Georgia Bankruptcy Blog

Barben v. Donovan (In re Donovan), No. 07-13915 (11th Cir. July 2, 2008).

Donovan filed a Chapter 13 bankruptcy petition on February 17, 2004, prior to the passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. ... Donovan became unable to make the payments under the plan as they came due. Accordingly, Donovan—apparently at the bankruptcy court’s suggestion—converted the case to Chapter 7 on June 14, 2006; the bankruptcy court dismissed the Chapter 13 case on June 30, 2006.

Barben objected to the conversion and moved to dismiss the Chapter 7 case. She argued that the conversion to Chapter 7 was presumptively  abusive within the meaning of the 2005 Act ... The bankruptcy court held that the more stringent standards of the 2005 Act for conversion to Chapter 7 did not apply ... Accordingly, her motion to dismiss was denied on November 8, 2006. It is this denial of the motion to dismiss that was appealed first to the district court, which affirmed and granted costs to Donovan, and now to this court.

A court of appeals has jurisdiction over only final judgments and orders arising from a bankruptcy proceeding, whereas the district court may review interlocutory judgments and orders as well....Finality is given a more flexible interpretation in the bankruptcy context, however, because bankruptcy is an aggregation of controversies and suits. ..Instead, “[i]t is generally the particular adversary proceeding or controversy that must have been finally resolved rather than the entire bankruptcy litigation.”... Thus, to be final, a bankruptcy court order must “completely resolve all of the issues pertaining to a discrete claim, including issues as to the proper relief."

Based essentially on this logic, the weight of circuit authority has concluded that orders denying a motion to dismiss for bad faith or abuse are not appealable. At least three other circuits have specifically held that an order denying a motion to dismiss a Chapter 11 bankruptcy case for abusive filing is not a final order. In re Jartran, 886 F.2d 859, 864 (7th Cir. 1989); In re 405 N. Bedford Dr. Corp., 778 F.2d 1374, 1379 (9th Cir. 1985); see also In re Comm. of Asbestos Related Litigants, 749 F.2d 3, 5 (2d Cir. 1984) (declining to issue mandamus to review denial of motion to dismiss; suggesting in dicta that such denial was insufficiently final for direct appeal). But some courts have concluded to the contrary. In particular, the Third Circuit has held that the denial of a motion to dismiss for bad faith is immediately appealable in both Chapter 7 and 11. See In re Brown, 916 F.2d 120, 123-124 (3d Cir. 1990) (citing In re Christian, 804 F.2d 46 (3d Cir. 1986)). These cases, however, do not discuss whether a particular adversary proceeding must be final. Here, the bankruptcy court’s order denying Barben’s motion to dismiss the Chapter 7 case is not a final order. By denying her motion to dismiss, the bankruptcy court permitted the Chapter 7 case to continue. The court did not conclusively resolve the bankruptcy case as a whole, nor did the court resolve any adversary proceeding or claim.

In re Ryan, No. 07-10845, 2008 WL 1969593 (11th Cir. May 8, 2008) (click for pdf).

Ryan filed a voluntary petition for bankruptcy in early 2002. At the time, he owned 100% of the stock in a number of corporate entities (“the Entities”), including Riverside Capital Advisors, Inc. On August 7, 2002, the bankruptcy trustee sold Ryan's interests in the Entities to Entrust for the sum of $60,000. In an order approving the sale, the bankruptcy court stated, in relevant part:

Any original books and records, and/or assets of the Entities ... for which the Debtor has possession, custody, or control, shall be turned over to the Trustee forthwith. The Court shall retain jurisdiction to ensure that the Trustee and/or the Debtor turn over the books, records, or assets of the Entities to Entrust....

Bankr.Ct. Order of Aug. 16, 2002, at 2. The trustee then turned over most of the business records of the Entities to Entrust. There remain, however, business records of Riverside that have not been turned over because Entrust and Winchester disagree about who owns them. ...

At some point before 2001, Winchester, a trust company that acts as sole trustee for several trusts, retained Riverside to provide investment advice. Ryan was an officer, director, and sole stockholder of Riverside. In August 2001, Winchester and Riverside terminated their business relationship. Pursuant to severance agreements, Ryan and Riverside were required to return to Winchester all files, books, and records related to the Winchester trusts. Ryan returned most of the records, but failed to return 26 boxes of records that had been stored in a warehouse with Ryan's property and were not located until after Ryan filed his bankruptcy petition. Winchester asserts that it owns these records pursuant to the severance agreements. Entrust asserts that it owns these records pursuant to its purchase of Riverside in the bankruptcy sale.

The Bankruptcy Court held that it did have jurisdiction over the dispute between the two non-debtors, but the District Court reversed and remanded.  The Eleventh Circuit held that the Bankruptcy Court did have jurisdiction.

 Entrust argues that the bankruptcy court has jurisdiction under both the “arising in” and the “related to” language of § 1334(b). Winchester maintains that the dispute is a simple contract matter over the effect of the 2001 severance agreements and therefore neither arises in nor is related to the bankruptcy case. We conclude that the bankruptcy court has “related to” jurisdiction and therefore do not proceed to address “arising in” jurisdiction.

A dispute is “related to” a case under title 11 when its result “ ‘could conceivably’ ” have an “ ‘effect on the estate being administered in bankruptcy.’ ” Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784, 788 (11th Cir.1990)... In this case, we find the Lemco Gypsum/Pacor “conceivable effect” test satisfied. The dispute between Winchester and Entrust over the Riverside documents could conceivably affect the bankruptcy estate because the resolution of the dispute could impact the amount of money in the estate. If the documents are not turned over to Entrust as arguably required by the bankruptcy court's order approving the sale of the Entities, Entrust will have a viable claim for a refund from the estate of all or part of the $60,000 purchase price...In the case presently before us, the dispute between Entrust and Winchester does have a conceivable effect on the bankruptcy estate, which could be subject to a $60,000 refund claim.

Not a Bankruptcy case, but relevant to corporate and shareholder litigation:

KITTIE LAPERRIERE, Class certification, to consist of all persons who acquired the publicly traded equity securities of Vesta Insurance Group, Inc., between June 2, 1995, and June 28, 1998, inclusive (the “Class Period”). Excluded from the class, ISRAEL BURGER, RICHARD SULLIVAN, POINTERS, THE CLEANERS & CAULKERS LOCAL 1 PENSION FUND, FLORIDA STATE BOARD OF ADMINISTRATION

 versus

VESTA INSURANCE GROUP, INC., et al., TORCHMARK CORPORATION,
Defendant-Appellee.

No. 06-14524 (April 30, 2008)  (Click here for opinion).

This interlocutory appeal presents an issue of first impression in the circuit courts: whether, and to what extent, the proportionate liability scheme of section 21(D)(f) of the Securities Exchange Act of 1934 (the “Act”),1 enacted as part of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), amends section 20(a) of the Act, under which a person who controls a violator of the Act is “liable jointly and severally with and to the same extent” as that violator.

......

We conclude that section 20(a) controlling person liability survives section 21(D)(f)’s proportionate liability scheme. Those who would have been substantively liable as controlling person under section 20(a) before the PSLRA was enacted will be substantively liable after its enactment. All that the PSLRA has changed for controlling persons is the standard for deciding whether their responsibility for damages is joint and several or proportionate. Damages are now allocated based on the proportionate liability provisions in the PSLRA, including the provision that knowing violators of the securities laws are “liable for damages jointly and severally.” The district court’s order denying Appellants’ motion to strike Torchmark’s PSLRA-based affirmative defenses is AFFIRMED.

