Restructuring

Contributed by Doron P. Kenter.
We at the Bankruptcy Blog have been working around the clock to bring you the most timely and insightful updates and commentary on the world of bankruptcy, but we have to admit that today, we’ve got turkey, football, seeing the in-laws, home cookin’, and pumpkin spice lattes on the brain.  So in the spirit of the season, we bring you a few of our favorite Thanksgiving-themed cases for your reading pleasure. These cases teach us some valuable lessons not just about bankruptcy law but also about the things we think about on Thanksgiving.
Be careful whom you meet in your flag football game
Marshall v. Moeller (in re Moeller), Adv No. 10-90219-LT (Bankr. S.D. Cal.Nov. 3, 2011):  Jeffrey Marshall and Ryan Moeller met in an intramural flag football game and through other social activities with mutual friends.  On two separate occasions, after receiving a mass email from Moeller advertising real estate investment opportunities, Marshall invested close to $50,000 with Moeller (all of which he had borrowed from his home equity line of credit).  After the real estate market fell, Moeller’s investments also failed, forcing Moeller to file for bankruptcy.  Marshall then sought a declaration that his claim against Moeller was not dischargeable, arguing that Moeller had made fraudulent representations and omitted material information regarding the ventures.  In an unpublished opinion, the court found that Moeller had not made any material misrepresentations and had not omitted any material facts, and concluded that his debt to Marshall was, in fact, dischargeable.
Lesson: Be careful playing flag football on Thanksgiving – you may lose more than the cheap plastic flags tucked into your waistband.
Be nice to your in-laws
In re Van Horne, 823 F.2d 1285 (8th Cir. 1987):  Michael Van Horne took out several loans from his mother-in-law.  Five days after renewing such a loan, Mr. Van Horne moved out of his family’s home.  Twelve days later, he filed a petition for divorce.  After Van Horne filed for bankruptcy, the bankruptcy court ruled that his debt to his ex-mother-in-law was not dischargeable, as it was obtained through false pretenses.  The district court and the United States Court of Appeals for the Eighth Circuit subsequently affirmed that judgment, concluding that Van Horne had intended to leave his wife at the time that he renewed his loan, and that his failure to disclose such a material fact – his intention to divorce his lender’s daughter – was a material omission actionable under section 523(a)(2)(A) of the Bankruptcy Code.
Lesson:  Always be honest with your in-laws.  Especially if you want something from them (or if you expect to be sharing a meal with them on Turkey Day).
Make real mashed potatoes
Grubel v. Sports Marketing, Inc. (In re Sports Marketing, Inc.), 116 B.R. 685 (Bankr. D. Minn. 1989):  Plaintiffs held prepetition claims against the debtor, Sports Marketing, Inc.  Plaintiffs’ claims were subject to a pre-confirmation objection, which was subsequently withdrawn (apparently due to some agreements with debtor’s counsel – though no such agreement was documented).  In the debtor’s disclosure statement, it noted that it was only aware of one disputed claim.  After confirmation, Sports Marketing’s new counsel filed a series of objections to claims, and Plaintiffs filed a complaint seeking revocation of the debtor’s confirmation order on the basis that confirmation was “procured by fraud” – grounds for such revocation under section 1144 of the Bankruptcy Code.  The court dismissed the complaint because it contained no indicia of fraud.  As the decision was issued on November 16, 1989 – a week before Thanksgiving – the court noted as follows:
Pouring gravy on cotton candy does not make it mashed potatoes; food cannot be created simply by applying a large measure of seasoning; allegations cannot be raised to the level of properly pleaded fraud simply by pumping them up with liberal and conclusory use of the term.
Lesson: Briefs and cookbooks have a lot more in common than you might think.  Who knew that a bankruptcy court could give us a good cooking lesson?
Feed your guests well
Montoya v. Campos (In re Tarin), 454 B.R. 179 (Bankr. D.N.M. 2011):  In January 2008, Eli and Lilia Tarin paid a wedding planner for various services in connection with their daughter’s wedding, scheduled for February 2, 2008.  After the wedding, in July 2008, the Mr. and Mrs. Tarin filed a joint petition under chapter 7 of the Bankruptcy Code.  Later, pursuant to section 548 of the Bankruptcy Code, the chapter 7 trustee for the Tarins’ estate commenced an action to recover the funds paid to the wedding planner, including amounts to pay for flowers, a photographer, a band, a piano player, and other goods and services, all as constructively fraudulent transfers.  Noting that the amounts paid to the wedding planner were certainly made “for value” (which provided the immediate and the subsequent recipients of those funds with defenses under sections 548(a)(1)(A) and 548(c) of the Bankruptcy Code), the court noted that it was “inconceivable” that the wedding planner, baker, florist, band, pianist, limo driver or photographer “would not be transferees in good faith for value.”  The court went on to note that goods and services provided to guests – including smelling flowers, listening and dancing to music, and eating food –should not be recoverable from those who were able to enjoy all of those things.  It further held that allowing recoveries in this case would just as absurd as allowing a chapter 7 trustee to avoid transfers to the grocery store or to the butcher – or to the debtor’s family and friends who had eaten the debtor’s turkey, sweet potato pie, and green bean casserole.  In the court’s words, “what would be the difference between this set of facts and a situation in which Debtors hosted Thanksgiving dinner for all the extended family?”
Postscript: All that being said, the court did take care to note that, had the debtors spent significantly more than they did on the wedding (e.g., $100,000, rather than $10,000), the results might have been different because the benefit to the debtor could then have been construed as “inconsequential” compared to the benefit to the debtor’s estate.  The court then cited the Tenth Circuit’s well-known doctrine, which I’ll restate here (at the risk of offending my rabbi): “There is a principle of too much; phrased colloquially, when a pig becomes a hog it is slaughtered.”
Lesson: Feed your guests well – they won’t have to give it back.
Get a big turkey…but fight over the drumstick
In re Leslie Controls, Inc., 437 B.R. 493 (Bankr. D. Del. 2010):  We’ve already written about the common interest privilege here and here.  But the spirit of the season compels us to look back at Leslie Controls, if only for its poignant and seasonal articulation of the nature of bankruptcy.  In discussing the multiple interests that creditors have in bankruptcy cases (which are sometimes shared and sometimes at odds), the court simply explained: “Think of Thanksgiving. Everyone wants the biggest turkey possible (except, perhaps, the chef) but all bets are off when it’s time to wrestle over who gets a leg.”
Lesson: Don’t try leg-wrestling my brother for the drumstick.  He wins every time.
All of us at the Bankruptcy Blog wish you a very happy Thanksgiving.  We’ll be back on Monday with your regularly scheduled Bankruptcy Blog content.