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. 

Debtor's Attorney Commended in Case Denying Objection to Discharge

 No attorney wants to see his name mentioned prominently in an opinion. However, if it has to happen, it's better if its something like this:  "Chance McGhee is an experienced and competent attorney that has practiced consumer bankruptcy law for many years." Adv. No. 21-5036; Wilson v. Silva (In re Silva) (Bankr. W.D. Tex. 5/19/2022).  The opinion can be found here. As the opinion lays out, Mr. McGhee demonstrated how an experienced and competent attorney should handle a potentially difficult case.

Willful and Malicious Standard Encompasses Alienation of Affections

Divorce can be both expensive and traumatic for the parties going through it but in a few states, it can be expensive for the outside party causing the divorce. As one Texas debtor recently found out, causing a marriage to crumble in North Carolina can result in a non-dischargeable debt.   King v. Huizar (In re King), No. 19-5007 (Bankr. W.D. Tex. 10/2/19).   The case, which can be found here, serves as a reminder that an obscure tort can fit within the broad confines of willful and malicious injury.

Some Background on Alienation of Affections

King v. Huizar involved a North Carolina judgment for alienation of affections.   The Debtor in the case made an unfortunate choice of a married woman to pursue because North Carolina is one of just six states which still recognizes the tort of alienation of affections. (The others are Hawaii, Mississippi, New Mexico, South Carolina and Utah).  Under North Carolina law, the elements of alienation of affections are: (1) That he and his wife were happily married, and that a genuine love and affection existed between them; (2) that the love and affection so existing was alienated and destroyed; (3) that the wrongful and malicious acts of the defendant produced and brought about the loss and alienation of such love and affection.  Litchfield v. Cox, 146 S.E.2d 641 (N.C. 1966).   

Beware the Living Trust! You May Lose Your Homestead

A living trust is a legal document that states who you want to manage and distribute your assets if you're unable to do so, and who receives them when you pass away. Having one helps communicate your wishes so your loved ones aren't left guessing or dealing with the courts.

This is what Legal Zoom says about Living Trusts.   What it does not say is that unless a living trust is set up properly, it can result in loss of the Texas homestead exemption as the Debtor found out in Case No.  18-50102, In re Steven Jeffrey Cyr (Bankr. W.D. Tex. 7/16/19) which can be found here.

Texas Bankruptcy Court Rejects Claim That Attorneys Were Non-Statutory Insiders

Last year, the Supreme Court ruled on a case involving a claim that a party was a non-statutory insider without ever deciding what legal test should apply.   U.S. Bank National Association v. The Village at Lakeridge, LLC, 138 S.Ct. 960 (2018).    Bankruptcy Judge Craig Gargotta was not able to dodge the issue and has written an opinion which is helpful in applying the non-statutory insider test.   Case No. 18-5238, Hornberger v. Davis Cedillo & Mendoza (Bankr. W.D. Tex. 4/16/19).

Under 11 U.S.C. Sec. 547, a preferential transfer made to an ordinary vendor can be recovered if it was made during the 90 days prior to bankruptcy.   However, if made to an insider, the period expands to one year.   11 U.S.C. Sec. 101(31) has a list of persons who are automatically considered insiders, such as the officers of a company.  The statute uses the word "includes" prior to the list.  This means that the list is not exclusive.  Persons who who are not specifically defined to be insiders but have a sufficiently close relationship to the debtor are referred to as non-statutory insiders.

  

 What Happened

Larry Struthoff was a majority shareholder of Olmos Equipment, Inc. ("OEI")..   He was also an officer, shareholder and director of SWL Enterprises, Inc.  ("SWL").   SWL had two other shareholders, Long and Weynand.   OEI acquired the assets of SWL.   Weynand became concerned that Struthoff had cheated him out of his share of the sales proceeds.   Weynand sued OEL, SWL, Struthoff, Long and another shareholder of OEI named Janecke for $6 million.

As trial approached, OEI's longtime counsel became concerned that he did not have the bandwidth for a "bet the company" trial.   OEI hired Davis, Cedillo & Mendoza, Inc. ("DCM").   Where OEI and the insiders previously had separate counsel, DCM represented all of the defendants.   OEI paid the law firm $400,000.   Other parties paid the firm $225,000.

DCM was not able to rescue the company.  After trial, judgment was entered against OEI for $5.3 million. (Judgment was also entered against Struthoff and Janecke). OEI filed chapter 11.  It confirmed a plan which which created a litigation trust.  Ronald Hornberger, the trustee of the litigation trust, sued DCM to recover $400,000 in payments made by the Debtor during the period which was more than 90 days before bankruptcy but less than one year.  The litigation trustee brought claims to recover preferential transfers and fraudulent transfers.   

In order for the preferential transfer complaint to state a claim, the trustee needed to make plausible allegations that DCM was a non-statutory insider of the Debtor. This required Judge Gargotta to answer the question that the Supreme Court had dodged:  what is the test for a non-statutory insider?

The Test

 Judge Gargotta looked to Browning Interests v. Allison (In re Holloway), 955 F.2d 1008 (5th Cir. 1992) to find the proper test.   Holloway was a case under the Texas Uniform Fraudulent Transfer Act.    The definition of an insider under TUFTA is identical to the one contained in the Bankruptcy Code.   Tex.Bus.&Com. Code Sec. 24.002(7).   Thus, the case involved a federal court interpreting a Texas statute which was based on a federal statute.  On top of that, it relied on precedents under the Bankruptcy Code.   The Court in Holloway said:

The cases which have considered whether insider status exists generally have focused on two factors in making that determination: (1) the closeness of the relationship between the transferee and the debtor; and (2) whether the transactions between the transferee and the debtor were conducted at arm's length.

