Source: https://www.naag.org/publications/nagtri-newsletters/bankruptcy-bulletin1/bankruptcy-bulletin-march-2016.php
Timestamp: 2019-04-19 18:55:47+00:00

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BANKRUPTCY SEMINAR -- Save the NEW dates!
We have signed the hotel contracts and we will definitely be back in Santa Fe, New Mexico for this year’s bankruptcy seminar. There is a small change in the dates – we will be meeting from September 27 through 30, 2016. We had to move away from the usual Sunday to Wednesday schedule because there is a Wine and Chile Fiesta in Santa Fe the previous weekend. We will also be holding the conference sessions at the Hilton Hotel, and splitting the hotel rooms between the Hilton and our usual favorite the Hotel Santa Fe. The conference has gotten big enough that we just outgrew the Hotel Santa Fe but we’ll only be a couple of blocks away (and a couple of blocks closer to the Plaza). Room rates will be $99 a night during the conference nights which should help your office to find the necessary room in their travel funding.
We’ll have a full agenda out in the next month or two so you’ll have plenty of time to inform your training office about the program; we will be opening registration before the last week in June so that those with a July 1 fiscal year can decide which budget year they want to take the funds out of. We will also be done with the conference before October 1, so whatever happens with the federal budget cycle will not affect our program. We’re still working up the final budget numbers but we expect the early registration conference fee to be approximately $500 for the three and a half days with our traditional $100 per person discount for groups of three or more from the same government office. We’re still researching this year’s “optional activity” but it looks like there are several great possibilities – we’ll let you know the winner when we send out the announcement.
We do still have a few copies left of the materials from the 2015 seminar. The materials include the printed binder, a thumb drive with much more material on the topics from this year and bonus material covering some topics from prior years, and a full copy of the 2015 Bankruptcy Code and Rules. Last year’s meeting used a hypothetical dealing with a non-profit hospital bankruptcy and a proposed sale to a buyer that proposed a conversion to a for-profit entity, with many related consumer protection, environmental, and tax issues woven in. Materials were also prepared for both beginner and advanced sessions, so there is something for everyone. The entire set is available for $90 which includes all shipping costs to your office. If you would like a set, please respond to Karen Cordry (kcordry@naag.org) to make arrangements for payment.
Sheriff v. Gillie, 785 F.3d 1091 (6th Cir. 2015), cert. granted and argued March 29, 2016, No. 15-338. This case does not deal with bankruptcy per se but does deal with the closely related area of collection practices for state debts. Ohio state law provides that debts from various agencies are eventually “certified” to the Attorney General’s office if they go unpaid for a length of time. That law also allows the Attorney General to employ “special counsel” in addition to in-house Assistant Attorneys General to collect those debts and provides that in connection with collecting particular tax debts that the special counsel are to use official state letterhead provided by the Attorney General. While special counsel are “retained” by the Attorney General, the agreement specifically provides that they are independent contractors and the state has no obligation to indemnify them from any claims that may arise from their collection activities.
This case revolved around claims that the actions of the special counsel in general, and, in particular, their use of the letterhead of the Attorney General, violated the Fair Debt Collection Practices Act (“FDCPA”). That act, in general, generally imposes its limits on actions of third party debt collectors, as opposed to those working directly for the creditor itself. As to states, the FDCPA provides that an “officer or employee” of a state is excluded from coverage while seeking to collect debts as part of his “official duties.” Thus, one question here was whether the outside “special counsel” would qualify as “officers” of the state. The other issue was whether the use of the state letterhead by the special counsel violated the ban on the use of any “false, deceptive, or misleading representation” in connection with the collection of a debt by making the person think they were being contacted by the Attorney General’s office itself. (At least with respect to a private entity, it is clear that a suggestion that the debt collection is being carried out by law enforcement officials would tend to create a coercive pressure on the debtor.) The FDCPA uses a very strict standard for this issue, namely whether the “least sophisticated consumer” would be misled by the particular statement.
The Attorney General intervened in the suit which was initially filed against the special officers in order to defend the office’s practices. The majority of the Sixth Circuit, though, rejected its arguments on both issues, reversing the trial court’s grant of summary judgment to the state. Judge Jeff Sutton, however, the former Solicitor General of Ohio, not surprisingly perhaps, took a different view and wrote a strong dissent. When the case reached the Supreme Court, the United States Solicitor General filed an amicus brief in support of the plaintiffs while Michigan filed an amicus brief, joined by Alabama, Arkansas, Arizona, Hawaii, Idaho, Kansas, Louisiana, Mississippi, North Dakota, Oklahoma, and Tennessee, supporting Ohio.
