Source: https://www.naag.org/publications/nagtri-newsletters/bankruptcy-bulletin1/bankruptcy-bulletin-january-march-2018.php
Timestamp: 2019-04-19 19:01:17+00:00

Document:
This year’s bankruptcy seminar will be held from Tuesday to Friday, October 16-19, 2018 in Columbus Ohio at the Sheraton Columbus at Capitol Square. The program begins with a 2-5 pm session on Tuesday to give bankruptcy novices an overall introduction to the topic, while there will be an optional session for more experienced practitioners. Then, on Wednesday morning, we will begin three days of sessions devoted to the full gamut of bankruptcy topics, ending at 3:30 on Friday afternoon. There will be a strong emphasis on demystifying bankruptcy for those who are new to the subject, with a number of sessions devoted to very practical, nuts and bolts discussions. For those who have attended before and/or who have more experience in bankruptcy, we will be having sessions that will focus on the more complicated or specialized issues that can arise in bankruptcy cases from time to time and will be looking at the nuts and bolts of collecting on and enforcing claims and other governmental interests. We will have separate sessions that focus on tax and regulatory issues as well as the special concerns of local governmental agencies, a session on ethics, and an interactive session on preparing for and trying an adversary proceeding. In short for anyone who finds bankruptcy impacting on their work load (which in the end means practically everyone), this will be a session that will give you a broad understanding of the issues and hopefully an appetite to learn even more.
We’ll have more information, including as to whether and how much there may be in the way of scholarship funding, in our next announcement, but we want to make sure you keep the dates open so as many of you as possible can attend.
U.S. Bank N.A. v. Village at Lakeridge, LLC, 138 S.Ct,. 960 (3/5/18). Clear error was the proper standard for review of a bankruptcy court’s fact-based determination about a party’s status as a non-statutory insider.
The Code statutorily defines certain parties as being “insiders,” based on factors such as whether they are owners, principal officers, etc. Because the definition is stated to “include” those parties, it can also include others (referred to as “nonstatutory insiders”) who are not specifically described but who have a relationship that is so closely entwined with the debtor that, on the facts, that person would not interact with the debtor on an arms-length basis. The question as to whether the facts as found, when analyzed under the applicable standard, would result in a finding that the party did or did not act at arms-length was a mixed question of law and fact. As such, the Court held, the Court of Appeals correctly applied “clear error” rather than de novo review of the analysis by the lower courts. While in some cases, the parties might be arguing about an overarching legal standard to apply and, in such a case, the review of that purely legal issue could be de novo, but, where the parties are primarily arguing about application of an agreed standard to particular facts, that is not the sort of scenario in which appellate courts are expected to step in and start over from scratch. The opinion in the end did little, largely because as four concurring justices (Sotomayor, Kennedy, Thomas, and Gorsuch) noted, the Court had not granted certiorari on whether the test used by the Ninth Circuit was correct and, hence, the more useful analysis; i.e., what standard should be used, was not before the court and was not decided in this case.
Merit Mgmt. Group, LP v. FTI Consulting, Inc., 138 S.Ct. 883 (2/27/18). Where a financial entity is merely a conduit through which a challenged transfer is made between the debtor and a shareholder, the Section 546(e) safe harbor does not apply to protect the entity.
The trustee sought to avoid a transfer that involved the purchase of stock from a number of entities. Rather than a payment being made directly from the buyer to the seller, the funds were passed through two “financial institutions” (as defined in Section 546(e)), along the way. That section provides that the trustee may not avoid a transfer made “by or to (or for the benefit of) a “financial institution” in connection with a “securities contract.” The original language came from a case where transfers by a bankruptcy commodity broker to a clearing house were allowed to be attacked as constructively fraudulent transfers and Congress wanted to provide a safe harbor for securities transactions because of the potential for disrupting the securities market. The question here is whether, if a qualifying financial institution is only involved as a conduit, that safe harbor exclusion applies. Here, one bank wired the purchase price to a second bank that served as an escrow agent to hold the purchase funds and the parties’ stock certificates until the closing date when the two items were exchanged for each other. When the trustee sought to avoid the overall purchase transaction under Section 548 as a fraudulent transfer, the issue was whether the final recipients of the funds could be protected from that action merely because their payments passed through financial entities (that were not themselves being sued by the trustee) on the way to them. Five Circuits did apply the safe harbor; two did not.
The Supreme Court unanimously agreed with the minority view. It first held that the only relevant transfer to be considered was the one the trustee actually sought to avoid, which here was the overall transfer from the buyer to the seller (neither of whom was a financial institution), not the intermediate transfers that went through such institutions. The trustee is free to define the transfer he wishes to attack as he chooses and, if the funds can be recovered from the defendant without regard to how it acquired them, it is irrelevant what other parties were involved in making the transfer. (Just as, if the buyer handed a package with cash in it to the Post Office and the postal employee delivered it to seller; no one would consider the sovereign immunity of the United States, no more here do the rights of the banks need to be considered.) The language about a transfer being made “for the benefit of” an entity was merely meant to make the safe harbor and the avoidance powers congruent, not to impose an additional burden on the trustee.
Kimzey v. Premium Casing Equip., LLC, 2018 U.S. Dist. LEXIS 42744 (W.D. La. 3/14/18). Lease payment was given administrative status even though equipment not actually used.
Where the debtor’s officials made a considered decision to continue leases for equipment that supplemented its own equipment in order to ensure that it had adequate capacity to handle orders if there were any problems with its own equipment, the payments were administrative expenses even if, in the end, the plant managers managed to avoid actually using the equipment during the bankruptcy. The fact that the equipment was maintained largely as insurance did not mean that its costs were not “reasonable and necessary” expenses, any more than insurance costs would not qualify for administrative status just because no claim was made on the policy during its term.
In re Hill, 2018 Bankr. LEXIS 506 (Bankr. N.D. Ill. 2/22/18). When car securing loan was impounded and later destroyed, creditor no longer held secured claim.
The debtor filed a Chapter 13 plan that proposed to pay the full value of the lender’s secured claim. At some point during the case, though, the car was impounded for unpaid parking tickets. The city notified the debtor and the lender of the impoundment which, under city ordinance, would allow the car to be reclaimed upon payment of the (some $2,000) of parking tickets. The debtor could not afford to do so and did nothing to retrieve the car. The creditor did nothing and, eventually, the city crushed the car to dispose of it. The debtor thereafter proposed to treat the creditor as now holding an unsecured claim and the court agreed. The creditor could have taken its own steps to protect the collateral securing its claim (or at least determining whether the debtor would do so). When it did not, and the collateral no longer existed, the lender was not secured and could not demand treatment different from any unsecured creditor.
Beem v. Ferguson, 2108 U.S. App. LEXIS 3029 (11th Cir. 2/6/18). Motion filed in main case asserting objection to discharge and spelling out facts and legal issues in great detail could be treated as equivalent of timely adversary complaint; later actual complaint could relate back.
The deadline for filing an adversary complaint objecting to the debtor’s discharge in normally enforced quite strictly. Here, though, although the filing made in the main case was clearly not the correct way to proceed, the court treated a motion that was filed prior to the deadline and that provided all of the information that would be contained in an adversary complaint as being sufficient to be treated as the equivalent of an actual, timely-filed complaint. A later complaint was allowed to relate back to the motion and be treated as an amendment thereto under Rule 7015. The approach is similar to that where courts treat filings that are not submitted on the proof of claim form, but that otherwise provide the necessary facts and make a demand on the debtor for payment, as “informal proofs of claim” that can be allowed.
Palmeroni v. N.V.E., Inc., 2018 U.S. Dist. LEXIS 29238 (M.D. Penn. 2/23/18). Where creditor’s motion to lift stay and objection to confirmation of Chapter 13 plan recited facts of debtor’s acts and objected to discharge, court held in dicta that later complaint could relate back to them.
Under facts very similar to Beem, the district court did not accept an interlocutory appeal of the bankruptcy court’s decision to move forward on a late-filed discharge complaint where the creditor had filed two earlier documents that contained all of the facts and arguments as to why the creditor’s debt should be excepted from discharge. The court noted that numerous decisions had allowed a correct but untimely document to relate back to earlier, timely document that were procedurally incorrect. As such, it saw no reason to allow early appeal of the decision here.
Mid-South Maint., Inc. v. Jones (In re Jones), 2018 Bankr. LEXIS 659 (Banrk. N.D. Miss. 3/9/18). Accepting embezzled funds with reckless disregard for their origin is fraud.
The debtor was a serial embezzler. She took the funds she stole from her employer and placed them in accounts in her parents’ names. They spent the money without ever inquiring as to how it ended up in their bank accounts even though they knew their daughter had embezzled funds before. The court held that reckless disregard for the possibility that one was received embezzled funds was sufficient to make one guilty of fraud within the meaning of Section 523(a)(2)(A), akin to the finding in Husky Intern. Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016) that had concluded that “fraud” could be found (for purposes of a “fraudulent” transfer) even if there were no false statements made by the debtor.
While a number of earlier cases suggested that a student “loan” could only exist where money changed hands between the parties (i.e., the college would give the student a sum of money which the student then turned around and paid to the school for tuition along with a promise to pay back the initial grant of funds), the court here took a more functional approach to the issue. There clearly was an extension of credit by the college covering the tuition costs and a formal agreement by the debtor to repay those amounts. Nothing more was needed for the debt here to be treated as a nondischargeable student loan.
TK Holdings, Inc. v. Hawai’I (In re TK Holdings Inc.), 2018 Bankr. LEXIS 414 (Bankr. D. Del. 2/14/18) (vacated by order approving settlement stipulation dated 4/6/2018, Dkt. No. 2594). Discharge exception in Section 1141(d)(6) did not cover claims by states for fraudulently-caused harms done to its citizens.
