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H I G H L I G H T S

Nortel’s Cross-Border Bankruptcy: 3rd Cir. Says Arbitration Not RequiredAllocation of telecommunications firm Nortel Networks’ $7.5 billion in bank-ruptcy sale proceeds will not go to arbitration because there was no agree-ment to arbitrate among debtor entities comprising the Nortel brand, the U.S.Court of Appeals for the Third Circuit holds. 703

Automatic Stay Relief to Creditor Granted; ‘Serial’ Bankruptcy Filings NotedA bankruptcy court did not abuse its discretion when it granted relief from theautomatic stay to a creditor in order to complete its foreclosure proceeding,and did so without a further hearing in the debtor’s case, the U.S. BankruptcyAppellate Panel for the Eighth Circuit concludes, affirming. Page 1704

BNA INSIGHTS: Is Electricity a ‘Good’ for Purposes of Section 503(b)(9)?Ashley E. Markow of Young Conaway Stargatt & Taylor, LLP discusses Bank-ruptcy Code Section 503(b)(9) and the split of authority on whether electric-ity is a good or merely a service. Page 1722

Debt Owed to Ex-Husband for Overpayment Is NondischargeableA $50,660 debt that a Chapter 7 debtor wife owed to her ex-husband for over-payment of spousal support is nondischargeable under Bankruptcy Code Sec-tion 523(a)(15) because the wife incurred the debt ‘‘in connection with a sepa-ration agreement,’’ the U.S. Court of Appeals for the Tenth Circuit holds, af-firming. Page 1711

Detroit Pension Ruling Is Incentive to Other Cities to Fix Funding IssuesJudge Steven Rhodes’ ruling that Detroit pensions are contractual obligationssubject to modification in bankruptcy, notwithstanding a Michigan constitu-tional provision protecting them, may spur other municipalities with pensionfunding problems to resolve them sooner rather than later, attorneys watch-ing the case say. Page 1705

Court Erred Finding Properties Could Be Sold Free and Clear of CovenantA bankruptcy court erroneously applied Bankruptcy Code Section 363(f)(5)when it found that a trustee could sell a debtor’s car dealership properties freeand clear of an equitable servitude, the U.S. District Court for the Central Dis-trict of California concludes, reversing. Page 1706

BNA INSIGHTS: The Valuable Role of Large Banking InstitutionsPaul L. Lee of Debevoise & Plimpton LLP explains that the experience in the2008 crisis demonstrated that multiple and in some instances cumulative ap-proaches to stabilizing the financial system were necessary and might againbe necessary in the future. According to the author, large banking institutionscan play a key role in a financial crisis. Page 1725

A L S O I N T H E N E W S

PROPERTY OF THE ESTATE: Defen-sive appellate rights are propertyunder Texas law and are sale-able by the bankruptcyestate, the U.S. Court of Appealsfor the Fifth Circuit holds in acase of first impression.Page 1712

MORTGAGES: The U.S. Bank-ruptcy Court for the SouthernDistrict of New York con-firms Residential Capital LLC’sChapter 11 plan. Page 1708

PHARMACEUTICALS: Chapter 11debtor Savient PharmaceuticalsInc. announces an agreementin which Crealta Pharmaceuti-cals LLC would acquire substan-tially all of its assets forapproximately $120.4 million.Page 1709

A R T I C L E S U B M I S S I O N S

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HOLIDAY: BNA’s BankruptcyLaw Reporter does not publishthe week of Christmas. The nextissue will be Jan. 2, 2014, andwill cover developmentsfrom the preceding two weeks.

VOL. 25, NO. 49 PAGES 1699–1734 DECEMBER 19, 2013

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Commercial Bankruptcy / Page 1703

Consumer Bankruptcy / Page 1711

Consumer Credit / Page 1715

BNA Insights / Page 1722, 1725

Supreme Court Scoreboard / Page 1729

Journal / Page 1733

C O M M E R C I A L B A N K R U P T C Y

AUTOMATIC STAY Court properly grants automaticstay relief to creditor; ‘‘serial’’ bankruptcy filingsnoted ................................................................ 1704

ENERGY Anadarko held liable for up to $14.2 billionin damages from Kerr-McGee-Tronox spinoff .......... 1707

MORTGAGES ResCap receives plan confirmation;settlement addresses litigation issues ..................... 1708

MUNICIPALITY Ruling on Detroit pensions seen asincentive to other cities to fix funding issues ........... 1705

PHARMACEUTICALS Crealta to acquire substantiallyall of Savient’s assets for $120.4 million .................. 1709

PREFERENCES Preferential transfer not proven bytrustee ............................................................... 1709

TAXATION Insurance company can’t recategorizeestimated payments, federal court rules .................. 1709

TELECOMMUNICATIONS Nortel’s cross-borderbankruptcy: arbitration not agreed upon, notrequired ............................................................ 1703

USE, SALE, OR LEASE OF PROPERTY Bankruptcy courterred finding properties could be sold free andclear of covenant ................................................ 1706

C O N S U M E R B A N K R U P T C Y

BANKRUPTCY FRAUD Prison terms for twodefendants charged with bankruptcy fraud, lying tocourts ............................................................... 1713

DEBT COLLECTION Debt collector’s bona fide errordefense fails ....................................................... 1714

EXCEPTIONS TO DISCHARGE Debt owed toex-husband for overpayment of spousal support isnondischargeable ................................................ 1711

PROPERTY OF THE ESTATE Defensive appellate rightsare property under Texas law; saleable by thetrustee ............................................................... 1712

Referral to bankruptcy court of claims denied .......... 1714

C O N S U M E R C R E D I T

CONSUMER PROTECTION Federal Trade Commissionhalts two firms targeting financially distressedconsumers ......................................................... 1720

DEBT COLLECTION Debt collector to pay $350,000 forFair Debt Collection Practices Act violations ........... 1721

FINANCIAL INSTITUTIONS Consumer FinancialProtection Bureau lawsuit against online lender maytest agency powers on rate caps ............................ 1719

Critics, advocates of arbitration clauses in financialproducts give CFPB earful .................................... 1717

Dodd-Frank mandated insurance report calls forstate, federal hybrid regulation ............................. 1718

Study finds few financial consumers file forarbitration to resolve disputes ............................... 1717

MORTGAGES Agencies exempt some higher-pricedloans from Dodd-Frank appraisal requirements ....... 1716

Johnson: Senate Banking Committee has work to doon housing finance bill ........................................ 1716

Regulators say qualified mortgage lending will notaffect Community Reinvestment Act evaluations ...... 1715

B N A I N S I G H T S

ENERGY Ashley E. Markow of Young ConawayStargatt & Taylor, LLP discusses Bankruptcy CodeSection 503(b)(9) and the split of authority onwhether electricity is a good or merely a service ...... 1722

(Vol. 25, No. 49) 1701

InThis Issue

BANKRUPTCY LAW REPORTER ISSN 1044-7474 BNA 12-19-13


B N A I N S I G H T S

Continued from previous page

SYSTEMIC RISK Paul L. Lee of Debevoise & PlimptonLLP explains that the experience in the 2008 crisisdemonstrated that multiple and in some instancescumulative approaches to stabilizing the financialsystem were necessary and might again benecessary in the future. According to the author,large banking institutions can play a key role in afinancial crisis .................................................... 1725

U . S . S U P R E M E C O U R T

APPEALS Review sought in Fourth Circuit caseconcerning bankruptcy appeals, Rooker-Feldmandoctrine, res judicata ........................................... 1732

Review sought in Third Circuit case concerningbankruptcy appeals ............................................. 1732

SCOREBOARD Chart depicts status of bankruptcy-related certiorari petitions filed with the court ......... 1729

TA B L E O F C A S E S

Behrens v. U.S. Bank N.A. (In re Behrens) (B.A.P.8th Cir.) ........................................................... 1704

Consumer Financial Protection Bureau v. CashCallInc. (D. Mass.) .................................................. 1719

Croft v. Lowry (In re Croft) (5th Cir.) ..................... 1712

Eide v. Colltech, Inc. (D. Minn.) ............................ 1714

Farrar v. Warda & Yonano, LLP (In re Bella Vista byParamont, LLC) (9th Cir.) ................................... 1709

Field v. Berman (U.S.) ......................................... 1732

FTC v. American Mortgage Consulting Group, LLC(C.D. Cal.) ........................................................ 1720

FTC v. Southeast Trust, LLC (S.D. Fla.) .................. 1720

Hassen Imps. P’ship, In re (C.D. Cal.) .................... 1706

Jones v. HSBC (U.S.) .......................................... 1732

Morrow v. West Asset Mgmt., Inc. (E.D. Mo.) .......... 1714

Nortel Networks Inc. v. Joint Adm’rs for NortelNetworks UK Ltd. (In re Nortel Networks Inc.) (3dCir.) ................................................................ 1703

Reorganized RFS Corp. & Subsidiaries v. UnitedStates (Fed. Cl.) ................................................. 1709

Taylor v. Taylor (In re Taylor) (10th Cir.) ............... 1711

Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.)(Bankr. S.D.N.Y.) .............................................. 1707

USA v. Bonavito (N.D. Cal.) ................................. 1713

USA v. Harrell (N.D. Cal.) .................................... 1713

Zimmerman v. Portfolio Recovery Associates LLC(S.D.N.Y.) ........................................................ 1721

B A N K R U P T C Y C O D E S E C T I O N I N D E X

SEC. 362, AUTOMATIC STAY Court properly grantsautomatic stay relief to creditor; ‘‘serial’’ bankruptcyfilings noted ....................................................... 1704

SEC. 363, USE, SALE, OR LEASE OF PROPERTYBankruptcy court erred finding properties could besold free and clear of covenant .............................. 1706

SEC. 523, EXCEPTIONS TO DISCHARGE Debt owed toex-husband for overpayment of spousal supportis nondischargeable ............................................. 1711

SEC. 541, PROPERTY OF THE ESTATE Defensiveappellate rights are property under Texas law;saleable by the trustee ......................................... 1712

Referral to bankruptcy court of claims denied .......... 1714

SEC. 547, PREFERENCES Preferential transfer notproven by trustee ................................................ 1709

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1702 (Vol. 25, No. 49)



http://www.bloomberglaw.com/public/document/Consumer_Financial_Protection_Bureau_v_CashCall_Inc_et_al_Docket_


http://www.ftc.gov/sites/default/files/documents/cases/131212americanmortgagestip.pdf

http://www.ftc.gov/sites/default/files/documents/cases/131212southeasttruststip.pdf

http://www.bna.com/products/corplaw/bblr.htm

CommercialBankruptcyTelecommunications

Nortel’s Cross-Border Bankruptcy:Arbitration Not Agreed Upon, Not Required

A llocation of telecommunications firm Nortel Net-works’ $7.5 billion in bankruptcy sale proceedswill not go to arbitration, because there was no

agreement to arbitrate among debtor entities compris-ing the Nortel brand, the U.S. Court of Appeals for theThird Circuit held Dec. 6 (Nortel Networks Inc. v. JointAdm’rs for Nortel Networks UK Ltd. (In re Nortel Net-works Inc.), 2013 BL 339861, 3d Cir., No. 13-2739,12/6/13).

In an opinion by Judge Julio M. Fuentes, the court re-jected arguments by joint administrators for Nortel Net-works UK Limited (and its affiliates in Europe, theMiddle East and Africa) that the parties had agreed toarbitrate. The court found that a contract at the centerof the dispute showed no such intent.

The court affirmed the bankruptcy court’s denial of across-motion to compel arbitration. It also declined tohear a challenge to the bankruptcy court’s decision toallocate the funds at issue in a future hearing, findingsuch a challenge to be premature.

Transnational Dispute. In 2009, Nortel Network enti-ties in several parts of the world declared bankruptcy,filing petitions in the U.S., Canada, U.K. and France.These debtors had a mutual interest in selling the trans-national company’s assets quickly, as the value of Nor-tel’s intellectual property and business ‘‘stood to dimin-ish over time,’’ the court said. However, the debtors alsohad conflicting interests in receiving a large share of as-set sales themselves, the court said.

To cooperate, the parties entered into an interimfunding agreement, establishing a framework for Nor-tel debtors to carry out asset sales ‘‘without first agree-ing how to allocate the proceeds of any sale,’’ the courtsaid.

The contract said that parties would agree on a pro-tocol for resolving allocation disputes, but they wereunable to do so. As a result, the U.S. Nortel debtors andthe U.S. creditors committee filed a motion in the U.S.Bankruptcy Court for the District of Delaware, request-ing that the court decide such disputes.

Meanwhile, the joint administrators for Nortel debt-ors in Europe, Africa and Middle East cross-moved torequire arbitration. The parties disagreed over whetherthe contract had an agreement to arbitrate.

The bankruptcy court ruled against the joint adminis-trators and also approved a judicial protocol for allocat-ing the asset sale proceeds. The joint administrators ap-pealed both rulings.

Agreement to Negotiate. On appeal, the Third Circuitanalyzed a section of the agreement titled ‘‘Entry intoSale Transactions.’’ This title did ‘‘not hint that the par-ties bound themselves to arbitrate,’’ the court said.

The Third Circuit also quoted the section’s statementthat the parties would ‘‘ ‘negotiate in good faith’ ’’ andattempt to agree upon ‘‘ ‘a protocol for resolving dis-putes’ ’’ concerning allocation of sale proceeds.

This agreement that parties would ‘‘ ‘negotiate’ ’’such a protocol indicated ‘‘the absence of an agreementon that protocol,’’ the court said.

The parties either could have agreed to negotiatewhat mechanism to use for dividing the funds, or theycould have agreed to allocate the proceeds through ar-bitration, the court said. ‘‘They could not have doneboth,’’ the court said. Further, the section did not dis-cuss ‘‘arbitrators, arbitration, or arbitral associations.’’

Plain Meaning. The joint administrators argued thatthe agreement mentioned ‘‘ ‘dispute resolver(s)’ ’’ in thesection at issue, and that the parties therefore agreed toarbitrate, the court said.

The Third Circuit said that New York law appliedhere as required by the agreement. It cited Greenfield v.Philles Records Inc., 780 N.E.2d 166 (N.Y. 2002), in say-ing that the agreement must therefore ‘‘be interpretedand enforced according to its plain meaning.’’

Relying on dictionary definitions, the court said‘‘ ‘dispute resolver(s)’ ’’ indicated ‘‘a flexible conceptthat would permit, for example, arbitrators, courts, ormediators.’’ In the context of the agreement, there wasno indication that a dispute resolver ‘‘could not be acourt,’’ the Third Circuit said.

Bankruptcy Courts Looser. The joint administratorsalso argued that by providing for a negotiated disputeresolution protocol, the parties showed an intent to re-solve disputes privately. They reasoned that becauselitigants cannot change a court’s procedural rules, a ne-gotiated protocol would not contemplate litigation, thecourt said.

The Third Circuit disagreed, noting that‘‘[b]ankruptcy courts confront fluid legal and businessproblems.’’ Such courts must therefore ‘‘work with theparties’’ in order to ‘‘apply the bankruptcy frameworkto the demands and idiosyncracies of each case.’’

The court found that there was no ambiguity con-cerning dispute resolution in the agreement’s text. Un-der New York law, it therefore could not consider ex-trinsic evidence, the Third Circuit said. The court gavesome advice to contract drafters, saying ‘‘Parties wish-ing to arbitrate should not hide their intent to do so inthe shadows of the text.’’

Not Yet. The joint administrators also challenged thebankruptcy court’s order requiring allocation at a fu-ture cross-border hearing. The court declined to con-sider the merits of the issue, finding it to be unripe. Thechallenge to the ‘‘hearing and its procedures wouldmore appropriately follow the hearing, when the parties

(Vol. 25, No. 49) 1703



have developed the record and raised their proceduralobjections to the Bankruptcy Court,’’ the appeals courtsaid.

Senior Judges Morton I. Greenburg and MaryanneTrump Barry joined the opinion.

Derek J.T. Adler, Hughes Hubbard & Reed LLP, NewYork, argued for the joint administrators.

Howard S. Zelbo, Clearly Gottlieb Steen & HamiltonLLP, New York, argued for the U.S. Nortel debtors. Pa-tricia A. Millett, Akin Gump Strauss Hauer & Feld LLP,Washington, argued for the U.S. creditors committee.

Attorneys for the U.S. creditors committee declined arequest for comment. Attorneys for the U.S. Norteldebtors and the joint administrators could not bereached for comment.

BY PATRICK L. GREGORY

Automatic Stay

Court Properly Grants Automatic Stay ReliefTo Creditor; ‘Serial’ Bankruptcy Filings Noted

A bankruptcy court did not abuse its discretion whenit granted relief from the automatic stay to a credi-tor in order to complete its foreclosure proceed-

ing, and did so without a further hearing in the debtor’scase, the U.S. Bankruptcy Appellate Panel for theEighth Circuit held Nov. 26 (Behrens v. U.S. Bank N.A.(In re Behrens), 2013 BL 330424, B.A.P. 8th Cir., No. 13-6032, 11/26/13).

Affirming the judgment of the bankruptcy court,Judge Barry S. Schermer concluded that the appealscourt would not second guess the bankruptcy court’sdecision that the record was sufficient to make its rul-ing, and that nothing would be gained by holding a sec-ond hearing in the debtor’s case.

According to the court, the debtor participated in thehearing held in his wife’s case just one day before thecourt lifted the automatic stay in his case. The debtor’swife submitted evidence as support for her position, thecourt said. The debtor’s wife’s case was based on thesame facts and issues as those that were relevant to thedebtor’s wife’s motion to compel, the court noted. Fur-ther, the bankruptcy court’s basis for granting relief un-der Bankruptcy Code Section 362(d)(4) in the debtor’swife’s case was the same as the court’s reasons forgranting such relief in the debtor’s case, the court said.

The appeals court determined that the bankruptcycourt’s decision was supported by the records in thetwo bankruptcy cases, and the court was not required toprovide to the debtor the opportunity to present addi-tional evidence. The debtor has not pointed to any addi-tional evidence that would show error in the bank-ruptcy court’s ruling, the court said.

Chapter 11 Filing. Debtor Bryan S. Behrens filed forChapter 11 protection March 14, 2013. This was thefourth out of five bankruptcy filings by the debtor andhis wife.

In June 2009, creditor U.S. Bank National Associa-tion began a foreclosure proceeding against real prop-erty owned by the debtor and his wife that secured theirindebtedness. Since February 2009, the debtor and hiswife have made no payments to the creditor. The credi-tor’s foreclosure proceeding has been stayed and re-

commenced at various points in time since November2009, due to bankruptcy filings by the debtor or hiswife.

The first three cases filed by the debtor or his wife—one Chapter 7 and two Chapter 13 cases—were dis-missed. The debtor filed this fourth case, which is thesubject of the appeal, originally under Chapter 11, butthe case was later dismissed. The dismissal was subse-quently vacated and the reinstated case was convertedto Chapter 7.

The fifth case, a Chapter 7 case filed by the debtor’swife, was ultimately dismissed after the bankruptcycourt entered the order that is the subject of this appeal.

Foreclosure Sale. After the debtor’s case was dis-missed, and before it was reinstated and converted toChapter 7, the property was sold to the creditor at aforeclosure sale May 10, 2013. The debtor’s wife, how-ever, filed her own bankruptcy case (the fifth filing)minutes prior to the foreclosure sale, which the creditorand sheriff were unaware of. Subsequently, on May 17,2013, the dismissal of the debtor’s case was vacated andthe reinstated case was converted to Chapter 7.

