Here is a brief summary of the issues addressed in the article, with a few additional comments:

• Section 523 of the Bankruptcy Code excepts some debts from discharge, including debts based upon fraud, misrepresentation, breach of fiduciary duty, and willful and malicious injury.
• If a judgment is obtained in non-bankruptcy court, and the defendant subsequently files a Bankruptcy petition, the creditor may seek to have the debt excepted from discharge pursuant to Section 523.  This includes punitive damages and perhaps other costs included in the underlying judgment.
• Collateral Estoppel may apply in the Bankruptcy proceeding, thus making it unnecessary for the judgment creditor to re-litigate the entire case.  In general, the requirements for collateral estoppel to apply are: (a) the issue in the prior action and the issue in the Bankruptcy court are identical, (b) the Bankruptcy issue was actually litigated in the prior action, (c) the determination of the issue in the prior action was a critical and necessary part of the judgment in that litigation, and (d) the burden of persuasion in the discharge proceeding must not be significantly heavier than the burden of persuasion in the initial action.
•  Judgments for fraud, misrepresentation, breach of fiduciary duty and willful and malicious injury based upon Georgia law will often meet the requirements for collateral estoppel to apply, based upon the substantive elements of state law.
• Depending on the specific language in the judgment, the Bankruptcy Court may grant partial summary judgment on the underlying claim but leaving open the issue of damages. If the underlying lawsuit included both dischargeable (such as breach of contract) and nondischargeable causes of action, and the final judgment is not clear as far as which claim the judgment was based upon, summary judgment may be denied.
• A default judgment may satisfy the requirement that the issue actually be litigated in the prior court.  I recently litigated an adversary proceeding  in which the judgment creditor received a default judgment in Oklahoma state court, but the defendant filed a Chapter 7 petition before the state court held a trial on damages.  The Bankruptcy Court, after comparing the substantive elements of Oklahoma state law,  held that collateral estoppel applied to the judgment as far as liability, but it would be necessary to hold a trial on damages.  The proceeding was resolved with a settlement.
•  An arbitration award may serve as the basis for the application of collateral estoppel in the Bankruptcy Court, if the state or federal court affirms the judgment and effectively converts it to a final judgment.  I recently obtained a judgment excepting a $1.6 million judgment from discharge, based on an arbitration award affirmed by the District Court.  The arbitration award itself was effectively a default award, as the defendant refused to participate.  Judge Mullins nevertheless found that collateral estoppel applied and the defendant had the opportunity to participate in the litigation.  Click here for a copy of the summary judgment brief (without voluminous exhibits) and click here for the Order granting summary judgment.

 Bill has several excellent tips for making your judgment as bankruptcy-proof as possible:

• Review section 523 of the Code when drafting your complaint, and separate claim that may be nondischargeable.
• Make your record by attempting to get specific findings of fact and conclusions of law, and even jury charges, that may later be consistent with the requirements of section 523. 
•  If you negotiate a consent judgment, try to include specific findings of fact that comply with the requirements of section 523.  Obviously, if you represent the defendant, you may want to avoid such admissions or conclusions, thereby making the creditor litigate the case in Bankruptcy Court.

Bill's article much more extensive that this brief summary, and he includes several case citations.  If you can get a copy of Calendar Call, or it is ultimately posted on the Georgia Bar website, read it.

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

Statewide, 12,356 properties had foreclosure filings -- including default notices, scheduled auctions and bank repossessions -- in February, RealtyTrac reported Thursday. That’s one in every 331 homes, compared with one in every 637 nationally.

Filings in February fell 0.89 percent from the previous month and marked a 3.52 percent drop from a year ago, according to the California-based firm, an online marketplace for foreclosure properties ... Atlanta ranked among metro areas with the highest foreclosure rates last month with one in every 244 homes having a filing.

Statistics maintained by the Bankruptcy Clerk's Office reveal that bankruptcy filings are also up significantly from January to February 2012.   In January 2012, there were 1,772 Chapter 7 cases and 1,283 Chapter 13 cases filed in the Northern District.  In February, the numbers rose to 2,437 Chapter 7 cases and 1,705 Chapter 13 cases.  The increase may be attributed to the end of the voluntary moratorium of some of the larger lenders in late 2011.  These numbers are still slightly lower than filings in January and February 2011.  Overall, since 2010, filings are above the benchmark level in 2005, when thousands rushed to file before the effective date of the BAPCPA.

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 Debtor, an operational consultant with an MBA in Finance, was formerly an employee of Proudfoot Consulting Company.  After Debtor left Proudfoot and went to work for Highland Consulting Group, Proudfoot filed suit against Debtor for violating the restrictive covenants in his employment agreement.  Proudfoot ultimately obtained injunctive relief and a monetary judgment for $1,659,000 and an additional $335,050.00 for Proudfoot's fees and expenses.  The judgment was appealed, but the judgment for attorneys fees was not stayed and Proudfoot initiated garnishment proceedings against Debtor.  The Debtor responded by filing a Chapter 7 petition.