 By: Scott B. Riddle, Esq.

Trusted Net Media Holdings, LLC v. The Morrison Agency, Inc. (In re Trusted Net Media Holdings, LLC), No. 07-13429 (11th Cir. April 29, 2008) (click here for pdf of opinion).  The basic facts are the following -

On April 20, 2002, Morrison, as a creditor, filed an involuntary bankruptcy petition against its debtor Trusted Net, requesting liquidation of Trusted Net’s assets pursuant to Chapter 7 of the Bankruptcy Code. Morrison’s petition listed Morrison as the only petitioning creditor of Trusted Net, and described Morrison’s claim against Trusted Net as “Trade Debt/Judgment” in an amount “[n]ot less than [$]534,000.00.” …

The debtor Trusted Net, whose assets were at that time under the control of a state-court-appointed receiver, filed no response to Morrison’s involuntary petition. Accordingly, the bankruptcy court entered an Order for Relief on May 15, 2002 and appointed a Chapter 7 trustee. The trustee marshaled Trusted Net’s assets in preparation for liquidation. …

Shortly thereafter, and more than four years after commencement of the case, Trusted Net … filed a motion to dismiss the entire bankruptcy case for lack of subject matter jurisdiction. Similar to Huffman’s motion two years earlier, Trusted Net argued that § 303(b)’s requirements must be met for the bankruptcy court to have subject matter jurisdiction, and that Morrison’s petition violated § 303(b) because: (1) at the time it filed its involuntary petition, Morrison was not the holder of a non-contingent, undisputed claim, and (2) Morrison’s involuntary Chapter 7 petition was not joined by three holders of non-contingent, undisputed claims.

The Bankruptcy Court held that § 303(b)’s requirements were not subject matter jurisdictional and any defense that the debtor may have had were waived. The District Court affirmed, finding the Bankruptcy Court’s order to be “thorough, well-reasoned, and correct in every respect.”

The Eleventh Circuit reversed, with instructions to the District Court to remand to the Bankruptcy Court to find whether the requirement of § 303(b) were met. The issue was whether the requirements of the Code could be waived -

Trusted Net asserts that, at the time Morrison’s involuntary petition was filed, Morrison’s petition failed to meet the § 303(b) requirements because: (1) Morrison’s claim against Trusted Net was the subject of a bona fide dispute; and (2) Trusted Net had twelve or more non-insider holders of undisputed, non-contingent claims, yet Morrison’s petition was not filed by three petitioning creditors. In response, Morrison argues that its petition established the prima facie grounds for commencing an involuntary bankruptcy case and, in any event, Trusted Net waived any potential objections to Morrison’s petition by waiting four years to raise them. Trusted Net does not contest that its four-year delay would normally constitute a waiver; instead, it contends that the § 303(b) requirements are subject matter jurisdictional and hence incapable of being waived.

After a thorough analasys, the Eleventh Circuit held that § 303(b) were jurisdictional based upon binding precedent in In re All Media Properties, Inc., 646 F.2d 193 (5th Cir. 1981), aff’g
5 B.R. 126 (Bankr. S.D. Tex. 1980), but it stated that this holding was not necessarily the most well-reasoned position -

Under our prior panel precedent rule, holdings made or adopted by an earlier panel–including express jurisdictional holdings–must be followed. See Main Drug, Inc. v. Aetna U.S. Healthcare, Inc., 475 F.3d 1228, 1231 (11th Cir. 2007); Knight v. Columbus, Ga., 19 F.3d 579, 585 (11th Cir. 1994). And All Media’s characterization of § 303(b) as imposing non-waivable jurisdictional requirements upon the bankruptcy court is holding, rather than dictum, because a determination that § 303(b) is subject matter jurisdictional was a necessary predicate for the court’s consideration of All Media’s argument–which was raised neither in the pleadings nor at trial–that the creditor Best, Inc. did not satisfy the statutory
requirement of having an unsecured or undersecured claim. See Black v. United States, 373 F.3d 1140, 1144 (11th Cir. 2004) (“Dictum is a term that has been variously defined as a statement that neither constitutes the holding of a case, nor arises from a part of the opinion that is necessary to the holding of the case.”); see also United States v. Shields, 49 F.3d 707, 710 n.11 (11th Cir.) (interpreting United States v. Osburn, 955 F.2d 1500 (11th Cir. 1992), and stating that certain language was “holding rather than dictum because a determination that the statutory scheme in fact favored growers who have just completed their harvest over growers who have not yet harvested their marijuana plants was a necessary predicate to the Osburn court’s subsequent consideration of the defendants’ constitutional challenge to that sentencing distinction”), vacated, 65 F.3d 900 (11th Cir. 1995) (en banc).

Therefore, we conclude that we are bound by All Media’s decision that the requirements of § 303(b) must be satisfied in order for the bankruptcy court to have subject matter jurisdiction over an involuntary bankruptcy case. We recognize that the weight of authority–and, in our view, the superior reasoning–lie against that holding. Nevertheless, All Media’s holding in this regard is prior panel precedent, and therefore controls. See United States v. Steele, 147 F.3d 1316, 1317-18 (11th Cir. 1998) (en banc) (“Under our prior precedent rule, a panel cannot overrule a prior one’s holding even though convinced it is wrong.”).

By:Scott B. Riddle, Esq.

Matthews, Wilson & Matthews, Inc. v. Capital City Bank, 2008 WL 901919, 07-15615 (April 4, 2008).

MWM [Debtor] had trouble making loan payments, and ultimately filed for Chapter 7 bankruptcy. The bankruptcy trustee sought approval from the bankruptcy court to sell the Conyers property [owned by Debtor] and use the sale proceeds to satisfy the [Capital City Bank's] lien. On behalf of MWM, Watkins filed an objection to the sale in which she argued that the bank had engaged in fraud, misappropriated funds and failed to give an accounting. The factual allegations in Watkins’s bankruptcy objection are also included in plaintiffs’ claims in this case. After a hearing, the bankruptcy court overruled Watkins’s objection and approved the sale of the Conyers property and the use of  the sale proceeds to apply to the bank’s lien. Thus, the bankruptcy court  effectively decided plaintiffs’ claims adversely to the plaintiffs.

Debtor then amended its schedules to include a cause of action against the Bank, based upon the same allegations made in the objection to the sale. The Trustee abandoned the claims under §544 and the plaintiffs filed suit in District Court.  The District Court granted summary judgment in favor of the Bank based on res judicata and the prior decision of the Bankruptcy Court.  Plaintiffs appealed, essentially arguing that the abandonment essentially gives them a "do over," as if the Bankruptcy Court never ruled on the allegations.

Plaintiffs contend that “the abandoned tort action would be treated as if it were never a part of the estate, leaving the bankruptcy court without jurisdiction to issue orders which have a preclusive effect.” Thus, according to plaintiffs, the bankruptcy trustee’s formal
abandonment of their state law claims retroactively divested the bankruptcy court
of jurisdiction over those claims and restored the claims to them in their prepetition
status.

The Eleventh Circuit disagreed (after the jump) -

Ghee v. Retailers Nat. Bank, No. 07-14128, 2008 WL 816666 (11th Cir. March 27, 2008).

