Remembering R. Glen Ayers (1947-2017)

R. Glen Ayers, who passed away on September 27, 2017,  was according to his obituary, "a force of nature in a bow tie."   He was a Southern gentleman.  He was at various times a professor, a judge, a practicing attorney and a Sunday School teacher.   He was a devoted family man.   To those of us who knew him as a bankruptcy professional, he was brilliant, irascible, and gracious often all at once.

The Life of Glen Ayers

Glen was born in Horry County, South Carolina.  He grew up feeding the chickens and hanging tobacco leaves.   He once described South Carolina as too small for a nation and too large for an asylum.

He graduated from Clemson in University in 1969.   At his funeral service, his law partner Bob Werner said that Glen could be counted on to state why Clemson was the champion, should have been the champion or would be in the future.   He earned a Master's Degree from the University of North Carolina in 1971 and served in the U.S. Army from 1971-72.

Glen met his wife Jan Miller Oldham on a blind date at Columbia College and married in 1972.   They had two children, Roderick and Claudia.    

Glen graduated summa cum laude from the University of South Carolina School of Law in 1975 and received an LLM from Harvard Law School in 1979.   If you are counting, that makes four degrees by the time he was 32.

Glen taught at St. Mary's Law School from 1981-1985.   According to Bob Werner, there were two types of lawyers in Bexar County, those who studied under Prof. Ayers and those who wished they did.    

Glen served as a Bankruptcy Judge for the Western District of Texas from 1985-1988.    More about that later.

After leaving the bench, Glen practiced in Washington, D.C. for a time and then returned to San Antonio where he practiced with Langley & Banack.    Bob Werner gave an anecdote about how Glen would be holding forth on some important story when the phone would ring with a call from a client or another counsel.   He said that Glen would pick up the phone and at that moment, whoever was on the phone would be the most important person in the world to him.   He would then resume the story in mid-sentence.    

Glen was a Sunday School teacher at United Presbyterian Church in San Antonio.   His friend, Robert Browning said that on the two Sundays before he passed away, they co-taught a class on Thomas Cahill's Heretics and Heroes.   Glen said that a heretic was someone who might one day be a hero.   His Pastor, Rev. San Williams, said that with Glen's death the collective IQ of the Sunday School class dropped precipitously.    

Pastor Williams used the text of Romans 14:7-9 to describe Glen's life, saying that he did not live to himself and neither did he die to himself.    In addition to his church work, he offered pro bono help to the San Antonio Battered Women's Shelter and the VA Clinic as well as helping individuals in need.

Glen leaves behind his wife of 45 years, Jan, his son Roderick, III, his daughter Claudia and her husband, George, granddaughter, Ellie and many family members and friends. 

The Bankruptcy Legacy of Glen Ayers

Glen came on to the Bankruptcy Bench in 1985 which was a tumultuous time in the bankruptcy world.   The jurisdictional scheme of the Bankruptcy Code had been declared unconstitutional the year before.    Texas was in the midst of a real estate crash which was flooding the courts with single asset chapter 11 filings.    Judge Ayers contributed thirty-six opinions to the fledgling West Bankruptcy Reporter which would not reach volume 100 until after his time on the bench.

In one of his earliest rulings, Judge Ayers reversed the Fifth Circuit.    In the case of In re Thompson, 59 B.R. 690 (Bankr. W.D. Tex. 1986), Judge Ayers discussed a recent Fifth Circuit decision stating:

Most commentators have found Allen to be a less than satisfactory opinion. Quite simply, the ruling is incorrect.

When Judge John Akard followed Judge Ayer's decision in In re Rogers, 63 B.R. 686 (Bankr. N.D. Tex. 1986), he was reversed.   This prompted Judge Akard to remark that he only followed the Western District of Texas once and he regretted it.   

In another early opinion, In re Hurbace, 61 B.R. 563 (Bankr. W.D. Tex. 1986), he ruled that equal co- partners did not owe each other a duty to account within the meaning of 11 U.S.C. Sec. 523(a)(4), a conclusion the Fifth Circuit would later reach in Matter of Gupta, 394 F.3d F.3d 347 (5th Cir. 2004), some eighteen years later.    

Another groundbreaking case was In re SI Acquisition, Inc., 58 B.R. 454 (Bankr. W.D. Tex. 1986) where he ruled that a creditor's suit against non-bankrupt parties seeking to pierce the corporate veil was not subject to the automatic stay.   While the Fifth Circuit disagreed with him, the case involved one of many areas that were unclear in the early days of the Bankruptcy Code.   

In In re Estate of Patterson, 64 B.R. 807 (Bankr. W.D. Tex. 1986), Judge Ayers ruled that a probate estate was not a "person" qualified to file bankruptcy.   

In re Fry Associates, Ltd., 66 B.R. 602 (Bankr. W.D. Tex. 1986) was an early decision discussing the concept of a bad faith filing for a single asset real estate entity.   However, in In re Oakgrove Village, Ltd., 90 B.R. 246 (Bankr. W.D. Tex. 1988), he declined to enter sanctions against a debtor exhibiting new debtor syndrome where the debtor reasonably believed that the bank would accept a workout proposal and did not oppose relief from the automatic stay.

