Calculating Title Insurance Claims: Reduction in Value vs. Insured Claim

First Am. Bank v. First Am. Transp. Title Ins. Co., 759 F.3d 427 (5th Cir. 2014)

After a mortgagor filed bankruptcy, a lender brought claims under a ship mortgage insurance title policy. The lender appealed the district court’s determination of the amount due under the policy, contending that the court used the wrong date of valuation, miscalculated the value of one of the insured vessels, and improperly made certain deductions. Continue reading

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Rejecting Related Contracts: When Can You Pick and Choose?

In re Trinity Coal Corp., 514 B.R. 526 (Bankr. E.D. Ky. 2014)

The debtors sought to reject easement and disposal agreements with the owners of adjacent coal mines. The adjacent owners objected on the basis that the agreements were an integral part of a larger transaction, and could not be separately rejected. Continue reading

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Mortgage Modifications: Senior Loans May Become Not So Senior

Sperry Assoc. Fed. Credit Union v. US Bank Nat’l Ass’n (In re White), 514 B.R. 365 (Bankr. E.D.N.Y. 2014)

A junior mortgagee sought to subordinate the senior mortgage loan based on an argument that modification of the senior loan impaired the junior mortgagee’s rights. Continue reading

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Mortgage-Backed Securities: “It Is The Rare Ordinary Human Being Who Understands Them”

In re Lehman Bros. Holdings Inc., 513 B.R. 624 (Bankr. S.D.N.Y. 2014)

A purchaser of residential mortgage-backed securities filed proofs of claim based on alleged misrepresentations by the debtors in offering materials distributed in connection with sale of the securities. The debtors objected and sought to subordinate the claims as claims arising from securities “of” the debtors. Continue reading

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Stay Relief: What Happens to “Unreasonable” Fees?

Wells Fargo Bank, N.A. v. 804 Congress, L.L.C. (In re 804 Congress, L.L.C.), 756 F.3d 358 (5th Cir. 2014)

After an oversecured creditor obtained relief from the automatic stay and foreclosed on some property, the bankruptcy court asserted jurisdiction over disposition of the sale proceeds and denied in part the creditor’s claim for fees. The district court reversed and the case was appealed to the 5th Circuit. Continue reading

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LLP: When Is A Partnership Not a Partnership (And Who Cares)?

In re Beltway Law Group, LLP, 514 B.R. 341 (Bankr. D. D.C. 2014) –

A managing partner filed an involuntary chapter 7 petition against a professional limited liability partnership. The bankruptcy court denied the petition and dismissed the case based on its interpretation that the entity was a corporation and not a partnership for purposes of the Bankruptcy Code.

Under Section 303(b)(3) of the Bankruptcy Code, if an entity is a partnership then an involuntary petition may be filed by “fewer than all of the general partners in such partnership.” The key question for the court was whether a limited liability partnership (LLP) should be classified as a partnership or as a corporation.

Although the Bankruptcy Code does not define “partnership,” it does define “corporation;” and the definition of corporation includes “partnership associations organized under a law that makes only the capital subscribed responsible for the debts of such association.” The court found that under applicable state law only the capital contributed by an LLP partner is at risk and partners are not liable for debts of the LLP by reason of their status as a partner. Thus, the LLP came within the definition of corporation.

The court found support for this view from additional sections of the Bankruptcy Code. It noted Section 723(a) provides that in a chapter 7 bankruptcy, if a “partnership” is insolvent, the chapter 7 trustee has a claim against general partners for the deficiency to the extent that general partners are personally liable under non-bankruptcy law.  Since the partners were not liable for an LLP’s debts, this section would not be applicable.

Along the same lines, Section 502(a) provides that in the case of a partnership that is a debtor in a chapter 7 bankruptcy, the creditor of a general partner has standing to object to claims against the partnership. The court viewed this as recognition that those creditors have an interest since reducing claims against the partnership reduces the potential exposure of the general partner dollar for dollar (on account of the claims that can be made against the general partner if the partnership is insolvent).

The court contrasted an LLP to a limited partnership, which is expressly excluded from the definition of “corporation.” Under applicable state law, a limited partnership was required to have at least one limited partner and one general partner, and a general partner is liable for the debts of the limited partnership by virtue of its status as a general partner.

The court also considered the history of this debtor. In particular, it was originally formed as a limited liability company and then converted to a limited liability partnership. Since the converted entity was still liable for all liabilities of the converting entity, the court reviewed whether there were any carryover liabilities.

However, members of a limited liability company are not liable for the debts of the LLC by virtue of being a member. Thus even in the prior incarnation the debtor was a corporation. The court acknowledged that a member of a professional LLC can be liable for the negligent or wrongful acts and misconduct of individuals under the member’s supervision and control, but found that this liability was imposed by reason of the supervision and control, and was not based on status as a member.

Consequently, in this case the limited liability partnership was classified as a corporation, and thus the managing general partner could not file an involuntary petition under Section 303(b)(3).

Note that this case should not be read to mean that all limited liability partnerships will be classified as corporations. Under the original LLP statutes, partners were protected only from vicarious liability for the negligent or wrongful acts of other partners or employees of the LLP, and remained liable for the LLP’s contractual obligations. This type has been referred to as a “partial shield” LLP. Later some states gave broader protection, granting limited liability to LLP partners similar to that of a shareholder in a corporation. This type has been referred to as a “full shield” LLP.

Although there is a trend towards full shield LLP statutes, there are still states with partial shield statutes. Under the court’s reasoning, it seems likely that a “partial shield” LLP would not be considered a corporation.

Vicki R. Harding, Esq.

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Environmental Claims: The Gift That Keeps On Giving

Asarco LLC v. Goodwin, 756 F.3d 191 (2nd Cir. 2014)

A reorganized company (Asarco) sought contribution for payment of environmental claims from beneficiaries of trusts created under John D. Rockefeller’s will. The district court dismissed the claims, and Asarco appealed to the 2d Circuit. Continue reading

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