X. Other Laws Affecting Commercial Transactions

A.      Bankruptcy

1.  Bankruptcy Estate

– In re Simplexity, LLC, 2017 WL 65069 (Bankr. D. Del. 2017) – The Chapter 7 trustee for a limited liability company stated a cause of action against the company’s principals for breach of their fiduciary duties – despite the exculpatory clauses in the debtor’s operating agreement – for their failure to file bankruptcy until after the company’s secured creditor swept the company’s deposit accounts and left the company with no funds to pay the WARN Act claims of its employees.

– In re Town Center Flats, LLC, 855 F.3d 721 (6th Cir. 2017) – An assignment of rents is, under Michigan law, an absolute assignment if the assignment has been recorded and a default has occurred. Therefore, rents arising from the debtor’s residential complex were not property of the estate.

2.  Automatic Stay

– In re Cowen, 849 F.3d 943 (10th Cir. 2017) – Retaining possession of property is not, by itself, exercising control over that property, and thus a secured party does not violate § 363(a)(3) merely by retaining possession of collateral after the debtor files a bankruptcy petition. The secured party in this case might, however, be liable for forging documents in an effort to show that it had disposed of the collateral before the petition was filed.

– In re Denby-Peterson, 2017 WL 4776965 (Bankr. D.N.J. 2017) – Although a secured party does not violate the stay simply by retaining possession of a vehicle repossessed prepetition, the debtor is entitled an order requiring the secured party to turn over the vehicle.

– In re Avila, 566 B.R. 558 (Bankr. N.D. Ill. 2017) – A city that had impounded the debtor’s vehicle for nonpayment of tickets did not violate the automatic stay by refusing to release the vehicle after the petition was filed because possession was necessary to maintain perfection of the city’s statutory lien and the trustee’s rights and avoidance powers are subject to such a perfected lien.

– In re House, 2017 WL 2579026 (Bankr. S.D. Miss. 2017) – A secured party that had repossessed the debtors’ car prepetition violated the automatic stay after the petition was filed by refusing to return the car after the debtors had provided proof of insurance.

– In re Holloway, 565 B.R. 435 (Bankr. M.D. Ala. 2017) – The order vacating dismissal of a Chapter 13 case reinstated the stay as of the date of the order, not retroactively to the date of dismissal. Therefore, a secured party that repossessed a vehicle after the dismissal but before the dismissal order was vacated did not violate the stay.

– In re Gilford, 567 B.R. 412 (Bankr. D. Mass. 2017) – The debtor’s ex-husband and his counsel willfully violated the automatic stay by proceeding with a state-court hearing that held the debtor in contempt for failing to comply with an order requiring the debtor to refinance a car lease or turn the car over to the ex-husband. Even though the car lease was in the ex- husband’s name, the car was in the debtor’s possession and thus protected by the automatic stay.

– In re Gray, 567 B.R. 841 (Bankr. W.D. Wash. 2017) – A judgment creditor and its law firm violated the automatic stay by failing to take steps to quash a bench warrant for the debtor’s arrest which they had obtained for failing to appear at supplemental proceedings. Those proceedings, which related to collecting a judgment debt, did not come within the police or regulatory power exception to automatic stay.

– In re HardRock HDD, Inc., 569 B.R. 443 (Bankr. E.D. Mich. 2017) – In determining whether collateral is needed for a successful reorganization, the court must consider which debtor entity in a jointly administered but not substantively consolidated case owns the collateral, and whether that owner has a realistic chance of successfully reorganizing.

3.  Substantive Consolidation and True Sale

– Curci Investments, LLC v. Baldwin, _ Cal.App.4th _ (2017) – Creditor of 99% member of LLC could state claim for “reverse veil piercing.”

– Rapid Capital Finance, LLC v. Natures Market Corp., 2017 WL 4764559 (N.Y. Sup. Ct. 2017) – A transaction structured as a sale of future receivables with a face amount of $38,100, in exchange for $30,000, with the seller obligated to turn over future receivables through daily debits of $152 was a true sale, not a secured borrowing, because the agreement contained a reconciliation provision that allowed for changes in the daily debits based on the amount of receivables generated. As a result, the transaction could not be usurious.