The argument was not a model of clarity and the justices seemed somewhat perplexed about what lines the FDCPA was trying to draw – and why – and how those lines should be applied in the context of a state creditor. (See attached transcript.) What was clear was that some of the Justices were more than a bit taken aback at the notion that the United States was arguing that the Attorney General of Ohio was, if not himself violating the law, at least directly sanctioning a violation of the law. A decision on the case should issue on or before by June 30; we will circulate more information about the result of the case when it does come out. It seems likely that a number of states may have similar arrangements or may consider them in the future; the decision should give clarity as to what the states may – and may not—authorize.
In re Justice (Justice v. United States), 2016 U.S. App. LEXIS 5816 (11th Cir. 3/30/16). Forms submitted belatedly by debtor after IRS had completed assessments did not qualify as “returns” for purposes of starting time limit for discharge of tax debts.
Under the Beard test, a return must meet four criteria; the operative one here is the requirement that it must represent an “honest and reasonable effort to comply with the tax law.” Prior to the BAPCPA amendments, four circuits (Fourth, Sixth, Seventh, and Ninth) had held that the filing of the tax forms after the IRS made its assessments precluded them from satisfying that criteria. The debtor later filed the missing tax forms and reported lower income than the IRS had assessed and the IRS accepted those filings. While the First, Fifth, and Tenth Circuits have read the new “hanging” language in Section 523 as defining returns to require timely filing (absent preparation of a 6020(a) return by the IRS), the court here did not rule on that issue. Instead, it viewed the test as including, at a minimum, the Beard test and concluded that the debtor’s filings failed that test. Like the other four circuits (but contrary to the position of the Eighth Circuit), the court concluded that the analysis must include not just the facial validity of the documents but also the extent to which the debtor had met – or cavalierly ignored – his responsibilities to self-assess and pay his taxes. In most cases, this will mean a return filed after the assessments are made will not qualify, but the court left open the door for the debtor to plead extenuating circumstances.
United States v. Wilson, 2016 U.S. Dist. LEXIS 7285 (N.D. Cal. 1/21/16). Failure-to-file tax penalties are nondischargeable if the date the return is due (October 15 for those who request an extension) is within three years of the petition date even if the underlying taxes had to be paid at an earlier date (i.e., by the original April 15 due date).
In re Addison (Addison v. United States Dept. of Agriculture), 2016 U.S. Dist. LEXIS 5739 (W.D. Va. 1/19/16). Setting off a prepetition federal tax overpayment against a debt owed to the USDA violated the automatic stay.
The court rejected the view that 26 U.S.C. 6402 should be applied before any determination was made as to whether a tax “refund” existed that could become property of the estate. While some courts had used that approach prior to the BAPCPA, the court viewed the addition of the addition of a stay exception (362(b)(26)) for setoff of prepetition income tax refunds and debts as proving that Congress did not intend to allow setoffs of income tax overpayments against any other form of debt owed to the government – and, by implication, as showing that Congress did not intend to have Section 6402 apply to trump the normal analysis of setoff.
In re Copley (Copley v. United States), 2016 Bankr. LEXIS 892 (Bankr. E.D. Va. 3/22/16). Tax setoffs may not be taken against exempt assets.
While Section 522 says exempt assets are not liable for debts (except for specified exceptions), Section 553 says setoffs are preserved despite any other provision in the Code (with a few specified exceptions). The courts are split as to which section trumps the other (if no specific exception applies). This court sided with those arguing that the exemption session should govern (while noting that the particular form of setoff here (tax debt against tax debt) was now an exception to the automatic stay). Oddly, the decision never discusses that Section 522(c)(1) does specifically allow collection of a debt that is excepted from discharge under Section 523(a)(1) (i.e., priority taxes) from exempt assets. While the particular tax years here might have been old enough that they were no longer priority, it would seem the provision should at least be relevant to making policy arguments on which should govern. In any case, the split is so deep that it will likely have to be resolved by the Supreme Court (or a legislative change).
In re Selbst (Selbst v. U.S. Dept. of Treasury), 544 B.R. 289 (Bankr. E.D. N.Y. 2016). Using the same reasoning as in Justice, the court here held that the forms filed by the debtor after the IRS made its assessments did not qualify as “returns” under the Beard test. As such, the court did not pass on the issue of whether the filings were excluded as soon as they were late.
