First Ever Young Lawyers Blogging Contest

The CLLA Bankruptcy Blog announces the first ever young lawyers' blogging contest.    The contest is intended to encourage younger members of the League to show off their writing talents and up their involvement in League activities.    According to CLLA Bankruptcy Blog editor Steve Sather, "Young members have grown up with blogging and social media so this should be a natural fit for them."  

Third Circuit Upholds Secured Creditor's "Gift" to Unsecured Creditors in Process Pioneered by CLLA Leader

By Louis Robin

Law Offices of Louis S. Robin

Longmeadow, MA

            The Third Circuit recently entered a decision regarding sales of assets and payment of funds to unsecured creditors over other priority creditors.  It provides additional support for these sales, and enhances the possibility of unsecured creditors gleaning some return for its claims in an otherwise hopeless situation.  It also has some personal significance for me and others as it forces us to revisit an old friend of the CLLA who recently passed. 

            In In re ICL Holding Company, Inc. No. 14-2709, (3rd Cir. 9/14/15), the Third Circuit reviewed the decision of the Bankruptcy Court approving a sale for substantially all the debtor's assets for $320 million to the secured creditor who was owed at least $350 million (the purchase was a credit bid).  There were two objections: first, by the creditors' committee which was resolved when it agreed to accept $3.5 million to be paid into a trust for the benefit of unsecured creditors; and, second, by the U.S. Government which maintained that the funds being paid to the unsecured creditors avoided the priority position of the IRS as the IRS was entitled to an administrative claim based upon capital gains incurred as a result of the sale. 

            There were various technical and substantive arguments made and discussed.  In short, the Third Circuit, after resolving the technical arguments, resolved the substantive issues by relying on the structure of the payment to the trust for the benefit of unsecured creditors – these funds were from the secured creditor, not the bankruptcy estate.

            This case provides a path for unsecured creditors in otherwise hopelessly under-secured cases.  True, the amount may be minor – I would estimate the return in ICL could be less than 5% (and maybe less) – I have had two such cases in the past, one with a dividend of less than 5% and one that may have exceeded 40%.  The later I would consider an anomaly, although garnering anything should be considered a small victory in such cases.

            In the First Circuit, these cases are common.  They were pioneered by Eugene Berman, a past president of the CLLA, in In re SPM Manufacturing Corp., 984 F.2d 1305 (1^st Cir. 1993).  This was a novel concept, accepted by no courts at the time.  Indeed, the Bankruptcy Court and District Court rejected the proposed distribution scheme, which made the Circuit Court decision even more of an accomplishment.  Eugene passed away on September 14, 2015, the day that the Third Circuit issued its decision.  Eugene would have taken great pride that the Third Circuit adopted the concept and procedure that he spearheaded.

            Eugene was an attorney with an immense personality and perseverance.  He accumulated many accomplishments as a creditors’ attorney and as a leader in the CLLA.  Over the years I have heard many accolades for him, although it should not be ignored that he had his share of detractors (something he would have taken pride in also). 

            I understand that Eugene last words were “Massachusetts should enact a judicial foreclosure statute, and that they should name it the 'Eugene Berman Judicial Foreclosure Act'”.  That Eugene, anew, focused on this new issue in the last seven years speaks volumes for his intellect, perspective, and personality.  And I understand that this issue is not over in the Commonwealth of Massachusetts, as some will continue this fight – I hope that I (with my debtor's counsel's hat on) can provide some assistance, although I would add that there is much for both sides to work together to benefit debtors, mortgage holders, and commerce if both sides take a fresh perspective.

Does A U.S. Bankruptcy Court Have Jurisdiction Over a Beis Din, or Jewish Religious Court?

By Michael R. King

Gammage & Burnham, P.C.

Phoenix, AZ

 

QUESTION:  DOES A U.S. BANKRUPTCY COURT HAVE JURISDICTION OVER A BEIS DIN, OR JEWISH RELIGIOUS COURT?

ANSWER:         AT LEAST IN THIS VELT, THE BANKRUPTCY COURT HAS ASSERTED ITS JURISDICTION OVER A BEIS DIN RELIGIOUS
COURT.

Would a Bankruptcy Judge really have the chutzpah to enjoin a Jewish Rabbinical Court and issue sanctions against it?

