Tuesday, February 17, 2015

Fifth Circuit Report: December-January Edition

The Fifth Circuit decided five bankruptcy cases over the past two months.  They include cases where the effort to recite the facts exceeded the importance of the decision, cases about the effect of summary judgments granted, denied and reversed and a footnote about Florida strip clubs.

United States v. Stanley, No. 13-60704 (5th Cir. 12/12/14).    This case concerns dischargeability of taxes.   Stanley filed for bankruptcy in 2009.   He owed taxes for the years 1998-2008 at the time.   In 2011, the government filed suit to reduce to judgment the tax claims.     The District Court granted summary judgment in favor of the government for years 2005-2008 because they came due in the three years prior to bankruptcy and years 2009-2010 because they were post-petition years.   Despite trial testimony that he suffered from bipolar disorder, the District Court ultimately found that Stanley had "willfully" failed to pay his taxes and that they were not discharged.  

The Court of Appeals noted that section 523(a)(1)(C) has both a conduct requirement and a mental state requirement.   There was no dispute that the Debtor met the conduct standard.   The mental state was based on a three part test that the debtor  (1) had a duty to pay taxes under the law (which basically duplicates the conduct requirement), (2) that he knew that he had a duty and (3) that he voluntarily and intentionally violated that duty.      The Fifth Circuit affirmed the District Court finding that:
In light of Stanley’s demonstrated ability to continue his medical practice, tend to many of his other financial obligations, and participate in complex financial transactions, compounded by the length of time at issue (over a decade) and evidence that Stanley would have had periods when he exhibited no symptoms of bipolar disorder during this span, the district court did not clearly err when it concluded that Stanley voluntarily and intentionally attempted to evade his tax obligations. We therefore uphold the district court’s finding that Stanley willfully attempted to evade his federal income taxes.
Opinion, p. 10.

Isbell v. DM Records, Inc. (Matter of Isbell Records, Inc.), No. 13-40878 (5th Cir. 12/18/14).   In this opinion, we learn that the song "Whoomp (There It Is)" was based on a chant when women disrobed in Florida strip clubs in the 1990s.  (It's in a footnote so it must be true).    We also learn that for half of the song's existence, the parties have been litigating over who owns the composition rights.    

The writers entered into a Recording Agreement with Isbell Records, Inc. d/b/a Bellmark Records which provided that 50% of the composition rights would go to Bellmark's publishing affiliate.   Bellmark filed bankruptcy and in 1997, its trustee sold all of its assets to DM Records.  DM exploited the copyright to Whoomp.   However, it turns out that the president of Bellmark, Albertis Isbell, had his own music publishing company, Alvert Music and he thought that it owned the rights rather than DM..    In 2002, Isbell filed suit against DM.    The District Court dismissed finding that Isbell had assigned his rights to someone else.   However, the Fifth Circuit reversed and remanded and the case finally went to trial in 2012.    The District Court ruled as a matter of law that Isbell owned the rights.  The jury awarded actual damages of $2.1 million.  The Fifth Circuit affirmed.   The opinion deals with a number of technical arguments about the trial itself which have nothing to do with bankruptcy.

The important take away here is that a sale free and clear of liens only conveys what the Debtor owned.    It will not create title where none existed.        

Ferguson v. Baron (Matter of Baron), No. 14-10092 (5th Cir. 12/22/14)(unpublished).   This case concerned procedural complications arising from an involuntary proceeding brought against an individual by various attorneys who he had hired and fired but did not pay.   This is unfortunately a case where the courts created confusion for the litigants.

As mentioned above, Baron hired multiple lawyers for one of his companies.  The District Court ordered a receivership over Baron and his companies.   It also conducted a hearing on the amount of fees owed to the various law firms and concluded that $879,000 was owed.  Baron appealed both orders to the Fifth Circuit.   The Fifth Circuit reversed the receivership order but did not address the order determining the amount of the fees.    Indeed, the Fifth Circuit said that the other orders of the District Court were not affected.

On the same  day that the reversal came down, the lawyers filed an involuntary bankruptcy petition.  The Bankruptcy Court granted partial summary judgment that the creditors held undisputed claims based on the fee order.   It then held a trial and concluded that the Debtor was not generally paying his debts as they came due.  The District Court reversed, concluding that the Fifth Circuit's order dissolving the receivership meant that the fee order was also no good. The District Court also concluded that there was at least some bona fide dispute as to the amount of the fees. The District Court remanded the case to the Bankruptcy Court with orders to dismiss. This was a problem for the attorneys because they had never had the chance to prove up their claims in Bankruptcy Court because they had been granted summary judgment.

