Thursday, May 1, 2014

Recent cases from around the Circuits - First Quarter, 2014.

Bankruptcy Circuit Update
Featuring cases from January and February 2014

Case files available for download:
The Federal Bar Association, Bankruptcy Division, has a writer or group of writers from each Circuit periodically summarize cases of interest in the area of Bankruptcy Law - here is their most recent posting.  I will be summarizing the cases for the First Circuit.
Pat Gardner, ESQ.

U.S. Supreme Court

Law v. Siegel, 188 L. Ed. 2d 146 (S. Ct. Mar. 4, 2014)

The Court unanimously found that the Ninth Circuit was incorrect in affirming the decision of the bankruptcy court that a court could surcharge the debtor’s exempt property under the court’s § 105 equitable powers for the debtor’s misconduct regarding bad faith litigation.  The trustee in Law v. Siegal had sued the debtor regarding a fictitious loan and fraudulent second deed of trust the debtor had asserted existed against his home as a means to eliminate any equity in the debtor’s house and remove any prospect that the trustee would attempt to liquidate the exempted home for the benefit of creditors.  The litigation took five years and hundreds of thousands of dollars in litigation costs.  The bankruptcy court granted the trustee’s motion to surcharge the debtor’s exempted home for $75,000 to compensate the trustee for the exorbitant litigation costs.  The bankruptcy court found that pursuant to its equitable powers under § 105 that it had the authority to surcharge otherwise exempt property.  Justice Scalia found that the surcharge contravened § 522, which determines exemptions in a debtor’s property and precludes further attempts to use exempted property for the satisfaction of a debtor’s creditors.  The Court further held the bankruptcy court’s ruling pursuant to § 105 exceeded the court inherent equitable powers by contravening the specific provisions of § 522 regarding a debtor’s otherwise valid exemption of his home.

Submitted by:
Judge Craig A. Gargotta
Hipolito F. Garcia Federal Building
and United States Courthouse
615 E. Houston St., Rm. 505
San Antonio, Texas 78205
Phone no. (210) 472-5181

2nd Circuit

GMAC Mortgage, LLC v. Orcutt, 2014 U.S. Dist. LEXIS 23001 (D. Vt., Feb. 28, 2014)

GMAC Mortgage LLC ("GMAC") appealed from orders of the Bankruptcy Court for the District of Vermont confirming the debtors' Chapter 13 Plan and treating GMAC as an unsecured creditor, and holding mortgage executed and delivered to GMAC was inoperative under Vermont law. GMAC argues that the debtors cannot properly claim a homestead exemption for the property at issue, that the Bankruptcy Court lacked statutory and constitutional authority to determine the validity of the mortgage, and that even if the mortgage was invalid the Bankruptcy Court should have considered the doctrine of equitable subrogation and treated GMAC as a secured creditor.  The District Court found that the Bankruptcy Court had statutory and constitutional authority to decide the validity of the mortgage under Vermont law, consistent with Stern v. Marshall, because the validity of the lien and secured creditor status of GMAC would have been resolved in the claims allowance process and that the Bankruptcy Court had authority to decide that state law issue. Addressing the validity of the mortgage, the District Court noted that GMAC had failed to raise various arguments before the Bankruptcy Court and deemed those arguments waived on appeal. The District Court examined Vermont statutes and case law and found that the Bankruptcy Court erred in not considering the doctrine of equitable subordination after finding the mortgage invalid under Vermont law.  Accordingly, the District Court remanded the proceedings to the Bankruptcy Court for further consideration of the validity of the mortgage during the claims allowance process.

Carval Investors UK Ltd. v. Giddens, 2014 U.S. Dist. LEXIS 25716 (S.D.N.Y., Feb. 26 2014)

Carval Investors UK Limited ("Carval") and the Federal Deposit Insurance Company (FDIC) appealed from an order of the Bankruptcy Court denying them customer status under the Securities Investor Protection Act ("SIPA") with respect to repurchase transactions with Lehman Brothers Inc. ("LBI"). LBI established accounts for the appellants that recorded transaction activities, but did not hold any of the purchased securities in a custodial or safekeeping account, but instead used the purchased securities for its own purposes. Nor did the account agreements require LBI to retain cash or property in the accounts during the term of the agreement. At the time LBI commenced liquidation the purchased securities were not held by LBI, but were in the possession of third parties.

The District Court examined prior case law and agreed with the Bankruptcy Court that there must be indicia of a fiduciary relationship in order to find an entrustment of securities, and therefore, a customer relationship under SIPA. The District Court noted that there were no indicia of a fiduciary relationship, rather than a contractual relationship controlled by the terms of the agreements between the appellants and LBI. Accordingly there was no entrustment, and the appellants were not customers entitled to SIPA protection. The District Court affirmed the decision of the Bankruptcy Court.

Daskal v. Banco Popular North America 2014 U.S. Dist. LEXIS 23001 (E.D.N.Y. Feb. 24, 2014)

Plaintiff Daskal moved to refer an action to the bankruptcy court and Defendant Banco Popular North America ("Banco Popular") moved to abstain and remand to state court. The complaint was originally filed by plaintiff in state court alleging breach of fiduciary duty, breach of contract, fraud and request for injunctive and declaratory relief in connection with a loan and subsequent foreclosure of a property located in New York State.  Plaintiff subsequently filed for Chapter 11 and removed the suit from state court on the grounds of "related to" jurisdiction and moved the District Court to refer the suit to the Bankruptcy Court. Plaintiff argued that the case was a core proceeding because it, inter alia, concerns the determination of the assets of the estate, the confirmability of any Plan, and the ability of the Debtor to timely proceed in his attempt to liquidate. Defendant argued that the case was non-core because there has been no final recognition and liquidation of the plaintiff's right to recovery. The District Court agreed that in the absence of a final determination on the Plaintiff's right to recovery, the matter was a non-core related to proceeding.

Because the case was non-core, the District Court had to determine whether mandatory abstention under 28 U.S.C. § 1334(c)(2) applied. The District Court found that there was no evidence the bankruptcy court could adjudicate the case faster than the state trial court, or that the bankruptcy court had superior expertise to resolve the issues of law or fact in the case. Accordingly, the District Court remanded the matter to the state trial court.

Submitted by:
Yosef Ibrahimi
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square | New York | 10036-6522

3rd Circuit
In re ID Liquidation One, LLC, 2014 U.S. App. LEXIS 2971 (3d Cir. Feb. 19, 2014) (Unreported)

Pre-petition, the Debtors (casino owners) terminated a management agreement with their management company.  The management company filed a $33 million administrative claim against the estates.  The Debtors filed an adversary action to contest the administrative claim and to assert counterclaims.  The parties settled, and the settlement allowed for, among other things, a $3.5 million administrative claim and a release of counterclaims. Certain creditors opposed the settlement, but the Bankruptcy court approved the settlement.  The Third Circuit, after considering the four Martin standards, held that the Bankruptcy Court had considered enough facts to make a determination on the approval of the settlement agreement, and did not abuse its discretion in approving a proposed compromise that resulted in (a) a substantial reduction of administrative expense claims against jointly-administered Chapter 11 estates; and (b) a release of the Debtors’ counterclaims against claimants.