Holloway at 1011.   Judge Gargotta also discussed the Tenth Circuit opinion in Austine v. Carl Zeiss Medical, Inc., 513 F.3d 1272 (10th Cir. 2008) which relied on similar reasoning.

The Ruling

 The litigation trustee argued that DCM exercised control over the Debtor because it persuaded the Debtor to pay for the attorneys' fees of Struthoff and SWL in addition to the Debtor.   The Court rejected this argument, stating:

The Court agrees with DCM that Plaintiff has not met the plausibility requirements of showing that DCM is a non-statutory insider of Debtor. Under the two-prong test of U.S. Medical, Inc, and Holloway, the Plaintiff has not shown that DCM had a sufficiently close relationship with OEI or that DCM exercised control or influence over the Debtor such that the transaction at issue was not done at arm’s length. The facts as deemed true only allege a contractual relationship between DCM and OEI and the course of dealing between the parties was that of an attorney-client. DCM represented OEI in complex civil lawsuit in state court that resulted in an adverse judgment. Plaintiff’s argument that Debtor’s By-Laws or other corporate documents precluded DCM from representing Debtor is unavailing—Struhoff had the requisite authority to engage DCM. Plaintiff has not cited with any specificity as to which corporate provisions were violated. Plaintiff’s assertion that DCM had access to OEI’s internal documents is insufficient to support a finding that DCM exercised control or influence over OEI. The fact that Debtor made payments to DCM for services performed is precisely what any other legal counsel would have requested in the allegations raised here. The payments, based on Plaintiff’s allegations, comport with what was required under DCM’s engagement letter. In sum, there are no facts to indicate that the transaction between the Parties’ was anything other than arm’s length.

Opinion, pp. 21-22.

An attorney representing a client in high-stakes litigation, whether it is a state court lawsuit or a chapter 11 proceeding, necessarily has a lot of influence over the client.  Because the client is counting on the attorney to guide it through legal peril, the attorney will have more impact on the client's decisions than say, the company's paper vendor.   The arms-length inquiry should focus, as the Court did here, on how the attorney's behavior comported with what attorneys normally do.   

Because this case found that the transactions were done at arms-length, it did not answer the question of what "not arms-length" would look like.   I tried to think of exampleswhere an attorney could exercise sufficient control to take the relationship outside of arms-length status:

1.  The attorney takes the wife of the Debtor's CEO hostage and threatens to kill her if payments are not timely made.  Admittedly, this would be a criminal violation as well.

2.  The client gives the attorney the password to its accounting software and allows the attorney to approve which bills get paid and which bills do not.

3.  The attorney requires that all funds belonging to the corporation be paid to a lockbox controlled by the attorney and the attorney only allows the client to use its funds after the attorney has deducted its fees.

These were extreme examples.   Here is one that is a bit closer:

The attorney and the company's CEO attend the same church and have gone on mission trips together.   The attorney and the CEO regularly dine at each other's home.   At one of these dinners, the attorney tells the CEO that the attorney's wife is receiving cancer treatment and that without the revenue coming in from the litigation, he would not be able to pay for her treatments.   Each week, the CEO asks the attorney how much money he needs and he pays that amount regardless of what the firm billed.     While the attorney in this hypothetical did not exercise improper influence over the generous CEO, the personal bond between the two men led the CEO to give the attorney treatment he would not provide to a third party vendor.  If you tweak the hypothetical slightly and the CEO paid each invoice the same day it was received, then it probably goes back to being arms-length.  While the relationship no doubt would influence the prompt payment, it is still within the range of ways that clients interact with their attorneys.

Post-script:

On August 17, 2019, I received an email from Larry Struthoff which stated "Sir, Who ever gave you the facts for the blog you posted surely misled you and gave you erroneous information. You have posted completely incorrect information about the basis of the case."   I based my blog post on the facts as found by Judge Gargotta in his opinion.   The primary focus of my article was whether Davis, Cedillo and Mendoza was a non-statutory insider.    While Mr. Stuthoff feels that he has been the victim of a miscarriage of justice, he is not the focus of this article.   In writing posts about judicial opinions, I accept the facts as found by the Court unless there are serious reasons to doubt them.   I know that judges sometimes get things wrong.   In fact, I have filed many appeals based on perceived errors or law or fact.  However, as someone trying to focus on issues important to the legal profession, it is not my position to right every wrong or correct every injustice.

 

Second Western District Judge Finds Proceeds From Post-Petition Sale Can't Be Clawed Back in Chapter 7

After sorting through conflicting precedents, Judge Craig Gargotta has ruled that a chapter 7 debtor who owned a homestead property on the date of bankruptcy and claimed the property as exempt did not lose the exemption when the property was sold and proceeds were not reinvested within six months.    Lowe v. DeBerry (In re Deberry), Adv. No. 15-5054 (Bankr. W.D. Tex. 10/28/15).

After Woerner, Courts Look for "Good Gambles"

You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run
--Kenny Rogers, The Gambler

After the Fifth Circuit’s opinion in Barron & Newburger, P.C. v. Texas Skyline Ltd. (Matter of Woerner), 783 F.3d 286 (5^th Cir. 2015), lawyers for bankruptcy estates breathed a sigh of relief, knowing that they could still be compensated for “good gambles” gone awry.   However, how would the courts measure a “good gamble” in the context of a case that didn’t quite work out?   Two decisions issued on the same day help answer that question.    In Case No. 13-33264, Digerati Technologies, Inc. (Bankr. S.D. Tex. 8/21/15), a highly contentious case resulted in a confirmed plan but only after an initial plan proposed by management was rejected.   In Case No. 10-11365, In re Woerner(Bankr. W.D. Tex. 8/21/15), the Bankruptcy Court that ruled in the case that was eventually reversed by the en banc Fifth Circuit reconsidered its ruling following remand.   In both cases, debtor’s counsel received some but not all of the fees requested.

