In In re Virissimo, 2005 WL 2854341 (Bankr. D. Nev., 10/31/05), Judge Linda B. Riegle of the Bankruptcy Court for the District of Nevada sided with Judge Robert Mark, Chief Bankruptcy Judge of the Bankruptcy Court for the Southern District of Florida, in the debate (referenced here) between Judge Mark and Arizona’s Judge Haines regarding whether BAPCPA’s limitation on the homestead exemption, as set forth in § 522(p) to the Bankruptcy Code, limits the amount that a resident debtor can claim as exempt as “homestead” property under state law if the debtor has not owned the property for more than 1215 days and did not previously own property in the state.
Judge Riegle summarized the debate between Judge Haines and Judge Mark as follows, ultimately concluding that Judge Mark had the winning argument:

Continue Reading BAPCPA’s Homestead Exemption: A Third Judge Weighs In on the Debate

The old phrase “Don’t Mess with Texas” rings true in today’s ruling from the Bankruptcy Court of the Southern District of Texas, In re Hubbard, (2005 WL 2847420) (Bankr. S.D. Tex., 11/2/05), where the Court denied a chapter 13 debtor’s request to extend the time to provide verification of credit counseling.
This mandatory requirement that consumer debtors seek the advice (in all but emergency situations) of credit counseling firms in advance of their filing for bankruptcy is a slithering outgrowth of BAPCPA, and is embodied in new section 109(h) of the Bankruptcy Code. Being the first opinion on the matter, the Court said it “will interpret § 109(g) in accordance with traditional principles.”
This case makes clear that lawyers and debtors should expect bankruptcy judges to hold a debtor’s feet to the fire and require it to follow BAPCPA’s rigid credit counseling guidelines. In sum, a tighter squeeze.
Here’s what the Court said, uncensored:

Continue Reading Don’t Mess with Texas: Texas Bankruptcy Court Denies Request for Extension of Time to Provide Verification of Credit Counseling

The strong feedback to recent posts (here and here) (including by our friends at The Volkoh Conspiracy) regarding the unjust windfall to bankruptcy estates from Moore v. Bay, 284 U.S. 1 (1931), led us internally to discuss which would more likely occur first: hell freezing over or the US Supreme Court overturning Moore v. Bay?
The answer being painfully apparent, we searched for a better mousetrap, and seized upon Congressional action as the preferred solution to the problem of Moore v. Bay. Just as Congress in 1994 enacted the much-heralded “Deprezio Amendment” to address the inequities of a much reviled (though correctly decided) Seventh Circuit decision, Congress should enact a “Moore v. Bay Amendment” to bury this widely-criticized, but universally followed, opinion.
We at The Bankruptcy Litigation Blog, therefore, posit for your consideration the following brainteaser:
HOW CAN THE BANKRUPTCY CODE BEST BE AMENDED TO FOREVER BURY THE HOLDING OF MOORE v. BAY?
The NCBJ (National Conference of Bankruptcy Judges) begins tomorrow in San Antonio, Texas, and I hope to get some good ideas down there on how to best solve this brainteaser. Meanwhile, any suggested concepts to consider, pitfalls to avoid, or language to employ would be most appreciated and duly recognized.
Stay tuned. Much more to follow (no pun intended).
Finally, thanks to all 2,100 visitors to the site in the first three weeks of the blog’s existence. Knowing you’re out there spurs us on (no pun intended, San Antonio)! Hopefully, this blog will continue to exceed our wildest expectations, and yours.
Thanks again for your support!
Steven Jakubowski
© Steve Jakubowski 2005

Here’s our weekly roundup of significant recently decided cases involving complex bankruptcy disputes for the week ended 10/30/05.
In re MDIP, Inc., (2005 WL 2792358) (Bankr. D. Del., 10/26/05)
In re Women First Healthcare, Inc., (2005 WL 2737436) (Bankr. D. Del., 10/21/05)
In re DSC Ltd., (2005 WL 2671314) (E.D. Mich., 10/19/05)
In re Skorich, (2005 WL 2811899) (Bankr. D.N.H., 10/19/05)
In re Center For Advanced Mfg. & Technology, (2005 WL 2660275) (Bankr. W.D. Pa., 10/19/05)
In re TW, Inc., (2005 WL 2671531) (Bankr. D. Del., 10/14/05)