Collection lawsuit against former Chapter 7 debtor's spouse, who was not a debtor in the bankruptcy case, did not violate the discharge injunction of §524(a)(2).  The appeal of the Bankruptcy Court's decision was frivolous, so the debtor's motion to proceed in forma pauperis was denied.

Walden v. Walker (In re Walker), 06-11743 (11th Cir. January 31, 2008) (click here for pdf).  The debtor filed a motion to remove the Chapter 7 Trustee.  The Bankruptcy Court, after hearing evidence, held that the Chapter 7 Trustee lied about her previous relationship with a creditor of the estate and removed her as Trustee in an oral order.  The Trustee filed a Notice of Appeal of the oral order, and then the Bankruptcy Court issued a written removal order.  The District Court affirmed and the Trustee appealed.

The first issue was whether the removal order(s) were final and appealable, an issue of first impression in the Circuit -

Other appellate courts are split as to whether the removal or appointment of a trustee is a “final” order. The Third and Fourth Circuits hold that these decisions are final, but the Seventh Circuit disagrees. The Fifth Circuit has concluded both ways.

In In re Marvel, the Third Circuit concluded that the order appointing the trustee met the finality requirement. In re Marvel Entm’t Group, Inc., 140 F.3d 463, 470-71 (3rd Cir. 1998). In that case, the court wrote that the purpose of the finality requirement is judicial economy but that judicial efficiency would be “turned on its head” if the court were to delay reviewing the trustee appointment until after the entire bankruptcy proceeding concluded. Id. at 470. The court noted that “[l]iberal finality considerations in orders appointing bankruptcy trustees are necessary because these orders cannot be meaningfully postponed to the bankruptcy’s conclusion.” Id. The court wrote that if it did not have jurisdiction “no meaningful review of the order appointing the trustee could ever take place.”  Id. It would “strain[] credulity to suggest that a reviewing court would jettison years of bankruptcy infighting, compromise[,] and final determinations solely for the purpose of reversing” on the issue of the identity of the trustee. Id. 

We are persuaded by the logic of the Third Circuit and conclude that the removal of a bankruptcy trustee is a “final” order appealable to this Court.

The second issue was whether the Bankruptcy Court had jurisdiction to enter a written order removing the Trustee after the Court entered an oral order and after the Trustee filed an appeal of the oral ruling -

This Court concluded [in In re Mosley, 494 F.3d 1320, 1328 (11th Cir. 2007)] that while the filing of a notice of appeal generally “confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal,” an exception exists. Id. at 1328 (quoting Griggs, 459 U.S. at 58). We concluded that when a trial court reduces its oral findings to writing and cites relevant case law, it does not lack jurisdiction to do so because the losing party filed a notice of appeal after the oral hearing but before the entry of the written order. Id. Such a subsequent order aids appellate review. Accordingly, we conclude that the bankruptcy court had jurisdiction to enter Removal Order II and the Final Judgment.

The Trustee also argued that the debtor did not have standing to move for removal because he did not have a pecuniary interest in the estate.  The Court noted that the question was also one of first impression in the Circuit, but that the Court did not have to decide it -

The statute governing the removal of a trustee does not require that a “party in interest” request the removal. 11 U.S.C § 324. It reads, “The court, after notice and a hearing, may remove a trustee, other than the United States trustee, or an examiner, for cause.” Id. The statute’s language does not restrict the court’s ability to remove a trustee to only those instances in which specific parties move  for removal. See Morgan v. Cast, 375 B.R. 838, 848 (BAP 8th Cir. 2007) (concluding that lying under oath provides cause for sua sponte removal). We conclude that § 324 authorizes the bankruptcy judge to remove the trustee sua sponte when, after notice and a hearing, the judge finds that the trustee had lied under oath. 

 In re Zimmerman, No. 06-15151, 2008 WL 161423 (11th Cir. Jan. 18, 2008).  The background facts are summarized by the Court as follows:

Zimmerman filed an adversary proceeding in his 2004 bankruptcy proceeding seeking a determination that his federal income tax liabilities for the years 1977 through 1979 would be dischargeable in the 2004 bankruptcy proceedings. ... For two of the tax years at issue, Zimmerman failed to file timely his returns; for one year he filed timely but claimed -- incorrectly -- that no tax was due. The 1977 through 1979 tax liabilities that Zimmerman seeks to discharge arose when the IRS disallowed tax shelter deductions claimed on those returns.

In 1996, Zimmerman petitioned for bankruptcy protection under Chapter 7 ... At that time, no outstanding  tax liability was listed for tax years 1977 - 1979, and no such liability had been assessed. Upon completion of an audit in 1997, IRS disallowance of tax shelter deductions claimed by Zimmerman on his 1977, 1978 and 1979 returns resulted in a significant understatement of income.

Debtor filed his present bankruptcy case in 2004, along with an adversary proceeding challenging the dischargeability of the taxes. The Court rejected the debtor's argument that no tax was due because it was discharged in his earlier bankruptcy case.

As an initial matter, we note that Zimmerman -- in the complaint he filed to
determine dischargeability -- acknowledged that the 1977 through 1979 taxes were
owed. Also, Zimmerman stipulated to entry of the bankruptcy court’s pretrial
order: an order which stated that he owed the taxes resulting from the
Assessment. So, we reject Zimmerman’s attempt to challenge the underlying tax
liability with his claim that the 1996 bankruptcy proceeding discharged the tax
liability resulting from the Assessment in 1997.

The Court noted that "mere nonpayment of taxes, without more, does not render a tax debt nondischargeable; but affirmative acts constituting a willful attempt to evade or defeat the collection of taxes will result in nondischargeability under section 523(a)(1)(C)." That standard is met where (1) the  debtor had a duty under the law, (2) the debtor knew he had that duty, and (3) the debtor voluntarily and intentionally violated that duty.

The bankruptcy court’s findings of fact chronicle Zimmerman’s (1) repeated failures to file timely tax returns;2 (2) repeated instances in which returns were only secured through collection;3 (3) multiple petitions for bankruptcy collection (some of which failed to include schedules of assets);4 (4) enjoyment of significant income and assets which could have paid delinquent taxes but instead were used to finance the lifestyle of Zimmerman and Patricia Montifinese, Zimmerman’s longtime girlfriend; (5) repeated intra-family asset transfers and asset transfers to Montifinese; and, more specifically, (6) asset transfers in close temporal proximity to government tax collection attempts. The bankruptcy court concluded that the tax liability from the Assessment should be excepted from discharge because Zimmerman engaged in substantial abuse of the bankruptcy system, attempted to hide assets from creditors, and willfully attempted to defeat or evade his tax
obligations.

 The Court found no error in the lower court rulings finding the tax debts nondischargeable.

A couple recent 11th Circuit Bankruptcy cases --

Mennen v. Onkyo Corp., No. 06-12050, 2007 WL 2669484 (11th Cir. September 13, 2007).   Property of the Estate.  Claims of trust rightfully belong to Bankruptcy estate, where creditor trust could not how distinct and individual damage.

In re Cotton, No. 07-10408, 2007 WL 2967920 (October 12, 2007). Jurisdiction.  Debtor's appeal of Bankruptcy Court Order denying her motion to dismiss Chapter 13 case, and converting to a Chapter 7, divested the Bankruptcy Court of jurisdiction to dismiss the Chapter 7 case.  

By: Scott B. Riddle, Esq.

