THE BANKRUPTCY COURTS’ GREATEST HITS: TOP 10 BANKRUPTCY COURT DECISIONS OF 2018

David G. Epstein George E. Allen1 Chair University of Richmond Law School

This is the 45th Annual SBLI Seminar on Bankruptcy Law & Rules. I spoke at the 3rd Annual Seminar on Bankruptcy Law and Rules held at the Hyatt Regency in February 1977.

I don’t remember what I talked about. The program says I talked about preferences and fraudulent conveyances and the relationship of the Uniform Commercial Code and the Bankruptcy Act of 1898.

I know that I did not talk about bankruptcy court decisions. Bankruptcy court opinions were not freely available. 1977 was before West Bankruptcy Reporter, before LEXIS and before WESTLAW.

By contrast, 2,486 bankruptcy court opinions entered during 2018 are available on Westlaw. Opinions from Delaware and New York and other states that misspell the “parol evidence rule.” E.g., In re Ryckman Creek Resources LLC, 2018 WL 4178692 (Bankr. Del 2018); In re AMR Corporation, 2018 WL 6523965 (Bankr. S,.D. N.Y. 2018) . Opinions that refer to an LLC (limited liability company) as a “limited liability corporation.” E.g., In re Braun, 2018 WL 506602 (Bankr. N.D. Cal. 2018); In re NNN 400 Capitol Center 16 LLC, 2018 WL 4849655 (Bankr. Del. 2018).

Even better, there is Judge Colton’s reference to South Park in In re Bateman, 585 B.R. 618 (Bankr. M.D. Fla 2018), a case involving an arbitration clause in the fine print of a Verizon consumer contract: “The court is reminded of an episode from the cartoon series “South Park” in which Apple comes to town and demands blood from iPhone customers because a provision to give up your blood was buried in the consumer service agreement that everyone in South Park had agreed to by simply clicking a box, but of course never read. (Trey Parker, 15 HumancentiPad South Park (2011) ).”

1 The honored Richmond trial lawyer, https://libguides.law.virginia.edu/c.php?g=39996&p=254096, Not the former Redskins Coach https://www.profootballhof.com/players/george-allen/ nor his politically incorrect former Senator son https://www.youtube.com/watch?v=r90z0PMnKwI

1 “TOP TEN”

FIRST CASE: COVENANT NOT TO COMPETE (101(5) AND 727(b))

In re Cyberton International, Inc., 2018 WL 3635708 (Bank. D. Kan. 2018)

11 U.S. Code § 101 - Definitions In this title the following definitions shall apply:

(5) The term “claim” means— (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

11 U.S. Code § 727 - Discharge (b) Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter…

Capps sold his business to Cybertron. Then Capps and Cyberton entered into two separate agreements: (1) an employment contract and (2) a covenant not to compete. The covenant not to compete provided for both injunctive relief and liquidated damages.

Several months later, Capps filed for Chapter 7 bankruptcy and received a discharge. Still later, Cyberton dismissed Capps who got a job with one of Cyberton’s competitors. Cyberton sued Capps in state court for injunctive relief. The state court granted a temporary injunction.

Cyberton then filed a complaint in bankruptcy court for a declaratory judgment that Capps obligations under the covenant not to compete were not discharged. The court ruled for Cyberton.

In so ruling, the bankruptcy court concluded that: (1) “…breach of a covenant not to compete . . . is not a claim because it cannot be remediated by mere money.” (2) “…the availability of liquidated damages in addition to injunctive relief did not render . . . breach of a performance of a covenant not to compete a claim.” (3) “These obligations could not be claims because they did not arise before Capps filed his bankruptcy petition. . . .Tenth Circuit precedent holds that a claim arises when the culpable conduct upon which the claim is based occurred.” The court cited to and relied on In re Parker, 313 F.3d 1267 (10thCir. 2002) (a legal malpractice claim).

