In Gordon v. Wells Fargo, Adv. No. 08-6612, 430 B.R. 287 (December 10, 2009)(J. Massey), the issue was "whether under Georgia law a filed and recorded deed to secure debt that lacks the signature of an unofficial witness on the deed's signature page provides constructive notice of the grantee's lien to a bona fide purchaser," such as a Chapter 7 Trustee pursuant to section 544.  Judge Massey ruled in favor of the Trustee and thus set aside the lien.

... a deed may have a patent defect, meaning that the defect is obvious and easily detectable. An example is a deed missing the signature of an unofficial witness. Georgia law has long provided that a patently defective deed does not provide constructive notice to a bona fide purchaser. See, e.g., Donalson v. Thomason, 137 Ga. 848, 74 S.E. 762 (1912). There is no dispute between the parties that this was the law prior to 1995.

Defendant argues that an amendment to O.C.G.A. § 44-14-33 in 1995 changed the law to provide that a recorded deed with a patent defect provides constructive notice to a subsequent bona fide purchaser. The amended statute (Ga. Laws 1995, p. 1076) reads as follows:

In order to admit a mortgage to record, it must be attested by or acknowledged before an officer as prescribed for the attestation or acknowledgment of deeds of bargain and sale; and, in the case of real property, a mortgage must also be attested or acknowledged by one additional witness. In the absence of fraud, if a mortgage is duly filed, recorded, and indexed on the appropriate county land records, such recordation shall be deemed constructive notice to subsequent bona fide purchasers.

O.C.G.A. § 44-14-33.

The amendment added the second sentence. O.C.G.A. § 44-14-61 provides that "[i]n order to admit deeds to secure debt or bills of sale to record, they shall be attested or proved in the manner prescribed by law for mortgages."...

A "duly" filed and recorded mortgage is obviously one that a clerk is authorized by law to record. The second sentence of § 44-14-33 must be read in light of the first sentence, which instructs clerks to "admit" a mortgage to record only if it is attested or acknowledged by an authorized officer and one additional witness. It is the appearance of the appropriate signatures on the deed that permits the clerk to record an attested deed. An unattested or partially attested deed, even if recorded, cannot provide constructive notice because it cannot be "duly filed, recorded and indexed."

Because the security deed was patently defective, it was not "duly filed," and thus could be set aside in favor of the Trustee.  Judge Massey went into great detail on the arguments raised by the lender with respect to statutory construction and the meaning of the amendments, and the full opinion should be consulted for the discussion.

The second case is Brown v. American General Financial Services, Adv. No. 09-1016, 430 B.R. 300 (January 19, 2010)(J. Drake).  In this case, the deed to secure debt at issue was notarized, but the notary stated that only one party, the debtor, and not the non-debtor spouse (and co-owner), signed the deed before the notary.   The Trustee asserted that this defect rendered the entire deed incapable of being recorded and prevented it from providing constructive notice of any transfer.

Judge Drake disagreed with the Trustee.

In Nalley Chevrolet, [100 Ga. App. 197 (Ga. App. 1959)] the Georgia Court of Appeals held that a bill of sale was recordable and provided constructive notice, notwithstanding the fact that the bill of sale contained two signatures, only one of which was attested properly. See id. at 200. The court stated that, because the purchaser who asserted that it lacked constructive notice of the bill of sale purchased the vehicle from the individual whose signature was properly attested, the fact that the bill of sale also contained an additional unattested signature was irrelevant and did not "prevent the recordation of the contract as the contract of" the individual whose signature was properly attested. Id. The Trustee disputes the applicability of Nalley Chevrolet to this case, as Nalley Chevrolet concerned a bill of sale and this case concerns the recording of a security deed. The Defendant, however, points out that the same statutory requirements for recording a security deed apply to the recording of a bill of sale. See O.C.G.A. 44-14-61 ("In order to admit deeds to secure debt or bills of sale to record, they shall be attested or proved in the manner prescribed by law for mortgages.").

