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Homaidan v. Sallie Mae: Second Circuit Interprets 11 U.S.C. §523(a)(8)(A)(ii) for Dischargeability of Private Student Loans

July 26, 2021

On July 15, 2021, the Second Circuit issued its ruling in Homaidan v. Sallie Mae, Navient Solutions, LLC, which essentially reviewed and interpreted 11 U.S.C. §523(a)(8)(A)(ii) to determine that private student loans under this section may be dischargeable in bankruptcy and in this specific case, the loans were determined to be discharged.

Homaidan v. Sallie Mae

The Debtor in this case took out two (2) direct to consumer tuition answer loans (“Loans”) from Sallie Mae between the years of 2003-2007. These loans were not paid to the higher educational institution but were rather paid directly to the Debtor and the loan proceeds exceeded the costs of his tuition. After graduating, the Debtor filed for Chapter 7 bankruptcy and was eventually discharged. It was unclear whether or not the Loans were discharged under the discharge order and therefore, after collection efforts, the Debtor repaid the Loans in full. Upon payment in full, the Debtor re-opened his bankruptcy and filed suit against Sallie Mae and its successor, Navient Solutions, on the basis that the Loans were not student loans that are non-dischargeable under 523(a)(8) and therefore were discharged in his Chapter 7 bankruptcy.

Navient filed a motion to dismiss under the theory that under 523(a)(8)(A)(ii), the Loans were prevented from being discharged. It argued that the term “educational benefit” encompassed all private student loans. The district court in Homaidan v Sallie Mae disagreed and found that 523(a)(8) exempt student loans in a narrower view and not all private student loans are nondischargeable. Navient appealed to the Second Circuit. The only argument on appeal was: whether the loans were funds received as an educational benefit subject to nondischargeability. Navient did not argue that the Loans fell into 523(a)(8)(A)(i) and 523(a)(8)(B); rather it solely focused on the language in 523(a)(8)(A)(ii) that the Loans were “an obligation to repay funds received as an education benefit, scholarship or stipend.”

The Second Circuit analyzed this argument based upon the statutory interpretation of the Code itself and Congressional intent of such construction. The Court in its review found that the strict and plain meaning of the Code does not support Navient’s interpretation. The Court also found that had Congress intended to exempt all private student loans from discharge, it would have specifically stated so in the Code. The Second Circuit read 523(a)(8)(A)(ii) and “educational benefit” to refer to conditional grants, scholarships, or stipends and does not cover private student loans. As it was not argued by Navient that the Loans fell under 523(a)(8)(B), “any other educational loan that is a qualified education loan, as defined in section 221(d) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual,” the Second Circuit did not analyze or base its ruling on that section of the Code.

Therefore, certain types of private student loans that may not qualify under 523(a)(A)(i) and 523(a)(B) may indeed be dischargeable by a Debtor. This ruling, while a move towards discharging private student loans, was strictly and narrowly decided based upon one section under 523(a)(8).

Keri Ebeck
Bankruptcy & Restructuring partner
Bernstein-Burkley, P.C.

American Rescue Plan Act of 2021, H.R. 1319: What’s In This Comprehensive Bill?

April 9, 2021

The American Rescue Plan Act of 2021, H.R. 1319 is a comprehensive bill that provides additional relief to address the continued impact of COVID-19 (i.e., coronavirus disease 2019) on the economy, public health, state and local governments, individuals, and businesses. It was sponsored by Representative John Yarmuth (D-KY-3) on February 24, 2021, passed in the house on February 27, 2021, passed in the Senate on March 6, 2021, and became a public law No. 117-2 on March 11, 2021.

Specifically, the American Rescue Plan Act of 2021, H.R. 1319 bill provides funding for:

  1. Agriculture and nutrition programs, including the Supplemental Nutrition Assistance Program (SNAP, formerly known as the food stamp program);
  2. Schools and institutions of higher education;
  3. Child care and programs for older Americans and their families;
  4. COVID-19 vaccinations, testing, treatment, and prevention;
  5. Mental health and substance-use disorder services;
  6. Emergency rental assistance, homeowner assistance, and other housing programs;
  7. Payments to state, local, tribal, and territorial governments for economic relief;
  8. Multiemployer pension plans;
  9. Small business assistance, including specific programs for restaurants and live venues, which include revitalization grants facilitated by the Small Business Administration (Restaurant Revitalization Grants)
  10. Assistance and grants for State arts agencies and regional arts organization under the National Foundation on the Arts and Humanities Act (See Shuttered Venue Grants);
  11. Assistance for museum and library services;
  12. Programs for health care workers, transportation workers, federal employees, veterans, and other targeted populations;
  13. International and humanitarian responses;
  14. Tribal government services;
    1. scientific research and development;
  15. State, territorial, and tribal capital projects that enable work, education, and health monitoring in response to COVID-19; and
  16. Health care providers in rural areas.

