Wednesday, March 03, 2021

The Consent Trap

A new decision from the Fifth Circuit holds that implied consent cannot overcome a formal denial of consent to entry of a final judgment by a magistrate judge, even when the objecting party expressly consented.  PNC Bank v. Ruiz, Case No. 20-50255 (5th Cir. 3/3/2021), which can be accessed here.  The decision is of interest to bankruptcy lawyers because the issue of consent is common to the actions of both bankruptcy judges and magistrate judges.

Saturday, January 16, 2021

NRA Filing Illustrates Venue Loophole for Chapter 11 Filers

The National Rifle Association likes guns. Texans like guns. Therefore, when the NRA decided to file bankruptcy, there was a certain logic to filing in Texas. Unfortunately, however, prior to November 24, 2020, the NRA had no legal right to file bankruptcy in Texas. This did not deter the gun rights advocates. They created one.

Let me explain how this works. Under the bankruptcy venue statute, 28 U.S.C. Sec. 1408(a), a debtor can file bankruptcy in its domicile, residence, principal place of business or where its principal assets in the United States were located during the preceding 180 days. The NRA did not meet any of these tests. It is incorporated in New York. Its principal place of business and presumably principal assets are located in Virginia. However Sec. 1408(b) offers a loophole. A company can file in a district where a bankruptcy by one of its affiliates is pending. An affiliate includes a company owned by the debtor.

Prior to November 24, 2020, the NRA could not have filed in Texas under affiliate venue either. So, on that day, less than sixty days before filing bankruptcy, the NRA created a Texas affiliate called Sea Girt, LLC. Sea Girt, LLC filed bankruptcy first and was assigned Case No. 21-30080. It did not list any creditors, which is not surprising for an entity created so recently. A few minutes later, the National Rifle Association filed its case and was assigned Case No. 21-30085.

This is a clear case of forum shopping. Indeed, a statement from the NRA said that it was trying to escape the "toxic political environment of New York." 

In an article in USA Today, Bankruptcy Prof. John Pottow speculated that the company might be attempting to obtain a judge who would be Second Amendment friendly. The judge assigned to the Sea Girt case is Harlan "Cooter" Hale. The judge assigned to the NRA case is Stacey Jernigan. The two cases will likely be consolidated under one of the judges. However, either judge is a straight shooter who may question whether the choice of venue was a misfire. 

I make no predictions about how the judge will deal with a politically charged debtor who is transparently attempting to manipulate the rules on venue. However, I do note the irony here. In 2001, Texas-based Enron filed bankruptcy in New York based on a filing by an obscure affiliate. Now the New York based NRA is attempting to do the same thing in Texas. 

Follow-up: NRA and Sea Girt have filed a motion for joint administration under Case No. 21-30085 which would leave Judge Jernigan as the presiding judge. 

Thursday, January 14, 2021

Supreme Court Rules That Passive Retention Does Not Violate Stay

 The Supreme Court decided that a creditor which passively retains possession of estate property does not "exercise control" over such property in violation of 11 U.S.C. Sec. 362(a)(3). The Court viewed the word "exercise" to require active measures.  Case No. 19-357, Chicago v. Fulton (1/14/21), which can be found here.

In the Fulton case, the City of Chicago impounded the Debtor's vehicle over failure to pay fees. The Debtors (there were multiple consolidated cases) filed chapter 13 and demanded return of their vehicles. The City refused. The Seventh Circuit held that the refusal to relinquish possession was a violation of the automatic stay.

Tuesday, December 15, 2020

Fifth Circuit Resurrects Fraud Suit Based on Removal to Bankruptcy Court

 In a very convoluted case, a plaintiff learned that removal to Bankruptcy Court can result in a do-over of adverse state court rulings.  Cohen v. Gilmore (Matter of Alabama & Dunlavy), Case No. 19-20152 (5th Cir. 12/15/20).  While the Rooker-Feldman doctrine prohibits a federal court from re-examining findings in an unrelated state court case, it does not grant similar protections in a removed action for the reason that the removed action is a continuation of the original case, just with a different presiding court.

What Happened (In Brief)

The facts of the case are very complicated. Here is an overly simplified summary. Alabama & Dunlavy owned some real property in Houston.  A trust controlled by Cohen was the 80% limited partner of Alabama & Dunlavy (A & D). In 2008, the Great Recession hit and the debt matured. Dilick controlled the general partner of A & D and also controlled the remaining limited partnership interest. Abercrombie was a developer. Abercrombie and Dilick approached the trustee of Cohen's trust about selling the property for $16.7 million. The trustee said yes because the partnership would make a profit. However, Abercrombie and Dilick failed to disclose that HEB was interested in signing a ground lease which would greatly increase the value of the property.