In In re Triplett, 87 B.R. 25 (Bankr. W.D. Tex. 1987), Judge Ayers ruled that an objection to use of cash collateral should not be a substitute for a motion to dismiss or convert under Sec. 1112.    The Court wrote:  

 Here, the focus on collateral and its use interferes with proper analysis of the case. Instead of being concerned with one item of "cash", the creditor should draw the court's attention to all of the problems with the case so that the debtor can either be placed on a timetable, the case converted, or the case dismissed.

In a footnote he pointed out that both of the lawyers had been his law students and were used to his editorializing.   

In re Kipp, 86 B.R. 490 (Bankr. W.D. Tex. 1988) established that a party could not conduct a Rule 2004 examination when it had a pending adversary proceeding.

Judge Ayers dealt with creative classification in the case of In re Meadow Glen, Ltd., 87 B.R. 421 (Bankr. W.D. Tex. 1988) where he did not allow a secured creditor's deficiency claim to be separately classified from other unsecured creditors.   The ruling predicted the Fifth Circuit's holding in Matter of Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1992) which also took a restrictive approach to classification (although the Fifth Circuit later moderated its position).   

In his final opinion, In re Abramoff, 92 B.R. 698 (Bankr. W.D. Tex. 1988), Judge Ayers ruled that a prepayment penalty combined with a due on sales clause constituted an unreasonable restraint on alienation and would not be enforceable under Texas law.    One of the lawyers on the case was Ronald King, who would shortly take Judge Ayers' place on the bench.

After leaving the bench, Glen Ayers had a long and productive career practicing in Washington, D.C. and San Antonio, Texas.   The cases that he tried as an attorney encompassed issues ranging from professional compensation, trustee liability, PACA, chapter 11 reorganization and property of the estate.

Final Thought

At the time that Glen passed away, we were working on a case together.   In our last conversation, he inquired, as he always did, about the health of one of my colleagues who had been experiencing some medical issues.   That was Glen Ayers.

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.

 

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.

Texas Judge Says You Can Do It Right or Just Wing It

Texas Bankruptcy Judge Tony Davis had some sound advice for persons setting off on a business venture.   In fact, his words should be mandatory reading in business schools and forums where would be entrepreneurs frequent.    He wrote:

When two individuals decide to join forces and form a business venture, they can take one of two paths. The first is to seek and pay for sound legal advice to define and structure their relationship and fairly allocate business risks, and to pay for sound financial advice to properly project future financial performance and accurately record the past. Or they can eschew the advice, save a little money, and just wing it. And that can work out fine in those few cases where the venture succeeds and prospers. But failure occurs far more often. And where, as here, business failure goes along with a lack of proper documentation, the parties can end up in litigation, and the attorney fees paid to litigation counsel are many times the fees that would have been paid for proper legal and financial advice up front.

Higgs v. Colliau (In re Colliau), Adv. No. 15-1118 (Bankr. W.D. Tex. 5/24/17).

Unfortunately, bankruptcy lawyers know this story all too well.   By the time that clients get to us, the time to properly document the deal is long gone and the once friendly parties are antagonistic.

However, there is still some wisdom for bankruptcy lawyers here.  A plan of reorganization is a contract.    Careful plan drafting can avoid litigation down the road.  As the late bankruptcy Judge Larry Kelly once said, "You guys drafted this plan and you voted for it and now you're asking me to tell you what you meant?"    Careful drafting up front and bringing in transactional lawyers when needed can save a lot of expense down the road.

Disclosure:  I initially represented the plaintiff in this case.   However, I did not try the case.

Fifth Circuit Report: 1st Quarter 2017

It has been a while since I have done a Fifth Circuit report.   With the new year, I am going to try to get back to chronicling each quarter's decisions from my home circuit.

Breach of contract; attorney's fees; abuse of process; malicious prosecution; sanctions; due process

Texas Capital Bank v. Dallas Roadster, Ltd. (In re Dallas Roadster, Ltd), 846 F.3d 112 (5th Cir. 1/17/17)

This case has only a tenuous connection to bankruptcy but it includes many of the types of issues that lenders and borrowers litigate.    Texas Capital Bank financed Dallas Roadster.   The DEA informed the Bank that it was investigating the Debtor for money laundering.   The DEA ultimately raided the Debtor and arrested its president.    One day prior, the Bank declared the Debtor to be in default.   After the raid, the Bank filed suit and obtained a receivership on an ex parte basis using an affidavit that contained false statements.   Dallas Roadster filed chapter 11 and got its business back from the receiver.   The state court litigation between the Bank, the Debtor and the guarantors was removed to federal court.   The Debtor confirmed a plan in which it provided for all of the Bank's claims except for attorney's fees arising from the Litigation.   

The District Court granted summary judgment against the Guarantors on their counterclaims against the Bank.  The case went to trial on the Bank's claim to recover its attorney's fees incurred in the Litigation and the Debtor's breach of contract claims against the Bank.   The District Court denied recovery to both parties.   It found that the Debtor could not recover for breach of contract because it had materially breached the contract first.   The District Court ruled that the Bank could not recover attorney's fees for defending itself against claims of wrongdoing and also used its inherent authority to sanction the Bank and deny attorney's fees.

