Bankruptcy Law Commons^™

The Applicability Of The Eleventh Amendment In Chapter 9 Cases, Christopher J. Pedraita

Bankruptcy Research Library

(Excerpt)

The sovereign immunity of the states, or the freedom of a state from suit by its citizens, became constitutionally protected in the late eighteenth century through the passage and ratification of the Eleventh Amendment. In particular, the Eleventh Amendment protected states from suits “commenced or prosecuted…by Citizens of another State, or by Citizens or Subjects of any Foreign State.” Notwithstanding the plain language, the Supreme Court has held that the Eleventh Amendment also bars suits against a state that are commenced by citizens of its own state. Moreover, the Eleventh Amendment also bars suits by municipalities brought against the …

Defining Residency Under The Federal Homestead Exemption, Sally Profeta

Bankruptcy Research Library

(Excerpt)

The homestead exemption is a longstanding doctrine in American jurisprudence that protects the interest debtors have in their dwelling when filing for bankruptcy. Section 522(d)(1) of the Bankruptcy Code’s federal exemption scheme provides debtors with the opportunity to preserve the interest they have in their residence, with outside limits on the amount that interest is valued. However, courts are divided on the interpretation of the word “residence,” and have struggled to determine whether “residence” requires actual occupancy of the claimed property at the date of filing.

There are two cannons of statutory interpretation that are used in this context, …

The Uncertain Future Of The Unfinished Business Doctrine, Dan Teplin

Bankruptcy Research Library

(Exceprt)

It is no secret that the legal industry has experience financial difficulty following the great recession. Many law firms have been less profitable, and in some extreme circumstances, have filed for bankruptcy. The worlds largest law firms are of no exception to this recent phenomenon. The collapses of the mega-firms Dewey & LeBoeuf, Coudert Brothers LLP, Heller Ehrman LLP, Howrey LLP, Thacher Proffitt & Wood LLP, and Thelen LLP are prime examples.

Since most law firms, especially large firms, do not reorganize in bankruptcy, a bankruptcy trustee will often be appointed to administer the firm’s estate. In order to …

The Nature Of A Parent-Subsidiary Relationship Determines How To Allocate A Refund In A Tax Sharing Agreement, Samuel Cushner

Bankruptcy Research Library

(Excerpt)

Often, a parent corporation and its subsidiaries will file a consolidated tax return because it comes with many benefits, such as being able to offset gains and losses and deferring tax consequences for sales between consolidated groups. The parent corporation and the subsidiaries will often enter into a tax sharing agreement, which will determine each entity’s respective tax liability. In the event that a refund is issued, the tax sharing agreement will usually dictate how to allocate the refund amongst the parent and the subsidiaries.

A tax sharing agreement is “an agreement among members of an affiliated group of …

Second Circuit Sets A Low Bar For Foreign Debtors Seeking Chapter 15 Relief, Samantha Ruppenthal

Bankruptcy Research Library

(Excerpt)

Continued globalization of trade and investment led Congress, through the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), to amend the Bankruptcy Code (“the Code”) in 2005 to include chapter 15. Chapter 15 adopted UNCITRAL’s Model Law on Cross-Border Insolvency —both aim to guide parties through cross-border insolvency proceedings. In addition to the policy objectives for all bankruptcies, chapter 15 specifically aspires to foster cooperation between the United States and foreign countries involved in cross-border insolvency cases and promote greater legal certainty in global trade and investment. A chapter 15 case is generally meant to supplement the plenary case …

Equitable Subordination- Where Is Applies, What It Does, And The Implications That Result, Lauren Casparie

Bankruptcy Research Library

(Excerpt)

Equitable subordination, as permitted under section 510(c)(1) of the Bankruptcy Code, provides the court the ability to reorganize creditor’s debt in the light of any inequitable conduct. The code gives courts the ability to subordinate the level of priority of a creditor’s claim in light of any inequitable conduct committed by that creditor. This remedy is applied in cases where the creditor has acted in an inequitable manner, causing injury or creating unjust positions for other creditors. This remedy is remedial, not punitive, and limited only to the extent necessary to remedy the damage caused by the wrongdoing creditor. …

