Bankruptcy Answers with Reno Fernandez

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Bankruptcy Court Rules Horse Breeding is Not Farming Under Chapter 12 Jun 08, 2023

Show notes

In re Leonaggeo, No. 23-35092, --- B.R. --- (Bankr. S.D.N.Y. May 24, 2023)

TRANSCRIPT

Hello to all the attorneys, fiduciaries, students, and bankruptcy fans out there. Today we are talking about In re Leonaggeo.

On May 24, 2023, the U.S. Bankruptcy Court for the Southern District of New York held that ordinary horse breeding, without more, does not constitute farming activity under chapter 12 of the Bankruptcy Code. Certain creditors filed a motion to dismiss the case or, in the alternative, for relief from the automatic stay. Specifically, they contested the debtor's eligibility under sections 109(f) and 101(18) of the Bankruptcy Code. In defense, Leonaggeo maintained that she qualifies for chapter 12 relief because she operates a horse farm and derives all her income from the farm. The court noted that Leonaggeo is a serial filer.

The court considered whether the debtor is a "family farmer," defined as someone "engaged in a farming operation." Most courts look to whether the activity in question involves risks similar to traditional farming, such as raising crops or livestock.

The court noted that there is a split of authorities over whether whether horse breeding, boarding, and training can be categorized as a "farming operation." Ultimately, the court distinguished the authorities on one side of the split because they involved debtors engaged in other operations in addition to horse raising.

Here, the debtor was involved in breeding, training, and boarding horses as well as rider instruction. But the court found this to be insufficient. Accordingly, the court dismissed the case.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy appeals throughout the country. If you would like to discuss, please feel free to reach out. Thank you.

Court Dismisses Chicago Hotel Bankruptcy Case for Lack of Authority to File Jun 06, 2023

Show notes

In re Chicago South Loop Hotel Owner, LLC, No. 23-02595 (Bankr. N.D.Ill. May 24, 2023)

TRANSCRIPT

Hello to all you attorneys, fiduciaries, students, and bankruptcy fans. Today we are talking about In re Chicago South Loop Hotel Owner, LLC.

On May 24, 2023, the U.S. Bankruptcy Court for the Northern District of Illinois filed a memorandum opinion dismissing the chapter 11 case of Chicago South Loop Hotel Owner, LLC, for lack of proper authority to have filed the case.

U.S. Bank had moved to dismiss the case, arguing that the debtor lacked the appropriate authority because the debtor’s parent company, Chicago South Loop Hotel, LLC, did not adhere to its own operating agreement. This noncompliance was evident in the parent company's unilateral decision to make several amendments and resolutions without obtaining the unanimous consent of all members—a requirement specified in the operating agreement.

This transgression led to an invalid acquisition of a significant membership interest by the manager of the parent company, Vickie White. Since this interest was unlawfully obtained, she did not have the authority to transfer it to Chicago South Loop Hotel Holdings, LLC. For the same reasons, Todd Hansen, who was elected as a manager by Vickie White, did not possess the necessary authority to sign the chapter 11 petition on behalf of the Debtor. Accordingly, the court granted U.S. Bank’s motion to dismiss.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

Court Declines to Award Punitive Damages for Mortgagee’s Violation of Rule 3002.1 Jun 02, 2023

Show notes

In re Dewitt, No. 11-36341 (Bankr. S.D.Ohio May 19, 2023)

TRANSCRIPT

Hello to you attorneys, fiduciaries, students, and bankruptcy fans. Today we are talking about In re Dewitt.

On May 19, 2023, the U.S. Bankruptcy Court for the Southern District of Ohio entered a decision on a motion for summary judgment that provides a comprehensive analysis of Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. The opinion investigates the meaning of the rule, available remedies, and the jurisdiction of bankruptcy courts to impose damages or penalties for breaches of the rule.

The opinion revolves around an ongoing conflict between a debtor and a mortgagee, involving an alleged violation of Rule 3002.1(g) by the mortgagee due to the non-disclosure of a tax payment made on behalf of the debtor. The debtor sought an injunction from the court to prevent the Mortgagee from presenting evidence or referring to the charge as an act of default. The Mortgagee, on the other hand, contended that such relief is unwarranted, claiming that its actions had caused no harm.

