Emory Bankruptcy Developments Journal

Volume 30Issue 2
Symposium

The Eleventh Annual Emory Bankruptcy Developments Journal Symposium

Sophia Priola | 30 Emory BDJ. i (2013-2014)

The Emory Bankruptcy Developments Journal hosted its Eleventh Annual Symposium on February 27, 2014. Each year, EBDJ's Symposium addresses current issues in bankruptcy law in a format that provides practical and timely information to today¿s bankruptcy practitioners. With the help and support of the Atlanta Bankruptcy Bar, EBDJ¿s Advisory Board, and our sponsoring firms, the Eleventh Annual Symposium was a tremendous success. This year, the Symposium featured two panels. In the first, a Consumer Panel, panelists responded to Professor Lawrence Ponoroff¿s article on chapter 7 lien-stripping, published in the Fall 2013 issue of EBDJ. 1 Lawrence Ponoroff, Hey the Sun Is Hot and the Water's Fine: Why Not Strip Off That Lien?, 30 Emory Bankr. Dev. J. 13 (2013). Our second panel focused on Corporate bankruptcy, and highlighted some of the current tensions in the chapter 11 process, given the large volume of petitions that end in a sale under 11 U.S.C § 363, rather than a chapter 11 plan confirmation. The following represents an edited transcript of the panels. EBDJ would like to thank its Advisory Board members, the panelists, and the moderators for their exceptional efforts on our behalf. Finally, I would like to thank Jake Kaplan, Alex Clamon, Smita Gautam, and the EBDJ staff for their personal efforts toward the success of this year¿s Symposium.

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Consumer Bankruptcy Panel Strip Off in Chapter 7: The Limits of Dewsnup

Lawrence Ponoroff, The Honorable Mary Grace Diehl, The Honorable A. Thomas Small, Beth Anne Harrill | 30 Emory BDJ. 291 (2013-2014)

Consumer Bankruptcy Panel Strip Off in Chapter 7: The Limits of Dewsnup

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Corporate Bankruptcy Panel: A Debate Among the Players in a Modern Chapter 11 Drama: Who Needs Chapter 11 When You Have § 363?

Kay Kress, Gary Marsh, Alan Pope, Mark Duedall, Gwendolyn Godfrey | 30 Emory BDJ. 321 (2013-2014)

Corporate Bankruptcy Panel: A Debate Among the Players in a Modern Chapter 11 Drama: Who Needs Chapter 11 When You Have § 363?

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Comments

Rewriting 11 U.S.C. § 523 (a)(16): The Problems of Delayed Foreclosure and Judicial Activism

Jeffrey S. Adams | 30 Emory BDJ. 347 (2013-2014)

To protect the interests of homeowners' associations and other housing communities in situations where their member homeowners have declared bankruptcy, § 523(a)(16) of the Bankruptcy Code excepts from discharge any "fee or assessment" that becomes due after the order of relief, as long as the debtor has a "legal, equitable, or possessory ownership interest" in the property. This section was intended to unify through legislation a split of authority deciding how to handle such postpetition fees. Unfortunately, by electing to protect first and foremost the interests of HOAs, Congress placed debtors in a position not conducive to the idea of a fresh start by which bankruptcy law is ordinarily guided. The result is a group of cases that are inconsistent with one another and with the Code, as some courts have taken steps to attempt to ease the burden on the debtor, while others have noted with resignation that, fair or not, the Code's plain language is clear and precludes judicial intervention. Further muddying the waters, the problems with the Code are different depending on whether the debtor's discharge was affected under § 727, § 1328(a), or § 1328(b). Given that the Code as written has failed to accomplish the unity sought in curing the split of authority, Congress should revisit not only its language but also the policy that informed the amendment. The nation's economic realities have changed since the 2005 amendment was passed, and these changes have brought into sharp focus the problems with the exception as it currently applies.

