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New Cases For the Week of February 25, 2018 - March 1, 2019

Older case summaries can be accessed by clicking here


February 25, 2019
In Re: Nicole Gas Production, Ltd.
6th Cir.

In a complicated contempt proceeding implicating the intersection of: (i) derivative corporate law, (ii) the automatic stay and (iii) state RICO law, the court finds that the sole shareholder of the debtor, dissatisfied with the trustee's handling of estate claims, violated the automatic stay by pursuing state court litigation against competitors who allegedly put the debtor out of business. The court rejects the argument that language in the state RICO statute creates individual standing and eliminates traditional distinctions between "individual" and derivative" claims:

The precise language of the Ohio Corrupt Practices Act is the complicating factor here. The Appellants claim that the wording of the statute converts a derivative shareholder action to an individual claim because it provides a private right of action for “any person directly or indirectly injured by conduct” violating the Act. Ohio Rev. Code § 2923.34. As the sole shareholder of Nicole Gas, normally Fulson would have to seek relief from Nicole Gas’s competitors via the traditional route of derivative liability. But, his successors argue, the Corrupt Practices Act means both (a) that he did not have to pursue a derivative claim at all, and (b) that thus, the bankruptcy Trustee did not have the right to exercise control over the claim. If Fulson’s successors are right, and the claim against Nicole Gas’s competitors can be alleged outside of corporate law and via the Corrupt Practices Act, then they did not violate the automatic stay. Thus, the basis for the Contempt and Fee Orders would disappear. We shall see in due course that they are wrong. In agreement with the persuasively reasoned decisions below, both in the Bankruptcy Court and the Bankruptcy Appellate Panel, we AFFIRM.
In Re: Hampton Ventures, LLC
Bankr. CT

The court finds that the "bona fide dispute" exception in 11 USC 363(f)(4) does not trump the fundamental requirement that property must be "property of the estate" in a free and clear sale. The issue of the estate's interest must be decided in an adversary proceeding (eg., not in the sale approval hearing) before a sale can occur:

11 U.S.C. § 363(b)(1) makes clear that the Trustee may only sell “property of the estate[.]” Section 363(f)(4) allows a sale free and clear of another entity’s interest in property of the estate if “such interest is in bona fide dispute” but § 363(f) explicitly subjects itself to § 363(b). Therefore, the threshold question this Court faces is not whether the Property is subject to a bona fide dispute but whether it is even property of the estate at all. In answering that question, the Court aligns with the decisions of this Court made by Judge Krechevsky in In re Claywell, 341 B.R. 396 (Bankr. D. Conn. 2006) and Judge Weil in In re Interiors of Yesterday, LLC, 2007 WL 419646 (Bankr. D. Conn. 2007) and their progeny. Contrary to the Trustee’s assertions, such a determination does not write § 363(f)(4) out of the statute because, as noted by the Trustee, a different sale could take place if a bona fide dispute does not call into question whether the estate has any interest in the first place, such as where there are joint tenants, tenants in common, tenants by the entirety, or various liens. The Trustee’s argument that he should be able to sell his legal interest in the Property without the equitable interest is unpersuasive because such an interest may actually be worthless.
In Re: Duensing
Bankr. KS

The court approves a procedure which enables student loan debtors to mitigate the amount of accruing post-petition interest they will owe upon completion of a plan.

In a Ch. 12 case with student loan debts, the court rejects a challenge to a provision of the debtor's plan requiring that all payments on the student debt be applied to principal. Although student debt cannot ordinarily be discharged, it can be modified:

ECMC objects to debtors’ directing application of their payments to the claim instead of post-petition interest.18 ECMC argues that the HEA and related regulations govern how payments are to be applied and that those rules supersede conflicting plan provisions in the Bankruptcy Code. Specifically, ECMC relies on its role as guarantor under the FFELP, the HEA, 20 U.S.C. § 1070 et seq., and the Department of Education regulations, specifically 34 C.F.R. 682.404(f) and 682.209(b). ECMC also argues that applying plan payments to principal first effectively discharges student loan debt without a finding of undue hardship. This argument is based on the arithmetic fact that a declining principal balance during the payment term will yield less interest accruing post-petition.

