Update on Recent Developments in Bankruptcy Law – Insolvency/Bankruptcy

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1. AUTOMATIC STAY

1.1 Activities covered

1.2 Effect of stay

1.3 Remedies

2. AVOIDANCE POWERS

2.1 Fraudulent Transfers

2.1.a The imposition and payment of a tax penalty does not constitute a fraudulent conveyance. While insolvent, the debtor incurred and paid tax penalties prior to bankruptcy. A transfer of title to the debtor while the debtor was insolvent for less than a reasonably equivalent value is avoidable as a fraudulent conveyance by construction. By referring to an exchange of value and defining when a transfer is made as when it takes effect between the parties, the UFTA does not contemplate involuntary obligations such as tax penalties. Therefore, the UFTA does not apply to a tax penalty. Cook c. USA (In re Yahweh Center, Inc.), 27 F.4th 960 (4th Cir. 2022).

2.2 Preferences

2.2.a First cousins ​​are “relatives”.The trustee sued a first cousin of the debtor’s principal to preferably avoid a transfer made more than 90 days before the date of the request. Section 547(b) allows the trustee to avoid a transfer to a “relative” made within one year before the date of the petition. The Bankruptcy Code defines “relative” as a member of the third degree of affinity or consanguinity as determined by common law. Courts have generally used state law, not federal law, but are divided on whether to use common law or state civil law. Due to the ambiguity of the definition, the court may turn to the legislative history. The definition derives from the Bankruptcy Act of 1898 without significant revision. The legislative history of this Act shows that Congress intended to refer to the common law of England, and the case law supports this interpretation. The use of English common law rather than state law also promotes uniformity. Under English common law, relationship is defined by distance from a common ancestor. For first cousins, the common ancestor is the grandparent. Cousins ​​are each two degrees removed from a common grandparent and therefore come under the third degree. Ehrenberg vs. Halajyan (In re Victory Entm’t, Inc.)634 BR 90 (Bank. CD Cal. 2021).

2.3 Post-request transfers

2.4 Clearing

2.5 Statutory privileges

2.6 Power of the strong arm

2.6.a Section 544(b) permits reliance solely on the claims filed or listed. In its day one petitions, the debtor in possession was authorized to pay withholding and employment taxes to the IRS. The debtor did not list the claims on its schedule of debts and the IRS did not file a proof of claim. Under the Internal Revenue Code, the IRS’ power to avoid fraudulent transfers has a ten-year scope. Section 544(b) allows a trustee to avoid any transfer “by the debtor which is voidable under applicable law by a creditor holding an unsecured debt which is admissible under section 502”. Section 502 permits the filing of a proof of claim and, unless an interested party objects, the claim is deemed permitted. Section 1111(a) deems permissible in a chapter 11 case any debt listed on the debtor’s lists as uncontested, liquidated, and unconditional. If a claim is not listed and the creditor does not file a proof of claim, the claim cannot be accepted. Therefore, the trustee cannot assert such a claim under section 544(b). Because the IRS has not filed a proof of claim and the debtor has not listed the IRS claim on its schedules, the trustee cannot rely on the IRS as a trigger creditor in under Section 544(b). Miller v. Fallas (In re J & M Sales Inc.), 2022 Bankr. LEXIS 434 (Bankr. D. Del. February 22, 2022.

2.7 Recovery

3. BANKRUPTCY RULES

3.1.a The court denies ex parte motion to extend the limitation period. The debtor refused to cooperate with the trustee’s investigation into the avoidable transfers. As a result, the trustee was delayed in learning the identity of the assignees and other potential defendants. With the two-year limitation period approaching, the trustee filed a ex parte motion to extend the law for fair toll reasons. Bankruptcy Rule 9006 governs extensions of time but does not allow the extension of a Congressional time limit, such as the statutes of limitations in Section 546 or 549. A fair toll can excuse a late-filed lawsuit. A defendant can dispute the late filing and dispute whether the fair toll applies. But an unknown defendant is unable to do so in response to a ex parte motion to prorogue the act for just reasons. And one ex parte the order would not bind a prospective defendant who was not given notice of the motion because due process requires that the defendant be given notice and given an opportunity to be heard. Therefore, the court dismisses the motion as ineffective and only asking for an advisory decision. In re Cramer, ___ BR ___ (Bankr. CD Cal. Feb. 8, 2022).

3.1.b Failure to comply with the local rule requiring removal of the citation voids the right to a jury trial. Local bankruptcy court rules provide that a party waives the right to a jury trial unless the party files a motion to withdraw the citation at least 14 days before the initial status conference in the adversarial proceeding. . Although the defendant requested a jury trial in the response, it did not timely file a motion to remove the reference. The local rule implements, rather than supersedes, Bankruptcy Rule 7038 because without consent, the bankruptcy court cannot try a case before a jury. Only the district court can do this, which requires a motion to withdraw the dismissal. Therefore, by failing to follow the required procedure, the defendant waived the right to a jury trial. Welt v. Bumshteyn (in re Bumshteyn), 2022 Bankr. LEXIS 90 (Bank. SD Fla. Feb. 1, 2022).

3.1.c Failure to move to apply Rule 23 to a putative class claim does not constitute excusable neglect to file late proofs of claim. The plaintiffs brought a class action against the debtor before the bankruptcy, which stayed the action. The court set a deadline for the claims, confirmed a plan and granted class representatives a stay to pursue the class action. Class representatives and certain alleged class members have filed proofs of claim. After the stay, the class action court found that the class action was abusive and dismissed the case. The remaining plaintiffs then sought permission to file individual claims late in the bankruptcy court, nearly three years after the statute of limitations. A court may allow late filing on the basis of excusable negligence, taking into account four factors: the injury to the estate, the length of the delay, the reason for the delay (including whether it was within the reasonable control of the plaintiff) and good faith. No factor is more important than the others. Damage requires substantial damage, which was not present in this case, and not only legal costs and delays, in particular because the debtor was aware of the pending claims. However, the nearly three-year delay was too long, and the delay could significantly affect the resolution of the litigation and the bankruptcy. The reason for the delay – waiting for the outcome of the class action – did not constitute excusable negligence. Several individual plaintiffs filed proofs of claim before the deadline, so the delay was reasonably within the plaintiffs’ control. Finally, the failure of the plaintiffs and their attorneys to seek the application of Rule 7023 to the so-called class claim evidence under Rule 9014 demonstrates a lack of diligence and a misunderstanding of the rules. on bankruptcy and a lack of good faith. Accordingly, the court denies the motion to file late claims. W. Wilmington Oil Field Claimants v. Nabors Corp. Servs., Inc. (In re CJ Holding Co.)27 F. 4th 1105 (5th Cir. 2022).

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