FYI: 8th Cir Affirms Denial of Discharge Due to Inadequate Records and Questionable Transactions

The U.S. Court of Appeals for the Eighth Circuit ("Eighth Circuit") recently affirmed the denial of bankruptcy discharge for a Chapter 7 debtor due to the debtor's failure to keep adequate records.

 

In particular, the Eighth Circuit focused on a sudden and financially significant return of hundreds of thousands of dollars' worth of high-end watches and jewelry that left significant unanswered questions as to the whereabouts of the assets and the legitimacy of the creditor jeweler's claim.

 

A copy of the opinion is available at:  Link to Opinion

 

Husband and wife doctors ("Debtors") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.  In Schedule A/B of their chapter 7 petition, they listed jewelry assets comprised only of a wedding ring worth $35, a wedding band and anniversary ring collectively worth $700, two sets of cufflinks collectively worth $1,250, and a watch winder worth $12,000, and no "other property of any kind [that they] did not already list."

 

The Debtors' Schedule A/B also stated that they had no ongoing monthly expenses related to "childcare or children's education costs," while their Statement of Financial Affairs ("SOFA") disclosed that in the ninety days before the petition, they paid amounts related to their son's college tuition and rent. The SOFA also claimed that the Debtors' had no gifts above $600 or no transfer of any property within the last two years, "other than property transferred in the ordinary course of [their] business or financial affairs."

 

Upon the Trustee's review of the filings, he notified the court that the case was "presumed to be an abuse" under 11 U.S.C. § 707(b).  The Debtors subsequently filed Amended Schedules A/B and C and an Amended SOFA, which also now disclosed $108,473.77 of payments related to their son and daughter's college expenses.

 

After a meeting of creditors, the Trustee noted a "potential fraudulent transfer" concerning the return of "twenty to thirty valuable watches" to a Las Vegas jeweler ("Jeweler"), who filed an unsecured claim in the amount of $413,788. 

 

The Trustee filed a Complaint to deny the Debtors' a discharge: (i) under 11 U.S.C. § 727(a)(2)(A), for transferring thousands of dollars to their children in the year preceding the petition with the intent to hinder, delay or defraud a creditor; (ii) under § 727(a)(4), for failing to disclose numerous and substantial transfers to their adult children within two years prior to commencement of the bankruptcy case; and (iii) under § 727(a)(3), for failing to maintain adequate records regarding the transfer of "numerous and valuable watches."

 

At trial on the Trustee's case, the Debtors described their decline of fortunes during the national foreclosure crisis in 2008, which resulted in a $2.4 million claim against the Chapter 7 estate for failure to pay their mortgage and hundreds of thousands of dollars of goods that were auctioned from storage for failure to pay rent with no accounting of the forfeited property. 

 

The husband Debtor testified he was an avid collector of expensive watches and jewelry, and while he was able to produce invoices recording deliveries there were few recorded payments, as his relationship with the Jeweler resulted in a "running total" that charged and credited watches and jewelry received and returned until he was eventually unable to pay, and signed a confession of judgment in the amount of $390,700.  To partially satisfy that judgment, in February 2013, he returned 27 watches and a bridal collection ring to the Jeweler's attorney, which was documented with receipts but not the value of the items or balance due after the return.

 

Following trial, the bankruptcy court denied the discharge on three grounds. 

 

Primarily, discharge was denied under § 727(a)(3) for unjustifiably failing to keep adequate records regarding the purchase, sale and return of hundreds of thousands of dollars of jewelry, finding the husband Debtor's testimony regarding purchase without paperwork or receipts not credible and that it was impossible to ascertain their financial condition and material transactions. 

 

The bankruptcy court also found discharge improper under § 727(a)(4)(A) for failure to disclose substantial transfers for the benefit of the Debtors' adult children, and under § 727(a)(5) for failing to document what happened to five watches purchased in 2008 marked as "paid" and an accounting of assets allegedly lost in the storage containers. 

 

On appeal, the Bankruptcy Appellate Panel (BAP) affirmed the denial of discharge under § 727(a)(3), while declining to address the denial under §§ 727(a)(4)(A) and (a)(5).  The Debtors appealed to the Eighth Circuit.

