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Banking & Finance Law Report

Category Archives: Bankruptcy

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Law v. Siegel, __ U.S. ___, 134 S.CT. 1188 (2014): The Supreme Court Addresses the Scope of the “All Writs” Provision in the Bankruptcy Code

Posted in Bankruptcy

The Bankruptcy Code has approximately 275 different sections. The number of its subsections and subparagraphs is well into the thousands. It is impossible to select the “most significant” provision in the Bankruptcy Code, but among the candidates for that title is certainly § 105 of the Code.

Section 105(a) of the Bankruptcy Code provides in part that “The court may issue any order, process, or judgment that is necessary to carry out the provisions of this title.” The importance of this “all writs” provision is obvious. It specifically authorizes bankruptcy courts to make the rest of the Bankruptcy Code effective, even if Congress has not specifically included in the other provision of the Code any directive that puts those provisions into motion. When the Bankruptcy Code addresses an issue, § 105 (a) is available to ensure that the issue can be resolved and the solution implemented.

The Supreme Court recently took on the task on determining the limits of the reach of § 105(a) in the case of Law v. Siegel. In Siegel, Stephen Law filed for Chapter 7 bankruptcy in 2004. Among the listed assets in the case was Law’s house in California. Law valued the house at approximately $350,000, and he claimed $75,000 of that amount as exempt under the California homestead exemption. The debtor’s schedules also stated that the house was subject to two mortgages. The first mortgage was identified as being held by Washington Mutual Bank and was in the amount of nearly $150,000. …


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In re McKenzie, 737 f.3d 1034 (6th cir. 2013) Extending the Deadline for Trustees to Attack Preferences: The Sixth Circuit’s Life Jacket for Tardy Trustees

Posted in Bankruptcy, SIxth Circuit

It is often said that the acid test of a security interest or lien on property is the bankruptcy of the property owner. If that person or entity files a bankruptcy petition, the bankruptcy trustee has a number of options to challenge or even avoid certain liens. A lien that is not properly perfected is subject to attack by a trustee under both the “strong-arm clause” (Bankruptcy Code § 544) and the preference provisions (Bankruptcy Code § 547). If the lien is avoided, the property can then be sold and the proceeds distributed to the unsecured creditors. The trustee must act timely, however, if he or she is to be successful in avoiding the lien. The Sixth Circuit Court of Appeals recently addressed the timeliness of a trustee’s actions against the holder of an allegedly unperfected lien on a debtor’s property. Its conclusion raises several important questions regarding the timeliness of trustees’ actions to challenge the propriety of a secured creditor’s claim.

In In re McKenzie, 737 F.3d 1034 (6th Cir. 2013), the debtor granted a security interest in certain of his property to secure his obligation to pay fees to his attorneys. Among the assets pledged as security for the fees was the debtor’s equity interest in a limited liability company. The trustee challenged the creditor’s security interest asserting that the creation of the security interest was a preferential transfer on account of an antecedent debt. The trustee did not issue this challenge, however, until almost three years …


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The Sixth Circuit Holds that Bankruptcy Courts Lack the Inherent Power to Award “Serious Non-Compensatory Punitive Damages”

Posted in Bankruptcy

Nearly 30 years after enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984 and establishment of the current bankruptcy court structure, courts are still struggling to understand the bounds of a bankruptcy court’s jurisdiction and power. Unfortunately for one recent appellant, a bankruptcy court’s power to enter punitive damages is not as great as it had hoped.

In Adell v. Honigman, Miller, Schwartz & Cohn, LLP (In re John Richards Homes Building Company, LLC), Case Nos. 12-2012, 12-2013, 12-2014, and 12-2015 (6th Cir. Nov. 20, 2013) (unpublished),1 the Sixth Circuit held that neither 11 U.S.C. § 105 nor the inherent powers of a bankruptcy court permit a bankruptcy court to enter “serious noncompensatory punitive damages.”2 The bankruptcy court in Adell had entered an award of sanctions in the amount $2.8 million as a consequence of a party’s continuing pattern of abuse of the judicial process in evading a prior monetary judgment entered against him by the bankruptcy court. As the bankruptcy court had found, this pattern of abuse included repeated instances of perjury, active participation with related entities in falsely responding to garnishments and filing an “unnecessary and abusive bankruptcy petition.”…


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Who Owns Oil and Gas When People (or Businesses) Go Bankrupt?