– In re Rocky Aspen, LLC, 2017 WL 977813 (D. Colo. 2017) – Although a lender to a limited liability company had, pursuant to its security agreement with the members, the right to vote their membership interests after default, because the company was managed by managers, the managers retained the authority to file a bankruptcy petition on behalf of the company.*

– In re Tara Retail Group, 2017 WL 1788428 (Bankr. N.D.W. Va. 2017) – Although the debtor’s organizational documents required the approval of an independent director for the filing of a bankruptcy petition, the debtor’s managing member, through its independent director, ratified the petition by remaining silent, despite having complete information and an opportunity to be heard on the matter.

– In re Kimball, 2017 WL 2110777 (Bankr. D. Kan. 2017) – The debtor’s prepetition collateral assignment of a life insurance policy to the SBA was merely as security for a loan, not outright, and therefore the policy became property of the estate.

Because the debtor’s confirmed Chapter 11 plan did not expressly provide otherwise and the SBA had a meaningful opportunity to participate in the case, the SBA did not retain its lien.

4.  Secured Parties, Set Off, Leases

– In re Semcrude LP, _ F.3rd _ (3rd Cir. 2017) – Court concluded that downstream parties who had negotiated for setoff rights and other remedies should not lose out to upstream parties who did not protect themselves. In the court’s view, parties who take precautions against insolvency do not act as insurers to those who take none.

– In re World Imports, Ltd., 862 F.3d 338 (3d Cir. 2017) – A furniture seller’s claim was entitled to priority under § 503(b)(9) because the goods sold were “received” by the debtor within 20 days prior to bankruptcy, even though the goods were shipped FOB and the risk of loss passed to the debtor prior to that time.

– In re SRC Liquidation, LLC, 573 B.R. 537 (Bankr. D. Del. 2017) – A supplier’s claim for goods that a supplier drop-shipped to the debtor’s customers was not entitled to priority under § 503(b)(9) because the goods were not “received” be the debtor.

– In re ADI Liquidation, Inc., 572 B.R. 543 (Bankr. D. Del. 2017) – Goods that a seller delivered directly to the members of the bankrupt debtor – a cooperative food distributor – were not “received” by the debtor and might not even have been sold to the debtor, and thus the claim for the price was not entitled to priority under § 503(b)(9).

– In re Windmill Run Associates, Ltd., 566 B.R. 396 (Bankr. S.D. Tex. 2017) – An oversecured creditor was entitled to post-petition interest at the pre-default rate, not at the default rate. Even though the debtor’s Chapter 11 plan provided for full payment of all unsecured claims, so that other creditors would not be hurt by awarding interest at the default rate, and even though the spread between the rates was only 4% and thus not unreasonable, because the creditor was at all times oversecured and engaged in obstructionist tactics, both before and during bankruptcy, the court would exercise its equitable powers to deny default-rate interest.

– In re Montiel, 572 B.R. 758 (Bankr. W.D. Wash. 2017) – The date to value collateral for the purposes of determining whether lien stripping will be permissible in a Chapter 13 case is the petition date, not the date on which the motion was made or heard, even though the debtor waited three years to bring the motion.

– Valley National Bank v. Ford Motor Co., 2017 WL 1084524 (D.N.J. 2017) – A lender with a prepetition security interest in the debtor’s accounts was not entitled to collect from an account debtor on accounts generated postpetition from the provision of services. Nothing in the cash collateral order expressly granted the lender a security interest in postpetition accounts and, absent such a term in the order, the lender’s security interest was cut off by § 552.

5.  Avoidance Actions

– In re Tenderloin Health, 849 F.3d 1231 (9th Cir. 2017) – In determining whether a prepetition payment to a creditor from a deposit account in which the creditor had setoff rights satisfied § 547(b)(5), by enabling the creditor to receive more than it would have had the transfer not been made and the debtor liquidated in Chapter 7, it was appropriate to consider whether the deposit of funds into the deposit account would itself have been an avoidable preferential transfer.

