At the same time that
the Supreme Court was busy ruling upon its bankruptcy cases for the term, the
Fifth Circuit was active as well. There were so many cases in April, that it took me two months to summarize them. Over
the course of April and May, the Court decided no less than sixteen cases with
bankruptcy implications. These include
cases relating to civil contempt, post-judgment remedies being granted
pre-judgment, the conclusion of the BPRE
case and important opinions on property of the estate, attorney’s fees,
discharge and dischargeability. There
are also four cases involving disputes between homeowners and lenders,
including two where the homeowner’s claim was revived on appeal. There is enough substance here, including in the unpublished opinions, to keep a lot of lawyers and judges reading for a long time.
This case involved a
request for mandamus with regard to a civil contempt order for failure to
comply with a turnover order. The SEC
obtained an order approving an ex parte temporary restraining order and a
receivership order. The receivership
order required the debtor to turn over all of his assets to the receiver along
with an accounting.
Upon investigation, the
receiver found that $500,000 had been delivered to the debtor in cash in a
Dillard’s bag. The funds were never
deposited into the business account or in any other account. The District Court entered a turnover order
requiring the debtor to turn over the funds and issued an order to show cause
in the event that he did not do so. “Ramirez
declined to turn over the asset or reveal where it had gone, and he has
continued to do so to this day.” The
District Court held the debtor in contempt then held a second evidentiary
hearing to allow the debtor to purge his contempt.
On the writ of
mandamus, the Court found that the contempt was supported by clear and
convincing evidence. The Court also
rejected the argument that the debtor was being punished for exercising his
Fifth Amendment right not to incriminate himself. However, the Court noted that:
(H)e is not being punished for his refusal to answer questions; he is being punished for refusing to turn over $500,000, thereby violating the turnover order. A defendant in a contempt hearing bears the burden of production to show that he is presently unable to comply with the underlying order. (citation omitted). He bears this burden even if he claims that his own testimony regarding inability to comply would incriminate him. (citation omitted). Moreover, as the district court repeatedly noted, Ramirez did not need to testify to show that it would be impossible to turn over the $500,000; he could call other witnesses to testify as to how he spent the money.
Opinion, pp. 7-8.
This case involved a
defendant who was ordered to provide discovery with regard to assets and to
refrain from transferring funds other than to pay bills in the ordinary course
of business without permission from the Court.
The defendant filed a writ of mandamus, which the Court treated as a
request for interlocutory appeal.
This case involved a
hospital which used its own billing codes to allow neighboring clinics which
did not have Texas hospital licenses to illicitly bill insurance
companies. The insurance company sued
for money had and received, fraud, negligent misrepresentation, unjust
enrichment and civil conspiracy. The
District Court granted a “partial judgment” in the amount of $8.4 million on
the money had and received claim. The
hospital, which was then under the control of a receiver, filed for chapter 11
relief. The District Court withdrew the
reference and lifted the automatic stay.
The insurance company asked for post-judgment discovery which the
District Court granted without a hearing.
At a later hearing, the District Court heard allegations that 2920 ER,
LLC had been transferring funds to a third party. The District Court “essentially ordered an
asset freeze from the bench.” This
order was later reflected in a written order.
The Fifth Circuit held
that mandamus was not proper because the remedy of an interlocutory appeal was
available. However, the Court proceeded
to treat the request for mandamus as an interlocutory appeal. It found that the request for mandamus
placed the insurance company on adequate notice of its claims. The Fifth Circuit found that a creditor is
generally not entitled to post-judgment remedies prior to judgment, relying on
the Supreme Court decision in Grupo
Mexicano de Desarrollo SA v. Alliance Bond Fund, Inc., 527 U.S. 308
(1999). The Court of Appeals found that
the asset freeze was not available prior to entry of a final judgment unless
the Plaintiff complied with Rule 65 which was not done. The Court vacated the District Court’s
orders except to the extent that the discovery was necessary to investigate
pending claims.
The take-away here is
straightforward. Post-judgment remedies
are generally not available pre-judgment.
If a creditor wants injunctive relief, it must follow the procedures set
out in Fed.R.Civ.P. 65.
