Republican Tax Plan May Expand Dischargeability of Private Student Loan Debt

In an application of the law of unintended consequences, the Republican plan to eliminate the deduction for student loan interest may render private student loans subject to discharge in bankruptcy.  

In 2005, Congress amended 11 U.S.C. Sec. 507(8) to add the following category of non-dischargeable debts:

any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual

NCBJ Report: Jevic--The Inside Story and the Impact on Future Chapter 11s

Jevic--The Inside Story and the Impact on Future Chapter 11s featured participants from the case offering their perspective on the case and what it meant.   Dan Dooley of MorrisAnderson was the Chief Restructuring Officer for Jevic.   Domenic Pacitti of Klehr Harrison was Debtor's counsel.   Rene Roupinan of Outten & Golden represented the WARN Act claimants.   The panel was moderated by Judge Gregg W. Zive (Bankr. D. Nev.).    

I have previously written about Jevic here.

Jevic Holding Company was a trucking company based in New Jersey.   It had been acquired by Sun Capital and was financed by CIT Group.    CIT requested that the debtor liquidate itself in Chapter 11.   The Debtor apparently gave WARN Act notices.   However, New Jersey had its own state statute which was stricter than the national statute.

When the case was filed, the CRO Dan Dooley, negotiated a wind-down budget which included $3.0 million for paying accrued wages and related payroll obligations.   After the company was liquidated, the Debtor was holding $1.7 million which was subject to Sun's lien (it was also a secured creditor).   There were two other important pieces of litigation.   The WARN Act claimants sued the Debtor and Sun Capital.  They alleged that the Debtor and Sun were a unitary employer.   The Official Committee of Unsecured Creditors sued Sun and CIT to unwind the leveraged buyout as a fraudulent transfer.     

Eventually a settlement was reached where Sun allowed the $1.7 million to be used to pay creditors and CIT paid another $2.0 million to cover priority and administrative claims.  However, in the settlement Sun did not want any money to go to the WARN Act claimants because they were also suing Sun.  As a result, a structured dismissal was set up which provided that the settlement funds would be paid to creditors but not to the WARN Act claimants.   This involved skipping over the WARN Act claimants' priority claims.   

The Bankruptcy Court approved the structured dismissal and the Third Circuit affirmed under the "rare circumstances" doctrine.   The Supreme Court reversed finding that a debtor could not violate the priority scheme under the Bankruptcy Code in a non-consensual an end of case distribution.  The Court left open the possibility that paying creditors out of sequence would be allowed in cases such as paying employee wage claims and critical vendor claims where doing so would advance Code-related goals.

Mr. Pacetti (the Debtor's lawyer) explained that they used a structured dismissal because there are only three ways to end a chapter 11 case--a plan, conversion or dismissal.  11 U.S.C. Sec. 349(b) says that the parties shall revert to the status quo ante unless the court "orders otherwise."  The structured dismissal was an attempt to have the court "order otherwise."    

Judge Zive focused on the Court's reference to allowing priorities to be skipped based on a Code-related objective.   He raised the case of Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452 (2nd Cir. 2007).   In Iridium,  the debtor had claims against its parent, Motorola, and Motorola had administrative claims against the estate.    In settlement of other litigation, a fund of money was created to fund a litigation trust to sue Motorola.  Any money remaining in the litigation trust would go to the unsecured creditors.  Motorola objected to diverting funds which could have paid its administrative claim to the trust.   The Second Circuit generally found that the settlement was permissible because having a well-funded creditors' trust would increase the value of the claims against Motorola.  However, it remanded for an explanation of why the residual funds in the trust would go to the unsecured creditors instead of being distributed in priority order.

Mr. Dooley stated that the Code-related objective here was maximizing the pie.

Judge Zive said that other areas where priority-skipping would be allowed would be wage orders, critical vendor motions and roll-ups as part of DIP financing.   He said these are all orders that allow the case to proceed.   

Ms. Roupinan was asked how Jevic would change WARN Act litigation.   She said that requiring parties to follow the absolute priority rule would provide clarity and predictability and improved ability to negotiate.

Mr. Pacetti said that in skipping priorities, it was important to consider what the stage of the case is.  First day motions will get greater latitude than end of case distributions.  He also stressed the importance of making an evidentiary record.

Judge Zive seconded this notion stating that any time you want the court to do something you should provide sufficient facts.  He gave the example of routine motions for cash management and continuing bank accounts which could result in de facto sustantive consolidation.  

Ms. Roupinian asked whether priority-skipping would be ok if all parties consented.   She asked what would happen if the U.S. Trustee was the only party objecting.

Judge Zive replied that the policy of the U.S. Trustee is not the Bankruptcy Code.  He said that "if everyone is consenting, I don't have a problem with that."   However, he focused on what constituted consent?   He said that if a party is given notice and fails to object, they have waived their objection.

Mr. Dooley said that the take-away from the case was that it was really about the absolute priority rule, not structured dismissals.

Judge Zive said that one of the problems with Jevic was that there was no going concern value to protect and no jobs.  As a result, the Code-related objective was much weaker.   A few moments later, he emphasized that priority skipping can be allowed to protect going concern value, jobs, etc. but that "there has to be a significant reason."   

The panel also discussed gifting, that is, where one creditor gives up value so that it can go to a creditor with lesser priority.   Judge Zive pointed out In re LCI Holding Co., 802 F.3d 547 (3rd Cir. 2015) where lenders acquired the debtor's asset via a credit bid but deposited funds in escrow for professional fees and paid some funds directly to unsecured creditors.   Where the funds were paid directly by the secured lender, they were never property of the estate and thus the court had no jurisdiction over them.  

Mr. Pacetti that lawyers should cut deals earlier in the case and read Jevic for what it says.   However, Ms. Roupinian said that parties should either follow the absolute priority rule or get consent.

Judge Zive said that courts would be skeptical about non-consensual priority-skipping and that lawyers should get the evidence that shows why the settlement is proper.

Mr. Dooley said that doing priority skipping "requires real proof."   He also said that structured dismissals must be squeaky clean and that first day orders may be more carefully examined.  He said that the ruling will embolden the U.S. Trustee.   

The take-aways from the panel were build your evidentiary record, identify a Code-related objective and do your deal at a time when it will still advance the reorganization.

 

NCBJ Report: Asset Protection Trusts--How to Make Them and How to Break Them

Asset Protection Trusts--How to Make Them and How to Break Them examined a phenomenon emerging in the laws of several states, including Nevada.   This panel was moderated by Ron Peterson of Jenner & Block with Neal Levin of Freeborn & Peters, Judith Greenstone Miller of Jaffe Raitt Heuer  Heuer & Weiss, P.C., Rebecca Hume of Kobre & Kim, and Judge Brian F. Kenney of the U.S. Bankruptcy Court for the Eastern District of Virginia.