Two Cases Illustrate How to Bring a Chapter 11 Case to a (Successful) End

This is an article about the end of a Chapter 11 case.  As the Doors put it:

This is the end
Beautiful friend
This is the end
My only friend, the end

Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end

All cases must come to an end.   Sometimes they linger on the docket until they smell like unwashed sweat socks stuffed behind the sofa.  Other times, the parties are eager to escape the scrutiny of the court and are looking for a creative way out.  This post focuses on how two cases reached their ends.

Structured Dismissal

In a recent case, Judge Harlin Hale wrote:

This case presents the issue of whether a bankruptcy court can approve a structured dismissal of a chapter 11 case, instead of conversion or forcing the parties to confirm a plan, when dismissal is what the parties want and is in the interest of creditors.

 In re Buffet Partners, L.P., et al, No. 14-30699 (Bankr. N.D. Tex. 7/23/14), p.1.    The opinion can be found here (PACER registration required).
     
What Happened:

Buffet Partners involved the Furr's restaurant chain's second trip to the bankruptcy buffet.   The Court entered an order approving the sale of substantially all of the company's assets within a little more than 90 days after filing.    The Debtor, the Purchaser and the Committee negotiated an agreement for funds to be set aside for the Debtor's and the Committee's professional fees as well as a stipend for unsecured creditors.   

The Debtor and the Committee then filed a motion to dismiss the cases upon certification that:  (1) the Committee had completed its reconciliation process; (2) all UST fees had been paid; (3) the Debtor had distributed funds to unsecured creditors according to a schedule to be filed with the Court; and (4) the Court had approved all final fee applications.   The UST was the only party to object, insisting that the case should be converted or that the Debtor be required to file a plan.

The Ruling:

The Court noted that, "Not much law, statutory or otherwise, exists regarding structured dismissals of this type."   Opinion, p. 4.    The Court concluded that structured dismissal was in the best interest of the creditors.   The Court stated:

In truth, in the present case, there is not much in the way of assets left to be administered. As noted by the In re OptInRealBig.com court, the economic value of the Debtor in this case will be served by dismissing the case, rather than converting it. Converting this case to chapter 7 would interfere with prompt and efficient payment to creditors, a primary goal of chapter 11. The parties with the skin in the game do not wish to prolong the distribution of funds to creditors by a conversion to chapter 7, which undoubtedly will do just that. Nor do those parties want to go through the time and expense of a plan, which will cause the pool of money left to be greatly diminished.

On a smaller scale, structured dismissals occur regularly in this and other bankruptcy courts. Often the parties enter the case on the eve of foreclosure, work out their differences through a sale or giveback of property, and the parties enter an agreement submitted to this court for approval that results in the dismissal of the case. This court begins its look at deals struck in this court with the eye that “it’s not my money.” If appropriate notice is given and the process is fair and does not illegally or unfairly trample on the rights of parties, the proposal should be approved.   (emphasis added).

 Opinion, p. 5.   

Having noted its deferential starting point, the Court stated that "parties do not have carte blanche to enter any settlement they choose."   Opinion, p. 6.    The Court found three criteria that must be met by a settlement of this type as defined by Fifth Circuit precedent:   (1)  senior interests must be given full priority over junior interests; (2) the settlement must not constitute a sub rosa plan;  and (3) the settlement must not discriminate unfairly against parties that have not objected to the proposal.    

There is an interesting tension in Judge Hale's discussion of the Fifth Circuit precedent.   On the one hand, the settlement must satisfy the absolute priority rule and not discriminate unfairly, both of which are requirements for a cram-down under section 1129(b).   On the other hand, the settlement must not be a sub rosa plan.   Thus, it must meet some of the most fundamental requirements for a plan without actually being a plan.    The Court found that the proposed structured dismissal did not prefer junior interests over senior ones and that the settlement did not discriminate unfairly for the reason that there were no non-consenting creditors.   The Court stated that "(a)lthough certain aspects of this dismissal are 'structured,' it does not rise to the level of a sub rosa plan."   Opinion, p. 6.

In conclusion, the Court stated:

It is important to emphasize that not one party with an economic stake in the case has objected to the dismissal in this manner. While this fact is not outcome determinative, it is still worthy of consideration. All of the following parties affirmatively assent to the proposed dismissal: the Debtor, the Lender, and the Committee, which represents a large portion of the unsecured debt. The UST is the sole objecting party. This court does note that the UST is well within its rights to file the objection. The Bankruptcy Code gives thee UST standing. See 11 U.S.C. § 1109(b). In fact, this court looks to the UST to raise issues to cause it to stop and completely consider a matter even when no creditor objects.

Opinion, p. 7.   Here, once again, Judge Hale has stumbled upon an important truth.   Many parties (myself included) find objections from the U.S. Trustee to be an unwelcome annoyance, especially when the parties with an economic stake are in agreement.    However, the U.S. Trustee is given the institutional role of serving up issues for the Court to consider.  When the U.S. Trustee does so in a manner that is cogent and grounded in the Code, it does the parties and the Court a favor.

Of course, just because the UST raises an issue does not mean that the Court will adopt its position.  I am reminded of the scene in My Cousin Vinny where this exchange takes place:

Judge Haller:  Mr. Gambini . . . that is a lucid, intelligent, well thought-out objection.

Mr. Gambini:  Thank you, Your Honor.

Judge Haller:   Overruled.