This is the coda to the
second of the Fifth Circuit’s now superseded cases finding that consent was not
available in Stern cases. The Debtor filed an adversary proceeding in
bankruptcy court. After receiving a
take-nothing judgment, it contended that the bankruptcy court lacked authority
to enter a final judgment. The Fifth
Circuit agreed and remanded the case.
The District Court treated the Bankruptcy Court’s findings and
conclusions as a report and recommendation which it adopted. On appeal, the Debtor contended that the Bankruptcy
Court should have allowed a jury trial despite the fact that its request was
untimely under the local rules of the bankruptcy court. The Fifth Circuit ruled that the right to a
jury trial may be waived due to inadvertence.
It stated that “we are not convinced that BPRE’s failure to timely
comply with the rule resulted from anything other than ‘mere inadvertence.’” The Fifth Circuit also found that the
evidence received in the trial before the bankruptcy court amply supported a
take nothing judgment. Thus, in this
case as in Frazin, the right to
request a do-over in the District Court did not change the result.
Debtor made false
statements in borrowing base certificates.
He argued that the borrowing base certificates were statements of
financial condition such that reasonable reliance was required. The Court distinguished between general
statements of financial condition and “specific falsifications on the ability
to repay the lender, misstatements of inventory and denial of other secured creditors
with priority--as was true here.” The
Court also found reliance notwithstanding the Debtor’s argument that the bank
could have investigated the statements.
This court will not impose on banking officials this requirement. Under all of these circumstances and the customary practice of lending institutions, it is necessary for them to be able to accept what Plaintiff signed as true.
The Court’s ruling with regard to financial
statements is probably wrong, although it most likely did not make a difference
in the specific case.
In this decision, the en banc Fifth Circuit overruled the
Pro-Snax case. I have previously written
about the case here.
Creditor sought to deny
debtors’ discharge. Husband was liable
on debt to bank but wife was not.
Bankruptcy Court denied discharge as to both debtors. On appeal, the Fifth Circuit held that bank
was a creditor of wife and had standing to object to discharge even though she
had no personal liability. The Court
concluded that because bank had a “community claim” against the wife by virtue
of her interest in community property that it was a creditor and could object
to her discharge.
The Court also held
that the Bank could show that the debtors failed to keep sufficient records
without seeking discovery from them. In
this case, the Trustee had requested documents from the Debtors which they failed
to provide. Additionally, in connection
with their Rule 26 disclosures, the Debtors were required to produce relevant
documents. The failure to provide
documents to the Trustee or in connection with the disclosures was sufficient
to show failure to keep records under 11 U.S.C. Sec. 727(a)(3).
The Court’s finding
with regard to standing seems surprising.
While the bank was a creditor in a technical sense due to its ability to
collect from community property, this hardly seems to be the type of interest
sufficient to deny discharge. In
particular, once the wife’s discharge was denied, the bank could not try to
collect from her other than out of any community property she might acquire in
the future. This is certainly an
argument against couples acquiring community property together.
This case concerned
whether the debtor’s interest in a malpractice claim against his bankruptcy
attorney was property of the estate.
The debtor accused his attorney of mishandling his chapter 11 case with
the result that confirmation of his plan was denied, the case was converted to
chapter 7 and the debtor lost his discharge.
The Fifth Circuit found that at least some of the harm from the attorney’s
actions occurred during the chapter 11 proceeding. As a result, the Court found that all claims
against the attorney were property of the estate.
The problem with this
case is that it considers all of the different actions which caused harm to
constitute a single cause of action rather than multiple claims based upon
different omissions and harms. By
holding that even one harm occurring pre-conversion meant that the entire cause
of action accrued pre-confirmation, the Court deprived the debtor of claims that
should rightly have belonged to him.
The absurdity of the Court’s result is illustrated by the claims that
the attorney’s negligence resulted in loss of the discharge. The estate was not harmed by denial of the
debtor’s discharge and the Fifth Circuit has previously held that claims for
loss of the discharge belong to the debtor rather than the estate. Nevertheless, under this opinion, the
chapter 7 trustee, who was the same party who sued for denial of the discharge,
could now sue the attorney for negligence leading to denial of the
discharge. This is a bizarre result and
should be reconsidered.
