Best & Worst Posts of the Past Four Years: Looking for Reader Input

After four years of blogging, I am approaching my 200th post. I was planning to do a retrospective on my ten favorite posts. However, I think it would be even more interesting to hear what you, the readers, think. Please send me your nominations for best posts. Votes from current or former judges get double points. I will also take nominations for dishonorable mention. Since I am commenting on and critiquing other people's cases, I think that it is fair for you to let me know where I have been unfair, off the mark or just plain stupid.

If you would like to participate, please send an email to ssather@bnpclaw.com by October 15th. If you would like to include comments with your nominations, please feel free to do so. Any comments will be published anonymously unless you specifically request attribution.

Thanks in advance for your help.

Escorts Read Bankruptcy Blogs

The latest trend which has turned up in the comments is thoughtful responses from women identifying themselves as escorts. Here is a sample:

It was extremely interesting for me to read that post. Thanx for it. I like such topics and everything that is connected to them. I definitely want to read more soon. H______ B_______ escorts kiev

It is extremely interesting for me to read this article. Thanks for it. I like such themes and anything connected to this matter. I would like to read a bit more soon. J______ H_____ adult escort

What to make of this? Do escorts take an interest in the intricacies of bankruptcy law or are they just hoping to meet some lonely bankruptcy lawyers? I would be more likely to publish the comments if they were not worded so similarly.

Pres. Obama Taps Liz Warren to Launch Consumer Financial Protection Bureau

Last Friday, President Obama tapped Harvard Prof. Elizabeth Warren to be a Special Assistant to the President to help launch the Consumer Financial Protection Bureau. If the only thing that I knew about her was that she was a Harvard professor, I might wonder if she was some ivory tower academic.

However, I do know better. She was my professor at the University of Texas Law School (granted it was Payment Systems and not Bankruptcy) where I got to observe her up close and personal three times a week.

Even after she left UT, she continued to be one half of the dynamic duo of Warren and Westbrook who would inaugurate each UT Bankruptcy Conference with their current case update, which was part serious academic discussion and part stand up.

Prof. Warren is that unique combination of academic law nerd and someone you might want to have a beer with (which says a lot because I am trying to cut down on carbs). Perhaps nothing says this better than her appearance on The Daily Show this year.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Elizabeth Warren
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

Congratulations Liz and good luck.

Fifth Circuit Muddles Judicial Estoppel; En Banc Review Needed

In a new opinion, the Fifth Circuit has taken a big step backward in sorting out the doctrine of judicial estoppel. Reed v. City of Arlington, No. 08-11098 (5th Cir. 9/16/10). While adopting the principle that one panel of the Fifth Circuit cannot overrule another one, the opinion appears to be inconsistent with the Fifth Circuit's most recent prior ruling on judicial estoppel, thus indicating the need for en banc review. The opinion can be found here.

Two Wrongs and Two Rights Make a Mess

The first wrong in this case originated with the City of Arlington. It violated the Family Medical Leave Act with regard to Kim Lubke, a former firefighter. Lubke obtained a one million dollar judgment against the City.

A year later, while the judgment was on appeal, Lubke filed chapter 7. He forgot that he had a valuable judgment and apparently omitted a number of other assets as well. The Trustee closed the case as a no-asset filing.

The Fifth Circuit remanded the case for recalculation of damages. Subsequent to the remand, the City offered to enter into a Rule 68 judgment for $580,000. In discussing this offer with his client, the Debtor's non-bankruptcy attorney, Roger Hurlbut first learned about the bankruptcy. He promptly informed the Trustee's counsel. The Debtor and the Trustee successfully reopened the bankruptcy case and the Trustee sought to be substituted as plaintiff. The Debtor also agreed to have his discharge vacated.

Let's recap who behaved well and who behaved badly at this point:

The City of Arlington behaved badly when it violated the FMLA.

The Debtor behaved badly when he lied on his schedules.

The Debtor's nonbankruptcy lawyer performed blamelessly, representing the Debtor competently in the FMLA action and promptly notifying the Bankruptcy Trustee once he learned upon the bankruptcy.

The Bankruptcy Trustee did what she was supposed to do by moving promptly to reopen the bankruptcy case and pursue the litigation.

So at this point, we have two wrongs and two rights. For their part, the creditors did nothing wrong.

The District Court Tries to Follow the Fifth Circuit

The District Court considered the issue of judicial estoppel. After considering the Fifth Circuit's conflicting precedents on judicial estoppel, it found that the Debtor was subject to judicial estoppel. However, it found that the Trustee and the creditors should not be punished for the Debtor's wrongdoing. It allowed the Trustee to proceed with the case, but provided that once creditors were paid, any excess funds would go back to the City of Arlington rather than to the Debtor. Had the District Court been affirmed, the bad would have been punished and the blameless would not.

However, the Fifth Circuit chose not to affirm the District Court.

The Law of Judicial Estoppel

The Supreme Court has fashioned a three pronged test for whether judicial estoppel should apply:

(1) whether a party's later position is clearly inconsistent with its position in a prior case; (2) whether the party succeeded in persuading the first court to accept its position, creating “the perception that either the first or the second court was misled;”and (3) whether the party espousing the inconsistency has gained an unfair advantage or imposed an unfair detriment on an opposing party by that means.

City of Arlington v. Reed, slip op., p. 5, discussing New Hampshire v. Maine, 532 U.S. 742 (2001).

Prior to Reed, the Fifth Circuit had completed a trilogy of cases on judicial estoppel in bankruptcy.

The first of the recent Fifth Circuit cases was In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999). In that case, the Debtor’s CEO formed a company which acquired the assets of the debtor corporation. The insider purchaser then filed suit on a claim which had not been disclosed in the schedules. The purchaser recovered $3.6 million on the undisclosed claim. The Fifth Circuit reversed on appeal, finding that accepting the argument that the claims were inadvertently left off the schedules “would encourage bankruptcy debtors to conceal claims, write off debts, and then sue on undisclosed claims and possibly recover windfalls.” In re Coastal Plains at 213.

Next came In re Superior Crewboats, 374 F. 330 (5th Cir. 2004). In that case, it was the debtor who was estopped. In that case, one of the debtors was injured prior to bankruptcy. During their chapter 13 case, they filed suit on a claim which was not listed in their schedules. After their case was converted to chapter 7, the debtors told the trustee about their claim, but represented that it was barred by limitations. As a result, the trustee abandoned the claim which the debtors continued to pursue. When the trustee learned about the case, he attempted to substitute in. However, the court granted summary judgment for the defendant.

The third component of the trilogy was Kane v. Nat’l Union Fire Ins. Co., 535 F.3d 380, 384 (5th Cir. 2008). That case looked a bit like Superior Crewboats, but with one major distinction. In Kane, the Debtor failed to disclose a claim. However, the Trustee did not abandon the claim. Instead, once the Trustee learned of the deception, the Trustee sought to pursue the claim on behalf of the creditors. The District Court granted summary judgment, relying on Superior Crewboats. However, the Fifth Circuit said not so fast. In its opinion, it stated:

There, because the trustee had abandoned the claim, he was not the real party in interest and was not entitled to be substituted as such. Rather, following the trustee’s abandonment, the interest in the claim had reverted to the debtors,who stood to collect a windfall from the asset at the expense of the creditors. In the case before us, the Kanes’ personal injury claim became an asset of their bankruptcy estate when they filed their Chapter 7 petition. The Trustee became the real party in interest in the Kanes’ lawsuit at that point and never abandoned his interest therein.

The Fifth Circuit noted that the Kane case did not present any equitable concerns. Indeed, the creditors would be harmed if judicial estoppel was applied to preclude the trustee from pursuing the claims. The court quoted from a great Seventh Circuit opinion which made the obvious point:

[The debtor’s] nondisclosure in bankruptcy harmed his creditors by hiding assets from them. Using this same nondisclosure to wipe out [the debtor’s claim against the defendant] would complete the job by denying creditors even the right to seek some share of the recovery. Yet the creditors have not contradicted themselves in court. They were not aware of what [the debtor] was doing behind their backs. Creditors gypped by [the debtor’s] maneuver are hurt a second time by the district judge’s decision. Judicial estoppel is an equitable doctrine and using it to land another blow on the victims of bankruptcy fraud is not an equitable application.

Kane, quoting Biesek v. Soo Line R.R. Co., 440 F.3d 410, 413 (7th Cir. 2006).

The Fifth Circuit's Ruling in Reed

Given that Reed and Kane involved nearly identical circumstances, the Trustee could have reasonably expected a similar result. However, that was not to be.

The Court acknowledged that its precedents might be a bit hard to follow. However, it insisted that it was necessary to disregard Kane and follow Coastal Plains and Superior Crewboats. Writing for the panel, Chief Judge Edith Jones stated:

What are the bankruptcy courts, which confront these problems regularly in our circuit, to make of these decisions? The grounds on which Kane distinguished In re Coastal Plains are that, in In re Coastal Plains, a corporate officer's misdeeds detrimentally influenced the corporate reorganization process as well as depriving creditors of the concealed cause of action. Id. Kane purports to distinguish In re Superior Crewboats, moreover, based on the differing procedural consequences between a trustee's abandonment of a claim (to the debtor) and the non-disclosure of assets that are not administered although still within the debtor's estate. Id. at 386-87. Whether these distinctions are correct in principle or on the facts are matters for another debate. Absent en banc harmonization, we must endeavor to reconcile the authorities. We are also guided by the principle that one panel of this court cannot overrule another panel decision. (citation omitted). Thus, judicial estoppel remains applicable to litigation claims that are undisclosed in bankruptcy, and the doctrine's essential ingredients remain the same.