Motions to Dismiss the Chapter 7 case were filed by the Chapter 7 Trustee and Proudfoot, and the Debtor opposed both motions.  Proudfoot then filed a Motion to Convert the case to a Chapter 11 based upon Debtor's substantial income and ability to repay a portion of his debts in a Chapter 11 plan.  Debtor opposed conversion, arguing that § 706(b) does not apply to individual debtors and, even if it did, forcing him into Chapter 11 would constitute unlawful involuntary servitude prohibited by the Thirteenth Amendment, and would be unlawful peonage pursuant to the Anti-Peonage Act, 42 U.S.C. § 1994.

A hearing was held, after which Judge Hagenau ruled that 1) § 706(b) did apply to individual debtors, 2) conversion was appropriate based upon Debtor's income and ability to fund a plan, and 3) Debtor's arguments with respect to the Thirteenth Amendment and Anti-Peonage Act were without merit.  

1. Conversion to Chapter 11 was Appropriate Pursuant to 11 U.S.C. § 706(b).

The actual amount of Debtor's monthly and disposable income was disputed, but the Court concluded for purposes of the motion that Debtor had disposable income of at least $3,400 per month and as much as $10,000 per month, based on total annual income of at least $250,000.  With approximately $450,000 in unsecured debt, Debtor had the ability to pay 45-100% of claims in a five year plan.

The Court found that Debtor's argument that § 706(b)did not apply to individual debtors with non-consumer debt was without merit. 

Section 706(b) of the Bankruptcy Code clearly, on its face, applies to all debtors in Chapter 7. There are no limitations on conversion from Chapter 7 to Chapter 11 other than being eligible to be a debtor in the chapter. There is no dispute but that individuals are entitled to be debtors under Chapter 11 of the Bankruptcy Code. See 11 U.S.C. § 109(d) and 11 U.S.C. § 101(41). The Debtor urges the Court to read Section 706 to exclude individuals with primarily non-consumer debts because of certain legislative history surrounding Chapter 13. In 1977, Congress expressed concern as to whether a mandatory or involuntary Chapter 13 would constitute in-voluntary servitude under the Thirteenth Amendment. The legislative history states further that "[o]n policy grounds, it would be unwise to allow creditors to force a debtor into a repayment plan." HR REP. NO. 95-595, at 120 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6081. However, this legislative history is not directly related to Section 706(b), nor is it related to Chapter 11, and does not reflect anything about the "policy grounds" of Section 706(b)...Where the language is not unclear, there is no need to refer to a statute's legislative history. In this case, the statute is eminently clear that it is not limited to corporate debtors and the Court therefore does not need to look at the legislative history of Chapter 13 in construing the statute.

 The Court next addressed the Debtor's Constitutional and Anti-Peonage arguments (after the jump). 

Having concluded that conversion was appropriate, the Court had to address Debtor's claims that involuntary conversion would constitute involuntary servitude and violate the Thirteenth Amendment of the United States Constitution.  The issue was briefed by the United States Attorney (click here and here for the briefs) and the Debtor (click here).

Since the Debtor challenges the application of Section 706(b) as being in violation of the Thirteenth Amendment's prohibition on involuntary servitude, the Court must examine the scope of involuntary servitude under the Thirteenth Amendment. The Supreme Court has recognized from its earliest decisions that the genesis of the Thirteenth Amendment was to prohibit slavery... However, "courts have consistently found the involuntary servitude standard is not so rigorous as to prohibit all forms of labor that one person is compelled to perform for the benefit of another. The Thirteenth Amendment does not bar labor that an individual may, at least in some sense, choose not to perform, even when the consequences of that choice are 'exceedingly bad'."  ...

The Debtor argues that converting his case from Chapter 7 to one under Chapter 11 is involuntary servitude because there is the potential for a number of provisions in Chapter 11 to be invoked. The Debtor points to the following specific possible ramifications of conversion:

     (i) The debtor's post-petition earnings become property of the estate and must be used as necessary for execution of a confirmed plan. 11 U.S.C. §§ 1115, 1123(a)(8).

(ii) Under 11 U.S.C. § 1129(a)(15), if an unsecured creditor objects to a proposed plan, the debtor must show that the amount of his projected disposal income for at least five years is being paid under the plan.

(iii) The debtor has no absolute right to dismiss or convert his case pursuant to 11 U.S.C. § 1112 since the Chapter 11 case was not voluntarily selected by the debtor.

(iv) A creditor can propose a plan under 11 U.S.C. § 1121(c).

(v) The absolute priority rule may require the debtor to surrender his house and other personal possessions.

(vi) The court may find the debtor in contempt for failure to comply with any confirmed plan and such contempt may be punishable by fine or jail.