The Court agrees with the Defendant and concludes that, under Georgia law, the existence of the unattested signature of Mrs. MacArthur does not prevent the security deed from being recorded as to the transfer of the Debtor's interest in the properties. Accordingly, the security deed provided constructive notice of the Defendant's interest in the properties. For this reason, the Trustee's complaint should be dismissed, and the Defendant should be granted relief from the automatic stay in the Debtor's main bankruptcy case.

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.

A group of "longtime readers and subscribers" of the St. Augustine Record (one of Debtors' newspapers), objected to the Plan saying they are "horrified" at the quality of the newspaper and its news coverage.  Because the newspaper promised "no change" as a result of the bankruptcy, the Activists argued that the Plan did not work.

The Objecting Parties object to "the promise of 'no change'" (id. P 3) as "uphold[ing] Morris family mismanagement" of the Debtors' media properties (id. P 10). The Objecting Parties see the Debtors' plan as "a potential death sentence for smaller newspapers" like the Record, the demise of which "would be a clear and present danger to our democracy, allowing wrongdoers to prosper without investigative news coverage." 2 (Id. P 7.) The Objecting Parties assert that "Morris Publishing must be held accountable" for inadequate news coverage and for "violating the standard of care . . . . result[ing] in a death spiral of declining interest in newspapers." (Id. P 8.) The Objecting Parties further argue that "[r]efusal to cover the news adequately is contrary to the interest of bondholders . . . in selling newspapers and advertising." (Id. P 9.)

It is not a surprise that the Court found that the Activists had no standing to object to the Plan as creditors.  The Court further held that they had no standing as "newspaper readers" or "community activists."

Mere interest in the outcome of the proceeding is not sufficient to meet the standard. In re Goldman, 82 B.R. 894, 896 (Bankr. S.D. Ohio 1988). Thus an entity without some kind of direct relationship with the debtor, the debtor's property, or the administration of the bankruptcy estate--an entity that is a stranger to the bankruptcy case--is generally not a party in interest under § 1109(b).

The Objecting Parties, as newspaper readers and community activists, are just such strangers to the bankruptcy case here, with nothing more than mere interest in the confirmation of the Debtors' plan. The Objecting Parties, self-styled as community activists or readers, have no direct relationship with the Debtors, the Debtors' property, or the administration of this chapter 11 case. Further, the Objecting Parties do not assert a pecuniary interest that is directly or adversely affected by confirmation and as to which they require representation. Indeed, the Objecting Parties do not assert any pecuniary interest at all.

None of the issues raised by the Objecting Parties are in any way related to the purpose of this chapter 11 case, which is to give the Debtors the breathing space necessary to accomplish their financial rehabilitation. The Objecting Parties raise what could generally be termed public interest issues. The Objecting Parties, self-styled as community activists or merely readers, therefore have not met the standard under § 1109(b) and consequently are not parties in interest as such.

Moreover, even if the Objecting Parties had met the standard under § 1109(b), they still would not have standing to object to confirmation as newspaper readers and community activists any more than they have standing to object as newspaper subscribers. Newspaper readers and community activists have no legally protected interest affected by confirmation in this case. The Objecting Parties are thus precisely the prospective litigants that the limits on standing were designed to exclude: the "clouds of persons indirectly affected by the acts and entitlements of others . . . [who] buzz about, delaying final resolution of cases"

Again, it is obviously no surprise that the group was denied standing to object to the Plan.  However, what if an "activist-minded" Congress decided that such groups did have standing?  What kinds of objections to Plans would we see in cases?  Environmental groups objecting to General Motors' filings because the cars do not meet a certain level of emission control? The local Homeowners' Association objecting to the plan of a business down the road?

Robinson v. Tyson Foods, Inc., 2010 U.S. App. LEXIS 2473 (11th Cir. Ala. Feb. 5, 2010).   The Debtor filed a Chapter 13 petition in 2002, and proposed to pay all claims, secured and unsecured, in full over 60 months.  In 2005, Debtor resigned from Tyson Foods alleging that she had been subject to harassment.  In October 2006, Debtor brought a civil suit against Tyson, alleging unlawful employment practices and mistreatment on the basis of race severe enough to constitute constructive termination.  She sought compensatory, punitive and liquidated damages.

