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High Court Broadens the Definition of “Actual Fraud” under Section 523(a)(2)(A)

The Supreme Court’s Decision:

On May 16, 2016, in Husky International Electronics, Inc. v. Daniel Lee Ritz, Jr., Case No. 15-145, the Supreme Court held that the term “actual fraud” in § 523(a)(2)(A) of the Bankruptcy Code encompasses fraudulent conveyance schemes, even if the scheme does not involve a false representation to the creditor.  In reversing the judgment of the Fifth Circuit, the Supreme Court’s ruling settled a split among the circuits regarding whether “actual fraud” under § 523(a)(2)(A) requires a misrepresentation or misleading omission to the creditor. Compare In re Ritz, 787 F.3d 312 (5th Cir. 2015) with McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000), and Sauer V. Lawson, 791 F.3d 214 (1st Cir. 2015).

The Appeal:

On March 1, 2016, the Supreme Court heard arguments as to whether the “actual fraud” exception to discharge under § 523(a)(2)(A) applied narrowly (i.e. only when the debtor

ASARCO’s Revenge: Do Estate Professionals Now Have to Charge the Same Fees to an Estate or Committee that They Would Charge a Similar Client in an Out-of-Court Matter?

Either from our prior posts here and here, or from the great posts from Stone and Baxter’s Plan Proponent blog or from Bracewell’s Basis Points blog, we all know the Supreme Court’s holding in ASARCO[1]/: a strict interpretation of Section 330(a) of the Bankruptcy Code[2]/ allows professionals to charge for the preparation of a fee application per Section 330(a)(6).  But as there is no express statutory authority to charge the estate for defense of a fee application, the “American rule” prevails, requiring professionals to bear their own defense costs if a third party objects to the fees.[3]/

The cases following Asarco have all been sad days for bankruptcy professionals.  As we have written, the Delaware Bankruptcy Court has rejected all arguments that Section 328 of the Bankruptcy Code, which allows the Court to approve reasonable contractual terms, could allow a contractual term

Preference Defendants, Rejoice! Services Billed in a Lump Sum Can Be Allocated Per Diem, for Your New Value Defense

May 4, 2016

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Preference actions are, for the most part, insanity. We won’t go on a tirade here. But recently, a ruling brings common sense to the “new value” defense.

Specifically, all bankruptcy lawyers know that any “new value” must come after the allegedly preferential transfer. This can be problematic for service providers, especially services provided daily, or over time. The debtor may, for instance, pay a prior invoice on April 10, and then file for bankruptcy on April 20, or 30, before the service provider generates an invoice for all of April’s services. A crafty trustee may thus argue that there is no evidence of new value provided after April 10, and hence no new value defense.

The recent case of Levin v. Verizon Business Global, LLC (In re OneStar Long Distance, Inc.), 3:15-cv-00049 (S.D. Ind. March 28, 2016) is a perfect example of this. The defendant provided telecommunications services to the

7th Circuit Disrupts Commercial Certainty in Lease Terminations; Landlords, We Hate That You Have to Read this Blog Post

There are many tenants that are, shall we say, “problem children.” They pay late, open late, breach, junk up your strip or building, threaten, the works. Sometimes, the landlord finds it easier just to reach a lease termination agreement with such a tenant, with the parties walking away with a mutual release. If the lease is below market, or the landlord is really motivated to move this tenant along, the landlord even provides some “keys money” to terminate the lease.

This normal practice may now be turned on its head. In a recent opinion, the Seventh Circuit ruled that a pre-bankruptcy lease termination was a “transfer” under the Bankruptcy Code. Because it was a “transfer,” if the tenant did not receive “reasonably equivalent value” for the value of the lease (such as where the tenant alleges it was a below market lease, which could have been assigned in bankruptcy for

Snooze Alert (but you really have to read this) – Bankruptcy Forms and Various Dollar Amounts Changing on April 1

On April 1, a bevy of dollar amounts set forth in the Bankruptcy Code will change. Some of these are quite important to substantive relief, and others are quite important to making sure you don’t look bad in front of the client or your favorite (least favorite?) judge. We have Section 104 of the Bankruptcy Code to thank for this malpractice-inducing enterprise, which we enjoy every three years. See 11 U.S.C. § 104 (a) (“On April 1, 1998, and at each 3-year interval ending on April 1 thereafter, each dollar amount in effect under sections . . . shall be adjusted . . . .”).