For another take, you can read what the Weil Blog had to say here.
For another take, you can read what the Weil Blog had to say here.
Disclosure:
I consulted with the Debtor and was designated as an expert witness.
The homeowners sued
Bank of America following a foreclosure.
The homeowners had sought to modify their loan under HAMP. They
were initially told that they did not qualify because their loan was not in
default. Subsequently they stopped
making the payments and reapplied. Over
the course of three years, they worked on their modification proposal with Bank
of America. Because they were in
default, they received periodic default notices. However, Bank of America agreed to postpone
action pending review of their modification proposal. Eventually the Bank denied the modification
and foreclosed.
The Court of Appeals
ruled that the Bank did not waive its right to foreclose by delaying
foreclosure multiple times. They also
claimed a violation of the Texas Debt Collection Act, alleging that the Bank
had misrepresented that their modification was under review. The District Court granted summary judgment
and the Fifth Circuit affirmed. Mere
delay is not a waiver of the right to foreclose. A statement with regard to a proposed
modification is not a representation about the character, extent or amount of a
consumer debt.
This case illustrates
how HAMP often causes more harm than good.
On the one hand, the borrower must be in default to apply for the
program. However, the lender has no
obligation to grant a modification.
Thus, by defaulting in order to apply for the program, the homeowner
places themselves in jeopardy of losing the property. This is a well-intentioned but terribly
designed program. While chapter 13 has
its drawbacks, at least the automatic stay provides some protection to the
debtor.
Nicholas and Stacy
Barzelis had a home loan with Flagstar Bank.
Nicholas died and Stacy submitted the death certificate to the
bank. Stacy filed chapter 13 and made
payments through the trustee. The bank
refused to accept any payments which did not come from Nicholas. Stacy sent Flagstar two Qualified Written
Requests. The bank stated that it would
not provide information to her unless she provided “letters of authority from a
probate attorney.”
When Flagstar began
foreclosure proceedings, Stacy sued.
The bank removed the case to federal court. Stacy amended to allege claims for breach of
contract, negligent misrepresentation, violation of the Texas Debt Collection
Act and violation of RESPA. The
District Court dismissed all of the state law claims as preempted under the
Home Owners Loan Act of 1933 (HOLA) and granted summary judgment on the RESPA
claim.
The Fifth Circuit found
that the breach of contract claims were preempted to the extent that they
relied upon the Texas Property Code, but not to the extent that they relied
upon the contractual agreements between the parties.
The Court found that
negligent misrepresentation claims based upon inadequacy of disclosures made
were preempted by HOLA.
The Court found that
the claims under the TDCA were not preempted.
It wrote:
We agree with the consensus, concluding that similar state consumer-protection laws—those “that establish the basic norms that undergird commercial transactions”—do not have more than an incidental effect on lending and thus escape preemption. The essential purpose of the TDCA is to limit coercive and abusive behavior by all those seeking to collect debts, something that does not burden lending in the same way as would a specific mandate on interest rates. Instead, it more closely resembles a generally applicable law against deceptive trade practices, governing behavior at the margins of banking and lending. Additionally, the law is consistent with “the safe and sound operation of federal savings associations.” Section 560.2(a). As a result, the statute overcomes the presumption, and the claims are not preempted under HOLA.
Opinion, pp. 8-9.
The Court also reversed the summary judgment
under RESPA. The District Court had
found that Flagstar was not required to respond because Stacy was not the borrower
and had not provided proof that she was acting as representative of her husband’s
estate. However, the Fifth Circuit
found that “under Texas law, Stacy, as the survivor to her husband’s interest
in the property subject to their community debt, was the successor-debtor on
the Note and was the legal borrower.”
As a result, Flagstar was required to respond to her QWR.
This is a rare case in
the Court did not affirm dismissal of the borrower’s claims against a home
lender. As a result, it is worth
reading.
The homeowners
contended that the statute of limitations barred a foreclosure. The Bank accelerated the debt in 2004. However, it accepted payments from the
homeowners in 2006. It accelerated for
a second time in 2010 and foreclosed in 2013.
