By: Jonathan Grasso
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In Walden v. Walker (In re Walker),[1] the Eleventh Circuit Court of Appeals held that the bankruptcy court has the power to remove a trustee sua sponte.  In Walker, the elected Chapter 7 trustee filed a verified statement claiming she had no significant connection with any party of interest and testified that she had no relationship with the second largest creditor. [2]  The debtor moved for removal and the trustee responded by asserting that a debtor in an insolvent estate had no pecuniary interest and thus was not a party in interest and lacked standing to challenge the trustee’s appointment.[3]  The court found that she had lied under oath concerning her relationship with the creditor and removed her as trustee. [4]  On appeal, the Eleventh Circuit held that bankruptcy judges possess the power to remove a trustee for lying under oath, sua sponte, after notice and a hearing.[5]

By: Elizabeth L. Anderson
St. John's Law Student
American Bankrutpcy Institute Law Review Staff
 
Rejecting the Second Circuit’s Wagoner[1] rule and agreeing with the First, Third, Fifth, and Eleventh Circuits, United States Court of Appeals for the Eighth Circuit held that the collusion of corporate insiders with third parties to injure the corporation does not deprive the corporation’s trustee of standing to sue third parties.[2] However, such a situation may give rise to the defense of in pari delicto barring the trustee’s action.[3]

By: Elizabeth Filardi
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In Morris v. St. John National Bank,[1] the Tenth Circuit concluded that a bankruptcy trustee who successfully avoids a lien under the Bankruptcy Code does not automatically assume all the rights the original lienholder may have against the debtor.[2] Here, the debtors borrowed $3,050 from the bank, using their 1980 Pontiac Trans Am as security.[3]  On the date the debtors filed for bankruptcy, they still owed the bank $3,237.50 on the loan, but the fair market value of the car was only $2,000.[4]  The Trustee successfully avoided the bank’s lien on the car.  While §551 preserved the lien for the benefit of the estate,[5] the issue was whether bankruptcy law permitted the trustee to recover the full amount owed or whether the trustee was limited to the value of the bank’s security interest in the car itself.[6]  The Tenth Circuit concluded that a trustee who avoids a lien pursuant to 11 U.S.C §544 and preserves it under §551 is limited to the value of the lien and does not acquire the bank’s right to collect any debt amount beyond the value of the security interest.[7] Consequently, the trustee’s recovery was limited to the $2,000 value of the secured interest on the debtor’s car and could not recoup the full $3,237.50 value owed on the loan at the time of the bankruptcy filing. 

By: Matthew McNamara
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
The Delaware district court has affirmed a bankruptcy court decision extending the settlement payment exception to the trustee’s avoiding powers to insulate from attack a leveraged buyout (“LBO”) involving a non-public company in Brandt v. B.A. Capital LP (In re Plassein International Corporation).[1]  The Plassein trustee sought to avoid transfers to the selling shareholders under Delaware fraudulent transfer law and section 544 of the Bankruptcy Code.[2]  Section 546(e), however, states that a settlement payment falls under an exemption to section 544 and thus the trustee may not void the transfer.[3]  Plassein follows and expands upon a line of cases adopting a broad interpretation of the term “settlement payment”.  The Third Circuit has adopted an extremely broad interpretation of the term, noting that it encompasses “almost all securities transactions”.[4]  Earlier decisions imposed policy based limitations on the section 546(e) settlement payment exemption in order to exclude payments made to shareholders as part of an LBO. [5]  The court in In re Resorts International[6], however, made it clear that “a payment for shares during an LBO is obviously a common securities transaction, and [the court] therefore [held] that it is also a settlement payment for the purposes of section 546(e)”.[7]  The shares in question in In re Resorts, however, were securities of a publicly traded company.  The court failed to specify whether the settlement payment exemption in an LBO was limited to shares of publicly traded companies or might also protect LBO’s involving non-public companies. 

By: Renton Persaud
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In a decision of importance to chapter 13 debtors, the Bankruptcy Appellate Panel for the Ninth Circuit in In Re Lopez [1] held that chapter 13 debtors are permitted to pay post-petition mortgage payments directly to creditors outside of the plan even though the plan cures and reinstates the mortgage.  According to the court, the new provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) do not change the law with respect to such direct payments.[2]  The court drew a distinction between claims “impaired” by the debtor’s plan, which must be made through the chapter 13 trustee, and unimpaired claims, which need not be.[3]  The court bifurcated the mortgage debt between the cure payments and the regularly scheduled payments accruing post-petition.  Under the court’s view, only the cure amount was impaired and must be paid through the plan.[4]  The importance of the decision to debtors is that it avoids the chapter 13 trustee’s fee on the regular mortgage payment, an amount that was $308 per month in this case.[5]  Of special interest in light of the currently pending legislation that could permit modification of home mortgages in chapter 13, the court distinguishes Fulkrod v. Barmettler (In re Fulkrod)[6]and indicated that, where the mortgage is reamortized, as in chapter 12 cases, the payments must be made through the plan.[7]