June 2010 6th Circuit Bankruptcy Case Summaries

After the Debtor filed for Chapter 11, it bought insurance whereby the Debtor agreed to reimburse the insurance company for certain potential future claims. Subsequently, the Debtor filed a bankruptcy plan to liquidate, and the insurance company argued that its claim related to future reimbursement payments was entitled to administrative priority status. Typically, administrative claims receive a much higher payout than general unsecured claims. Under 11 U.S.C. Section 503(b)(1)(A), a creditor's claim must be related to an "actual" cost that is "necessary" to the "preservation" of the company in Chapter 11 in order to qualify as an administrative expense. The Sixth Circuit determined that the insurance company's claim would not be "actual" until the insurance company made the future payments and sought reimbursement, and, therefore, declined to grant the insurance company's claim administrative priority.

Menninger v. Schramm (B.A.P.)

In a case involving a Debtor's effort to exempt life insurance proceeds from trustee liquidation in a Chapter 7 case, the Court noted that life insurance contracts owned by a Debtor are exempt from creditor claims under 11 U.S.C. Section 522(d)(7) and payments to a Debtor/Beneficiary who is a dependent of the insured are exempt to the extent reasonably necessary for the support of the Debtor under 11 U.S.C. Section 522(d)(11)(C).

Cusano v. Klein (B.A.P.)

The Debtor filed three Chapter 13 cases in three years, frustrating a California creditor's collection efforts. Oddly, the creditor at issue was the rock bank KISS. After the California creditor filed a Motion to Convert to Chapter 7, the Debtor filed a Motion to Dismiss. The Bankruptcy Court dismissed the case, barred the Debtor from refiling under Chapter 13 for two years, and ordered that the automatic stay for any future case would not prohibit the California creditor's future collection efforts. The Bankruptcy Appellate Panel affirmed in finding that 11 U.S.C. Section 349(a) and 11 U.S.C. Section 105(a) provide authority to sanction bad-faith serial filers and condition dismissal of a case upon prospective relief from the Bankruptcy Code's automatic stay of collection efforts.

Limor v. First Nat'l Bank of Woodbury (B.A.P.)

A Bank held a security interest in funds that were located in the Debtor's checking account. After the Debtor filed a Chapter 7 case, the Trustee asked the Debtor to turnover the funds in the account. The Debtor complied by delivering a check to the Trustee. After transfer of the funds pursuant to the check, the Trustee sought under 11 U.S.C. Section 544 to avoid the Bank's security interest in the funds. The Trustee argued that under UCC 9-332 the Bank's loss of possession and control of the collateral resulted in loss of perfection of the security interest. However, the Bankruptcy Appellate Panel determined that claims and their priority are determined as of the petition date pursuant to 11 U.S.C. Sections 502, 506 and 507, and, therefore, rejected the Trustee's argument.