The Fifth Circuit affirmed denial of the counterclaims and also affirmed the ruling denying the Debtor's breach of contract claims.   However, it reversed the findings against the Bank.   It found that the District Court had made an incorrect Erie guess as to how Texas courts would rule.  It also found that the District Court was permitted to sanction the Bank but had to provide it with due process before doing so.

The opinion has a good discussion of the difference between abuse of process and malicious prosecution.    A claim for abuse of process must show that process was improperly used after it was issued.   On the other hand, a claim that malice or wrongful intent caused the process to be issued the claim is one for malicious prosecution.  Because the Guarantors sued for abuse of process based on obtaining the receivership they did not have a claim.   A claim for criminal malicious prosecution must show that a person provided false information to the prosecuting party and that this party acted in reliance on the false information.    The claim by the Debtor's president that the Bank did not provide the DEA with exculpatory evidence was not sufficient to give rise to a claim for criminal malicious prosecution.

The Fifth Circuit held that the Debtor breached the loan agreements prior to the date that it claimed that the Bank breached the agreements.   The court rejected the Debtor's arguments that its breaches, which consisted of obtaining other financing without notifying the bank, were not material.   The District Court properly weighed the factors identified in Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195 (Tex. 2004) to determine that the breaches were material.  In particular, the reporting violations deprived the Bank of benefits it had negotiated for and placed it at risk.   Because the Debtor breached first, it could not complain about the Bank's subsequent defaults.   

The Court's ruling on the Bank's claim for attorney's fees incurred in the litigation involved an "Erie guess," that is, a prediction as to how Texas courts would resolve an issue of first impression.    In Zachary Construction v. Port of Houston Authority, 449 S.W.3d 98 (Tex. 2014), the Texas Supreme Court found that a contractual provision which would insulate a party from liability based on its own misconduct was unenforceable.   The contract between the parties contained a no damages for delay provision.   However, the Port deliberately and intentionally interfered with Zachary's performance.  In that context, the Texas Supreme Court found that the Port could not use the no damages for delay provision to shield itself from liability for its own misconduct.   The District Court concluded that Texas courts would extend this ruling to the case where the lender sought to recover attorney's fees for defending itself from claims of wrongdoing.    The Fifth Circuit found that there was a material difference between using a contractual provision to shield itself from wrongdoing as opposed to recovering the cost of successfully defending itself.   

The Fifth Circuit also reversed and remanded the District Court's sanctions award against the Bank.   The District Court found that where litigation was "instigated or conducted in bad faith or there's been willful abuse of the judicial process" it could dismiss claims under its inherent authority.   The Fifth Circuit found that the District Court did have the inherent authority to dismiss claims based on vexatious litigation.   However, before doing so, it had to give notice to the party against whom sanctions were sought and give it the chance to respond.   Because the District Court issued the sanctions sua sponte, it deprived the Bank of due process and a remand was required.

Diversity jurisdiction; fraudulent transfers

Hometown 2006-1 1925 Valley View, LLC v. Prime Asset Income Management, Ltd., 847 F.3d 302 (5th Cir. 2/3/17)

This case raised issues required citizenship for diversity jurisdiction purposes and what constitutes property under the Uniform Fraudulent Transfer Act.    Hometown obtained a judgment against Prime.  Prime had been a party to three management contracts which could only be terminated upon sixty days' notice.   The other parties to the contracts terminated them without giving the required notice and Prime acquiesced.   Hometown then sued the contract counterparties in U.S. District Court on the basis that waiving the fees due during the 60 day cancellation period was a fraudulent transfer.    The District Court dismissed finding that the contracts were not "assets" which could be transferred under TUFTA.

On appeal, the Fifth Circuit considered whether diversity jurisdiction was present.   Hometown was a Texas limited liability company with one member, U.S. Bank.  Citizenship of an artificial entity other than a corporation is based on the citizenship of its members.   U.S. Bank is a citizen of Ohio.  However, U.S. Bank was trustee of a trust.   Therefore the Defendants argued that it was necessary to determine the citizenship of each of the beneficiaries of a trust.   The Fifth Circuit rejected this argument, finding that citizenship of a trust is based on the citizenship of the trustee.   Because none of the defendants were from Ohio, there was diversity.   This ruling surprised me because I assumed that the citizenship of an LLC, which is a form of company, would be based on its state of formation.  However, this is not the case.

The District Court had relied on several Seventh Circuit cases which had held that termination of a contract according to its provisions was not a transfer of an asset under the Uniform Fraudulent Transfer Act.   The Fifth Circuit said:

We agree. The rub is that the contracts here were not freely terminable. Rather, the Advisory Agreements provided for termination without cause upon sixty days' written notice.

As a result, termination of the contracts without giving 60 days' notice transferred the fees which would have been paid to the judgment debtor to the contract counterparties.   That was a transfer of property.   As a result, the Complaint stated a cause of  action and should not have been dismissed.