In re Stephan, LLC, 2014 U.S. Dist. LEXIS 14527 (D.N.J. Feb. 5, 2014)

The Bankruptcy Court issued an order on May 20, 2013 denying the Debtor’s motion to preclude distribution to Wells Fargo as to the Debtor’s second mortgage.  The District Court affirmed, and found that Wells Fargo was entitled to distribution on the second mortgage claim, and that while the automatic stay precluded Wells Fargo from foreclosing, it did not make Wells Fargo’s mortgage claim unenforceable in the Bankruptcy.

In re Brown, 2014 U.S. Dist. LEXIS 22891 (E.D.Pa. Feb. 24, 2014)

The Bankruptcy Court held that the absolute priority rule’s application in individual Chapter 11 cases had not been affected or abrogated by the 2005 amendments to the Bankruptcy Code.  The District Court affirmed.  Section 1129 provides that “except in the case in which the debtor is an individual, the debtor may retain property included in the estate under Section 1115…”  The District Court held that the term “included in the estate under Section 1115” refers only to the property that was added to the Bankruptcy estate post-petition by virtue of Section 1115 and does not supplant the definition of property of the estate in Section 541.  If Congress intended to exempt an individual debtor’s entire estate, it would have referred to Sections 541 and 1115 in Section 1129, but it did not, and there is nothing in the statutory language or legislative history indicating that Congress intended to repeal the absolute priority rule by the BAPCPA amendments.

Submitted by:
Meena Untawale
100 Mulberry Street, Four Gateway Center // Newark, New Jersey 07102

4th Circuit

Gold v. First Tennessee Bank Nat'l Assoc. (In re Taneja), 2014 U.S. App. LEXIS 3279 (4th Cir. Feb. 21, 2014):

On February 21, the Fourth Circuit Court of Appeals, in a 2-1 decision, affirmed the U.S. District Court for the Eastern District of Virginia, which had upheld the Bankruptcy Court's ruling that First Tennessee Bank (the "Bank") was a good faith transferee under 11 U.S.C. § 548(c).

The Debtors operated a home loan origination business and financed that business through warehouse loans from large financial institutions, including the Bank.  The warehouse lenders required that the loans originated by the Debtor be sold on the secondary market.  The Debtor struggled to sell the loans and engaged in fraud to conceal those struggles in order to obtain new credit. 

The Trustee sued the Bank to recover payments alleged to be fraudulent transfers made by the Debtors to the Bank.  In holding that the Bank, through two employees, established the affirmative defense of good faith, the Fourth Circuit wrote that the lower courts must consider whether the transferee was aware or should have been aware, at the time of the transfers and in accordance with routine business practices, whether the debtor intended to hinder, delay, or defraud.  The Court held that the good faith affirmative defense may be proven by either expert or lay testimony, as the Bank's employees did through lay opinions. 

The dissent, however, contended that the District Court had committed clear error by finding good faith on the part of the Bank due to red flags on the part of the Debtor of which the Bank ought to have been aware.  The Bank failed to carry its burden to prove good faith.

Submitted by:
Jed. K. Donaldson
Spotts Fain
411 E. Franklin Street
Suite 600
Richmond, VA 23219

5th Circuit

Credit Union Liquidity Servs., L.L.C. v. Green Hills Dev. Co., L.L.C., 741 F.3d 651 (5th Cir. Feb. 3, 2014):

In an involuntary bankruptcy, the bankruptcy court determined that the mover had standing because its claims were not subject to a bona fide dispute under 11 U.S.C § 303(b).  However, the bankruptcy court held that there was insufficient evidence to establish that the debtor was not paying his debts as they became due, and alternatively, the claims were subject to a bona fide dispute under §303(h)(1).  The district court affirmed. 

On appeal, the Fifth Circuit clarified that § 303(b) - as amended in 2005 - requires the petitioning creditor to show that there is no bona fide dispute as to liability or amount.  Moreover, the court expressly disclaimed all precedent interpreting § 303(b) before the 2005 amendment of the statute.  The court ultimately held that the pending, unresolved claims in parallel litigation was a bona fide dispute under § 303(b) and the mover lacked standing to bring the involuntary bankruptcy.   

Liberty Bankers Life Ins. Co. v. Grencorp Mgmt., No. 13-10731, 2014 U.S. App. LEXIS 3558 (5th Cir. Feb. 25, 2014):

In a lien-priority dispute, Grencorp obtained liens on disputed property through an assignment of deeds of trust but failed to record the deed.  Six months later, Liberty recorded a deed of trust for a loan secured by the same property; however, the recorded deed inadvertently omitted a description of the property.  Subsequently, Grencorp recorded its deeds of trust, and Liberty corrected its property description two months later.

The Fifth Circuit affirmed the district and bankruptcy courts and awarded summary judgment in favor of Grencorp.  Under Section 13.001 of the Texas Property Code, the court held that once properly recorded, Grencorp’s interest obtained priority over any interest that Liberty subsequently acquired. 

Liberty Mut. Ins. Co. v. Holloway, No. 1260762 c/w No. 12-60777, 2014 U.S. App. LEXIS 2298 (5th Cir. Feb 4, 2014):

An insurer agreed to settle a fraud action against several companies conditioned upon full payment of $4.5 million to be paid in three installments.  Additionally, the owner of one company personally guaranteed the third payment of $1.25 million.  The first two payments were made timely; however, the owner’s company filed for Chapter 11 bankruptcy before the third and final payment was made to the insurer. 

The bankruptcy trustee sought to recover the first two settlement payments as preference payments.  The insurer sought the remaining payment from the owner in accordance with his personal guaranty.  Although the owner agreed to pay, the insurer refused to release the defendants due to the pending bankruptcy preference litigation.  Subsequently, the insurer settled the preference suit and returned $1.9 million to the bankruptcy, retaining only $1.35 million.   

Meanwhile, the insurer released the other co-defendants for $500,000.  The owner sought to receive a credit for the co-defendants’ payment, which the district court granted.  The district court further ruled that the insurer could not recover the $1.9 million returned to the Trustee, and the pending fraud litigation was subsequently dismissed.

On appeal, the Fifth Circuit held that the owner was not entitled to any credit as the guaranty was a separate and distinct contract from both the original settlement agreement and the co-defendants’ $500,000 settlement.  Further, the court held that the insurer had retained its right to re-open the fraud action if they did not receive full payment, and due to the preference payment the insurer had the right to re-open the fraud litigation. 