Continue Reading Notable Reported Cases for the Week Ended 10/30/05

Back in the early to mid-1990’s, while Conseco’s profligate CEO, Steve Hilbert, was on his way to becoming America’s highest paid CEO (with a whopping $277 million between 1991 and 1996), Hilbert was (forever?) smitten with the lovely 25 year old Indy stripper Tomisue Tomlinson as she jumped out of a cake at his stepson’s bachelor party.
Unlike Hilbert’s five previous marriages, this one has survived the test of time (and loss of money). Conseco’s bankruptcy appears to have joined them at the hip (or maybe the prepetition asset transfer to Tomisue did), as evidenced by a recently decided case in Conseco’s post-confirmation bankruptcy saga, here involving the rights of the Hilberts’ “irrevocable trusts” to four “split-dollar” life insurance agreements established in 1998. In re Conseco, 2005 WL 2737507 (N.D. Ill., 10/18/05).
Under these self-dealt policies, Conseco agreed to pay annual premiums owing under the policies (worth between $12.5 million and $25 million each). The Hilberts were also required to pay a portion of the policy premiums (presumably the minimum required to maximize tax benefits). If the Hilberts failed to pay their portion, the trusts could pay on their behalf. The Court noted that the Agreements had early termination provisions if Conseco went bankrupt, or if the Hilberts or their trusts failed to pay Conseco a share of the premiums. Upon termination, the trusts could repurchase the policy from Conseco by reimbursing Conseco for premium payments made. If, within 60 days, the trusts did not exercise this repurchase option, Conseco could either become the owner of the policy or surrender the policies and get its premium payments back.
In December 2001, Conseco stopped making payments on the insurance policies, believing the Hilberts owed Conseco millions of dollars in defaulted D&O loans. Apparently, after Conseco stopped making payments, the trusts responded by converting the policies into paid-up policies with lower death benefits so that no further payments were due under the insurance policies.
One year later, Conseco filed for bankruptcy, and on September 10, 2003, it’s reorganization plan went effective. Notably, neither the Hilberts nor their trusts exercised their option to purchase the policies from Conseco within 60 days of the bankruptcy filing, but rather filed claims against Conseco in the bankruptcy case seeking damages for alleged breach of the Agreements. (Perhaps they were thrown off by the ipso facto clauses in the Agreements that provided for termination in the event of bankruptcy, which every bankruptcy lawyer knows will not alone terminate an executory contract.)
The trusts asserted in their proofs of claims that Conseco’s bankruptcy filing did not terminate the Agreements. Conseco objected to the claims, smartly asserting that the Agreements were not executory, and thus were terminated because neither the Hilberts nor the trusts exercised their option to purchase the policies from Conseco within 60 days of the bankruptcy filing (the ipso facto clause notwithstanding). In September 2004, Conseco’s attorneys advised the trusts that the Agreements were terminated and that Conseco intended to enforce its rights to recoup the premium payments made. Counsel for the trusts responded that the trust “would consider your taking of the cash value of the policies not only to be an additional breach of the [Agreements], but also to be conversion as well.”
The Bankruptcy Court, however, disagreed with the trust counsel’s assessment, holding that the Agreements were not “executory contracts” under Bankruptcy Code section 365, and thus were automatically terminated when Conseco filed for bankruptcy in December 2002. The Bankruptcy Court also found that “because Conseco was not attempting to enforce a contract, its material breach of the Agreements in December 2001, when it stopped making premium payments, was of no consequence.”
The District Court, reviewing the bankruptcy court’s rulings and conclusions of law de novo, ruled that the bankruptcy court correctly adopted the “Countryman definition” of an exectuory contract as one in which “the obligation of both the bankruptcy and the other party are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance by the other.” (Citing Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn L. Rev. 439, 460 (1973)). The District Court also concurred with the Bankruptcy Court’s logical extension of the Countryman definition in concluding that “if any of the parties’ duties is deemed immaterial, then the contract is deemed not executory.”
As regards whether a contract is “executory,” the District Court noted the split in the circuits between the majority Countryman “material breach” test and the minority “functional test” (with the Seventh Circuit following the Countryman definition), stating as follows:

Continue Reading What Makes a CEO Perk Executory and the Circuits’ Split Over the Definition of an Executory Contract