According to Judith Greenstone Miller, there are now seventeen states that allow Debtor Asset Protection trusts ("DAPs").    Some states have a statute of limitations as short as eighteen months to challenge a DAP while others may allow up to four years or more for an existing creditor that did not have knowledge of the transfer.   Some states require an affidavit of solvency.

Michigan was the seventeenth state to allow DAPs in March 2017 and amended the Uniform Fraudulent Transfer Act (UFTA) to exempt a "qualified disposition."    There are also variations in state law between those following the Uniform Fraudulent Transactions Act (UVTA) and the Uniform Voidable Transfers Act.   While UFTA does not have a specific choice of law provision, UVTA does.

Ms. Miller explained that DAPs require giving up control and that high net worth indiiduals don't like to give up control.    DAPs are attractive to individuals with plenty of assets now who fear future liabilities such as doctors.

In Michigan, DAPs must be irrevocable.   The Trustee must reside in Michigan.   The settlor must execute an affidavit that the transfer of assets into the trust will not render them insolvent and that they are not subject to pending litigation other than as described.     They may retain the power to direct investments and request distributions of income and principal although they cannot demand a distribution.   The sole means to challenge a DAP is to bring an action under the UVTA by clear and convincing evidence.      The statute of limitations in Michigan is shortened from six years to two years, although it starts at the time of the qualified disposition.   If a claim arises after the disposition, the statute of limitations is two years from when the claim arises.   Beyond the state statute of limitations, the only resort is to Sec. 548 of the Bankruptcy Code for actual intent to hinder, delay or defraud.   If a transfer is set aside, the property reverts to the settlor and only to the extent necessary to satisfy the claim.  

Neal Levin described Nevada's DAP law, which he described as an "absolute shield" for assets.  It has been around since 1999 and has a two year statute of limitations with a six month discovery rule.  There is no requirement for an affidvait of solvency.   The burden of proof is clear and convincing evidence. Additionally, the settlor retains incredible control over the trust assets.   He said that the only exception to the Act's protections is an action under the UVTA.

Judge Brian F. Kenney described the Virginia law as being one of the least protective.  He said that his state statute says that a transfer is not voidable solely because is was made to a self-settled trust without consideration.   As with the law of several other states, Virginia's statute contains a provision shielding professionals who structure a transfer from liability.    However, at the same time, Virginia adopted a statute providing for sanctions against any party within its jurisdiction who transfers assets with knowledge of a judgment.   Thus, there is some conflict in the law.

Rebecca Hume came all the way from the Cayman Islands to discuss foreign asset protection trusts which she described as a war between the world and the debtor's assets with a gate that only the debtor has a key to.   She described the Cook Islands as the worst jurisdiction for creditors with the Island of Nevis close behind.   The law of the Cayman Islands provides that issues relating to Cayman Islands trusts must be governed by the law of the Cayman Islands and that any order of a foreign court attempting to assert control over a Cayman Islands trust would be unenforceable.   In the Cook Islands, a claim must be brought within two years of when the transfer was made.   The creditor must prove a fraud beyond a reasonable doubt.   Further, the creditor must hire a lawyer in the Cook Islands and may not enter into a contingent fee arrangements.   She said she knew of only one case where a Cook Islands Trust was set aside. 

Judge Kenney said that Sec. 548(e) was added to the Code to address the problem of DAPs.   He said that it allows a ten year lookback for a self settled trust and requires an intent to hinder, delay or defraud.    This standard relies on the traditional badges of fraud analysis.     The Trustee has two years to commence an action but that the statute could be equitably tolled.

Ron Peterson asked Judge Kenney what he could do to a debtor who was ordered to repatriate assets from a Cook Islands Trust but refused to do so.   He said that under Sec. 105(a), he has the power to enforce his orders.   He said that as a practical matter, incarceration for civil contempt will often be referred to the U.S. District Court because the District Court has more tools available to deal with incarceration.   In one case, a debtor named Sala raised the defense of impossibility but the Court ruled that where is the impossibility is self-created, the defense would be rejected.   He described it as a game of chicken between the debtor who is willing to sit in jail without giving up his funds and the Court that keeps him there.

In U.S. v. Grant, Neal Levin said that the settlor's widow raised the impossibility defense saying "I asked for the money back but they said no."   The Court found that this was not sufficient to purge the contempt. 

Mr. Levin pointed out that one-third of the world's wealth is kept in off-shore jurisdictions.    He said that it was important to work with professionals in the affected jurisdiction.  

Ms. Hume said that many offshore jurisdictions allow the settlor to retain great control over the trust and would only impose an independent trustee when "things get dicey."  She said that settlors frequently retain the policy to change the trustee.   She pointed to a court of appeals decision which required a settlor to disclose where trusts were located and what was within them.   She described a Privy Council decision where a settlor had a power to revoke the trust but refused to exercise that power.   The Council held that it could appoint a receiver over the power of revocation which allowed the trust to be revoked and the money collected.

Mr. Levin talked about how most wire transfers pass through New York banks.   Because these banks are in the United States, the U.S. Courts have jurisdiction over them and they can be brought into the case. 

Ron Peterson pointed out that the U.S. has treaties with countries such as Switzerland and that the U.S. Attorney can be brought to enforce the treaty in limited instances.

Mr. Levin pointed out that on the other side are "the forces of evil" such as foreign judges who view their responsibility as limited solely to enforce their laws and foreign professionals who want to protect their fees.    He also said that the United States is now considered to be the largest recipient of offshore funds as foreign citizens are transferring funds to DAPs in the United States.  He described the problem of professionals helping people conceal their assets as a "pervasive problem."

Ms. Hume pointed out that the Cayman Islands are now parties to various statutes requiring disclosures of cash transfers so that there is greater transparency and less advantage to hiding assets in the Cayman Islands.

 The main take-away from the panel was that when dealing with DAPs or offshore trusts, the key is to engage qualified professionals who understand the local law in order to avoid committing malpractice whether trying to set up one of these vehicles or challenging one.

NCBJ Report: Dean Chemerinsky Says It's Formalism for the Foreseeable Future

The Commercial Law League of America presented a keynote address from Dean. Erwin Chemerinsky, of UC Berkeley Law School at its annual luncheon.  Dean. Chemerinsky discussed his main area of expertise in a talk entitled The Supreme Court:   Appointments to and Statutory and Constitutional Interpretation by the Court in Bankruptcy Cases.   He spoke for over an hour without notes.

He started by talking about the place of bankruptcy cases in the Supreme Court's jurisprudence.  Although bankruptcy cases outnumber every other case in the federal system, the Supreme Court only takes two or three bankruptcy cases in a given term.   He noted that of the current justices on the court only one had served as a trial court judge and several justices had never argued a case in any court before being appointed to the Supreme Court.   As a result, the Court is taking fewer and fewer cases.   For much of the 20th Century, the Court heard as many as 200 cases a term.  Last term the Court heard only 59 cases (not counting cases decided without argument). 