Shankle v. Shankle, No. 13-60251, 2014 U.S. App. LEXIS 2356 (5th Cir. Feb. 7, 2014):

Where an ex-husband refused to tender a debt for marital property for over three years, his conduct constituted willful and malicious economic harm to his former wife under 11 U.S.C. § 523(a)(6) and rendered the debt nondischargeable in his subsequent bankruptcy proceeding.  The Fifth Circuit affirmed the bankruptcy and district courts’ finding that the husband’s conduct caused a “willful and malicious injury” because there was an objective substantial certainty of harm.

Submitted by:
Anne-Marie Mitchell
Stone Pigman Walther Wittmann L.L.C.
546 Carondelet Street | New Orleans, Louisiana 70130
Direct Dial: (504) 593-0958 | Direct Fax: (504) 596-0958

6th Circuit

In re Baldridge, 2014 U.S. App. LEXIS 2213 (6th Cir. Feb. 3, 2014).

Chapter 7 case where 7 Trustee sold debtor’s principal residence.  Two secured creditors; sale proceeds were sufficient to pay senior secured creditor in full, and left a deficiency to second secured creditor.  Second secured creditor and Trustee agreed to a $28,000 payment from second creditor to Trustee.  Debtor claimed homestead exemption as to that $28K.

Sixth Circuit denied Debtor’s claim to that $28K.  $28K was not part of estate that could be subject to exemptions at time case was filed.  The amount of secured debt exceeded the value received at sale.  Reason that second creditor made this payment to Trustee was irrelevant because there was nothing for homestead exemption to attach to.
In re Rizzo, 741 F.3d 703, 704 (6th Cir. 2014)

Chapter 7 debtor was officer of an LLC that failed to pay Michigan state business taxes; state statute made him responsible for payment of those taxes; issue was whether his individual liability was non-dischargable.

§ 523(a)(1)(A) excepts from discharge taxes specified in § 507(a)(8).  § 507(a)(8) includes “an excise tax on a transaction.”  From the company’s perspective the tax was an excise tax, but was the individual officer’s liability an excise tax?

Court of Appeals said yes it was an excise tax, and therefore non-dischargable.  The officer’s derivative liability (if corporation does not pay) does not change the nature of the tax, which is still an excise tax.  It just makes him additionally liable for payment of that excise tax.  The Michigan tax statute “functionally pierces the corporate veil” making the officer individually liable for the same excise tax as the corporation.

Submitted by:
Mike Abelow
Sherrard & Roe, PLC
150 3rd Avenue South
Suite 1100
Nashville TN 37201

7th Circuit

In re Equipment Acquisition Resources, Inc.,  742 F.3d 743, (Feb. 4, 2014) (Flaum, J.).

Summary of decision:

On February 4, 2014, the Seventh Circuit Court of Appeals reversed the decision of the Bankruptcy Court of the Northern District of Illinois, holding that the abrogation of sovereign immunity with respect to 11 U.S.C. § 544 found in 11 U.S.C. § 106(a)(1) does not allow a bankruptcy trustee to assert a claim under § 544(b)(1) against the IRS to recover tax payments. 

This decision represented the first Circuit Court of Appeals to address the issue and “diverge[d] from all of the bankruptcy and district courts to consider this issue in the context of the federal government.”  Slip Op. at 10.

Here, the Court held that the trustee’s claim to recover tax payments made to the IRS under § 544(b)(1) (which authorizes the trustee to avoid transfers by standing in the shoes of an actual unsecured creditor) necessarily failed for at least two reasons: (1) “there is no question that no creditor exists in this case,” and (2) even if there were, “an unsecured creditor would have been barred from bringing an Illinois fraudulent-transfer action against the IRS outside of bankruptcy.” Id. at 7.

In re A&F Enterprises, Inc., II, No. 13-3192, 742 F.3d 763 (Feb. 7, 2012) (Sykes, J.)

Summary of decision:

On February 7, 2014, the Seventh Circuit Court of Appeals reversed the decision of the Bankruptcy Court of the Northern District of Illinois, holding that a Chapter 11 debtor-franchisee was entitled to continuation of an order staying enforcement of an underlying order holding that certain leases associated with the franchise agreements had been rejected pending resolution of the debtor-franchisee’s appeal of that order before the district court.  

The Seventh Circuit expressly did not address the merits of the underlying issue: whether the debtor-franchisee had until confirmation of its plan to reject or assume leases associated with various IHOP franchise agreements under 11 U.S.C. § 365(d)(2), governing franchise agreements, or only 120 days (subject to a possible 90 day extension) under 11 U.S.C. § 365(d)(4), governing leases generally. See Slip Op. at 6.  However, the court granted the stay of the underlying order that turned on this legal issue because it “does not have a clear-cut answer,” that the Court was “provisionally persuaded that [debtor-franchisee’s] position has substantial merit,” and that, therefore, it would “rest [its] decision on whether to grant the stay primarily on the balance of potential harms,” which it found favored the debtor-franchisee.  Id. at 7-9.

Submitted by:
Michael R. Cedillos
Greenberg Traurig, LLP | 77 West Wacker Drive | Suite 3100 | Chicago, IL 60601

