The big decision out of the Fifth Circuit this month was a Ponzi scheme case against The Golf Channel. Honorable mentions included the follow up appeal in the Frazin case which first addressed consent in Stern cases and several cases involving mortgages. Because there have been slim pickings among bankruptcy cases per se, I have included several non-bankruptcy cases which generally involve debtor-creditor relations.
This case involved a dispute between two parties with regard to Cru Energy, Inc., a renewable energy company, which they founded. Krueger sued Torres for breach of fiduciary duty, fraud, conversion and the like. Torres counterclaimed and obtained a temporary injunction against Krueger. Krueger allegedly violated the injunction by transferring funds from Cru Energy. Krueger filed chapter 7 bankruptcy prior to any contempt proceedings. Cru obtained relief from the stay and Krueger was held in contempt. The contempt order was reversed on application for habeas corpus because the injunction was not sufficiently specific.
Cru also filed an objection to Krueger's discharge. Krueger convened a shareholder meeting of Cru and voted to oust Torres and fire the attorneys who were pursuing the litigation against him. The District Court gave notice that it intended to dismiss Cru's claims on the basis that it was a corporation that was not represented by counsel. Torres sought to intervene in the 727 action and also sought authority to represent Cru on a derivative basis. The District Court dismissed Cru's claims and denied Torres's motions. Subsequently, the Trustee sold Krueger's shares in Cru and Krueger's bankruptcy case was dismissed.
The Court found that it was not an abuse of discretion to deny intervention or leave to pursue claims derivatively. Also, the Court found that when Krueger's bankruptcy was dismissed, it had the practical effect of keeping him from receiving a discharge. It shows that a party should realize when to declare victory and not keep appealing.
Wheeler v. Collier (In re Wheeler), No. 14-30961 (5th Cir. 3/4/15)(unpublished).
This case stands for the proposition that a court cannot sua sponte impose relief against a party without prior notice. It also shows how difficult life can be when you get on the wrong side of a federal judge. Collier was a Louisiana bankruptcy lawyer who advertised "No money down" chapter 7 bankruptcies. Wheeler, one of his clients, sued him for violation of the automatic stay after he debited her account post-petition. The case proceeded in U.S. District Court after Collier requested a jury trial. Following a status conference, the Court set a hearing to determine whether the defendants had violation 11 U.S.C. Sec. 528 (one of the Debt Relief Agency provisions) and whether they should be held in contempt for violating the discharge injunction. The Court found that the defendants had violated both sections 526 and 528 and that they had violated the discharge injunction. The Court awarded disgorgement of $1,300, $10,000 in actual damages, $30,000 in punitive damages and attorneys' fees. It also assessed contempt sanctions of $10,000 payable to the Clerk of the Court and ordered the lawyers to cease and desist from "all Chapter 7 consumer 'No Money Down' bankruptcies" and to cancel all "No Money Down" advertisements.
This case stands for the proposition that a court cannot sua sponte impose relief against a party without prior notice. It also shows how difficult life can be when you get on the wrong side of a federal judge. Collier was a Louisiana bankruptcy lawyer who advertised "No money down" chapter 7 bankruptcies. Wheeler, one of his clients, sued him for violation of the automatic stay after he debited her account post-petition. The case proceeded in U.S. District Court after Collier requested a jury trial. Following a status conference, the Court set a hearing to determine whether the defendants had violation 11 U.S.C. Sec. 528 (one of the Debt Relief Agency provisions) and whether they should be held in contempt for violating the discharge injunction. The Court found that the defendants had violated both sections 526 and 528 and that they had violated the discharge injunction. The Court awarded disgorgement of $1,300, $10,000 in actual damages, $30,000 in punitive damages and attorneys' fees. It also assessed contempt sanctions of $10,000 payable to the Clerk of the Court and ordered the lawyers to cease and desist from "all Chapter 7 consumer 'No Money Down' bankruptcies" and to cancel all "No Money Down" advertisements.
The attorneys appealed the $10,000 sanction and the injunction. The Fifth Circuit reversed. The docket notation with regard to contempt under section 105 for violation of the discharge injunction did not provide notice that the court would consider criminal contempt sanctions. Civil contempt under section 105 is intended to compensate, while criminal contempt is intended to punish. Ordering the attorneys to pay sanctions to the Clerk of the Court constituted criminal contempt. Because the Court did not provide advance notice that it intended to consider this sanction, it lacked authority. The same result applied to the injunctive relief.
This is the second time that a proceeding related to this matter has reached the Fifth Circuit. Previously, the Fifth Circuit had granted a writ of mandamus when the District Court ordered Mr. Collier imprisoned for 48 hours for criminal contempt. You can read about the prior opinion here.
