Sunday, May 01, 2016

Fifth Circuit Report: First Quarter 2016

During the first quarter of 2016, the Fifth Circuit handed down some important decisions relating to bankruptcy and debt.     These include cases about how attorneys get paid from PACA proceeds, standing to object, denial of discharge, dismissal for cause, enforcing a chapter 11 plan, preferences, more fallout from the Stanford Ponzi scheme and some cases of general interest.

Click on the style of the case to go to the opinion.   

Part One:  Bankruptcy Decisions

Attorney's Fees; PACA Claimants

This is a must-read opinion for anyone dealing with PACA claims in bankruptcy.   The first paragraph of the opinion explains the case better than I could try. 
This attorney’s fee dispute has its roots in the Perishable Agricultural Commodities Act (PACA), a Depression-era statute designed to protect sellers of perishable produce from delinquent purchasers. Two such purchasers filed for bankruptcy and the bankruptcy court appointed special counsel to collect and disburse funds to PACA-protected sellers that had claims against the purchasers-turned-debtors. When special counsel sought approval of his fees and expenses, which would be paid out of the PACA fund, some sellers objected and appealed the bankruptcy court’s fee award to the district court, which vacated it. Now that this same chain of events—fee awards, objections, appeals, and vacaturs—has occurred twice more, this case is ripe for decision. The question is: can special counsel’s fees and expenses be disbursed from the PACA fund?
Opinion, p. 1.   The Court's principal holding was that counsel could not be paid from PACA funds until the PACA claimants had received payment in full.    However, the result was mitigated for counsel because only one PACA claimant holding a small percentage of the PACA claims objected.  Because the other claimants did not object, the Court found that they implicitly agreed that the attorney could be paid from their funds.  As a result, only about $15,000 out of $200,000 in total fees allowed were at risk.   The Court found that the "free rider" problem of allowing a claimant to benefit from the services of an attorney without paying for it could be mitigated even more by allowing the attorney to be appointed as special counsel to the estate and to be paid by non-PACA proceeds.   The Court also disposed of a Stern v. Marshall issue by finding that the parties had consented to entry of a final order by the Bankruptcy Court.

Claims; Standing to Object

This case involved whether a chapter 7 debtor had standing to object to claims filed in his case.  The court noted the general rule that a debtor who is not a debtor-in-possession rarely has standing to objection to claims.    The reason is that the chapter 7 debtor rarely has a concrete interest in how the assets of the estate are divided between creditors.    However, in this case, the creditors were pursuing dischargeability actions.    As a result, whether the claim was allowed or not would affect the debtor and there was standing to object.   

Denial of Discharge; Standing

A creditor brought an adversary proceeding attempting to deny the debtor's discharge and seeking a determination that various companies controlled by the debtor were his alter egos.    The bankruptcy court granted summary judgment in favor of the debtor.    

The Fifth Circuit found that the sole right to pierce the corporate veil or seek a determination of alter ego belonged to the trustee.    While the creditor could have requested standing to pursue these claims if the trustee had unjustifiably refused to do so, the creditor never made the request.   As a result, it lacked standing. 

The creditor contended that the debtor's discharge should be denied under section 727(a)(2)(A) because his wholly owned company paid the debtor and his wife salaries totaling $27,000 per month.  The court found that these transactions were disclosed and that payment from the company to the debtor and his wife was not a transfer of property of the debtor or the estate so as to invoke section 727(a)(2)(A).   

The Fifth Circuit also affirmed summary judgment under section 727(a)(3).   The creditor alleged that the debtor had failed to disclose contracts belonging to his company.   However, the court found that he was not under any obligation to do so and had fully responded to the trustee's questions.

The creditor sought to deny the debtor's discharge under section 727(a)(4) based on four allegedly false oaths:  1)  he stated that some of his business interests were subject to litigation; 2)  he failed to disclose an insurance policy; and 3) he failed to disclose his accountant.    The Fifth Circuit affirmed the bankruptcy court's findings that these statements were either not material or not made with fraudulent intent.

