Debtors Have to Show Up for 727 Trials: A Cautionary Tale

 A recent Fifth Circuit opinion brought back memories of a case I was involved with as a young lawyer. The lesson to be learned is that debtors are required to appear for a hearing on a complaint objecting to discharge regardless of whether they have been subpoenaed. Fed.R.Bankr.P. 4002(a)(2) requires a debtor to "attend the hearing on a complaint objecting to discharge and, if called, testify as a witness." In a recent Fifth Circuit opinion, Judge Edith Jones found that the debtor violated the rule but that it was harmless error. In a case I was involved with, the court was prepared to deny the discharge based on failure to appear.  The Fifth Circuit case is Black v. Triplett (In re Triplett), Case No. 25-40520 (5th Cir. 8/6/26), which can be found here. 

Camp Mystic illustrates That Insurance Can Be Property of the Estate

A motion to lift the automatic stay to allow a tort claimant to proceed against the debtor's insurance coverage is one of the simpler pleadings to file in bankruptcy. Because insurance involves a third party's obligation to defend a suit or pay claims, property of the estate is not implicated. While the debtor remains a nominal party to the suit (thus requiring the stay to be lifted), the insurance company has the real economic interest. However, this is not always the case. As shown by Fifth Circuit precedent, where there are more claims against policy proceeds than proceeds, the insurance becomes a form of special property of the estate. Law Office of Rogelio Solis, PLLC v. Curtis, 83 F.4th 409 (5th Cir. 2023). 

 

I had started to write about this case several years ago and got distracted. However, the principle has new importance in the Camp Mystic case. In re Camp Mystic, LLC, Case No. 26-90621 (Bankr. S.D. Tex.). According to published reports, Camp Mystic only carried $6 million in liability coverage. Twenty-seven people died there during the catastrophic Fourth of July flooding last year The insurance coverage does not appear likely to cover the damages. As a result, the Bankruptcy Court will be unlikely to lift the stay to allow suits to proceed against the coverage. Instead, that coverage will be one asset that can be marshaled for the benefit of creditors. 

Supreme Court Rejects Fifth Circuit's Approach to Judicial Estoppel

 The Fifth Circuit has long applied judicial estoppel aggressively when a debtor fails to list a cause of action. It once held (in a panel opinion overruled by the en banc court) that a trustee was bound by a debtor's failure to disclose assets. Reed v. City of Arlington, 620 F.3d 477 (5th Cir. 2010), rev'd en banc 650 F.3d 571 (5th Cir. 2011). More recently, the Fifth Circuit held that a chapter 13 debtor who failed to disclose a post-petition cause of action would be barred from pursuing the claim due to judicial estoppel despite having confirmed a plan which paid all creditors 100% of their claims. A unanimous Supreme Court has now reversed that decision and remanded for determination under a totality of the circumstances test. Case No. 25-6, Keathley v. Buddy Ayers Construction, Inc. (U.S. 6/11/26). The opinion can be found here. 

What Happened

The Keathleys filed chapter 13 bankruptcy in Arkansas in 2019. They confirmed a plan which paid unsecured creditors 100% of their claims, albeit without interest. In August 2021, Mr. Keathley was in an auto accident. He retained a personal injury attorney and informed his bankruptcy lawyer of the claim. The bankruptcy lawyer did not amend the debtor's schedules to disclose the claim. He filed suit in the Northern District of Mississippi in December 2021. In March 2023, the defendant moved for summary judgment based on failure to disclose the cause of action to the bankruptcy court. Keathley filed an affidavit affirming that the had informed his bankruptcy counsel of the claim. Nevertheless, the district court granted summary judgment. 

The Fifth Circuit affirmed, although Judge Haynes filed a concurrence questioning whether the purposes behind judicial estoppel were served when nondisclosure resulted from an honest mistake. The standard in the Fifth Circuit was that failure to schedule a claim could only be inadvertent if (1) the debtor did not know the facts underlying the claim, or (2) there was no potential motive to conceal the claim. Long v. GSDMIdea City, LLC, 798 F. 3d 265, 273 (5th Cir. 2015). The District Court and the Fifth Circuit found that Keathley knew about the facts giving rise to the claim and he might possibly have  not disclosed the claim to avoid having to pay his creditors interest.

The Supreme Court Ruling

In a unanimous opinion the Supreme Court reversed. Curiously, the Supreme Court assumed without deciding that judicial estoppel could apply in the bankruptcy context and that inadvertence or mistake could be an exception to the doctrine. It held that under these assumptions, "the Fifth Circuit’s understanding of 'inadvertence or mistake' is simultaneously too rigid and too broad." Opinion, p. 7. The Court found that the Fifth Circuit failed to apply equitable principles when applying an equitable doctrine. 

