Author Archives: David A. Blansky, Esq.

Amended Federal Rules Emphasize Proportionality and Cooperation

This is the second post concerning amendments to the Federal Rules of Civil Procedure (“FRCP”), which became effective on December 1, 2015. This post focuses primarily on amendments to FRCP 1 and 26 governing the need for proportionality.

The prior post concerned revisions to FRCP 37(e) governing the preservation of electronically stored information (“ESI”), the remedies for spoliation of ESI where a party has failed to take “reasonable steps” to preserve, and remedies arising from “prejudice” as compared to spoliation of ESI arising from “intent to deprive”.

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Amended FRCP 37(e) Provides Rules Governing ESI Preservation and Sanctions

Amended Rule 37(e) of the Federal Rules of Civil Procedure (“FRCP”), effective as of December 1, 2015, squarely addresses sanctions for the spoliation of electronically stored information (“ESI”) and overrules Second Circuit jurisprudence in the area. Some commentators have called FRCP 37(e) the most significant rule governing eDiscovery since the Zubulake line of cases.

Prior to the adoption of FRCP 37(e), there existed a split among the Circuits as to the grounds for sanctions arising from the spoliation of ESI. In 2002, in Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002), the U.S. Court of Appeals for the Second Circuit permitted sanctions for negligent failure to preserve. That decision conflicted with less stringent standards in the Fourth, Tenth and Eleventh Circuits, which required a showing of “willfulness” or “bad faith” to support sanctions for spoliation. FRCP 37(e) rejected the Residential standard in favor of a bad faith standard for the imposition of more serious sanctions.

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Supreme Court Hears Oral Argument on “Lien-Stripping” in Chapter 7 Cases

In 1992, the United States Supreme Court came down with a decision in Dewsnup v. Timm that has caused a stir in the Chapter 7 bankruptcy world ever since. The Court held that, under section 506(d) of the Bankruptcy Code, a Chapter 7 debtor could not “strip down” a lien to the current value of the collateral, thereby getting rid of a junior mortgage lien, when the senior debt owed exceeds the value of the collateral. In part, the Supreme Court went against lien-stripping because the Bankruptcy Act (the predecessor to the Code) provided that liens pass through bankruptcy unaffected and the Bankruptcy Code’s ambiguous language was not a clear departure from this principle.

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New York’s Highest Court Rules on Rent-Stabilized Leases in Bankruptcy

Mary Santiago-Monteverde lived in her apartment, which was rent-stabilized, for over forty years. When her husband died, she was unable to pay her credit card debts and filed for Chapter 7 bankruptcy. She initially listed her apartment lease on Schedule G of her petition as a standard unexpired lease. Shortly thereafter, the owner of the apartment approached the Chapter 7 Trustee and offered to purchase the debtor’s interest in the lease. When the Trustee advised the debtor that he planned to accept the offer, she amended her filing to list the value of her lease on Schedule B as personal property exempt from the bankruptcy estate under DCL § 282 (2) as a “local public assistance benefit.”

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Supreme Court Clarifies “Stern Claims” in Key Decision on Bankruptcy Court Power

Bellingham Insurance Agency (“Bellingham”) ceased operations in 2006 and subsequently transferred assets and operations to a successor, Executive Benefit Insurance Agency, Inc. (“Executive”). Bellingham filed under Chapter 7 in the Western District of Washington later in 2006 . In 2008, the Bellingham trustee, Peter Arkison (the “Trustee”), filed an adversary proceeding against Executive and other insiders of Bellingham seeking the avoidance of fraudulent transfers, a declaratory judgment that Executive is a successor in interest to Bellingham and substantive consolidation of certain defendant entities. The Bankruptcy Court subsequently granted the Trustee’s motion for summary judgment. The District Court for the District of Washington then affirmed. Importantly, this was done by reviewing the Bankruptcy Court’s decision de novo.

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