Until 2005, a corporation that confirmed a plan of reorganization received a discharge of all its debts of any nature, based essentially on the premise that the plan divided all of the debtor’s assets – including its future earning capacity -- and accordingly, that there was nothing left over that could be allocated to a creditor whose debt was not discharged. (An individual, on the other hand, does not have his entire life turned over to creditors so a discharge exception can apply to the future funds he or she can earn.) The BAPCPA amendments, though, added Section 1141(d)(6) that provided that confirmation did not discharge a debt of a kind specified in Section 523(a)(2) that is owed to a domestic governmental unit, or owed to a person as the result of an action filed under the False Claims Act (31 U.S.C. § 3729 et seq.) or a similar state statute. (The latter provision is meant to apply to private qui tam plaintiffs who bring False Claims Act suits in the name and on behalf of the government. See Section 3730(b)).
Takata made air bags and, due to an unfortunate design defect that it took great pains to hide for a number of years, a number of those bags, instead of protecting a car’s inhabitants, blew up with great force and killed or injured them. As the injuries mounted and Takata’s fraudulent concealment became known, it was sued by many parties, including the states of Hawai’i, New Mexico, and the U.S. Virgin Islands. (Other states carried on a separate multistate investigation and settlement process.) When the debtor filed bankruptcy, those three states filed adversary complaints asserting that their claims, filed on behalf of their injured citizens, were not discharged under Section 1141(d)(6). The debtor moved to dismiss the complaint, arguing first that the States’ claim are not debts “owed to” a governmental unit, but rather only to its citizens. The court disagreed, holding that the statutes under which the States filed do provide for it to recover payments for violations directly in its own name.
The court then turned to the debtor’s second argument; i.e., that its conduct did not fall under Section 523(a)(2). The court upheld the debtor’s original contention in a different form – although the government could collect the debt in its own right, the false statements were not made to it and, thus, did not fall within Section 523(a)(2)’s provisions. The States pointed out that there were numerous cases in which they had been able to assert similar claims directly under Section 523(a)(2) with regard to fraudulent statements made by debtors to the state’s citizens but the court noted that those cases were all against individuals and that, as such, the directly defrauded victim could equally have brought their own action against the debtor. The Debtor argued that it would be in derogation of the Code’s structure to protect the State’s claims here but not those of the individual victims. The court agreed and then stated that the fraud was not shown because the false statements were not made to the States but rather to the consumers so the State could not have relied thereon. The court held that only where the State itself was the direct victim could there be a showing that Section 523(a)(2) was met. However, whatever the logic of that argument, it flies in the face of the decisions cited above that do find fraud in the discharge cases involving individual debtors. Those cases used the reliance of the underlying consumer victims to find fraud, even though the debt was owed to and collected by the State. Yet, here, the court required that the State itself be the party that relied on the false statements merely because a corporation was involved.
In short, what the court gave with one hand – that this was a debt owed to the States, not the consumers on whose behalf it acted – it took away with the other hand by finding that the States could not satisfy the reliance element because they were not the consumers who had been lied to. The court did this based on its view that it would contravene the Code’s priority and distribution schemes to allow the States to recover but not the consumers although that a) assumes the answer that the case was meant to decide (after all, if this provision was meant to broadly protect State claims, it would not contravene the Code to do so), and b) assumes that the Code never privileges States when they are carrying out police and regulatory actions even if the same action would not be allowed by the individual victims. That disparate treatment could have been devised in recognition of the a) State’s prosecutorial discretion in agreeing to a reasonable settlement, or b) the efficiency of a collective action by the State and/or c) fact that payments to States will in most cases end up in victims’ hands in the end. Any or all of those considerations could explain why Congress excepted the debt to the states but not to individuals.
In any event, after a settlement was reached with the three states, providing for roughly $6.8 million for state claims and $200,000 for fees and costs (in lieu of the multi-billion dollar proofs of claim filed by the States), the debtors and the States moved to have the decision vacated and the Court approved that settlement on April 6, 2018. Thus, the decision no longer exists but its analysis needs to be reckoned with in future cases.
In re Bravo, 2018 Bankr. LEXIS 340 (Bankr. W.D. Wash. 2/8/18). Various costs of prosecution and fees imposed in criminal proceeding were excepted under Section 523(a)(7).
Based in part on their treatment under state law, and in part on the broad definition of a penalty adopted by the Court in Kelly v. Robinson, 479 U.S. 36 (1986) to hold that all aspects of a state criminal sentence were excepted from the debtor’s discharge, the court here concluded that a variety of charges that were included in the “Principal Penalty” imposed by Washington State, and added thereto (such as costs for crime victim assessments, DNA database fees, Criminal Filing Fees, and attorney fees and costs for the court-appointed lawyer) were all part of the nondischargeable criminal penalty.
Lansden v. Jones (In re Jones), 2018 Bankr. LEXIS 213 (Bankr. E.D. Tenn. 1/26/18). Good discussion of differences between false pretenses and false representations.
Armstrong v. Oslin (In re Oslin), 2018 Bankr. LEXIS 168 (Bankr. N.D. Okla. 1/24/18). Owner of bar that served alcohol to minor could discharge judgment for personal injury caused by minor who caused accident while driving drunk.
Many states impose liability (under “dram shop” laws) on those who serve liquor to obviously intoxicated persons or to minors for injuries caused by those persons while driving drunk. Such a judgment was imposed here but the court held that it could not be excepted from discharge. Section 523(a)(6) covers willful and malicious injuries but it does not extend the liability of the person carrying out the act (“drunk driving”) to someone else through vicarious liability. Nor did the complaint allege that debtor as a matter of her own personal knowledge and acts (failure to adequately supervise the bar) either intended to harm the victim or had objectively certain knowledge that her conduct would cause harm. A strong possibility is not enough and that is all that could be shown here. Because of these problems with proof under Section 523(a)(6), Congress later enacted Section 523(a)(9), which applied directly to drunk driving but it again only applies to injury caused when the debtor is driving drunk, not when the debtor sold alcohol to someone else who drove drunk. Accordingly, the debtor could discharge all liability.
Anderson v. Credit One Bank, N.A. (In re Anderson), 2018 U.S. App. LEXIS 5703 (2nd Cir. 3/7/18). Debtor could not be required to arbitrate claim that creditor’s action violated discharge.
The lender refused to change the description of the debtor’s obligation with the credit bureaus after the debtor received his discharge. He sued, arguing that this was an attempt to coerce him to pay that debt and the lender sought to force him into arbitration (which would have, inter alia, precluded him from bringing his claim as a class action). Arbitration, however, cannot be forced on a debtor where it concerns a “core proceeding” (enforcement of the debtor’s fresh start) that is at the “core” of bankruptcy’s very purpose, and the relief sought in the action is critical to ensuring the debtor’s protection under the discharge. As such, the Second Circuit held, the matter should remain within the enforcement realm of the bankruptcy court.
Dahlin v. Lyondell Chem. Co., 881 F.3d 599 (8th Cir. 2018). Debtor need not list every predecessor or identify potential forms of liability it may have incurred to satisfy due process.
The plaintiff here acquired leukemia based (according to a jury verdict) on exposure to benzene during the 1990s at a facility that eventually became owned by a company that was a subsidiary to the Lyondell debtors. The notice in the Lyondell bankruptcy under the Federal Rules only required identification of names used within the prior eight years, and the company at issue was acquired long before that. It did not include any reference to potential liability from benzene exposure or to the particular facility where the exposure occurred, even though, prior to the bankruptcy, Lyondell had been fined by the EPA with respect to that site, had been sued numerous times for benzene exposure, and had been required to remediate the site at issue. The district court thought those facts were sufficient to show that due process was not satisfied, even if there was literal compliance with the Federal Rules. The Eighth Circuit agreed that due process issues could still be raised, but held that it was satisfied here. It was not enough to show that the liability was foreseeable for creditors to be “known,” but the court held they must also be “reasonably ascertainable,” and, individual persons who might be subject to benzene exposure would not be (particularly when they did not work for the debtor or its predecessors directly).
Put a different way, at the very least, that would suggest that if someone does see the publication notice, they could actually learn that they are affected, but it is clear that the notice here would give no information even if the plaintiff had read it. The court in Mullane was concerned about the burden for the party there in trying to identify and give actual notice to any potential party but the opinion does not speak to the content of the publication notice, which was not disputed. The courts that conflate the questions of “who is entitled to notice” and “what must a publication notice say” go far beyond what Mullane says – particularly since they typically do so without any consideration of how clear-cut the potential for liability is, even if the precise persons who will suffer that liability are still unknown. The case here is a prime example, since the potential for benzene exposure suits was not only foreseeable, but actual. This issue has not returned to the Supreme Court but perhaps it should to clarify whether due process is really so limited.
Consumer Financial Protection Bureau v. Think Finance, LLC, 2018 U.S. Dist. LEXIS 19480 (D. Mont. 2/6/18). Court refused to transfer police and regulatory action pending in district court in different state to debtor’s bankruptcy court.
The debtor filed bankruptcy in Texas after settlement talks with the CFPB broke down. The CFPB filed a police and regulatory action against the debtor in Montana a few weeks later, due in part to the presence in Montana of tribal lenders whose debts the debtor was charged with trying to collect improperly, as well as on the basis of the specific law applicable in Montana to such actions. The debtor sought to transfer the action to the district in which the bankruptcy court sat (and then would seek to have the matter referred to that bankruptcy court) and asked the Texas district court to apply 28 U.S.C. 1412, a bankruptcy specific transfer statute. That section allows transfer for either the interest of justice or the convenience of the parties and generally implies a preference for allowing the transfer. The court first held that it would not apply that section, but rather limit its analysis to Section 1404, the general transfer section, for two reasons.