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The Preclusive Effect of Disgorgement Orders in Non-Dischargeability Actions under § 523(a)(19)

Holly Baird | 30 Emory BDJ. 383 (2013-2014)

In two cases recently decided by the Ninth and Tenth Circuits, the courts independently considered whether a disgorgement order levied by securities regulators against a debtor is excepted from statutory discharge under § 523(a)(19) of the Code. The issue split the panels in both cases, producing vehement dissents. In both circuits, the majority held that § 523 does not except a debt arising from a disgorgement order from statutory discharge under § 727 if the debtor has not been charged with or convicted of violating state or federal securities laws. Thus, a debtor's obligation to disgorge funds acquired through the fraudulent activity of a third party is a dischargeable obligation in bankruptcy. This Comment argues that the decisions by the Ninth and Tenth Circuits incorrectly construed the plain meaning of § 523(a)(19) and ignored language in the statute that broadens the exception to embrace a debtor's obligation to disgorge funds acquired through the fraudulent misconduct of another individual. The Comment emphasizes that the character of the debt determined by the state courts should have been given preclusive effect by the bankruptcy courts. Deference to the state courts coincides with long-standing doctrines in bankruptcy law, which preserve in bankruptcy the property rights of the debtor defined by state or non-bankruptcy law. This new approach would aid the enforcement of security laws and support a framework for debtor attorneys and regulators preparing for litigation. Finally, lending preclusive effect to disgorgement orders does not threaten misappropriation of § 523 exceptions. Properly construed, § 523(a)(19) should except a debtor's obligation to return fraudulent funds regardless of their culpability for a security violation because there is a legitimate government interest in mitigating the egregious effect of large-scale investment fraud and protecting investors.

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Government Payments: When do They Become Property of the Estate?

Patricia Boxold | 30 Emory BDJ. 429 (2013-2014)

Government payments received by a debtor postpetition are often tied to prepetition events, presenting the issue of whether a legal or equitable interest existed as of the commencement of the case under § 541 of the Bankruptcy Code. The Fifth, Eighth, Ninth, and Eleventh Circuits have held that a debtor has no legal or equitable interest in a government payment until the legislation authorizing the payment is signed into law. These decisions, however, failed to articulate a clear standard, as evidenced by recent case law. The issue of when a government payment becomes property of the estate has been particularly contentious in the crop disaster payment context. A new program, the Supplemental Revenue Assistance Program (SURE), presents a novel fact pattern. In SURE, the Secretary of Agriculture must designate the county where a crop was lost as a disaster county before a farmer can qualify for payment. Therefore, when a bankruptcy petition is filed, payment may still be contingent upon an act within the agency¿s discretion. This Comment will argue that a government payment becomes property of the estate when the payment is ¿absolutely owed,¿ meaning the payment is no longer contingent in any way. First, the case law reveals no clear standard as to when a government payment becomes property of the estate under § 541. The right to setoff in § 553 has a clearer rule, a contrast that can help guide analysis. Second, recent cases regard the statutory authorization date as determinative, but this approach runs contrary to the Code and relevant case law, for §§ 541 and 553 require a more nuanced factual inquiry. Third, administrative law dictates that a government payment becomes an entitlement for purposes of due process when legal sources create enforceable standards that guide an agency¿s discretion. This standard should control when agency discretion is an issue.

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Per Se Bad Faith? An Eempirical Analysis of Good Faith in Chapter 13 Fee-Only Plans

Alexander F. Clamon | 30 Emory BDJ. 473 (2013-2014)

Section 1325(a)(3) of the Bankruptcy Code requires chapter 13 plans to be "proposed in good faith and not by any means prevented by law." Section 1325(a)(7) requires that "the action of the debtor in filing the petition was in good faith." Courts evaluate both good faith provisions through a subjective inquiry into the totality of the circumstances in each case, typically using similar factors in the analysis. Many jurisdictions provide a list of factors for this assessment. Courts caution that any list is non-exhaustive and should not limit the subjective nature of the good faith inquiry. Some chapter 13 plans propose to pay little more than the trustee and attorney fees, and leave nothing or a nominal repayment to general unsecured creditors. These so-called "fee-only" plans challenge one of the underlying goals of chapter 13: a fair distribution of the debtor's future income to repay creditors. While courts find most fee-only plans fail to satisfy the good faith requirements, three circuit courts have ruled that fee-only plans are not per se bad faith. This Comment provides insight into how courts are actually dealing with fee-only cases through an empirical study of good faith litigation over plans proposing zero or a nominal repayment to general unsecured creditors. This study compiles data and conducts a broad analysis of the factors that courts have listed and discussed in the totality of the circumstances test for good faith. This Comment hypothesizes that two particular variables are significant predictors of a court's ruling on good faith: (1) the repayment to general unsecured creditors and (2) the number of factors discussed in the case. Analysis of the data does not support the first hypothesis but does support the second. This Comment concludes that, in the absence of a strong correlation between the number of factors and good faith rulings, courts should not overhaul the traditional good faith analysis when dealing with fee-only plans. This Comment suggests, however, one of the circuit court rulings may provide a modified approach that balances the benefits of a subjective, discretionary standard against the wide-ranging concern over plans that propose little or no repayment to general unsecured creditors.