The American Rescue Plan Act of 2021, H.R. 1319 bill also includes provisions that:

  1. Extend unemployment benefits and related services through September 6, 2021;
  2. Make up to $10,200 of 2020 unemployment compensation tax-free;
  3. Make student loan forgiveness tax-free through 2025;
  4. Provide a maximum recovery rebate of $1,400 per eligible individual;
  5. Expand and otherwise modify certain tax credits, including the child tax credit and the earned income tax credit and the employee retention credit;
  6. Provide premium assistance for certain health insurance coverage; and
  7. Requires coverage, without cost-sharing, of COVID-19 vaccines and treatment under Medicaid and the Children’s Health Insurance Program (CHIP).

For the full text of HR. 1319 and related bills, click here https://www.congress.gov/bill/117th-congress/house-bill/1319/text?q=%7B%22search%22%3A%5B%22american+rescue+plan+act%22%5D%7D&r=13&s=1

For more information about business assistance programs of the SBA, click here https://www.sba.gov/funding-programs/loans/covid-19-relief-options.

Note: The info on the Restaurant Revitalization Grants has not yet been posted on the SBA site.

By Salene Mazur Kraemer
Bernstein-Burkley, P.C.

What to Know About Section 541 of the Consolidated Appropriations Act of 2021

March 22, 2021

By Keila Estevez
Associate, Bernstein-Burkley, P.C.

Keri Ebeck, Esq.
Partner at Bernstein-Burkley, P.C.

On December 27, 2020, the Consolidated Appropriations Act of 2021[1] (the “Appropriations Act”) was enacted. The Appropriations Act was passed in order to supplement the CARES Act, which was enacted on March 27, 2020. The Appropriations Act provides for temporary modifications to various sections of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (as amended, the “Bankruptcy Code”). Section 541 is included among the amended provisions.

Estate/Property of the Estate

Upon the filing for relief under sections 301, 302, or 303 of the Bankruptcy Code, the Bankruptcy Code creates an estate. Generally, the estate consists of the debtor’s assets as of the petition date. The assets classified as “property of the estate” are defined by section 541 of the Bankruptcy Code. Property of the estate is broadly defined by section 541(a) of the Bankruptcy Code.

Property of the Estate Factors

Property of the estate includes the following:

  • All legal and equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1);
  • Certain interests of the debtor and the debtor’s spouse in community property as of the commencement of the case. 11 U.S.C. § 541(a)(2);
  • Any interest in property that the trustee recovers under enumerated provisions of the Bankruptcy Code. 11 U.S.C. § 541(a)(3);
  • Any interest in property preserved for or transferred to the estate under Section 510(c) (equitable subordination) or Section 551 (preservation of avoided transfer). 11 U.S.C. § 541(a)(4);
  • Certain interests in property acquired by the debtor or to which an entitlement arises, within 180 days after filing, by bequest, devise inheritance, property settlement, divorce decree, life insurance policy or death benefit plan. 11 U.S.C. § 541(a)(5);
  • Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case. 11 U.S.C. § 541(a)(6); and
  • Any interest in property that the estate acquires after the commencement of the case. 11 U.S.C. § 541(a)(7).

As broadly defined by the Bankruptcy Code, property of the estate includes “all kinds of property, including tangible or intangible”[2].

Property Exclusions

On the other hand, section 541(b) of the Bankruptcy Code provides what assets are excluded as property of the estate. The Appropriations Act amends 541(1)(b) to exclude ‘‘recovery rebates made under section 6428 of the Internal Revenue Code of 1986”[3] from property of the estate. This amendment provides that the pandemic relief payments are not property of the debtor’s estate and therefore may not be used in a bankruptcy case to satisfy obligations of the debtor. Pursuant to the Appropriations Act, the amendment to section 541(b) shall remain in effect for one year from the enactment of the act. Accordingly, the added subsection 541(b)(11) provision shall be stricken on December 27, 2021, unless extended by enactment of a subsequent act.