2 Another 2018 bankruptcy court decision, In re Baerg Real Property Trust, 585 373, 388-89 (Bankr.N.D. Tex. 2018), addresses covenants not to compete in dictum: “The right to specific performance, unlike other equitable obligations, such as an injunction enforcing a covenant not to compete, generally gives rise to a ‘claim’ that can be discharged in bankruptcy. 11 U.S.C. § 101(5). Route 21 Assocs. of Belleville, Inc. v. MHC, Inc., 486 B.R. 75, 85 (S.D.N.Y. 2012), aff'd sub nom. In re Lyondell Chem. Co., 542 Fed.Appx. 41 (2d Cir. 2013). See also In re A.J. Lane & Co., Inc., 107 B.R. 435, 439 (Bankr. D. Mass. 1989) (“[R]ecognition of the doctrine and allowance of specific performance against a debtor in bankruptcy proceedings would be to prefer one creditor over others”). The policy rationale is that specific performance should not be permitted where the remedy would in effect do what Section 365 of the Bankruptcy Code can avoid, that is, the imposition of burdensome contracts on the debtor. Id. at 439 (right of specific performance is subordinate to debtor’s rejection rights).

SECOND CASE: SUBSTANTIVE CONSOLIDATION (105 AND 303)

In re Kretchmar, 579 B.R. 924, 591 B.R. 876 (Bankr. Okla 2018)

11 U.S. Code § 105 - Power of court (a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

11 U.S. Code § 303 - Involuntary cases (a) An involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced. (b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title— (1) 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 $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims; * * *

(h) If the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed. Otherwise, after trial, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed, only if—

3 (1) the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount; or (2) within 120 days before the date of the filing of the petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession.

Debtor, an individual farmer, filed a Chapter 7 petition. His parents conduct similar farming operations.

The Chapter 7 trustee and a creditor brought an adversary proceeding seeking substantive consolidation of the debtor and his non-debtor parents. After the bankruptcy court granted the non-debtor parents’ motion to dismiss, the plaintiffs moved for reconsideration, and the bankruptcy court reaffirmed its holding as to the parents.

The parents’ motion to dismiss was based on two legal arguments. First, that the only way to achieve the effect of substantive consolidation of a non-debtor is through a section 303 involuntary bankruptcy petition. Second, individual debtors cannot be substantively consolidated with individual non-debtors.

The court rejected the first argument as inconsistent with precedent: “a large majority of courts, including those in the Tenth Circuit, permit the doctrine of substantive consolidation to be applied to a non-debtor without a discussion of section 303.” The cases cited and discussed were all decided before Law v. Siegel, 134 S.Ct.l 1188 (2014).

A recent ABI Journal article by a graduate of the University of Richmond Law School argues “allowing substantive consolidation of a debtor with a nondebtor entity without complying with the requirements of § 303 would seemingly appear to be the same sort of end- run around prohibited by Law v Siegel. Effectively, substantive consolidation would allow for a nondebtor entity to be forced into bankruptcy without the need to have three creditors take concerted action and, perhaps most importantly, without the risk of § 363(i)’s fee-shifting provision and the imposition of actual and/or punitive damages as a result of an unsuccessful petition. Thus, because § 303 details the requirements to force an entity into bankruptcy and use of § 105 to substantively consolidate a nondebtor entity would effectively ignore those express statutory requirements, Law v. Siegel implicitly suggests that substantive consolidation of nondebtor entities is no longer a viable use of the courts' general equitable powers.” Rachel A. Greenleaf, Is Substantive Consolidation a Viable Cause of Action Post-Law? ABI Journal, December 2018, p. 64, 84.

The Kretchmar decision devoted a single sentence to rejection of the impact of Law on substantive consolidation: “Furthermore, because an involuntary bankruptcy and substantive consolidation are separate, independent remedies, the Court does not find they are in direct conflict so as to preclude substantive consolidation under Law v. Siegel.” 579 B.R. at 930.

4 The Kretchmar court was persuaded by the non-debtor’s other argument, ruling as “a matter of law that individual debtors cannot be substantively consolidated with individual non-debtors.” 591 B.R at 882. In so ruling, the court first noted it could not find any substantive consolidation case “where both the debtor and the non-debtors are individuals” and then explained “the concept of substantively consolidating a non-debtor arose from the non- bankruptcy remedy of ‘piercing the corporate veil.’” 579 B.R. 933-934

THIRD CASE: EXTENSION OF DEADLINE (108(b) AND SECTION 11e of the 1898 Act)

In re 1075 South Yukon, LLC, 590 B.R. 527 (Bankr. Colo 2018)

11 U.S. Code § 108 - Extension of time (b) Except as provided in subsection (a) of this section, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of—

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) 60 days after the order for relief.