First, the Court notes that, with one possible exception, none of the items the Debtor sets out in the parade of horribles occurring from a conversion happen automatically from the conversion of the case. The only effect of converting the case under Section 706(b) is that the Debtor's post-petition earnings become property of the estate, which means that, if he wishes to use those post-petition earnings for non-typical purposes, a request for approval to spend the money must be filed with the Bankruptcy Court and the use must be approved...The other possible consequences of a Chapter 11 case raised by the Debtor are not ripe for consideration... 

None of the foregoing "horribles" have occurred, and none will occur without other decisions by the Court. Following the Supreme Court justiciability doctrines, the Court concludes the constitutionality of these other sections of Chapter 11 as applied to an individual non-consumer debtor are not ripe for review since none are at issue at this time. Even if the matters are constitutionally ripe, they are not prudentially ripe since determining the issues would require the Court to assume many facts not in evidence and not even in existence at this time. There is no hardship to the Debtor in requiring he wait to litigate these issues only if and when they are presented. If and when a plan is presented that is not accepted by creditors and any of these issues arise, the Court can address them...

 As discussed above, the Debtor has not suffered an actual injury, nor is injury imminent based merely on a conversion of the case to Chapter 11. Any potential injury to the Debtor would occur only as a result of subsequent actions taken by this Court in ruling on the various issues that may arise if and when a plan is proposed that is not accepted by the creditors. Therefore, the Debtor does not have standing at this time to challenge the constitutionality of sections of the Bankruptcy Code which are not now in issue and no creditor has sought to apply. Even if the Debtor has Article III standing, prudential concerns preclude the Debtor's standing to challenge the applicability of code sections not now in issue. The only question before the Court is whether conversion to Chapter 11 alone violates the Thirteenth Amendment. The Court concludes the mere conversion of the case from Chapter 7 to Chapter 11 is not a type of physical or legal coercion constituting involuntary servitude... Conversion simply places the Debtor in another chapter within the Bankruptcy Code, the protection of which the Debtor invoked by voluntarily filing his own petition to facilitate his discharge.

(emphasis added).

3.      Involuntary Conversion Does not Violate the Anti-Peonage Act.

Debtor next argued that the involuntary conversion of his case to Chapter 11 would violate the Anti-Peonage Act, 42 U.S.C. § 1994.  Based upon a similar reasoning as the Constitutional issue, the Court held that the mere conversion of the case did not violate the statute.

As in the discussion regarding the constitutionality of Section 706(b), the Court finds the only matter ripe for decision is the effect of mere conversion of the case from Chapter 7 to Chapter 11, and not whether any of the "horribles" described by the Debtor might, under certain circumstances, violate the Anti-Peonage Act. Since, again, the mere conversion of the case from one under Chapter 7 to one under Chapter 11 does not require the Debtor to work for a particular employer, or at a particular job, or to work at all nor to pay anyone, the conversion itself does not violate the Anti-Peonage Act.

The Court also found it relevant that the Debtor's attorneys fees were being paid by Highland Consultant, his current employer, and thus Debtor suffered no damages by the conversion.   The Court also noted that Debtor had opposed the motions to dismiss. "Thus, the Debtor is not opposed to bankruptcy protection, just opposed to making payment on his debts"

Based upon the above, the Court converted the case to a case under Chapter 7.  On February 7, 2012, the Debtor filed a Notice of Appeal with the District Court.  Presumably, the Chapter 11 case will proceed in the Bankruptcy Court until the District Court rules on the appeal.

Bankruptcy, Workout and Creditor Representation

Business and Commercial Litigation

Real Estate and Construction Litigation

About Scott:

Scott Riddle graduated from The University of North Carolina at Chapel Hill with a BSBA in 1987 and received his JD, with honors, in 1991 from the UNC School of Law. After graduation from law school, Scott clerked for two years for Judge W. Homer Drake, Jr., United States Bankruptcy Judge for the Northern District of Georgia. He then spent several years in the bankruptcy and litigation sections of Troutman Sanders, LLP prior to starting his own firm.  Scott is admitted in all state and federal Courts in Georgia, and the Eleventh Circuit Court of Appeals.

Scott has spoken at several continuing education seminars, and in the community, has been an active member of the Kiwanis Club, Buckhead Business Association, Atlanta Peachtree Rotary Club and North Point Community Church. He has been cited in several publications, including the Wall Street Journal Online, Atlanta Journal-Constitution, Atlanta Business Chronicle, Fulton County Daily Report, and CNN.com. Scott served as a member of the Board of Directors of the Bankruptcy Section of the Atlanta Bar Association, the Georgia Chapter of the Turnaround Management Association and the American Bankruptcy Institute.

Scott is also active in the community.  In addition to volunteering with local charities, Scott has participated and led mission trips to orphanages in Russia and Romania, conducted English camps in Romania and Poland, participated in earthquake relief trips in Haiti, and helped organized and participated in an earthquake relief trip to Chile.

This lawsuit as well as similar lawsuits in other jurisdictions have been the subject of articles in the Atlanta Business Chronicle, and other publications.  The meat of the Complaint is as follows:

20. On information and belief, Souza intentionally engaged in a scheme or multiple schemes to exploit and profit from Internet domain names that are confusingly similar to Facebook’s famous and distinctive mark, FACEBOOK.