The lesson here is that the creditor cannot just throw a batch of random allegations against the wall and expect to have a case that will survive summary judgment.

Dismissal for Cause; 707(a)

This cases deals with the standard for dismissing a chapter 7 petition for cause and includes an example of the word chutzpah.   I did a full article on this case which can be found here.

 Plan of Reorganization, Effect of; Sanctions

 Skyport Global Communications confirmed a plan in which it merged with SkyComm Technologies and Skycomm's shares were canceled and reissued to a new party.   The confirmation order enjoined derivative claims on behalf of Skyport and SkyComm but did not enjoin direct claims against third parties.

The Schermerhorn parties had been minority shareholders of SkyComm.   They did not appeal the confirmation order or seek to revoke the confirmation order.   Instead, they filed suit in state court.   That suit was removed to bankruptcy court.    The bankruptcy court found that the state court lawsuit was a collateral attack on the confirmation order.   It ordered the plaintiffs to pay sanctions consisting of the defendants' attorneys' fees and expenses.    

On appeal, the defendants argued that the court could not order the sanctions under its inherent authority.     The Fifth Circuit found that although the suit was originally filed in state court, the bankruptcy court could issue sanctions "pursuant to its inherent authority to police practitioners who act in direct contravention of its orders."    The Fifth Circuit affirmed the award of sanctions.
Voidable Preferences

This case involves a trustee who sought to recover $4.5 million in allegedly preferential payments.   The Bankruptcy Court found that the creditor had established the section 547(c)(5) defense to a preference action involving a creditor with a lien on inventory or accounts receivable.   However, the Fifth Circuit found that the Trustee had not proven that the creditor had received more than it would have under a chapter 7 liquidation if the payment had not been made for the reason that the creditor was paid with the proceeds from its own collateral.   As a result, the Trustee still lost.   This is a good case for determining whether a preference can be asserted against a secured creditor.

Part Two:   Cases Related to the Stanford Ponzi Scheme

Aiding and Abetting; Attorney Immunity

The plaintiffs brought a class action suit against one of Stanford's attorneys and his firm alleging that they had aided and abetted Stanford in thwarting an SEC investigation.    The attorneys sought to dismiss the case under the attorney immunity doctrine.   However, the district court ruled that there was a fraud exception to attorney immunity.   

 The defendants appealed the denial of their motion to dismiss and the plaintiffs moved to dismiss the appeal on the basis that it was not an appealable order.    In order to constitute an appealable order, it must conclusively resolve a disputed issue, be separate from the merits of the case and effectively be unreviewable on appeal.   The Fifth Circuit found that the first two prongs were undisputed.   As to the third prong, it found that under Texas law, attorney immunity is an immunity to suit.   The court found that this was similar to judicial immunity, prosecutorial immunity and the litigation privilege.  If the party is forced to defend the suit, it has lost the benefit of the immunity.   As a result, the Fifth Circuit found that the order was appealable.

While the case was pending, the Texas Supreme Court ruled that fraud was not an exception to attorney immunity so long as the actions taken were within the scope an attorney discharging his duties to a client.   Cantey Hanger, LLP v. Byrd, 467 S.W.3d 484 (Tex. 2015).    In Cantey Hanger, the Texas Supreme Court found that
f]raud is not an exception to attorney immunity; rather, the defense does not extend to fraudulent conduct that is outside the scope of an attorney’s legal representation of his client, just as it does not extend to other wrongful conduct outside the scope of representation.
Id. at 484.   In this case, all of the actions taken by the attorney were within the scope of the representation.
Indeed, Plaintiffs do not dispute before this court that Sjoblom’s alleged conduct was “the kind of conduct in which an attorney engages when discharging his duties to his client.” (citation omitted). Nor could they credibly do so. Plaintiffs alleged that, in representing Stanford Financial in the SEC’s investigation, Sjoblom: sent a letter arguing, using legal authorities, that the SEC did not have jurisdiction; communicated with the SEC about its document requests and about Stanford Financial’s credibility and legitimacy; stated that certain Stanford Financial executives would be more informative deponents than others; and represented a Stanford Financial executive during a deposition. These are classic examples of an attorney’s conduct in representing his client. That some of it was allegedly wrongful, or that he allegedly carried out some of his responsibilities in a fraudulent manner, is no matter.
Opinion, p. 10.    The fact that attorneys have absolute immunity for being sued for conduct involved in the scope of their representation provides a valuable tool for attorneys being sued by third parties.