Diversity jurisdiction

Foster v. Deutsche Bank National Trust Co., 848 F.3d 403 (5th Cir. 2/8/17)

Homeowner sued lender and trustee in state court to enjoin a foreclosure sale.   The lender removed the case to federal court.    The district court denied a motion to remand based on lack of diversity.  It dismissed the homeowner's claims with prejudice.   The Fifth Circuit affirmed.

The Fifth Circuit agreed that the trustee was improperly joined.   It found that violation of the trustee's duties under the deed of trust would give rise to a claim for wrongful foreclosure.   However, because no foreclosure took place, this claim could not be asserted.    As a result, joining the substitute trustee as a defendant did not defeat diversity jurisdiction.   The Fifth Circuit found that Texas would not recognize a claim for attempted wrongful foreclosure.  As a result, it affirmed the dismissal of the homeowner's claims.   This left the lender free to post the property for a future foreclosure.

Denial of discharge

Chu v. Texas (In re Chu), 2017 Bankr. LEXIS 2370 (5th Cir. 2/9/17)(unpublished)

An orthodontist filed bankruptcy following accusations of Medicaid fraud.   The State of Texas filed suit to deny this discharge.   After a trial, the Bankruptcy Court denied the discharge under 11 U.S.C. Sec. 727(a)(4) and (a)(5).   The Fifth Circuit affirmed.

The Debtor argued that the State lacked standing to object to his general discharge because its debt would be non-dischargeable under 11 U.S.C. Sec. 523(a)(7).  The Fifth Circuit rejected this argument as speculation.  Because there was no final determination of the underlying claim, the State had constitutional standing to object to the global discharge. 

 The Court rejected the Debtor's argument that the Bankruptcy Court had aggregated his false statements to reach a conclusion of reckless indifference to the trust.   Instead, the Court found that the bankruptcy court was permitted to gauge the "cumulative effect of false statements." 

The Court found that the Debtor had failed to account for loss of assets.   In a personal financial statement four years before bankruptcy, the Debtor had listed assets of $75,500, including jewelry and watches.  In his schedules, he listed only $11,000 in household items, books and pictures worth $1,000 and a ring valued at $500.   Based on the Bankruptcy Court's finding that the Debtor had failed to offer a viable explanation for what happened to the assets, the Fifth Circuit affirmed the ruling that the Debtor had failed to account for assets.

 Federal Debt Collection Practices Act; turnover

United States v. Diehl, 848 F.3d 629 (5th Cir. 2/13/17)

This case involved another statute abbreviated as FDCPA, the Federal Debt Collection Practices Act.   The Court found that the FDCPA in its case did not prohibit the government from using the Texas Turnover Statute to collect a debt owed to the government.

Homestead exemption; fraudulent transfer

Wiggains v. Reed (In re Wiggains), 848 F.3d 655 (5th Cir. 2/14/17)

Debtor and spouse partitioned homestead on eve of bankruptcy to avoid limit on homestead exemption under 11 U.S.C. Sec. 522(p).   Court found that maximizing homestead was not sufficient reason to avoid partition as a fraudulent transfer.    Additionally, wife had no right to compensation under 11 U.S.C. Sec. 363(j) because entire community property interest entered estate.

Automatic Stay

Gathright v. Clark, 2017 U.S. App. 3258 (5th Cir. 2/23/17)

Automatic stay in bankruptcy did not preclude creditor from filing bad check charges.  Criminal actions are exempt from the stay.

Bankruptcy fraud

United States v. Grant, 850 F.3d 209 (5th Cir. 3/1/17)

Debtor filed five bankruptcy cases between 2008 and 2011.   In two of her cases, Debtor only disclosed one of her two social security numbers.   In another case, she failed to disclose two of her prior bankruptcies.   She was convicted on three counts of perjury and sentenced to fifteen months imprisonment..

Fraudulent transfer; damages

Galaz v. Galaz (In re Galaz). 850 F.3d 800 (5th Cir. 3/10/17)

Raul Galaz was married to Lisa Galaz.   He owned 50% of Artists Rights Foundation.   When they divorced, Lisa received 50% of Raul's 50% interest.    However, Raul transferred ARF's assets to another entity for no consideration.    Lisa filed chapter 13 bankruptcy and sued to avoid the transfer.  Julian Jackson, who owned the other 50% of ARF, sued Raul for breach of fiduciary duty.   The Bankruptcy Court ruled for Lisa and Julian awarding actual and exemplary damages. 

In the first appeal to the Fifth Circuit, the Court reversed and remanded.  The Court found that the Bankruptcy Court had no jurisdiction over the claims between Julian and Raul.   It also found that the Bankruptcy Court lacked jurisdiction to enter a final judgment on Lisa's claims against Raul.   On remand, the District Court referred the matter to the Bankruptcy Court for proposed findings and conclusions.   Based on the Bankruptcy Court's proposed findings, the District Court awarded actual and exemplary damages to Lisa.

The Fifth Circuit upheld the findings of liability.   Fraudulent intent was a question of fact reviewed under the clearly erroneous rule.   Court found that at least six badges of fraud were present.