In In re Piccadilly Cafeterias, Inc., No. 06-13759 (pdf),  484F.3d 1299 (11th Cir. April 18, 2007), the debtor sold substantially all of its assets pursuant to §363, prior to a confirmation of a Chapter 11 plan.  In its §363 motion, and again in its plan, the debtor requested an exemption from stamp taxes on the sale pursuant to §1146(c) (which has now been re-designated as §1146(a)).  The Florida Department of Revenue objected, lost in both the Bankruptcy and District Courts, and appealed to the Eleventh Circuit.

The statute provides the following -

§ 1146. Special tax provisions

(a) The issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax.

(emphasis added).  Notwithstanding the fact that the §363 sale was not a sale "under a confirmed plan," the Court affirmed the District Court ruling and held that a §363 sale may be eligible for the §1146(a) tax exemption. 

In our view, the better reasoned approach to § 1146(c) is found in Jacoby-Bender and T.H. Orlando, as the better reading of “under a plan confirmed” looks not to the timing of the transfers, but to the necessity of the transfers to the consummation of a confirmed plan of reorganization. See Hechinger, 335 F.3d at 261 (Nygaard, J., dissenting).

First, the plain language of § 1146(c) is ambiguous, as the statute can plausibly be read either as describing eligible transfers to include transfers “under a plan confirmed” regardless of when the plan is confirmed, or, as the DOR argues, imposing a temporal restriction on when the confirmation of the plan must occur. Second, when Congress wanted to place a temporal restriction in the Bankruptcy Code it did so expressly. .... Next, although, as a general rule, grants of tax exemptions are narrowly construed, it is equally true that “we are not to abrogate the purpose of the exemption through too narrow an application.” Hechinger, 335 F.3d at 259 (Nygaard, J., dissenting). This is especially so in light of the principle that a remedial statute such as the Bankruptcy Code should be liberally construed. ... Finally, the strict temporal construction of § 1146(c) articulated by the Third and Fourth Circuits ignores the practical realities of Chapter 11 reorganization cases, as even transfers contemplated in a plan of reorganization will not qualify for the tax exemption unless they occur after the order confirming a plan is entered. But it is just as probable that a debtor may need to close a sale as a condition precedent to the parties' willingness to proceed with confirmation of a plan as it is for the parties to agree on the terms of a plan, obtain confirmation, and then determine what the sale will bring. See In re Beulah Church of God In Christ Jesus, Inc., 316 B.R. 41, 50 (Bankr.S.D.N.Y.2004). For these reasons, we decline to follow the strict temporal interpretation adopted by the Third and Fourth Circuits. Instead, we hold that § 1146(c)'s tax exemption may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan.

In order to clarify the "ambiguous" phrase, "under a plan confirmed under section 1129 of this title,"  the United States Supreme Court granted the DOR's cert. Petition.  Steve Jakubowski describes the issues in the Bankruptcy Litigation Blog -

At first blush, the answer seems obvious given that Section 1146 on its face is limited to transfers "under a plan confirmed under section 1129 of this title." But just to show you how creative bankruptcy lawyers—and judges—can get, the Eleventh Circuit agreed with the argument that the Section 1146 exemption "may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan." ....

One small problem for the respondents, and Bingham McCutcheon's Eric Brunstad, who represents the respondent-debtor; that is, Hechinger was decided by none other than then-Judge, now-Justice Alito, the author of the two latest bankruptcy opinions decided by the Supreme Court (i.e., Travelers & Marrama). I think that it's fair to say that reversal of the Eleventh Circuit's decision is about as safe a bet as you'll find

Educational Credit Management Corp. v. Mosley, No. 06-10349 (11th Cir. August 9, 2007).  

The Eleventh Circuit upheld the Bankruptcy Court's (Judge Mullins, ND Ga) order discharging the debtor's student loans where the debtor had a history of mental illness, physical limitations preventing some work, and a long history of living under the poverty line.

The Court, following the recent case of Barrett v. Educational Credit Management Corp., 487 F.3d 353 (6th Cir. 2007),  rejected the creditor's argument that the debtor was required to present independent medical evidence of his condition.

United States v. Jacobs (In re Jacobs), No. 06-15333, 2007 U.S. App. LEXIS 15542 (11th Cir. June 29, 2007).   Debtor was a lawyer with significant income tax debt related to his law practice.  The opinion discusses several instances of the debtor's somewhat lavish lifestyle, transfers to his spouse, placing assets in his spouse's name, several vehicles, etc.

Nevertheless, the Bankruptcy Court found the tax debt dischargeable -

After a bench trial, the Bankruptcy Court determined that Mr. Jacobs’s tax liability was not excepted from discharge under § 523(a)(1)(C). (Bankr. Ct. Op. 8- 10.) It reasoned that the Government had not carried its burden of proof as to § 523(a)(1)(C)’s “willfullness” element, because Mr. Jacobs “ha[d] portrayed a remorseful debtor with a white heart,” “filed accurate returns each year [for the tax years in issue], voluntarily assessed himself with such tax debt, and paid, during the years 1990 through 1998, approximately $200,000 in income taxes to the government.” Id. at 8. The Bankruptcy Court further reasoned that § 523(a)(1)(C)’s “conduct” element, which the Bankruptcy Court stated required “evidence of actual evasion,” was not satisfied, because Mr. Jacobs’s payments to family members and charities instead of the IRS during the years in question “d[id] not rise to the level of willful evasion.” Id. at 10. ... The Government timely  appealed to the District Court.

The District Court reversed -

By: Scott B. Riddle, Esq.

Empire Marble and Granite v. Antonio Adinolfi (In re Rosacometta, S.R.L)., No. 06-14003, 2007 U.S. App. LEXIS 15720 (11th Cir. June 29, 2007).  Creditors obtained a state court judgment against an Italian company.  After the Italian company filed a bankruptcy action in Italy, the debtor's representative filed an ancillary bankruptcy proceeding in the United States Bankruptcy Court and asked the court to enjoin  the creditors from enforcing the claim against the debtor except in the Italian Bankruptcy court, pursuant to 11 U.S.C. § 304 (now 11 U.S.C. §1501, et seq.). 

The Bankruptcy Court granted the injunction. The Eleventh Circuit affirmed --

The bankruptcy court did not abuse its discretion in weighing the § 304(c) factors and granting § 304(b) relief. Before exercising the § 304(b) relief, the bankruptcy court was required by the Bankruptcy Code to consider § 304(c) factors, including the (1) just treatment of all claim holders in the estate; (2) protection of United States claim holders against prejudice and inconvenience in foreign bankruptcy proceeding; (3) prevention of preferential or fraudulent dispositions of the estate; (4) distribution of the estate substantially in accordance with United States bankruptcy code; and (5) comity. While comity is the ultimate consideration, it does not automatically override the other statutory factors. Treco, 240 F.3d at 156. Comity should not be withheld unless it is against the interests of the United States. Cunard S.S. Co. Ltd. v. Salen Reefer Services AB, 773 F.2d 452, 457 (2d Cir. 1985).

In re Dr. Gail Van Diepen, P.A., No. 06-14517, 2007 U.S. App. LEXIS 12796 (11th Cir. May 31, 2007).

After judgments were entered against the debtor entity, the principal closed the debtor and started a new company to provide health care services.  Assets of the debtor were transferred to the new company.  After the debtor went into Bankrutcy, the trustee evaluated claims that the debtor's estate may have against the new company, the principal and other non-debtors.  The trustee did so, and negotiated a settlement with those parties. 