In re Altegrity, Inc., 544 B.R. 772 (Bankr. D. Del. 2016). Using Section 505 as a way to obtain an expedited ruling on the constitutionality of a state tax statute is not appropriate. It was not necessary to assist case administration because the debtor had already confirmed a plan providing for full payment of priority taxes; the creditors were not harmed by an earlier failure of the debtor to litigate the issues; and courts should avoid reaching out to determine constitutional issues so it would not decide that issue any more quickly than the state courts. All of the state law issues were already pending before the state Tax Commission and the debtor had numerous non-constitutional defenses that must be resolved first. Moreover, the evidence indicated that the debtors were really looking for a way to escape unhelpful precedent in the state courts. Where the 505 determination will not assist the plan process and the issues can all be litigated in pending state court proceedings, the court should (and did) abstain.
In re Tribune Company Fraudulent Conveyance Litigation, 2016 U.S. App. LEXIS 5543 (2nd Cir. 3/24/16). Section 546(e) impliedly preempts constructive fraudulent transfer suits by any party, not just the trustee, at any time, even if the trustee chooses not to pursue such actions.
In this case, the Creditors Committee (taking the place of the trustee) brought intentional fraud claims under Section 548 against the debtor seeking to avoid transfers in connection with a leveraged buyout in which the former shareholders of the Tribune Company paid a hefty premium for their shares little more than a year before the company filed bankruptcy. That choice was undoubtedly made because of the extraordinarily broad “safe harbor” provisions in Section 546(e), which protect sales involving securities and/or financial institutions unless such intentional fraud is proven. Other groups of creditors sought to file suit under state law after the two-year period expired during which a trustee (or the creditors’ committee) could bring suit. They argued, and the district court agreed, that, while their right to bring such a suit was precluded during the period of time the trustee could act to assert rights of individual creditors under Section 544, their rights revived once the trustee chose not to act. The district court also read Section 546(e) as only applying to suits brought by the trustee under federal law, not to the private creditor suits under state law. The Second Circuit reversed, holding that the provisions of Section 546(e) were ambiguous, at best, in terms of whether it was as limited as the creditors argued for. Accordingly, the court could then determine whether those state law rights were impliedly preempted in order to protect the full effect of federal law. The Court of Appeals found they were, holding that a) the trustee’s Section 544 action is also a matter of federal law, albeit one defined by state law parameters, b) those state law rights of the individual creditors actually were transferred to and vested in the trustee by virtue of Section 544 (i.e., not only could he bring such a claim as a federal law right, but he was taking over the actual claims of the creditors), c) there was no basis to find that those rights revested in creditors when the time period expired for the trustee to bring his action, and d) allowing those creditors to bring a state law suit that would be barred to the trustee under Section 546(e) would create exactly the same (or worse) disruption of the securities markets as would be the case if a federal action were brought. Accordingly, the court held the state law suits were preempted and must be dismissed.
In re Smith (Smith v. SIPI, LLC), 811 F.3d 228 (7th Cir. 2016). While BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) conclusively presumes that a price received at a lawfully conducted mortgage foreclosure sale is reasonably equivalent value, the same is not true for all tax lien sales. Some states do use a similar bidding process to reach the highest price (and those are likely protected from avoidance) but states that use an “interest rate method,” under which parties bid on how little interest they will demand to receive, are likely not protected from such an action. By definition, the amount being bid will have no necessary connection to the value of the property and will normally be far less to the point that it cannot possibly be deemed to be fair value. Allowing these avoidance actions will induce some degree of uncertainty in these properties but generally only for an additional two years and acquiring one of these properties is very uncertain in any case since the vast majority are redeemed in a timely fashion.
Even though an initial transferee of a fraudulent transfer has no defense to a finding that the transfer is avoidable under Section 550(b), Section 548(c) actually provides protection that is very little different from that provided in Section 550 – and it is available to any transferee, initial or subsequent. Section 548(c) provides that a transferee that “takes for value and in good faith” has a lien on or may retain any interest transferred to the extent of the value that was given. To invoke that defense, the recipient must not have been on “inquiry notice” of the wrongdoing. That term “signifies awareness of suspicious facts that would have led a reasonable firm, acting diligently, to investigate further and by doing so discovery wrongdoing.” It is less than actual knowledge but more than mere speculation – it is “knowledge that would lead a reasonable law-abiding person to inquire further – would make him in other words suspicious enough to conduct a diligent search for possible dirt.” Here, for instance, the bank had documents in its possession that “on even a casual perusal” would show that the debtor did not have authority to pledge money in its customers’ accounts as security for loans it was receiving from the bank. A negligent failure to appreciate the significance of that information will not protect the recipient. The court did agree, though, that mere negligence was not enough to require equitable subordination of the bank’s claim for repayment of its loan as an unsecured creditor, after it lost its right to a secured position.
