2008 Was a Busy Bankruptcy Year for the Fifth Circuit

The Fifth Circuit has busy this year. They have been turning out bankruptcy opinions at a rate where they might consider changing the name of the court to the Fifth Circuit Court of Bankruptcy Appeals. So far I have written a dozen articles about their decisions this year. However, there are still a lot of interesting cases that I didn’t get around to. Here is a quick rundown of the best of 2008 (and one from 2007). Where I have already written about a case, I have provided the reference to the prior article. Some cases can be summed up in a sentence while others are more complicated and some are just plain baffling.

Appellate Practice
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Matter of Gadzooks, Inc., 2008 U.S. App. LEXIS 19339 (5th Cir. 2008). “Fifth Circuit Dismisses Gadzooks Appeal.” (10/2/08).
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Matter of Hilal, 534 F.3d 498 (5th Cir. 2008).

Substantial consummation of plan did not result in dismissal of appeal based on equitable mootness where debtor framed his appeal narrowly.
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Matter of S.I. Restructuring, Inc., 542 F.3d 131 (5th Cir. 2008).
“Equitable Mootness Fails to Prevent Disgorgement” (10/2/08).
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Attorney Fees

Matter of Babcock & Wilcox Company, 526 F.3d 824 (5th Cir. 2008).

Bankruptcy court did not abuse its discretion in reducing amounts billed for travel time in half.
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Automatic Stay/Discharge
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Matter of Bayhi, 528 F.3d 393 (5th Cir. 2008).

This case is not easy to follow, but is worth reading, for no reason other than the fact that Chief Judge Edith Jones dissented to vindicate the debtor’s discharge. The case begins with a husband and wife who consolidated their student loan debts into a single obligation. Under Louisiana law, liability was in solido meaning that the creditor could seek recovery of the entire debt from either party or both. The couple divorced and agreed that each would pay half of the debt. The wife continued to pay until she filed bankruptcy. Although the husband was listed as a creditor, he did not file an action to determine dischargeability under Sec. 523(a)(15).

Post-discharge, the husband filed a declaratory judgment action seeking a determination that the debt was a community obligation and thus solidary. This was agreed to. Subsequently, he filed a complaint for specific performance seeking to compel the wife to pay her share of the student loan directly to Sallie Mae. The state court granted a judgment in the husband’s favor.

The wife then re-opened her bankruptcy and sought to have the husband held in contempt for violation of the discharge. The bankruptcy court agreed, finding the pro se husband in contempt, but did not award any damages. Instead, it enjoined the husband from seeking to collect the wife’s share of the debt and vacated the state court judgment.

On appeal, Judge Wiener, writing for himself and Judge Barksdale, voted to reverse and remand, while Chief Judge Jones dissented in part. Section 524(a)(1) states that the discharge “voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged . . .” The judges disagreed among themselves as to what was a debt.

The majority judges concluded that the wife’s obligation to pay one-half of the student loan debt pursuant to the divorce decree was not a “debt.” Therefore, it could not be discharged. Since the student loan debt was not discharged, the husband’s attempt to compel the wife to pay a non-discharged debt did not violate the discharge.

Chief Judge Jones agreed that the husband should not be held in contempt because “in asserting that novel claim, (the husband) did not intentionally violate his ex-wife’s discharge order and should not be subject to civil contempt for violation of the 11 U.S.C. §524(a) discharge injunction.” However, the Chief Judge held that vacating the state court judgment was nothing more than an end run around the discharge. Judge Jones viewed the wife’s obligation vis-à-vis the husband to pay one-half of the student loan debt as a separate debt from the student loan itself. While the husband could have sought a determination that his contribution right was not discharged pursuant to 11 U.S.C. §523(a)(15), he did not and his rights were discharged.

This is a case where the dissent has the better side of the argument. While the wife’s obligation to Sally Mae was clearly not discharged, the husband’s right to compel the wife to pay her share of the debt is “an equitable remedy for breach of performance” which can be reduced to judgment and thus falls within the definition of a claim under 11 U.S.C. §101(5)(B).

However, the dissent evenhandedly provides a benefit to the creditor as well. Because the husband was asserting a novel claim, he did not intentionally seek to violate the discharge. Before a creditor can be held in contempt, he must intentionally violate a court order. Where the scope of the order is unclear, contempt is not available. The dissent pairs nicely with the Gervin opinion, in which the creditor was held not to violate the discharge by trying to collect from property it believed was subject to its judgment lien, but was actually owned by the co-debtor.
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Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008).