8th Circuit
Kaler v. Bala (In re Racing Services, Inc.), 2014 U.S. App. LEXIS 3714 (8th Cir. Feb. 27, 2014)
The court was required to determine whether an employee or the bankruptcy estate of her former employer had the superior claim to the liquidation proceeds of a cash-value life insurance policy purchased for her by the employer.  As a result of a conviction for federal criminal gaming and money laundering violations against both the employer and employee, the Department of Justice sought a forfeiture order against the employee which included the insurance policy as an asset for forfeiture.  Although no final order on the forfeiture was entered by the district court, the insurance company sent a check to the DOJ for the cash value of the policy and a letter to the employee saying that the policy had been “surrendered.”  Subsequently, the conviction and forfeiture order were overturned by the Eighth Circuit, and the proceeds from the policy were returned. 
Pursuant to an agreement between the employer and employee the employer had the right to “obtain upon surrender of the policy by the Assignor [Bala], an amount of the cash surrender proceeds up to the amount of the Assignee’s interest in the policy.”  The trustee of the employer’s bankruptcy filed an adversary proceeding to determine if the proceeds from the insurance were property of the estate.
The bankruptcy court found for the Trustee.  This ruling was affirmed by the BAP, which held that the insurance company’s treatment of the policy as surrendered in response to the forfeiture order obtained by the DOJ was substantively the same as a surrender by the employee.  The Eighth Circuit overturned the BAP’s ruling, holding that the plain language of the agreement made surrender by the employee herself the only trigger regarding the employers rights to the surrender proceeds, and that the forfeiture order which required the DOJ to avoid disposition of the property until expiration of the notice period or resolution of competing claims could not transfer title of the policy to the DOJ until entry of a final order. 
Bank of England v. Rice (In re Webb), 742 F.3d 824 (8th Cir.  Feb. 6, 2014)
In this action, the debtors, a husband and wife, listed in their schedules farming equipment and rice grain (the “property”) owned in connection with a joint venture, purportedly created between them.  The Bank of England (“Bank”) asserted that it had a perfected security interest in this property pursuant to an agreement between the Bank and the Joint Venture.  The Chapter 7 Trustee moved for a permanent injunction to prevent the Bank from exercising control over the property in dispute.   Bankruptcy court granted the injunction, determining that the joint venture was not a separate legal entity and the property belonged to the estate.  The District court upheld the bankruptcy court ruling and the Eighth Circuit affirmed. 
The Bank asserted that the joint venture was a partnership under Arkansas law and that the bankruptcy court erred in looking at testimonial and documentary evidence beyond the joint venture agreement itself, which the Bank claimed demonstrate a clear intent to create a separate legal entity.  The Eighth circuit held that, at the least, provisions of the joint venture agreement mandating equal divisions of profits and asserting the creation of “an entity” were ambiguous when read together with the agreements specific state that “nothing herein shall be construed to create a partnership of any kind.”  As a result of this ambiguity the bankruptcy court did not err when it considered evidence outside the four corners of the agreement. 
Behrens v. US (In re Behrens), 2014 Bankr. LEXIS 565 (8th Cir. BAP Feb. 14, 2014)
The debtor brought an adversary proceeding against the United States of America asking the bankruptcy court to invalidate a restitution lien resulting from a pre-petition federal criminal charge against the debtor.  The debtor argued that his criminal prosecution and the government’s actions to collect on the restitution judgment violated an order staying litigation and proceedings against the debtor and the automatic stay provided by 11 U.S.C. § 362.  The stay order was entered by US district court as part of a consent judgment in a civil action brought by the SEC that preceded the bankruptcy and the criminal prosecution.
The bankruptcy court dismissed the adversary proceeding for failure to state a claim upon which relief could be granted.  The BAP affirmed the bankruptcy court’s ruling.  The BAP held that the bankruptcy court correctly dismissed the appeal as a collateral attack on the validity of a pre-petition judgment.  The BAP further held that criminal judgments, including restitution awards and attendant liens are given special protection from discharge in bankruptcy pursuant to 11 U.S.C. § 523(a)(13) and 18 U.S.C. §§ 3613(e), 3663, 366A and 3664.
Copeland v. Fink (In re Copeland), 742 F.3d 811 (8th Cir. Jan. 31, 2014)
The debtors filed for Chapter 13 bankruptcy relief and proposed a plan that would pay nondischargeable state and federal tax debts before other unsecured creditors.  The bankruptcy court rejected the plan, and the BAP found that the plan unfairly discriminated against the other unsecured creditors and affirmed.  The Eighth Circuit affirmed the BAPs ruling.
The debtor’s argued that the plan was not unfairly discriminatory, in part due to the nondischargeability of tax debt which indicates a strong public policy in favor of full tax collection providing a reasonable basis for the discrimination.  The Eighth Circuit rejected this argument holding that nondischargeability does not provide a justification for special treatment.  The Eighth Circuit also held that the plan lacked good faith in that it proposed to pay those creditors who would be paid in full regardless of the plan while leaving nothing for the other unsecured creditors. 
Paul v. Allred (In re Paul), 739 F.3d 1132 (8th Cir. Jan. 13, 2014)
In this voluntary Chapter 7 proceeding, the debtor listed among his assets real property which he claimed was exempt under South Dakota’s homestead exemption.  At the Section 341 meeting of creditors the debtor admitted that he did not had not resided at the property for fourteen or fifteen years and did not plan to resume living there.  The trustee brought an objection asserting the homestead exemption did not cover the property in question.   The debtor asserted pursuant to the South Dakota statute and constitution required allowed him to assert the homestead exemption for any real property owned in South Dakota even though he made his home somewhere else and had no intent to move. 
The bankruptcy court entered an order granting summary judgment in favor of the trustee.   The bankruptcy court’s order was affirmed by the BAP, which ruled that the homestead exemption could not be claimed absent an actual intent to return and reside on the property.  The Eighth Circuit affirmed the BAP’s decision, holding that the property was not a homestead under South Dakota law.
Cook v. Empire Bank (In re Cook)504 B.R. 496 (8th Cir. BAP Jan. 9, 2014)
The Empire Bank (“Empire”) appealed from an order of the bankruptcy court holding that the judicial lien held by Arvest Bank (“Arvest”) was superior to the liens held by Empire.  Arvest claimed that the deed of trust purporting to secure Empire’s lien was not supported by valid consideration or existing indebtedness and was null and void.  The debtors also sought a declaratory judgment that Empire did not have a valid need of trust against their property.  The bankruptcy court found that the Empire deed of trust was not valid, and even assuming it was supported by adequate consideration, it did not secure obligations of the debtors based on personal guarantees signed by them.  The bankruptcy court further held the Arvest lien to be superior to Empire’s judgment lien and that the transfer of two promissory notes to satisfy the Empire judgment was avoidable as a preferential transfer.  The BAP reversed the bankruptcy court’s order.
The BAP determined that because Arvest and the debtors alleged that the deed was not enforceable, they had the burden to prove the lack of consideration.  The debtors acknowledged the deed of trust was signed, and stated on its face that it was for valuable consideration and offered no contrary evidence.  Thus, Arvest and the debtors failed to meet their burden.
The BAP also reversed the bankruptcy court’s holding that the deed of trust, if valid, failed to secure the guarantee obligations.  The bankruptcy court found a latent ambiguity in the deeds provision that it was to secure any existing or future debt and the statement in the earlier executed guarantees which stated they were “unsecured.”  The BAP noted that at the time of execution the guarantees were unsecured but that in the event of conflicting agreements the latter agreement controls.  Having determined that the debt owed to Empire was at least partially secured, the BAP remanded the case for further proceedings on the preference claim. 
Submitted by:
Matthew S. Sepuya
Greenfield Sullivan Draa & Harrington LLP
150 California Street, Ste 2200
San Francisco, CA 94111
(415) 283-1776

9th Circuit

In re Gary Allen Moore, et al., 2014 Bankr. LEXIS 214  (D.Alaska Jan. 15, 2014)

On January 15, 2014, the United States Bankruptcy Court for the District of Alaska overruled Debtor’s objection to Secured Lender’s Proof of Claim for lack of legal description in the Deed of Trust, rendering it unenforceable under Alaska state law, and, therefore, leaving the Secured Lender unsecured.