In re Jahrling (Cora v. Jahrling), 2016 U.S. App. LEXIS 5013 (7th Cir. 3/18/16). (Failure of lawyer to arrange to speak to client except through counsel for opposing side was gross deviation from normal duties of care and constituted defalcation under Section 523(a)(4)).
Mr. Cora was 90 years old and could speak only Polish; his lawyer, Mr. Jahrling, spoke no Polish and could only communicate with Mr. Cora through the lawyer for the prospective buyers of his house. The net result of Mr. Jahrling’s work on the sale documents was a transfer of the property for a small fraction of its actual worth and without the most important term Mr. Cora wanted – retention of a life estate so he could stay in the house for the rest of his days. As a result, he quickly found himself being evicted and he sued his lawyer for malpractice. The lower courts held, and the Seventh Circuit agreed, that his failures to adequately represent his client by virtue of being unable to communicate with him were so obvious and so egregious that they met the standard in Bullock v. BankChampaign, N.A., 569 U.S. ---, 133 S.Ct. 1754 (2013) of being a “gross deviation” from the expected standard of care, making the debt excepted from discharge.
Appling v. Lamar, Archer & Cofrin, LLP, 2016 U.S. Dist. LEXIS 39958 (M.D. Ga. 3/28/16). Where the debtor assured his unpaid attorneys that he would receive a specified tax refund and that he would use those funds to pay their bills if they would keep representing him, but instead used the refund to operate his company, his actions were false statement about present facts and his present intention and warranted exception of the debt under Section 523(a)(2)(A); his statement did not refer to his “financial condition” and was not required to be in writing under Section 523(a)(2)(B); false statement leading to forbearance or refinancing can render whole debt nondischargeable even if new credit not extended after statements.
In re Smith (Auto-Owners Insurance Company v. Smith), 2016 U.S. Dist. Lexis 26558 (E.D. Mich. 3/1/16). As stated in Kelly v. Robinson, 479 U.S. 36 (1986), any provision included in a state law criminal sentence is excepted from discharge under Section 523(a)(7), which includes restitution payable to an individual victim (which was an issue explicitly discussed in Kelly. It is irrelevant that the amount of restitution is tied to the amount of the victim’s loss.
In re Casciano (Juett v. Casciano), 2015 Bankr. LEXIS 82 (6th Cir. BAP 1/11/16). A debt may be excepted under Section 523(a)(6) as a “willful” action even if the debtor did not necessarily intend the precise injury that resulted. So long as he actually intended to strike the person, the fact that the blow was more severe than he anticipated is irrelevant.
O’Rorke v. Porcaro, 2016 Bankr. LEXIS 346 (1st Cir. BAP 2/3/16). Knowingly installing windows that were too small (disregarding the warnings of the subcontractor actually doing the work) that would leak and needed to be torn out and replaced was held to be a willful and malicious injury under Section 523(a)(6). While in most cases, construction problems would just be deemed to be negligence, the knowing nature of the violation here took it to a higher level. It was also malicious since there was no excuse for the violation.
In re Campbell (Campbell v. Citibank, N.A.), 2016 Bankr. LEXIS 928 (Bankr. E.D. N.Y. 3/24/16). A “bar loan” (apparently a loan taken out to help support the debtor while she studied for the bar) made by Citibank was not excepted from discharge as a student loan. It was not made under any sort of student loan program run by a governmental unit or nonprofit, nor was it an otherwise “qualified education loan,” nor was it a scholarship, or stipend. The lender argued that it was an “educational benefit,” under Section 52(a)(8), but the court held that term did not apply to every loan that happened to be of benefit to someone obtaining an education. Rather, it was more intended to deal with programs such as benefit grants that could turn into a loan if the conditions of the grant were not met. The program here was a standard commercial loan, albeit the parties knew it would be received by a student in connection with her education.
In re Milan (County of Dakota v. Milan), 2016 Bankr. LEXIS 680 (Bankr. D. Minn. 3/1/16). While it might be possible to include provisions in a criminal sentence requiring an inmate to make payments towards the cost of incarceration, the program in Minnesota did not use that approach, but rather left it up to each county to decide whether to impose a “pay to stay” fee that was maintained in the county administrative process (not the courts) and was enforced civilly if not paid. Accordingly, the court held it did not fall under Section 523(a)(7).