22. As used in this Complaint, “typosquatter domain name” means a domain name that is confusingly similar to a protected mark. A typosquatter domain name may be confusingly similar to a protected mark either because it incorporates the protected mark (e.g., “facebookmarketingforresults.com”) or because it is an intentionally misspelled or corrupted version of the protected mark that is similar to the protected mark in sight, sound, and meaning (e.g., “faceboook.com”). Souza is or has been a registrant, owner, or operator of typosquatter domain names and/or has profited from typosquatter domain names that are confusingly similar
to Facebook’s famous and distinctive mark, FACEBOOK.

24. As described below, Souza intentionally and fraudulently used at least one typosquatter domain name and one landing website to divert consumers from Facebook’s online location and profit from consumers’ confusion.

25. On information and belief, Souza intentionally and fraudulently used other typosquatter domain names and other landing websites of which Facebook is not yet aware to divert consumers from Facebook’s online location and profit from consumers’ confusion.

26. On information and belief, Souza has also induced or encouraged others to participate in schemes identical or substantially similar to the one described below.

27. Souza registered the domain name facebookmarketingforresults.com and made it accessible to Internet users at http://www.facebookmarketingforresults.com.

28. The facebookmarketingforresults.com domain name incorporates Facebook’s famous and distinctive mark, FACEBOOK. Souza intentionally and fraudulently used the FACEBOOK mark to suggest, falsely, that the facebookmarketingforresults.com domain name and the http://www.facebookmarketingforresults.com website were connected to or approved by Facebook.

 29. If a consumer typed “facebookmarketingforresults.com” into his web browser on July 19, 2011, his browser would have been redirected immediately to an intermediate landing website, http://1939.com, and then to the landing website http://social.worldrewardcenter.com/.

34. On information and belief, that survey was pretextual and false. Visitors who
completed the survey did not receive the prizes and awards as promised. They were, however, presented with various advertisements and offers, some of which required visitors to divulge personal information.

35. On information and belief, Souza received payment each time a consumer visited http://social.worldrewardcenter.com/ via http://www.facebookmarketingforresults.com, clicked on one of the offers or advertisements on http://social.worldrewardcenter.com/, bought goods or
services on http://social.worldrewardcenter.com/, and/or divulged personal information on http://social.worldrewardcenter.com/.

The basic facts are as follows.  International Management Associates, LLC and related entities were operated as a Ponzi scheme by Kirk Wright).  "Wright used the Debtors to operate a fraudulent Ponzi scheme whereby capital contributions made to the Debtors by later equity investors were used to repay earlier investors more than their investments were actually worth, as well as fictitious profits."

Perkins, the Trustee, filed adversary proceedings against several defendants for the recovery of fraudulent transfers.Each of the defendants in the appeal were individuals who made a capital contribution through a limited liability company agreement, limited partnership agreement or subscription agreement.  Each of the defendants received transfers consisting a return of capital and/or "profits" from their investment.

The general rule for fraudulent transfers in a Ponzi Scheme case is that the transferee has an immediate claim for fraud against the debtor at the time of the original investment.  A recovery of the transferee's initial investment, therefore, is treated as a release of the claim against the debtor, and provides the transferee with an affirmative defense in an action to recover the fraudulent transfer. The defense is not available for transfers over and above the initial investment, or "profits," and a trustee can normally recover those transfers.

Most of the cases involving Ponzi schemes and adversary proceedings to recover fraudulent conveyances involve loans or investments to the debtors.  In the cases on appeal, the defendants were equity holders in debtors.

The Trustee argued that the affirmative defense should not be available to the defendants because the transfers operated to redeem their worthless equity interests and were not made in satisfaction of a debt.  

The Trustee hangs his hat on a line of cases holding that transfers to redeem an equity investment in an insolvent entity (initially made free of fraud) cannot constitute a transfer “for value.” See e.g., Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 982 (1st Cir. 1983); Schafer v. Hammond, 456 F.2d 15, 17-18 (10th Cir. 1972); Lytle v. Andrews, 34 F.2d 252 (8th Cir. 1929); M.V. Moore & Co. v. Gilmore, 216 F. 99, 100-01 (4th Cir. 1914). In each of these decisions, investors exchanged shares of stock for other security interests, notes, or real property, all at a time when the corporations were insolvent. The courts held that the exchanges constituted fraudulent transfers because the stock returned to the corporations as part of the exchange was, at that time, virtually worthless due to the corporate insolvency. As such, the corporations received “less than a reasonably equivalent value.” See Roco Corp., 701 F.2d at 982; Schafer, 456 F.2d at 16-18; Lytle, 34 F.2d at 253-54.

The Circuit panel disagreed. None of the cases cited by the Trustee involved Ponzi schemes.  Rather, they involved insolvent corporations paying off equity holders at the expense of creditors. 