* * *

[S]tudent loan creditors are no different from other unsecured creditors in that they cannot include unmatured or post-petition interest in their allowed claim.20 Chapter 12 and 13 debtors are not required to pay interest on general unsecured claims. Chapter 12 and 13 debtors may only provide for paying post-petition interest on student loan claims if they have sufficient disposable income after paying all other allowed claims in full. Because student loans are excepted from discharge, the debtors will remain personally liable for paying any post-petition interest that accrues during the pendency of the case, even if the principal portion of a non-dischargeable debt is paid in full under the plan. That interest remains a personal liability of the debtor that the student loan lender can collect after the bankruptcy case is completed.

* * *

ECMC argues that the student loan regulations [allowing payments to be applied first to late charges and interest] control how student loan payments should be applied, even in bankruptcy cases, and that non-bankruptcy student loan law and regulations trump the Bankruptcy Code. While federal regulations may have the same preemptive effect as federal statutes, traditional preemption analysis, having its roots in the Supremacy Clause, applies where state law conflicts with federal law. It doesn’t apply where two federal statutes appear to be in conflict.

There is no express conflict between the student loan regulations and the Bankruptcy Code or the debtors’ Chapter 12 plan. First, the lender’s and borrower’s substantive rights arise out of the Notes which are, in turn, subject to the HEA and the regulations.29 This is no different than any other lender-borrower relationship: its parameters are governed by the parties’ contract (the notes, etc.) and the governing law. Second, the lender’s application of payments is permissive in nature.30 Third, the regulations expressly permit prepayment of any part of a loan (i.e. the principal) without penalty. Fourth, the terms of the Notes specifically refer to “other applicable federal statutes.”31 The Bankruptcy Code is an “applicable federal statute” that expressly permits any debtor, including one with student loans, to modify the terms of repayment of the student loan obligation. Section 1222(b)(2) allows debtors to modify unsecured claims through their Chapter 12 plan and nothing in the Code insulates student loan claims from that treatment. The Bankruptcy Code controls the substantive rights of debtors and creditors with respect to claims and their treatment, including student loan claims in bankruptcy plans, cases and proceedings.

Courts are not free to enforce one congressional enactment to the exclusion of another. If two statutes can coexist, and Congress has expressed no intention to the contrary, it is the duty of the courts to regard each as effective. Here, the student loan regulations and the bankruptcy statute coexist comfortably. The regulations deal with general servicing concerns while the Code regulates the allowance and modification of the claims in bankruptcy and insulates the debts themselves from being discharged.

The court rejects the debtors' "creative" proposal to create a creditors' trust through a final distribution under their plan to continue creditor payments beyond the five-year period specified in 11 USC 1222(c).

In Re: Living Benefits Asset Management, L.L.C.
5th Cir. The bankruptcy court did not err in finding that an adviser (the debtor) which provided pre-petition services to a business that wanted to purchase and then sell viatical contracts: (i) performed the services (valued at &900,000 under the contract ) but (ii) was also an "investment adviser" in this context. Because the debtor was not registered as an investment adviser, the contract was void and no money is owed.
In Re: Netversant Solutions III, LLC
Bankr. MA In a proceeding to approve a compromise between: (i) the estate and (ii) an owner whose property became encumbered by mechanics liens as a result of the debtor's pre-petition failure to pay subcontractors, the debtor's largest secured creditor objected, arguing that the subcontractors who would be paid from the sale (at a substantial discount) were unsecured creditors who should not receive any funds before the secured creditor. The court approves the compromise as within the range of reasonableness. The court notes that although the views of the largest creditor are entitled to some weight, so is the trustee's business judgment, especially since the trustee has pending substantial litigation against the creditor.
In Re: Van Winkle
Bankr. NM On remand in a discharge violation proceeding (after the BAP found that the bankruptcy court erred in finding that real property redeemed post-discharge vests free of a prior lien - per the BAP, the lien reattaches), the bankruptcy court finds that although the creditor did not violate the discharge injunction, the creditor did violate a prior stipulated order, warranting actual and punitive damages.
In Re: Batten
Bankr. ED NC

In a claim objection proceeding concerning a mortgage claim which the debtors had not paid in over 10 years, the court rejects a limitations challenge to the claim. The 10-year limitations period cited by the debtors applies only to in personam actions against the borrower. State court precedent rejects the notion that such a stale in personam debt bars in rem enforcement.

The court notes that there is a different 10-year limitations period for foreclousure of the mortgage, but that period runs from the date of acceleration. In this motion to dismiss context, the court refuses to assume that a default notice sent more than 10 years ago stating that the lender "may accelerate" means that the lender did in fact accelerate at that time.