Notable Points to Bankruptcy Practitioner:

No notable points of interest to the bankruptcy practitioner. 


In Gayle Ann Derrick, 2014  U.S. Dist. LEXIS 5199 (D.Ariz. Jan. 15, 2014)

On January 15, 2014, the United States District Court for the District of Arizona reversed the Bankruptcy Court’s Order disqualifying counsel for the Debtor for violating 11 U.S.C. § 329(a) by not disclosing that Debtor’s personal injury attorney was representing her in the bankruptcy proceeding. 

Notable Points to Bankruptcy Practitioner:

The Debtor’s attorney failed to review the engagement agreement closely and upon a thorough review would have discovered that the paralegal’s draft of the engagement agreement mistakenly included the personal injury lawyer in the agreement.  This was a clerical error and the personal injury lawyer was not an attorney representing a Debtor in a case under Title 11; therefore, 11 U.S.C. § 329 did not obligate a filing of a statement of compensation. 
In re Jeffrey Albert Kolb and Heidi Elaine Kolb, 2014 U.S. Dist. LEXIS 3069 (D.Ariz. Jan. 9, 2014)

On January 10, 2014, the United States District Court for the District of Arizona affirmed the Bankruptcy Court’s denial of a filing of an amended complaint where the only change to the complaint was the addition of a request for attorney fees and denied the motion to dismiss the appeal based on jurisdictional defects. 

In re Joseph Otto Letizia and Zhanhong Chen, 2014 Bankr. LEXIS 179 (D.Ariz. Jan. 14, 2014)

On January 10, 2014, the United States Bankruptcy Court for the District of Arizona held that debtors in Arizona, doing business as sole proprietors, may not exempt vehicles used primarily for business purposes using Arizona’s personal property exemptions, but instead must use Arizona’s tools of the trade exemptions.  

Notable Points to Bankruptcy Practitioner:

A short and concise opinion any consumer practitioner in Arizona should be aware of and read. 

In re Calderon, 2014 Bankr. LEXIS 1136 (BAP 9th Cir. Feb. 28, 2014)

On February 28, 2014, the United States Bankruptcy Appellate Panel vacated the United States Bankruptcy Court’s Order disallowing the Debtor’s homestead exemption in property based solely on the Debtor’s vague expression to return to the property someday.  It remanded for a proper interpretation and application of Arizona’s homestead exemption law.  

Notable Points to Bankruptcy Practitioner:

On petition date, if the Debtor has been living away from his home for less than two years, only evidence of clear intent of permanent removal will be sufficient to allow a bankruptcy court to find a Debtor has abandoned his homestead exemption under Arizona law. 

In re Scannell, 2014 Bankr. LEXIS 803 (D.Ariz. Jan. 24, 2014)

On January 24, 2014, the United States Bankruptcy Court for the District of Arizona held that a purchase money deed of trust has priority over an earlier recorded restitution lien in Arizona. 

Notable Points to Bankruptcy Practitioner:

In a matter of first impression in Arizona, the Court parsed the legislative intent of two competing statutes and determined, based on multiple factors, but mainly, that the most recent specific statute governs the older.  The Court did note it assumed the legislature knew what it was doing.   

In re Dale, 2014 Bankr. LEXIS 495 (BAP 9th Cir. Feb. 5, 2014)

On February 5, 2014, the United States Bankruptcy Appellate Panel of the Ninth Circuit affirmed the United States Bankruptcy Court for the District Court of Arizona decision holding that an inheritance received by a chapter 13 debtor more than 180 days following the petition date, but before confirmation of a chapter 13 plan and before the case was closed, is property of the estate.  

Notable Points to Bankruptcy Practitioner:

An opinion worth reading concerning the interplay between two subsections of the Bankruptcy Code, §§ 541(a)(5)(A) and 1306(a)(1). 


Schoenmann v. Federal Deposit Insurance Corporation, 2014 U.S Dist. LEXIS 1121 (N.D. Cal. Feb. 6, 2014)

On January 6, 2014, the United States District Court for the Northern District of California denied a motion to compel discovery of communications between a non-party witness, the U.S. Trustee and her attorney, based on the work product doctrine as set forth in Rule 26(b)(3) of the Federal Rules of Civil procedure. 

Notable Points to Bankruptcy Practitioner:

No notable points of interest to the Bankruptcy Practitioner; however, a good review of the work product doctrine and its application.  

In re Shart, 2014 Bankr. LEXIS 411 (C.D. Cal. Jan. 29, 2014)

On January 29, 2014, the United State Bankruptcy Court for the Central District of California held that the fraudulent conduct of a debtor-husband could not be imputed to the debtor-wife for purposes of dischargeability for debts arising from false pretenses, false representation, or actual fraud. 

Notable Points to Bankruptcy Practitioner:

A well written opinion by the Honorable Barry Russell discussing the origin of the imputation of fraud in non-dischargeability proceedings. 

In re NNN Parkway 400 26, LLC, 2014  Bankr. LEXIS 269 (C.D. Cal. Jan. 21, 2014)

On January 28, 2014, the United States Bankruptcy Court for the Central District of California denied confirmation of the chapter 11 plan of reorganization and granted relief from the automatic stay.

Notable Points to Bankruptcy Practitioner:

A good discussion on the new value exception to the absolute priority rule and market testing as provided by Bank of America Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle Street P’ship, 526 U.S. 434, 456-57, 119 S. Ct. 1411, 1424, 143 L.Ed.2d 607 (1999).  The case also provides a good synopsis of classification, consent of an impaired class, and feasibility.         

In Riding v. Cach LLC, 2014 U.S. Dist. LEXIS 6518 (C.D. Cal. Jan. 17, 2014)

On January 17, 2014 the United States Bankruptcy Court for the Central District of California granted in part and denied in part Defendant’s motion to dismiss.

Notable Points to Bankruptcy Practitioner:

A good discussion of the Rooker-Feldman doctrine.   

In re Hudson, 2014  Bankr. LEXIS 219 (BAP 9th Cir. Jan. 14, 2014)

On January 17, 2014, the United States Bankruptcy Appellate Panel of the Ninth Circuit reversed an Order entered by the United States Bankruptcy Court for the Central District of California annulling the automatic stay to allow foreclosure purchaser who allegedly acquired Chapter 13 debtor’s property a few minutes prepetition to complete an unlawful detainer action.        

Notable Points to Bankruptcy Practitioner:

A good opinion on the application of the business records exception to the hearsay rule and other issues regarding the admissibility of evidence.  

In re Neff, 2014 Bankr. LEXIS 471 (BAP 9th Cir. Feb. 4, 2014)

On February 4, 2014, the United States Bankruptcy Appellate Panel of the Ninth Circuit affirmed the United States Bankruptcy Court for the Central District of California’s opinion that 11 U.S.C. § 727(a)(2)(A) is a statute of repose and not subject to equitable tolling.