In re Hall (Hall v. State of Texas), 2016 Bankr. LEXIS 304 (Bankr. E.D. Tex. 2/1/16). Non-bankruptcy courts have concurrent jurisdiction to determine discharge issues with respect to taxes (and other exceptions not subject to 523(c)); state may bring issues in state court without violating discharge injunction.
In re Mickletz (Carmelo v. Mickletz), 544 B.R. 804 (Bankr. E.D. Penn. 1/28/16). Most, but not all debts relating to workplace injury and debtor’s failure to maintain workers’ compensation insurance were excepted from discharge.
Debtor-business owner engaged in dispute with employee, and pushed him to ground, causing injury, but the business did not have workers’ compensation insurance. State law imposed criminal sanctions (including restitution in the amount of the worker’s compensation award that would have been paid through insurance) on owners who failed to maintain insurance and that judgment was nondischargeable under Section 523(a)(7). In addition, after the victim sued the debtor to hold him personally liable civilly based on piercing the corporate veil, the debtor agreed to entry of judgment. When the debtor later filed bankruptcy, the court held that the nature of the debt underlying the judgment was a willful and malicious act (i.e., the pushing) and that the judgment was excepted under Section 523(a)(6). Finally, to the extent that the workers’ compensation award included an upwards penalty for failure to maintain insurance, the court held that was not a willful and malicious injury since, although an injured employee would surely be harmed in the absence of such insurance, there was no certainty that there would be such an injured employee to begin with. (Note that there was already a criminal punishment imposed for failure to provide the insurance).
In re Hernandez (Hernandez v. Banco Popular de Puerto Rico), 2016 Bankr. LEXIS 873 (Bankr. D. P.R. 3/18/16). Mortgage lien papers that had been filed but not processed by the recording office (even years later) were still sufficient, under Puerto Rico law, to create an interest that could be perfected retroactive to the filing date; that interest was protected under Sections 362(b)(3) and 564(b).
While the automatic stay generally prohibits postpetition acts to perfect liens, Section 362(b)(3) allows that perfection where the trustee is subject to those acts under Section 546(b); that section, in turn, allows for perfection if applicable law permits perfection to be effective against an entity with earlier-acquired rights. That is, an entity that may “prime” earlier interest holders may do so even during a bankruptcy case with respect to its prepetition interest. This is a very little known, but very powerful, section of the Code, not least because it is one whose scope is left up to the government. This could occur with respect to property tax liens, or a “superpriority” lien for environmental clean-up costs (see 229 Main St. v. Mass., 262 F.3d 1 (1st Cir. 2001)) , or here for these documents which were treated as binding under Puerto Rican law as creating an “interest” even if there was not yet a perfected lien.
In re Rainbows United, Inc. (Dold v. Rainbows United, Inc.), 2016 Bankr. LEXIS 689 (Bankr. D. Kan. 3/4/16). Indemnity claim for tax penalties imposed on “responsible officer” after debtor confirmed its plan was discharged. Claim accrued when taxes were not paid and potential arose for officer to be assessed the penalty; fact that penalties were not actually imposed until much later does not make them postpetition. A clear, contractual right to indemnity existed at the time of the bankruptcy and the contingency that would make the officer liable was equally clear.
In the Matter of Forehand (Associated Maintenance Services, Inc. v. Forehand), 2016 Bankr. LEXIS 467 (Bankr. S.D. Ga. 2/12/16). Enforcement of a no-compete agreeing by injunctive relief that seeks to bar future violations is not a “claim;” it is not an alternative to the money damages sought for already completed violations, but is a complement thereto. Moreover, the debtor does not, in general, have a right to demand to make some payment in lieu of abiding by the terms of the no-compete agreement. For that reason, and for other practical reasons, the court decided it was appropriate to lift the stay to allow the plaintiff to proceed with its pending state court action.
In re Craig (Craig v. Gibbons), 2016 Bankr. LEXIS 40 (Bankr. M.D. Tenn. 1/5/16). Notice to the state that a debtor had unpaid criminal fines and court costs did not violate the stay both because this was purely a ministerial act and because any actions arising from that report (such as denial of a driver’s license renewal) was part of the sentencing process and a continuation of a criminal proceeding.
Zachary v. California Bank & Trust, 811 F.3d 1191 (9th Cir. 2016). Overruling In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012) and joining the 4th, 5th, 6th, and 10th Circuits, the court held that the absolute priority rule continued to apply in individual Chapter 11 cases; the only property of the estate excepted from that rule is the debtor’s postpetition earnings which are added to the estate under Section 1115.
