Monday, July 31, 2017

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 LEXIS 5966 (5th Cir. 4/6/17)(unpublished)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.


Friday, July 21, 2017

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.