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reiterated New Energy on that point in finding that 11 U.S.C. § 544(b) (unlike 11 U.S.C. § 544(a)) requires
“the actual existence of an unsecured creditor that could have brought the state-law action itself” in order
for the bankruptcy trustee or debtor-in-possession to avoid a transfer under state fraudulent transfer law.
On the latter point, the court acknowledged it was the first Circuit Court of Appeals to so rule and that its
ruling was contrary to the great weight of lower court authority.

Automatic Stay Doesn't Require Dismissal Of Citation

Because dismissal of a supplementary proceeding would result in loss of the lien priority obtained
upon service of a citation to discover assets, a judgment creditor is not required to dismiss those
proceedings in order to comply with the automatic stay in bankruptcy, a bankruptcy judge in Chicago has
held. Calling dismissal a “drastic step,” the court in In re Tires N Tracks, Inc., 498 B.R. 201 (Bankr. N.D.
Ill. 2013), said the creditor could allow the proceeding to remain pending as long as it did not take any
step in the citation court to enforce its lien. It did not address the effect of the automatic freeze which a
citation typically effects (735 ILCS 5/2-1402(f)(1)).

Charitable Gifts Over 15% Are Avoidable In Toto, Court Says

When bankrupts-to-be give more than 15% of their gross annual income (GAI) in pre-petition
contributions to a charity, the entire transfer – and not just the amount exceeding 15% of GAI – may be
recovered on behalf of the bankruptcy estate, the 10th Circuit U.S. Court of Appeals has ruled.

In a case interpreting the Bankruptcy Code as amended by the Religious Liberty & Charitable
Donation Protection Act of 1998 (Pub. L. 105-183), the court said the statutory language was
unambiguous in providing that a transfer of a charitable contribution to a qualified religious or charitable
entity or organization is not avoidable in any case in which “the amount of that contribution does not
exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the
contribution is made”. It accepted the bankruptcy trustee’s logic that “the converse must also be true – if
the ‘transfer’ exceeds 15% of GAI, then the ‘transfer’ – meaning the entire transfer – is subject to
avoidance.” In re McGough, 737 F.3d 1268 (10th Cir. 2013).

7th Circuit Addresses Constructive Trusts in Bankruptcy

The Seventh Circuit Court of Appeals has issued an instructive decision on handling constructive trust
claims in bankruptcy.

In In re Mississippi Valley Livestock, Inc., __ F.3d __, 2014 WL 949969 (7th Cir. 2014), the putative
creditor entrusted his animals to the debtor for resale. Shortly before filing bankruptcy, the debtor paid to
the creditor nearly $900,000 representing completed sales. The trustee attempted to recover those funds
as preferential transfers. Finding that the parties’ relationship constituted a bailment, the court found that
the proceeds were never a part of the estate. Moreover, it said, “When a restitution claim is made against
a bankruptcy estate, the key question to ask is whether the estate – not the now-defunct debtor – would
be unjustly enriched by keeping the claimant’s property.”

– John T. Hundley, Jhundley@lotsharp.com, 618-242-0246
Brenda\SharpThinking\#111.pdf
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