RECENT BANKRUPTCY DEVELOPMENTS

This will supplement the general outline with cases decided in February and early March.

1. Involuntary Cases. Following up In re Marlar (outline p. 4), the BAP held that the defense that the debtor is a farmer and therefore not subject to involuntary relief cannot be made on a motion to convert the case to chapter 7. In re Young, ___ B.R. ___, 2006 WL 398639 (BAP 8th Cir. 2006).

2. Automatic Stay.

(a)

In a somewhat surprising decision, the court held that a Bank which had frozen an account pending directions from the chapter 7 trustee had violated the stay. Although the Bank was not a creditor, the court said that the Bank had exercised control over the debtor's funds, and could have closed the account and turned over the funds to the Trustee. The Court also suggested liability for actual and possibly punitive damages. In re Jimenez, 335 B.R. 450 (Bk. D.N. Mex. 2005).

(b)

Assume a tax sale is conducted postpetition in violation of the automatic stay. What is the remedy? The Fifth Circuit has held that the sale could not be attacked as void pursuant to section 362 but, instead, had to be attacked as a postpetition transfer under section 549. The differences are that section 549 has limitations whereas section 362 doesn't, and section 549 is subject to a statute of limitations. In re Paxton, ___ F.3d ___, 2006 WL 327374 (5th Cir. 2006).

3. Avoidable Transactions:

(a)

In re Florsheim Group Inc., 336 B.R. 126 (Bk. N.D. Ill. 2005) (applying U.S. preference law to Taiwanese company from which debtor had ordered goods to be manufactured in mainland China; goods were to be delivered in US and defendant could anticipate the application of US law).

(b)

In re French, ___ F.3d ___, 2006 WL 328392 (4th Cir. 2006) (trustee can set aside fraudulent transfer of Bahamian property of a US debtor which otherwise would have been property of the estate; court notes that restrictions on extraterritorial application of US law were not applicable to this situation and creditors were entitled to the debtor's property "wherever located")

(c)

In re CXM, Inc., 336 B.R. 757 (Bk. N.D. Ill. 2006) (schedules don't rebut the presumption of insolvency, especially when assets sold shortly after bankruptcy for a price far below liabilities; sales price established insolvency).

© 2006 by Jonathan M. Landers.
Covers cases reported through mid-February, 2006.