Tuesday, September 15, 2015

After Woerner, Courts Look for "Good Gambles"

You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run
--Kenny Rogers, The Gambler

After the Fifth Circuit’s opinion in Barron & Newburger, P.C. v. Texas Skyline Ltd. (Matter of Woerner), 783 F.3d 286 (5th Cir. 2015), lawyers for bankruptcy estates breathed a sigh of relief, knowing that they could still be compensated for “good gambles” gone awry.   However, how would the courts measure a “good gamble” in the context of a case that didn’t quite work out?   Two decisions issued on the same day help answer that question.    In Case No. 13-33264, Digerati Technologies, Inc. (Bankr. S.D. Tex. 8/21/15), a highly contentious case resulted in a confirmed plan but only after an initial plan proposed by management was rejected.   In Case No. 10-11365, In re Woerner(Bankr. W.D. Tex. 8/21/15), the Bankruptcy Court that ruled in the case that was eventually reversed by the en banc Fifth Circuit reconsidered its ruling following remand.   In both cases, debtor’s counsel received some but not all of the fees requested.

Judge Jeff Bohm described the new regime following the death of Pro-Snax in these words:
The Court issues this opinion in the wake of the Fifth Circuit's issuance of In re Woerner,783 F.3d 266 (5th Cir. 2015), a watershed case because of its rejection of the 17-year-old holding of Matter of Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998). Now, the law in the Fifth Circuit is that bankruptcy courts should evaluate fee applications under a "good gamble" approach rather than the "identifiable, tangible, material benefit" retrospective standard. The debtors' bar is breathing a sigh of relief in the wake of this change in the law. However, as this opinion shows, merely because Pro-Snax is gone does not necessarily mean that fee applications will more easily be approved in their entirety.

Digerati Technologies, Inc., p. 1.   This post will look at what the new cases tell us about how courts will look at compensation in less than successful cases.

What Happened

Digerati Technologies, Inc. involved a publicly held company with over 6,000 shareholders.   At the time the case was filed, two factions contended that they were the rightfully constituted board of directors.    The management group that filed the bankruptcy was opposed by a creditor group consisting of individuals who had sold their oilfield services companies to the Debtor.  

In its opinion, the Court detailed several motions put forward by Debtor’s counsel that were denied, a discovery dispute and a plan that was denied because the continued participation of management was not in the best interest of creditors.    Ultimately, the Debtor proposed a joint plan with the principal creditor group which was confirmed.

Debtor’s counsel filed a final fee application seeking fees in the amount of approximately $1.2 million.    The fee application was opposed by the creditor group.   The Court conducted hearings on the fee application over parts of eight days.  Three witnesses testified, two attorneys from the applicant and one attorney for the objectors.     The Court found that each of the attorney-witnesses were credible and accorded their testimony equal weight.

In the Woerner case, an individual filed chapter 11 bankruptcy following an adverse ruling in a state court case involving claims of fraud and breach of fiduciary duty.    Two creditors took an extremely active role in the case, both of whom had been partners with the Debtor in different partnership ventures.    The Texas Skyline parties ultimately recovered a judgment in the amount of $1,308,000.   John T. Baker, Jr., a partner in different ventures, asserted unliquidated claims.   Both Texas Skyline and Baker, as well as a third creditor, filed complaints to determine dischargeability.

The Texas Skyline parties stated an interested in reaching a negotiated settlement.   The parties conducted a mediation before a sitting Bankruptcy Judge.   Although the mediation was not successful, the parties continued to negotiate throughout the case.    Baker filed a Motion to Convert the case based on the fact that the Debtor had omitted certain brass statues from his schedules.   Debtor’s counsel amended the schedules to disclose the statues, as well as additional assets the Debtor had failed to schedule.   Shortly thereafter, the Debtor and Baker reached a settlement which was documented in a Motion to Compromise and Settle filed with the Court.  However, Baker reneged upon the settlement and insisted on proceeding with the hearing on the Motion to Convert.    The Court granted the Motion to Convert based primarily on the failure to disclose.   Although the Debtor had filed a proposed plan, the Court did not allow the plan to go forward.

After conversion, the firm filed a fee application in the amount of approximately $140,000.     Both the Texas Skyline parties and the U.S. Trustee objected to the fee application.  The Court conducted a hearing at which two attorneys for the applicant, as well as the Debtor’s state court counsel testified.   The objecting parties did not offer any witnesses.    Based on the Pro-Snax decision, the Court denied 85% of the requested fees.   

Debtor’s counsel appealed to the District Court and the Fifth Circuit, both of which affirmed the Bankruptcy Court’s decision.   However, the Fifth Circuit panel took the unusual step of issuing a concurrence recommending that the en banc court reconsider the Pro-Snax decision.   In a unanimous en banc opinion, the Court of Appeals reversed Pro-Snax and remanded the case to the Bankruptcy Court for further proceedings.   
Following remand, the Bankruptcy Court allowed the parties to submit additional briefing and took the matter under advisement.

The Digerati Ruling

Judge Bohm described the standard after Woerner as follows:

Woerner reversed the Fifth Circuit's prior retrospective test, under which professionals could only be compensated for services that actually resulted in a tangible, identifiable, and material benefit to the estate. See Pro-Snax, 157 F .3d at 426. Instead, under the new, prospective test, "[ w ]hether the services were ultimately successful is relevant to, but not dispositive of, attorney compensation." Woerner, 783 F.3d at 276 (emphasis added). In sum, the Fifth Circuit held that when read in its entirety, § 330 "permits a court to compensate an attorney not only for activities that were 'necessary,' but also for good gambles-that is, services that were objectively reasonable at the time they were made-even when those gambles do not subsequently (or eventually) produce an 'identifiable, tangible, and material benefit.'" Id. at 273-74. If professional services were either "'necessary to the administration' of a bankruptcy case or 'reasonably likely to benefit' the bankruptcy estate 'at the time at which [they were] rendered,' see 11 U.S.C. § 330(a)(3)(C), (4)(A), then the services are compensable." 5 Id. at 276. However, the Fifth Circuit emphasized that its Woerner ruling "is not intended to limit courts broad discretion to award or curtail attorney's fees under § 330, 'taking into account all relevant factors.'" Id. at 277 (quoting § 330) (emphasis added).