[1] See H.R. 133, 116th Cong.

[2] O’Dowd v. Trueger (In re O’Dowd), 233 F3d 197, 202 (3d Cir 2000)

[3] H.R. 133, 116th Cong., Div. FF, Title X, § 1001(a)

Temporary Amendment in the Consolidated Appropriations Act Provides for Improved Treatment of Entities Paying Customs Duties through December 27, 2021

March 15, 2021

By Sarah E. Wenrich, Esq.
Bankruptcy & Restructuring Associate

Keri P. Ebeck, Esq.
Bankruptcy & Restructuring Partner

On December 27, 2021, the Consolidated Appropriations Act (the “CAA”) made various temporary amendments to the Bankruptcy Code with the intention to assist various parties in overcoming some of the many challenges caused by the pandemic. One of the changes that the CAA made to the Bankruptcy Code is that entities paying a customs duty to the United States government for imported merchandise, such as customs brokers or sureties, will be subrogated to the priority status afforded under 11 U.S.C. § 507(a)(8)(f).[1]

“Priority” in the Bankruptcy Code

Section 507 of the bankruptcy code provides that certain types of debts in a bankruptcy, such as domestic support obligations, have “priority” over other debts, such as taxes. All priority claims set forth in 11 U.S.C. § 507 have priority over general unsecured claims and will therefore receive payment in full before general unsecured creditors receive any payment. Further, priority unsecured debts are non-dischargeable so that if a debtor does not pay all allowed priority unsecured claims in the bankruptcy, the unpaid portion will remain outstanding and will not be discharged. The relevant section, 11 U.S.C. § 507(a)(8)(f), provides a priority status to allowed unsecured claims of governmental units for certain customs duties arising out of the importation of merchandise.

Licensed customs brokers often advance payment of estimated duties/taxes to the government and serve as a pass-through entity for collecting and paying the duties.[2] The role that the customs brokers pay allows for uninterrupted trade and facilitates the timely payment of billions of dollars in duties to the government.[3] However, as the plain language of the statute shows, the priority status related to customs duties is limited to governmental units only and custom brokers who paid the same customs duties did not receive the same priority treatment.[4]

Extending Priority 

Because of the benefit that the customs brokers provide to the government, there has been a substantial effort from groups such as the National Customs Brokers and Forwarders Association of America to extend the priority provided to governmental units under § 507(a)(8)(f) to the customs brokers. The temporary change to the Bankruptcy Code clarifies that – at least until December 27, 2021 – custom brokers who pay custom taxes/duties on behalf of the brokers’ client companies can enjoy the same priority rights of the government under § 507(a)(8)(F) to the extent of the customs duties are paid by the broker prepetition if the broker’s client files for bankruptcy.[5]

Prior to the CAA’s amendment, customs brokers’ claims were treated as general unsecured claims and brokers could receive pennies on the dollar for their claims, or even no payment at all, and still have their claims discharged in the bankruptcy. The CAA’s temporary subrogation of these claims to priority status prevents the discharge of customs brokers’ unpaid claims and allows for better treatment of their claims in the bankruptcy.

While the CAA provides that the change is only effective through December 27, 2021, it is possible that continued efforts from industry groups gain the support necessary to make this a permanent change in the Bankruptcy Code, particularly in light of the benefit that customs brokers provide to the government in advancing payment of the customs duties.

[1] See H.R. 133, 116th Cong., Div. FF, Title X, § 1001(i) [hereinafter, the “Consolidated Appropriations Act”].

[2] See The Customs Business Fairness Act (H.R. 2261), National Customs Brokers and Forwarders Association of America, Inc., https://guides.libraries.uc.edu/c.php?g=222561&p=1472886 (last visited March 15, 2021).

 [3] See id.

 [4] See 11 U.S.C. § 507(a)(8)(F).

 [5] See Consolidated Appropriations Act.

Consolidated Appropriations Act of 2021 Expands Protection for Consumer Debtors

March 2, 2021

By Lara Martin
Associate, Bernstein-Burkley, P.C.

Keri Ebeck
Partner, Bernstein-Burkley, P.C.