The bulk of his talk discussed the battle between the formalists and the realists on the Court.  He offered three theses:  1)  we have and are likely to continue to have a conservative Supreme Court; 2)  the conservatives and some of the liberals tend to be quite formalistic; and 3) this trend is undesirable.  

NCBJ Report: Awards Edition

One thing that conferences like NCBJ celebrate are the best in the profession.  This year I went to three awards presentation.   Prof. Nancy Rapoport of the University of New Las Vegas Law School received the Lawrence P. King Award for Excellence in Bankruptcy from the Commercial Law League of America.   Judge Mary Walrath (Bankr. D. Del.) received the Norton Judicial Excellence Award from the American Bankruptcy Institute and Thompson Reuters.   Finally Judge Homer Drake (Bankr. N.D.Ga.) received the Distinguished Service Award from the Bankruptcy Alliance of the American Inns of Court.    

NCBJ Report: What is a Limited Liability Company and Why Does It Matter in Bankruptcy?

This panel discussed some of the unusual issues raised by limited liability companies.   The panel consisted of Bankruptcy Judge Ashely Chan from the Eastern District of Pennsylvania,  Prof. Carter Bishop from Suffolk University Law School, Craig Goldblatt form Wilmer Hale, Paul L. Lion, III from Morrison & Foerster, LLP and Emily Pagorski from Stoll Keenon Ogden PLLC   Emily Pagorski and Craig Goldblatt played the role of litigators in two moot court arguments.

NCBJ Report: The Wolf (of Wall Street?) at the Door

The Wolf (of Wall Street?) at the Door:   Lending to the Financial Underclass examined a variety of issues affecting those with limited means.   Bankruptcy Judge D. Sims Crawford from the Northern District of Alabama moderated a discussion with Thad Bartholow with Kellett & Bartholow and Prof. Creola Johnson from the Ohio State University Moritz College of Law.

NCBJ Report: Broken Bench TV

This year's National Conference of Bankruptcy Judges takes place in Las Vegas at the Paris Hotel and Casino.   The conference kicked off just one week after the horrific shootings here.  Mass shootings represent a break down of the social contract.  The law is intended to resolve disputes between people without the need for violence.   Bankruptcy law deals with break downs of financial relations.   It can involve such weighty matters as whether a company goes out of business or a family loses their home.  It is an imperfect system.   However, the terrible tragedy that occurred here is a reminder of the alternative to the rule of law.  #VegasStrong.

The conference opened with Broken Bench TV, NCBJ's current events program anchored by Judge Bruce Harwell (Bankr. D. N.H.), Prof. (and candidate for Congress) Katherine Porter from the University of California Irvine School of Law and Prof. John Pottow from the University of Michigan School of Law.     Last year, NCBJ opened with Broken Bench Radio.   This year brought the conference into the 21st Century with a combination of highly produced video reports and live in-studio conversations. 

Remembering R. Glen Ayers (1947-2017)

R. Glen Ayers, who passed away on September 27, 2017,  was according to his obituary, "a force of nature in a bow tie."   He was a Southern gentleman.  He was at various times a professor, a judge, a practicing attorney and a Sunday School teacher.   He was a devoted family man.   To those of us who knew him as a bankruptcy professional, he was brilliant, irascible, and gracious often all at once.

The Life of Glen Ayers

Glen was born in Horry County, South Carolina.  He grew up feeding the chickens and hanging tobacco leaves.   He once described South Carolina as too small for a nation and too large for an asylum.

He graduated from Clemson in University in 1969.   At his funeral service, his law partner Bob Werner said that Glen could be counted on to state why Clemson was the champion, should have been the champion or would be in the future.   He earned a Master's Degree from the University of North Carolina in 1971 and served in the U.S. Army from 1971-72.

Glen met his wife Jan Miller Oldham on a blind date at Columbia College and married in 1972.   They had two children, Roderick and Claudia.    

Glen graduated summa cum laude from the University of South Carolina School of Law in 1975 and received an LLM from Harvard Law School in 1979.   If you are counting, that makes four degrees by the time he was 32.

Glen taught at St. Mary's Law School from 1981-1985.   According to Bob Werner, there were two types of lawyers in Bexar County, those who studied under Prof. Ayers and those who wished they did.    

Glen served as a Bankruptcy Judge for the Western District of Texas from 1985-1988.    More about that later.

After leaving the bench, Glen practiced in Washington, D.C. for a time and then returned to San Antonio where he practiced with Langley & Banack.    Bob Werner gave an anecdote about how Glen would be holding forth on some important story when the phone would ring with a call from a client or another counsel.   He said that Glen would pick up the phone and at that moment, whoever was on the phone would be the most important person in the world to him.   He would then resume the story in mid-sentence.    

Glen was a Sunday School teacher at United Presbyterian Church in San Antonio.   His friend, Robert Browning said that on the two Sundays before he passed away, they co-taught a class on Thomas Cahill's Heretics and Heroes.   Glen said that a heretic was someone who might one day be a hero.   His Pastor, Rev. San Williams, said that with Glen's death the collective IQ of the Sunday School class dropped precipitously.    

Pastor Williams used the text of Romans 14:7-9 to describe Glen's life, saying that he did not live to himself and neither did he die to himself.    In addition to his church work, he offered pro bono help to the San Antonio Battered Women's Shelter and the VA Clinic as well as helping individuals in need.

Glen leaves behind his wife of 45 years, Jan, his son Roderick, III, his daughter Claudia and her husband, George, granddaughter, Ellie and many family members and friends. 

The Bankruptcy Legacy of Glen Ayers

Glen came on to the Bankruptcy Bench in 1985 which was a tumultuous time in the bankruptcy world.   The jurisdictional scheme of the Bankruptcy Code had been declared unconstitutional the year before.    Texas was in the midst of a real estate crash which was flooding the courts with single asset chapter 11 filings.    Judge Ayers contributed thirty-six opinions to the fledgling West Bankruptcy Reporter which would not reach volume 100 until after his time on the bench.

In one of his earliest rulings, Judge Ayers reversed the Fifth Circuit.    In the case of In re Thompson, 59 B.R. 690 (Bankr. W.D. Tex. 1986), Judge Ayers discussed a recent Fifth Circuit decision stating:

Most commentators have found Allen to be a less than satisfactory opinion. Quite simply, the ruling is incorrect.

When Judge John Akard followed Judge Ayer's decision in In re Rogers, 63 B.R. 686 (Bankr. N.D. Tex. 1986), he was reversed.   This prompted Judge Akard to remark that he only followed the Western District of Texas once and he regretted it.   

In another early opinion, In re Hurbace, 61 B.R. 563 (Bankr. W.D. Tex. 1986), he ruled that equal co- partners did not owe each other a duty to account within the meaning of 11 U.S.C. Sec. 523(a)(4), a conclusion the Fifth Circuit would later reach in Matter of Gupta, 394 F.3d F.3d 347 (5th Cir. 2004), some eighteen years later.    

