The National Attorneys General Training & Research Institute
Bankruptcy Bulletin - July 2016
This year’s bankruptcy seminar will be held at the Santa Fe Hilton Hotel, from Sept. 26-29, with the room block split between the Hilton and the usual Hotel Santa Fe. Rooms are only $99 a night (plus taxes) during the conference nights (Sunday through Thursday night), so this is a great opportunity to attend at a reasonable cost. All of the details are on the NAAG website.
We will be working with a detailed hypothetical that will provide a framework for discussions during the whole seminar. This year’s hypothetical will involve both consumer protection and tax issues, arising out of a real estate development operation that eventually devolved into a Ponzi scheme. We have a highly distinguished panel of presenters including bankruptcy judges, private practitioners, the U.S. Trustee’s office, and experienced counsel from many states and localities, and the federal government that will guide us through the complexities, substantive and procedural, that arise in such a case. We will also have an interactive session on the new discovery rules that went into effect on December 1, 2015 and represent one of the most significant changes in the scope of discovery in many years and an ethics session. CLE will be obtained for all states with attendees (and we will have a lively ethics session that all should enjoy whether required for CLE or not). Breakout sessions will be geared for both beginners and experienced counsel so attendance will be worthwhile whatever your current level of knowledge,
The early bird registration rate for governmental attendees (and those whose practice is substantially confined to representing governmental clients) will be $495; if there are three or more from your office, the rate will be $395 per person. The regular rate, after September 2, 2016, will be $550 ($450 per person for three or more attendees from the same office). The rate for non-governmental counsel is $695 with the same $100 per person discount for groups of three or more. We will also have an “optional activity” at a local art exhibition space in Santa Fe along with locally catered barbeques before and after tours of the exhibit.
The room block is rapidly filling and we want to make sure we have room for everyone who wants to attend – so, please register as soon as possible. And, remember, the more who come, the more your office saves so we hope to see as many as possible. Also, please pass the announcement on to anyone who you think may be interested – particularly to counsel for local entities that may not have any other conference that deals with governmental interests in bankruptcy. Thanks for your help – and your support every year.
SUPREME COURT NEWS
Czyzewski v. Jevic Holding Corp., No. 15-649, certiorari granted from Official Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3rd Cir. 2015).
The Supreme Court granted certiorari on this case – which deals with whether a settlement during the case must conform to the absolute priority rule or whether such settlements must simply meet a general standard of “fairness” if the case is then to be dismissed – at the end of June. It will be heard in December 2015 by the Court – whether by 8 or 9 members is yet to be known. This could be a very important case since, in recent years, there has been an ever growing number of “creative” ways of resolving cases that do not follow the established structures in the Code, particularly with respect to recognizing priorities. Since governmental entities are the beneficiaries – for themselves or their citizens – of many of the priorities, including those for taxes, consumer claims, employee claims, and domestic support obligations, giving the other parties authority to ignore those priorities will likely lead to such claims being devalued in many instances.
Illinois will be taking the lead again on submitting an amicus brief in support of the petitioner’s arguments in favor of requiring compliance with the absolute priority rule whenever a settlement is considered, not just if it is to become part of a confirmed plan. As of now, we expect the brief to be due on September 2 and a copy will likely be circulating by approximately August 12, which should give your offices plenty of time to review it. We hope all of the States will be able to sign on since a showing of a unified position often has positive effects on the Court’s review.
In a related case, Energy Future Holdings Corp. v. Del. Trust Co., 2016 U.S. App. LEXIS 8179 (3rd Cir. 5/4/16), the Third Circuit considered whether a proposed preconfirmation settlement violated the “equal treatment of creditors” provision in Section 1129. Although the court eventually explained at length that the settlement proposal did not in fact violate the equal treatment rule, it began by first asserting that, on the authority of Jevic, that it did not necessarily need to meet that rule either. Thus, this illustrates the degree to which the Jevic holding will likely ramify if not confined by the Supreme Court.
Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust) 195 L.Ed.2d 298 (2016).Puerto Rico is preempted from enacting a municipal bankruptcy law even though its municipalities are barred from using Chapter 9.
Although no one can explain why, when the Code was amended in 1984, Puerto Rico was designated as a “State,” for all purposes except for being able to authorize its municipalities to file a Chapter 9 petition. At the same time, nothing excluded Puerto Rico from the provision in Section 903(1) that barred states from enacting bankruptcy laws for their municipalities that would bind dissenting creditors. Thus, the Supreme Court concluded, based on a “plain language” reading of the Code, Puerto Rico had no options when its municipal entities were failing – they could not obtain relief under federal law and it could not enact a debt restructuring law of its own. Congress has since then enacted a Puerto Rico-specific bankruptcy provision but it is still far from clear whether that will be enough to allow Puerto Rico and its subsidiaries to get back onto financially stable footing.
SELECTED LOWER COURT CASE DECISIONS:
In re Smith (Smith v. IRS), 2016 U.S. App. LEXIS 12859 (9th Cir. 7/13/16). Court continued to rely on “Beard” test, did not pass on “hanging paragraph” definition of return.
At least where party did not file return until years after IRS assessed taxes and filed substitute return despite numerous communications from IRS, court had no difficulty in finding that the return was not an “honest and reasonable attempt to satisfy the requirements of the tax law.” As such, it would not be sufficient to be a “return” that could start the time running on the “late-filed return” exception in Section 523(a)(1)(B)(ii).
In re McCarthy, 2016 Bankr. LEXIS 2548 (Bankr. D. Mass. 7/11/16). Penalties associated with non-dischargeable late-filed taxes can be discharged.
Section 523(a)(7) excepts penalties from discharge except for tax penalties that a) relate to a tax not specified in Section 523(a)(1) or b) imposed with respect to a transaction taking place more than three years prepetition. The state argued that the penalties must both relate to a non-section (a)(1) tax and must be more than three years old; alternatively, if the two tests were separate, it argued that the failure to pay the tax owed was a continuing violation that would bring the occurrence within the three-year period. The court first held that the two exceptions were disjunctive, so the debtor need only show the operative event was more than three years prior to the petition date. It then held that, under both state law and the federal exception, the triggering event for the penalties was the failure to file the return, not the continuing failure to pay. While that continuing failure does increase the amount of the penalty, it doesn’t change the trigger.
In re Layher (Layher v. Mo. Dept. of Revenue), 2016 Bankr. LEXIS 2410 (Bankr. E.D. Tenn. 6/28/16). Section 505(a) abstention now allowed if debtor has lost rights under state law.
Section 505(a) gives the bankruptcy court the discretion to hear tax law issues that have not been adjudicated under state law prior to the bankruptcy, even if the appeal is not necessarily timely under state law. The general rationale for that is to protect other creditors who should not lose potential assets because the debtor allowed tax judgments to be entered against him. However, where the case is a no-asset proceeding and creditors will receive nothing, courts often agree to abstain from hearing the issue. Here, though, the court held it would not abstain if the debtor was time-barred from having the matter heard in state proceedings, taking the position that, in essence, by filing bankruptcy, a debtor could always guarantee the right to be relieved from a prepetition default.
In re Pittman, 2016 Bankr. LEXIS 1954 (Bankr. E.D. Penn. 5/6/16). Right to redeem property may be exercised over course of Chapter 13 plan.