While the lawyer succeeded in reversing both sanctions, he can hardly be said to have gotten off scot-free. It is both difficult and expensive to take a case up to the Fifth Circuit.
While the lawyer succeeded in reversing both sanctions, he can hardly be said to have gotten off scot-free. It is both difficult and expensive to take a case up to the Fifth Circuit.
Janvey v. The Golf Channel, Incorporated, No. 13-11305 (5th Cir. 3/11/15)
This was the big case out of the Fifth Circuit this month. In order to generate awareness for its brand (which consisted of running a Ponzi scheme), Stanford International Bank advertised on the Golf Channel. It paid at least $5.9 million for this advertising. Ralph Janvey, the receiver for Stanford, sued to recover the funds as a fraudulent transfer. The District Court found that the Golf Channel had a complete defense because it had received the funds in good faith and had provided reasonably equivalent value.
The Fifth Circuit reversed. It looked at whether the property or service exchanged had any value as a matter of law and then at whether that value was reasonably equivalent. The Fifth Circuit noted that Texas courts had not ruled on whether payments made in furtherance of a Ponzi scheme constituted value. The Court held that the relevant question was not whether the payments would provide value to an ordinary business but rather, whether they provided value to the creditors in the actual case. The Court wrote:
Golf Channel’s services did not, as a matter of law, provide any value to Stanford’s creditors. Just like the broker’s (unknowing) efforts to extend the Ponzi scheme in Warfield, Golf Channel’s (unknowing) efforts to extend Stanford’s scheme had no value to the creditors. While Golf Channel’s services may have been quite valuable to the creditors of a legitimate business, they have no value to the creditors of a Ponzi scheme. Ponzi schemes by definition create greater liabilities than assets with each subsequent transaction. Each new investment in the Stanford Ponzi scheme decreased the value of the estate by creating a new liability that the insolvent business could never legitimately repay. (citation omitted). Services rendered to encourage investment in such a scheme do not provide value to the creditors.
Opinion, pp. 8-9. The Court concluded that the relevant test was whether the creditor provided a benefit to the creditors of the Ponzi scheme, not whether the services themselves were valuable. Thus, an insurance premium paid to insure the fine art bought with the proceeds of the Ponzi scheme would conceivably provide value to creditors, while the wages paid to the receptionist who answered the phone might not. This is a harsh result for the creditor who unknowingly propped up an illegitimate scheme. While the creditor could sue the promoter of the Ponzi scheme for fraud in not disclosing the scheme's existence, the promoter is likely to be sent to jail and have his assets seized.
This is a problem which deserves a legislative solution.
Dawson v. Bank of America, No. 14-20560 (5th Cir. 3/13/15)(unpublished).
Debtor defaulted on debt but negotiated a modification agreement. Debtor then sued bank for failure to record the modification agreement and report her payment history to the credit bureaus. The Fifth Circuit affirmed dismissal for failure to state a claim. There is no cause of action against a credit provider for failure to report positive information under FCRA.
Hawkins v. JP Morgan Chase Bank, No. 13-50086 (5th Cir. 3/16/15)(unpublished)
Debtor sought to bring a class action alleging that Texas home equity loan restructurings which capitalized past-due interest, fees, taxes and escrow into the principal constituted extensions of credit which would need to follow the requirements for an original home equity loan. Relying on a recent Texas Supreme Court case, Sims v. Carrington Mortg. Servs., L.L.C., 440 S.W.3d 10, 17 (Tex. 2014), the Court affirmed dismissal of the claims. This is a good result for borrowers because it removes an impediment to loan restructurings which could allow the borrower to keep the property.
Frazin v. Haynes & Boone, LLP (In re Frazin), No. 14-10547 (5th Cir. 3/30/15)(unpublished)
Frazin hired two law firms to bring claims on his behalf in his chapter 13 bankruptcy. After they only recovered $3.2 million, he brought claims for malpractice, breach of fiduciary duty and DTPA as counterclaims to their fee applications. The Bankruptcy Court denied all relief. In the first appeal, the Fifth Circuit found that the malpractice and breach of fiduciary duty claims could be decided by the Bankruptcy Court because they were necessarily decided in ruling upon the fee application. The Fifth Circuit remanded for reconsideration of the DTPA claims by the District Court. I previously wrote about the case here.
On remand, the District Court dismissed the DTPA claims. The Court found that the DTPA claim "is merely a restated negligence claim." It additionally found that claims for rendering professional services are exempt under the DTPA. The District Court's order can be found here. The Fifth Circuit affirmed for the reasons stated by the District Court.
Thus, the odyssey of Mr. Frazin and his attempt to sue his lawyers has come to an end.
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