Recent Developments In Bankruptcy Law, July 2022

• Published date: 01 August 2022
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Charges, Mortgages, Indemnities, Financial Services, Insolvency/Bankruptcy
• Law Firm: Jenner & Block
• Author: Mr Richard Levin

1. AUTOMATIC STAY

1.1	Covered Activities
1.1.a	Order granting counterclaim declaring validity of mortgage on the debtor's property does not violate the stay. The debtor acquired property subject to a disputed mortgage. The debtor brought a quiet title action against the mortgagee. The mortgagee counterclaimed to declare the mortgage valid. While summary judgment motions were pending, the debtor filed a chapter 11 case. The nonbankruptcy court granted summary judgment to the mortgagee after the debtor's petition date. The automatic stay prohibits continuation of any action against the debtor that was or could have been commenced before the petition date, any act to obtain possession or exercise control of property of the estate, and any act to create, perfect, or enforce a lien against property of the debtor. Because the mortgagee's counterclaim was simply the mirror image of the debtor's complaint, did not seek additional relief, and was only a defense to the complaint, the mortgagee's counterclaim was not an action against the debtor. The counterclaim also sought only to maintain the status quo and as such, did not constitute an act to obtain possession or control of property of the debtor or the estate. It simply affirmed the validity of an existing lien. Finally, the judgment on the counterclaim did not create, perfect, or enforce a lien on the debtor's property. It only declared existing rights. Therefore, the nonbankruptcy court's summary judgment order did not violate the stay. Censo, LLC v. Newrez, LLC (In re Censo, LLC), 638 B.R. 416 (9th Cir. B.A.P. 2022).
1.2	Effect of Stay
1.3	Remedies

2. AVOIDING POWERS

2.1

Fraudulent Transfers

2.1.a

A bank's customer is a financial institution for purposes of section 546(e)'s safe harbor. The debtor's special purpose entity, which issued notes under note purchase agreements to facilitate the debtor's Ponzi scheme, transferred payments on the notes, as provided in the agreement, to the note holder at the holder's custodial account at a bank. Section 546(e) prohibits a trustee from avoiding a transfer that is a settlement payment or made in connection with a securities contract and that is by or to (or for the benefit of) a financial institution. The Code defines "financial Institution" to include a customer of a bank when the bank is acting as agent or custodian for the customer. The bank was an agent or custodian for the note holder, because it received the note payments into a custodial...