While the case initially were split, virtually all now seem to agree that a right to redeem a property that has been sold at a tax sale or otherwise can be treated as the equivalent of a secured debt that can be paid in full over the course of a plan. Thus, so long as the debtor files before the time expires, it will have up to 3 to 5 years to pay off the amount owed, rather than only the balance of the redemption period plus the (short) extensions in Section 108. The court here held that the Section 108 time limit would only apply to the debtor’s decision to redeem, not to the actual payments being made to do so.
FTI Consulting v. Merit Management Group, LP, 2016 U.S. App. LEXIS 13705 (7th Cir. 7/28/16). Where payments for securities transaction merely pass through financial institution (i.e., where it is escrow agent for instance), not enough to trigger Section 546(e) safe harbor.
Where party bought shares of other party by using money borrowed from bank one, and by using as escrow account at bank two to facilitate transaction, involvement of neither bank was enough to trigger the Section 546(e) safe harbor. Mere reference of payment being made “by or to” (or for the benefit of) financial institution was ambiguous as to whether bank had to have its own stake in the transaction or was merely an intermediary. Reading the Code as a whole, the Seventh Circuit held that, by analogy to the other avoidance sections, the transfers “made by” an entity would only refer to transfers of the debtor and the transfers to or for the benefit of an entity must be ones made to a creditor (not a neutral like the banks here). In other words, the safe harbor should only apply to transfers that would be otherwise avoidable under Sections 544, 547, and 548. The safe harbor should not be triggered by the involvement of a type of entity that is a mere conduit (and who would not, for that same reason, be itself subject to an avoidance action). The other view would protect every transaction other than one where the parties paid in actual cash and there is no reason to think Congress intended to go that far. At this point, the 11th Circuit sides with the 7th, while the 2nd, 3rd, 6th, 8th, and 10th take a broader view.
In re Lyondell Chemical Co. (Weisfelner v. Hofmann), 2016 U.S. Dist. LEXIS 98057 (S.D. N.Y. 7/27/16). Standard for imputing fraudulent intent of company president in inflating value of company being sold in leveraged buyout to corporate entity itself.
The Trustee’s complaint alleges the company president knowingly presented false projections to the Board and to the interested parties to convince the latter to pay an inflated price for the debtor, much of which then ended up in the president’s pocket. The bankruptcy court refused to impute his alleged intent to the board and the company absent a showing that he could control the board. The district court reversed. Under Delaware corporate law, it is normal to impute the actions and intent of the insider principals to the corporation (indeed, this is the basis of the in pari delicto doctrine that often precludes the corporation from bringing suit against those that aided and abetted its wrongdoing). The only exception is if the insider is acting solely in his own personal interest, rather than to advance the corporation’s interests (even if only its short-term interests that could lead to a later collapse). The bankruptcy court’s “control of the board” analysis went too far (and appears to be derived from the same in pari delicto analysis; i.e., the corporation may be able to escape its application if it can show that there were independent board members that could and would have acted had they been given notice.)
Burkhart v. Community Bank of Tri-County, 2016 U.S. Dist. LEXIS 97803 (D. Md. 7/27/16). Secured creditor that does not file claim in case cannot have its lien valued and/or avoided.
Reading Section 506(d) literally, the court affirmed the bankruptcy court’s conclusion that it can only be used to avoid liens that are the subject of filed claims; if no claim is filed, it explicitly does not apply to void the lien. The court found this was consistent with the notion that liens can float through the case unaffected. If the debtor wished to pull the lien into the case and deal with it, it could have filed its own proof of claim for the lender.
In re Milby (Templeton v. Milby), 545 B.R. 613 (9th Cir. BAP 2016). Effect of equitable tolling.
The two-year statute of limitations for filing avoidance actions is subject to equitable tolling. When tolling is found to be justified, it precludes any running of the statute of limitations until the necessary information is obtained. At that point, the statute begins to run and the trustee has the full normal period of time to file; there need be no showing that the trustee acted as quickly as possible after discovery of the information to file his action.
In re Leaks, 2016 Bankr. LEXIS 2531 (Bankr. E.D. Ark. 7/8/16). Where process to determine unemployment overpayments used administrative appeals and judicial review, resulting lien was judicial, not statutory and could be avoided if it impaired exemptions.
The court discusses the differences between judicial and statutory liens (with the latter generally involving more disputes, litigation, and potential for judicial involvement) so as to decide if a particular lien could be avoided under Section 522(f). Arkansas’ process did involve those more elaborate proceedings so its lien could be avoided.
In re Davis (Tabor v. Davis), 2016 Bankr. LEXIS 2311 (Bankr. W.D. Tenn. 6/14/16). Not all payments made by Ponzi scheme operator are automatically “in pursuance of scheme.”
While all payments made in pursuance of a Ponzi scheme are automatically actually fraudulent for purposes of an avoidance action, the converse is not necessarily true. Not all payments made while a Ponzi scheme is operating are in pursuance thereof – for instance, ordinary course business expenses such as rent, or utilities, or payment to rank and file employees will probably not be deemed to be “in pursuance” of the scheme. This is at least in part for practical reasons; using the broadest approach would mean that every single person dealing with a Ponzi scheme, no matter how uninvolved, would be subject to suit seeking to reclaim the payments.
In re Neff (DeNoce v. Neff), 2016 U.S. App. LEXIS 10439 (9th Cir. 6/1/2016). No equitable tolling for Section 727 objection to discharge deadline.
Section 727(a)(2) allows the court to deny a debtor a discharge where he transferred property within one year of the bankruptcy with the intent to hinder creditors. In this case, the debtor filed two bankruptcies, which were both dismissed. He then some time later (and more than a year after the transfer) filed a third case and the creditor sought to renew the motion to deny the discharge based on the transfer (which, by this point, had been unwound by the debtor), arguing that the time limit should be tolled during the pendency of the prior cases. The Ninth Circuit rejected that argument, finding initially that the time period in Section 727 was not a true statute of limitations (which would be subject to tolling). Indeed, because the debtor’s actions could be concealed such that the creditor would never know of them prior to expiration of the time period, it did not serve the purpose of encouraging creditor diligence as a statute of limitations period would do. The court also noted that the transfer back had eliminated a windfall in any event.
In re Newell (Wayne County v. Newell), 2016 U.S. Dist. LEXIS 97128 (E.D. Mich. 7/26/16). Attorneys’ fees awarded to government under fee-shifting statute were not a “penalty” under Section 523(a)(7) and were dischargeable.
Where the debtor rejected a pre-petition valuation of her claim by a mediator and then failed to recover at least as much as she rejected (she, in fact, lost completely), state law shifts the fees of the other party to that entity. The court held that such a provision was not imposed on the debtor for any sort of wrongdoing or culpable conduct akin to that usually covered by that section and the fees were not reasonably viewed as a penalty. Moreover, it was clear the amount ordered to be paid was clearly a compensatory measure both by the amount and purpose for which it was ordered.
In re Bushkin (Bushkin v. Singer), 2016 Bankr. LEXIS 2688 (9th Cir. BAP 7/22/16). Defining what are “consumer debts” for purposes of applying Section 523(d) attorneys’ fees.
Arrangement between two parties for advancement of funds for debtor to live on while writing a book for commercial purposes did not create consumer debt. Parties were engaged in a venture that was intended to create profits so it was immaterial that the actual use of the funds was for normal living expenses.