Reed at 7 (emphasis added). When one judge within the circuit contends that an opinion by another panel "purports" to distinguish a prior precedent, these are very strong words. Why does Judge Jones believe that the per curiam opinion from Judges King, Wiener and Elrod merely "purports" to distinguish the prior precedent?

Judge Jones makes it seem as though it were a mere procedural distinction, the difference between abandonment and non-abandonment. However, it rests on something much more substantive. In order for judicial estoppel to apply, the case must involve the same parties. The trustee is not the same party as the debtor. Therefore, judicial estoppel should NEVER apply to the trustee based on the Debtor's actions.

However, Judge Jones believes that the distinction between the trustee and the debtor is inconsequential. She writes:

(I)t is not sufficient to distinguish the debtor’s conduct from that of the trustee in applying judicial estoppel. Even though Reed herself takes no inconsistent legal positions, she succeeds to the debtor’s claim with all its attributes, including the potential for judicial estoppel.

Reed, at 7. Judge Jones does not provide any further analysis as to why the Trustee is bound by the Debtor's actions. Since this was the primary focus of the Kane opinion, a little more explanation would have been helpful.

While Judge Jones's statement is true in the abstract, it is disingenuous in the specific case. A trustee succeeds to the debtor's rights as of the petition date. Thus, a trustee would be bound by the fact that the debtor did not preserve his cause of action by filing suit within the period allowed by the statute of limitations. A trustee would also be bound if the debtor had settled the case on an arms length basis and squandered the proceeds before filing bankruptcy.

However, the facts constituting judicial estoppel do not exist on the petition date. Even if the debtor filed the false schedules with the bankruptcy petition, the element of receiving a benefit from the inconsistent position cannot occur until after the petition date.

When a debtor files bankruptcy, all of his legal rights become property of the estate under Section 541. The Trustee is the representative of the Estate. Therefore, if the claim had not been invalidated as of the petition date, the Trustee has the right to pursue it. When the Trustee closes a case, any properly scheduled assets which are not administered revert to the Debtor. However, undisclosed assets remain property of the estate subject to future administration by the Trustee. Since judicial estoppel cannot arise until after the bankruptcy filing and the Debtor is not the representative of the estate and the undisclosed asset never reverts to the Debtor, it should be clear that the Debtor cannot prejudice the rights of the Trustee subsequent to the petition.

This should be pretty obvious. However, the court dismissed it with one sentence and no further elucidation.

Judge Jones offers an alternate explanation of how judicial estoppel works. She writes:

The lowest common denominator appears to lie in a holistic, fact-specific consideration of each claim of judicial estoppel that arises from litigation claims undisclosed to a bankruptcy court.

Reed, at 6.

The Court then went on to find that the equities favored the City of Arlington.

The creditors are not materially advantaged if this case proceeds further. Only about one-sixth of the original creditors (reckoned in amount of claims) timely refiled when the case was re-opened a year after they were informed there were no non-exempt assets to distribute. See supra note 2. The untimely filers have little if any hope of recovery from the bankruptcy estate; the timely filers' recovery will be contingent on the payment of large priority administrative expenses caused by the ongoing litigation. True, Lubke agreed to revoke his discharge, but most creditors will have foregone alternative collection strategies at this point. The rincipal remaining bankruptcy “claimants” are Reed herself and Lubke's trial attorney Roger Hurlbut, who has already received from Lubke some payment for his services. Reed’s claim has been substantially increased because of this judicial estoppel litigation. Here, equity does not favor ignoring Lubke’s misuse of the court system for the primary benefit of attorneys.

Reed, at 8.

Equity is like pornography in that a person should be able to know it when they see it. Here, the court's view of equity is that the City of Arlington should be excused from liability for its wrongdoing because many of the creditors did not file timely claims and because the benefit of the case might go to attorneys.

Let's analyze the relative rights and wrongs here. The creditors who filed timely claims did not do anything wrong. However, under the Court's opinion, they will not stand any chance of recovery. The Debtor's nonbankruptcy attorney did everything right. However, he will lose out on the vast majority of his compensation. The Trustee did everything right. However, she will not receive any compensation. Indeed, the Debtor's nonbankruptcy attorney and the Trustee are placed in a suspect class because they are attorneys (just like the judge who wrote the opinion). The most charitable thing which can be said about the court's equitable analysis is that it is not obvious when you see it.

The Need for En Banc Review

The opinion in Reed was justified by the fact that one panel of the circuit cannot overrule another one absent en banc review. Judge Jones believes that the Kane court overruled Superior Crewboats and that its opinion should not be respected. An equally valid argument can be made that Reed overrules Kane. Of the four Fifth Circuit opinions dealing with judicial estoppel in the bankruptcy context, only two involved claims asserted by trustees. Those two opinions are diametrically opposed. This is a case where the en banc court needs to step in and resolve the inconsistency.

Integrity and Incentives

The en banc court should also consider whether this ruling promotes or hinders the integrity of the bankruptcy system and the larger federal court system. The integrity of the bankruptcy system is policed by multiple parties. At the outset, it depends upon the honesty of the debtor and the professionalism and ethics of the debtor's counsel. It also depends upon the trustee, creditors and the U.S. Trustee to ferret out wrongdoing.

Under Reed, the Debtor is given a perverse incentive to dishonesty. If the Debtor commits fraud and does not get caught, he keeps the benefits of his wrongdoing. If the Debtor commits fraud and does get caught, he has no opportunity to mitigate the damage. While there is no excuse for dishonesty, the Kane opinion gives the ethically wavering debtor the opportunity to make amends, while Reed does not.

The Reed opinion also removes the incentive for Debtor's counsel to bring fraud to light. The real hero in this case is Roger Hurlbut, the Debtor's nonbankruptcy counsel. When he learned about his client's omission, he immediately brought it to the Trustee's attention. His reward for displaying high ethics is that he loses the fee that he had earned. A less ethical lawyer knowing the penalty for disclosure might have been tempted to keep his mouth shut.

The Trustee also is deprived of any incentive to go after undisclosed assets. If the Trustee learns of an undisclosed asset which is being stealthily being pursued by the Debtor, the Trustee will have little motive to go after it. Trustees get paid on a commission. They succeed if the creditors succeed. However, under Reed, the diligent Trustee gets nothing for her effort. Indeed, the fact that she is a lawyer is cited as a reason why it would be inequitable to allow the case to proceed.

Finally, in the context of the larger federal court system, wrongdoers are given an opportunity to escape responsibility. Congress passed the FMLA because it beileved that its policies served an important goal in society. The City of Arlington apparently flouted those policies. The City was ready to settle until it learned that it had an out. What incentive does the City have to change its ways under this decision?

Here is what should happen in the case of an undisclosed asset. First, the parties to the case should have an incentive to discover the fraud and bring it to the trustee's attention. Second, the trustee should be given the first opportunity to pursue the claim. If the trustee does not elect to pursue the claim, then judicial estoppel should apply as to the debtor and the claim should be dismissed. However, if the trustee elects to pursue the claim, the alleged wrongdoer is in no worse position and may even be in a better position. As a fiduciary for the benefit of the creditors, the trustee may be willing to cut a better deal with the defendant so as to minimize the risk and delay to the creditors.

Hat Tip to Steve Roberts and St. Clair Newbern.

UPDATE: The Commercial Law League of America has submitted an amicus brief in support of the Trustee's motion for rehearing en banc. You can read it here.

Jernigan on Reaffirmations

I hate reaffirmation agreements. They are way too complicated under BAPCPA and consume way too much time. However, Judge Stacy Jernigan has written a 22 page opinion that explains everything you would ever want to know about reaffirmations. In re Grisham, No. 10-32524 (Bankr. N.D. Tex. 9/7/10). You can find it here. This opinion came to me with the recommendation, "this opinion is so excellent that I felt it would be a shame not to pass it along." I am doing my part by passing it along to this blog's readers.

The Facts

It starts with a debtor and a truck. The Debtor wanted to reaffirm a debt for $17,690.59 which was worth only $16,225 and contained an interest rate of 17.5%. The debtor had 71 months of payments left. His occupation was "retired/unemployed" and his income consisted of social security and unemployment benefits (which were about to expire). He also had about $200,000 in non-dischargeable debt consisting of taxes, alimony and student loans. His net income on Schedules I and J was -$1,091.

Initial Requirements

Judge Jernigan points out that reaffirmations are subject to mandatory requirements without which they are unenforceable.

The first requirement is that the reaffirmation be "made" prior to the granting of the discharge. That means that both parties must have signed it by this date. The reaffirmation met this test. However, if the parties needed more time, the court points out that they can file a motion to defer discharge under rule 4004(c)(2).

The second requirement is that the agreement be "filed" no later than 60 days after the first date set for the first meeting of creditors. Under Rule 4008, the Court has the power to enlarge the time for filing the reaffirmation agreement and may do so without a motion. In fact, the court can enlarge the time period simply by ignoring the fact that the agreement was not timely filed. The agreement in this case met the second test.

Whether to Require a Hearing

The next step in the process is to determine whether there must be a hearing. Judge Jernigan identifies the following cases where a hearing will be set:

1. If the debtor is not represented by counsel during the negotiation of the agreement, there must be a hearing. In order to be approved, the court must find that the agreement does not impose an "undue hardship" on the debtor and is in the debtor's "best interest."

The Court noted with dismay that some attorneys do not assist their clients with reaffirmation agreements.

