Source: https://www.naag.org/publications/nagtri-newsletters/bankruptcy-bulletin1/bankruptcy-bulletin-jan-march-2017.php
Timestamp: 2019-04-19 18:35:30+00:00

Document:
This year’s seminar will be held from November 13 to 16 in Savannah, Georgia. We will be holding the conference itself at the Coastal Georgia Center in the heart of the historic district; we will be staying at three “suites” hotels within a few minutes’ walk of the Center. The price will be the same at all three – approximately $145 including all taxes and that price will also cover a hot breakfast at the hotel before the meeting starts. We expect pricing for the meeting to remain steady or perhaps even slightly less than in prior years; i.e., about $450 a person for “early bird” pricing (which we expect most people will qualify for), with a $100 per person discount if your office sends 3 or more attendees.
Our theme this year will be one that builds upon both consumer protection and education and student loan issues. We will be working with a hypothetical that deals with a for-profit college that goes out of business with numerous consumer protection charges filed against it, but that also had claims against numerous students for payment of their student loan debts. We expect to discuss both student loans in general (particularly with respect to discharge actions) and also as an example of a situation where the states oppose attempts to collect from defrauded consumers. We will spend time on both cutting edge legal issues as well as “nuts and bolts” discussions about how to present a winning case and “best practices” for states seeking to work together collectively to present a common case. We also expect to have a major tax and collections emphasis for those who do more on the financial side than on regulatory issues; we will also break out a number of sessions between beginner and advanced presentations so all comers will find something of use to them.
Stay tuned for further information in a future update about the formal announcement and the registration process which will be posted on the NAAG website. We did want to give you an early heads up, however, on the timing, topics, and pricing, so you can start building this into your office’s training budget. No final word yet on scholarship availability – we’ll pass that on too as soon as we have any information. Hope to see you all this fall in any event.
Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973 (3/22/17). Settlement that was basis to dismiss case could not contradict the priority provisions of Code without consent of affected parties.
Workers employed by a debtor who were laid off in violation of the WARN Act (providing notice and/or severance pay to displaced employees) had priority claims in case. Settlement with third party that proposed to use the funds it provided to make payments to lower priority claimants in order to keep funds out of the hands of the workers (to protect that party from being sued) was not valid. While it might be appropriate to use funds during the course of the case out of strict priority order, as for instance with making early payments to critical vendors, there had to be a showing that doing so advanced the overall reorganization interests of the case and were designed to lead to higher recoveries in the end for all. A settlement that simply provided for skipping priority creditors could not be approved even if it arguably provided more for the entire creditor body (albeit those receiving the added funds were lower priority creditors). This is true even if the settlement is made part of a “structured dismissal” of the bankruptcy case since the dismissal provisions give the court no greater authority to ignore the priority structure. The Court did not sanction a “rare case” exception, not least because such exceptions quickly tend to swallow up the rule in bankruptcy. Moreover, the presence of such an exception would allow parties to concoct scenarios to fit that possibility and would undercut the ability of the priority creditor to use the leverage provided by the Code to advance its position.
Merit Management Group v. FTI Consulting, 860 F.3d 690 (7th Cir. 2016). Certiorari granted on May 1st on decision regarding scope of Section 546 “safe harbor” provision for financial institutions. Details will be written up in next Update.
Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, 2017 U.S. App. LEXIS 5241 (5th Cir. 2017). Claim filed in no-asset case is not treated as allowed judgment with res judicata effect even if no objection is filed.
Although Section 502(a) states that a claim that that is filed and not objected to is “deemed allowed,” the court held that, read in context of the Code as a whole, this only applied when there were assets in the case that would result in the trustee and other parties having any need to review and accept or contest the claim. Claims filed in no-asset cases serve no bankruptcy purpose and other parties need not monitor the docket for such filings.
In re Brown (Brown v. Beaver), 2017 Bankr. LEXIS 822 (9th Cir. BAP 3/27/17). Claim enforced at higher amount where bankruptcy precluded use of settlement that would have lowered debt.
Parties often agree to lower the amount owed by defendants based on their financial situation, but plaintiffs are reluctant to do so if there is a possibility that the defendants will file bankruptcy before the reduced payments are completed. This case upheld a settlement that liquidated the claim at the higher amount, albeit the debtors would have been released from liability had they fully complied with its terms for a lower settlement amount. Here, a judgment of damages was entered in an amount of more than $625,000. The parties eventually settled on the basis of an agreement that the debtor would pay $171,000 over 15 years, but if there was any default, the plaintiffs could enter a stipulated nondischargeable judgment in the amount of $500,000. The debtors did later default and the plaintiffs asked to be allowed to have the judgment entered (less any settlement payments actually made) and the Chapter 13 case dismissed on the basis that the debtors had exceeded the debt limits. The bankruptcy court rejected the debtor’s arguments that the judgment should be limited to $171,000 (less payments made), noting that the parties had clearly agreed that the judgment was for $500,000 and there was only a conditional reduction agreed to that the debtors had failed to satisfy. The BAP agreed that the appropriate claim amount started with the $500,000 and that it was appropriate to use that amount in looking at the eligibility limits even though the debtor had not scheduled it as such, since the amount of the claim was clear as a matter of law. The court also held that it would not adopt an interpretation of the settlement that would make it effective in the amount of $171,000 with an unenforceable penalty of the rest of the $500,000.
In re Avitabile (Avitabile v. Rocheleau), 2017 Bankr. LEXIS 410 (9th Cir. BAP 2/13/17). Letter sent to Chapter 7 trustee treated as informal proof of claim.
An informal proof of claim is a document filed with the court that serves the purpose of a proof of claim by stating the amount and nature of the debt and the creditor’s demand for payment from the debtor but that is not actually filed as a claim. In this case, shortly after the filing (in which the debtor asserted it had no real property), a creditor sent a letter to the Chapter 7 trustee indicating that the party had a specified judgment against the debtor, that the debtor in fact had assets that were not disclosed and urged the trustee to look into the matter. The trustee did and eventually recovered some $77,000 for the estate. The creditors dispute receiving any notice in the case until the trustee moved to settle the recovery motion; shortly thereafter, they filed a formal proof of claim and a motion to be allowed to file a late claim, arguing inter alia that the letter to the trustee should be treated as an informal proof of claim. Where, as here, the letter was itself filed with the court by the trustee as part of his action to pursue the assets revealed by the creditors, the court held it was appropriate to treat the letter as an informal proof of claim.
In re Cintron (Deutsche Bank National Trust Company v. Cintron), 2017 Bankr. LEXIS 355 (Bankr. D. Conn. 2/8/17). Objection to confirmation by secured creditor treated as informal proof of claim.
As in Avitabile, the creditor sought to rely on the informal proof of claim doctrine. In this case, the creditor objected to confirmation and, in that objection, spelled out the basics of its claim. The court held that was sufficient.
In re Kennedy, 2017 Bankr. LEXIS 618 (Bankr. D. Kan. 3/7/17). Student loan debt could include collection charges based on formula rather than actual individualized costs.
Regulations applicable to student loan enforcers allow them to charge the costs of collection of the loans – and, under Dept. of Educ. regulations, those charges can be based on taking the entire operational cost of the enforcer and dividing them by its whole portfolio and assessing that amount to all borrowers, rather than trying to keep track of costs on a person by person basis.
In re World Marketing Chicago, LLC, 2017 Bankr. LEXIS 532 (Bankr. N.D. Ill. 2/24/17). WARN Act class action claim allowed as administrative expense.
The WARN Act provides for payment to employees who are laid off without notice. The court here found that the payment qualified under Section 503(b)(1)(A)(ii) as an administrative expense (noting that the two subsections were alternative forms of such expenses and that the claimants did not need to satisfy both subsections to qualify for administrative status) in that the liability did not occur until the employees were terminated postpetition and that the WARN Act payments operated as a form of severance pay. The court also held that there was a nonstatutory defense to liability, called the “liquidating fiduciary” exception (based on guidance from the Department of Labor) but that exception only covered the actions of a fiduciary who, it was clear initially, was planning on liquidating the company. Here, though, the debtor spent significant time at the beginning of the case trying to operate as a going concern, so that was dispositive of its status for WARN Act purposes even if it did eventually shut down.
In re Pilgrim’s Pride Corp., 2017 Bankr. LEXIS 538 (Bankr. N.D. Tex. 2/15/17). Rights to back pay, reinstatement rights, and actions to bar alleged labor law violator from continued right to contract with government were all claims that could be discharged in bankruptcy.