 

As you may recall, Chapter 7 of the Bankruptcy Code allows debtors to discharge their debts by liquidating assets to pay creditors. See 11 U.S.C. §§ 704(a)(1), 726, 727.  Although objections to discharge "are strictly construed in favor of the debtor," an objecting party need only establish one ground to support a discretionary denial of discharge by the bankruptcy court. See In re Korte, 262 B.R. 464, 471 (B.A.P. 8th Cir. 2001); Union Planters Bank, N.A. v. Connors, 283 F.3d 896, 901 (7th Cir. 2002).

 

Section 727(a)(3) authorizes denial of discharge if "the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case."

 

The objecting party (here, the Trustee) must show "(1) that the debtor failed to maintain and preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor's financial condition and material business transactions." Meridian Bank v. Alten, 958 F.2d 1226, 1232 (3d Cir. 1992).  Upon meeting this initial burden, "the burden of production shifts to the debtor to offer a justification for his record keeping (or lack thereof); however, the objecting party bears the ultimate burden of proof with respect to all elements of this claim." In re Swanson, 476 B.R. at 240.  No proof of intent is required for a denial of discharge under Section 727(a)(3). In re Wolfe, 232 B.R. at 745.

 

Here, the Eighth Circuit agreed with the BAP that the Trustee met its initial burden because the Debtors' inadequate records left the bankruptcy court without a way to determine transactions between the Debtors and Jeweler. 

 

Although the Debtors did not have the same "duty to create and preserve records" of these transactions as a Chapter 7 debtor operating as a business with substantial assets, the return of twenty-seven valuable watches and bridal collection rings to the judgment creditor Jeweler was such a "sudden and large dissipation of assets" that even a consumer bankruptcy debtor maintained a greater duty to keep records.  Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 727.03[3][g] at 727-34 (16th ed. 2019); See, e.g., In re Buzzelli, 246 B.R. 75, 113-14 (W.D. Pa. 2000). 

 

Moreover, the husband Debtor was a sophisticated collector of valuable watches and jewelry and the subject purchases and returns not only had a significant impact on the Debtors' financial condition, but also impacted the legitimacy of the Jeweler's bankruptcy claim for the complete Confession of Judgment.  The Eighth Circuit agreed that the lone receipt produced by Debtors failed to substantiate the transactions and shifted the burden of production to the Debtors to justify their lack of adequate records.

 

To determine whether a debtor's record keeping was justified, the Bankruptcy Code "requires the trier of fact to make a determination based on all the circumstances of the case." Meridian Bank, 958 F.2d at 1231. Here, because creditors began asserting claims against the Debtors and they were considering bankruptcy, the appellate court concluded that a reasonable person would insist on documenting the impact of this transaction on its financial condition.  Although the husband Debtor may not have known the fair market value of the watches at the time of their return, the Eighth Circuit noted that he could have matched each watch to an invoice in his possession, noted the purchase price and demanded that the Jeweler document the amount each returned watch would reduce the unpaid judgment. 

 

Instead, the Eighth Circuit held that his failure to do so "created serious, unanswered questions as to the whereabouts of these assets and the legitimacy of [the Jeweler's] bankruptcy claim."

 

For these reasons, the Eighth Circuit agreed with the BAP that the bankruptcy court did not err in denying Debtors a discharge under section 727(a)(3) for failing to keep adequate records of the financially significant watch and jewelry transactions, and affirmed the bankruptcy court's judgment, while declining to address the alternative denials of discharge under sections 727(a)(4) and (a)(5).

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 5th Cir Reverses Sanctions Against Consumer's Counsel for Failure to Promptly Settle

The U.S. Court of Appeals for the Fifth Circuit recently reversed a trial court's order sanctioning a consumer's counsel for failure to promptly settle a lawsuit, but affirmed the trial court's order denying a motion to recuse because the trial court was not biased against the consumer.

 

A copy of the decision is available at:  Link to Opinion

 

In January 2016, a consumer disputed a debt by sending a facsimile to a debt collector. Despite this alleged fax transmission, the debt collector continued to report the debt to a consumer reporting agency without noting that the consumer disputed the debt. 