The Fifth Circuit affirmed the award of $241,309.10 in actual damages to Lisa.   This was based on 25% of royalties received of $969,317.92 less certain reasonable expenses.    Appellants argued that the royalties should have been valued as of the time they were transferred (at which time value was negligible).   However, statute allowed the court to adjust the value "as the equities may require."   The Court also affirmed the award of $250,000.00 in exemplary damages.   Court found that factual finding that loss was caused by fraud, malice or gross negligence was not clearly erroneous.

Sanctions; All Writs Act

Carroll v. Abide (In re Carroll), 850 F.3d 811 (5th Cir. 3/13/17)

This is a sanctions case.   The Carrolls and their wholly owned company filed chapter 7 and were substantively consolidated.   The Carrolls engaged in "troublesome conduct" that "displayed (a) pattern of harassment" toward the trustee.    The Bankruptcy Court enjoined them from filing any further pleadings without court permission and awarded sanctions under 11 U.S.C. Sec. 105(a) in the amount of $49,432.  

The Court set out the standard for awarding sanctions under its inherent authority and enjoining vexatious litigants.

We begin by noting the bankruptcy court has numerous tools by which to sanction the conduct of individuals. "Federal courts have inherent powers which include the authority to sanction a party or attorney when necessary to achieve the orderly and expeditious disposition of their dockets."  "Such powers may be exercised only if essential to preserve the authority of the court and the sanction chosen must employ the least possible power adequate to the end proposed."  A court must make a specific finding of bad faith in order to impose sanctions under its inherent power.  Moreover, when sanctions are imposed under the inherent power, this court's "investigation of legal and evidentiary sufficiency is particularly probing" and this court must "probe the record in detail to get at the underlying facts and ensure the legal sufficiency of their support for the district court's more generalized finding of 'bad faith.'" 

Federal courts also have authority to enjoin vexatious litigants under the All Writs Act, 28 U.S.C. § 1651.  Moreover, under 11 U.S.C. § 105, "a bankruptcy court can issue any order, including a civil contempt order, necessary or appropriate to carry out the provisions of the bankruptcy code."  When considering whether to enjoin future filings, the court must consider the circumstances of the case, including four factors:

(1) the party's history of litigation, in particular whether he has filed vexatious, harassing, or duplicative lawsuits; (2) whether the party had a good faith basis for pursuing the litigation, or simply intended to harass; (3) the extent of the burden on the courts and other parties resulting from the party's filings; and (4) the adequacy of alternative sanctions.

  830 F.3d at 815. (internal citations omitted).

The Court had no trouble sustaining a finding of bad faith, stating,  

Appellants' suggestion that their conduct was not done in bad faith is belied by their repeated attempts to litigate issues that have been conclusively resolved against them or that they had no standing to assert and by their unsupported and multiple attempts to remove Abide as the trustee

The amount of the sanctions award was affirmed because it represented the amount of attorneys' fees incurred by the trustee in responding to the Carrolls' conduct.

Voidable preference

Tower Credit, Inc. v. Schott (In re Jackson), 850 F.3d 816 (5th Cir. 3/13/17)


 The Trustee sued to avoid a wage garnishment as a preferential transfer.   The Defendant argued that the transfer occurred when the garnishment order was issued, which was more than 90 days before bankruptcy.    The Court found that a transfer is made when it is "perfected," that is, when a judgment creditor could not obtain superior rights in the property.   However, a transfer also is not made until the debtor has rights in the property.   As a result, each time the debtor obtained wages and the garnishment lien reached those wages was a new transfer.   Therefore, the Court affirmed the judgment in favor of the trustee.

 Proof of claim; res judicata

Kipp Flores Architects, LLC v. Mid-Continent Cas. Co., 852 F.3d 405 (5th Cir. 3/24/17)

This case involved the effect of a proof of claim in subsequent litigation.   A creditor filed a proof of claim in a no-asset bankruptcy case.   No party objected to the claim.    The creditor then argued that because the proof of claim was "deemed allowed," it was res judicata in the creditor's subsequent claim against the debtor's insurance company.    The Court found that the claim did not have any preclusive effect where there was never a deadline to object to claims and adjudicating the claim would not have served a bankruptcy purpose.   

Sanctions

Armendariz v. Chowaiki, 2017 U.S. App.  LEXIS 5531 (5th Cir. 3/30/17)(unreported)

Plaintiffs sued various parties for RICO based on a fraudulent transfer action brought in U.S. Bankruptcy Court.    The District Court dismissed the suit but denied a motion for sanctions under Rule 11.    The Court did not give reasons for its denial of the sanctions motion.   The Fifth Circuit affirmed the order dismissing the suit.   However, it reversed and remanded the denial of sanctions.  The Court explained that when a court grants or denies sanctions, it must provide reasons sufficient for the reviewing court to determine the basis for the ruling.  

Supreme Court Says Structured Dismissals Must Follow Priority Scheme

In a blow to creative lawyering, the Supreme Court ruled today that a structured dismissal which allocates value contrary to the priority scheme of the Bankruptcy Code may not be approved.   Czyzewski v. Jevic Holding Corp., No. 15-649 (U.S. 3/22/17).   You can find the opinion here.