Fraudulent Transfers;Mandamus

Allen Stanford made charitable contributions to various charities.   The Receiver elected not to pursue these claims.   Instead, he assigned them to  the Official Stanford Investors Committee (OSIC) which did bring suit.   The charities moved to dismiss claiming that the jurisdictional provisions applicable to a receiver did not extend to the assignee of a receiver.   The district court found that the OSIC was analogous to a creditors committee in bankruptcy and thus had authority to sue.   The charities sought a writ of mandamus.    

The Fifth Circuit denied the writ of mandamus.   To be entitled to mandamus relief, the petitioners/charities were required to show that the district court "clearly and indisputably erred."   The Fifth Circuit said that "we find the answer to the question far from clear."   As a result, it denied the request for mandamus without expressing an opinion on the ultimate jurisdictional issue.

Fraudulent Transfer

Romero worked part-time at the Stanford International Advisory Board (IAB).    Over the course of eight years, he received over $700,000 in advisory board fees.  The jury found that the receiver could not have learned of the claims prior to February 15, 2010.   As a result, the suit filed on February 15, 2011 was timely.   The District Court entered judgment against him for $788, 655.01.    

The suit was brought under the Texas Uniform Fraudulent Transfer Act (TUFTA).  Under TUFTA, the statute of limitations for bringing a claim is four years from when the transfer was made or one year after the transfer or obligation could have been discovered by the claimant.    Although the Receiver was appointed on February 6, 2009, the Fifth Circuit refused to second guess the jury's verdict, finding that the Receiver presented sufficient evidence that he could not have discovered the claims sooner.

Romero did not object to the jury instruction that value was to be determined from the point of view of Stanford's creditors because this was the law at the time.   Instead, he asked that the appeal be abated until the Texas Supreme Court answered a certified question in another case on this issue.   The Fifth Circuit found that because he did not object to the jury instruction, he waived the argument. 

Part Three:  Everything Else

Diversity Jurisdiction; Forum Non Conveniens

Plaintiff Fulcrum Enterprises, LLC filed suit based on diversity jurisdiction.  It alleged that it was a Nevada LLC and a citizen of Nevada.   On appeal, the Fifth Circuit sua sponte raised the issue of jurisdiction.   Court held that a limited liability company is a citizen of each state in which its members reside as opposed to where it is incorporated.    In response to a question from the Court, Fulcrum stated that its members were citizens of Georgia, Nevada, New York and North Carolina.   This posted a problem since Bank of America is a North Carolina company.   Court remanded for District Court to determine whether diversity jurisdiction was present.

Peter Weber sued PactXPP Technologies, AG in Texas.   The contract between the parties contained a forum selection clause requiring that suit be brought in Germany.   The District Court dismissed based on forum non conveniens.   The Fifth Circuit affirmed finding that the forum selection clause  "is mandatory and enforceable, and no overwhelming public interest requires retention in Texas."   Case contains a good discussion of forum selection clauses.  

Homeowners Suing Lenders

I usually do not summarize the often unreported cases involving homeowners suing their lenders.   This time I chose to list them in order to show just how difficult it is for homeowners to obtain relief.   Nevertheless, each month there are a new batch of similar cases.