Notable Points to Bankruptcy Practitioner:

An issue of first impression in the Ninth Circuit and worth the read, although probably not something that will arise in your every day practice.


In re Parsons, 2014 Bankr. LEXIS 270 (Bankr. D. Hawai’i Jan. 21, 2014)

Hawai’i Office of Consumer Protection (OCP) brought an adversary proceeding to except from discharge Debtor’s alleged obligation for fines, civil restitution, attorneys’ fees and interest payable in connection with alleged unfair and deceptive practices. The parties cross-moved for summary judgment. Held: OCP entitled to summary judgment to the extent it is permitted to collect fines and penalties and interest thereon under the plain language of §527(a)(7); Debtor entitled to summary judgment holding that claims for civil restitution, attorneys’ fee and interest thereon are dischargeable. The claims of civil restitution are “compensation for actual pecuniary loss” suffered by consumers and are not payable “for the benefit” of OCP; the statute requires that the claim be both punitive (“a fine, penalty, or forfeiture”) and noncompensatory.


In re John P. Squires and Carol A. Squires, 2014 Bankr. LEXIS 177 (D.Idaho Jan. 15, 2014)

On January 15, 2014, the United States Bankruptcy Court for the District of Idaho granted Defendant’s Rule 12(b)(6) motion because the claims were barred by the applicable statute of limitations. 

In re Keith Stewart Borup and Judith Ann Borup, 2014  Bankr. LEXIS 98 (D.Idaho Jan. 9, 2014)

On January 10, 2014, the United States Bankruptcy Court for the District of Idaho sustained the Trustee’s objection to Creditor’s proof of claim based on insufficiency of evidence.

In re Jay P. Clark, 2014 Bankr. LEXIS 97 (D.Idaho Jan. 10, 2014)

On January 10, 2014, the United States Bankruptcy Court for the District of Idaho granted Plaintiffs summary judgment under 11 U.S.C. § 523(a)(2)(A) excepting from discharge debts owed to Plaintiffs.

In re Douglas Carl Johns and Janina Johns, 2014 Bankr. LEXIS 56 (D. Idaho Jan. 7, 2014)

On January 7, 2014, the United States Bankruptcy Court for the District of Idaho overruled secured creditor’s objection to Debtor’s claimed homestead exemption. 

In re Lawrence Darwin McKay, 2014  Bankr. LEXIS 23(D.Idaho Jan. 3, 2014)

On January 3, 2014, the United States Bankruptcy Court for the District of Idaho held that Debtor’s failure to keep or produce certain documents that could shed light on the Debtor’s finances was not sufficient to deny the Debtor a discharge.


Blixseth v.Yellowstone Mountain Club, LLC, 742 F.3d 1215 (9th Cir. Feb. 14, 2014)

The Ninth Circuit affirmed the bankruptcy court and District Court of Montana with regard to the denied motion of the co-founder of the Chapter 11 debtor (Blixseth) to recuse the bankruptcy judge asserting that judge was biased against him.Held:  Alleged ex parte communications, the bankruptcy rulings of the court and the judge’s allegedly biased statements did not warrant recusal. The Court stated that judicial rulings alone almost never constitute a valid basis for a bias or partiality [recusal] motion; that the ex parte contacts did not pertain to matters involving Blixseth or his interests and were legitimate under the circumstances; and judicial remarks made during the course of a trial require recusal only if they reveal such a high degree of favoritism or antagonism as to make fair judgment impossible, which were not present in this case.

In re Reisbeck, 2014 Bankr. LEXIS 597 (Bankr. D. Mont. Feb. 13, 2014) 

Chapter 13 debtor moved for turnover of funds that the IRS obtained postpetition from debtor’s insurance commissions, based upon its prepetition levy. The IRS objected to Debtor’s motion and moved to lift the automatic stay nunc pro tunc to the petition date so the funds could be retained and applied to debtor’s tax debt. Debtor objected to the IRS motion. Held: Despite having discretion under §362(d)(1), the Court did not find that the IRS had shown cause to lift the stay retroactively; the IRS was aware of the Debtor’s bankruptcy petition when it levied, the Debtor was not engaged in any unreasonable or inequitable conduct and balancing the equities Debtor required the return of the funds for its reorganization plan or would suffer irreparable harm, while the IRS had adequate protection by its tax liens  and priority and nondischargeable status of its claim.


Shapiro v. Henson, 739 F.3d 1198 (9th Cir. Jan. 9, 2014)

The Ninth Circuit reversed the bankruptcy court and U.S. District Court of Nevada and held as a matter of first impression that a trustee’s turnover power was not restricted to property of the estate at the time that the turnover motion was filed.Held: A trustee may seek turnover from an entity that had “possession, custody, or control” of the subject property during the bankruptcy case whether or not the entity had “possession, custody, or control” at the time the turnover motion is filed. The Court looked at the phrases “during the case” and “or the value of such property” in the statute to find that the Debtor, although not holding funds that had been in her bank account and stating she no longer had possession at the time the motion was filed, and, would not comply with the trustee’s demand for turnover, had held the funds during the bankruptcy case and would have to turn over the value of such property to the trustee.

USACM Liquidating Trust v. Deloitte & Touche, 2014 U.S. App. LEXIS 3036 (9th Cir. Feb. 18, 2014)

The Ninth Circuit affirmed the Nevada district court’s summary judgment in favor of the Defendant (Deloitte) on the ground that the misconduct of the plaintiff’s principals/officers must be imputed to USACM under Nevada’s “sole actor” rule, which imputes an agent’s actions to the principal corporation even where the agent totally abandons the corporation’s interest when the corporation and its agent are indistinguishable from each other. Held: The plaintiff Trust failed to present evidence of any “innocent decision-makers” within USACM sufficient to permit a reasonable fact finder to find that the principal/officers were not USACM’s sole actors for purposes of imputation. Deloitte’s affirmative defense that USACM’s claims had expired under Nevada law prior to the petition date  and were thus ineligible for the two-year extension of applicable limitations period under 11 U.S.C. §108(a) that would have rendered its claims timely was also upheld.