Debtor did not amend her Bankruptcy schedules to disclose the claim against Tyson.  However, in 2007, she completed all payments under her Chapter 13 plan, paid all creditors in full, and received a discharge.

Tyson subsequently moved for a dismissal of the lawsuit based on judicial estoppel as Debtor failed to disclose her claim in the Chapter 13 case.

In preparation for her employment discrimination suit, Tyson took Robinson's deposition in September 2007. During the deposition, Robinson revealed that she had not disclosed her suit against Tyson to the bankruptcy court. .... When asked whether she had any suits or administrative proceedings pending, Robinson checked "NONE" on the schedule disclosure forms... Tyson argued that Robinson's non-disclosure constituted inconsistent positions under oath that were calculated to make a mockery of the judicial system. The district court agreed and granted summary judgment for Tyson. This appeal followed. The only issue on appeal is whether the district court abused its discretion in applying judicial estoppel.

Debtor argued that she had no continuing duty to disclose changes in her assets after the Chapter 13 was filed. The Court disagreed.

Our court has emphasized the importance of full and honest disclosure in bankruptcy proceedings, stating that it is "crucial" to the system's "effective functioning." Id. A debtor seeking shelter under the bankruptcy laws has a statutory duty to disclose all assets, or potential assets to the bankruptcy court. 11 U.S.C. §§ 521(1), 541(a)(7). "The duty to disclose is a continuing one that does not end once the forms are submitted to the bankruptcy court; rather the debtor must amend [her] financial statements if circumstances change." Burnes, 291 F.3d at 1286. This duty applies to proceedings under Chapter 13 and Chapter 7 alike because "any distinction between the types of bankruptcies available is not sufficient enough to affect the applicability of judicial estoppel because the need for complete and honest disclosure exists in all types of bankruptcies." ...

[E]ven if the reasoning in Burnes is dicta, it became the law of this circuit.... Therefore, under the established law of this circuit, a Chapter 13 debtor has a statutory duty to disclose changes in assets...

In addition to the general statutory duty, in this case there was a court ordered duty to disclose additional assets. The bankruptcy court's order specifically states that, "the property of the estate shall not vest in the Debtor until a discharge is granted under § 1328 or the case is dismissed." Therefore, all qualified property acquired by Robinson during the pendency her bankruptcy belonged to her bankruptcy estate and not her personally...

When Robinson submitted her bankruptcy schedules under oath, she also submitted that she would update those schedules as required. Therefore, when Robinson filed suit against Tyson, she had a sworn duty to disclose that suit to her bankruptcy estate.

By failing to update her bankruptcy schedule to reflect her pending claim, Robinson represented that she had no legal claims to the bankruptcy court while simultaneously pursuing her legal claim against Tyson in the district court. These actions, both taken under oath, are clearly inconsistent.
 

The Court further held that Debtor's failure to amend was not due to a mistake.

It is undisputed that Robinson had knowledge of her claims. Therefore, the issue of motive is the determining factor in this case. Robinson contends she lacked motive to conceal her claims against Tyson as her Chapter 13 plan proposed complete repayment. However, full monetary repayment does not necessarily preclude a finding of a motive to conceal… The application of judicial estoppel does not require that the nondisclosure must lead to a different result in the bankruptcy proceeding… Rather, the motive to conceal stems from the possibility of defrauding the courts and not from any actual fraudulent result.

The district court found that Robinson had a motive to conceal her claim because if "she realized any proceeds from the suit prior to the discharge of her bankruptcy . . . she could have kept the proceeds for herself without their becoming part of the bankruptcy estate and going to her creditors to satisfy her debts." The district court focused on the nine month window between when Robinson brought her claim against Tyson and when she was dismissed from bankruptcy. Specifically, the district court found that if Robinson's claim had settled in this time period, she would have been able to keep the proceeds for herself and denied the creditors a fair opportunity to claim what was rightfully theirs. ..

