August 15, 2007 by Jordan Bublick
On May 16, 2007, the court issued its decision in the case of In re Thermoview Industries, Inc., ___ B.R. ___, 2007 WL 1447855 (Bkrtcy.W.D.Ky.)(Lloyd, J.), in which the Chapter 11 Trustee brought a preference action against a Canadian corporation. The court held that it lacked specific personal jurisdiction over the the Canadian creditor and dismissed the adversary proceeding.
The Canadian corporation had it principal place of business in Canada. It did not do business in the U.S. and it was not registered to do business in the U.S. The Debtors purchased items from the Creditor FOB the plant in Canada. The Trustee attempted to serve the Canadian Creditor by mail and further measures in compliance with the Hague Convention’s requirements. The Trustee contended that the fact that the Debtor’s purchased products FOB the creditor’s Canadian plant was sufficient to confer specific personal jurisdiction. The Trustee did not contend that there was “continuous and systemmatic” contacts with the forum as is required for general personal jurisdiction.
The court noted that in order to establish the existence of specific jurisdiction, a three part test must be met: 1. the defendant must purposely avail himself of the privilege of acting in the forum state or cause a consequence in the forum state, 2. the cause of action must arise from the defendant’s activities there, and 3. the acts of the defendant or consequences must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable. Southern Machines Co., Inc. v. Mohasco Industries, Inc., 401 F.2d 374, 381 (6th Cir. 1968). All three elements must be met to invoke personal jurisdiction. LAK, Inc. v. Deercreek Enterprices, 885 F.2d, 1293, 1303 (6th Cir.1989).
As to meeting element number one, the court noted the Sixth Circuit Court of Appeal’s preference for the “stream of commerce plus” approach in analyzing whether a defendant purposely avails itself of the privilege of acting in the forum state. Under this theory, the placement of a product into the stream of commerce, without more, is not an act of the defendant purposely directed toward the forum State.
The creditor sought dismissal of the complain based on lack of personal jurisdiction and insufficient service of process. The court noted that the record before the court showed that creditor was not registered to do business in the U.S. and that it in fact did not do business in the U.S. The court found merit in the creditor’s arguments and dismissed the preference adversary proceeding
Posted in Avoided Preference Repaid Pre-Petition, Specific Personal Jurisdiction | Leave a Comment »
August 14, 2007 by Jordan Bublick
On July 31, 2007, two Bear Stearn’s hedge funds filed insolvency petitions in the Grand Court of the Cayman Islands. The two funds, which were limited liability companies organized and incorporated in the Cayman Islands, were the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. (“High-Grade Fund”) and the Bear Sterns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. (“Enhanced Fund”). In their petitions to the court, they pled that they were insolvent and unable to pay their debts as they fell due. They requested that they be “wound up” by the court under the provisions of the Cayman Island’s Companies Law. The court appointed Joint Provisional Liquidators (“JPLs”) with various powers, including to take control of the funds’ assets and books and records. Some commentators have expressed concern that the proceedings of the Cayman Court will prove less transparent than would a proceeding in a U.S. Court and that the Cayman Judges have a track record highly favorable to incumbent management.
The hedge funds were open-ended investment companies and intended to invest in various investments, including asset-backed securities, synthetic asset-backed securities, mortgage-backed securities, derivatives, options, swaps, and futures. Bear Stearns Asset Management, Inc. (“BSAM”) was the investment manager of the funds. Following volatility in the U.S. subprime lending market in early 2007, the funds began to suffer a significant devaluation of their asset portfolios which led to margin calls from many of its trading counterparties which the funds were unable to meet. This led to default notices by these counterparties and their exercise of rights to seize and/or sell assets that were subject of repurchase agreement or over which they held security agreements. Subsequent events led to further downward pressures and deterioration.
On July 25, 2007, the JPLs of the High-Grade Fund and Enhanced Fund filed Chapter 15 petitions pursuant to section 1504 and 1515 commencing Chapter 15 cases in the U.S. Bankruptcy Court for the Southern District of New York in cases 07-12383 and 07-12384 respectively. These Chapter 15 cases were ancillary to the Cayman Island’s proceedings and sought recognition of the Cayman proceedings as a “foreign main proceeding” pursuant to section 1502(4). The effect of the Chapter 15 cases will be based on whether the Cayman foreign proceedings are each determined to be a “foreign main proceeding” or a “foreign nonmain proceeding.” This is based on a determination by the court whether the debtor’s “center of main interests” (“COMI”) is in the jurisdiction where the foreign proceeding was commenced. There is a presumption that a debtor’s COMI is its place of incorporation, but this presumption can be rebutted.