District Court Rules that Proceeds of a Texas Homestead Sold Post-Petition Lose Their Protection After Six Months in a Chapter 7 Case

Overruling a bankruptcy court decision, a District Judge in the Western District of Texas has ruled that proceeds from sale of a homestead can be recovered if not timely reinvested in a Chapter 7 case.   The Court ruled that the Frost decision applied equally in both a Chapter 13 and a Chapter 7 setting.   Lowe v. DeBerry, No. 5:15-cv-1135-RCL (W.D. Tex. 3/10/17).    The opinion can be accessed through PACER here.    The opinion raises serious questions about whether an exemption can ever be truly final.

Non-Filing Spouse Suffers Another Texas Homestead Loss

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") capped the amount of a homestead exemption which could be claimed by a debtor that acquired a homestead within 1,215 days prior to bankruptcy.    Currently, the amount of the cap, as set by 11 U.S.C. Sec. 522(p), is $160,375 in equity per debtor.  This cap has resulted in a seismic shift in Texas where the unlimited homestead exemption is part of the State Constitution.   Now debtors' attorneys must learn how to count to 1,215 and calculate the allowable equity before filing a bankruptcy petition. However, what of the case where only one spouse files?   The short answer is that all community property enters the bankruptcy estate and that the cap is based on the one spouse that filed.   This means that the non-filing spouse can be involuntarily divested of her otherwise sacrosanct homestead interest.    The Fifth Circuit has now ruled on three different variations of this scenario and in each case, including the recent decision in Wiggains v. Reed  (Matter of Wiggains), No. 15-11249 (5th Cir. 2/14/17), which can be found here, the non-filing spouse has come up short.

Texas Supreme Court Limits Remedies for Home Equity Loan Violations

By Michael V. Baumer

Law Office of Michael Baumer

Austin, TX

This is a very long post describing some recent case law with respect to home equity litigation in Texas. These events are significant to a consumer bankruptcy practice, but if the subject is of no interest, you may want to skip it.

The Texas Supreme Court issued two opinions on May 20, 2016 regarding issues related to the home equity loan forfeiture provisions of the Texas Constitution. These opinions make significant changes to Texas case law regarding applicability and enforcement of those provisions. The first case was Garofolo v. Ocwen Loan Servicing, L.L.C., 497 S.W.3d 474 (Tex.2016) and the second is Wood v. HSBC Bank USA, N.A., 2016 WL 2993923 (Tex.2016). It is important that the cases are read in sequential order as Wood relies on Garofolo in reaching its conclusion. (All references to the Texas Constitution herein are to Article XVI, section 50(a)(6) and its subsections unless otherwise noted.)

Litigators Beware! Judge Gorsuch is a Stickler on Procedural Matters (Except When He Isn't)

This continues a series on the bankruptcy opinions of Neil Gorsuch, President Trump's nominee for the Supreme Court seat vacated by the death of Antonin Scalia.   One point which is clear is that Judge Gorsuch strongly believes that rules should be followed and is not sympathetic to arguments that procedural failures may be excused.

Did Gorsuch Expand Bankruptcy Court Referral Power?

Newly minted Supreme Court nominee Neil Gorsuch sat on the Tenth Circuit for ten years.  During that time, he signed on to eleven opinions regarding bankruptcy, which means that he wrote about bankruptcy around once a year.    None of his opinions are particularly well-known.  (In contrast, fellow finalist Thomas Hardiman authored the opinion in Official Committee of Unsecured Creditors vs. CIT Group/Business Credit, Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3rd Cir. 2015) which is currently before the Supreme Court).    However, these opinions demonstrate his crisp writing style and offer some insights into his judicial thinking.   I am going to look at one of his opinions in depth and follow up with a separate post on his remaining decisions.

Minnesota Judge Shows Disclosure Statement Wisdom

The case for The Archdiocese of St. Paul and Minneapolis, No. 15-30125 (Bankr. D. Minn.) has been an extremely contentious one.   The Debtor and the Official Committee of Unsecured Creditors have different ideas on how to compensate sexual abuse claims and have submitted competing plans.    Not surprisingly, both parties objected to the other's disclosure statement.    The orders entered by Judge Robert Kressel show remarkable wisdom about how the disclosure statement process works in the real world.    

Dismissal Ruling Full of Disney Allusions

Judge H. Christopher Mott of the Western District of Texas is known to fill his opinions with references to movies and pop songs.   His latest opinion in Xtreme Power Plan Trust v. Schindler, et al (In re Xtreme Power, Inc.), No. 16-1004 (Bankr. W.D. Tex. 12/22/16) continues this trend with allusions to Disney's Frozen, an ironic reference given the current warm weather in Austin.   

The opinion begins:

This type of lawsuit has become somewhat commonplace—directors of a now defunct corporation are sued for breach of fiduciary duties. Here, the parties are currently “Frozen” in battle—as the Defendants filed motions to dismiss under Rule 12(b)(6), echoing “Indina Menzel” to demand that the Plaintiff just “let it go.” For the most part, the Court agrees with the Defendants and will send all but a single claim to a wintery grave.

Opinion, pp. 1-2.

Following a lengthy opinion, the Court allowed a claim against four directors for breach of the duty of loyalty to proceed while concluding that "the remainder of the Complaint skates on such thin ice that it must be dismissed under Rule 12(b)(6)." 