The Fifth Circuit’s rule is not only overly rigid; it is also overly broad. In particular, the Fifth Circuit holds that an omission falls outside of the exception any time a debtor knows certain facts or could potentially benefit from nondisclosure of a claim. But it is rare for a debtor to be unaware of the underlying facts of his claim, and a debtor will almost always hypothetically benefit from not revealing such a claim to his creditors. In essence, then, the Fifth Circuit’s approach is a one-size-fits-all test that requires courts to view as purposeful nearly every bankruptcy omission. . . . 

 The overbreadth of the Fifth Circuit’s rule (the fact that it almost always is satisfied) makes it patently incompatible with an inadvertence-or-mistake standard, which suggests that circumstances—and outcomes—may vary. A near-dispositive criterion is a poor fit for a fair inquiry into whether an omission is actually the result of inadvertence or mistake.

Opinion, pp. 8-9. As a result, the Supreme Court remanded the case to the Fifth Circuit.

What Does It Mean

Unfortunately, the Supreme Court did not give much guidance on what the Fifth Circuit should do on remand. It just said that if there is going to be a mistake or inadvertence standard, the court should look at whether there was actually mistake or inadvertence. This would seem to give latitude for trial courts to make a fact intensive inquiry and decide whether equity applies. Of course, it could also give cover to the Fifth Circuit come up with a different formulation of an overly broad test.

What is more fun about this opinion is the concurrences. Justice Thomas, joined by Justice Gorsuch said that:

Lower federal courts have applied this doctrine broadly without clear authority to do so, and with only limited support from this Court’s precedents. In a future case, we should reexamine it.

Justice Sotomayor wrote that

I write to address why it may not ever make sense to apply judicial estoppel when bankruptcy proceedings are pending, and why, in any context, judicial estoppel should always turn on the totality of the circumstances. 

and

 I write to address why it may not ever make sense to apply judicial estoppel when bankruptcy proceedings are pending, and why, in any context, judicial estoppel should always turn on the totality of the circumstances.

Thus, while the majority opinion was narrow, cautious and largely unhelpful, there are three justices from two different wings of the court who would go further. This should be enough to cast doubt on the haphazard and arbitrary application of the doctrine going forward. 

 

   

Mediation in Consumer Bankruptcy Cases

TV lawyers are constantly heading into trial, sometimes after seeing the file for the first time that morning. On television, the clients never seem to worry about how they are going to pay their lawyers to go to trial. The reality is different in real life, especially when dealing with consumer bankruptcy cases. A consumer debtor seeks a fresh start because their finances are at their breaking point. When a litigation matter pops up, it stands in the way of the fresh start. 

When Should A Corporation File Chapter 7?

When an individual files for Chapter 7 relief, the goal is to keep their exempt property and discharge their dischargable debts. A corporation does not receive either of these benefits in Chapter 7, meaning that it turns over all of its property to be liquidated and still owes the remainder of its debts after the case is over. So why would a corporation ever for Chapter 7?

Farewell to Chevron Deference

One of the many controversial opinions coming from the Supreme Court at the end of its term was Loper Bright Enterprises v. Raimondo, No. 22-451 (6/28/24) which abolished what is known as Chevron deference. The commentators on the podcasts that I listen to were aghast that the Supreme Court felt that judges should hold themselves out to make difficult decisions as to clean air and water or whether to approve a prescription drug when there were agencies who had expertise in these areas.  Several commentators pointed out that it might not be a good idea to rely on federal judges to make scientific determinations after Justice Gorsuch confused nitrous oxide with nitrogen oxide in another case.  \

Supreme Court Nixes Non-Consensual Third-Party Releases

In an opinion that resolves decades of circuit court splits, the Supreme Court ruled against allowing nonconsensual third-party releases. Harrington v. Purdue Pharma, LP, No. 23-124 (6/27/24) which can be found here.  While the opinion is emphatic in its rejection of extra-textual plan provisions, the 5-4 ruling and numerous caveats mean this won't be the last time creative lawyers will be testing the limits of the Code.