The proposed settlement enjoined the judgment creditors from pursuing or prosecuting actions against the debtor and non-debtor entities.  The judgment creditors objected. 

The Eleventh Circuit upheld the Bankruptcy Court's approval of the settlement, and the District Court's affirmance -

[The Judgment Creditor] cites In re Transit Group Inc., 286 B.R. 811, 817 (Bankr. M.D. Fla. 2002) for the proposition that the release of third party non-debtors in bankruptcy cases is the exception and should be done only under "unusual circumstances." However, as the district court correctly noted, In re Transit is inapplicable to this case. In re Transit dealt with a confirmation of a reorganization plan under Chapter 11, not a liquidation under Chapter 7. Id. at 814. In a Chapter 11 case, upon the confirmation of a plan of reorganization, the debts of the bankrupt debtor are no longer subject to collection and are discharged. Id. at 815. In In re Transit, the debtor sought to expand the scope of the discharge to include non-debtor third parties. The bankruptcy court noted that a problem with releasing third party non-debtors liability in approving a reorganization plan of the debtor is that under 11 U.S.C. § 524(e) the "discharge of the debt of debtor does not affect the liability of any other entity on . . . such debt." Id. The court stated that since section 524(e) does not provide for a release of third parties from liability, a release of non-debtors can only be done in unusual circumstances. Id. at 817.

Unlike a situation in a case involving the reorganization plan of a debtor, the settlement agreement in this case does not discharge the P.A.'s debts. To the contrary, the agreement supplies the bankrupt estate with additional funds to pay the P.A.'s creditors. Furthermore, unlike In re Transit, the Trustee had the sole authority to prosecute, and therefore settle, the fraudulent conveyance claims against Van Diepen and OIM. Therefore, the factors that the bankruptcy court discussed in In re Transit as concerning a release of a third party non-debtor's liability to creditors under a proposed reorganization plan are not applicable to the circumstances in this case.

Pavlov v. Ingles Market, Inc., No. 06-16011, 2007 U.S. App. LEXIS 13555 (11th Cir. June 6, 2007).  Pro se debtors could not pursue state law claims that should have been, but were not, disclosed as an asset in their prior bankruptcy case. 

By; Scott B. Riddle, Esq.

In Florida Department of Revenue v. Omine, No. 06-11655 (11th Cir. May 11, 2007), the Florida Department of Revenue violated the automatic stay numerous times, including after the Bankruptcy Court had already sanctioned them for prior violations.  The DOR argued that sovereign immunity precluded the relief requested by the debtor, which included attorneys fees, costs and damages.  The debtor, based on the United States Supreme Court's decision in Central Virginia Community College v. Katz, disagreed.

The Eleventh Circuit, overruling prior precedent, held that sovereign immunity did not apply --

 [W]e agree with the district court that, pursuant to Katz, actions to force a creditor to honor the automatic stay are the types of “proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy court[],” and that, therefore, the Florida DOR may not assert sovereign immunity here. See 546 U.S. at ___, 126 S. Ct. at 1005. And while the Florida DOR insists that the Katz decision should be read narrowly, the Court’s broad language makes clear that “the jurisdiction of courts adjudicating rights in the bankrupt estate include[s] the power to issue compulsory orders to facilitate the administration and distribution of the res.” Id. at ___, 126 S. Ct. at 996. In fact, in holding that the States could not assert their sovereign immunity to defeat preference recovery proceedings, the Court in Katz did not limit its decision by singling out any other specific types of ancillary bankruptcy proceedings that remain subject to the States’ Eleventh Amendment immunity. We hold that the bankruptcy court’s ancillary order to enforce an automatic stay, which is one of the fundamental debtor protections provided by the bankruptcy laws, operates free and clear of the Florida DOR’s claim of sovereign immunity.

It is well settled that a panel of this court may depart from circuit precedent based on an intervening opinion of the Supreme Court that undermines the prior precedent. United States v. Dennis, 786 F.2d 1029, 1049 (11th Cir. 1986). As a result of the Supreme Court’s opinion in Katz, it is necessary to point out that our pre-Katz reasoning of In re Crow, 394 F.3d at 922, invalidating § 106(a), in part, on the basis that Congress may not abrogate state sovereign immunity by legislation passed pursuant to its Article I powers, is no longer good law. See 546 U.S. at ___, 126 S. Ct. at 996 (acknowledging that statements in Seminole Tribe of
Florida v. Florida, 517 U.S. 44, 72, 116 S. Ct. 1114, 1132 (1996), reflected an erroneous assumption that its holding that “Article I cannot be used to circumvent  the constitutional limitations placed upon federal jurisdiction,” would apply to the  Bankruptcy Clause).

Moreover, as we shall discuss, even without Katz’s pronouncement  regarding state abrogation of sovereign immunity under the Bankruptcy Clause, the Florida DOR filed a proof of claim in this case, which raises issues of waiver of sovereign immunity

The Court also found that the damages were limited by the application of 11 U.S.C. § 106 -

We agree with the Florida DOR that based on the plain text of 11 U.S.C. § 106(a)(3), the award limitations found in § 106(a)(3) are applicable in this case. Section 106(a)(3) clearly states that “[t]he court may issue against a governmental  unit an order . . . under such sections.” The phrase “such sections” in § 106(a)(3)  unambiguously refers to the list of sections in § 106(a)(1), which includes an order pursuant to § 362, the section that addresses the automatic stay, and § 105, the section that addresses the power of the court to issue orders necessary to carry out  the provisions of the Bankruptcy Code. A plain reading of § 106(a)(3) requires that “such order or judgment for costs or fees under this title” shall be consistent with the provisions and limitations of 28 U.S.C. § 2412(d)(2)(A) and may not include an award of punitive damages.

By: Scott B. Riddle, Esq.

Williford v. Funderburke, et al, No. 06-15119, 2007 App. LEXIS 5803 (11th Cir. March 13, 2007).  The Bankruptcy Court entered a final order on summary judgment, in favor of the defendants, in an adversary proceeding, but it was undisputed that the proceding was a non-core proceeding, and the parties had not consented to the district court referring the case to the Bankruptcy Court for final determination.  The Order was appealed, and the District Court affirmed.

The Eleventh Circuit held that the Bankruptcy Court erred in entering a final order in a non-core proceeding. However, since the District Court reviewed the order de novo pursuant to 28 U.S.C. §157(c)(1) the Bankruptcy Court's memorandum would be treated as a report and recommendation and the District Court's order would be treated as a final order adopting the report and recommendation. 

The Court also held that the plaintiff had not stated a claim for the reasons stated in the Bankruptcy Court's memorandum (treated as a report and recommendation), and affirmed.

By: Scott B. Riddle, Esq.

In The Whiting-Turner Contracting Co. v. Electric Machinery Enterprises, Inc. (In re Electric Machinery Enterprises, Inc.), No. 06-13733 (11th Cir. February 23, 2007) (appeal from MD Fla), the debtor was a sub-contractor that performed services for Whiting-Turner, the general contractor of a project called "Suess Landing."  A dispute arose on the project, leading to the execution of a tolling agreement between Debtor and Whiting-Turner, for the purpose of allowing Whiting-Turner the opportunity to seek damages against  the owner.  The tolling agreement contained an arbitration clause.  Debtor subsequently filed a Chapter 11 petition and filed an adversary against Whiting-Turner to recover payment from Whiting-Turner for services performed on the project. 