First, Section 1412 only applies to matters arising “under title 11” – and the proceeding here was only “related to” the bankruptcy case. Second, and more importantly perhaps, the court concluded that the presence of a police and regulatory action, which the Code protects in many ways, means that there should be no presumption about the transfer decision and the concerns of the regulatory agency should be given considerable weight. That could be done through using Section 1404 which requires the court to find that both criteria have been met, not just one. In light of the factors underlying the CFPB’s choice as to where to file its proceeding, the district court held the balance weighed in favor of deferring to the CFPB’s choice of forum.
One additional point that the district court did not note, but that would provide further support for the position here is the contradiction with 28 U.S.C. 1452(a) that a contrary position would create. Under Section 1452, a police and regulatory action is not subject to the normal provision allowing removal to the local district court (and reference to the bankruptcy court) and is not subject to the automatic stay so litigation continues in the chosen nonbankruptcy forum. Yet if, by happenstance, there is already an action pending in a different district court, a ruling that allows a ready transference to a foreign district court (and reference by that court) would leave the regulatory agency, not just in federal court but in a whole different location from where it had started out to litigate. Thus, this ruling is consistent with the limits set out in Section 1452.
Gardens Reg’l Hosp. & Med. Ctr., Inc. v. California (In re Gardens Reg’l Hosp. & Med. Ctr., Inc.), 2018 Bankr. LEXIS 732 (9th Cir. BAP 3/12/18). Supplemental Medi-Cal payments from state could be setoff against supplemental fees charged to hospital without violating stay.
The state has a program of assessing Medi-Cal fees against each hospital in the state based upon the number of days and types of patient care provided. Those fees are then returned to various hospitals based on the Medi-Cal services they provide. The two payments use different formulas so it is quite possible for a hospital to gain more from the payments than the fees assessed or vice versa. Here, after the hospital ceased paying the fees, the state began recouping the fees from the supplemental payments that would otherwise go to the hospital. The BAP found that this was lawful, in that the offset of payments was true recoupment and, as such, was not barred by the stay. The fees charged and payments received were part of a single, interconnected system such that there was a sufficient “logical relationship” to warrant allowing the offset to take place even after the bankruptcy was filed. The fact that the fees paid and benefits received could vary widely was simply indicative of the redistributional nature of the program and not an indication that the state was not entitled to recoup the payments it would otherwise make against the fees the hospital was failing to pay. The relationship is particularly clear since the reciprocal obligations were part of the provider agreement the hospital signed.
Baechel v. Republic Storage Sys., LLC, 2018 U.S. Dist. LEXIS 39164 (N.D. Ohio 3/9/18). Non-bankruptcy court can consider on its own whether to “extend” stay to third party.
It is clearly recognized that courts other than the bankruptcy court have the power to determine if the stay applies to their actions, while only the bankruptcy court can modify or lift the stay if it applies. The question here was the scope of the non-bankruptcy court’s authority to “extend” the automatic stay to a third party whose rights were allegedly so entwined with those of the debtor that a judgment against one would functionally be the equivalent of a judgment against the other. The answer to that, to some extent, depends on how one characterizes the source of the authority to make that determination – if one is arguing that the third party is, in essence, so close to the debtor that it is just an alter ego – then arguably the stay always applied automatically to that party and just had to be recognized. As such, the nonbankruptcy court is simply recognizing the fact and construing the stay as it exists. If, on the other hand, one treats the “extension” of the stay as more akin to a decision under Section 105 to impose a discretionary stay that did not exist until a decision was made to do so, then it would seem to be more akin to a decision on modifying the stay that only a bankruptcy court can make. (That said, though, the nonbankruptcy court has its own “inherent authority” to stay that it can perhaps rely on without need to look to the bankruptcy court’s powers.) In any event, the court here decided that it could decide the extension issue on its own (in a “sufficiently entwined” scenario) and impose a stay on a third-party action.
Bandy v. DeLay (In re DeLay), 2018 Bankr. LEXIS 934 (Bankr. C.D. Ill. 3/29/2018). Chapter 7 debtor did not have standing to pursue his pending counterclaim in state court after bankruptcy, doing so violated stay.
The debtor continued to pursue his pending counterclaim after filing bankruptcy even though the suit was property of the estate that was in the trustee’s control. Although she casually told the debtor he could go ahead and pursue the matter, she had no authority to do so without court approval. The problems were compounded by the fact that the debtor had his own attorney listed as the service party for the creditor who, therefore, never learned of the bankruptcy filing or the effects on his case until months later. The court held that the summary judgment the debtor obtained on his counterclaim was void due to the stay violation and that the creditor was entitled to attorneys’ fees and punitive damages for the time he spent trying to fix the problems .
In re Hicks, 2018 Bankr. LEXIS (Bankr. N.D. Ill. 2/1/18). City’s action in booting debtor’s car for numerous unpaid parking tickets (including several incurred postpetition) did not violate stay.
In yet another round of the saga of the City of Chicago versus scofflaws, the court held that the booting of the debtor’s car was protected by the police and regulatory exception to the stay. The issue to be examined was the purpose of the ordinance, not the merits of every violation assessed against the debtor. Even though the booting served a pecuniary interest of the city, the basic purpose of the traffic and safety laws at issue that the city was enforcing were all matters of public interest and deterrence. At least in the case of this debtor (with some 50 pending citations, nine of which were postpetition), the process did serve the city’s goal of keeping a dangerous driver off the road. The same factors also showed that the city had met the public purpose test for the police and regulatory exception. The court did hold, however, that the issue was one that must be made on a case by case basis and largely turned on this debtor’s horrible record, thus leaving the city with a legal fight every time it does boot a car.
Sundquist v. Bank of Am., N.A., (In re Sundquist), 2018 Bankr. LEXIS 135 (Bankr. E.D. Cal. 1/18/18). Court refused to vacate opinion finding bank had engaged in highly violative conduct warranting $45 million in punitive damages but agreed to vacate judgment so it would not have preclusive effect in other cases.
The court had previously issued an opinion finding that Bank of America had enmeshed the debtors in a Kafkaesque nightmare with respect to their attempts to save their home by violating both substantive state law and the automatic stay in numerous ways. In a 2017 decision, the court imposed judgment for $1 million in actual damages and $45 million in punitive damages, of which $5 million would go to the debtors and the other $40 million to various public interest entities, subject to certain remittur provisions. Bank of America was, not surprisingly, unhappy with both the amounts assessed and the opinion, which it viewed as having the potential to be used against it by other borrowers. It initially offered to pay a good bit more than $6 million to the debtors but only if the court dismissed the original case so as to result in vacatur of the opinion. The court declined that “hostage standoff” offer but eventually came up with a solution whereby a) the opinion would still stand, but b) he would vacate the actual judgment and state that the case was not sufficiently final for the opinion to be precedential, and c) the debtors would still get their additional funding (apparently a total of at least $9 million), on d) their promise that they would donate $300,000 to be split among a number of law schools and consumer law centers. On that basis, he viewed the ruling as satisfying all the points of his original decision. And, the intervenors (who would have received the $40 million) indicated they were satisfied with the final result.
In re Smiley, 2018 Bankr. LEXIS 78 (Bankr. N.D. Ill. 1/11/18). Automatic stay does not require creditor holding citation lien against bank account to release it when bankruptcy is filed.
Under state law, a judgment creditor may obtain a “citation lien” against assets held in a bank account to help it collect on a judgment. The creditor here had such a lien when the debtor filed bankruptcy. It did not take further steps to try to collect those assets from the bank account but refused to release its lien when requested by the debtor. The court agreed with the creditor that it was not required to do so. While Thompson v. GMAC, 566 F.3d 699 (7th Cir. 2009) held that merely retaining a repossessed car subject to a security interest was still an “act” under Section 362(a)(3), the court here held that its situation was distinguishable. The car lien was based on a contract and would continue to apply after the car was returned so the creditor would be able to obtain other relief such as an adequate protection order. The citation lien, though, would only apply so long as there were assets being held to which it could apply. If the asserts were released, the lien and specific rights to those assets disappeared and the creditor would not be entitled to adequate protection. Accordingly, the court held the creditor could maintain its lien on those assets – a ruling that also presumably supports the position of the City of Chicago that it need not release cars that it has seized for unpaid traffic fines since doing so would destroy the possessory lien that the city had in the vehicles.
In re Parker, 2018 Bankr. LEXIS 239 (Bankr. N.D. Cal. 1/30/18). Attorney that only provided advice to clients did not violate stay even if client acting on advice might do so.
An attorney was sued for allegedly giving advice to a client that arguably suggested actions that would violate the stay. The court held it did not need to know what advice was given or to decide if the actions would violate the stay since simply giving advice did not itself violate the stay. Only the party acting thereon could be held liable.
Phoenix Surgicals, LLC v. Victor (In re Victor), 2018 Bankr. LEXIS 143 (Bankr. D. Conn. 1/22/18). Filing an adversary proceeding that includes state law claims is not barred by stay.
While, literally read, the automatic stay would apply to even cases filed in the bankruptcy court against the debtor, virtually all courts have held that there is an implicit exception in the stay for cases filed in the home bankruptcy court. This is for both policy reasons – the stay is meant to centralize all litigation and ensure that a single court can schedule litigation so the debtor is not overwhelmed, and a filing before the bankruptcy court serves both of those purposes – and practical reasons, since the bankruptcy court can always lift the stay to allow the action to proceed. Finding that such actions are not stayed to begin with simply removes a burden from all parties by not making a plaintiff go through a “Mother, may I” request to have the stay lifted.
In re Shuey, 2018 Bankr. LEXIS 36 (Bankr. N.D. Ill. 1/3/18). Debtor was not discharged from postpetition obligations to co-signer on debt that was not discharged.
