By: Sean Scuderi
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
Recently, the United States Bankruptcy Court in the Western District of Texas gave secured lenders a new weapon to attack the discharge of debt by a debtor who sold collateral without the creditor’s knowledge and used the proceeds to pay unsecured debts.  In In re Barnes[1], the Court held that the sections 727(a)(2) and (7)[2] fraudulent transfer grounds for objection to discharge apply to collateral dispositions where the debtor had an intent to defraud the secured creditor.  In Barnes, the debtor, through his business of Mobar, LLP, sold off his store in Guadalupe without the required approval of Franklin Bank, S.B.B. (“the Bank”), which held a security interest in it, and the Small Business Association (“SBA”).[3]  Not only did the debtor not receive approval, but he also failed to notify the Bank or the SBA of the sale.[4]  The debtor used the proceeds of the sale to pay off unsecured debtors when the money should have gone to the Bank.[5]  The Bank brought an adversary proceeding to determine the dischargability of its claim against the debtor and to object to the discharge.[6]

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: Jonathan Borst
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In In re Whitehall Jewelers Holdings, Inc., [1] the court held against Whitehall Jewelers Holdings, Inc. (“Debtors”), in favor of approximately 124 consignment vendors (“Consignment Vendors”), where Debtors sought an order permitting the “free and clear” sale of all of their assets and inventory, including consigned goods from Consignment Vendors.[2] 

By: Ian Park
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In the first appellate court decision on the issue that favors the debtor, the Sixth Circuit Court of Appeals splits with the Fourth and Eleventh Circuits and holds that the repossession of collateral under UCC Article 9 does not alter the debtor’s property rights or remove the collateral from the estate.[1]  The effect of this ruling is that the debtor may retain the collateral by paying its value to the creditor and is not limited to the state law redemption rights, which require payment in full of the secured obligation. 

By: Vitaly Libman
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In the first appellate decision on point, the Eleventh Circuit Court of Appeals held in In re Graupner[1] that the anti-bifurcation protection granted to certain purchase money security interests by BAPCPA’s “hanging paragraph” applies even though the loan includes negative equity. The Second Circuit, meanwhile, opted to defer determination of this issue by certifying the question of whether negative equity is to be included in such purchase money security interests to the New York Court of Appeals.[AA]   In Graupner, the debtor traded in a vehicle with negative equity as part of his purchase of a new car.[2]  Both the purchase price of the new car and the negative equity from the earlier loan were included in the amount financed by the dealer.[3]  Rejecting the debtor’s argument that the inclusion of negative equity meant that the security interest was not a purchase money security interest, the court held that the entire unpaid balance was deemed to be a secured claim, including the negative equity.[4]