Digerati Opinion, p. 21.    The Court went on to explain that the lodestar approach continued to be the standard for assessing attorney’s fees.   Applying the lodestar approach, the Court took a three step approach.   First, it looked at the hours billed to see whether they were reasonable.   Second, it looked at the hourly rates charged.   Finally, the Court looked at “all other factors.”

Lodestar:  Reasonable Hours

In determining the amount of reasonable hours, the Court looked at two basic factors:  whether they were properly documented and whether the services themselves were reasonable or necessary, i.e., whether they were good gambles.    The Court denied some fees because the time entries describing them were too vague or because the time entries contained lumping.    The Court stated that “(t)ime entries that do not provide sufficient detail to determine whether the  services  described are compensable may be disallowed due to vagueness.”   Opinion, p. 24.   The Court noted that the vagueness could have been cleared up through testimony at the hearing but was not.   (Query:  How would the attorney know which time entries the Court thought were vague so as to provide the testimony?).    The Court pointed out that lumping time entries violates the U.S. Trustee Fee Guidelines.   The Court also pointed out that Board Certified attorneys should have been aware of the Court’s stance on lumping.    The amounts deducted for failure to properly document the time entries totaled about 6% of the requested fees.

Next the Court went through the twenty categories within the fee application to determine “whether the services rendered were reasonable or necessary.”    The Court complained that in some instances the applicant did not provide testimony as to why the services performed were reasonable or necessary.   In several instances, the Court identified services performed which did not represent a “good gamble.”    Pleadings which were not filed or which were filed and then withdrawn drew the Court’s attention.    The Court was also critical of a motion for post-petition financing which was denied due to “the poor preparation and paucity of relevant and convincing testimony that the Applicant adduced at the hearing.”    The Court denied approximately 7.5% of the requested hours for services that were not reasonable or necessary.
Finally, the Court ruled that the hours spent on some tasks which were reasonable or necessary were nevertheless excessive.    In some cases, the Court compared the number of pages of a particular document filed to the number of hours spent to produce it.    This resulted in a deduction of just under 1% of the hours. 
The Court’s extensive review of the hours billed resulted in a total reduction of just under 15% of the total requested.

Lodestar:  Hourly Rates

In the next step, the Court reviewed the hourly rates billed.    While the attorneys did not provide specific testimony as to the rates charged by other attorneys in the jurisdiction, the Court took judicial of rates charged by other similarly skilled practitioners.     As a result, the Court approved the hourly rates of $400.00 per hour and $275.00 per hour charged by the two principal attorneys on the file.   (Note:   I have performed a fee survey of rates charged in the Western District of Texas which indicated that these rates are below market in my District).  
Applying the Johnson Factors

The Court did not make any adjustment to the fees based upon the Johnson factors, finding that these factors were largely subsumed within the lodestar analysis. 
All Other Relevant Equitable Factors

The Court’s final analysis concerned “all other relevant equitable factors.”   This language is taken from Judge Jolly’s concurring opinion in Woerner where he stated:

(1) a court is permitted, but not required, to award fees under § 330 for services that could reasonably be expected to provide an identifiable, material benefit to the estate at the time those services were performed (or contributed to the administration of the estate); and (2) courts may consider all other relevant equitable factors, as stated in § 330(a)(3), including as one of those factors, when appropriate, whether a professional service contributes to a successful outcome.

 783 F.3d at 278 (Jolly, J., concurring) (emphasis added).

The Court adjusted the fees downward based upon three additional considerations:   failure to disclose a prior relationship with an investment banker, preferring the interest of management and litigation tactics.  

The Court noted that under In re American International Refinery, Inc., 676 F.3d 455 (5th Cir. 2012), the Court could deny all compensation based upon failure to make adequate disclosure.  In this case, the attorneys failed to disclose that they had previously represented the proposed investment bankers in appealing one of Judge Bohm’s orders.    The law firm did not disclose its prior representation of the investment banker.    The Court found that the failure to disclose the relationship was “related to the limited success of the Debtor’s case, because this relationship led—at least in part—to the employment of an investment banker . . . whose services were woeful and did not come within hailing distance of providing the benefit to the estate that” was initially promised.    Opinion, p. 70.    Because the failure to disclose was not as egregious as in American International Refinery where the Fifth Circuit approved a 20% deduction and because the case resulted in a “fairly successful reorganization,” the Court ordered a reduction of 5%.

The Court also found that the attorneys had initially proposed a plan which retained the Debtor’s existing management as the sole officers and directors “with excessive compensation packages” which rendered the plan “patently unconfirmable.”    Because of the “overly cozy” relationship with management, the Court deducted an additional 5% from the fee request.

Finally, the Court made a deduction for “unsavory” litigation tactics.   After the record was closed on the fee application but prior to closing arguments, the firm filed a Supplement to its fee application.   The first section informed the Court of the decision in the Woerner case and was “entirely appropriate.”   However, the second section included a discussion of the arrest of one of the objecting parties with copies of relevant documents.   The Court found that this was “blatantly beyond the scope of the authorized briefing” and “irrelevant to the issues before the Court.”    Based on “this ‘Rambo’ conduct,” the Court deducted an additional 2.5% from the fee request.

In the final analysis, the Court awarded $835,014.57 out of a total request of $1,155,321.50 amounting to about 72% of the original amount sought.   While a 28% reduction is no doubt painful, receiving compensation of over $800,000 is still a good pay day.   Given the contentious nature of the case and the fact that the first plan was shot down, this could even be viewed as making a silk purse out of a sow’s ear.   The Debtor’s attorneys have appealed and the objecting parties have cross-appealed.   As a result, there may be another addition to the Fifth Circuit’s growing jurisprudence on attorney’s fees in bankruptcy.