The sheriff did not record his sheriff’s deed prior tothe time when the debtor’s wife filed her petition in thefifth case, or the time when the dismissal of the debtor’scase was vacated and reinstated.

Motions, Hearings. In the debtor’s wife’s case, thebankruptcy court scheduled a hearing on a motion tocompel filed by the debtor’s wife. The motion to compelasked for an order voiding the foreclosure sale as beingin violation of the automatic stay, and requiring the par-ties to act in accordance with the stay.

The creditor filed an objection to the motion, and alsofiled a separate motion to annul or terminate the stay,seeking to validate the May 10, 2013 foreclosure saleand allow the sheriff’s deed to the property to be re-corded.

The debtor, acting pro se, participated in, and madearguments at, the hearing. The bankruptcy court ac-cepted as evidence an affidavit filed by the creditor anddocuments submitted by the debtor’s wife.

Serial Filings to Delay, Hinder Creditor. The bankruptcycourt held that under Section 362(d)(4), the automaticstay in the debtor’s wife’s case was annulled to validatethe May 10, 2013 foreclosure sale, and terminated to al-low the creditor to record the sheriff’s deed. Accordingto the court, the debtor and his wife ‘‘collectively en-gaged in serial bankruptcy filings in an effort to delayand hinder [the Creditor] from foreclosing its interest inthe Property.’’

The bankruptcy court did not hold a separate hearingon the creditor’s motions. Subsequently, the court en-tered an order granting the creditor the relief it soughtin the debtor’s case. The court based its ruling on thereasons it set forth on the record at the May 28, 2013,hearing, and in the May 29, 2013, written order enteredin the debtor’s wife’s case. Subsequently, the sheriff’sdeed to the property was recorded.

‘Scheme’ to ‘Hinder, Delay Creditors.’ The appealscourt concluded that it would not second guess thebankruptcy court’s determination that the debtor’sbankruptcy filing was part of a ‘‘scheme’’ to hinder ordelay creditors, and that such scheme was one involv-ing multiple bankruptcy filings that affected the prop-

1704 (Vol. 25, No. 49) COMMERCIAL BANKRUPTCY



mailto: [email protected]

erty. The bankruptcy court saw a pattern of multiple fil-ings by the debtor and his wife solely for the purpose ofavoiding the creditor’s foreclosure action, with no pay-ment being made to the creditor during the course ofthe filings, the court said. Since the time when thecreditor began its foreclosure proceedings in 2009, thedebtor and his wife have filed five bankruptcy actions,and they had not made any payment to the creditorsince a date in 2009 prior to the commencement of theforeclosure.

According to the court, the record, as was recognizedby the bankruptcy court, clearly shows that the debtorand his wife filed their petitions during the foreclosureproceedings to halt or prohibit those proceedings morethan once on the eve of the foreclosure sale in an at-tempt to avoid foreclosure. Throughout these proceed-ings, the debtor never denied that the filings were madeto stop the foreclosure, the appeals court said. In thisappeal, the debtor alleged that he and his wife had tofile the bankruptcy cases because they needed assis-tance from the bankruptcy court since the creditor’sforeclosure violated the federal receivership order, thecourt said. The bankruptcy court had a proper basis fordetermining that the latest bankruptcy cases were notpursued in good faith, the appeals court said.

Relief From Automatic Stay. Section 362(d)(4) providesfor relief from the automatic stay ‘‘after notice and ahearing,’’ the court said. ‘‘Notice and a hearing’’ is de-fined as ‘‘after such notice is appropriate in the particu-lar circumstances, and such opportunity for a hearingas is appropriate in the particular circumstances,’’ thecourt said, citing Section 102(a)(A).

The appeals court concluded that it would not secondguess the bankruptcy court’s decision that the recordwas sufficient to make its ruling, and that nothingwould be gained by holding a second hearing in thedebtor’s case. The debtor participated in the hearingheld in his wife’s case, just one day before the courtlifted the stay, the court said. The debtor’s wife submit-ted evidence as support for her position, and the bank-ruptcy court’s grant of relief to the creditor under Sec-tion 362(d)(4) in his wife’s case was based on the samefacts and issues as those that were relevant to the debt-or’s wife’s motion to compel, the court said. Further, thebankruptcy court’s basis for granting relief under Sec-tion 362(d)(4) in his wife’s case was the same as thecourt’s reasons for granting such relief in the debtor’scase, the court said.

According to the appeals court, the bankruptcycourt’s decision was supported by the records in thetwo bankruptcy cases, and the court was not required toprovide to the debtor the opportunity to present addi-tional evidence. The debtor has made no argument onappeal or pointed to any additional evidence that wouldshow error in the bankruptcy court’s ruling, the courtsaid.

Chief Judge Arthur B. Federman and Judge Anita L.Shodeen joined the opinion.

BY DIANE DAVIS

To contact the reporter on this story: Diane Davis inWashington at [email protected]

To contact the editor responsible for this story: JayHorowitz at [email protected]

Municipality

Ruling on Detroit Pensions Seen as IncentiveTo Other Cities to Fix Funding Issues

J udge Steven Rhodes’ ruling that Detroit pensionsare contractual obligations subject to modificationin bankruptcy, notwithstanding a Michigan consti-

tutional provision protecting them, may spur other mu-nicipalities with pension funding problems to resolvethem sooner rather than later, attorneys watching thecase said.

Rhodes’ decision on pensions was part of a Dec. 3ruling that found Detroit met all the necessary condi-tions to file for Chapter 9 bankruptcy protection, clear-ing the way for the city to file a debt reorganization plan(In re City of Detroit, Bankr. E.D. Mich., No. 13-53846,ruling announced 12/3/13)(25 BBLR 1638, 12/5/13).

‘‘We have cases decided by the U.S. Supreme Courtthat have recognized that governments, for higher pub-lic purposes — health, safety and welfare of a city —can impair contracts,’’ James Spiotto, head of the spe-cial litigation, bankruptcy and workout group at Chap-man and Cutler LLP in Chicago, told Bloomberg BNADec. 11.

‘‘Also, as a practical matter, I think there’s supportfor municipalities [changing pension terms] outside ofbankruptcy for a higher public purpose,’’ Spiotto said.‘‘It’s not good for the workers, it’s not good for the re-tirees, or anything else if you’re crowding out essentialgovernment services in the funding of those, and whenyou do that, you end up with Detroit,’’ he said.

Rhodes’ decision ‘‘points out the reality that you needto save the city for the sake of everyone, and points outclearly that in bankruptcy you can do this,’’ Spiottosaid. ‘‘I think we’re going to see more municipalities,hopefully working with the unions and the workers, sayto workers, ‘Look, we’re going to pay you everything wecan, but we’re not going to sacrifice the future of themunicipality,’ ’’ he said.

Plan of Adjustment Upcoming. Detroit, currently led byEmergency Manager Kevyn Orr, plans to submit a planof adjustment to the bankruptcy court in early January.The plan is not likely to be a ‘‘cure to systemic problemsthat may exist that caused the Chapter 9,’’ Spiotto said.‘‘What Detroit really needs is a recovery plan’’ to putthe city on a path to attracting business and residentsand thereby increasing the tax base, he said. Orr andMayor-Elect Mike Duggan may propose such a plan,built on increasing opportunities for education andjobs, and include it in the debt reorganization plan,Spiotto said. Rhodes, in evaluating the plan of adjust-ment, can look to the recovery plan to determine its‘‘feasibility’’ in terms of allowing Detroit to continue topay its debts, he said.

Consensual Agreement. By tackling the constitutional-ity issue regarding pensions ‘‘head on,’’ Rhodes ‘‘let theparties know early on what they were facing,’’ ratherthan leaving the issue to be decided after the city pro-posed its plan of adjustment, Douglas Bernstein, a part-ner with Plunkett Cooney in Birmingham, Mich., toldBloomberg BNA Dec. 11. ‘‘That may be motivation forthem to get together and work on a consensual deal,’’he said.

COMMERCIAL BANKRUPTCY (Vol. 25, No. 49) 1705



mailto:[email protected]



City retirees and workers are appealing the pensiondecision, and Rhodes has scheduled a Dec. 16 hearingto determine whether the case may be appealed directlyto the Sixth Circuit Court of Appeals, bypassing federaldistrict court. ‘‘There are no appellate court decisions inthe municipal bankruptcy world,’’ Bernstein said. Be-cause of that, there is a ‘‘tremendous risk to the partywho loses,’’ he said. If an appeal fails, ‘‘then you’ve gota binding precedent,’’ he said. ‘‘It’s a risk.’’

States with constitutional pension-protection clauseshad ‘‘better pay attention,’’ Bernstein said. ‘‘If there areissues with the funding level, that’s something thatshould be addressed sooner rather than’’ later, he said.The ruling ‘‘gives them an indication it would be wise tobe proactive rather than reactive,’’ he said.

Illinois is already doing that, with new legislationaimed at bringing the state’s five public pension sys-tems to full funding in 30 years and reducing long-termpension obligations by $160 billion. Los Angeles, Phila-delphia and Oakland, Calif., are among other jurisdic-tions thought to have ‘‘heavily unfunded pension liabili-ties,’’ he said.

Rhodes is the first judge ‘‘to tackle the pension issuehead on and come to this conclusion that it’s a con-tract,’’ Bernstein said. While the decision is not bindingon any other court, ‘‘Rhodes is a widely respected, long-tenured bankruptcy judge,’’ and in the absence of anyother guidance, ‘‘you’ll pay attention to what he has tosay,’’ he said.

Detroit filed for Chapter 9 protection in July (25BBLR 1005, 7/25/13).

BY NORA MACALUSO

To contact the reporter on this story: Nora Macalusoin Lansing, Mich., at [email protected]


Use, Sale, or Lease of Property

Bankruptcy Court Erred Finding PropertiesCould Be Sold Free and Clear of Covenant

A bankruptcy court erroneously applied Section363(f)(5) of the Bankruptcy Code when it foundthat a trustee could sell a debtor’s car dealership

properties free and clear of an equitable servitude, theU.S. District Court for the Central District of Californiaheld Nov. 25 (In re Hassen Imps. P’ship, 2013 BL334202, C.D. Cal., No. 2:13-cv-07200-CAS, 11/25/13).

Reversing the decision of the bankruptcy court,Judge Christina A. Snyder found that the hypothetical‘‘legal or equitable proceeding’’ argument advanced bythe appellees would not in fact lead to a ‘‘money satis-faction’’ in exchange for the appellant’s equitable servi-tude within the meaning of Section 363(f)(5), and there-fore the trustee could not sell the property free andclear of the appellant’s interest.

Auto Dealership Covenants. Throughout the 1980s and1990s, the Redevelopment Agency of the City of WestCovina conveyed several properties to debtor HassenImports Partnership. The properties included three au-tomobile dealerships that Hassen operated along withWest Covina Motors. Both Hassen and West CovinaMotors, along with a third entity, Dighton America Inc.,were controlled by an individual named Ziad Alhassen.

On Oct. 29, 1999, the redevelopment agency enteredinto a ‘‘Second Amended Restated Disposition, Devel-opment and Owner Participation Agreement’’ with Has-sen. Portions of the agreement were recorded in the of-ficial records of Los Angeles County on Nov. 10, 1999.Pursuant to the agreement, Hassen agreed to severalcovenants regarding the use of the properties. An own-ership covenant gave the redevelopment agency theright to approve or disapprove of any future owners ofthe property, an operating covenant gave the redevelop-ment agency the right to approve or disapprove of anyfuture operators of the dealerships, and a use covenantrequired that the properties only be used forautomobile-related purposes.

Covenants Enforceable? Hassen filed for Chapter 11protection on July 27, 2011, and the case was later con-verted to a Chapter 7 proceeding. On Aug. 21, 2013, theChapter 7 trustee moved for an order authorizing thesale of the properties free and clear of the covenants setforth in the agreement. The City of West Covina, as thesuccessor in interest to the redevelopment agency,moved to enforce the covenants. Any auction of theproperties was likely to be won by Dighton, which thecity hoped to avoid based on their history dealing withAlhassen. Therefore, the city sought to enforce the cov-enants in order to preclude Alhassen from owning oroperating the dealerships.

The bankruptcy court found that the ownership cov-enant was not enforceable under California propertylaw. However, the bankruptcy court also found that theoperating covenant was enforceable as an equitable ser-vitude. Despite finding that the operating covenant wasenforceable, the bankruptcy court found that thetrustee could sell the properties free and clear of the op-erating covenant pursuant to Section 363(f)(5). Thebankruptcy court auctioned the properties, Dightonwon the auction, and the bankruptcy court approvedthe sale.

The city appealed the order authorizing the sale tothe district court. After the bankruptcy court denied thecity a stay pending appeal, the city moved for a stay inthe district court, which was granted.

Equitable Servitude Enforceable Against Trustee. First,the district court affirmed the bankruptcy court’s find-ing that the operating covenant was an enforceable eq-uitable servitude. The court said that Section 544(a)(1)of the Bankruptcy Code ‘‘treats the trustee as a bonafide purchaser for value of the properties, and, as abona fide purchaser, the trustee may sell property freeand clear of unenforceable prior interests.’’ The courtsaid that an equitable servitude is enforceable against asubsequent bona fide purchaser if: (1) the purchaserhad notice of the interest at time the purchaser obtainedan interest in the property, and (2) the equitable servi-tude ‘‘touches and concerns’’ the land.

In this case, the bankruptcy court found that thetrustee had constructive notice of the equitable servi-tude because it was recorded. The bankruptcy courtalso found that the operating covenant touched andconcerned the land because it related to the use of theproperties. The district court agreed with both findingsand thus affirmed that the equitable servitude was en-forceable against the trustee.







Hypothetical Foreclosure. However, the district courtfound that the bankruptcy court erred in finding thatSection 363(f)(5) authorized the sale of the propertiesfree and clear of the operating covenant. Section363(f)(5) authorizes a trustee to sell property free andclear of any interest if ‘‘such entity could be compelled,in a legal or equitable proceeding, to accept a moneysatisfaction of such interest.’’ The court said that thissection contains three elements: ‘‘that (1) a proceedingexists or could be brought, in which (2) the nondebtorcould be compelled to accept a money satisfaction of (3)its interest.’’

In this case, the trustee argued that the hypotheticalproceeding that could be brought was a foreclosure of asenior lien held by CorePointe Financial on the proper-ties. The bankruptcy court agreed, finding that foreclo-sures can qualify as a ‘‘legal or equitable proceeding’’within the meaning of Section 363(f)(5). The bank-ruptcy court also found that under California propertylaw, the foreclosure of a senior lien extinguishes juniorcovenants and equitable servitudes. Having found thatthe foreclosure of the CorePointe lien would extinguishthat operating covenant, the bankruptcy court con-cluded that such a foreclosure would qualify as an eli-gible proceeding under Section 363(f)(5) and thereforethe trustee could sell the properties free and clear.

No ‘Money Satisfaction.’ The district court disagreedwith this reasoning. Instead, the court was persuadedby the city’s argument that in the event of such a fore-closure, the city would receive nothing in exchange forthe operating covenant. Therefore, such a foreclosurewould not compel the city to accept a money satisfac-tion of the covenant as required by the statute. Lookingto the plain language of the statute and enforcing it ac-cording to its terms, the court said that ‘‘the word‘satisfaction’—at least when used in the context of ‘sat-isfaction of [an] interest’—connotes giving somethingof value in exchange for terminating an outstanding ob-ligation.’’ Therefore, the court interpreted the phrase‘‘money satisfaction’’ to mean the giving of money withthe intent to extinguish an existing legal obligation.

The court was not persuaded by the cases the appel-lees cited to support their argument. The court said thatin those cases involving a foreclosure on senior liens,the liens on the monetary proceeds of the foreclosuresales qualified as the ‘‘money satisfaction’’ of the juniorinterests. In the present case, the court said, the citywould receive no such lien on proceeds as ‘‘money sat-isfaction’’ in exchange for the operating covenant. In-stead, the covenant would simply be terminated.

Narrow Ruling. Therefore, the court found that the hy-pothetical foreclosure on CorePoint’s lien was not aneligible legal or equitable proceeding compelling thecity to accept money satisfaction under Section363(f)(5). The court thus concluded that the trusteecould not invoke this hypothetical to justify selling theproperties free and clear of the operating covenant.

‘‘The [c]ourt emphasizes the narrowness of this con-clusion,’’ the court said. ‘‘The [c]ourt does not find thatthe trustee is conclusively barred from selling the prop-erties to Dighton. Nor does the Court find that thetrustee can never invoke [Section] 363(f)(5) to sell theproperties free and clear of the [o]perating [c]ovenant.’’

Arnold M. Alvarez-Glasman of Alvarez-Glasman &Colvin, Industry, Calif., Christopher J. Petersen BlankRome LLP, Los Angeles, and Jordan Kroop and Stephen

T. Owens of Squire Sanders US LLP, Los Angeles, rep-resented the appellant.

Daniel A. Lev of Sulmeyer Kupetz PC, Los Angeles,and Susan I. Montgomery of the Susan I. MontgomeryLaw Offices, Los Angeles, represented the appellees.

BY STEPHANIE M. ACREE

To contact the reporter on this story: Stephanie M.Acree in Washington at [email protected]


Energy

Anadarko Held Liable for Up to $14.2 BillionIn Damages From Kerr-McGee-Tronox Spinoff

K err-McGee Corp. is liable for billions of dollars indamages as a result of the 2005 spinoff of TronoxInc. because the corporate reorganization was

done with the intention of evading huge environmentalliabilities, a federal bankruptcy court in New York con-cluded (Tronox Inc. v. Kerr McGee Corp. ( In re TronoxInc.), Bankr. S.D.N.Y., No. 09-10156, 12/12/13).

The Dec. 12 ruling by Judge Allan L. Gropper of U.S.Bankruptcy Court for the Southern District of NewYork followed a lengthy trial in a lawsuit filed byTronox against Kerr-McGee, which was acquired byAnadarko Petroleum Corp. shortly after the spinoff formore than $18 billion.

Tronox claimed the spinoff left it insolvent and un-dercapitalized, holding 70 years and billions of dollarsof legacy environmental liabilities while Kerr-McGeekept the valuable oil and gas assets, making it an attrac-tive merger candidate.

Expert testimony established that the Tronox legacyliabilities from environmental and tort claims at thetime of the initial public offering (IPO) totaled $1.3 bil-lion, other liabilities totaled $803 million, and its assetswere worth $1.2 billion, leaving the company insolventby $850 million, the court said.

Tronox sued for recovery of the transferred oil andgas assets, which were worth an estimated $15.9 billionat the time of the IPO.

Damages Amount Unresolved. The case ‘‘raises issuesof first impression regarding the application of thefraudulent conveyance laws in the face of substantialenvironmental and tort liability,’’ according to the 166-page opinion.

The amount of the plaintiffs’ damages on the fraudu-lent conveyance claims may be the most complex issuein the case and will be decided based on briefs to besubmitted by both sides in the case, the court said.

Depending on how the court applies bankruptcy lawgoverning the defendant’s right to an offset, the plain-tiffs’ award of damages will be $5.15 billion or $14.166billion.

Federal prosecutors said the award is the largest everin a bankruptcy for governmental environmental claimsand liabilities and one of the largest environmental en-forcement awards ever made.