The debtor incurred student loans and her former father-in-law was a co-signer on those loans. When she did not pay them prior to filing bankruptcy, he was obligated to, and did, make the payments thereon. Amounts she owed to him for those prepetition payments were discharged, but when the underlying loan was not discharged in her case, new payment obligations continued to accrue postpetition and he, again, continued to make those payments. Those new payments in turn created new obligations on her that were not discharged in the prior case and he could take steps to collect thereon.
In re Chesteen, 2018 Bankr. LEXIS 360 (Bankr. E.D. La. 2/9/18). Despite the finding by the Supreme Court that the amount charged to those who did not buy insurance under the Affordable Care Act should be viewed as a tax, the court here held it was really a non-priority penalty.
The court concluded that the imposition for failing to buy insurance was a “penalty” as labeled in the statute and, as such, it would not be given priority for payment. The court relegated the Supreme Court’s discussion of this same issue in its decision upholding the legality of the ACA (based on finding that these payments were taxes) to a single footnote stating that it did not view the narrow ruling in the ACA case as extending to the Code’s priority scheme. Since the payment was only imposed for the failure to do something, the court held it was meant to penalize the violation and, as such was not a tax. Notably, though, citing the exact same case that the court here to prove that this payment was meant to be a punishment, the Supreme Court in the ACA case, said, “While the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to do is unlawful. . . . If someone chooses to pay rather than obtain health insurance, they have fully complied with the law.” In light of what seems to be a contradiction, it will be interesting to see what happens on appeal.
In re USA Sales, Inc., 2018 Bankr. LEXIS 286 (Bankr. C.D. Cal. 1/31/18). Cigarette taxes were excise taxes but since returns were due more than three years prior to petition date, taxes were not priority; tolling language in Section 507(a)(8) did not apply.
The debtor was liable to pay taxes on its cigarette sales. It did not make payment for certain sales that the tax agency determined, after an audit, should have been covered and that would result in $1.27 million in liability. The debtor contested its liability for the taxes and that dispute meant that the determination of the taxes was not final for purposes of collecting the taxes as of the date of the petition. Shortly after the debtor filed its petition, the appeals court decided the dispute, and provided for certain sales to be excluded and the others to be made subject to a final determination. The debtor then moved to dispute the priority status of even the taxes that were found to be owing arguing that, because the tax returns for such taxes were due more than three years before the petition date, the taxes no longer enjoyed priority status even though the amount of the taxes had not yet even been finally determined on that date. For income taxes, the date for priority is tied, among other factors, to whether and when taxes have been assessed. But, for excise taxes, the statute ties the priority date to when the underlying return for the transactions at issue was due.
There is a tolling provision at the end of Section 508 that applies to any period during which the government is precluded under applicable nonbankruptcy from collecting the tax due to a request for a hearing and an appeal of any collection action taken or proposed against the debtor. The court agreed with the state that these payments were excise taxes but disagreed that the relevant transaction was the determination of the deficiency; rather, it held, the transaction was the initial sale of the cigarettes that triggered the liability for the taxes. It then held that the tolling provision only applied to requests for hearings in connection with collecting the taxes, not on determining the liability for the tax to begin with, even though, of course, one cannot begin a collection action until liability is determined.
The state argued that this reading was absurd, since it meant the debtor could always deprive the state of its priority status merely by filing a dispute over liability. The court responded that Congress could have meant exactly that since the wording could have used the same reference to when taxes were assessed as was used with regard to income taxes but that was not done. However, that begs the question – one may want to tie an initial deadline to factors other than assessment if they are more appropriate for different types of taxes, but that does not mean that Congress intended to preclude the use of tolling in other situations where the taxes were not yet final. Indeed, under the court’s analysis, this tolling provision would also not apply to most of the other provisions of subsection 507(a)(8) – making it unclear why it was placed at the end which suggests that it is applicable to the section as a whole. Moreover, the original case on this issue, Young v. United States, 535 U.S. 43 (2002) invoked general principles of equitable tolling without relying on any Code section and indeed noted that a particular provision that had specific tolling language was meant to supplement, not displace, the general concepts of equitable tolling. It would be somewhat odd to use a provision that was meant to codify and expand upon those principles to then suggest that no other form of equitable tolling could be invoked unless expressly cited in the Code. In any event, the court did not cite any other cases that had addressed this particular issue so it is, surprisingly, possibly the first time the issue has arisen. It will be interesting to see what happens on appeal.
Kline v. IRS (In re Kline), 2018 Bankr. LEXIS 203 (Bankr. W.D. Ark. 1/25/18). Deadline for filing return was a “filing requirement” for purposes of defining if a document was a return.
Although the Eighth Circuit had previously taken a very lenient view as to what was required for a late filing to qualify as a return, the court here concluded that the new language at the end of Section 523 that provided a definition of a “return” specifically looked to state law to determine the filing requirements for a document to qualify as such. Since the documents here were all filed after the normal deadline for a return to be filed, the court read the language strictly and held that none of them qualified at returns and the taxes shown thereon were nondischargeable.
Hutchinson v. United States (In re Hutchinson), 579 B.R. 860 (Bankr. E.D. Cal. 2018). Tax liens covering penalties may not be avoiding even if they apply to otherwise exempt property.
Under Section 726(a)(4), claims for penalties are subordinated to fourth place for payment. Section 724(a), in turn, provides that the trustee may avoid a lien that secures a claim for such penalties, thereby ensuring that the intended subordination is implemented. If a trustee does not use his powers under Section 724, the debtor has similar, although more limited right to move to avoid liens – namely, he may seek to avoid liens that could have been avoided by the trustee under Section 724 if he would be entitled to exempt the property under Section 522(g)(1). This, in turn, works with the provision in Section 551 that would normally preserve the assets freed up by the trustee’s avoidance action for the estate; if those assets would, however, be subject to being exempted by the debtor, then it would make sense to allow him to assert the avoidance action if the trustee doesn’t do so. The final provision here, though, is Section 522(c)(2)(B) which, as to taxes, essentially takes away from a debtor what Section 522(g)(1) appeared to give him. That section provides that exemption protects property from being held liable for debts except, inter alia¸ for debts secured by a properly filed and noticed tax lien. Thus tax liens trump exemptions and there is no exclusion in that provision for liens protecting tax penalties. That provision applies to avoidance actions by trustees and debtors, which presumably explains why the trustee did not move to avoid the tax lien here – and why the debtor cannot do so either.
Philadelphia Entertainment & Development Partners, LP v. Dept. of Revenue (In re Philadelphia Entertainment & Development Partners, LP), 879 F.3d 492 (3rd Cir. 2018). Bankruptcy court could decide whether revocation of license and forfeiture of license fees was fraudulent transfer without considering validity of state court’s decision upholding forfeiture; Rooker-Feldman doctrine did not apply.
In 2006, the state gaming board awarded a license to the debtor and collected a $50 million fee for the license the following year as provided for under state law. The debtor was required to open its facility by 2008 but did not do so and continued to fail to meet various conditions and milestones despite being given another 18 months to do so. At that point, the board revoked the license and forfeited the fee (again as provided under state law). The debtor appealed the revocation and challenged the forfeiture as an unreasonably harsh sanction. The state Supreme Court denied all of the challenges on March 29, 2012. Just over two years later, on March 31, 2014, the debtor filed a Chapter 11 case and initiated an adversary proceeding (which it needed to file under Section 544 since its case was filed too late to be litigated directly under Section 548.) It asserted that the revocation of the license was a transfer for which it received no value and it sought payment of the $50 million as an amount approximating the value of the transfer.
The bankruptcy court dismissed the adversary action finding that it was barred by the Rooker-Feldman doctrine which bars federal courts (other than the Supreme Court) from sitting in appellate judgment on actions of state courts. It held that the only way the debtor could claim some right in the license that could have been lost to the harm of the estate was to challenge the merits of the underlying state judgment on the revocation. It further held that the claim to a right to compensation was merely the other side of the same coin with respect to challenging the revocation decision. As to any claim that the “transfer” at issue was the failure to refund the fee, the court held that the debtor filed to state a claim since a nonpayment is not itself a transfer. The district court affirmed those various conclusions.
On appeal, the Third Circuit reversed. It noted that there was a tension since “the avoidance of a claim [presumably the court meant a transfer] seems to authorize what the Rooker-Feldman doctrine prohibits – appellate review of state court judgments by [lower] federal courts.” But, the court noted, an avoidance action may proceed to some degree, if based on an independent federal ground, despite Rooker-Feldman, by not implicating the merits of a state court decision. (As one example, one might well have a perfectly valid judgment for future rent, but Section 502(b) would only allow a claim for part of that judgment. That limitation on allowance of the claim does not impugn the state court judgment, it only imposes a separate federal limitation on how much will be paid.) Here, the court held, the trustee’s argument was that the fraudulent transfer provisions meant that the state could not revoke a license without paying value for the revocation – even if the revocation was perfectly proper under state law and a valid exercise of the state’s police and regulatory powers. The court stated that the bankruptcy court could analyze that claim in terms of whether “reasonably equivalent value” was paid without overturning the validity of the state court’s judgment. Under its view (as explicated in much greater length in Great Western Mining & Mineral Co. v. Fox Rothschild, LLP, 615 F.3d 159 (3rd Cir. 2010)), Rooker-Feldman is quite a narrow doctrine that frequently will still allow the federal court to enter decisions on points already addressed by the state court and to reach conclusions directly contrary to those of the state court. Those effects should be dealt with by use of traditional preclusion principles rather than Rooker-Feldman, the Third Circuit held, and remanded the case for analysis along those lines.