In re Pacher, 2016 Bankr. LEXIS 2587 (Bankr. S.D. Miss. 7/11/16). Debt that is excepted from discharge in bankruptcy 1 remains excepted in bankruptcy 2 unless listed in Section 523(b).
Section 523(b) removes a few debts from automatic carryover of discharge determinations, all others retain the same status by virtue of res judicata. No new adversary proceeding is needed in the second case and there is no specific time limit on when the issue can be raised.
In re Wyly, 2016 Bankr. LEXIS 2437 (Bankr. N.D. Tex. 6/29/16). Where debtor owes amount for violating securities laws, his exemption is limited (as well as debt excepted from discharge).
Section 522(q)(1) limits a discharge exception to $155,675 (an amount indexed for inflation) where the debtor “owes a debt arising from” any violation of the federal or state securities law. The court held that it had to find that that Wyly owed such a debt on the day he filed his case (presumably because exemptions are determined on that date?) A judgment had been entered against Wyly that was on appeal when the bankruptcy was filed; the court held that, while the appeal might make the claim contingent and disputed, it would still be a claim (and a debt) on the filing date. As a result, the exemption would be limited (although the parties agreed not to sell the property at issue until after the appeal was resolved).
In re White (Hoewischer v. White), 2016 Bankr. LEXIS 2360 (Bankr. S.D. Ohio 6/23/16). Standard for giving collateral estoppel to state judgment
The standard in each case is set by state law with respect to state judgments; some require “actual litigation,” some allow default judgments to govern. Others, like Ohio, are somewhat of a hybrid – one must have actual litigation but that can be shown by debtor’s knowing foregoing of right to participate, when coupled with presentation of actual evidence so bankruptcy court can clearly evaluate what state court passed on in issuing default judgment. Here, that was done based on actual testimony of victim of “revenge porn” about the emotional distress and invasion of privacy she suffered. Award of punitive damages by court was sufficient to show that debtor was acting with intent to cause harm.
In re Hunter (State of Kansas Dept. of Labor v. Hunter), 2016 Bankr. LEXIS 2251 (Bankr. D. Kan. 6/9/16). Pay attention to your IT issues!
As a lesson in the failings of computers, the state timely tried to file its discharge complaint but some internal glitch (or mistaken attachment attempt) left the filing with two copies of the cover sheet, and no complaint, and another glitch resulted in a form being filed without the answers being included thereon. While the paperwork was corrected within nine days, that fell outside the deadline and the court refused to allow the corrections to relate back.
AUTOMATIC STAY, POLICE AND REGULATORY POWERS, AND DISCHARGE INJUNCTION ISSUES
In re G-I Holdings, Inc. (New York City Housing Authority v. G-I Holdings, Inc.), 2016 U.S. App. LEXIS 13108 (3rd Cir. 7/18/16). Housing authority that was not regulator with respect to asbestos clean-up issues could not repackage its (discharged) claim for property damages into request for “injunctive” relief.
While the Third Circuit had held in In re Torwico Elecs., Inc., 8 F.3d 146 (3rd Cir. 1993) that the State’s injunctive authority to enforce environmental laws was not a claim and was not discharged, the situation here differed in several respects. The maker of the asbestos-containing products that were placed in the housing authority’s buildings was not under a statutory clean-up obligation and the housing authority was not a regulator with authority over such an entity. Rather, it was simply a landlord (albeit a public one) with an obligation to provide a safe housing environment that had been harmed when a potentially harmful product was initially installed. That cause of action for property damage had accrued on installation and was included in the debtor’s discharge when it confirmed a plan.
In re Hoover, 2016 U.S. App. LEXIS 11939 (1st Cir. 6/29/16). Sanctions imposed for misstating rule to suggest that continuing foreclosure sale violated stay
Not only did the court find that the debtor’s counsel was incorrect in asserting that merely continuing a foreclosure sale would violate the stay (at least absent a prompt motion to lift the stay) but it also found that the issue was so clearly resolved under prior case law that his argument – and his misstatement of that case law warranted sanctions. In view of that filing, as well as his misquoting a statute in another pleading, and in light of prior monetary sanctions against him for similar violations, the bankruptcy court this time required that he take a minimum 3-hour course on professional ethics at an accredited law school and the Third Circuit upheld the sanction.
Billings v. Portnoff Law Associates, Ltd., 2016 U.S. Dist. LEXIS 75713 (E.D. Penn. 6/10/16). Continuing sheriff’s sale does not violate stay.
Actions by a creditor to merely continue the timing of a foreclosure sale from time to time do not violate the stay; they do not move the action forward but merely maintain the status quo in the most cost-effective manner (lowering the costs that will eventually be assessed against the debtor under the mortgage). At least unlike the counsel in Hoover, debtor’s counsel was not sanctioned.
In re Anderson (Credit One Financial v. Anderson), 2016 U.S. Dist. LEXIS 77966 (S.D. N.Y. 6/14/16). Arbitration of class action contesting reporting on discharged claims not allowed.
The court found that a class action against a creditor dealing with the way that it reported discharged debt should not be subjected to arbitration. The court noted that discharge issues were core matters that went to the heart of the bankruptcy case so that it was most important that the issue was correctly decided (although this was not actually dealing with the discharge itself, but only a collateral reporting issue). The court also suggested that the court should retain control over interpretations of its order – namely the discharge injunction, although such orders in Chapter 7 cases are normally a form provision. Finally, the court looked to the virtue of uniformity suggesting there would be many separate arbitrations which could come to different results rather than a single class action result. (The court noted that “uniform application of the Bankruptcy Code is furthered by federal, class action litigation” – although many courts show much less sympathy for class actions within the confines of the bankruptcy court.)
In re Spencer (Missouri v. Spencer), 550 B.R. 766 (8th Cir. BAP 2016). Domestic support obligations are not dischargeable; irrelevant that claim for part of DSOs was denied.
The debtor was subject to a support order requiring that he pay $1200 per month (originally part as maintenance and part of as child support, and later all as maintenance); based on a calculation
error, the state originally submitted a claim that did not include the full amount owed. When the state sought to amend the claim, the debtor objected and the bankruptcy court disallowed the higher amount, asserting that the state had waived a portion of the payment by acquiescing in the debtor’s lower payments. The state did not object then but after the debtor completed its plan (and paid the lower amount in full), the state resumed actions to collect on the remaining balance. The bankruptcy court held the state in contempt, but the BAP reversed. It noted that DSO obligations are automatically nondischargeable and remain so whether or not a claim is filed or allowed therefor. There is a dissent although its reasoning is not altogether clear – in particular, it is not clear if it is arguing that the bankruptcy court had the right to determine that the payments were not owed (even though that would normally be a function of the state court) and that the determination was binding under the plan on res judicata principles. The majority does not clearly address that issue. This is a recurring issue when a claim is not filed for a dischargeable debt or is only partially allowed for whatever reason. The courts generally agree (at least on appeal) that absent extraordinarily clear language in the plan that binds the creditor to the result, the balance of a nondischargeable claim remains so after the plan is completed.
In re Hurvitz, 2016 Bankr. LEXIS 2657 (Bankr. E.D. Mass. 7/20/16). Noncompete injunction is not a claim; creditor entitled to have stay lifted.
The debtor signed, but did not abide by a noncompete agreement after he was terminated. The creditor obtained a temporary restraining order in state court enforcing the agreement and the debtor filed bankruptcy. The court agreed with the creditor that the agreement here (and state law) provided that the injunctive remedy was cumulative to, and not alternative to, any damages rights under the agreement. As such, it was not a claim and not dischargeable; accordingly, it was appropriate to lift the stay and allow the creditor to proceed in state court.
