Middle District of Tennessee, U.S. Bankruptcy Judge Keith M. Lundin opines that the small-dollar home court venue exception in 28 U.S.C. § 1409(b) applies to bankruptcy preference recovery litigation. To reach that conclusion, he holds that there is an “overlap between ‘arising under title 11’ and ‘arising in’ a case under Title 11 for purposes of venue under § 1409.” Judge Lundin thereby honors the clear legislative intent found in his scholarly, exhaustive review of the legislative history of Section 1409.
Recent, Significant Bankruptcy Preference Decisions
Recent decisions of federal courts on significant issues of bankruptcy preference, avoidable transfer law
Badami v. Ainsworth Feed Yards, LLC (In re AFY, INC.), Adv. Proc. No. 10-04060 (Bankr. D. Neb. August 18, 2011)
Order, Report and Recommendation filed in the AFY, INC. Adversary Proceedings by Ainsworth Feed Yards, LLC before Chief, U.S. Bankruptcy Judge Thomas L. Saladino in the United States Bankruptcy Court for the District of Nebraska. Judge Saladino grants defendant’s motion for relief from a $4.5 million judgment based on the U.S. Supreme Court’s decision in Stern v. Marshall. The defendant moved to set aside the judgment entered in the proceeding on June 1, 2011. The Bankruptcy Court had granted the trustee’s motion for summary judgment on the trustee’s efforts to collect approximately $4.5 million on an account receivable allegedly owed to the debtor from defendant. Although not mentioned by Judge Saladino as a factor in his decision, the defendant had not filed a claim in the underlying bankruptcy case. Judge Saladino focused on the nature of the action, concluding “What the trustee is pursuing is a demand on an alleged debt, which is beyond the scope of § 542.”
Badami v. Sears et al (In re AFY, INC.), Adv. Proc. No. 10-04054 (Bankr. D. Neb. August 18, 2011)
08/18/2011 – Order filed in the AFY, INC. Adversary Proceedings by Sears before Chief, U.S. Bankruptcy Judge Thomas L. Saladino in the United States Bankruptcy Court for the District of Nebraska. Judge Saladino rules on the defendant’s one sentence motion to dismiss for “lack of subject matter jurisdiction” in light of Stern v. Marshall. In this turnover action under 28 U.S.C. § 157(b)(2)(E), the Court finds that the action is a core proceeding. Accordingly, the bankruptcy court “is not deprived of subject matter jurisdiction simply because resolution of the lawsuit may require the application of state law.”
Badami v. Sears Cattle Co. et al (In re AFY, INC.), Adv. Proc. No. 10-04062 (Bankr. D. Neb. August 18, 2011)
08/18/2011 – Order, Report and Recommendation filed in the AFY, INC. Adversary Proceedings by Sears Cattle Co. et al before Chief, U.S. Bankruptcy Judge Thomas L. Saladino in the United States Bankruptcy Court for the District of Nebraska. Judge Saladino grants defendant’s motion to set aside a judgment entered on July 6, 2011, granting the trustee’s claim for collection of an account receivable in the amount of $291,937. Judge Saladino acknowledges that the claim falls within the scope of § 542(b). However, he characterizes the claim as a “collection action”. Applying, the Supreme Court’s decision of Stern v. Marshall, Judge Saldino holds that “[b]ecause this action does not arise under Title 11 or arise in the bankruptcy case itself, nor would it be resolved in the claims allowance process, it is not a core proceeding within the constitutional authority of the bankruptcy court to enter judgment.” The key portions of Judge Saladino’s decision follow.
Lehman Brothers Holdings Inc. et al v. JPMorgan Chase Bank, N.A.: US Bankruptcy Judge Peck’s Order in Relation to the Impact of Stern v. Marshall
Lehman Brothers Holdings Inc. et al v. JPMorgan Chase Bank, N.A. (In re Lehman Commercial Paper Inc. Case No. 08-13555), Adv. Proc. No. 10-03266 (Bankr. S.D.N.Y. August 15, 2011) : Southern District of New York, United States Bankruptcy Judge James M. Peck issues this Case Management Order in Relation to the Impact of Stern v. Marshall following the receipt of briefing from Plaintiff Lehman Brothers Holdings and Defendant JPMorgan Chase Bank on the impact of the U.S. Supreme Court’s decision in Stern. Far more than a “case management order”, Judge Peck indicates his initial impressions of the Stern decision. Among the most significant of Judge Peck’s statements is his conclusion that: “JPMorgan reads Stern broadly—too broadly, in the Court’s view. The JPMorgan position paper argues that unless Plaintiffs move promptly to withdraw the reference, the Amended Complaint should be dismissed. JPMorgan is wrong: Stern does not support dismissal.”