It should be considered a basic part of chapter 7 debtor-representation that an attorney advise his client as to something as fundamental and significant as a reaffirmation agreement and assist him in negotiation of the same.

Opinion, p. 9 (emphasis in original).

2. There must be a hearing if the presumption of undue hardship is triggered. If the debtor's post-bankruptcy income less other expenses is less than the amount of the debt being reaffirmed, then the presumption is triggered and there must be a hearing. The Court expressed dissatisfaction with attorneys who checked the no presumption box even though the debtor was "barely" negative or who failed to check either box. The Court also noted that if attorneys supplied more information as to how the debtor would be able to afford the payments, it might not be necessary to hold a hearing to determine that the presumption of undue hardship had been rebutted.

Special Cases

The rules are different for Credit Unions and Homesteads.

The presumption of undue hardship does not apply to credit unions. Thus, if the debtor is represented by the counsel, the court must approve the agreement. If the debtor is not represented by counsel, the court must still hold a hearing but need only consider whether the agreement is in the "best interest" of the debtor.

The best interest test does not apply to debts secured by homesteads. Thus, if the debtor is represented by counsel and the math is negative, the court must conduct a hearing limited to undue hardship. If the debtor is not represented by counsel and the math is positive, the court must hold a hearing to give the debtor the statutory warnings, but must approve the agreement.

When to Hold the Hearing

The hearing must be held before the discharge is entered. However, it is slightly more complicated than that. The presumption of undue hardship expires after 60 days. Therefore in a case where the math is negative, the court must conduct a hearing, if at all, within 60 days of when the agreement is filed.

Applying The Test to the Particular Case

In this case, the Debtor and the Creditor timely made the agreement and timely filed it. The Debtor's attorney checked the presumption of undue hardship box so that a hearing was required to be held. The Court held the hearing within 60 days and prior to entry of the discharge. Thus, the only question was whether the presumption of undue hardship was rebutted.

Going back to the original facts discussed above, the Court found that it was an undue hardship for a debtor with negative income which was only going to get worse to reaffirm a debt on a pickup truck with no equity and required 71 more payments at 17.5% interest, especially where the Debtor had large amounts of non-dischargeable debt.

The Conclusion

The Court's Conclusion is worth setting forth in its entirety:

It would be hard for anyone to deny that Section 524 of the Bankruptcy Code—the statute describing the process for reaffirmation of debt—is one of the most unwieldy and cumbersome provisions applicable to consumer bankruptcy cases. Section 524 makes for painful reading. In addition to the items discussed in this opinion, there are lengthy disclosures and other requirements in Section 524 that must be adhered to for a reaffirmation agreement to be enforceable. Moreover, the official form for a reaffirmation agreement has been modified numerous times over the years. Thus, on balance, it is not terribly surprising that compliance with this Code section (and the accompanying rules) is frequently woefully deficient. The court hopes that this Memorandum Opinion provides a resource in the future for those struggling with proper protocol in the area of reaffirmation agreements.

The court also hopes that the thought-process that this court shared, regarding the above-referenced Debtor (and, specifically, why the court would not approve his Reaffirmation Agreement), is useful. Bankruptcy is about “fresh starts” and new beginnings. It is about belt-tightening and shedding past bad habits. Too often, a reaffirmation agreement will reveal that someone just does not comprehend this, and wants to go forward in a manner that will impair his fresh start and perpetuate bad habits from the past.

The court realizes that this is sometimes complicated. In a context in which a debtor does not enter into a reaffirmation agreement during a chapter 7 case regarding a debt-encumbered vehicle, there are probably situations in which a vehicle-lender will repossess the debtor’s vehicle post-discharge, even when the debtor is making regular and timely contractual payments for the car post-discharge—for the simple reason that the debtor did not “reaffirm.” This court has heard intellectual pontificating regarding the legal propriety of such an action by a lender. It would appear that Sections 521(a)(6) and (d), combined with Section 362(h)(1)(A) and (j), may have ended the intellectual debate about this, and may allow such a course of action (at least from a Bankruptcy Code standpoint)—except for, perhaps, in a case in which the debtor entered into a reaffirmation agreement but such agreement was nevertheless not approved by the court. See 11 U.S.C. § 521(a)(6), (d) (2010).7 Thus, the court can understand why a debtor and his counsel might see the wisdom of entering into a reaffirmation agreement, even if they can envision the court may never approve it because of the negative math. Perhaps they imagine that this will help the debtor with the car lender post-discharge, if they at least tried to get the reaffirmation agreement approved with the court. Moreover, perhaps the debtor genuinely needs a car and worries that, absent an attempt at a reaffirmation agreement, he will surely lose the car post-discharge and may not be able to purchase (i.e., obtain financing) for another vehicle in the near future.

Again, the court is not unsympathetic and realizes this can all be very complicated. The court realizes that we are in a world where car lenders may not always act like economically rational animals. And, the court appreciates that car lenders may sometimes have their own economic pressures with which to contend. But, again, the fresh start is the overriding purpose of a chapter 7 bankruptcy case. Many reaffirmation agreements presented to the court are the farthest thing from a “fresh
start” that one could ever imagine. Many times it is time to say “good riddance” to the car. And many times—maybe, just maybe—a car lender will see the wisdom of renegotiating a car loan if reaffirmation is denied.

Accordingly,

IT IS ORDERED that the Reaffirmation Agreement between the Debtor and Capital is disapproved.

Opinion, pp. 19-22 (emphasis added).

This opinion doesn't make me like reaffirmations any more, but it does make the process a bit more clear. I plan to use the language about making a fresh start and ditching bad habits with my clients.

Hat Tip to David DeSoto.

Bankruptcy Court Predicts Fifth Circuit Will Adopt Broad View of Statement of Financial Condition

Section 523(a)(2) is a Code section which is very familiar to most experienced practitioners, but still can be tricky. In particular, the distinction between statements regarding financial condition and all other fraudulent statements has prompted disagreement among the courts. A new opinion from Judge Craig Gargotta predicts that the Fifth Circuit would join the minority position on this issue. Material Products International, Ltd. v. Ortiz, No. 09-1062 (Bankr. W.D. Tex. 8/27/10). You can find the opinion here.

There are three types of fraudulent statements under 11 U.S.C. Sec. 523(a)(2):

1. Statements which are not made "respecting the debtor's or an insider's financial condition" which are actionable under Sec. 523(a)(2)(A);

2. Written statements "respecting the debtor's or an insider's financial condition" which are actionable under Sec. 523(a)(2)(B) and have a higher reliance standard; and

3. Verbal statements "respecting the debtor's or an insider's financial condition" which cannot form the basis for a non-dischargeability complaint based on fraud.

Because the distinction between statements about the debtor or an insider's financial condition and all other statements is significant, it is important to know what a "statement respecting the debtor's or an insider's financial condition" means.

The majority opinion, as represented by the Tenth Circuit's opinion in In re Joelson, 427 F.3d 700 (10th Cir. 2005), holds that only statements which concern a debtor's overall financial condition, that is, are the equivalent of a financial statement, will be subject to the restriction. The minority position holds that "financial condition" is broader than simply a financial statement and that statements regarding an individual asset may qualify.

In the Ortiz case, the creditor alleged that the Debtor had lied about whether equipment at a restaurant was free of liens. (The restaurant was located in my neighborhood and I ate there once. There was nothing about the food which indicated that it was or was not subject to prior liens). The creditor's complaint alleged the elements of Section 523(a)(2)(A) and quoted the statute. The complaint did not reference Section 523(a)(2)(B). The debtor filed a motion for judgment on the pleadings under Rule 12(c).

The court ruled that whether the equipment was subject to prior liens was a statement regarding financial condition. Thus, it could not be brought under Sec. 523(a)(2)(A). Although the Fifth Circuit has not ruled on this issue, the Court found the Fifth Circuit's opinion in In re Mercer, 246 F.3d 391 (5th Cir. 2001) to be instructive. Judge Gargotta wrote:

The parties readily agree that the Fifth Circuit has not addressed this issue. That said, the Court agrees with the Defendants that the Fifth Circuit’s opinion in AT&T Universal Card Svcs. v. Mercer (In re Mercer), 246 F.3d 391, 405 (5th Cir. 2001) is suggestive of how the Fifth Circuit might rule.

The Court agrees with the Defendants’ assertion that while it has not expressly addressed the scope of a “statement respecting a debtor’s or insider’s financial condition,” the Fifth Circuit Court of Appeals’s decision regarding the applicability of § 523(a)(2) to credit card use is consistent with the broad interpretation of that phrase. Under that approach, courts have included statements that reflect on the debtor’s ability to pay as statements respecting a debtor’s financial condition. See Mercer, 246 F.3d at 405 (5th Cir. 2001) (noting that “if [credit] card-use could be understood as a representation not only of intent, but also ability, to pay, the latter is not actionable under § 523(a)(2)(A); as noted, it excludes from its scope ‘a statement respecting the debtor’s . . . financial condition.’”) (emphasis and footnote omitted); (additional citations omitted).

Therefore, as a matter of law, taking all Plaintiff’s allegations in the Complaint as true, Plaintiff cannot show that the claim is non-dischargeable under § 523(a)(2)(A) as it alleges, and the Defendants are entitled to judgment on the pleadings denying the Plaintiff’s cause of action requesting that the claim be declared non-dischargeable.

Ortiz, slip op. at 15-16.