The bankruptcy court denied [Debtor] EME's motion for summary judgment and found that this case is not a “turnover” action because it involves a disputed and unliquidated claim. The bankruptcy court also found that this case presents a constructive trust situation, because Whiting-Turner collected money in settlement for itself and for EME, and if Whiting-Turner does not distribute the proportion of the settlement owed to EME, Whiting-Turner will be unjustly enriched. However, the bankruptcy court acknowledged that the amount of money that Whiting-Turner owes to EME is a “hotly disputed” factual issue. Having determined that a constructive trust existed, the bankruptcy court determined that it had jurisdiction over the res of the constructive trust, and that the determination of the amount of res in the constructive trust was a “core” bankruptcy proceeding. Therefore, the bankruptcy court found that arbitration under these circumstances was not appropriate and denied Whiting-Turner's motion to compel arbitration. The district court affirmed, and Whiting-Turner appealed.

 The Eleventh Circuit reversed.  It was undisputed that the Arbitration Clause in the tolling agreement was valid and enforceable --

By: Scott B. Riddle, Esq.

Welt v. MJO Holdings, Inc. (In re Happy Hocker Pawn Shop, Inc.), No. 05-16182, 2006 U.S. App. LEXIS 31639 (11th Cir. December 21, 2006).

Prior to filing bankruptcy, the debtor pawn shop had transferred its inventory to the plaintiff in satisfaction of a debt, and the plaintiff thereafter also operated a pawn shop.  After the debtor filed a Chapter 7, and listed as assets personal property located at the pawn shop, the Chapter 7 Trustee mistakenly shut down the plaintiff's business.  Plaintiff filed an adversary seeking a declaratory judgment that the debtor had transferred its assets and had no further interest in the shop, and the business was re-opened a few days later.  The plaintiff and Trustee then entered into an agreed-upon final judgment in the adversary, which was not appealed, which concluded that the inventory had been transferred to the plaintiff prior to debtor's Bankruptcy filing.

Plaintiff then  filed a Motion for Leave to Sue Trustee in State Court for various tort claims, including trespass, conversion and tortious interference with contract.  The Trustee opposed the Motion, arguing that his actions were within the scope of his duties and he should have qualified immunity.  He alternatively argued that the proceeding should be pursued in Bankruptcy Court as it was either a core proceeding because it was within the scope of his duties, or  "related to" the underlying Bankruptcy case. The Bankruptcy Court granted the plaintiff's motion and the District Court affirmed.

The Eleventh Circuit affirmed.  The proposed complaint was not a core proceeding, as it involves property (the inventory that had been transferred to the plaintiff pre-petition) that was never property of the estate. The complaint was also based entirely on state law claims, and Title 11 does not give a Trustee the right to seize property of a non-debtor.  The proposed complaint also does not invoke "related to" jurisdiction because the Trustee was acting outside the scope of his authority, and the damages sought would not come out of the debtor's estate. Alternatively, if the Trustee prevailed, the estate would not derive any benefit.

US v. Archibald, No. 06-11882 (11th Cir. December 6, 2006).  Debtors filed a joint Chapter 13 petition, and in the schedules disclosed their 100% ownership of the stock of Rooster's Barnyard, Inc.  They valued the stock at $2,000.  In fact, the corporation operated as an adult club in Atlanta that had no debt and was worth approximately $4 million.  On motion from a creditor, the Bankruptcy case was dismiss as being filed in bad faith and because the debtors did not qualify for a Chapter 13. 

The case was turned over to the FBI for investigation of Bankruptcy fraud, and debtors came up with various reasons for their valuation of the Club in their schedules.  They were prosecuted and Debtor was sentenced to 60 months prison.  The Eleventh Circuit affirmed, finding that even though the Bankruptcy case was dismissed, creditors could have been harmed by the concealment of the asset. 

Again, I find it easier to liberally quote from the opinion rather than to attempt to summarize.

Fibreboard Corp. v. Celotex Corp. (In re Celotex Corp.), No. 05-16039 (11th Cir. December 20, 2006).

 The basic facts are as follows -

In 1989, Celotex and Fibreboard were found jointly and severally liable for several asbestos personal injury cases. In 1990, Celotex filed a petition for Chapter 11 bankruptcy. To protect its assets in order to satisfy the judgments, Celotex filed supercedeas bonds on the appeals of the adverse judgments. Ultimately, Fibreboard paid the entire amount of the joint and several liability judgments and the judgment creditors released their claims against Fibreboard and assigned their claims against Celotex to Fibreboard.

Fibreboard asserted a subrogation claim in the bankruptcy court to recover Celotex’s share of the joint and several liability judgments payments from the supersedeas bonds. The bankruptcy court granted summary judgment to Celotex after finding that under both the Bankruptcy Code and state law, Fibreboard was not entitled to subrogation because it was primarily liable for the judgments. The district court affirmed the grant of summary judgment for Celotex, and Fibreboard appealed.

In re Bruce Lee Jennings, No. 05-15212 (11th Cir. October 4, 2006). 

Eleven related debtors filed Chapter 11 petitions in the Middle District of Florida and the cases were administratively consolidated.  The Debtors' Law Firm filed a single application for employment pursuant to Rule 2014, purportedly revealing all of its connections with the Debtors.  The application was approved.  However, a creditor subsequently moved to disqualify the Law Firm based upon its alleged failure to comply with Rule 2014 and the existence of actual and potential conflicts of interest.  The Bankruptcy Court disqualified the Law Firm, denied all fees, and required disgorgement of prepetition fees.  The District Court affirmed, and the Firm appealed.

The Eleventh Circuit affirmed.  It is the responsibility of the Law Firm to fully comply with Rule 2014 and disclose all relevant facts and connections with the debtors.  Bankruptcy Courts are not required to "hunt around and ferret through" documents in search of the basic disclosures required by Rule 2014.   

Further, the court found that the conflicts of interest supported disqualification.  An actual conflict existed where one debtor depleted assets despite another debtor's security interest in the assets.  This forced the firm to assert "two diametrically opposed goals."  One of the debtors also wiped away a $500,000 loan to another debtor with no money changing hands, and there were real estate transactions between the debtors that may have produced administrative claims.

The Eleventh Circuit Court of Appeals now has RSS feeds for its published cases.  You can go to this page to set up the feed on your news reader (or the latest version of Explorer). 

Laurent v. Herkert, No. 05-17173, 2006 WL 2429960 (11th Cir. August 22, 2006)

District courts may grant leave to hear appeals of interlocutory orders entered by a bankruptcy judge. See 28 U.S.C. § 158(a). “Because [28 U.S.C. § 158(a) ] does not provide the district court any criteria for determining whether to exercise their discretionary authority to grant leave to appeal, the court[s] look[ ] to 28 U.S.C. § 1292(b) which governs discretionary interlocutory appeals from district courts to the court of appeals.” In re Charter Co., 778 F.2d 617, 620 n. 5 (11th Cir.1985). In order to obtain leave to proceed under 28 U.S.C. § 1292(b), a party must demonstrate that: (1) the order presents a controlling question of law; (2) over which there is a substantial ground for difference of opinion among courts; and (3) the immediate resolution of the issue would materially advance the ultimate termination of the litigation. See 28 U.S.C. § 1292(b).

