Georgia Bankruptcy Blog

 Milavetz, Gallop & Milavetz, P.A. v. United States, No. 08-1119 (March 9, 2010) (click here for opinion). The majority opinion was written by Justice Sotomayor.   Justices Scalia and Thomas filed opinions concurring in part in the opinion, and the judgment.

The issue before the Court was whether Bankruptcy lawyers were "debt relief agencies" as defined by 11 U.S.C. §101(12A) (added in the BAPCPA in 2005).  The BAPCPA amendments "prohibit such "agencies"  from “advis[ing] an assisted person . . . to incur more debt in contemplation of [filing for bankruptcy] . . . .” §526(a)(4). It also requires them to disclose in their advertisements for certain services that the services are with respect to or may involve bankruptcy relief, §§528(a)(3), (b)(2)(A), and to identify themselves as debt relief agencies, §§528(a)(4), (b)(2)(B)."

The plaintiff lawyers argued that they were not "debt relief agencies" and were therefore not bound by the above-stated restrictions.  The District Court agreed.  The Eighth Circuit affirmed in part and reversed in part. It held that lawyers were debt relief agencies and bound by the disclosure requirements, but §526(a)(4) was unconstitutional.

The United States Supreme Court held today that:

1) Attorneys who provide bankruptcy assistance to assisted persons are debt relief agencies under the BAPCPA.

         ... a debt relief agency is “any person who provides any bankruptcy assistance to an assisted person” in return for payment. §101(12A). By definition, “bankruptcy assistance” includes several services commonly performed by attorneys. Indeed, some forms of bankruptcy assistance, including the “provi[sion of] legal representation with respect to a case or proceeding,”§101(4A), may be provided only by attorneys... Moreover, in enumerating specific exceptions to the definition of debt relief agency, Congress gave no indication that it intended to exclude attorneys. See §§101(12A)(A)–(E). Thus, as the Government con-tends, the statutory text clearly indicates that attorneys are debt relief agencies when they provide qualifying services to assisted persons...
            But Milavetz does not contend, nor could it credibly, that only professionals expressly included in the definition are debt relief agencies. On that reading, no professional other than a bankruptcy petition preparer would qualify—an implausible reading given that the statute defines “debt relief agency” as “any person who provides any bankruptcy assistance to an assisted person . . . or who is a bankruptcy petition preparer.”

2) "Section 526(a)(4) prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose. The statute’s language, together with its purpose, makes a narrow reading of §526(a)(4) the natural one"

The Government’s sources show that the phrase “in contemplation of” bankruptcy has so commonly been associated with abusive conduct that it may readily be understood to prefigure abuse. As used in §526(a)(4), however, we think the phrase refers to a specific type of misconduct designed to manipulate the protections of the bankruptcy system... [W]e conclude that §526(a)(4) prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose... That “[n]o other solution yields as sensible a” result further persuades us of the correctness of this narrow reading.

3) Section 528's disclosure requirements are valid as applied, as it is directed at misleading commercial speech  and imposes a disclosure requirement rather than an affirmative limitation on speech.

 §528’s required disclosures are intended to combat the problem of inherently misleading commercial advertisements—specifically, the promise of debt relief without any reference to the possibility of filing for bankruptcy, which has inherent costs. Additionally, the disclosures entail only an accurate statement identifying the advertiser’s legal status and the character of the assistance provided, and they do not prevent debt relief agencies like Milavetz from conveying any additional information... Other information that Milavetz must or may include in its advertisements for bankruptcy-assistance services provides additional assurance that consumers will not misunderstand the term. The required statement that the advertiser “‘help[s] people file for bankruptcy relief’” gives meaningful context to the term “debt relief agency.” And Milavetz may further identify itself as a law firm or attorney. Section 528 also gives Milavetz flexibility to tailor the disclosures to its individual circumstances, as long as the resulting statements are “substantially similar” to the statutory examples. §§528(a)(4) and (b)(2)(B).