In sum, the Trustee asks the court to focus solely on the form of the investment to the exclusion of all other factors, and to ignore the realities of how Ponzi schemes operate. As the bankruptcy court correctly noted, however, no court to date has applied this form over substance rule in fraudulent transfer actions involving Ponzi schemes. More specifically, no court has distinguished between equity investments and debt-based claims when applying the general rule to fraudulent transfer actions arising out of a Ponzi scheme. To the contrary, the Ninth Circuit – the only court of appeals to address this issue to date – applied the general rule to equity investors in a Ponzi scheme, and rejected any attempts to distinguish between the forms of the investment.[In re AFI Holding, Inc.,525 F.3d 700, 704 (9th Cir. 2008)]...

 The [AFI] court emphasized that the limited partners in AFI Holding “were defrauded into their limited partnership role by the operator of the Ponzi scheme.” 525 F.3d at 708. The AFI debtors operated the Ponzi scheme before McKenzie made his principal investment, and the Ponzi scheme continued to exist well before any transfers were made back to him. Accordingly, McKenzie “acquired a restitution claim at the time he bought into [the] Ponzi scheme, . . . [and] [i]t is this restitution claim, in toto, that McKenzie exchanged when AFI returned McKenzie’s principal ‘investment’ amount.” 525 F.3d at 708.“Although circumstances of the exchange were cloaked in terms of a partnership interest, [we have looked] beyond the ‘form’ to the ‘substance’ of the transaction.” Id. Whether the debtor was insolvent at the time was irrelevant. The fact that McKenzie and the other investors held equity interests was also of no moment. The general rule applies in a Ponzi scheme setting regardless of whether good faith investors have an equity interest in, or some other form of claim against, the legal entity constituting the instrument of the fraud. We agree with that analysis and the result.

Virtually identical facts are presented in this case. The Trustee agrees that the investor defendants purchased limited partnerships from the Debtors at a time when the Ponzi scheme was already in operation and a claim for fraud or restitution was created in favor of the investors based on the Debtors’ fraudulent activity. Under AFI Holding and the general rule, later transfers from the Debtors up to the amount of the investment satisfied the investor defendants’ restitution or fraud claims and provided value to the Debtors. 

[emphasis in bold added].  The Bankruptcy Court's denial of summary judgment to the Trustee was therefore affirmed.

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 represents clients in many aspects of complex business and commercial litigation, including:

• Contract negotiation and disputes, including the negotiation of the sale and purchases of businesses or business assets.
• Trademark and trade secret disputes, including the use and disclosure of customer lists and other confidential information.
• Corporate governance disputes, including the representation of corporations and individual officers and directors in breach of fiduciary proceedings.
•  Derivative actions.
•  Business torts.
•  Partnership, limited liability company and joint venture disputes.
•  Employment agreements.
• Covenants not to compete and other restrictive covenants related to employment agreements or the sale of businesses.
• Temporary Restraining Orders and other emergency injunctive relief

 
Many disputes occur at the stage of formation of corporate business entities or commercial ventures, or take place later due to poor planning and execution of the formation documents. Other disputes arise in the normal course of business, and can involve suppliers and vendors, customers and consumers, officers or shareholders, employees, or competitors. All of these disputes drain the resources of the company and take time and attention away from business operations. If left unresolved or unattended, they can ruin the company. Prompt and efficient action by a knowledgeable and skilled business litigation attorney is essential to resolving business disputes. Even where the dispute does not end in litigation, careful planning and a strong litigation posture are essential to a favorable settlement or other resolution.

In addition to the firm's litigation practice, Mr. Riddle represents clients in bankruptcy proceedings, representing debtors and creditors in individual bankruptcies and business bankruptcies and restructurings. Please see the bankruptcy page for further information.

Real Estate Litigation

Scott has significant experience in commercial and residential real estate and title litigation in state and federal courts, including the following:

• Representation of parties in several of the most high-profile mortgage fraud cases in the State of Georgia.
• Representation of residential and commercial owners of real estate in contract disputes and litigation.
• Representation of several title insurance companies in cases involving title disputes.
• Representation of several golf course and other commercial real estate developers.
• Representation of large churches and religious institutions in out-of-court loan modifications and workouts.
• Counsel to a Receiver appointed by the District Court in the Northern District of Georgia for a real estate investment company.
• Counsel to the Committee of Unsecured Creditors in the Chapter 11 bankruptcy case of Greater Atlanta Brokerage Solutions, LLC (dba Re/Max of Greater Atlanta), formerly one of the largest residential real estate brokers in the United States.

 
Construction Litigation

Scott has extensive experience prosecuting and defending cases in several jurisdictions in industrial and commercial construction litigation. Scott has acted as counsel to national industrial contractors, including a national contractor with a multi-million dollar claim against a Vermont power generation plant, a Louisiana based chemical company, and a national hotel contractor. Mr. Riddle has represented a national HVAC/Air Filtration company in several lawsuits regarding toxic mold in homes. He has represented homeowners and builders in water runoff litigation, contract disputes, and latent defects.