This opinion is significant because Judge Gargotta adopted the minority position. By taking a broad view of what constitutes a statement of financial condition, the Court has given creditors a higher burden of both pleading and proof. When in doubt about whether a representation is a statement of financial condition, it is better to plead both subsections (A) and (B) in the alternative.

Jurisdiction to Enforce a Settlement

When parties settle a case, there are good feelings all around and relief that the dispute is over. However, parties who have been disagreeable prior to settlement often remain that way after they have compromised their dispute. A recent Fifth Circuit case makes the point that it is important to think about how the settlement will be enforced should the parties go back to feuding. SmallBiz Pros, Inc. v. MacDonald, No. 09-50879 (5th Cir. 9/1/10). The opinion can be found here.

In SmallBiz Pros, the parties settled a dispute which required turnover of documents among other things. They entered a Stipulation of Dismissal pursuant to Rule 41(a)(1)(A)(ii). This was a non-bankruptcy case. However, the same provision would apply under Bankruptcy Rule 7041. The Stipulation referenced a "Stipulated Settlement Order." The Court signed the Stipulated Settlement Order. However, the order did not contain "so ordered" language and did not provide for the Court to retain jurisdiction to enforce the order.

Disagreements arose and SmallBiz Pros returned to court to have MacDonald held in contempt. The District Court obliged and MacDonald appealed. The Fifth Circuit reversed, finding that the District Court lacked jurisdiction to enforce the settlement.

In its conclusion, the Court stated:

Each of the parties and the district court likely intended for the district court to retain ancillary jurisdiction to enforce the terms of the settlement agreement, but jurisdiction is a strict master and inexact compliance is no compliance. The Stipulation effectively dismissed the case when it was filed on August 7, 2009 pursuant to Rule 41(a)(1)(A)(ii). It did not expressly provide for ancillary jurisdiction. It referenced and attached the terms of the settlement in a document styled an “Order,” but did not make the dismissal expressly contingent upon the district court’s signing the Order or upon any other act. Moreover, the “Order” was not a proper dismissal order. The parties could have filed a joint “stipulation and order of dismissal,” expressly provided for ancillary jurisdiction or embodied the terms of the settlement in the order, and made the filing contingent upon the district court’s entry of the order, but they chose not to do so. Because the district court lacked jurisdiction to enforce the terms of the settlement agreement, we hereby VACATE the contempt order and REMAND to the district court with instructions to dismiss for lack of jurisdiction.

Slip Op. at 8-9.

I like the language that "jurisdiction is a strict master and inexact compliance is no compliance." As a matter of practice, I don't like using a Stipulation of Dismissal under Rule 41(a)(1)(A)(ii) because it does not result in a court order. However, I had not thought about including language in the order that the court retains jurisdiction to enforce it. I think I will now.

Thoughts on To Kill A Mockingbird

This year is the 50th Anniversary of the publication of To Kill A Mockingbird. There was an entire program devoted to it at the State Bar Convention this summer and my daughter was assigned the book for her summer reading project. I decided to give the book another look. I was struck by the following passage. To me, it captures the ideal of what it means to be a lawyer and man of honor.

“Do you defend *******, Atticus?” I asked him that evening.

“Of course I do. Don’t say ******, Scout. That’s common.”

“’s what everybody at school says.”

“From now on it’ll be everybody less one—“

“Well if you don’t want me to grow up talkin’ that way, why do you send me to school?”

My father looked at me mildly, amusement in his eyes. Despite our compromise, my campaign to avoid school had continued in one form or another since my first day’s dose of it. . . .

But I was worrying another bone. “Do all lawyers defend n-Negroes, Atticus?”

“Of course they do, Scout.”

“Then why did Cecil say you defended ******? He made it sound like you were runnin’ a still.”

Atticus sighed. “I’m simply defending a Negro—his name’s Tom Robinson. He lives in that little settlement beyond the town dump. He’s a member of Calpurnia’s church, and Cal knows his family well. She say’s they’re clean-living folks. Scout, you aren’t old enough to understand some things yet, but there’s been some high talk around town to the effect that I shouldn’t do much about defending this man. It’s a peculiar case—it won’t come to trial until summer session. John Taylor was kind enough to give us a postponement. .. .”

“If you shouldn’t be defendin’ him, they why are you don’ it?”

“For a number of reasons,” said Atticus. “The main one is, if I didn’t, I couldn’t hold up my head in town, I couldn’t represent this county in the legislature, I couldn’t even tell you or Jem not to do something again.”

“You mean if you didn’t defend that man, Jem and me wouldn’t have to mind you any more?”

“That’s about right.”

“Why?”

“Because I could never ask you to mind me again. Scout, simply by the nature of the work, every lawyer gets at least one case in his lifetime that affects him personally. This one’s mine, I guess. You might hear some ugly talk about it at school, but do one thing for me if you will; you just hold your head high and keep those fists down. No matter what anybody says to you, don’t let ‘em get your goat. Try fighting with your head for a change …. it’s a good one, even if it does resist learning.”

“Atticus, are we going to win it?”

“No, honey.”

Harper Lee, To Kill A Mockingbird, pp. 99-101.

There is so much in this passage. I agree that every lawyer gets one case in his lifetime that affects him personally. For me, it was the case of a little girl who was in foster care and whose grandmother and uncle would not give up on her. I also like the idea that a person’s right to respect depends upon doing the right thing, even when it’s hard. Finally, I like the idea of fighting with your head.

Few of us, myself included, live up to the ideal of Atticus Finch. However, if you have an ideal, at least you can try to aim in that general direction. Sometimes you might get close.

This is a book worth reading and re-reading.

Do Not Hide Assets From the Trustee. You Will Get Caught and Go to Jail.

Most of us have heard cocktail party talk about someone who had a lot of assets but managed to file bankruptcy and keep all of their stuff. Usually, the explanation has to do with exemptions and fully encumbered property. However, every once in a while, someone tries to play fast and loose with the trustee. As a public service, I would suggest that anyone contemplating this scheme talk to Donovan Lindhorst.

Donovan Lindhorst was a roofing contractor. He got in trouble with the union for using non-union workers and for not accurately reporting his workers' time or appropriately funding their benefits. That was a bad idea because the union filed an involuntary bankruptcy petition against him. No. 07-34117, Donovan Louis Lindhorst (Bankr. Ore. 2007).

During the run-up to his bankruptcy, he withdrew money from his accounts in the form of cash, cashier's checks or checks payable to cash in an amount exceeding $800,000. However, when he filed his schedules and statement of financial affairs, he neglected to mention the money that he had transferred to his son, his wife and his wife's trust and the vehicles, real estate, cash and gold and silver coins that he still owned. He testified that his schedules and statements were true and correct at his creditors' meeting and on the first day of his Rule 2004 exam. On the second day of the exam, he refused to answer any additional questions.

The alert and diligent trustee secured an ex parte order to search the debtor's property. Here is just a sample of what they found:



As of February 25, 2010, the Trustee had recovered assets totaling $643,022.31 and had cash on hand of $283,591.81. The U.S. Trustee filed an action objecting to the Debtor's discharge. The Debtor agreed to waive his discharge.

The U.S. Attorney obtained a five count indictment against Lindhorst. No. 3:09-cr-00303, United States v. Donovan Lindhorst (D. Ore. 2009). On August 23, 2010, he agreed to plead guilty to two counts. As part of his plea agreement, he had to write in his own handwriting that he was guilty of the two counts.




He is now subject to a five year prison sentence, supervised release after completion of his sentence, a $250,000 fine and restitution.

Anyone thinking about pursuing a similar scheme should keep this in mind. Assets leave a paper trail. Just because you withdraw the money from your account and give it to your wife and son or hide it in a safe does not mean that it doesn't exist.

Don't do it. You can get caught. You can lose your discharge. You can go to jail. Just like Donovan Lindhorst.

Bad News for the Non-Filing Spouse

Frequently it makes sense for only one spouse to file bankruptcy. Where the husband has wracked up large business debts in his name only and the wife has significant separate property or sole management property, the husband can file bankruptcy without bringing the wife's non-joint assets into the estate. This allows a certain amount of double-dipping. The husband can claim his assets and the joint assets as exempt and the wife can keep her non-estate assets as well. While this will benefit the couple 99% of the time, two recent cases show a downside for the non-filing spouse.

In Kim v. Kim, No. 3:09-CV-1082-N (N.D. Tex. 8/11/10), which can be found here(PACER registration required), creditors filed an involuntary bankruptcy petition against Mr. Kim and then sought to limit his homestead exemption under 11 U.S.C. Sec. 522(p) for the reason that the property had been acquired within 1,215 days before bankruptcy. As a result, the debtor's homestead exemption was limited to $136,875. Had the spouse joined in the bankruptcy, the couple would have been entitled to double this amount. Instead, Mr. Kim filed a declaratory judgment action against Mrs. Kim to determine whether her homestead interest in the property (1) precluded sale of the property by the estate and (2) whether she was entitled to compensation for her interest. The Petitioning Creditor intervened and opposed the relief.

The Bankruptcy Court granted summary judgment in favor of the Petitioning Creditor and the District Court affirmed. The District Court found that bankruptcy law preempted Texas state homestead law. Because the homestead was joint community property, it became property of the estate. Because it became property of the estate, bankruptcy law determined the extent to which it could be exempted. The result for Mrs. Kim was that the involuntary bankruptcy petition, to which she was not a party, diminished her homestead rights. Not only that, but because she remained outside of the bankruptcy proceeding, the couple received only half of the homestead protection they would have otherwise had under Sec. 522(p).