The bankruptcy court commented that Rule 3002.1 enhances transparency in chapter 13 cases and facilitates a final reconciliation. With this in mind, the court considered whether a violation could result in the exclusion of evidence of the fee charged, compensatory damages, or punitive damages, and whether the court has the power to award such relief under Bankruptcy Code § 105(a).

Ultimately, the court granted the debtor’s motion for summary judgment, in part, and scheduled an evidentiary hearing on remaining issues. The court agreed with the debtor’s position, including the debtor's request for an injunction against introducing evidence of default. But the court ruled out the recovery of damages beyond attorney fees and costs.

Of course, I will put a link to the opinion down in the show notes. I am Reno Fernandez, and I handle bankruptcy appeals across the country, all the way up to the U.S. Supreme Court. If you would like to chat, please do not hesitate to reach out. Thank you.

Bankruptcy Court Rules Violation of Uniform Voidable Transfer Act is Not Embezzlement or Larceny May 31, 2023

Show notes

Garven v. Paczkowski (In re Paczkowski), No. 19-04140 (Bankr. D.Minn. May 22, 2023)

TRANSCRIPT

Hello to all the lawyers, fiduciaries, students and bankruptcy fans out there. Today we are talking about Garven v. Paczkowski. On May 22, 2023, the U.S. Bankruptcy Court for the District of Minnesota issued a memorandum decision on the dischargeability of a debt in bankruptcy, specifically two exceptions to discharge and the possible application of the doctrine of collateral estoppel.

The issue is whether findings from a state court case can serve as evidence that the debtor committed embezzlement or larceny under Bankruptcy Code § 523(a)(4) or caused willful and malicious injury under § 523(a)(6). In state court, a default judgment was entered, followed by a jury verdict.

The procedural posture of the case involves two motions for summary judgment. After a hearing, the court took the first motion under advisement, while the second motion was partially granted and partially denied. Specifically, the court refused to grant summary judgment for embezzlement or larceny, but the court did grant summary judgment for willful and malicious injury.

The underlying litigation resulted in a default judgment on construction-defect allegations, followed by litigation under the Minnesota Uniform Voidable Transfer Act where the jury found the defendant had intentionally transferred assets to hinder, delay, or defraud the plaintiffs.

The court applied the doctrine of collateral estoppel. With respect to the transfer of assets, the court determined that violation of the Uniform Voidable Transfer Act cannot be categorized as larceny or embezzlement.

The court then scrutinized the plaintiffs' claim for willful and malicious injury. Three elements need to be satisfied for the exception under § 523(a)(6) to apply: first, the debtor caused an injury to the creditor; second, the injury was willfully inflicted; and third, the debtor acted with malice. The court found that all three elements are satisfied by the underlying default judgment and jury verdict.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, including all the way up to the U.S. Supreme Court. If you have questions or would like to chat, please feel free to reach out. Thank you.

Second Circuit Upholds Non-Consensual Third-Party Releases in Purdue Pharma Case May 30, 2023

Show notes

In re Purdue Pharma L.P., No. 22-110, --- F.4th --- (2d Cir. 2023)

TRANSCRIPT

Hello to all you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about Purdue Pharma.

On May 30, 2023, the U.S. Court of Appeals for the Second Circuit delivered an opinion holding that Bankruptcy Code §§ 105(a) and 1123(b)(6) enable Purdue Pharma L.P. and associated entities to include in their Chapter 11 plan, non-consensual third-party releases of direct claims against non-debtors. The circuit court reversed the district court's contrary decision and upheld the bankruptcy court's order confirming the plan.

The U.S. District Court for the Southern District of New York had overturned the bankruptcy court's order approving the Purdue plan. The district court found that the bankruptcy court lacked express or implied statutory authority under the Bankruptcy Code to approve non-consensual releases of direct third-party claims against non-debtors. Furthermore, the district court determined that the bankruptcy court lacked residual equitable authority to approve these releases, and that the necessary authority for such approval was not obtained merely because the plan required the releases for confirmation.