In re Village Green I, GP (Village Green I, GP v. Federal National Mortgage Assoc.), 811 F.3d 816 (6th Cir. 2016). A plan was not proposed in good faith where the only supporting “impaired” creditors were the debtor’s accountant and lawyer, who were owed less than $2,400 and who would be paid within 60 days of confirmation. While even a minor change in a party’s rights will meet the literal terms for impairment, the Section 1129(a)(3) requirement that a plan be proposed in good faith must also be satisfied. The evidence clearly indicated that the debtor could have paid these claims up front but did not do so to manufacture the necessary impairment (a fact buttressed by the refusal of those creditors to take an immediate payment from FNMA).
In re Dvorkin Holdings, LLC, (Colfin Bulls Fundings A, LLC v. v. Paloian), 2016 U.S. Dist. LEXIS 40669 (N.D. Ill. 3/29/16). All creditors are entitled to interest at the contractual rate on their claims, not just the federal judgment rate, if the debtor is solvent.
The debtor filed its case in 2012 and its plan was confirmed almost three years later. The debtor was solvent and its plan proposed to pay all creditors in full and with interest at the federal judgment rate of .17%. The bankruptcy court held that none of the creditors were impaired and no vote on the plan was needed because a) Section 502(b)(2) bars payment of postpetition interest and b) even under the “best interests of creditors” test which invokes Section 726(a)(5) and its requirement for interest payments, the applicable “legal rate” is the judgment rate, not the standard contract or default rates. The court also held that a provision barring late-filed claims could be included even though in Chapter 7 such claims are paid (with interest) before equity receives any excess funds. On appeal, the district court rejected the view that the “legal rate” is limited to the judgment rate when the debtor is solvent; rather, there is a presumption that the contract rate should be paid absent equitable considerations. While the Ninth Circuit read the term “legal rate” in Section 726(a)(6) to refer only to the federal judgment rate, the district court disagreed that it was meant to erode a well-established understanding that solvent debtors should be required to make creditors truly whole. The legislative history of the “fair and equitable” test in Section 1129(a)(7), for instance, cited to case law requiring contractual interest to be paid if the debtor was solvent and there is no equitable basis to deny creditors their due if it can be paid.
Slater v. U.S. Steel Corp., 2016 U.S. App. LEXIS 3225 (11th Cir. 2/24/16). Discussion of standards as to when a debtor should be estopped from pursuing a cause of action that was not disclosed in the schedules; impassioned dissent calls for en banc review to revise approach currently being used.
The debtor here, as in many other cases, failed to disclose a pending law suit when she filed her bankruptcy case. The defendant learned of her case, and filed a motion to dismiss the law suit or for summary judgment based on the principle of judicial estoppel. That is, the defendant argued that her position that she had a meritorious case against it was inherently inconsistent with the failure to list the suit which, by implication, was an assertion that the suit had no merit and no worth that needed to be disclosed. While the debtor moved to convert her case to Chapter 13 and to use funds from any victory in the suit to pay creditors, the Chapter 13 trustee sought to take over the case and pursue it, and the bankruptcy court was prepared to allow that approach, the district court reversed. Under existing Eleventh Circuit precedent, it held, the only issues were whether the debtor knew of the cause of action (clearly she did, having filed suit) and whether she had a motive to conceal the action (which, equally clearly she did, in order to keep the funds). The district held on those facts that it was irrelevant that the only remedy was barring the lawsuit and the need to deter debtor misconduct overrode any harm to creditors and that it was irrelevant that the debtor had not yet benefitted from her misstatement or had the court accept the position. The Eleventh Circuit majority agreed.
The dissent engaged in an extremely lengthy and detailed discussion of the evolution of the concepts of judicial estoppel in general, and in particular, how they would apply to the fact pattern here in support of his position that the current approach accomplishes little in terms of deterrence, while harming creditors and giving defendants a windfall. Among the points he noted were that there is no automatic bar on asserting inconsistent positions – indeed Federal Rule 8(d)(3) explicitly allows inconsistent statements in the same pleading. The normal concern is to ensure that the inconsistencies are not used in a way that prejudices the other party, which does not happen automatically. Indeed, as the court noted, exposing inconsistencies is one of the classic methods of impeachment. The other, perhaps most persuasive point, is that, in most cases, it is the first statement that is usually taken as true, and the second inconsistent statement is taken as untrue and merely advanced in an effort to avoid the harmful effect of the first statement. In those cases, the court strikes the presumably false statement and preserves the true statement so as to obtain a consistent approach. The analysis in these “omitted disclosure” cases in bankruptcy, though, is precisely the opposite – solely in order to punish the debtor, the most likely false statement (that the cause of action does not exist and/or has no merit) is accepted, and the presumably true statement (that a meritorious cause of action exists) is the one that is stricken. Put another way, one can make the two statements consistent by forcing the disclosure and application of the omitted asset, but, instead, the courts produce consistency by destroying the asset. As the dissent strongly argues, that makes little sense, especially since there are numerous other ways by which the debtor may be punished (i.e., denying a discharge, or denying any right to benefit from the action beyond the amount needed to pay creditors, etc.) that do not require that creditors also lose out.