While the U.S. Trustee was alone and unsuccessful in its objection, the end result was a useful opinion from the Court which will provide valuable guidance to future parties.

Final Decree

While the final decree under Bankruptcy Rule 3020 is the most common way to close a successful chapter 11 case, it is hard to find case law interpreting its requirements.   Judge Craig Gargotta recently added to this thin jurisprudence with his opinion in In re Valence Technology, Inc., No.  12-11580 (Bankr. W.D. Tex. 10/17/14).   The opinion can be found here.

 Debtor confirmed a plan on November 18, 2013 and the effective date occurred on December 4, 2013.    The Debtor appealed the orders partially allowing fees and expenses to two of its investment bankers.   Meanwhile, one of the investment bankers appealed the denial of its request for attorney's fees.   The Debtor requested entry of a final decree on the basis that the case had been "fully administered."   The investment bankers objected on the basis of the pending appeals.  They contended that without a pending case, there was no way to ensure that the Debtor paid their claims once the appeals process was concluded. 

Final decrees are governed by Bankruptcy Rule 3022, which allows the Court to enter a final decree "(a)fter an estate is fully administered in a chapter 11 reorganization case."

Judge Gargotta noted that many courts have relied upon the factors set out in the Advisory Committee Notes to Bankruptcy Rule 3022 in determining when a case has been fully administered.   These factors are:

Factors that the [bankruptcy] court should consider in determining whether the estate has been fully administered include (1) whether the order confirming the plan has become final, (2) whether deposits required by the plan have been distributed, (3) whether the property proposed by the plan to be transferred has been transferred, (4) whether the debtor or the successor of the debtor under the plan has assumed the business or the management of the property dealt with by the plan, (5) whether payments under the plan have commenced, and (6) whether all motions, contested matters, and adversary proceedings have been finally resolved.

Opinion, p. 3.   In the particular case, five out of six factors favored closing the case.   The Debtor further argued that closing the case would relieve it from the burden of paying U.S. Trustee fees and "remove the stigma of being in Chapter 11."    Id.  

The Court held that it was not necessary to meet all six factors and that courts agreed that a pending adversary proceeding alone was not sufficient to deny a closing order.    The Court also noted that the parties whose orders were being appealed could have protected themselves by requesting that the Debtor post a bond and could seek to reopen the case in the event that the Debtor needed to be persuaded to comply with the final orders on appeal.    As a result, the Court granted the application for final decree.

This opinion highlights the court taking a very practical approach to closing a case.   While there were matters still pending, the Bankruptcy Court was not directly involved in their resolution.   As a result, the Court concluded that leaving the case open as not being "fully administered" would be a matter of form over substance.

Note:   Procedurally, the party who would request a stay pending appeal and post a bond would be the appellant rather than the appellees.   However, the appellees could have forced the issue by seeking to execute upon the unstayed order which would have required the Debtor to seek a stay.

Stern v. Marshall: The Texas Cases

This is a paper that I did for the Austin Bar Association summarizing the Texas cases applying Stern v. Marshall to date.   Please note that where the holding is indented, I am directly quoting the opinion.   I also used the following key for highlighting certain decisions:

*--If you only read a few cases, read these ones.

#--Cases where the Court found that Bankruptcy Judge lacked authority to enter a final order. 

Fifth Circuit Court of Appeals:

Technical Automation Services Corp. v. Liberty Surplus Insurance Corporation, 673 F.3d 399 (5^th Cir. 3/5/12)(E. Grady Jolly)

Facts:              Magistrate Judge granted summary judgment on an insurance coverage dispute.   Fifth Circuit sua sponte requested briefing on whether Stern v. Marshall affected the Magistrate Judge’s ability to enter a final judgment.

Holding:          Stern v. Marshall did not overrule prior precedent on constitutionality of U.S. Magistrate’s authority to enter a final judgment.

U.S. District Courts:

Feuerbacher v. Moser, 2012 U.S. Dist. LEXIS 44396 (E.D. Tex. 3/29/12)(Marcia A. Crone)

Facts:  Trustee sued debtor’s husband under TUFTA to recover fraudulent transfers.    Bankruptcy Court ruled in favor of Trustee.   On appeal, husband raised a Stern issue.

Holding:

           

Application of the aforementioned rationales to the case at bar reveals that Stern does not preclude the bankruptcy court from issuing a final judgment on claims where, as here, the Trustee seeks to recover fraudulent transfers.  

Mahanna v. Bynum, 465 B.R. 436 (W.D. Tex. 11/28/11)(Sam Sparks)

           

Facts:  Debtors filed chapter 13 bankruptcy.   Court directed debtors to convert to chapter 7 or chapter 11.   Debtors converted to chapter 11.   After debtors failed to comply with obligations of debtors-in-possession, U.S. Trustee filed Motion to Dismiss or Convert.    Debtors requested conversion.   Court dismissed the case over debtors’ objection.   Debtors appealed.

           

Holding:   Court rejected argument that Bankruptcy Court lacked authority to enter a final order on motion to dismiss or convert.

 

Stern did not destroy all finality in bankruptcy courts, it simply held § 157(b)(2)(C) was unconstitutional to the extent it swept counterclaims not arising in or under Title 11 into the category of "core" proceedings.

Bushman v. Moore, 2011 U.S. Dist. LEXIS 154776 (S.D. Tex. 9/14/11)(Vanessa D. Gilmore)

           

Facts:  Bankruptcy Court entered judgment finding debt to be non-dischargeable and finding that property was not homestead.

           

Holding:  Debtors argued that Stern v. Marshall prevented Bankruptcy Court from entering final judgment.  