In In re Wages, 2009 Bankr. LEXIS 4325 (Bankr. N.D. Ga. Dec. 21, 2009), the Debtor had applied for a credit card at Best Buy.  The Application, signed by the Debtor, stated the following:

"You grant us a purchase money security interest in the goods purchased on your Account." 4 Section 3 of the Application also states that use of the credit card constitutes agreement to the terms and conditions of a "Cardholder Agreement and Disclosure Statement" (the "Cardholder Agreement") that would be sent with the credit card. Paragraph 5 of the "Important Terms" set forth in the Cardholder Agreement states in pertinent part, "[Y]ou grant us a purchase money security interest in the goods purchased with your Card."

Debtor made several purchases on the account, each time signing a sales slip.  The Debtors' Chapter 13 plan proposed to pay HSBC Bank Nevada, N.A. as an unsecured claim.

The Debtors contend that HSBC does not have an enforceable security interest under O.C.G.A. § 11-9-203. Under § 11-9-203(b)(3)(A), the creation of a valid security interest requires, among other things, the debtor's authentication of "a security agreement that provides a description of the collateral." A description of personal property "is sufficient, whether or not it is specific, if it reasonably identifies what is described," O.C.G.A. § 11-9-108(a), but a description only by type of collateral is an insufficient description of consumer goods in a consumer transaction. O.C.G.A. § 11-9-108(e)(2). The basic requirement is that the description must make possible the identification of the collateral described.

The Court, however, disagreed that the creditor had not met these requirements.

Georgia law does not require that a single document contain all of the requisites of a security agreement… Here, both the Application and the Cardholder Agreement that it incorporates, coupled with Mr. Wages' use of the credit account, establish the existence of a security agreement in which he agreed that HSBC would retain a security interest in goods he might later purchase on that account. When he purchased the goods and thereby acquired rights in them, HSBC retained a security interest in them pursuant to the earlier security agreement. O.C.G.A. § 11-9-203(b)(2). The sales slips that evidenced transactions on the account show the purchased items that serve as collateral, and Mr. Wages has not challenged the adequacy of those descriptions.

The Court therefore concludes that HSBC has a valid and enforceable security interest in the goods Mr. Wages purchased on the account… The Chapter 13 plan proposed by the Debtors in this case contemplates treatment of HSBC's claim as unsecured. As such, it cannot be confirmed. The Debtors shall have 20 days from the date of entry of this Order to file and serve a modification to their plan, or to propose a new plan, that deals with the claim of HSBC as a secured claim.

11 U.S.C. § 521(e)(2)(A)(i) provides that the Debtor shall provide not later than 7 days before the date first set for the first meeting of creditors, to the trustee a copy of the Federal income tax return required under applicable law (or at the election of the debtor, a transcript of such return) for the most recent tax year ending immediately before the commencement of the case and for which a Federal income tax return was filed. If the debtor fails to comply with this requirement, the next subparagraph provides that the court "shall dismiss the case unless the debtor demonstrates that the failure to comply is due to circumstances beyond the control of the debtor." 11 U.S.C. § 521(e)(2)(B).

The Motion's request for dismissal under these provisions is problematic because it does not clearly articulate the basis for dismissal. The Motion appears to assume that, because the Debtor was required to file federal tax returns for recent years, § 521(e)(2)(A)(i) requires the debtor to produce a tax return for a recent year. This is not what the statute says. Rather, it states that the debtor must produce the return for the most recent tax year that was filed. Nothing requires that the Debtor file a tax return...

Admittedly, the Debtor here has provided no explanation for the absence of his most recent tax return (whatever year that is), so he has arguably failed to carry the burden that § 521(e)(2)(B) expressly places on him. One could reasonably expect that a debtor seeking to avoid dismissal should advise the United States Trustee and the Court of the last tax return that he filed. Because the Debtor has not done so on the record before the Court, the Court could possibly grant the Motion on technical pleading grounds.

