New Cases - Week of September 26, 2011

New Cases For the Week of September 26, 2011 - September 30, 2011

September 30, 2011
In re Mortgage Lenders Network USA (DBN)	Bankr. DE	A post-confirmation suit by a debtor's ex-employees under State law seeking unpaid wages from the debtor's officers was a non-core matter. The ex-employees had already been paid all that they were going to receive the bankruptcy estate. Thus, the outcome of their lawsuit would have no impact on the bankruptcy.
In re Heller Ehrman LLP (DBN)	Bankr. ND CA	Stern v. Marshall is not the "game changer" it is commonly averred to be. The opinion did not question the pre-existing "recommended findings" procedure in non-core matters. Moreover, because of the narrowness of the holding in Stern, the bankruptcy court remains bound by pre-existing Circuit precedent holding that fraudulent transfer actions are core proceedings.

September 29, 2011

Picard v. Katz
(DBN)

SD NY

Due to the "settlement payment" safe harbor contained in 11 USC 546(e), claims by the Madoff trustee based upon preference or constructive fraud are barred.

Claims for actual fraud are not affected by the safe harbor. Customers' principal cannot be recovered by the trustee (assuming the customers paid such principal in good faith), but customers' profit is subject to avoidance and recovery. "Good faith" in this context (a SIPA proceeding) has a meaning informed by federal securities law. Under securities law, an investor has no inherent duty to inquire about his stockbroker, and SIPA creates no such duty. Thus, the Madoff trustee cannot rely on a"failure to further investigate" theory as a basis for proving lack of good faith. Instead, the trustee must prove "willful blindness" which is a subjective standard rather than an objective standard.

The court does not decide whether the trustee can avoid as profits only what defendants received in excess of their investment during the two year look back period specified by section 548 or instead the excess they received over the course of their investment with Madoff.

The trustee's claim seeking to disallow investor claims is also colored by SIPA law. Under general bankruptcy la, a claim held by the recipient of an avoidable transfer is disallowed until the avoidable transfer is repaid, SIPA allows pursuit of claims by recipients of voidable transfers. SIPA does not however, modify the equitable subordination section of the Bankruptcy Code, and investor claims are subject to equitable subordination to other claims upon proper proof.

September 27, 2011
In re USHC, LLC (DBN)	Bankr. WD KY	Only "rare cases" justify departure from the professional fee application process contained in the Bankruptcy Code. Counsel for a Ch. 11 debtor who sought a $2,000/month post-petition security retainer failed to demonstrate that the case was such a "rare case," and the post-petition security retainer was denied.
In re Zais Investment Grade Limited VII (DBN)	Bankr. NJ	Junior noteholders can't contest an involuntary petition filed by senior noteholders that the debtor itself didn't contest.
In re Renew Energy LLC (DBN)	Bankr WD WI	When a forward contract matures in order to invoke the §546(e) safe harbor exception to avoidance actions.

September 26, 2011

In The Matter Of American Rice, Inc.
(DBN)

5th Cir.

A creditor entered into a post-confirmation contract with a commercial corporate debtor in which the debtor agreed to pay pre-petition debts in exchange for the creditor agreeing to not pursue collection of a pre-petition judgment against an affiliate of the debtor which had not filed bankruptcy. . When the debtor did not pay, the creditor sued in State court for $18 million. The bankruptcy was reopened and the debtor defended by asserting that the contract was a reaffirmation agreement and the creditor had not complied with 11 USC 524.

The bankruptcy court did not err in finding that the post-confirmation contract was unenforceable due to the creditor's non-compliance with section 524. The creditor argued that the post-confirmation contract was supported by "new and independent" consideration (i.e., not merely the repayment of a discharged debt). The Circuit Court finds that there is no "new and independent consideration" exception to the reaffirmation rules. If a contract involves the repayment of any part of discharged debt, it must comply with section 524.