In re Daecharkhom, 2014 Bankr. LEXIS 653 (9th Cir. BAP Jan. 24, 2014)

The bankruptcy court determined that the creditor was not justified in pursuing a §523(a)(2) nondischargeability action on a consumer debt and that the requested attorneys’ fees and costs under §523(d) were reasonable, but reduced the award on a determination of special circumstances. Held: A special circumstances determination requires a complete disallowance and on the record special circumstances justifying a disallowance did not exist. Once the bankruptcy court determined that a fee award was appropriate under §523(d), it had the opportunity to reduce fees as a debtor is entitled only to reasonable fees and costs; however, its reliance upon special circumstances to reduce rather than disallow reasonable fees and costs was inappropriate


Meyer v. U.S. Bank N.A., 2014 Bankr. LEXIS 651 (Bankr. W.D. Wash Feb. 18, 2014)

Chapter 13 debtor-borrowers brought an adversary proceeding against, among others, successor trustee under deed of trust, asserting various foreclosure –related causes of action, including violation of the Washington State Deeds of Trust Act (DOTA), the Washington State Consumer Protection Act (WACPA), and the Fair Debt Collection Practices Act (FDCPA). The court discusses the convoluted and complex history of a loan placed in a securitized trust and the many entities involved with the odyssey of the loan up to the time of foreclosure. Held: The DOTA recognizes a pre-sale cause of action for damages for the wrongful initiation of foreclosure proceedings; successor trustee failed to materially comply with its duties under the DOTA; successor trustee’s multiple violations of the DOTA also violated the WACPA; and borrowers failed to prove entitlement to relief under the FDCPA because the court found there was a present right of possession of the property through an enforceable security interest, even though the procedure initiating the enforcement of that security interest was defective.

Submitted by:
John C. Smith
Gerald K. Smith and John C. Smith Law Offices, PLLC
6720 E. Camino Principal, Suite 202
Tucson, AZ 85715
Tel:  (520) 722-1605
Fax: (520) 722-9096


Franklin D. "Troy" Dodge
Ryan Rapp & Underwood, P.L.C.
3200 N. Central Avenue, Suite 1600
Phoenix, Arizona 85012
(602) 280-1000
(602) 728-0422 Fax

10th Circuit

Clark v. Zwanziger (In re Wolfgang Friedrich Zwanziger, 741 F.3d 74 (10th Cir. 2014) (Tymkovich, J.) (before Tymkovich, Holloway, and Gorsuch, C.J.) (Appeal from the United States Bankruptcy Appellate Panel).

The Bankruptcy Appellate Panel’s (the “BAP”) decision applying issue preclusion to preclude an award of damages for emotional distress was REVERSED AND REMANDED. In the decision immediately below, the BAP applied issue preclusion to a previous finding in a separate district court matter that held the parties had procedurally waived emotional distress damages. As a result, the BAP reversed the bankruptcy court’s non-dischargeability award to the extent it included amounts arising out of emotional distress. Applying Oklahoma law on issue preclusion, the Tenth Circuit found that litigation determining whether a party has waived a claim is not the equivalent of a decision on the merits of the waived claim. Consequently, the previous district court decision on waiver of the emotional distress claim did not satisfy the requirement of a decision on the merits of the emotional distress claim sufficient to warrant application of issue preclusion. The case was remanded to the bankruptcy court ordering a reinstatement of the original judgment including emotional distress damages.

Rushton v. ANR Company, Inc. et al. (In re C.W. Mining Company), 740 F.3d 548 (10th Cir. 2014) (Tymkovich, J.) (before Tymkovich, Brorby, and Murphy C.J.) (Appeal from the United States Bankruptcy Appellate Panel).

The Tenth Circuit’s opinion AFFIRMED five of the six appeals at issue agreeing with the Bankruptcy Appellate Panel that the parties’ requests for relief would impermissibly affect the validity of the sale in violation of 11 U.S.C. § 363(m) therefore mooting the appeals.  The issue on appeal was whether any relief could be granted that would not affect the validity of the prior sales.  In discussing the relative burdens of the parties, the Tenth Circuit stated that while the trustee bears the burden of proving the appeal is moot pursuant to  § 363(m), the appellants must at least identify an available remedy that will not affect the sale’s validity.  Upon analysis of each appeal, the Tenth Circuit determined that only one appellant satisfied its burden of requesting relief that would not affect the validity of the sale.  The successful appellant established he had sought alternative relief pursuant to a state statute providing monetary damages that would not affect the validity of the sale.  Consequently, this one appeal was remanded for further proceedings consistent with the Tenth Circuit’s decision that his appeal was not moot under § 363(m).

First National Bank of Durango v. Reason Lee Woods (In re Woods)2014 U.S. App. LEXIS 2960, (10th Cir. Feb. 19, 2014) (J. Holmes) (Before Homes, O’Brien, and Matheson, C.J.) (Appeal from the Bankruptcy Appellate Panel for the Tenth Circuit Court of Appeals (B.A.P. No. 11-083-CO).

The Tenth Circuit Court of Appeals vacated the decision of the United States Bankruptcy Court for the District of Colorado (the “bankruptcy court”) and remanded the case for further proceedings after finding that the bankruptcy court applied the wrong legal standard and test for determining when a debt for a debtor’s principal residence arises out of a farming operation under 11 U.S.C. § 101(18)(A).  Otherwise known as the “fifty-percent-farm-debt” rule, § 101(18)(A) identifies the type of debtor that may seek relief under the Chapter 12 of the Bankruptcy Code; namely, an individual that has at least 50% of aggregate noncontingent, liquidated debt arising out of a farming operation.  Excluded from this farm debt calculation, is a debt for the individual’s principal residence unless such debt “arises out of a farming operation.”  Individuals that meet this rule qualify as “family farmers” under the Bankruptcy Code and are entitled to Chapter 12 bankruptcy relief. 

In this case, the Court’s focus was on a construction loan obtained by the debtors’ to build a house on their farmland.  If the construction loan did not evidence a debt arising from a farm operation then the debtors’ would fail the “fifty-percent-farm-debt” rule and be disqualified from Chapter 12 bankruptcy relief.  The bankruptcy court found that the construction loan arose from the debtors’ farm operations and should be included in the debtors’ farm debt total, because it was used to build a house that was an “integral part” of the debtors’ farm operation.  The bankruptcy court’s conclusion was supported by two (2) factual findings--(1) the debtors’ farming operation’s office and records were located in the residence; and (2) the house was situated in close proximity to the debtors’ farming operation since it was built on the farmland.

Adopting the test articulated in In re Kan Corp., 101 B.R. 726 (Bankr. W.D. Okla. 1988), the Court held that, when the debt at issue is a loan debt, it arises out of a farming operation and may be included in the debtor’s farm debt total if it is directly and substantially connected to any of the farming operation activities outlined in § 101(21).  The Court went on to hold that, to determine whether the “direct-and-substantial-connection” standard is satisfied, an objective “direct-use” test should be employed, which singularly focuses on whether the loan proceeds were directly applied to or used in a farming operation.