In Re: Runnymeade Capital Management, Inc.
Bankr. WD VA

In avoidance litigation against a bank used by a financial adviser who misappropriated funds from a client, the court finds that the Ch. 7 trustee (of a company used by the adviser as an intermediary to funnel the money from the client and then loot the company) has plausibly pled claims against the bank used by the adviser:

The Trustee describes facts showing fraud and deception. The complaint pleads that Runnymede made the transfers with an intent to defraud Mrs. Kinder while SunTrust was on notice of such intent and that certain facts should have prompted an investigation. The complaint describes that SunTrust and its agent, Mr. Du Bose, reviewed and knew the sources of income and other financial information of Mr. Dandridge and his companies. . Specifically, SunTrust knew that Mr. Dandridge had no regular source of income and that Timberlake was making no money. While acknowledging Mrs. Kinder's beneficial interest, SunTrust knew that Mrs. Kinder was the source of the transfers into the Runnymede account and knew that most of the Runnymede Transfers Out went to other entities indebted to the bank, mostly to Mr. Dandridge as his "income" but also to the companies he owned. These facts show that Mr. Dandridge was using Mrs. Kinder's assets to pay his and his entities' debts to SunTrust, instead of investing or safeguarding Mrs. Kinder's savings. The Trustee pleads that these facts should have prompted SunTrust to investigate. The Trustee pleads based on these facts, that SunTrust was on notice of Mr. Dandridge and Runnymede's intent to defraud Mrs. Kinder.

SunTrust watched as funds from Mrs. Kinder came into the Runnymede account and then were rather quickly diverted for Mr. Dandridge's personal use. SunTrust knew or should have known that such activity out of the Runnymede account was not usual for the purported business purposes of Runnymede, particularly in light of the hundreds of thousands of dollars paid to SunTrust from these funds for the sole benefit of Mr. Dandridge and his companies, all indebted to SunTrust.

The court rejects the bank's argument that there was no "transfer" when funds were deposited in accounts at the bank. The court distinguishes precedent holding that a debtor's deposit of his own funds into his own bank account is not a "transfer." The bank here was not acting solely in the role of a simple depositary institution:

SunTrust insists it is not a transferee of the deposits described in the complaint. SunTrust primarily relies upon the Fourth Circuit's ruling in Ivey v. First Citizens Bank & Trust Co. (In re Whitley), 848 F.3d 205 (4th Cir. 2017), to argue that the transactions described in the complaint do not qualify as "transfers" for purposes of the Trustee's avoidance actions.

* * *

Upon reviewing the case law, the Fourth Circuit was "persuaded . . . that the better interpretation of 'transfer' does not include a debtor's regular deposits into his own unrestricted checking account." The Fourth Circuit emphasized that when Mr. Whitley (the debtor) made deposits and accepted wire transfers into his personal bank account, "he continued to possess, control, and have custody over those funds, which were freely withdrawable at his will."

* * *

Other Circuits have likewise recognized the concept that deposits into one's "own unrestricted checking account in the regular course of business" are not transfers to the depository institution holding that account.

* * *

If the Trustee only sought to avoid the debtor's deposits into its own unrestricted bank account held by SunTrust, then SunTrust's objection may be well taken. If it was acting as a mere depository institution, SunTrust may not be a "transferee" of the deposits. But the Trustee's complaint alleges more. The Trustee sets forth facts in the complaint revealing that SunTrust was more than a mere depository institution. For example, the Trustee alleges: (1) SunTrust entered into a Commercial Note with Mr. Dandridge; (2) under the Commercial Note, SunTrust obtained a security interest in "all deposits and investments of" Mr. Dandridge; (3) SunTrust made loans to Mr. Dandridge's related entities, and those entities opened bank accounts with SunTrust; (4) Runnymede transferred Mrs. Kinder's funds to Mr. Dandridge's bank accounts; (5) an interest in the funds passed from Runnymede to SunTrust upon their deposit into Mr. Dandridge's bank account; (6) Runnymede transferred Mrs. Kinder's funds to Mr. Dandridge and also transferred her funds to his related entities' bank accounts at SunTrust while each entity was indebted to SunTrust; and (7) these funds were ultimately transferred to SunTrust for payment of SunTrust loans. These allegations illustrate more than transfers from Runnymede into its own unrestricted bank accounts at SunTrust.