Another groundbreaking case was In re SI Acquisition, Inc., 58 B.R. 454 (Bankr. W.D. Tex. 1986) where he ruled that a creditor's suit against non-bankrupt parties seeking to pierce the corporate veil was not subject to the automatic stay.   While the Fifth Circuit disagreed with him, the case involved one of many areas that were unclear in the early days of the Bankruptcy Code.   

In In re Estate of Patterson, 64 B.R. 807 (Bankr. W.D. Tex. 1986), Judge Ayers ruled that a probate estate was not a "person" qualified to file bankruptcy.   

In re Fry Associates, Ltd., 66 B.R. 602 (Bankr. W.D. Tex. 1986) was an early decision discussing the concept of a bad faith filing for a single asset real estate entity.   However, in In re Oakgrove Village, Ltd., 90 B.R. 246 (Bankr. W.D. Tex. 1988), he declined to enter sanctions against a debtor exhibiting new debtor syndrome where the debtor reasonably believed that the bank would accept a workout proposal and did not oppose relief from the automatic stay.

In In re Triplett, 87 B.R. 25 (Bankr. W.D. Tex. 1987), Judge Ayers ruled that an objection to use of cash collateral should not be a substitute for a motion to dismiss or convert under Sec. 1112.    The Court wrote:  

 Here, the focus on collateral and its use interferes with proper analysis of the case. Instead of being concerned with one item of "cash", the creditor should draw the court's attention to all of the problems with the case so that the debtor can either be placed on a timetable, the case converted, or the case dismissed.

In a footnote he pointed out that both of the lawyers had been his law students and were used to his editorializing.   

In re Kipp, 86 B.R. 490 (Bankr. W.D. Tex. 1988) established that a party could not conduct a Rule 2004 examination when it had a pending adversary proceeding.

Judge Ayers dealt with creative classification in the case of In re Meadow Glen, Ltd., 87 B.R. 421 (Bankr. W.D. Tex. 1988) where he did not allow a secured creditor's deficiency claim to be separately classified from other unsecured creditors.   The ruling predicted the Fifth Circuit's holding in Matter of Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1992) which also took a restrictive approach to classification (although the Fifth Circuit later moderated its position).   

In his final opinion, In re Abramoff, 92 B.R. 698 (Bankr. W.D. Tex. 1988), Judge Ayers ruled that a prepayment penalty combined with a due on sales clause constituted an unreasonable restraint on alienation and would not be enforceable under Texas law.    One of the lawyers on the case was Ronald King, who would shortly take Judge Ayers' place on the bench.

After leaving the bench, Glen Ayers had a long and productive career practicing in Washington, D.C. and San Antonio, Texas.   The cases that he tried as an attorney encompassed issues ranging from professional compensation, trustee liability, PACA, chapter 11 reorganization and property of the estate.

Final Thought

At the time that Glen passed away, we were working on a case together.   In our last conversation, he inquired, as he always did, about the health of one of my colleagues who had been experiencing some medical issues.   That was Glen Ayers.

Fifth Circuit Report: 2nd Quarter 2017

During the second quarter of 2017, the Fifth Circuit decided numerous cases on home loans, several cases related to doctors and hospitals and interesting cases on judicial estoppel and Rooker-Feldman.
 

Ocwen Loan Servicing v. Berry, 852 F.3d 469 (5th Cir. 3/29/17) 

In this case, the Fifth Circuit followed authority from the Texas Supreme Court over its own prior decisions.   While one panel of the Fifth Circuit may not overrule another, the Court can take notice of changes in state law which supersede its prior decisions.   Here, the Fifth Circuit followed the Texas Supreme Court to find that a quiet title action based upon an invalid home equity loan was not subject to any statute of limitations.  

Alcala v. Deutsche Bank Nat’l Trust, 2017 U.S. App. LEXIS 5966 (5th Cir. 4/6/17)(unpublished)

This case also dealt with the statute of limitations on a deed of trust.   In this case, the bank sent a notice of acceleration in 2009.   However, it sent a subsequent notice of default in 2012.   Because the notice of default allowed the homeowner to cure the default, it abandoned the prior acceleration and reset the statute of limitations.

Lefoldt v. Rentfro, 853 F.3d 750 (5th Cir. 4/6/17)

Public, not for profit hospital filed chapter 9.   A liquidation trust was created and trustee sought to sue officers and directors of hospital for breach of fiduciary duty.    The District Court dismissed the action finding that the suit was barred by the Mississippi Tort Claims Act ("MTCA").   The MTCA protects employees of a governmental entity from being held personally liable for acts or omissions that occur within the course and scope of their employment.     The Trustee argued that this statute should not apply against the governmental entity.   Finding that there was no controlling precedent from the Mississippi Supreme Court, the Fifth Circuit certified the question to the state supreme court.

Neiman v. Bulmahn, 854 F.3d 741 (5th Cir. 4/21/17)

Shareholders of ATP Oil & Gas Corporation brought a securities fraud claim against certain officers and directors of the company after it collapsed into bankruptcy.   District Court dismissed second amended complaint with prejudice for failure to state a cause of action.

Investors claimed that ATP's CFO committed securities fraud when he stated that a new well was producing according to original expectations on two occasions.   The Court found that pleading did not allege scienter since accurate production figures were reported shortly thereafter and there was no allegation that CFO knew about actual production figures which were lower.

Scienter was also not present with regard to officers' statements that company had sufficient capital to meet its liquidity needs where ATP continuously disclosed its worsening cash position.

Hernandez v. Select Portfolio Servicing, Inc., 2017 U.S. App. LEXIS 7207 (5th Cir. 4/24/17)(unpublished)

This is another case where the Court found that the lender abandoned its prior acceleration thus resetting the statute of limitations.

Caldwell-Blow v. Wells Fargo Bank, N.A. (In re Caldwell-Blow), 2017 U.S. App. LEXIS 7241 (5th Cir. 4/25/17)(unpublished)

Debtor defaulted upon loan.   Loan servicer accelerated the debt on three occasions in 2007 and 2008.    In October 2009, servicer sent a notice stating that the first two notices of acceleration were rescinded.   Servicer then sent notices of acceleration in June and August 2012.    Servicer also filed a motion for summary judgment in state court that was granted by the court.   However, debtor filed chapter 11 before order could be entered.

Debtor filed adversary proceeding in bankruptcy court asserting that lien was barred by the statute of limitations.   Bankruptcy Court granted summary judgment finding that prior notices of acceleration had been abandoned.

Court found that a lender abandons a notice of acceleration when it demands payment for less than the full amount owed.   When servicer rescinded the first two notices of acceleration, it stated that borrower could resume making regular payments.   This was sufficient to abandon the notices of acceleration, including the one that was not specifically mentioned in the letter.