I find it difficult to disagree that Bankruptcy lawyers don't fall within the definition of "debt relief agencies" as defined in the Code.  Instead, it is simply one of the many BAPCPA amendments that add absolutely nothing of substance to Bankruptcy law.  I will read the opinion in more detail later and will likely update this post.

The rules for venue for bankruptcy cases are found in 28 U.S.C. § 1408, which provides the following:

Except as provided in section 1410 of this title, a case under title 11 may be commenced in the district court for the district—

(1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district; or
(2) in which there is pending a case under title 11 concerning such person’s affiliate, general partner, or partnership.
 

Typically, large corporate Chapter 11 cases have been filed in Delaware or the Southern District of New York. Often, Delaware is an option because most large corporations are incorporated in Delaware (although there have been recent efforts to remove the "state of incorporation" venue option).  Other large corporations may have been incorporated in another state, and have their principal office in another state, yet choose Delaware or New York because they have an office or facility there.  This option may no longer be available, depending on how Courts apply the recent Supreme Court opinion.

On February 23, 2010, the United States Supreme Court issued its opinion in Hertz v. Friend, No. 08-1107 (U.S. February 23, 2010) (click here for the opinion). One of the issues in the case was the location of the principle place of business for a corporation.  Justice Breyer, for a unanimous Court, stated the following:

In an effort to find a single, more uniform interpretation of the statutory phrase, we have reviewed the Courts of Appeals’ divergent and increasingly complex interpretations. Having done so, we now return to, and expand, Judge Weinfeld’s approach, as applied in the Seventh Circuit. See, e.g., Scot Typewriter Co., 170 F. Supp., at 865; Wisconsin Knife Works, 781 F. 2d, at 1282. We conclude that “principal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s “nerve center.” And in practice it should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion).

Three sets of considerations, taken together, convince us that this approach, while imperfect, is superior to other possibilities. First, the statute’s language supports the approach. The statute’s text deems a corporation a citizen of the “State where it has its principal place of business.” 28 U. S. C. §1332(c)(1). The word “place” is in the singular, not the plural. The word “principal” requires us to pick out the “main, prominent” or “leading” place. 12 Oxford English Dictionary 495 (2d ed. 1989) (def. (A)(I)(2)). Cf. Commissioner v. Soliman, 506 U. S. 168, 174 (1993) (interpreting “principal place of business” for tax purposes to require an assessment of “whether any one business location is the ‘most important, consequential, or influential’ one”). And the fact that the word “place” follows the words “State where” means that the “place” is a place within a State. It is not the State itself.

The United States Supreme Court agreed on Monday to  decide whether an individual who owes on a student loan may wipe out a portion of the debt in a bankruptcy without showing that the debt posed an “undue hardship.” United Student Aid Fund v. Espinosa (08-1134).  See the cert petition by clicking here.

In Espinosa v. United Student Aid Funds, Inc.,  530 F.3d 895; 2008 U.S. App. LEXIS 13314 (9th Cir. June 24, 2008) (click here for .pdf file,  here for the subsequent opinion, and here for the third opinion), the issue was whether a debtor could discharge a portion of his student loan debt in his Chapter 13 plan where he provided notice of the deadline for objections and the confirmation hearing, but did not file an adversary proceeding under secion 523(a)(8).  

This is the nub of Funds’s argument: To satisfy its obligations under the Bankruptcy Code, a Chapter 13 debtor usually only has to notify creditors by mail of the deadline for filing objections and when the confirmation hearing will occur, Fed. R. Bankr. P. 2002(b), as Espinosa did here. However, student loans may be discharged under Chapter 13, 11 U.S.C. § 1328(a)(2), only if the debtor can show “undue hardship,” id. § 523(a)(8), and such a showing can only be made in an adversary proceeding, Fed. R. Bankr. P. 7001(6). To initiate an adversary proceeding, a debtor must file a complaint, id. 7003, which must be served on the creditor along with a summons, id. 7004. Espinosa didn’t commence an adversary proceeding and therefore did not obtain a judicial declaration of “undue hardship.” Absent such a declaration, Funds argues, the bankruptcy court lacked authority to discharge the student loan debt by means of the Chapter 13 plan. Funds’s motion for relief from the discharge order was based on the fact that Espinosa obtained his discharge without following the statutorily-prescribed procedures for discharging student loan debt.