For reasons that are far from clear, the Department of Labor (“DOL), which had been investigating numerous aspects of the operations, failed to file claims for many of the issues it was looking at and managed to have some of its claims disallowed in any event. DOL waited until the debtor’s plan was confirmed and then sought to pursue those matters outside the bankruptcy case. The court first held that actions for back pay were all prepetition, discharged claims which is not particularly controversial. The court also held, though, that all claims for reinstatement were also “claims” (even though no money was sought for the employees) because the government could have, instead, sought “front pay” for them. That is distinctly more problematic in that front pay is unlikely to have an unlimited term attached to it, while reinstatement could continue indefinitely. Even more problematic is reinstatement serves a collective good (particularly in the union organizing arena) that goes beyond the value served by paying money to an individual employee and treating that non-monetary remedy as one that the employee (and the government) can be forced to accept, destroys those other values without any replacement being supplied. Most problematic, perhaps, is the contention that the government cannot rely on the prepetition events as a basis for issuing debarment orders going forward merely because it is too late to seek a remedy for the underlying conduct. The court held that such remedies were either claims themselves or attempts to collect on discharged claims, without ever explaining how a refusal to do business in the future – wholly divorced from any attempt to be paid could be an attempt to collect on a claim, discharged or otherwise. The court did hold that the government could seek injunctive relief barring the debtor from engaging in future violations.
In re Dumbuya, 2017 Bankr. LEXIS 327 (Bankr. N.D. Ohio 2/6/17). Secured creditor must file claim by normal bar date in order to obtain payments under Chapter 13 plan.
A secured creditor is not required under the current Code and Rules to file a proof of claim in a Chapter 13 case in order to maintain its lien until the plan is completed. However, if the creditor wishes to receive payment under the plan during the case, it must file a proof of claim – and it must do so within the time limit set in Rule 3002(c). While Rule 3002(a) (which requires unsecured creditors to file their proofs of claim) does not apply to secured creditors, Rule 3002(c) applies to any proof of claim, not just those that must be filed under Rule 3002(a).
In re Durango Georgia Paper Company (Pension Benefit Guaranty Corp. v. Durango Georgian Paper Company), 2017 Bankr. LEXIS 160 (Bankr. S.D. Ga. 1/18/17). PBGC’s analysis of how to calculate the cost of unfunded pension liabilities governs; bankruptcy court may not create its own analytical method.
The PBGC enforces ERISA which provides that the agency takes over failing pension plans and has a claim for the unfunded costs. The PBGC enacted a regulation that calculated how such liability would be determined using various factors and assumptions. The trustee wanted the bankruptcy court to make its own analysis as to how to determine that liability but the court declined. Rather, it held, because a debtor’s liability in bankruptcy is determined under existing nonbankruptcy law (absent a specific overriding provision in the Code), the PBGC’s regulation was the applicable law to determine the claim amount. The fact that other claims might be decided in other fashions under other laws did not undermine the validity of the PBCG analysis.
In re Armstrong (Armstrong v. Kaplon), 2017 U.S. App. LEXIS 3202 (9th Cir. 2/22/17) (unpublished). Criminal restitution order was automatically nondischargeable.
Pursuant to Kelly v. Robinson, 479 U.S. 36 (1986), all aspects of a state criminal sentence are excepted from discharge. That is true even if the statute provides for both restitution and a restitution fine since Kelly applies to all parts of the sentence and is meant to give the state full discretion to decide how to punish and rehabilitate the wrongdoer.
In re Lunsford (Lunsford v. Technologies Services, LLC), 2017 U.S. App. LEXIS 2666 (11th Cir. 2/15/17). Section 523(a)(19) applies to a judgment imposed on a debtor arising from a securities law violation even if the debtor did not himself commit the violation.
Section 523(a)(19) broadly bars debts “for the violation of” securities laws and the court held that such a term means a debt “as a result of” such a violation. There is no limit on the chain of causation for such a debt and there is no requirement that the debtor himself must have directly caused the violation (as opposed to having vicarious liability under the law for violations carried out by his company). Other subsections are directly limited to debtor conduct, but this one is not. The court distinguished a Tenth Circuit decision that held that an unjust enrichment judgment against Ponzi scheme investors did not fall under this section, because that judgment is distinct from the underlying securities fraud judgment.
In re Appling (Appling v. Lamar, Archer & Cofrin, LLP), 2017 U.S. App. LEXIS 2602 (11th Cir. 2/15/17). A statement about even a single asset is a statement respecting the debtor’s “financial condition;” since the false statement was not in writing, it was not excepted by Sec. 523(a)(2)(B).
Section 523(a)(2)(A) excepts debts arising from false statements from discharge; however, if the statement is one regarding the debtor’s “financial condition” then Section 523(a)(2)(B) applies and the statement must be in writing. The courts are deeply split as to how broadly to construe the “financial condition” requirement. While the majority probably construe it to apply only to statements regarding one’s overall financial status (i.e., the sum of one’s assets and liabilities), the court here held that, even if that was what “financial condition” meant, that the exception’s reference to a statement “respecting the debtor’s . . . financial condition” could be much broader and could include a statement even about a single asset (i.e., the debtor’s likely receipt of a tax refund and the promise to pay it to his attorney to cover his fees). The court held this broader approach, dictated by the word “respecting” was required, without any resort to legislative history (which other courts had relied on to show that Congress was primarily concerned with only the more global type of financial statement being subject to this requirement). Presumably, this is an issue that may well end up in front of the Supreme Court to resolve the conflict.
Haler v. Boyington Capital Group, LLC, 2017 U.S. Dist. LEXIS 13514 (E.D. Tex. 2/1/17). Contra to Appling, a statement about “financial condition” is limited to one generally relating to overall net worth of entity.
This case well illustrates the split in the case law; the debtor here assertedly claimed the company was in fine legal and financial shape and had plenty of operating cash. Neither one, the district court held, was sufficiently detailed to be the equivalent of a balance sheet or a profit/loss statement. As such, these would not, under Fifth Circuit law, fall under Section 523(a)(2)(B) so as to require that the statements be in writing.
Penberthy v. Chickering, 2017 U.S. Dist. LEXIS 6153 (S.D. N.Y. 1/13/17). Plan that stated that amounts owed to former spouse were not alimony (and, hence, not dischargeable) was binding.
While Section 1141(d)(2) provides that confirmation of a plan does not discharge a debt that is covered by an exception under section 523, the court held that the plan here tried to do something different. Rather than treating the debt as support, and then purporting to discharge it, the plan simply denied that the debt was for support; as such, it would then be legal for the debt to be discharged by the plan. Where the debtor’s argument for the payments not being support was at least colorable, the plan would be binding where the spouse did not object to it.
In re Harris (Dept. of Labor v. Harris), 561 B.R. 726 (8th Cir. BAP 2017). Funds withheld from employee wages for health insurance are trust funds; employer official’s failure to pay them to plan was defalcation by fiduciary.
The ERISA law designates those dealing with employee benefit funds to be fiduciaries; the Code, however, does not assume that all such fiduciaries automatically also qualify as fiduciaries for purposes of Section 523(a)(4). However, where the person at issue is dealing with funds withheld from employee earnings (as opposed to merely general employer funds that are contractually required to be paid into the fund), those withholdings do create a res and a person with authority to direct how such funds are handled is a fiduciary. Using them to pay even other corporate expenses would be a defalcation; using them for the debtor’s personal expenses was even more clearly violative.
In re Pulvermacher (Hellenbrand Glass LLC v. Pulvermacher), 2017 Bankr. LEXIS 897 (Bankr. W.D. Wis. 3/31/17). Where original debt was for conduct that would be excepted from discharge under Section 523(a)(4), treble damages and attorneys fee judgment imposed after default on settlement were also excepted.
The debtor violated the “theft by contractor” state law that requires general contractors to hold funds received for subcontractors in trust for them. He settled the state court complaint with a promise to pay those amounts and an agreement for a judgment for treble damages and attorneys fee if he defaulted. He later did default and filed bankruptcy and stipulated, post-filing that at least the original amount would be excepted from discharge under section 523(a)(4). The court noted that, at least with respect to judgments the bankruptcy court must determine, the court is always free to look behind the terms of any settlement to determine the true nature of the conduct at issue. Here, though, in any event, the debtor stipulated to the nature of the original conduct and the court agreed that, under the analysis in Cohen v. de la Cruz, all amounts arising out of the original conduct would be part of the debt excepted from discharge so the treble damages and attorneys’ fees were also excepted.
In re Davis (Conn. v. Davis), 2017 Bankr. LEXIS 872 (Bankr. D. Conn. 3/30/17). State did not prove that debtor knowingly and fraudulent gave the false answers she made when receiving unemployment compensation benefits.
The state uses the apparently common method of having claimants call in and leave recorded answers with respect to whether they are working or not in order to receive unemployment benefits. The state also provides a written booklet explaining the system and the questions to be answered. The debtor followed those procedures and claimed to not be working during several periods when she was, in fact, employed, albeit apparently at reduced hours. The questions and her answers were recorded and part of the record. Following various audits, the state determined that she had been overpaid and mailed her numerous notices of hearings at which she could contest those findings. She did not appear at any of those hearings. The state eventually determined she had been overpaid close to $13,000 and imposed administrative penalties for the false statements. When she filed bankruptcy, the state moved to have both the debt and the penalties excepted from discharge. She testified that she didn’t lie, that she purportedly always said she was working reduced hours, did what was right “to her knowledge,” and denied receiving any of the letters sent by the state with respect to her violations and hearings.