 

In June 2016, the consumer sued the debt collector for allegedly violating the federal Fair Debt Collection Practices Act ("FDCPA") and the Texas Debt Collection Act ("Texas Act"). The consumer alleged that the debt collector violated these statutes by communicating "credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed." 15 U.S.C. § 1692e(8); §§ 392.202(a), 392.301(a)(3).

 

In a September 2016 order, the trial court required the parties to exchange settlement offers by October 19, 2016. In compliance with this order, the debt collector offered to settle for $1,101, plus reasonable attorneys' fees and costs. The consumer's lawyer never responded to the debt collector's offer and did not issue a written settlement demand. Subsequently at his deposition, the consumer testified that the offer would "make him whole and conclude the case."

 

The parties filed cross-motions for summary judgment.  The trial court granted the debt collector's motion under the Texas Act because the borrower had no competent evidence to establish the required actual damage element of this claim, but denied the parties' cross-motions on the FDCPA claim finding that a triable issue of material fact existed over whether the consumer's January 2016 fax "actually disputed the debt."

 

After this, the parties settled the case. The debt collector agreed to pay the consumer $1,000 and to forgive the debt.  The parties agreed to allow the trial court to resolve the dispute over attorneys' fees and costs.

 

The consumer moved for attorneys' fees and costs totaling. $14,731.80.  The debt collector moved to sanction the consumer's lawyers (the "Attorney-Appellants") under 28 U.S.C. § 1927 and 15 U.S.C. § 1692k(a)(3), and sought attorneys' fees and costs totaling $13,950.38.

 

Before ruling, trial court wrote to the disciplinary committee for the U.S. District Court for the Western trial of Texas accusing the Attorney-Appellants of participating in "a scheme to force settlements from debt collectors by abusing the FDCPA." In support of this alleged ethical violation, the trial court provided a list of FDCPA cases in which consumer's attorneys had participated.

 

In April 2018, the trial court ruled on the cross motions for fees and costs. The trial court denied the consumer's motion for attorneys' fees and costs. Moreover, the trial court sanctioned the Attorney-Appellants under 15 U.S.C. § 1692k(a)(3) and Federal Rule of Civil Procedure 11(c), and ordered that them to pay the debt collector's attorneys' fees and costs.

 

In so ruling the trial court found that the Attorney-Appellants "acted in bad faith when they: (1) failed to comply with the September 2016 settlement-offer order; (2) continued to litigate the case even after receiving an offer that would make [the consumer] whole; and (3) drafted the January 2016 debt letter in a manner that would cause the debt collector not to realize that the debt was disputed, so that counsel could engage in a "scheme" to "force settlements from debt collectors by abusing the FDCPA."

 

After the sanctions order, the consumer filed a motion to recuse the trial court judge under 28 U.S.C. §§ 144 and 455, which was assigned to a different judge. In May 2018, the new judge issued an order denying the motion to recuse because there was no evidence that the trial court judge possessed any extrajudicial knowledge and the "rulings did not show sufficient antagonism for a reasonable person to harbor doubts about the judge's impartiality."

 

This appeal by the consumer and his lawyers followed.

 

The Fifth Circuit began by noting that a trial court may not award attorneys' fees under Rule 11 sua sponte.  Ordinarily, this alone ordinarily would warrant reversal.  However, the consumer and his attorneys waived this argument requiring the Fifth Circuit to examine the merits of the trial court's sanctions orders.

 

As you may recall, Rule 11 requires that "[e]very pleading, written motion, and other paper must be signed by at least one attorney of record in the attorney's name." FED. R. CIV. P. 11(a). The Rule 11(a) required signature "certifies that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances," the filing is not sanctionable under Rule 11(b). Thus, Rule 11's plan text makes it clear that it only applies "where a person files a paper."  Rule 11 does not apply to "abusive tactics in litigation in respects other than the signing of papers." This is why a trial court deciding a Rule 11 motion evaluates an attorney's conduct when they file "a pleading, motion, or other paper."

 

The trial court provided three justification for sanctioning the Attorney Appellants under Rule 11: (1) they did not "make or respond to a settlement offer," contrary to the scheduling order; (2) they continued litigating after the consumer testified at his deposition that the debt collector's offer would have made him whole, and (3) the January 2016 letter disputing the debt "was part of a fraudulent scheme to abuse the FDCPA." 