Posted in Bankruptcy

Businesses active in Ohio’s current oil and gas boom should be aware of how oil and gas leases are treated in bankruptcy. Unsettled Ohio law regarding whether a debtor owns unextracted oil and gas as part of the debtor’s real property can make this a difficult issue. This eBook discusses recent court opinions and examines the question of just who owns unextracted oil and gas in a bankruptcy context. Download Oil and Gas Leases in Bankruptcy.…


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A False Sense of Security: Fictitious Checks and Fraudulent Transfers

Posted in Bankruptcy

When a person “pays” a debt with a fictitious check, someone other than the bad guy usually ends up losing. The Sixth Circuit Court of Appeals recently addressed such a situation in White Family Cos., Inc., v. Slone (In re Dayton Title Agency, Inc.), Case Nos. 12-3265;3359, July 31, 2013. In Dayton Title, the accused bad guy was Krishan Chari. Chari operated a real estate business in which he bought and sold commercial properties.

Those purchases were often accomplished through the use of short-term bridge loans. In September of 1999, Chari received two such loans totaling approximately $4.8 million which were intended to enable him to complete the purchase and sale of a specific property. The loans came due on Oct. 3, 1999, and Chari gave checks to repay the two creditors. Unfortunately, the checks were dishonored for insufficient funds. Chari then wrote a new check that was payable to Dayton Title Agency (DTA). DTA deposited the check in its account that was supposed to include trust funds. It then, in violation of its own procedures, issued two checks to Chari’s lenders.

Presumably, this form of transaction was intended to provide added assurances to the two lenders by “running the money” through DTA. One of the lenders exchanged his check from DTA with an official bank check, and the second lender deposited his check at another bank and that check cleared through the normal banking check collection process.
 …


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What Goes Up … Quick Glance #3 at Ohio Oil and Gas Leases in Bankruptcy

Posted in Bankruptcy, Commercial Lending, Ohio Law

As with our prior posts on oil and gas leases in bankruptcy (located here and here), this post presents another thorny issue – namely, “Is an oil and gas lease a lease at all?”

Whether an oil and gas lease is a “lease” is significant in the bankruptcy context, because the Bankruptcy Code has several provisions regarding the treatment of leases.

This post considers two cases that interpret 11 U.S.C. § 365(d)(4), which provides that unless the bankruptcy court orders an extension, “an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by … the date that is 120 days after the date of the order for relief [(typically, the commencement of the case)]….” The Code further provides that “the rejection of an … unexpired lease of the debtor constitutes a breach of such contract or lease … immediately before the date of the filing of the petition.” …


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What Goes Up…Quick Glance #2 at Ohio Oil and Gas Leases in Bankruptcy

Posted in Bankruptcy, Commercial Lending, Ohio Law

As Ohio enjoys its latest boom in oil and gas exploration, it is important to understand how oil and gas leases are treated in bankruptcy.  The importance of these issues are underscored by the frequency with which the courts confront them; hence we visit again this unsettled area and consider further the question of the ownership of unextracted oil and gas in a bankruptcy context.

In the recent case of In re Cassetto, 475 B.R. 874 (Bankr. N.D. Ohio 2012), a bankruptcy court for the Northern District of Ohio examined whether a bankruptcy trustee charged with administering the assets of an individual chapter 7 debtor could enter into an oil and gas lease despite the debtor’s objections, and, if so, whether the debtor’s homestead exemption would apply to the signing bonus for such lease.

The lease the trustee sought to enter into had a five year term and would permit the extraction of oil and gas in exchange for a $3,900 per acre signing bonus and royalties of 17.5% of the value of any oil and gas produced from the property.  The trustee sought to enter into the lease, receive the signing bonus and thereafter abandon the lease to the debtor such that the debtor would be entitled to any royalty payments under the lease.…


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What Goes Up …A Quick Glance at Ohio Oil and Gas Leases in Bankruptcy

Posted in Bankruptcy

As Ohio enjoys its latest boom in oil and gas exploration, it is important to understand how oil and gas leases are treated in bankruptcy. Unsettled Ohio law regarding whether a debtor owns unextracted oil and gas as part of the debtor’s real property can make this a difficult issue. 