Meet Judge Robinson

Shad Robinson took the bench as the twelfth bankruptcy judge to serve in the Western District of Texas on February 21, 2023. Judge Robinson, by his own telling, took an unlikely path to law school and practicing bankruptcy law. He is fairly unique among his bankruptcy colleagues in that he practiced in a small firm in a small city and practiced both consumer and business bankruptcy. However, he does possess one credential common among the current judiciary in that he clerked for one the Western District Bankruptcy Judges. Practitioners were introduced to Judge Robinson at a brown bag lunch followed several days later at his Investiture Ceremony. This article is taken from those two sessions and questions that Judge Robinson was kind enough to answer.

Supreme Court Strikes Blow for Deciding Cases and Explains What Is Jurisdictional and What Is Not

Author's Note: I started writing this post in April. My life has been a bit busy this year so I haven't blogged as much as in prior years. If you are already familiar with the holding of Moac Mall Holdings, you may want to skip to the end to the What It Means section.

In Justice Ketanji Brown Jackson's first major opinion, the Supreme Court ruled that 11 U.S.C. Sec. 363(m) is not a jurisdictional bar and batted away an appellate mootness argument. The ruling means that Mall of the Americas may continue to challenge the assignment of a lease to a subsidiary of a purchaser in the Sears bankruptcy case. However, in a larger sense, the opinion is a challenge to the rulings that have shielded many bankruptcy court rulings from appellate review. The case is No. 21-1270, MOAC Mall Holdings, LLC v. Transform Holdco, LLC, 508 U.S. ___ (U.S. 4/19/23). You can find the opinion here. 

What Happened

When Sears filed bankruptcy, it sold most of its assets to Transform Holdco, LLC. One of the assets it purchased was the right to designate who leases would be assumed and assigned to. It formed a subsidiary to assume a lease at Mall of the Americas. Mall of the Americas objected that Transform Holdco could not prove that its newly formed entity could not provide adequate assurance of future performance under 11 U.S.C. Sec. 365(f)(2)(B). The Bankruptcy Court overruled the objection. MOAC requested a stay pending appeal. The Bankruptcy Court denied the stay on the basis that Sec. 363(m) did not apply. Transform insisted that it would not rely on Sec. 363(m).

MOAC appealed to the District Court which reversed the order approving the assignment. Transform then moved for reconsideration on the basis that Sec. 363(m) deprived the Court of jurisdiction to hear the appeal (the very position it had told the Bankruptcy Court it would not assert). The District Court was not happy and said some choice things about Transform. Nevertheless, it held that it lacked jurisdiction and dismissed the appeal. MOAC appealed to the Second Circuit which affirmed in an unpublished order.

The Issue at the Supreme Court 

Section 363(m) states that:

The reversal or modification on appeal of an authorization under [§363(b) or §363(c)] of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

The Second Circuit had previously held that Sec. 363(m) was jurisdictional, meaning that an appellate court had no power to review an order falling within its power while the Third and Eleventh Circuits said that it was not. Justice Jackson framed the issue this way:

In this case, we are called upon to decide whether §363(m)’s strictures are jurisdictional. If so, a party may invoke that provision at any time—without fear of waiver, forfeiture, or similar doctrines interposing. If not, courts can apply such doctrines when evaluating §363(m) issues, where appropriate. 

Opinion, p. 2. 

It's Not Jurisdictional

Justice Jackson and the unanimous Court concluded that Sec. 363(m) was not jurisdictional. 

Congressional statutes are replete with directions to litigants that serve as “preconditions to relief.” Filing deadlines are classic examples. So are preconditions to suit, like exhaustion requirements.  So, too, are “statutory limitation[s] on coverage,” or“on a statute’s scope,” such as the “element[s] of a plaintiff ’s claim for relief.” Congress can, if it chooses, make compliance with such rules “important and mandatory.” But knowing that much does not, in itself, make such rules jurisdictional.

The “jurisdictional” label is significant because it carries with it unique and sometimes severe consequences. An unmet jurisdictional precondition deprives courts of power to hear the case, thus requiring immediate dismissal. And jurisdictional rules are impervious to excuses like waiver or forfeiture. Courts must also raise and enforce them sua sponte.

This case exemplifies why the distinction between nonjurisdictional and jurisdictional preconditions matters. In light of Transform’s belated invocation of §363(m), the District Court stated that, “if ever there were an appropriate situation for the application of judicial estoppel, this would be it.”  But not even such egregious conduct by a litigant could permit the application of judicial estoppel as against a jurisdictional rule. 

In view of these consequences and our past sometimes-loose use of the word “jurisdiction,” we have endeavored “to bring some discipline” to this area.  We have clarified that jurisdictional rules pertain to “ ‘ “the power of the court rather than to the rights or obligations of the parties.” ’ ” And we only treat a provision as jurisdictional if Congress “ ‘clearly states’ ” as much. 