The Woerner Remand

The Court described the history of the case and the ruling by the en banc Fifth Circuit in detail.  It noted that the Court of Appeals had given it the following instructions:

Because our opinion today announces a new legal rule, and out of an abundance of caution given the complex facts of the case before us, we remand this matter for the bankruptcy court to evaluate whether B &N is entitled to fees under the prospective, ‘‘reasonable at the time’’ standard. 
Opinion, p. 8.    Following remand, Barron & Newburger and the U.S. Trustee submitted additional briefing to the Court while the Texas Skyline parties merely referred the court to its prior briefing.   The U.S. Trustee contended that the filing of objections to dischargeability "should have alerted Applicant to the problems that their clients had created and continued to foster by their lack for candor during the case."    Essentially, the U.S. Trustee argued that Debtor's counsel had a duty to give up at the first sign of trouble.   

The Court did not accept the U.S. Trustee's position that no additional compensation should be granted, although it did not award as much as Barron & Newburger had requested either.   

The Court found that fees incurred under the category of Asset Analysis and Recovery should have been allowed with the exception of fees related to a constructive trust on Debtor's homestead.    

The Court increased the amount that it awarded for Case Administration from $5,000.00 to $20,751.50.   The Court allowed fees for providing required reporting and responding to discovery requests from creditors.   The Court found that "B&N had a duty to represent the Debtors" with regard to a motion to convert and motion to compromise that was filed, but found that the amount was excessive.   The Court allowed approximately one-third of the fees incurred in conducting discovery and litigating the unsuccessful effort to prevent conversion.   

Under the category of claims determination, the Court allowed all of the fees except for those which were for the benefit of the individual debtor.

The firm did not fare as well with regard to the fees spent preparing a plan and disclosure statement.  The Court explained:
This is the most difficult aspect of B&N’s fees to resolve. The undersigned judge presided over all of the proceedings through conversion to chapter 7 and adjudicated four dischargeability actions against Debtors. The Court had the definite conclusion early in the case that, notwithstanding B&N’s efforts, there was never going to be a consensual plan. While the Court commends B&N’s efforts at mediation, Debtors’ pre-existing misappropriation of partnership assets that precipitated the filing of chapter 11 case, coupled with the repeated misrepresentations in schedules and Debtors’ lack of credibility, leads this Court to the firm conclusion that this case was doomed from the start.

As such, this Court must balance the professional duty of the lawyer to represent the chapter 11 individual debtor against whether the services were reasonably necessary at the time they were rendered. In doing so, the Court believes that it should not reach the merits of whether a chapter 11 plan could be confirmed, but rather, could the case have proceeded to confirmation hearing in the context of a motion to convert the case to chapter 7. Under the circumstances of this case, the Court concludes that, based on the record before it, the services related to the Disclosure Statement and Plan were not reasonably necessary at the time they were incurred. The Court understands the argument that the filing of a chapter 11 plan afforded creditors the prospect of repayment; however, that possibility is not supported by the record recognizing the lack of creditor support at the time of conversion to chapter 7.
Opinion, pp. 18-19.

The Court allowed fees incurred in connection with employment of professionals finding that these services were reasonable at the time rendered.

The Court declined to award any additional fees with regard to preparing the schedules and statement of financial affairs.    The firm charged $5,000.00 for preparing the original schedules and for two amendments.   In both of its rulings, the Court allowed $2,500.00 in this category.   The Court found that preparing schedules in an individual chapter 11 case should not be that much greater than in a chapter 13 proceeding.
Simply put, schedules and a statement of financial affairs are customary in all bankruptcy cases. Moreover, the preparation of schedules in a chapter 13 individual case and those in an individual chapter 11 case are not that different. What distinguishes chapter 13 and individual chapter 11 cases is many times the amount of debt involved. The Court recognizes that the cost of a chapter 11 case is more than a chapter 13, but questions why it  cost over $5,000.00 to get accurate schedules and a statement of financial affairs. The only explanation that B&N provided was that it had to independently verify Debtors’ valuations of their own assets and that further inquiries were necessary when it became apparent that Debtors had not accounted for all their assets. Here, the Court remains convinced that the time expended on filing the amended schedules and SOFAs was attributable to Debtors’ conduct. Neither the creditors nor the estate should have to bear the additional expense. Under the facts of this case, the Court finds that original fee award of $2,500.00 is appropriate and will not award any additional fees in this category.
Opinion, pp. 20-21.    This ruling highlights a seeming inconsistency in priorities.   The Court and creditors expect that schedules and the statement of financial affairs will be accurate.  Indeed, the Court's primary complaint was that the Debtors omitted approximately $10,000 in assets from the original schedules.   However, the Court also expects that counsel will not spend any more than would be done in a consumer chapter 13 case.   

In the final analysis, the firm received $46,311.00 out of $130,656.50.   This represented nearly three times the amount of fees initially approved under Pro-Snax, but was still only 35% of the total.   Two factors offer some solace.   The allowed fees will consume much of the estate.   A higher award would have been gratifying but ultimately uncollectible.    Additionally, the Court approved a Motion to Clarify which allowed the firm to seek the disallowed fees from the individual debtor.   

Disclosure:   The Woerner case involved my firm.   As a result, my objectivity might not be the same as when I discuss someone else's case.   However, I felt it was important to provide the final act in a drama that had been widely followed by the bar.   Also, I frequently write about the courts judge other lawyers and clients.   Turnabout is fair play when it is our turn to be in the spotlight.    

Lessons to Be Learned

1.  Results still matter.   In the Digerati case, the Court said some uncomplimentary things about the lawyers but awarded them 78% of their requested fees.   In the Woerner case, the Court had nothing bad to say about the lawyers but they only recovered 35% of their fees.   The difference is that Digerati had a confirmed plan while Woerner had a conversion and waiver of discharge.