While I do not have time for a lengthy analysis, click on the style of the case above to read it.   It is useful reading for those litigating director and officer liability claims.

Circuit Split Emerging on Dischargeability of Late Returns

There is an emerging circuit split as to whether late filed tax returns can ever be considered to be “returns.”   The issue arises because BAPCPA included a paragraph stating that a return “means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements.”    This is known as the hanging paragraph of section 523(a) because it appears following section 523(a)(19) without any other designation.

Protection for Religious Entities in Bankruptcy

This is an article that I wrote for the National Conference of Bankruptcy Judges this year.

Freedom of religion is enshrined in the First Amendment to the Constitution which protects the free exercise of religion, as well as legislation such as the Religious Freedom Restoration Act[1] the Religious Land Use and Institutionalized Persons Act of 2000[2] and the Religious Liberty and Charitable Donation Protection Act[3].   When religious and secular parties clash in bankruptcy court the constitutional and statutory protections of religion are often invoked but rarely successful.   This paper will give a brief overview of the issues.

NCBJ Report 2016: Restructuring and Bankruptcy Challenges in the 21st Century World of Not for Profits

This was the first of two educational programs sponsored by the Commercial Law League of America.   I had the privilege of appearing on a panel featuring moderator Beverly Weiss Manne, Prof.  Pam Foohey, Sam Maizel and Nancy Peterman.   Prof. Foohey and I focused on religious entities in bankruptcy, while Sam Maizel and Nancy Peterman discussed healthcare non-profits.   

Types of Cases Filed

On the church side, Prof. Foohey's research shows that 654 churches filed bankruptcy between 2006 and 2013.   The vast majority of these churches were African American congregations.    Some of the notable filings during 2016 included Carter Tabernacle Christian Methodist Episcopal Church, a 100 year old congregation in Orlando and Metropolitan Baptist Church in the District of Columbia.    Since 2004, fifteen Catholic Dioceses and religious orders have sought chapter 11 protection to resolve sexual abuse claims.   Two examples of these cases are the Diocese of Stockton which is proceeding toward a consensual confirmation following a two year mediation process and the Diocese of St. Paul and Minneapolis, MN where competing plans have been proposed by the Diocese and the Committee of Unsecured Creditors.    Finally, a handful of predominantly white mega-churches, such as the Crystal Cathedral and Great Hills Baptist Church have entered chapter 11 proceedings.   On the healthcare side, there have been at least nine hospital bankruptcies filed this year.   However, healthcare filings range from community hospitals to skilled nursing facilities.    In re Bayou Shores, SNF, LLC, 828 F.3d 1297 (11th Cir. 2016) is an example of the issues that can arise in the healthcare sector.

NCBJ Report 2016: From Detroit to San Juan--Perspectives on Municipal and Territorial Restructurings

The Commercial Law League of America held its annual luncheon at NCBJ featuring the Lawrence King Award and a keynote speech by Andy Dillon.

Bankruptcy Judge Dennis Montali received this year's King Award, joining such luminaries as Elizabeth Warren, Steven Rhodes and Gene Wedoff.   Among his accomplishments, Judge Montali sailed from San Francisco to Hawaii when he was only seventeen.    He served in the Navy.   As a practitioner, he helped to craft the emergency rule which allowed the courts to function after the Marathon decision.  He was appointed to the bench in 1993 and presided over the Pacific Gas & Electric case.   He gave a heartfelt acceptance speech in which he emphasized his commitment to treating each case as if it was his most important.

Andy Dillon was the keynote speaker.  Mr. Dillon was speaker of the Michigan House of Representatives before becoming Michigan's State Treasurer.   As Treasurer, his responsibilities included placing failing cities, including Detroit, into receivership.    More recently, he has advised Puerto Rico on its financial issues through his association with Conway McKenzie.    

NCBJ Report 2016: Hot Spots in a Cold Restructuring World: Energy and Healthcare Restructuring

This panel examined energy and healthcare reorganizations.   The unifying theme of this panel was that industries that are highly regulated, highly leveraged and lack control over their prices are prime candidates for bankruptcy.   According to the moderator, Judge Margaret Mann, the panel hoped to make its presentation relevant to practitioners regardless of whether their typical client was a gas station or dentist as opposed to a major oil producer.   Judge Mann said that these two areas are "vital to the economy and heavily regulated."

Bill Wallander explained that the energy industry was in a mess because oilprices dropped from $110 per barrel to $26, although they have recovered to $50.   He said that companies had made their plans based on being able to survive at $70-80 a barrel but that prices kept dropping.  He did add that companies that hedged were able to hold on later but that many did not have sufficient hedges.  Ana Alfanso stated that banks didn't see the drop coming either.   She stated that the crisis highlighted the problem with asset based lending.   She added that cash was a major issue because companies without cash could not drill.

NCBJ Report 2016: Broken Bench Radio

The first plenary session of NCBJ was Broken Bench Radio, a fast-paced discussion of hot topics in the form of a radio call-in show.   It covered insights from the Caesar's Entertainment case, upcoming Supreme Court decisions, recharacterization, equitable mootness, Chapter 13 updates, the CFPB and the Husky case.  

