It is a fundamental tenet of bankruptcy law that not all of a debtor’s assets must be used to pay pre-bankruptcy debts.  Ordinarily, on the day that a debtor files a petition for relief under the Bankruptcy Code, the debtor’s property becomes property of the bankruptcy estate – in other words, such property no longer belongs to the debtor.  11 U.S.C. § 541(a)(1).  However, an individual debtor may “exempt” certain types of his or her assets from becoming property of the bankruptcy estate, thus allowing them to remain the debtor’s property.  11 U.S.C. § 522(b)(1).  The purpose of exempting some assets from becoming property of the estate is to protect a debtor’s “fresh start” post-bankruptcy.

Funds set aside for retirement – commonly called “individual retirement accounts” or “IRAs” – may be exempted from becoming property of the estate.  11 U.S.C. §§ 522(b)(3)(C), (d)(12).  The issue in Clark was whether an IRA inherited by someone other than the IRA account holder’s spouse constituted “retirement funds” – a term that the Bankruptcy Code does not define – that could be claimed as exempt property.  Other courts, including the Court of Appeals for the Fifth Circuit, had previously answered that question in the affirmative.  See, e.g., In re Chilton, 674 F.3d 486 (5th Cir. 2012).  But the Seventh Circuit disagreed with those decisions, focusing on the different rules that apply to IRAs inherited from non-spouses.  On the one hand, when a married holder of an IRA dies, the decedent’s spouse is permitted to “roll over” those funds into his or her own IRA and may not withdraw any of that money before reaching the age of 59 ½ without paying a penalty tax.  Such funds, the court reasoned, remained “retirement funds” because they were dedicated to the surviving spouse’s retirement years.

An IRA inherited by a non-spouse, on the other hand, is fundamentally different.  The Internal Revenue Code disallows the inheritor from contributing any new money to the inherited account, requires that IRA to begin distributing its assets within one year of the account holder’s death and mandates that the fund be completely distributed within five years (in most cases).  As such, the Seventh Circuit concluded that an IRA inherited from non-spouse do not qualify as “retirement funds” because they “represent an opportunity for current consumption, not a fund of retirement savings.”  Because the court’s decision disagrees with the Fifth Circuit’s decision in Chilton, the Supreme Court of the United States may have the final word.  Stay tuned.

For additional information regarding inherited IRAs, exempt assets, and bankruptcy matters, contact Terry Banich at 312 980 3859 .

Rules 10 and 11.  These rules – which respectively govern the size of “papers” filed in Illinois courts and how such “papers” are to be served – have been amended to authorize electronic filing.  On the same day the Supreme Court entered the order amending Rules 10 and 11, it also approved electronic filing standards and principles that are designed to ensure that electronic filing practices and procedures are uniform statewide.  As a result, Rules 10 and 11 are amended to replace the word “papers” with “documents,” and Rule 11 now expressly authorizes documents to be served by electronic mail.  Significantly, Rule 11 now contains a new subdivision (d) requiring every party or attorney to list an electronic mail address for the service of documents on the appearance form and all pleadings filed with the court.

Rule 138.  This rule is new.  It provides that a document or exhibit filed with a court may not contain “personal identity information.”  In a general sense, Rule 138 is similar to Federal Rule of Civil Procedure 5.2, but Rule 138 protects a broader category of information and provides a penalty for willful noncompliance that is not found in its federal counterpart.  Rule 138(b) defines “personal identity information” to include Social Security numbers, birth dates, mother’s maiden names, driver’s license numbers, financial account number and debit/credit card numbers.  Federal Rule 5.2(a), by contrast, is not as expansive.  Rule 138(b)’s definition of “personal identity information” is not exclusive, however; the rule authorizes a court to order that other types of information must be redacted or filed confidentially, so long as it is “consistent with the purpose and procedures” of Rule 138.  Subsections (c) though (e) set out the procedures parties are to follow as to documents and exhibits that contain personal identity information.  Significantly, Rule 138(f) authorizes a court to award reasonable attorney’s fees and costs if it finds that the inclusion of personal identity information in a filed document or exhibit was willful.

Rule 201(m).  Rule 201 is the general rule pertaining to civil discovery.  Subsection (m) previously permitted circuit courts to adopt a local rule requiring parties to file discovery with the clerk.  Amended subsection (m) withdraws that permission and expressly prohibits circuit courts from entering such a generally applicable local rule.  The rule does, however, allow individual judges to order that discovery must be filed in a particular case – a power that the official comments observe should be exercised “based on limited circumstances.”  Significantly, amended Rule 201(m) also requires attorneys to file a certificate of service for any discovery document served.