2.  Following Woerner, if you find your fees challenged, be sure to explain why you thought the action you took was a good gamble.   In the Digerati opinion, the Court repeatedly stated that there was no explanation of why it seemed like a good idea at the time. 

3.  There is a randomness to the fee application process.    Judge Bohm wrote an 83 page opinion with 400 pages of supporting exhibits (thanks to his dedicated law clerks and interns).    He took the time to sift through a massive fee application and document things like lumping and vague time entries.   In the Woerner case, the U.S. Trustee appeared to take a visceral dislike of the law firm and made it their mission to say as many bad things as possible.   These are both unusual cases.   In the typical instance, fees are approved without objection.    Thus, fee requests which could have been dramatically cut in one case pass through without objection in another.

4.  In these two cases, there was no reward for exercising billing judgment.   Hoover Slovacek clearly charged a below market rate in the Digerati case.   If they had charged rates that were 20% higher, they would have still billed a market rate and would have recovered as much as they initially requested.   In Woerner, Barron & Newburger aggressively no-charged time and charged a reduced rate where multiple attorneys were involved.   However, in both cases, the starting point for the analysis was what the firms actually charged rather than what they could have charged.  This seems to be a necessary consequence of the lodestar approach.    The lesson here appears to be to bill high so that more of your fees will survive a challenge.  

Tuesday, September 08, 2015

Texas Judges Explore State Law on Liens and Homestead Exemptions

Much state law regarding liens and property rights emerges from the Bankruptcy Courts because they are frequently the first to confront novel issues.   Two recent opinions from the Western District of Texas bankruptcy judges confirm this trend.   In one case, Judge Tony Davis found that an option to acquire a leased homestead could be claimed as exempt, No. 14-11006, James Wayne See (Bankr. W.D. Tex. 7/14/15), while in the other, Chief Judge Ronald King rejected an attempt to void a judgment creditors' lien under the Texas Property Code, Studensky v. Buttery Company, LLP,  Adv. No. 15-6001 (Bankr. W.D. Tex. 7/2/15).

Homesteads and Future Interests

The general rule in Texas is that a homestead may only be claimed in a possessory interest.   Because future interests, such as a remainder interest, are not capable of being possessed, they generally cannot be claimed under a homestead exemption.   However, in the See case, Judge Davis was faced with an unusual fact scenario.    

In a prior bankruptcy, the Debtor's mother had sued him for a nondischargeable debt.  In settlement of that adversary proceeding, the Debtor agreed to a non-dischargeable judgment for $150,000 and his mother agreed to lease three tracts of property to him and to grant him an option to purchase the property within 180 days after her death.    The Debtor did not receive a discharge in the first case because the case was dismissed.   After the settlement was reached, the Debtor filed a second chapter 7 case.   In this case, he claimed both the leases of the property and the options to purchase under the homestead exemption.   The Trustee objected to exemption of the options on the basis that they were not possessory interests.   

 The Court concluded that the options standing alone were not present possessory interests.   However, the Court also concluded that the leases and the options could not be severed from each other.   Thus, the Debtor could claim the leases as exempt because they gave him the right to occupy the land and could claim the options because they were integrated with the leases.
Although the options are future interests, they are future interests in the same properties that are subject to the exempt leaseholds.  Because the leases and options are integrated and cannot be severed, the present possessory interests in the properties are effectively merged with the future interests and James can properly exempt both.
Opinion, p. 12.    The take-away here is that categories such as possessory and non-possessory which look ironclad under the law may sometimes be more amorphous than they first appear.

 Voiding Judgment Liens

Texas Property Code Sec. 52.042 grants relief from certain judgment liens in the event of bankruptcy.  An enterprising Chapter 7 trustee attempted to use it to void liens against property of the estate in Studensky v. Buttery Company, LLP.   However, the Court did not allow this relief.

The Debtor owned two tracts of real property:  his homestead and a vacant tract of 8.884 acres.   While he listed the Buttery Company as an unsecured creditor, the company's proof of claim revealed that it held an abstract of judgment and was claiming status as a secured creditor.      The Trustee filed suit in state court to set aside the judgment lien under the Texas Property Code.   The creditor removed the case to Bankruptcy Court.   The Trustee then filed a Motion for Summary Judgment.   

The Court's opinion contains a helpful discussion of the evolution of the Texas statute dealing with what happens to judgments against bankrupts.     The Texas statutes have been adopted or amended in 1975, 1983 and 1993.   The current provision states:

(a) A judgment is discharged and any abstract of judgment or judgment lien is canceled and released without further action in any court and may not be enforced if:
(1) the lien is against real property owned by the debtor before a petition for debtor relief was filed under federal bankruptcy law; and
(2) the debt or obligation evidenced by the judgment is discharged in the bankruptcy.
 TEX. PROP. CODE ANN. § 52.042.

A second provision provides that liens are not canceled in the following circumstance:

A judgment lien is not affected by [section 52.042] and may be enforced if the lien is against real property owned by the debtor before a petition for debtor relief was filed under federal bankruptcy law and:

(1) the debt or obligation evidenced by the judgment is not discharged in bankruptcy; or
(2) the property is not exempted in the bankruptcy and is abandoned during the bankruptcy.
TEX. PROP. CODE ANN. § 52.043.

Taken at face value, these two provisions appear to state that a Debtor's discharge extinguishes a judgment lien unless the property is claimed as exempt or abandoned by the Trustee.   Does this then mean that the Trustee can extinguish a lien on property of the estate following the Debtor's discharge?   Chief Judge Ronald King said no.