Insights From Caesar's Entertainment

James Sprayregen was the first caller in to the show.   He talked about the Caesar's Entertainment case.    He repeatedly alluded to the interesting issues that could have been decided, such as the involuntary petition filed against the company and the section 105 injunction in favor of the parent company, if only the case hadn't settled.   His best quote was "Settlement negotiations are never over and the activities in the courtroom are an extension of the settlement negotiations.

Upcoming Supreme Court Decisions

Prof.  Erwin Chemerinsky gave a brief public service announcement about two upcoming Supreme Court cases:  Czyzewski v. Jevic Holding Corp and Midland Funding, LLC v. Johnson.   The Supreme Court has granted cert in both of these cases.   Jevic is about whether a  settlement agreement resulting in a structured dismissal can violate the priority scheme under the Bankruptcy Code.   Midland Funding deals with the question of whether it is a violation of the Fair Debt Collection Practices Act to file a proof of claim that is barred by the statute of limitations.   This is an issue where the Eleventh Circuit, which says yes, is at odds with at least three other circuits.  I have a case on this issue pending before the Fifth Circuit so it is of special interest to me.

NCBJ Report 2016: The Streets of San Francisco

I am resuming my coverage of the National Conference of Bankruptcy Judges this year.   Last year the demands of work kept me off the blog.   NCBJ 2016 is taking place in San Francisco.  A few random observations.    People in San Francisco wear jackets even when it isn't cold.   There are mica specks in the sidewalk that make them glitter when the light hits them.   The Golden Gate Bridge looks incredible when it is lit up at night. 

Another observation is that San Francisco is one of the most expensive cities to live in.  I am told that a 700 square foot teardown sells for a million dollar.  However, in walking the streets, I noticed that they were teeming with milennials.    It makes me wonder where they live and how they live.

I started NCBJ wondering why I agreed to wake up at 5:00 a.m. to go running.   This year was the Seventh Annual Wake Up and Run event.   About 70 runners got to experience the darkened streets of San Francisco and the waterfront for a 5k fun run. The turnout was impressive given the early hour and the prior night's festivities.  As usual, I finished near the back of the pack but I was not alone.   It was a good way to start the conference and see some of the City.   

Arizona District Court Applies Section 1129(a)(10) on a Per Plan Basis

One challenge in confirming a chapter 11 plan is finding an impaired accepting class without counting votes of insiders as required by 11 U.S.C. Sec. 1129(a)(10).   A new opinion from the District Court of Arizona makes that job easier in cases with jointly administered debtors.   In re Transwest Properties, Inc., 2016 U.S. Dist. LEXIS 102575 (D. Ariz. 6/22/16).  

The Transwest case involved five cases that were jointly administered but not substantively consolidated.    The organizational structure consisted of a holding company, two mezzanine companies and two operating companies.   The debtors proposed a plan in which the mezzanine debtors would be dissolved and the operating companies would be owned by an investor contributing new capital under the plan.    The principal secured creditor (Lender), which had acquired the mezzanine debt during the case, voted against the plan.   Lender argued that because it held the only claim in the mezzanine debtor cases that the plan could not be confirmed under section 1129(a)(10).   The bankruptcy court approved the plan.   Lender appealed.    On the first appeal, the district court dismissed the case as equitably moot.   The Ninth Circuit reversed and sent the case back to the district court.

On remand, the District Court noted a split in authority as to whether section 1129(a)(10) applied on a per plan or a per debtor basis.   The Lender relied on two cases from the Bankruptcy Court of Delaware to argue that there had to be an accepting vote in each case.  In re Tribune, 464 B.R. 126 (Bankr. D. Del. 2011), and In re JER/Jameson Mezz Borrower II, LLC, 461 B.R. 293 (Bankr. D. Del. 2011).    The Debtors relied on cases from the bankruptcy courts for the Southern District of New York and Middle District of Pennsylvania.  In re SPGA, Inc., 2001 WL 34750646 (Bankr. M.D. Pa. 2001), In re Enron Corp., 2004 Bankr. LEXIS 2549 (Bankr. S.D.N.Y. 2004), and In re Charter Communications, 419 B.R. 221, 266 (Bankr. S.D.N.Y. 2009).   Thus, a district court in Arizona was called upon to resolve a split between East Coast bankruptcy courts.

Rather than relying on the rationales advanced by the competing bankruptcy courts, the District Court applied a plain meaning analysis.   

Here, the Court finds that § 1129(a)(10) applies on a per-plan basis. First, unlike the Tribune court, this Court finds the plain language of the statute to be dispositive. The statute states that "[i]f a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan" then the court shall confirm the plan if additional requirements are met. 11 U.S.C. § 1129(a)(10) (emphasis added). Thus, once an impaired class has accepted the plan, § 1129(a)(10) is satisfied as to all debtors because all debtors are being reorganized under a joint plan of reorganization.

In re Transwest Properties, Inc., at *15.  

The District Court opinion takes a perfectly defensible position.    Section 1129(a)(10) is a technical requirement.   Therefore, technical compliance should be sufficient.