In re Cole (Southwest Airlines Co. v. Tidewater Finance Company), 2016 Bankr. LEXIS 2652 (Bankr. N.D. Ga. 6/24/16). While court claimed right to override decision of state court on whether automatic stay applied, it eventually concluded that the state court was right anyway.
The debtor’s creditor issued a notice of garnishment to the debtor’s employer, Southwest. Southwest failed to respond to the notice and a default judgment was entered, making it independently responsible for the entire amount of the debtor that the garnishment pertained to. Southwest filed a motion to set aside the default but the debtor filed bankruptcy while the motion was pending. The state court eventually proceeded with the motion regarding Southwest based on its view that there had been a final judgment entered prebankruptcy creating an independent liability against Southwest. Southwest did not file anything with the bankruptcy court until after the state court had ruled against it. The bankruptcy court concluded that it could hear Southwest’s stay motion despite the application of the Rooker-Feldman doctrine, which normally bars a federal court from sitting in appellate judgment over a state court decision.
The court noted that the cases were split over its application but sided with those that concluded it did not apply because an action in violation of the stay was “void” and because a ruling on application of the stay that was wrong was the functional equivalent of an unauthorized action to modify the stay. (Both of those conclusions are debatable, not least because the 1940 Supreme Court case the court relies upon was dealing with a different bankruptcy law with a much different scope of authority for the State courts.) In any event, though, having decided to review the issue itself, it came to the same conclusion the state court already had – that the judgment entered against Southwest was basically an independent penalty against it for failing to respond to the garnishment that would not necessarily result in any liability of the debtor. To the extent there were any issues with the default judgment, they could be revisited with the state court. Absent the prepetition judgment against the garnishee, it would normally be obligated to seek guidance from the bankruptcy court as to what to do with any property of the debtor that it was holding. This result – that the court engages in a review that says the state court was right to begin with – is not atypical. It also illustrates the problem when the aggrieved party does not go to the bankruptcy court in the first place as it could have done before the state court ruled.
In re Crowder, 2016 Bankr. LEXIS 2307 (Bankr. W.D. N.Y. 6/16/16). No damages awarded for stay violation where debtor suffered no injuries.
The creditor repossessed a vehicle postpetition without knowledge of the bankruptcy filing and in the good-faith belief that both co-owners acquiesced in the action. After the action was taken, the debtor filed a sanctions motion without making any effort to contact the creditor’s counsel or resolve the issues consensually. Further, in light of the clear lack of equity in the vehicle, the intention of the debtor to surrender the vehicle, and the lack of notice to the creditor of the case, the debtors had not been harmed by its loss and the creditor had not acted in bad faith. Indeed, the only damages claimed were those of their counsel in writing up an unnecessary sanctions motion. The court refused to allow those, holding that stay violations were not intended to create a cottage industry for debtor’s counsel.
In re Johns-Manville Corp., 2016 Bankr. LEXIS 2444 (Bankr. S.D. N.Y. 6/30/16). When can prepetition exposure without visible injury create a prepetition claim.
The question of when prepetition conduct by the debtor (i.e. exposing workers and, indirectly, their families) to a toxic chemical such as asbestos can create a prepetition claim continues to cause issues for the court. The decision here is very lengthy and, in some ways, could be seen as in conflict with the Second Circuit’s emphasis in the Motors Liquidation case below about the need to be able to identify the claimants. The cases, though, are ultimately reconcilable, in the end, by recognizing that the claim here – of the wife of a asbestos worker who was diagnosed with mesothelioma in 2015 – some thirty years after the plan was confirmed in the case of Johns-Manville. While it clearly would have been impossible for her to have known or reasonably even foreseen that she should somehow file a claim in the case back in the mid-1980s for a disease that did not manifest itself until decades later, that was true of numerous other persons. Manville filed, in fact, not due so much to the claims that it had on hand on the petition date, but rather, in view of its recognition that there were likely to be decades of cases to come and that its insurance might run out long before the plaintiffs did. What the court did then – and Congress has since codified in Section 524(g) – was to create a process for “future claims” – those where there were innumerable persons who might have a “claim” under the extraordinarily broad definition in the Code, but where there was no current injury and no possible way to tell who or when an injury would develop. Rather than trying to structure payments to them now (which would inevitably be over- and under-inclusive, the plan set up a trust mechanism, included significant assets therein (and an ongoing funding source), and then “channeled” all potential claims to that trust fund. Those claims would be filed when and if injury developed (even decades into the future) and would then be evaluated and paid accordingly. The court held that, where the victim here was no different than many others, the source of her exposure was covered by the plan, and there was widespread notice of the bankruptcy (including the filing by her husband’s employer) in light of the unprecedented nature and size of the Manville case, there was no basis to treat her differently than other asbestos victims.
In re Pacific Sunwear of California, Inc., 2016 Bankr. LEXIS 2579 (Bankr. D. Del. 6/22/16). Filing claim under state “private attorney general” law and class actions.
California has a relatively unique statute allowing individuals to serve as “private attorney generals” to seek redress for a class of employees for labor law violations. The person doing so serves in a qui tam role; the claim filed though is not a true class action and does not require certification or approval by the court. A separate class action was filed and the court agreed that, in general, class proofs of claims could be filed. The court must first decide whether to apply Rule 7023 (the equivalent of the civil class action rule) to allow a class to go forward. The main concern the courts consider if is certification will cause undue delay. Here, the certification had already occurred prepetition and the debtor had not chosen to notify all potential claimants of the bar date so that they could file on their own. The court also noted that the case was in its early stage and recognition of the certification had been promptly requested. Moreover, handling the issues as a class would be more efficient – there would likely be numerous individual claims otherwise with omnibus objections filed. Absent a commonly funded counsel, individual claimants, though, would likely be unable to defend their claims. Moreover, absent the class claim, the court would likely have to extend the bar date to protect the individuals’ right to file.
And, when added to the existence of the private attorney general claim, it made sense to allow the class to proceed. The court in particular found the class process was a superior method of proceeding because otherwise individual claimants could not afford to pursue their claims (which is, of course, the basic reason for class actions to begin with).
In re Native Wholesale Supply Company, 2016 Bankr. LEXIS 2399 (Bankr. W.D. N.Y. 6/16/16). Standard for allowing (or disallowing) Section 502(j) reconsideration.
Federal Rule of Civil Procedure 60 contains the standards for seeking relief from an existing judgment. The Bankruptcy Code has that rule (in Rule 9024) but it also has a statutory provision in Section 502(j) (and an associated Rule 3008) that provide in very general terms for when the allowance or disallowance of a claim can be reconsidered. Section 502(j) states that the claim may be reconsidered for “cause,” and if reconsidered, shall be “allowed . . . according to the equities of the case.” The statute gives no definition of what “cause” includes but, until that is shown, any question about what “equity” requires does not come into play. The court here held that it could look at whether there were mistakes in its own handling of the case, or whether fraud or collusion had been shown but that it was bound by 28 U.S.C. § 1738 to give “full faith and credit” to the underlying state court decision. Put another way, it could not find “cause” merely based on an argument that it should revise the outcome of the underlying proceeding because it did not agree with it on the merits. (That was particularly true in that the debtor had already twice unsuccessfully sought certiorari from the Supreme Court on that judgment.) The court also found that, where the plan specifically addressed and provided for payment of the precise claim when it became “allowed,” its terms were binding on the debtor and it was not free to seek a different result.