Debtor entered into a repurchase agreement with CPI which gave it the option to repurchase real property for $1,750,000. The agreement contained a deadline for closing – 5:00 p.m. MST on May 31, 2018 and a “time is of the essence” provision.

Debtor filed a Chapter 11 petition at 4:00 p.m. on May 31, 2018. Then, 43 days later, Debtor filed a motion to compel CPI to sell the land to the Debtor for $1,750,000. The Debtor asserts that section 108(b) gives it an additional 60 days to exercise the option.

The bankruptcy court treated the case “as a matter of first impression” for the Tenth Circuit. While the opinion discusses cases from other districts and other circuits (including 1898 Act cases, such as a Good Hope Refineries v. Benavides, 602 F.2d 998 (1st Cir.1979), it based its denial of the motion on the language of section 108(b). In sum, the court concluded that the exercise of a purchase option is neither (i) a “cure of default” nor (ii) an “other similar act” for purposes of section 108(b).

Happily, the court was able to explain the latter conclusion without any “Latin”: whether some other act is a “similar act” under Section 108(b) must be determined in light of the more specifically enumerated acts preceding it. . . .[E]xercising the purchase option granted under the

5 Amended Agreement does not involve filing any pleading, demand, notice or proof of claim or loss, or any act ‘similar’ to these specific acts.” 590 B.R. 530.

FOURTH CASE: TURNOVER OF COLLATERAL (362(a)(3), 542, 1303 and 362(k))

In re Denby-Peterson, 576 B.R, 66, affirmed, 2018 WL 5729907 (N.J. 2018)

11 U.S. Code § 362 - Automatic stay (a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of— * * * (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; * * *

(k) (1) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

11 U.S. Code § 542 - Turnover of property to the estate (a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

Debtor financed the purchase of a Corvette under a loan contract that was assigned to Nu2u. Debtor missed payments; Nu2u repossessed; debtor filed a Chapter 13 petition and demanded a return of the Corvette. When Nu2u did not return the car, the debtor filed a motion for turnover under section 542 and for stay violations under section 362(k).

The court(s) ruled that section 362(a)(3) does not require a lender to turn over repossessed property immediately or face section 362(k) sanctions. In so ruling, the court(s) acknowledged that most circuit court decisions that have considered the question have ruled to the contrary. The district court opinion gives four reasons for affirming the bankruptcy court’s adoption of the minority rule; the first is the most persuasive: “the language used in 11 U.S.C. § 362 is prospective in nature. The relevant statutory provision states that it “operates as a stay” of “any act ... to exercise control over property of the estate.” 11 U.S.C. § 362 (emphasis added). As is clear from the statutory text, the exercise of control is not stayed, but the act to exercise control is stayed.

6 There is other language in both the bankruptcy court opinion and the district court opinion that is more puzzling: “as the Bankruptcy Court pointed out here, an affirmative duty still exists in certain circumstances. If the creditor demands proof of insurance for a vehicle, naming it as loss payee, and the debtor complies, the creditor will be in violation of the automatic stay unless the vehicle is returned to the debtor.” Is the demand for proof of insurance “an act . . . to exercise control”? Why would a lender in possession of the vehicle demand proof of insurance?

Professor David Carlson has suggested a very different analysis: “the automatic stay does not imply a duty to surrender possession at the behest of a bankruptcy trustee. The reason is that the Bankruptcy Code, in Section 542(a), provides for a trustee’s right to a turnover of such collateral. In response to the trustee’s action, a secured party will have an opportunity to assert defenses that are described in and around Section 542(a). These defenses imply that a secured party need not surrender collateral in the absence of a court order. Rather, a secured party may hold the collateral in anticipation of the trustee’s action for a Section 542(a) turnover . . . [T]he United States Supreme Court has already decided this question. In Citizens Bank v. Strumpf, Justice Antonin Scalia ruled that, when a bank “freezes” a deposit account, it has not violated the automatic stay. Freezing a deposit account is precisely analogous to holding repossessed collateral pending the turnover action.” David Gray Carlson, Turnover of Collateral in Bankruptcy: Must a Secured Party in Possession Volunteer? 6 J. Bankr.L. & Prac 483, 487-88 (1997). No reported case has cited to this article.