Although Judge King engages in a lengthy discussion, the critical conclusion is contained here:

It appears to the Court that, as with the 1975 statute, the legislative intent in 1993 was not to affect lien rights in a bankruptcy case, but rather to help enable a debtor, following bankruptcy, to sell real property burdened by liens in the county records. The Court therefore concludes that Texas Property Code sections 52.042-043 do not alter the rights of a judgment lienholder in a bankruptcy case. Further, even if, as the Trustee argues, the plain meaning of sections 52.042-.043 purported to transform a judgment lienholder into an unsecured creditor in a bankruptcy case, federal bankruptcy law would preclude such a result.
Opinion, p. 7.   The Trustee gets points for reading Texas law but ultimately no relief from the Court.    While I do not discuss it at length, the opinion contains an excellent discussion of how bankruptcy affects the rights of secured creditors.  


Saturday, July 18, 2015

Fifth Circuit Report: June 2015

This month's Fifth Circuit report doesn't have a lot of bankruptcy sizzle:  an interesting case on abstention and remand,  two unpublished cases about how not to reserve a claim under a plan and a case about suing a trustee.   However, there are some fascinating cases about lenders, liens, fraudulent transfers, the Texas Debt Collection Act and the Fair Debt Collection Practices Act.    The big news here is that the Fifth Circuit vacated its Golf Channel decision and instead certified the question to the Texas Supreme Court.   Here are June's decisions.   (Click on the style of the case to go to the actual opinions).
Bankruptcy; Abstention; Remand

This case is significant because it is a rare case where an appellate court considered and vacated an order for abstention and remand.    The plaintiffs were Louisiana pension funds which invested in a feeder fund in the Cayman Islands that was part of another fund which was part of a master fund entity.    The plaintiffs filed suit in state court against various parties for violations of the Louisiana securities laws.  The case was removed to U.S. District Court because it was related to the Chapter 11 bankruptcy of the master fund and based on diversity.   (In order to make the diversity allegation work, the plaintiffs had to allege that law firm Skadden Arps was improperly joined.   Because Skadden Arps is a partnership whose members include U.S. citizens living abroad, it is considered stateless and therefore non-diverse).    The plaintiffs moved for abstention and remand.    Meanwhile, the actual funds that the plaintiffs invested in filed for liquidation in the Cayman Islands and received recognition of their proceedings in chapter 15 petitions filed in New York.

The District Court granted the motions to abstain and remand without addressing the impact of the Chapter 15 proceedings.    The Court of Appeals found that it did have authority to review the remand order.   While remand decisions are generally non-reviewable, there is an exception where the remand exceeds the authority of the remand statute.   Here, 28 U.S.C. Sec. 1334(c)(1) allows permissive abstention "except with respect to a case under chapter 15."   Because Chapter 15 cases were not subject to permissive abstention, the Court of Appeals had jurisdiction to determine whether this exception applied.

In a case of first impression, the Court concluded that the reference to "a case under chapter 15" included "both the Chapter 15 case itself and cases 'arising in or related to' Chapter 15 cases."   Opinion, p. 8.    Although the remand statute does not contain a chapter 15 exception, the court read the two statutes together.
Reading §§ 1334(c)(1) and 1452(b) together, then, the prohibition against abstention from proceedings related to Chapter 15 cases also applies to bar the equitable remand of those proceedings under § 1452.  
 Opinion, p. 9.    Thus, the Court reversed the remand and abstention orders.
We hold that a district court cannot permissively abstain from exercising jurisdiction in proceedings related to Chapter 15 cases. Accordingly, we conclude that the district court erred by permissively abstaining and equitably remanding the case in the face of the Chapter 15 bankruptcies.
Opinion, p. 10.
Bankruptcy; Barton Doctrine

This case involves debtors who sued their trustee for violating their Fourth Amendment rights.    A couple and their corporation each filed for bankruptcy.   Abide was appointed trustee for both estates.  A dispute arose between the trustee and the individual debtors' children as to who owned certain property.   Following Stern v. Marshall, the District Court withdrew the reference on the case from the bankruptcy court.   It then entered an order for the debtors and their children to deliver all of the records and computers of the bankrupt company to the trustee.   The trustee showed up at their home and began taking things, including a computer which they contended was personal.    

The individual debtors filed a motion to compel the trustee to return their computer.   The District Court allowed the trustee to retain the computer to have a forensics expert examine it.   A year later, the District Court granted summary judgment to the trustee and ordered him to return the computer.   After the computer was returned, the individual debtors determined that it had been accessed on multiple occasions while in the possession of the trustee.    They then sued the trustee alleging that he had violated their Fourth Amendment rights by seizing and accessing their personal computer and that the trustee had conducted an unconstitutional search of their home.

The District Court dismissed the case under the Barton doctrine which says that a trustee cannot be sued without permission of the Court which appointed him.   The Court found an exception to the Barton doctrine on the basis that the claim arose from the trustee's actions pursuant to an order of the District Court.   Where the trustee was acting under the District Court's authority, the District Court "shared the strong interest in protecting Abide from personal liability for acts taken within the scope of official duties under the supervision of the district court."    

The Court distinguished the case from last month's Villegas decision.   In that case, the debtors filed suit in the District Court under the belief that the Bankruptcy Court would have lacked authority under Stern v. Marshall and that the District Court had supervisory power over the Bankruptcy Court.  Here, the District Court was not the appointing court, but it was the court that authorized the trustee to act.   This was sufficient to bring the case out from under the Barton doctrine.  

 Bankruptcy; Reservation of Claims

 Chapter 11 debtors sued their former Texas lawyers.    The lawyers moved to dismiss on the ground that the confirmed plans did not contain a "specific and unequivocal" reservation of the claims.   The District Court agreed and dismissed the case.   The Fifth Circuit held that general language reserving claims was not sufficient.   The interesting thing here is that the plans were confirmed in California.  The Ninth Circuit allows general reservations of claims.   The Court acknowledged that the result might have been different in the Ninth Circuit but followed its own precedent rather than the law that would have been applied by the California bankruptcy court.