‘‘We are very pleased with this outcome, which willappropriately and fairly account for past pollution andreplenish funds for tomorrow’s cleanups,’’ Acting Assis-tant Attorney General Robert G. Dreher said in a state-







http://www.bloomberglaw.com/public/document/Tronox_Incorporated_et_al_v_Anadarko_Petroleum_Corporation_et_al_

ment. ‘‘This court decision also sends a clear messagethat polluters cannot simply walk away from a toxiclegacy and leave federal, state, and tribal governmentsto pick up the tab. This ruling will keep the financialburden on the responsible party, and not allow it to beshifted to the American taxpayer.’’

Anadarko issued a statement in which it said, ‘‘Giventhe significant factual evidence supporting our position,we vehemently disagree with the judge’s Memorandumof Opinion, and we fully expect to pursue every avenueavailable to us through the appellate process to protectthe interests of our stakeholders, once a final judgmentincluding damages has been rendered.’’

Uranium, Thorium, Creosote, Perchlorate. Historically,Kerr-McGee operated businesses that included uraniummining, radioactive thorium processing, creosote woodtreatment and perchlorate manufacture, which left con-taminated sites nationwide.

Burdened with these environmental liabilities,Tronox went into bankruptcy in 2009. Anadarko Litiga-tion Trust was created under the company’s Chapter 11reorganization plan to pursue claims by the Tronoxbankruptcy estate against Anadarko and several of itssubsidiaries, including Kerr-McGee.

The trust represents public and private entities thathave claims for damages for environmental responsecosts and tort liabilities, including the U.S., the NavajoNation, 11 states, four environmental response trustsand a trust for the benefit of tort plaintiffs.

Under Tronox’s plan of reorganization, about 88 per-cent of the recovery in the lawsuit, net of Anadarko Liti-gation Trust expenses, will be distributed to the envi-ronmental response trusts and to the federal, state andlocal environmental creditors for environmentalcleanup of contaminated sites around the country, fed-eral prosecutors said.

Key Environmental Recoveries. Federal prosecutorssaid the damage award will fund recoveries for environ-mental claims and for cleanup of contaminated sites atnumerous locations, including:

s Between $1.1 billion and $3.1 billion will go to amultistate trust created in the Tronox bankruptcy toclean up more than 24 polluted sites nationwide, includ-ing the Kerr-McGee Superfund Site in Columbus, Miss.;

s Between $1.1 billion and $3.1 billion will go to theNevada Environmental Response Trust to clean up per-chlorate and other contamination resulting from opera-tions at an industrial park near Lake Mead, Nev.;

s Between $880 million and $2.4 billion will go tothe EPA for cleanup of contamination from uraniummining in the Navajo Nation;

s Between $220 million and $620 million will go tothe EPA for cleanup of thorium contamination at theWelsbach Superfund Site in Gloucester, N.J.; and

s Between $213 million and $601 million will go tothe superfund program in repayment of costs previ-ously incurred by the EPA in cleaning up the FederalCreosote Superfund Site in Manville, N.J.

BY LORRAINE MCCARTHY

To contact the reporter on this story: Lorraine Mc-Carthy in Philadelphia at [email protected]

To contact the editor responsible for this story: LarryPearl at [email protected]

Plan ConfirmationsMortgages

ResCap Receives Plan Confirmation;Settlement Addresses Litigation Issues

T he U.S. Bankruptcy Court for the Southern Districtof New York confirmed the second amended jointChapter 11 plan of Residential Capital LLC on Dec.

11 (In re Residential Capital LLC, Bankr. S.D.N.Y., No.12-12020 (MG), plan confirmed 12/11/13).

According to court documents, a key element of thedebtor’s plan is a global settlement that settles numer-ous litigable issues: ‘‘The [p]lan includes an integratedand comprehensive settlement that resolves variousinter-[d]ebtor, [d]ebtor]-[c]reditor and inter-[c]reditorissues through (i) the Ally [s]ettlement, including thefunding of the Ally [c]ontribution, (ii) the RMBS[s]ettlement, (iii) the settlement of the allowed amountand priority of [c]laims held by certain monoline insur-ers, including the FGIC [s]ettlement [a]greement, (iv)the settlement of the [p]rivate securities [c]laims, (v)the settlement of the allowed amount and priority of the[c]laims of the Kessler [c]lass [c]laimants, (vi) the NJCarpenters [c]laims [s]ettlement, (vii) the settlement ofthe claims held by the [s]enior [u]nsecured [n]otes[i]ndenture [t]tustee, on behalf of the [s]enior[u]nsecured [n]oteholders,’’ and others. ‘‘Each compo-nent of the [g]lobal [s]ettlement is an integral and inex-tricable part thereof and cannot be severed from thewhole without unraveling the entire [p]lan.’’

The debtor’s parent company, Ally Financial Inc., is-sued a Dec. 11 press release announcing the confirma-tion. The release characterizes the court’s order as the‘‘formal approval of broad releases for all mortgage-related claims against Ally Financial Inc. and its subsid-iaries (Ally), subject to certain exceptions.’’ Ally ChiefExecutive Officer Michael A. Carpenter said, ‘‘Thismarks a key milestone for Ally, and the ResCap chapterin our history is officially behind us.’’ He continued,‘‘Ally is a fundamentally transformed company. Wehave exited non-core operations globally, addressedlegacy mortgage issues and returned more than 70 per-cent of the investment to the U.S. taxpayer. Today, Allyhas leading market positions in its core franchises, oneof the strongest balance sheets in the industry, a highlyregarded customer-centered philosophy, and a clearpath to drive value for our shareholders.’’

The debtor, along with 52 affiliated debtors, filed forChapter 11 protection in the U.S. Bankruptcy Court forthe Southern District of New York on May 14, 2012 (24BBLR 662, 5/17/12).

The order confirming the plan is available at: http://www.bloomberglaw.com/public/document/Residential_Capital_LLC_Docket_No_112bk12020_Bankr_SDNY_May_14_20/4












Asset SalesPharmaceuticals

Crealta to Acquire Substantially AllOf Savient’s Assets for $120.4 Million

C hapter 11 debtor Savient Pharmaceuticals Inc.Dec. 11 announced an agreement under whichCrealta Pharmaceuticals LLC would acquire sub-

stantially all of Savient’s assets, including the drugKrystexxa, for approximately $120.4 million.

The agreement was reached following an auction us-ing bidding procedures approved by the U.S. Bank-ruptcy Court for the District of Delaware, Savient said.Savient and Crealta will seek the required bankruptcycourt approval of the sale.

According to the agreement, Crealta will purchaseSavient’s pharmaceutical portfolio, which is highlightedby the chronic refractory gout drug Krystexxa (pegloti-case), which was approved in 2010.

The transaction is subject to closing conditions in-cluding approval from the court and the termination ofthe waiting period under the Hart-Scott-Rodino anti-trust law, the company said.

Savient filed for Chapter 11 protection on Oct. 14 (25BBLR 1438, 10/24/13).

Savient is based in Bridgewater, N.J., and Crealta isbased in Lake Forest, Ill.

Other DevelopmentsTaxation

Insurance Company Can’t RecategorizeEstimated Payments, Federal Court Rules

T he U.S. Court of Federal Claims held that an insur-ance company that is a successor company after itsparent companies’ Chapter 11 reorganization

couldn’t amend its income tax return to recategorize es-timated tax payments as special estimated tax pay-ments and take corresponding deductions in later yearstotaling $38 million, because the special estimated taxpayments had to be made by the filing deadline for theoriginal return (Reorganized RFS Corp. & Subsidiariesv. United States, 2013 BL 342408, Fed. Cl., No. 1:09-cv-00371-TCW, 12/11/13).

Judge Thomas C. Wheeler said the taxpayer, Reorga-nized RFS Corp., couldn’t take deductions that wouldcorrespond to special estimated tax payments (STEPs)under tax code Section 847, because ‘‘the statute explic-itly allows an additional deduction for the taxable yearonly’’ if STEPS are made by the original due date of theyear for which the deduction is claimed.

Property and casualty insurers are required under taxcode Section 846 to discount incurred but unpaid losseswhen claiming them as a current deduction. Section847 allows insurance companies to take an optional taxdeduction 16 years after it makes a STEP if the payment

isn’t used to offset additional tax due for the 15 yearsfollowing the STEP.

Bankruptcy Proceeding. RFS was the successor of Re-liance Insurance Co. (RIC) following a Chapter 11 reor-ganization of RIC’s parent entities, Reliance GroupHoldings Inc. (RGH) and Reliance Financial ServiceCorp. (RFSC). RGH, the parent of RIC’s consolidatedgroup, chose not to make STEPs for the 1988 through1991 tax years.

RGH and RFSC filed for Chapter 11 protection in2001, and in 2003, during the pendency of the bank-ruptcy proceedings, RGH submitted amended returnsfor the 1988 through 2001 tax years recategorizing itsestimated payments as STEPs. The Internal RevenueService didn’t accept the returns.

In 2004, the unsecured creditors’ committees soughtand received a declaratory judgment recategorizing theoriginal estimated payments for 1988 through 1991 asSTEPs. The IRS wasn’t a party to the proceeding anddidn’t attend or participate in the hearing preceding thejudgment.

RGH filed returns for 2004 and 2005 and RFS filed re-turns for 2005 and 2006 requesting refunds based onthe judgment recategorizing the payments. The IRS de-termined they weren’t entitled to the refunds. RFS fileda lawsuit for refund claiming it had an ‘‘unfetteredright’’ to file amended returns recategorizing the esti-mated payments.

No Collateral Estoppel. Wheeler first determined thatthe government wasn’t collaterally estopped from liti-gating whether RFS made STEPs, because the govern-ment never appeared in a prior action regarding the is-sue, citing In re Trans Tex. Holding Corp., 498 F.3d1290 (Fed. Cir. 2007). ‘‘That holding applies with evengreater force here, where the issue was not opposed byany party, let alone the Government,’’ Wheeler said.

Wheeler then addressed the language of Section 847.Wheeler said that ‘‘under § 847, a company must makeSTEPs by the unextended due date for filing its tax re-turns, must make such payments in connection with acorresponding deduction, and must establish and main-tain a corresponding special loss discount account.’’

Wheeler said the facts that RGH didn’t take any Sec-tion 847 deductions or designate any payments asSTEPs on its original returns or establish or maintain aspecial loss account weren’t disputed. ‘‘Given thesefacts, it is impossible to conclude that STEPs were evermade, and absent such payments, there can be no ex-cess payments to refund.’’

Kim Marie Boylan of White & Case LLP in New Yorkrepresented RFS. Cory A. Johnson of the Department ofJustice’s Tax Division in Washington represented thegovernment.

Cases-in-BriefPreferential Transfer Not Proven by Trustee

A Chapter 7 trustee did not show that conveyances tothe commercial debtor’s attorneys constituted preferen-tial transfers under Section 547 of the BankruptcyCode, but a finding that the debtor had made fraudulentconveyances to the attorneys was upheld where all the




elements of Section 548 were satisfied, according to theU.S. Court of Appeals for the Ninth Circuit (Farrar v.Warda & Yonano, LLP (In re Bella Vista by Paramont,LLC), 2013 BL 342985, 9th Cir., No. 11-60022, 12/11/13).

The Bankruptcy Appellate Panel for the Ninth Circuitreversed the bankruptcy court’s rulings that preferen-tial transfers and fraudulent conveyances had beenmade by the debtor to its lawyers. On appeal, the circuitcourt observed that under Section 547, a preferentialtransfer made to an insider is avoidable if made withinone year of the bankruptcy filing. The court stated thatcontrary to the bankruptcy court’s findings, there was‘‘nothing in the record’’ suggesting that the debtor andattorneys shared bank accounts or any other property,and thus the issue of ‘‘control,’’ which goes to the trans-feree’s insider status, was not satisfied.

As to the allegations that the attorneys had receivedfraudulent conveyances under Section 548, the circuitcourt agreed with the courts below that the statute wassatisfied. However, because the bankruptcy court didnot establish the amount of such conveyances, the ap-pellate panel should have remanded for a finding onthat issue, and accordingly, the circuit court did so. Italso reversed the appellate panel’s determination thatthe trustee had not established that the lawyers werethe ‘‘initial transferee,’’ as required in order to recovera fraudulent conveyance.

The circuit court noted that in fact, the bankruptcycourt made such a finding when it stated that thetrustee was entitled to judgment under Section 550 ofthe Bankruptcy Code.




ConsumerBankruptcyExceptions to Discharge

Debt Owed to Ex-Husband for OverpaymentOf Spousal Support Is Nondischargeable

A $50,660 debt that a Chapter 7 debtor wife owed toher ex-husband for overpayment of spousal sup-port is nondischargeable under Bankruptcy Code

Section 523(a)(15) because the wife incurred the debt‘‘in connection with a separation agreement,’’ the U.S.Court of Appeals for the Tenth Circuit held Dec. 9 (Tay-lor v. Taylor (In re Taylor), 2013 BL 339882, 10th Cir.,No. 12-2163, 12/9/13).

Affirming the bankruptcy court’s ruling, Chief JudgeMary Beck Briscoe concluded that the ex-husband’sclaim is nondischargeable as a ‘‘domestic support obli-gation’’ under Section 523(a)(5).

The court also affirmed the Bankruptcy AppellatePanel of the Tenth Circuit’s ruling that the ex-husbandwas not entitled to attorneys’ fees because neither theBAP nor the bankruptcy court had authority to awardattorneys’ fees under the marital separation agree-ment’s (MSA) fee-shifting agreement.

The court determined that the overpayment debtdoes not qualify as a domestic support obligation underSection 523(a)(5). Under the plain language of the stat-ute, the court said, the debt must be ‘‘in the nature ofalimony, maintenance, or support (including assistanceprovided by a governmental unit) of such spouse.’’Looking at the ordinary meaning of ‘‘such,’’ the courtconcluded that the debt must be in the nature of sup-port to the creditor-spouse, or in this case, in supportfor the debtor’s ex-husband.

According to the appeals court, under Section523(a)(15)’s plain and unambiguous language, the over-payment debt qualifies as a nondischargeable debt. Thedebt arose as a result of a judgment against a spouse infavor of her former spouse by the state court ‘‘in con-nection with a separation agreement or divorce de-cree,’’ the court said. The state court entered the over-payment judgment after retaining jurisdiction to modifythe amount of the ex-husband’s spousal support obliga-tion to the debtor, the court said.

Spousal Support. Debtor Eloisa Maria Taylor and herex-husband Matthew Taylor were married in 1988, anddivorced in 2005. They entered into a MSA, and a Vir-ginia state court entered a final decree of divorce Sept.22, 2005, which incorporated the MSA. As part of thedecree, the court ordered the ex-husband to pay $2,500per month to the debtor as spousal support and to con-tinue until ‘‘the death of either party, or the remarriageof [Eloisa], or after ten years of payments, whicheverevent first occurred.’’

In 2009, Matthew Taylor moved to terminate spousalsupport because Eloisa had been living with a man forthe past two years and they were in a marriage-like re-lationship. He argued that her cohabitation should re-

sult in the termination of his spousal support obligationunder the divorce decree under Va. Code § 20-109.

The state court agreed with Matthew and retroac-tively terminated his spousal support obligation, order-ing the debtor to repay $40,660 in overpaid spousal sup-port payments, plus $10,000 for Matthew’s attorneys’fees incurred to prosecute the motion for termination.The court entered a judgment against the debtor for$50,660.

Chapter 7 Filing. The debtor filed for Chapter 7 pro-tection in 2010. Her ex-husband objected to the dis-chargeability of the $50,660 judgment and initiated anadversary proceeding.

The bankruptcy court found that the overpaymentdebt fell within the plain language of Section523(a)(15), and the legislative history also supported aconclusion that the overpayment was nondischarge-able. Thus, the court granted Matthew’s motion forsummary judgment and denied the debtor’s motion forsummary judgment. The court did not address Mat-thew’s claim that he was entitled to attorneys’ fees in-curred while pursuing the bankruptcy adversary com-plaint.

Both parties appealed to the BAP. The BAP affirmedthe bankruptcy court’s ruling that the overpaymentdebt was not a ‘‘domestic support obligation’’ underSection 523(a)(5), and did not qualify for an exceptionfrom discharge under Section 523(a)(15).

The BAP also ruled that neither it nor the bankruptcycourt had the authority to award attorneys’ fees underthe MSA’s fee-shifting agreement.

The debtor appealed the bankruptcy court’s sum-mary judgment ruling to the Tenth Circuit, and Mat-thew cross-appealed the bankruptcy court’s dismissalof his Section 523(a)(5) claim and the BAP’s ruling onattorneys’ fees.

Two provisions of the Bankruptcy Code except fromdischarge debts arising out of obligations to the family:Section 523(a)(5) excepts from discharge any domesticsupport obligation as defined in the Bankruptcy Code,and Section 523(a)(15) excepts from discharge obliga-tions arising in connection with a divorce proceeding orsettlement agreement, the appeals court said. Theseprovisions, the court said, reflect the congressionalpreference for the rights of spouses to alimony, mainte-nance, or support over the rights of debtors to a ‘‘freshstart’’ free of debts.

Domestic Support Obligation. A domestic support obli-gation, the court said, is defined in Section 101(14A)and now explicitly includes support obligations that ac-crue post-petition, and the order, agreement, or deter-mination creating the obligation can now be either pre-or post-petition. ‘‘Assistance provided by a governmen-tal unit’’ is also now expressly included in the defini-tion, the court said.

According to the appeals court, when determiningwhether an obligation is in the nature of alimony, main-

(Vol. 25, No. 49) 1711



tenance, or support, the court conducts a ‘‘dual inquiry’’looking first to the intent of the parties at the time theyentered into their agreements, and then to the sub-stance of the obligation. As the party seeking to holdthe debt nondischargeable, Matthew has the burden ofestablishing by a preponderance of the evidence thatthe parties intended the debt to be in the nature of sup-port and that the obligation was in substance support,the court said.

According to the court, there are four requirementsfor a domestic support obligation: (1) the debt must beowed to either a ‘‘spouse, former spouse, or child of thedebtor,’’ which is listed under subpart (i) or a ‘‘govern-mental unit,’’ which is listed under subpart (ii); (2) the‘‘nature’’ of the debt must be ‘‘alimony, maintenance, orsupport (including assistance provided by a govern-mental unit) of such spouse, former spouse, or child ofthe debtor . . . without regard to whether such debt isexpressly so designated;’’ (3) the debt must arise fromthe separation agreement, divorce decree or propertysettlement agreement; and (4) the debt must not havebeen assigned to a nongovernmental entity, unless forcollection purposes. The only one at issue in this case iswhether the debt meets the second requirement that itbe in the nature of support, the court said.

Under the plain language of the statute, the courtsaid, the debt must be ‘‘in the nature of alimony, main-tenance, or support (including assistance provided by agovernmental unit) of such spouse.’’ Looking at the or-dinary meaning of ‘‘such,’’ the court concluded that thedebt must be in the nature of support to the creditor-spouse, or in this case, in support for Matthew.

The appeals court rejected Matthew’s argument thatthe plain language of the statute needs some analysis,concluding that he alleged no facts to support his con-tention that the nature of the overpayment debt was ac-tually for his support. Thus, the bankruptcy court didnot err by dismissing his Section 523(a)(5) claim, thecourt said. The overpayment debt does not qualify as adomestic support obligation, the court said.

Debt Is Nondischargeable. Under Section 523(a)(15)’splain and unambiguous language, the court said, theoverpayment debt qualifies as a nondischargeable debt.The debt arose as a result of a judgment against aspouse in favor of her former spouse by the state court‘‘in connection with a separation agreement or divorcedecree, the court said. The state court entered the over-payment judgment after retaining jurisdiction to modifythe amount of Matthew’s spousal support obligation tothe debtor, the court said. Thus, under the plain lan-guage of the statute, the overpayment judgment is non-dischargeable debt, the court said.