Here, in contrast to Stern v. Marshall, the Bankruptcy Court was not ruling on a state law counterclaim, but on a determination as to the dischargeability of particular debts under 28 U.S.C. § 157(b)(2)(I). These types of claims remain under the bankruptcy judge's core proceedings jurisdiction following Stern v. Marshall.

           

#In re AIH Acquisitions, LLC, 2011 U.S. Dist. LEXIS 101190 (N.D. Tex. 9/7/11)(John McBryde)

Facts:  Individuals filed plea in intervention in adversary proceeding involving Textron.   Bankruptcy Court dismissed claims with prejudice for failure to plead with specificity under Rule 9(b)).

Holding:          Bankruptcy Court lacked authority to enter a final order on claims.    Claims asserted in plea in intervention were state law claims similar to the counterclaim in Stern v. Marshall.   The District Court reversed the dismissal order and withdrew the reference.

Bankruptcy Courts:

Burchik v. Butler, Adv. No. 11-1220 (Bankr. W.D. Tex. 5/10/12)(Craig A. Gargotta)(oral ruling)

            Facts:  Chapter 7 Debtor brought suit against former counsel for malpractice.

            Holding:          In announcing oral ruling, Court noted that absent consent, it would not have had authority to enter a final ruling under Stern.   Because parties expressly consented, Court could enter a final order.

In re Ruth, 2012 Bankr. LEXIS 1857 (Bankr. S.D. Tex. 4/26/12)(Jeff Bohm)

           

Facts:  Debtors filed adversary proceeding against creditor seeking to deny claim and recover sanctions for abuse of the proof of claim process and for vexatious litigation.

           

Holding:  Court had authority to enter a final order on counterclaim to proof of claim because counterclaim arose out of Bankruptcy Code and Bankruptcy Rules.  Additionally, it was necessary to resolve the dispute to determine the claim.

In re Bechuck, 2012 Bankr. LEXIS 1459 (Bankr. S.D. Tex. 4/4/12)(Jeff Bohm)

           

Facts:  Trustee filed an application to employ special counsel.

           

Holding:   Because Court denied application to employ special counsel, authority to enter a final order was not implicated.    However, Bankruptcy Court would nevertheless have authority because employment of counsel is governed by Bankruptcy Code and Bankruptcy Rules.

In re Laughlin, 2012 Bankr. LEXIS 1268 (Bankr. S.D. Tex. 3/23/12)(Jeff Bohm)

           

Facts:  Creditor filed complaint to determine dischargeability of debt.

           

Holding:         

This suit is therefore based on an express bankruptcy statute; indeed, the requested relief is unique to the Code and could never be obtained under state law. For these reasons alone, this Court concludes that Stern is inapposite, and therefore it has constitutional authority to enter a final judgment in this dispute.

In re Thalmann, 2012 Bankr. LEXIS 1066 (Bankr. S.D. Tex. 3/13/12)(Jeff Bohm)

           

Facts:  Creditor moved to dismiss case as having been filed in bad faith and Debtor objected to proof of claim filed by State Court Receiver.

           

Holding:         

State law has no equivalent to (sections 1307(c) and 1325(a)(3) and (a)(7)); they are purely a creature of the Bankruptcy Code. Accordingly, because the resolution of this dispute is based on express bankruptcy statutes, not state law, Stern is inapplicable, and this Court has the constitutional authority to enter a final judgment on the Motion pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Carlew, 2012 Bankr. LEXIS 1006 (Bankr. S.D. Tex. 3/9/12)(Jeff Bohm)

           

Facts:  Chapter 7 trustee objected to debtor’s exemptions.

           

Holding:         

In the dispute at bar, the Chapter 7 Trustee has objected to the Debtor's exemption of the Insurance Proceeds pursuant to Section 522(l) and Fed. Bankr. R. 4003(b). State law has no equivalent to this statute and rule; therefore, the facts in this case  are distinguishable from those in Stern, which involved solely state law. Granted, the resolution of the dispute at bar does hinge on Texas state law regarding homestead exemption. But, unlike Stern, where the resolution of the debtor's counterclaim did not necessarily adjudicate the creditor's claim, here, the resolution will certainly determine whether the Debtor has a claim to the Insurance Proceeds. If he does--i.e. if these proceeds are exempt--there will necessarily be less funds available for distribution for creditors. If the Debtor does not have a claim to the Insurance Proceeds--i.e. the proceeds are not exempt--then the Trustee will have more funds to distribute the proceeds to pay creditors. For these reasons, the dispute at bar is sufficiently distinguishable from the dispute in Stern for this Court to sign a final order.

In re Frazer, 466 B.R. 107 (Bankr. S.D. Tex. 107 (Bankr. S.D. Tex. 3/5/12)(Jeff Bohm)

            Facts:  Debtors filed adversary proceeding to strip lien of homeowners association from their homestead.

            Holding:  While validity of lien depends on state law, determination of dispute is necessary to resolve claim and therefore Court has authority to enter a final order.

In re Crescent Resources, LLC, 2012 Bankr. LEXIS 843 (Bankr. W.D. Tex. 3/2/12)(Craig A. Gargotta)

            Facts:  Plan Trustee filed a Complaint to Avoid and  Recover Improper “Bonus” Payments.    Defendants filed a Motion to Dismiss.    Court granted motion in part and denied in part.    Specifically, Court ruled that plan of reorganization did not adequately preserve causes of action under 11 U.S.C. §544 under state fraudulent conveyance law.  Trustee requested that Court certify a direct appeal to the Fifth Circuit Court of Appeals.   One issue that the Trust requested the Court to certify was whether the Court had authority to enter a final order dismissing the claims with prejudice.