The Court noted that its prior precedent dictated that the Court rule against the creditor:

 Funds argues that the confirmed bankruptcy plan is void, because Funds didn’t receive service of a complaint and summons and there was no adversary proceeding to establish “undue hardship,” which the Bankruptcy Code and Rules require as a condition for discharging a student loan debt. We rejected this argument in Pardee v. Great Lakes Higher Education Corp. (In re Pardee), 193 F.3d 1083, 1086 (9th Cir. 1999).

Relying on the Tenth Circuit’s opinion in Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253, 1258 (10th Cir. 1999), overruled by Educ. Credit Mgmt. Corp. v. Mersmann (In re Mersmann), 505 F.3d 1033, 1046-47 (10th Cir. 2007) (en banc), we held that “[i]f a creditor fails to protect its interests by timely objecting to a plan or appealing the confirmation order, ‘it cannot later complain about a certain provision contained in a confirmed plan, even if such a provision is inconsistent with the Code.’ ” Pardee, 193 F.3d at 1086. In reaching this conclusion, Pardee also relied on a long line of cases, from our circuit and elsewhere, that “recognized the finality of confirmation orders even if the confirmed bankruptcy plan contains illegal provisions.” Id...

By: Scott B. Riddle, Esq.

This is not a bankruptcy case, but it will be applicable in many large bankruptcy cases involving allegations of fraud by shareholders or investors.

On January 15, 2008, the United States Supreme Court entered an important decision in Stoneridge Investment Partners v. Scientific-Atlanta (06-43) (click here to download the opinion).

There is no need to re-invent the wheel here, or wait on law review articles to analyze the case.  Lawyers and scholars have already provided a thorough analysis of the important two-day old opinion.  Here are just a few of the articles:

From the Supreme Court Blog --

The Supreme Court, in one of the most important securities law rulings in years, decided Tuesday that fraud claims are not allowed against third parties that did not directly mislead investors but were business partners with those who did. ...

Investors, the Court said, may only sue those who issued statements or otherwise took direct action that the investors had relied upon in buying or selling stock — whether that involved public statements, omissions of key facts, manipulative trading, or conduct that was itself deceptive. One impact of the decision is likely to be the scuttling of a massive $40 billion lawsuit against financial institutions growing out of the Enron scandal. The Court has a case on its docket involving that very dispute, and Tuesday’s ruling will be followed up soon, perhaps by next week, with action on that case — California Regents v. Merrill Lynch, et al. (06-1341).

...
Justice Anthony M. Kennedy, who wrote the Stoneridge ruling, said the private right to sue for securities fraud “does not reach the customer/companies because the investors did not rely upon their statements or misrepresentations.” The ruling upheld a decision by the Eighth Circuit Court rejecting claims against Scientific Atlanta, Inc., and Motorola, Inc. The investors contended that those two companies helped a giant cable TV firm, Charter Communications, inflate artificially its financial statements in order to bolster its stock’s price. The investors contended that the two companies should be treated as “primary violators,” even though they had not themselves issued any public statements to advance the alleged manipulation plot.

Prof. Larry Ribstein's Ideoblog -

I’m very sympathetic with the result. The amicus brief I signed onto argued against a 10b-5 private right of action “against a non-trading, non-speaking entity that merely ‘enables’ the commission of an alleged fraud by a public company on its shareholders.”

My problem is that, instead of focusing on the type of conduct that should get a defendant into trouble under the securities laws, the Court focused on reliance. This is a weak theory once you accept, as the Court does, that 10b-5 liability can be based on conduct rather than misstatements. Given the fraud-on-the-market presumption of reliance, it's far from clear why reliance was missing here, as the dissent pointed out. ...

Professor Stephen Bainbridge has a primer on the case on his Business Associations Blog, and summarizes the opinion in this post.  

 A few other random articles:

• Conde Nast Portfolio -  Champagne Popping Over Stoneridge Ruling
• Wall Street Journal Law Blog
• Washington Post: Corporate Fraud lawsuits Restricted: Enron and Other Shareholders Limited By Court.