Disbursing Agent under confirmed plan sued Debtor's former lawyers.   District Court dismissed the claims on the basis that the claims were not specifically reserved under the confirmed plan.    The Disbursing Agent argued that because the attorneys were not creditors, they were not affected by failure to specifically reserve the claims against them since they were not able to vote on the plan.   The Fifth Circuit ruled that the Disbursing Agent had waived this argument because he did not raise it until a motion for reconsideration in the District Court.    The Plan reserved certain avoidance actions.   However, the claims against the lawyers were common law tort claims.   As a result, the claims were not preserved.

Debt Collection; Fair Debt Collection Practices Act

The Fifth Circuit affirmed a summary judgment for the plaintiff finding violation of the FDCPA.   A debtor who lived in San Antonio borrowed money from a Delaware bank.    After default, a debt buyer acquired the debt and filed suit in Justice Court in Houston.   The JP suit gave the debtor's address for service as San Antonio which showed that the debt collector knew that he was filing suit in the wrong forum.
To make out a claim for venue abuse under the FDCPA, Serna must show that (1) Onwuteaka is a “debt collector”; (2) Onwuteaka brought “a legal action on a debt”; (3) Serna is a “consumer,” meaning that he is “obligated to pay [a] debt” incurred “primarily for personal, family, or household purposes”; and (4) Onwuteaka’s debt-collection suit was not brought in a venue “in which [Serna] signed the contract sued upon” or “in which [Serna] reside[d] at the commencement of the action.” 15 U.S.C. §§ 1692a, 1692i, 1692k.
Opinion, p. 8.    The Court found that the debtor met his burden to establish these elements.   In particular, his statement in his affidavit that the debt was for personal, family or household purposes was not an improper conclusionary statement that could not be considered since it was based on his personal knowledge of his purpose for incurring the debt.

The Court rejected the debt collector's bona fide error defense on the basis that mistakes of law do not qualify.    The Court stated:
Onwuteaka’s argument is not only meritless, but frivolous and sanctionable. Onwuteaka’s sole authorities for the premise that mistakes of law qualify for the bona fide error defense are Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 538 F.3d 469 (6th Cir. 2008), and Taylor v. Luper, Sheriff & Niedenthal Co., L.P.A., 74 F. Supp. 2d 761 (S.D. Ohio 1999). The Supreme Court granted certiorari in Jerman and ultimately reversed the Sixth Circuit on precisely this point. See Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S. Ct. 1605, 1624–25 (2010) (holding that “the bona fide error defense in § 1692k(c) does not apply to a violation of the FDCPA resulting from a debt collector’s incorrect interpretation of the requirements of that statute” and reversing the contrary judgment of the court of appeals). Despite including outdated subsequent history in his citation indicating that the Supreme Court had granted certiorari in Jerman, Onwuteaka retained this citation and presented the Sixth Circuit’s now-rejected original holding to this Court as valid law. Taylor, for its part, predates both opinions in Jerman, and it pertains to a mistake about the requirements of state law rather than about the requirements of the FDCPA itself. Taylor, 74 F. Supp. 2d at 765.
Opinion, p.15.   Jerman was a big deal when it came out five years ago.  It is hard to believe that a debt collection lawyer would not know about it.   Thus, the court was right to classify this argument as sanctionable.

In one final did at the deficient debt collector, the Court stated:

In light of Onwuteaka’s persistently deficient briefing and misrepresentation of legal authority, we tax the costs of this appeal against Onwuteaka consistent with Federal Rule of Appellate Procedure 39(a)(2).
Opinion. p. 22.   

Debt Collection; Texas Debt Collection Act

This is a case where the plaintiff recovered damages for violation of the Texas Debt Collection Act (TDCA).    Allie McCaig was the mother of David McCaig.   She bought a home with financing from Wells Fargo.   When she died, David and his wife Marilyn took over the payments.    When they fell behind, Wells Fargo entered into a settlement agreement with them which recognized that David and Marilyn were not the obligors on the debt and establishing a period for curing defaults under the loan.   Wells Fargo also agreed to waive certain costs if the McCaigs completed the forebearance agreement.

The McCaigs successfully completed the terms of the agreement.   However, Wells Fargo made repeated mistakes in servicing the loan.   As a result, the McCaigs received notices of default, statements indicating that they were being charged for amounts that had been waived and at least one foreclosure notice.   The McCaigs complained to the Texas Attorney General.   In response, Wells Fargo erroneously claimed that the McCaigs had broken the agreement.    
For over two years, the McCaigs were subjected to intermittent and repeated threats of foreclosure. Their attempts to correct the problems were met with misinformation at times, non-responsiveness at times, and at times, apologies—followed by still more of the same “mistakes.” Eventually, they sued Wells Fargo in state court. Wells Fargo removed to federal court on the basis of diversity jurisdiction, and the case went to trial on breach of contract and TDCA claims. In addition to establishing the facts set forth above, the McCaigs testified that Wells Fargo’s mistakes took a toll on their mental health. David and Marilyn testified on this issue, as did their son and an expert witness.
Opinion, p. 3.    The jury ruled for the plaintiffs and awarded them $75,000 each for mental anguish, $1,900 for expenses incurred, $500 each for making incorrect statements to a third party and attorney's fees of $200,000.    

The Court rejected Wells Fargo's argument that the McCaigs lacked standing to assert a claim under the TDCA.  The Court found that anyone injured by a violation of the TDCA could bring suit even if they were not the obligor.    The Court found that the fact that Wells Fargo's conduct was also a breach of contract did not preclude liability under TDCA.   The Court stated, "A statutory offender will not be shielded from liability simply by showing its violation also violated a contract."   Opinion, p. 9.   

The Opinion contains an interesting discussion of the jury charge.   The charge consisted of a single question asking if five sections of the TDCA had been violated.   Ordinarily, the case would need to be remanded for a new trial if one of the items included was legally or factually insufficient since the reviewing court could not tell whether the jury made its decision based upon the invalid item.   However, in this case when Wells Fargo proposed multiple questions and the judge suggested a single question, Wells Fargo's counsel replied, "“If I had to draft this over again, that’s the way I’d draft it.”   Because this constituted "invited error" Wells Fargo waived the chance to complain about the broad form submission.   This shows that deference to the trial court is not a good idea when the trial court is wrong.

