CBA Bankruptcy Committee Meeting: Sixth Circuit Case Summaries

Here are the Sixth Court Case Summaries from the Cincinnati Bar Association Bankruptcy Committee Meeting from July 2017.

In re Phillip C. and Nekolia S. Burke, No.: 16-6603, ___ F.3d ____ (July 14, 2017).

The Sixth Circuit affirmed a bankruptcy court decision requiring a chapter 7 trustee to abandon his interest in the debtors’ homestead, on debtors’ motion, where the property had an appraised value of $108,000.00 and secured claims against it of $91,581.00.

The trustee argued that the debtors’ could not file a motion to abandon property because they were not “parties in interest” and because he had already tendered their homestead exemption ($7500.00 for Tennessee residents). The court rejected the trustee’s standing argument finding that they had “as practical a stake in the outcome” as any other party and because 11 USC §554(b) allows for abandonment of property that is of inconsequential value to the estate.

The trustee’s tender of the homestead exemption did not advance the trustee’s position, according to the court. The debtors have more than one remedy when faced with a trustee seeking to administer an asset of the estate: accept the exemption or move to compel abandonment. In this case, the debtors chose the latter and were able to prove to the court that their home had no equity for the benefit of unsecured creditors.

In re Indian Harbor Insurance Company v. Zucker, et al., Nos.: 16-1695, 16-1697, 16-1698, ___ F.3d ____ (June 20, 2017).

When Capitol Bancorp filed chapter 11 bankruptcy, a liquidating trust was created. The trust was assigned all causes of action that the debtor had so that it could pursue those claims on behalf of creditors. One of the stipulations of the chapter 11 plan was that Capitol Bancorp’s officers had no post-bankruptcy liability and any pre-bankruptcy liability was limited to the extent of their insurance policy. But the officers were required to bring suit against the insurer if coverage was denied.

Indian Harbor wrote the policy to exclude “insured versus insured” coverage, meaning that it did not intend to cover claims “by, on behalf of, or in the name or right of, the Company or any Insured Person.” When the liquidation trustee sued the officers, Indian Harbor denied the claim, citing this exclusion from coverage. The trustee argued that coverage existed because when Capitol Bancorp filed chapter 11, Capitol Bancorp was no longer the claimant under the policy, the assignee (liquidating trust) was.

The Court rejected this argument holding that as a voluntary assignee, the liquidating trust “stands in Capitol’s shoes and possesses the same rights subject to the same defenses. . . . Just as the exclusion covers a lawsuit ‘by’ Capitol, it covers a lawsuit ‘by’ the Trust ‘in the…right’ of Capitol.” The Court reasoned that while the filing of a chapter 11 created a new entity, a “lawsuit by Capitol as debtor in possession on behalf of the bankruptcy estate remains a lawsuit ‘by’ Capitol and thus would still fit within the insured-versus-insured exclusion.”

In re Town Center Flats, LLC, No.: 16-1812, ___ F.3d ____ (May 2, 2017).

The debtor, a single asset real estate company, made an assignment of rents to creditor ECP in the mortgage it gave ECP for the construction of the residential complex it owned. When it filed chapter 11 bankruptcy, the debtor sought to use the assigned rents to pay its expenses and fund its plan. ECP objected, arguing that the assigned rents belonged to ECP entirely.

The bankruptcy court ruled in the debtor’s favor, holding that assigned rents were cash collateral. The Sixth Circuit disagreed. Under §544.231 of Michigan Comp. Laws, an assignment of rents is considered a transfer of ownership in those rents such that the assignor no longer has any interest in the rents. Furthermore, the mortgage here “used broad language to ‘irrevocably, absolutely and unconditionally’ transfer the debtor’s rights in the rents.”

In re Conco, Inc., No.: 16-6166, ___ F.3d ____ (April 28, 2017).

Conco’s confirmed chapter 11 plan provided that the reorganized debtor could not purchase shares of the company from the Employee Stock Ownership Plan until January 1, 2019. Other provisions of the plan prohibited the sale of the stock until that date as well.

Delfasco, a Conco competitor, sought to purchase Conco’s stock from the ESOP and asked the bankruptcy court to approve it. The court declined citing the plain language of the plan which prohibited the sale. Delfasco argued that the plan only prohibited the sale to Conco, not to third parties.

The bankruptcy court recognized that the plan was silent as to the purchase of stock by third parties other than Conco. Using Kentucky principles of contract interpretation, the Sixth Circuit held that the silence in the plan pertaining to third parties did not prohibit the bankruptcy court from finding, in its discretion, that the subject provision could apply to sales of stock by all third parties other than Conco. Under Kentucky law, “if a contract is silent on a certain point, the law will imply an obligation to carry out the purpose for which the contract was made.” In this case, the court held that “the surrounding context shows that the intent of the parties and the purpose of the Confirmed Plan, cannot accommodate any sales of equity until the Confirmed Plan term expires” (in 2018).