Articles Posted in Trustees

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As a creditor, the news of a debtor who owes you a substantial sum of money filing bankruptcy is often the most alarming news you can learn—that is, until you seek advice of counsel and learn that payments the debtor made to you within 90-days prior to the bankruptcy will be the subject of a lawsuit and likely recoverable by the bankruptcy estate as a “preference.”  This is usually the point I offer soothing chamomile tea to the client.

Recovery of “preference” transfers in bankruptcy cases, though seemingly unfair to the individual creditor, serve an important role and offer a degree of protection to the creditors as a whole.  The primary elements of a preference transfer are relatively straightforward: a debtor who is insolvent, makes a payment or payments to a creditor, within 90 days[1] prior to the bankruptcy filing, to satisfy at least a portion of a pre-existing debt[2], and the creditor receives more than it would have had the debtor filed a chapter 7 (liquidation) bankruptcy case.  Though the “don’t rob Peter to pay Paul” concept appears clear enough, the Ninth Circuit has recently illustrated how complicated the matter can become in In re Tenderloin Health[3] where the court addressed the often overlooked final element to a preference—the “greater amount” test.

As the Ninth Circuit noted, the “greater amount test … ‘requires the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7’ without the alleged preferential transfer.” Id. at *7.  This task of creating a hypothetical chapter 7 liquidation grows ever more daunting as a case grows more complex, leading to uncertainty for a creditor client, especially when unresolved legal issues come up within the hypothetical bankruptcy.

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The Fifth Circuit Court of Appeals recently issued a decision that should make defendants in Ponzi cases shiver in their boots.  The court said that the defendant, the Golf Channel, had to return nearly $6 million and that it could not take advantage of a commonly-invoked “reasonably equivalent value” defense.  Even though the Golf Channel had aired advertisements promoting the business, which would normally have been “reasonably equivalent value,” the Fifth Circuit held that by airing advertisements promoting the Ponzi scheme, the Golf Channel did nothing to help the Ponzi scheme’s creditors.  But how was the Golf Channel supposed to know that it was dealing with a Ponzi scheme?  For more on the case, and what it means for merchants, read on. Continue reading

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Editor’s note: this post originally appeared in Law360.

In a recent decision, the United States Bankruptcy Appellate Panel of the Ninth Circuit resolved what it described as an issue of “first impression” in the Ninth Circuit — whether or not the two-year statute of limitations provided by Section 546(a) of the Bankruptcy Code “. . . preempts a state-law statute of repose such as California Civil Code § 3439.09(c).”  Rund v. Bank of America NA et al. (In re EPD Investment Co. LLC), 523 B.R. 680, 682 (B.A.P. 9th Cir. 2015).

The EPD Investment decision involved the application of the California Uniform Fraudulent Transfer Act (UFTA), set forth at Civil Code §§ 3439-3439.12, which allows a creditor to recover a fraudulent transfer from the transferee under various circumstances, including “actual fraud” and “constructive fraud.”  The statute of limitations provided in the UFTA, Civil Code § 3439.09, generally provides that claims must be brought within four years from the date of the transfer or in some cases, within one year of discovery of the claim.  The BAP found that despite the terms of Civil Code § 3439.09(c), if a claim existed under the UFTA on the date of the “order for relief,” the trustee had an additional two years to file a complaint with respect to that claim by reason of Sections 544(b) and 546(a) of the Bankruptcy Code.  EPD Investment, 523 B.R. 680 at 691-692.

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Bankruptcy Judge Dennis Montali in San Francisco said last week that he will allow a direct appeal to the Ninth Circuit from one of his rulings in the bankruptcy of Howrey LLP, skipping an intermediate appeal to the U.S. District Court.  The judge relied on Jewel v. Boxer — a California state law case which holds that profit earned on unfinished business after dissolution belongs to the “old” firm, not to a newly-formed firm that completed the work.

The case is of intense interest to attorneys who move to other firms when their existing firms go out of business.  Judge Montali had allowed the Howrey trustee to sue several law firms including Jones Day and Seyfarth Shaw LLP for profits they made on work that began at the now-defunct firm.

The New York Court of Appeals recently ruled to the contrary in response to a question by the New York-based Second Circuit Court of Appeals in litigation involving the failed law firms Thelen and Coudert Brothers.  The New York Court of Appeals stated:  “We hold that pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ within the meaning of New York’s Partnership Law.  A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”

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The Beverly Hills Bar Association’s Bankruptcy Section recently held a program discussing the three recent bankruptcy-related Supreme Court decisions: Law v. Siegel (a case regarding surcharge, which was discussed on this blog in a previous post by Courtney Pozmantier), Executive Benefits Insurance Agency v. Arkison (In re Bellingham) (redux of Stern v. Marshall), and Clark v. Rameker (regarding inherited IRAs and exemptions).  The program was presented by Ken Klee and Dan Bussel and moderated by Greenberg Glusker’s own Brian Davidoff.

While the three cases that were discussed address different issues, the cases were linked by common themes.  All three cases were decided unanimously by the Supreme Court — no split decisions or plurality decisions here!  Also, all three opinions made use of textual analysis.  The panelists at the program speculated that perhaps unanimity came at the cost of squarely addressing key issues.  The Supreme Court’s grant of certiorari in the Wellness International case[1], in order to resolve issues left open by the Bellingham, supports this contention.  The panel also discussed the possibility that the use of textual analysis, which is advocated by some conservative Justices, may have been necessary for unanimity.  This is supported by the fact that Justice Sotomayor incorporated textual analysis into her opinion in Clark v. Rameker.

The program went on to address how these three cases will impact the practice of bankruptcy, including how courts will deal with Stern v. Marshall-type claims in the future.  A DVD of the program is available from the Beverly Hills Bar Association’s website.  By purchasing and viewing the DVD, attorneys can earn 1 hour of MCLE credit.