Yesterday, the Bankruptcy Panel of the Ninth Circuit Court of Appeals issued yet another decision related to standing and rights to appeal bankruptcy court orders.  In Bray v. U.S. Bank National Association, (In re Bray), the Ninth Circuit BAP considered a chapter 7 individual debtor’s appeal from an order reopening his involuntary chapter 7 bankruptcy case.  See Bray, B.A.P. No. CC-17-1373-SKuF (9th Cir. BAP Aug. 7 2018).

Our prior blog posts on similar decisions from the Ninth Circuit regarding rights and standing to appeal bankruptcy court orders are available here and here.

Appeal

In determining whether the debtor here had appellate standing, the Court explained that “reopening a closed case is a ‘ministerial act’ that primarily enables the clerk to manage the case as an active matter.”  Id. at 10 (citation omitted).  The Court further elaborated that a bankruptcy court order reopening a case “lacks legal significance and determines nothing with respect to the merits of the case.”  Id. (citation omitted).

The Court considered the person aggrieved standard, which provides that “‘those persons who are directly and adversely affected pecuniarily by an order of the bankruptcy court’ have standing to appeal.” Id. at (citation omitted).  In order to meet this standard, the debtor would have to show that the order on appeal “diminished his property, increased his burdens or otherwise detrimentally affected his rights.”  Id. at 11.

The Court found that the order reopening the case did not impact Bray in any of these ways, and thus he lacked standing to appeal the bankruptcy court’s order reopening the case.  Id. at 11 (dismissing appeal).

In a recent opinion, the Fifth Circuit affirmed a district court ruling that found that a debtor was judicially estopped from claiming a stay violation by a mortgagee, who foreclosed on the debtor’s property, due to the debtor’s failure to disclose the affected property or his putative claims in his bankruptcy.

The Fifth Circuit explained that the “doctrine of judicial estoppel is equitable in nature and can be invoked by a court to prevent a party from asserting a position in a legal proceeding that is inconsistent with a position taken in a previous proceeding.” The Fifth Circuit further emphasized that judicial estoppel “is particularly appropriate where . . . a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset.”

Examining the facts of the case, the Court determined that “Chapter 13 debtors have a continuing obligation to amend financial schedules to disclose assets acquired post-petition,” and the debtor failed to fulfill this duty.  By failing to amend his asset schedule the debtor “impliedly represented” to the bankruptcy court that his financial status was unchanged.

Read the full opinion here.

When a trademark licensor files for bankruptcy, can the licensees of their trademarks continue using those marks, or does the licensor have the right to prohibit their continued use? On Fox’s Above the Fold blog covering advertising law, partner Elizabeth Patton recently wrote a post discussing this open question, which sits at the heart of a case that may be heard by the U.S. Supreme Court.

We invite you to read Elizabeth’s post covering the case and its potential impact:

How Bankruptcy Effects Rights Under Trademark Licenses

An opinion issued yesterday by the U.S. Court of Appeals for the Ninth Circuit reiterates the importance of filing written objections and appearing in the Bankruptcy Court to preserve rights to appeal.  The opinion clarifies the Ninth Circuit’s recent opinion on this issue, which we covered in a recent blog post.  In Reid and Hellyer, APC v. Laski (In re Wrightwood Guest Ranch, LLC), No. 16-56856, D.C. No. 5:16-cv-07168-MFW, the Ninth Circuit considered an appeal of an order issued by the U.S. Bankruptcy Court for the Central District of California that approved a settlement between a chapter 11 trustee and a secured creditor.

GavelIn August 2015, an involuntary petition was filed against the Debtor, Wrightwood Guest Ranch, LLC (the “Debtor”) and a trustee was appointed.  The Trustee elected to settle a $9.6 million claim secured by the estate’s principal asset, a large piece of real estate, by allowing an affiliate of the secured creditor to purchase the property for $8.5 million and having the secured creditor limit its claim to that amount and also carve out funds for estate professionals, expenses and unsecured creditors.

The Official Committee of Unsecured Creditors (the “Committee”) and an individual creditor filed written objections to the proposed settlement.  The Debtor’s counsel and the Committee’s counsel (the “Administrative Claimants”) did not file any written objections on behalf of themselves despite that they had administrative claims in the case.

The bankruptcy court held a hearing on the sale of the property and the settlement and attorneys from the law firms representing the Committee and the Debtor appeared on behalf of the Committee and the Debtor, respectively.  Neither Administrative Claimant stated during the hearing that it was appearing on its own behalf.  The Bankruptcy Court granted the sale motion and approved the settlement under Federal Rule of Bankruptcy Procedure 9019.