This is in any event, an issue that has continued to roil the courts and has resulted in a great disparity of approaches among the lower courts, the appellate courts, and even within a giving circuit. It is likely to not reach a final conclusion absent legislative changes or a Supreme Court decision, but no cases have ever yet been accepted for certiorari. It does seem possible that the strict approach taken in Law v. Siegel, 134 S.Ct. 1188 (2014) as to use of general equitable principles to control debtor actions in the absence of explicit statutory authority might also apply here and argue against using estoppel as a blunt weapon to punish debtor misconduct.
Van Horn v. Martin, 812 F.3d 1180 (8th Cir. 2012). Debtor who failed to disclose employment-related discrimination claim that arose towards the end of her Chapter 13 bankruptcy was estopped from pursuing her claims. Evidence did suggest that debtor tried to terminate her bankruptcy case quickly so she could then immediately pursue the employment claim. See also Jones v. Bob Evans Farms, Inc., 811 F.3d 1030 (8th Cir. 2012).
Asarco, LLC v. Noranda Mining, Inc., 2016 U.S. Dist. LEXIS 41352 (D. Utah 3/29/16). In a more traditional example of judicial estoppel, the debtor Asarco was barred from suing a third party for contribution for costs of doing clean-up at a facility that both were responsible for where Asarco had represented in settling a case with the United States and confirming its plan that the amount that it paid on the environmental claim was, in fact, a fair and accurate resolution of its actual liability for the site. Its present claim that, in fact, it was not actually liable for that amount was a) inconsistent with that prior statement, b) left the appearance that one of the two courts was being misled, and c) would receive an unfair advantage by being able to discharge the much larger liability being alleged by the United States during the bankruptcy and later seeking to obtain payment of the same sum from a third party.
United Mine Workers of America Combined Benefit Fund v. Walter Energy, Inc., 2016 U.S. Dist. LEXIS 29097 (N.D. Ala. 3/8/16). Coming full circle from one of the first cases that held that a party could sell free and clear of a continuing benefit obligation, the court held that a buyer could acquire the debtor’s mine property free and clear of any obligation to pay statutory premiums for Coal Act benefits as a successor to the debtor. The term “interest” in Section 363(f) is meant to include more than in rem interests (even though that is the limit of that term everywhere else in the Code). As such, it can refer to “any obligation that may flow from ownership of property.” Interestingly, the court waited until the end of the opinion to note that, it was far from clear that the buyer would qualify as a successor in any event merely by buying some of the assets of a defunct business. It is unclear why this court (and many others that haste to expand the meaning of the term “interest”) does not use this much more straightforward approach.
In re Young, 2016 U.S. Dist. LEXIS 14029 (E.D. Penn. 2/5/2016). Discussion of when a debtor’s cause of action becomes “property of estate” – which differs from whether it is a “claim” for purposes of filing against a debtor’s estate.
This case dealt with an asbestos worker who had filed a claim regarding potential non-malignant asbestos disease in the 1990s, which case was administratively dismissed (due to lack of clear injury or evidence at the time) and put on a docket of cases that could be reopened if more proof developed later. Several years later he filed a bankruptcy case and quickly received a discharge without making reference to that “dismissed” cause of action. More than two years later, he was diagnosed with asbestos-related cancer and filed suit for that and several years after that, the non-malignant cases were reactivated by the original court. The question was which of those causes of action were property of the estate during the original bankruptcy (in that they both arose from prepetition exposure) and whether the debtor was estopped from bringing suit for either of them by failing to include them in his bankruptcy schedules. The court did not find estoppel to be warranted since the status of the non-malignancy case was highly ambiguous at best and there was no reason for the debtor to assume he should report something that arguably no longer existed. (And, of course, he did not even know he would later develop cancer.) As to the status of those actions, the court found that the non-malignancy claims were prepetition property since they had developed enough to be filed for prepetition and that they had not been abandoned so the trustee could reopen the case to pursue them if he wished. The court further held that the malignancy claim arose postpetition (based at least in part on maritime law that used a discovery rule for causes of action) and, as such was not property of the estate on the petition date, despite the prepetition exposure. The decision includes discussion of several other cases with variations on those types of facts.