Chapter 15 is the U.S. adoption of the model law on cross-border bankruptcies proposed by the United Nations Commission on International Trade Law. The law generally mandates the cooperation of the U.S. bankruptcy courts with those of foreign jurisdictions.
The funds both filed motions for a temporary restraining orders and preliminary injunctions staying execution and litigation against the funds and further sought to entrust the funds assets to the JPLs. The funds pled to the court that the relief sought would avoid piecemeal distribution of its assets and provide “breathing-room” necessary to conduct an orderly review and wind-up of the funds’ affairs so that their creditors would receive equitable treatment.
Posted in Cayman Islands Bankruptcy, Chapter 15, International Insolvencies | Leave a Comment »
August 13, 2007 by Jordan Bublick
In the pre-BAPCPA decision of In re Arispe, 289 B.R. 245 (Bankr.S.D.Fla.)(Mark, C.J.), the court held that a debtor who is a resident in Florida but not a domicile of Florida is entitled to claim the Section 522(d) federal exemptions as the Florida opt-out statute only applies to those domiciled in Florida.
The debtor was resident of Florida but not a domicile of Florida or any State as he was neither a U.S. citizen nor a permanent resident of the U.S. and therefore not able to legally form the intent to remain permanently which is an element of domicile. The Trustee argued that the Florida opt-out statute precluded the Debtor from utilizing the section 522(d) Federal exemptions. The Florida opt-out statute provides that residents of Florida are not entitled to utilize the federal exemptions provided in section 522(d). Florida Statutes, Section 222.20.
The court held that the “point of departure” in this analysis is Section 522(b) and not the Florida opt-out statute. The court noted that Section 522(b)(1) allows a debtor to utilize the federal exemptions “unless the State law that is applicable to the debtor under paragraph (2)(A)….specifically does not authorize..” Paragraph (2)(A) triggers reference to the State law at the place at which the debtor’s domicile was located during the 180 days prior to filing or the greater part of the 180 day period. Since the Debtor was not domiciled in Florida or any State during the 180 days prior to filing of the petition, reference to Florida or any other State’s opt-out is not initiated to not authorize the debtor to utilize the exemptions of Section 522(d) Federal Exemptions.
The Arispe case was subsequently followed in In re Goldsmith, 2003 WL 295690 (Bkrtcy.S.D.Fla.)(Cristol, J.).
It may be noted that a new provision added by BAPCPA to Section 522(b) may have been inspired by the Arispe decision. New Section 522(b) hanging paragraph provides that “If the effect of the domiciliary requirement under subparagraph [3](A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).”
Posted in Domicile, exemptions | Leave a Comment »
August 12, 2007 by Jordan Bublick
In re Key Largo Watersports, Inc., Case No. 07-12820 (Bankr.S.D.Fla. August 10, 2007)(Mark, J.) dealt with whether a nonresidential lease was an “unexpired lease” and therefore assumable by the Chapter 11 Debtor. Section 365(a) provides that a Chapter 11 debtor may, subject to the court’s approval, assume an unexpired lease. Section 365(c)(3) provides that a nonresidential lease may not be assumed if it was “terminated” prepetition.
The landlord sought relief from the automatic stay in order to complete eviction proceedings against the Debtor. The landlord argued that the Debtor was unable to assume the lease as it was “terminated” prior to the filing of the case and was no longer an “unexpired lease.” The landlord pointed to a prepetition letter of termination and eviction order. The Debtor argued that the lease had not been terminated and that it could therefore be assumed under section 365.
The court concluded that a prepetition final order or judgment of eviction extinguishes a Debtor’s property interest and right of possession whether or not the lease had been “terminated” prepetition. As the right of possession is extinguished, a lease is no longer an “unexpired lease” which may be assumed under Section 365. Although Section 365 can be used to cure defaults, it cannot revive an expired lease.
The court further noted that absent a prepetition eviction judgment, the issue is whether the lease was “terminated” prepetition as a nonresidential leases that has been terminated pursuant to state law cannot be assumed. Section 365(c)(3). In re Foxfire Inn of Stuart Florida, Inc., 30 B.R. 30, 31 (Bankr.S.D.Fla. 1983)(Britton, J.). The court noted that absent the eviction order in this case, the court would have had to analyze the lease and the actions taken pursuant it, including the purported termination letter, to determine whether the lease was “terminated” prepetition.