Thereafter, Administrative Claimants both filed appeals of the settlement order.  The District Court for the Central District of California consolidated the appeals and the Trustee moved to dismiss the appeals claiming that neither Administrative Claimant / appellant had standing to appeal because neither, in its own capacity, objected to the settlement or appeared at the hearing.  The District Court agreed and dismissed the appeals.

In their appeals to the Ninth Circuit, the Administrative Claimants / appellants argued that despite their failure to “explicitly object” below, the Bankruptcy Court and Trustee were aware of their positions and their intent to object on their own behalves.  The Ninth Circuit noted its recent decision in In re Point Center Fin., Inc. wherein the Ninth Circuit “clarified that attendance and objection are not prudential standing requirements in bankruptcy cases, but rather relate to whether a party has waived or forfeited its right to appeal a given order of the bankruptcy court.”  Wrightwood, at 8.

Here, the Court found that “the law firms have forfeited their claims regarding the propriety of the settlement order because neither firm attended the hearing or objected to the settlement in its own capacity.”  Id. at 9.  The Ninth Circuit further explained its Point Center ruling – “[t]here, although the appellants did not file a written objection or attend the hearing, they quickly realized the error and ‘filed a motion to reconsider with the bankruptcy court before it had issued a written order on the motion,’ which the bankruptcy court considered and rejected on the merits.'”  Id. at 10 (citing Point Center).  Accordingly, the Ninth Circuit affirmed the judgement of the District Court.

The Ninth Circuit’s ruling in Wrightwood is a good reminder – “When a party has not objected to an order in writing and the record contains no explicit indication that a party meant to object, a party has normally failed to preserve its objection to that order.”  Id. at 16.

In an appeal from the U.S. Bankruptcy Court for the District of Hawaii, the U.S. District Court for the District of Hawaii determined when the date of the transfer occurred for the purposes of a preferential transfer asserted by a trustee pursuant to 11 U.S.C. §547.  See Coulson v. Kane (In re Price), Civ. No. 17-00437-LEK-KSC (D. Hi June 29, 2018).  Generally, a preferential transfer under Section 547 of the Bankruptcy Code involves a transfer of the debtor’s funds or property shortly before filing for bankruptcy (within 90 days) and such a transfer can be avoided (and the funds/property returned to the bankruptcy estate) if certain conditions are met.

In this case, the Appellant was sued by a bankruptcy trustee for receipt of funds out of escrow that occurred during the 90 days immediately preceding the debtor’s bankruptcy filing. The appellant argued, among other things, that the transfer actually occurred outside the 90-day period because the transfer occurred at some earlier time when the funds were put into escrow because bankruptcy courts have previously held that escrow funds are not property that vests in the bankruptcy trustee.  Id. at 16.

Honolulu, Hawaii
Honolulu, Hawaii

The Court explained that “[t]o prevail on his escrow theory, Appellant must show the ultimate transfer of funds to him, which occurred outside the preference period, did not ‘deplete the assets of the estate available for distribution,'” or, in other words, that the “Escrow Instructions diminished the Debtor’s interest in the escrowed funds sufficiently so that they were not property of the bankruptcy estate.”  Id. at 17 (citations omitted).

For example, escrow instructions that have left a debtor with only a “contingent right” to the funds might sufficiently diminish the debtor’s interest in escrow funds such that the funds are no longer estate property.  Id.  Here, however, the Escrow Instructions at issue did not contain any particular terms that caused the Debtor’s interest to be “without value to the bankruptcy estate.”  Id. at 18.

Accordingly, the Hawaii District Court affirmed the Bankruptcy Court’s ruling that the trustee could recover the transfer of the escrowed funds to appellant because that transfer occurred within the 90-day preference period.  Although sometimes receipt of a preferential transfer can’t be avoided, this case serves as an important reminder to review escrow instructions carefully to the extent they could be used as a defense.

Kerri Gallagher writes:

The Eleventh Circuit recently held that when determining whether a plaintiff’s inconsistent statements are intended to make a mockery of the judicial system, a court must evaluate all facts and circumstances of the case rather than simply make an inference.  See Slater v. U.S. Steel Corp., No. 12 15548 (11th Cir. June 12, 2018).

In Slater v. U.S. Steel Corp., the plaintiff failed to disclose to the Bankruptcy Court that she was prosecuting employment discrimination claims against the defendant.  Citing Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1283 (11th Cir. 2002), the defendant moved to dismiss her claims under the judicial estoppel doctrine.  The district court granted the motion to dismiss, and the Eleventh Circuit affirmed.