[This is the first of many posts highlighting cases that touch on the splits among the federal circuit courts on various topical bankruptcy issues.]
“Hell hath no fury like a lover scorned” is a well-known epithet that comes to mind when reading the Tenth Circuit’s recent opinion in Cadwell v. Joelson (In re Joelson), (2005 WL 2722891) (10th Cir., 10/24/05). The case recounts how Stan Cadwell (a retired single man from Casper, Wyoming) met Joelene Joelson (a waitress) in a Casper “cafe” where Joelene worked. Stan took out a mortgage on his house for $50,000 for the benefit of his erstwhile lover, but not until after he had performed some due diligence of his own into Joelene’s claims to ownership of a sizable, though illiquid, estate. When the affair ended, and Joelene didn’t repay her debt, Stan sued Joelene in Wyoming state court on the $50,000 he had given her. Joelene demurred, saying it was but a gift from her former lover, but the state court disagreed, and entered judgment against Joelene. She later filed a petition for chapter 7 relief.
Stan proved that “hell hath no fury like a [Cadwell] scorned” and filed an adversary proceeding in the bankruptcy court seeking to bar the discharge of all of Joelene’s debts (or, at a minimum, his state court judgment). The bankruptcy court would not deny the discharge of all of her debts, but did agree that Stan’s claim was non-dischargeable under Bankruptcy Code section 523(a)(2)(A). This section states that a debt obtained by “false pretenses, a false representation, or actual fraud” is nondischargeable, subject to this important exception: if a debt is obtained by a false oral “statement respecting the debtor’s … financial condition,” the debt is dischargeable. Conversely, under Bankruptcy Code section 523(a)(2)(B), a debt obtained by a false written statement “respecting the debtor’s … financial condition” is nondischargeable, provided certain conditions are met.
In finding the debt to Stan nondischargable, the bankruptcy court found actionable Joelene’s misrepresentations to Stan that she owned “residences in both Casper and Glendo, a motel in Glendo, and a number of antique vehicles stored in Glendo.” On appeal, the BAP affirmed the ruling of the bankruptcy court, holding that some of Joelene’s misrepresentations to Stan were not statements “respecting [her] financial condition,” thus rendering her debt to Stan nondischargable.
The case is notable for its exceptional analysis of the roots of § 523(a)(2) (whose origins are found in the Bankruptcy Act of 1898) and the prevailing split in the circuits on the meaning of the phrase “respecting the debtor’s … financial condition.” In affirming the ruling of the lower courts, the Tenth Circuit outlined the respective legal positions of Stan and Joelene, and concluded that Stan’s “strict interpretation” of the phrase was “most consistent with the text and structure of the Bankruptcy Code, Congress’s intent as expressed in the legislative history of 11 U.S.C. § 523(a)(2)(A) and (B), and case law,” stating:

Continue Reading Hell Hath No Fury Like a Lover Scorned: Stan, Joelene, and the Circuits’ Split Over the Section 523(a)(2) Discharge

Last night, the Chicago White Sox swept the World Series, bringing great joy to much of Chicago (except for Cub fans, whose Cubbie blue is turning a shade of pale-green from all the jealousy). Even the most dogged Cub fan has to admit that the White Sox played incredible baseball. Congratulations to the entire organization and to all the long-suffering White Sox fans!
© Steve Jakubowski 2005
Speaking of long-suffering… In a recent post, I noted the inequity of the “all or nothing” rule of Moore v. Bay, 284 U.S. 4 (1931), which provides that a transfer avoidable by a bankruptcy trustee as to a single creditor (even as to just a nickel), is avoidable to the entire extent of the transaction (even if the transaction is worth millions). Unlike today’s weighty US Supreme Court opinions, Moore v. Bay is only one page. It’s author was none other than Justice Oliver Wendell Holmes, Jr., who wrote the opinion at the end of his rich life, while in his last term on the bench. You can’t say much in one page; and Justice Holmes didn’t, to be sure. Still, the rule of Moore v. Bay staunchly remains the law of the land.
Having brought up the case only in passing in my previous post, I said that my discussion of Moore v. Bay will have to await another day. With the Bankruptcy Court from the Northern District of Illinois in In re Unglaub, (2005 WL 2740595) (Bankr. N.D. Ill., 10/24/05), reminding us recently that the rule of Moore v. Bay remains the law of the land, it looks like today is that day. In Unglaub, the Bankruptcy Court stated matter of factly:

In a case under § 544(b)(1), the trustee has the rights of an unsecured creditor to avoid transactions that can be avoided by such creditor under state law. In re Image Worldwide, Ltd., 139 F.3d 574, 576-77 (7th Cir. 1998). The trustee need not identify the creditor, so long as an unsecured creditor exists. Id. at 577; In re Leonard, 125 F.3d 543, 544 (7th Cir. 1997). The transaction can be avoided completely even if the trustee cannot produce creditors whose liens total more than the value of the property. Leonard, 125 F.3d at 544-45.