One of the cases relied upon by the Kim court was In re Douglass, 2008 WL 2944568 (Bankr. W.D. Tex. 2008)(a case that I am intimately familiar with because I was on the losing side). In that case, the husband filed chapter 13. He made a tactical decision not to claim the homestead as exempt. Instead, he argued that the house was contaminated and was worth no more than the value of the land. Because the house was not being occupied as a residence, he was successfully able to cram down the value on the house. Had the case proceeded to discharge, the couple would have been able to retain the house. However, mid-way through the case, the wife moved back into the house and the husband sought to sell the home and pay off his chapter 13 plan early. The parties agreed to allow the sale of the home and to fight over the proceeds. The Bankruptcy Court ruled that (1) the wife was not entitled to any compensation for her homestead rights under Texas law and (2) the wife had failed to establish a separate property interest in the home. (She had provided the down payment for the home from her separate property).

Had the husband not filed bankruptcy, he could not have sold the property without the wife's consent. Therefore, the husband's filing divested the wife of a valuable right without her consent. Of course, if the husband had not filed bankruptcy, the property would have been foreclosed upon and the wife would have lost her interest.

These two cases are a powerful cautionary that sometimes the decision to remain outside of the bankruptcy can have negative consequences for the non-filing spouse. While it may seem unfair, it is a simple matter of reading Sec. 541(a)(2) which includes all joint management community property in the estate.

Hat Tip to Howard Mac Spector for sending me the Kim case.

Seventh Circuit Upholds Attorney's Bankruptcy Fraud Conviction

Circuit level opinions dealing with bankruptcy fraud are none too common, so that when one appears, it is worth taking note. This week, the Seventh Circuit affirmed the conviction of attorney Thomas O'Connell Holstein on nine counts of bankruptcy fraud. United States v. Holstein, No. 09-2822 (7th Cir. 8/18/10). The opinion can be found here.

This was not a high dollar case involving hidden assets or Ponzi schemes, but rather, something more mundane. It was about an attorney who wanted to keep practicing after his license was suspended. In September 2005, Thomas Holstein agreed to an 18 month suspension of his license.

Even though he knew that his suspension would take effect within a few weeks, he continued to take on new clients. Holstein would answer the phone and set up the consultations, but the clients would meet with his paralegal. She would help them fill out the forms and would accept payment from them. His paralegal would then black out the attorney's signature block and indicate that the case was being filed pro se. Since the clients were ostensibly filing pro se, there was no disclosure of fees being paid. The clients usually did not find out that they had filed pro se until they arrived at the first meeting of creditors and there was no lawyer there to represent them. The paralegal testified that she did all this on Holstein's instructions.

After a bench trial, Holstein was convicted on nine counts of bankruptcy fraud and sentenced to a year and a day.

In order to establish bankruptcy fraud it is necessary to show: (1) that he engaged in a fraudulent scheme; (2) that he made misrepresentations to the bankruptcy court; (3) in order to further the scheme. To be found guilty of falsifying documents before the bankruptcy court, the government had to show that he "falsified . . . any document with the intent to impede, obstruct or influence" a bankruptcy matter.

On appeal, Holstein made the following arguments:

Holstein argues that the government failed in its proof because he had no involvement in any of the consultations with the clients or in filing the fraudulent bankruptcy petitions. For almost the entire time, according to Holstein, he was drunk and secluded at his summer home. He claims the evidence showed that Vega acted alone. Vega met with the clients, filled out the petitions and accepted the fees. Holstein was rarely if ever in the office. He points to several possible motives Vega may have had for filing the petitions pro se, including keeping her job and retaliating against Holstein for a failed romance. If Vega acted alone, she would be solely responsible for the misrepresentations.

As a sort of alternative argument, Holstein claims the government failed to prove he could have intended to mislead the bankruptcy court about whether the debtors in question were represented by counsel. Even if he directed Vega’s actions in filing the pro se petitions, the fact that he paid the debtors’ filing fees with Lawline
checks precludes any inference that he intended to defraud the court. Lawline was “universally associated” with Holstein, he argues, and he would never have used the checks bearing his firm’s name if he wanted to mislead the court. Other lawyers did appear on the clients’ behalf in some of the cases, which Holstein claims is further proof that he never intended to conceal the fact that the clients were represented by counsel. (emphasis added)

Slip Op., pp. 4-5.

The Court was not impressed. Among other things, it found that his argument that use of the Lawline checks indicated that the clients were represented by counsel undercut his argument that his paramour paralegal acted alone.

With no evidence in the record to cast doubt on the district court’s findings, Holstein’s appeal boils down to challenging the Judge determinations as to the credibility of the witnesses. Such a tactic is “doomed at the outset.” (citation omitted).

Slip Op., p. 6.

On the one hand, this case should prompt a monumental "Well duh!" Taking money from clients to represent them in a bankruptcy proceeding and then sending them into court on a pro se basis is one of the worst ethical violations an attorney can commit. The petition preparer rules were intended to remedy just this type of misconduct. What makes this case astonishing is that the attorney was willing to run this risk to bring in a few thousand dollars more once his suspension took effect. The scheme was bound to unravel once the clients started showing up at creditors' meetings wondering where there lawyer was. His defense of I was drunk at my summer home was not likely to arouse much sympathy. Similarly, his attempt to throw his paralegal under the train by attributing the scheme to a spurned lover was similarly doomed to fail.

While it shouldn't be necessary to make the point, this case illustrates that consumer bankruptcies are serious business and that bad things can happen to people who cut corners and try to make a fast buck.

Hat-Tip to Manny Newburger who alerted me to this case.

Judge Isgur Takes on the "Absolute" Assignment of Rents

The absolute assignment of rents was a trendy lender's argument during the 1980s. The lender could claim that its loan documents granted it ownership of the rents to be received by the debtor. The lender would magnanimously allow the debtor to use its rents so long as the debtor was not in default. However, upon default, the lender would take back "its" rents. Without ownership of the rents, the debtor would have nothing to fund a plan of reorganization with and thus no hope of reorganization.

The absolute assignment of rents was largely discredited during the 1980s. However, like Jason or Freddy Krueger in a cheap horror movie, it keeps coming back. In a thoughtful opinion, Judge Marvin Isgur explains why it might work outside of bankruptcy, but that the mighty Code has the power to unravel the assignment, no matter how absolute it might claim to be. In re Amaravathi Limited Partnership, 416 B.R. 618 (Bankr. S.D. Tex. 2009).

What Happened

In Amaravathi Limited Partnership, the Debtors owned four apartment properties in the Greater Austin area. They were supposed to pay their rents into a lock box. The lender would make the debt payments and remit the balance to the debtors. This did not leave the debtors with enough money to operate their properties, so the debtors stopped sending their money to the lock box. The lender filed suit and obtained appointment of a receiver. The debtors then filed bankruptcy and asked for permission to use cash collateral. The lender objected contending that the absolute assignment of rents meant that they were not property of the estate.

Section 541(a)(6) Spells It Out

Judge Isgur (in a lengthy opinion) found an elegantly simple answer. Under Section 541(a)(6), property of the estate includes "proceeds, product, offspring, rents or profits of or from property of the estate. . . " Therefore, regardless of whether you have a collateral assignment of rents or an absolute assignment of rents, the post-petition rents are property of the estate.

Judge Isgur found that this straightforward reading of the Code would control unless it would lead to an absurd result. He found that it did not.

The Code provisions dealing with post-petition rents maintain a balance. Section 541(a)(6) brings the rents into the estate; Sec. 552(b) extends the lender's lien to post-petition rents and Sec. 363 requires adequate protection in order to use rents. This structure "incentivizes debtors and creditors to behave efficiently."

C1 Trust seeks to seprate the rental income from the assets and individuals that produce the rental income. Permitting such separation creates inefficient incentives that could greatly impede any debtor's ability to successfully reorganize. It is a fundamental principal of a capitalist society that when the owners of productive assets cannot benefit from the income produced by the assets , the incentive to produce income is eliminated. Without any prospect to generate rental income, the business's prospects for success are minimal at best.

In re Amavarathi Limited Partnership, at 624.

In concluding his statutory reading, he said:

The Court therefore follows the unambiguous text of Sec. 541(a)(6) and declines C1 Trust's request to choke the Debtors out of bankruptcy.

Id. at 626.

You Can Call It Mickey Mouse But It's Still a Lien

Having decided the issue, he went on to offer several additional rationales. First, he argued that the term "absolute" assignment of rents is a misnomer. Regardless of what you call it, it is still a security device. He quoted In re Foundry of Barrington Partnership, 129 B.R. 550, 557 (Bankr. N.D. Ill. 1991) for the proposition that:

The lender can call this arrangement an "absolute" assignment or, more appropriately "Mickey Mouse." It's still a lien.

Id. at 631.

The Court noted that the Fifth Circuit used the term "contingent present assignment" to describe the so-called absolute assignment of rents.

Why It's Different Outside Bankruptcy

Judge Isgur further explained that under Texas law, an absolute assignment of rents grants the lender legal but not equitable title to the rents. Outside of bankruptcy, the lender's legal title to the rents controls. However, inside bankruptcy, the retained equitable interest passes to the estate.

Synthesizing Whiting Pools with International Property leads to the conclusion that the post-petition rents at issue in this case are property of the estate. This conclusion is unmistakable despite the fact that the International Property lender was was permitted to retain the "absolutely" assigned rents. They key difference between the ostensibly inconsistent outcomes in this case and International Property is the bankruptcy framework. Outside of bankruptcy, International Properties stands for the proposition that once default occurs, the lender immediately has rights to the "absolutely" assigned rents. The debtor cannot keep rents received post-default. Upon receiving the rents, the lender must then take the cash from those rents and apply it to the mortgage debt. In doing so, the lender becomes both the equitable and the legal title holder of the cash from the rents. It is not until the cash is applied to the debt that the equitable title transfers from the debtor to the lender.

