Georgia Bankruptcy Blog

Georgia Bankruptcy Blog

11th Circuit Rules On The Georgia Real Property Remedial Statute – Who Is A “Subscribing Witness?”

Once again, a Bankruptcy case leads to a key opinion in Georgia real estate law and, as often the case, the Chapter 7 Trustee prevails.  In In re Lindstrom, 2022 WL 1041192 (11th Cir. April 7, 2022) (click here for .pdf) the issue was the validity of a security deed, the interpretation of the Georgia “Remedial Statute” and the definition of “subscribing witness.” The basic, undisputed facts are:

When [Debtor] Virginia Lindstrom needed to put up collateral for a $174,500 loan from LoanDepot.com, LLC, she executed a security deed for a piece of property in Lawrenceville, Georgia. As part of that process, her sister attested the deed, signing that she had witnessed its execution. At some point later that same day, Lindstrom also acknowledged the deed to her closing attorney (a public notary), who certified the acknowledgment on the deed’s final page. Although no one recognized it then, the deed was invalid on its face. Under Georgia law, a deed must be attested by two witnesses, and at least one of them needs to be an official such as a notary or court clerk. O.C.G.A. §§ 44-2-15, 44-14-61. The attorney was a notary, but he failed to attest the deed. And his certification of Lindstrom’s acknowledgment was not enough to make the deed valid. There is likely an easy, if unsatisfying, explanation for this oversight: a statutory amendment. Indeed, had the deed been signed only a few weeks earlier, it would have been completely valid. At that time Georgia law permitted deeds to be either attested by or acknowledged before an official. See O.C.G.A. § 44-14-61 (1931) (amended July 1, 2015); O.C.G.A. § 44-14-33 (1995) (amended July 1, 2015). Lindstrom had acknowledged the deed, but the old law no longer governed.

The Debtor filed a Chapter 7 petition in February 2017 and the Chapter 7 Trustee filed an adversary proceeding against LoanDepot and Pingora Loan Servicing (who had taken over the loan) to avoid the security deed.  Scarver v. LoanDepot.com and Pingora Servicing, LLC, Adv. Proc. No. 18-05174 (Bankr. N.D.Ga.) (Sigler, J.).  Bankruptcy Judge Sigler granted the Trustee’s Motion for Summary Judgment (click here for .pdf of summary judgment order).  The lenders appealed and the District Court reversed (click here for District Court opinion).  The Trustee appealed to the 11th Circuit Court of Appeals and the Circuit reversed the District Court. Continue Reading

District Court Upholds Georgia Bankruptcy Court’s Restrictions On Chapter 7 Trustee Attorneys’ Fees

[Updated – The Trustee has filed a Motion for Rehearing (click here for .pdf of motion)]

In this lengthy post, we discuss Judge Paul Bonapfel’s 73-page Order in which he skewered the fee application of a Chapter 7 Trustee and effectively changed the way all judges in the Northern District of Georgia view fee applications for Trustees’ counsel. In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331 (Bankr. N.D.Ga. October 28, 2019).  Many of the judges have required that attorneys now include in employment orders language such as this –  “The approval of employment of counsel is limited to those duties that are not trustee duties. See generally, In re McConnell, 19-67128-PWB, 2021 WL 203331 (Bankr. N.D. Ga, Jan. 4, 2021)”  (this is an actual note I received from chambers after submitting an employment order).  Judges have scrutinized fee applications from the bench, asking lawyers if they have complied with McConnell.  You can read the full, very detailed opinions – the initial twenty-four page Order and Notice (click here for .pdf) and the seventy-three page Final Order (click for .pdf or the Westlaw link). The Trustee appealed Judge Bonapfel’s Order to the District Court and on March 11, 2022 the District Court entered its Order. Gordon v. McConnell and Gargula, Civil Action No. 1:21-cv-304-AT (N.D. Ga. March 11, 2022) (click here for .pdf of District Court Order).

The short #tldr summary of the 38-page District Court Order is that it is not good for Chapter 7 Trustees and their attorneys.  The District Court essentially upheld Judge Bonapfel’s analysis of what are, or are not, “Trustee duties” that are included in the Trustee commission and not separately compensable as attorneys’ fees. See January 4, 2021 Bonapfel Order at pp. 20-34.  After reviewing the facts of the Bankruptcy Case at pp. 2-10, the District Court identified the issues on appeal.