Yet another professor provides yet another different analysis. Professor Ralph Brubaker focuses on the use of the word “control” (which he distinguishes from “possession”) and the phrase “property of the estate” (which he ties to section 541 “interest of the debtor in property”) in section 362(a)(3). Ralph Brubaker, Turnover, Adequate Protection and the Automatic Stay: A Reply to Judge Wedoff, 38 N.11 Bankruptcy Law Letter NL 1.

FIFTH CASE: SALES FREE AND CLEAR OF EXPERIENCE RATINGS (363(f))

In re Verity Health Systems of California, Inc., 2018 WL 6828993 (Bankr. C.D. December 28, 2018)

11 U.S. Code § 363 - Use, sale, or lease of property (f) The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if—

Debtors in their Chapter 11 moved for authorization to sell their hospital free and clear of “Conditions.” The Conditions had been imposed by the State of California three years before the Chapter 11 filing as a part of a System Restructuring and Support Agreement. The Conditions required the hospitals to provide specified levels or emergency care, intensive care, cardiac care, and other services.

7 In concluding that the Conditions are an “interest in property” within the meaning of section 363, the Verity Health System opinion repeatedly used the phrase “monetary obligations arising from the ownership of property”: “The required service levels were derived based upon the historical experience of the prior operator. As such, the Conditions are monetary obligations arising from the ownership of property.” The opinion did not consider In re Wolverine Radio Co., 930 F.3d 1132 (6th Cir. 1991), which concluded that a debtor’s experience rating is not a section 363(f) “interest in property.” See, e.g., Fouad Kurdi, Considerations in the Transfer of Unemployment Insurance Experience Ratings: The Tax Injunction Act and Bankruptcy Section 363(f), 24 no. 4 J. Bankr. L & Prac issue 4 (August 2015).

SIXTH CASE: SUPERPRIORITY IN CHAPTER 7 (364(c) and 726(b))

In re Happy Jack’s Petroleum, Inc., 2018 WL 6192207 (Bankr. Neb. 2018)

11 U.S. Code § 364 - Obtaining credit (c) If the trustee is unable to obtain unsecured credit allowable under section 503(b)(1) of this title as an administrative expense, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt— (1) with priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title;

11 U.S. Code § 726 - Distribution of property of the estate (b) Payment on claims of a kind specified in paragraph (1), (2), (3), (4), (5), (6), (7), (8), (9), or (10) of section 507(a) of this title, or in paragraph (2), (3), (4), or (5) of subsection (a) of this section, shall be made pro rata among claims of the kind specified in each such particular paragraph, except that in a case that has been converted to this chapter under section 1112, 1208, or 1307 of this title, a claim allowed under section 503(b) of this title incurred under this chapter after such conversion has priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title…

In its Chapter 11 case, the debtor filed a motion to obtain fuel on credit from Hansen pursuant to section 364(c)(1). The unopposed motion was granted.

Less than a year later, the case was converted from Chapter 11 to Chapter 7. Hansen applied for payment of its 364(c) superpriority expense claim. The Chapter 7 trustee and other creditors objected.

The bankruptcy court ordered that Hansen’s section 364(c) super-priority claim has priority over administrative claims arising in the Chapter 7 cases. The court based its ruling on the language of section 726(b): “Section 726(b) does not reference § 364(c)(1) at all. Since super-priority claims granted under § 364(c)(1) are not administrative claims under § 503(b) – in

8 fact, they are a special category of claims with priority over § 503(b) administrative claims – § 726(b) does not trump the super priority granted to § 364(c)(1) claims.”