The debtor argued that Section 523(a)(15) was en-acted to protect the dependent spouse, and that theplain language of the statute should be applied in thatcontext. According to the debtor, if the debt is not dis-chargeable, she will be ‘‘left in the lurch’’ because herwages will be garnished for decades in order to satisfythe overpayment judgment. The debtor invoked the‘‘absurdity doctrine,’’ which applies to unambiguousstatutes ‘‘as a means to avoid applying the unequivocallanguage of a statute.’’

The appeals court rejected the debtor’s argument,concluding that there is no indication that congressio-nal concern extended to the protection of a debtor-dependent spouse who may be responsible for repay-

ment of wrongfully paid spousal support. ‘‘It is not un-thinkable that Congress would place importance on allmarital obligations, regardless of whether the debt wasowed to or by the dependent spouse—even above theneed for the debtor’s fresh start,’’ the court said.

Attorneys’ Fees. Matthew also appealed the BAP’s rul-ing that neither it, nor the bankruptcy court, had au-thority under the MSA to award Matthew attorneys’fees incurred pursuing the adversary proceeding. Afterreviewing the provision in the MSA, the appeals courtconcluded that the BAP’s ruling on this issue is clearlycorrect.

Judges Stephanie K. Seymour and Carlos F. Lucerojoined the opinion.

Karl F. Kalm of Kalm Law Firm, P.C., Albuquerque,N.M., represented the debtor/appellant. Bonnie B. Gan-darilla and George M. Moore of Moore, Berkson & Gan-darilla, P.C., Albuquerque, N.M., represented MatthewE. Taylor/appellee.

BY DIANE DAVIS

To contact the reporter on this story: Diane Davis inWashington at [email protected]


Property of the Estate

Defensive Appellate Rights Are PropertyUnder Texas Law; Saleable by the Trustee

D efensive appellate rights are property under Texaslaw and are saleable by the bankruptcy estate, theU.S. Court of Appeals for the Fifth Circuit held

Dec. 10 in a case of first impression in the Fifth Circuit(Croft v. Lowry (In re Croft), 5th Cir., No. 13-50020,12/10/13).

Affirming the district court’s reversal of the bank-ruptcy court’s ruling, Judges E. Grady Jolly, Jerry E.Smith, and Edith Brown Clement found that the debt-or’s defensive appellate rights constituted a ‘‘valuableright and interest’’ which became part of the debtor’sbankruptcy estate when he filed for Chapter 7 protec-tion.

Appeals of Sanction Orders. Debtor Bradley Croft wasinvolved in lawsuits against AMS SA Management LLCand Shavano Rogers Ranch Swim Club Inc. Both suitsresulted in sanctions against Croft and attorneys’ feesin favor of his opposing parties. After appealing bothsanction orders, Croft filed for Chapter 7 protection andboth appeals were stayed. Croft moved for limited relieffrom the automatic stay in order to pursue the appeals.

AMS and Shavano opposed Crofts’s motion for relieffrom stay, arguing that Croft’s right to appeal the sanc-tions was property of the estate and thus the decision ofwhether to pursue the appeal or sell the appellate rightsbelonged exclusively to the trustee. The bankruptcycourt found that Croft’s appellate rights were not prop-erty of the estate because they were ‘‘purely defensive’’and it ordered that the stay be lifted so that Croft couldpursue the appeals. The bankruptcy court also foundthat both Croft and the trustee had standing to pursuethe appeals.

The district court reversed the decision of the bank-ruptcy court, finding that the appellate rights were

1712 (Vol. 25, No. 49) CONSUMER BANKRUPTCY






property of the estate. Croft appealed to the circuitcourt.

Conflicting Case Law. The circuit court said that thedeterminative question in this case was whether thedebtor’s ‘‘interest in appealing a judgment against himconstitutes property under Texas law — and is there-fore part of the estate — or not.’’ The court said thatTexas has a broad definition of property, which in-cludes ‘‘every species of valuable right or interest.’’ Thecourt said that while it is well established that debtors’causes of action are property of the estate, only twocourts have addressed the question of whether or notthe right to appeal a judgment against the debtor isproperty of the estate.

In In re Mozer, 302 B.R. 892 (C.D. Cal. 2003), thecourt found that defensive appellate rights were prop-erty under California law because an appeal from ajudgment against the debtor could reduce a debtor’s li-abilities and therefore increase the value of the estate.However, the court in In re Morales, 403 B.R. 629(Bankr. N.D. Iowa 2009), found that defensive propertyrights were not property under Iowa law, and that evenif they were, they would still not be considered propertyof the estate because allowing the trustee to dispose ofthe debtor’s appellate rights would ‘‘effectively destroyany right to object to the claim.’’

Valuable Right and Interest. The bankruptcy courtagreed with the reasoning in Morales, but the districtcourt found that defensive appellate rights constituteboth a right, because they ‘‘grant[] a party the preroga-tive to unilaterally invoke the court system,’’ and a‘‘valuable interest,’’ because a ‘‘judgment against prop-erty directly affects the property’s value and character,and because a judgment can be modified or vacated onappeal, the right to appeal a judgment constitutes an in-terest in the underlying property.’’ The circuit courtagreed with the district court’s reasoning and the rea-soning in Mozer.

‘‘While it is true that a judgment against the debtor isan obligation and has no value to the estate - and wouldtherefore not be included in a list of ‘property’ - theright to appeal that judgment certainly has a quantifi-able value to the debtor, and therefore constitutes prop-erty under Texas law,’’ the circuit court said. Thereforethe court found that Croft’s defensive appellate rightswere property of the estate under Section 541(a)(1) ofthe Bankruptcy Code.

Furthermore, the court said the impropriety of thebankruptcy court’s contrary conclusion was evident inits finding that both the debtor and the trustee hadstanding to pursue the appeals. The court said that thisfinding was in conflict with the ‘‘well-established prin-ciple’’ that if a claim belongs to the estate, the trusteehas exclusive standing to assert the claim, and if theclaim does not belong to the estate, then the trusteelacks standing.

Bid Exceeds Value of Appeal. Finally, the court rejectedCroft’s argument that his defensive appellate rightsshould not be saleable because it would effectively de-stroy his right to object to the appellees’ claim. Thecourt said that Croft would have the opportunity to ob-ject if the trustee moved the court to accept a bid for thedefensive appellate rights. The court also said that thetrustee, bound by a duty to maximize the value of the

estate, would only accept a bid for these rights if theprice exceeded the value of pursuing the appeal.

The court said that Croft’s argument could also beunderstood as ‘‘objecting to the simple fact that he canno longer appeal the merits of the judgment.’’ The courtsaid this argument lacked merit because it is ‘‘well es-tablished that the right to appeal is property of the es-tate.’’ The court said Croft provided no arguments as towhy ‘‘losing defensive appellate rights would create agreater injustice than losing cause-of-action appellaterights, [therefore] there is no reason to treat them dif-ferently.’’ Accordingly, the circuit court affirmed theruling of the district court.

BY STEPHANIE M. ACREE

Bankruptcy Fraud

Prison Terms for Two Defendants ChargedWith Bankruptcy Fraud, Lying to Courts

T wo defendants accused in unrelated bankruptcyfraud cases were sentenced to prison terms of sixmonths for lying about assets and 10 months for a

retired dentist who pleaded guilty in a foreclosure delayscheme (USA v. Bonavito, N.D. Cal., No. 3:13-cr-00248,order 12/4/13; USA v. Harrell, N.D. Cal., No. 3:13-cr-00090, judgment 11/26/13).

Walter Bruce Harrell, Montara, Calif., admitted heused the Bankruptcy Code’s automatic stay provision tohalt proceedings for individuals whose homes were fac-ing foreclosure by transferring a fractional interest inforeclosed properties to individuals willing to file bank-ruptcy, Harrell said in a defense sentencing memoran-dum .

Foreclosure Delay Scheme. The transfer postponedforeclosure during the pendency of the proceedingwhile homeowners renegotiated loans or arrangedshort sales, a system Harrell used to prevent his ownhome’s foreclosure, Harrell’s sentencing memo said.

The retired dentist said he was approached by othersfor help in staying in their homes and used the systemin Alameda, Contra Costa and San Mateo counties andother districts.

The indictment said some homeowners had receivedfunds under the Troubled Asset Relief Program. Thehomeowners received no money for the transfer andwere able to stay in their homes longer, the defensememo said.

After the property was transferred, Harrell completedbankruptcy documents, listing the fractional interest asan asset and stalling foreclosure. The action was re-peated to keep homeowners in their foreclosed homesas long as possible, the defense memo said.

Harrell received about $400 per month from some ho-meowners to cover the cost of filings and pay those in-volved. His role in preparing false bankruptcy petitionswas not disclosed, U.S. Attorney for the Northern Dis-trict of California Melinda Haag said in a Dec. 3 newsrelease.

Judge Susan Illston, U.S. District Court for the North-ern District of California, sentenced Harrell on Nov. 26to 10 months in prison on his guilty plea to bankruptcyfraud and for giving false statements in a bankruptcyproceeding. Eight counts were dismissed.

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Harrell’s public defender could not be reached forcomment Dec. 11.

Lying to the Courts. Separately, Patricia Bonavito, for-merly of San Francisco now living in New York, admit-ted she lied in her Chapter 7 proceedings and concealeda $150,000 promissory note from the sale of a Berkeley,Calif., apartment building for which her share was$75,000.

Bonavito admitted she also concealed from the bank-ruptcy trustee a $209,291 profit from a September 2008San Francisco condo sale. Bonavito gave $200,000 toher daughter that they then used to buy a New YorkCity property in joint tenancy, eight days after the de-fendant filed bankruptcy, the government’s sentencingmemorandum said.

Judge William Alsup on Dec. 4 ordered Bonavito toself surrender Jan. 7, 2014, for a six-month prison sen-tence.

Alsup on Nov. 19 sentencedBonavito to six months on each of four counts of giv-

ing false statements in a bankruptcy proceeding to beserved concurrently at the Federal Correctional Insti-tute in Danbury, Conn. Alsup also sentenced thewoman to a three-year supervised release.

Bonavito was indicted April 16, 2013, on eight countsof false statements and one count of false testimony inher bankruptcy petition through which she sought reliefof $308,249 in debts.

Bonavito in a letter to the court said she had lost herfinancial services job, was unable to repay $137,500 insalary advanced based on future commissions andcould not get a new job or sell her condo for a decentprice after the financial crisis hit. She also blamedfaulty legal advice.

Bonavito’s public defender could not be reached forcomment.

BY JOYCE E. CUTLER

To contact the reporter on this story: Joyce Cutler inSan Francisco at [email protected]


Cases-in-BriefDebt Collector’s Bona Fide Error Defense Fails

A debt collector that purportedly relies on its creditorto retain accounts that have been discharged failed toprove the ‘‘bona fide error’’ defense to a bankrupt’sclaims under the Fair Debt Collection Practices Act, ac-cording to a Dec. 11 opinion from the U.S. DistrictCourt for the District of Minnesota, which denied thedefendant’s motion for summary judgment (Eide v. Col-ltech, Inc., 2013 BL 341795, D. Minn., No. 0:12-cv-00812-JRT-JJG, 12/11/13).

Richard Eide sued Colltech, Inc., after receiving adunning letter for a medical debt that he had dis-charged in bankruptcy. He alleged that the suggestionthat he owed the debt was false or misleading in viola-

tion of the Fair Debt Collection Practices Act (FDCPA),15 U.S.C. § 1692 et seq. Arguing that it is entitled to thebona fide error defense, Colltech moved for summaryjudgment.

Judge John R. Tunheim denied Colltech’s motion be-cause he concluded that there is a genuine issue of ma-terial fact about whether Colltech can invoke the de-fense. While Colltech averred that it relies on the credi-tor, a hospital, to determine whether debts are disputedor have been previously discharged, the court con-cluded that a jury could conclude that Colltech’s reli-ance on the hospital for those details was unreasonable.

Colltech did not provide evidence of how reliably thehospital flags discharged accounts, the court noted, nordid Colltech prove whether it had knowledge of poorbookkeeping or billing practices at the hospital. Underall the facts, the court reasoned, Colltech failed to provethe defense and must proceed to trial.

Referral to Bankruptcy Court of Claims DeniedClaims as to post-petition violations of the Fair Debt

Collection Practices Act (FDCPA) would not be referredto the bankruptcy court because they would have no ef-fect on the administration of the consumer debtor’sbankruptcy estate and thus did not fall within the bank-ruptcy court’s jurisdiction, according to the U.S. DistrictCourt for the Eastern District of Missouri (Morrow v.West Asset Mgmt., Inc., 2013 BL 327622, E.D. Mo., No.4:13-cv-01404-JAR, 11/25/13).

Prior to the plaintiff/ debtor’s filing of her Chapter 13petition, the defendant/creditor had obtained a judg-ment against her for an outstanding debt. The debt wasthen listed in the debtor’s bankruptcy petition, and thecreditor filed a claim in her case to that effect. The debt-or’s plan proposing to pay the claim in full, with inter-est, was confirmed. The debtor then learned that anoutstanding judgment in favor of the defendant ap-peared on her credit report, and the defendant told herthat the judgment still existed despite the bankruptcy.The plaintiff then brought suit alleging violations of theFDCPA.

The defendant sought to refer the action to the bank-ruptcy court, arguing that because the issue waswhether the judgment had been discharged and/or ex-tinguished in the debtor’s bankruptcy case, it was a‘‘core’’ proceeding under the Bankruptcy Code. The dis-trict court disagreed. First, it noted, claims under theFDCPA ‘‘do not raise substantive rights created underbankruptcy law, as such claims can exist independentlyof a pending or ongoing bankruptcy case, and are nototherwise defined as core proceedings under 28 U.S.C.§ 157(b)(2).’’ The court then stated that the majority ofcourts that had considered such claims based on acreditor’s post-petition collection activity had not foundthem ‘‘related to’’ the bankruptcy case.

Quoting Harlan v. Rosenberg & Assocs., LLC (In reHarlan), 402 B.R. 703, (Bankr. W. D. Va. 2009), thecourt said, ‘‘[a]ny recovery on a post-petition claim un-der FDCPA is not property of the bankruptcy estate un-der [S]ection 541(a)(1) of the Bankruptcy Code becausethe claim did not exist as of the commencement of thecase.’’ Accordingly, the claims would not benefit the es-tate, and they did not fall within the bankruptcy court’slimited, ‘‘related to’’ jurisdiction.

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ConsumerCreditMortgages

Regulators Say QM Lending Will Not AffectCommunity Reinvestment Act Evaluations

R esidential mortgages issued by banks will not besubject to Community Reinvestment Act (CRA)scrutiny based solely on their status under the

Consumer Financial Protection Bureau’s (CFPB) newstandards for qualified mortgages (QM), according tonew supervisory guidance issued by four federal regu-lators.

The Federal Reserve Board, the Federal Deposit In-surance Corporation, the National Credit Union Admin-istration and the Office of the Comptroller of the Cur-rency issued the document, less than one month beforethe CFPB standards are to take effect Jan. 10.

‘‘The agencies recognize that some institutions mayoriginate only or predominantly QMs, particularlywhen the bureau’s ability-to-repay rule first takes ef-fect. In fact, the agencies note that some institutions’existing business models are such that all of the loansthey originate satisfy the requirements for QMs,’’ theguidance said.

The CFPB regulation sets new requirements for mort-gage lenders to consider borrowers’ ability to repayhome loans before extending them credit (25 BBLR 92,1/17/13).

However, QMs automatically would be presumed tocomply with the ability-to-repay requirements becauseof certain safer features that they include. To qualify asa QM, the borrower’s monthly debt-to-income (DTI) ra-tio must be 43 percent or less. Interest-only mortgagesand mortgages with points and fees exceeding 3 per-cent of the loan do not qualify as QMs.

The four regulators said that the CFPB’s ability to-repay rule and QM definition are comparable with fairlending laws and the Community Reinvestment Act.

Under the CRA, the agencies assess the performanceof depository institutions in helping to meet the creditneeds of low- and moderate-income neighborhoods,consistent with the safe and sound operations of thelender.

The four agencies anticipate that many lenders willshy away from issuing non-QM loans as they assesshow to move forward under the CFPB’s new regulatoryregime for mortgage lending. Those lenders that focuson QMs will not be viewed negatively under the CRA,according to the guidance.

‘‘Accordingly, the agencies that conduct CRA evalua-tions do not anticipate that institutions’ decision tooriginate only QMs, absent other factors, would ad-versely affect their CRA evaluations,’’ the regulatorssaid.

The guidance said that each CRA evaluation ‘‘takesinto account the unique performance context of the in-stitution.’’

In addition to automatically meeting the CFPB’sability-to-repay requirements, QM loans are affordedspecial legal protection from potential borrower law-suits should the loan falter down the line.

The document said that institutions may choose tooriginate both QMs and non-QMs, ‘‘based on their busi-ness strategies and risk appetites.’’

‘‘Regardless of whether residential mortgage loansare QMs or non-QMs, the agencies continue to expectinstitutions to underwrite residential mortgage loans ina prudent fashion and address key risk areas in theirresidential mortgage lending, including loan terms, bor-rower qualification standards, loan-to-value limits, anddocumentation requirements,’’ the guidance said.

Lending Outside of QM. Large mortgage lenders suchas Bank of America and Wells Fargo have indicatedplans to issue non-QM loans for higher-quality borrow-ers after the CFPB rule takes effect next month. Somesmaller, community-based financial institutions haveexpressed the belief that there are still opportunities inthe non-QM market.

Mary Dunn, senior vice president and deputy generalcounsel of the Credit Union National Association, saidthat there a number of creditworthy borrowers whohave debt-to-income levels above what is allowed forQM loans.

‘‘You can still demonstrate an ability to repay a loan,but have a debt-to-income ratio that is higher than 43percent,’’ she told Bloomberg BNA. ‘‘We think that anumber of credit unions are looking at how they canmake loans that wouldn’t qualify as QMs.’’

Regulators also have said that QM-only lendingwould not violate anti-bias prohibitions under the EqualCredit Opportunity Act (25 BBLR 1447, 10/24/13). How-ever, Dunn said that a mix of QM and non-QM lendingmight be the best way for a financial institution to avoidexcluding creditworthy borrowers protected by ECOAand other fair lending laws.

‘‘There is real concern that if you just make QMloans, there could be an overall disparate impact onsome borrowers,’’ she said.

BY MIKE FERULLO

To contact the reporter on this story: Mike Ferullo inWashington at [email protected]

To contact the editor responsible for this story: JoeTinkelman at [email protected]

The guidance document is available at: http://op.bna.com/bar.nsf/r?Open=mfeo-9ecuee.

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Mortgages

Agencies Exempt Some Higher-Priced LoansFrom Dodd-Frank Appraisal Requirements

F ederal banking regulators have issued a narrow setof exemptions to new appraisal requirements forhigh-priced mortgage loans as required by the

Dodd-Frank Wall Street Reform and Consumer Protec-tion Act.

The final rule exempts home loans of $25,000 or lessand certain ‘‘streamlined’’ refinancings under govern-ment initiatives such as the Home Affordable RefinanceProgram (HARP) from the Dodd-Frank Act appraisalrequirements, which go into effect on Jan. 18, 2014.

In January 2013, six federal agencies issued new ap-praisal standards for higher-priced home loans, definedas costing 1.5 percentage points above the averageprime rate (25 BBLR 125, 1/24/13).