The Opinion contains a very good discussion of how Wells Fargo's conduct violated the TDCA.   Among other things, Wells Fargo threatened to take an action prohibited by law, attempted to collect a charge or fee not authorized and misrepresented the nature of the debt.    When a lender threatens to foreclose after it has entered into a forbearance agreement, this is a threat to take an action prohibited by law.   When a lender attempts to collect charges it agreed to waive, this is a threat to collect an unauthorized charge even if the charge was not paid.   Finally, a bank's “failure to keep accurate records” can lead to damages for misrepresenting the nature of the debt.   

The Court of Appeals affirmed the award of damages except for the out of pocket expenses.   Because the plaintiffs did not trust Wells Fargo, they sent their payments by priority mail and used cashier's checks.   The Court found that these damages were not caused by Wells Fargo's violations of TDCA and reversed the $1,900 attributable to this item of damages.  

The Opinion has an excellent discussion of the standard for awarding mental anguish damages.   

Under Texas law, to show an entitlement to mental anguish damages, the plaintiff must put on evidence showing “the nature, duration, and severity of their mental anguish, thus establishing a substantial disruption in the plaintiffs’ daily routine,” or showing “‘a high degree of mental pain and distress’ that is ‘more than mere worry, anxiety, vexation, embarrassment, or anger.’” Plaintiffs are not required to show the mental anguish resulted in physical symptoms.

“[D]amages for mental anguish are recoverable under the [TDCA].” Expert testimony is not required to show compensable mental anguish, which may be proven by the “claimants’ own testimony, that of third parties, or that of experts.”
Opinion, p. 23 (internal citations omitted).   The Court credited the following testimony in upholding the mental anguish damages:
Marilyn testified that dealing with Wells Fargo was “outrageous and angering,” that “[i]t’s like this ominous cloud over you all the time, and everything is related to this,” and that she was “very upset and angry.” She also testified she obsessed over the matter and experienced an “ongoing fear” that Wells Fargo would take the house away. Additionally, she testified she had to “try to keep [herself] calm,” when observing her husband’s related stress—stress she feared might cause him a heart attack. In her own words:
It’s just heart stopping; it’s panic; it’s fear. It’s what—what can you do? I mean, it’s like just—and hopelessness is mixed in there, as well, and then also just plain anger that—just out—that’s just outrageous. It’s just unbelievable that this could continue this way, on an on, and be ignored and be—just not—just not respected.
There is evidence David experienced anxiety and chest pain based on stress related to Wells Fargo’s misconduct. According to the testimony, he had to visit the emergency room twice as a result of this pain. David testified that the events were “extremely upsetting” and affecting his family, and also that the experience left him “very anxious” and “very fearful.” David testified that Wells Fargo’s misconduct affected him every day over a two-and-a-half-year span. Marilyn testified that David “was becoming more anxious; he was becoming more withdrawn . . . it just wasn’t his usual self. He would wake up and be thinking about this.” The McCaigs’ son also testified to a change in David—that he was “tense, stressed, frustrated, worried.”
Opinion, pp. 23-24.

The Court of Appeals also reversed the $1,000 in damages for making a false statement about a debt to a third party.   When the McCaigs complained to the Texas Attorney General, Wells Fargo's response to the complaint acknowledged that there was a dispute and told its erroneous story that the McCaigs had defaulted.    This did not constitute a statement “to any person other than the consumer that a consumer is wilfully refusing to pay a nondisputed consumer debt when the debt is in dispute and the consumer has notified in writing the debt collector of the dispute.”

The net effect of the opinion is that $2,900 in damages was subtracted from the judgment while the major portion of the award remained intact.

This opinion is significant for two reasons, one legal and one philosophical.   On the legal side, this case illustrates the use of the Texas Debt Collection Act in a case where the federal Fair Debt Collection Practices Act would not be available because the lender was not a debt collector.   While TDCA and FDCPA have many similar provisions, they are not identical and knowing the difference can be critical.

On a philosophical level, this case is heartening because it shows the small guy standing up to a big bank and being vindicated.    Banks are not evil.   However, they are frequently unable to perform their required functions in an accurate manner.   This case demonstrates that it is not acceptable for a bank to make a deal and then refuse to adhere to it whether this is through negligence, stupidity or bureaucratic ineptitude.    The complaints made by the McCaigs are very familiar to any practitioner who represents consumer debtors.    Usually the mistakes are remedied after a lot of effort and sleepless nights by the consumer.    However, the experience is distasteful.   This case demonstrates that these slights are in fact wrong.

I would be remiss if I did not add one very important caveat.  Much of this opinion turned on the fact that the McCaigs were not in default on the forbearance agreement.    In the typical case, the consumer is in fact in default and the dispute is over the extent of the default or the lender's failure to work with the borrower.   The outcome of this case turned on the fact that throughout their travails, the McCaigs continued to make their payments on time.   A borrower who becomes frustrated with the lender and stops sending payments would not be able to prove many of the violations in this case.

FDIC/RTC; Tax Sales

This is not a bankruptcy case but deals with issues relating to title to real estate and liens.   The debtor granted a deed of trust to a savings & loan.    The lender failed and was taken over the RTC.    The debtor also failed to pay its property taxes.   In 1990, the Georgetown Independent School District filed suit to foreclose its tax lien.   The RTC answered and appeared at trial.  The school district obtained a foreclosure judgment and acquired the property.   The property was sold to subsequent purchasers who developed the property.    In 1996, the FDIC (which had taken over for the RTC) sold the debt and liens to a debt buyer.   After several transfers, CAP Holdings acquired the debt.   In 2013, some 23 years after the tax sale, it filed suit for a declaration that the sale was void ab initio because it was conducted without the consent of the RTC.    