In re Porrett, 2016 Bankr. LEXIS 766 (Bankr. D. Idaho 3/10/16). Right to payment arising from prepetition misconduct by debtors’ mortgage lender was property of the estate and subject to inclusion in bankruptcy assets even though the consent order providing for the payment was not agreed to (or even alleged) at time bankruptcy case was filed. Events leading to the right all occurred prepetition and the settlement released all prepetition liability. Court distinguished some other cases that dealt with postpetition misconduct or that were based on postpetition statutes creating new benefit programs, even though they compensated for prepetition losses.
In re Yonish, 2016 Bankr. LEXIS 650 (6th Cir. BAP 3/3/16). There is no time limit on moving to eliminate judicial liens that impair a debtor’s exemptions. Accordingly, the debtor may seek to reopen its case to belatedly file such a motion and denial on the ground of laches must be based on a showing of actual prejudice to the creditors, not just the potential arising from a lengthy delay in filing the action.
In re Cohen, 2016 Bankr. LEXIS 618 (Bankr. D. Az. 2/29/16). Once a case is dismissed, a creditor may levy or garnish the trustee for funds remaining in his hands before they are distributed to the debtor. While Section 1326(a)(2) says the trustee is to return the funds to the debtor, that simply establishes an obligation between the trustee and the debtor, and the trustee is subject to execution on those funds just like any other third party owing money to the debtor.
In re Hoggarth, 2016 Bankr. LEXIS 911 (Bankr. D. Col. 2/23/16). Whether before or after a plan is confirmed, after a case is converted a Chapter 13 trustee may not use debtor payments she is holding to pay administrative costs incurred by the debtor’s counsel, based on Sections 348(e) and 1326(a)(2).
In re McVicker, 2016 Bankr. LEXIS 490 (Bankr. N.D. Ohio 2/17/16). Existence of substantial exempt assets was not a basis to find case should be dismissed under Section 707(a).
While the Sixth Circuit does allow a Chapter 7 case to be dismissed for “cause” under Section 707(a) based on charges of “bad faith,” the standard generally requires “egregious” actions. Even though the bankruptcy here concerned basically only one large commercial debt and the debtors had exempt retirement funds and homestead equity several times the size of that debt, the court held the filing was not egregious in that the debt was not incurred fraudulently, the debtors had paid on it for a substantial period, the debtors were now retired and had limited sources of income, did not have a lavish lifestyle or excessive expenditures, and did not falsify their bankruptcy filings. The existence of exempt assets did not, standing alone, indicate abuse since, by definition, such assets are generally not expected to be used to pay debts – and, even bad faith, is not necessarily a basis to deny exemptions under Law v. Siegel, 134 S.Ct. 1188 (2014).
In re Beck, 2016 Bankr. LEXIS 372 (Bankr. E.D. Wis. 2/5/16). Under state law, a determination that a debtor has been overpaid for unemployment benefits by reason of fraud creates a judicial, not a statutory lien. There is no automatic lien created upon the overpayment; rather, there must first be a determination as to the reason for the overpayment, and then there are several levels of available review. Only at the end of that process is a lien imposed that is to be treated as a “judgment in all respects.” Those factors were sufficient to make this a judicial lien.
In re Gibas, 543 B.R. 570 (Bankr. E.D. Wis. 1/19/16). Discusses three views of how to read the refiling bar in Section 109(g)(2) – a) simple sequence between stay motion filing and dismissal; b) new case barred only when motion to lift stay is “cause” of dismissal of prior case; and c) presumption of sequential reading but debtor can rebut by showing no actual abuse. Court adopts strict sequential reading; voluntary dismissal is a strategic tool and debtors must take into account the limit on an immediate refiling and Congress may choose to use a bright-line rule rather than imposing new work on courts in every instance. Moreover, the section does not include any provisions allowing courts to disregard its application based on their discretionary analysis. The debtor’s multiple filings would warrant denial of automatic stay if case could remain in effect, and dismissal was appropriate here – along with a one-year bar on refiling.
In re Trump Entertainment Resorts, 810 F.3d 161 (3rd Cir. 2016). Section 1113, which provides a special set of procedures for modifying collective bargaining contracts (superseding the general language in Section 365) apply equally to expired contracts as to contracts that are still in effect. Accordingly, the debtor was allowed to reject its contracts due to the dire financial condition of the casino.

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