For such loans, lenders must use a licensed or certi-fied appraiser who prepares a report based on a physi-cal inspection of the interior of the property. In addi-tion, if the seller acquired the property for a lower priceduring the prior six months and the price difference ex-ceeds certain thresholds, creditors will have to obtain asecond appraisal at no cost to the consumer.

The new standards—developed by the Federal Re-serve Board, the Consumer Financial Protection Bu-reau, the Federal Deposit Insurance Corporation, theFederal Housing Finance Agency, the National CreditUnion Administration, and the Office of the Comptrol-ler of the Currency—also require disclosures to mort-gage applicants about the purpose of the appraisals. Ap-plicants also must be provided a free copy of any finalappraisal report.

In addition to small loans and streamlined refinanc-ings, the agencies have carved out exemptions formanufactured homes. Loans secured by a new manu-factured home and land will be exempt only from therequirement that the appraiser visit the home’s interior,according to the final rule issued Dec. 12.

For loans secured by manufactured homes withoutland, creditors will be allowed to use other valuationmethods without an appraisal, such as using third-partyvaluation services or ‘‘book values.’’

In addition, the appraisal requirements for manufac-tured homes will not got into effect until July 18, 2015.

The Dodd-Frank appraisal standards are intended toaddress fraudulent property ‘‘flipping’’ practices withnew requirements to ensure that the value of the prop-erty has legitimately increased before it is resold. Therequirements only apply to higher-priced loans.

BY MIKE FERULLO



The final rule is available at: http://op.bna.com/bar.nsf/r?Open=mfeo-9ebtcw.

Mortgages

Johnson: Senate Banking CommitteeHas Work to Do on Housing Finance Bill

S enate Banking Committee Chairman Tim Johnson(D-S.D.) said his panel is unlikely to meet its goalof producing bipartisan legislation to revamp the

secondary mortgage market by the end of 2013.

Johnson’s committee has wrapped up a series ofhearings devoted to the theme of replacinggovernment-sponsored enterprises Fannie Mae andFreddie Mac with a mortgage finance system domi-nated by private capital and backstopped by more lim-ited government guarantees (25 BBLR 1275, 9/19/13).

However, the committee ‘‘is not as far along’’ in draft-ing legislation as Johnson had originally intended, hesaid in remarks to an event hosted by the BipartisanPolicy Center.

‘‘We were thrown a couple of curveballs over the lastfew months including a 16-day government shutdownand a couple of weeks of unanticipated congressionalrecess. Though the committee continued to work onhousing finance reform through all of this, these curve-balls did delay some conversations,’’ he said.

‘‘However, I was never going to let this process bedictated by aspirational, and frankly arbitrary, dead-lines,’’ Johnson added.

Legislation (S. 1217) introduced by Sens. Bob Corker(R-Tenn.) and Mark Warner (D-Va.) is regarded as theprimary Senate vehicle to overhaul the government’srole in the secondary mortgage market, but the bill re-mains a work in progress. Other proposals are expectedas the Senate committee continues its work.

Johnson said he remains committed to producing abill that can attract strong bipartisan support in theSenate, and told the forum he is ‘‘bullish on ourchances.’’

On the House side, the Protecting American Taxpay-ers and Homeowners (PATH) Act (H.R. 2767) was ap-proved by the House Financial Services Committee onJuly 24, with only Republican support. The measurewould overhaul the Federal Housing Administrationand replace the GSEs with a fully-privatized mortgagefinance system.

Committee Chairman Jeb Hensarling (R-Texas) is op-timistic that both the House and Senate will make head-way advancing housing reform legislation in the com-ing months. ‘‘I am hopeful that the House will confer-ence with the Senate on a bill,’’ he said in a recentspeech to the Exchequer Club (25 BBLR 1616,11/28/13).

BY MIKE FERULLO



Johnson’s prepared remarks are available at: http://op.bna.com/bar.nsf/r?Open=mfeo-9earlq.

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Financial Institutions

Study Finds Few Financial ConsumersFile for Arbitration to Resolve Disputes

T he Consumer Financial Protection Bureau’s(CFPB) preliminary research on the use of arbitra-tion clauses in financial products and services indi-

cates that consumers do not choose arbitration overclass action settlements in attempting to resolve dis-putes with companies.

The CFPB said it examined filings from the AmericanArbitration Association (AAA), the predominant admin-istrator of consumer financial arbitrations, and foundfewer than 1,250 consumer arbitrations among fourtypes of products—credit cards, checking accounts,payday loans and prepaid cards—between 2010 and2012.

During that same time period, the bureau has foundmore than 3,000 lawsuits in federal court about creditcard issues alone, according to the study embargoed forrelease at 12:01 a.m. Dec. 12.

Although it continues to uncover class action filingsrelated to credit cards and other financial products andservices, the CFPB said that more than 13 million classaction participants have made claims or received pay-ments under settlements between 2010 and 2012.

The agency also has identified 3,605 individuals whoopted out of participating in the settlements, whichgave them the right to bring their own cases. At most,only a ‘‘handful’’ of those consumers chose instead tofile an arbitration case, the CFPB study said.

CFPB Director Richard Cordray presented the find-ings at a CFPB field hearing in Dallas. See related ar-ticle in this issue.

‘‘One significant takeaway from these various pointsis that few consumers use arbitration at all, at leastwhen compared to the number of consumers involvedin lawsuits and class actions,’’ Cordray said in preparedremarks.

In most instances, consumers do not have a choicebetween arbitration or legal action.

Cordray said that arbitration is a ‘‘take-it-or-leave-it’’proposition in which consumers agree to resolve all dis-putes about the financial product or service outside ofthe court system. Consumers may open a new accountor take on a new product without being aware of whatthe contract says about mandatory arbitration, headded.

More Common Among Larger Banks. The CFPB studyfound that larger financial institutions are more likelyto include an arbitration clause in consumer contractsthan community banks or credit unions.

About 62 percent of the top 50 banks have arbitrationclauses in their checking account contracts, accordingto the CFPB, compared to about 7.7 percent of allbanks.

‘‘That raises interesting questions about why smallerinstitutions and credit unions do not use arbitrationclauses as frequently in these markets,’’ Cordray said.

For some products, such a prepaid cards, the CFPBfound that arbitration clauses are used frequently byboth large and small banks.

Regardless of who was using them, the arbitrationclauses in credit card agreements were found to be

more complex and tougher to comprehend than theother parts of the contracts, the CFPB said.

‘‘In every case, the rest of the credit card contractscored better in terms of readability than did its arbitra-tion clause considered alone,’’ Cordray said.

Cordray said the study represents the CFPB’s ‘‘firstround of preliminary findings’’ on the use of arbitrationand that more work will follow. However, the stakes arehigh for banks and others that use mandatory arbitra-tion clauses in their products.

Section 1028 of the Dodd-Frank Wall Street Reformand Consumer Protection Act allows the CFPB to pro-hibit or impose limitations on arbitration—only if it firstfinds that it would be ‘‘in the public interest and for theprotection of consumers.’’

In the second of phase of its study, the CFPB will seeka better understanding of the somewhat rare incidenceof arbitration claims, as well as the outcomes for con-sumers, Cordray said.

‘‘We will look to see what happens to arbitration fil-ings and endeavor to compare what we see happeningin arbitration to what we see happening in litigation, in-cluding class litigation,’’ he said.

Industry Seeks Greater Input. Banks and other finan-cial companies that use pre-dispute arbitration clauseshave said that arbitration is faster and cheaper than liti-gation, and at least as fair. Some in the industry havebeen critical of the CFPB for not allowing enough op-portunity for stakeholders to participate in the study.

Although the CFPB initially requested comment onhow it should conduct the study, it never revealed to thepublic and industry the topics it chose to study, the U.S.Chamber of Commerce Center for Capital MarketsCompetitiveness said in a Dec. 11 letter to the bureau.

‘‘As a result, interested individuals and organizationshave had no real opportunity to inform the bureau ofavailable evidence bearing on the issues the bureau hasdecided to study, or to develop additional empirical datarelevant to those issues,’’ the letter said.

BY MIKE FERULLO



The CFPB study is available at: http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf.The Dec. 11 letter from the Chamber of Commercecan be found at: http://op.bna.com/bar.nsf/r?Open=mfeo-9eauc9. Cordray’s prepared remarks scheduledfor delivery in Dallas Dec. 12 can be viewed athttp://op.bna.com/bar.nsf/r?Open=mfeo-9eav5k.


Critics, Advocates of Arbitration ClausesIn Financial Products Give CFPB Earful

A rbitration clauses in financial products and ser-vices are unfair and eliminate important protec-tions for consumers, opponents of the controver-

sial way to resolve disputes outside the court systemtold Consumer Financial Protection Bureau DirectorRichard Cordray and other agency staff in Dallas.

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CFPB held the hearing Dec. 12, the same day theagency released preliminary research on the use of ar-bitration clauses in connection with consumer financialproducts and services.

The study found that few consumers choose arbitra-tion over class action settlements in attempting to re-solve disputes with financial businesses that offerchecking accounts, credit cards, payday loans and pre-paid cards.

The Critics: A Poor Legal System Substitute. Opponentscontend that arbitration clauses, by eliminating classactions, are reducing the opportunity for discovery, andmay effectively immunize companies from a range ofprivate civil liabilities.

Critics also said arbitration is mostly conducted inprivate, which undermines transparency in the rule oflaw.

Ellen Traverna, legislative director of the NationalAssociation of Consumer Advocates, said years of re-search already establish how harmful forced arbitrationis to consumers.

‘‘Consumers have absolutely no idea that just by pur-chasing a financial product they are giving up constitu-tional rights by waiving access to the court system,’’Traverna said.

Forced arbitration strips consumers of the right to atrial, jury and to join with other consumers to hold cor-porations accountable, she said.

The CFPB study demonstrates that forced arbitrationclauses have become standard business practices incontracts for financial products. The study also foundthat 90 percent of arbitration clauses now expressly barconsumers from joining together in a class, she said.

‘‘Class actions are the only way of revealing wide-spread corporate fraud,’’ Traverna said. She said it isnot economically feasible for consumers to individuallyfile claims in any forum—arbitration or court.

Traverna urged CFPB to complete the second phaseof its study as quickly as possible so it can initiate rulemaking to eliminate forced arbitration clauses for con-sumer financial products.

The Bankers: Needed Flexibility. Shannon Phillips,deputy general counsel with the Austin-based Indepen-dent Bankers Association of Texas, said most smallerbanks in its membership do not currently use arbitra-tion clauses in their standard agreements.

But the largest community banks do include con-sumer arbitration agreements within their deposit ac-counts and other documents, Phillips said.

‘‘Many medium-size banks are evaluating the needfor arbitration provisions at this time,’’ Phillips toldCFPB.

His association believes that, to retain flexibility forcommunity banks of all sizes, it is critical to appropri-ately use well-drafted and fair arbitration agreements,he said.

In Texas, Phillips said, bankers have seen first-handhow ‘‘out of control’’ class actions can be used to theadvantage of plaintiffs without any real benefits to con-sumers.

A mandatory CFPB rule limiting arbitration clausesfor financial products could result in an indirect amend-ment to the Federal Arbitration Act, in turn, creating abifurcated system with special rules for financial ser-vices companies and clear federal law as approved by

the U.S. Supreme Court for all other parties, Phillipssaid.

Without alternative dispute resolution, Texas wouldhave to establish more civil courts at a significant cost,he said.

‘‘Any CFPB prohibitions on pre-dispute arbitration inconsumer transactions would clearly run counter to thestate court effort to reduce the case loads of statecourts,’’ Phillips said.

Phillips also said if CFPB determines that it mustregulate the use of pre-dispute arbitration in financialproducts, the banking association would urge theagency to use an approach supported by the U.S. Su-preme Court’s ruling in AT&T Mobility LLC v. Concep-cion, 131 S. Ct. 1740 (2011), and require reasonable pa-rameters for consumer transactions.

BY SUSANNE PAGANO

To contact the reporter on this story: Susanne Pa-gano in Houston at [email protected]

To contact the editor responsible for this story: Ste-ven Patrick at [email protected]


Dodd-Frank Mandated Insurance ReportCalls for State, Federal Hybrid Regulation

A Treasury Department report released Dec. 12 oninsurance industry regulation found that the in-dustry, traditionally regulated at the state-level,

should be viewed as a ‘‘hybrid model’’ of state and fed-eral supervisors, and recommended against establish-ing a single federal supervisor.

‘‘Establishing a new federal agency to regulate all orpart of the $7.3 trillion insurance sector would be a sig-nificant undertaking,’’ the report said, requiring aworkforce, funding and expertise of huge proportions.

A Treasury official told reporters that in most cases,state regulators will remain the primary supervisor.

The 65-page report, titled ‘‘How to Modernize andImprove the System of Insurance Regulation in theUnited States,’’ was prepared by the Treasury’s FederalInsurance Office (FIO), a body created under the Dodd-Frank Act to monitor the insurance industry for gaps inregulation. The FIO was also instructed under Dodd-Frank to research and write the report, a process thatbegan October 2011 with a public comment period.

Associations to Meet With Lew. Insurance industrygroups and commissioner associations began takingstock of the lengthy report, according to spokespersons,but most said in initial statements they were pleasedwith the report’s conclusion that state-based regulationshould be maintained.

Stakeholders had not seen the final report until it wasreleased Dec. 12, but had participated in the earlystages of the FIO’s research. Members of the NationalAssociation of Insurance Commissioners met with FIODirector Michael T. McRaith in December 2011 to ex-plain the state regulator perspective, NAIC Presidentand Louisana Insurance Commissioner Jim Donelonsaid in a statement.

‘‘Like the recent [Government Accountability Office]report ‘Insurance Markets During the Financial Crisis,’we note that it acknowledges the effectiveness of state-




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based insurance regulation and the improvementsstates have made,’’ Donelon said. ‘‘The timing of the re-port is fortuitous, as our membership will be gatheringfor our Fall National Meeting in Washington, D.C. thisweekend. We will be discussing this report there, aswell as with [Treasury] Secretary [Jacob] Lew when wemeet with him next week.

State Uniformity. The report is not meant to considerwhether federal involvement in insurance is appropri-ate, but where and how that involvement should be cali-brated, the Treasury official said. In some instances, thelack of uniformity among the states has created a bur-den for policy-holders, industry participants and the in-ternational economy, the official said.

The mortgage insurance industry is one sector wherefederal supervision is appropriate in all of its aspects,the official said. The report’s first recommendation in alist of areas for direct federal involvement is for federalstandards and oversight for mortgage insurers to be de-veloped and implemented.

Leigh Ann Pusey, president and CEO of the AmericanInsurance Association (AIA), said in a statement the re-port affirms the goals of competitive insurance marketsboth at home and abroad, and agreed that there existsa need for more standard regulations across states, andan assessment of rate-related regulations that encour-age competition on personal-lines insurance markets.

Personal-lines insurance policies are those issued toindividuals or families, as opposed to commercial linespolicies.

But Pusey added a caveat on binding risk classifica-tion standards, the industry practice of grouping riskswith similar characteristics and probabilities for thepurpose of setting prices.

‘‘Any movement toward proposing binding risk clas-sification standards would be counterproductive,’’Pusey added.

Recommend, not Regulate. The report lists under areasfor near-term reform by states the recommendation thatstates should develop standards for the appropriate useof data used for pricing personal lines insurance. Statesshould also monitor different rate regulation regimeson various markets ‘‘in order to best identify rate-related regulatory practices that best foster competitivemarkets for personal lines insurance consumers.’’

Former Democratic Senator for Nebraska Ben Nel-son, NAIC’s CEO, said that ultimately the FIO as cre-ated under Dodd-Frank is not a regulatory agency anddoes not hold the authority to displace state insuranceregulation.

‘‘While we appreciate FIO’s suggestions for improve-ment, the states have the ultimate responsibility forimplementing regulatory changes,’’ he said.

BY K. CLAIRE COMPTON

To contact the reporter on this story: K. Claire Comp-ton in Washington at [email protected]

To contact the editor responsible for this story:Heather Rothman at [email protected]

The full report can be found here: http://op.bna.com/der.nsf/r?Open=sbay-9ebr96


CFPB Lawsuit Against Online LenderMay Test Agency Powers on Rate Caps

T he Consumer Financial Protection Bureau suedCashCall Inc., saying the Anaheim, Calif. lender,its owner, and related firms used American Indian

trial law to purchase, service, and collect on consumerloans that were void or partially nullified under state in-terest rate limits and licensing restrictions (ConsumerFinancial Protection Bureau v. CashCall Inc., D. Mass.,No. 13-cv-13167, 12/16/13).

The 23-page complaint filed in the U.S. District Courtfor the District of Massachusetts already is shaping upas a significant test. It marks the first such suit by thenew consumer watchdog involving what it calls‘‘regulatory-evasion schemes’’ by small-dollar lendersand payday lenders that do their business online.

In remarks prepared for a conference call on the suit,CFPB Director Richard Cordray said CashCall and theother defendants ‘‘engaged in unfair, deceptive, andabusive practices in services they provided for an onlinelender.’’

‘‘The bottom line is that the Internet is a convenientand desirable place for many consumers and compa-nies to do business, but we cannot allow it to becomethe Wild West of unregulated and irresponsible lend-ing,’’ Cordray said.

Attorneys See Overreach. CashCall’s attorneys imme-diately cast the case in a different light. In a Dec. 16statement, Neil M. Barofsky, former special inspectorgeneral for the Troubled Asset Relief Program who isrepresenting defendants CashCall, Delbert Services,and Western Sky Financial LLC, said the suit goes be-yond what Congress allowed.

In a joint statement with fellow Jenner & Block part-ner Katya Jestin, he said the CFPB is trying to imposecaps on interest rates, action he said is prohibited bySection 1027 of the Dodd-Frank Wall Street Reform andConsumer Protection Act.

‘‘The CFPB’s charges today against CashCall fly inthe face of Congress’ clear intent when it plainly andsimply declared out of bounds any effort by the CFPBto impose interest rate caps,’’ Barofsky and Jestin said.

They also said tribes have the right to regulate theirown economic affairs. ‘‘The charges against CashCallare without merit, we will fight them in court, and Cash-Call will be vindicated,’’ they said.

Several Defendants Named. According to the CFPB,the suit involves several companies related to J. PaulReddam, one of the defendants. Reddam, the CFPBsaid, is the chief executive officer, president, director,and owner of CashCall, the president, manager, mem-ber, and owner of WS Funding (a CashCall subsidiary),and director and owner of Delbert Services, a collector.

Also named as a defendant is Western Sky Financial,an online lender chartered under South Dakota law thatsuspended operations Sept. 3, citing ‘‘unwarrantedoverreach by state regulators.’’

According to the CFPB, Western Sky is owned by amember of the Cheyenne River Sioux Indian Reserva-tion, ‘‘but is not owned or operated by a tribe or tribalentity.’’




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Online Loans Cited. The CFPB suit focused on actionsit said began in 2009 and continued into 2013. Accord-ing to the CFPB, CashCall and WS Funding arrangedwith Western Sky ‘‘to secure high-cost, consumer-installment loans’’ that they said did not have to complywith state law.

The suit said loans were made in Western Sky’sname, marketed by CashCall, financed by WS Funding,quickly sold and assigned (also to WS Funding), andthen serviced and collected either by CashCall, DelbertServices, or both.

The CFPB said repayment costs were substantial. Forexample, a $2,600 loan would come to approximately$13,840 in payments over a 47-month repayment term,more than five times the borrowed amount, accordingto the agency, and often with payments obtained by di-rect debit.

