Monday, February 19, 2018

Fifth Circuit Report: Third Quarter 2017

The third quarter of 2017 had one blockbuster opinion reaffirming the finality of exemptions in Chapter 7 and several less remarkable decisions.   It was a slow quarter for bankruptcy.

Rosbottom v. Schiff (Matter of Rosbottom), 701 Fex. Appx. 330(5th Cir. 7/17/17)(unpublished)
The Debtor and his spouse conveyed their interests in a Louisiana residence to trusts.   They then sold the residence for $1,850,000 and each deposited half the money in their own account.   In 2005, Rosbottom divorced his spouse.  He purchased a condominium in Dallas using his share of the proceeds from the Louisiana residence.  He then conveyed the condo to his trust.   Rosbottom filed for bankruptcy in 2009.   He was convicted of bankruptcy fraud and a Chapter 11 trustee was appointed.   After the Trustee confirmed a plan, the Trustee and the ex-spouse brought a declaratory judgment action seeking to determine that the Dallas condo was property of the estate.

The Bankruptcy Court found that the trust created by Rosbottom was invalid under Louisiana law because it violated Louisiana law prohibiting the conveyance of an undivided interest in community property.    The Fifth Circuit affirmed.    Because the creation of the trust was a nullity under Louisiana law, it never gained title to the Louisiana property.  When that property was sold and a new residence was purchased, that property belonged to the Debtor and was property of the estate.

Cowin v. Countrywide Home Loans, Inc. (In re Cowin), 864 F.3d 344 (5th Cir. 7/18/17)

This was a dischargeability case under 11 U.S.C. Sec. 523(a)(4) and (a)(6).    The Debtor entered into a scheme to purchase properties being foreclosed for unpaid condominium assessments.   The properties were subject to mortgage liens which were not extinguished by the sales.   The Debtor then arranged for a related party to purchase the ad valorem tax liens against the property and conduct a second sale.   The tax lien sale extinguished the mortgage liens.  However, the excess proceeds should have been paid to the mortgage lenders.  Instead, they were diverted to a company controlled by the Debtor.   This happened four separate times.

Several lenders, including Bank of America and Countrywide, filed suit.   The Debtor filed two chapter 11 proceedings which were dismissed.   After the second bankruptcy was dismissed, the bankruptcy court retained jurisdiction over the adversary proceedings.  The Debtor entered into an agreed judgment with Bank of America.  After the Countrywide case was tried but before the Bankruptcy Court entered findings and conclusions, the Debtor filed a chapter 7 proceeding.   However, the Debtor did not file a suggestion of bankruptcy until after the Bankruptcy Court ruled that the debt was nondischargeable.   The Bankruptcy Court entered judgment in favor of Countrywide after it learned of the second bankruptcy filing.   Bank of America sued for a nondischargeable judgment in the second case.

On appeal, the Debtor argued that the agreed judgment with Bank of America was a new debt which could be discharged and that the Bankruptcy Court violated the automatic stay by entering judgment in the Countrywide adversary.  

The Debtor argued that the Bankruptcy Court erred in imputing his co-conspirator's actions to him.   The Fifth Circuit found that  he participated sufficiently in the conspiracy to have personal liability and that actions of a co-conspirator could be imputed to him.   Thus, the Court found that Cowin's actions constituted larceny and were nondischargeable under 11 U.S.C. Sec. 523(a)(4).    

The Fifth Circuit found that it did have a clear precedent on whether the automatic stay prevented the Bankruptcy Court in one case from entering a judgment after a second case was filed.   The closest precedent the court had was that filing a proof of claim in a bankruptcy case did not violate the stay.   However, the Court found that any error was harmless because the Bankruptcy Court could have simply lifted the automatic stay to enter the judgment.   

The Court did not directly address the claim that the Bank of America judgment extinguished any possible claim for nondischargeability.   However, the Supreme Court decision in Archer v. Warner, 123 S.Ct. 1462 (2003) seems to foreclose this argument.

Hawk v. Engelhart (In re Hawk), 864 F.3d 364 (5th Cir. 7/19/17), vacated, 871 F.3d 287 (5th Cir. 9/5/17)

A debtor filed a petition under chapter 7 and claimed an IRA account as exempt.  No party objected to the exemption.    Later it turned out that the Debtor had withdrawn the IRA funds and had not re-invested them within 60 days as required by the exemption statute.   The Trustee sued for turnover and prevailed in the Bankruptcy Court.   Initially, the Fifth Circuit ruled in the Trustee's favor, finding that exempt property must retain its exempt status throughout the case.  On petition for rehearing, the Fifth Circuit withdrew its opinion and distinguished its prior Frost opinion.   It held that in a Chapter 13 proceeding, property that was exempt could come into the estate once it lost its exempt status because of 11 U.S.C. Sec. 1306(a)(1).   I was one of the amici who sought to overturn the original decision.

I have written about the opinion in depth at "Fifth Circuit Walks Back on the Disappearing Exemption Case," XXXVII ABI Journal 1, 38-39, 89-90, January 2018.

Bynane v. The Bank of New York Mellon. 866 F.3d 351 (5th Cir. 8/3/17)

Plaintiff bought a home.   Mortgage was assigned to a securitization trust.  Bank of New York Mellon was the trustee for the trust.    Property was sold at foreclosure to Guzman.   Plaintiff filed suit in state court which was removed to federal court.    Plaintiff sought to remand based on incomplete diversity.    District Court denied the motion and dismissed plaintiff's claims.    

Court found that citizenship of trust was based on citizenship of trustee.   Because Bank of New York was domiciled in New York it did not defeat diversity.    Court declined to hold that trust was a citizen of each of the domiciles of its shareholders.    Plaintiff also sought to establish that Guzman transferred property to a Texas resident who should be considered the real party in interest.   Court said that it would determine diversity based on the actual parties not a non-party with a potential interest in the case.

Court also rejected argument that Bank of New York did not hold good title because assignment to it was forged or was not authorized.   Court ruled that obligor could not defend itself on a ground that rendered the assignment voidable but not void.    The without authority ground would only make the assignment voidable.   While a forged assignment would be void, the Plaintiff did not meet the pleading requirements of Fed.R.Civ.P. 9 to establish fraud.

Court also rejected promissory estoppel claim based on alleged promise from Bank of America to sign a modification agreement.    However, Plaintiff did not plead what the terms of the alleged modification were so that claim failed.

Dorsey v. U.S. Department of Education (Matter of Dorsey), 870 F.3d 359 (5th Cir. 9/1/17)

Debtor sought a hardship discharge under 11 U.S.C. Sec. 523(a)(8).    After his creditors successfully moved to re-open the bankruptcy case to file proofs of claim, the Debtor filed a notice of appeal in the main case.    Thereafter, the Court conducted a trial on the adversary proceeding at which the Debtor failed to appear.    The  Debtor then sought to amend his statement of issues and record in the District Court to include matters relating to the adversary proceeding.   The District Court found that because there was not a notice of appeal in the adversary proceeding, it lacked jurisdiction over the attempt to appeal from the adversary proceeding.   The Fifth Circuit affirmed.

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