The Court held that the Bank abandoned its acceleration when it
subsequently accepted payments and that the foreclosure was within the four
year statute of limitations.
This is a rare case
interpreting the effect of section 1111(b) in the context of a sale. Baker Hughes and other creditors filed an
involuntary petition against the debtor.
The case was converted to chapter 11.
Scott Oils filed a plan of reorganization which allowed it to purchase
90 mineral leases and several wells for $3.4 million. Baker Hughes claimed liens on four of the
leases and one of the wells. Four other
creditors had mineral liens in the same well.
Baker Hughes attempted
to make a section 1111(b) election in order to treat its claim as fully
secured. Baker Hughes did not object to
confirmation, appear at the confirmation hearing or appeal the confirmation
order. Apparently the sale occurred subsequent
to confirmation and Baker Hughes appealed the sale order.
Baker Hughes contended
that it was entitled to submit a credit bid on the properties in which it
claimed a lien and that by virtue of the section 1111(b) election, it could
treat its claim as fully secured. The
Fifth Circuit found that a section 1111(b) election was not available on a sale
pursuant to a plan. Additionally, the
plan provided that the right to credit bid was preserved but Baker Hughes
failed to show that it actually submitted a credit bid.
Judge Edith Jones
submitted a concurrence to address the unusual position of Baker Hughes. Judge Jones found that Baker Hughes waived
its section 1111(b) election by failing to pursue it at the confirmation
hearing. She concurred to question the
majority’s conclusion that the plan had actually preserved the right to credit
bid. She questioned whether a private
bulk sale of assets burdened by multiple liens could actually protect a secured
creditor’s right to credit bid regardless of whether the orders said that it
did. She went further and stated that a
creditor would be entitled to make a section 1111(b) election even though the
property was being sold pursuant to a plan if the sales procedures did not
preserve the right to credit bid. However,
because the creditor did not pursue its section 1111(b) election at
confirmation, it lost the right to protest.
Additionally, Judge Jones noted that given the other liens on the
property, the creditor would have been required to satisfy the other
lienholders to make a credit bid which would have rendered it impractical.
The bottom line seems
to be that Judge Jones believes that a sale pursuant to a plan which does not
expressly provide for a credit bid could be subject to a section 1111(b)
election. In this case, failure to
pursue the right argument at the right time waived it. Otherwise, it could have been an interesting
mess.
This is the almost a Ponzi scheme case. Templeton invested in
partnerships organized by American Housing Foundation (AHF). The trustee sought to equitably subordinate
his claims, to recover voidable preferences and to recover fraudulent
transfers. The Bankruptcy Court
granted equitable subordination and preference recovery but denied the
fraudulent transfer claim. Both parties
cross-appealed.
The Fifth Circuit
affirmed the equitable subordination ruling.
It found that Templeton’s claims arose from the purchase of securities
of AHF’s affiliates and were subject to equitable subordination.
The Bankruptcy Court
rejected Templeton’s ordinary course defense on the basis that AHF was a Ponzi
scheme and that payments from a Ponzi scheme are not in the ordinary course of
business.
However, the Court found that AHF was not a Ponzi scheme. Although it engaged in some fraudulent and Ponzi-like transactions, it “engaged in substantial legitimate business.” The Court ruled that it was improper to expand the rule against treating Ponzi scheme distributions as not in the ordinary course “to cover legitimate businesses in which there were some fraudulent or Ponzi-like transactions.” As a result, it reversed and remanded for the Court to consider Templeton’s defense.
However, the Court found that AHF was not a Ponzi scheme. Although it engaged in some fraudulent and Ponzi-like transactions, it “engaged in substantial legitimate business.” The Court ruled that it was improper to expand the rule against treating Ponzi scheme distributions as not in the ordinary course “to cover legitimate businesses in which there were some fraudulent or Ponzi-like transactions.” As a result, it reversed and remanded for the Court to consider Templeton’s defense.