 

The Fifth Circuit found all three reasons meritless because none of them were "tied to a filing," as required.

 

Initially, the failure to discuss settlement concerns an attorney's litigation tactics, not "a filing subject to Rule 11." The Fifth Circuit emphasized that it and its and sister circuits "have held that courts do not have the power to compel parties to make settlement offers, and that the failure to make an offer is not sanctionable." See Dawson v. United States, 68 F.3d 886, 897 (5th Cir. 1995) (collecting cases from other circuits).

 

The Fifth Circuit observed that contrary to its holding in Dawson, it has become a common practice in the "Western trial of Texas for judges to require parties to exchange settlement offers." The Fifth Circuit addressed this by reiterating that "if a party is forced to make a settlement offer because of the threat of sanctions, and the offer is accepted, a settlement has been achieved through coercion."

 

The Fifth Circuit made it clear that it will not tolerate this result, holding that the trial court erred when it sanctioned the Attorney Appellants because the consumer did not engage in settlement discussions.  The trial court "lacked the power" to order the consumer "to make a settlement offer." 

 

The Fifth Circuit next reviewed the trial court's justification for sanctioning the Attorney Appellants for continuing to litigate after receiving a settlement offer. The Fifth Circuit concluded that "the decision to reject a settlement offer is not a court filing subject to Rule 11(b). Thus, this rationale did not support sanctioning the Attorney Appellants.

 

The Fifth Circuit also examined the trial court's final reason for sanctioning the Attorney Appellants under Rule 11 that the debt dispute letter was intentionally vague and sent in bad faith to create FDCPA liability. The letter itself was "not a filing or other paper subject to Rule 11," but the consumer attached it to his complaint bringing it within the scope of conduct that Rule 11 was intended to govern. 

 

Nevertheless, the Fifth Circuit found that there is no evidence that the consumer acted in "bad faith" when he filed his complaint.  As such, it was reversible error for the trial court to "ignore the language of the letter and instead infer subjective bad faith based on its view of the attorneys' intent."

 

Additionally, Rule 11 does not include the phrase "bad faith" and the trial court did not specify which part of Rule 11 the Attorney Appellants supposedly violated.  The trial court might have considered that the letter did not did not "have evidentiary support" under Rule 11(b)(3), but it found that a material fact dispute "exist[ed] on whether Plaintiff actually disputed the Debt" so the "lack of evidentiary foundation cannot be the problem here." Moreover, a "claim that survives summary judgment" is not frivolous. See FED. R. CIV. P. 11(b)(2).  Thus, the Fifth Circuit reversed the sanction award against the Attorney Appellants.

 

The Fifth Circuit next examined the trial court's fee award to the debt collector under 15 U.S.C. § 1692k(a)(3), which allows a court to "award to the defendant attorney's fees" "[o]n a finding . . . that an action under this section was brought in bad faith and for the purpose of harassment." As the Fifth Circuit already rejected the trial court's bad faith finding, it also reversed this award.

 

The Fifth Circuit also reversed this fee award because the trial court improperly ordered the Attorney Appellants to pay it when section "1692k(a)(3) does not stretch that far."  Courts must strictly construe statutes awarding attorneys' fees given the long-standing American Rule "against awarding costs and fees to the prevailing party." Specifically, the Fifth Circuit held, courts must read statutes that depart from the American Rule "with a presumption favoring the retention of long established and familiar legal principles."  With these principals in mind, "when a statute awards fees to one party, but does not identify from whom they may be collected," the Fifth Circuit declined to allow "recovery from the other party's counsel."

 

Section 1692k(a)(3) permits a court to "award to the defendant attorney's fees," but it "is silent as to whether a plaintiff's attorney may be ordered to pay them." This section does not explicitly authorize the court to sanction lawyers and require them to pay a fee award in derogation of the common law prohibition against this practice. 