Appellant [Trustee] raises eleven issues in his brief on appeal. However, by Appellant’s own admission, these eleven issues can be distilled into three general grounds for error: that the bankruptcy court erroneously concluded

1. that the firm be denied compensation for services that were the performance of the Trustee’s statutory duties;

2. that the firm’s services in opposing conversion to chapter 13 are not allowable because they were not necessary or beneficial to the estate; and

3. that the firm should be denied compensation for services in connection with Appellant’s retention of the firm and its application for compensation.

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Eleventh Circuit Addresses Deadlines to Appeal Order of District Court (when Acting as Bankruptcy Appellate Court) to Court of Appeals

In a relatively brief opinion, the Eleventh Circuit Court of Appeals ruled on the deadlines for appealing an order from the District Court (acting as an appellate court for a Bankruptcy Court Order) to the Court of Appeals.  Appellants appealed a Bankruptcy Court Order to the District Court for the Northern District of Georgia.  On July 15, 2021 the District Court dismissed the appeal after finding that Appellants lacked standing, and a Judgment was entered the same day.  Four days later, on July 19, 2021, an Amended Judgment was entered that only corrected the court division in the header.  Appellants appealed the District Court Order and Judgment on August 17, 2021.

When an appeal is taken from a judgment or order of a district court exercising appellate jurisdiction in a bankruptcy appeal, the Federal Rules of Appellate Procedure apply with certain exceptions not relevant to this appeal. See Fed. R. App. P.
6(b)(1)(A). This includes Rule 4(a)(1), which provides that a notice of appeal must be filed with the district clerk within 30 days after entry of the judgment or order appealed from. Fed. R. App. P. 4(a)(1). If the last day of a period falls on a weekend or holiday, the period runs until the next day that is not a weekend or holiday. Fed. R. App. P. 26(a)… Because the amended judgment did not change a matter of substance or resolve a genuine ambiguity, the time to appeal did not begin anew. See FTC v. Minneapolis-Honeywell Reg. Co., 344 U.S. 206 (1952). Thirty days after the July 15 final judgment was a Saturday, August 14, so the period ran until Monday, August 16. See Fed. R. App. P. 4(a)(1), 6(b)(1), 26(a). [Appellant’s] August 17 notice of appeal was thus one day late.

Appellants also argued that the deadline to appeal should be extended three days because the judgment was received by mail. See Fed. R. Civ. Proc. 6(d) (“When a party may or must act within a specified time after being served and service is made under Rule 5(b)(2)(C) … 3 days are added after the period would otherwise expire under Rule 6(a)”).

But we have held that the 30-day requirement of Appellate Rule 4(a)(1) is not affected by former Civil Rule 6(e), now Civil Rule 6(d), because the time to appeal starts from entry of the judgment, not from service of the notice. See Fed. R. App. P. 4(a)(1); Lashley v. Ford Motor Co., 518 F.2d 749, 750 (5th Cir. 1975). Although Lashley was a civil case, Rule 4(a)(1) applies to appeals from an order of the district court exercising appellate jurisdiction in a bankruptcy appeal, and Lashley’s reasoning also applies here. See Fed. R. App. P. 4(a)(1), 6(b)(1). Therefore, [Appellants’] notice of appeal was untimely.

Appeal dismissed.

In re SUGARLOAF CENTRE, LLC., 2022 WL 663020 (11th Cir. March 4, 2022)

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.  

 

When Does a Judgment Lien and FiFa Attach to Real Property in Georgia?

In Georgia, does a judgment lien attach to real property as of the date the judgment was entered or as of the date and time the writ of fieri facias on that judgment is properly recorded in the county records, as required under Georgia law?  The Supreme Court of Georgia answered this question in Synovus Bank v. Kelley, No. S20Q0843 (August 24, 2020) (click here for .pdf).  The case came to the Georgia Supreme Court after the United States District Court for the Middle District of Georgia certified the question to the Court. Specifically, the following two questions were certified:

Whether as between a creditor, who obtains a judgment against a debtor’s real property, and the judgment debtor, OCGA § 9-12-80 creates a lien on the debtor’s real property or rather is a lien against the debtor’s real property created at the time of recordation pursuant to OCGA § 9-12-86. If such lien is created at the time of recordation, whether the effective date of creation of that lien relates back to the date of the judgment for purposes of establishing the date a creditor obtained a lien against the judgment debtor’s real property.

