Friday, June 05, 2015

Fifth Circuit Report: April-May 2015

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   There is enough substance here, including in the unpublished opinions, to keep a lot of lawyers and judges reading for a long time.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.

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.
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?

1 comment:

Jordan said...

Very interesting case here. Thanks so much for sharing this report so that we can look into what's going on.