This case would follow the outcome of International Property if the Debtors had not filed bankruptcy. Upon the Debtors' bankruptcy filing, however, Sec. 541(a)(1) brings all property in which the Debtors hold an equitable interest into the estate. At the time of the filing of the bankruptcy petition, the Debtors held equitable title to all future rents, despite the lender's right to the rents under the "absolute" assignment.

Id. at 633.

This is a thoughtful opinion and well worth the time to read it. Judge Isgur has done an admirable job of reconciling the labels, the state court doctrine and the Bankruptcy Code's effect on these rights. Not only that, his opinion is based on basic capitalist principles.

All About Emails, Texts, Blogs and Non-Dischargeability

On February 3, 2010, Judge Jeff Bohm released his opinion in Wallace v. Perry, 423 B.R. 215 (Bankr. S.D. Tex. 2/3/10), opinion available with PACER access here. Following a twelve day trial, the court penned a 118 page opinion. The opinion is an interesting study in how to try a dischargeability case and just how bizarre relations between partners can get. I was going to do several short posts on this opinion. However, the subject matter is so inter-related that I am going to do it in one long article. The topics that I will be focusing on are getting the right parties, creative use of Sec. 523(a)(6) and dischargeability in the electronic age.

Background

Judge Bohm made extensive fact findings, some of which are summarized here.

Will Perry, Costa Bajjali and the Wallace Trusts became partners in W.C. Perry Partners, L.P. in 2004 and 2005. The Wallace Trusts were two trusts formed for the daughters of David Wallace. Perry, Bajjali and Wallace all worked in different aspects of the partnership. Wallace also served as mayor of Sugar Land. The partnership received substantial investments from third parties, including the clients of a talk radio host.

The relationship between the partners did not go well. Bajjali and Wallace were unhappy that Perry would spend his afternoons at the movies instead of working and that he often made decisions without consulting them. Perry complained that Wallace's political activities had become a liability to the partnership and accused Bajjali of lurching at him in the office kitchen. Perry decided that he needed a bodyguard to protect him from his partner. Perry sent an email canceling all partnership meetings.

In an attempt to smoke out his partners, who he thought were secretly reading his emails, he sent his assistant an email stating that he intended to file bankruptcy and leave them with nothing.

Subsequently, he agreed to buy out his partners and indemnify them from any liabilities. He also agreed to a liquidated damages clause if he did not use his best efforts to get them released from their guarantees.

Having parted ways with his partners, Mr. Perry started a smear campaign against them. He told others that he had removed them from the partnership because they were dishonest and incompetent. He also asserted that they were receiving kickbacks and stealing funds from the partnership. Perry sent a mass email to the Sugarland Rotary Club telling them not to associate with Bajjali or Wallace. Perry also had his assistant print out copies of a blog accusing Wallace of unethical conduct and distribute them anonymously.

The allegations took a toll on Wallace who was then running for Congress. The Fort Bend Republican Party returned a contribution he made and forbade him from introducing the speaker at the Lincoln-Reagan Dinner. He was also asked not to speak at the Gathering of Men, a faith-based men's group. Wallace was unsuccessful in his Congressional race.

After Perry Properties crashed and burned, Bajjali and Wallace spent $3.78 million to restructure the debts they had guaranteed.

Perry filed for chapter 11 bankruptcy and a non-dischargeability action ensued.

It's Hard to Party Without the Right Parties

David Wallace, Costa Bajjali and the Wallace Trusts each brought non-dischargeability claims based upon failure to honor the indemnification and non-disparagement clauses of the Purchase Agreement. However, Wallace and the Trusts found themselves in a catch-22 situation.

The Trusts were parties to the Purchase Agreement. However, Judge Bohm ruled that under Texas law, a trust lacks capacity to sue or be sued. Instead, only the trustee may sue or be sued on behalf of the trust. If the trustee abrogates his duty, a beneficiary may sue. However, David Wallace, the only natural person named was neither the trustee of the trusts nor a beneficiary. Thus, he could not sue on behalf of the trusts and the trusts could not sue on their own behalf.

Wallace also was unable to recover under the non-disparagement clause. The clause applied to the parties to the agreement and their "affiliates." The Court found that an affiliate was a person who controlled or was controlled by a party or an officer, director, partner, employee or relative of a party. Wallace did not control the trusts nor was he controlled by them. While he was a relative of the beneficiaries of the trusts, he was not a relative of the trusts themselves. Therefore, he was not an affiliate and could not recover.

The problems with parties here raise several important points. When the Purchase Agreement was drafted, it referred to the "Sellers," being Bajjali and the Trusts. However, despite the fact that the trusts were the partners, Wallace had a very direct involvement in the partnership. Careful drafting could have prevented this problem.

The difficulty with the trusts is more baffling. While the capacity of a trust to sue or be sued is not obvious, it must have been raised in the pleadings in order for the court to have addressed it in the opinion. If the issue was raised prior to trial, it should have been possible to substitute the trustee in as the real party in interest.

Creative Use of Section 523(a)(6)

Section 523(a)(6) allows non-dischargeability of debts for willful and malicious injury. While the language used suggests physical injury or at least tort claims, the statute is much broader and can be applied to a wide variety of injuries, including injuries arising from breach of contract.

In this case, the plaintiffs brought suit under Sec. 523(a)(2), (a)(4) and (a)(6). However, the court struck the claims under 523(a)(2) and (4) based on misconduct of the plaintiff's original counsel, leaving them to proceed solely under Sec. 523(a)(6).* The plaintiffs had two types of claims: claims for failure to honor the indemnification clause and claims for defamation. While it is easy to see how defamation can fall under Sec. 523(a)(6), a claim for willful and malicious breach of a contractual obligation to indemnify seems like more of a reach.

*Note: The Court was quick to point out that Plaintiff's trial counsel Johnnie Patterson was not responsible for the conduct that led to the pleadings being struck. The court stated, "Mr. Patterson's conduct throughout his representation of the plaintiffs was exemplary, as was the conduct of counsel for the defendant, John W. Wauson."

In this case, the plaintiff provided the defendants with evidence that his breach of contract was not just inadvertent, but was intended to harm the defendants.

In the "trick" email which Perry sent to his administrative assistant prior to execution of the Purchase Agreement, he stated:

I wanted to let you know that I am going filing bankruptcy per my attorneys advice. Please do not worry as this is part ofmy big plan I am going to be hatching this week. Dave [Wallace] and Costa [Bajjali] think they can pull the wool over my eyes they have no idea what is about to happen and I just love it. They [Wallace and Bajjali] will walk away with nothing after this week and oh Dave [Wallace] can kiss his political career goodbye. Costa [Bajjali] will be getting all the blame plus a hell of a lot of debt. The master is at work and I have them by there balls. Costa should have never sided with Dave.

While Perry later claimed that he sent this email in order to catch his partners reading his email, the court found that it betrayed his true intentions.

He also told another business associate "don't **** with me, I will destroy you like I did David Wallace."

He also stated that he wanted to cause Bajjali to incur a lot of debt and did not intend to pay him a dime.

Based on this evidence, the court found that Perry had actual subjective intent to harm Bajjali and knew with substantial certainty that his actions would cause harm. As a result, Bajjali was entitled to recover $3.78 million in damages incurred with regard to the indemnification clause.

The plaintiffs also brought defamation claims which were a more traditional use of Sec. 523(a)(6). The most interesting facet of the defamation claims concerned Perry's distribution of a blog written by someone else. The Rhymes With Right blog (www.rhymeswithright.mu.nu) wrote a post about Wallace which described him as "unethical, corrupt and not fit to represent the GOP." The blog post amounted to disorganized ramblings which imputed that Wallace was involved in arms dealing and attempts to overthrow governments. The Court found that the blog posting was defamatory. However, the Court also found that Perry did not write the blog or contribute to it.

However, the Court found that under Texas law, a person is liable for defamation if he "publishes" the defamatory statement. A statement in an email constitutes a publication. The Court found that emailing a link to the blog to a third party and instructing his assistant to print out the blog and distribute it constituted publication.

The court also found that statements with regard to kickbacks, "gross fraud," "serious crimes" and extortion were defamatory.

The Court found that the statements constituted defamation per se. As a result, the plaintiffs were able to recover without proof of specific damages. The Court awarded both actual and exemplary damages.

A Few Thoughts About Evidence in the Electronic Age


In this case, Will Perry got into trouble by shooting off his mouth. However, the evidence included texts, emails and blogs. The risk posed by electronic communications is that (i) the speaker will unleash his raw, unvarnished thoughts without any self-censorship and (ii) there will be a tangible record of those statements.

The "trick" email was probably the most damaging piece of evidence against Perry. This was an act of macho boasting to his administrative assistant. If it hadn't been sent in email form, there would not have been any record of it. The Court's extensive discussion of the credibility of the witnesses (discussed here) illustrates the fallibility of human memory. However, by incriminating himself in an email, Perry placed himself in the position of having to invent an unbelievable rationalization for his words.