The recently enacted Consolidated Appropriations Act of 2021 (“CCA 2021”) affects many provisions of the bankruptcy code, including a significant, albeit temporary, change to expand protection (codified in 11 U.S.C. § 525) for consumer debtors who file for bankruptcy to allow such debtors to obtain mortgage forbearance relief or other mortgage-related assistance under the CARES Act.

11 U.S.C. Section 525 provides in relevant part that a governmental unit may not deny, revoke, suspend, refuse, or otherwise discriminate against a person that is or has been a debtor solely because of a bankruptcy filing. Section 1001(c) of Title X of the CAA 2021 amends this Section 525 of the Bankruptcy Code by adding that a person may not be denied relief under specific provisions of the CARES Act because the person is or has been a debtor under the Bankruptcy Code. This provision thus now includes a prohibition against discriminatory treatment under Section 525 for those individual debtors seeking CARES Act funding. The relevant CARES Act programs available to individual debtors are: (a) the foreclosure moratorium and right to request forbearance (15 U.S.C. §9056); (b) the forbearance of mortgage payments for multifamily properties (15 U.S.C. §9057); and (c) the temporary moratorium on eviction filings (15 U.S.C. §9058). The CCA 2021 amendment is significant in that mortgage servicer’s need to be sure they do not deny CARES Act relief to borrowers because of a filing and additionally, file appropriate proofs of claims for borrowers who have received a CARES Act forbearance and monitor/adjust their operations to account for these changes to their processes. However, the practical implications of this amendment are still unclear: for example, what, if any, bases for denial of CARES Act relief for prior or current debtors will be considered acceptable by the courts? Servicers in particular will need to monitor case law carefully for the imposition of any regulations or further restrictions prohibiting denial of CARES Act relief for debtors.

This change is temporary for only one year and expires on December 27, 2021.

Consolidated Appropriations Act, 2021 (“CAA”) and PPP Loan Eligibility

February 23, 2021

Mark Lindsay, Esq.
Partner at Bernstein-Burkley, P.C.

On December 22, 2020, Congress passed the Consolidated Appropriations Act, 2021 (“CAA”), which was signed into law on December 27, 2020. The CAA contains specific provisions that would amend §364 of the Bankruptcy Code. Most significantly, the amendments to §364 would allow certain bankruptcy debtors to seek approval of financing under the Paycheck Protection Program (“PPP”) created under the “Coronavirus Aid, Relief, and Economic Security Act,’’ otherwise known as the ‘‘CARES Act.’’ The PPP provides loans to eligible businesses to assist with ongoing expenses, including employee payroll, interest on mortgages, rent, and utilities. One of the key benefits of these loans is that they may be fully forgiven if used appropriately according to the program. These amendments to §364 sound like good news for bankruptcy debtors, but there remains a problem.

The PPP loans are implemented and overseen by the Small Business Administration (“SBA”), and despite the clear intent of providing relief to businesses in times of financial distress, the SBA has taken the formal position that debtors in bankruptcy are not eligible for the program AND the CAA does not overrule the SBA. Rather, the CAA provisions do not become effective and cannot be utilized by bankruptcy debtors unless and until the SBA provides a written determination to the Office of the United States Trustee stating that debtors are eligible. Rather than giving such written authority, on January 6, 2021 the SBA issued an Interim Final Rule again, stating that debtors in bankruptcy are not eligible for PPP loans. Accordingly, as of the date of this article, bankruptcy debtors continue to be ineligible for PPP loans.

If the SBA does change its stance and the new provisions of the CAA do become effective, there are certain key provisions that bankruptcy debtors must be aware of. First, only businesses filing under the Small Business Reorganization Act of Chapter 11 (Subchapter V) or under chapters 12 (family farmers) or 13 (individuals) would be eligible. Parties filing under ordinary Chapter 11 would not be eligible. Eligible debtors may obtain a PPP loan notwithstanding existing cash collateral or debtor-in-possession lending arrangements that would otherwise prohibit subsequent borrowing. Unless and until a PPP loan is forgiven under the PPP, it would be treated as a super-priority administrative expense under Sections 364(c)(1) and 503(b) of the Bankruptcy Code. Furthermore, the amendments would permit confirmation of a plan that includes payment of a PPP loan in full pursuant to the loan’s terms, notwithstanding the super-priority status of the loan. Also, recognizing the frequent exigent circumstances facing a debtor, the CAA provides that a bankruptcy court must hold a hearing within seven days of a debtor’s request for permission to incur a PPP loan.