In re City of Detroit, 548 B.R. 748 (Bankr. E.D. Mich. 2016). Test for determining when claims accrue.
The case dealt with several instances where Detroit and the claimants differed over whether their claims accrued pre or postpetition and the court’s discussion of governing principles. Two involved employee disciplinary actions and the third dealt with payments under the No-Fault Insurance Act where the injuries occurred prepetition but the payments did not come due until postpetition. In one of the employee cases, the conduct (failing to submit to a drug test) and the beginning of disciplinary proceedings both occurred prepetition but the arbitration decision upholding her dismissal did not occur until postpetition. In the other, the employee had failed to show up for work on prior occasions and allegedly did so again on the day of the bankruptcy filing. The city did not initiate disciplinary action until a few days after the petition was filed. In each case, the claim was not actionable under state law, but the court found that the first employee and the car accidents were prepetition claim, while the other employee was not. The court discussed the state law cause of action test (espoused initially by the Third Circuit but later renounced); the “debtor’s conduct” test, and the “fair contemplation” test. The latter requires both that the conduct occur prepetition but also that the potential could be said to contemplate its existence so as to allow a claim to be filed.
In the Matter of Motors Liquidation Co. (Elliott v. General Motors LLC), 2016 U.S. App. LEXIS 12848 (2nd Cir. 7/13/16). Free and clear sale cannot bind those given inadequate notice.
This case deals with the interaction of the infamous “ignition switch” defects in GM cars with GM’s “free and clear” sale in bankruptcy in 2009. GM was well aware of the problem but gave no specific notice of it during its bankruptcy case in general or to the holders of cars with the faulty switch in particular. The Circuit Court noted that the bankruptcy was filed against a background where President Obama promised specifically that, in loaning money to GM to keep it going, the United States would ensure that warranties would be respected. It also noted that “New GM” acquired the business assets of bankrupt “Old GM” and certain selected liabilities but all other debts were left behind in Old GM with a relatively limited amount of cash, and a 10% equity stake in New GM (which could expand if claims against Old GM exceeded $35 billion). Old GM would become “Motors Liquidation Company” (“MLC”) and file a plan of liquidation and generally just concentrate on collecting and disbursing its assets. The court further noted that the sales order provided for new GM to assume liabilities for post-closing accidents and to assume express warranties – and, at the insistence of the state Attorney Generals, to assume liability for “Lemon Law” claims as an extension on the warranty issues. Just as the process against MLC was winding down, information began to emerge about the ignition switch defect and Old GM’s longstanding knowledge thereof.
A number of parties began to assert claims against new GM for accidents involving Old GM cars with the ignition defects, occurring from cars bought before or after the sale. Other parties asserted economic loss claims based on the tarnish on the brand, and a third group asserted claims for Old GM cars based on something other than the ignition switch. The bankruptcy court found a) Old GM knew of the problems pre-sale, b) it had failed to give notice to persons with the switches, c) they were entitled to actual, not just publication notice, and d) the failure to give such notice violated due process. It also found, though, that they were not prejudiced because they were essentially similar to other parties with pre-sale claims that had not been carried over to New GM and would have been treated the same way in the sale if they had been given notice. The court did agree that, if there were claims based on New GM’s own independent conduct in concealing defects, they could be asserted. The court also refused to allow the claims to be asserted against the Old GM trust, concluding that the plan had been substantially consummated and the claims were equitably moot.
On appeal, the Second Circuit agreed that the claimants had not been given due process but disagreed with the “no prejudice” ruling. It first began by revisiting what are “interests” that could be sold “free and clear” of under Section 363(f) (noting that its decision in In re Chrysler, LLC, 576 F.3d 108 (2nd Cir. 2009) had been vacated as moot). It noted that an “interest” clearly included in rem rights but may be broader. It agreed that “successor liability claims can be ‘interests’ when they flow from a debtor’s ownership of transferred assets” based in part on its view that sales under plans and under Section 363 should be “harmonized” as much as possible (despite the clear difference in language; i.e., Chapter 11 refers to “claims” and Section 363 does not). (Notably, no court using this approach has found any particular type of successor liability claim that does not flow from the ownership of the transferred assets – which is essentially a tautology because the transfer of assets is the factor that establishes the successorship rights to begin with.)
In any event, though, the court held that at most a sale could only cover the same “claims” that could be covered in a Chapter 11 plan; i.e., those defined by Section 101(5). A claim must be a right to payment that arose prepetition; it had not definitively addressed the context of contingent claims where the debtor’s negligence or misconduct had occurred prepetition but there had been no actual consequences to the victim when the case was filed. To avoid creating unlimited categories of claimants and to preserve due process, not only must the debtor’s conduct have occurred prepetition but “there must be some contact of relationship between the debtor and the claimant such that the claimant is identifiable.” Here, the court found that pre-closing accident claims of existing owners fell under the definition as did the economic loss claims (although they did not know of their loss prepetition). (Post-sale accidents would be covered by New GM’s assumption of warranty liability). Claims of “independent” liability against new GM based on its post-sale conduct are not claims based on prepetition conduct or rights to payment (much less they were not claims against the debtor). And, finally, the court held persons who bought existing Old GM cars after the sale did not hold claims. Although Old GM’s conduct was prepetition, those persons had no contact with Old GM and did not have the necessary “relationship.” As such, they did not hold “claims.” (Although, the court does not clearly note this, the GM sales order in fact limited the definition of a claim to that stated in the Code (see Par. AA of the Order -- (for purposes of this Order, the term “claim” shall have the meaning ascribed to such term in section 101(5) of the Bankruptcy Code), that language was inserted at the insistence of the States for precisely this purpose – to limit the “free and clear” provisions to no more than what the Code allowed).
It then discussed whether the Sale Order could constitutionally bar actions by the two groups that did hold claims. While bankruptcy law gives great protections to debtors, it does so only when they reveal the scope of their known liabilities so that claims can be filed. Although the ignition switch claims might be contingent in some cases (where an accident had not yet occurred or where the economic loss had not occurred due to lack of knowledge), they would still be claims and owners were entitled to actual notice. The court then found “prejudice” because a debtor seeking to consummate a transaction with numerous moving parts and a desire for a quick resolution has great flexibility in structuring the transaction. Business justifications – raised by those with knowledge of the case and a pending claim – may well be enough to sway the terms. Any uncertainty about their arguments and their success weighs against the offending party, not the claimants. Especially in a case like this with the involvement of the U.S. having great effect as to which liabilities would be assumed – and the strenuous intervention of the state Attorneys General which was shown to have resulted in changes in the order – it cannot be said with assurance that there would have been no difference in the result. The threat of a criminal prosecution (such as did occur when the information came out and resulted in a $900 million forfeiture payment from new GM) could have also swayed the results. Thus, it held, the plaintiffs could not be barred by the sale order. (Notably, this does not automatically mean new GM is liable – there are many limitations on asserting successor liability claims, but this at least gives them the ability to try those issues.) Finally, the court vacated the order holding that claims against the MLC trust were equitably moot as premature since such claims had not actually been filed yet.