This clear-statement rule implements “Congress’ likely intent” regarding whether noncompliance with a precondition “governs a court’s adjudicatory capacity.”  We have reasoned that Congress ordinarily enacts preconditions to facilitate the fair and orderly disposition of litigation and would not heedlessly give those same rules an unusual character that threatens to upend that orderly progress.

Opinion, pp. 7-8 (cleaned up). To sum up, jurisdictional limitations are limitations on the power of the court, not the parties and Congress must clearly state when it is imposing a jurisdictional limit. First, there must be an express jurisdictional grant, such as diversity jurisdiction or bankruptcy jurisdiction under 28 U.S.C. Sec. 1334 or appellate jurisdiction under 28 U.S.C. Sec. 1291. If there is not an affirmative grant of jurisdiction, the court has no power to proceed. However, even if there is an affirmative grant of jurisdiction, there may be cases in which Congress has taken that jurisdiction away. Transform was arguing that Sec. 363(m) fell into this second category, that it took the power to adjudicate certain disputes regarding sales or leases away from the appellate courts if a stay pending appeal was not granted. 

Supremes Say No to Equitable Mootness

In keeping with the focus on deciding cases on the merits, the Court also rejected an equitable mootness argument. This was not a hard call. None of the lower courts applied equitable mootness. As a result, there was not a factual record for the court to rule on. To apply equitable mootness at the Supreme Court level, the Court would have to find that application of the doctrine was required under the undisputed facts of the case. Justice Brown dispatched this argument as easily as she rejected the jurisdictional argument. (Note: The Court's opinion addressed mootness first. Because it was a secondary issue to me, I addressed it in order of importance). 

Justice Brown explained equitable mootness using these words:

A “case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.”  The case remains live “‘[a]s long as the parties have a concrete interest, however small, in the outcome of the litigation.’” 

Opinion, p. 5. Justice Brown noted that mootness is disfavored, which must have come as a surprise to all of the hundreds of courts that have used it as a means to clear their dockets. In the end, she found that that the Supreme Court was not going to not going to act as a court of first review where it was not clear that no relief could be granted. She wrote:

Here, as elsewhere, we decline to act as a court of “‘first view,’” plumbing the Code’s complex depths in “‘the first instance’” to assure ourselves that Transform is correct about its contention that no relief remains legally available.

Opinion, p. 6. Under this formulation, mootness is a doctrine of last resort. For example, if a criminal defendant passes away while a case is on appeal, the correctness of the sentence becomes moot since the defendant has already been granted release. 

The Post-Script 

On November 6, 2023, the Second Circuit vacated the decision of the District Court and remanded the case for further proceedings. MOAC Mall Holdings, LLC v. Transform Holdco (In re Sears), 2023 U.S. App. LEXIS 29477 (2nd Cir. 2023). It found that because Sec. 363(m) was not jurisdictional, the District Court should not have dismissed the appeal. 

 

 

NCBJ 2023: The Valuation Paradox

In the program Who Killed the Company? Tips and Trends in Claims and Defenses, Judge Marvin Isgur and his fellow panelists confronted issues such as in pari delicto, insurance coverage and waiver of fiduciary duties. However, one discussion led by Judge Isgur focused on whether solvency should be determined based on what was known at the time of the valuation or what was known at a later date. The discussion highlighted that valuation can be a moving target based on what is known at a given point in time. 

NCBJ 2023: The View from Austin

 The National Conference of Bankruptcy Judges came to Austin for its 2023 conference with the slogan Blues, Barbecue and Bankruptcy. Here are some images from the conference.

 

 

 

 

Sheriff Ronnie King was the Master of Ceremonies for the Conference.

 

 

 

Chief Judge Craig Gargotta welcomed conference goers to Austin.

 

 

 

The Western District delegation

 

 

 

Judge Shad Robinson

 

 

Judge Ronnie King

Law Clerk Bach Norwood

 

 

                  The Rockestra

 

 

 

                    That's a lot of bull

                      Ouch

The Bankruptcy Judges of the Western District of Texas

The Western District of Texas crosses two time zones, has a population of 7.6 million and contains 93,000 square miles.  It is larger than the State of Oklahoma but smaller than the State of New Mexico. It contains the 7th, 11th and 24th largest cities in the United States (San Antonio, Austin and El Paso respectively). Since the Bankruptcy Code was adopted, the Western District has been served by 12 judges.  The judges of the Western District have come from San Antonio, Houston, Waco and El Paso. I have appeared in front of ten of them.