$376 Million Preference Complaint against Quebecor Noteholders Dismissed
Concluding that the recent opinion of the Court of Appeals for the Second Circuit in In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., __F. 3d __, 2011 WL 2536101 (2d Cir. June 28, 2011) (“Enron“) left him no choice, Southern District of New York United States Bankruptcy Judge James M. Peck grants summary judgment to the defendant noteholders against a claim recovery of approximately $376 million received from Quebecor World (USA) Inc. during the preference period. As interpreted in Enron, Judge Beck found that the “settlement payment” protection from avoidance in Bankruptcy Code Section 546(e) protected the transfer of cash made to complete a repurchase and subsequent cancellation of privately-placed notes. Judge Peck makes clear that he did not agree with this result: “Purely from an equitable perspective, the disparity in relative recoveries between the Noteholders and Quebecor’s other creditors almost cries out for a remedy unless the payments fall within an appropriately more favored category of transfers that logically fits the definition of settlement payments under the Code.”
Delaware Bankruptcy Judge Sontchi Imposes Sanctions for “Grossly Deficient” Preference Complaint
Visteon Corporation v. Global Asset Protection Services, LLC (In re Visteon Corporation), Adv. Proc. No. 11-52070 (Bankr. Del. July 21, 2011) Delaware District of Delaware United States Bankruptcy Judge Christoper S. Sontchi issues an order imposing sanctions against plaintiff’s counsel for the “filing of a grossly deficient” complaint seeking recovery of preferential transfers under Section 547 and constructively fraudulent transfers under section 548(a)(1)(B). In this two page order, Judge Sontchi also (1) denies Defendant’s motion to dismiss, (2) grants leave to Plaintiff to file the First Amended Complaint (which Plaintiff had already filed), and (3) prohibits any further amendments to the complaint. Defendant already had signaled in its reply brief that the First Amended Complaint also is deficient, so the problems for Visteon’s claims against Defendant may not be over.
W.D. Missouri Bankruptcy Court Rejects Pseudo Ponzi Scheme Challenge to Ordinary Course Preference Defense
Western District of Missouri Bankruptcy Judge Dennis R. Dow holds that, in this bankruptcy preference action against trade creditors (the “Defendants”), the source of funds is irrelevant to the determination of the application of the §547(c)(2) ordinary course defense. The Chapter 7 trustee (the “Trustee”) argued that the source of the funds debtors Joseph and Rebecca Graff (the “Debtors”) used to pay the Defendants was inconsistent with the ordinary course defense. The Trustee attempted to bootstrap case authority denying the ordinary course of business defense as to payments to investors in a “Ponzi scheme”. The Court rejected the argument. This decision addresses an issue of increasing importance as Chapter 7 trustees seek to apply the Ponzi scheme label to legitimate business dealings in order to establish the prima facie elements of preference claims and defeat preference defenses.
Bankruptcy Court Opinion in In re Drier of Significance to Ponzi Scheme Avoidance Action Defendants
Southern District of New York Bankruptcy Judge Martin Glenn issues an exhaustive opinion that presents a mixed bag of good and bad news for avoidance action defendants who received Ponzi scheme payments. Among the issues addressed in the opinion are: the applicability of the “Ponzi scheme presumption” to actual fraudulent conveyance claims under § 548(a)(1)(A); the lack of a “mutual fraudulent intent” requirement under NYDCL § 276; the inability of the Trustee to pursue claims for constructive fraudulent conveyance under § 548(a)(1)(B) as to repayment of investor principal; and the inability of the Trustee to pursue constructive fraudulent conveyance claims under the NYDCL where repayment satisfied an antecedent debt.
Judge Walrath (Bankr. Del.) Grants 12(b)(6) Dismissal in Miller v. Mitsubishi Digital (In re Tweeter Opco)
In George L. Miller v. Mitsubishi Digital Electronics America, Inc. (In re Tweeter Opco, LLC), Ap. No. 10-54038 (Bankr. Del. June 14, 2011), Delaware Bankruptcy Judge Mary F. Walrath again applies the Iqbal and Twombly standards to the pleading of a bankruptcy preference claim. Given the precedent in the Delaware Bankruptcy Courts, the decision is no surprise. What will be disappointing to defenders of bankruptcy preference claims is Judge Walrath’s willingness to allow the Plaintiff to amend his complaint to address the pleading deficiencies. To see a copy of Judge Walrath’s opinion click this link.