The state presented testimony about all of the normal practices followed for all claimants but the bankruptcy court appeared to place no weight on them because there was no one who could directly testify eight years later that they had personally handed her the booklet or talked to her. The court also faulted her because she had not been shown the recordings of her answers when she gave them – and appeared to be skeptical that the records reflected what they claimed to show. Although the debtor could not recall her actual responses, the court apparently credited her generalized claim that she never made a false statement over the recorded answers that did show untrue answer. The court also faulted the state for not proving that the debtor had read the booklet or understood it – and there is no mention at all of the fact that the debtor claimed to have received no letters from the state about its audits. That statement seems highly unlikely on its face and might well be viewed as reflecting on the debtor’s credibility in general but the court does not discuss that point at all. As a result, the court concluded that the debtor’s bare denials trumped all of the state’s evidence (and the several other cases it cited that did rely on debtor misstatements under similar recorded phone systems that did find false statements).
It seems likely in the end that the case may well be reversed on appeal in that adopting its form of analysis would require a level of proof and evidence that would be well-nigh impossible to ever produce particularly as part of a large-scale automated system used throughout the county. That said, one can read the judge’s caveats as points that a state might well review to determine what additional evidence it can put on and what it can do to tighten up its procedures to avoid a similar result. For instance, it might be possible to play back a claimant’s recorded answers at the end of a call and require the debtor to acknowledge that the responses are accurate to avoid the court’s concern here that the debtor had not been asked to review the responses. Other similar measures might be used – for instance, if the instruction booklet is physically handed out in an initial interview, the claimant might be required to sign a receipt and that receipt could be kept in the claimant’s file. Systems engineering the process in advance is always better than being forced to litigate issues at the end.
In re Roth (Roth v. Nationstar Mortgage LLC), 2017 U.S. Dist. LEXIS 28710 (M.D. Fla. 3/1/17). “Informational statement” sent by secured lender post-closing did not violate discharge.
The discharge bars efforts to collect a debt from the debtor as a personal liability. However, the in rem rights of a secured lender remain in place and allow it to foreclose on a property if the debtor does not continue to pay on the loan. It has now become the practice for the lender to continue sending some form of monthly statement which usually has an express disclaimer about not being an attempt to collect the debt. While such a statement might or might not be clear enough to meet the “least sophisticated consumer” standard under the Fair Debt Collections Practices Act, the court held that it was sufficient to avoid a discharge injunction violation.
In the Matter of Coker (Tybee v. Coker), 2017 Bankr. LEXIS 865 (Bankr. S.D. Ga. 3/28/17). “Entire agreement” provision in settlement did not bar inquiry into underlying nature of debt.
Pursuant to Archer v. Warner, 538 U.S. 314 (2003), a general agreement to settle a case cannot be res judicata of the issue of a discharge exception based on fraud. Such issues must be decided by the bankruptcy court and the parties do not need to try to anticipate what the court’s review would provide; the plaintiff can go behind the settlement terms (even with a so-called “merger” clause) and show the true nature of the underlying cause of action.
In re Pierce (Winkler v. Pierce), 2017 Bankr. LEXIS 433 (Bankr. C.D. Cal. 2/15/17). Same as Coker.
The mere fact that a debtor signed a settlement with an integration clause resolving the securities fraud allegations against him (but did not comply with the agreement before filing bankruptcy) does not provide a basis for the court to find that the debt was nondischargeable. Instead, under Archer, as noted in Coker, the courts do not expect discharge issues to be resolved in the underlying merits litigation. The status of the debt, once established, may be resolved in the bankruptcy court when the debtor chooses to file his case.
In re Dufrane (Dufrane v. Navient Solutions, Inc.), 2017 Bankr. LEXIS 934 (Bankr. C.D. Cal. 3/23/17). Reference in Section 523(a)(8)(A)(ii) to obligation to repay funds received as “an educational benefit” should be read narrowly to not apply to loans (even if they might have been used to pay tuition) in order to not override limit on other “loan” provisions in the section.
This section dates back to 1990 where it was added to clarify the status of scholarships and similar amounts received by the debtor, which might turn out to be repayable if the conditions were not met. It was later recodified in a somewhat different form but the court here concluded the same limitations were meant to apply. By excluding true “loans” from this provision, the courts were able to enforce the limits on which loans would be treated as nondischargeable. At least up until the BAPCPA amendments, all purely private loans, for instance, were not covered and that limitation would have been written out if the fact that a loan was used for an educational purpose was enough to fit it within the “educational benefit” section. Accordingly, the loans received here did not trigger this section and did not fit within the loan provisions either and, hence, were dischargeable.
In re Smith (Process Engineering Associates, LLC v. Smith), 2017 Bankr. LEXIS 488 (Bankr. E.D. Tenn. 2/21/17). Interest on fiduciary debt excepted from discharge is also nondischargeable.
Nothing in Section 523(a)(4) limits the type of debt owed for a breach of fiduciary duty, so the interest accumulation on a judgment for such conduct was equally nondischargeable.
In re Anzo (Hurston v. Anzo), 2017 Bankr. LEXIS 259 (Bankr. N.D. Ga. 1/30/17). Time period for revoking discharge in Section 727(e)(1) is statute of repose not subject to equitable tolling.
Since Section 727(e) applies to actions under Section 727(d) that, by definition, are based on acts of fraud not known to the creditors during the case, its time limit must logically be treated as a statute of repose even if the creditors argues that fraudulent concealment warrants extending the time limit. The values of finality are sufficiently important to warrant cutting off liability at a time certain. And, while the creditor filed a motion to reopen the case within the time limit, it did not actually make sufficient allegations regarding the fraud in that motion so as to put the debtor on notice or allow the later-filed complaint to relate back to the motion date.
In re Phillips (Wilson v. Phillips), 2017 Bankr. LEXIS 53 (Bankr. E.D. Tex. 1/9/17). Good discussion of bases for applying collateral estoppel to findings in criminal and civil proceeding for purposes of determining dischargeability.
the court found that invading another’s privacy for one’s own sexual gratification was clearly conduct that was objectively certain to harm the debtor and, thus, could be viewed as showing the debtor’s subjective intent to inflict injury.
In re Cowen (WD Equipment LLC v. Cowen), 2017 U.S. App. LEXIS 3486 (10th Cir. 2/27/17). Failure to return property of estate that was repossessed prepetition does not violate stay.
The creditors repossessed two trucks prepetition and refused to turn them over upon the filing of the bankruptcy petition. The court held that the mere retention of the vehicles was not an “act” to control property of the estate because an “act” requires an affirmative step, not merely passive retention. There is a separate section dealing with turnover and that is where the obligation arises against a creditor holding assets seized prepetition. The creditors here, however, went further and affirmatively lied and made up paperwork to convince the court that they had ended all of the debtor’s rights prepetition and those claims, if credited, would have led the court to grant them final control over the trucks. As such, the court held that was a sufficient “act” to trigger the stay and allow sanctions to be imposed.
Gatheright v. Clark (In re NAC Farms, Inc.), 2017 U.S. App. LEXIS 3258 (5th Cir. 2/23/17). Creditor who filed bad check complaints against debtor was not liable for malicious prosecution or stay violation.
Even though the charges against the debtor were eventually dismissed (but not until after he spent almost seven weeks in jail), the malicious prosecution charge failed in that there was no indication that the creditor had not filed his complaint in subjective good faith or had done so without a reasonable belief in the debtor’s guilt – particularly where an indictment was issued on the charges he filed. Nor did the creditor’s actions violate the automatic stay in that Section 362(b)(1) fully excepts all aspects of a criminal prosecution from the stay. It is the prosecutor that makes the decision to go forward so the creditor’s mere action in filing an initial complaint was not the operative cause of the debtor’s prosecution.
Federal Trade Commission v. BlueHippo Funding, LLC, 2017 U.S. Dist. LEXIS 45500 (S.D. N.Y. 3/28/17). Discussion of scope of allowable contempt measures during bankruptcy case.
A company that engaged in consumer protection violations and its CEO (who had been sued by a number of states as well as the FTC) were held jointly and severally liable for consumer restitution. The owner was ordered to pay $13.4 million but failed to submit any portion of that amount. Despite claiming to be unable to pay, though, the owner lived in a $940,000 mortgage-free home, received $15,000 a month from annuities worth $2 million, had other investment accounts, was spending $517 a month on a Lexus, and racked up credit card bills of $5-15,000 a month. The court held that the police and regulatory stay exception protected the FTC’s ability to bring the contempt action. It also held that the debtor must show that it could not pay any portion of the amount owed (even if he could not pay in full) in order to avoid being found in contempt of the court order – in view of the owner’s luxurious life style, the court concluded that he clearly could have made at least some payments towards the judgment. The court did not immediately order him incarcerated as the FTC requested but ordered that he immediately negotiate a payment schedule with the FTC on pains of incarceration should he fail to comply.
U.S. and Tennessee v. Vanguard Healthcare, LLC, 2017 U.S. Dist. LEXIS 35466 (M.D. Tenn. 3/13/17). Action under False Claims Act is excepted from stay as police and regulatory action.