Rehearing the case en banc, the Eleventh Circuit overruled portions of Burnes, which permitted the inference that a plaintiff intended to make a mockery of the judicial system by failing to disclose a civil claim.  Slater v. U.S. Steel Corp. (“Slater II”), 871 F.3d 1174, 1185 (11th Cir. 2017).  Instead, the Eleventh Circuit held that, instead of making an inference, a court should evaluate “all the facts and circumstances of the particular case,” and provided a non-exhaustive list of facts for consideration.  Id.

Citing its holding in Slater II, the Eleventh Circuit in the instant action, found that the district court failed to consider any relevant facts in granting the defendant’s motion for summary judgment.  Accordingly, the Court vacated the summary judgment order and remanded the case for further proceedings.

Kerri Gallagher is a summer associate in Fox Rothschild’s Philadelphia office.

Samuel Goodstein writes:

The U.S. Supreme Court resolved a dispute about whether debts obtained by false promises to pay (or fraud) can be discharged in bankruptcy.

On June 4, 2018, the U.S. Supreme Court issued an opinion affirming the U.S. Court of Appeals for the Eleventh Circuit’s ruling that false statements related to a single asset (here, a tax refund) that could be used deny discharge of a particular debt may prevent denial of discharge because the statement relates to the Debtor’s financial condition. See Lamar, Archer, & Cofrin, LLP v. Appling, No. 16-1215 (U.S. June 4, 2018).

InvoicesThe case involved R. Scott Appling (“Debtor”) who failed to pay his attorneys, Lamar, Archer & Cofrin (“Creditor”) for legal services provided in a business litigation. Creditor/attorney threatened to withdraw from the case and place a retaining lien on the work product to compel payment.

Debtor made remarks to Creditor about certain expected tax refunds that could be used to pay for the legal services; and Creditor agreed not to withdraw from the representation. Debtor thereafter did not pay Creditor for the legal services.  Ultimately, Creditor brought suit against Debtor for the balance due and obtained a judgment, and Debtor then filed for chapter 7 bankruptcy.

In the chapter 7 case, Creditor brought an adversary proceeding claiming that the debt was not dischargeable under 11 U.S.C. § 523(a). Section 523(a)(2)(A) provides an exception to dischargeability of a debt if the debt is obtained by “false pretenses, a false representation, or actual fraud,” but 523(a)(A) itself has an exception and does not deny discharge if the statement is “respecting the debtor’s . . . financial condition.”

When the purported false statement is “respecting” the debtor’s financial condition, §523(B), applies to render the debt not dischargeable if the false statement was in writing.  Here, the Debtor’s promise to pay creditor with his tax refund proceeds were not in writing so Creditor argued that the Debtor’s statements about his tax refund was not a “statement respecting” his financial condition such that the exception to denial of discharge in 523(a)(2)(A) would not apply.

The Supreme Court affirmed the Eleventh Circuit’s ruling and found the debt was still dischargeable because the false promises to pay with the tax refund proceeds constituted a statement “respecting” the Debtor’s financial condition and were not in writing.  The Supreme Court agreed and broadly construed the word “respecting.”  The Supreme Court decided that statements about a single asset (the tax refund) can constitute a “statement respecting the debtor’s financial condition” such that denial of discharge is not appropriate.

The practical implications of this ruling are rather straightforward. Debtors can make, at the very least, a single false statement about their ability to complete payment to creditors as long as it relates to their financial condition and it isn’t memorialized in writing.  It will be interesting to see how this plays out throughout the country.

Samuel Goodstein is a summer associate in Fox Rothschild’s New York Office.

Yesterday a panel of the U.S. Court of Appeals for the Ninth Circuit issued an opinion reversing a district court order dismissing an appeal from the bankruptcy court for lack of standing.  See Harkey v. Grobstein (In re Point Center Financial, Inc.), Bankr. No. 16-56321, D.C. No. 8:16-cv-1336-DSF (May 29, 2018, 9th Cir.).

The appeal was related to the U.S. Bankruptcy Court for the Central District of California’s order authorizing a chapter 7 trustee to assume the operating agreement of a limited liability company whose interests were implicated in the bankruptcy proceedings.

On appeal, the U.S. District Court for the Central District of California found that the members and president of the LLC lacked standing to challenge the Bankruptcy Court order because, despite receiving notice of the trustee’s assumption motion, they did not object or attend the hearing on the motion.  The Ninth Circuit explained that standing to appeal a bankruptcy court order is limited to “persons aggrieved” by the order.  Id. at 7 (collecting cases).

A person aggrieved is someone “‘directly and adversely affected pecuniarily’ by a bankruptcy court’s order.”  Id. (citing Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 443 (9th Cir. 1983)).  This can include an order “that diminishes one’s property, increases one’s burdens, or detrimentally affects one’s rights….”  Id. (citation omitted).  The Court explained that this standard exists because Bankruptcy Court orders can implicate the interests of various stakeholders, including entities and individuals who are not formally parties to proceedings.