            Holding:          Court disagreed that case was “squarely within the category of state law proceedings” implicated by Stern.    Although case involved a fraudulent transfer action brought under state law by virtue of strong arm powers under section 544, Court’s ruling was based upon interpretation of the Plan.    Furthermore, order was interlocutory and therefore was not a “final” order governed by Stern.

*In re American Housing Foundation, 2012 Bankr. LEXIS 449 (Bankr. N.D. Tex. 2/10/12)(Robert Jones)

            Facts:  Trustee brought actions under 11 U.S.C. §§544, 547 and 548.   96 defendants in 20 adversary proceedings filed motions to dismiss based on Stern v. Marshall.   Motions were filed under Rule 7012(b)(1) based on lack of subject matter jurisdiction.

            Holding:          Court assumed that it did not have authority to enter final orders in proceedings because defendants did not file claims and causes of action did not fit within public rights doctrine.    Court considered whether it could hear cases and issue proposed findings of fact and conclusions of law to the U.S. District Court.  “(I)t makes little sense to suggest that a bankruptcy judge has authority to hear a matter and issue proposed findings of fact and conclusions of law on "related to" matters but does not have authority to do the same with respect to "core" matters.”   Court concluded that it could enter non-binding findings of fact and conclusions of law.    Case contains a very thoughtful and extensive discussion of Stern.  

In re Franceschini, 2012 Bankr. LEXIS 156 (Bankr. S.D. Tex. 1/12/12)(Marvin Isgur)

           Facts:  Creditor brought action to determine dischargeability under 11 U.S.C. §523(a)(6).

            Holding:         

The right to a discharge is established by the Bankruptcy Code and is central to the public bankruptcy scheme.   (citations omitted).   Determinations of whether a debtor meets the conditions for a discharge are integral to the bankruptcy scheme, and bankruptcy courts have the authority to make such determinations pursuant to its in rem jurisdiction. (citation omitted).”   Court had authority to enter final order on determination of dischargeability.

In re Hereford Biofuels, LP, 2012 Bankr. LEXIS 22 (Bankr. N.D. Tex. 1/3/12)(Stacey C.G. Jernigan)

            Facts:  Non-debtor brought action against another non-debtor over interpretation of section 363 order.

      Holding:  

       

While the Adversary Proceeding has arisen in a post-confirmation context, and is between two non-debtor parties, the disputes herein ultimately concern: (a) the interpretation and enforcement of a prior sale order of the bankruptcy court, under section 363 of the Bankruptcy Code (and the asset purchase agreement that the bankruptcy court approved); and (b) the definition of what was or was not property of the bankruptcy estate in the underlying bankruptcy case, pursuant to section 541 of the Bankruptcy Code. In fact, the asset purchase agreement, the bankruptcy court sale order, and what was "property of the estate," are undoubtedly at the crux of the parties' disputes. The only place that one would find a bankruptcy court sale order and these post-sale issues is in the context of a bankruptcy case. Thus, the court determines that this is a core "arising  in" proceeding, pursuant to 28 U.S.C. §§ 157(b)(2)(A), (O) & 1334(b). It is a proceeding in which the bankruptcy court may enter final orders.

In re Hill, 2011 Bankr. LEXIS 5186 (Bankr. S.D. Tex. 12/30/11)(Jeff Bohm)

            Facts:  Chapter 13 trustee filed objection to exemptions and motion to modify confirmed plan.

            Holding:          Because proceeding arose under Bankruptcy Code and Rules, Court could enter a final order.   Public rights doctrine applied as well.

 

*In re Apex Long Term Acute Care-Katy, LP, 465 B.R. 452 (Bankr. S.D. Tex. 12/28/11)(Marvin Isgur)

            Facts:  Trustee brought four preference suits.   Trustee compromised three of the cases and sought to dismiss them with prejudice.  Trustee sought a default judgment on the fourth case. 

            Holding:  Court raised issue of its ability to enter the orders sua sponte.   Because dismissal with prejudice and default judgment constitute final orders, Court had to examine its authority.   After extensive analysis, Court concluded that it could enter final orders in cases where defendants filed claims because preference action was part of the claims adjudication process.    As to defendants who did not file claims, Court could enter final orders based on the public rights doctrine.”   Thia is a very scholarly opinion and should be the "go to" opinion for defending the ability of the bankruptcy court to enter final orders in a preference case.

 

In re Carroll, 464 B.R. 293 (Bankr. N.D. Tex. 12/13/11)(Barbara J. Houser)

            Facts:  Debtor filed for chapter 13 relief.   Creditor sought to liquidate claims and have them declared to be nondischargeable.    Debtor argued that court did not have jurisdiction.

            Holding:          Court had authority to enter final orders.   Stern clarifies “bankruptcy courts’ constitutional power, not their subject matter jurisdiction.”   “(T)here can be little doubt that this Court, as an Article I tribunal, has the Constitutional authority to hear and finally determine what claims are non-dischargeable in a bankruptcy case. Determining the scope of the debtor's discharge is a fundamental part of the bankruptcy process.”   Because Stern left intact Court’s ability to adjudicate a creditor’s claim, Court may liquidate amount of non-dischargeable debt.

*#In re Soporex, Inc., 463 B.R. 344 (Bankr. N.D. Tex. 11/28/11)(Barbara J. Houser)

            Facts:  Trustee filed complaint against officers and directors for breach of fiduciary duty and objections to claim.   Defendants filed motion to dismiss which did not raise a Stern issue.

            Holding:          Court raised Stern issue sua sponte.   Court concluded that it could not enter a final order on trustee’s counterclaims against insiders filing claims.    Court ruled that it could issue proposed findings and conclusions to the district court on statutory core proceedings where it lacked constitutional authority to enter a final order.   In dicta, Court noted whether parties could “remove the constitutional impediment identified by Stern by consent is unclear.”