At the time that Debtors filed chapter 13, they owed 15 delinquent mortgage payments, owed for taxes and insurance advanced for a prior year and had not made any escrow payments in the current year. Rather than including the current year’s escrow shortage in the proof of claim, the creditor stated that the amount of the post-petition payment would be increased to recoup these amounts. The Bankruptcy Court found that Countrywide had violated the automatic stay, but allowed for an interlocutory appeal prior to assessing damages.

Under RESPA, Countrywide had the right to increase the debtors’ payment by the amount of any insufficiency in the escrow account. The Fifth Circuit held that the pre-petition escrow arrearage was a “claim” within the meaning of the Bankruptcy Code and that the automatic stay applied to efforts to collect that claim. However, where the creditor did not actually collect the increased amount stated in the proof of claim and did not take any affirmative steps to collect the increased amount other than including the statement in the proof of claim, the creditor had not taken an action which violated the stay.
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Matter of Gervin, No. 07-50099 (5th Cir. 11/21/08)(unpub).

The Bankruptcy Court affirmed the District Court finding that the creditor did not violate the discharge when it attempted to collect a debt from property that it believed to be subject to its judgment lien. The District Court opinion is discussed at “District Court Reverses Discharge Violation; Finds Some Violations Too Technical to Punish.” (7/23/07).
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In re Repine, 536 F.3d 512 (5th Cir. 2008).
“Fifth Circuit Answers Three Questions of First Impression on Automatic Stay.” (7/25/08).
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Avoidance Actions
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Matter of Bossart, 2008 U.S. App. LEXIS 21807 (5th Cir. 2008)(unpub).

This unpublished opinion affirmed a bankruptcy court opinion allowing a trustee to sue a company which issued an annuity to recover the annuity payment as a fraudulent transfer. The case was essentially an end run around the debtor's claim of the annuity as exempt.
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In re Entringer Bakeries, 2008 U.S. App. LEXIS 23313 (5th Cir. 2008).
“Fifth Circuit Explains Earmarking” (11/6/08)
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Matter of N A Flash Foundation, Inc., 541 F.3d 385 (5th Cir. 2008).

Where creditor was paid out of debtor’s general operating account, but debtor would have received funds subject to a construction trust fund claim subsequently, creditor did not receive more than it would have in a hypothetical chapter 7 liquidation. In a hypothetical liquidation case, the court presumes that the debtor would have preserved the trust funds and the creditor would have been paid in full.
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Constitutionality

Hersh v. United States, No. 07-10226 (5th Cir. 12/18/08)
“Fifth Circuit Relies on Constitutional Avoidance to Uphold Sec. 526(a)(4)(12/19/08)
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Dischargeability

Matter of Shaffer, 515 F.3d 424 (5th Cir. 2008).

Dentist had license revoked and was required to pay costs incurred in investigation in amount of $217,852.13. Fifth Circuit held that costs were in compensation of actual pecuniary loss and therefore did not fall within exception to discharge for fines and penalties under 11 U.S.C. §523(a)(7).
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Due Process

Matter of Waterford Energy, 2008 U.S. App. LEXIS 20972 (5th Cir. 2008)(unpub).

The Debtor owned oil and gas well in Oklahoma and was required to pay royalties to the State of Oklahoma. When it filed bankruptcy, it did not give notice to the State, but it did file a copy of its bankruptcy petition and draft plan in the real estate records. Under Oklahoma law, a certified copy of a bankruptcy petition filed in the real estate records constitutes constructive notice. However, the Fifth Circuit held that federal law rather than state law controlled on question of whether constructive notice to unknown creditors was adequate. Notice by filing in the real estate records was inadequate. Notice to unknown creditors should have been given by publication. As a result, the State did not receive notice complying with due process and its claims were not discharged.
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Equitable Subordination

Matter of S.I. Restructuring, Inc., 532 F.3d 355 (5th Cir. 2008).
“Fifth Circuit Rejects Equitable Subordination Claim With Deepening Insolvency Aspect; Insiders Not Liable for Stoking Fires of Sinking Ship.” (7/1/08).
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Exempt Property
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Matter of McClain, 516 F.3d 301 (5th Cir. 2008).