The Court declines to reach such an absurd result on the undisputed facts that the present record reflects. Had the Debtor stated, "The last tax return I filed was around 1993 and I no longer have it," the Court would conclude without hesitation (no other evidence being presented) that the passage of 15 years from the date of filing of the return established cause for not producing it. And absent something else in the record, that is exactly what the Court thinks the Debtor meant in his declaration... And the Court does wonder what relevance the debtor's 1993 tax return could possibly have to his current financial situation.
 

 The U.S. Trustee also sought dismissal under § 707(a), contending that the Debtor failed to submit necessary documents, and the trustee is not required to speculate about or reconstruct the Debtor's financial history.

(after the jump...)

The Motion's sole ground for dismissal under § 707(a), then, is the Debtor's failure to file tax returns for 15 years. The Bankruptcy Code does not, however, ground eligibility for chapter 7 relief on the filing of prepetition tax returns. When Congress wanted to condition bankruptcy relief on the filing of tax returns, it knew how to do so. For example, in chapter 13 cases a debtor must file tax returns, 11 U.S.C. § 1308, failure to do so results in dismissal, 11 U.S.C. § 1307(e), and the Court cannot confirm a plan unless required tax returns have been filed. 11 U.S.C. § 1325(a)(9). The absence of comparable provisions in chapter 7 demonstrates that the failure to file tax returns, standing alone, is not "cause" for dismissal under § 707(a).

In short, the bare allegation of a failure to file tax returns without further factual allegations connecting that failure in any way to the need for information in this case does not constitute "cause" for dismissal under § 707(a).

The Motion to Dismiss was denied without prejudice.

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.

        A corporation’s “nerve center,” usually its main headquarters, is a single place. The public often (though not always) considers it the corporation’s main place of business. And it is a place within a State. By contrast, the application of a more general business activities test has led some courts, as in the present case, to look, not at a particular place within a State, but incorrectly at the State itself, measuring the total amount of business activities that the corporation conducts there and determining whether they are “significantly larger” than in the next ranking State. 297 Fed. Appx. 690.

       This approach invites greater litigation and can lead to strange results, as the Ninth Circuit has since recognized. Namely, if a “corporation may be deemed a citizen of California on th[e] basis” of “activities [that] roughly reflect California’s larger population . . . nearly every national retailer—no matter how far flung its operations—will be deemed a citizen of California for diversity purposes.” Davis v. HSBC Bank Nev., N. A., 557 F. 3d 1026, 1029–1030 (2009). But why award or decline diversity jurisdiction on the basis of a State’s population, whether measured directly, indirectly (say proportionately), or with modifications?

      Second, administrative simplicity is a major virtue in a jurisdictional statute. Sisson v. Ruby, 497 U. S. 358, 375 (1990) (SCALIA, J., concurring in judgment) (eschewing “the sort of vague boundary that is to be avoided in the area of subject-matter jurisdiction wherever possible”).Complex jurisdictional tests complicate a case, eating up time and money as the parties litigate, not the merits of their claims, but which court is the right court to decide those claims. Cf. Navarro Savings Assn. v. Lee, 446 U. S. 458, 464, n. 13 (1980). Complex tests produce appeals and reversals, encourage gamesmanship, and, again, diminishthe likelihood that results and settlements will reflect a claim’s legal and factual merits. Judicial resources too are at stake. Courts have an independent obligation to determine whether subject-matter jurisdiction exists, even when no party challenges it. ...So courts benefit from straightforward rules under which they can readily assure themselves of their power to hear a case...

      Simple jurisdictional rules also promote greater predictability. Predictability is valuable to corporations making business and investment decisions....
A “nerve center” approach, which ordinarily equates that “center” with a corporation’s headquarters, is simple to apply comparatively speaking. The metaphor of a corporate “brain,” while not precise, suggests a single location. By contrast, a corporation’s general business activities more often lack a single principal place where they take place. That is to say, the corporation may have several plants, many sales locations, and employees located in many different places. If so, it will not be as easy to determine which of these different business locales is the “principal” or most important “place.”