Clearly these amendments could provide much needed assistance to companies seeking relief in bankruptcy. So bankruptcy debtors, their counsel, lenders and other parties interested in furthering the goal of successful bankruptcy reorganizations remain hopeful that the SBA will change its position in the near future. Such parties remain on high alert hoping for this relief to become available. Currently though, the additional PPP lending under the CAA expires on March 31, 2021, so this potential window of opportunity is quickly closing.

Consolidated Appropriations Act (CAA) Amends 11 U.S.C. §1328- Discharge of Debts

February 15, 2021

Keri Ebeck, Esq.
Partner at Bernstein-Burkley, P.C.

On December 22, 2020, Congress passed the Consolidated Appropriations Act, 2021 (“CAA”), which was signed into law by the President on December 27, 2020.

The CAA specifically amends §1328 and adds section (i). The amendment now allows the Bankruptcy Court to grant a Chapter 13 discharge of debts under subsection (a) to a debtor who has not completed payments to the trustee or a creditor holding a security interest in the principal residence of the debtor if-

  • (1) the debtor defaults on not more than 3 monthly payments due on a residential mortgage under section 1322(b)(5) on or after March 13, 2020, to the trustee or creditor caused by a material financial hardship due, directly or indirectly, by the coronavirus disease 2019 (COVID–19) pandemic; or
  • (2)(A) the plan provides for the curing of a default and maintenance of payments on a residential mortgage under section 1322(b)(5); and
    (B) the debtor has entered into a forbearance agreement or loan modification agreement with the holder or servicer (as defined in section 6(i) of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2605(i)) of the mortgage described in subparagraph (A).

There is not a lot of guidance from the legislation regarding how a debtor would seek to receive this early discharge. Under the amendment, there is no specific language that the residential mortgage must be the primary residence, so does this include a second residence? Also, there is anticipated litigation on what is “directly or indirectly” caused by the coronavirus.

From paragraph (2), this does not include residential mortgages that will mature during the life of the bankruptcy. This would only include a plan that provides for long-term continuing debt of a residential mortgage. Additionally, there is no specific timeframe as to when the debtor has to have entered into a forbearance agreement or loan modification. This could very well be pre-bankruptcy filing. The amendment as a whole leaves some questions and issues for the courts to interpret if a debtor seeks an early discharge under the Section.

If you are a mortgage servicer or creditor and have a debtor seeking an early discharge, it is imperative to make certain your rights are protected.

Consolidated Appropriations Act, 2021 Amends Bankruptcy Code to Assist Commercial Tenants

January 22, 2021

By Salene Mazur Kraemer
Partner, Bernstein-Burkley, P.C.

It’s an understatement to say that COVID-19 has caused “global shock.” Everything the virus touches has been marked by uncertainty, whether it comes to its path, duration, or magnitude. In some capacity, no one has been immune to it and that includes commercial clients. The March 2020 U.S. government shutdown orders drastically changed businesses’ ability to pay their rent on time, and the Bankruptcy Code does not allow debtors to adjust the terms of property leases.

Congress, however, recently implemented the Consolidated Appropriations Act, 2021 (“CAA”), which includes $2.3 trillion and was signed into law on December 27, 2020. Under the CAA, businesses and individuals are provided with additional COVID-19 relief, including nine amendments to the Bankruptcy Code, three of which affect commercial tenants.

In the Bankruptcy Code, a debtor is required to adhere to rental responsibilities during the bankruptcy case. The recent enactment of the CAA expands bankruptcy court and debtor discretion to obtain relief when it comes to commercial leases. These are the three amendments:

1. CAA amends section 365(d)(3) to allow courts to extend the time for performance of lease obligations. Generally Section 365(3)(3) extensions are given not beyond 60 days after the petition date, but the CAA has prolonged potential relief by an additional 60 days, meaning 120 days total, but only for small business debtors filing under subchapter V of Chapter 11 who continue to experience material financial hardship because of the coronavirus.

2. CAA amends section 365(d)(4) to extend the initial deadline for a debtor to assume or reject an unexpired lease of nonresidential real property by an additional ninety (90) days to a total of two hundred and ten (210) days after the petition date. A debtor could potentially have as many as 300 days to decide whether to assume or reject an unexpired commercial lease without the consent of the landlord.