Whether Undistributed Chapter 13 Payment Plan Funds Held By A Chapter 13 Trustee Should Be Distributed To The Debtor Or The Debtor’S Creditors After Conversion From Chapter 13 To Chapter 7, Rosa Aliberti

Bankruptcy Research Library

(Excerpt)

Qualified individuals seeking to reorganize their debts may file under Chapter 13 of the Bankruptcy Code. Under chapter 13, a debtor makes payments according to a court approved payment plan, which is administered by a chapter 13 trustee, and remains in possession of all the property of the estate. Once a debtor makes all his payments under the chapter 13 payment plan, he has a right to seek a discharge, provided that he meets certain requirements. These requirements include that the debtor: (1) certifying that he paid all domestic support obligations prior to the certification being made; (2) received …

Chapter 11 Liquidations And The Termination Of Collective Bargaining Agreements, Cecilia Ehresman

Bankruptcy Research Library

(Excerpt)

Section 1113 of the Bankruptcy Code governs the modification or rejection of a collective bargaining agreement (“CBA”) by a chapter 11 trustee or debtor-in-possession. To modify or reject a CBA, a trustee or debtor-in-possession must (1) make a proposal to the union which provides the “necessary modifications in the employees benefits and protections that are necessary to permit the reorganization of the debtor”; (2) provide the union with relevant information as is necessary to evaluate the proposal; and (3) meet with the union and confer in good faith. For the modification or rejection to take place, the union must …

Self-Employed Debtors Face A Hard Truth When Calculating Their Current Monthly Income For The Applicable Commitment Periods Under Chapter 13 Plans, Arthur Rushforth

Bankruptcy Research Library

(Excerpt)

A bankruptcy court may confirm a debtor’s chapter 13 plan of reorganization if the requirements of section 1325(a) of the Bankruptcy Code are satisfied. If the chapter 13 trustee or an unsecured creditor objects to the confirmation of the plan, however, the bankruptcy court may only confirm the plan if it either provides for the repayment in full of claims or that the debtor must devote all of his projected disposable income towards payments of his unsecured creditors during the plan’s “applicable commitment period.” The debtor’s applicable commitment period is five years if the debtor’s current monthly income exceeds …

Rule 9011 Of The Federal Rule Of Bankruptcy Procedure, Nancy Bello

Bankruptcy Research Library

(Excerpt)

Rule 9011(b) of the Federal Rules of Bankruptcy Procedure, the bankruptcy counterpart to Rule 11 of the Federal Rules of Civil Procedure (“Rule 11”), provides, that in presenting a pleading to the court, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, that: (1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) the claims, defenses, and other legal contentions therein are warranted by …

The Earmarking Doctrine: Can It Be Used To Protect Late-Recorded Mortgages In Preference Action?, Michael Benzaki

Bankruptcy Research Library

(Excerpt)

Borrowers often seek to refinance their home loan mortgages in order to attain more favorable interest rates and other terms. Essentially, in these refinancing transactions, “the parties are looking simply to exchange one more expensive secured loan for another less expensive secured loan.” Typically, as part of the transaction, a refinancing lender will discharge the original mortgage and record a new mortgage. It is not uncommon for a delay to occur such that the new mortgage is recorded over thirty days after the lender transferred the funds to pay off the original loan. In such a case, if the …

Does The Fdcpa Apply In Bankruptcy?, Garam Choe

Bankruptcy Research Library

(Excerpt)

In 1977, Congress enacted the Fair Debt Collection Practices Act (“FDCPA”) to remedy rampant abusive debt collection practices by debt collectors. A year later, the Bankruptcy Code was enacted under Title 11 of the United States Code. Conflicts arise as to whether which law applies when debt collectors use abusive debt collection practices while seeking to recover from a debtor in a bankruptcy case. Circuit courts are split as to whether the Bankruptcy Code displaces the FDCPA in the bankruptcy context. Some circuit courts have concluded that the Bankruptcy Code displaces the FDCPA in the bankruptcy context. Alternatively, some …

Borrowers And Bankruptcy Trustees’ Unsuccessful Attempts To Avoid A Mortgage Under The “Splitting-The-Note” Theory, Alana Friedberg

Bankruptcy Research Library

(Excerpt)

In 1993, the mortgage industry created the electronic database Mortgage Electronic Registration System (“MERS”) in order to “track ownership interests in residential mortgages.” MERS “serves as the mortgagee in the land records for loans registered on the MERS System, and is a nominee (or agent) for the owner of the promissory note.” To date, MERS holds title to around 60 million home mortgages, about half of all home mortgages in the United States.