 

Although the Fifth Circuit reversed the sanction award against the Attorney Appellants, it was not ready to order the debt collector to pay the consumer's fees and costs.  Such an order would require the consumer to prove that his action to enforce FDCPA liability was successful. 15 U.S.C. § 1692k(a)(3).  The Fifth Circuit has not yet "decided whether a private settlement renders the action "successful" under § 1692k(a)(3)" and the trial court did not consider this issue.  Thus, the Fifth Circuit remanded this issue to the trial court to decide whether the consumer may recover attorneys' fees under the FDCPA.

 

Finally, the Fifth Circuit analyzed the consumer's claim that the trial court erroneously denied his recusal motion under 28 U.S.C. §§ 144 and 455. Recusal is required under these sections when the court "has a personal bias" against a party, 28 U.S.C. §§ 144, 455(b)(1), if the court's "impartiality might reasonably be questioned," id. § 455(a), or if the court has "personal knowledge of disputed evidentiary facts concerning the proceeding," id. § 455(b)(1). The key here is that the bias must be against a "party," not their counsel. Bias against a non-party attorney alone does not require disqualification.

 

Another ground for disqualification would be if the court's views are "extrajudicial." A courts views are not extrajudicial when the court formed its opinion "on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings." Here the trial court's supposed bias was not derived from extrajudicial knowledge because the court presided over this case and three of the other cases referenced in the sanctions order.

 

Further, the other cases cited in the sanctions order came from a record created by the ECF system for the Western District of Texas which listed other cases involving the Attorney Appellants. Given that the Attorney-Appellants asked the trial court in their fee petition to look at these cases to justify their experience and claimed billing rate they "have only themselves to blame," and if they do not like what the trial court found it does not give them grounds to claim bias.

 

Finally, when a court applies section 455(a), a court must determine "whether a reasonable and objective person, knowing all of the facts, would harbor doubts concerning the judge's impartiality."  Here the trial court did not have any extrajudicial knowledge about the consumer or his counsel so the consumer had the burden to demonstrate that the trial court "displayed a deep-seated favoritism or antagonism that would make fair judgment impossible."

 

The Fifth Circuit found that trial court's anger was directed at the Attorney Appellants based on their conduct, not at the consumer. This ire did not rise to the level of "a continuing and personal nature," sufficient to require recusal.

 

The Fifth Circuit also found that there was no evidence that the trial court harbored "a deep-seated antagonism" against the consumer "that would make fair judgment impossible." Rather, the trial court was concerned that the Attorney Appellants did not properly inform the consumer about the settlement offer.  Thus, the Fifth Circuit affirmed the trial court's denial of the motion to recuse.

 

Therefore, the Fifth Circuit reversed the trial court order sanctioning the Attorney Appellants and remanded for further proceedings consistent with its opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 8th Cir BAP Rejects Most of Trustee's Voidable Preference Action Against Bank

The U.S. Bankruptcy Appellate Panel ("BAP") for the Eighth Circuit recently affirmed a bankruptcy court's holding that the contemporaneous exchange for new value defense to a preference action under § 547(c) applied to a creditor bank that released its liens for less than full payment.

 

In so ruling, the Eighth Circuit BAP held that the bankruptcy trustee could not recover 2 of the 3 payments that the debtor made to the bank during the 90-day pre-petition preference period.

 

A copy of the opinion is available at:  Link to Opinion

 

The debtor and its affiliated companies owned and operated gas stations and convenience stores in multiple states.  The debtor "bounced" several checks and then entered into an agreement with its bank to pay the overdrawn amounts, including a security interest in most of the debtor's assets.

 

The debtor entered into an agreement to sell all its assets for $27 million.  The agreement required that the assets "be free and clear of any liens … and closed on April 20, 2015."

 

A senior secured creditor with priority over the debtor's bank received $14 million from the sale proceeds and released its lien in return for partial payment on the debt. The bank released its liens as required by the agreement and received separate payments of $1.3 million, $100,000 and $73,490.67 from the sale proceeds "in partial payment on its debt" during the preference period.

 

In July of 2015, the debtor filed for relief under Chapter 11 of the Bankruptcy Code and a trustee was duly appointed.

 

The bankruptcy trustee "filed and adversary proceeding seeking avoidance and recovery of the $1.3 million, $100,000 and $73,490.67 payments to [the bank] as preferences."