‘‘If consumers had known or understood that theywere not legally obligated to pay all or part of the loans,many consumers likely would not have authorized De-fendants to process debits for the full loan balances,which included substantial interest and fees, or suc-cumbed to Defendants’ demands for full payment,’’ thesuit said.

J. Paul Reddam could not immediately be reached forcomment.

The CFPB was represented by Acting Deputy En-forcement Director Anthony Alexis, Acting Deputy En-forcement Director Jeffrey P. Ehrlich, Assistant Litiga-tion Deputy Natalie R. Williams, and Enforcement At-torneys Lisa D. Rosenthal, Jesse Silverman, CrystalSumner, and Paula Tuffin.

CashCall, Delbert Services and Western Sky are rep-resented by Barofsky and Jestin, partners in the NewYork offices of Jenner & Block.

BY CHRIS BRUCE

To contact the reporter on this story: Chris Bruce inWashington at [email protected]


The complaint is at http://www.bloomberglaw.com/public/document/Consumer_Financial_Protection_Bureau_v_CashCall_Inc_et_al_Docket_. The WesternSky statement is at http://www.westernsky.com/.

Consumer Protection

FTC Halts Two Firms TargetingFinancially Distressed Consumers

T he Federal Trade Commission announced entry ofconsent decrees against two separate operations—one offering mortgage relief and the other offering

debt relief services—banning each from providing thoseservices and entered in the U.S. District Court for theCentral District of California and the U.S. District Courtfor the Southern District of Florida (FTC v. AmericanMortgage Consulting Group, LLC, C.D. Cal., No. 8:12-cv-01561-DOC-JPR, 9/18/13; FTC v. Southeast Trust,LLC, S.D. Fla., No. 0:12-cv-62441-WJZ, 9/23/13).

The FTC filed complaints against:

s Mark Nagy Atalla and his companies, AmericanMortgage Consulting Group and Home Guardian Man-agement Solutions alleging violations of FTC Act § 5

and the Mortgage Assistance Relief Services Rule(known as the MARS Rule or Regulation O) by promis-ing to lower consumers’ monthly mortgage paymentssubstantially in exchange for an up-front fee rangingfrom $1,495 to $4,495; and

s Paul A. Wexler, the principal of Southeast Trust,LLC (formerly known as The Debt School, LLC, also do-ing business as Financial Freedom Credit Counseling)alleging violations of the FTC Act and the agency’sTelemarketing Sales Rule by charging cash-strappedconsumers hundreds of dollars based on misrepresen-tations that they could obtain credit card interest ratesas low as zero percent.

The American Mortgage defendants will surrendertheir assets and be banned from providing mortgage re-lief or debt relief services to consumers. In addition,they will be prohibited from misrepresenting the fea-tures of any product or service, and making claimswithout competent and reliable evidence. The commis-sion noted that ‘‘Atalla faces a $514,910 judgment,which will be suspended when he turns over variousitems of personal property and proceeds from the saleof other assets.’’

The Southeast Trust defendants are prohibited from:

s collecting money from consumers who used theirservices;

s making unauthorized withdrawals from consum-ers’ bank accounts;

s misrepresenting the features and characteristics offinancial or other types of products and services; and

s making unsupported claims about products andservices.

The order requires them to keep any consumer infor-mation they have confidential and destroy it promptly.Although it imposes a $2.7 million judgment againstWexler, the full amount is suspended based on his in-ability to pay. The full amount of the judgment will be-come due if it is determined that the financial informa-tion the defendants gave the FTC was untruthful.

The commission vote approving both consent decreeswas 4-0.

BY CECELIA M. ASSAM

To contact the reporter on this story: Cecelia M. As-sam in Washington at [email protected]

To contact the editor responsible for this story: Shel-don B. Richman at [email protected]

The American Mortgage complaint is available athttp://www.ftc.gov/sites/default/files/documents/cases/2012/10/121009homeguardiansolutionscmpt.pdf.

The consent judgment is available at http://www.ftc.gov/sites/default/files/documents/cases/131212americanmortgagestip.pdf.

The Southeast Trust complaint is available at http://www.ftc.gov/sites/default/files/documents/cases/2012/12/121213financialfreedomcmpt.pdf.

The consent judgment is available at http://www.ftc.gov/sites/default/files/documents/cases/131212southeasttruststip.pdf.










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Cases-in-BriefDebt Collector to Pay $350,000 for FDCPA Violations

Seven of 13 individual plaintiffs who submitted par-tial claims forms in a class action alleging violations ofthe Fair Debt Collection Practices Act by a debt collec-tor are granted a share of the $350,000 class award, ac-cording to a Dec. 12 decision by the U.S. District Courtfor the Southern District of New York (Zimmerman v.Portfolio Recovery Associates LLC, S.D.N.Y., No. 1:09-cv-04602-PGG, 12/12/13).

Jason Zimmerman brought suit against Portfolio Re-covery Associates LLC for alleged violations of the Fair

Debt Collection Practices Act (FDCPA), 15 U.S.C.§ 1692 et seq. After the court granted Zimmerman’s mo-tion for summary judgment and class certification, itawarded him statutory damages and authorized a classaward of $350,000. Thirteen class members submittedvague or incomplete claim forms, prompting the courtto order supplemental briefing.

After reviewing those briefings, the court concludedthat seven of those should be granted a share of theaward and that class counsel should recover over$130,000 in fees and costs. It further held that anyamount left over after satisfying the class members’claims should be distributed to seven organizations pro-posed by Zimmerman.




BNAInsightsIs Electricity a ‘‘Good’’ for the Purposes of Section 503(b)(9) of the BankruptcyCode? Delaware Court Weighs in on Circuit Split

BY ASHLEY E. MARKOW

S ection 503(b)(9) of the Bankruptcy Code grantscertain creditors that sell goods to debtors in thetwenty days prior to the bankruptcy filing an ad-

ministrative claim. Since its enactment in 2005, thescope of Section 503(b)(9) has been a source of debateamong bankruptcy courts and practitioners.1 In particu-lar, a split of authority has developed as to exactly whatconstitutes a ‘‘good’’ for the purposes of Section503(b)(9), a term which is not defined by the Bank-ruptcy Code.

As a result of the ambiguity with respect to the mean-ing of goods, creditors who would seemingly hold onlya general unsecured claim are asserting administrativeclaim priority under Section 503(b)(9). Utility providersare among the creditors that have attempted to use Sec-tion 503(b)(9) to elevate their general unsecured claimsto administrative status. Although courts appear to bein agreement that water and natural gas are goods, they

have split as to whether electricity is a good or merelya service.2

Surprisingly, many bankruptcy courts have not ad-dressed whether an electricity provider is entitled to aSection 503(b)(9) claim for electricity sold to a debtorprior to its bankruptcy filing. The Bankruptcy Court forthe District of Delaware recently weighed in on the is-sue for the first time in NE Opco, Inc. and took a slightlydifferent approach than other courts considering the is-sue.3

A. Case Law Prior to NE Opco, Inc.A creditor is entitled to an administrative claim under

Section 503(b)(9) if: (i) the creditor sold goods to thedebtor; (ii) the debtor received the goods within twentydays prior to filing; and (iii) the creditor sold the goodsto the debtor in the ordinary course of business.4 Be-cause the Bankruptcy Code does not define the term‘‘good,’’ courts have turned to the definition providedby Article 2 of the U.C.C.5 Section 2-105 of the U.C.C.defines a ‘‘good’’ as a thing that is movable at the timeof identification to the contract for sale.6 Section 2-107of the U.C.C. specifically provides that natural gas fallswithin the definition of goods.7

Despite the consensus that the term ‘‘good’’ shouldbe given the meaning ascribed to it in the U.C.C., courtsare not in agreement as to whether electricity fallswithin the U.C.C.’s definition. Some courts have heldthat electricity is a good because it is movable at thetime of identification to the contract—i.e. when it ismeasured by the meter.8 In Erving, for instance, theBankruptcy Court for the District of Massachusetts ex-plained that ‘‘at the time electricity is identified to thecontract, it is literally moving, and it remains movable

1 Congress enacted Section 503(b)(9) as part of the Bank-ruptcy Abuse Prevention and Consumer Protection Act of2005. In re The Great Atlantic & Pacific Tea Co., Inc., Case No.12-CV-7629 (CS), 2013 BL 248503 (S.D.N.Y. Sept. 16, 2013).

2 See, e.g., In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr.N.D. Tex. 2009); GFI Wis. Inc. v. Reedsburg Utility Comm’n,440 B.R. 791 (Bankr. D. Mass. 2010); 5 COLLIER ON BANKRUPTCY ¶503.16[1] (16th ed. 2011).

3 In re NE Opco, Inc., Case No. 13-11483 (CSS), 2013 BL303956 (Bankr. D. Del. Nov. 1, 2013).

4 In re Goody’s Family Clothing, Inc., 401 B.R. 131, 133(Bankr. D. Del. 2009).

5 See, e.g., GFI Wis. Inc., 440 B.R. at 799-800; In re Pilgrim’sPride Corp., 421 B.R. at 235-36; In re Plastech EngineeredProds., 397 B.R. 828, 835 (Bankr. E.D. Mich. 2008).

6 U.C.C. § 2-105 (2012).7 Id. § 2-107; see also In re Pilgrim’s Pride Corp., 421 B.R. at

240-41.8 In re Erving Indus., Inc., 432 B.R. 354 (Bankr. D. Mass.

2010); GFI Wis. Inc. v. Reedsburg Utility Comm’n, 440 B.R.791, 800 (Bankr. D. Wis. 2010); Puget Sound Energy, Inc. v.Pac. Gas & Elec. Co. (In re Pac. Gas & Elec. Co.), 271 B.R. 626,639-40 (N.D. Cal. 2002).

Ashley E. Markow is an associate in the Bank-ruptcy and Corporate Restructuring Practiceat Young Conaway Stargatt & Taylor, LLP.Ms. Markow focuses her practice on issuesrelating to debtors, secured and unsecuredcreditors, and creditors’ committees in Chap-ter 11 cases.

1722 (Vol. 25, No. 49)



for some period of time thereafter.’’9 Although the pro-cess ‘‘may occur at speeds so imperceptible that con-summation appears to occur simultaneous with identifi-cation,’’ the court found that electricity does continue tomove until it reaches the end product.10 In addition, atleast one court held that the determination of whetherelectricity is a good depends on the ‘‘general movabilityof electricity, common perceptions of electricity, andthe exchange of electricity as a commodity on the mar-ketplace.’’11 In GFI Wisconsin, the District Court for theWestern District of Wisconsin reasoned that becauseelectricity is ‘‘movable, tangible and consumable,’’ ‘‘hasphysical properties,’’ and is ‘‘bought and sold in themarketplace[,]’’ it is a good under the U.C.C.12

Other jurisdictions have concluded that electricitydoes not fall within the U.C.C.’s definition of goods be-cause it is not movable at the time for identification tothe contract.13 According to the United States DistrictCourt for the District of Texas in Pilgrim’s Pride,‘‘[o]nce electricity has been ‘identified’ by measure-ment at the meter, it has already been consumed by theend user.’’14 In addition, a more recent decision fromthe Bankruptcy Court for the District of Puerto Rico,PMC Marketing, concluded that whether or not electric-ity is a good depends on the relationship between theelectric company and the customer.15 In this case, be-cause the electric company was a public corporationthat was the sole provider of electricity (unlike the alter-native energy provider in Erving), the court held thatthe electric company was a utility provider governed bySection 366 of the Bankruptcy Code.16 As a result, thecourt concluded that the electric company provided ser-vices, not goods.17

B. The NE Opco, Inc. DecisionIn NE Opco, Inc., Westfield Gas & Electric Light De-

partment (‘‘Westfield’’) filed a motion seeking allow-ance and payment of an administrative claim pursuantto Section 503(b)(9) for electricity and natural gas itprovided to the debtors in the twenty days prior to thepetition date.18 Although some of the charges includedin Westfield’s motion related to services, Westfield ar-gued that since it sold goods to the debtors, Section503(b)(9) applied to all the charges.19

In response, the debtors argued that electricity is aservice, not a good, under the U.C.C., and Westfield’sadministrative claim must be denied.20 Moreover, al-though the Debtors did not dispute that natural gas wasa good under the U.C.C., they argued that Westfield was

only entitled to an administrative claim for charges re-lated to the sale of goods.21 Thus, other costs includedon Westfield’s invoices, such as delivery, distribution,maintenance, and customer service charges, were notentitled to administrative priority under Section503(b)(9).22

The court addressed two primary issues in its opin-ion: (i) whether electricity is a good and (ii) whetherWestfield’s entire claim was entitled to priority ormerely the portion attributable to goods.23

I. Electricity As a Good Under the U.C.C.After a lengthy examination of precedent from other

jurisdictions on the issue, the court held that electricityis not a good for the purposes of Section 503(b)(9).24

Like other decisions, the court started with the lan-guage of Section 2-105 of the U.C.C., and, in particular,the requirement that in order to be a good, electricitymust be movable at the time of identification to the con-tract.25

The court’s analysis took a slightly different turnfrom that in other decisions, however. According to theCourt, ‘‘the inclusion of movability as an element in thedefinition of a good goes back to the inception of theterm almost 1,000 years ago. . . . A service is not mov-able property but, rather, it is performed and consumedsimultaneously.’’26 The court went on to find that ‘‘inorder for electricity to be a good, there must be a periodbetween when electricity is identifiable and consumed.But, in order to do justice to the term as it has devel-oped over 1,000 years, the period between identificationand consumption must be meaningful.’’27

According to the court, the ‘‘infinitesimal’’ time be-tween the identification and consumption ofelectricity—1/60th of 1/60th of 1/60th of a second, to beexact—rendered the separation meaningless.28 Becausethere is no meaningful delay between identification andconsumption of electricity, the court held that electric-ity is not a good under a plain reading of the statute.29

The court turned to other arguments made by West-field and the Debtors. First, the court rejected the ratio-nale set forth in GFI Wisconsin and espoused by West-field that electricity must be a good given its similaritieswith other goods such as water and natural gas.30 Un-like water and natural gas, electricity cannot be storedin its current form for an indefinite period of time.31 Al-though electricity may be stored in a battery, it does notretain its form.32 Rather, it becomes ‘‘potential energy,stored in materials or chemicals that will produce elec-tricity when they react with each other.’’33

The court also rejected the debtors’ attempts to useother sections of the Bankruptcy Code to limit themeaning of goods. First, the court held that it is not nec-essary for a good to be reclaimable in order to be givenadministrative priority under Section 503(b)(9), reason-

9 In re Erving Indus., Inc., 432 B.R. at 370 (emphasis inoriginal).

10 Id.11 GFI Wis. Inc., 440 B.R. at 800.12 Id. at 800-01.13 In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D.

Tex. 2009); In re Samaritan Alliance, LLC, Case No. 07-50735,2008 BL 129819 (Bankr. E.D. Ky. June 20, 2008).

14 In re Pilgrim’s Pride Corp., 421 B.R. at 239.15 In re PMC Mktg., Case No. 09-02048, 2013 BL 234851

(Bankr. D.P.R. Sept. 4, 2013).16 Id.17 Id.18 In re NE Opco, Inc., Case No. 13-11483 (CSS), 2013 BL

303956, at *1-2 (Bankr. D. Del. Nov. 1, 2013).19 See id. at *6-7, *37-38.20 Id. at *7.

21 Id. at *37-38.22 Id.23 Id. at *2.24 Id. at *8-26.25 Id. at *24-25.26 Id.27 Id. at *25 (emphasis in original).28 Id. at *26.29 Id.30 Id. at *27-29.31 Id. at *28-29.32 Id.33 Id. at *29.

BNA INSIGHTS (Vol. 25, No. 49) 1723



ing that ‘‘[g]oods under section 503(b)(9) cannot andare not defined by the exception to the rule. While cer-tain goods are subject to reclamation, other non-reclaimable goods are also entitled to an administrativeexpense claim.’’34 The court also found that Section 366of the Bankruptcy Code has no bearing on whetherelectricity is a good or service.35 Section 503(b)(9) ‘‘ad-dresses the sale of goods pre-petition while section 366addresses the provision of utility services post-petition.’’36

Finally, the court rejected the reasoning set forth inPMC Marketing that the relationship between thedebtor and the utility provider must be examined to de-termine if electricity is a good.37 The court reasonedthat this approach would result in electricity starting asa good but ending as a service, particularly where thepurchaser is a wholesaler, not an end user.38

II. Predominant Purpose v. Apportionment TestThe second issue addressed by the court was whether

Westfield was entitled to the full amount of its claim fornatural gas charges or only the portions of the bill relat-ing to the sale of goods. Westfield argued that the ‘‘pre-dominant purpose’’ test should be adopted, which pro-vides that if the transaction predominantly involvesgoods, then the seller’s entire claim is entitled to admin-istrative priority, including any service-relatedcharges.39 The debtors argued, however, that the courtshould apportion the bill between service-related and

goods-related charges and only allow a Section503(b)(9) claim for the goods-related charges.40

The court agreed with the debtor, noting that ‘‘[t]heonly relevant determination under [Section] 503(b)(9)is the value of the ‘goods’ that were delivered, irrespec-tive of whether the contract also called for the deliveryand sale of services.’’41 Thus, the court rejected the‘‘winner take all’’ approach and closely examined thecharges on the debtors’ natural gas bill.42 Ultimately,the court concluded that only a small portion of thenatural gas bill was for the sale of goods.43

C. ImpactNE Opco, Inc. is an important decision that provides

much needed clarity to debtors and creditors on thescope of Section 503(b)(9) claims. The court’s rulingthat electricity is not a good and its adoption of the ap-portionment test is a significant win for debtors in theDistrict of Delaware and potentially other jurisdictions.The court took a novel approach in its analysis ofwhether electricity is a good for the purposes of Section503(b)(9) that has not been addressed in other seminaldecisions on the issue, such as Erving and GFI Wiscon-sin. These cases concluded that electricity was movableat the time of identification to the contract; however,they also concluded that the time between identificationand consumption was imperceptible. In light of the rul-ing in NE Opco, Inc. that the period between identifica-tion and consumption of a good must be meaningful,perhaps these jurisdictions will reconsider their conclu-sion that electricity is a good.

34 Id. at *32-33.35 Id. at *33-34.36 Id. at *33.37 Id. at *34-35.38 Id. at *35.39 Id. at *37-38.

40 Id. at *38.41 Id. at *39 (citing In re Plastech Engineered Prods., 397

B.R. 828, 837 (Bankr. E.D. Mich. 2008)).42 Id. at *39-40.43 Id. at *40.