       Third, the statute’s legislative history, for those who accept it, offers a simplicity-related interpretive benchmark. The Judicial Conference provided an initial version of its proposal that suggested a numerical test. A corporation would be deemed a citizen of the State that accounted for more than half of its gross income. Mar. Committee Rept. 14–15; see supra, at 8. The Conference changed its mind in light of criticism that such a test would prove too complex and impractical to apply. Sept. Committee Rept.2; see also H. Rep. 1706, at 28; S. Rep. 1830, at 31. That history suggests that the words “principal place of business” should be interpreted to be no more complex than the initial “half of gross income” test. A “nerve center” test offers such a possibility. A general business activities test does not.

Symposium Schedule

8:00 am – 8:45 am
Registration and Breakfast

8:45 am – 8:50 am
Welcome
    Dean David Partlett

8:50 am – 9:50 am
Panel Discussion
“Ponzi Schemes—Bankruptcy Court v. Federal Court Equity Receivership”:  The Business Bankruptcy Panel

      Featured Panelists:

9:50 am – 10:20 am
Coffee and Refreshments

10:20 am – 11:20 am
Panel Discussion
“Views from the Bench—Five Years of BAPCPA”:  The Consumer Bankruptcy Panel

      Featured Panelists:

11:20 am – 11:50 am
Coffee and Refreshments

11:50 am – 12:50 pm
Panel Discussion
“Ethics 2.0—The Ethical Challenges and Pitfalls Web 2.0 Presents to Bankruptcy Attorneys”: The Ethics Panel

     Featured Panelists:

12:50 pm – 2:00 pm Lunch

Location

Tull Auditorium
Emory University School of Law
1301 Clifton Road, NE
Atlanta, GA 30322
Map and Directions

Parking

Please note: parking has changed from previous years. Click here for more information.

Questions

If you have any questions or suggestions about the symposium, please contact Robert Rhodes or Trevor Pinkerton.

We look forward to your attendance,

Robert F. Rhodes
Executive Symposium Editor

Trevor G. Pinkerton
Symposium Editor
Notes and Comments Editor

Plaintiff Bank sought an order of nondischargeabilty for cash advances taken by the Debtor within 174 days of the filing of her Chapter 7 case. Debtor did not answer, and Plaintiff moved for default.  However, the Plaintiff failed to file the affidavit required by the Servicemembers Civil Relief Act.  Additionally, the Complaint did not allege that cash advances were taken within 70 days of the filing of the petition, as required by § 523(a)(2)(C).  The Complaint also failed to allege facts from which to conclude that the advances arose from false pretenses, false representations or actual fraud as required by § 523(a)(2)(A). 

In FDS National Bank v. Alam (In re Alam), 314 B.R. 834 (Bankr. N.D. Ga. 2004), this Court set forth the criteria for establishing nondischargeability under § 523(a)(2)(A). In Alam, the plaintiff, a credit card company, contended that each use of the debtor's available credit line for a purchase or a cash advance was a representation that he had the ability and intent to repay the debts incurred (the "implied representation theory"). The Court rejected this implied representation theory and instead held that, in order for a Plaintiff to prevail on a false representation or false pretenses claim, the plaintiff must show an express, affirmative representation made by the debtor to the plaintiff or use of the card after clear communication of its revocation... With respect to actual fraud, the Court also rejected the implied representation theory and held that "a debtor commits actual fraud for purposes of § 523(a)(2)(A) if the debtor uses a credit card without the actual, subjective intent to pay the debt thereby incurred." Id. at 841. Such a claim is established by showing sufficient facts from which the Court may draw an inference of the debtor's actual, subjective fraudulent intent. Id. at 843.