 

After a trial, the bankruptcy court held that the trustee could recover the $73,490.67 payments as preferences, but not the $1.3 million and $100,000, which "qualified for the § 547(c)(1) defense." The bankruptcy trustee appealed.

 

On appeal, the Eighth Circuit BAP first explained the standard of review. "The existence of intent, contemporaneousness, and new value are questions of fact." The "[i]interpretation of the Bankruptcy Code is reviewed de novo."

 

The Court then explained that under § 547(c) of the Bankruptcy Code, the trustee can "avoid pre-petition preferential transfers. 'In general, an avoidable preference is a transfer of the debtor's property to or for the benefit of a creditor, on account of the debtor's antecedent debt, made less than ninety days before bankruptcy while the debtor was insolvent, that enables the creditor to receive more than she would in a Chapter 7 liquidation.'"

 

However, "[s]ection 547(c)'s contemporaneous exchange for new value defense prohibits a trustee from avoiding a transfer under § 547(b) … to the extent that such transfer was—(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value give to the debtor; and (B) in fact a substantially contemporaneous exchange."

 

The creditor receiving payment bears the burden of proving the transfer is not avoidable "under subsection (c) of [§ 547]."

 

The Eighth Circuit BAP noted that the "Bankruptcy Code [in § 547(a)(2)] defines 'new value' as 'money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation. … The release of a lien can constitute new value. … 'Contemporaneous new value exchanges are excepted from avoidance because they encourage creditors to continue doing business with troubled debtors who may then be able to avoid bankruptcy altogether, and because other creditors are not adversely affected if the debtor's estate receives new value.'"

 

The Court then addressed the first question presented: "Did [the senior creditor's] release of its liens for less than full payment of its debt permit [the bank's] lien releases to provide new value?"

 

The Eighth Circuit BAP answered "yes," rejecting the trustee's argument that the bank's "release of its liens did not constitute new value[,]" and agreeing with the bankruptcy court's decision that the bank's "release of its liens on the Debtor's furniture, fixtures, and equipment ("FF&E") resulted in new value to the Debtor exceeding the $1.4 million in payment made to it in connection with the Sale." The Court concluded that "[w]hen, as in this case, a senior secured lender voluntarily releases its liens, the requirement for providing new value under § 547(c)(1) by the junior creditor is satisfied."

 

The next question the Court considered was whether "the IRS's lien releases enabled [the bank's] lien releases to provide new value to the Debtor[.]" The Court concluded that the IRS's release of its $1.5 million tax lien in return for payment of $600,000 provided new value to the debtor and that all liens on the property sold were released, including those on the inventory and FF&E.

 

The third question the Eighth Circuit BAP addressed was whether "the parties inten[ded] for the [bank's] $100,000 payment to be a contemporaneous exchange[.]" It saw no reason in the record to call into question the bankruptcy court's decision that the $100,000 payment, even though made prior to the sale closing, was part of the same deal and the parties intended the payment "to be made as an advance for the deal already reached by the parties regarding the April 30 Sale."

 

The Court then turned to the final question: whether the bank's release of its claims against two affiliated creditors that owned certain stores managed by the debtor and supplied fuel to the debtor "result[ed] in: (a) new value to the Debtor; (b) that the parties intended to be a contemporaneous exchange[.]"

 

The Eighth Circuit BAP agreed with the bankruptcy court's finding that the bank's "release was made as a condition to a two year and two month restructuring of the Debtor's obligation to [the fuel supplier] for past fuel purchased, and for [the fuel supplier] to extend new credit to the Debtor for fuel purchases." Without the credit, "the Debtor would have been out of business." The Court also agreed with the bankruptcy court's finding that "the Debtor needed to keep its relationship with [the fuel supplier] in place because the buyer intended to assume the [fuel supplier] agreement as part of the Sale."

 

The Court rejected the trustee's argument that the debtor did not receive new value for the fuel supplier's release "because the only deal in place as of the April 30 Sale closing was for a 90-day forbearance from collecting old debt, which is not new value." Because the fuel supplier's restructuring agreement "was documented in a promissory note executed 60 days after the Sale closing …," the Court saw no clear error with the bankruptcy court's determination that "the promissory note [was] … documentation of a deal made earlier."

 

Accordingly, the bankruptcy court's decision was affirmed. 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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