Grammar Dooms Innocent Spouse in Non-Dischargeability Case

While we often recite that bankruptcy is for the honest but unfortunate debtor, a new case from the Supreme Court shows that getting into bed or business with the wrong person can lead to a non-dischargeable debt for an innocent spouse. The case is No. 21-908, Bartenwerfer v. Buckley, which you can find here.

Notes on a Diversity Workshop

 At the ABI Winter Leadership Conference, I attended a diversity and inclusion workshop put on by Elton Ndoma-Ogar of Alix Partners and Peter S. Salib of Perkins Coie, LLP. I wasn't sure that writing about an interactive workshop would be useful, but a friend encouraged me to try. At the end of the article, I have included a link to their materials, which you can access if you are an ABI member. If you are not an ABI member, contact me and I can send them to you.

NCBJ 2022: Gradually, Then Suddenly. The Bankruptcy of Detroit

This program looked at the bankruptcy of the City of Detroit through the lens of a documentary filmmaker. I thought it was a clever way to look at one of the most consequential bankruptcies of our time through the eyes of someone who was not a bankruptcy lawyer or judge. While filmmaker Sam Katz is not part of the bankruptcy profession, he did have substantial experience in municipal finance, having served as Chair of the Fiscal Oversight Board in Philadelphia in the 1990s. It took him six years to make the film compared to the fourteen months that Detroit was in bankruptcy. I have included a link to a website about the film at the end.

NCBJ 2022: The Role of the Bankruptcy Judge

 This panel asked the question, what is the role of the bankruptcy judge? To answer that question, they featured two retired judges, Judge Robert Drain from the Southern District of New York and Judge Harlan "Cooter" Hale from the Northern District of Texas along with sitting judges Erithe Smith from the Central District of California and Grace Robson from the Middle District of Florida. Rather than trying to recreate their panel, I will try to distill their presentation into a series of rules.

Counsel's Retention of "Wet Signatures" Overcomes Debtor's "Faulty" Memory

Sometimes debtors get buyer's regret after filing a bankruptcy petition.  However, once a bankruptcy petition is filed, it remains on the debtor's credit for ten years. One debtor sought to throw his attorney under the bus by claiming that the bankruptcy filing had never been authorized. Fortunately the debtor's attorney had retained his client's wet signatures and text messages which protected him from the Court's Order to Show Cause. In re Wilson, 2022 Bankr. LEXIS 3378 (Bankr. D. N.J. 11/30/22).  

Judge Gargotta Nixes Non-Dischargeability Claim Against Corporate SubV Debtor

 Distinguishing a precedent from his own district and disagreeing with the Fourth Circuit, Judge Craig Gargotta has ruled that non-dischargeability only applies to human Subchapter V debtors. Adv. No. 22-5052, Avion Funding, LLC v. GFS Industries, LLC (Bankr. W.D. Tex. 11/10/2022).  The decision can be found here. The decision was especially sweet for me personally because the case it distinguished, New Venture Partnership v. JRB Consolidated, Inc. (In re JRB Consolidated, Inc.), 188 B.R. 373, 374 (Bankr. W.D. Tex. 1995), was one that I lost and always thought was wrongly decided. 

NCBJ 2022: The Devastating Impact of the Opioid Crisis featuring Pulitzer Prize Winning Journalist Eric Eyre

 "The opioid crisis is nothing short of sinister."

Eric Eyre and Patrick McGinley from the West Virginia University College of Law, told the story of how a small town journalist discovered the cause of the opioid epidemic in Appalachia. Along the way, Mr. Eyre developed Parkinson's disease, won the Pulitzer Prize for his book and had his newspaper file for Chapter 11 relief. Prof. McGinley represented the newspaper pro bono in making open records act requests which were repeatedly rebuffed.  

NCBJ 2022: Mass Torts in Bankruptcy: Two Steps Forward or Two Steps Back

 

One of the big themes appearing in this year's National Conference of Bankruptcy Judges was the effect of mass tort cases on the bankruptcy system. The panel Mass Torts in Bankruptcy: Two Steps Forward or Two Steps Back focused on third party releases. The speakers were Hon. Craig Goldblatt (Bankr. D. Del.), Karen Cordry from the National Association of Attorneys' General, Prof. Douglas Baird and Sander Esserman.  

Third party releases have been in the news a lot lately. In Purdue Pharma and Mahwah Bergen Retail Group, District Courts struck down overly broad provisions, while they were allowed in the Mallinckrodt PLC case.