Bankruptcy Law

James Cole, Esquire

U. S. Supreme Court holds that secured creditor may not be barred from credit-bidding by terms of a Chapter 11 plan that calls for an auction sale of the collateral.  Radlax Gateway Hotel, LLC v. Amalgated Bank, No. 11-166 (May 29, 2012). 

Debtor unsuccessfully argued that a plan establishing procedures for an auction sale, including cash-only bidding, was confirmable as providing the “indubitable equivalent” of the secured claim under Bankruptcy Code § 1129(b)(2)(A)(iii). The Supreme Court ruled that the case was covered by a more specific alternative, § 1129(b)(2)(A)(ii), which addresses plan provisions for sales of encumbered property.  Clause (ii) incorporates § 363(k), a section that expressly permits credit-bidding.  Accordingly, the Court affirmed the Bankruptcy Court’s denial of confirmation.

Failure to prove misrepresentations by defendant sinks non-dischargability action. Montgomery Bank v. Steger, No. 12-6018 (BAP 8th Cir., 6/14/12).  Debtor, Marsha Steger, and James Clay Waller owned an LLC that borrowed $140,000 from the bank to construct a duplex.  Debtor and her husband, Ray Steger, guaranteed the loan.  Somehow, the bank disbursed all the loan proceeds on the submission of lien waivers without realizing that the duplex was being constructed on a lot other than that on which the bank took its deed of trust.  Upon discovery of the circumstances, the bank collected a large part of its loan from the borrower, but a deficiency of approximately $39,000 remained when the Stegers filed for Chapter 7 relief.

Bank pursued an adversary proceeding to hold the guaranteed debt non-dischargeable. The bank dismissed Husband before trial but went to trial against Wife alleging actual misrepresentations under § 523(a)(2)(A) concerning where the duplex was to be built and willful, malicious injury to the bank under § 523(a)(6).  The Bankruptcy Court found for defendant. The bank never offered evidence of any misrepresentations by Ms. Steger. For her part, she testified she didn't know the loan proceeds were used for a different duplex than was contemplated by the loan until after all the proceeds had been disbursed.  Moreover, there was no evidence that Ms. Steger had committed any tort, much less one resulting in willful, malicious injury. 

On this record, the Bankruptcy Court found for defendant.  The bank failed to claim until appeal that Ms. Steger ratified the fraud and that she was bound by certain statements of Mr. Waller, and these claims were thus rejected.  Applying the "clearly erroneous" standard to what was argued below, the Bankruptcy Appellate Panel affirmed.