Abercrombie signed the ground lease with HEB under an entity named TAFI that had yet to be formed. Dilick then caused A & D to sell the property to TAFI for $13.5 million.  Shortly after acquiring the property     TAFI took out a loan for $19.9 million against the property. Various people got money, including  HEB's director of real estate. 

Cohen sued Abercrombie and TAFI among others. The state court granted Abercrombie and TAFI's motion for summary judgment after it excluded most of Cohen's summary judgment evidence.  The summary judgment apparently was never severed out of the case and remained interlocutory.   Several years later in 2015, A & D filed Chapter 7 bankruptcy and Regions Bank, which was another defendant, removed the case to Bankruptcy Court. The case was referred to the U.S. District Court. The District Court entered an agreed final judgment on February 7, 2019 among the remaining parties.  Abercrombie and TAFI never participated in the District Court litigation. Abercrombie and his lawyer both died. The property was sold to a third party. 

The Issue Arrives at the Fifth Circuit

Cohen then appealed to the Fifth Circuit. So, what was the Fifth Circuit doing reviewing a summary judgment granted by a state court? Although the District Court never addressed the Abercrombie and TAFI claims, they were still part of the case.

 In this circuit, when a case is removed from state court to federal court, the federal court takes the case as it finds it and treats the state court rulings as its own. . . . Since the Fifth Circuit has eschewed legal formalities and treated cases like this one as reviewable even if the district court provided little discussion of the state court decision, this case is ready for appellate review.
Opinion, p. 7. 

What A Difference A Court Makes

Where the change in forum really made a difference was in the Fifth Circuit's review of the State District Court's ruling on the motion for summary judgment. In Texas State Court, rulings on summary judgment evidence can be very informal. In this case, the State Court signed an order which granted or denied various evidentiary objections without explanation. This is not adequate in federal court. 

Cohen contends that the state trial court abused its discretion in granting several evidentiary objections in TAFI’s and Abercrombie’s favor. We agree. The grant of these objections improperly excluded important evidence from consideration. To start, the state trial court offered no explanation as to why it granted the objections. It simply checked boxes on a form saying that the objections were sustained. Since a trial court can abuse its discretion by failing to explain the reasons for excluding evidence, the lack of a reasoned explanation weighs in favor of overturning the objections.  Courts also typically consider evidence unless the objecting party can show that it could not be reduced to an admissible form at trial.
Opinion, pp. 8-9.  

This passage illustrates a remarkable difference between the state and federal courts. In my experience, state courts rarely explain their rulings. In the unusual cases where a motion for summary judgment is taken under advisement, the typical ruling from the court is a one sentence letter stating that the motion is granted or denied. Evidentiary objections are disposed of with a simple granted or denied.

Because the Court considered it an abuse of discretion to exclude evidence without stating a reason, it considered the summary judgment evidence. Because the Court examined the summary judgment evidence, it found that there were fact issues. Because the Court found that there were fact issues, it reversed the summary judgment.  As a result, seven years and one month after the summary judgment was granted, and after both the defendant and his lawyer had passed away, the summary judgment was reversed.

Practice Tips

The obvious practice tip for a party receiving an unexplained and possibly unconsidered ruling from a state court is to get the case to federal court before the judgment is final. This won't always be possible. If the claims on which summary judgment were granted were the only claims in the case, the judgment would have been final prior to bankruptcy. Similarly, filing bankruptcy after a state court has ruled but before it has entered its order is unlikely to provide any relief. However, in a complicated suit with lots of parties and claims, a terrible, horrible ruling might face a stricter review in federal court as opposed to being rubber stamped in state court.

The practice point for the party better the terrible, horrible ruling (or the wonderful, well-thought out decision depending on where you sit) is to get the ruling severed into its own case so it can become final. While I don't know what happened (any counsel is no longer around to explain), what probably occurred was that the defendants got their take-nothing ruling and assumed the case was over. Unfortunately, it was not.   

On a final note, this case just smelled bad and that may have affected the ruling.




Wednesday, September 30, 2020

A Few Thoughts on the Opinions of Amy Coney Barrett

 This post was originally intended to be about the bankruptcy jurisprudence of Supreme Court nominee Amy Coney Barrett. That would have been a very short post. She has been on panels which issued seven per curiam unpublished opinions in bankruptcy matters, none of which were very remarkable. Instead, I will look at three of her opinions dealing with consumer financial services and cases where she did not rule for law enforcement or employers,  traditional favorites of conservatives. While most of her writing is workmanlike, she occasionally reaches for a memorable turn of phrase.