In In re Loveday, No. 10-64110, 2012 WL 1565479 (Bankr. N.D. Ohio May 2, 2012), the Northern District of Ohio examined whether a Chapter 13 debtor had properly included in his bankruptcy schedules his interest in unextracted oil and gas relating to the debtor’s real property. Whether the debtor’s oil and gas rights were properly scheduled was a significant factor in determining whether the debtor could retain the proceeds of the sale of his oil and gas rights. But more importantly, for the companies who sought to purchase the debtor’s oil and gas rights, knowing whether such rights were properly scheduled was necessary to determine whether the debtor had unfettered authority to sell his oil and gas rights without court approval.…


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In re: Tracy Broadcasting Corporation

Posted in Bank Lending, Bankruptcy

Secured creditors of borrowers holding Federal Communications Commission ("FCC") broadcasting licenses, as well as such borrowers seeking credit, will be reassured by a recent decision of the United States Court of Appeals for the Tenth Circuit, In re: Tracy Broadcasting Corporation, released October 16, 2012. The Tenth Circuit has joined other courts in upholding the priority of a creditor’s security interest over that of unsecured creditors in the post-bankruptcy sale proceeds of an FCC broadcasting license. The decision reversed the decisions of lower courts and held that "a security interest in the proceeds of a license attaches when the licensee enters into the security agreement, regardless of whether a sale [of the license] is contemplated at that time."

In 2008, Tracy Broadcasting (the "Debtor") issued a promissory note in favor of Valley Bank & Trust Company (the "Secured Creditor") and secured such obligations with various assets, including its general intangibles and the proceeds of such collateral. In 2009, the Debtor filed a Chapter 11 petition in the U.S. Bankruptcy Court for the District of Colorado. An unsecured creditor of the Debtor brought an adversary action to determine the extent of the Secured Creditor’s security interest in the proceeds of the sale of the Debtor’s license.…


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Part Seven

Posted in Bankruptcy

This article is Part Seven in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find previous articles in this series here: Structuring Sales to Ensure Payment; Signs of Trouble Before Payment Default; Default by a Customer: Knowledge is Power; What to Consider When Non-Payment Leads to Litigation and Post-Judgement Remedies. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.

This posting will provide a general overview of bankruptcy law for the non-lawyer, including what it means to be "bankrupt," the types of bankruptcy, and bankruptcy issues for creditors, particularly for sellers of goods or services.

Bankruptcy Structure
Bankruptcy Code is federal law- it was created by, and is amended by the U.S. Congress. In theory, the same laws and rules apply wherever you file bankruptcy in this country, however it does happen that different Bankruptcy Courts around the country interpret the same statute differently. When this happens, the cases are appealed. If the U. S. Courts of Appeals reach different conclusions about the same statute, it is possible that the U.S. Supreme Court will resolve the controversy. …


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Signs of Trouble Before Payment Default

Posted in Bank Lending, Bank Litigation, Bankruptcy, Collection and Foreclosure, Commercial Lending, Commercial Loans and Leases

This article is Part Two in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find Part One of this series here: Structuring Sales to Ensure Payment. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series. 

With the recent economic slowdown in many sectors and the parade of corrupt corporate executives on the evening news, corporate managers are more sensitive than ever to signs of troubled business practices and how those practices affect outstanding receivables.  Many distressed businesses display early warning signs of impending trouble, including some or all of the following:

  • Lack of a sound business plan- The company may not have a plan or may have expanded past the vision of it original business plan.
  • Ineffective management style- The management of a small company that has experienced rapid growth may not be able to delegate authority effectively. 
  • Poor lender/vendor relationships- The company may not respond quickly or fully to its vendor’s request for financial information or may actively hide information from its vendors.
  • Change in market conditions- The market for the company’s product may have changed, leaving the company with a shrinking market share and lower sales. The company’s technology or marketing may be obsolete to compete in the current marketplace (remember 8-track tapes?).
  • Over-diversification of products- The company may enter non-traditional markets too quickly in an effort to increase flagging sales but without the necessary resources or knowledge to

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RECOUPMENT AND SETOFF ISSUES FOR HEALTH CARE LENDERS

Posted in Bank Capital, Bankruptcy, Finance

Health care lenders and others evaluating or relying on the financial strength of a healthcare provider need to think about the potential recoupment and setoff of claims against Medicare/Medicaid receivables of the provider. 