Rule 201(p).  Subsection (p) is new.  It regulates how a party must assert privilege or work product following an inadvertent production during discovery.  Apart from expressly requiring that the production be “inadvertent[],” Rule 201(p) is substantively identical to Federal Rule of Civil Procedure 26(b)(5)(B).

For additional information regarding Supreme Court rules, and bankruptcy matters, contact Terry Banich at 312 980 3859 .

In April 2014, Mr. Shaw will become the 24^th President of the country’s largest organization of restructuring professionals at the ABI’s Annual Spring Meeting in Washington DC.

 PRESS RELEASE  

CLASS 24 INDUCTEES

WASHINGTON, D.C. – The American College of Bankruptcy inducted Jay S. Geller of the Law Office of Jay S. Geller (Portland, Maine) as a Fellow of the College on March 15, 2013, in Washington, D.C.  The ceremony took place at the Smithsonian Donald W. Reynolds Center for American Art and Portraiture, and was presided over by D.J. (Jan) Baker, Chair of the College.

Mr. Geller was one of 39 nominees who were honored and recognized for their professional excellence and exceptional contributions to the fields of bankruptcy and insolvency.  Mr. Geller’s practice focuses on complex bankruptcy and commercial litigation, corporate reorganizations, workouts, and Chapter 11 bankruptcies.  He spent the first 15 years of his career as an associate and then a partner in the Commercial Law Department of Jenner & Block (Chicago) until he relocated to Maine in 2000.  From 2009-2011, he was Co-Chair of Bernstein Shur’s Business Restructuring and Insolvency Practice Group.  From 2002-2009 and again from 2012-present, Mr. Geller also has been Of Counsel to Shaw Fishman (Chicago).  He has served for more than 20 years as a faculty member at the National Institute of Trial Advocacy and at the American Bankruptcy Institute Litigation Symposium, teaching trial advocacy skills to commercial and bankruptcy attorneys.

The American College of Bankruptcy is an honorary professional and educational association of bankruptcy and insolvency professionals.  The College plays an important role in sustaining professional excellence.  College Fellows include commercial and consumer bankruptcy attorneys, insolvency accountants, turnaround and workout specialists, law professors, judges, government officials and others involved in the bankruptcy and insolvency community.

Nominees are extended an invitation to join based on a record of achievement reflecting the highest standards of professionalism.  The College now has 821 Fellows, each selected by a Board of Regents from among recommendations of the Circuit Admissions Council in each federal judicial circuit and specially appointed Committees for Judicial and Foreign Fellows.

Criteria for selection include: the highest standard of professionalism, ethics, character, integrity, professional expertise and leadership contributing to the enhancement of bankruptcy and insolvency law and practice; sustained evidence of scholarship, teaching, lecturing or writing on bankruptcy or insolvency; and a commitment to elevate knowledge and understanding of the profession and public respect for the practice.

For more information about the American College of Bankruptcy, or about the 2013 Induction Ceremony, contact Shari A. Bedker, Executive Director at 703-934-6154 or fax at 703-802-0207 and email at gro.locremanull@rekdebs.

Released: March 26, 2013

He and his fellow panelists will discuss “The Ins & Outs of LBOs” by exploring the challenges and difficulties of avoiding leveraged buyout transactions, covering emerging law involving LBOs including application of the safe harbor under section 546(e) of the Bankruptcy Code and the ability to collapse the often complex structures of LBOs, and explaining strategies for structuring and attacking LBOs.

Download article by Jarret Raab – The Partial Motion to Dismiss: Is Piecemeal Litigation Required in Federal Court Under Rule 12? published in The Federal Lawyer.

Prior to filing for bankruptcy protection, the Debtor in the case defaulted on its obligations under a note and mortgage, whereupon the assignee mortgage lender (“Fannie Mae”) exercised its right to accelerate the entire unpaid principal balance under the note.  Fannie Mae’s proof of claim filed in the Debtor’s bankruptcy case included $400,962.55 as a prepayment premium and $81,362.56 in default interest.  The Debtor sought disallowance of Fannie Mae’s claim pursuant to section 502(b)(1) of the Bankruptcy Code “to the extent it is unenforceable under the governing agreement or applicable law.”  The Debtor argued, in relevant part, that: (1) because the note had been accelerated, the prepayment premium is not enforceable as a matter of Illinois law; and alternatively (2) if the prepayment premium is allowed, the default interest is not enforceable as an unreasonable charge.