Here, the bankruptcy court's order granting the Trustee's motion to redirect payment and ordering that any remaining funds, including those returned from Bank Atlantic, be refunded to Laurent, did not meet the criteria warranting leave to file an interlocutory appeal. The order did not present any issue of controlling law over which there is disagreement among courts, but rather, it resolved the practical issue concerning to whom the Trustee should pay the funds she still held. Moreover, the order does not materially advance the outcome of the litigation. At the time of the order, the bankruptcy court had closed the case and discharged the Trustee, and Bank Atlantic, for whom the contested funds had been ear-marked, had rejected the funds.

Additional facts found in a prior opinion, Laurent v. Herkert, No. 04-16182, 149 F.App'x. 933 (August 22, 2005). 

This is a lengthy (50 page) opinion, so I will try to briefly summarize the issues addressed by the court.  Note that much of the facts and findings deal with the Bank's failure to respond to several court orders, and the Bankruptcy Court's sanctions for that bad faith conduct.  For brevity, I have omitted discussion of those issues, although the Bank's conduct ended up costing it quite a bit of money. The opinion is linked below, and should be reviewed from all parties to trust relationships.

In re Sunshine Jr. Stores, Inc., Bank of New York v. Sunshine Jr. Stores, Nos. 04-16650, 04-16651, 05-10031 (11th Cir. July 18, 2006).

Debtor filed a Chapter 11 in December 1992.  As part of its reorganization Plan, it executed a Trust Indenture Agreement appointing NationsBank as Trustee. The purpose of the trust was to administer the promissory notes and liens (on Debtor's property) distributed to the general unsecured creditors under the Plan (avoiding the administrative problems of dealing with many individual noteholders).  The Trust Agreement also permitted the creation of a separate trust in which the Debtor could deposit funds sufficient to call and pay the notes in advance of maturity (the "prepayment funds.").

In October 1995, a Purchaser acquired the Debtor and its assets, including the collateral securing the Notes, and Debtor called the Notes and deposited prepayment funds (approx. $1 million) with NationsBank. In December 1995, Bank of New York (BONY) acquired the corporate trust division of NationsBank and the unclaimed funds were transferred to BONY, which continued to disburse the funds to noteholders tendering their Notes.

Apparently, between 1995 and 2000, BONY continued to pay the tendered Notes, and allegedly did not properly respond to the Debtor's requests for an accurate accounting.  In April 2000,  the Debtor moved the Bankruptcy Court for an order requiring an accounting and setting procedures for paying notes of persons who have lost their Notes.  This initiated a period of time in which BONY failed to comply with court orders, appear at hearings, or provide documents and accounting to the Debtor (discussed in great detail in the opinion).  This led to the Bankruptcy Court striking the Bank's opposition to the Debtor's request for interest on the trust funds, and the rate of interest applied, and ordering the Bank to pay interest and attorneys fees.

Since this is rather long-winded summary of the 29 page opinion, and the facts are rather convoluted, reading the opinion is important.  The Court's question presented is the following: "Under what circumstances will a creditor be barred from later bringing an action against a co-creditor based upon state law claims if, during the pendency of a bankruptcy, it failed to raise such claims."

In re Atlanta Retail, Inc. (fka Wolf Camera, Inc.); Eastman Kodak Company v. Atlanta Retail Inc., No 05-12327 (11th Cir. July 18, 2006).

Prior to the filing of Debtor's Chapter 11 petition, Kodak and Wachovia were both lenders of the Debtor (operating as Wolf Camera, a retailer with numerous locations).  In September 1998, Kodak and Wachovia executed  a Subordination Agreement under which Kodak's loans  were subordinated to Wolf's other secured creditors, including Wachovia.  They also executed a separate Intercreditor Agreement whereby each agreed to notify the other of occurrences "which may significantly affect the other Secured Creditor with regard to the ability of (Wolf) to meet its obligations.  In 1999, Kodak and Wolf began discussing a new $30 million loan (which would also be subordinate to Wachovia) to be used for the expansion of Wolf's business.  In March 2000, Kodak made the loan which was expressly conditioned upon its use for expanding the business. 

The crux of the current dispute is Kodak's allegations that Wolf was nearing a breach of its other obligations, Wachovia was aware of the imminent breach and Kodak's proposed loan, and Wachovia withheld the information from Kodak so that Kodak would lend Wolf the money and that the funds would be used to pay Wachovia's debt.  In fact, the Kodak loan proceeds were used to pay off some of Wolf's debts and none of the proceeds were used for business expansion.

Wolf filed a Chapter 11 petition in June 2001 and requested DIP financing from Wachovia and other lenders, of $10 million.  Kodak did not object, and the request was approved.  In August 2001, Wolf filed a motion seeking approval to sell substantially all of its assets to Ritz Camera, and with Wachovia, filed a Joint Motion to Approve Stipulation with Respect to Distribution of Proceeds  ("Stipulation Motion").  Kodak only opposed the Sale Motion, arguing that the sale should not be free and clear of its liens.  The Bankruptcy Court denied the objection, finding that Kodak waived its right to object in the Intercreditor Agreement, and that Kodak's claim was essentially valueless. 

Kodak then filed an action against Wachovia in the Western District of New York, alleging equitable  subordination , breach of contract, fraud and tortuous interference, all based upon Kodak's allegations that it was fraudulently induced to make the $30 million loan.  In the meantime, back in Georgia, the debtor and lenders requested approval to settle an adversary filed by unsecured creditors, wherein the validity of certain liens were challenged.  Kodak objected, but only to the extent the language of the Stipulation could be construed as barring any claims against the pre-petition lenders held by third parties other than the debtor.  Kodak did not raise its allegations against Wachovia, although the debtor argued that all claims of subordination needed to be addressed to make the settlement enforceable.  The settlement was approved. 

In Chauncey v. Dzikowski, No. 05-12543 (11th Cir. July 7, 2006), debtor, prior to filing for bankruptcy, received a personal injury settlement and had the proceeds sent directly to her mortgagee.  This payment was applied to her principal and significantly increased the equity in her home.  The debtor did not dispute that her intent was to protect, under Florida law, the equity in her homestead from unsecured creditors.  There was no dispute that the debtor delayed her bankruptcy filing until after the transfer to the mortgagee was concluded.

The trustee requested that the Bankruptcy Court grant an equitable lien on the real property as a result of the debtor's conduct, and the Court granted the lien. The District Court affirmed and the debtor appealed.

The Eleventh Circuit reversed with respect to the lien.  The debtor did not obtain the funds by fraud or wrongdoing, and while her move was a blatant attempt to deceive her creditors and made in bad faith, it did not rise to the level of fraud or egregious behavior, as required for the imposition of an equitable lien under Florida law.

Bracewell v. Kelley,  No. 05-11951  (11th Cir. June 30, 2006).  Debtor filed a Chapter 12 petition on May 29, 2002, and he converted to a Chapter 7 on January 2, 2003.  After the conversion date, Congress passed the Agricultural Assistance Act of 2003,  which provided for monetary assistance to farmers who had suffered crop losses in 2001 or 2002 due to weather related disasters or other emergency conditions.  In January 2004, the debtor applied for a payment as a result of losses he suffered in 2001.  He subsequently received a payment of $41,566 and the trustee claimed the payment should be property of the estate.   The Bankruptcy Court held the payments were estate property pursuant to §541(a)(1), and the District Court held the payment was not property of the estate. 