Common claims in the construction industry include:

• Soil and slope instability problems.
• Design defects.
• Poor workmanship.
• Roadway and infrastructure problems.
• Building material failures.

Scott is admitted and has practiced in Bankruptcy Courts for the Northern, Middle and Southern Districts of Georgia, as well as other state and federal courts.

Scott represents Chapter 7 and 11 debtors, creditors, Chapter 7 and Chapter 11 trustees, receivers, committees and other interested parties in bankruptcy cases and bankruptcy litigation. Scott also has significant experience in litigating breach of fiduciary duty and other corporate governance claims in the context of bankruptcy proceedings.

Scott's bankruptcy experiences and services include:

• Representing debtors, creditors, trustees and other parties in Bankruptcy Court
• Acting as general counsel and special counsel to Chapter 7 and Chapter 11 trustees and creditors committees.
• Acting as local counsel to out-of-state firms in Bankruptcy cases.
• Representing individual and corporate debtors in complex bankruptcy cases involving significant debt and assets, including business or real estate debt.
• Representing debtors, principals, purchasers, and creditors in connection with non-bankruptcy business reorganization and workouts.
• Representing creditors in consumer and business bankruptcy cases, and in adversary proceedings filed in Bankruptcy Court, including proceedings to recover fraudulent or preferential transfers.

The Atlanta Journal has an article about the case, and the declining poultry business in Georgia:

It was the latest bad sign for the industry, worth $4.2 billion to Georgia farmers. Production prices have increased as prices for chicken have dropped. As Georgia producers lower their output to get in balance with demand, employment in processing plants has dropped.

Cagle's, which began 60 years ago as a chicken shop in downtown Atlanta, listed $92 million in assets and $62.9 million in debts in papers filed Wednesday in the U.S. Bankruptcy Court in the Northern District of Georgia. Chapter 11 bankruptcy protects a company's assets while a business continues to operate and work out payments with creditors.

It is the 21st largest producer in the U.S., according to the U.S. Poultry and Egg Association.

One creditor has already filed a Notice of Reclamation to recover distiller's grain received by Cagle's just prior to the filing.  Creditors and other parties who provided goods to the Debtor just prior to the filing of the Chapter 11 petition need to act quickly to serve notices of reclamation in order to receive the goods or a priority claim.  More information on reclamation is found in this prior post.

(1) the individual defendants breached their duty of care by approving the late 2007 acquisitions (of other entities) without informing themselves of JetDirect’s true financial condition,

(2) the individual defendants acted in bad faith by consciously failing to implement and monitor an adequate system of internal controls and—with respect to one specific individual defendant—hiding critical information from the board, and

(3) certain individual defendants breached their duty of loyalty by benefitting from self interested asset sales upon JetDirect’s asset liquidation in 2008.

 The defendant managers sought dismissal of the derivative claims on the grounds that CML, as a creditor, did not have standing.  The Court of Chancery dismissed the claims and CML appealed.  On appeal, the Delaware Supreme Court affirmed.

The central provision at issue is 6 Del. C. § 18-1002, entitled “Proper plaintiff.” That provision reads:

In a derivative action, the plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action and:
(1)  At the time of the transaction of which the plaintiff complains;
or
(2)  The plaintiff’s status as a member or an assignee of a limited liability company interest had devolved upon the plaintiff by operation of law or pursuant to the terms of a limited liability company agreement from a person who was a member or an assignee of a limited liability company interest at the time of the transaction.

This provision is unambiguous on its face; therefore, its plain language controls...

Because section 18-1002 is unambiguous, is susceptible of only one reasonable interpretation, and does not yield an absurd or unreasonable result, we apply its plain language. Only LLC members or assignees of LLC interests have derivative standing to sue on behalf of an LLC—creditors do not. Therefore, section 18-1002 precludes CML from suing derivatively, and the Vice Chancellor properly granted the motion to dismiss.

The Delaware Court was not persuaded that LLCs should be compared with corporations:

CML contends that this result is absurd because, given the policy underlying derivative standing, there should be no difference between LLCs and corporations. CML argues that unless the Court of Chancery can vest creditors of insolvent LLCs with derivative standing in equity, there will exist no stakeholders with incentive to enforce fiduciary duties through legal action. CML may be correct that in insolvency creditors become the ultimate risk bearers in LLCs. But, the General Assembly is free to elect a statutory limitation on derivative standing for LLCs that is different than that for corporations, and thereby preclude creditors from attaining standing. The General Assembly is well suited to make that policy choice and we must honor that choice. In this respect, it is hardly absurd for the General Assembly to design a system promoting maximum business entity diversity. Ultimately, LLCs and corporations are different; investors can choose to invest in an LLC, which offers one bundle of rights, or in a corporation, which offers an entirely separate bundle of rights.

Professor Larry Ribstein has a thorough analysis of the case at his Truth on the Market Blog. 