3. The CAA also strives to incentivize a distressed company’s landlords and vendors to provide flexible payment schedules by adjusting the preference provisions of section 547 to say that any “covered payment of rental arrearages” cannot be avoided as preferences. “Covered payments” are defined as payments made pursuant to arrangements entered into between the debtor and landlord on or after March 13, 2020, to delay payments owed under a lease.

The amendments to section 365(d)(3), allowing courts to extend the time for performance under a commercial lease, are limited to subchapter V small business debtors. The other two amendments apply to all debtors. The CAA includes a two-year sunset after enactment, upon which the above amendments will be struck from the Bankruptcy Code on December 27, 2022.

Notably, if a commercial debtor-tenant wants to assume a lease, then they are still responsible for all back rent, as Section 365(b) requires that the tenant cure, or provide adequate assurance of prompt cure, of any default under the lease.

By enacting these amendments to the Bankruptcy Code, the CAA provides a measure of relief to debtors suffering from COVID-19-related financial distress.

Chicago v. Fulton: Everything You Need to Know about the January 2021 SCOTUS Decision

January 15, 2021

By Jeffrey C. Toole
Partner, Bernstein-Burkley, P.C.

Under Section 362(a)(3) of the Bankruptcy Code, the filing of a bankruptcy petition automatically operates as a “stay” applicable to all entities of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” In bankruptcy, for the most part, “property of the estate” consists of “all legal and equitable interests of the debtor in property as of the commencement of the case.” Section 542(a) provides that, with a handful of exceptions, any entity in possession of such property of the estate “shall deliver to the [bankruptcy] trustee, and account for, that property.” Federal appellate courts have disagreed for years about whether a creditor that repossesses or seizes a debtor’s property before bankruptcy and then retains that property during the bankruptcy (instead of delivering it to the trustee or returning it to the debtor), “exercise[s] control over property of the estate” in violation of Section 362(a)(3). On January 14, 2021, in a case entitled Chicago v. Fulton, the U.S. Supreme Court answered that question in an 8-0 decision. The answer is “no.”

The consequences for willfully violating the automatic stay can be severe. Section 362(k) provides that any individual debtor injured by a willful violation of the stay ”shall recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” In Fulton, the City of Chicago impounded several debtors’ vehicles for unpaid fines and parking tickets. Each of the debtors filed a Chapter 13 bankruptcy case and demanded the return of his or her vehicle. The City refused, and in each case, the bankruptcy court held that the City violated the stay. On appeal, the Seventh Circuit affirmed those judgments in a consolidated opinion. It concluded that, by retaining possession of the vehicles after the debtors filed bankruptcy, the City had “exercised control” over property of their estates in contravention of Section 362(a)(3).

The Supreme Court vacated that decision. It concluded that merely retaining possession of estate property during bankruptcy does not violate Section 362(a)(3). The Court wrote that, taken together, the most natural reading of the statute’s words – the “stay” of “any act” to “exercise control” – is that Section 362(a)(3) “prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” Therefore, something more than passively retaining possession is required to violate the statute (such as, for example, selling the repossessed or seized property during the bankruptcy, without prior bankruptcy court approval).

The Court also observed that any ambiguity in Section 362(a)(3) is resolved by Section 542(a), which expressly requires “turnover” of estate property to the trustee. Interpreting Section 362(a)(3) to cover mere retention of estate property would render Section 542(a) superfluous, because it would make Section 362(a)(3) a blanket “turnover” provision that displaces most or all of Section 542(a). The better interpretation, the Court concluded, is that Section 362(a)(3) prohibits collection efforts outside of the bankruptcy case that would change the status quo, while Section 542(a) operates within the bankruptcy case “to draw far-flung estate property back into the hands of the debtor or trustee.” Also, the Court observed that interpreting Section 362(a)(3) as a “turnover” provision would render its and Section 542(a)’s commands contradictory. Specifically, Section 542(a) contains exceptions that Section 362(a)(3) lacks, and nothing in the statute suggests that Congress intended Section 362(a)(3) to command immediate turnover of estate property.