The blog also deserves some discussion. Rhymes With Right is written by "Greg," a 40-something teacher from Seabrook, Texas according to his profile. Much of it consists of right-wing rants. However, for some reason, "Greg" developed a deep dislike for Dave Wallace. According to Judge Bohm, his writings were defamatory. When Perry distributed it, he probably didn't think that he was making a defamatory statement. Instead, he was merely providing third party confirmation. The irony here is that the anonymous blog poster escaped liability while the passer-on did not. However, Perry would not have been held liable were it not for the raft of other evidence concerning his irrational hatred toward his former partner. The lesson here is that just because you read something on the internet doesn't make it safe for publication.

Final Thoughts

It is said that the most dangerous cases are those with Exes, ex-spouses, ex-partners and so on. A bad break-up triggers enough negative emotions to overwhelm rational thought. That is not a good thing when the person on the other side knows where the bodies are buried. This was just such a case. Despite the other side's failure to name the right parties and failure to cooperate in discovery, the defendant still ended up with a non-dischargeable judgment for $4 million give or take. The debtor's self-righteous anger fueled by excessive testosterone ultimately proved to be destructive for him.

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Ninth Circuit BAP Finds Wells Fargo Freeze Policy Violates Automatic Stay

Breaking with judges in Texas and New Mexico, the Ninth Circuit Bankruptcy Appellate Panel has found that an administrative freeze policy utilized by Wells Fargo Bank violates the automatic stay. No. 09-1408, Mwangi v. Wells Fargo Bank, N.A. (Ninth Cir. BAP 6/30/10). The opinion can be found here.(PACER access required).

Wells Fargo's Policy

Every night, Wells Fargo compares cases filed in CM/ECF against its account holders. If one of its account holders files chapter 7 bankruptcy, Wells Fargo places an administrative freeze upon the account and sends a letter to the chapter 7 trustee requesting instructions on disposition of the funds. In the Mwangi case, the debtors initially disclosed that they had only $1,300.00 in their Wells Fargo accounts. After Wells Fargo froze the accounts, they amended their schedules to disclose $17,075.06 and claimed 75% of this amount as exempt. The Debtors then demanded that Wells Fargo release the funds based upon their claim of exemption. When Wells Fargo refused, the Debtors filed a motion for sanctions. By the date of the hearing, the exemption had become final. The Bankruptcy Court ruled that Wells Fargo had not violated the stay because the funds were property of the estate and that Wells Fargo had not attempted to collect a debt.

The BAP Doesn't Like the Bank's Policy

The Bankruptcy Appellate Panel disagreed. It held that once the Debtors claimed the funds as exempt, they had an inchoate interest in the funds. This gave them standing to assert a violation of Sec. 362(a)(3), which prohibits acts to "exercise control over property of the estate." The Court found that continuing to hold the funds constituted exercise of control over property of the estate. The Panel wrote:

Wells Fargo asserts that it did not exercise control over property of the estate. We disagree. Wells Fargo could have paid the account funds to the trustee; it did not. Wells Fargo could have released the account funds claimed exempt to the Appellants when demand was made; it did not. Wells Fargo could have sought direction from the bankruptcy court, by way of a motion for relief from stay or otherwise, regarding the account funds; it did not. Instead, it chose to hold the funds until a demand was made for payment that it alone deemed appropriate. If that is not "exercising control over" the funds, we don't know what is. (emphasis added).

. . .

The impact of Wells Fargo's national policy is to turn on its head the balance between rights of parties legislatively created. As a result of the policy, every party, except Wells Fargo, whose rights are impacted by the administrative freeze will need to take action.

Slip Op. at 19, 20.

The BAP remanded for a determination of whether the violation of the stay was willful and whether the debtors were entitled to damages.

The BAP Disagrees With Other Courts

The Ninth Circuit BAP's opinion contrasts with the decisions in Wells Fargo Bank v. Jimenez, 406 B.R. 935 (D. N.M. 2008) and In re Calvin, 329 B.R. 589 (Bankr. S.D. Tex. 2005). In each of those cases, the courts found that until the funds became exempt, they were property of the estate. As a result, the debtors lacked standing to complain that the bank was withholding funds from the trustee. Judge Jeff Bohm was sympathetic to the dilemma faced by the bank, writing:

Under the Bankruptcy Act of 1898, entities owing debts, such as the Bank were shielded from liability even if they paid a debtor post petition as long as the entities were "acting in good faith." (citation omitted). The Bankruptcy Reform Act of 1978 eliminated this provision with the passage of Sec. 542. Entities owing a debt now have exposure to Chapter 7 trustees if payment on the debt is made to the debtor because that debt is owed to the estate until such time as it is abandoned or any exemption becomes final. Under these circumstances, it makes good business sense for the Bank to have instituted a policy that freezes the accounts of depositors who file a Chapter 7 petition. In this manner, the Bank can shield itself from any liability to a trustee while that trustee determines whether the funds are exempt, or nonexempt (or, even if nonexempt, of inconsequential vale to the estate). It is its potential exposure to trustees, not to debtors upon which the Bank must properly focus.

In re Calvin at 604.

A Big Mess

These cases point out an enormous practical problem. Sec. 541 provides that money in the debtor's bank account is property of the estate. Sec. 542 provides that an entity holding property of the estate "shall deliver to the trustee" the property. However, as a practical matter, most funds held by debtors will be exempt or of inconsequential value to the trustee so that the trustee will not administer the asset. Debtors have the expectation that they will continue to be allowed access to the funds since the odds are that they will ultimately receive them. From the Trustee's point of view, it is burdensome to hold funds which will not be administered, but potentially more burdensome to recover those funds from the debtor once they have been spent.

At first blush, the bank appears to be an officious intermeddler. It freezes the funds even when it has no claim to them. Instead of turning them over to the trustee, it holds them. However, Judge Bohm (who was a banker prior to attending law school), has a legitimate point. The Code says turn over the funds. Recognizing that the trustee might not want the funds, the Bank agrees to hold the funds pending direction from the trustee. Of course, trustees rarely provide that direction because it would be burdensome in administering large numbers of cases.

The Ninth Circuit BAP outlined what it believed to be the Bank's options in this situation:

1. It could have turned the funds over to the trustee. This would be appropriate under the Code, but would overwhelm trustees.

2. It could have turned the funds over to the debtor. This would violate the Code and expose the bank to liability.

3. It could have sought direction from the court. While this would be appropriate, it would be very burdensome to the bank when it had to be done in tens of thousands of cases.

Under the Ninth Circuit BAP's opinion, the only viable option for the bank is to transfer the funds to the trustee whether the trustee wants them or not. Of course, there is another option. Trustees could agree to hold banks harmless for allowing debtors access to funds unless directed otherwise. There is no chance that banks will be able to negotiate agreements with hundreds of panel trustees or the the U.S Trustee's office would allow them to agree to it.

Since all of the options under existing law are bad, it might make sense to go back to the "acting in good faith" standard under the Bankruptcy Act of 1898 and leave the bank out of the picture.

Trustee Held Liable for Failure to Remit Sales Taxes

Failure to remit trust fund taxes is a common cause of bankruptcy and personal liability for the owners of a business. Far less common is the case of a bankruptcy trustee held responsible for the same violation. However, that is what happened in the case of Texas Comptroller of Public Accounts v. Liuzza, No. 09-50544 (5th Cir. 7/6/10). The opinion can be found here.

The case arose out of the bankruptcy of Texas Pig Stands, described by the court as a "venerable San Antonio restaurant company." Despite its venerable status, it wound up in chapter 11. The court appointed a chapter 11 trustee after the debtor failed to remit post-petition sales taxes to the Comptroller. Then the chapter 11 trustee failed to remit the taxes. The court confirmed a plan which required the trustee to pay all delinquent post-petition taxes on the effective date of the plan and to remain current on the sales taxes. The trustee did neither. Shortly thereafter, the Comptroller froze the company's bank accounts and revoked its sales tax permit, after which the case was converted to chapter 7.

The Comptroller brought an adversary proceeding seeking to hold the trustee liable for the taxes. The Bankruptcy Court ruled that the trust agreement limited the trustee's liability to gross negligence and ruled against the Comptroller. The District Court reversed. The Fifth Circuit agreed with the District Court that the trustee was liable.

The Court found that the trustee was personally liable for the taxes under state law. However, it also found that if the confirmed plan of reorganization protected the trustee from liability, this would override state law. The Court stated:

The Comptroller is bound to any liability limitations imposed by the Plan, which included the Trust Agreement. The Plan and Trust Agreement are contracts that must be read in their entirety to be given full meaning. (citation omitted). Further, under the governing law of Texas, "exculpatory clauses are strictly construed, and the trustee is relieved of liability only to the extent to which it is clearly provided that he shall be excused."

Opinion, p. 8.

The Trust had inconsistent provisions. On the one hand, it stated that "persons dealing with the Trustee in matters relating to the Trustee have recourse only against the Trust Assets to satisfy any liability incurred by the Trustee to such person in carrying out the terms of this Agreement or the Plan, and the Trustee shall have no personal or individual obligation to satisfy such obligation. . . ." However, the Trust Agreement also provided that "Except in the case of fraud, willful misconduct or gross negligence, the Trustee shall not be liable for any loss or damage by reason of any action taken or omitted by him pursuant to the discretion, power and authority conferred on him by this Agreement or the Plan." Reading the two provisions together, the Court found that the Trustee had no personal liability so long as he followed the plan and did not commit fraud or willful misconduct. The Court concluded:

Luizza exceeded his authority, violated the Plan, and committed willful misconduct. Accordingly the Trust Agreement does not limit his liability.

Opinion, p. 9.

There are two lessons here.