As is now familiar, Purdue and members of the Sackler family were caught up in mass tort litigation related to the effects of OxyContin. In order to settle these civil claims, a deal was made whereby Purdue would file for bankruptcy, and in return, the Sacklers would personally contribute billions of dollars to the bankruptcy if all civil claims against them were released. As such, Purdue and related entities filed Chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the Southern District of New York, while the Sackler family did not. After extensive action in the bankruptcy court, the court approved Purdue's proposed plan of reorganization. This plan included a non-consensual third-party release of claims against the Sacklers, which directly affected Purdue's estate. In exchange, the Sacklers agreed to contribute between $5.5 and $6 billion to the bankruptcy.

Multiple parties, including the Office of the United States Trustee, appealed the confirmation ruling to the district court. As mentioned, the district court reversed but was then itself reversed by the Second Circuit.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

Vehicle Lien Release in Chapter 13 Plan Does Not Apply to Co-Debtor’s Interests May 29, 2023

Show notes

In re Buttel, No. 22-40542 (Bankr. D.Kan. May 18, 2023)

TRANSCRIPT

Hello to all the lawyers, fiduciaries, students, and bankruptcy fans out there. Today we are talking about In re Buttel.

Specifically, on May 18, 2023, the U.S. Bankruptcy Court for the District of Kansas entered a memorandum opinion denying confirmation of a chapter 13 plan. The issue was whether a creditor is obligated to release a lien on a vehicle when one of two co-debtors completes a Chapter 13 plan and is granted a discharge. There was also a dispute over the value of the vehicle.

In this case, debtor Vicki Lyn Buttel and co-debtor Kerry H. Kuehn jointly purchased a 2019 Mitsubishi Eclipse with financing provided by Lawrence Mitsubishi. The sales contract was subsequently assigned to Regional Acceptance Corporation (the creditor), which perfected a lien under Kansas law.

When the debtor filed for Chapter 13 bankruptcy relief, she proposed a three-year plan to cram down the secured claim by paying the present value of the vehicle and releasing the lien. The creditor, however, objected to the plan, arguing that the lien should not be released until the full balance was paid.

The court found that the value of the collateral must be at least the value of the debtor's one-half interest in the vehicle and ruled that the lien release at discharge only applies to the lien granted by the debtor, not the co-debtor.

The opinion also discusses the requirements for cramdown under Bankruptcy Code § 1325(a)(5), which provides that the holder of a secured claim retains the lien until either the underlying debt is paid or a discharge under section 1328 occurs. The debtor and creditor disagreed over the timing of the lien release, with the debtor advocating for a release upon discharge and the creditor maintaining that the lien should remain until the co-debtor pays the outstanding debt.

The court found this to be a matter of statutory construction of § 1325 and related sections, resulting in the conclusion that the lien release only applies to the debtor's one-half interest in the vehicle, not the co-debtor's interest. Consequently, the court denied confirmation of the debtor's plan, deeming that it did not sufficiently address lien release in line with the court's interpretation. The debtor was instructed to submit an amended plan with non-standard provisions regarding release of the lien.

Of course, I will put a link to the opinion in the show notes.

I am Reno Fernandez, and I handle bankruptcy-related appellate matters throughout the country, all the way up to the Supreme Court. If you would like to chat, please feel free to reach out. Thank you.

Bankruptcy Court Rules Contiguous Properties Under Common Ownership are Not Single Asset Real Estate May 26, 2023

Show notes

In re Nuovo Ciao-Di, LLC, No. 23-10068 (Bankr. S.D.N.Y. May 19, 2023)

TRANSCRIPT

Hello you bankruptcy attorneys, fiduciaries, and students. Today we are talking about In re Nuovo Ciao-Di, LLC. On May 19, 2023, the U.S. Bankruptcy Court for the Sothern District of New York entered a memorandum opinion examining whether two contiguous commercial condominiums can be classified as "single asset real estate" under the Bankruptcy Code, specifically under 11 U.S.C. § 101(51B). The opinion concludes that they do not meet this definition.