How does this case apply in Georgia, if at all, since Georgia and most other states look to decisions of Delaware Courts for corporate matters?  The rule is essentially the same in Georgia. O.C.G.A. § 14-11-801  (2011) provides the following:

A member may commence a derivative action in the right of the limited liability company to recover a judgment in its favor if all of the following conditions are met:

(1) Either management of the limited liability company is vested in a manager or managers who have the sole authority to cause the limited liability company to sue in its own right or management of the limited liability company is vested in the members but the plaintiff does not have the authority to cause the limited liability company to sue in its own right under the provisions of the articles of organization or a written operating agreement;

(2) The plaintiff has made written demand on those managers or those members with such authority requesting that such managers or such members take suitable action;

(3) Ninety days have expired from the date the demand was made unless the member has earlier been notified that the demand has been rejected by the limited liability company or unless irreparable injury to the limited liability company would result by waiting for the expiration of the 90 day period;

(4) The plaintiff (A) is a member of the limited liability company at the time of bringing the action, and (B) was a member of the limited liability company at the time of the transaction of which he or she complains, or his or her status as a member of the limited liability company has devolved upon him or her by operation of law from a person who was a member at the time of the transaction; and

(5) The plaintiff fairly and adequately represents the interests of the limited liability company in enforcing the right of the limited liability company.

(emphasis added).  See also Ledford v. Smith, 274 Ga. App. 714 (Ga. Ct. App. 2005) (company that was not member did not have derivative standing).

The holding of the case is not a surprise:

Section 365(c)(1) of the Bankruptcy Code limits the assignment of an executory contract of the debtor if “applicable law” authorizes the other party to the contract to refuse to accept performance from an assignee “whether or not such contract . . . prohibits or restricts assignment.”  ...[T]rademark law is applicable law.

...

None of this matters, though, because as far as we’ve been able to determine, the universal rule is that trademark licenses are not assignable in the absence of a clause expressly authorizing assignment. Miller v. Glenn Miller Productions, Inc., 454 F.3d 975, 988 (9th Cir. 2006) (per curiam); In re N.C.P. Marketing Group, Inc., 337 B.R. 230, 235-36 (D. Nev. 2005); 3 McCarthy on Trademarks § 18:43, pp. 18-92 to 18-93 (4th ed. 2010). “The purpose of a trademark, after all, is to identify a good or service to the consumer, and identity implies consistency and a correlative duty to make sure that the good or service really is of consistent quality, i.e., really is the same good or service. If the owner of the trademark has broken off business relations with a licensee he cannot ensure the continued quality of the (ex-)licensee’s operation, whose continued use of the trademark is therefore a violation of trademark law.” Gorenstein Enterprises, Inc. v. Quality Care USA, Inc., 874 F.2d 431, 435 (7th Cir. 1989).

Bob Eisenbach has written an excellent summary of the opinion on In the (Red) Business Bankruptcy Blog, as has Pamela Chestek in the Property, intangible Blog.

 In Myers v. TooJay's Management Corp., No. 10-10774 (11th Cir. May 17, 2011) (click here for the .pdf of the opinion), the plaintiff applied for a job at Defendant's TooJay's Gourmet Deli restaurant. As part of the hiring process, the plaintiff worked at the deli for two days, for $100 per day, for an "on the job evaluation."  At the conclusion of the evaluation period, the plaintiff was never actually offered employment and, according to the defendant, he was notified that permanent employment would be based on a background check. The plaintiff was subsequently denied employment based upon information in the background check.  The evidence indicated the decision was based upon the plaintiff's bankruptcy filing.   The plaintiff then filed a lawsuit, contending that he was actually hired and then was terminated in violated 11 U.S.C.  §525 or, alternatively, he was denied employment in violation of the statute.

Section 525 of the Bankruptcy Code provides the following (applicable to private, non-government employers):

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt--

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;

(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

The Court affirmed the jury's conclusion that the plaintiff was never an employee of the defendant, and thus the termination prohibition never came into play.  With respect to the claim for a denial of employment, the Court followed the Fifth Circuit in Burnett and other courts and held that §525does not prohibit the denial of employment by a private employer. The Court followed the reasoning of the District Court, which stated the following:

A comparison of the words used in subsections (a) and (b) demonstrates that subsection (a) prohibits government employers from “deny[ing] employment to” a person because of his or [her] bankrupt status, whereas subsection (b) does not contain such a prohibition for private employers. Rather, the private sector is prohibited only from discriminating against those persons who are already employees. In other words, Congress intentionally omitted any mention of denial of
employment from subsection (b), but specifically provided that denial of employment was actionable in subsection (a). Thus, by its plain language, the statute does not provide a cause of action against private employers for persons who are denied employment due to their bankrupt  status. “Where Congress has carefully employed a term in one place but excluded it in another, it should not be implied where excluded.

 This opinion, as well as the other opinions interpreting this statute, as well as the plain language of the statute itself, strongly indicate that any prohibition against the denial of employment by a private employer is a matter for Congress.