In a concurring opinion, Justice Sotomayor agreed with the result but wrote separately to emphasize what the Court did not decide: namely, whether or when Section 362(a)’s other provisions may require a creditor to return a debtor’s property. Some of those other provisions stay: for example, any act to collect, assess, or recover a pre-bankruptcy claim against a debtor, or any act to create, perfect, or enforce any lien against estate property. Those provisions therefore might provide debtors with an alternative means to compel immediate turnover, without having to sue creditors under Section 542(a) to do so. Justice Sotomayor also lamented that a lawsuit for turnover under Section 542(a) can take several months to complete. Because vehicles are often essential for a Chapter 13 debtor to get to work and earn income to repay his or her creditors (including the creditor with a lien on the vehicle), Justice Sotomayor suggested that the Bankruptcy Rules or Code should be amended to expedite the timeline to return debtors’ vehicles.

Although seized vehicles were an issue in Fulton, the Court’s analysis and decision arguably apply much more broadly – to any creditor with a lien on any property that it repossesses or seizes before a debtor’s bankruptcy.  If a creditor passively retains possession of estate property during a bankruptcy, a debtor may still try to invoke other provisions in Section 362(a) to sanction the creditor for willfully violating the stay. Consequently, a creditor that merely retains possession of estate property may still be at some risk. But Fulton eliminates the risk that passive retention violates Section 362(a)(3). In view of the uncertainty relating to whether or when Section 362(a)’s other provisions might require turnover, Fulton may give a creditor (with a lien on property it repossesses pre-bankruptcy) additional leverage to insist upon suitable protections in exchange for returning the estate property to the debtor or trustee. Such protections might include periodic payments to compensate the creditor for any future depreciation in the property’s value during the bankruptcy, maintenance of adequate insurance coverage, or other relief, to increase the likelihood that the creditor will be repaid for its collateral’s value.

The decision is City of Chicago v. Fulton, No. 19-357 (U.S. Supreme Court, Jan. 14, 2021).

COVID-19 Relief Package Includes Amendments to Section 366 of the Bankruptcy Code

January 6, 2021

By Keila Estevez
Associate, Bernstein-Burkley, P.C.

Keri Ebeck, Esq.
Partner at Bernstein-Burkley, P.C.

On December 27, 2020, President Trump signed a new $900 billion COVID-19 Relief Package. The bill provides for certain bankruptcy protections. Pursuant to Division FF, Title X-Bankruptcy Relief, section 366 of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the “Bankruptcy Code”), was amended to add the following provisions:

(d) Notwithstanding any other provision of this section, a utility may not alter, refuse, or discontinue service to a debtor who does not furnish adequate assurance of payment under this section if the debtor-

  • is an individual;
  • makes a payment to the utility for any debt owed to the utility service provided during the 20-day period beginning on the date of the order for relief; and
  • after the date on which the 20-day period beginning on the date of the order for relief ends, makes a payment to the utility for services provided during the pendency of case when such a payment becomes due.

The added subsection (d) to section 366 prohibits utility companies from terminating services for individual debtors for failure to provide adequate assurance as long as the individual debtor becomes and remains current for post-petition services during the 20-day period after the commencement of the bankruptcy case. After the 20-day period from the commencement of the bankruptcy case has ended, utility companies are still prohibited from discontinuing services so long as the individual debtor remains current for post-petition services.

The amended section 366 shall remain in effect for one year from the enactment of the Bill. Accordingly, the added subsection d provision shall be stricken on December 27, 2021 unless extended by enactment of a subsequent act.

More information:

For information on Bernstein-Burkley’s Bankruptcy & Restructuring practice area and services, reach out to info@bernsteinlaw.com or call (412) 456-8100.

Partner Keri P. Ebeck Becomes Certified in Consumer Bankruptcy by the American Board of Certification

December 28, 2020

(PITTSBURGH) December 28, 2020 – This month, Bernstein-Burkley partner Keri P. Ebeck became certified in Consumer Bankruptcy by the American Board of Certification. Bernstein-Burkley now has board-certified attorneys in every ABC certification area (Consumer Bankruptcy Law, Business Bankruptcy Law, and Creditors’ Rights) and has more board-certified business bankruptcy and creditors’ rights specialists in the Commonwealth of Pennsylvania than any other law firm.

In 2020, Ebeck was named to the list of The Best Lawyers in America© and was also named to the Lawdragon 500 Leading U.S. Bankruptcy & Restructuring Lawyers List. She is a member of the Legal League 100, the Allegheny County Bar Association, Judith K. Fitzgerald Bankruptcy Inns of Court, American Legal & Financial Network, International Women’s Insolvency & Restructuring Confederation – Pittsburgh Chapter, the Turnaround Management Association, and ALFN’s Bankruptcy and Women in Legal Leadership Committees.