The basic, relevant facts were stipulated to by the parties.  On December 7, 2016 Synovus obtained a judgment against the Brownlees in Tift County, Georgia and the Writ of Fieri Facias (“FiFa”) was issued on December 22, 2016 and recorded on the court’s General Execution Docket.  On January 25, 2017 the FiFa was recorded on the GED of the Superior Court of Worth County, where the Brownlees owned real property.  On March 21, 2017, the Brownlees filed a Chapter 11 Bankruptcy petition, and the case was converted to Chapter 7 on March 7, 2018.  In July 2018, Chapter 7 Trustee Walter Kelley filed an adversary proceeding to avoid the judicial lien on the Brownlee’s real property as preferential transfers, as the recording of the FiFa in both counties was within 90 days of the Bankruptcy petition date.

Both the Trustee and Synovus filed motions for summary judgment. The Bankruptcy Court granted the Trustee’s motion “holding that ‘[u]nder Georgia law, only recording a judgment creates a judicial lien on real property’ and thus the transfer of interest in the Brownlees’ real property occurred on the date the Fi. Fa. was recorded, not the date the judgment was entered.” In re Brownlee, 593 BR 916, 923 (IV) (Bankr. M.D. Ga. 2018). Synovus appealed to the District Court, which certified the above questions to the Georgia Supreme Court.  For purposes of this post, knowledge of preferential transfer law is presumed and the focus is on Georgia real estate law. Continue Reading

Elite Bankruptcy Consulting Firms Battle It Out With Fraud and RICO Claims Related to Bankruptcy Disclosures and Lost Engagements

In Jay Alix, as assignee of AlixPartners, LLP v. McKinsey & Co., Inc., 2022 WL 163800 (2nd Cir., January 19, 2022) (click here for .pdf), two major competitors in the niche market of Bankruptcy advising to estates with a billion dollars or more of assets were in court against each other over lucrative consulting assignments. Alix sued McKinsey, three of its subsidiaries and several current or former employees under state law and the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 USC §1961, et seq.

The amended complaint alleges that McKinsey secured lucrative consulting assignments in this market by knowingly and repeatedly filing disclosure statements in the Bankruptcy Court containing incomplete, misleading, or false representations concerning conflicts of interest. Alix alleges that this pattern of misrepresentations to the Bankruptcy Court resulted in injury to AlixPartners through the loss of engagements it otherwise would have secured and of substantial revenues those assignments would have generated, as well as through the loss of the opportunity to compete for them in an unrigged market… Alix alleges that AlixPartners was directly harmed by McKinsey’s conduct because, had McKinsey truthfully and timely disclosed its conflicts to the Bankruptcy Court, McKinsey would have been disqualified from obtaining at least some of the assignments it secured. In turn, Alix alleges that AlixPartners, because of its major presence in this niche market, would have been retained in at least some of the cases.

Alix also alleges a “pay-to-play” scheme under which McKinsey arranged meetings between its clients and bankruptcy attorneys in exchange for exclusive bankruptcy assignment referrals from those attorneys. Consistent with this scheme, Alix alleges that McKinsey offered to introduce AlixPartners to its clients if Alix would “drop the issues he had raised concerning McKinsey’s acknowledged pay-to-play scheme and its illegal disclosure declarations.”

The District Court dismissed Alix’s RICO claims for failure to show a causal connection between the alleged RICO violations and Alix’s injuries. See 470 F.Supp.3rd 310 (S.D.N.Y. 2020).  The Third Circuit reversed and found that the amended complaint adequately alleged proximate causation under RICO, and remanded the case. Continue Reading

Roth IRA Is Exempt Under New Georgia Exemption Laws, 11th Circuit Says in Case of First Impression

In In re Hoffman, 2022 WL 203415 (11th Cir. January 24, 2022) (click here for .pdf) the issue before the Court was whether Roth IRAs were exempt pursuant to 11 U.S.C. §541(c)(2) or O.C.G.A. § 44-13-100(a)(2)(E).  This is a case of first impression in the Circuit, based upon recent amendments to the Georgia exemption statutes.