Suits under the False Claims Act are excepted from the stay, even though they do deal with a pecuniary interest of the government. Under the “pecuniary interest” test, the issue is whether the stay exception gives the government a pecuniary “advantage,” over other creditors and the answer is no, since it merely allows the government to liquidate the claim, not to elevate its status. The mere fact that a governmental action has a financial component does not change its underlying nature. It also meets the “public policy” test since the Act serves to police the integrity of those dealing with the government. The court also held that the government was not required to file the declaratory judgment motion vis-a-vis the stay in bankruptcy court; it, like other courts retained concurrent jurisdiction to determine the scope of the stay.
In re Liberty Asset Mgmt. Corp. (Maxwell Real Estate Invest., LLC v. Liberty Asset Mgmt. Corp.), 2017 Bankr. LEIXS 758 (9th Cir. BAP 3/21/17). Stay does not apply to actions filed in bankruptcy court.
While the Maxwell parties initially sought to have the stay lifted for their counterclaims to be heard in state court, they eventually ended up arguing that the stay should be lifted to allow them to litigate all of those matters in the bankruptcy court at the same time. The bankruptcy court, somewhat bemusedly, made clear that “You can file anything you want to in this court to call the debtor to account” without regard to the stay – and the BAP affirmed. There is no need to lift the stay in order to file actions in the bankruptcy court – even if no explicit exception says that.
In re Avila, 2017 Bankr. LEXIS 780 (Bankr. N.D. Ill. 3/21/17). City did not violate stay by holding repossessed vehicle under exception in Section 362(b)(3) for creditor with priming lien.
Section 362(b)(3) except from the stay an act to perfect or maintain an interest in property to the extent that the trustee’s rights in the property are subject to such perfection under Section 546(b)(1). That section, in turn, provides that the trustee’s rights in property are subject to any entity that can assert a priming lien against a lien holder with earlier rights in the property. That is, in most cases, liens apply in the order they were imposed, but some liens are given superpriority rights to jump to the head of the line – property taxes typically do so and, in this case, a lien in favor of the city on an impounded vehicle trumps the underlying purchase mortgage lien on the car. In this case, interestingly, the section was added in 2016, but, although its enactment was likely triggered by virtue of the treatment of those charges in prior bankruptcy cases, it was not applicable only in bankruptcy, so it remains a valid law for purposes of Section 546 and 362. Since, in this case, unlike a typical security agreement, the lien only applies while the vehicle is impounded in the possession of the city, the court agreed that the city could retain the vehicle without violating the stay.
Cousins International Food Corp. v. Vidal, 2017 Bank. LEXIS 763 (9th Cir. BAP 3/21/17). Debtor must provide actual notice to known creditors of case and major events; failure to do so bars finding that stay has been violated.
Similarly, in this case, where the debtor failed to schedule or serve a former employee who had a pending lawsuit with notice of the bankruptcy filing. Although there was eventually some mention of the filing in the employee’s lawsuit, the debtor failed to follow that court’s direction to submit evidence of the filing and the listing of the employee. The debtor later moved to sell all of its assets to a third party; that sale was approved without the employee being listed or given notice of the sale. The bankruptcy court eventually held that the purchaser did not have standing to assert claimed stay violations that might have belonged to the debtor and that the purchaser was also not entitled to relief under the sale order from the employee’s efforts to collect from it under a successorship theory. The failure of the parties to the sale to ensure notice to known creditors precluded them from being able to use that order against the employee’s suit.
In re Burbano (Burbano v. Grange Mutual Ins. Co.), 2017 Bankr. LEXIS 737 (Bankr. N.D. Ga. 3/20/17). Where state law suspending driver’s license for unpaid accident costs was initiated by creditor and could be terminated on creditor’s request, party’s refusal to do so violated stay.
The court viewed the license suspension statute here as primarily a revenue collection device rather than as being directed to health and safety concerns. At least where the creditor had to affirmatively request suspension when the debt was not paid, and the statute allowed the creditor to control whether the suspension continued, the creditor’s failure to take affirmative steps to remove the suspension request violated the stay. The ruling is contrary to Cowen, above, but consistent with a number of cases that deal with garnishment actions and repossessed vehicles.
In re Spearman (Spearman v .Common wealth Credit Union), 2017 Bankr. LEXIS 627 (Bankr. W.D. Ky. 3/9/17). Removing electronic privileges from private credit union account (while allowing debtor access to funds by in person withdrawal) did not violate stay.
The credit union’s policy to deny certain membership benefits to those who filed bankruptcy and did not reaffirm debts did not violate stay. Where the denial was not a direct effort to collect the funds and was done to protect against member overdrawing account and causing further losses, there was no violation. Debtor was not denied her funds, at most access was more difficult. While parties discussed signing reaffirmation, credit union did not pressure her to do so and absent coercion, the credit union’s actions were protected.
In re Ream Properties, LLC (Ream Properties v. Hamilton), 2017 Bankr. LEXIS 246 (Bankr. M.D. Penn. 1/30/17). Automatic stay does not preclude criminal prosecutions or contempt action against debtor’s principal.
The Code and constitutional concerns of comity require that the automatic stay not be used to prevent criminal prosecutions (particularly of third parties and particularly where the punishment will not require payment of debtor assets). While there may be some leeway to limit a criminal complaint where brought in bad faith or for purpose of harassment, the motives of the private party seeking the intervention of the state are not attributed to the prosecutor. Similar concerns of comity mean that the stay should not be extended simply to protect a non-debtor party.
In re Perry Petroleum Equip. Ltd., Inc. (Perry Petroleum Equip. Ltd., Inc. v. Commonwealth of Pennsylvania), 2017 Bankr. LEXIS 92 (Bankr. M.D. Penn. 1/12/17). Asserted bad faith of creditor is not attributed to prosecutor, being forced to defend against criminal “bad check” charges was not sufficient to warrant enjoining criminal case.
Section 362(b)(1) broadly excepts criminal actions from the automatic stay and that applies even if the criminal action is based on a monetary charge such as a “bad check” claim. Moreover, the fact that the creditor might have acted in bad faith by giving the state inaccurate information would not, without much more, taint the good faith of the prosecution that was bringing the action or eliminate the automatic stay exception. Nor would the burden and cost of defending against a good faith criminal case warrant the issuance of a discretionary stay to bar the action.
In re Corrin (State of Tennessee v. Hildebrand), 2017 U.S. App. LEXIS 3245 (6th Cir. 2/23/17). A law that denominates a payment as “interest” solely for bankruptcy purposes is not an “applicable nonbankruptcy law” for purposes of Section 511.
In re Gaudio, 2017 Bankr. LEXIS 207 (Bankr. C.D. Ill. 1/25/17). Income taxes are “incurred” on the last day of the taxable year when all events that will determine amount have occurred.
While numerous acts that may affect the amount of income tax owed take place over the course of the year, the actual amount owed is based on the total cumulative effect of those events. That does not occur until the completion of the tax year. If that date falls after that petition date, then the entirety of the income taxes owed are treated as a postpetition tax owed by the estate that receives administrative priority.
In re Boudreau (Boudreau v. R.I. Div. of Taxation), 2017 Bankr. LEXIS 198 (Bankr. D. R. I. 1/24/17). While late-filed taxes are excepted from discharge, penalties are not.
Under Fahey v. Mass. Dept. of Rev., 779 F.3d 1 (1st Cir. 2015), the “hanging paragraph” in Section 523(a) makes taxes that are filed after the return due date nondischargeable. Tax penalties, on the other hand, are treated under Section 523(a)(7) which requires that they be owed to the government, not be for actual pecuniary loss, and not be based on an event occurring more than 3 years before the petition date. If the penalty fails these tests (i.e., as when it might be stale by being based on a tax year ending more than three years earlier), then it will not be excepted from discharge. While, as a general rule, the treatment of interest and penalties follows that of the underlying debt, it is different where the statute specifically provides for penalties.
In the Matter of Jackson, 2017 U.S. App. LEXIS 4639 (5th Cir. 3/13/17). Garnishment order cannot serve to “transfer” wages until they are actually earned.
Joining the Sixth Circuit and most lower courts, and relying on Barnhill v. Johnson, 503 U.S. 393 (1992), the Fifth Circuit held that pre-Barnhill decisions by the Second, Seventh, and Eleventh Circuit which held that a garnishment ordered transferred an interest in the debtor’s property when issued, were incorrect. A transfer cannot occur, pursuant to Section 547(e)(3), until a debtor has actual rights in the property and a debtor cannot acquire rights in his potential future wages until he works and earns them. As such, the garnishment order simply has nothing to which it can attach when it is initially entered. The fact that the order may predate the preference period is irrelevant since it cannot effect the transfer until the wages are earned; as a result, any transfers based on wages earned within the preference period are avoidable.
Meoli v. Huntington National Bank, 2017 U.S. App. LEXIS 2248 (6th Cir. 2/8/17). Discussion of “good faith” defense to avoidance action; holding that bank receiving and passing on customer deposits is “mere conduit” and cannot be held liable for return of those funds.