On the other hand, the
Bankruptcy Court rejected the fraudulent transfer allegations on the basis that
Templeton gave value and acted in good faith under 11 U.S.C. Sec. 548(c). The Court found that the Bankruptcy Court’s
findings on value were insufficient because they did not show that AHF
appropriated Templeton’s investments in the limited partnerships. It also found that the Bankruptcy Court
applied the wrong test in determining whether Templeton acted in good
faith. The Bankruptcy Court found that
Templeton acted in good faith because his transactions did not defraud other
creditors. However, this was the wrong
standard. Instead, the test is whether
the claimant was “on notice of the debtor’s insolvency or the fraudulent nature
of the transaction.”
As a result, the Fifth
Circuit affirmed the equitable subordination but remanded the other claims for
further consideration.
Jett sued American home
Mortgage Servicing for negligently and willfully failing to update her credit
information. Jett became delinquent on
her home mortgage and filed for chapter 13 relief. After she completed her plan, her credit
report “erroneously showed the mortgage as discharged in bankruptcy with a $0
balance.” Jett disputed the listing
and Experian sent an automatic credit dispute verification form to American
Home. American Home attempted to reply
back that the loan was current with a balance of $35,000. However, her credit report was not updated
over a period of two and a half years.
Jett sued claiming that
she was denied refinancing because American Home failed to update her
credit. Apparently American Home left a
field on the form blank which signaled that Experian should continue to report
the original information. The District
Court granted summary judgment on Jett’s claims finding that she had not produced
evidence as to American Home’s policies and procedures and that therefore she
had failed to show that American Home knew that it was supposed to conform to
those policies.
The Fair Credit
Reporting Act creates a private cause of action for both negligent and willful
reporting of erroneous information.
The Court found that “regardless of the policies and procedures used to
investigate the dispute, the plain language of (FCRA) makes clear that a
furnisher is liable if it negligently reports the results of its investigation
to the CRA.” Thus, the fact that
American Home knew that the credit was being erroneously reported and failed to
correct it was sufficient to create a fact issue for purposes of summary
judgment.
This was the companion
case to Cantu v. Schmidt. It involved malpractice claims against the
debtor’s accountant, who was the husband of the attorney sued in the other
case. The Court found that all of the
injuries occurred prior to conversion and that the creditor body was
damaged. As a result, it found that the
claims belonged to the estate.
This is an important dischargeability case. I have recently written about it in depth here.
This case involved a
suit brought against a chapter 7 trustee.
(This is the third of three cases involving Michael B. Schmidt discussed
in this post. He prevailed in all three
cases). BFG Investments, Inc. filed
bankruptcy and Schmidt was appointed as Trustee. His final report was approved in 2009 and
no appeal was taken. Four years later,
BFG and its president filed suit in U.S. District Court against Schmidt
alleging gross negligence and breach of fiduciary duty. The District Court dismissed the suit
because the plaintiffs had failed to obtain leave from the Bankruptcy Court
before filing suit against the Trustee.
The Supreme Court has
held that “before suit is brought against a receiver leave of the court by
which he was appointed must be obtained.”
Barton v. Barbour, 104 U.S.
126, 128 (1881). This principle applies
to bankruptcy trustees as well.
The Plaintiffs argued
that Stern v. Marshall created an exception
to this rule because the Bankruptcy Court would lack authority to enter a final
judgment. Based on Executive Benefits Insurance Agency v.
Arkison, the Court found that Stern
does not “decide how bankruptcy or district courts should proceed when a ‘Stern’ claim is identified.” It
went on to state that:
We are not called upon in this case to provide all the details regarding how a party should, post-Stern, proceed under Barton. We hold only that a party must continue to file with the relevant bankruptcy court for permission to proceed with a claim against the trustee. If a bankruptcy court concludes that the claim against a trustee is one that the court would not itself be able to resolve under Stern, that court can make the initial decision on the procedure to follow. Once a bankruptcy court makes such a determination, this court can review the utilized procedure.
Opinion, p. 4.
The Court also rejected
the argument that Barton is satisfied
by filing suit in the District Court.
Thus, it seems clear
that a suit against a trustee must originate in the Bankruptcy Court.
Those are all of the cases that I could find for April and May 2015. I am exhausted. How about you?
Those are all of the cases that I could find for April and May 2015. I am exhausted. How about you?
1 comment:
Very interesting case here. Thanks so much for sharing this report so that we can look into what's going on.
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