By: Scott B. Riddle, Esq. (thanks to the Supreme Court Blog for the tip).

In an opinion entered today in the case of Travelers Casualty & Surety v. Pacific Gas & Electric (05-1429), the Supreme Court reversed the Ninth Circuit and held that the Bankruptcy Code does not forbid a claim for attorneys fees where such fees are provided for in a contract, even where the fees were generated in litigating Bankruptcy issues. 

The facts from the Syllabus -

After respondent (PG&E) filed for Chapter 11 bankruptcy, petitioner (Travelers), which had previously issued a surety bond to guarantee PG&E's payment of state workers' compensation benefits, asserted a claim in the bankruptcy action to protect itself should PG&E default on the benefits. With the Bankruptcy Court's approval, PG&E agreed to insert language into its reorganization plan and disclosure statement to protect Travelers in case of such a default. Additional litigation over the negotiated language nevertheless ensued and was ultimately resolved by a court-approved stipulation stating, inter alia, that Travelers could assert a general unsecured claim for attorney's fees, which were authorized in the parties' original indemnity agreements. When Travelers filed an amended claim for such fees, PG&E objected based on the rule the Ninth Circuit adopted in its prior Fobian decision that where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney's fees generally will not be awarded. The Bankruptcy Court rejected Travelers' claim on that basis, and the District Court and the Ninth Circuit affirmed.

  The Court first reviewed the general law regarding the filing of claims -

When a debtor declares bankruptcy, each of its creditors is entitled to file a proof of claim—i.e., a document providing proof of a “right to payment,” 11 U. S. C. §101(5)(A)— against the debtor’s estate. Once a proof of claim has been filed, the court must determine whether the claim is “allowed ” under §502(a) of the Bankruptcy Code: “A claim or interest, proof of which is filed under section 501 . . . is deemed allowed, unless a party in interest . . . objects.”

But even where a party in interest objects, the court “shall allow” the claim “except to the extent that” the claim implicates any of the nine exceptions enumerated in §502(b). Ibid. …

Travelers’ claim for attorney’s fees has nothing to do with property tax, child support or alimony, services provided by an attorney of the debtor, damages resulting from the termination of a lease or employment contract, or the late payment of any employment tax. See §§502(b)(2)–(8). Nor does it appear that the proof of claim was untimely. See §502(b)(9). Thus, Travelers’ claim must be allowed under §502(b) unless it is unenforceable within the meaning of §502(b)(1).

By: Scott B. Riddle, Esq.

In an opinion entered today in the case of Marrama v. Citizens Bank of Massachusetts, No. 05-996 (February 21, 2007), the United States Supreme Court held that an individual debtor does not have an unqualified right to convert from a Chapter 7 case to a Chapter 13 case.

The Court, by Justive Stevens, identified the issue to be decided -

An issue that has arisen with disturbing frequency is whether a debtor who acts in bad faith prior to, or in the  course of, filing a Chapter 13 petition by, for example,fraudulently concealing significant assets, thereby forfeits his right to obtain Chapter 13 relief. The issue may arise at the outset of a Chapter 13 case in response to a motion  by creditors or by the United States trustee either to dismiss the case or to convert it to Chapter 7, see §1307(c). It also may arise in a Chapter 7 case when a debtor files a motion under §706(a) to convert to Chapter 13. In the former context, despite the absence of any statutory provision specifically addressing the issue, the federal courts are virtually unanimous that prepetition bad-faith conduct may cause a forfeiture of any right to proceed with a Chapter 13 case.1 In the latter context, however, some courts have suggested that even a bad-faith debtor has an absolute right to convert at least one Chapter 7 proceeding into a Chapter 13 case even though the case will thereafter be dismissed or immediately returned to Chapter 7.2 We granted certiorari to decide whether the Code mandates that procedural anomaly. 547 U. S. ____ (2006).