Congregation Birchos Yosef filed a Chapter 11 reorganization bankruptcy. In re: Congregation Birchos Yosef, Case No. 15-22254 (Bankr. S.D.N.Y.). After filing the Chapter 11 petition, Congregation Birchos Yosef filed an adversary lawsuit in bankruptcy court against Bais Chinuch L'Bonois, Inc. ("Bais Chinuch") and others alleging claims for fraud, breach of fiduciary duty and "looting" of assets of Congregation Birchos Yosef.

Religious Proceeding Violates Automatic Stay

By Jeff Sayer

Scorpion Legal Services, LLC

Roswell, GA

 

The Honorable Robert Drain of the United States Bankruptcy Court for the Southern District of New York issued an opinion on August 24, 2015 in a case which raised a conflict between bankruptcy law and Jewish religious proceedings.

In In re: Congregation Birchos Yosef, the Debtor was a debtor in possession of a Jewish School in a case filed under Chapter 11. The issue arose when the Debtor asserted an adversary proceeding against Bais Chinuch L’Bonois (“Bais”), another Jewish School asserting claims of breach of fiduciary duty and looting of the Debtor’s assets. Upon the filing of the adversary proceeding, Bais invoked a religious proceeding to hear the case, in which a Jewish religious court, a Beis Din, would allow the principals of the Debtor to dispute the charges brought by the Bais. If the principals of the Debtor did not participate in the Jewish court hearing, the result would be at a minimum a shunning by their religious community, a Sirov, and potentially all Orthodox Jews. 

The Million Dollar Typo

By Michael R. King

Gammage & Burnham

Phoenix, AZ

QUESTION:    HOW DID THE BANK LOSE OVER $1 MILLION WORTH OF COLLATERAL DUE TO A PETTY TYPOGRAPHICAL ERROR? ANSWER:  A BANKRUPTCY TRUSTEE ACTS AS A HYPOTHETICAL SECURED CREDITOR THAT CAN IGNORE THE REALITIES OF THE FACTS! What a difference two days makes! The State Bank of Toulon lost its collateral securing a loan of $1,100,000 because its security agreement had the number “13” for a date instead of the number “15.”  Really!  David L. Duckworth borrowed $1.1 million from the State Bank of Toulon (the “Bank”) on December 15, 2008.  The loan transaction was documented with a promissory note dated and signed on December 15, 2008.  The document creating the lien against the collateral was an Agricultural Security Agreement (“Security Agreement”) dated December 13, 2008.  The Security Agreement granted a security interest in crops and farm equipment belonging to Mr. Duckworth.  In re Duckworth, 776 F.3d 453 (7th Cir., 2014)

Three Recent Supreme Court Cases--None Concerning Jurisdiction

By Louis S. Robin

Law Offices of Louis S. Robin

Longmeadow, MA 

As we return from our summer respites (if any of us consider the few moments we may be able to steal as a summer respite), some discussion of three recent Supreme Court cases might quicken our return to our the struggles we endure in our legal practices.  They may have some effect on our practices.  I will also provide some suggestions and comments.

Harris v. Viegelahn

            This case provides guidance regarding payments (usually based upon earnings) to a Chapter 13 trustee for the plan but not yet distributed, followed by the Chapter 13 case being converted to Chapter 7.  I would suggest similar guidance applies to Chapter 13 cases which have been dismissed (a circumstance that is unfortunately common). 

Debtor Not Allowed to Claim Exemption on Proceeds Created By Trustee's Carve-out Agreement

By Beau Hays

Hays, Potter & Martin, LLP

Peachtree Corners, GA

Judge Margaret Murphy of the Bankruptcy Court for the Northern District of Georgia recently handed down a victory for Trustees (and creditors) in a case involving a carve-out negotiated with secured lenders to allow for a short sale and create a fund for unsecured creditors. In re Diener,  No. 11-83085-MHM (Bankr. N.D.Ga. 7/6/15; docket #88) The Opinion can be found here.

 What Happened

Debtors filed Chapter 7 case with three security deeds on their home, totaling about $350,000.00.  As everyone acknowledged that the property was underwater, the Trustee sought to negotiate a carve-out with Wells Fargo, holder of the second- and third-priority liens on the house, offering to pay $9,000.00 in satisfaction of the second and third positions in exchange for finding a buyer and keeping the property from being foreclosed by the first mortgage holder.  A buyer was eventually found at market value; the first lien was paid off, Wells Fargo got its $9,000 and the balance was paid to the Trustee – allowing the Trustee to pay administrative expenses in the case and ultimately providing for about $6000 to go to the unsecured creditor pool.