– In re Asheford, 2017 WL 6550424 (Bankr. N.D. Ohio 2017) – A security interest in a motor vehicle that was perfected 32 days after the debtor signed the purchase agreement and took possession was avoidable as a preference even though the agreement was conditional on financing and the approval for the financing came through less than 30 days before the security interest was perfected. Even if the transfer of the security interest did not occur the date when financing was approved, the transfer would still be on account of an antecedent debt because the debtor made his promise to pay when he signed the purchase agreement. The transfer of the security interest was not a substantially contemporaneous exchange because it was outside the 30-day period.

– In re CVAH, Inc., 570 B.R. 816 (Bankr. D. Idaho 2017) – A trustee’s power under § 544(b) to exercise the rights of unsecured creditors to avoid prepetition transfers includes the power of the IRS to avoid transfers under state law as far back as ten years, without regard to any state statute of limitations. It also includes the power to use the Federal Debt Collection Procedures Act to avoid transfers made up to six years earlier.

6.  Executory Contract

– In re Spanish Peaks Holdings II, LLC, 862 F.3d 1148 (9th Cir. 2017) – A sale of the debtor’s real property free and clear effectively terminated prepetition leases that the trustee had not rejected prior to the sale. Although § 365 includes protections for lessees of the debtor’s property upon rejection, there was no conflict between § 363 and § 365 because the leases had not been rejected.

7.  Claims

– U.S. Bank v. T.D. Bank, 569 B.R. 12 (S.D.N.Y. 2017) – Because the Rule of Explicitness is part of the non-bankruptcy law of New York and applies in disputes outside of bankruptcy court. If a lender is to be entitled to be paid postpetition interest before the principal owed to a different lender, the intercreditor agreement must so state clearly. Nevertheless, by providing that the lenders were “entitled to receive post-petition interest . . . to the fullest extent permitted by law,” the intercreditor agreement in this case was sufficiently explicit that both the senior and junior lenders were entitled to postpetition interest before the principal of either the senior or junior debt could be paid. It did not matter that post-petition interest would not have been available in the bankruptcy proceeding because this was not a bankruptcy case and, in any event, the agreement defined “Obligations” to include “interest and fees that accrue after the commencement . . . of any Insolvency or Liquidation Proceeding . . . regardless of whether such interest and fees are allowed claims in such proceeding.”*

– In re Salamon, 854 F.3d 632 (9th Cir. 2017) – A creditor whose claim was secured by a junior deed of trust on real property could not make the § 1111(b) election after the property was sold at a nonjudicial foreclosure sale. After that time, the claim was no longer secured by a lien on property of the estate.

– In re Licursi, 573 B.R. 786 (Bankr. C.D. Cal. 2017) – The obligations of a husband and wife who guaranteed a secured loan to a corporation that they owned and operated and that sold collateral to a newly formed entity that the couple also owned, and who not only failed to inform the secured lender of the sale but continued to misrepresent the corporation’s financial condition, were nondischargeable under § 523(a)(2). Although the misrepresentations occurred after the secured lender had extended credit, they caused the secured lender to delay exercising its rights. Because the corporation was insolvent at the time of the sale, and thus the husband as an officer owed a fiduciary duty to the corporation’s creditors, the husband’s liability was also nondischargeable under § 523(a)(4).

The couple’s dissipation of proceeds of the collateral was also grounds for making their obligation nondischargeable under § 523(a)(6).

– Midland Funding LLC v. Johnson, 137 S.Ct. 1407 (2017) – A “claim” exists in bankruptcy even though statute of limitations has run, unless the running of the statute extinguishes the claim.

8.  Plan

– Czyzewski v. Jevic Holding Corp., _ U.S. _ (2017) – A structured settlement of a bankruptcy case must follow the “basic priority rules” of the Bankruptcy Code.