The basic facts are as follows --  

In verified schedules attached to his petition, Marrama made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. For instance, while he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. Neither statement was true. In fact, the Maine property had substantial value, and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his Chapter 13 petition. Marrama later admitted that the purpose of the transfer was to protect the property from his creditors. After Marrama's examination at the meeting of creditors, see 11 U. S. C. §341, the trustee advised Marrama's counsel that he intended to recover the Maine property as an asset of the estate. Thereafter, Marrama filed a "Verified Notice of Conversion to Chapter 13."

Relying primarily on Marrama's attempt to conceal the Maine property from his creditors,the trustee contended that the request to convert was made in bad faith and would constitute an abuse of the bankruptcy process. The Bank opposed the conversion on similar grounds.

The Akin Gump Supreme Court Blog has an excellent recap of yesterday's Supreme Court oral argument in the case of Marrama v. Citizens Bank of Massachusetts (05-996).  The blurb about the case is as follows -

The question presented in Marrama is whether a bankruptcy court may deny a debtor’s request to convert his case from chapter 7 to chapter 13 of the Bankruptcy Code based on a finding that the debtor has acted in bad faith. The petitioner, Robert Louis Marrama, contends that a court may not deny a debtor’s requested conversion under the plain language of Section 706(a) of the Code, whereas the respondents suggest that a bankruptcy court possesses the inherent authority to sanction bad faith conduct by denying a conversion.

Visit the Supreme Court Blog for the excellent recap and analysis of the argument and questioning (including whether or not the issue is moot - an issue not raised in the briefs).

In Howard Delivery Service v. Zurich American Insurance, No. 05-128, the Supreme Court ruled today that claims for unpaid workers comp. premiums were not entitled to priority status under then-Section 507(a)(4) (now subsection (a)(5)).

In a nutshell, the Justice Ginsberg wrote that workers compensation was more comparable to other types of business insurance (fire, theft, vehicle, etc.) than insurance provided to employees as a fringe benefit. Further, the insurance premiums were, in large part, for the protection of the employer as it protected it from large tort awards.

Read the opinion here (after a welcome screen).

From the Supreme Court Blog --

The Supreme Court agreed on Monday to spell out the right of a debtor to change a Chapter 7 proceeding into a Chapter 13 case. The case is Marrama v., Citizens Bank of Massachusetts (05-996).

In that case, the First Circuit Court ruled that the right to convert such a case is not absolute, and can be denied in some circumstances. The appeal of Robert Louis Marrama argues that the actual language of the federal bankruptcy law does make that right absolute. In his case, the conversion was denied on the basis of a bankruptcy court finding that the request was made in bad faith

Click here for the First Circuit Opinion.

As reported in the Supreme Court Blog, only one bankruptcy case is awaiting a ruling by the US Supreme Court before the term ends in about 3 weeks. In case no. 05-128, Howard Delivery v. Zurich American Insurance, the issue is whether a claim for workmen's compensation insurance is a priority claim Section 507(a)(4) of the Bankruptcy Code as a "contribution to an employee benefit plan arising from services rendered," as held by the 4th and 9th circuits, or is such a claim not entitled to statutory priority, as held by the 6th, 8th and 10th circuits.

You can read the Fourth Circuit's opinion here.

In an opinion entered yesterday (Marshall v. Marshall, No. 04-1544), the US Supreme Court gave former Playment and current diet products spokeswoman Anna Nicole Smith (real name Vickie Lynn Marshall) another bite at her deceased husband's $1.6 billion estate. The Bankruptcy Court originally awarded Anna Nicole $474 million in a case filed against her late husband's son, E. Pierce Marshall. However, the Ninth Circuit threw out the entire judgment, finding that the "probate exception" to federal jurisdiction precluded the Bankruptcy Court from hearing the case.

Both sides have vowed to continue the battle in lower courts.

For further discussion about the case and the Supreme Court's opinion, see the Bankruptcy Litigation Blog and the article at Law.com.

In Central Virginia Community College v. Katz, No. 04-885, the Supreme Court held that states do not have soverign immunity from preference actions.

Update: Background and discussion on this decision can be found at the SCOTUS Blog and at the Bankruptcy Litigation Blog.