In his schedules, Debtor disclosed an interest in 1) Traditional IRA, 2) Roth Contributory IRA, and 3) Fidelity 401(k), and claimed exemptions for all three. Signature Bank objected to the exemptions for all accounts.  The Bankruptcy Court overruled the objections for the Traditional IRA and 401(k), but granted the objection for the Roth IRA based on the absence of recent authority for the new Georgia statutes.  The District Court upheld the Bankruptcy Court Order and the Debtor appealed.

In 2016 Georgia amended the exemption statutes, and O.C.G.A. § 18-4-6(a)(2)  now provides that “[f]unds or benefits from an individual retirement account or from a pension or retirement program shall be exempt from the process of garnishment until paid or otherwise distributed to a member of such program or beneficiary thereof.”  Thus, according to the Court, “Georgia’s current exemptions no longer differentiate between a traditional IRA and a Roth IRA. referring solely to “an individual retirement account.

We find that the development of the caselaw in this area and the subsequent amendments to the Georgia Code reflect the Georgia Assembly’s intention to clarify that both traditional IRAs as defined in 26 U.S.C. § 408 and Roth IRAs as defined in § 408A are exempt from garnishment, thus subjecting IRAs to a restriction on transfer by state statute, see [In re Meehan, 102 F.3d 1209 (11th Cir. 1997)] at 1211–12, and making both types of IRAs eligible for exclusion under the Bankruptcy Code. The current version of the exemptions provision compels this result. By no longer listing the kinds of retirement accounts that are exempt from garnishment, and instead exempting “individual retirement account[s],” there is no basis for us to conclude that Georgia intended to treat traditional IRAs differently than Roth IRAs for the purpose of garnishment. It is undisputable that a Roth Individual Retirement Account, by its very name and definition is “an individual retirement account.” See O.C.G.A. § 18-4-6(a)(2); see also 26 U.S.C. § 408A(a) (noting that Roth IRAs shall be treated “in the same manner” as IRAs for the purposes of this title).

As noted above, a debtor’s property is excluded from his bankruptcy estate pursuant to federal law if: (1) the debtor has “a beneficial interest in a trust”; (2) the interest has a restriction on transfer; and (3) the restriction is enforceable under either state or federal law. See § 541(c)(2); [In Matter of Upshaw, 542 B.R. 619 (Bankr. N.D. Ga. 2015)] at 622. Roth IRAs meet all three requisite elements. No one contests that, just like a traditional IRA’s corpus, a Roth IRA’s corpus qualifies as a beneficial interest in a trust. And, pursuant to both the 2006 and the 2016 amendments to the exemptions provision, Roth IRAs have a restriction on transfer that is enforceable under state law.

 

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.  

 

The Expansion of the Rooker-Feldman Doctrine is Over, and Far Fewer Cases Will Be Barred, says Eleventh Circuit Panel.

Apologies in advance for the lengthy post and quotes, but my goal was to provide a meaningful summary of the change-of-course for the Eleventh Circuit and scaling back the application of the Rooker-Feldman Doctrine.

The Rooker-Feldman Doctrine, in general, is a “narrow jurisdictional doctrine” that “simply establishes that a party who loses a case in state court cannot appeal that loss in a federal district court.”  Behr v. Campbell, 2021 WL 3559339 (11th Cir. August 12, 2021) (click here for opinion or here for .pdf).

This is a straightforward enough rule, and the Supreme Court has held the line without hesitation for nearly a century. But the story has been different in the lower courts—our application of Rooker-Feldman has been unrestrained to say the least, sometimes leading to dismissal of any claim that even touches on a previous state court action. Though the Supreme Court has stepped in to restore the doctrine to its original boundaries, courts have continued to apply Rooker-Feldman as a one-size-fits-all preclusion doctrine for a vast array of claims relating to state court litigation.

In Behr, the Plaintiff and two of his children filed a 30-count pro se complaint, alleging tort, Constitutional and statutory counts against 18 defendants after “a series of child custody interventions and state proceedings.” The Plaintiff had lost custody of two of his four children and alleged in state court a conspiracy between his ex-wife, her partner and various state and school officials.  Two defendants removed the case to federal District Court because of the federal law claims in the complaint.

The second amended complaint rounds out at 75 pages and contains 30 counts. Those counts include allegations that the defendants violated the Behrs’ Fourth and Fourteenth Amendment rights and federal law in a number of ways—fabricating reports, pressuring the children to make false statements against their father, entering Louis’s home without permission and on false pretenses, and discriminating against the Behrs on the basis of age, sex, disability, and religion. The Behrs also raise several state-law claims.