Based upon the above, the Court declined to enter a default against the Debtor.  Finally, Judge Bonapfel also expressed concerns about the lawyers for both parties:

The filing of this motion raises two troubling issues for the Court. First, five years after this Court's Alam decision, the Plaintiff's attorney has filed a complaint that ignores the holding of Alam. The Plaintiff's law firm cannot plead ignorance; it was also the firm representing the plaintiff in the Alam decision and, thus, is well aware of this Court's requirements for the pleading and proof of a § 523(a)(2)(A) and (a)(2)(C) claim. The continued reliance on the "implied representation theory" in such circumstances is a strategy that appears foolish at best (denial of motion for default judgment or dismissal of the claim), and reckless at worst (see 11 U.S.C. § 523(d)).

Just as troubling is the Debtor's attorney's disregard of this Court's instruction in In re Egwim, 291 B.R. 559, 580 (Bankr. N.D. Ga. 2003). The failure to respond to a complaint and motion that so plainly fail to state a factual basis for relief is an abdication of responsibility to the client. The Court notes that the Debtor's attorney has attempted to except representation in adversary proceedings from the scope of its representation of the Debtor. However, unless and until the Debtor's attorney is permitted to withdraw from representation, the Debtor's attorney has a responsibility  to the client to protect her interests. See In re Egwim, 291 B.R. 559, 580 (Bankr. N.D. Ga. 2003) ("A lawyer must represent the debtor in connection with all adversary proceedings and contested matters filed in the case which may affect the debtor's rights and interests unless and until the lawyer withdraws in accordance with BLR [9010-5(b)]."). Here, failing to respond had the potential for entry of a judgment against the Debtor, a result directly adverse to one of the Debtor's primary objectives - obtaining a discharge. Counsel for the Plaintiff and the Debtor are advised to govern themselves accordingly or face potential sanctions in this or any other future case.

This Court made it clear in a prior published decision that absent extraordinary circumstances, a trustee cannot sell, transfer, or assign the right to assert and maintain an estate's avoidance action to an individual creditor. In re Carragher, 249 B.R. 817, 820 (Bankr. N.D.Ga. 2000); see also In re Metro. Elec. Mfg. Co., 295 B.R. 7, 12 (Bankr. E.D.N.Y. 2003). The rationale for this is sound. The Bankruptcy Code gives trustees special powers to fulfill their primary duty of marshaling the debtor's assets for the benefit of the estate. A Chapter 7 trustee is appointed and trained by the United States Trustee and must have certain qualifications to be appointed. A single creditor does not have the training or qualifications to exercise the role of a panel Chapter 7 trustee. The trustee "is visibly the court-appointed representative of creditors, but a buyer is just another self-interested  party." ...The trustee's power to bring an avoidance action is one such power reserved exclusively for the trustee.

In limited situations, a court may grant a creditor derivative standing to bring an avoidance action.  Official Comm. of Unsecured Creditors of Cybergenics v. Chinery, 330 F.3d 548, 568 (3d Cir. 2003). However, Cadles is not seeking derivative standing; it seeks to purchase the Trustee's rights to bring avoidance claims in its own name. Derivative standing is granted to benefit the estate as a whole, not merely to benefit the creditor bringing the claim. Craig v. Green Light Capital Qualified, L.P. (In re Prosser), 51 B.C.D. 256, 2009 Bankr. LEXIS 2237 (Bankr. D.V.I. 2009). In addition, none of the elements justifying derivative standing has been established in this case. Neither the Trustee nor Cadles has established any colorable claim, and there is no indication that the Trustee has unjustifiably refused to bring any avoidance action.

 Cadles should not be surprised by this Court's ruling. See Reed v. Cooper (In re Cooper), 405 B.R. 801, 816 (Bankr. N.D. Tex. 2009) ("[T]he court will not allow Cadle [The Cadle Company] to usurp the role of the Trustee in this case and pursue estate causes of action")...

 

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What happens when a company goes out of business (in or out of bankruptcy) and leaves behind unpaid federal withholding taxes (commpnly known as "trust fund taxes")?  The Fourth Circuit addressed that question in an opinion entered Wednesday.  See Erwin v. United States, No. 08-1564 (4th Cir. January 13, 2010) (click here for opinion). 

