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Bankruptcy Court Reluctantly Allows Creditor To Shuck “Lil’ Sweet Pea” Accounts

Any first-year law student could attest that understanding what the law is can be a difficult task, in part because the law is not always applied consistently by courts.  This problem gives rise to a maxim law professors often invoke (sometimes citing Justice Oliver Wendell Holmes, a proponent of this maxim) when questioned about the law’s occasional incoherence: “hard cases make bad law.”[1]  The idea is that courts are sometimes tempted to skirt the proper application of the law when the result seems harsh or unfair.  Typically, this happens when a court is faced with a particularly sympathetic party who happens to be on the wrong side of the dispute.  Although the court’s desire to avoid a harsh outcome is laudable, if the court allows this desire to distort its interpretation of the law it allows other (often less sympathetic) parties to avoid proper application of the law

In Case You Missed It – PACA Trust Rights in Bankruptcy are Just Plain Old Secured Claims

Happy 2018!  We at The Bankruptcy Cave have been itching to write about the Cherry Growers Chapter 11 case – which really is ground-breaking – but the holidays, life, and yes, work for clients too, all just got in the way.  But with each passing week, the case stayed on our minds.  So now that time permits, here is the writeup – and see below for the remarkable significance of the case.

In re Cherry Growers (now reported at 576 B.R. 569, Bankr. W.D. Mich. 2017), is a garden-variety produce-related bankruptcy case.  (Ha ha, “garden-variety” produce, get it?)  The Debtor bought produce and sold it to others, in addition to conducting other food distribution activities.  When the Debtor filed for bankruptcy, there was the typical push-and-pull between a lender secured by the Debtor’s inventory and a/r, and a supplier claiming a trust interest in those same assets, protected by the

The Magic of Mt. Gox: How Bitcoin Is Confounding Insolvency Law

Arthur C. Clarke famously observed: “Any sufficiently advanced technology is indistinguishable from magic.” Our regulatory, legislative, and judicial systems illustrate this principle whenever new technology exceeds the limits of our existing legal framework and collective legal imagination.  Cryptocurrency, such as bitcoin, has proven particularly “magical” in the existing framework of bankruptcy law, which has not yet determined quite what bitcoin is—a currency, an intangible asset, a commodity contract, or something else entirely.

The answer to that question matters, because capturing the value of highly-volatile cryptocurrency often determines winners and losers in bankruptcy cases where cryptocurrency is a significant asset.  The recently-publicized revelation that the bankruptcy trustee of failed bitcoin exchange Mt. Gox is holding more than $1.9 billion worth of previously lost or stolen bitcoins highlights the issue.

The Mt. Gox Case: Timing is Everything

In 2013, Mt. Gox[1] was the world’s largest bitcoin exchange.  By some

From Across the Pond – Dissipation of Assets May be Tort Under English Law: Marex Financial Limited v. Garcia [2017] EWHC918

Editor’s Note from The Bankruptcy Cave:  Our good colleagues Robert Dougans and Tatyana Talyanskaya from BC’s London office published this earlier in the summer, and we could not wait to add it to your autumn reading list.  The lesson here is powerful – England, the birthplace of the common law, comes through again to right an injustice where traditional legal principles might otherwise fall short.  Many of you readers have often dealt with defendants playing a shell game with their assets.  The Marex decision provides a powerful response – an independent tort against the individuals who perpetrated the asset stripping, instead of a pursuing a daisy-chain of subsidiaries and affiliates, all bereft of assets.  We at The Bankruptcy Cave applaud this decision – for every right, there shall be a remedy! 

There is a joke that freezing injunctions are

No Notice: How Unnotified Creditors Can Violate a Discharge Injunction

Here is the scenario: You are a creditor.  You hold clear evidence of a debt that is not disputed by the borrower, an individual.  That evidence of debt could be in the form of a note, credit agreement or simply an invoice.  You originated the debt, or perhaps instead it was transferred to you — it does not matter for this scenario.  At some point the borrower fails to pay on the debt when due.  For whatever reason, months or even years pass before you initiate collection efforts.

Finally, you seek to collect on the unpaid debt. Those collection efforts include letters and phone calls, and maybe even personal contact, all of which are ignored.  Then you employ an investigator and an attorney.  You eventually obtain a default judgment from a state court, which the borrower (unsurprisingly) refuses to pay.  You then garnish the borrower’s wages to pay the debt.  You

What’s Yours is Mine and What’s Mine is For the Benefit of My Creditors: Bankruptcy Courts Remain Reluctant to Impose Constructive Trusts on Debtor Property

February 27, 2017


There is an inherent tension between the goals of bankruptcy law and the state law doctrine of constructive trust.  A central tenet of bankruptcy policy is that similarly situated creditors should be treated equally: because an insolvent business or individual will not be able to pay all creditors in full, a proper bankruptcy system must provide as equitable a distribution to each of them as possible.  Constructive trust law, on the other hand, works to the advantage of a single creditor – which always means the detriment of the others when everyone is competing for limited funds.

Constructive trusts are imposed when “property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest.”  Beatty v Guggenheim_Exploration_Co, 225 N.Y. 380, 386 (1919) (Cardozo, J.).  When a creditor in a bankruptcy case alleges that the debtor is

Involuntary Bankruptcy Primer Part I: Understanding the Oft Ignored Involuntary Bankruptcy Petition (with Bankruptcy Cave Embedded Briefs for Your Use!)

August 30, 2016


Editor’s Note:  This is a new one for us at The Bankruptcy Cave.  We are starting a series of primers, covering a narrow range of law but with more depth than just “here’s a recent case.”  And also, we have our first edition of “The Bankruptcy Cave Embedded Briefs” – top quality briefs on a certain issue, feel free to download to your own form files or come back and grab ’em when you need ’em.  Let us know what you think – we are always trying to improve things around here for our readers.


Involuntary bankruptcy is an underused but potentially powerful tool in the Bankruptcy playbook.  Although the process to initiate an involuntary case is relatively straightforward (and has been largely unchanged for decades), the scarcity of involuntary petitions filed each year means few bankruptcy lawyers have any practical experience in this area of law.  In 2012

PROMESA Shields Puerto Rico Behind a New Automatic Stay

July 21, 2016


On June 30, 2016, President Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)[1] into law.  A copy of the Act can be found here. The most significant portions of PROMESA are found in titles I and II, which establish an Oversight Board with budgetary and fiscal control over Puerto Rico, and title III, which creates of a debt adjustment procedure for Puerto Rico and other territories of the United States.  From a bankruptcy perspective, title III gives rise to a fascinating new procedure that, while it does not make U.S. territories eligible to commence cases under chapter 9 of the Bankruptcy Code, patterns itself after a chapter 9 case by adopting and incorporating substantial portions of chapters 1, 3, 5, 9, and 11 of the Bankruptcy Code to create an wholly new debt adjustment process for Puerto Rico and other U.S. territories.


How Reporting a Crime May Subject You to Sanctions

You are a creditor and your loan is secured by personal property, let’s say equipment.  The borrower recently filed for bankruptcy protection.  You receive a phone call from a friend advising you that someone has a moving truck outside the borrower’s business location and it looks like they are stealing equipment.  You don’t know who is moving the equipment — but you do know it’s without your permission and in violation of the security agreement.  You are furious.  You think a crime is being committed and you want tell the appropriate authorities.  You call the police, file a police report and hope the police will recover the equipment so your collateral remains intact.  A few weeks later, the chapter 11 debtor files an action against you for willful violation of the automatic stay and requests sanctions again you under 11 U.S.C. 362(k)(1)!  Will you have to pay sanctions?

Believe it

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