That result may be correct and, even if so, claim or issue preclusion will often result in the same outcome, albeit by a different route. The primary concern will be if courts conclude that the revocation of a license granted with clear provision for the fee to be forfeited upon revocation can a) be a transfer, or b) can be treated as a situation where bankruptcy can create a right to refund of the fee that does not exist under state law. It is frequently stated that bankruptcy is not intended to be a “haven for wrongdoers,” but a result that would effectively eliminate the ability to revoke the license (and forfeit the fee) if the state could be forced to undo the forfeiture, would have much that effect. In any case, one will just have to wait and see the results upon remand.
Hackler v. Arianna Holding Co., LLC (In re Hackler), 2018 U.S. Dist. LEXIS 47954 (D. N.J. 3/22/18). Tax sale could be attacked a preferential transfer where payment was far less than value of the property sold.
In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the Court held that a validly conducted foreclosure sale was dispositive of the issue of “value” received for purposes of an fraudulent transfer avoidance action. A number of cases since then, though, have looked at the issue in the context of a tax deed sale which often uses proceedings that are far less likely to obtain a competitive market price for the property. This case also involved the further wrinkle that the trustee sought to assert a preference action which explicitly requires that the court determine what the party would have received in the bankruptcy absent the transfers. In this case, it could not reasonably be argued that the trustee could not have obtained more than the $45,000 owed to the buyer if he were able to sell a property valued at more than $300,000. Nor would the creditor be unfairly harmed since she would still retain her initial lien (and the right to interest at 18%).
Pergament v. Fairfield Univ., 2018 NYLJ LEXIS 1060 (Bankr. E.D. N.Y. 3/28/2018); Pergament v. Hofstra Univ., 2018 Bankr. LEXIS 941 (Bankr. E.D. N.Y. 3/28/18). College was subsequent transferee of payments from student accounts funded by parents.
There have been a number of recent cases where trustees have sought to payments made by debtor-parents to colleges for their children’s tuitions recover as fraudulent transfers on the basis that the parent did not receive any value for the payment. While the cases have argued over whether the parent does obtain value (including from the possibility that the child will be able to afford to move out of the house someday), the case here dealt with a simpler approach that will work as long as the parent trusts his child. The colleges arranged to have student accounts set up into which parents could make irrevocable deposits and then the student decides whether or not to enroll or just to take the money out and spend it at will. The court concluded that, since the student had total dominion and control over the money once deposited, that the student was the initial transferee and the college was a subsequent transferee when the tuition was paid. Under Section 550, then, the college was not liable to return any funds as long as it gave value (to the student) and received the funds in good faith. The fact of the children’s actual control over the accounts removed them from being treated as “mere conduits;” conversely, even though the funds actually moved directly from the parents to the school initially, it took them only in order to transfer them, as a conduit, to the accounts controlled by the students. Accordingly the trustee here lost (and presumably other colleges will take note) and use similar programs.
First Bank of Denton v. Manton Family Partnership, LLLP (In re Manton), 2018 Bankr. LEXIS 543 (Bankr. N.D. Ga. 2/28/18). Fraudulent conveyance action filed prepetition becomes property of estate when bankruptcy filed and only Chapter 7 trustee has standing to pursue.
Private parties had filed a fraudulent conveyance action against the debtor prior to her bankruptcy filing but, after she filed her case, she filed a notice of removal and the trustee then moved to intervene and take over control of the case. (It is unclear why the debtor sought to have the action continued in the bankruptcy case since it may have been too late for the trustee to have pursued it on his own, but it may be that the debtor was hoping to challenge the default judgment that had been previously entered against her in state court.) In any case, the bankruptcy court agreed the action was removable by the debtor as a “party” to the action, even if the trustee would then have sole power to control it. The court also held mandatory abstention did not apply because the right of the trustee to step into the shoes of the preexisting creditor made the action a “core proceeding,” even the matter could exist outside bankruptcy. The court declined to abstain discretionarily or to remand, holding that both of those actions were governed by essentially the same set of equitable considerations which, here, favored keeping the case in bankruptcy court.
Novak v. Univ. of Miami (In re Demetrius), 2018 Bankr. LEXIS 526 (Bankr. D. Conn. 2/27/18). Loans taken out by debtor parents to pay for college tuition where payments went directly to schools were not transfers of the debtors’ property.
Under the Direct Parents PLUS loan program, parents can take out loans that are earmarked for their children’s education and the proceeds of which go directly to their children’s colleges. The funds never come to the debtors and are never available to go into their bank accounts or under their control to pay creditors generally. As such, there is never a transfer of debtor property under this program. At most, creditors could complain about the fact that the debtors are not taking out loans to pay off their debts but there is no such obligation in the Code; the fact that these debtors chose to put themselves further into their debt for their children’s education is not a fraudulent transfer.
McFarland v. Battle Creek State Bank (In re Int’l Mfg. Grp., Inc.), 2018 Bankr. LEXIS 341 (Bankr. E.D. Cal. 2/7/18). Payments made by debtor to third party for value actually furnished by that party on debtor’s behalf not fraudulent even if made as part of overall Ponzi scheme.
Newton v. Metal Craft Fabrication & Sales, LLC (In re Davis), 2018 Bankr. LEXIS 263 (Bankr. E.D. Tenn. 2/1/18). Restitution payment made by debtor to avoid incarceration as part of criminal sentence did not provide “new value.” Payment was preference.
The debtor embezzled $120,000 from her employer. When caught, she agreed to repay the funds as part of her sentence on the criminal charges and made an initial payment of $70,000 partially funded by the sale of her house. She filed bankruptcy within 90 days thereafter and the trustee sought to avoid the payment as a preference. The court agreed that the benefit to her of not being sent to jail did not constitute “new value” within the meaning of the defenses to a preference action. While, to be sure, that result was of value to her, new value is analyzed in terms of what benefit is provided to the other creditors that reduces the loss they would otherwise suffer from the payment being made that reduced estate assets. On that basis, the court found there was no such benefit to creditors here and the payment was avoidable. The originally embezzled funds were part of her estate even if illegally obtained so the employer could not argue that it was merely reclaiming what it always owned. One point not addressed was whether the funds from the sale of her house were otherwise exempt – if so, then paying those funds did not reduce what creditors would otherwise have received.
In re Litton, 2018 Bankr. LEXIS 256 (Bankr. N.D. Miss. 1/30/18). Payments made by debtor’s father on her behalf (and treated as loans to her) were not preferential transfers: no assets of debtor were transferred, funds were earmarked for particular creditor.
To be a preferential transfer, a payment must initially be of assets of the debtor. Here, the debtor owed money to her divorce lawyer and her father agreed to make payments directly to the lawyer. The debtor agreed to repay her father but there was never a time when she received those funds or had control of them. As such, they were not transfers of estate assets since the money was always earmarked for the lawyer.
Kelley v. McDonald (In re Petters Co.), 2018 Bankr. LEXIS 117 (Bankr. D. Minn. 1/17/18). Trustee need not avoid initial transfers in order to sue subsequent transferees as long as he alleges that initial transfer was avoidable.
Section 548 allows the trustee to avoid payments to those beyond initial recipients of fraudulent transfers and Section 550 allows the trustee to recover from those subsequent persons “to the extent that a transfer is avoided under” one of the relevant sections. Although the literal wording of Section 550 suggests an earlier transfer must actually have been avoided by the trustee in order to go after a later recipient, most courts have considered that such a rule could cause too much delay and expense where several transfers might have taken place or where an earlier party might no longer exist to be sued. Those courts have, accordingly, read the section as if it read “to the extent that a transfer is avoidable” and not actually “avoided.” They do so, in part, by reading the “to the extent” language as merely referring to the scope of the transfer being avoided; i.e., if the initial transfer is avoided only in part the later transferees cannot be held liable for more than that. The courts dutifully note that the trustee must prove that the earlier transfer is avoidable and that the later recipients can defend the validity of such transfers, but that is likely to have little practical value since those recipients may have no basis to know of or be able to prove the defenses of the original recipients. Nor is it clear if the trustee can be forced to continue the suit against the initial recipients if he can recover more easily from a later (usually substantially less guilty) party. If not, at best, that party may be left to bear the brunt of trying to sue the original recipient rather than the trustee or the estate as a whole.
LaMonica v. CEVA Grp., PLC (In re CIL Ltd.), 2018 Bankr. LEXIS 36 (Bankr. S.D. N.Y. 1/5/18). Avoidance provisions of Code do not apply to transfers that took place outside U.S. since law does not apply extraterritorially; court has jurisdiction over property of estate wherever located but assets transferred do not become property of estate until recovered; turnover only applied to undisputed claims of ownership.
In an extremely lengthy and complex opinion, the court discussed whether it would be proper to use Section 544, 547, or 548 to attack a transfer that took place among foreign entities offshore from the U.S., even if the net result was allegedly to remove assets from the reach of creditors in the U.S. There is a presumption against extraterritorial application of statutes and the language of the avoidance provisions does not overcome that presumption. Courts that have looked to the reference in Section 541 to the court’s control over property of the debtor and the estate, “no matter where located” to justify going after foreign assets, the court held, do not take into account the additional provision in Section 541(a)(3) that assets subject to an avoidance action do not become property of the estate until actually recovered. The court also noted, as to other assets, that a turnover action can only be brought with respect to assets whose ownership is not subject to a bona fide dispute. It is not meant to be an all-purpose way to strong arm recovery of those assets from a contending party.
Okla. State Treasurer v. Linn Operating, Inc.¸ 2018 U.S. Dist. Dist LEXIS 52890 (S.D. Tex. 3/29/18). Debtor holding “unclaimed property” stands as trustee for such funds and can be required to turn them over to state in accordance with applicable law.