The Georgia Supreme Court, on March 25, 2011, entered an opinion affirming the reasoning and holding of Judge Massey, and in favor of the Chapter 7 Trustee.   U.S. Bank National Assoc. v. Gordon, No S10Q1564 (Ga. March 25, 2011) (click here for the opinion).  This ruling will benefit Trustees and homeowners who seek to nullify defective security deeds.

The primary issue is the interpretation of the 1995 amendments to O.C.G.A. § 44-14-33. 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.

The 1995 amendment added the second sentence. Judge Massey held that the statute, when read as a whole, means that a mortgage must be properly attested or acknowledged before it can be duly filed and serve as constructive notice:

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.

The Georgia Supreme Court agreed. The certified question was "whether the 1995 Amendment means that, in the absence of fraud, a security deed that is actually filed and recorded, and accurately indexed, on the appropriate county land records provides constructive notice to subsequent bona fide purchasers, where the security deed contains the grantor’s signature but lacks both an official and unofficial attestation (i.e., lacks attestation by a notary public and also an unofficial witness)."

Turning back to the certified question, we note that the “recordation” that is deemed to provide constructive notice to subsequent purchasers clearly refers back to “duly filed, recorded, and indexed” deeds. U.S. Bank argues that a “duly filed, recorded, and indexed” deed is simply one that is in fact filed, recorded, and indexed, even if unattested by an officer or a witness. We disagree.

Construing the 1995 Amendment in harmony with other recording statutes and longstanding case law, we must reject U.S. Bank’s definition of “duly filed, recorded, and indexed.” Its definition ignores the first sentence of § 44-14-33, which provides that to admit a security deed to record, the deed must be attested by or acknowledged before an officer, such as a notary public, and, in the case of real property, by a second witness. See OCGA § 44-2-15 (listing the “officers” who are authorized to attest a mortgage or deed)… Indeed, U.S. Banks’ construction of the 1995 Amendment contradicts OCGA § 44-14-39, which provides that “[a] mortgage which is recorded . . . without due attestation . . .shall not be held to be notice to subsequent bona fide purchasers.”

Thus, the first sentence of § 44-14-33 and the statutory recording scheme indicate that the word “duly” in the second sentence of § 44-14-33 should be understood to mean that a security deed is “duly filed, recorded, and indexed” only if the clerk responsible for recording determines, from the face of the document, that it is in the proper form for recording, meaning that it is attested or acknowledged by a proper officer and (in the case of real property) an additional witness...

Finally, it should be recognized that U.S. Bank’s interpretation of the 1995 Amendment to § 44-14-33 “would relieve lenders of any obligation to present properly attested security deeds” and “would tell clerks that the directive to admit only attested deeds is merely a suggestion, not a duty,” and this would risk an increase in fraud because deeds no longer would require an attestation by a public officer who is sworn to verify certain information on the deeds before they are recorded and deemed to put all subsequent purchasers on notice. Gordon, 429 BR at 51-52. Moreover, while “it costs nothing and requires no special expertise or effort for a closing attorney, or a lender, or a title insurance company to examine the signature page of a deed for missing signatures before it is filed,” U.S. Bank’s construction would “shift to the subsequent bona fide purchaser and everyone else the burden of determining [possibly decades after the fact] the genuineness of the grantor’s signature and therefore the cost of investigating and perhaps litigating whether or not an unattested deed was in fact signed by the grantor.” Id. at 52.

The question is whether or not this practice is legal.  Section 525 of the Bankruptcy Code provides the following (applicable to private, non-government employers):

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt--

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;

(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

A fair reading of the plain language of this section may lead a reasonable person to conclude that discrimination in the hiring process is prohibited.  In a recent case, the Fifth Circuit Court of Appeals reached a different conclusion and held that discrimination in the hiring process was not prohibited by Section 525(b).

In Burnett v. Stewart Title, Inc., No. 10-20250, 2011 WL 754152 (5th Cir. March 4, 2011) (click here for .pdf of opinion) the issue was whether §525(b) created a private cause of action for a debtor who was denied employment by a private employer.

The Court contrasted the language of §525(a), applicable to government units:

... a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act...

(emphasis added).  The Court noted that Congress included specific language about denying employment in subsection (a), applicable to public employers, but omitted the language in subsection (b), applicable to private employers.  Under the rules of statutory construction, it is presumed that Congress "acted intentionally and and purposefully in the disparate inclusion or exclusion" of specific language, and statutes are to be read as a whole.  In short, had Congress wanted to include the denial of employment in §525(b), which was enacted several years after subsection (a), they knew very well how to so.  We have to assume the omission was intentional.

Whether one agrees or disagrees with the principal, the rather short and straightforward opinion of the Fifth Circuit is based on straightforward rules of statutory construction.  Therefore, employers in the Fifth Circuit (Texas, Louisiana, Mississippi) (Georgia was in the 5th Cir. until 1981) apparently are free to discriminate against applicants based on a prior bankruptcy filing of the applicant or a person associated with the applicant (such as a spouse).

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.