Janvey v. Dillon Gage, Inc., 856 F.3d 377 (5th Cir. 5/5/17)

This was a fraudulent transfer action arising from the Stanford Ponzi scheme.  It shows the danger of trying a fraudulent transfer suit to a jury.  

The Receiver sued Dillon Gage, which was a wholesale supplier of metals, bullion and coins to Stanford Coins & Bullion.   Dillon Gage provided a line of credit to Stanford Coins which grew to $2.3 million.   Dillon Gage stopped fulfilling orders to Stanford Coins.   Between January 23, 2009 to February 13, 2009, Stanford Coins paid approximately $5 million to Dillon Gage, leaving a credit balance of about $1 million.

The Trustee sued to recover the $5 million in payments under the Texas Uniform Fraudulent Transfer Act.    Following trial, the jury found that the payments were not fraudulent.   The Receiver moved for judgment as a matter of law but the motion was denied.   Dillon Gage moved for payment of its fees which was denied.   Both parties appealed.

The Receiver argued that he had proven fraudulent intent as a matter of law because Stanford Coins had used funds advanced from one customer to pay antecedent debts.   However, the Court found that there was sufficient evidence in the record to show that Stanford Coins could have believed that it would be able to honor the new customer's order if it had not been shut down.   The Court also rejected the argument that the Receiver had shown two badges of fraud as a matter of law.   The Court concluded that the jury could have properly found that Stanford Coins was generally paying its debts as they came due.  

Finally, the Court rejected arguments that the jury charge contained improper provisions.   The Court found that a jury charge stating that "mere intention" to prefer one creditor over another did not constitute fraudulent intent accurately stated Texas law.   (There were three other arguments rejected that I have not discussed because I didn't find them to be interesting).

The District Court denied attorneys' fees to Dillon Gage on the basis that the Receiver's claims were not frivolous unreasonable or without foundation and that an award of attorneys' fees would not be equitable and just.   

Selenberg v. Bates (In re Selenberg), 856 F.3d 393 (5th Cir. 5/8/17)

This case was a tragedy of errors.   A client hired an attorney to bring a malpractice action against another attorney.   However, the attorney allowed the prescriptive period to expire.   Thus, the malpractice attorney committed malpractice.   The second attorney gave the client a note for $275,000 in consideration for the client's agreement not to file suit for malpractice or file a grievance.   The attorney then filed bankruptcy.

The Court found that the note was an extension of credit which would invoke section 523(a)(2)(A).   The attorney failed to advise the client to seek independent counsel before she accepted the note.   This was required under the Louisiana State Bar rules.  The Court found that the attorney committed fraud by failing to inform the client about the desirability of obtaining independent counsel.

 ASARCO, LLC v. Montana Resources, Inc., 858 F.3d 949 (5th Cir. 6/2/17)

Res judicata, collateral estoppel and judicial estoppel are frequently invoked to derail pesky claims.  However, this is a case in which some of these doctrines were unsuccessful.    ASARCO was a partner in a copper mine with Montanta Resources, Inc.  (MRI)  When it could not meet cash calls, MRI made them for it.  This had the effect of reducing ASARCO's partnership interest from 49% to 0%.   Eight years later, ASARCO sought to invoke the reinstatement clause under the partnership agreement by tendering the missed payments plus interest.   Interestingly, the partnership agreement did not have a deadline for making this demand.     

MRI invoked res judicata based on an adversary proceeding in the bankruptcy court.    ASARCO brought a declaratory judgment action asserting that it could invoke the reinstatement clause but dismissed it without prejudice.   Discussing a prior decision, the Court stated "when it comes to claim preclusion, a request for declaratory relief neither giveth nor taketh away."   Because the request for declaratory relief was more narrow than the subsequent suit, it could not give rise to res judicata.   Further, the claim brought by ASARCO in the present case was still contingent at the time of the declaratory judgment action.   Because MRI had not rejected ASARCO's request for reinstatement, ASARCO did not yet have a claim for breach of contract.   The earlier action could not be res judicata on a claim that had not yet accrued.  

 ASARCO made conflicting disclosures in its schedules and statement of financial affairs.   It did not disclose the partnership interest or right to reinstatement as an asset, but did disclose the partnership interest as an executory contract.  It also listed the partnership as "dissolved" in the Statement of Financial Affairs.   However, the Court ruled that this non-disclosure did not matter because creditors were paid in full.

The district court disagreed. It emphasized that the purpose of the disclosure requirement is to protect creditors, as it maximizes the value of the estate to ensure that creditors are paid as fully as possible. To that end, the district court noted that all creditors were paid in full, and the trustee was undoubtedly aware of the partnership contract because it filed the adversary proceeding with claims derived from the partnership agreement. Ultimately, it found that the disclosure of the interest, though scant, was sufficient. The district court's decision to not apply judicial estoppel was within the discretion we afford it in this fact-intensive area.

This opinion arguably contradicts another recent Fifth Circuit opinion regarding a Chapter 13 plan which  paid unsecured creditors in full but without interest and which did not pay disallowed claims.   (When does a plan ever pay disallowed claims?).   United States ex rel. Long v. GSDMIdea City, LLC, 798 F.3d 265 (5th Cir. 2015).   The only difference between the two cases is that in one case the district court invoked its discretion to apply judicial estoppel while in the other one it did not. 

Novoa v. Minjarez (In re Novoa),  2017 U.S. App. LEXIS 9947 (5th Cir. 6/5/17)(unpublished)

A doctor facing malpractice suits filed chapter 7.    The patients moved for relief from the automatic stay to proceed against insurance.   An agreed order was entered between the patients and the chapter 7 trustee which allowed the insurance companies to settle without the consent of the doctor.   The doctor moved to set aside the order and then appealed the denial of that motion.   The district court dismissed his appeal for lack of standing.   Nearly a year later, the debtor moved to reopen the case on the theory that the agreed order was void for lack of jurisdiction.     The bankruptcy court denied the motion and the district court affirmed.

The Fifth Circuit explained that normally denial of a Rule 60(b) motion is reviewed based on an abuse of discretion standard.   However, when the motion is filed under Rule 60(b)(4), there is no discretion.  Either the judgment is void or is not.   Relying on Espinosa, the Court stated that allegedly failing to follow the law did not render the judgment void.   

Kreit v. Quinn (In re Cleveland Imaging & Surgical Hospital, LLC), 2017 U.S. App. LEXIS 10473 (5th Cir. 6/13/17)(unpublished)

A state court appointed a receiver over a hospital.  The receiver placed the hospital into chapter 11 and obtained an order for sale free and clear of liens.    A disgruntled doctor sent numerous letters alleging improprieties to the U.S. Trustee, the U.S. Attorney and state regulators.  After a three day trial, the Court found that the doctor had violated the automatic stay by attempting to exercise control over an asset of the estate.    