Specifically, creditor DCC Vigilant, LLC filed a motion to classify the debtor as a "single asset real estate" debtor. DCC argued that the two units should be regarded as a "single property" because they have never been owned separately, were transferred under a single deed, and they both are collateral for a single mortgage. Furthermore, DCC suggests that these units should be seen as a "single project" since they resemble an office building or shopping mall where the rental units are part of a unified plan.

On the other hand, the debtor argued that the two units are discrete entities, each having different tenants, divergent commercial uses, separate plans for future sale and development, and unique listings as separate lots by the New York City Department of Finance.

The court explained the test for "single asset real estate" cases as defined in the Bankruptcy Reform Act of 1994. It clarified that "single asset real estate" refers to real property that comprises a single property or project, which substantially generates all the gross income of a debtor. The designation of real property as a "single property or project" is a factual matter, and the responsibility falls on the movant to prove that multiple parcels amount to a "single property or project."

It is true that courts consider the proximity of the parcels, their common ownership, and whether they were transferred under a single deed subject to a single mortgage. However, the court ruled that the two units do not constitute a "single property" due to their differing lot numbers and unique characteristics. The court also concluded that these units do not form a "single project" since DCC has not successfully shown that the properties are united by a common plan or scheme. As a result, the court denied DCC's motion to designate Nuovo Ciao-Di, LLC as a "single asset real estate" debtor.

Of course, I will put a link to the opinion in the show notes.

I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the county, all the way up to the U.S. Supreme Court. If you’d like to chat or you have any questions, please feel free to reach out. Thank you.

Eighth Circuit BAP Holds Substantial Change of Circumstances is Necessary to Modify Chapter 12 Plan May 25, 2023

Show notes

In re Swackhammer, --- B.R. ---, 2023 WL 3591920 (8th Cir. May 23, 2023)

TRANSCRIPT

Greetings lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about In re Swackhammer.

On May 23, 2023, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit upheld the ruling of the U.S. Bankruptcy Court for the Southern District of Iowa approving a debtor's fourth modified repayment plan under Bankruptcy Code § 1229. The BAP found that according to § 1229 and Eighth Circuit case law, a debtor is implicitly required to demonstrate that they've undergone a significant change in circumstance. It also agreed with the Bankruptcy Court's factual findings related to the modification of the plan, indicating they were not clearly erroneous.

In the original case, the debtors had put forth a fourth request to adjust their chapter 12 repayment plan. Farm Credit, a secured creditor of the debtors, opposed this modification. They argued that the debtors hadn't proven any substantial and unanticipated change in circumstances and claimed that the proposed adjustment lacked feasibility.

The Bankruptcy Court overruled Farm Credit's objections but acknowledged concerns about the plan's feasibility. As a result, the court determined that if the debtors failed to meet any term of the fourth revised plan, their case would be dismissed. Displeased with this outcome, Farm Credit appealed.

The case began in September 2018 when the debtors filed a bankruptcy petition under chapter 12 and confirmed a consensual second modified plan a year later. Over the following years, they proposed multiple modifications to extend payment deadlines, citing unanticipated changes such as wet weather, equipment failure, employee illness, and farmland losses. Each time, Farm Credit opposed the modifications but failed to prevent their approval.

Eventually, the Bankruptcy Court ordered all parties to convene and agree on the terms of a fourth amendment, which was confirmed following a telephonic hearing. Despite objections from Farm Credit, the court held that the evidence of a substantial change in circumstances and measures to improve feasibility, such as the waiver of unpaid fees by the debtors' counsel, made the fourth modified plan viable.

On appeal, the BAP upheld the lower court's ruling, stating it had not abused its discretion. The opinion analyses § 1229 and compares it to § 1329, which governs modification of chapter 13 plans. The BAP noted a split among courts over the interpretation of § 1229(a) and § 1329(a), which hasn't been directly addressed by the Eighth Circuit. At least one case states that modification of a confirmed chapter 13 plan should only happen when substantial changes in circumstances occur. Another suggests the possibility of later creditor-driven modifications should the debtor's ability to pay undergo significant changes. Ultimately, the BAP concluded that a "significant change in circumstances" is necessary to justify a modification to the repayment plan.