State law required the debtor to hold “unclaimed property,” i.e., rights to payments by third parties who could not be located, in trust for them and to turn those amounts over to the state on demand for it to hold. The court agreed with the state that such funds did not become property of the estate, were not dealt with under the plan, and could be required to be turned over even after confirmation of the plan.
Moyer v. Rosich (In re Rosich), 2018 Bankr. LEXIS 1045 (Bankr. W.D. Mich. 3/30/18). Claim that “exempt” asset was fraudulently created prepetition does not trigger Rule 4003(b)(2) timing.
Under Law v. Siegel, 134 S. Ct. 1188 (2014), the fact that an exemption may be fraudulent (i.e., there was no good-faith basis for claiming it or it was based on fraudulent prepetition conduct to create the exemption) does not serve as a basis to deny the exemption unless the underlying law so provides. The Bankruptcy Code has no provision denying an exemption based on its fraudulent nature and the court has no legal authority to create one. Rule 4003 was amended in 2008 to extend the deadline for filing an objection where the debtor “fraudulently asserted the claim of exemption” but the court held that provision only applied to the debtor’s action during the case in presenting and claiming the exemption. It does not create a substantive basis for objection nor is it directed at an exemption that was openly and accurately claimed by the debtor, even if the exemption is totally frivolous under applicable law.
In re Bolton, 2018 Bankr. LEXIS 144 (Bankr. D. Id. 1/22/18). Debtor’s product liability claim, based on state law, did not arise prepetition where injury from product occurred postpetition. In re Vasquez, 2018 Bankr. LEXIS 498 (Bankr. D. Vt. 2/23/18) (similar issue).
The debtor received a hip replacement prepetition and, at first it appeared to be healing well. Sometime later he noticed some mild discomfort and visited the doctor who saw some indication but no clear proof of a problem with the device. Eventually the problem worsened and the debtor had to have the hip replaced. In the meantime, the debtors had filed bankruptcy at a time between the first twinges of pain and the visit to the doctor but long before any decision was made to take any action about the replacement. The trustee argued that the debtor’s suit against the manufacturer should be treated as accruing prepetition, so that the funds would be property of the estate; the debtor argued otherwise. The issue is the flip side of the question as to when does a claim against the debtor accrue. While it would seem that the two issues should use the same standard, in fact, the analysis is quite different. Claims against the debtor use Section 101(a)(5) which sets a very broad standard that is not tied to state law; claims by the debtor are based on the idea that such a claim is “property of the estate,” and the decision as to what is such property is based on state law.
Here, the court found the claim had not accrued prepetition. Although the issue is relatively close as to such a claim against the debtor (although even then it would probably not be found to have accrued on the petition date), the cases are relatively unanimous that the claim by the debtor is not prepetition property. State law in this case would require discovery of an injury, not just the fact that a defective product had been installed that could cause injury. And, here, the court found that the mild twinging the debtor had felt before the doctor’s visit was not enough to find either injury or clear defect at that time. The court also rejected application of a pre-Code test looking to whether the claim was “sufficiently rooted in the prebankruptcy past,” holding that this was more properly limited to matters where the claim was tied to and based on rights established prepetition where the only question was whether a contingency would come to pass.
Vasquez dealt with a very similar analysis regarding another defective product case where the injury and its tie to the device were not clear at the time of the bankruptcy. The court has an extensive discussion of the issues regarding when the debtor’s claim accrued for state law purposes and looks at the same “sufficiently rooted in the prebankruptcy past” issue noted above.
In re Woodruff, 2018 Bankr. LEXIS 125 (Bankr. M.D. Ga. 1/19/18). Court could deny bad-faith motion to convert to Chapter 7 where cause existed to immediately dismiss or reconvert case.
Section 706 allows a court to dismiss or convert a case for cause. Here, the debtor initially filed a no-asset Chapter 7 case but sought to convert his case to Chapter 11 upon receiving a fairly substantial inheritance shortly after filing that the Trustee sought to administer. The general idea of converting to Chapter 11 would be to allow the debtor to control treatment of that asset. The court found there was no good reason for the conversion since the main asset ($120,000 of stock) was non-exempt and readily liquidatable by the Trustee without the costs and delay of a Chapter 11 plan. Moreover, the debtor had no proposed plan and no disposable income to support a plan that might perhaps substitute earned income for simply paying out the value of the stock. Since the Chapter 11 case would serve little purpose and risked reducing estate assets and prejudicing creditors with no countervailing benefits, the court held that it would be appropriate under Marrama v. Citizens Bank, 549 U.S. 365 (2007), to deny conversion rather than allowing a futile action that would only be undone shortly thereafter.
In re Rent-A-Wreck of America, Inc., 2018 Bankr. LEIXS 406 (Bankr. D. Del. 2/13/18). Petition filed simply to allow solvent debtors to reject lease and oust franchisee from its territory was not filed in good faith; case dismissed.
The debtor had been involved in litigation for an extended period of time with the owner (Schwartz) of the original Rent-A-Wreck concept. The rights to that name and operation went to other parties for everywhere except the original Los Angeles location which Schwartz had retained. The new parties litigated for years with Schwartz over whether he could keep using that name and whether he had to be treated as a franchisee although not paying any royalties. The new owners spent some $2.7 million in legal fees in unsuccessful efforts to push him out and in defending themselves on contempt charges he brought. They then filed bankruptcy and promptly sought to reject whatever agreements were deemed to exist with him. He moved to have the case dismissed as being filed in bad faith and the bankruptcy court agreed. The Code provides many extremely valuable and intrusive tools to an entity in financial distress to help it improve its situation – for the benefit of its creditors. Allowing such tools to be used to allow an entity to reverse the results under state law, as long as it is willing to file bankruptcy, even if it is solvent and in no financial distress, is not a proper use of the Code.
In re RainTree Healthcare of Forsyth LLC, 2018 Bankr. LEXIS 334 (Bankr. M.D. N.C. 2/7/18). Chapter 11 case filed by entity with no operating business and whose only “asset” was license whose renewal had been denied was dismissed; case was objectively futile and subjectively in bad faith.
The debtor purported to be seeking to reorganize in Chapter 11 but had no operating business at all and was purporting to use bankruptcy to obtain value for its only “asset,” a license for nursing home beds. However, since the license had expired and not been renewed due to the debtor’s failure to meet its obligations and the only point of the case was to relitigate issues that had already been resolved, the court saw no objective reason to proceed in Chapter 11 (rather than a Chapter 7 liquidation) and deemed the case to be subjectively in bad faith since it was merely to try to obtain a litigation advantage over other parties that it could not obtain outside bankruptcy.
Snider v. Rogers (In re Rogers), 2018 Bankr. LEXIS 187 (Bankr. W.D. N.Y. 1/25/18). Case dismissed for bad faith where debtor would not testify and assets were missing.
Although this case happened to be in Chapter 12, the same principles apply as in a Chapter 11 filing. The debtor was a farmer who appeared to have lost track of 2100 head of cattle just prior to the bankruptcy (leading to a number of bad puns by the judge) and who invoked the Fifth Amendment rather than testify as to what happened to them. The court had no difficulty in concluding that the debtor was not acting in good faith in filing his case when he concealed (and/or lied about ever having assets) and refused to comply with his duty to provide information about his case. The court held that the matter should be dismissed to allow parties to pursue civil – and possible criminal – actions against the debtor in the state court arena.
Burkhart v. Grigsby, 2018 U.S. App. LEXIS 7928 (4th Cir. 3/29/18). Chapter 13 plan can strip off lien for wholly unsecured loan even if creditor does not file proof of claim.
While a debtor may not strip off even a wholly unsecured lien in Chapter 7, he has greater powers under a Chapter 13 plan. The courts agree that a confirmed plan may include language that “strips off” that lien (as opposed to “stripping down” a partially secured lien). The debtor argued that such a process could only take place in connection with the filing of a claim by the “secured” creditor but the court held that no claim filing was required. Plans routinely affect rights of creditors that do not file a claim and there is no reason to treat a wholly underwater lien holder any differently than other unsecured creditor. Section 506(a) and 1322(b) deal with valuing liens and stripping off unsecured ones; Section 506(d) is the only provision that deals with stripping off a lien when a claim is not allowed but that section is not implicated here.
In re Fishel, 2018 Bankr. LEXIS 965 (Bankr. W.D. Wis. 3/30/18). Chapter 13 eligibility limits are not jurisdictional; if amount of debt is unclear, court can leave issue unresolved and allow case to go forward, if debtor proposes a feasible plan.
The debtor owed student loans although the parties differed as to the amount thereof. There was a strong likelihood, although not a certainty (and the court took no steps to resolve the issue) that the amount owed was in excess of the eligibility limits for Chapter 13. The court relied on cases holding that eligibility was not a “jurisdictional” requirement to find that it had discretion as to whether or not to dismiss the case when the Trustee objected to the debtor’s eligibility to proceed. However, none of those cases ruled on the issue here; i.e., whether the bankruptcy court may override a proper and timely filed objection to eligibility by the trustee because the court believes that the debtor has no viable alternative filing choice. The court may well be correct in its concerns that the Chapter 13 limits may be too low to deal with massive student loan debts or that Chapter 11 would provide far less to creditors, but it is not clear that the statute was meant to allow courts to simply disregard eligibility limits to reach a better result.
In re Pfetzer, 2018 Bankr. LEXIS 833 (Bankr. E.D. Ky. 3/22/18). Deadline for confirmation objections is last date to object that petition was filed in bad faith.
Section 1325(a)(7) explicitly lists “filing a petition in bad faith” as being a basis for objecting to confirmation of the debtor’s plan. The court held, accordingly, that if a creditor files an objection based on Section 1307(c) seeking dismissal for bad faith in filing the petition, such an allegation is subsumed by Section 1325(a)(7) and must be filed by the date for objecting to the plan. That is true even if the plan has not yet been confirmed by the court so that, arguably, there has been no decision made yet on confirmation.
