November 02, 2018

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

Extension Obtained By Chapter 7 Trustee For Filing of Section 523 Complaints Deemed Valid 

By Michael Enright

U.S. Bankruptcy Court Judge Donald Cassling, in the Northern District of Illinois, recently weighed in on the vexing issue of who has standing to request an extension of time to file nondischargeability complaints under Section 523 in a Chapter 7 case. The issue has split the Courts of Appeal. The court ruled that an extension obtained at the request of the Ch. 7 trustee was valid by denying the debtor’s motion to dismiss the subsequently filed Section 523 complaint. Cyrnek v. Oliva, Adv. No. 18-00189 (October 23, 2018). As the court explained, Rule 4007(a) governs when a Section 523 complaint may be filed by a debtor or any creditor. Based on the language of that subsection of the rule, a 1984 U.S. District Court in the same district  dismissed an adversary proceeding brought after an extension obtained by a Ch. 7 trustee, on the basis that the Ch. 7 trustee had no standing to obtain the extension, rendering the complaint untimely. Declining to follow that caselaw, the court concluded that the language of Rule 4007(c), which governs extensions of this period, was broader than Rule 4007(a), and the provision permitted a party in interest, including a Ch. 7 trustee, to make the request. The ruling aligns with the Sixth Circuit’s holding in Brady v. McAllister, 101 F.3d 1165 (6th Cir. 1996), and departs from the Fourth Circuit’s holding in In re Farmer, 786 F.2d 618 (4th Cir. 1986). The court noted that the 7th Circuit has not ruled on the issue. Practitioners representing prospective plaintiffs interested in filing a nondischargeability complaint, as well as those undertaking the defense of such actions, might consider whether any extension of time sought by a Chapter 7 trustee can effectively preserve the extension in their jurisdiction, unless and until the Supreme Court decides the issue and creates a uniform holding.   

The District of Puerto Rico and the Bankruptcy Court for the Central District of Illinois on Description of Collateral in Financing Statements

By Stephen Sepinuck, Frederick N. & Barbara T. Curley Professor & Director of the Commercial Law Center at Gonzaga University School of Law

In re The Financial Oversight and Management Board for Puerto Rico, 2018 WL 3968285 (D.P.R. 2018). Filed financing statements that described the collateral as “[t]he pledged property described in the Security Agreement attached as Exhibit A hereto,” and which attached the security agreement, were nevertheless ineffective to perfect because the attached security agreement did not define the pledged property and instead referenced a bond resolution that defined the term but which was not attached. It did not matter that the bond resolution was a publicly available document because it was not filed with the UCC records. Amendments to the financing statements that did describe the collateral were also ineffective because, by the time they were filed, the debtor’s name had changed so as to make the name listed for the debtor in the originally filed financing statement seriously misleading, and the amendment did not correct the debtor’s name.

In re 180 Equipment, LLC, 2018 WL 4006294 (Bankr. C.D. Ill. 2018).  A filed financing statement that described the collateral solely as “[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party, “ but which did not attach the referenced security agreement, was ineffective to perfect. While Section 9-108(b)(6) provides that any method of identifying the collateral is sufficient “if the identity of the collateral is objectively determinable,” the collateral description in the financing statement was effectively blank, and that is not objectively determinable even though it might have put searchers on notice that the secured party claimed a security interest in some assets of the debtor.

Uniform Commercial Code

Uniform Electronic Transactions Act (UETA) Legislative Developments in California and Ohio

By Paul Hodnefield

California: AB 2658, which addresses blockchain technology, passed the State Senate with amendments on August 23, 2018 and the House on August 27, 2018. The bill as originally introduced would have revised provisions of UETA that define "electronic record" and "electronic signature" to include a record or a signature that is secured through blockchain technology. It also would have expanded the definition of "contract" to include a smart contract, which is another blockchain-friendly application. However, those provisions were removed from the current bill, which now is limited to requiring the Government Operations Agency to appoint a blockchain working group. The group will evaluate and report on the risks and benefits of the use of blockchain by state government and California businesses. The bill was signed by the governor on September 9, 2018.

Ohio: On August 2, 2018 the governor signed SB 220, which enhances the definitions of  "electronic record" and "electronic signature" under the state’s UETA, so as to be more accommodating of blockchain technology processes. Now, Ohio’s version of UETA expressly provides that an “electronic record” includes “a record or contract that is secured through blockchain technology.” Similarly, an “electronic signature” now includes one “that is secured through blockchain technology." In each case, the state is telegraphing that blockchain is a presumptively valid electronic platform to conduct commercial transactions. The new law takes effect on November 2, 2018.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.