In reversing the District Court opinion, the Ninth Circuit considered whether attendance at the hearing and filing an objection are “prerequisites” to appellate standing under the person aggrieved standard and found that “[b]ankruptcy standing concerns whether an individual or entity is ‘aggrieved,’ not whether one makes that known to the bankruptcy court.”  Id. at 10.  Thus, the Ninth Circuit concluded that an appellant need not attend the hearing or file objections to be adversely affected by a bankruptcy court decision and have standing to appeal.  Id. (reversing and remanding).

Anahita Anvari writes:

In In re Beach v. Beach, the Fifth Circuit elaborated on its standard of review for adversary litigation settlements.  No. 17-10481 (5th Cir. May 16, 2018).

In this case, Debtor, a Dallas oil-and-gas businessman, formed a partnership to drill oil with a New York investment firm (“Creditor”).  Following a dispute between Debtor and Creditor, Debtor filed for bankruptcy.

Creditor and Trustee filed an adversary proceeding against Debtor, claiming he was not entitled to a discharge of his debts under Section 727 of the Bankruptcy Code. The Complaint alleged that Debtor fraudulently transferred assets from a family trust to a new trust to shield the assets from creditors. Section 727 prevents discharge of the debtor where the debtor has fraudulently transferred assets to hinder, delay, or defraud creditor or officer of the estate. 11 U.S.C. § 727(a)(2).

In mediation, Trustee reached an agreement with Debtor (the “Settlement”) while representatives of Creditor were not present.  Creditor objected to the Settlement, arguing that it did not maximize value for the creditors.  After a two-day hearing, the bankruptcy court approved the settlement.  Creditor appealed to the district court, which affirmed.

The bankruptcy court weighed the overall costs and benefits of the exchange, reasoning that Trustee would likely win the precise settlement amount in litigation, and that litigation would be complex and costly. As to Creditor’s argument that the Settlement did not maximize the value of one of Debtor’s assets, the bankruptcy court reasoned that the value was merely speculative and did not render the Settlement unfair.

The Fifth Circuit reviewed the bankruptcy court’s approval of the Settlement for any abuse of discretion. The Court held that “a trial court abuses its discretion when it makes an error of law or clearly erroneous assessment of evidence.”  The Court found that the bankruptcy court made findings showing its consideration of the three-part balancing test to determine if the Settlement is in the best interest of the estate. Specifically, the bankruptcy court considered: (1) the probability of success in litigation of the adversary claim; (2) the complexity and likely duration of litigation; and (3) other factors including (i) the best interest of the creditors and (ii) the extent to which the settlement is a product of bargaining, and not fraud or collusion.

The Fifth Circuit affirmed the findings of the lower courts.  In so ruling, the Court considered the evidence provided by Creditor, including costs and likely outcome of litigation. The Court reasoned that the bankruptcy court adequately considered the three-part test, and did not abuse its discretion or make any legal errors or clearly erroneous factual findings or assessments of the evidence.

Anahita Anvari is a summer associate in the firm’s Philadelphia office.

The United States Supreme Court recently issued a ruling in which it held that the Bankruptcy Code’s safe harbor provision § 546(e) does not prevent a trustee from clawing back transfers involving securities and financial institutions in circumstances when such institutions serve as mere pass-through entities for the transfer.  The decision, Merit Management Group, LP v. FTI Consulting, Inc., Case No. 16-784, affirming the Seventh Circuit Court of Appeals, marked a resolution of a circuit split on an issue that will have significant impact in the bankruptcy world.

Lighthouse next to a harbor at sunset

The case involved the sale of stockholder interests by transferor, Merit Management Group, LP, to transferee, Valley View Downs.  Two financial institutions, Credit Suisse and Citizens Bank, were party to the transaction as lender and escrow agent.

The safe harbor defense to the trustee’s avoidance powers exempts transfers that are settlement payments “made by or to (or for the benefit of) a…financial institution.”  The Supreme Court reasoned that the relevant question in determining whether the safe harbor defense applies is the “overarching transfer” the trustee seeks to avoid.  Because the trustee sought to avoid the purchase of stock by Valley View from Merit Management, Credit Suisse and Citizens Bank’s role as conduits, or “component parts” as described by the Supreme Court, were irrelevant to the § 546(e) analysis.  The parties did not contend that either Valley View or Merit Management were covered entities under § 546(e) and accordingly, the transfer was not protected by the safe harbor defense.

The decision throws out previous law made by the Second, Third, Sixth, Eighth and Tenth Circuits on the safe harbor rule and will have significant effects on pending and future bankruptcy proceedings, by enlarging trustees’ avoidance power and narrowing a frequently-used defense by transferee defendants.