– In re Sunnyslope Housing L.P., 859 F.3d 637 (9th Cir. 2017) – Replacement value, not foreclosure value had to be used in valuing for the purposes of cramdown collateral that the debtor proposed to retain and use, even though in this rare case foreclosure value would be higher because it would vitiate covenants requiring that the collateral be used for low-income housing

– In re Alliance Well Service, LLC, 2017 WL 4877228 (Bankr. D.N.M. 2017) – An insurance premium financier that had a security interest in the debtor’s unearned premium and which, pursuant to a confirmed plan of reorganization, had the right to cancel the policy, collect any unearned premium from the insurer, and to apply it to the loan balance, was not entitled to retain the amount that the insurer refunded as an overpayment of the premium. The financier’s secured claim was paid in full by periodic payments pursuant to the plan; the plan provided that amounts remaining due were unsecured.

– In re ARSN Liquidating Corp., 2017 WL 279472 (Bankr. D.N.H. 2017) – A sale of assets under § 363(f) free and clear of all claims and interests, including claims under a successor liability theory, meant that buyer acquired the debtor’s assets free of the debtor’s experience rating and contribution rate to the state’s unemployment compensation fund.

9.  Other

B. Consumer Law

– Mashiri v. Epsten Grinnell & Howell, _ F.3d _ (9th Cir. 2017) – A debtor stated a claim under Fair Debt Collection Practices Act. The court applied the “least sophisticated debtor” standard. A collection letter used language that “overshadowed” information that indicated the individual’s right to validate the debt.

– Expressions Hair Design v. Schneiderman, _ U.S. _ (2017) – The Second Circuit had upheld a NY statute prohibiting posting a credit card surcharge as Constitutional under the First Amendment because the Second Circuit concluded that the regulation of pricing information was not “speech” for purposes of the First Amendment. The Supreme Court held that the New York statute regulating how prices were communicated involved “speech” subject to the First Amendment. The Supreme Court did not determine whether the New York statute’s regulation of protected “speech” violated the First Amendment and sent the case back to the Second Circuit to consider that issue.

– Midland Funding LLC v. Johnson, _ U.S. _ (2017) – A debt collector’s knowing filing of a time-barred proof of claim in the debtor’s bankruptcy was not a “false, deceptive or misleading” act under the Fair Debt Collection Practices Act.

– Henson v. Santander Consumer USA Inc., _ U.S. _ (2017) – Fair Debt Collections Act does not apply to a creditor that acquires a debt and collects it for its own account.

– Soberanis v. City Title Loan, LLC, 2017 WL 1232437 (D.S.C. 2017) – A debtor stated causes of action against a secured party for conversion, breach of the peace, violation of the Fair Debt Collection Practices Act, and unconscionable debt collection for repossessing the debtor’s car over her objections and without first sending a notice of cure required by South Carolina law. The debtor also stated a claim for unfair trade practices by alleging that the secured party included a mandatory arbitration clause in the agreement, refusing to waive it, but also refusing to participate in arbitration, all for the purpose of delaying adjudication of the debtor’s claims.*

– Duncan v. Asset Recovery Specialists, Inc., 2017 WL 2870520 (W.D. Wis. 2017), appeal filed, (7th Cir. Aug. 8, 2017) – Although the debtor did not have a claim under the Fair Debt Collection Practices Act against either the secured party or the repossession agent based on her mistaken belief that the repossession agent sought to charge her $100 to return property within the repossessed car, the debtor might have a conversion claim.

– Complete Cash Holdings, LLC v. Powell, 2017 WL 1422476 (Ala. 2017) – A jury award of compensatory and punitive damages against a secured party for repossessing a vehicle based on a forged title pawn agreement had to be reversed because the secured party was creditor – not a debt collector within the meaning of the Fair Debt Collection Practices Act – and therefore the jury’s general verdict could have been based in its erroneous conclusion that the secured party had liability under the FDCPA.

– Afewerki v. Anaya Law Group, _ F.3d _ (9th Cir. 2017) – A debt collector violated the Federal Fair Debt Collection Act when its complaint alleged more than was owed and overstated the interest rate. The misstatement was “material” for purposes of a claim under that Act because the misstatements could disadvantage the “least sophisticated debtor” in the debtor’s “charting a course of action.”