The first is that entrepreneurs and fiduciaries occupy much different realms. Entrepreneurs take big risks in the hope of big gains. Occasionally it might make rational sense for an entrepreneur to gamble on not paying trust fund taxes in the hope of preserving the enterprise(although usually not). However, fiduciaries don't get paid extra to take risks. Therefore, it will never make sense for a fiduciary to incur personal liability in the hope of making the case work.

Second, this was not a case where better drafting could have saved the day. While the fatal language was probably boilerplate carried over from another document, it would be hard to draft around this problem. The exculpatory provision of the trust document contained exceptions for fraud, willful misconduct and gross negligence. It also limited the exculpatory provision to actions taken "pursuant to the discretion, power and authority conferred on him by this Agreement or the Plan." Thus, the Court was able to find liability because failure to pay the taxes was not authorized by the plan and constituted willful misconduct. It would have been a closer case if the trust had simply stated that the Trustee would not be liable absent fraud or gross negligence or even limited it to just fraud. However, the more broadly the exculpatory provision is drafted, the more likely it would be to draw objection. Further, in order to avoid the problem, the trust's drafters would have to have contemplated that the trustee would continue to misappropriate trust funds. If that were the case, they should not have supported him for trustee.

This is a harsh result for a trustee who received no personal benefit and thought he was doing the right thing for the estate. However, it is often said that insanity is doing the same thing over and over and expecting a different result. In this case, both the debtor in possession and the chapter 11 trustee failed to remit taxes. When this happened, the Comptroller became upset and demanded relief from the Bankruptcy Court. Thus, a reasonable person would have been on notice that continued failure to pay the taxes could lead to bad results. Bankruptcy is a court of second, third and fourth chances. However, eventually the chances run out, even for a trustee.

Kagan on Christmas Day

I am not sure whether this is amusing or appalling or just weird. Sen. Lindsay Graham starts talking about the Christmas Day Bomber, but ends up asking "where were you at on Christmas Day." Ms. Kagan gamely tries to make sense out of the question before the Senator clarifies that he just wants to know where she was.



While Sen. Graham sets Ms. Kagan up for a good applause line, his subsequent attempt to equate Christmas and Hanukkah is a bit awkward. For those who are a little unsure about the reference, I am told that it is a Jewish-American tradition to eat Chinese food on Christmas day because a) it is a day off and b) Chinese restaurants are open on Christmas Day. However, it has no religious significance.

It is worth noting that once she understood the question, Ms. Kagan answered directly and unequivocally.

Supreme Court Decides Skilling Case

In an offshoot from the collapse of Enron Corporation, the Supreme Court has ruled that the conviction of Jeffrey Skilling for conspiracy to commit "honest-services" wire fraud must be reversed. However, it rejected his contention that he should have been granted a change of venue. The Supreme Court ruled that in order to bring a criminal charge for deprivation of honest services, the defendant must have received bribes or kickbacks from a third party which caused him to deprive his employer of honest services. Merely engaging in self-dealing is not sufficient to invoke the criminal penalty. The opinion can be found here. United States v. Skilling, 561 U.S. ____ (6/24/10).

Barbara Houser Like You've Never Seen Her Before

For those of you familiar with Barbara Houser as a serious, scholarly judge, you might want to check out her wilder side. She is having way too much fun in this video promoting the 2010 National Conference of Bankruptcy Judges in New Orleans.

Do Bankruptcy Judges Have Class (Certification Ability)?

While bankruptcy has been described as the epitomy of a class action (that is, an action by the debtor against all of his creditors), there has been some controversy over whether a bankruptcy court could certify a class consisting of debtors against a single lender. In a new opinion, the Fifth Circuit has held that Bankruptcy Judges may certify a class consisting of debtors, but not in the specific case. Matter of Wilborn, No. 09-20415 (5th Cir. 6/18/10).

In Wellborn, several debtors claimed that Wells Fargo was charging post-petition fees and expenses in chapter 13 cases without obtaining court approval. They sought to obtain certification of a class of debtors who had filed chapter 13 bankruptcy in the Southern District of Texas over a five year period where Wells Fargo was the lender or servicer. The Bankruptcy Court granted class certification as to a class consisting of 1,236 members.

The Fifth Circuit found that the Bankruptcy Court could certify a class of debtors within the same district even if they did not have the same judge. The court found this based upon the application of Fed.R.Bankr.P. 7023, which makes class actions applicable in bankruptcy court.

However, the Fifth Circuit found that the particular class action failed the requirements of Rule 23(b). Where the circumstances of the individual debtors varied, it was not proper to certify a class. The Court ruled:

Plaintiffs’ claims here fail under the predominance and superiority inquiries because individual issues for each class member, particularly with respect to damages, override class concerns when we consider how the case must be tried. As noted above, the claim that Wells Fargo charged, or charged and collected, undisclosed fees is based on § 506(b) of the Bankruptcy Code and Rule 2016. There is disagreement among the bankruptcy courts as to the scope of the requirement under § 506(b) and Rule 2016 for lenders to obtain court approval before assessing contractually-allowed fees.19 For purposes of reviewing the certification order, we will assume, without deciding, that prior disclosure and approval are necessary. See Langbecker v. Elec. Data Sys. Corp.20 However, when we “evaluate with rigor,” as we must, the claims and the Rule 23 requirements, we conclude that class adjudication of the case is not warranted. The cases of the individual named plaintiffs show how the circumstances of the fees charged by or paid to Wells Fargo may vary from debtor to debtor and illustrate the many underlying circumstances of the charges that would need to be considered. In the case of Wilborn, the parties entered into an agreed order to modify the stay after Wilborn defaulted on her loan post-petition. The agreed order required Wilborn to resume payments to Wells Fargo, but when Wilborn could not comply with the order, the automatic stay terminated under the terms of the order. In order to avoid the resulting foreclosure, Wilborn agreed to a loan modification, pursuant to which she agreed to pay certain fees and costs in addition to the delinquency. The Flournoys also defaulted on their loan postpetition, but the bankruptcy court entered an agreed order modifying the stay to allow the Flournoys to cure post-petition delinquencies and to pay fees and costs, which were then approved by the court. Finally, the bankruptcy court allowed Martin to sell her home outside of bankruptcy and all fees and costs accrued to the loan were paid at the closing.

The bankruptcy court certifying this class action recognized that differing events had occurred within each individual debtor’s bankruptcy case, but the court held that because all plaintiffs had fees and costs charged to their accounts by Wells Fargo during the pendency of the bankruptcies, common issues of law or fact predominate over individual issues. But this ignores how and why certain fees were charged or paid. The circumstances surrounding the charging of fees require an individual assessment of the claims. It appears that some debtors, like Wilborn, may have agreed to certain fees as an inducement to Wells Fargo for a loan modification and provided additional consideration for the modification. In other cases at least partial fees were approved for some debtors.

Such varying circumstances will require the court to examine each individual bankruptcy case. The bankruptcy court cannot require Wells Fargo to simply disgorge all fees that were not previously approved because it is evident that there has been a wide “array of charges tailored” to each individual debtor. See Maldonado, 493 F.3d at 525–26.

In some cases it may be appropriate to require Wells Fargo to disgorge fees, but we think that is for the bankruptcy court to decide. The differing circumstances of the debtors render the reasonableness of the individual charges a fact-specific inquiry rather than a class-oriented decision. See Maldonado, 493 F.3d at 526. In some instances, it may also be necessary to determine whether fees were actually imposed on the debtors or merely recorded on internal records. See In re Padilla, 379 B.R. 643, 662 (Bankr. S.D. Tex. 2007) (“The Bankruptcy Code does not prohibit [creditors] from maintaining internal records of costs incurred.”). Furthermore, where fees have been imposed Wells Fargo may have viable defenses to some plaintiffs’ claims, such as waiver or estoppel. See In re Monumental Life Ins. Co. Finally, the rulings of different 22 bankruptcy judges during their cases may affect the computation of allowable charges by Wells Fargo. In short, the myriad issues that may arise in each case as towhether and how fees and costs were imposed preclude a class-wide disposition of the case under Rule 23(b)(3).

For similar reasons, class certification is improper under Rule 23(b)(2). The Rule 23(b)(2) inquiry focuses on whether the putative class defendant “has acted or refused to act on grounds that apply generally to the class” so that injunctive or declaratory relief is appropriate for the class as a whole. See FED. R. CIV. P. 23(b)(2). Again, the circumstances and court orders differ between the judges and cases. And the injunctive or declaratory relief sought by the plaintiffs must predominate over claims for monetary relief. Maldonado, 493 F.3d at 524. This requires that requests for monetary relief be incidental to the class-wide injunctive or declaratory relief so that plaintiffs will be automatically entitled to the monetary remuneration once liability is established for the class. See Allison, 151 F.3d at 416. The monetary relief must be “capable of computation by means of objective standards and not dependent in any significant way on the intangible, subjective differences of each class member’s circumstances.” Id. at 415. The Plaintiffs’ request for disgorgement of fees is not merely incidental to the sought-after injunction and declaration. The amount that each plaintiff was charged, perhaps the amount that is “reasonable,” and any amount to be disgorged will depend on the specific circumstances of each class member and whether and how fees were imposed. See Maldonado, 493 F.3d at 524. We therefore disagree with the bankruptcy court’s determination that disgorgement amounts may be determined with mathematical certainty absent individual hearings. The class certification under Rule 23(b)(2) was therefore improper.

Opinion, at 11-13.

The conclusion from this opinion seems to be that class actions in bankruptcy are permissible, but that the requirements of Rule 23 still control. Merely because a practice affects multiple parties does not justify a class action.