsidiary could be potentially liable for the suit.

In re Santa Fe Medical Group, LLC, 557 B.R. 223 (D. N.M. 2016). Code does not have general provision allowing for disgorgement of professional fees to ensure equal treatment of others professionals.

The court discusses the theories used by courts in trying to decide whether professionals who are paid early in the case can be required to disgorge some portion of their fees if the estate later becomes administratively insolvent so that other professionals can receive the same proportion of their claim. After analyzing the various approaches, the court sided with those that found, particularly after the decision in Law v. Siegel, 134 S.Ct. 1188 (2014) that, where there was no explicit authorization for such an action in the Code and a number of provisions that arguably would preclude it, the general powers granted in Section 105(a) did not provide adequate support for imposing such a remedy. The court did note that there were a number of remedies a professional could utilize to avoid being left with nothing, most of which involved a closer monitoring of the case and a willingness to move for conversion or other action by the court if the case appeared to be sliding towards insolvency.

In re Enloe, 2016 Bankr. LEXIS 3237 (Bankr. S.D. Tex. 9/1/16). Code does not provide for substantial contribution payment in Chapter 7 cases.

Despite the clear contribution of certain private parties to successfully defeating the debtor’s claim of homestead exemption, they could not receive payment of their attorneys’ fees because Section 503(b)(3)(D) only provides for “substantial contribution” payment in Chapters 9 and 11.

Union Oil Company of Cal. v. Shaffer, 2016 U.S. Dist. LEXIS 103192 (E.D. La. 8/5/16). There is no set order as to which is considered first: remand or transfer; judge did not abuse discretion in deciding issues itself and remanding most of case to state court.

When a case is removed to a district court (and then referred to the bankruptcy court) in a district other than where the bankruptcy is pending, that court must decide whether to transfer the matter to the forum bankruptcy court and let that court decide any remand issues, or whether to make that decision itself. The decisions may be made in either order and are reviewed on an abuse of discretion standard. Where the particular suit will have only minimal impact on the primary bankruptcy, it can be proper for the removal court to make the decision on whether jurisdiction exists first before deciding whether to transfer the case. In this case, where the main litigation was between non-debtor parties, and the only relationship to the debtor was a cross-claim by one of the defendants against the debtor for indemnity, the district court agreed that that litigation was not related to the bankruptcy since is resolution would have no direct effect on the debtor’s case. As to the cross-claim, the district court agreed that the bankruptcy court had not abused its discretion in retaining that single motion to transfer, noting that all of the issues arose under local state law and were matters that had been pending in state court for some time.

In re Chain (Winnecour v. Chaini), 558 B.R. 750 (Bankr. W. D. Pa. 2016). Debtor cannot proceed in two cases simultaneously where same assets are at issue.

A debtor may file a Chapter 7 case and obtain a discharge but the property involved in the case may still remain under the control of the Chapter 7 trustee for an extended period while he seeks to market the assets in the estate, for instance. The debtor cannot thereafter, while the property still remains within the Chapter 7 estate, also seek to file a second, separate Chapter 13 case in which he purports, for instance, to pay off the debts owed on those same assets. While it may not be per se bad faith to maintain two cases where the first case is involved in purely ministerial activities, the courts generally will find that the debtor may not have cases going in two chapters where substantive actions are being taken in both cases with respect to the same assets.

In re Gunboat Int’l, Ltd., 2016 Bankr. LEXIS 2935 (Bankr. E.D. N.C. 8/19/16). Attorney may receive administrative expense for prepetition costs relating to filing of case.

The Code requires a general bankruptcy counsel hired for the case to be “disinterested,” and that term usually requires that one not be a creditor in the case. In addition, administrative expense status is normally only accorded to expenses that accrue after the petition date when they can benefit the estate that is created on that date. Nevertheless, the court here (relying on prior cases) concluded that it could not only allow a firm that had not been fully paid on the petition date to retain its claim for fees but could also treat those fees as administrative expenses as long as they directly related (both temporally and logically) to the preparation and filing of the case. The court here noted that Section 329 gives the court the power to oversee claims for prepetition expenses in contemplation of bankruptcy and viewed that as being sufficient to integrate such claims with the Section 330 provisions for postpetition fees – although the statute does not actually say that. Courts probably adopt this position out of a sense of necessity. If counsel avoided being disinterested by being paid in full before the case began, that would make them subject to an avoidance action which, itself, could again give them an adverse relationship to the debtor. Even if one went to the absurd position of having one firm prepare the petition and a different firm represent the debtor during the case, this would still soon leave debtors with no ability to retain counsel since no one would spend time on a case just to know their fees would either not be paid or would be subject to avoidance as soon as the case was filed. The result is that courts fudge the standards by adopting the approach that Congress should have taken to begin with. (A similar problem arises for Chapter 7 counsel and the courts continue to struggle with how to deal with those payments.)

In re Hernandez (Marr Sanchez & Assoc. v. Hernandez), 2016 Bankr. LEXIS 3044 (Bankr. N.D. Cal. 8/16/16). In rem relief cannot be ordered for the owner of a property (as opposed to a secured creditor).

Prior to the passage of the BAPCPA amendments, the courts fairly routinely granted so-called in rem relief to parties holding an interest in a property that were being thwarted in exercising their rights based upon multiple filings by the debtor(s). Those orders were generally entered in reliance on the court’s authority under Section 105. In the 2005 amendments, Congress added Section 362(d)(4) which explicitly recognized the court’s right to issues such in rem orders, but referred to granting them at the request of a “secured creditor” and for a period of only up to a year. Nothing in the amendment changed the application of Section 105 but this court and a number of others have read the section as implicitly limiting the otherwise broad scope of Section 105 by allowing an in rem order only in the circumstances discussed there. Accordingly, the court held, since the section only mentioned secured creditors, it did not intend to provide any protection for owners of the affected property, no matter how abusive the filings were by the debtor-occupant. This is yet another example where attempting to codify a useful provision turns out to have negative consequences with respect to issues not covered thereby.

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