SEVENTH CASE: SUBSTANTIAL CONTRIBUTION AND 7(503)

In re Javed, 2018 WL 4955839 (Bankr. Md 2018)

11 U.S. Code § 503 - Allowance of administrative expenses (b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including— (3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by— (D) a creditor . . .in making a substantial contribution in a case under chapter 9 or 11 of this title;

Creditor obtained a $138,000 judgment against debtor prior to debtor’s bankruptcy filing. Debtor filed a Chapter 7 petition. Before debtor’s section 341 meeting, creditor filed a dischargeability adversary proceeding and a Motion for Rule 2004 Examination. Both of these filings occurred “prior to the active engagement of the Chapter 7 trustee in this case.” Creditor requested an administrative expense claim for making a “substantial contribution” to the estate based on these actions. The Chapter 7 trustee did not oppose this request. The Court granted creditor an administrative expense priority of $7,987.50. The judge described the result as a “rare exception rather than the rule.” The opinion emphasized (i) the language of section 503(b), (ii) the role of the Chapter 7 trustee, (iii) the absence of a counterpart in Chapters 9 and 11, (iv) creditor’s “early actions (emphasis added) contributed at least in part to the Debtor disclosing certain assets that allegedly had been transferred prepetition by the Debtor to his spouse or other family members not otherwise disclosed in the Debtor’s bankruptcy documents” and (v) the creditor took the actions before the “active engagement of the Chapter 7 trustee.”

EIGHTH CASE: CRITICAL VENDOR DEFENSE TO PREFERENCE RECOVERY (547(b))

In re Personal Communications Devices, LLC, 588 B.R. 661 (Bank. E.D. N.Y. 2018)

11 U.S. Code § 547 - Preferences .* * * (b) the trustee may avoid any transfer of an interest of the debtor in property— (5) that enables such creditor to receive more than such creditor would receive if— (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.

9 This case is a summary judgment case. In this opinion, Judge Trust simply decided that a creditor was not entitled to summary judgment on its critical vendor defense to a preference avoidance action.

Debtor sold cell phones and other communications devices. Creditor was one of several companies (“Repair Service Vendors”) that did warranty work for debtor’s customers.

Debtor made substantial payments to creditor (nearly four million dollars) during the preference period. A trust created by debtor’s plan filed an adversary proceeding to recover these payments.

Almost immediately after filing bankruptcy, debtor filed a motion stating that the Repair Service Vendors were “critical” to debtor’s ongoing operations and the loss of any one Repair Service Vendor would cause severe disruption to debtor’s business. The court entered an order authorizing payment to the Repair Service Vendors.

In this later order denying creditor’s motion for summary judgment based on a critical vendor defense, the court emphasized that the earlier order (1) “did not require the court to make any payments to any critical vendor,” and (2) did not “include any discussion of waiver of preference liability, especially the potential of waiving a nearly $4,000,000 claim.” The court noted that three creditors would have objected to any such preference waiver.

The opinion discusses earlier Delaware cases that distinguish (i) a critical vendor defense based a motion that required payments to the vendor in question, and (ii) a defense based on section 365(b) assumption. The opinion did not focus on the language of section 547(b)(5)(A). It is easier to envision assumption of a lease in a chapter 7 case than a critical vendor payment.

NINTH CASE: PAYMENT OF TUITION AS AN AVOIDABLE TRANSFER (548 and 550)

In re Sterman, 2018 WL 6333588 (Bankr. S.D.N.Y. 2018)

11 U.S. Code § 548 - Fraudulent transfers and obligations (a) (1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily— * * * (B) (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and * * * (d) (2) In this section—

10 (A) “value” means property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor;

11 U.S. Code § 550 - Liability of transferee of avoided transfer (a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from— (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee. (b) The trustee may not recover under section (a)(2) of this section from— (1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or

This is a summary judgment case. The trustee invokes section 544(b) and New York law to avoid transfers within the six years before the bankruptcy petition to or for the benefit of the debtors’ daughters for “college educations at Oberlin College and related expense including school books and supplies, meals, campus housing, . . .”.

In concluding that transfers made after the daughters were 21 are avoidable, Judge Glenn’s opinion focuses on tuition and looked to the definition of “value” in New York law and section 548: “Whether insolvent parents receive reasonably equivalent value for college tuition payments made for the benefit of their adult children is a culturally and socially charged issue. With the greatest respect for the courts that have found reasonably equivalent value for such tuition payments, the Court is constrained by the language of the Bankruptcy Code and the NYDCL—those statutes define the terms ‘value’ and ‘fair consideration’ to require either the transfer of property or the satisfaction of an antecedent debt in return for an insolvent debtor’s payments. 11 U.S.C.A. § 548(d)(2)(A); NYDCL § 272. The Debtors received neither in this case with respect to transfers made to or for the benefit of Alexandra and Samantha after they reached the age of majority—21 years old in New York State.”