The path to ABC certification is a process that takes more than a year and requires 30% of practice time devoted to bankruptcy-related matters, a Short Form Application, a Long Form Application, nine references from attorneys (including five from those against you in bankruptcy matters), a 6-hour test, a minimum of 60 hours of CLEs within 36 months prior to date of the Long Form Application, verification of grievance history, 400 hours of practice in bankruptcy-related matters during the last 3 years, and 30 adversary proceedings or contested matters in Chapter 7, 9, 11, 12, or 13 cases.

Bernstein-Burkley is committed to supporting all eligible attorneys to become ABC certified, with the goal for across-the-firm certification by 2025.

For more information on the American Board of Certification, visit the ABC website.

ABOUT THE AMERICAN BOARD OF CERTIFICATION (ABC)

The American Board of Certification (ABC) is a non-profit organization committed to providing progressive and responsible leadership in the field of legal specialization. ABC offers separate certification programs in business bankruptcy, consumer bankruptcy, and creditors’ rights law. ABC certification is designed to recognize lawyers who have met discrete, rigorous, and objective certification standards.

ABOUT BERNSTEIN-BURKLEY, P.C.

Bernstein-Burkley, P.C. has more board-certified business bankruptcy and creditors’ rights specialists in Pennsylvania than any other law firm and is highly regarded and respected for its national reach in Bankruptcy & Restructuring, Business Law, Creditors’ Rights, Litigation, Oil & Gas, and Real Estate. The firm strives for across-the-firm board certification for eligible Bernstein-Burkley attorneys by 2025, with offices in Pittsburgh, Cleveland, and Wheeling.

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For more information, visit www.bernsteinlaw.com or contact:
Megan McLachlan
Marketing Manager, Bernstein-Burkley
mmclachlan@bernsteinlaw.com or 412-456-8114

How Utilizing More Personal Communication Can Turn Opponents into Referrals

November 23, 2020

By Harry W. Greenfield
Partner, Bernstein-Burkley, P.C.

I’ve been telling associates and up-and-coming attorneys for years: The best way to resolve matters is to talk to the other side, not write them, not email, not text—talk. Recently, Forbes published this article highlighting the importance of non-text communication in business, citing research indicating that voice communication creates stronger bonds than communication via writing.

In my 50 years in law, I can tell you this is all too true. By picking up the phone or hopping on a Zoom call, you build rapport and trust through a more nuanced but basic mode of conversation. Some of my best referrals have come from lawyers who were on the other side of a case, simply because I stayed connected with them beyond text messaging and emails. Here’s why.

Your opponent just wants to work things out like you. Even though we may be on opposing sides, ultimately we want what’s best for our clients and to get the best results for them. When you have personal conversations with opposing counsel, you can often glean ways to negotiate and come to the best results for both sides. You see each other more as people rather than “the enemy.”

They understand tone. You often can’t detect inflection in emails or texts, so a message that’s meant to be straightforward may come off as curt. In a voice conversation, your opponents are more likely able to detect that you aren’t being abrupt or rude.  As an example, I have a dry delivery when I’m joking with the other side. They get it when it’s spoken. Humor is always a good icebreaker. Timbre and tone can be essential when it comes to fostering relationships, whether they are on your side or not. It’s important that your opponent knows where you are coming from and you know where they are coming from, too.

They gain your respect. “I’ll call you” is often an empty gesture. Many people, in and out of the corporate world, say they are going to call you and then don’t. Following through with calls and putting forth that first step in communication shows you’re true to your word, which demonstrates integrity to opposing counsel.

You establish trust. After a series of conversations, the other side will start to trust you, if you have earned their trust. This makes getting a settlement a lot easier.

I’m always more than happy to pick up the phone and chat, whether it’s with clients, colleagues, or opposing counsel. Sometimes one conversation can completely alter a case—and future working relationships—for the better.

Further, we are all humans who need human contact. On a call, I never get right into the case. I talk about how the client is doing. I find out about their kids. I find out about their other cases. If I find out their birthday, I put it into my contacts so I can send them an e-card. If your opponent likes you, you will get to yes faster.

More information:

For more information on Bernstein-Burkley’s practice areas and services, reach out to info@bernsteinlaw.com or if you’re wanting more personalized attention, call (412) 456-8100.