C.       Professional Liability

– In re Designline Corp., 2017 WL 279488 (Bankr. W.D.N.C. 2017) – A transaction by which a bankruptcy trustee sought to obtain financing for three, complex adversary proceedings by selling 25% of the net litigation proceeds – after payment of expenses and attorney’s fees – constituted champerty and would therefore not be approved because: (i) it did not require the financier to make any advances and instead required the trustee to request advances quarterly; (ii) it required the trustee to seek the financier’s input and approval of strategic decisions; and (iii) if the trustee’s counsel withdrew, it required the trustee required to consult with the financier regarding substitute counsel.

– Oakland Police & Fire Retirement System v. Mayer Brown, LLP, 861 F.3d 644 (7th Cir. 2017) – The law firm representing the debtor and which provided transaction documents to counsel for the creditors’ agent, resulting in the filing of termination statements for a $1.5 billion term loan that was not paid off, had no liability to the creditors because the firm owed no duty to the creditors. It did not matter that the firm represented the agent in unrelated matters or that it had prepared the documents.

– GemCap Lending, LLC v. Quarles & Brady, LLP, 269 F.Supp. 3d 1007, 2017 WL 4081884 (C.D. Cal. 2017), appeal filed, (9th Cir. Oct. 6, 2017) – A secured party did not have a cause of action against the debtor’s counsel for professional malpractice in connection with an opinion letter counsel issued because, even though the opinion stated that the Loan Agreement created a valid security interest in favor of the secured party in the debtor’s rights in the “collateral,” and some of the intended collateral was in fact owned by a related entity, the opinion letter defined “collateral” to be the debtor’s property and thus was not incorrect.

– J.W. Hall, Inc. v. Nalli, 2017 WL 626715 (Pa. Super. Ct. 2017) – The seller of a business had no cause of action for malpractice against the attorney who documented the transaction for both the buyer and the seller and who failed to provide for a security interest in the assets sold to secure the buyer’s obligation to pay the balance of the purchase price because the seller could not prove to have suffered damages. The seller repurchased the property in the buyer’s bankruptcy proceeding, the seller therefore had the property back, and the payments the seller did receive from the debtor offset the expenses incurred in repurchasing the property.

– Hattem v. Smith, 52 N.Y.S.3d 172 (N.Y. App. Div. 2016) – The malpractice claim of an individual who sold a business against his lawyer who failed to perfect a security interest in the buyer’s assets was properly reduced by the individual’s comparative fault and failure to mitigate. The individual failed to inform the lawyer of changes in the closing process until after a bank perfected its security interest in the buyer’s assets and the individual failed to foreclose on some of the assets, permitting them to be seized and sold by another creditor.

– DLA Piper LLP (US) v. Linegar, 2017 WL 6559658 (Tex. Ct. App. 2017) – The law firm that represented the surviving company in a merger, in connection with which the company received a bridge loan from an entity controlled by one of the company’s principal owners, was liable for malpractice for failing to perfect the security interest that secured the loan. Even though the firm did not represent the secured party or the principal owner, a member of the firm told the principal owner that the security interest was not at risk and that “everything would be taken care of,” and failed to make clear who the firm represented.*

– Macquarie Capital (USA) Inc. v. Morrison & Foerster LLP, 2018 WL 326391 (N.Y. Sup. Ct. App. Div. January 9, 2018) – Litigation by underwriter against its counsel alleging that counsel should have brought certain information to underwriter’s attention in connection with an offering; court holds that trial court should have determined whether the information, while admittedly in the underwriter’s possession, put the underwriter on sufficient notice without counsel’s interpretation of the information.

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2017-2018 Commercial Law Developments

I. PERSONAL PROPERTY SECURED TRANSACTIONS 
II. REAL PROPERTY SECURED TRANSACTIONS
III. GUARANTIES
IV. FRAUDULENT TRANSFERS AND VOIDABLE TRANSACTIONS
V. CREDITOR AND BORROWER LIABILITY
VI. U.C.C. – SALES AND PERSONAL PROPERTY LEASING
VII. NOTES AND ELECTRONIC FUNDS TRANSFERS
VIII. LETTERS OF CREDIT, INVESTMENT SECURITIES, AND DOCUMENTS OF TITLE
IX. CONTRACTS
X. OTHER LAWS AFFECTING COMMERCIAL TRANSACTIONS