General Bankruptcy Litigation News & Updates

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.

A recently issued opinion by the U. S Bankruptcy Court for the District of New Mexico provides some guidance on the relevant date for the transfer of real property for purposes of the statute of limitations applicable to fraudulent transfer claims.

In Gonzales v. Sexton (In re Esquibel), Adv. No. 17-1042-j (Bankr. D.N.M. July 23, 2018) the Bankruptcy Court considered a chapter 7 trustee’s summary judgment motion regarding the trustee’s claims for avoidance and recovery of actual and constructive fraudulent transfers under the Bankruptcy Code and state law.

real estate transferPre-petition, the Debtor owned unencumbered real property (the “Property”).  This Property was transferred to the Defendant on May 19, 2014 via a quitclaim deed.  In exchange for the Property, the Defendant (recipient of the Property) promised to maintain the property, provide the Debtor with a rent-free place to live, and care for Debtor if she was unable to care for herself.  Id. at ¶ 27.

Several years later, on September 7, 2016, just 177 days before the Debtor filed her voluntary bankruptcy petition, Defendant recorded the quitclaim deed.  Id. at ¶ 29.  The Trustee brought suit against the Defendant claiming that the transfer of the Property was avoidable under Section 548 of the Bankruptcy Code and state law because it constituted both actual and constructive fraudulent transfers.

The threshold issue for the Court was when the Property was transferred for purposes of statute of limitations – in 2014 when the deed was executed or in 2016 when the deed was recorded.  Section 548 allows a trustee to avoid transfers of estate property that occurred during the 2 years before the bankruptcy.  The Defendant asserted that the transfer occurred when the deed was signed in 2014, and the Court disagreed, finding that the transfer for the purposes of a Section 548 fraudulent transfer occurred when the deed was recorded, in 2016.

The Court looked to Section 548(d), which states “a transfer is made when such transfer is so perfected that a bona fide purchaser from the debtor against whom applicable law permits such transfer to to be perfected cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee.”  Id. at 10.  The Court further explained that the purpose of 548(d) is to “prevent fraudulent transfers from becoming impregnable to attack by keeping them secret until the limitation period has lapsed.”  Id. (citation omitted).

The Court then looked to New Mexico state law to determine when a real property transfer is perfected and found that such a transfer is perfected “when it is recorded with the county clerk of the state in which the real estate is situated.”  Id. at 11 (citation omitted).  Given this, the Court found that the transfer of the Property occurred upon recording in 2016, which was within 177 days of the chapter 7 filing, and therefore was “within the two-year look-back period under §548(a).”  Id. 

 

In Beskrone v. Int’l Educ. Corp., Adv. No. 17-50523 (CSS) (Bankr. D. Del. July 2, 2018), the Bankruptcy Court for the District of Delaware held that a chapter 7 trustee’s adversary proceeding to recover alleged prepetition accounts receivable fell under the Court’s “related to” jurisdiction. Pursuant to 28 U.S.C. §§ 1334 and 157(a), bankruptcy courts have jurisdiction over the following types of matters: cases under title 11 of the United States Code, i.e., the Bankruptcy Code; proceedings arising under title 11; proceedings arising in a case under title 11; and proceedings related to a case under title 11. In Beskrone, the Court assessed its jurisdiction under this last prong.

In this case, PennySaver USA Publishing, LLC and affiliated entities (the “Debtors”) filed voluntary petitions for relief under chapter 7 of title 11 of the United States Code and Don A. Beskrone was appointed to serve as the chapter 7 trustee of the Debtors’ bankruptcy estates (the “Trustee”). Before the close of the Debtors’ cases, the Trustee filed a single-count complaint against International Education Corporation (“IEC”), who had entered into a prepetition agreement with PennySaver for advertising services. Id. at 3. The Trustee sought to collect payments allegedly requested by PennySaver that IEC did not pay in full. Id. at 3-4. IEC moved to dismiss the Trustee’s complaint for lack of subject-matter jurisdiction. Although IEC made both facial and factual challenges to the Court’s jurisdiction over the Trustee’s claim, the Court held that it should hold IEC’s factual challenges for a later proceeding and evaluate only IEC’s “facial” challenge. Id. at 7. In a “facial” challenge to a court’s jurisdiction, a court accepts as true all factual allegations in the plaintiff’s complaint and only examines the pleadings to determine if jurisdiction exists.

In Beskrone, the Court held that it did have subject-matter jurisdiction. Principally, the Court reasoned that in assessing whether it had “related to” jurisdiction over the Trustee’s claim, the test articulated by the Third Circuit in Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1985) still provided useful guidance. In Pacor, the Third Circuit reasoned that a bankruptcy court had “related to” jurisdiction over a matter if the “outcome of [the] proceeding could conceivably have any effect on the estate being administered in bankruptcy.” 743 F.2d at 994. The Court noted that the Pacor test is satisfied if a proceeding “may impact . . . debtor’s rights, liabilities, options, or freedom of action or the handling and administration of the bankrupt estate.” Op. at 9-10. As applied to the Trustee’s claim against IEC, the Court held that the claim satisfied the Pacor test. The claim was an action held by the debtor pre-petition, and thus was property of the estate, and the Trustee’s recovery under his claim might increase funds available to the body of the Debtors’ creditors. Id. at 10.

