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The ever-changing world of bankruptcy caselaw.

AS THE MAIN FOCUS OF MOST CREDIT executives is upon the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), one must still remember that a great deal of caselaw is being generated from those bankruptcy cases in existence prior to October 17, 2005 (the general effective date of the BAPCPA). This article will discuss some of the areas of interest, mixing the old with the new, separated by topics.

Preferences

In re SGM Acquisition Co., February 2006--This case will remain meaningful whether a creditor is defending a preference under the pre-BAPCPA statute or under the BAPCPA. The Bankruptcy Court ruled against the creditor in this instance and the United States District Court affirmed the Bankruptcy Court's decision. The reason why this case will remain meaningful is because the courts focused upon the "subjective" prong of the "ordinary course of business defense". The majority of creditors will most likely use this subjective prong in the future, now that the BAPCPA gives the creditor the choice between the "objective" and "subjective" prong. Judge Jones noted that there was nothing unusual or extraordinary about the payments made during the preference period--i.e, there were "no extra charges or penalties within the preference period other than the payments being somewhat delayed." Nevertheless, in comparing the average payment internals during and prior to the preference period, there was a discrepancy such that the preference period payments could not be accepted as "ordinary".

In re 360networks (USA) Inc., et al., December 2005--Although the SGM case followed 360networks, the facts lead to a different conclusion. In 360networks, the court found that pressure was exerted upon the debtor to induce payments to be made; payments were required to be made by wire transfer rather than by checks, which would have been consistent with prior practice; and the debtor was threatened that certain customary advances would not be made unless payments were received. These factors were clear evidence that the payments made were not "ordinary", even though the timing of the payments was consistent with pre-preference period payments.

In re The Electron Corp., January 2006, is relevant to those in the construction industry. This decision reaffirms prior court decisions stating that where a creditor gets paid at a time when it was eligible to file a lien (in this case a materialman's lien), then the payment did not give the creditor more than it would have received if there was no bankruptcy. That being the case, the creditor did not receive a preference payment when it received payment for goods and services that it had rendered to real property owned by the debtor.

In re Amherst Technologies, January 2006--Although this case is not a true "preference" case, it is interesting for the manner in which a potential preference action comes into play. In this instance, there was an election for a permanent chapter 7 trustee. The totality of unsecured claims in the case approximated $22 million. One unsecured creditor who sought to vote at the trustee's election was disqualified from doing so. That creditor had received $4.2 million in preferences from the debtor. The court found that the creditors' preferential receipts was material, and that because of this substantial and material interest which the creditor had, that creditor should be disqualified from voting for the very trustee who would be investigating preferential transfers.

Involuntary Petitions In Bankruptcy

The BAPCPA has changed an important section pertaining to the commencement of an involuntary petition in bankruptcy. 11 U.S.C. [section] 303(b)(1) now states that an involuntary case may be commenced "by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $12,300 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims."

This change may seem simplistic enough, but has already resulted in case law--not just at the Bankruptcy Court level, but also at the Circuit Court of Appeals level.

In re Dilley, March 2006--This case was first heard and decided in the Bankruptcy Court in Maine in September 2005. An involuntary debtor moved to dismiss the chapter 7 petition filed against him on the ground that the petitioning creditors were subject to a bona fide dispute both as to liability and as to amount. Although the involuntary debtor admitted that he had shot his wife and his children's mother in their presence, his subsequent "not guilty plea to murder charge" established that there was a bona fide dispute as to the liability and amount of the claims of the petitioning creditors. The claims were for "intentional infliction of emotional distress, support and personal injury" and for "wrongful death and maintenance contributions". Judge Kornreich found that the debtor's "not-guilty" plea "establishes a contest to be resolved in the criminal court." The court dismissed the involuntary petition. The case was immediately appealed to the Bankruptcy Appellate Panel for the First Circuit Court of Appeals, who found that the bankruptcy court "was incorrect in determining that the 'plea outweighs the debtor's crime scene admission for present purposes because it establishes a contest to be resolved in the criminal court.'" The BAP found that "the plea, standing alone, is akin to a mere denial" and insufficient to knock out the petitioner's claims that supported the involuntary petition.

Mechanics' Liens And Automatic Stays

In a unique and seemingly illogical twist to a proper reading of the statute, the Bankruptcy Court in South Carolina held that permission of the Bankruptcy Court had to be obtained prior to enforcing a mechanics' lien against non-bankruptcy estate property.

In In re Rogers & Son Construction, Inc., February 2006, the debtor had absolutely no ownership interest in real property, which was the subject of various mechanics' liens. However, the debtor had been the general contractor in connection with the improvements upon that real property. The court found that in order to enforce any mechanics' liens against that real property, the debtor had to be part of that state court proceeding to enforce those liens. The reasoning of the court was that "1) there is no independent promise to pay by the property owner; 2) there is an aggregate limit and the owner cannot be compelled to pay twice; and 3) the general contractor may have defenses or set-offs the owner does not have." Accordingly, the court held that the lienors had to move for and obtain permission of the Bankruptcy Court to lift the automatic stay before any lien could be enforced against the non-estate property.

While this decision is unique and certainly in the minority, mechanics' lien holders must be wary of moving against property if a "necessary party" to the lien enforcement is in bankruptcy.