In rejecting the Debtor’s arguments, the bankruptcy court first found that the strong public policy in Illinois of “freedom to contract” favored upholding the prepayment premium upon the lender’s acceleration of the loan.  Unlike in the cases cited by the Debtor, in the promissory note at issue, the term “prepayment premium” was used in the context of both voluntary and involuntary prepayments.  The court held that this unambiguous inclusion of involuntary prepayments (i.e. acceleration) provided for the accrual of the prepayment premium upon the Debtor’s default and concurrent acceleration by Fannie Mae.

The bankruptcy court further dismissed the Debtor’s argument that the default interest should be disallowed as it is being imposed over the same post-default time period as the prepayment premium, and that allowance would “amount to an unreasonable and impermissible double recovery.”  The court found that, pursuant to the express terms of the note, the prepayment premium and default interest addressed two different kinds of loss.  The prepayment premium was intended to compensate Fannie Mae for the loss of its income expectancy due to the early payoff, while the default interest is attributed to the increased risk of nonpayment and the extra expenses involved in servicing a delinquent loan. Accordingly, although the period of default interest partially overlapped with the discount period of the prepayment premium, they compensated Fannie Mae for two distinct sets of losses and thus were not duplicative.

The Kimbrell Realty/Jeth Court, LLC decision evidences a judicial trend toward enforcing mortgage provisions that expressly allow for numerous fees and charges, such as default interest and prepayment premiums upon acceleration.  When these charges are unambiguously provided for in the governing loan documents and are intended to compensate for distinct losses, bankruptcy courts will allow such charges in a lender’s proof of claim.  Borrowers who are in danger of defaulting on their loans need to consider these ancillary charges when conducting their pre-default and pre-bankruptcy planning.

For more information please contact Marc Reiser.

In the wake of Stern, however, lower courts have questioned whether Stern also prohibits bankruptcy courts from entering final orders in fraudulent transfer cases.  Like the counter-claim in Stern, fraudulent transfer actions have historically been considered “core” under 28 U.S.C. § 157.  But in FTI Consulting and Canopy, the courts held that bankruptcy judges have no authority to enter final orders on fraudulent transfer claims after Stern.  Similarly, some bankruptcy judges in the Northern District of Illinois have refrained from issuing final orders in fraudulent transfers case.  Instead, they’ve issued “proposed” rulings for approval by the district court.

In Kimball Hill, the bankruptcy court reaffirmed its ability to issue final orders in fraudulent transfer cases after Stern.  The case implicitly disagrees with FTI Consulting and Canopy (although none of the opinions are binding on bankruptcy judges).  In Kimball Hill, a liquidating trust brought an adversary proceeding against two defendants seeking to recover over $1.6 million in allegedly fraudulent and preferential transfers.  The defendants moved to dismiss, arguing inter alia that Stern precluded the bankruptcy court from entering a final judgment on the fraudulent transfer count.  The bankruptcy court disagreed.  The court held that, under Stern, a bankruptcy judge may issue a final ruling when “(i) the action at issue stems from the bankruptcy itself, or (ii) [it] would necessarily be resolved in the claims allowance process.”  The court then determined that, historically, fraudulent transfer law has “bankruptcy law” as its source.  Thus, “fraudulent transfer clams are at the core of the federal bankruptcy power.”  The court therefore concluded that Stern did not preclude the bankruptcy court from entering a final order resolving the fraudulent transfer claim.  The ruling was consistent with the admonition in Stern that its holding was “narrow” and would not result in a “meaningful” change to the “division of labor” in the federal courts.

Why does Kimball Hill matter?  From a practical perspective, the opinion may prevent future litigants in the Northern District of Illinois from delaying and complicating avoidance litigation by raising Stern.  From a legal perspective, the opinion provides some certainty in the Northern District of Illinois to an otherwise contentious area of the law.   Although, as the court noted, “quite [a] large” number of courts have ruled consistently with Kimball Hill, the opinion conflicts with FTI Consulting and Canopy, as well as a recent opinion from the Ninth Circuit Court of Appeals, Executive Benefits Insurance Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), No. 11-35162, 2012 WL 6013836 (9th Cir. Dec. 4, 2012).  That case held, consistent with FTI Consulting and Canopy, that a bankruptcy court may not enter a final order on a fraudulent transfer claim if the defendant has not filed a proof of claim in the bankruptcy case (although some commentators have suggested that its holding was dictum, since it also held that the defendants waived their Stern objection).  In any event, the question will not be fully resolved in the Northern District of Illinois until the Seventh Circuit Court of Appeals addresses the issue.

For more information please contact David Doyle.

Disclosure: Shaw Fishman Glantz & Towbin LLC represented the liquidating trust in Kimball Hill.