The defendants moved to dismiss based on the statute of limitations.    CAP Holdings argued that the purchasers could not assert the limitations defense because they were not in privity with the original owner.    According to CAP, if the foreclosure sale was completely void, then the purchasers never obtained title and therefore could not assert limitations.   The District Court granted the motion to dismiss based on limitations.

On appeal, the Fifth Circuit reversed and remanded.     It held that the District Court did not engage in sufficient analysis to determine whether limitations applied.  

Under 12 U.S.C. Sec. 1825(b)(2), property of the FDIC is not subject to levy or foreclosure without its consent.    The Fifth Circuit held that if the property was sold without the consent of the RTC that the sale would be completely void.    This would reinstate the property in the name of the original debtor subject to the lien of the FDIC.   The Court rejected the argument that the sale would be void only as to the lien of the FDIC.   

The Fifth Circuit remanded to the District Court to determine whether the RTC had consented to the sale by appearing at trial and not raising its immunity from foreclosure.   The Court said that if the District Court concluded that consent was lacking, it should consider whether under Texas law a purchaser at a void sale is in privity with the original owner and can assert the personal defense of limitations.   

I included this case because it is a reminder of the bad old days when I was a young lawyer.   In those days, almost all of the banks and S & Ls in the state failed and were taken over by the FDIC and the RTC.    These statutory successors claimed immunity from most defenses that would have been applicable to the original lender.    This case illustrates the broad powers granted to the government.  Hopefully the District Court will take the Fifth Circuit's hint and find that the RTC consented to the sale.   Anything else would lead to an absurd result.

Fraudulent Transfers

The Fifth Circuit drew a lot of attention when it ruled that The Golf Channel received a fraudulent transfer when it was paid for advertising purchased by the Stanford Ponzi scheme.   The Court ruled that whether value was provided must be viewed from the perspective of the debtor's creditors.   Thus, if the advertising helped perpetuate the Ponzi scheme by making it look respectable, it did not provide value.   The  Fifth Circuit rejected the Golf Channel's argument that value should be viewed from its perspective, namely that because advertising is a valuable commodity in the market, it must provide value.    The opinion was reported at Janvey v. Golf Channel, 780 F.3d 641 (5th Cir. 2015).

On June 30, the panel withdrew its opinion.   Instead, it certified the following question to the Texas Supreme Court:
Considering the definition of “value” in section 24.004(a) of the Texas Business and Commerce Code, the definition of “reasonably equivalent value” in section 24.004(d) of the Texas Business and Commerce Code, and the comment in the Uniform Fraudulent Transfer Act stating that “value” is measured “from a creditor’s viewpoint,” what showing of “value” under TUFTA is sufficient for a transferee to prove the elements of the affirmative defense under section 24.009(a) of the Texas Business and Commerce Code?
Opinion, p. 13.  

Fraudulent transfer law is codified in two different but related systems.   Most fraudulent  transfer law is based on state versions of the Uniform Fraudulent Transfer Act.   Bankruptcy trustees can either rely on the UFTA under 11 U.S.C. Sec. 544 or the Bankruptcy Code's own statute found at 11 U.S.C. Sec. 548.    Both sets of laws revolve around the concepts of transfers made with intent to hinder, delay or defraud and transfers made for lack of reasonably equivalent value while insolvent.  However, there are differences.   The main one is that the Bankruptcy Code has a two year look back while UFTA allows creditors to unravel transfers made up to four years previously.   

While the Fifth Circuit could draw on a wide range of federal fraudulent transfer decisions, the statute at issue was a state one.   This allowed the Court to send the legal question over to their brethren on the Texas Supreme Court based on the following logic:
Given the possible tension within TUFTA with respect to the perspective from which to measure “reasonably equivalent value,” that this is a question of state law that no on-point precedent from the Supreme Court of Texas has resolved, that the Supreme Court of Texas is the final arbiter of Texas’s law, and that the meaning of “reasonably equivalent value” is central to this case as well as other pending cases filed by Stanford’s receiver, we believe it is best to certify the question at issue.
 Id.     Thus, the case of the receiver and the Golf Channel is not ready to head into the clubhouse just yet.

Liens; MERS

Consumer debtor's lawyers have launched many challenges against MERS.   MERS is a private company that acts as a nominee for lenders.  Under the MERS system, debtors grant liens to MERS as nominee for the actual lender.   So long as the lender transfers its note and lien to another MERS subscriber, there is no need to record a document in the public records.   MERS simply acts as nominee for the new lienholder.    Critics of MERS argue that it subverts the public recording system by allowing lenders to conceal the actual holder of the deed of trust.   

A group of Texas counties sued MERS because they didn't like the fact that MERS was allowing lenders to skip paying recording fees by transferring title privately.    The Counties claimed that MERS violated the Texas Local Government Code and the Texas Civil Practice and Remedies Code and engaged in fraudulent misrepresentation and unjust enrichment.   It is one thing to play a shell game with home owners, but the Counties did not want MERS to mess with Texas filing fees.   

The District Court dismissed some claims and granted summary judgment on others.     The Fifth Circuit ruled that Texas law does not require lenders to record assignments of deeds of trust whenever the underlying note is transferred.    The Court also affirmed the dismissal of Dallas County's claims that MERS was recording fraudulent liens in violation of state law.   One element of this claim is that the person recording the instrument intended to harm the plaintiff.   This statute was intended to deal with militia and sovereign citizen groups that were filing fraudulent liens against government officials in support of their theory that the United States had no authority over them.   The Court held that because there was no duty to record assignments that MERS was not trying to harm the counties by not recording assignments.    Finally, the Court rejected the argument that MERS was committing a fraudulent misrepresentation when it claimed to be the beneficiary under the deed of trust.   

The take away here is that the attacks on MERS have likely run their course.   If entities as powerful as Dallas and Harris counties couldn't take MERS down, then individual property owners stand little chance of success.  MERS messed with Texas and emerged victorious.