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Retaining the Hope That Rejection Promises: Why Sunbeam is a Light That Should Not Be Followed

Benjamin H. Roth | 30 Emory BDJ. 529 (2013-2014)

Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC incorrectly altered the remedies available to a trademark licensee after a debtor licensor has rejected the license. Decided in July 2012, this decision by the U.S. Court of Appeals for the Seventh Circuit conflicts with decisions going back more than twenty-five years, when the U.S. Court of Appeals for the Fourth Circuit decided Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. During that span of time, licensees had a single remedy upon rejection of the license: damages in the way of an unsecured prepetition claim. Licensees were not granted specific performance, and were not permitted to continue using the trademark or retain any other rights under the license, save for the claim for damages. Congress had granted guaranteed specific performance to the licensee of a patent, copyright, or trade secret through 11 U.S.C. § 365(n). However, when Congress enacted § 365(n) in 1989, Congress explicitly and unequivocally excluded trademark licenses from the protection of that provision. In July 2012, the Seventh Circuit held in Sunbeam that because trademark licensees are not protected by § 365(n), the Bankruptcy Code is silent as to the rejection of a trademark license. A licensee was granted the right to continued use of the trademark, just as that remedy would be available outside of bankruptcy. Ideal as this holding may be, this Comment argues it is contradictory to a careful examination and interpretation of the law as it applies, and historically has been applied. Fundamentally, allowing a trademark licensee to retain its rights is a de facto order of specific performance on a trademark owner, but when that owner is a debtor in bankruptcy, specific performance should not be available against it. In short, Sunbeam should not be given any weight going forward. A licensee should be limited to a prepetition claim for damages, only.

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Debtors as Predators: The Proper Interpretation of "a statement respecting the debtor's . . . financial condition" in 11 U.S.C. § 523(a)(2)(A) and (B)

Mallory Velten | 30 Emory BDJ. 585 (2013-2014)

U.S. Courts of Appeals disagree on the correct interpretation of the phrase "statement respecting the debtor's . . . financial condition" as it appears in the exceptions to discharge in 11 U.S.C. § 523(a)(2)(A), the fraud provision, and § 523(a)(2)(B), the false written statement provision. Two major viewpoints have emerged-the strict and the relaxed. Under the strict interpretation, for the fraud provisions to apply, the statement must comprise the overall financial condition of the debtor. According to the relaxed interpretation, the debtor's fraudulent assertion of ownership of only a single item of property constitutes a statement respecting the debtor's financial condition. The Fifth, Eighth, and Tenth Circuits have adopted the strict interpretation, while the Fourth Circuit has followed the relaxed interpretation since 1984. Lower courts in other circuits have gone both ways. The divergence of opinion has resulted in some courts allowing debtors who acquired money through fraud or misrepresentation to walk away from those debts by discharging them in bankruptcy, while others hold such debtors accountable and refuse discharge. This Comment interprets § 523(a)(2) and concludes that the correct reading of "financial condition" is the debtor's overall financial health-the view of the courts that have adopted the strict interpretation. This Comment further proposes adding a definition of "financial condition" to 11 U.S.C. § 101 to resolve the circuit split. This split jeopardizes the dual purposes of bankruptcy-to provide relief to honest debtors and to ensure the fair treatment of creditors. As it is, in some jurisdictions debtors who commit fraud are allowed to abandon their debts, leaving creditors in a lurch. Burning creditors in this way may result in negative repercussions for other debtors, such as decreased borrowing ability. Providing a clear definition of "financial condition" will help promote better bankruptcy policy for debtors and creditors.

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