The opinion discusses how the bankruptcy court found the Swackhammers successfully demonstrated an unanticipated, substantial change in their circumstances. It also notes that the fourth modified plan was deemed feasible and confirmable. Therefore, the Bankruptcy Appellate Panel for the Eighth Circuit affirmed the decision of the lower court, asserting that it had exercised its discretion appropriately.

As usual, I will put an opinion link in the show notes. I am Reno Fernandez, and I handle bankruptcy related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

Sears Bankruptcy Judge Holds Electricity is Not a Good Under UCC and Section 503(b)(9) May 24, 2023

Show notes

In re Sears Holdings Corporation, No. 18-23538 (Bankr. S.D.N.Y. May 15, 2023)

TRANSCRIPT

Hello to all you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about a memorandum opinion entered in the Sears’ bankruptcy cases on May 15, 2023. Specifically, the U.S. Bankruptcy Court for the Southern District of New York held that electricity is not a "good" under the Uniform Commercial Code, and claims for providing power are not entitled to administrative priority under Section 503(b)(9) of the Bankruptcy Code. This issue is closely linked to claims lodged by the Puerto Rico Electric Power Authority (PREPA) against Sears Holdings Corporation and Kmart, which, as a result, are ultimately designated as general unsecured claims.

The issue was an objection to two claims lodged by PREPA against Sears and its affiliates. PREPA advocated for administrative priority status for two claims amounting to about $530,000. These claims represent unpaid electricity expenses that had accrued before the Debtors filed for bankruptcy. However, the Debtors disputed this, arguing that the claims shouldn't be accorded administrative priority status, contending that electric energy is not a "good" as defined by Section 503(b)(9). Agreeing with the Debtors, the court sustained their objection and reclassified the claims as general unsecured claims.

The court's determination is heavily based on the definition of "goods" under the UCC. The opinion comments that it is common practice for bankruptcy courts to utilize the UCC's definition of "goods" when applying Section 503(b)(9).

PREPA, on the other hand, pushes for the court to adopt the perspective of bankruptcy courts in certain other jurisdictions that have classified electric energy as a good under the UCC. However, the court dismissed this argument, highlighting that an equal number of cases have arrived at the contrary conclusion. PREPA also argued that Puerto Rico law should be applied, but the court dismissed this suggestion as well, observing that it would conflict with the objective of maintaining uniformity in bankruptcy law.

As usual, I will put a link to the opinion in the show notes. Thank you.

Directors of SVB Financial Group May Use Insurance Defense Funds Despite Creditor Committee’s Objections May 23, 2023

Show notes

In re SVB Financial Group, No. 21-10367 (Bankr. S.D.N.Y. May 22, 2023)

TRANSCRIPT

Greetings to all you attorneys, fiduciaries, students, and bankruptcy fans. Today we are talking about the SVB Financial Group bankruptcy case again.

On May 22, 2023, the U.S. Bankruptcy Court for the Southern District of New York entered a memorandum opinion granting a motion by sixteen current and former directors for relief from the automatic stay to allow the payment of defense costs under certain directors and officers insurance policies.

The official committee of unsecured creditors objected, raising multiple concerns. Among other things, the committee argued that the proceeds of the so-called “ABC” policies are property of the estate. The committee was particularly concerned about “side C” coverage, the purpose of which is to protect the debtor entity itself. The committee also raised fears that unchecked payment of defense costs could drastically reduce the available proceeds, especially given that they are “wasting policies,” meaning that the available coverage diminishes with each payout.

This is amidst the context of several securities class actions that have been filed against the movants and the debtor, and additional similar lawsuits that are sure to follow, plus ongoing regulatory investigations concerning the events leading up to Silicon Valley Bank’s collapse.

The movants countered that the estate would benefit from a robust defense by the insureds, asserting that without protection from the D&O policies, the directors’ attention might be diverted from the debtor's operations.

As a backup position, the committee requested safeguards be put in place, and the movants agreed to provide quarterly reporting and to seek further relief before using policy proceeds to pay any settlement.

In the end, the court agreed with the movants that the balance of harms favored lifting the stay, stating that denying access to defense costs would cause imminent and significant harm, and that potential harm to the debtor was speculative. The court adopted the movants' proposed requirements of reporting and settlement approval but declined to impose any cap.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

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