2nd CIRCUIT CASES

David B. Shaev, Esq.

2nd Circuit Leader

State Chair/SDNY/EDNY

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1.Avoidable transfers—Interest of debtor in property:The debtor did not have an interest in, or control over, payments made to a university pursuant to a Parent PLUS loan taken out by the debtor to fund tuition costs at a college attended by the debtor's child, so that the payments were not avoidable under Code § 544(b) or § 548(a).In re Ladipo, 2018 WL 1121590 (Bankr. D. Conn. Feb. 27, 2018) (adv. proc. no.2:16-ap-2002);In re Demitrus, 2018 WL 1121589 (Bankr. D. Conn. Feb. 27, 2018) (adv. proc. no.2:17-ap-2036).

2. Property of the estate—Cause of action:The Chapter 7 debtor's causes of action to recover for injury resulting from defective transvaginal mesh implanted prepetition were not property of the estate where, under Vermont law, the causes of action accrued when the debtor discovered the injury postpetition, and the causes of action were not sufficiently rooted in the debtor's pre-bankruptcy past to become property of the estate despite their postpetition accrual.In re Vasquez, 581 B.R. 59 (Bankr. D. Vt. Feb. 23, 2018) (case no.5:10-bk-10806).

3. Judicial Estoppel-Not a “Mechanical Rule”: The Second Circuit aligned itself with other circuits on the standard of review in cases involving judicial estoppels, but only by a slim margin. Clark/Plaintiff-Appellant vs. AII Acquisition/Defendant/Appelles, decided 3/30/2018. No. 17-1727-cv. Couple confirmed 5 year chapter 13 plan paying 100% in 2010, with interest. Shortly before final plan payment, the debtor/husband was diagnosed with mesothelioma, alerted bankruptcy counsel of potential new asset who failed to amend the schedules or notify the court. 2nd Circuit held that particular factual circumstance tipped the balance in favor of the debtor because of the de minimus effect on bankruptcy proceeding and allowed debtor to proceed with cause of action outside the bankruptcy. Although a win for this debtor, the case appears to set a very high standard for debtors in future cases.

4.Reopening of case:A party that purchased the Chapter 7 debtors' residence in a foreclosure sale held during the pendency of the debtors' case in violation of the automatic stay was not a party in interest for the purpose of reopening the case under Code § 350(b) and seeking retroactive annulment of the automatic stay, where the purchaser did not have a prepetition relationship with the debtors, and the purchaser's interest in the debtors' property did not arise until after the debtors received their discharge.In re Riley, 2017 WL 4334033 (Bankr. N.D. N.Y. Sept. 28, 2017) (case no. 6:13-bk-61356).

5.Avoidable transfers—Constructively fraudulent transfer under Code § 548(a)(1)(B):Persuasive law supports the conclusion that tuition payments made by a debtor to educate his or her minor children confer reasonably equivalent value on the parent because, among other reasons, parents have an obligation to provide for their children's necessities, including their education and care, and it is not necessary for a family to meet that obligation, and all of its other prepetition daily needs and requirements, at the lowest possible cost, or at no cost at all. Accordingly, the tuition payments are not avoidable as constructively fraudulent transfers under Code § 548(a)(1)(B).In re Michel, 572 B.R. 463 (Bankr. E.D. N.Y. Sept. 18, 2017) (adv. proc. no. 1:16-ap-1121);In re Michel, 573 B.R. 46 (Bankr. E.D. N.Y. Sept. 18, 2017) (adv. proc. no. 1:16-ap-1122).

6. Chapter 13—Entitlement to discharge:Where a Chapter 13 debtor has failed to make direct postpetition mortgage payments and is therefore not entitled to a discharge, the debtor may be able to cure the default through either a consensual loan modification or a modification of the debtor's plan under Code § 1329. However, either of these options must be approved by the court prior to the expiration of the term of the debtor's plan.In re Hanley, 2017 WL 3575847 (Bankr. E.D. N.Y. August 11, 2017) (case no. 8:11-bk-76700). This reveals the danger in Final Cure notification.

7. Arbitration of the debtor's claim for violation of the discharge injunction presented an inherent conflict with the Bankruptcy Code and the bankruptcy court did not abuse its discretion in refusing to compel arbitration.Anderson v. Credit One Bank, No. 16-2496 (2d Cir. March 7, 2018).

8. Avoidable transfers—Constructively fraudulent transfer—Receipt of “reasonably equivalent value”: The county that acquired the debtor's real property at a non-collusive tax foreclosure sale conducted in strict compliance with state law procedures that provided for notice, ample opportunity to cure, and judicial supervision of the sales was conclusively presumed to have provided the debtor with "reasonably equivalent value" for the property, so that the sale was not avoidable as constructively fraudulent under Code § 548(a)(1)(B). In re Gunsalus, 576 B.R. 302 (Bankr. W.D. N.Y., Nov. 6, 2017) (adv. proc. nos. 2:17-ap-2008, 2:17-ap-2009), appeal filed, Gunsalus v. County of Ontario, New York, Case No. 6:17-cv-6810 W.D. N.Y., filed Nov. 22, 2017).

This case is interesting and should be distinguished from Veltre pending in the Third Circuit. NACBA has filed an amicus brief arguing that “reasonably equivalent value” is not the proper measure in a preference action as opposed to a fraudulent transfer action.

9. Due Diligence by Counsel – In re Beinhauer, 570 B.R. 128 (EDNY 4.13.17). Representing a debtor in a chapter 7 bankruptcy requires reasonable due diligence on the part of counsel. Counsel failed to request reasonable documents from client prior to filing and the Court found that counsel violated Sec. 707(b)(4)(A.) Trustee moved to dismiss petition and court dismissed the case and awarded Trustee fees and expenses. This case is an interesting read as a reminder of counsel’s responsibility as attorney. The Court’s analysis and counsel’s failures are pretty clear and to be avoided.

10. Bankruptcy Court’s Contempt Powers are Limited - Vermont bankruptcy court had awarded $75,000.00 against PHH for violations of Bankruptcy Rule 3002.1(i)(2) which authorizes the court to award other appropriate relief. The Court further issued an award of $300,000.00 under Sec. 105(a) and the Court’s “inherent powers.” PHH appealed to the District Court which ruled on 12/19/2017 limiting the bankruptcy court’s contempt power and remanded back to the bankruptcy court. The District Court did say that it has the power to impose criminal contempt sanctions in the event a referral is made by the bankruptcy court.

This decision limits the liability of the mortgage companies and servicers in bankruptcy court making it more difficult to obtain substantial damage awards for violating consumer rights. There is little doubt that the banks and services will continue to violate Rule 3002.1, but punishing the institutions will require additional steps and deeper pockets. PHH Mortgage Corporation v. Sensnich, 2017 U.S. Dist. LEXIS 207801 (D. Vt. Dec. 18, 2017)

11. Chapter 13 Sec. 109(e) Limitations is Not Jurisdictional- in re Fioriglio, 1-16-40602-EDNY, Judge Nancy H. Lord, 3/27/18. Debtor filed Chapter 13 schedules reflecting debts below limits allowed by the Code. However, the Debtor listed a secured debt as $0. After a number of months, a Motion to Lift Stay was filed and Debtor amended schedules reflecting secured debts in excess of limits imposed by Sec. 109(e). A Motion to Dismiss was filed. The Court found that 109(e) is not jurisdictional, which can be important in other cases. However, the Court dismissed the petition finding that laches were not proven and that the creditor raised the debt limit issue in a timely manner.