1724 (Vol. 25, No. 49) BNA INSIGHTS



BNAInsightsA Lesson from the Financial Crisis:The Valuable Role of Large Banking Institutions

BY PAUL L. LEE

I n the desperate days of 2008, the U.S. authorities in-voked a wide range of emergency measures to avertthe collapse of the U.S. financial system and with it

the global financial system. The broad outlines of thesemeasures will be familiar to most observers of the fi-nancial scene even if some of the details of these mea-sures have begun to recede in memory. Most observerswill recall that the Federal Reserve Board implementeda set of emergency funding programs to support notonly the banking system, but also the larger financialsystem, including the commercial paper and asset-backed securities markets, and that the Treasury De-partment developed an unprecedented program toguarantee (on a temporary basis) money-market mu-tual funds. At the urging of the Treasury Departmentand the Federal Reserve Board, the Bush Administra-tion also introduced and promoted the adoption of theTroubled Asset Relief Program legislation, which ulti-mately provided direct capital support to banks bothlarge and small.1

Emergency AcquisitionsAmong the most dramatic and cinematic moments in

the crisis were those involving the emergency acquisi-tion of some of our largest and most venerable financialinstitutions. These were acquisitions actively promotedby the government to forestall a further descent intochaos. Bank of America acquired Merrill Lynch (afterinitially being encouraged by the Treasury Departmentto acquire Lehman Brothers), JPMorgan Chase ac-quired Bear Stearns and Washington Mutual (and wasencouraged by the Treasury Department to consider ac-quiring Morgan Stanley), and Wells Fargo acquiredWachovia. These were extraordinary transactions, ac-complished on an expedited basis that did not allow foras extensive a due diligence process as the acquiringparties might have liked. The government’s desire tocalm the markets took precedence over normal transac-tional protocols. The drama surrounding these transac-tions is described by Andrew Ross Sorkin in his bookToo Big To Fail.2

If one were to characterize Andrew Ross Sorkin’sbook as the first draft of history, one might regard HankPaulson’s book On the Brink and Sheila Bair’s bookBull By The Horns as the initial entrants in the seconddraft of history.3 Former Secretary of the Treasury TimGeithner’s forthcoming book will provide still anotherperspective in the third draft of history. Like no less afigure than Churchill, these authors intend history to bekind to them by writing it. The early accounts, however,do not provide much insight into the understanding thatthese officials had in 2008 of the full range of the con-sequences of their actions. This is to be expected. A cri-sis after all requires action, not reflection.4

An Instance of Unintended ConsequencesNow fully five years after the events, the conse-

quences of some of these actions are coming into muchhigher relief. One of the consequences that has recentlycome into very high relief is presumably an unintended

1 In response to a Congressional request, the United StatesGovernment Accountability Office has recently released a re-port analyzing the effects of these programs on the bankingsystem and focusing particularly on the effects on the largestbanks. See U.S. Gov’t Accountability Office, GAO-14-18, Gov-ernment Support for Bank Holding Companies: Statutory

Changes to Limit Future Support Are Not Yet Fully Imple-mented (Nov. 2013) [hereinafter GAO Report].

2 See Andrew Ross Sorkin, Too Big to Fail: The Inside Storyof How Wall Street and Washington Fought To Save the Fi-nancial System—And Themselves (2009).

3 HENRY M. PAULSON, JR., ON THE BRINK: INSIDE THE RACE TO STOP

THE COLLAPSE OF THE GLOBAL FINANCIAL SYSTEM (2010); SHEILA BAIR,BULL BY THE HORNS: FIGHTING TO SAVE MAIN STREET FROM WALL

STREET AND WALL STREET FROM ITSELF (2012).4 In a prologue to a September 2013 trade edition of his

book, Hank Paulson has provided further reflections on theconsequences of actions taken during the crisis.

Paul L. Lee is of counsel at Debevoise &Plimpton LLP and a member of the firm’sFinancial Institutions Group. Debevoise& Plimpton represents a number of largefinancial institutions, including institutionsmentioned in this article.

(Vol. 25, No. 49) 1725



consequence. This unintended consequence is the in-creased exposure of several of the largest U.S. bankinginstitutions to significant liabilities for the mortgageorigination and securitization activities of the entitiesacquired in the crisis. The acquisitions of Countrywideand Merrill Lynch by Bank of America, of Bear Stearnsand Washington Mutual by JPMorgan Chase, and ofWachovia by Wells Fargo have exposed each of theseacquirers to liabilities arising from the mortgage origi-nation and securitization activities of the acquired insti-tutions. The recent announcement of a $13 billionsettlement by JPMorgan Chase with the government re-lated to mortgage origination and securitization activi-ties has highlighted this exposure.5 JPMorgan Chasehad previously disclosed that more than 80 percent ofits reserves for mortgage-backed securities litigation re-lated to the activities of Bear Stearns and WashingtonMutual.6 For its own part, Bank of America has alreadypaid almost $50 billion in litigation costs related to itsacquisition of Countrywide and those costs continue tomount.7 It is unlikely that either the government or theacquirers could have accurately assessed the extent ofthese contingent liabilities at the time that these dealswere struck in 2008. It is clear, however, that subse-quent government actions as in devising new litigationstrategies and theories have increased the exposure onthese contingencies.8

These acquisitions have resulted in an increased ex-posure of the banking system to liabilities that wouldhave otherwise been resolved outside the banking sys-tem. If Countrywide had not been acquired by Bank ofAmerica (or another large banking institution), it wouldalmost certainly have gone into bankruptcy. The contin-gent liabilities from its mortgage origination and secu-ritization activities would have been resolved in a bank-ruptcy proceeding likely with a low level of recovery forthe claimants as was the case with the other mortgageoriginators that went into bankruptcy in 2007 and 2008.Similarly, if Bear Stearns had not been acquired by JP-Morgan Chase and had gone into bankruptcy, its con-tingent liabilities would have been resolved in the bank-ruptcy proceeding with a low level of recovery for theclaimants. The outcome for public and privatemortgage-backed securities claimants against these en-tities will be very different because these entities arenow part of large, financially secure companies. Thepublic and private litigation claimants against these en-tities have clearly benefitted from the acquisition ofthese entities by large banking institutions. Theseclaimants join the long list of other creditors and coun-terparties in the financial system who have become

beneficiaries of acquisitions made by large banking in-stitutions.

An Instance of Intended Consequences

Another consequence – that was obvious at the timeof the emergency acquisitions – was that they wouldcontribute to a substantial consolidation of the U.S.banking sector. Three of the four largest U.S. bankinginstitutions grew in size and arguably in complexity asa direct result of their acquisition of other faltering in-stitutions in 2008. These acquisitions were done at theurging of, and with active political and in some cases fi-nancial support from, the government. These institu-tions did not do these acquisitions against their will. Butit is clear that the government led them to believe thatthey were playing an essential role in protecting the fi-nancial system by undertaking these extraordinary ac-quisitions. If there is any doubt about this proposition,one need only read Hank Paulson’s book. It is a refresh-ingly candid and unabashed account by the former Sec-retary of the Treasury of what he actually did to getthese institutions to acquire other faltering firms. Theterm of choice of the former Secretary is that he‘‘leaned’’ on the acquiring institutions to do these dealsand to do them quickly.9

Given the active government encouragement of theseacquisitions, it seems a little incongruous and perhapseven a little perverse for the government now to say tothese institutions that they have allowed themselves tobecome too large and too complex. It is very clear thatit served the government’s interest and the national in-terest at the time of the financial crisis for these institu-tions to become larger and more complex. In fact, theproblem in September 2008 was that we had just aboutrun out of large U.S. institutions that were strongenough to take over the faltering institutions. It haslong been government policy in the banking sector topromote the acquisition of failing banks by banks thatwere not just stronger but larger.10 We were runningout of such options in September 2008. It may be re-called that the U.S. government actively pursued Bar-clays (and other foreign prospects) as a savior of Leh-man Brothers until the U.K. government balked at therisk of a U.K. bank catching (in former SecretaryPaulson’s words) the ‘‘American disease.’’11 It may alsobe recalled that Wachovia at approximately $800 billionin assets wound up being acquired with the active en-couragement of certain government agencies by WellsFargo, which at approximately $600 billion in assetswas the smaller of the two institutions. The increase insize and complexity of these acquiring institutions wasnot an unintended consequence of government action.It was an intended consequence – at least as that termis defined in the legal lexicon.

5 See Tom Schoenberg et al., JPMorgan Reaches Record$13 Billion Mortgage Settlement, BLOOMBERG (Nov. 19, 2013),available at http://www.bloomberg.com/news/2013-11-19/jpmorgan-settlement-announced-by-u-s-justice-department-1-.html.

6 See JPMorgan Chase & Co., Form 8-K Current Report(Oct. 11, 2013), Exhibit No. 99.1, Earnings Presentation Slidesat 2 n.3.

7 See Shayndi Raice, BofA, AIG Battle Over Settlements,Wall St. J., Nov. 20, 2013, at C2.

8 See, e.g., Christopher M. Matthews, Federal ProsecutorsEmerge From Mortgage-Fraud Trial With New Weapon, Influ-ential Judges Have Signed Off on Novel Interpretation of Ob-scure Law, WALL ST. J. (Oct. 23, 2013), available at http://online.wsj.com/news/articles/SB10001424052702304069604579154033805282804.

9 PAULSON, supra note 2, at 80, 174 & 347. In some of his de-scriptions, the former Secretary is even more graphic: ‘‘Wediscussed how we could put pressure on Jamie [Dimon].. . .SoI called Jamie and told him we needed him to buy Bear[Stearns].’’ Id. at 110.

10 See, e.g., Richard J. Parsons, Sending a Bad Message toBig Banks, WALL ST. J., Oct. 21, 2013, at A19.

11 PAULSON, supra note 2, at 188.




http://www.bloomberg.com/news/2013-11-19/jpmorgan-settlement-announced-by-u-s-justice-department-1-.html



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These institutions did not do these acquisitions

against their will. But it is clear that the

government led them to believe that they were

playing an essential role in protecting the financial

system by undertaking these extraordinary

acquisitions.

To offer that observation is not to question the deci-sion of government policymakers that it was essentialthat our largest institutions play a key role in helping tostabilize the U.S. financial system and in helping, in thewords of former Secretary Paulson, to avoid the col-lapse of the global financial system. It is merely to sug-gest that an appreciation of history is appropriate here– as it is in virtually any other policymaking environ-ment – in considering the questions that we now faceabout the size and complexity of U.S. banking institu-tions. It is also appropriate to consider how current gov-ernment actions will influence future outcomes, for ex-ample, by limiting options to the government for assis-tance from the U.S. banking industry in whatever forma future crisis may take. If we do not have U.S. bankinginstitutions of sufficient size, strength, and will to assist,we may be forced to rely on the kindness of strangersfor assistance in the next crisis.

Questions of Size and ComplexityHow then are we to address the questions posed

about the size and complexity of U.S. financial institu-tions, including those that grew in size and complexitywith the encouragement of the government during thefinancial crises? The answer - at least in the first in-stance - is that we have a set of legislative determina-tions for these questions in the Dodd-Frank Wall StreetReform and Consumer Protection Act (the ‘‘Dodd-Frank Act’’).

Title I Prudential MeasuresThe Dodd-Frank Act contains numerous measures

designed to strengthen the overall resilience of the U.S.banking system. Title I of the Dodd-Frank Act also con-tains measures specifically designed to strengthen on adifferential basis the largest banking institutions andother designated systemically important nonbank fi-nancial companies. These measures include enhancedcapital and liquidity requirements, single counterpartycredit exposure limits, stress tests, and early remedia-tion and living will requirements, all of which will en-courage the largest banking institutions and other des-ignated nonbank financial companies to weigh care-fully the regulatory and business tradeoffs surroundingsize and complexity.12 In fact, in implementing thesenew enhanced prudential standards, the Federal Re-

serve Board has said that it is following the legislativedirection that the standards should increase in strin-gency with the ‘‘systemic footprint’’ of the covered com-pany. The largest U.S. financial institutions are alreadyresponding to these regulatory imperatives as well as tomarket pressures.13

The Dodd-Frank Act authorizes the Federal ReserveBoard to impose still other prudential standards on thelargest banking institutions. The Federal Reserve Boardhas indicated that it will be issuing in the next fewmonths proposed rules that will require the largestbank holding companies to maintain a specified mini-mum level of unsecured long-term debt that would beavailable for loss absorption or ‘‘bail-in’’ in the eventthat the company had to be resolved.14 The Federal Re-serve Board is also considering regulatory measuresthat would limit or discourage the issuance of short-term debt at the holding company level. These mea-sures are intended to strengthen the funding structureof these holding companies, making them less suscep-tible to a market ‘‘run’’ on their funding at the holdingcompany level.15

Title II Orderly Liquidation AuthorityThe proposed funding measures are also specifically

intended to assist in implementing another singularmeasure in the Dodd-Frank Act, the Title II Orderly Liq-uidation Authority regime, which is designed to facili-tate the orderly resolution of systemically important fi-nancial institutions. Title II represents one of the greatinnovations in the design of crisis management andresolution techniques for the U.S. financial sector. Asoriginally conceived by the Treasury Department, TitleII was intended as an alternative to the Hobson’s choicethat confronted government authorities in the 2008 cri-sis: (i) either a government bail-out of the institution asin the case of AIG; or (ii) a ‘‘disorderly’’ bankruptcy ofthe institution as in the case of Lehman Brothers. TitleII is designed to permit an orderly liquidation of system-atically important financial institutions by the FederalDeposit Insurance Corporation (the ‘‘FDIC’’), applyingrules that generally parallel the longstanding rules forthe resolution of insured depository institutions underthe Federal Deposit Insurance Act.16

12 Pub. L. No. 111-203, § 165, 124 Stat. at 1423-1432 (codi-fied at 12 U.S.C. § 5365).

13 See, e.g., Lewis Krauskopf & Ernest Scheyder, GE planscredit card unit spinoff to shrink finance arm, REUTERS (Nov.15, 2013), available at http://www.reuters.com/article/2013/11/15/ge-investors-idUSL2N0J00PE20131115; See also McKinsey& Company, Breakaway: How Leading Banks OutperformThrough Differentiation (2013), available at http://www.mckinsey.de/sites/mck_files/files/mckinsey_global_bankin_annual_review_2013.pdf (describing how new globalregulatory requirements will require a transformation ofglobal banking institutions).

14 See Governor Daniel K. Tarullo, Address at the FederalReserve Board and Federal Reserve Bank of Richmond Confer-ence, ‘‘Planning for the Orderly Resolution of a Global Sys-temically Important Bank’’ (Oct. 18, 2013) (transcript availableat http://www.federalreserve.gov/newsevents/speech/tarullo20131018a.htm).

15 Id.16 For a detailed discussion of the considerations underly-

ing the enactment of Title II, see Paul L. Lee, The Dodd-FrankAct Orderly Liquidation Authority: A Preliminary Analysis andCritique—Part I, 128 BANKING L. J. 771 (2011).

BNA INSIGHTS (Vol. 25, No. 49) 1727



http://www.reuters.com/article/2013/11/15/ge-investors-idUSL2N0J00PE20131115

http://www.reuters.com/article/2013/11/15/ge-investors-idUSL2N0J00PE20131115

http://www.mckinsey.de/sites/mck_files/files/mckinsey_global_bankin_annual_review_2013.pdf



http://www.federalreserve.gov/newsevents/speech/tarullo20131018a.htm

http://www.federalreserve.gov/newsevents/speech/tarullo20131018a.htm

If we do not have U.S. banking institutions of

sufficient size, strength, and will to assist, we may

be forced to rely on the kindness of strangers

for assistance in the next crisis.

In its developmental work under Title II, the FDIChas incorporated a new concept into its thinking andinto its planning process. It is the concept of single-point-of-entry recapitalization. The single-point-of-entry concept envisions that a Title II proceeding wouldbe commenced only for the top-tier holding company inthe group. The top-tier holding company would beplaced into a Title II receivership proceeding and sub-stantially all of its assets, including the shares of all orvirtually all of its operating subsidiaries, would betransferred to a new bridge financial company over theresolution weekend.17 Subordinated debt and seniorunsecured debt of the holding company would be leftbehind in the receivership. Losses at the operating sub-sidiaries would be simultaneously ‘‘pushed up’’ to thetop-tier holding company.18 These losses would be ab-sorbed by converting the subordinated debt and unse-cured long-term debt left behind in the receivershipproceeding into equity of the bridge company or suc-cessor company. This conversion or bail-in allows therapid capitalization of the bridge company and recapi-talization of the operating subsidiaries. One of the keypreconditions to a single-point-of-entry model is thatthe top-tier company will have enough subordinateddebt and senior unsecured debt to absorb all the lossesat the top-tier company and at its operating subsidiar-ies. Another precondition is that the top-tier company(or its successor bridge company) will have sufficientassets (including intercompany loans to its operatingsubsidiaries) to allow the top-tier-company (or its suc-cessor bridge company) to recapitalize the operatingsubsidiaries. These preconditions are expected to be thesubject of the proposed rulemaking from the FederalReserve Board, which it is undertaking in consultationwith the FDIC.19

Large Banking Institutions Are Still HandyTo Have Around in a Financial Crisis

The single-point-of-entry bail-in strategy is envi-sioned to have substantial advantages over other pos-sible approaches. Ideally, it would avoid the need for

multiple resolution or bankruptcy proceedings at thelevel of the operating subsidiaries, with the attendantcomplexities and conflicts that would inevitably ariseeven in a domestic context. These complexities andconflicts would of course be compounded in a cross-border context. This strategy would also allow for con-tinuity in the provision to the markets of critical finan-cial functions by these subsidiaries. It should also maxi-mize the going concern value of these subsidiaries.Finally, it would minimize the imperative of finding asingle savior for the failed institution over a resolutionweekend. It introduces the prospect of a more ‘‘orderly’’disposition process for parts of the failed entity as partof the ongoing resolution process for the successorbridge company.

The single-point-of-entry strategy, coupled with a re-quired minimum loss absorbing capacity at the top-tierholding company, is one of the most promising develop-ments in resolution strategy for systemically importantfinancial institutions. The FDIC has indicated that itwould likely be the ‘‘preferred’’ path for a Title II reso-lution proceeding.20 There are nonetheless many con-tingencies imbedded in the planning and execution pro-cess for a single-point-of-entry resolution beyond thoseoutlined above. Moreover, even in a successful single-point-of-entry resolution, a relatively rapid dispositionof major operating subsidiaries may still be necessaryor desirable. The availability of other large banking in-stitutions as potential acquirers of components of therecapitalized or recapitalizing successor entity mayprove critical to the success of the process.

Conceding the desirability, indeed the necessity, ofthe additional option provided by Title II of the Dodd-Frank Act, a policymaker should nonetheless concludethat it would be wise to retain as many options as pos-sible and specifically to preserve the option for the useof a combination of options in any future crisis.21 Theexperience in the 2008 crisis demonstrated that mul-tiple and in some instances cumulative approaches tostabilizing the financial system were necessary andmight again be necessary in the future. Reliance on asingle strategy would be self-limiting and dangerous.The experience in the 2008 crisis also confirmed thelong historical experience that large banking institu-tions can play a key role in a financial crisis. Based onhis own experience, former Secretary Paulson mightsay that large strong banking institutions are handy tohave around in a financial crisis. Indeed, more thanhandy, they may be indispensable.

17 See James R. Wigand, Director, Office of Complex Finan-cial Institutions, Statement on Improving Cross Border Reso-lution to Better Protect Taxpayers and the Economy to theSubcommittee On National Security and International Tradeand Finance, U.S. Senate (May 15, 2012) (transcript availableat http://www.fdic.gov/news/news/speeches/spmay1513_2.html) (describing the proposed operation of the single-point-of-entry approach).

18 See Bipartisan Policy Ctr., Too Big to Fail: The Path to aSolution, 25-27 (May 2013), available at http://bipartisanpolicy.org/sites/default/files/TooBigToFail.pdf.

19 Tarullo, supra note 14.

20 See Martin J. Gruenberg, Chairman, FDIC, Remarks atthe Volcker Alliance Program (Oct. 13, 2013) (transcript avail-able at http://www.fdic.gov/news/news/speeches/spoct1313.pdf); Martin J. Gruenberg, Acting Chairman, FDIC,Remarks at the Federal Reserve Bank of Chicago Bank Struc-ture Conference (May 10, 2012) (transcript available at http://www.fdic.gov/news/news/speeches/chairman/spmay1012.html).