In what may be the last in a very long-running series of cases, the court found that the bank lost its good faith defense to payments that were made to it by a debtor operating a fraudulent business in 2004 after information passed on and acquired by the Security Department was sufficient to show the falsity of the statements made by the debtor and the fraudulent background of its principal. That department did not pass the package of information on to management that could have acted thereon. That group did take steps to wind down the relationship with the debtor gradually and was able to receive back all of the money it had laid out – while the debtor continued defrauding others. The court held that the bank lost its protected status once at least some responsible officials had the necessary information and any delays based on the internal failures of communication did not immunize the bank from the trustee’s action.
However, the court rejected the argument that if there was “inquiry notice” at an earlier stage, that that was sufficient to destroy the good faith. The actual standard looks to not only what facts gave rise to the “notice,” but also “what investigative avenues existed, whether a reasonable person would have undertaken those avenues given the situation, and what findings the reasonable investigation would have revealed.” It cited as an example a case where the only party to have asked about the legitimacy of certain corporate payments were the guilty officers of the corporation who would have denied that there was any violation in the payments. By citing that case, the court indicates that the “reasonable investigation” does not necessarily imply a massive audit as opposed to simple requests that could often be turned away by the guilty party.
Finally, the court found that payments that were processed through the debtor’s accounts and the overall balance in the account were not subject to avoidance since the bank was acting as a mere conduit for payments going in and out of the bank account and had no ability to control the debtor’s used thereof.
In re Whitley (Ivey v. Whitley), 2017 U.S. App. LEXIS 1715 (4th Cir. 1/31/17). Deposits made by a debtor into his own unrestricted checking account at a bank are not “transfers” to the bank.
A bank’s mere holding of the debtor’s funds in a checking account does not give the bank ownership rights therein and do not diminish the ability of the debtor’s estate to lay claims to such funds in a bankruptcy case. As a result, the cash, check, and wire deposits into (and out of) the bank accounts were not transfers that could be avoided by the trustee.
In re Crespo (Crespo v. Immanuel), 2017 U.S. Dist. LEXIS 47558 (E.D. Penn. 3/30/17). Price obtained at competitive tax sale is per se reasonable and not subject to avoidance.
In line with the holding in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the price obtained at a sale of real property subject to the obligation to pay the delinquent taxes thereon is automatically deemed to satisfy the reasonable value standard so as to preclude avoidance under Section 548, so long as all notice and other requirements for a valid sale are complied with. If those conditions are met, the sale is deemed to have obtained the best price available under the no-optimal circumstances under which it is being conducted.
Whitlock v. Lowe, 2017 U.S. Dist. LEXIS 41045 (W.D. Tex. 3/22/17). Recipient of payments from debtors prepetition held strictly liable as initial transferee to return funds to trustee, even though she had repaid most of the money to the debtors prior to the filing date.
The debtors transferred $275,000 into a bank account in the name of the wife’s sister and directed her over time as to where to spend the money. While she always viewed herself as only holding the funds subject to the direction of her in-laws, there was no binding legal obligation on the sister and she could have spent the funds as she wanted. The court held this was enough to make her an initial transferee subject to the strict liability provisions in Section 550. Moreover, although Section 550(d) limits a trustee to only a single satisfaction of the transfer, the court held that provision was not applicable here. The sister had written checks back to the debtors before the petition date for the great bulk of the funds but the court held that did not limit the trustee’s rights against the sister. Because the debtors had spent those funds prior to the petition date, they were not in the estate when the case began so the estate was not in the same position on the filing date as if the transfers had never taken place. Accordingly, the court held the sister could be required to return the funds received even though she had never benefitted from the money. (The problem with the court’s analysis is that it ignores the fact that the debtors could readily have spent the same money prior to the filing date had the transfers never taken place. The fact that the debtors no longer had those funds to be added to the estate was logically unrelated to the question of whether they had been transferred away and then transferred back.) In any event, the holding does illustrate that one should be wary about helping out financially troubled parties.
Schmidt v. Nordlicht, 2017 U.S. Dist. LEXIS 18374 (S.D. Tex. 2/9/17). Parties alleging only state law claims against third parties that aided fraudulent transfer were subject to mandatory abstention.
The court agreed with the plaintiffs that, where they carefully segregated claims against non-debtor parties in a state court action that only alleged state law causes of action such as breach of fiduciary duty, negligence and the like with regards to those actions of parties that facilitated fraudulent transfers, but did not itself allege such transfers, their state law case was subject to mandatory abstention. The fraudulent transfer case could proceed in bankruptcy court against the direct and indirect recipients of the transfers without precluding the state law case proceeding against other defendants. The mere fact that there would be a significant overlap in the evidence presented did not make the two cases interchangeable.
In re Tribune Company Fraudulent Conveyance Litigation (Kirschner v. Fitzsimons), 2017 U.S. Dist. LEXIS 3039 (S.D. N.Y. 1/6/17). Analysis of whether LBO of Tribune Co. was carried out with actual fraudulent intent.
In the Matter of Dunston (Roach v. Skidmore College), 2017 Bankr. LEXIS 362 (Bankr. S.D. Ga. 2/7/17). Treatment of payments made to college for debtor’s daughter’s tuition.
Where the debtor could trace payments taken from the Section 529 Plan college account for her daughter through her checking account and then promptly onto payment of her daughter’s tuition, those payments did not constitute transfers of an interest of the debtor’s property. However, if a payment could not be excluded from being a transfer of the debtor’s interest, the court held that the trustee could avoid the payment. The fact that the debtor felt a moral obligation to pay for her daughter’s education, or that such payments might ensure that her daughter didn’t come back to live in her basement was not a reasonably equivalent value or one that provided any benefit to creditors.
In re Sandburg Mall Realty Mgmt. LLC v. Kohansieh, 2017 Bankr. LEXIS 283 (Bankr. C.D. Ill. 1/31/17). 2-year limitations period for actions under Section 548 is a statute of repose, not a statute of limitations subject to equitable tolling due to fraudulent concealment by debtor.
Actions under Section 548, as such, are purely creations of the Code and, as such, the time periods applicable are those set by the Code. Since no plaintiff could have existed until the date the petition was filed, the two-year period set for such actions is always fully available to the trustee. The section sets a statute of repose, not one of mere limitation. If the trustee needs to go back further, he must rely on Section 544(b) to allow him to use longer state limitation periods. A challenge under Section 544(b) requires a creditor who either held a claim on the petition date, or under some sections of the state law, must have held the claim on both the transfer date and the petition date. In this case, the court construed the state law – which was based on the Uniform Fraudulent Transfer Act – as also making the deadlines therein statutes of repose and not of limitations as well. The statute also includes a separate, much shorter timeline for bringing actions after discovery of an action based on actual fraud, which supports the view that the standard deadline does not incorporate discovery concepts.
In re Aquatic Pools, Inc., 2017 Bankr. LEXIS 368 (Bankr. D. N.M. 2/8/17). Federal tax liens that are perfected by filing notice cover future accruing interest and penalties.
Section 544 allows avoidance of liens where a hypothetical creditor could have overridden the lien outside of bankruptcy; i.e., in general, where the lien is not perfected. A federal tax lien is perfected with notice is filed and, by the terms of the statute, the lien automatically covers not only the original tax but also all interest, penalties, and related amounts that accrue thereafter. Since such accrual is provided for by statute, any party seeing the original notice of the lien would know that it would also include such after-accruing amounts.
The decision has an extended discussion of the “Ponzi scheme presumption” – that all transfers in “pursuance of” the Ponzi scheme are inherently fraudulent – and its historical development. The court noted that the fraud in these schemes is generally not in the form of transfers away of the debtor’s existing assets so as to preclude creditors from seizing them, but rather a fraudulent inducement of creditors to provide money to the debtor (which he then uses at least in part to pay prior investors) until the scheme collapses. The court noted that virtually all cases relying on the presumption trace back to only two decisions neither of which dealt with some of the later issues that have arisen. In particular, even if one assumes the inevitable collapse and relies on that to find that the overall scheme is inherently fraudulent, there is still the question of whether every single transfer the debtor makes is part of that scheme. Are payments for rent, or utilities, or breaks in the snack room fraudulent because the scheme could not literally progress without a place to sit to make the calls to new investors? Most courts, even if using the broad presumption, do find at least some transfers to fall outside the scheme, generally excluding those that are the sort of normal day-to-day expenses paid to entities that are not part of the scheme and only incidentally help it to proceed. Only if the payment to a third party is clearly and inherently part of the fraudulent inducement (such as perhaps payments for advertisements to bring in new victims) is it treated as subject to the presumption. In this case, the debtor used an outside brokerage firm to make stock trades that were themselves legitimate and that were not part of the discussions with or promises made to clients; as such the transfers to the firm was not covered by the presumption. The transfers themselves were made for adequate consideration because they were buying and selling actual stocks at market prices. As such, and absent the presumption, the court held they were not sufficient to prove actual fraudulent intent. The court did hold, however, that the mere fact that transfers were made for full equivalent value does not necessarily preclude them from being fraudulent; they are only protected if they fall under section 548(c) (i.e., they were taken in bad faith).