Senco Brands, Inc. v. Ohio Dept. of Job and Family Services, 2016 Ohio App. LEXIS 2563 (Ohio Ct. App. 6/30/16). Basing successor’s unemployment premiums based on experience ratings of debtor is not an “interest,” not covered by “free and clear” sales order.
This case deals with one of the furthest extensions of what parties seek to include in a “free and clear” sale – namely whether the use of the debtor’s experience rating in the setting of the premiums for the payments paid by the purchaser for its own operations is an “interest” that can be covered by the sale order. In an early case, Michigan Emp. Sec. Comm. v. Wolverine Radio Co.., 930 F.2d 1132 (6th Cir. 1991), the court held that it clearly was not. Since then, though, in recent year, a number of courts have picked up on the expansion of the term “interest,” (noted by the Second Circuit in the Motors Liquidation Co. case) to assert that the transfer of the rating is barred, even when it has nothing to do with a claim against the debtor. The court there, though, firmly sided with the original Wolverine decision and against the expansion. (There may still be an issue in the end with whether the sales order wording was so broad as to go beyond the legal status of what is an interest, and/or to simply bar any ability to apply the ratings – the court here held it did not, but regardless of the outcome of that issue, the holding that the sales order should not be able to go that far will be very useful to any party seeking to object to such an order.) The court noted that the rating was not based on the debtor’s status as an entity in bankruptcy, nor did it turn on the purchase of the debtor’s assets (as opposed to the retention of the debtor’s workforce – who presumably cannot be sold even by a bankruptcy court). It may also depend on the buyer’s own conduct – i.e., does it resume the same business as the debtor as opposed to using the assets for some other purpose. The court noted that there was no basis to attribute the buyer’s actions (and the liabilities that it incurred for the premiums) to the debtor or to allow the state to assert a claim for the buyer’s premiums in the debtor’s case. Nor did the buyer provide a compelling reason why buyers from debtors should receive a preferable tax rate compared to all other employers buying existing businesses. Finally, on the facts in this case, the court was able to reject the argument that the supposed right to buy free and clear was a critical inducement to the sale in that the buyer had, in fact, bought the assets in 2009 and paid the premiums for several years before it finally raised the issue at the end of 2012.
In re Cousins International Food Corp. (Encanto Restaurants, Inc. v. Vidal), 2016 Bankr. LEXIS 2283 (Bankr. D. P.R. 6/14/16). Creditors not given notice of Section 363 sale were not bound by its provisions.
Where known creditors were given no notice of the debtor’s bankruptcy or the proposed sale of the business, their rights could not be cut off in a Section 363 sale. The terms of the order could not eliminate their right to assert successor liability claims against the buyer and the litigation of whether claims were valid would be left to the state court proceeding. General knowledge of a Chapter 11 case is not enough for known creditors, but they did not even receive that much information.
CHAPTER 11 PLAN PROVISIONS
In re One2One Communications, LLC (Quad/Graphics, Inc. v. One2One Communications, LCC), 2106 U.S. Dist. LEXIS 78305 (D. N.J. 6/14/16) (unpublished). Validity of debtor’s release of third-parties.
The debtor obtained a sponsor for its plan who proposed to pay $200,000 for the debtor’s equity, but the plan also proposed to have the debtor release all of its avoidance claims against all creditors, as well as all actions against the debtor’s principals, shareholders, and employee without any payment. The sponsor insisted that it would not provide funds if there was any chance it could be sued and that it was aware of the proposed payments. The primary creditor opposed the releases and argued that the recitation that it would not be cost-effective to pursue the claim was too cursory, particularly where it offered to pay up $20,000 for those claims. The bankruptcy court approved the settlement, but the district court remanded. While the courts are reluctant to approve releases of non-debtor by other non-debtors, the debtor may be able to agree to such a release if there is an identity of interests, a “substantial contribution” by the non-debtor, a necessity for the release to the reorganization, very strong support by the creditors and payment of most such parties. Here, the bankruptcy court erred by failing to analyze the consideration being supplied versus the value of what was being released.
In the Matter of Rogers, 2016 Bankr. LEXIS 2398 (Bankr. S.D. Ga. 6/24/16). Individual debtors remain subject to absolute priority rule; court would value assets rather than require auction.
The BAPCPA amendments revised the provisions applicable to individual Chapter 11 debtors; while the courts are split, the substantial majority agree with this court that the absolute priority rule continues to apply to those debtors. That does cause issues in cases such as this where the debtors guaranteed loans of a business they operate. While they have a payment plan for the business, the plan in their own bankruptcy had to deal with whether they could retain that asset if their liabilities as a guarantor were not paid in full. The court held that their ownership interest was subject to the absolute priority rule; to determine what, if anything they owed, that interest would have to be valued. The court did hold, though, that it would not extend the rule for normal corporate Chapter 11s that require a full-scale auction because that would tend to be overkill in most cases for the relatively small assets held by most debtors. If the court did not believe that the evidentiary hearing was sufficient, it could always order an auction at a later date.
CHAPTER 13 ISSUES
Germeraad v. Powers, 2016 U.S. Dist. LEXIS 11433 (7th Cir. 6/23/16). Standards for modifying Chapter 13 plan due to change in income.
About halfway through the debtors’ plan, the trustee learned from reviewing their tax return that their income had increased by $50,000. The trustee moved to modify their plan to increase payments for the balance of the plan. The bankruptcy court agreed with the debtor that the Code did not allow modification based on the debtor’s increased ability to pay and that, if it did, the trustee had not proven his case. The district court affirmed on the first ground, but the Seventh Circuit reversed. An order denying a proposed modification is final and may be appealed. The appeal is not moved or barred by the statute; while the Code limits a plan to proposing payments for only five years, it does not preclude a debtor from making payments for more than five years if needed to cure a default. Here, if the court agreed with the trustee, the decision would relate back to the original filing date and leave the debtor in default for that period. Allowing the debtor to make higher payments to cure that default would not violate the Code and the possibility of doing that would keep the issue from being moot. Similarly, because the request to modify was made before the plan payments ended, it could still be acted on even if the payments were later completed.
Section 1329 allows certain changes to be made in a modification but does not state the standard for when one is allowed. Just as courts routinely modify a plan if adverse circumstances limit the debtor’s ability to comply, there is no reason they cannot similarly modify the plan if the debtor’s finances improve. The modification is not made based on any need to satisfy the disposable income test in Section 1325(b) (which may not apply); but rather simply on the inherent discretion left with the courts under Section 1329. Nor must the trustee affirmatively show that “good faith” requires an increase. The plan must be proposed in good faith (by the creditor or trustee) but good faith is not a separate, additional requirement.
In re Anderson (Jernigan v. Hancock), 2016 U.S. App. LEXIS 7634 (4th Cir. 4/27/16). “Curing” default under Chapter 13 plan does not result in elimination of default interest rate.
Where debtors defaulted on their mortgage, which resulted in an increase from 5 to 7% in the loan interest rate, they could “cure” the arrearages by paying them over time, but that “cure” did not extend to eliminating the lender’s right under the mortgage agreement to charge the higher default rate for the balance of the contract. Doing that would “modify” the lender’s rights in violation of Section 1322(b)(2). The “cure” in Section 1322(b)(5) refers to the right to force a deceleration of the loan balance and resume long-term payments, but such payments must conform with the loan documents including the default provisions. Inability of lenders to enforce default interest rates would make them less likely to want to offer loans and that concern is the prime reason for the anti-modification language in Section 1322(b)(2).