The court noted it prior decision in In re CHS Electronics, Inc., 265 B.R. 339, 342 (Bankr.S.D.Fla. 2001) in which it held that a lease remains “unexpired” if a debtor voluntarily surrenders possession prepetition to a landlord who expressly reserved all rights. The court noted that to the extent its CHS Electronics, Inc. decision was inconsistent with its decision in this case, it would stand by its decision herein.
Posted in Assumption of Unexpired Lease, Relief from Automatic Stay | Leave a Comment »
August 11, 2007 by Jordan Bublick
The recent case of In re Arsenault, ___ B.R. ___, 2007 WL 1956277 (Bkrtcy.M.D.Fla.)(Williamson, J.) held that the presumptive starting point to determine a Chapter 13 debtor’s “projected disposable income” under section 1325(b)(1)(B) is the number obtained from the Form B22C which makes this calculation based on the historical CMI. The court further held that this figure may be rebutted by evidence that Form B22C’s “historic snapshot” does not form a reasonable basis for projected income forward over the life of the Chapter 13 plan. In applying these conclusions in Arsenault, the court found that the debtors’ projected disposable income should not be determined solely by Form B22C and that the court should take into account the debtor husband’s future annual bonuses that were not reflected in the Form B22C.
The court noted that in general two lines of cases dealing with this issue have emerged. One line of cases which is typified by In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006) holds that disposable income is based on CMI and that disposable income is the same as projected disposable income. The determination of projected disposable income is basically a mechanical test using historical income data. The other line of cases, typified by In re Hardacre, 338 B.R. 718 (Bankr.N.D.Tex.2006) holds that the term “projected disposable income” is not the same as “disposable income” and that projected disposable income must be based on the debtor’s anticipated income during the term of the plan and not be merely an average of prepetition income. The court found that Hardacre line of cases to be the better-reasoned line of cases.
The court also addressed the manner of calculation of expenses for the above-median income Chapter 13 Debtor. The court held that per section 1325(b)(3), the expenses must be determined under Form B22C without resort to Schedule J. The court noted that this section uses the term “shall” in its direction to use 707(b)(2) for expenses and it meant to take away all judicial discretion in the specific deduction areas set forth in section 707(b)(2). e.g. In re Barr, 341 B.R. 181 (Bankr.M.D.N.C.2006). The court did note though that the plan is subject to being modified under section 1329 to increase or decrease payments if circumstances change resulting in different expense calculations than those under section 707(b)(2).
Posted in BAPCPA, Projected Disposable Income | Leave a Comment »
August 9, 2007 by Jordan Bublick
In a previous post on August 4, 2007, I reviewed the Benedetti decision from the Southern District of Florida which sided with the Wilson and Hartwick line of cases and held that the Debtor was entitled to deduct her obligations on a motor vehicle lease in calculating the “means test” even though she intended to surrender the vehicle and would not be making the lease payments. In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.(Cristol, J.).
On August 8, 2007, the Bankruptcy Court for the Southern District of Florida issued another case siding with this line of cases in In re Morgan, Case No. 06-11263-BKC-AJC (Bankr.S.D.Fla. August 8, 2007)(Cristol, J.). Morgan involved an over-median income debtor whose real property was not subject to a mortgage. The Debtor claimed a deduction for mortgage/rent under the Local Standards even though he did not actually have a mortgage payment. The chapter 13 Trustee argued that the Debtor was not entitled to this deduction as he did not actually have a mortgage payment. In accordance with the Wilson and Hartwick line of cases, the court agreed with the Debtor and held that the plain meaning of the phrase “applicable monthly expenses” found in section 707(b)(2)(A)(ii)(I) of the Bankruptcy Code entitled the Debtor to deduct from CMI the Local Standard allowance without regard to whether the Debtor actually pays a housing/rental expense. The court noted the distinction in the use of the words “applicable” and “actual” as used by the Bankruptcy Code. The court found that section 707(b)(2)(A)(ii)(I) provides that a debtor’s expenses “shall be” the “amounts specified” in the Local Standards and that the statute makes no provision for reducing the specified amounts to the debtor’s actual expenses.