Debtor purchased an insurance policy with funds which were not disclosed on his schedules. When the insured died, the trustee claimed the policy proceeds under a constructive trust theory. The Fifth Circuit held that the trustee could have an interest in the policy if it could trace the undisclosed funds to the policy premiums and remanded the case for a trial to determine tracing and to determine what portion of the proceeds, if any, should go to the trustee.
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Matter of Peres, 530 F.3d 375 (5th Cir. 2008).

Where creditors’ meeting was continued but a new date was not announced at the meeting, time to object to exemptions did not start to run until creditors’ meeting was concluded eleven months later.
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Matter of Rogers, 513 F.3d 212 (5th Cir. 2008).
“Fifth Circuit Rules on Homestead Cap” (1/30/08).
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Matter of Soza, 542 F.3d 1060 (5th Cir. 2008).

Debtor bought an annuity the day before filing bankruptcy. Based on timing of purchase, fact that debtors retained control of funds and fact that annuity payment would have been sufficient to pay all creditors in full among other things, the Fifth Circuit found that the annuity was purchased “in fraud of a creditor” and denied the exemption based on Texas law.
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Interest Rate

Drive Financial Services, LP v. Jordan, 521 F.3d 343 (5th Cir. 2008).
“Fifth Circuit Releases Interest-Ing Opinion on Chapter 13 Interest Rates” (3/30/08).
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Judicial Estoppel

Kane v. National Union Fire Insurance Company, 535 F.3d 380 (5th Cir. 2008). “Trustee Avoids Judicial Estoppel Finding As Fifth Circuit Comes Full Circle” (7/25/08).
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Jurisdiction

Matter of Maples, 529 F.3d 670 (5th Cir. 2008)

This is a case where the published opinion sheds very little light on what happened. The opinion was published at the request of the dissenting judge and the majority goes to great lengths to say very little other than that there was no reversible error. It is necessary to read the unpublished District Court opinion to get some understanding of the case.

The Debtors owned Global Limo, Inc. Partain obtained a judgment against the Debtors and obtained a turnover order for the Debtors’ stock in the company. Partain then took possession of the assets of Global Limo. The Debtors filed bankruptcy and brought suit to set aside the turnover order as a preference. Partain, acting on behalf of Global Limo, brought a third party action against Texas State Bank alleging that it had harmed Global Limo. Somewhere there was also a claim that the Debtors and Texas State Bank had conspired to deprive Partain of his choice of counsel.

The Bankruptcy Court avoided the turnover order as a preference and denied Partain’s claims for lack of standing, since he did not have authority to act on behalf of Global Limo.

On appeal to the Fifth Circuit, the majority stated: “This case is poorly briefed, and the record is incomplete. The majority is therefore unwilling to say anything other than that the district court committed no reversible error in affirming the bankruptcy court.”

In dissent, Judge Emilio Garza argued that the Bankruptcy Court lacked subject matter jurisdiction over the claims between Partain and Texas State Bank and that the bankruptcy court had exceeded its authority in ordering the corporate assets of Global Limo brought into the bankruptcy estate of the debtors. The dissent took the majority to task for failing to consider the jurisdictional issue on the ground that the underlying claim was patently meritless. The dissent stated: “Nothing in the record suggests that TSB’s potential exposure would impact the Mapelses’ bankruptcy estate. Because this claim between third parties has no conceivable effect on the bankruptcy estate, the bankruptcy court improperly resolved this claim over which it lacked subject matter jurisdiction.” The dissent also faulted the bankruptcy court for ordering the corporate assets transferred to the estate. Although the corporate charter had been forfeited, the corporation and not its debtor shareholders still owned its assets.
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Newby v. Enron Corporation, 535 F.3d 325 (5th Cir. 2008).
“Fifth Circuit Clarifies Post-Confirmation Jurisdiction” (7/11/08).
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Property of the Estate

Matter of Seven Seas Petroleum, Inc., 522 F.3d 575 (5th Cir. 2008).

This case is the latest in a line of cases including In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir. 1983) and In re Educators Group Health Trust, 25 F.3d 1281 (5th Cir. 1994) which construe whether a cause of action belongs to the bankruptcy estate or may be asserted by individual creditors.