Creditors' Committees New Responsibilities Under BAPCPA

For credit executives who have the opportunity to take a seat on a Creditors' Committee, this is one area that has been the source for much concern and has yielded substantial and substantive caselaw on this issue. The following is the leading case dealing with this issue. Many others have followed suit either by court-ordered stipulation or upon an order granting the motion of a creditors' committee. Several of the other cases dealing with this issue will be discussed at this years Credit Congress and information on the various decisions will be included in the Credit Congress materials. Section 1102(b)(3) now states:

"A committee appointed under subsection (a) shall-(A) provide access to information for creditors who-(i) hold claims of the kind represented by that committee; and (ii) are not appointed to the committee; and (B) solicit and receive comments from the creditors described in subparagraph (A); and (C) be subject to a court order that compels any additional report or disclosure to be made to the creditors described in subparagraph (A)."

In re Refco, December 2005--While this was not the first decision on this point, Refco has become recognized as the leading case settling much of the discomfort arising from the new Creditors' Committees' Responsibilities. The Refco decision established three specific points by which the Creditors' Committee would provide access to creditor information. Those three points are:

a) Establish and maintain an Internet-accessed website that will provide various information (specifically delineated by the Refco court)

b) Distribute case updates via electronic mail for creditors that have registered for this service on the Committee website

c) Establish and maintain a telephone number and electronic mail address for creditors to submit questions and comments

To fulfill that criteria, the specific delineations set forth by the Refco court for the various information to be provided on the Committee website are twelve-fold:

(1) general information concerning the chapter 11 cases of Refco Inc. and its affiliated debtors (collectively, the "Debtors"), including case dockets, access to docket filings and general information concerning significant parties in the cases;

(2) monthly Committee-written reports summarizing recent proceedings, events and public financial information;

(3) highlights of significant events in the cases;

(4) a calendar with upcoming significant events in the cases;

(5) access to the claims docket as and when established by the Debtors or any claim agent retained in the cases;

(6) a general overview of the chapter 11 process;

(7) press releases (if any) issued by each of the Committee and the Debtors;

(8) a non-public registration form for creditors to request "real-time" case updates via electronic mail;

(9) a non-public form to submit creditor questions, comments and requests for access to information;

(10) responses to creditor questions, comments and requests for access to information; provided that the Committee may privately provide such responses in the exercise of its reasonable discretion, including in the light of the nature of the information request and the creditor's agreements to appropriate confidentiality and trading constraints;

(11) answers to frequently asked questions; and

(12) links to other relevant websites.

Homestead Exemptions--Most credit executives hear these words and immediately presume that this is only for creditors dealing with consumers; this is incorrect. Any credit grantor dealing with an individual sole proprietor, a personal guarantor or, in the case of the construction industry, any individual owner of real property on which there is an improvement which gives rights to a mechanic lienor, must be aware of the law changes under the BAPCPA regarding Homestead Exemptions. These law changes may yield a significant benefit for these credit grantors.

Most courts are now in agreement that the new Homestead Exemption law applies in every state. The major change to the homestead law states:

[section] 522(p)(1) Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in--

(A) real or personal property that the debtor or a dependent of the debtor uses as a residence;

(B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;

(C) a burial plot for the debtor or a dependent of the debtor; or

(D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

In re McNabb, Arizona, June 2005--Judge Haines held that the Debtor was not limited to the new homestead exemption cap of $125,000, finding that the statutory cap "applies only "as a result of electing". Where there is no election, the cap cannot be the result. Because Arizona is an opt-out state that does not permit debtors to make any elections of which exemptions to claim, the $125,000 cap of Code [section] 522(p) is not implicated."

In re Kaplan, Florida, October 2005--Chief Judge Mark strongly disagreed with the McNabb decision, finding that the language of the statute is unambiguous and that "there is absolutely no doubt that the statute was intended to apply in all states, including Florida, ..." Judge Mark recognized that "Florida's unlimited homestead was at the heart of the legislative debate." He determined that the homestead limitation is applicable to chapter 7 debtors filing and residing in Florida.

In re Wayrynen, Florida, October 2005--Judge Friedman agreed the homestead exemption cap was "clearly intended ... to apply to all debtors." However, in that the debtor had purchased his original Florida residence in 1989, 5,824 days prior to his chapter 7 proceeding, Judge Friedman found that the ownership of this previous residence in the same state applied to completely exempt Wayrynen's current residence from the BAPCPA limitations.

In re Maronde, Minnesota, November 2005--Unlike the McNabb and Kaplan decisions, this opinion addresses the limitation under [section] 522(o), imposed when non-exempt assets are used to increase the value of the homestead. The court found that the debtor "transformed non-exempt assets into exempt assets within the time period provided and with the requisite intent to hinder, delay, and defraud his creditors," and therefore denied his claim for a homestead exemption of that transferred amount.

In re Blair, Texas, November 2005--An unsecured creditor filed an objection to the debtors' claim of exemption in their homestead asserting that "any and all interest that the debtors acquired" during the 1215 days prior to the petition date and which exceeds $125,000 could not be exempt. The court found the debtors' had acquired their title and fee interest in their home about one year prior to the beginning of the 1215-day period, even though they continued to build the actual equity in their home during the 1215-day period. The court differentiated between title and equity, and allowed the complete homestead exemption.

Summary

New decisions come down every day on old aspects of the Bankruptcy Code as well as new changes under the BAPCPA. Credit executives must be ever on the alert for what each day may yield.

Wanda Borges, Esq. is a member of Borges & Associates, LLC. She is also a member of the Commercial Law League of America and the American Bankruptcy Institute. She can be reached at borgeslawfirm@aol.com.
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Author:Borges, Wanda
Publication:Business Credit
Article Type:Cover story
Date:May 1, 2006
Words:2394
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