Many are debating the breadth of the Supreme Court's decision in Stern. The arguments are interesting and, in some instances, mind-numbing. For today, I leave those arguments to others because I believe that the issue before me can be more simply, and practically, decided. It would be incredibly ironic for this Court to lack constitutional authority to finally determine the Trustee's breach of fiduciary duty and corporate waste claims against Smith and Sabolik (when they actually inserted themselves into Inc.'s bankruptcy case by filing a proof of claim) as the Supreme Court has clearly held in Stern, but to have constitutional authority to finally determine the Trustee's breach of fiduciary duty claims (arising from substantially the same acts or failures to act) against Linehan, the Outside Directors, and Letson, who chose not to involve themselves in the Debtors' bankruptcy cases at all until they were forced to do so by the Trustee's decision to sue them here. As a practical matter, this Court concludes that such a result is irreconcilable with the Supreme Court's analysis in Stern. If this Court lacks constitutional authority to finally determine  one set of breach of fiduciary duty claims against two former officers of certain of the Debtors, surely it lacks constitutional authority to finally determine substantially identical sets of breach of fiduciary duty claims against other former officers and/or directors of certain of the Debtors.

            As a result, the Court submitted proposed findings of fact and conclusions of law with regard to the motions to dismiss.

In re Whitley, 2011 Bankr. LEXIS 4545 (Bankr. S.D. Tex. 11/21/11)(Jeff Bohm)

            Facts:  Court issued order to show cause regarding compensation of attorney in chapter 13 proceedings.

            Holding:         

The dispute at bar is not a counterclaim of the Debtor, nor does it arise out of state law; therefore, Stern does not apply. This suit arises out of alleged violations of the disclosure requirements imposed by an express Bankruptcy Code provision--i.e. § 329. Moreover, the Trustee also seeks relief based upon another express Bankruptcy Code provision--i.e. § 330, which allows the Court to award or deny compensation to attorneys that represent the debtor and the debtor's estate. State law has no equivalent to these statutes; they are purely creatures of the Bankruptcy Code. Accordingly, the resolution of this dispute is not based on state common law, Stern does not apply, and this Court has the constitutional authority to enter a final judgment in this dispute pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Chao, 2011 Bankr. LEXIS 4543 (Bankr. S.D. Tex. 11/21/11)(Jeff Bohm)

            Facts:  Court issued Memorandum Opinion Regarding Sua Sponte Conversion of Case from Chapter 11 to Chapter 7.

            Holding:          Court found that it had authority to enter a final order converting the case from chapter 11 to chapter 7.

#In re Special Value Continuation Partners, LP,  2011 Bankr. LEXIS 4475 (Bankr. S.D. Tex. 11/15/11)(Marvin Isgur)

            Facts:  Lenders filed a state court action against officers and directors alleging that they provided misleading financial projections and made misrepresentations to obtain financing for company which filed bankruptcy.   Defendants removed case and requested that venue be transferred to Delaware.   Plaintiffs moved to abstain and remand.

            Holding:          One factor that court considered in denying motion to transfer venue and granting motions to abstain and remand was that court could not enter a final order under Stern.   “These are state law causes of action by nondebtors against nondebtors. The causes of action neither derive from nor depend upon any agency regulatory scheme.”

In re Noram Resources, Inc., 2011 Bankr. LEXIS 4268 (Bankr. S.D. Tex. 11/7/11)(Marvin Isgur)

            Facts:  Chapter 7 trustee brought suit against officers and directors asserting that they had breached their fiduciary duties under Canadian law.    Directors moved to dismiss.

      Holding:         

“After Stern, the Court's authority over state-law matters (or, in this case, foreign-law matters) is particularly questionable.”   However, Court still had authority to enter interlocutory orders, such as ruling on a motion to dismiss.

#In re Yazoo Pipeline Co., LP, 459 B.R. 636 (Bankr. S.D. Tex. 10/14/11)(Marvin Isgur)

            Facts:  Trustee filed suit to recover damages for misconduct occurring while debtor was in chapter 11.   Trustee filed motion for leave to file second amended complaint.

            Holding:         

Although the claims in this proceeding involve  conduct that took place within the context of a bankruptcy case, bankruptcy law does not alter the state-law character of the claims. The claims would not necessarily be resolved through the claims adjudication process or through the resolution of any other essential bankruptcy matter. This Court does not have authority to enter a final judgment in this matter. On this Court's Recommendation, the District Court has ordered that the reference will be withdrawn after all pretrial matters are concluded.

In re The Heritage Organization, LLC, 459 B.R. 911 (Bankr. N.D. Tex. 10/3/11)(Barbara J. Houser)

            Facts:  Several years after an adverse judgment, defendants moved to vacate the judgment under Rule 60(b)(4) based on the Stern decision.

            Holding:          Judgment is not void for want of jurisdiction unless nor arguable basis for jurisdiction existed in the first place.   Court had statutory jurisdiction.   Because Stern case was not decided for two years after judgment, court “declines to conclude that it lacked any arguable basis for jurisdiction.”

#In re Heights Melrose Group, LLC, 2011 Bankr. LEXIS 153073 (Bankr. S.D. Tex. 9/29/11)(Marvin Isgur)

            Facts:  Debtor filed suit to determine that defendants did not have a claim to certain condominiums.    Defendants claimed that foreclosure sale at which debtor purchased properties was invalid.   Both parties moved for summary judgment.

            Holding:          Court could not enter final orders on parties’ state law claims.   As a result, Court submitted proposed findings and conclusions to the District Court.