Mack Sperling has summarized this opinion in his North Carolina Business Litigation Blog.   He summarizes the situation where individuals can become liable for unpaid taxes:

• Employers are required to withhold social security and federal excise taxes from employee wages.
• Those withheld funds are held in trust for the United States, and are often referred to as "trust fund taxes."
• Once in the hands of the employer, those funds are held for the exclusive use of the government, not the employer.
• Even if the employer needs the withheld tax money to pay suppliers and vendors to keep the business operating as a going concern, it can't, because "the government cannot be made an unwilling partner in a floundering business."
• The Internal Revenue Code imposes personal liability for payroll tax on the officers and agents of an employer who are (1) responsible for "the employer's decisions regarding withholding and payment of the taxes" and (2) who willfully fail to see that the taxes are paid. 

You do not have to be an owner, officer or director to be a "responsible person" who has personal liability for these taxes.  If you have sufficient control over the company's payroll, which creditors to pay or not pay, the day-to-day business affairs and who to hire and fire, you could be liable. 

Click here to read Mack's detailed analysis of this opinion and individual liability for taxes.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

The president of Miles, Daniel J. Miles, was already in bankruptcy.  An involuntary Chapter 7 petition was filed against him on December 8, 2009, Case No. 09-92601.  The case was later converted to a Chapter 11 case. Creditors in the personal case are seeking the appointment of a Chapter 11 Trustee in that case (click here for motion).

This is just the latest in a string of developers that have either filed for bankruptcy protection, allowed properties to be foreclosed upon, or just ceased operations.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

In 2003, the Probate Court determined that "After receiving said [settlement] funds, Teheran Waters [Defendant], guardian made numerous unauthorized expenditures or otherwise encroached upon the corpus without leave of the Court." The probate court determined that "[$ 11,755.09 of] expenditures itemized on the return are unauthorized and [are] the individual responsibility of the guardian [Defendant] and his wife."

Debtor subsequently filed a Chapter 13 case and Plaintiff filed an action to except the Probate Court award from Debtor's discharge pursuant to  § 523(a)(4), fraud or defalcation while acting in a fiduciary capacity.  Plaintiff filed a motion for summary judgment based on the Probate Court order, and Debtor did not respond.  The Court granted the motion.

The Court is persuaded that Plaintiff is the proper party to bring thisnondischargeability action. A surety who pays the debt of his principal is subrogated to all the rights of the creditor. The surety may proceed immediately against his principal for the debt paid. O.C.G.A. §§ 10-7-41,-56 (2009).

Plaintiff was called upon to honor its surety bond. Plaintiff is subrogated to all rights that the successor guardian could have asserted against Defendant. This includes the right to contend that Defendant's obligation is nondischargeable under § 523(a)(4)...  Defendant, as guardian, was already a fiduciary when he encroached upon the corpus of the settlement finds...The Court is persuaded that Defendant, as his minor son's guardian, was "acting in a fiduciary capacity" for purposes of § 523(a)(4).

Next, Plaintiff must show that Defendant committed a defalcation...The probate court, after a hearing where Defendant was represented by counsel, determined that Defendant, as guardian, "made numerous unauthorized expenditures or otherwise encroached upon the corpus without leave of the Court." A guardian, without leave of court, cannot spend money from the corpus of the ward's estate. Leigh v. Fears, 145 Ga. App. 644, 244 S.E.2d 616, 618 (1978). See O.C.G.A. § 29-2-2 (2003).

The Court is persuaded that collateral estoppel applies to the probate court's determination. The issue of mismanagement of funds was raised and litigated in the probate court proceeding and was necessary to the probate court's final decision. Defendant was represented by counsel. The probate court is a court of competent jurisidiction for purposes of collateral estoppel...

The Court is persuaded that Defendant, acting as a fiduciary, misappropriated funds of his ward for Defendant's personal use. The Court is persuaded that Defendant's obligation is nondischargeable under § 523(a)(4). The Court is persuaded that Plaintiff is entitled to summary judgment.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.