Borrowers and bankruptcy trustees have attempted unsuccessfully to argue a mortgage or deed of trust is void if a third party, such as MERS, was designated …

Professional Fee Enhancements: Determining Whether A Professional Is Entitled To A Fee Enhancement Under Section 330 Of The Bankruptcy Code, Adrianna R. Grancio

Bankruptcy Research Library

(Excerpt)

The Bankruptcy Code governs the compensation of a professional person employed under section 327 or 1103 of the Bankruptcy Code. Under section 330(a), the court may award a professional “reasonable compensation for actual [and] necessary services.” Section 330 provides a non-exclusive list of factors for a court to consider in determining whether the proposed compensation is reasonable. In addition to these statutory factors, courts also analyze the proposed fee by using two methods utilized in pre-bankruptcy code cases; (1) “Lodestar” method and (2) factors from Johnson v. Georgia Highway Express, Inc (the “Johnson Factors”).

The determination of whether the …

Student Loans Can Be Discharged (At Least Partially) In Bankruptcy After All, Carmella Gubbiotti

Bankruptcy Research Library

(Excerpt)

Section 523 of the Bankruptcy Code sets forth debts that are not dischargeable. Among the non-dischargeable debts, which a debtor will still owe after they receive a bankruptcy discharge, are debts from educational loans. As such, these student loan debts may prevent many debtors from receiving a truly fresh start following bankruptcy. Courts historically have approached the undue hardship exception to this rule narrowly, applying it only where the debtor, under the circumstances, could not reap the benefit of her education.

This Article will discuss the various tests courts use to determine whether an educational debt is dischargeable. Part …

An Oversecured Creditor’S Post-Petition Attorneys’ Fees, Governed By State Law Or Federal Law’S 11 U.S.C. 506(B), Charles Lazo

Bankruptcy Research Library

(Excerpt)

In bankruptcy, an oversecured creditor is generally entitled to post-petition interest on their underlying claims, and post-petition reasonable fees, costs, or charges provided for under a contract or state statute. Although an oversecured creditor might be entitled to attorneys’ fees under a contract provision or a state statute, bankruptcy courts will review such fees for reasonableness. However, the Bankruptcy Code does not provide what laws govern on the issue of whether fees are reasonable. Currently, there is a three-way split among courts: (1) the majority of courts rule that federal law preempts state law as to the enforceability and …

The Exception To The Automatic Stays: Determining Whether Revenues Are Pledged Special Revenues, Debra March

Bankruptcy Research Library

(Excerpt)

The Bankruptcy Code provides two automatic stays in cases under chapter 9. These automatic stays, with limited exceptions, prevent both direct and indirect collection efforts against a municipal debtor. The first automatic stay provided by section 362(a) generally stays all direct collection efforts against the debtor. In addition, section 922(a) provides for an automatic stay that, with limited exception, also stays the commencement and continuation of claims against an officer as inhabitant of a municipal debtor, and the enforcement of a lien on or arising out of taxes or assessments of the municipal debtor. However, section 922(a) imposes a …

Same-Sex Couple Deemed “Spouses” For Purposes Of The Bankruptcy Code, Michael Rich

Bankruptcy Research Library

(Excerpt)

The Bankruptcy Code states that a legally married couple may file a joint bankruptcy petition pursuant to section 302(a). However, this right to joint filing is narrowly limited to an “individual that may be a debtor under such chapter and such individual’s spouse.” Generally, courts have rejected joint filings under section 302(a) filed by debtors who are not legally married. For example, a parent and child cannot file a joint bankruptcy petition under section 302(a). Further, a couple that is living together without being legally married may not file a joint petition. The Bankruptcy Code is silent as to …