The District Court dismissed the case twice with leave to file and amended complaint, then seven days after the last Amended Complaint was filed the Court dismissed the case for lack of subject-matter jurisdiction.

The Rooker-Feldman doctrine, it said, prevented it from reviewing the Behrs’ claims because they were “presented or adjudicated by a state court” or “ ‘inextricably intertwined’ with a state court judgment.” The district court concluded that the Behrs’ claims were, at bottom, “requesting the Court review the determinations by the state that caused two of [Louis’s] children to be removed from his custody and determine that it was the product of falsified reports.” It dismissed the entire complaint on that basis, with prejudice.

The Panel first discussed the expansion of Rooker-Feldman over time:

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11th Circuit – Creditor Cannot Pursue Pre-Petition Fraudulent Transfer Claims Against Debtor for Non-Dischargeable Debt; Establishes Standard of Review for In re Jet Florida.

In SuVicMon Development, Inc. v. Morrison, __ F.3d __, 2021 WL 1136546 (11th Cir. March 25, 2021) (click here for .pdf), the plaintiffs are three corporations that sued the Debtor for fraud and securities violations in state court. Plaintiffs subsequently amended the complaint to include fraudulent transfer claims against Debtor and his two sons. Debtor then filed a Chapter 7 petition, and the Bankruptcy Court lift the automatic stay so the state court case could proceed to liquidation of the claims. A judgment was entered against Debtor on some claims and they were excepted from Debtor’s general discharge. Nevertheless, the Plaintiffs sought to continue the fraudulent transfer claims against the Debtor.

The first argument of Plaintiffs was that the suit was an action to collect the non-dischargeable debt (the securities fraud judgment), and because the debt was non-dischargeable the discharge injunction of 11 U.S.C. §524(a)(2) did not  apply. The Circuit Panel disagreed.

The plaintiffs’ argument is incorrect. The reason is that a fraudulent transfer action is “not a mere ‘collection action,’ ”but “rather a claim that requires an independent adjudication of liability based on statutorily-defined elements.” Under the AUFTA, a creditor has a fraudulent transfer claim against a debtor for actual fraud whenever “the debtor made the transfer with actual intent to hinder, delay, or defraud any creditor of the debtor.”…  A fraudulent transfer can also be found on the basis of constructive fraud, typically when the debtor makes the transfer without receiving “reasonably equivalent value,” under certain circumstances specified in the statute… Fraudulent transfer is a distinct cause of action, and, at least in the case of actual fraud, a tort…

The distinctness of a fraudulent transfer action is shown most clearly by the availability of damages specific to that action. While the remedy for fraudulent transfer may be avoidance of the transfer or execution directly on the transferred asset, see Ala. Code § 8-9A-7(a)(1), (b), under Alabama law it appears that a fraudulent transfer can in some instances result in an award of compensatory damages in addition to the value of the creditor’s underlying claim… It also appears that punitive damages may be available, at least in instances of actual fraud…  The plaintiffs’ reasoning, accordingly, fails to distinguish between the different potential debts involved in this case…

A fraudulent transfer action differs in this respect from execution on a judgment. Modes of execution and associated proceedings, such as writs of execution, attachment, judgment liens, and garnishment, do not constitute a new claim against the debtor or give rise to a new debt distinct from the judgment being executed. The reason for this, however, is that execution and associated proceedings are unlike ordinary causes of
action against the debtor; they mostly are not causes of action at all. Because execution proceedings are ancillary to the prior judgment … they do not require any allegation of wrongdoing but are instead based simply on an executable judgment and the identification of property appropriately subject to execution. Modes of execution are generally in rem, in the sense that they “confer a property interest on the judgment creditor that satisfies the judgment”… Garnishment, by which a creditor may obtain property of the debtor or money due to the debtor from a third party, has been described as quasi in rem:… it typically both gives the creditor a lien on the property… and constitutes an action brought in personam against the garnishee. Another exceptional case is that of an action to enforce a foreign judgment, which is brought in personam against the debtor, but does not depend on any conduct of the debtor and merely makes the judgment effective and executable in the forum jurisdiction…  A fraudulent transfer action is not an execution proceeding, and thus is not a ‘collection action’ in any sense helpful to the plaintiffs’ argument. Fraudulent transfer is a cause of action which can be brought against the debtor in personam

The plaintiffs’ first argument, then, is unsuccessful: a fraudulent transfer action does not function as an execution proceeding, and the fact that the underlying claim is non-dischargeable does not compel the conclusion that the fraudulent transfer claim is non-dischargeable.