On the other hand, in concluding that transfers made before the daughters were 21 are not avoidable, Judge Glenn looked to In re Akkammu, 502 B.R. 124 (Bankr. E.D.N.Y. 2013), in which Judge Craig did not look to statutory language to support the conclusion that by paying tuition for minor children debtors “satisfied their legal obligation to educate their children, thereby receiving reasonably equivalent and fair consideration.” Id. at 132-33.

Although Oberlin College is a named defendant in the Sterman case, the focus is on recovery from the debtors’ daughters and the section 548/544 issues of whether the debtors received reasonably equivalent value. In a footnote, Judge Glenn dismisses as “inapposite” a 2018 district court decision, Pergament v. Brooklyn Law School, 2018 WL 61825022 (E.D.N.Y. 2018), in which the trustee was seeking recovery from the school and the issue was not whether

11 the parents received reasonably equivalent value for their tuition payments but whether the school was a subsequent transferee that could invoke the section 550(b) good faith defense.

In Pergament, the district court concluded that the colleges were mere conduits of payments made before students registered for classes: “the debtor’s children were not required to use the money transferred by their father to pay for tuition; they could have withdrawn from school and taken the money themselves, to do with as they wished. The schools would have refunded the money to them, not to the debtor. It is for that reason—not because the schools routed tuition payments through ‘student accounts’—that, with respect to any money transferred by the debtor before tuition was due, the bankruptcy court correctly determined that the debtor’s children were the initial transferees.”

TENTH CASE: MODIFYING MORTGAGES ON MIXED USE PROPERTY (1322(b)(2))

In re Lister, 2018 WL 6273357 (Bankr. S.D.Ohio 2018)

11 U.S. Code § 1322 - Contents of plan (b) Subject to subsections (a) and (c) of this section, the plan may— (2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims

Debtor’s Chapter 13 plan modifies a mortgage on real property that includes not only debtor’s principal residence but also rental property and a child care facility. Debtor argues that section 1322(b)(2)’s anti-modification provision does not apply.

The Lister court found the statutory language “ambiguous where the real property at issue serves as more than the debtor’s principal residence” then looked to the legislative history favoring home mortgage in concluding that section 1322(b)(2) applies as long as the debtor resides in some portion of the property. The court described this approach as “bright line includes approach” that has been adopted by “an emerging” minority of courts.

The Lister opinion includes a lengthy review of cases that have taken a “bright line only” approach and a “case by case approach.” Lister also discussed the split in cases on the question of what is the date for determining the property’s use and emphasizes the word “is” in section 1322(b) as supporting the petition date as the relevant time.

OTHER NOTEWORTHY 2018 BANKRUPTCY COURT DECISIONS

There are, of course, numerous other 2018 bankruptcy court opinions that I would like to talk about. Judge Paul Black, a University of Richmond Law School alum, wrote an opinion in a Chapter VII case filed in 1928, In re Yellow Poplar Lumber Company, Inc., 2018 WL 5793179

12 (Bankr. W.D. Va. 2018). And there is a decision from Phoenix, where I first tried to practice, holding that a $7,500 post-petition payment from the debtor’s Heathy Paws Insurance policy carrier for pre-petition surgery on the debtor’s dog Scout – a dog valued on the debtor’s Schedule at $100, was exempt. In re Hill, 2018 WL 6039096 (Bankr. Ariz 2018).

But, I was told to talk about ten cases. And, I want to be sure that I have time to “sing” the first verse of my “version” of the John Prine song, “When I Get to Heaven2.”

When I’m a bankruptcy judge, I am going to get a law clerk

Who has practiced for 25 years so they can do my work

And then buy me a long robe that goes way done to my feet

So I can work in my undies. A’nt bankruptcy judging neat.

And, then I am going to claw back fees, appoint my friends trustee

Yeah I am going be a judge that scares all big cases away

Be tough on dip lenders, deny critical vendors

Cause this old man is going to town.

2 https://www.youtube.com/watch?v=l0EiV423j0M

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