Meachum v. The Bank of New York Mellon Trust Company, No. 15-10237 (5th Cir. 1/11/16)(unpublished)

Homeowner claimed that bank waived prior notice of acceleration by requesting payment for less than full amount of loan.    Homeowner lost.

Fields v. JP Morgan Chase Bank, N.A.,  No. 15-10034 (5th Cir. 1/15/16)(unpublished)

Homeowner sued under Texas Debt Collection Act alleging that lender charged "unreasonable fees."  However, they did not say which fees were unreasonable.  District Court dismissed case and Fifth Circuit affirmed.
Wolf v. Bank of America National Association, No. 14-41227 (5th Cir. 1/20/16)(unpublished)

Pro se debtor's rambling and disjointed pleading alleging fraud, breach of contract, RICO and violations of the Fair Housing Act was dismissed for failure to state a cause of action.    Case was apparently based on attempts to refinance their residence.   Dismissal affirmed by Fifth Circuit.

Garza v. Wells Fargo Bank, N.A., No. 15-10426 (5th Cir. 1/28/16)(unpublished)

This case is truly tragic.   Debtor's mother died intestate.   Lender refused to accept payments from her because she was not on the note.   Wells Fargo foreclosed on house.   Eventually probate court awarded debtor one-half interest in house.   Wells Fargo sought to evict her.   Debtor sued claiming that Wells Fargo had failed to give her notice under Texas Property Code 51.002(d).   Case was dismissed.   Fifth Circuit found that she was not entitled to notice of the foreclosure sale because she was not the debtor.
Payne v. Wells Fargo Bank, N.A., No. 15-10366 (5th Cir. 2/11/16)(unpublished) 

 After Wells Fargo foreclosed on her home, debtor sued alleging that lender  should have applied insurance proceeds to cure delinquency.  Homeowner alleged numerous theories based on this argument. Court found that lender had the right to use insurance proceeds to repair the house and was not required to apply them to delinquent note balance.   

Martin v. Federal National Mortgage Association, No. 15-41104 (5th Cir. 2/22/16)

Homeowner brought suit to quiet title.    Homeowner claimed that lender waived default by accepting payments for sixteen months.   District Court dismissed.   Fifth Circuit held that non-waiver clause in the Deed of Trust controlled.    Court pointed out that lender accepted payments after declaring initial default, but not prior to acceleration.   As a result, accepting payments did not waive subsequent right to accelerate.

Villareal v. Wells Fargo Bank, N.A., No. 15-40243 (5th Cir. 2/26/16)

Homeowner brought claims for breach of contract, negligence, wrongful foreclosure and violation of the Texas DTPA.    Villareal's husband signed note.   Both she and husband were on the deed of trust. Deed of trust provided for notices to be sent to the property address.   Villareal was awarded the house in the divorce.     She apparently moved to a new address.    Notices of default, acceleration and foreclosure were sent to the property address but not to her new address.   She sued the bank and an employee claiming that they should have sent notice to her new address and should have debited the funds from her account.    Court found no breach of contract because Villareal was herself in default.   Court found no negligence because all she alleged was breaches of contract.    Wrongful foreclosure claim was dismissed due to failure to allege grossly inadequate selling price or chilling of bidding.   DTPA claim was dismissed because she did not allege that primary purpose of transaction was acquiring goods or services.
Homeowners sued to prevent foreclosure.   They claimed that loan servicer lacked authority to foreclose.    Servicer rescinded notice of acceleration and homeowner dismissed suit.   Lender posted for foreclosure several years later.   Homeowner sued again, claiming that servicer had not properly rescinded acceleration so that foreclosure was barred by limitations.   Homeowner also claimed that lender waived right to foreclosure by failure to seek it in first suit.    Court found that servicer could abandon acceleration by sending notice that it was abandoning acceleration.   Failure to seek foreclosure in a prior suit that was dismissed did not waive it in the future.  

For this group of cases, the score is lenders 8, homeowners 0.

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