The court noted that while few courts have addressed the Local Standard deduction with regard to housing, that bankruptcy courts across the country have faced the same issue with regards to the transportation deduction under the Local Standards and noted the split in authority. The court cited with approval other housing expense cases of In re Farrar-Johnson, 353 B.R. 224 (Bankr.N.D.Ill.2006) and In re Naslund, 359 B.R. 781 (Bankr.D.Mont.2006).
Posted in BAPCPA, Means Test, Projected Disposable Income | Leave a Comment »
August 9, 2007 by Jordan Bublick
In a previous post on August 4, 2007, I reviewed the Benedetti decision from the Southern District of Florida which sided with the Wilson and Hartwick line of cases and held that the Debtor was entitled to deduct her obligations on a motor vehicle lease in calculating the “means test” even though she intended to surrender the vehicle and would not be making the lease payments. In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.(Cristol, J.). On August 8, 2007, the Bankruptcy Court for the Southern District of Florida issued another case siding with this line of cases in In re Morgan, Case No. 06-11263-BKC-AJC (Bankr.S.D.Fla. August 8, 2007)(Cristol, J.).
Morgan involved an over-median income debtor whose real property was not subject to a mortgage. The Debtor claimed a deduction for mortgage/rent under the Local Standards even though he did not actually have a mortgage payment. The chapter 13 Trustee argued that the Debtor was not entitled to this deduction as he did not actually have a mortgage payment. In accordance with the Wilson and Hartwick line of cases, the court agreed with the Debtor and held that the plain meaning of the phrase “applicable monthly expenses” found in section 707(b)(2)(A)(ii)(I) of the Bankruptcy Code entitled the Debtor to deduct from CMI the Local Standard allowance without regard to whether the Debtor actually pays a housing/rental expense. The court noted the distinction in the use of the words “applicable” and “actual” as used by the Bankruptcy Code. The court found that section 707(b)(2)(A)(ii)(I) provides that a debtor’s expenses “shall be” the “amounts specified” in the Local Standards and that the statute makes no provision for reducing the specified amounts to the debtor’s actual expenses.
The court noted that while few courts have addressed the Local Standard deduction with regard to housing, that bankruptcy courts across the country have faced the same issue with regards to the transportation deduction under the Local Standards and noted the split in authority. The court cited with approval other housing expense cases of In re Farrar-Johnson, 353 B.R. 224 (Bankr.N.D.Ill.2006) and In re Naslund, 359 B.R. 781 (Bankr.D.Mont.2006).
Posted in BAPCPA, Means Test, Projected Disposable Income | Leave a Comment »
August 5, 2007 by Jordan Bublick
As has been reported in the national media, the OJ Simpson civil case has found its way to the Bankruptcy Court of the Southern District of Florida. The decision reported was In re Lorraine Brooke Associates, Inc., Case No. 07-12641 (Bankr.S.D.Fla. July 2, 2007)(Cristol, C.J. Emeritus). In this corporate chapter 7 case, the objection to the claim of Frederic Goldman came before the court. Goldman’s secured claim in the amount of approximately $38 million dollars was based on the judgment against OJ Simpson obtained in the Los Angeles County Superior Court in 1997. The stock of the Debtor corporation was owned by Simpson’s four adult children.
The evidence before the court was the May 8, 2006 contract between the Debtor and HarperCollins contract concerning the publication of the book titled “If I Did It”, a letter by Simpson stating that he wrote the book, the trail of money which was paid by HarperCollins which showed that it ultimately reached Simpson or his benefit, and documents under which Simpson transferred to the Debtor his rights to the book and related intellectual property rights. Goldman previously obtained an assignment order and restraining order dated March 13, 2007 in the aforementioned California State Court. He further obtained an order declaring the Debtor corporation a surrogate of Simpson. Goldman argued to the bankruptcy court that the Debtor was barred from re-litigating the California State Court assignment and surrogate orders.
The court noted the fundamental principle that judicial proceedings of any state are entitled to the full faith and credit in every court within the United State. “The principles of full faith and credit require[s] that federal court ‘must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered.’” In re Bursack, 65 F.3d 51, 53 (6th Cir. 1995). The court noted that the Eleventh Circuit Court of Appeals has held that the collateral estoppel law of a state must be applied to determine the preclusive effect of a prior state court judgment. In re St. Laurent, 991 F.2d 672, 676 (11th Cir. 1993). The court found that California would give apply collateral estoppel to preclude the relitigation of the issues argued and decided in the prior assignment and surrogate orders.