Though the Bankruptcy Court did not expressly cite Moore v. Bay, it effectively did so by citing to Leonard, where the Seventh Circuit said this about Moore v. Bay:

Section 544(b) of the Bankruptcy Code of 1978 gives the Trustee the power to “avoid any transfer of an interest of the debtor in property … that is voidable under applicable law by [an unsecured creditor]”. 11 U.S.C. § 544(b). In other words, if any unsecured creditor could reach an asset of the debtor outside bankruptcy, the Trustee can use § 544(b) to obtain that asset for the estate. As part of the estate, that asset is then divided among all the unsecured creditors, not just the creditor who could have reached the asset outside bankruptcy. Barker and Lieblich complain that the Trustee has not articulated the specific creditor who could set aside Zach’s gift, but a trustee need not do so. Thirteen unsecured claims have been filed; the Trustee can assume the position of any one of them. Unless the claims of Barker and Lieblich are secured, any unsecured creditor may pursue a fraudulent-conveyance action under Illinois law. Even if he cannot point to creditors whose claims total more than the value of the land, the Trustee can avoid the transaction entirely. Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931). The whole value of the asset then is distributed among creditors of the estate. 11 U.S.C. § 551. The wisdom of this approach has been questioned, see Douglas G. Baird, The Elements of Bankruptcy 104 (2d ed. 1993); Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 79-83 (1986), but this entrenched rule is the source of the dilution that Barker and Lieblich want to escape.

While the application of Moore v. Bay didn’t appear to affect the outcome of the case before the Bankruptcy Court in Unglaub, it surely could have. Which leads to a simple question, why should a transaction that is not voidable as to certain creditors become avoidable in its entirety merely because the debtor happens to be in bankruptcy?
It’s always easier to follow a rule then to work to change it, but this law needs to be changed. Perhaps someday the rule of Moore v. Bay will become a relic of the past, just as the “no-World-Series-win-in-my-lifetime” is now, happily, a thing of the past on Chicago’s south side. Go Sox!
Steve Jakubowski

Bankruptcy Code section 1109(b) gives a “party in interest” the right to raise, and appear and be heard on, any issue in a chapter 11 case. Two recent cases involving insurers of debtors in mass tort asbestos-related bankruptcies came to different conclusions as to whether insurers have standing to object to issues arising in the bankruptcies of their insureds. In In re Congoleum Corp., (2005 WL 2559715) (3d Cir., 10/13/05),the Third Circuit held that a debtor asbestos-manufacturer’s insurers had standing to challenge the retention of Gilbert, Heintz & Randolph, LLP as special insurance counsel under Bankruptcy Code section 327(e). Conversely, in In re A.P.I., Inc., (2005 WL 2630662) (Bankr. D. Minn., 10/15/05), the Bankruptcy Court found that the insurers lacked standing to object to confirmation of the debtor-insured’s asbestos-related plan because plan confirmation would not have any material collateral impact on pending state court insurance coverage litigation between the insurer and the debtor-insured.
It’s not easy to reconcile these two cases: the insurers in Congoleum are granted standing; the insurers in A.P.I. are not. Still, both opinions seemingly yielded the “better” result. In A.P.I., by denying standing to the insurers, 83 thorny objections to the plan were eliminated, thus clearing the way to confirmation. Conversely, in Congoleum, granting the insurers standing enabled them to expose cozy relationships among law firms on opposite sides of the table, thus giving the Third Circuit an opportunity to deliver a stern message regarding professional responsibilities in bankruptcy. Still, the A.P.I. case is so strong for asbestos debtors trying to prevent insurers from gaining standing in bankruptcy that one has to wonder whether this case will lead to Minnesota’s bankruptcy court becoming the “Delaware” (i.e., the preferred venue) of asbestos bankruptcies.
Summaries of these two cases follow:

Continue Reading An Insurer’s Standing in Mass Tort Bankruptcy Cases: Finding the Right Rule and/or Reaching the Right Result

Here’s our weekly roundup of significant recently decided cases involving complex bankruptcy disputes for the week ended 10/23/05.
In re Safety-Kleen, (2005 WL 2656399) (Bankr. D. Del., 10/19/05)
Illinois Department of Revenue v. Hayslett/Judy Oil, Inc., (2005 WL 2649994) (7th Cir., 10/18/05)
Boyer v. Gildea, (2005 WL 2648673) (N.D. Ind., 10/17/05)
SEC v. Great White Marine & Recreation, Inc., (2005 WL 2604454) (5th Cir., 10/14/05)
Dunlap v. Friedman’s, Inc., (2005 WL 2561470) (S.D. W. Va., 9/30/05)
In re American Tissue, Inc., (2005 WL 2574014) (Bankr. D. Del., 9/27/05)
In re XO Communications, Inc., (2005 WL 2319155) (Bankr. S.D.N.Y., 9/23/05)

Continue Reading Notable Reported Cases for the Week Ended 10/23/05