*In re Bigler, LP, 458 B.R. 345 (Bankr. S.D. Tex. 8/19/11)(Jeff Bohm)

            Facts:  Bank brought declaratory judgment complaint against other creditors to determine extent, priority and validity of liens.

            Holding:

The broader applicability of the Supreme Court's decision  remains unclear. Other types of disputes frequently decided by bankruptcy courts may now also require final adjudication by Article III courts. A bankruptcy court's authority over matters involving state law causes of action is particularly questionable. Indeed, just as the debtor's counterclaim in Stern was based entirely upon state law, the law governing the dispute in this adversary proceeding is based entirely upon state law. Accordingly, at first blush, it would appear that the undersigned Article I judge does not have the constitutional authority to enter a final judgment in this adversary proceeding. However, for the reasons set forth below, this Court concludes that it does have such authority.

This Court may exercise authority over matters integral to the bankruptcy scheme under the "public rights" exception articulated in Stern. Under Thomas v. Union Carbide Agric. Prods. Co., a right closely integrated into a public regulatory scheme may be resolved by a non-Article III judge.  (citation omitted). The Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including "the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a 'fresh start' by releasing him, her, or it from further liability for old debts." (citation omitted).

Here, this suit concerns a dispute that must be resolved in order to determine the appropriate distribution among the Debtors' creditors. The determination of lien priority on assets that were once property of the bankruptcy estate are part of the "public rights" exception, as it involves the exercise of the Bankruptcy Court's in rem jurisdiction over the estate. (citation omitted).

Hence, resolution of the lawsuit pending in this Court arises from an express provision of the Plan, the very purpose of which is to distribute cash to the prevailing party or parties--thereby accomplishing the very objective of the public right known as the bankruptcy process  (i.e. paying claims of creditors). (citation omitted). Therefore, not only does this lawsuit involve a right integral to the bankruptcy scheme--the determination of lien priority--but it also involves a right created by the Bankruptcy Code--distribution of property of the estate to creditors pursuant to the Plan. Accordingly, this dispute falls within the undersigned judge's constitutional authority to enter a final judgment.

In re Ritz, 459 B.R. 623 (Bankr. S.D. Tex. 8/4/11)(Jeff Bohm)

            Facts:  Creditor of a corporation asserted that debtor drained corporation of funds.   Creditor asserted claim against the debtor and sought determination of nondischargeability.

            Holding:          Court could enter a final order under the public rights doctrine.

In re Okwonna-Felix, 2011 Bankr. LEXIS 3028 (Bankr. S.D. Tex. 8/3/11)(Jeff Bohm)

            Facts:  Debtor sought approval of compromise of claims against insurance companies.

            Holding:         

Accordingly, because the resolution of the Motion is not based on state common law, but entirely on federal bankruptcy law (both the Rule and the case law instructing how to apply the Rule), the holding in Stern is inapplicable, and this Court has the constitutional authority to enter a final order in this contested matter pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Muhs, 2011 Bankr. LEXIS 3032 (Bankr. S.D. Tex. 8/2/11)(Marvin Isgur)

              Facts:  Creditor filed complaint to determine dischargeability.

            Holding:         

When a bankruptcy court determines the extent of a creditor's nondischargeable claim, the court simply decides that a particular creditor is entitled to something more than the creditor would otherwise get out of the bankruptcy bargain.  Such determinations are inextricably tied to the bankruptcy scheme and involve the adjudication of rights created by the Bankruptcy Code. This case therefore falls within the Bankruptcy Court's authority, and the Bankruptcy Court's judgment is final.

*In re Turner, 462 B.R. 214 (Bankr. S.D. Tex. 7/11/11)(Jeff Bohm)

            Facts:  Chapter 13 debtors filed Complaint for Turnover and Damages against Bank that froze account.

            Holding:          Complaint for turnover was based on automatic stay and not upon state law.

  

The automatic stay is one of the most important--if not the most important--features of the Bankruptcy Code, and it is integral to the public bankruptcy scheme. Its purpose is to enjoin all creditors from taking action against the debtor and the estate so that the debtor may have some breathing room to propose and obtain confirmation of a plan of reorganization which will pay creditors.  (citation omitted). A debtor has a fiduciary duty to his creditors to take the action necessary to pay their claims. (citation omitted). Given the central role of the automatic stay in the bankruptcy scheme, the broad effect of the automatic stay, and the fiduciary duty imposed upon debtors, this Court concludes that enforcement of the automatic stay fits within the "public rights" exception. The automatic stay protects not just one person or entity, but rather protects all of those persons and entities affected by the filing of a bankruptcy petition. (citation omitted). The debtor and the estate benefit because the stay is an injunction that enjoins creditors from unilaterally attempting to collect their respective claims against the estate. (citation omitted). Each of the creditors benefits because no other creditor may unilaterally take action against the estate--which means that the debtor has time to deliberately and carefully file a plan and then obtain confirmation so that all claims can be paid. (citation omitted). Stated differently, the existence of, and the benefits provided by, the automatic stay do not constitute a private right  of any one specific person or entity, but rather comprise a public right that inures to the benefit of all those persons involved in a bankruptcy. Without the enforcement of the automatic stay, reorganization of consumer debtors and business debtors throughout the country would be impossible and would undermine the public policy of allowing honest debtors to obtain a fresh start. Accordingly, because the undersigned judge concludes that the dispute at bar involves a "public right," the undersigned judge concludes that he has the constitutional authority to sign a final judgment in this adversary proceeding.

This is the first Texas opinion that I could find applying Stern v. Marshall.   Since this opinion, Judge Bohm has included a discussion of Stern v. Marshall in virtually every opinion he has written.