The court then discussed what would be needed to make the showing of good faith. Some courts use an objective standard: did the trustee have information to put him on inquiry notice, and what was the result of a diligent investigation carried out based on that inquiry notice. The court here noted that an objective standard was likely appropriate when applied to insiders or those involved in marketing the scheme but probably not so, though, for a pure third-party doing business in the ordinary course. Imposing an inquiry notice standard would make the party liable for nothing more than ordinary negligence, which would go far beyond ordinary business practices. The court noted that the “mere conduit” doctrine had been established to cover situations where a transferee party had no control over the funds but was merely following the directions of the third party. In the absence of any actual knowledge of the scheme, such a third-party will generally not be required to act on a strict “inquiry notice” basis. Other courts have reached the same result by using a subjective test that looks to the actual knowledge of the transferee and whether it chose to act in “willful ignorance” of facts readily available to it. (This is not markedly different from inquiry notice but requires a showing of larger red flags than under that alternative doctrine.) Indeed, the court here noted a number of points of concern, including failure to properly document the account, and frequent susceptibility to margin calls that could have been viewed as suspicious, but the court held the evidence did not point to the firm actually viewing those lapses as such.
In re RW Meridian LLC (County of Imperial Treasurer-Tax Collector v. Stadtmueller), 2017 Bankr. LEXIS 324 (9th Cir. BAP 2/3/17). Expiration of right of redemption for property did not terminate all of debtor’s rights in property; completion of prepetition auction postpetition violated stay.
A foreclosure auction could not be commenced until the day after a debtor’s right to redeem his property expired. However, while the auction began prepetition, the process was not concluded (i.e., by the acceptance of the bid and the payment of the purchase price) until after the petition date. As such, the loss of redemption rights did not equate to the termination of all rights in the debtor so that the completion of the sales process postpetition did violate the stay.
In re Affirmative Insurance Holdings, Inc., 2017 Bankr. LEXIS 845 (Bankr. D. Del. 3/29/17). Claim that property is not part of estate must be litigated as core proceeding.
Determination of what property constitutes property of the estate is a fundamental aspect of the bankruptcy court’s analysis. As such, that initial determination is a core proceeding even if the court might no longer have power to deal with the asset if it finds it is excluded from the estate.
In re Olsen, 2017 Bankr. LEXIS 476 (Bankr. E. Dist. Wis. 2/17/17). Right of first refusal survived Section 363 sale where holder was not give formal notice of sale.
A party holding a right of first refusal to purchase a property was not given any formal notice of the proposed sale free and clear of interests. At most, the party learned of a potential sale one week prior to the date it occurred. Rule 6004 requires 21 days’ notice of a proposed sale and failure to meet those requirements can result in a due process violation that makes the sale void. Here the “notice” was too short and too unclear to satisfy due process particularly where the debtor made no effort to give formal notice even knowing the interest holder had not been made aware of the case. Where the party’s right of first refusal was recorded in the land records, the purchaser was not a “bona fide” purchaser without notice of the competing claim. As a right, the party could exercise its first refusal when the buyer sought to sell the property.
In re Cooper, Inc., 2017 Bankr. LEXIS 408 (Bankr. D. Kan. 2/13/17). Where proper tax sale had taken place prepetition and debtor no longer had right to redeem, stay was lifted.
The tax sale here had taken place prepetition and, by the time the case was filed, the time to redeem the property had expired. Where the debtor only retained bare legal title and actual possession, the county was entitled to relief from the stay to allow the final orders to be entered completing the sale process since the debtor no longer had any rights that warranted recognition.
In re Skin Sense, Inc., 2017 Bankr. LEXIS 307 (Bankr. E.D. N.C. 2/3/17). Discussion of appropriate treatment of gift cards including debtor’s ability to sell them postpetition.
The debtor here was seeking to reorganize its business in which prepaid gift cards for its services were a major part of its operations. The court discussed the general treatment of gift cards in a variety of cases and also considered whether it could allow the debtor to continue selling such cards postpetition and, if so, what controls and protections it needed to impose with respect to funds received for such cards to make sure that both the customers and the secured lender were protected.
In re ARSN Liquidating Corp., Inc., 2017 Bankr. LEXIS 185 (Bankr. D. N.H. 1/20/17) After assets sold to new company, entity selling workers’ compensation insurance was precluded from using health record experience data of old company to set rate for new company.
Section 363(f) allows a sale to be made free and clear of “interests.” Although read in context of the Code as a whole, that term almost certainly was meant to apply to lien and equity rights, the courts have since expanded it greatly to apply to almost any sort of right that in any way relates to the prior debtor’s operations and to preclude any reliance thereon, even if the effect is only on the future obligations of the buyer and has nothing to do with any claim against the debtor. That is, this has nothing to do with successor liability in the classic sense of trying to make the buyer pay for an existing claim against the debtor. Rather, in the recent cases, the courts have held that any provision that treats the buyer and its future obligations as something other than a totally new entity with no established track record is an interest that can be barred from application. In this case, for instance, the court held that the insurer’s use of its normal experience ratings manual, that looks at the existing record of medical expenses for a group of employees to set premium costs going forward, cannot be applied to a situation where the employer bought assets and brought over an employee group from a debtor through a Section 363 sale. The sale order itself used the term “interest” but did not define it so as to explicitly apply to the insurer’s analysis of the employee health records in setting the premium rate.
Lynch v. Jackson, 845 F.3d 147 (4th Cir. 2017). Debtors may use full amount of IRS standards for means test even if their expenses are less.
The Fourth Circuit agreed that the Official Forms for the means test, which instruct debtors to use the full IRS standard amounts for their expenses in several categories (such as for mortgages and car payments) rather than their actual expenses are correct. The court noted that certain categories do refer to actual expenses, but others simply refer to “applicable” expenses and reference the IRS standards. This test is only used for the mechanical analysis under Section 707(b)(2). It is possible that a trustee might still choose to rely on the subjective test under Section 707(b)(3) if the discrepancy was sufficiently large. In any event, the use of a bright line rule simplifies the analysis process and ensures that the debtor has a cushion both here (and, when the same test is applied in Chapter 13) when his ability to pay is at stake.
In re Stubbs (Stein v. Stubbs), 565 B.R. 115 (6th Cir. BAP 2017). Debtor in potential asset Chapter 7 case could not require that case be dismissed in lieu of turning over asset or having discharge revoked for failure to do so.
The debtor had a tax return that came due during the normal processing period of her case. The Chapter 7 trustee allowed her discharge to go through but told her she still needed to provide the tax return so he could see if there were assets to administer. The debtor failed to do so and failed to appear in response to any of the trustee’s motions to obtain compliance. The bankruptcy court, however, refused to either enforce contempt sanctions against her or revoke her discharge, reasoning that, because a Chapter 13 debtor might be able to have their case simply dismissed if assets were not turned over, the same should be true of a Chapter 7 debtor. The BAP reversed, noting initially that Chapter 13 was meant to be a totally voluntary process and debtors had greater rights to a dismissal than in a Chapter 7 case. The denial of the default motion for revoking the discharge was an abuse of discretion since the debtor had ignored clear orders of the court entered during the process of trying to obtain compliance. The trustee had acted reasonably promptly with respect to the discharge and could not be held, as the lower court did, in essence, to have been guilty of laches. Moreover, of course, another distinction with Chapter 13 is that Chapter 7 uses an early discharge process while allowing the trustee to continue his suits, whereas in Chapter 13 the discharge does not even occur until the end.
In re Tillman, 2017 Bankr. LEXIS 638 (Bankr. W.D. N.C. 3/8/17). Credit counseling may be done on the same day case is filed even after petition is filed.
In the 2005 BAPCPA amendments, Congress added a prepetition credit counseling requirement to try to reduce the number of filings by having debtors learn to better manage their finances before they considered filing for bankruptcy. However, the actual requirement only states the session be held during the 180 days ending on the petition date, which the court read to literally allow the session to be held not only up to, but even after the filing, so long as it was on the same day. While that timing serves no purpose (particularly in that a separate financial management course is required during prior to obtaining a discharge), the court refused to find the literal reading to be absurd. As a result, most commentators support deleting this provision.
In re Sivaram (U.S. Trustee v. Sivaram), 2017 Bankr. LEXIS 507 (Bankr. W.D. Penn. 2/23/17). Filing bankruptcy one day before starting highly paid job that would allow repayment of all debts without disclosing that fact showed bad faith and case would be dismissed as abusive.
While the courts differ as to how much weight to place on the fact that a debtor can repay all or most of his debts, they all agree that such a factor is relevant and may be highly persuasive. Under even the most lenient view, timing one’s filing to avoid disclosing that job status and affirmatively concealing information about the job and other related factors on the filed schedules was enough to show that the filing was in bad faith and abusive, particularly when the debtors were also paying bills for their adult children rather than satisfy their own creditors.
In re Augusto’s Cuisine Corp., 2017 Bankr. LEXIS 833 (Bankr. D. P.R. 3/28/17). Absent very unusual circumstances, a class in which no one votes is not treated as being an accepting class.