In re Evans, 2018 Bankr. LEXIS 668 (Bankr. D. Ore. 3/8/2018). Debtor can use “direct payments” to avoid paying trustee fee only with respect to unimpaired (i.e., ordinary course, ongoing payments) to creditors.
A Chapter 13 debtor will normally make payments on many aspects of his life, such as for ongoing bills for utilities, mortgages, and non-delinquent secured claims, directly to the creditor without involving the trustee – and doing so avoids paying the Chapter 13 trustee’s fee. Debtors like to do that; Chapter 13 trustees do not, since it impairs their ability to receive the funds needed for their offices to function. By analogy with Chapter 11 case law, impairment assumes a claim was not in default on the petition date and continues to be paid on time or, at most, any default at the filing date was cured by no later than the plan confirmation date. If the creditor rights’ are being affected and it is being forced to refrain from enforcing its rights to collect on a default after confirmation as it could have absent a bankruptcy filing, then it is impaired and payments on such amounts, even if made directly to the creditor must include the trustee’s fees.
In re Gibson, 2018 Bankr. LEXIS 609 (Bankr. C.D. Ill. 3/5/18). Failure of debtor to make direct payments described in plan does not require dismissal of case.
In re Brinton, 2018 U.S. Dist. LEXIS 25868 (D. Ut. 2/15/18). Filing Chapter 13 petition by ineligible debtor is still sufficient to give court jurisdiction to convert case to Chapter 7.
The debt limits in Section 109 for Chapter 13 cases are not jurisdictional; as such, while a person that does not meet them is not eligible to be a Chapter 13 debtor, the filing is not a nullity or outside the bankruptcy court’s jurisdictional powers. It has sufficient authority to accept the case, to consider its own jurisdiction, and then to decide whether to convert or dismiss the case if the debtor is not eligible to be in Chapter 13. The debtor presumably wanted to have the case dismissed if he could not stay in Chapter 13 and sought to bar the court from placing him in Chapter 7 (which he could not automatically dismiss). Having failed to move himself, though for dismissal of his Chapter 13 petition, he could not bar the conversion from being ordered.
In re Eubanks, 2018 Bankr. LEXIS 434 (Bankr. S.D. Ill. 2/16/18). If plan paid 100%, it could be confirmed even though it spread out payments longer than necessary and paid no interest.
Chapter 13 sets up a test for disposable income for above-median income debtors that is based on the rather artificial values set out in the means test. If the plan is not a 100% plan, the debtor must pay all of its disposable income each month for the full commitment period (60 months for above-median income debtors). If the plan does pay creditors in full, though, the Code does not explicitly require that the debtor use all of its income to pay creditors more quickly than 60 months, nor is there any general requirement that interest be paid if the overall timing is delayed. The court, therefore, held that since neither provision was explicitly required by the Code, the debtor was not acting in bad faith by failing to do either. Nor would the Court include a minimum payment provision the trustee sought to include to deal with the possibility of a scenario where the debtor’s income shrank in later months and it could no longer actually pay claims in full. The net result is that debtors are able to unilaterally write themselves what could be a substantial delay in making full payment, not pay any interest during that time period, and be protected if their situation worsens so that creditors are left without full payment. That reading might well be consistent with the literal wording of the Code although it is not entirely clear that doing everything literally allowed is always in good faith. It does illustrate, in any event, some of the more glaring drafting problems included in the BAPCPA.
In re Ripley, 2018 Bankr. LEXIS 311 (Bankr. E.D. N.C. 2/6/18). Debtors could not avoid increasing plan payments by quickly paying making lump sum payment at existing terms.
The debtors greatly increased their income during the case, in large part because the male debtor was a commission salesperson and was given a large new territory during the case. When that information came to the trustee’s attention, the debtors sent the trustee a check for the 15 months of $135 payments remaining under their original plan and sought to have the case treated as being completed. The trustee had moved to modify the plan before the check was processed, but after it had been received. On the timing issue, the court held that a plan could not be treated as completed (so as to bar modifications) until the last payment was actually processed which did not happen here. On the merits, the court held there was sufficient basis to find cause to modify the plan – the debtors’ income had increased by over 50% and their disposable income was likewise higher; the amount was substantial and could not have been predicted at the beginning of the case; and it was appropriate to evaluate the ability to pay with respect to the facts as they existed when the trustee’s motion was heard. Increasing the payment to the level of disposable income would allow all creditors to be paid in full by the end of the original plan term.
In re Meserole, 2018 Bankr. LEXIS 164 (Bankr. W.D. N.Y. 1/24/18). Debtor cannot use second Chapter 13 case to modify effects of prior, substantially consummated plan.
The debtor filed a Chapter 13 case to allow her to catch up on arrears on her mortgage and promised to pay the principal balance of the balloon mortgage at the end of the five years through a sale or refinancing or similar action. The plan was confirmed but, at the end of the time, the debtor had not managed to complete any of those options. She then proposed to file a second Chapter 13 case and spread out the balloon payment over the full five-year term of that plan. The court held she could not do so: a Chapter 13 plan binds the debtor as much as it does the creditors and the debtor may not use a new filing as a way of circumventing the binding effect of the original plan. While there may be some basis to file a second plan if there are unusual, unforeseen circumstances that caused the failure and support the view that the second filing is in good faith, nothing here fit that criteria since it was readily foreseeable that the debtor might not be able to complete the first plan as planned.
In re Humes, 579 B.R. 557 (Bankr. D. Col. 2018). Debtor may not make payments after expiration of five-year period even if it wishes to do so to cure a default.
Although the court was sympathetic to the reasons why the debtor sought additional time to cure a default under its plan (presumably so it could obtain the desired Chapter 13 discharge), it found that the Code intended to set a bright-line deadline for making payments both to ensure that creditors were not unduly delayed in being paid and to keep debtors from being forced into a long-term period of involuntary servitude. The court considered but rejected arguments by some other courts that had held they had latitude in allowing at least some additional time to comply.
Jones v. APR Energy Holdings Ltd. (In re Forge Grp. Power Pty Ltd.), 2018 U.S. Dist. LEXIS 23660 (N.D. Cal. 2/12/18). Foreign debtor must satisfy eligibility requirement under Section 109 to be a debtor, but attorney retainer was sufficient property to qualify.
placing property in the United States, even if only in the form of an attorney retainer for the counsel who is filing the petition, is sufficient to qualify as “property,” at least as long as the debtor has some rights in the retainer on the filing date. That is, a completed payment to the United States attorney would not suffice, but an amount held in escrow until the attorney actually earned it, with a reversionary right in the debtor if it were not all spent, would qualify.
Williams v. Robbins (In re Williams), 2018 Bankr. LEXIS 382 (Bankr. W.D. Va. 2/12/18). Discussion of improper law firm practice model, effect on debtors, and imposition of sanctions.
The enactment of the BAPCPA was meant, at least in part, to protect consumers by imposing greater disclosures and other responsibilities on their counsel. That has, in turn, increased somewhat the cost of filing a bankruptcy case and, in turn, that has led to some who have preyed on those having difficulty meeting those costs. This case describes a law firm that purported to operate nationwide to obtain debtor clients who would use local “partner” attorneys to actually file the cases. While the court found that the situation was sufficiently structured that the local counsel could actually be deemed to be part of this national “firm,” and did not run afoul of the restrictions on fee splitting, the rest of the model was seriously problematic. Potential clients were given the hard sell to sign up, the firm did not adequately monitor the representation by the local counsel, a program was utilized for those who had vehicles to surrender them that greatly harmed the lenders and violated the obligations in the loan documents, and representation documents were not properly and accurately prepared. The court revoked all right for the firm and its principals to operate within the district for five years and fined them a collective total of $300,000. It also fined the two local lawyers in lesser amounts and revoked their rights for one year and for 18 months respectively. There were other sanctions that the state bar might be able to impose but the court left those to that entity to decide upon.
Cadwell v. Kaufman, 2018 U.S. App. LEXIS 8128 (11th Cir. 3/30/18). Section 526(a)(4) is read literally; bankruptcy counsel may not advise consumer debts to pay fees with credit card.
Section 526(a)(4) bars debtor’s counsel from advising their clients to take on debt in order to pay their fees. The question was whether that ban required a showing of any abusive purpose in order to bar the use of a credit card and, if not, whether the ban would violate the First Amendment. The court held that it did not and that the “in contemplation of bankruptcy” language in the section only applied to incurring more debt generally but not to the specific second bar on incurring more debt in order to pay the bankruptcy attorney. The court held this did not violate the First Amendment because counsel could discuss the issues with the client, he simply could not affirmatively advise the client to incur the debt.
SPV OSUS, Ltd. v. UBS AG, 882 F.3d 333 (2nd Cir. 2018). Fact that bar date had expired did not meant that action could not be “related to” bankruptcy case.
The creditor here sued third parties that it alleged were at least partially responsible for the fact that the creditor had invested in funds run by Bernie Madoff and lost several billion dollars in the process. The creditor sought to argue that its case was not “related to” the bankruptcy because those parties potential rights to indemnity and/or contribution from the Madoff debtors’ estates were too remote either a) because they did not exist due to the passage of the claims bar date and/or the dearth of funds in the case or b) the right to indemnity was not based on a contractual provision that would automatically create liability but rather would require further litigation to determine if that indemnity right even existed. As to the latter point, the court noted that it, like many courts that purported to apply the test for “related to” jurisdiction stated in Pacor, Inc. v. Higgins, 748 F.2d 984 (3rd Cir. 1984), rejected the Third Circuit’s application of its own test to the type of indemnity issues dealt with here. Those courts, like the Second Circuit here, hold that a matter can be “related to” the debtor’s case even if the potential for liability is contingent on a whole set of proofs and further litigation.