RECOUPMENT

Recoupment, which is the netting of two related claims which is the function of a single, unitary transaction between the parties, occurs in the normal course of business and is not stayed by the automatic stay in a bankruptcy proceeding. For example, if Party A sells 100 widgets to Party B, and Party B discovers that four of the widgets were not delivered, Party B will deduct (recoup) the invoice amount of each unit in making payment to Party A.

In dealing with Medicare/Medicaid recoupment issues in bankruptcy, two general approaches have been taken by the Circuit Courts of Appeal with respect to the netting of overpayments against accounts due to the provider.

In the Third Circuit, which includes Delaware, the Court has applied an integrated transaction test, which means generally that any recoupment of Medicare/Medicaid payments is viewed as yearly payments and therefore the government can only recoup overpayments against payments due for a single year. Most of the Circuit Courts have adopted a “logical relationship test” in which Medicare/Medicaid overpayments and any payments due are all part of the same transaction even if they are not in the same year or the services are not rendered to the same patients. States are also permitted to recoup amounts owed for hospital and bed taxes by withholding certain Medicare/Medicaid …


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Secured Lenders Have a Right to Credit Bid in Bankruptcy — At Least in the Seventh Circuit

Posted in Bankruptcy

Breaking with the Third Circuit and the Fifth Circuit, on June 28, 2011, the Seventh Circuit held that a debtor’s plan of reorganization that provides for the sale of the debtor’s assets free and clear of an existing security interest may only be confirmed over the objection of its secured creditor if the plan’s sale procedure permits the secured creditor to credit bid its secured debt for the assets being sold. River Road Hotel Partners, LLC v. Amalgamated Bank, — F.3d –, Nos. 10-3597 & 10-3598 (7th Cir. June 28, 2011).

The circuit split centers on the Bankruptcy Code’s provisions that only permit the confirmation of a plan of reorganization over the objection of a creditor class (a so called "cram down") where the plan’s treatment of such class is "fair and equitable." When the objecting class consists of secured creditors, the Bankruptcy Code requires that such fair and equitable treatment include provisions whereby either: (A) the secured creditor retains its liens in its collateral whether such collateral is retained by the debtor or transferred to another party and the secured creditor receives a specified level of cash payments under the plan, 11 U.S.C. § 1129(b)(2)(A)(i); (B) the secured creditor "realiz[es] … the indubitable equivalent" of its claim, id. § 1129(b)(2)(A)(iii); or (C) the secured creditor’s collateral is sold subject to the secured creditor’s right to credit bid for such property, the secured creditor retains a lien in the proceeds of the sale and the treatment of this …


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Recent Decision Limits Utilization of Non-Consenting Secured Creditor’s Cash Collateral

Posted in Bankruptcy

The ability of a single asset real estate debtor in a bankruptcy case to utilize a non-consenting secured creditor’s cash collateral has been limited by a recent decision from the Bankruptcy Appellate Panel of the Sixth Circuit in In re Buttermilk Towne Center, LLC, 2010 FED App. 0010P (B.A.P. 6th Cir. 2010).

Under 11 U.S.C. § 552(a)(2), a pre-petition security interest in rents extends to rents generated by a debtor post-petition. Further, 11 U.S.C. § 363 provides that a debtor can only use the cash collateral of a non-consenting secured creditor if the creditor is deemed to be "adequately protected." Prior to Buttermilk, the Sixth Circuit Court of Appeals issued the unpublished decision of Stearns Bldg. v. WHBCF Real Estate (In re Stearns Bldg.), 165 F.3d 28 (6th Cir. 1998), in which the Sixth Circuit held that a secured creditor was not adequately protected when a single asset real estate debtor only offered to provide the creditor with a replacement lien on post-petition rents that were encumbered by the secured creditor’s pre-petition lien. Many courts in the Sixth Circuit have failed to follow the unpublished decision of Stearns Building, and rather have held that a pre-petition secured creditor is adequately protected when a single-asset real estate debtor provided a replacement lien on rents that were already encumbered by the creditor’s pre-petition lien.

In Buttermilk, the Debtor was the owner and operator of a commercial real estate development. Bank of America was the Debtor’s primary pre-petition secured lender and had …


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