Shovlin v. Klass, 2016 U.S. Dist. LEXIS 99617 (W.D. Penn. 7/29/16). Chapter 13 debtor was not barred from completing payments under plan in more than five years.
Although a debtor may not propose and confirm a plan with more than a five-year payment term, that does not mean that the debtor is barred from making payments after the five-year period expires in order to cure a temporary default that occurred during the plan term or to make up any discrepancies in what was owed under the plan. Since a debtor must complete its plan payments to obtain a discharge, providing a minor degree of leeway on when the payments end ensures that he does not lose the benefit of filing and complying with his obligations in Chapter 13.
Dufrene v. ConAgra Foods, Inc., 2016 U.S. Dist. LEXIS 91029 (D. Minn. 7/12/16). Chapter 13 debtor has authority to pursue postpetition causes of action on behalf of estate.
Postpetition actions are generally property of estate during pendency of Chapter 13 case but Section 1306(b) leaves debtor “in possession” of that property unless the plan provides otherwise. Both the trustee and the debtor in possession have authority under Rule 6009 to purse estate causes of action. Six courts of appeal (2nd, 3rd, 4th, 7th, 10th,and 11th) have agreed the debtor has standing to pursue such actions; only the 6th Circuit disagrees. The court here sided with the majority view.
In re Williams, 2016 Bankr. LEXIS 2733 (Bankr. E.D. N.C. 7/28/16). Chapter 13 debtor must pay for full length of plan even if some creditors drop out.
Where the debtor’s plan provided that unsecured creditors would receive any amounts available after the secured lender was paid off (although that was projected to be $0), the debtor was not entitled to end her plan and receive a refund of the amounts that would have gone to that lender when it chose to cancel the debt. The plan was based on the amount the debtor could afford to pay, not just what she would pay one creditor. The plan projection was a minimum, not a cap on what the other creditors were entitled to.
In re Crawford, 2016 Bankr. LEXIS 2695 (Bankr. W.D. Tex. 7/21/16). Conditions on confirmation.
Where the Code allows a debtor to either pay all of his disposable income for the required period, or pay creditors 100% of their claims, courts have held this not only allows debtor to complete plan without paying 100% but also allows debtor to pay less than disposable income and stretch out payments to creditors to maximum term. Where debtor chose to do this, court was not barred from imposing condition that he must actually pay claims in full to obtain discharge and could not modify plan to avoid full payment.
In re Cantu, 2016 Bankr. LEXIS 2585 (Bankr. E.D. Va. 7/14/16). Debtor that pays off 401(k) loan may use funds freed up from payment to begin making contributions, subject to good faith limitation.
The debtor was paying on two 401(k) loans when he filed his plan; when he paid one off a few months later, he moved to modify his plan to allow the amount of the payment (about $270 a month) to be used to make contributions rather than being paid to creditors (who were receiving about 13%). The court reviewed three lines of analysis on the issue: a) the debtor may not make any contributions during the case; b) the debtor may continue prepetition contributions but may not make new ones, and c) the debtor may begin making contributions postpetition (whether wholly new or resuming ones that had been barred while he was paying off the loan) up to the maximum allowed amount, subject only to a good faith analysis. The court sided with the third view, concluding that retirement contributions were excluded from disposable income in Section 541 and that was enough to allow them to be made in Chapter 13. And, the court found the debtor was acting in good faith, since he had been precluded from making contributions due to his loan, and since the amount was relatively modest and well under the maximum limit.
In re Nicodemus, 2016 Bankr. LEXIS 2582 (Bankr. S.D. Ohio 6/30/16). Plan may not include provision requiring payment of retained funds to debtor’s attorney on dismissal.
Debtor’s counsel dealing with problems such as that set out in Bateson, below, where funds are paid to the trustee but not paid out on conversion or dismissal have sought to contract around the problem by having the debtor agree to have the payments made to counsel before any balance is sent to the debtor. The court held, though, that, after conversion or dismissal, the trustee had no authority to do anything but give the money to the debtor and, presumably, before conversion or dismissal, the plan had not provided for full payment at that point to the attorney. Perhaps the debtor could advise the trustee of a plan to request conversion or dismissal so the trustee could send out whatever funds he had on hand but that would not deal with a scenario where the trustee had some funds but they were not all allocated to payment of administrative claims first.
In re Bateson, 2016 Bankr. LEXIS 2359 (Bankr. E.D. Mich. 6/23/16). Funds held by trustee on case dismissal post-confirmation must be returned to debtor, not creditors.
In Harris v. Viegelahn, 135 S.Ct. 1829 (2015), the Supreme Court held that Section 348 required that funds in a converted case must go to the debtor not the creditor, based on its conclusion that, upon conversion, the trustee had no further role in the case and no authority to distribute funds. The Court also noted the general view that debtors should be given incentives to try to complete a Chapter 13 plan by not being penalized if it failed. The court here held the same logic applied, with even greater force, to dismissals of the complaint. The main takeaway is that trustees must move diligently to distribute funds quickly and keep as little as possible on hand after they have been paid in.
In re Parker (Parker v. Parker), 2016 Bankr. LEXIS 2119 (Bankr. S.D. Tex. 5/26/16). Right of creditor to garnish trustee after dismissal.
Where the debtor pays in funds to the trustee debtor prior to confirmation of a plan and those funds are not distributed, they return to property of the debtor upon dismissal of the case. At that point, while the trustee is holding them, he is like any other third party holding funds of a debtor and is subject to being garnished by a creditor. The automatic stay or discharge injunction do not apply so the creditor may proceed until the funds have actually been returned to the debtor.
Nelson v. Midland Credit Mgmt. Inc., 2016 U.S. App. LEXIS 12683 (8th Cir. 7/11/16). Filing a time-barred claim does not violate the Fair Debt Collections Practices Act (“FDCPA”).
Contributing to a Circuit split, the Eighth Circuit joined the Second Circuit in holding, contrary to the Eleventh Circuit, that the FDCPA did not apply to untimely claims. The court viewed the bankruptcy structure – where the trustee had a duty to object to such claims and where the harm in allowing an invalid claim would typically fall on other creditors, not the debtor – as showing that the conduct was not “unfair, unconscionable, deceptive, or misleading,” as required to prove a FDCPA violation.
In re Robinson (Robinson v. JH Portfolio Debt Equities, LLC), 2016 Bankr. LEXIS 2742 (Bankr. W.D. La. 7/28/16). Filing a time-barred claim does not necessarily violate the Fair Debt Collections Practices Act (“FDCPA”).
In this case, the court concluded that there was no inherent conflict between the Code and the FDCPA so as to preclude a challenge based on the filing of a time-barred claim. However, for much the same reasons relied on by the Eighth Circuit – including the fact that a stale claim still existed under state law and the issue had to be raised as an affirmative defense, and the fact that a Chapter 13 trustee existed part of whose job was to object to stale claims – the court found that the debtor had not alleged any actual FDCPA violations based merely on the filing. There was nothing false or fraudulent in the claim as filed and the creditor had done nothing coercive beyond the filing. Thus, while the court was prepared to assume a valid FDCPA claim could be filed, it held that none had yet been alleged.
Nissour-Rabban v. Capital One Bank, 2016 U.S. Dist. LEXIS 81373 (S.D. Cal. 6/6/16). Credit-reporting of debts during bankruptcy.