The wrinkle here is that the plaintiff asserted as well a number of practical reasons why any such indemnity claim would be wholly illusory but the court rejected those as well. Initially, while the bar date had literally passed, the court noted that these types of claims could often not be asserted until much later when the third party was actually sued, and such facts could well mean that the bankruptcy court would allow a late filed claim. Moreover, even just the cost of suing to determine whether the late claim would be allowed or not would be a sufficient effect since it would cost the estate something. The court also held that the fact that at the current time, there were no funds available to pay such claims (so filing a claim would be meaningless to the estate distributions and a futile act one would not likely indulge in) did not necessarily mean that there would never be sufficient funds since the trustee’s litigation was still proceeding so that was not enough to deny jurisdiction.
Mission Product Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir. 2018). Because trademark holder had ongoing duty to monitor and control use of trademark, its rejection of license for use of mark barred any continuing use of mark by licensee.
Under Section 365(a), a debtor is generally entitled to reject any contract it finds burdensome and such rejection is treated, under Section 365(g) as a prepetition breach of the contract (not its termination). Further, in a number of areas, Congress specifically included protections for certain counter-parties so they would not be unduly burdened by the rejection. These include tenants who can retain in the property but not necessarily demand services by the debtor-landlord. It also includes holders of intellectual property licenses, but trademarks are explicitly not included in the definition of such property. Thus, they are presumably left to the normal structure of Section 365 and to arguments over the proper reading of Section 365(g) – i.e., does it only allow for a damages remedy or does it also allow for specific performance. The Seventh Circuit had held that it did not preclude specific performance (if that remedy would be available to a party facing such a breach under nonbankruptcy law), but the majority here seems to suggest that the section may inherently limit remedies to money damages, although the statute does not say that. The majority, though, was most concerned here, though, because, due to the unique nature of trademarks, the debtor cannot be effectively relieved of the burden of being forced to monitor and control the use of the trademark without risking the loss of its rights in the trademark. For that reason, the majority drew a bright line rule against enforcing a trademark license but it did not appear to rule that rejection always eliminated all specific performance rights – an issue that continues to divide the courts.
In re Motions Seeking Access to 2019 Statements, 2018 U.S. Dist. LEXIS 50532 (D. Del. 3/27/18). Bankruptcy court did not err in limiting access to Rule 2019 statements filed by attorneys for mass tort victims.
Rule 2019 requires that any lawyer representing multiple clients must file a statement in the court giving substantial information about each such client and his or her potential claim. Such filings are purely statements made by counsel, are not attested to by the clients, and do not represent proofs of claim since many such persons may not, in fact, end up filing a claim in a particular case. In the context of asbestos cases where one person may have potential claims against numerous defendants and where there have also been credible allegations of fraud in claim filings, the defendants have sought access to these statements to try to gain information to bolster their defenses. The courts have, over many years, set up protocols for access to this information. While Section 107 does make virtually all information in the case presumptively open to the public, the court is entitled to set limits on that access. And, indeed, in the 2005 BAPCPA amendments, the court’s authority to limit access to personal information, due to privacy and identity theft concerns was expanded. The use of electronic filing has made it much simpler for parties to gather large quantities of information and, thus, made those issues more relevant. The district court agreed that the balance that had been struck in prior cases (i.e., having identifying information filed with the court, but on CD, and not as a public electronic filing and allowing access upon specific request to the court and showing proper need and limiting ability to use individual (as opposed to aggregate) data) remained valid and consistent with a proper balance of Section 107 and the privacy/security concerns of potential claimants.
Lauter v. Citgo Pet Corp., 2018 U.S. Dist. LEXIS 21065 (S.D. Tex. 2/8/18). Debtor cannot sue for breaches of executory contract after it has chosen to reject its terms.
The debtor maintains the right to enforce the terms of an executory contract against other parties postpetition (while being able to avoid being sued itself) prior to the date when the debtor decides to assume or reject the agreement. If the counterparty does not live up to the terms of its agreement, it may be violating the stay or, in any case, the court may be able to require it to comply with the contract. When the debtor does not take such actions, though, and rejects the agreement, the situation reverts to one where the contract is treated as being breached by the debtor prepetition. As such, it no longer has standing to sue the other party for alleged breaches that occur postpetition – and post the date on which the debtor is deemed to have first breached the contract.
Olson v. Van Meter (In re Olson), 2018 Bankr. LEXIS 480 (9th Cir. BAP 2/5/18). Having some involvement with marijuana business might not be automatically disqualifying for debtor.
As a sign of changing times, for a number of years, bankruptcy courts had automatically dismissed cases in which debtors operated marijuana businesses or had some involvement with a marijuana business – even in states that had legalized the business at issue – on the grounds that the bankruptcy courts are federal entities and federal law still criminalizes any form of marijuana trade. In this case, the 92-year-old, legally blind debtor owned a commercial property where one tenant operated a marijuana dispensary. She filed bankruptcy and sought to sell the property (while rejecting the lease with that tenant) but the bankruptcy court still dismissed the case sua sponte due to her accepting rent to the date of the rejection. The BAP remanded for the court below to issue more detailed findings as to why, on the precise facts there, it found that she had actually violated the federal law which required a knowing violation and whether it was necessary to dismiss a case where the structure of the plan did not depend on any income from the marijuana business. The concurring opinion noted in particular the need for clarity where 25 states had now legalized some or all uses of marijuana.
Baerg Real Prop. Truste v. Garland Solutions, LLC (In re Baerg Real Prop. Trust), 2018 Bankr. LEXIS 996 (Bankr. N.D. Tex. 3/30/18). Specific performance remedy was available; creditor was not limited to simply receiving money damages.
The debtor had entered into an agreement to sell four apartment complexes to Garland. Various repairs and other matters had to be dealt with but the parties had a deadline for a closing date at which Garland was to be required to be able to fund the purchase price. Garland was, the court found, ready willing and able to do so but, by then, the debtor had changed its mind and no longer wanted to complete the sale and, instead, accused Garland of breaching the agreement. Garland countersued to enforce the contract and the debtor filed bankruptcy. The bankruptcy court found in Garland’s favor and concluded that it had met all of its obligations and the sale contract was enforceable. It also held that a judgment for specific performance could be entered. The contract should not be treated as executory because all that was left for Garland to do was pay money (which it was fully prepared to do). There was a basis to find that the petition was not filed in good faith when the only goal was to avoid complying with its obligations under valid contracts that it was capable of performing. State law would allow specific performance under the circumstances here and rights under state law are generally enforceable. While some courts have been concerned about that remedy where it might harm other creditors, the case here was basically just a two-party dispute and there was no reason to believe the debtor could not pay its other creditors if the contract were enforced. Although courts have sometimes (particularly in the context of executory contracts) relied on part of the definition of a “claim” to hold that an equitable injunctive remedy can be involuntarily converted into a monetary claim for damages, the Fifth Circuit has held in Sheerin v. Davis (In re Davis), 3 F.3d 113 (5th Cir. 1993) that not all such equitable remedies must be treated as dischargeable money claims. According to Davis, while creditors are encouraged to select monetary damages, they are not required to forego an equitable remedy under state law for a “suboptimal remedy of money damages.” Such equitable rights are often particularly strong in the context of real property disputes where the law has long treated such interests as being uniquely linked to the property and not necessarily able to be satisfied by a mere payment of money. The right to the remedy was also particularly strong in light of the lack of adverse effect on other parties and the debtor’s bad faith.
Manchester v. Kretchmar (In re Kretchmar), 579 B.R. 924 (Bankr. W.D. Okla. 2018). While substantive consolidation of non-debtor with debtors is possible, court refused to order it in case involving only individual parties.
A number of courts have considered whether one can use “substantively consolidation” to bring a non-debtor party into a case. Some have refused to do so, holding that this is just another way of commencing an involuntary bankruptcy without affording the non-debtor the protections of Section 303. The majority, though, say that substantive consolidation is meant to serve another, primarily remedial function and should not be limited to only circumstances that will fit the terms of Section 303. That section, for instance, requires proof of insolvency by the entity being added – and the usual point of substantive consolidation (as here) is to bring in other solvent or at least more nearly so parties than the debtor, it would never be possible to satisfy Section 303 which requires the debtor there to be insolvent. However, having agreed with the possibility of using Section 303, the court then held that all such cases had previously been used in the context of merging separate corporate entities, not, as here, combining the estate of an individual debtor and his non-debtor individual parents. Businesses might actually have no separate existence – people do, plus the evidence did not sufficiently show that the creditors had relied on the parent’s credit. Accordingly, the court denied the motion for consolidation.
In re Gill, 2018 Bankr. LEXIS 156 (Bankr. W.D. Okla. 1/22/18). Section 109(g)(2) should be read as requiring only a chronological sequence in order to bar the second bankruptcy filing.
Section 109(g)(2) says that a debtor may not file a second petition for 180 days where his prior case was dismissed “following the filing of a request for relief from the automatic stay.” Some courts have held the term “following” to be ambiguous and concluded that it requires more than just a chronological sequence; i.e., the dismissal must be causally based on the stay request. Others seek to take a discretionary approach that uses a good faith analysis to evaluate whether the filing of the stay motion and the dismissal were part of a process of abuse. The court here held that the statute should be given its most natural meaning (especially since Congress had never seen fit to amend it) and the term “following” should be read to require nothing more than that the stay motion precedes the voluntary dismissal in order to limit the debtor’s right to refile for the 180-day period. This would normally allow the creditor to carry out the actions sought in the stay relief so that the debtor could not preclude that relief merely by dismissing and quickly refiling its case.

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