The debtor may largely divide up classes as it chooses. If it decides, though, to set up a class with only one or a few members and none of them choose to vote, the issue is whether that is counted as accepting the plan, rejecting it – or simply neutral. Put a different way, can one claim an actual acceptance of the plan based on a null vote, or must one simply leave that class out of the analysis altogether. Since Section 1129(a)(8) requires, to avoid cram down, that each class must “accept” the plan, a null class means that this requirement is not met. While the 10th Circuit did take the position in a very large, complex case that a null class should not be allowed to force the use of a cram down analysis, most cases (including this decision) have come out on the opposite side and concluded that silence is not affirmative consent.
In re Arm Ventures, LLC, 2017 Bankr. LEXIS 416 (Bankr. S.D. Fla. 2/14/17). A plan based on revenues from marijuana sales in inherently infeasible and filed in bad faith.
Although many states have removed criminal sanctions for marijuana from their state laws, it remains the fact that there is no federal exemption as yet, for medical marijuana or otherwise. A plan that is based on income that violates federal law cannot be confirmed because it would involve the court in that same violation and would violate Section 1129(a)(3).
LVNV Funding, LLC v. Harling, 2017 U.S. App. LEXIS 5538 (4th Cir. 3/30/17). Chapter 13 plan confirmation is not res judicata determination with respect to unsecured claims that were merely to be provided pro rata payment from assets.
Plan confirmation in a Chapter 13 case normally takes place before the claims bar date. While secured creditors must be given specific treatment in the plan and they must be paid in full or else accept the plan’s terms. Unsecured creditors, on the other hand, normally merely receive pro rata payments. As a result, the only confirmation issue for those entities is whether the class as a whole has received as much as it would in a Chapter 7 case; if so, the plan is confirmed without any need to review or object to their claims. In that situation, the approval of the plan does not resolve any issues related to the merits of the claims (or vice versa) so that plan confirmation and claims allowance do not involve the same issues for res judicata purposes. As a result, the failure to object to a claim filed prior to confirmation does not automatically allow the claim. See also In re Haskis, below.
In re Sagendorph (Wells Fargo Bank v. Sagendorph), 2017 U.S. Dist. LEXIS 8962 (D. Mass. 1/23/17). Chapter 13 plan cannot provide for forced vesting of ownership of property in lender.
Chapter 13 allows a debtor to choose to “surrender” property and also states that a plan may provide for property to “vest” in a lender. In the last few years where property values have stagnated for a long time, debtors have been concerned where lenders were given leave to foreclose but did not actually do so. They have tried to combine the provisions for “surrendering” property with the ability to “vest” property by stating in their plan that surrender of the property will best the ownership in the lender. (The goal here is to get the property off the debtor’s hands and place it (and any attending tax and maintenance expenses) in the lender’s hands. The court held, though, that Chapter 13 did not allow for this option; property cannot be vested; i.e., transferred to the lender absent its consent.
In re Gamble, 2017 Bankr. LEXIS 959 (Bankr. S.D. Tex. 3/30/17). Claim amounts for purposes of eligibility determination do not take into account the allowance caps in Section 502(b).
Section 502(b) caps a number of otherwise valid claims at amounts below their full value. The court here concluded that such limits were not relevant to the question of whether the debtor met the original eligibility limits for a Chapter 13 filing. While those claims might be imposed after the case was filed, they would be disregarded for the initial eligibility determination.
In the Matter of Holt (First American Title Lending of Ga, LLC v. Holt), 2017 Bankr. LEXIS 601 (Bankr. N.D. Ga. 3/6/17). Debtor could not use Chapter 13 plan to redeem asset over time.
The debtor had obtained a pawn loan on her car prepetition. When she filed, she was still current with her payments but did not make a postpetition payment. At that point, under state law, she had 30 days to redeem the loan in full; she did not do so, but, instead, filed a plan proposing to pay the loan off over its full duration. Under state law, though, the failure to redeem the vehicle caused the borrower to automatically forfeit all rights therein. The court here agreed that, while Section 108(b) extended the redemption period to 60 days after the petition date, that date was the limit of the debtor’s rights. When she failed to redeem then, she automatically lost all rights and the car was no longer property of the estate that could be retained by periodic plan payments.
In re Rothenbush, 2017 Bankr. LEXIS 622 (Bankr. M.D. Fla. 2/27/17). Debtor may be granted derivative standing to pursue avoidance action.
Although the trustee is the only party initially granted standing to pursue avoidance actions in Chapter 13 cases, the debtor may be granted derivative standing to do so where the trustee does not choose to proceed. The trustee often may not have the funds to pursue the case but if the debtor seeks permission to do so, the court may authorize him to take the trustee’s place.
In re Haskis, 2017 Bankr. LEXIS 234 (Bankr. W.D. Va. 1/27/17). Chapter 13 plan confirmation is not res judicata of objections to unsecured claims filed prepetition.
The creditor filed a claim that was concededly barred by the statute of limitations prior to the confirmation date; the debtor obtained the court’s approval of a “pot” plan that provided a specified amount of money to be divided between whatever unsecured claims were allowed. The court held that, in that scenario, confirmation did not purport to be an adjudication of the merits of any of the filed claims. As such, the debtor was not required to object to the claims in advance of confirmation in order to have the challenges heard.
In re Norton, 2017 Bankr. LEXIS 197 (Bankr. N.D. Tex. 1/24/17). Limits on filing late-filed claims in Chapter 13 under rule 3002 do not apply to debtor-filed claims under Rule 3004.
There is no “excusable neglect” provision in Rule 3002 for creditors that file a late claim in Chapter 13. However, Rule 3004 allows a debtor to file a proof of claim for a creditor and it may choose to do so in order to ensure that payments are made on a secured debt or one that is excepted from discharge. Rule 3004 is not subject to the bar in Rule 9006 on expanding the time limit set thereunder so it is possible to apply the usual rule to debtor-filed late claims if the debtor can assert excusable neglect for the failure to comply with the rules.
The availability of third party releases has been a subject of long-standing controversy. The Ninth Circuit has generally taken a hard line against allowing such releases, and even other courts that do allow them usually require the party being released provide some form of benefit to creditors so as to “buy” themselves the release. Here, the court noted that the Ninth Circuit’s position was based on its view that Section 524(e) which bars the “discharge” of nondebtors also applied to the scenario of a “release” of a non-debtor. (Other courts disagreed and held that Section 524(e) was irrelevant). That section, though, is inapplicable in Chapter 9 cases so the Ninth Circuit’s case law is not binding here. Instead, the court must only just the appropriateness of granting the requested injunctive relief. And, under the facts here, where the city only had enough funds to put into bringing services back up to par, the court had no difficult in concluding that the injunction was necessary to keep the city from being forced to pay large amounts in indemnity claims that it could not afford. Absent those payments for critical services, the city would continue to descend into a vicious circle of unmet needs and declining resources. Even with the limited payments, the city was desperately short on funds – and the employees receiving releases were contributing by only being paid 1% on their claims for reduced retiree benefits. The plan also did not limit insurance payments for the claimants, but only payments that the city would have to provide indemnity for.
In re Money Center of America, Inc. (Casino Caribbean, LLC v. Money Centers of America), 2017 Bankr. LEXIS 548 (Bankr. D. Del. 2/28/17). Indian tribes are not unambiguously covered by the reference to “other domestic governments” in the definition of a governmental unit and, hence, their sovereign immunity is not abrogated.
Section 101(27) specifically defines a governmental unit as including all manner of federal, state, and local governments, a foreign state, and also includes “or other foreign or domestic government.” The issue is whether the phrase “other domestic government” includes (or, indeed, is only applicable to Indian tribes. While the Ninth Circuit initially thought the issue was simple – Indian tribes have been referred to as “domestic dependent nations” or “domestic sovereigns;” either of those terms is linguistically identical to domestic government; and there is no other entity that anyone has suggested would be covered by the term “other domestic government” besides Indian tribes – other decisions have taken a more restricted view. Those courts have said that the Supreme Court has not explicitly used the term “domestic government” to refer to a tribe, that efforts to abrogate tribal immunity must be unambiguous and that every prior effort to abrogate immunity has used the words “Indians” or “Indian tribes.” Accordingly, those courts and the court here concluded that the definition did not unambiguously cover tribes; as a result, the tribe could not be sued on a preference action. (Moreover, Section 106(b) which provides that a “governmental unit” waives its immunity by filing a claim does not apply to an Indian tribe which is not a defined governmental unit.) The court did note that there was at least the possibility of a common-law waiver based on the concept of recoupment, but it needed more facts to assess whether the concept applied to the tribe’s claim and the trustee’s counter-claim. It was not enough that the same contract was at issue in both claims. This result appears to be a growing consensus although it is somewhat ironic that Indian tribes who had no part in forming the Constitution are treated as having greater rights than the states themselves.
In re Gugliuzza (Gugliuzza v. FTC), 2017 U.S. App. LEXIS 5211 (9th Cir. 3/24/17). The Ninth Circuit’s prior expansive allowance of appeals in non-final situations is no longer valid.