Submitted by:
Christopher M. Staine
Lysbeth L. George
A Professional Corporation
20 North Broadway, Suite 1800
Oklahoma City, OK 73102-8273
(405) 235-7700
(405) 239-6651 (Facsimile)

11th Circuit

Dunn v. Advanced Medical Specialties, et. al., 2014 U.S. App. LEXIS 2433 (11th Cir. Feb. 10, 2014) 

Two months prior to filing bankruptcy, the debtor sued her former employer in the District Court for alleged violations of the Americans With Disabilities Act, the Civil Rights Act of 1964 and the Equal Pay Act.  However, the debtor failed to disclose the lawsuit as a contingent asset in her bankruptcy schedules.  Following the entry of an order granting the debtor a discharge, the District Court entered summary judgment in favor of the former employer based on judicial estoppel.  The United States Court of Appeals for the Eleventh Circuit affirmed the entry of summary judgment and the denial of the trustee’s motion to vacate under Rule 60(b)(4).

Brown v. Gore742 F.3d 1309 (11th Cir. Feb 14, 2014)

The debtor filed a Chapter 13 plan that required monthly payments of $150.00 for three years.  The Bankruptcy Court denied confirmation, finding that the plan was not proposed in good faith.  Specifically, the Court found that the primary reason for filing 13 was to finance the payment of the debtor’s attorney’s fees.  The United States Court of Appeals for the Eleventh Circuit affirmed the decision of the District Court, which had affirmed the Bankruptcy Court’s denial of confirmation.

Antonini v. Duran, U.S. App. LEXIS 2568 (11th Cir. Feb. 11, 2014)

An individual and his company filed an involuntary petition under Chapter 7, alleging that the putative debtor was insolvent and owed them approximately $640,000.00.  Following a two day bench trial, the Bankruptcy Court dismissed the Chapter 7 case and found that it had been filed in bad faith.  Based on the finding of bad faith filing of the involuntary case, the Bankruptcy Court ordered the petitioning creditors to pay $185,000.00 in attorneys’ fees and $50,000.00 in punitive damages.  The District Court found that the record was replete with evidence of bad faith and affirmed the order of the Bankruptcy Court.  The   United States Court of Appeals for the Eleventh Circuit affirmed the decision of the District Court.

Realan Investment Partners, LLP, et. al. v. Leigh Meininger, as Chapter 7 Trustee, 2014 U.S. Dist. LEXIS 16422 (M.D. Fla. Feb. 10, 2014)

The Chapter 7 trustee for a number of affiliated companies, all of which had filed Chapter 11 cases that was converted to Chapter 7, filed several adversary proceedings in an effort to recover fraudulent transfers from the former owner of the debtors, the former owner’s family members, the estate of the former owner’s deceased wife and related entities. 

Following the commencement of the adversary proceedings, the trustee entered into a settlement agreement pursuant to which the defendants agreed to pay $925,000.00 to the trustee conditioned, in part, on the trustee’s agreement to seek a bar order and channeling injunction that would permanently enjoin the trustee and the debtors’ creditors from pursuing any claims against the settling parties arising from, related to, based upon, or deriving from the business activities of the debtors.

The trustee filed a motion to approve the settlement as required by Bankruptcy Rule 9019.  Two investors, each of which had invested a substantial amount of money in the debtors prior to bankruptcy, objected to the Bankruptcy Court’s approval of the settlement.  The objecting parties asserted, in part, that the Bankruptcy Court lacked constitutional authority to enjoin third parties from bringing claims against the settling parties.  The Bankruptcy Court overruled the objections and entered an order approving the settlement.

On appeal, the objecting parties argued that the Bankruptcy Court lacked the constitutional authority to enter a bar order prohibiting third parties from bringing state law claims against the settling parties.  The District Court rejected this argument, reasoning that Stern v. Marshall, 131 S. Ct. 2594 (2011) does not prevent a bankruptcy court from entering a bar order in approving a settlement agreement.  The District Court concluded that Stern was limited to the holding that a bankruptcy court lacked statutory and constitutional authority to enter a final judgment on a state law counterclaim to a proof of claim that had been filed in a bankruptcy case.

The District Court affirmed the Bankruptcy Court’s order approving the settlement.

Millian v. Wells Fargo & Co., et. al., 2014 U.S. Dist. LEXIS 31520 (S.D. Fla. Feb. 18, 2014)

Following a payment default on a home loan mortgage, Wells Fargo Bank, N.A. filed a mortgage foreclosure case in state court.  Prior to filing bankruptcy, the debtor raised lack of standing as a defense.  The debtor filed a Chapter 7 bankruptcy case on the same day that the trial was to commence in state court.  After filing bankruptcy, the debtor filed an adversary proceeding against Wells Fargo Bank, N.A. and several of its affiliate. The debtor once again raised the standing issue, as well as other defenses and claims.  The Bankruptcy Court granted the motions to dismiss and abstain.  On appeal, the District Court affirmed the order that granted the motions to dismiss and abstain.

Submitted by:
Lynn James Hinson
Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A.
800 North Magnolia Avenue, Suite 1500
Orlando, Florida 32803
407-841-1200 . Fax 407-423-1831

DC Circuit

Hope 7 Monroe Street Limited Partnership v. RIASO, LLC (In re Hope 7)2014 U.S. Dist. LEXIS 31520 (DC Cir. Feb. 28, 2014)

While bankruptcy proceedings were ongoing, the debtor discovered information it alleged showed that its largest creditor and its agents had committed fraud and breached their fiduciary duty to the Debtor.  The debtor filed a state court action against the creditor and agents on the basis of those allegations.  Concurrently, the creditor filed a proof of claim in the bankruptcy proceedings.  The debtor objected based on the alleged fraud, but the bankruptcy court overruled the objection and ordered claim be paid from the estate.  The trustee proposed to sell the estates interest in the state court action to one of the creditors co-defendants as a compromise of the claims.  The bankruptcy court approved the sale.

Subsequently, the debtor brought a motion pursuant to FRCP 60(b) to vacate the orders overruling the claim objection and ordering payment of the creditors claim, as well as the order approving the sale of the legal claims.  The bankruptcy court denied the debtors motion, and the district court affirmed.  After its review the DC Circuit upheld the rulings of the two lower courts.

In its ruling the DC Circuit first addressed whether or not the debtor had standing to bring appeal the bankruptcy courts order.  Debtors generally lack standing because the debtor lacks an interest in the distribution of the estates property and because the bankruptcy proceedings absolve the debtor’s liability to creditors.  The DC circuit noted however, that a debtor does have standing when success on appeal could result in a surplus in the estate that would revest in the debtor at the close of the bankruptcy.  The DC Circuit determined that the debtor had standing to bring the appeal, but affirmed the lower courts’ rulings on the merits.

Submitted by:
Matthew S. Sepuya
Greenfield Sullivan Draa & Harrington LLP
150 California Street, Ste 2200
San Francisco, CA 94111
(415) 283-1776

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