The Debtor owed money to unsecured bondholders. The bonds provided a formula which limited the amount of secured debt which the debtor could incur. This formula was based in part on the value of the debtor’s reserves. A consultant (Ryder Scott) calculated the reserves in an amount which proved to be highly overstated. The debtor sold $45 million in secured notes, half of which were purchased by Chesapeake. The other half were purchased by a group of investors led by the Debtor’s chairman (Hefner).

An involuntary bankruptcy was filed against the Debtor. The trustee brought various claims against Chesapeake, but dropped all claims except one seeking to re-characterize the debt as equity. All claims against Chesapeake were settled pursuant to the Debtor’s plan, which was supported by the unsecured bondholders.

The bondholders then brought a state court action against Chesapeake, Hefner and Ryder Scott alleging Conspiracy to Defraud and Aiding and Abetting Fraud. Chesapeake removed the case to the bankruptcy court. The bankruptcy court found that the claims against Chesapeake were property of the estate and had been released under the plan.

The bondholders appealed claiming that the claims belonged to them individually and were not property of the estate. The Fifth Circuit reversed and remanded. It held that the bankruptcy estate may bring claims which are typically brought by creditors outside of bankruptcy if the claims seek to recover assets which rightfully belong to the bankruptcy estate but are held by others. Thus, fraudulent conveyance claims and claims to pierce the corporate veil belong to the estate. However, claims to recover damages incurred by creditors will continue to belong to the creditors. In this case, the court found that the creditors were not seeking to recover assets belonging to the estate. As a result, the claims belonged to them and the bankruptcy court erred in dismissing the claims based on the plan.
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Sanctions and Misconduct
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Baum v. Blue Moon Ventures, LLC, 513 F.3d 181 (5th Cir. 2008).

U.S. District Judge had authority to enter pre-filing injunction preventing vexatious parties from filing litigation in any federal court, but lacked jurisdiction to enjoin state court filings.
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Cochener v. Barry, 2008 U.S. App. LEXIS 22339 (5th Cir. 2008).
“Fifth Circuit Reinstates Sanctions Award” (11/14/08).
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Matter of Pratt, 524 F.3d 580 (5th Cir. 2008).
“Fifth Circuit Clarifies Requirements of Rule 9011.” (4/8/08).
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Matter of Yorkshire, LLC, 540 F.3d 328 (5th Cir. 2008)

This is a case which is not designated for publication, but which is included in the West Reporter. Thus, it seems to be a published unpublished opinion. This case involved a business dispute between owners/managers of a business. When Knight, who was one of the managers, received notice that the other owners planned to remove him, he hired an attorney to file bankruptcy for two related entities. The bankruptcy attorney “conducted little diligence on the financial status of the entities an no diligence on their ownership and management so as to reach an informed decision as to whether a bankruptcy was warranted, and if so, who had authority to file it.” Shortly thereafter, Knight was removed from management and the new management voted to fire the attorney who had filed the bankruptcy case. After being fired by the debtor, the attorney represented Knight against the debtor. The Bankruptcy Court dismissed the cases after finding that the debtors were solvent and not in default upon their debts, but retained authority to consider sanctions. The Bankruptcy Court sanctioned both Knight and the attorney. The Fifth Circuit affirmed the Bankruptcy Court, finding that its conclusion of bad faith conduct was supported.
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Single Asset Real Estate

Matter of Scotia Pacific Company, 508 F.3d 214 (5th Cir. 2007).

Fifth Circuit considered whether debtor was a Single Asset Real Estate debtor. Test is: (1) debtor must own real property constituting a single property or project; (2) which generates substantially all of the gross income of the debtor; and (3) on which no substantial business is conducted other than the business of operating the real property and activities incidental thereto. Fifth Circuit affirmed finding that debtor conducted a substantial business on the property. Debtor employed over 60 employees and engaged in sophisticated activities such as soil conservation, road planning, design and engineering. In order to be a SARE, revenues received by the debtor must be passive rather than active.
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Standing

Matter of United Operating Company, LLC, 540 F.3d 351 (5th Cir. 2008).

Reorganized debtor lacked standing to pursue claims arising during bankruptcy, where (i) assets of estate did not revest in debtor upon confirmation and (ii) plan provided for retention of claims created under Bankruptcy Code but not common law claims.