The Ninth Circuit had, over a number of years, utilized an ever-broader rationale for allowing interlocutory appeals in situations where it viewed the resolution of a “legal” issue as helpful to determining the final result in the case by the court below. After Bullard v. Blue Hills Bank, 135 S.Ct. 1686 (2015), the court here concluded that its prior line of cases was no longer valid and it must return to the more traditional view of final orders and appellate authority, i.e., that the order must actually resolve the underlying dispute and that orders remanding a matter for further significant fact-finding and decisions do not fit within that category.
Netzer v. Office of Layer Regulation, 2017 U.S. App. LEXIS 4396 (7th Cir. 3/13/17). Time limit for filing notice of appealing under Rule 8002(a) is jurisdictional – or at least must be enforced.
The courts have typically held that time limits for filing appeals as jurisdictional (i.e., they can’t be equitably extended). However, in some recent cases, the Supreme Court has distinguished between the effects of time limits set in rules, versus those set by statute and has taken Hamer v. Neighborhood Housing Services of Chicago, 835 F.3d 761 (7th Cir. 2016) to consider the issue. The court here, though, held that question was irrelevant since the only point it needed to decide was whether to affirm a decision below that had relied on the time limit in the rule to dismiss an appeal – and the answer to that was yes regardless of whether the rule was jurisdictional.
Schwab Industries, Inv. v. Huntington Nat’l Bank, 2017 U.S. App. LEXIS 2648 (6th Cir. 2/13/17) (unpublished). Failure to abide by timeliness provisions in Rule 8002 are jurisdictional; court cannot use equitable or other principles to extend them beyond what Rule 8002 allows.
This is an instance of the court automatically applying the “jurisdictional” label to an untimely appeal, even where the plaintiff was making arguments about whether the court below exceeded its constitutional authority. The issue may be affected by the cert. grant in Hamer.
In re Philadelphia Entertainment and Devel. Partners, LP, 2017 U.S. Dist. LEXIS 46751 (E.D. Penn. 3/29/71). Rooker-Feldman doctrine precluded bankruptcy court from revisiting merits of prepetition state court decision upholding revocation of casino license and retention of $50 million application fee as sanction.
The debtor applied for and was awarded a license to operate a casino but did not do in a timely fashion. After several years of failing to move forward, its license was revoked but the $50 million application fee was retained as a nonrefundable deposit. Those actions were unsuccessfully challenged by the debtor in state court and the decision became final in 2012. The debtor filed bankruptcy in 2014 and immediately sought to challenge the revocation under the turnover and fraudulent transfer provisions of the Code as well as under claims of unjust enrichment and promissory estoppel. The district court affirmed the bankruptcy court’s findings that the prior state court determinations were dispositive of the various issues and it was barred by the Rooker-Feldman doctrine from considering the issues itself. Absent a contrary ruling on the validity of the revocation, none of the trustee’s claims had merit, and the court had not power to make such a ruling. The trustee was bound just as much as the debtor in whose shoes he stood. Nor was there any “transfer” when the fee was not returned; the transfer occurred long before and the decisions held there was nothing to be returned. The court did not rule on the state’s arguments relating to sovereign immunity.
Natusch v. Nibert, 2017 U.S. Dist. LEXIS 45533 (N.D. W.V. 3/28/17). Rooker-Feldman decision applies (at least outside bankruptcy) despite claim that state court lacked jurisdiction or that decision was fraudulently procured.
The Rooker-Feldman doctrine (which holds that lower federal courts do not have appellate jurisdiction over state court actions) applies even if there is a claim that the state court did not have jurisdiction to enter its decision so that its decision was arguably void. Such an argument is just as much one subject to appellate review within the state court system (and ultimately to the Supreme Court) as the decision on the merits. The court noted that virtually the only decisions that went the other way were in the bankruptcy court system (although even there the arguments for that result do not adequately explain why the normal result is inapplicable in bankruptcy). Nor the court noted have most decisions ever allowed for a claim that a decision obtained by “fraud” is excepted from Rooker-Feldman, presumably because there are existing remedies in the appellate chain of the original decision to raise such allegations.
In the Matter of Osorio, 2017 Bankr. LEXIS 874 (Bankr. E.D. Wis. 3/30/17). Court found Rooker-Feldman doctrine did not bar its review of whether state court action violated discharge injunction; no violation found on the merits.
Even prior to the debtor’s discharge, the creditor had been pursuing a garnishment action against a corporate entity owned by the debtor to collect the debt that was discharged as to the debtor’s personal liability. The corporation did not respond or defend the garnishment and a conditional judgment was entered in the amount of the debt for which garnishment was sought against the corporation and eventually the corporation’s owner (i.e., the debtor) for the corporation’s failure to respond. This was the same action that could occur against any third-party entity that failed to respond. After the discharge, a final judgment was entered against the corporation and then the debtor with respect to the corporate debtor. It was not until a year after judgment was entered against the debtor in the garnishment action that she asked the state court to find that the action violated the discharge injunction. It refused to do so and, rather than appeal, she waited another 18 months to finally return to the bankruptcy court and ask that it find the creditor in contempt.
The creditor argued that the state court determination barred the bankruptcy court’s review of the discharge complaint because of the Rooker-Feldman doctrine. The bankruptcy court disagreed, asserting that Rooker-Feldman did not apply because it had its own original jurisdiction to hear discharge complaints and it could do so, even if that meant reaching a different conclusion on the merits than the state court had. However, the case cited for that proposition did not refer to “original” jurisdiction, but rather an “independent” jurisdictional basis. The trial court that is asked to hear a complaint to which a Rooker-Feldmanobjection is raised will always have original jurisdiction, there would be no way to file the complaint absent such jurisdiction. The Rooker-Feldman argument about exercising “appellate jurisdiction” over a state court action is a description of the functional nature of what the federal court is doing, not a literal statement of actual jurisdiction. What the courts do hold is that if there is an independent action that can be brought in federal court that would provide some relief to the plaintiff on a basis that does not require overriding the state court decision, it can proceed even if the reasoning for the federal action may contradict some legal conclusion in the state court decision. Here, the debtor is asking the court to decide precisely the same cause of action that it raised in the state court (i.e., whether there was a violation of the discharge injunction) and to find that the state court erred in so deciding. This does not appear to be a true “independent” cause of action.
The court also found that the state court could not award sanctions for a violation of the discharge injunction because there is no independent cause of action for such a violation; rather it must be adjudicated as a contempt action before the issuing bankruptcy court. But, on the merits, the court found that there was no attempt to collect from the debtor personally because of the original debt. Rather, it was because she failed to have the corporation respond to efforts to collect from its corporate resources such that she eventually became personally liable again.
U.S. SEC v. ITT Educational Services, Inc., 2017 U.S. Dist. LEXIS 164 (S.D. Ind. 1/3/17). Waiver of attorney-client privilege carries over to debtor’s trustee.
Where the debtor waived attorney-client privilege prior to filing bankruptcy, the trustee may not act as if it is a new party and claim the right to assert the privilege on the debtor’s behalf during the case. Waiver is final and may not be reclaimed.
In re Lee, 2017 Bankr. LEXIS 841 (Bankr. S.D. Okla. 3/27/17). Debtor can be required to testify at Rule 2004 exam even if criminal case is pending.
While the debtor may have 5th Amendment rights to refuse to answer certain questions, he cannot simply refuse to appear at a Rule 2004 deposition or refuse to provide documents. The debtor is seeking a benefit from the bankruptcy and cannot both demand that benefit and refuse to comply with his obligations thereunder.
In re Williams (Williams v. Navient Solutions, LLC), 564 B.R. 770 (Bankr. S.D. Fl. 2017). Chapter 7 discharge did not eliminate enforceability of arbitration and class action waiver provisions in debtor’s student loan promissory note.
A party that seeks to avoid enforcement of an arbitration provision must generally show that the proceeding at issue is both core and that allowing arbitration would inherently conflict with the purposes and goals of the Code. The court held that while an arbitration provision dealing with whether a student loan was dischargeable did deal with a core proceeding, the use of arbitration with regard to the issue was not inherently in conflict with the Code. The discharge decision had no effect on the ongoing case or distributions from the estate, the fact that the debtor sought to pursue a class action suggested the issue was not closely tied to her own situation, and the court was not being asked to interpret its own order, but rather merely the terms of the statute that were incorporated into the form order. As such, arbitration was appropriate.
In re Roby, 2017 Bankr. LEXIS 69 (Bankr. N.D. Ohio 1/10/17). Notices sent to PO Box instead of proper address for either tax agency or AG office were inadequate, orders vacated.
Where the debtor sent its notice of a lien avoidance motion only to a post office drop box, rather than to the statutory address for the tax department or for the Attorney General, the service was insufficient. Bankruptcy uses a comparatively simple method of service by mail; the trade-off is that the requirements imposed on the use of such service must be strictly adhered to. Even actual notice would, at least initially, not be sufficient to cure the violation so as to preclude the state from being able to have default notices issued against it lifted. While such failings will not necessarily give the defendant an unlimited period of time to seek reconsideration under Rule 60(b), they were sufficient here where the state moved within less than two weeks.

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