Deeping Insolvency: A Cause Of Action, A Tool Of Measuring Damages, Or Nothing At All?, Nicholas Santoro

Bankruptcy Research Library

(Excerpt)

“Deepening Insolvency” is a rather new theory of either liability or damages in cases brought by a plaintiff (typically a bankruptcy trustee, litigation trust, or some other party “filling in” for an insolvent corporation, or debtor) against directors, officers, attorneys, or other professionals, based on their dealings with the debtor. “Deepening insolvency” has been defined as “injury to the debtors' corporate property from the fraudulent expansion of corporate debt and prolongation of corporate life.” The theory of deepening insolvency has become a highly debated by attorneys, creditors, and the courts.

The courts, both state and federal, have continued to …

Are Government Creditors Exempt From U.C.C. Article 9 Filing And Perfection Requirements?, Thomas Sica

Bankruptcy Research Library

(Excerpt)

Article 9 of the Uniform Commercial Code (the “UCC”) requires a creditor to perfect its security interests against its collateral in order to recover the creditor’s priority in such collateral. Former versions of the UCC that predate 2001 provided that the Article 9’s perfection requirements did not apply “[t]o a transfer by a government or a governmental unit of the state.” This exception was eliminated from the UCC in 2001. Thirty-two states, however, still have versions of the UCC that contain some version of this exception. Within the states that still enforce this exception for governmental units, there are …

Judicial Estoppel: Essentially Locking In Representations Made During Bankruptcy Proceeding, Sophie Tan

Bankruptcy Research Library

(Excerpt)

The Bankruptcy Code provides that a debtor is required to file with the bankruptcy, among other things, “a list of [its] creditors,” a “schedule of [its] assets and liabilities,” and “a statement of [its] financial affairs.” With the filing of its schedules, the debtor asserts a position with respect to its assets, liabilities, and financial affairs, which is relied on by the bankruptcy court, the debtor’s creditors, and the other parties in interest. Accordingly, various circuit courts have recognized that “the success of our bankruptcy laws requires a debtor’s full and honest disclosure,” and that there needs to be …

The Irs Can Offset Post-Petition Tax Overpayments Against Pre-Petition Tax Liabilities, Kyle J. Tumsuden

Bankruptcy Research Library

(Excerpt)

In bankruptcy cases, creditors have the powerful right of “setoff,” i.e., the right to “net” or cancel payments. The right to set off usually arises in cases of mutual debt obligations where a debtor owes a debt to a creditor who in turn owes a unilateral debt back to the same debtor. The rationale for the right to setoff it obvious, as it allows the parties to apply their mutual debt obligations against each other, “thereby avoiding the absurdity of making A pay B when B owes A.” In other words, the court will reduce the two competing judgments …

The Continued Growth Of The Presumption Against Extraterritoriality And Its Impact On The Bankruptcy Code’S Avoidance Provisions, Michael Vandermark

Bankruptcy Research Library

(Exceprt)

Over the past several years, ever since the United States Supreme Court’s seminal decision in Morrison v. National Australia Bank Limited, the presumption against extraterritoriality has steadily expanded across much of the legal field. In doing so, the presumption has again become the dominant standard in deciding whether Congressional legislation may be used on an extraterritorial basis. This expansion has recently encompassed portions of the Bankruptcy Code, specifically, its avoidance provisions.

The presumption, as noted in detail below, relies on the premise that although the legislature has the authority to regulate beyond the borders of the United States, …

Gifting & The Absolute Priority Rule, Brianna Walsh

Bankruptcy Research Library

(Excerpt)

The absolute priority rule sets forth a hierarchical scheme for the distribution of proceeds obtained through liquidating the assets of a debtor. The scheme provides that property of an estate shall be distributed to secured creditors, then to administrative and priority unsecured creditors, then to unsecured creditors, and lastly to equity holders. Under Chapter 11, section 1129(b)(2)(B)(ii) for a dissenting class of impaired creditors, a plan is “fair and equitable” only if the allowed value of such creditors claims are paid in full, or the holder of any claim or equity that is junior to the dissenting creditors will …