21 Several options that were available in 2008 have beenforeclosed or significantly limited by other provisions of theDodd-Frank Act. For example, open bank assistance, whichwas used to assist Citigroup during the crisis, is no longeravailable. In addition, the emergency lending authority of theFederal Reserve Board under Section 13(3) of the Federal Re-serve Act has been limited. These changes are discussed in theGAO Report, supra note 1, at 47-55. These limitations make iteven more important for policymakers to retain other options.




http://www.fdic.gov/news/news/speeches/spmay1513_2.html

http://www.fdic.gov/news/news/speeches/spmay1513_2.html

http://bipartisanpolicy.org/sites/default/files/TooBigToFail.pdf

http://bipartisanpolicy.org/sites/default/files/TooBigToFail.pdf

http://www.fdic.gov/news/news/speeches/spoct1313.pdf

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Scoreboard SUPREMECOURT

DocketNumber Case Name

PetitionFiled

Cert.Status

CaseArgued

DecisionRendered

10-875 Hall v. United States(9th Cir., 617 F.3d 1161 (2010)(22 BBLR 1160, 8/26/10))Question presented: DoesI.R.C. § 1399, which provides that abankruptcy filing other than an individual Chapter 7 or individualChapter 11 does not give rise to a ‘‘separate taxable entity,’’ meanthat the capital gains income tax incurred due to the sale of thepetitioners’ family farm is not a Bankruptcy Code administrativeexpense owed by the bankruptcy estate and payable under abankruptcy reorganization plan?

12/30/10(23 BBLR 1161/27/11)

Granted6/13/11(23 BBLR 7426/16/11)

Argued11/29/11(23 BBLR 149112/1/11)

Decided5/14/12(24 BBLR 6535/17/12)

11-166 RadLAX Gateway Hotel LLC v. Amalgamated Bank(River Road Hotel Partners LLC v. Amalgamated Bank, 7th Cir.,6/28/11)(23 BBLR 842, 7/14/11):Question presented: May a debtor pursue a Chapter 11 plan thatproposes to sell assets free of liens without allowing the securedcreditor to credit bid, but instead providing it with the indubitableequivalent of its claim under Section 1129(b)(2)(A)(iii)?

8/5/11(23 BBLR 10769/1/11)

Granted12/12/11(23 BBLR 153712/15/11)

Argued4/23/12(24 BBLR 5514/26/12)

Decided5/29/12(24 BBLR 7145/31/12)

11-1518 Bullock v. BankChampaign, N.A.(11th Cir., 670 F.3d 1160 (2012)(24 BBLR 250, 2/23/12)):Question presented: What degree of misconduct by a trusteeconstitutes ‘‘defalcation’’ under Bankruptcy Code Section 523(a)(4)that disqualifies the errant trustee’s resulting debt from a bankruptcydischarge—and does it include actions that result in no loss of trustproperty?

6/14/12(24 BBLR 8726/28/12)

Granted10/29/12(24 BBLR 140911/1/12)

Argued3/18/13(25 BBLR 3903/21/13)

Decided5/13/13(25 BBLR 6695/16/13)

12-1200 Executive Benefits Insurance Agency v. Arkison(Ruling below (In re Bellingham Insurance Agency Inc., 9th Cir.,702 F.3d 553 (2012)(24 BBLR 1615, 12/13/12)):Questions presented: (1) Does Article III permit the exercise of thejudicial power of the United States by bankruptcy courts on the basisof litigant consent, and, if so, is ‘‘implied consent’’ based on alitigant’s conduct, where the statutory scheme provides the litigantno notice that its consent is required, sufficient to satisfy Article III?(2) May a bankruptcy judge submit proposed findings of fact andconclusions of law for de novo review by a district court in a ‘‘core’’proceeding under 28 U.S.C. § 157(b)?

4/3/13(25 BBLR 5184/11/13)

Granted6/24/13(25 BBLR 8936/27/13)

12-1408 United States v. Quality Stores Inc.(Ruling below (In re Quality Stores Inc., 6th Cir., 693 F.3d 605(2012)(24 BBLR 1174, 9/13/12)):Question presented: Are severance payments made to employeeswhose employment was involuntarily terminated taxable under theFederal Insurance Contributions Act, 26 U.S.C. § 3101 et seq.?

5/31/13(25 BBLR 8506/13/13)

Granted10/1/13(25 BBLR 133510/3/13)

12-5196 Law v. Siegel(Ruling below (In re Law, 435 F. App’x 697 (2012)):Questions presented: (1) Does the decision of the U.S. Court ofAppeals for the Ninth Circuit conflict with decisions of other circuitsand the U.S. Supreme Court? (2) May a bankruptcy court allow asurcharge to extend to a debtor’s homestead property?

7/5/12(25 BBLR 8696/20/13)

Granted6/17/13(25 BBLR 8696/20/13)

13-258 Grant, Konvalinka & Harrison, P.C. v. Still(Ruling below (Grant, Konvalinka & Harrison, P.C. v. Banks, 6thCir., 716 F.3d 404 (2013)):Questions presented: (1) Should a bankruptcy trustee who files ameritless lawsuit always be presumed to be acting within the scopeof his authority and be immune from prosecution? (2) Should a partynot be allowed to file and pursue a state court action to assert claimsfor malicious prosecution/abuse of process against the bankruptcytrustee without having to satisfy the Barton doctrine requirement ofobtaining leave of the bankruptcy court?

8/22/13(25 BBLR 12509/12/13)

Denied10/15/13(25 BBLR 142210/17/13)

(Vol. 25, No. 49) 1729




PetitionFiled

Cert.Status

CaseArgued

DecisionRendered

13-299 Clark v. Rameker(Ruling below (7th Cir., 714 F.3d 559 (2013)(25 BBLR 572,4/25/13)):Question presented: Is an individual retirement account that a debtorhas inherited exempt from the debtor’s bankruptcy estate underBankruptcy Code Section 522, which exempts ‘‘retirement funds tothe extent that those funds are in a fund or account that is exemptfrom taxation’’ under certain provisions of the Internal RevenueCode?

9/6/13(25 BBLR 12869/19/13)

Granted11/26/13(25 BBLR 161211/28/13)

13-373 Kapila v. IRS(Ruling below (11th Cir., 517 F. App’x. 840, 2013 BL 108710):Questions presented: (1) Do federal equity principles control overstate law property rights in determining who is a fraudulenttransferee of a debtor’s property? (2) Where under state law atransfer by cashier’s check is necessarily made to the payee and notto any intermediary who held possession of the check between theremitter and the payee, may a bankruptcy court use equity principlesto conclude that the transfer was made first to the intermediary?

7/13/13(25 BBLR 138910/10/13)

13-401 Longaker v. Bos. Scientific Corp.(Ruling below (8th Cir., 715 F.3d 658, 2013 BL 111256):Question presented: Can the future earnings that a debtor wouldhave earned under a fixed-term employment contract become part ofthe debtor’s bankruptcy estate upon filing of a bankruptcy petition,or should the debtor receive a fresh start and retain an interest in hispost-bankruptcy earnings?

9/24/13(25 BBLR 139010/10/13)

Denied11/4/13(25 BBLR 153011/7/13)

13-455 Offıcial Comm. of Unsecured Creditors of Quebecor World (USA)Inc. v. Am. United Life Ins. Co.(Ruling below (2d Cir., 719 F.3d 94, 2013 BL 152381)(23 BBLR1345, 10/27/11)):Question presented: Does Section 546(e) of the Bankruptcy Codeeliminate the statutory power to avoid payments related to asecurities transaction when a financial institution acts as a mereconduit for the transferred property, as the Second, Third, Sixth andEighth circuits have held, or must the financial institution have abeneficial interest in the transferred property, as the Eleventh Circuithas held?

10/8/13(25 BBLR 145810/24/13)

13-523 Anti-Lothian Bankr. Fraud Comm’n v. Lothian Oil Inc.(Ruling below (5th Cir., 508 F. App’x. 352 (2013), 2013 BL 17873):Questions presented: (1) Did the U.S. Court of Appeals for the FifthCircuit expand the jurisdiction of bankruptcy courts beyond theouter boundaries of the bankruptcy estate recognized by this courtand in direct conflict with the holdings of the First, Second, Seventh,Ninth, Tenth and Eleventh circuits? (2) Must this court limit theFifth Circuit’s expansion of bankruptcy court roving power underBankruptcy Code Section 105(a) to impose millions of dollars ofpunitive contempt sanctions for even good faith filings in Article IIIfederal courts objecting to post-confirmation bankruptcy jurisdictionto enjoin state court actions against property possessed bynondebtors?

6/3/13(25 BBLR 153011/7/13)

13-580 Tanguy v. West(Ruling below (5th Cir., 2013 BL 208281, unpublished):Questions presented: (1) Can Article III’s prohibition against theexercise of the district court’s traditional powers by bankruptcycourts be waived by the conduct of litigants such as the filing ofcounter-claims against the trustee for his post-petition conduct? (2)May a bankruptcy court judge who lacks jurisdiction to sign a finaljudgment adjudicating a private common law or statutory claimunder Article III submit proposed findings of fact and conclusions oflaw for entry by the district court in a ‘‘core’’ proceeding under 28U.S.C. § 157(b) and thereby circumvent a noncreditor’s right to trialin an Article III court? (3) May a noncreditor’s right to jury trial in abankruptcy proceeding under the Seventh Amendment to the U.S.Constitution be waived by its filing of a counter-claim in an effort toavoid res judicata or collateral estoppel?

11/6/13(25 BBLR 159411/21/13)

1730 (Vol. 25, No. 49) SUPREME COURT SCOREBOARD




PetitionFiled

Cert.Status

CaseArgued

DecisionRendered

13-581 Ryan v. United States(Ruling below (7th Cir., 725 F.3d 623, 2013 BL 181059):Question presented: May a debtor under Chapter 13 void a lien byoperation of Section 506(d), or is that relief barred by this court’snarrow holding in Dewsnup v. Timm, 502 U.S. 410 (1992)?

10/4/13(25 BBLR 159411/21/13)

13-614 In re McDonald(Ruling below (6th Cir., 8/19/13):Questions presented: (1) Does an officer of the court have discretionto refuse a litigant legal representation based solely on bias andprejudice? (2) Does a bankruptcy judge exceed the jurisdictionconferred by setting a pre-trial conference in a Chapter 7 proceedingbefore there was a meeting with the creditors? (3) Did thebankruptcy panel exceed the jurisdiction conferred by dismissing acase that was appealed directly to the court of appeals to challengethe constitutionality of a federal statute? (4) Did the bankruptcypanel or the court of appeals exceed the jurisdiction conferred byallowing a trial court to issue a second final order, while the case isalready on appeal, without serving a copy on the petitioner?

11/16/13(25 BBLR 166012/5/13)

13-619 Spehar Capital, LLC v. Mayer Brown, Rowe & Maw, LLP(Ruling below (Grochocinski v. Mayer Brown Rowe & Maw, LLP,7th Cir., 719 F.3d 785, 2013 BL 164760):Questions presented: (1) Was it error for the lower courts to applythe doctrine of judicial estoppel against the trustee and thebankruptcy estate based upon the pre-petition legal position andsubsequent actions of a creditor of the estate? (2) Did the lowercourts fail to (i) give full faith and credit to the California statejudgment and (ii) follow the final orders of the bankruptcy court?

11/18/13(25 BBLR 166012/5/13)

13-646 RCS Capital Dev., LLC v. ABC Learning Ctrs. Ltd.(Ruling below (In re ABC Learning Ctrs. Ltd., 3d Cir., 728 F.3d 301,2013 BL 228042 (25 BBLR 1215, 9/12/13)):Question presented: Is a noncollective receivership proceeding,which manages an insolvent company and realizes its assets solelyfor one class of creditors, entitled to the benefit of Chapter 15recognition?

11/25/13(25 BBLR 169612/12/13)

13-666 Jones v. HSBC(Ruling below (In re Jones, 3d Cir., 518 F. App’x 103, 2013 BL138549):Question presented: The District Court did not have jurisdictionover Jones’s appeal from the order of the bankruptcy court, and wetherefore decline to reach the merits of the appeal.

9/21/13(25 BBLR 173212/19/13)

13-678 Field v. Berman(Ruling below (4th Cir., 526 F. App’x 287, 2013 BL 144804):Questions presented: (1) Is collateral state court circumvention ofthe bankruptcy process shielded from federal court review by thedoctrines of res judicata or Rooker-Feldman? (2) Are complexfactual disputes properly resolved by a motion to dismiss?

9/27/13(25 BBLR 173212/19/13)

Note: This is a partial list of bankruptcy-related cases pending before the U.S. Supreme Court for the 2013–2014 term.A comprehensive list can be viewed on the electronic version of BNA’s Bankruptcy Law Reporter.

SUPREME COURT SCOREBOARD (Vol. 25, No. 49) 1731



Supreme Court DocketThe U.S. Supreme Court was in session on Monday,

Dec. 16. It is not expected to enter any further ordersuntil Monday, Dec. 23.

Review Sought

The following bankruptcy-related petitions were re-cently filed in the U.S. Supreme Court.

13-666 Jones v. HSBC

Bankruptcy Appeals.

Ruling below (In re Jones, 3d Cir., 518 F. App’x 103,2013 BL 138549):

The district court did not have jurisdiction overJones’s appeal from the order of the bankruptcy court,and we therefore decline to reach the merits of the ap-peal.

Questions presented: (1) Did the U.S. Court of Ap-peals for the Third Circuit err when it stated that thebankruptcy court construed the motion dated Sept. 29,2009, as a Motion for Reconsideration, when the motiondated March 13, 2009, clearly states that it is a motionfor reconsideration? (2) Did the bankruptcy and districtcourts violate petitioner’s due process and free speechrights? (3) Did attorney Brian W. Kincaid falsify evi-dence of citations to the Third Circuit stating that themotion dated Sept. 29, 2009, was a motion for reconsid-eration, and did not deny or address any of my allega-

tions in the Sept. 29, 2009, motion, in violation of Fed-eral Rule of Appellate Procedure 28.1(c)(2)?

Petition for certiorari filed 9/21/13, by Jean Jones, prose, of Newark, N.J.

13-678 Field v. Berman

Bankruptcy appeals—Rooker-Feldman doctrine—Resjudicata.

Ruling below (4th Cir., 526 F. App’x 287, 2013 BL144804):

The district court correctly dismissed all plaintiff’sclaims seeking declaratory and injunctive relief in thisbankruptcy case. The district court properly concludedthat a 2011 judgment precludes some of plaintiff’sclaims under the doctrine of res judicata, and rendersthis court unable to grant relief on others, making dis-missal under Federal Rule of Civil Procedure 12(b)(6)appropriate. This court need not reach the districtcourt’s alternative basis for dismissal under the Rooker-Feldman doctrine for lack of subject matter jurisdiction.Two other counts were properly dismissed underRooker-Feldman, as the district court could not haveadjudicated them without also reviewing the proprietyof a final state court decision. Because the final countalleges a state law claim and all of the claims overwhich the district court had original jurisdiction wereproperly dismissed, the decision to decline supplemen-tal jurisdiction and dismiss under 28 U.S.C. § 1367(c)(3)was also warranted.

Questions presented: (1) Is collateral state court cir-cumvention of the bankruptcy process shielded fromfederal court review by the doctrines of res judicata orRooker-Feldman? (2) Are complex factual disputesproperly resolved by a motion to dismiss?

Petition for certiorari filed 9/27/13, by Michael Field,pro se, of Virginia Beach, Va.

1732 (Vol. 25, No. 49) SUPREME COURT SCOREBOARD



JournalC O N F E R E N C E S

A listing of upcoming professional conferences re-lated to bankruptcy law.

January 20, 2014

ABI’s Western Consumer Bankruptcy Conference .Las Vegas, NV. Sponsored by the American BankruptcyInstitute, 44 Canal Center Plaza, Suite 400, Alexandria,VA 22314. 703-739-0800. www.abiworld.org.

January 23–24, 2014

ABI’s 19th Annual Rocky Mountain Bankruptcy Con-ference. Denver, CO. Sponsored by the AmericanBankruptcy Institute, 44 Canal Center Plaza, Suite 400,Alexandria, VA 22314. 703-739-0800. www.abiworl-d.org.

February 6–8, 2014

ABI’s 10th Annual Caribbean Insolvency Symposium.San Juan, Puerto Rico. Sponsored by the AmericanBankruptcy Institute, 44 Canal Center Plaza, Suite 400,Alexandria, VA 22314. 703-739-0800. www.abiworl-d.org.

February 26–28, 2014

VALCON 2014: Contested Valuation Issues in Bank-ruptcy. Las Vegas, NV. Sponsored by the AmericanBankruptcy Institute, 44 Canal Center Plaza, Suite 400,Alexandria, VA 22314. 703-739-0800. www.abiworl-d.org.

March 11, 2014

Bankruptcy Battleground West. Los Angeles, CA.Sponsored by the American Bankruptcy Institute, 44Canal Center Plaza, Suite 400, Alexandria, VA 22314.703-739-0800. www.abiworld.org.

March 13–15, 2014

ABI/Stetson Alexander L. Paskay Bankruptcy Semi-nar. Tampa, FL. Sponsored by the American Bank-ruptcy Institute, 44 Canal Center Plaza, Suite 400, Alex-andria, VA 22314. 703-739-0800. www.abiworld.org.

April 24-27, 2014

ABI’s 32nd Annual Spring Meeting. Washington, DC.Sponsored by the American Bankruptcy Institute, 44Canal Center Plaza, Suite 400, Alexandria, VA 22314.703-739-0800. www.abiworld.org.

May 15, 2014

ABI’s 16th Annual New York City Bankruptcy Confer-ence. Hilton New York, NY. Sponsored by the Ameri-can Bankruptcy Institute, 44 Canal Center Plaza, Suite400, Alexandria, VA 22314. 703-739-0800. www.abi-world.org.

June 12–15, 2014

21st Annual Central States Bankruptcy Workshop.Grand Geneva Resort & Spa, Lake Geneva, WI. Spon-sored by the American Bankruptcy Institute, 44 CanalCenter Plaza, Suite 400, Alexandria, VA 22314. 703-739-0800. www.abiworld.org.

July 31–August 2, 2014

19th Annual Mid-Atlantic Bankruptcy Workshop.Hyatt Regency Chesapeake Bay, Cambridge, MD.Sponsored by the American Bankruptcy Institute, 44Canal Center Plaza, Suite 400, Alexandria, VA 22314.703-739-0800. www.abiworld.org.

October 8–11, 2014

NCBJ’s 88th Annual Conference. Chicago, IL. Spon-sored by the National Conference of BankruptcyJudges, 241 Aristides Dr., Irmo, SC 29063. 803-749-4115. www.ncbj.org.

October 24, 2014

ABI/Georgetown University Law Center ‘‘Views fromthe Bench.’’ Washington, DC. Sponsored by the Ameri-can Bankruptcy Institute and Georgetown UniversityLaw Center, 44 Canal Center Plaza, Suite 400, Alexan-dria, VA 22314. 703-739-0800. www.abiworld.org.

December 4–6, 2014

ABI’s 26th Annual Winter Leadership Conference. LaQuinta Resort & Spa, La Quinta, CA . Sponsored by theAmerican Bankruptcy Institute, 44 Canal Center Plaza,Suite 400, Alexandria, VA 22314. 703-739-0800.www.abiworld.org.

(Vol. 25, No. 49) 1733



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