The Consumer Protection Decisions

In determining a case under the Telephone Consumer Protection Act, Judge Barrett lamented that the provision in question was "enough to make a grammarian throw down her pen." Gadelhak v. AT&T Services, 950 F.3d 458 (7th Cir. 2020).  She succinctly stated that:

We'll save the intense grammatical parsing for the body of the opinion—here, we'll just give the punchline. We hold that "using a random or sequential number generator" modifies both "store" and "produce." The system at issue in this case, AT&T's "Customer Rules Feedback Tool," neither stores nor produces numbers using a random or sequential number generator; instead, it exclusively dials numbers stored in a customer database. Thus, it is not an "automatic telephone dialing system" as defined by the Act—which means that AT&T did not violate the Act when it sent unwanted automated text messages to Ali Gadelhak.

While Judge Barrett may have wanted to throw down her pen, she did follow the grammar.

However, the statutory language did not keep her from ruling against an FDCPA plaintiff who alleged a technical notice violation. In Casillas v. Madison Ave. Associates, 926 F.3d 329 (7th Cir. 2019), a debt validation notice failed to state that any requests for validation must be made in writing. The consumer did not attempt to make a written or verbal request for validationbut did file an FDCPA class action. Judge Barrett wrote that under the Supreme Court's Spokeo decision that a plaintiff cannot claim "a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III."

Judge Barrett also wrote an opinion affirming a summary judgment for the defense in a case under the FDCPA and FCRA in Walton v. EOS CCA, 885 F.3d 1024 (7th Cir. 2018).  This was a case about verification of a debt to ATT in the amount of $268.47. When ATT sent the debt to the debt collector, it transposed several of the digits in the account number. The clever consumer wrote to the debt collector stating that she did not "own (sic) AT&T any money under the account number listed above." The debt collector responded that it had verified that her name, address and the last four digits of her social security number matched the debt report it had received from AT&T. The debt collector reported the debt to two credit reporting agencies but indicated that it was disputed.   The consumer filed two complaints with the credit reporting agencies. In the second, she stated that the account number was incorrect. At that point, the debt collector deleted the trade line. The consumer sued under FDCPA contending that the debt collector failed to verify the debt with the original creditor and under FCRA asserting that it failed to reasonably investigate the disputed information.

Judge Barrett went to the dictionary to see what the term "verification" meant but then noted that the "question here is what the debt collector is supposed to be verifying." The consumer argued that the debt collector was required to verify the original debt while the debt collector argued that it was required to verify that the notice it provided to the consumer matched the information it had received from the creditor. Judge Barrett agreed with the debt collector.

Judge Barrett also ruled that the debt collector properly investigated the dispute made to the credit reporting agencies. The first dispute asserted that the debt was not hers. The debt collector properly verified that the information that it received from the creditor identified the account as belonging to the consumer. When she clarified that the account number was wrong, the debt collector deleted the trade line. 

These opinions demonstrate that Judge Barrett has a passing familiarity with the three major federal consumer protection statutes and that she appears to take these issues seriously.

Judge Barrett Does Not Always Rule for the Authority Figure

In the classic film, School of Rock, Jack Black's character tells his young charges that the purpose of rock and roll is to stick it to the man. Although Judge Barrett is a conservative judge, there are definitely opinions in which she has been willing to stick it to the man. This was the most interesting thing that I found in examining her slight judicial record of less than one hundred published opinions.

 Judge Barrett has ruled against the employer in several cases involving discrimination on the basis of sex. Judge Barrett affirmed a judgment against Costco for failing to prevent a hostile work environment when a customer relentlessly stalked and harassed a female employee. While Costco argued that other unsuccessful Title VII plaintiffs had alleged far worse conduct, Judge Barrett found that the evidence was sufficient for the jury to find in the EEOC's favor.  EEOC v. Costco Wholesale Corp., 903 F.3d 618 (7th Cir. 2018).  In a male on male sexual harassment case, Judge Barrett affirmed the jury verdict. Where male employees grabbed another man's buttocks and genitals and reached down his pants among other actions, there was sufficient evidence to conclude that he was harassed based on sex where there was no evidence that female employees were subject to the same treatment. (He was also told to go back to Africa which would indicate racial discrimination as well). Smith v. Rosebud Farm, Inc., 898 F.3d 747 (7th Cir. 2018). These decisions show a willingness to uphold jury verdicts based on evidence. However, they also show a lack of judicial activism to protect employers from being sued.