On appeal, the doctor claimed that the order appointing the receiver was void and that therefore the bankruptcy was not authorized and that the automatic stay did not come into effect.   The receiver argued the Rooker-Feldman doctrine.   However, the doctor claimed that Rooker-Feldman did not apply that a state court judgment that was void ab initio.   The Fifth Circuit acknowledged that there was a split of authority over whether Rooker-Feldman would apply to a void judgment.   However, the Court held that where the state court had jurisdiction over the parties and had authority to approve a receivership, the argument that the particular type of receivership was not allowed by Texas law did not render the judgment void.   As a result, the Court did not have to resolve the split in authority and the opinion remained unpublished.

Feuerbacher v. Wells Fargo Bank, N.A., 2017 U.S. App. LEXIS 11141 (5th Cir. 6/22/17)(unpublished)

Borrower filed bankruptcy in 2009.   In her schedules, she acknowledged secured mortgage claim and did not list any contingent or unliquidated claims.   In 2015, Borrower sued Mortgage holder for Texas Home Equity violations.     The District Court granted summary judgment based on judicial estoppel.

The Fifth Circuit rejected argument that a lien cannot be "estopped" into existence because it was not raised below.   It also rejected the argument that the claim had not accrued at the time of the bankruptcy.   Because the home equity loan violations occurred when the loan was made, the borrower had a cause of action even if she was not aware of it.

This is a harsh result for the borrower.

 

Fifth Circuit Goes Further Down the Disappearing Exemption Rabbit Hole

In yet another blow to the finality of exemptions, the Fifth Circuit has ruled that a chapter 7 debtor who claimed an IRA as exempt but later withdrew the proceeds must pay the funds to the trustee.   Engelhart v. Hawk (Matter of Hawk), No. 16-20641 (5th Cir. 7/19/17).    The decision follows on the Court's ill-conceived Frost opinion and raises the specter that no exemption can ever be final.   (I am abandoning my usual stance of editorial neutrality to come out and say I think this is a terribly bad decision).   

What Happened

Gregory Hawk filed chapter 7 bankruptcy and Eva Engelhart was appointed trustee.   Hawk claimed an IRA account with over $133,000 in it as exempt.   No party objected to the exemption within the period allowed by the bankruptcy rules.   The Trustee filed a no-asset report.   However, a creditor objected to the Debtor's discharge.   In the course of discovery, the creditor learned that the Debtor had withdrawn most of the funds shortly after filing bankruptcy and had used them to pay living expenses.    The Trustee filed a motion for turnover.   The Bankruptcy Court ordered that all of the funds be turned over to the Trustee on the basis that they lost their exempt status when they were not reinvested into a new IRA.  The District Court affirmed.

Texas Judge Says You Can Do It Right or Just Wing It

Texas Bankruptcy Judge Tony Davis had some sound advice for persons setting off on a business venture.   In fact, his words should be mandatory reading in business schools and forums where would be entrepreneurs frequent.    He wrote:

When two individuals decide to join forces and form a business venture, they can take one of two paths. The first is to seek and pay for sound legal advice to define and structure their relationship and fairly allocate business risks, and to pay for sound financial advice to properly project future financial performance and accurately record the past. Or they can eschew the advice, save a little money, and just wing it. And that can work out fine in those few cases where the venture succeeds and prospers. But failure occurs far more often. And where, as here, business failure goes along with a lack of proper documentation, the parties can end up in litigation, and the attorney fees paid to litigation counsel are many times the fees that would have been paid for proper legal and financial advice up front.

Higgs v. Colliau (In re Colliau), Adv. No. 15-1118 (Bankr. W.D. Tex. 5/24/17).

Unfortunately, bankruptcy lawyers know this story all too well.   By the time that clients get to us, the time to properly document the deal is long gone and the once friendly parties are antagonistic.

However, there is still some wisdom for bankruptcy lawyers here.  A plan of reorganization is a contract.    Careful plan drafting can avoid litigation down the road.  As the late bankruptcy Judge Larry Kelly once said, "You guys drafted this plan and you voted for it and now you're asking me to tell you what you meant?"    Careful drafting up front and bringing in transactional lawyers when needed can save a lot of expense down the road.

Disclosure:  I initially represented the plaintiff in this case.   However, I did not try the case.

Fifth Circuit Report: 1st Quarter 2017

It has been a while since I have done a Fifth Circuit report.   With the new year, I am going to try to get back to chronicling each quarter's decisions from my home circuit.

Breach of contract; attorney's fees; abuse of process; malicious prosecution; sanctions; due process

Texas Capital Bank v. Dallas Roadster, Ltd. (In re Dallas Roadster, Ltd), 846 F.3d 112 (5th Cir. 1/17/17)

This case has only a tenuous connection to bankruptcy but it includes many of the types of issues that lenders and borrowers litigate.    Texas Capital Bank financed Dallas Roadster.   The DEA informed the Bank that it was investigating the Debtor for money laundering.   The DEA ultimately raided the Debtor and arrested its president.    One day prior, the Bank declared the Debtor to be in default.   After the raid, the Bank filed suit and obtained a receivership on an ex parte basis using an affidavit that contained false statements.   Dallas Roadster filed chapter 11 and got its business back from the receiver.   The state court litigation between the Bank, the Debtor and the guarantors was removed to federal court.   The Debtor confirmed a plan in which it provided for all of the Bank's claims except for attorney's fees arising from the Litigation.   

The District Court granted summary judgment against the Guarantors on their counterclaims against the Bank.  The case went to trial on the Bank's claim to recover its attorney's fees incurred in the Litigation and the Debtor's breach of contract claims against the Bank.   The District Court denied recovery to both parties.   It found that the Debtor could not recover for breach of contract because it had materially breached the contract first.   The District Court ruled that the Bank could not recover attorney's fees for defending itself against claims of wrongdoing and also used its inherent authority to sanction the Bank and deny attorney's fees.

The Fifth Circuit affirmed denial of the counterclaims and also affirmed the ruling denying the Debtor's breach of contract claims.   However, it reversed the findings against the Bank.   It found that the District Court had made an incorrect Erie guess as to how Texas courts would rule.  It also found that the District Court was permitted to sanction the Bank but had to provide it with due process before doing so.

The opinion has a good discussion of the difference between abuse of process and malicious prosecution.    A claim for abuse of process must show that process was improperly used after it was issued.   On the other hand, a claim that malice or wrongful intent caused the process to be issued the claim is one for malicious prosecution.  Because the Guarantors sued for abuse of process based on obtaining the receivership they did not have a claim.   A claim for criminal malicious prosecution must show that a person provided false information to the prosecuting party and that this party acted in reliance on the false information.    The claim by the Debtor's president that the Bank did not provide the DEA with exculpatory evidence was not sufficient to give rise to a claim for criminal malicious prosecution.