In Re: Lettie
Bankr. ED WI

Noting a split of authority, the court finds that in a converted Ch.13 case where the debtors where unable to confirm a plan (here, due to a house fire) Ch. 13 debtors' counsel is not entitled to payment from the Ch. 13 trustee from funds on hand; the funds should be returned to the debtor:

This Court agrees with the growing majority that Harris applies equally to cases converted from Chapter 13 to Chapter 7 after confirmation and prior to confirmation. To adopt the reasoning of Brandon and rely on section 1326(a)(2) to allow payment of fees in a preconfirmation converted case would ignore the Harris court’s sweeping statement that “no chapter 13 provision holds sway” after conversion.

But this conclusion does not fully resolve the question before the Court; because the Letties’ case is on the verge, but has not yet been converted to a Chapter 7, the Chapter 13 provisions still “hold sway.” Those provisions, however, do not authorize the relief that counsel has requested: a prospective, pre-conversion order directing the Chapter 13 trustee to distribute attorneys’ fees prior to an impending conversion.

* * *

Ordering the trustee to distribute funds in a manner that is not authorized by, and inconsistent with, the payment scheme outlined by the Code—and which favors one administrative claimant creditor over all other creditors—is beyond the Court’s equitable powers under 11 U.S.C. section 105(a).

* * *

The Supreme Court noted in Harris “the ‘fortuity’ . . . that a ‘debtor’s chance of having funds returned’ is ‘dependent on the trustee’s speed in distributing the payments’ to creditors”—contrasting a trustee who distributes payments regularly (and thus may have little or no accumulated wages to return to the debtor) with one who distributes payments infrequently (possibly entitling a debtor who converts to Chapter 7 to a sizable refund)—but explained that these (disparate) outcomes “follow directly from Congress’ decisions to shield postpetition wages from creditors in a converted Chapter 7 case, § 348(f)(1)(A), and to give Chapter 13 debtors a right to convert to Chapter 7 ‘at any time,’ § 1307(a).” 135 S. Ct. at 1839.

A similar “fortuity” of circumstance and timing has come into play here. The Letties might have had their plan confirmed, and their counsel paid regularly through the plan, had not the extensive house fire occurred so early in their case. Ultimately, the outcome is consistent with congressional intent to shield post-petition wages from creditors in a converted Chapter 7 case, and debtors like the Letties have the right to convert at any time. Unfortunately, the fire at the Letties’ uninsured home means they intend to exercise that right early, before a plan can be confirmed and any plan payments distributed to creditors or administrative claimants.

The Court appreciates that representation of Chapter 13 debtors who may not attain plan confirmation, and who may even face a need to convert to Chapter 7, carries some financial risk for debtors’ counsel. See, e.g., Post- Harris Fee Review, National Consumer Bankruptcy Rights Center, found at; see also Beauregard, 533 B.R. at 832 (“We are mindful of the hardship Harris may impose on attorneys representing debtors in Chapter 13 cases, and of the deleterious effect Harris could have on the willingness of attorneys to represent debtors in Chapter 13 cases.”); Ivey, 568 B.R. at 96 (“The Court is acutely aware that the extension of Harris to pre-confirmation cases may result in harsh consequences for bankruptcy attorneys who represent Chapter 13 debtors.”); Hoggarth, 546 B.R. at 879 (“The Court is mindful that its ruling creates a very real hardship for attorneys representing chapter 13 debtors.”). But the Court is bound by the language of the Code, and it is up to Congress to consider a legislative fix to allow Chapter 13 attorneys like the Letties’ counsel to receive attorneys’ fees for work performed in a Chapter 13 case that is converted, or about to be converted, prior to confirmation.

Barbato v. Greystone Alliance, LLC
3rd Cir. In a FDCPA case, the court finds that an entity that acquires debt for the “purpose of . . . collection” but outsources the actual collection activity qualifies as a “debt collector.” An entity that otherwise meets the “principal purpose” definition cannot avoid the dictates of the FDCPA merely by hiring a third party to do its collecting.
In Re: Truong
3rd Cir.

The Barton doctrine applies to actions filed in bankruptcy court.

In a 2015 Ch. 7 bankruptcy, the court lifted the stay to allow a receiver to obtain an order in state court declaring that the debtor's pre-petition transfer of a 25% interest in certain property was void.

In a 2016 Ch. 7 bankruptcy, the 25% transferee filed litigation against: (i) the trustee in the first bankruptcy and (ii) the debtor in the first bankruptcy regarding the administration of in the first bankruptcy.

The court finds that the claims against the trustee are barred by the Barton doctrine and the claims against the debtor are barred by the automatic stay.

In Re: Heiser
Bankr. MD PA The court finds that a land sale contract (sometimes called a "contract for deed") can be addressed as a secured claim in a Ch. 13 bankruptcy.


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