 Judge Barrett was also unwilling to reverse a district court's determination that a detective was not entitled to qualified immunity in a Section 1983 case. The detective contended that even though he lied in his probable cause affidavit, his lies were not material. Judge Barrett wrote that "when the lies are taken out and the exculpatory evidence is added in" there was not sufficient evidence to arrest a man for the murder of his mother.  The fact that he had a key to his mother's apartment, checked on her and stood to inherit was not enough to establish probable cause. Rainsberger v. Benner, 913 F.3d 640 (7th Cir. 2019). 

In another case, the DEA arrested a suspect and then went to search his apartment. A woman wearing a bathrobe let them in. The agents did not ask her who was or why she was there until partway through the search.  Judge Barrett reversed the trial court's decision not to suppress the evidence obtained during the search. She wrote that "A bathrobe alone does not clothe someone with apparent authority over a residence, even at 10:00 in the morning." United States v. Terry, 915 F.3d 1141 (7th Cir. 2018).

Judge Barrett also ruled that a defendant was entitled to a new sentencing hearing before a different judge after the judge refused to recuse himself.  The judge had previously been a prosecutor in the same U.S. Attorney's office which was prosecuting the defendant. It came to light that the judge had had over 100 ex parte communications with the U.S. Attorney's office about other cases. As a result, the Chief Judge removed the judge from any cases involving his former office. The defendant raised the judge's failure to recuse for the first time on appeal because the ex parte contacts were not disclosed until after sentencing. Judge Barrett wrote that "Allowing Atwood's sentence to stand would undermine the public's confidence in the fairness of this sentence and in the impartiality of the judiciary." United States v. Atwood, 941 F.3d 883 (7th Cir 2019).

There are other similar cases that I could discuss as well. To me, this second set of cases demonstrates that Judge Barrett displays judicial independence in cases where business and law and order advocates might have preferred a different result. The decisions appear to be carefully thought out and correct. If Judge Barrett is a dangerous idealogue, she has not provided her critics with evidence in this handful of cases.



Thursday, August 20, 2020

Texas Sees Surge in Large Bankruptcy Filings

Texas lawyers have long bemoaned the tendency of large Texas-based companies to file bankruptcy in Delaware or New York. However, with the collapse in oil prices and the impact of Covid-19 on retail, many large companies are seeking to restructure in Texas. Since January, 36 groups of companies reporting at least $100 million in assets have filed Texas cases.

These cases generated a total of 802 individual case filings. Since the filing fee for a case is $1,717, the flood of filings has generated $1,377,034 in filing fees for the clerk’s offices.

To arrive at these numbers, I looked at all of the chapter 11 filings in Texas this year. On the petition, there is a place to list estimated assets in ranges of $100-$500 million, $500 million - $1 billion, $1-$10 billion, $10-$50 billion and $50 billion or more. In a few cases, where the petitions did not seem to reflect the assets, I looked further at schedules and first day declarations. In the case of GGI Holdings (Gold’s Gym), I knew that the company had sold for $100 million, so I gave it a bump up to that category. I also aggregated fourteen single asset real estate cases related to World Class Capital into a group of companies although they are not being jointly administered.

 Of the 36 groups of cases, 31 filed in the Southern District of Texas, including two $10 billion cases, four filed in the Northern District of Texas and one filed in the Western District of Texas. The Southern District of Texas cases were divided between just two judges, Judge Marvin Isgur and Judge David Jones, who make up that district’s complex case panel.

 Oil and gas extraction and support services made up 21 of the large groups of filings. There were also a number of well-known retailers filing in Texas, including Neiman Marcus, Stage Stores, JC Penney, Tuesday Morning and Tailored Brands (Men’s Warehouse and Joseph A. Bank). Other businesses likely affected by Covid-19 were fitness chain Gold’s Gym, California Pizza Kitchen and NPC International (franchisee for Wendy’s and Pizza Hut).

Of these cases, eleven met my minimum cutoff of $100 million. Another five cases reported assets of at least half a billion dollars. Eighteen cases hit the billion-dollar mark. Two cases broke $10 billion. That means that Texas had twenty billion dollar filings, an incredible showing for less than a year’s time.

Out of the 36 groups of companies, three were headquartered outside of the United States, eleven were based in other states, and twenty-two were Texas based (even if they filed in a different Texas district than their home office).

Ironically, large number of financially troubled companies filing in Houston could be a boost for that city’s economy. Bloomberg Business Week has estimated that having a major case filed in a city generates $4.5 million worth of economic activity, such as amounts spent on hotels, restaurants and cabs. The thirty-one large filings in Houston and Corpus Christi could be worth at least $139,500,000 in economic activity, not including fees earned by Texas professionals. (While many of the lead law firms were from out of state, nearly every case had a Texas local counsel. 

If you would like a chart showing the filings, please feel free to email me at