IEC argued that if the only conceivable effect on the Debtors’ bankruptcy estates was a greater dividend for creditors, that finding jurisdiction over such an action would overly extend “related to” jurisdiction in chapter 7 liquidations. Id. at 11. In support thereof, IEC cited cases applying jurisdictional analyses in post-confirmation proceedings. The Court acknowledged that a proceeding’s effect on a bankruptcy case may be different in a reorganization versus a liquidation, and pre-confirmation versus post-confirmation, but ultimately dismissed IEC’s argument.

First, the Court noted that the notion that the nature of a bankruptcy filing could create different scopes of jurisdiction has been criticized, and that the nature of a chapter 7 liquidation “does not upend the logic of Pacor.” Id. at 13. The Court reasoned that the Trustee’s action to recover accounts receivable would directly benefit the Debtors’ estates, and that there was nothing noteworthy about the Trustee’s claim that implicated characteristics “unique to a chapter 7 liquidation.” Id. at 14. Second, the Court rejected IEC’s contention that the Trustee’s claim should be dismissed for lack of jurisdiction because the matter did not satisfy the test established by the Third Circuit in Binder v. Price Waterhouse & Co., LLP (In re Resorts Int’l, Inc.), 372 F.3d 154 (3d Cir. 2004) for determining jurisdiction over post-confirmation proceedings in chapter 11 cases.  In Resorts Int’l, the Third Circuit reasoned that a bankruptcy court has “related to” jurisdiction over certain post-confirmation proceedings that “affect an integral aspect of the bankruptcy process – there must be a close nexus to the bankruptcy plan or proceeding.” Op. at 14-15 (citing Resorts Int’l). But, as the Court noted, post-confirmation proceedings diminish connections to the bankruptcy estate when the parties “have purposefully and by agreement removed a debtor from court oversight.” Id. at 15. In contrast, pre-closing chapter 7 liquidations, such as the Debtors, are “less attenuated to the estate.” Id. at 16. Lastly, the Court found IEC’s argument that there are similarities between chapter 7 and chapter 11 liquidations that make the application of the jurisdictional standard set forth in Resorts Int’l proper, to be unpersuasive.

Ultimately, the Court denied IEC’s motion to dismiss for lack of subject-matter jurisdiction and found that the Trustee’s proceeding to recover prepetition accounts receivable fell within the Court’s “related to” jurisdiction.

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 Bankruptcy Court for the Southern District of New York recently dismissed claims in an adversary proceeding commenced by pilots against the pilots’ union and an airline in connection with the airlines’ rejection of an old collective bargaining agreement (“Old CBA”), and negotiation of a new collective bargaining agreement (“New CBA”) that eliminated certain job protections that the pilots held under the Old CBA.  In addition, the airline entered into a letter agreement with the pilots’ union that permitted an arbitration proceeding to create new job protections for the pilots who lost the protections under the Old CBA.

In prior proceedings the bankruptcy court dismissed many of plaintiffs’ claims, leaving only a claim for breach of duty of fair representation against the pilots’ union, and a collusion claim against an airline.  Defendants sought summary judgment and dismissal of these remaining claims, which the bankruptcy court granted.

In so holding, the bankruptcy court found, among other things: (i) plaintiffs failed to put forward evidence demonstrating a causal connection for their various claims under any causation standard, and (ii) plaintiffs failed to provide sufficient basis for their “sweeping denials” of the facts that defendants contended were undisputed.

With respect to the fair representation claim, the bankruptcy court rejected a number of plaintiffs’ arguments.  For example, plaintiffs argued that the pilots’ union breached its duty of fair representation by wrongfully structuring the arbitration to permit two separate pilot committees to submit two competing proposals rather than one unified pilot position. The bankruptcy court rejected this argument because it was raised for the first time in plaintiffs’ responses to the summary judgment motions. The court further reasoned that “[e]ven if this argument were not waived, however, it would fail because the lack of a unified position was not discriminatory, arbitrary, or in bad faith.”  In addition, the plaintiffs argued that the pilots’ union failed to replicate certain protections under the Old CBA. The bankruptcy court again rejected this argument noting that it had been raised and rejected in the prior proceedings.

With respect to the collusion claim, the bankruptcy court held that in order to prove collusion, plaintiffs must prove a breach of duty of fair representation. Since the breach of duty claim failed, the bankruptcy court determined that the collusion claim failed as well.

Read the full opinion here.

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

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.