At some point in the careers of the contributors to The Bankruptcy Cave, we would love to speak to the legislative scribes who meticulously cross-referenced all of BAPCPA’s new dollar figures to Section 104, but still managed to give us the hanging paragraph

The A++ Forms and Resources: Handling the No-Show Deposition

Editor’s Note:  Here at The Bankruptcy Cave, we love insolvency stuff; we eat it for breakfast and dream about it at night.  (We are not kidding.)  Sometimes that includes credit-related litigation, and so we keep our pre-trial, trial, and appellate skills honed.  To that end, here is a very helpful cheat sheet we prepared and which we bring with us to every deposition, just in case.  (Your author Leah even got to enjoy a no-show deposition in Chicago last year; she created a perfect record using the below.)  Feel free to use it, and if it is handier to have a Word version, email one of the authors.  We will update the post later to make it download-able, but the rudimentary blogging skills of your new editor prevent that now, alas.

Editor’s Note 2:  If you like practice tips and cheat sheets like this, see also Mark and Leah’s “The A++, Super Comprehensive, Don’t

Delaware Bankruptcy Court Holds, Twice: “ASARCO is Here to Stay” (But Your Authors Have Hatched Another Plan; Read Below!)

You may recall the holding and analysis of ASARCO [1]/ from Jay’s previous post, here. At bottom, ASARCO  followed a strict interpretation of Section 330(a) of the Bankruptcy Code,[2]/ holding that professionals are allowed to charge certain fees for the preparation  of a fee application per Section 330(a)(6). But as there is no express statutory authority to charge the estate for defense  of a fee application, the “American rule” prevails, requiring professionals to bear their own defense costs if a third party objects to the fees.[3]/

The efforts to get around ASARCO  are well underway, primarily in the venue of the Delaware Bankruptcy Court. So far, the score is ASARCO  (two wins), to frustrated estate professionals (zero). And, even as your authors were writing this post, there is another means underway, using the “upcharge” principal – the hourly rates will be $x if

11th Circuit Holds Consumer Lenders Can’t Include Estimated Expenses In Pre Closing Reinstatement or Payoff Letters; What You Should Do About This Remarkable Opinion

Editor’s Pre- / Post-Script:  The original post about this case was, frankly, a bit sarcastic toward the consumer borrower, and made light of a serious matter.  (Your author Mark Duedall is to blame for that.)  When the post found its way to the borrower’s counsel, he was kind enough to let us know, as Paul Harvey would say, “the rest of the story.”  And that was this – the borrower was down on his luck, a hard working public servant, but eventually managed to come up with the funds needed to pay his bills (including this loan) in full.  Truly, an individual deserving to be treated fairly in all respects.  But when he paid the loan in full, including the estimated future charges, the lender then refused to refund the estimated future charges that the borrower had paid in full (and that the lender did not incur).  Yikes; the consumer had

10th Circuit Holds That First Time Transactions Fall Within 11 U.S.C. 547(c)(2), Ordinary Course of Business Defense

In a decision that surprised many, the United Stated Circuit Court of Appeals for the Tenth Circuit (the “10th Circuit Court of Appeals”) affirmed decisions finding that a payment made on account of a first time transaction between a debtor and creditor can qualify for the ordinary course of business defense under 11 U.S.C. § 547(c)(2).

C.W. Mining Company (the “Debtor”) entered into an equipment agreement with a new contractor, SMC Electric Products, Inc. (“SMC”), in an attempt to increase the Debtor’s coal production. This agreement was reached several months before the filing of an involuntary bankruptcy petition. Within 90 days of the involuntary bankruptcy filing, the Debtor made the first payment under the agreement in the amount of $200,000 to SMC via wire transfer. The Trustee filed an adversary proceeding seeking to avoid and recover the $2000,000 payment under 11 U.S.C. §§ 547(b) and 550, as an alleged preferential

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