The Fifth Circuit held that the Debtor breached the loan agreements prior to the date that it claimed that the Bank breached the agreements.   The court rejected the Debtor's arguments that its breaches, which consisted of obtaining other financing without notifying the bank, were not material.   The District Court properly weighed the factors identified in Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195 (Tex. 2004) to determine that the breaches were material.  In particular, the reporting violations deprived the Bank of benefits it had negotiated for and placed it at risk.   Because the Debtor breached first, it could not complain about the Bank's subsequent defaults.   

The Court's ruling on the Bank's claim for attorney's fees incurred in the litigation involved an "Erie guess," that is, a prediction as to how Texas courts would resolve an issue of first impression.    In Zachary Construction v. Port of Houston Authority, 449 S.W.3d 98 (Tex. 2014), the Texas Supreme Court found that a contractual provision which would insulate a party from liability based on its own misconduct was unenforceable.   The contract between the parties contained a no damages for delay provision.   However, the Port deliberately and intentionally interfered with Zachary's performance.  In that context, the Texas Supreme Court found that the Port could not use the no damages for delay provision to shield itself from liability for its own misconduct.   The District Court concluded that Texas courts would extend this ruling to the case where the lender sought to recover attorney's fees for defending itself from claims of wrongdoing.    The Fifth Circuit found that there was a material difference between using a contractual provision to shield itself from wrongdoing as opposed to recovering the cost of successfully defending itself.   

The Fifth Circuit also reversed and remanded the District Court's sanctions award against the Bank.   The District Court found that where litigation was "instigated or conducted in bad faith or there's been willful abuse of the judicial process" it could dismiss claims under its inherent authority.   The Fifth Circuit found that the District Court did have the inherent authority to dismiss claims based on vexatious litigation.   However, before doing so, it had to give notice to the party against whom sanctions were sought and give it the chance to respond.   Because the District Court issued the sanctions sua sponte, it deprived the Bank of due process and a remand was required.

Diversity jurisdiction; fraudulent transfers

Hometown 2006-1 1925 Valley View, LLC v. Prime Asset Income Management, Ltd., 847 F.3d 302 (5th Cir. 2/3/17)

This case raised issues required citizenship for diversity jurisdiction purposes and what constitutes property under the Uniform Fraudulent Transfer Act.    Hometown obtained a judgment against Prime.  Prime had been a party to three management contracts which could only be terminated upon sixty days' notice.   The other parties to the contracts terminated them without giving the required notice and Prime acquiesced.   Hometown then sued the contract counterparties in U.S. District Court on the basis that waiving the fees due during the 60 day cancellation period was a fraudulent transfer.    The District Court dismissed finding that the contracts were not "assets" which could be transferred under TUFTA.

On appeal, the Fifth Circuit considered whether diversity jurisdiction was present.   Hometown was a Texas limited liability company with one member, U.S. Bank.  Citizenship of an artificial entity other than a corporation is based on the citizenship of its members.   U.S. Bank is a citizen of Ohio.  However, U.S. Bank was trustee of a trust.   Therefore the Defendants argued that it was necessary to determine the citizenship of each of the beneficiaries of a trust.   The Fifth Circuit rejected this argument, finding that citizenship of a trust is based on the citizenship of the trustee.   Because none of the defendants were from Ohio, there was diversity.   This ruling surprised me because I assumed that the citizenship of an LLC, which is a form of company, would be based on its state of formation.  However, this is not the case.

The District Court had relied on several Seventh Circuit cases which had held that termination of a contract according to its provisions was not a transfer of an asset under the Uniform Fraudulent Transfer Act.   The Fifth Circuit said:

We agree. The rub is that the contracts here were not freely terminable. Rather, the Advisory Agreements provided for termination without cause upon sixty days' written notice.

As a result, termination of the contracts without giving 60 days' notice transferred the fees which would have been paid to the judgment debtor to the contract counterparties.   That was a transfer of property.   As a result, the Complaint stated a cause of  action and should not have been dismissed.

Diversity jurisdiction

Foster v. Deutsche Bank National Trust Co., 848 F.3d 403 (5th Cir. 2/8/17)

Homeowner sued lender and trustee in state court to enjoin a foreclosure sale.   The lender removed the case to federal court.    The district court denied a motion to remand based on lack of diversity.  It dismissed the homeowner's claims with prejudice.   The Fifth Circuit affirmed.

The Fifth Circuit agreed that the trustee was improperly joined.   It found that violation of the trustee's duties under the deed of trust would give rise to a claim for wrongful foreclosure.   However, because no foreclosure took place, this claim could not be asserted.    As a result, joining the substitute trustee as a defendant did not defeat diversity jurisdiction.   The Fifth Circuit found that Texas would not recognize a claim for attempted wrongful foreclosure.  As a result, it affirmed the dismissal of the homeowner's claims.   This left the lender free to post the property for a future foreclosure.

Denial of discharge

Chu v. Texas (In re Chu), 2017 Bankr. LEXIS 2370 (5th Cir. 2/9/17)(unpublished)

An orthodontist filed bankruptcy following accusations of Medicaid fraud.   The State of Texas filed suit to deny this discharge.   After a trial, the Bankruptcy Court denied the discharge under 11 U.S.C. Sec. 727(a)(4) and (a)(5).   The Fifth Circuit affirmed.

The Debtor argued that the State lacked standing to object to his general discharge because its debt would be non-dischargeable under 11 U.S.C. Sec. 523(a)(7).  The Fifth Circuit rejected this argument as speculation.  Because there was no final determination of the underlying claim, the State had constitutional standing to object to the global discharge. 

 The Court rejected the Debtor's argument that the Bankruptcy Court had aggregated his false statements to reach a conclusion of reckless indifference to the trust.   Instead, the Court found that the bankruptcy court was permitted to gauge the "cumulative effect of false statements." 

The Court found that the Debtor had failed to account for loss of assets.   In a personal financial statement four years before bankruptcy, the Debtor had listed assets of $75,500, including jewelry and watches.  In his schedules, he listed only $11,000 in household items, books and pictures worth $1,000 and a ring valued at $500.   Based on the Bankruptcy Court's finding that the Debtor had failed to offer a viable explanation for what happened to the assets, the Fifth Circuit affirmed the ruling that the Debtor had failed to account for assets.

 Federal Debt Collection Practices Act; turnover

United States v. Diehl, 848 F.3d 629 (5th Cir. 2/13/17)

This case involved another statute abbreviated as FDCPA, the Federal Debt Collection Practices Act.   The Court found that the FDCPA in its case did not prohibit the government from using the Texas Turnover Statute to collect a debt owed to the government.

Homestead exemption; fraudulent transfer

Wiggains v. Reed (In re Wiggains), 848 F.3d 655 (5th Cir. 2/14/17)

Debtor and spouse partitioned homestead on eve of bankruptcy to avoid limit on homestead exemption under 11 U.S.C. Sec. 522(p).   Court found that maximizing homestead was not sufficient reason to avoid partition as a fraudulent transfer.    Additionally, wife had no right to compensation under 11 U.S.C. Sec. 363(j) because entire community property interest entered estate.