Apart from the application of the doctrine of collateral estoppel, the court found that the Debtor was part of a scheme or device to hinder, delay, or defraud creditor Goldman by the use of the corporate veil. The court found the Debtor to be the nominee of Simpson. The court pierced and lifted the corporate veil from the device created for the sole purpose of secreting the possible assets from creditor Goldman. The court further found a lack of separate existence between the Debtor and Simpson and that the Debtor was incorporated without any legitimate business purpose.
The objection to the Goldman claim was overruled and the Goldman secured claim was allowed in full.
Posted in Collateral Estoppel, Hinder Delay Defraud Creditors, Pierce Corporate Veil | Leave a Comment »
August 5, 2007 by Jordan Bublick
On May 11, 2007, the court in In re Mazon, ___ B.R. ___, 2007 WL 1437370 (Bkrtcy.M.D.Fla.)(Williamson J.) issued its decision on an issue on which [t]here is no Eleventh Circuit Court of Appeals case or any Florida case – either bankruptcy court or district court…” But the court noted that other courts around the country have had the occasion to consider the issue – the issue being whether a trustee should be permitted to surcharge exempt property in exceptional circumstances such as where there has been a material failure to disclose estate assets that are subsequently dissipated. The court concluded that pursuant to its authority under section 105 and its inherent powers, it may equitably surcharge statutorily exempt property where the debtor has failed to schedule and turn over estate assets, but could not equitably surcharge an exempt Florida homestead unless the estate assets can be traced into the acquisition of an interest in the homestead.
The court noted that the only explicit reference to a right to surcharge in the bankruptcy code is found in section 506(c), but that this section is limited to a trustee’s right to recover the reasonable and necessary costs and expenses of preserving or disposing of property securing a claim to the extent that the secured claimant has benefits. Section 506(c) states that “[t]trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim.”
The court noted that although the bankruptcy code does not explicitly provide for the remedy of surcharge against a debtor’s exemptions, that bankruptcy judges have broad authority to prevent abuse of process pursuant to section 105 which authority was recently reaffirmed by the Supreme Court in Marrama v. Citizens Bank of Massachusetts, ___ U.S. ___ (2007). Furthermore as noted in Marrama, even if section 105(a) had not been enacted, every federal court possesses the inherent power to sanction abusive litigation practices which may provide an adequate justification for a remedy when faced with a debtor’s active misconduct to take advantage of the bankruptcy systems for improper purposes as occurred in Marrama and has occurred in the case before the court. The court also noted that the Supreme Court has also recognized that bankruptcy courts have long relied upon their inherent equitable powers in passing on and preventing “a wide range of problems arising out of the administration of bankruptcy estates.” Pepper v. Litton, , 308 U.S. 295 (1939). Accordingly, the court surcharged the assets that the debtors had claimed as exempt under Florida statutory exemptions. These assets included the debtors’ 401k retirement accounts and the cash value of a life insurance policy.
The court found though that Florida law does not permit or authorize a surcharge against the debtors’ constitutionally allowed homestead exemption. The court based its decision on Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla.2001) in which the Florida Supreme Court at the request of the Eleventh Circuit Court of Appeals considered whether a debtor is entitled to Florida’s homestead exemption when the debtor acquired the homestead using non-exempt funds with the specific intent to hinder, delay, or defraud creditors. The Florida Supreme Court answered the certified question in the affirmative and held that so long as the funds being used to pay down a mortgage or buy the homestead were not acquired by fraud or under egregious circumstances, the homestead exemption cannot be denied. The court in Havaco noted that article X, section 4 of the Florida Constitution expressly only provides for three narrow exceptions to the homestead exemption.
The court stated that the Trustee was essentially asking the court to impose an equitable lien against the debtors’ homestead as a means to collect on the obligation of the debtors to turn over estate property. The court cited to In re Chauncey, 454 F.3d 1292 (11th Cir.2206) where the Eleventh Circuit Court of Appeals reaffirmed that an equitable lien may be imposed under Florida law only when money used to obtain an interest in the homestead property is obtained by fraud or egregious conduct. The focus then would be on how the money is obtained and no upon how is is used. Money lawfully obtained that is thereafter improperly used does not support the imposition of an equitable lien against homestead property. Under the facts of this case, the court held that an equitable lien or surcharge against the homestead were not appropriate as the money and property were not diverted to acquire the interest in the homestead.
Posted in Equitable Liens, Florida Homestead, Surcharge | Leave a Comment »