The Fifth Circuit reversed the District Court's dismissal of the involuntary petition.   It did so based on the fact that the Debtor and the attorneys had expressly stipulated that if the summary judgment was denied, they would still be entitled to a hearing to prove up whether their claims were subject to a bona fide dispute.   However, the Court could have ruled on another equally important ground.  When a Court denies summary judgment, it does not automatically mean that the other side is entitled to relief.  It simply means that there is an issue for trial.   Here, the fact that there was a dispute about whether there was a dispute did not mean that the creditors held disputed claims and were ineligible to file the involuntary.  It simply meant that their status had yet to be determined.  

Thompson v. Deutsche Bank National Trust Company, No. 14-10084 (5th Cir. 12/29/14).    While this is not a bankruptcy case, it relates to Texas Home Equity loans, a subject which often arises in bankruptcy cases. The Thompson obtained a home equity loan from Option One in 2006.  They sued Deutsche Bank in state court and obtained a default judgment.    Deutsche Bank contended that it had never been properly served and removed the case to federal court.   The U.S. District Court set aside the default judgment and dismissed the suit on the basis that the Thompsons were required to bring their suit within four years after the loan was made, which would have been in 2010.   The Fifth Circuit affirmed based on prior precedent that suits based on constitutional infirmities in Texas Home Equity loans must be brought within four years from when the loan was made.   This ruling and the prior case which it follows mean that infirm home equity loans will be purified four years after they are made.   Since many borrowers will not examine their paperwork and discover problems until years later when problems arise, they will lose the benefits that the legislature (and the voters) intended to provide them with.   This problem can be solved by the Texas legislature enacting a discovery rule provision.

Trang v. Taylor, Bean & Whitaker Mortgage, No. 14-50281 (5th Cir. 1/7/15)(unpublished).    Debtor sued to block a foreclosure.   The lender removed to District Court and moved for dismissal.   The District Court denied a motion for remand and dismissed the suit.     

On appeal, the Fifth Circuit found that the District Court properly denied the motion to remand.   Even though the law firm, Barrett, Daffin, Frappier & Engel, LLP, was a Texas resident, the complaint did not allege sufficient facts against the firm.   Therefore, they were improperly joined and did not factor into the diversity equation.

 The Debtor made the novel argument that because the lender had filed its own bankruptcy proceeding and had not assumed the deed of trust as an executory contract, that the deed of trust was rejected and therefore could not be assigned to a new holder.   The Court ruled that even if the deed of trust was an executory contract (which it said was "highly contestable"), rejection did not render the deed of trust unenforceable.

TCI Courtyard, Incorporated v. Wells Fargo Bank, N.A. (Matter of TCI Courtyard Incorporated), No. 14-10635 (5th Cir. 1/22/15)(unpublished).    This is a case where the feasibility of Debtor's plan depended upon how interest was calculated.   The note provided that after default, accrued interest would be added to the balance of the note.   The Fifth Circuit affirmed the conclusion that this meant that post-default interest was compounded.    Because the plan was infeasible based upon calculation of the debt, confirmation was denied and the case was dismissed.

Ratliff Ready-Mix, LP v. Pledger (Matter of Pledger), No. 14-50023 (5th Cir. 1/23/15)(unpublished). This case involves the rare situation where a debtor prevailed on a dischargeability complaint based on the Texas Construction Trust Fund Act.   Barry Joe Pledger had a construction company.   It was paid for three construction projects but did not pay its concrete subcontractor.   When Pledger filed for chapter 7 bankruptcy, Ratliff Ready-Mix filed a non-dischargeability action under section 523(a)(4).    Both parties filed for summary judgment asserting that there were no material disputed facts.   The Bankruptcy Court granted summary judgment for the Plaintiff.  On Motion for Reconsideration, the Court reversed the ruling for the Plaintiffs and entered summary judgment for the Defendant.   Among other things, the Bankruptcy Court found that the Plaintiffs must “adduce some evidence that funds were misapplied under the test.” I

The Fifth Circuit affirmed the Bankruptcy Court's ruling in favor of the Debtor.   Even though the Debtor's company was paid in full but didn't pay Ratliff, this was not enough to ensure victory for the creditor.   The critical factor was whether a contractor that uses Construction Trust Funds to pay general overhead expenses instead of subcontractor bills has violated the trust.   The Fifth Circuit ruled that under prior precedent, the answer was no.  As a result, the Debtor was entitled to a take nothing judgment.

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