The Eleventh Circuit affirmed.  Pursuant to §1207(a)(1), the estate includes property acquired by a Chapter 12 debtor after the filing of the Chapter 12 petition, up to the date the case is closed, dismissed or converted.  However, the legislation authorizing the payment was not passed until after the case was converted, and therefore, not until the enactment did the debtor's hope for payment become an interest cognizable under §541(a)(1). 

Note that the bulk of the opinion is a response to the dissent, wherein Justice Pryor believed the payment was property of the estate either because it as a contingent interest in disaster relief created by a reduced yield, or proceeds from property of the estate. 

This case provides a lesson that debtors still need to disclose all claims and potential claims in their schedules, or amend as soon as possible, AND creditors also need to be diligent.


In Ajaka v. BrooksAmerica Mortgage Corp., 2006 U.S. App. LEXIS 16303, No. 05-12105 (11th Cir. June 29, 2006), the issue was whether the debtor was judicially estopped from asserting Truth-in-Lending claims against the lender  where the claim was not  disclosed on his bankruptcy schedules.

Debtor obtained a loan secured by his home in 2000.  In 2002, he and his spouse filed a Chapter 13 petition and plan, which was subsequently confirmed.  It is undisputed that when the petition was filed and the plan confirmed, debtor was not aware of a potential TILA claim.  In early 2003, Debtor learned through non-bankruptcy counsel that he may have a TILA claim and that his schedules may have to be amended to reflect the claim.  His bankruptcy attorney was informed of the need to amend the schedules in March 2003 but bankruptcy counsel did not immediately act.

In April 2003, debtor (through non-bankruptcy counsel) filed a TILA action in District Court. Ten days later, the lender filed a proceeding in Bankruptcy Court seeking, inter alia, a declaratory judgment that debtor was judicially estopped from asserting the TILA claim.  (It is unclear how the Bankruptcy Court would have jurisdiction to do this).  As of the date of this action, no creditor had objected to the debtor's confirmed plan within the 180 period set forth in 11 U.S.C. 1330(a).  On June 20, 2003, after the expiration of the 180 day period, debtors schedules were amended to include the TILA claims as an asset.

The District Court subsequently granted summary judgment to the lender based upon the
failure of the debtor to list the claim as an asset and the debtor appealed.

The Eleventh Circuit reversed.

In Guerra v. Fernandez-Rocha, 2006 U.S. App. LEXIS 14339 (11th Cir. June 12, 2006), the plaintiffs had obtained a judgment against the debtor physician for negligence in the death of their newborn baby.  The physician subsequently filed a bankruptcy petition and the plaintiff filed an adversary contending that the debt should be excepted from discharge pursuant to §523(a)(4) (fraud or defalcation while acting in a fiduciary capacity).

The plaintiffs' claim was based upon the debtor's failure to comply with Florida's Financial Responsibility Act, which requires physicians to maintain malpractice insurance, a letter of credit, or maintain an escrow account sufficient to pay a claim of $250,000.  Fla. Stat. § 458.320(1).  Plaintiffs claimed that this statute created a fiduciary duty to the extent of the fund required to be maintained.  The Bankruptcy Court dismissed the proceeding and the District Court affirmed.

The Eleventh Circuit affirmed.  The statute was a regulatory statute, and did not create a fiduciary duty or technical trust between physician and patient.  Moreover, the statute did not create a debt for purposes of §523(a)(4), as the statute excepts debts based on "defalcation" and not negligence.  The plaintiffs' debt was based upon negligence and malpractice and the nature of that debt was not altered by the existence of the state statute.

In Jones v. Clayton County, 2006 U.S.App. 13925 (11th Cir. June 7, 2006), the plaintiff filed a racial discrimination claim against Clayton County. However, as the plaintiff had filed a Chapter 7 petition nine months before filing the lawsuit, the claims were property of the bankruptcy estate.  The plaintiff, who did not disclose the claim in his schedules, did not have standing to pursue the action. 

In Mays v. Chase Manhattan Mortgage Corp., 2006 U.S.App. LEXIS 13478 (May 31, 2006), the plaintiff/debtor filed an adversary in the District Court wherein he asserted claims related to bankruptcy and insurance fraud.  The events forming his causes of action occured during the course of his bankruptcy proceeding.  The District Court dismissed on the grounds that it did not have subject matter jurisdiction because the Bankruptcy Court, pursuant to the standing referral order, had exclusive jurisdiction.

The Eleventh Circuit held the District COurts holding was in error.  Pursuant to 11 U.S.C. §1334, the District Courts have original, but not exclusive, jurisdition over "related to" proceedings. Therefore, the District Court had subject matter jurisdiction over the adversary.  However, the District Court also based its dismissal upon a finding that the plaintiff did not state a claim for relief.  Because the plaintiff did not properly address this independent ground for dismissal, the District Court's order was affirmed.

In a prior entry, we discussed the case of Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards, wherein the court held that the trustee was subject to the in pari dilecti defense.

The trustee filed a Petition for Certiorari on April 14, 2006.

Update: October 2006; The US Supreme Court Denied Cert

11 U.S.C. §523(a)(7); Dischargeability of Criminal Restitution

Colton v. Verola, No. 04-16079 (11th Cir. April 20, 2006)

Debtor was found guilty of fraudulent transactions and his sentence included a state court order to pay $2,538,557.07 in restitution through the state Department of Corrections. Debtor filed an action to determine dischargeability of his debt under §523(a)(7) and the Bankruptcy Court granted summary judgment in his favor because the money collected was ultimately for the victims instead of a governmental unit. The District Court reversed and the debtor appealed.

The Eleventh Circuit affirmed. In Kelly v. Robinson, 479 U.S. 36, 50, 107 S.Ct 353, 361 (1986), the Supreme Court held that §523(a)(7) preserves from discharge "any condition a state criminal court imposes as part of a criminal sentence." Kelly was not abrogated by Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 110 S.Ct. 2126 (1990), wherein the Supreme Court held that the exception to discharge relied upon in Kelly did not extend to Chapter 13. Davenport did not question the general holding that state-imposed restitution obligations are not dischargeable under §523(a)(7). Additionally, Congress' addition of §523(a)(13) (restitution under Title 18 of the US Code) to the Code in 1994 does not support the conclusion that the meaning of §523(a)(7) was effectively changed. Finally, the fact that the restitution is ultimately for the benefit of the victims does not alter the outcome.

11 U.S.C. §330(a); Allowance and Disgorgement of Fees

In re Westwood Community Two Association, Inc., 2006 U.S.App. Lexis (11th Cir. April 12, 2006).

After ruling that the Trustee did not have the power to levy a special assessment against non-debtor homeowners to satisfy claims against the debtor, the Bankruptcy Court denied fees and orderd disgorgement of interim fees. The District Court affirmed and the law firm appealed.

The Circuit affirmed, holding that the law firm had no right to retain fees derived from the improper assessment and not from estate property. The law firm assumed the risk of non-payment or disgorgement of fees if the estate turned out to be insolvent. The law firm's argument that the Bankruptcy Court did not have jurisdiction to order disgorgement was meritless, as was the argument that disgorgement constituted an improper restitution award to the homeowners.

Judicial Immunity

Bush v. Washington Mutual Bank, No. 05-14907 (11th Cir. April 11, 2006)

Bankruptcy Judge entitled to judicial immunity for damages and acts committed within their judicial discretion and capacity.