Automatic Stay

Gathright v. Clark, 2017 U.S. App. 3258 (5th Cir. 2/23/17)

Automatic stay in bankruptcy did not preclude creditor from filing bad check charges.  Criminal actions are exempt from the stay.

Bankruptcy fraud

United States v. Grant, 850 F.3d 209 (5th Cir. 3/1/17)

Debtor filed five bankruptcy cases between 2008 and 2011.   In two of her cases, Debtor only disclosed one of her two social security numbers.   In another case, she failed to disclose two of her prior bankruptcies.   She was convicted on three counts of perjury and sentenced to fifteen months imprisonment..

Fraudulent transfer; damages

Galaz v. Galaz (In re Galaz). 850 F.3d 800 (5th Cir. 3/10/17)

Raul Galaz was married to Lisa Galaz.   He owned 50% of Artists Rights Foundation.   When they divorced, Lisa received 50% of Raul's 50% interest.    However, Raul transferred ARF's assets to another entity for no consideration.    Lisa filed chapter 13 bankruptcy and sued to avoid the transfer.  Julian Jackson, who owned the other 50% of ARF, sued Raul for breach of fiduciary duty.   The Bankruptcy Court ruled for Lisa and Julian awarding actual and exemplary damages. 

In the first appeal to the Fifth Circuit, the Court reversed and remanded.  The Court found that the Bankruptcy Court had no jurisdiction over the claims between Julian and Raul.   It also found that the Bankruptcy Court lacked jurisdiction to enter a final judgment on Lisa's claims against Raul.   On remand, the District Court referred the matter to the Bankruptcy Court for proposed findings and conclusions.   Based on the Bankruptcy Court's proposed findings, the District Court awarded actual and exemplary damages to Lisa.

The Fifth Circuit upheld the findings of liability.   Fraudulent intent was a question of fact reviewed under the clearly erroneous rule.   Court found that at least six badges of fraud were present.

The Fifth Circuit affirmed the award of $241,309.10 in actual damages to Lisa.   This was based on 25% of royalties received of $969,317.92 less certain reasonable expenses.    Appellants argued that the royalties should have been valued as of the time they were transferred (at which time value was negligible).   However, statute allowed the court to adjust the value "as the equities may require."   The Court also affirmed the award of $250,000.00 in exemplary damages.   Court found that factual finding that loss was caused by fraud, malice or gross negligence was not clearly erroneous.

Sanctions; All Writs Act

Carroll v. Abide (In re Carroll), 850 F.3d 811 (5th Cir. 3/13/17)

This is a sanctions case.   The Carrolls and their wholly owned company filed chapter 7 and were substantively consolidated.   The Carrolls engaged in "troublesome conduct" that "displayed (a) pattern of harassment" toward the trustee.    The Bankruptcy Court enjoined them from filing any further pleadings without court permission and awarded sanctions under 11 U.S.C. Sec. 105(a) in the amount of $49,432.  

The Court set out the standard for awarding sanctions under its inherent authority and enjoining vexatious litigants.

We begin by noting the bankruptcy court has numerous tools by which to sanction the conduct of individuals. "Federal courts have inherent powers which include the authority to sanction a party or attorney when necessary to achieve the orderly and expeditious disposition of their dockets."  "Such powers may be exercised only if essential to preserve the authority of the court and the sanction chosen must employ the least possible power adequate to the end proposed."  A court must make a specific finding of bad faith in order to impose sanctions under its inherent power.  Moreover, when sanctions are imposed under the inherent power, this court's "investigation of legal and evidentiary sufficiency is particularly probing" and this court must "probe the record in detail to get at the underlying facts and ensure the legal sufficiency of their support for the district court's more generalized finding of 'bad faith.'" 

Federal courts also have authority to enjoin vexatious litigants under the All Writs Act, 28 U.S.C. § 1651.  Moreover, under 11 U.S.C. § 105, "a bankruptcy court can issue any order, including a civil contempt order, necessary or appropriate to carry out the provisions of the bankruptcy code."  When considering whether to enjoin future filings, the court must consider the circumstances of the case, including four factors:

(1) the party's history of litigation, in particular whether he has filed vexatious, harassing, or duplicative lawsuits; (2) whether the party had a good faith basis for pursuing the litigation, or simply intended to harass; (3) the extent of the burden on the courts and other parties resulting from the party's filings; and (4) the adequacy of alternative sanctions.

  830 F.3d at 815. (internal citations omitted).

The Court had no trouble sustaining a finding of bad faith, stating,  

Appellants' suggestion that their conduct was not done in bad faith is belied by their repeated attempts to litigate issues that have been conclusively resolved against them or that they had no standing to assert and by their unsupported and multiple attempts to remove Abide as the trustee

The amount of the sanctions award was affirmed because it represented the amount of attorneys' fees incurred by the trustee in responding to the Carrolls' conduct.

Voidable preference

Tower Credit, Inc. v. Schott (In re Jackson), 850 F.3d 816 (5th Cir. 3/13/17)


 The Trustee sued to avoid a wage garnishment as a preferential transfer.   The Defendant argued that the transfer occurred when the garnishment order was issued, which was more than 90 days before bankruptcy.    The Court found that a transfer is made when it is "perfected," that is, when a judgment creditor could not obtain superior rights in the property.   However, a transfer also is not made until the debtor has rights in the property.   As a result, each time the debtor obtained wages and the garnishment lien reached those wages was a new transfer.   Therefore, the Court affirmed the judgment in favor of the trustee.

 Proof of claim; res judicata

Kipp Flores Architects, LLC v. Mid-Continent Cas. Co., 852 F.3d 405 (5th Cir. 3/24/17)

This case involved the effect of a proof of claim in subsequent litigation.   A creditor filed a proof of claim in a no-asset bankruptcy case.   No party objected to the claim.    The creditor then argued that because the proof of claim was "deemed allowed," it was res judicata in the creditor's subsequent claim against the debtor's insurance company.    The Court found that the claim did not have any preclusive effect where there was never a deadline to object to claims and adjudicating the claim would not have served a bankruptcy purpose.   

Sanctions

Armendariz v. Chowaiki, 2017 U.S. App.  LEXIS 5531 (5th Cir. 3/30/17)(unreported)

Plaintiffs sued various parties for RICO based on a fraudulent transfer action brought in U.S. Bankruptcy Court.    The District Court dismissed the suit but denied a motion for sanctions under Rule 11.    The Court did not give reasons for its denial of the sanctions motion.   The Fifth Circuit affirmed the order dismissing the suit.   However, it reversed and remanded the denial of sanctions.  The Court explained that when a court grants or denies sanctions, it must provide reasons sufficient for the reviewing court to determine the basis for the ruling.