Whether A Contract Is Divisible For Purposes Of Section 365 Of The Bankruptcy Code, Christopher Bolz

Bankruptcy Research Library

(Excerpt)

Section 365 of the Bankruptcy Code governs the assumption, rejection, and assignment of executory contracts and unexpired leases in bankruptcy cases. Although the definition of an executory contract has not been codified, it is considered to be a contract that has not been fully performed. The assumption or rejection of an executory contract is achieved through court approval, except in certain instances concerning Chapter 7 bankruptcy. Rejection leads to a non-administrative unsecured claim for damages. Following rejection, neither the estate nor the other party owes performance to one another.

The trustee or debtor in possession must assume or reject …

Whether The Absolute Priority Rule Has Been Abrogated In Individual Chapter 11 Cases, Colin Coburn

Bankruptcy Research Library

(Excerpt)

In recent years, a debate has been raging over whether the absolute priority rule in applies to individual chapter 11 debtors. Essentially, the absolute priority rule dictates that junior creditors cannot retain anything under a plan if an objecting senior creditor is not paid in full. If each class of creditor does not consent to a plan of reorganization, a bankruptcy court can still confirm the plan if it meets statutory requirements and is deemed “fair and equitable.” This method of confirmation is known as a “cramdown.” In order for a plan to be “fair and equitable,” it must, …

S-Corp And Qsub Tax Status As Property Of The Bankruptcy Estate, Ryan Jennings

Bankruptcy Research Library

(Excerpt)

Under the Internal Revenue Code, a corporation can elect to be an “S” Corporation (“S-Corp”) for federal income tax purposes. Electing for S-Corp status will make the corporation a pass through entity, meaning that the corporation itself will not have any tax benefits or liability. Instead, the company’s income will be passed on to it shareholders, who will have to report it on their personal tax returns. Similarly, an S-Corp that owns a subsidiary corporation can elect to treat it as qualified subchapter S subsidiary (“QSub”). A QSub is also a pass through entity that passes its tax benefits …

Section 362(C)(3): Does It Terminate The Entire Automatic Stay?, Michael Aryeh

Bankruptcy Research Library

(Excerpt)

Section 362 operates to create an automatic stay upon the filing of a bankruptcy petition. The automatic stay, among other things, prevents a debtor’s creditors from seeking to enforce a judgment against a debtor or against property of the estate, taking any act to obtain possession of property of the estate, or taking any act to create or enforce a lien. Section 362, however, does contain numerous provisions that provide for limitations to the automatic stay.

Among these provisions is section 362(c)(3)(A), which provides in relevant part that “if a single or joint case is filed by or against …

Determining When Projected Disposable Income Test May Be A Basis For A Post-Confirmation Modification, Steven Ching

Bankruptcy Research Library

(Excerpt)

In order for a chapter 13 plan to be confirmed, the plan must provide that the debtor will contribute his projected disposable income towards his plan payments. However, circumstances may change after confirmation of the chapter 13 plan, and the debtor or trustee may find themselves in need to modify the plan payment. Under section 1329 of the Bankruptcy Code, the debtor, trustee, or an unsecured creditor may request to modify the plan after confirmation of the plan but before completion of the payments.

Generally, bankruptcy courts have broad discretion to approve or disapprove a post-confirmation modification of a …

Professional Firm Retention: Determining Whether A Professional Is A “Professional Person” Within Section 327(A) Of The Bankruptcy Code, Alexandra Hastings

Bankruptcy Research Library

(Excerpt)

An important issue in chapter 11 cases is whether a “professional person” qualifies as a bankruptcy “professional” within section 327(a) of the Bankruptcy Code. Section 327(a) requires that a trustee or debtor-in-possession must seek court approval for the employment of attorneys, accountants, appraisers, auctioneers, or other “professional persons” assisting the debtor with its bankruptcy case. Further, section 327(a) specifies, among other things, that a trustee or debtor-in-possession may only employ professionals that are “disinterested persons” to assist in the administration of the debtor’s bankruptcy case. The failure to obtain court approval under section 327(a) “may result in the denial …