Reporting a debt as “charged off” after the petition is filed but before the discharge is entered is factually accurate and does not necessarily violate the Fair Credit Reporting Act. An allegation that the creditor had failed to report the debts in accordance with industry standards did state a cause of action for inaccurate or misleading information under the FCRA.
Marshall v. Honeywell Technology Systems, Inc., 2016 U.S. App. LEXIS 12759 (D.C. Cir. 7/12/16). Chapter 7 debtor that failed to list pending cause of action was estopped from litigating it after obtaining discharge.
Where the debtor did not initially reveal her pending EEOC claims and never amended her schedules to list them after they were partially revealed to the trustee upon questioning, the claims remained part of the estate and were not abandoned on discharge. However, after the trustee much later was able to take control of the suits, he was unable to effectively pursue them and abandoned them then. The defendants sought to dismiss her cases based on judicial estoppel and the court agreed. Although there was some limited disclosure during her case, the net result of her actions was that it became impossible to pursue the case for the benefit of the creditors and the district court did not abuse its discretion in dismissing her EEOC cases so she did not benefit. A dissent argued that her oral disclosure should have been considered as part of an analysis as to whether she had been mistaken in filling out the forms, especially if that would allow recovery from the defendants for the benefit of her creditors.
In re Bayou Shores SNF, LLC (Agency for Health Care Admin. v. Bayou Shores SNF, LLC), 2016 U.S. App. LEXIS 12727 (11th Cir. 7/11/16). Recodification in 42 U.S.C. 405(h) of bar on judicial review of decisions made in the Medicare administrative process prior to completion of that process omitted reference to bankruptcy jurisdiction from scrivener’s error, bar still applied.
In this case, the federal and state governments issued several deficiency notices to a nursing facility and were taking steps to terminate its provider funding agreements. It filed bankruptcy, and the bankruptcy court concluded it could review those determinations because Section 405(h) did not reference 28 U.S.C. 1334 in its limits. It then decided the deficiencies weren’t that bad and confirmed a plan that allowed the facility to keep operating. The district court reversed and the Eleventh Circuit affirmed.
It gave an extremely detailed analysis of the legislative history and the bases for deciding that there had been a “scrivener’s error,” particularly since the codifying statute itself stated that it was not intended to change the existing law. The court systematically rebutted arguments by courts that relied on the “plain language” of the section (such as the bankruptcy court below). It noted the policy arguments of those who urged that requiring full exhaustion could make a facility’s bankruptcy infeasible, but basically concluded it was up to the government, not the courts to decide if a facility was worth saving. In that regard, it stopped to note the violations found by the government were substantially more serious than the somewhat sanitized version stated in the bankruptcy court’s opinion, leading credence to the government’s decision to terminate the provider after three strikes. Accordingly, the court held, the facility could not require that its provider agreements be continued.
The net result of the decision will leave the fate of these facilities largely in the hands of the government; it may well wish to see an operation continue to serve a particular population and it has discretion to do so. But, if it believes an operation is unsalvageable, it can enforce that decision by terminating the agreements and the result probably cannot be changed on appeal soon enough to preserve the business. It will also strengthen the government’s hand in requiring that existing payment disputes be resolved (by payment, or by negotiation to an acceptable figure) before a provider number may be transferred.
In re Town Center Flats, LLC (ECP Commercial II LLC v. Town Center Flats), 2016 U.S. Dist. LEXIS 42063 (E.D. Mich. 3/30/16). Rents subject to perfected assignment to secured lender following debtor’s mortgage default were not property of estate and could not be cash collateral.
Where the secured lender had issued the required notices to trigger an assignment of rents to it following the debtor’s default on its mortgage payments, that assignment remained valid after the bankruptcy was filed and precluded the rents from becoming property of the estate. State law was the governing factor and it clearly treated the assignment as depriving the debtor of all rights in the rents until the assignment was terminated. (There is no discussion as to whether the assignment could be considered a preferential transfer that could be undone in the bankruptcy.) The courts are somewhat split on this, in large part because it could be a death sentence for single asset real estate cases.
In re The Archdiocese of Saint Paul and Minneapolis, 2016 Bankr. LEXIS 2769 (Bankr. D. Minn. 7/28/16). Non-profit institutions could not be added to bankruptcy case through substantive consolidation; facts did not warrant remedy in any event.
The court held that Section 303(a), which bars involuntary bankruptcy filings against non-profit entities would preclude the use of Section 105(a) as a means of bringing non-filing entities into the bankruptcy of the parent archdiocese. In addition, the court held, the complaint did not specifically identify the potential liability of each of the 200 parishes that were sought to be added, there was no showing that their finances were inextricably intermingled (even if the Archdiocese did exercise control over their finances), and because charges did not exist against all of the parishes, it would not necessarily benefit all of the creditors to combine their finances.
In re Sanjel (USA) Inc., 2016 Bankr. LEXIS 2771 (Bankr. W.D. Tex. 7/28/16). Relief in U.S. court in Chapter 15 case from stay entered by Canadian court.
An American bankruptcy court has the power to modify the director and officer stay imposed by the Canadian court in the main bankruptcy case, which stay was initially recognized and applied in the American Chapter 15 case. Where it was necessary to modify the stay to allow at least some actions to be brought against the directors and officers under the United States Fair Labor Standards Act, the court held it had the power to do so and it was not necessary for American creditors to go to Canada to ask permission to proceed in American courts under American law. They were not seeking a recovery from the debtor and they should be allowed to proceed to the extent necessary to avoid statute of limitations issues.
In re Love, 2016 Bankr. LEXIS 2634 (Bankr. D. S.C. 7/8/16). Debtor cannot force lender to allow sale and release of its lien on only part of a part of a parcel of land where sale will not pay claim in full.
Debtor could not use Section 363 to force lender to allow sale of a part of a parcel of land (with payment to be applied to debt) where sale would not fully pay off the lender’s claim. The sale would not meet any of the Section 363(f)(1-4) provisions and the court found that it would not satisfy Section 363(f)(5) either. The court read the section to require a showing that the debtor or trustee (not some other party such as a lien holder) could actually bring some valid proceeding that could “compel” the debtor to accept a monetary payment for part of the parcel in exchange for part of its lien. The court held that none existed and, accordingly, the lender could not be forced to accept the proposed sale.
In re Ayobami, 2016 Bankr. LEXIS 2655 (Bankr. S.D. Tex. 6/9/16). Even after Schwab, debtor may seek to exempt 100% of value of asset and claim property (and appreciation) if value when exempted was within statutory limit.
Although most courts read Schwab v. Reilly, 560 U.S. 770 (2010) to preclude debtors from claiming the right to exempt an entire asset if the exemption is phrased in terms of a certain dollar value – at least unless the trustee fails to object to such a claimed exemption – the court here held that Schwab actually intended to allow debtors to exempt an asset as a whole, even if the exemption is limited to a particular dollar amount. That is, if an asset is worth $9,000, and the exemption level is $10,000 and the debtor asserts an exemption of 100% of “fair market value,” the court held this meant the debtor could then claim ownership of the entire asset and capture any postpetition appreciation. Thus, if the trustee held onto the asset and later sold it for $11,000, the debtor was entitled to the $11,000, not the $9,000, or even the $10,000 limit. The courts are distinctly split on this issue so it may find its way back up to the Supreme Court again.