Recent Developments in Bankruptcy Law, January 2022 – Insolvency/Bankruptcy/Restructuring
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1. AUTOMATIC STAY
1.1 Activities covered
1.1.a Taggart vs. Lorenzen standard applies to suspension of breach in a corporate matter. Debtor sold assets prior to petition. After the date of the petition, the buyer demanded payment of certain working capital adjustments provided for in the purchase agreement. The automatic suspension prohibits any act of collection or collection of a pre-request debt. Section 362(k) allows an individual debtor to recover damages for willful breach of the stay. Under Sixth Circuit law, it does not protect non-individual debtors. Therefore, the remedy for a breach of stay in a non-individual obligor case is a civil contempt citation under section 105(a).
Taggart vs. Lorenzen, 139 S.Ct. 1795 (2019), applied the general standards of a citation for civil contempt to a violation of the injunction of discharge, allowing a finding of contempt only if the actor had no objectively reasonable basis on which to assert that the discharge order did not apply. But in dicta, the decision singled out automatic stay breaches in individual debtor cases, suggesting a strict liability standard might be appropriate. Since section 362(k) does not apply to cases of non-individual obligors, the distinction does not apply; general standards of civil contempt apply. In this case, compliance with the purchase agreement regarding purchase price adjustments would not violate the stay, but the late request for payment did. However, the seller had an objectively reasonable basis to conclude that the action did not violate the stay. Therefore, the court rejects the request for sanctions. Harker v. Eastport Holdings, LLC (In re GYPC, Inc.)___ BR ___ (Bankr. SD Ohio Nov. 22, 2021).
1.1.b Refusal to vacate a pre-garnishment writ does not violate the stay as long as the creditor stays all proceedings. Prior to the bankruptcy, the creditor obtained a writ of garnishment and seized the debtor’s bank account. The bank froze the account, but before releasing the funds to the creditor, the debtor filed for bankruptcy. The creditor asked the state court for a stay and advised the court that he had no objection to the bank releasing the funds, but would not void his writ or order the bank to release the funds. The court stayed the proceedings, granted the debtor’s request to set aside the writ, and denied the debtor’s request for the return of the funds. However, the bank unblocked the account a few days later. The automatic stay prohibits (1) a creditor from commencing or continuing an action to recover a pre-petition claim, (2) the execution against the debtor of a pre-petition judgment, (3) any act to obtain possession of or exercise control over property of the estate or estate, and (6) any act to collect or recover a debt antecedent to the petition. City of Chicago vs. Fulton, 141 S.Ct. 585 (2021), held that Section 362 requires a creditor holding property of the debtor or estate to maintain the status quo, but does not require the return of the property, which is instead governed by Section 542. Refusing to vacate the garnishment was not the pursuit of a pre-petition action, nor an attempt to enforce a pre-petition judgment, so long as the creditor stayed all proceedings in the ‘action. Nor was the refusal to set aside the writ an act to obtain property or an act to collect the debt. Here, the creditor did nothing to change his position and the debtor’s account was unblocked. Therefore, the creditor did not breach the stay. Stuart v. City of Scottsdale (In re Stuart)632 BR 531 (9th Cir. BAP 2021).
1.2 Effect of stay
2. AVOIDANCE POWERS
2.1 Fraudulent Transfers
2.1.a Sale by tax foreclosure for the amount of taxes owed is subject to attack as a fraudulent conveyance. The debtor failed to pay the property taxes. In accordance with state law, the local taxing authority seized the property by bidding on the amount of taxes, which was approximately 10% of the fair market value of the property. The debtor filed a Chapter 13 case and brought an constructive fraudulent conveyance action under Section 548(a)(1)(B) to avoid the foreclosure sale. Section 548(a)(1)(B) allows a trustee (or a Chapter 13 debtor) to avoid a transfer of ownership of the debtor made for less than a reasonably equivalent value within two years before the date of the petition while the debtor was insolvent. In BFP c. Res. Trust Corp., 511 U.S. 531 (1994), the Supreme Court held that a properly conducted non-collusive mortgage foreclosure sale resulted in reasonably equivalent value and therefore was not subject to reversal as a fraudulent conveyance. However, the Court did not address tax seizures. In this case, the tax authority’s ability to purchase the property without an auction at a price unrelated to the value of the property gave rise to potential fraudulent conveyance liability. Lowry v. Southfield Neighborhood Revitalization Initiative (In re Lowry), ___ F.4th ___, 2021 US App. LEXIS 13042 (6th Cir. Dec. 27, 2021).
2.3 Post-petition transfers
2.5 Statutory privileges
2.5.a Section 108(c) does not limit the notice period provided for in Section 546(b). A creditor has registered a notice of pre-petition of mechanical lien. State law required the creditor to file an action to enforce the lien within 90 days of registration. The debtor filed his petition within the 90-day period. The creditor gave notice under section 546(b) more than 90 days after the record date. Section 546(b) provides that instead of seizing property or taking any action required under non-bankruptcy law to continue or maintain perfection of a lien, the creditor may continue or maintain the lien “by giving notice within the time fixed by this Act for such seizure or commencement”, and giving such notice does not violate the automatic stay. Section 108(c) sets the statute of limitations for that ‘a creditor brings an action until the end of this period or 30 days after the notice of termination of the automatic stay. Since section 546(b) gives an alternative – to give notice – which does not violate stay, Section 108(c) does not set the notice period, therefore the creditor’s notice was late and his lien terminated. Philmont Mgmt., Inc. v. 450 Western Ave., LLC (In re 450 Western Ave., LLC)633 BR 894 (9th Cir. BAP 2021).
2.6 Power of the strong arm
3. BANKRUPTCY RULES
4. COMMENCEMENT OF CASE AND ELIGIBILITY
4.1.a Requiring shareholder approval for a bankruptcy petition is not contrary to public order. The debtor LLC borrowed from an investor, who also acquired, for a separate substantial price, a preferred interest. The Debtor’s LLC Agreement was amended to provide that the Debtor could not file for bankruptcy without the affirmative vote of a majority of the Preferred Units. The applicable non-bankruptcy law determines who has the power to file a bankruptcy petition. A court should apply any provision of the debtor’s organizational documents that specifies who has the power. Such a provision could be contrary to public order if it only granted a “preferred share” to a creditor to prevent a deposit. Here, however, the creditor is also a significant shareholder who, as a non-executive member of an LLC, has no fiduciary duty to the LLC or its other members and can therefore protect its rights by withholding its consent to the bankruptcy filing. . In re 3P Hightstown, LLC631 BR 205 (Bankr. DNJ 2021).
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