(Several citations omitted).

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Second Circuit Court Of Appeals: “We Said What We Said” About Brunner Test And Student Loans

In In re Tingling, __ F3d __, 2021 WL 922448 (2nd Cir. March 11, 2021) (click for .pdf), the Debtor filed an adversary proceeding seeking discharge of her student loans.  The Bankruptcy Court determined that the debtor failed to meet the Brunner Test, and the District Court affirmed.  The Debtor appealed to the Second Circuit, arguing that the lower courts abused their discretion in finding that she would not face an “undue hardship” if her loans were not discharged. The Debtor also argued that the Brunner Test has, over time, become too high a burden for debtors to satisfy.  The Second Circuit disagreed, and affirmed. It is probably relevant that the Debtor was pro se for the latter part of the adversary proceeding and appeals. I do not really find this to be a close call on the Brunner Test, so perhaps the Second Circuit took the opportunity to let everyone know the test is still the test.

Section 523(a)(8) provides:

(a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for— 

(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Pursuant to Brunner v. N.Y State Higher Educ. Servs. Corp., 831 F.2d 395 (2nd Cir. 1987) – the infamous “Brunner Test” –

[A] debtor who claims “undue hardship” to defeat the statutory presumption against a student loan discharge must make the following specific factual showing by a preponderance of the evidence:

(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;

(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

(3) that the debtor has made good faith efforts to repay the loans.

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Eleventh Circuit Allows Individual Chapter 11 Debtor To Argue Appointment Of Trustee Violated Thirteenth Amendment

In In re Breland, __ F.3d __ , 2021 WL 910657 (11th Cir., March 10, 2021) (click here for .pdf) the individual Debtor filed a voluntary Chapter 11 petition.  After it was determined that he was transferring assets and defrauding his creditors a Chapter 11 Trustee was appointed.

[Debtor] protested that the trustee’s appointment violated his Thirteenth Amendment right to be free from “involuntary servitude”— because, he said, under the trustee’s direction, all of his postpetition earnings would be put into the bankruptcy estate for the benefit of his creditors. The bankruptcy court dismissed [Debtor’s]  Thirteenth Amendment claim as unripe, and, on review, the district court similarly held that [Debtor] couldn’t show an injury-in-fact sufficient to confer Article III standing…

The Eleventh Circuit panel disagreed with the District Court, finding that “[Debtor’s] loss of authority and control over his estate, which he suffered as a result of his removal as the debtor-in-possession, constitutes an Article III-qualifying injury-in-fact that is both traceable to the bankruptcy court’s appointment of the trustee and redressable by an order vacating that appointment...”  Accordingly, the Panel held that Debtor had standing to pursue his Thirteenth Amendment arguments.

The Thirteenth Amendment to the United States Constitution provides the following:

Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

Of course, this Amendment is most notable for abolishing slavery rather than protecting individuals who have filed voluntary Bankruptcy petitions.  Nevertheless, the Panel left a small opening for the Debtor to make his case.

Both the bankruptcy court and the district court held that [Debtor’s] Thirteenth Amendment claim was nonjusticiable in the absence of a reorganization plan requiring [Debtor] to work and devote his income to paying off his creditors —the bankruptcy court because the claim wasn’t ripe, and the district court because Debtor had suffered no injury-in-fact. Whatever the merits of [Debtor’s] Thirteenth Amendment challenge—and we are skeptical—we hold that the appointment of the trustee sufficiently diminished [Debtor’s] ability to control the assets in his own bankruptcy estate to satisfy Article III’s standing requirements…

Before the appointment of a trustee—i.e., while he remained the debtor-in-possession—[Debtor] could, even without the bankruptcy court’s approval, hire professionals whose work is “necessary in the operation” of his business, id. § 327(b); use, sell, or lease the property of the estate in the ordinary course of business, id. § 363(c)(1); and obtain unsecured credit in the ordinary course of business, id. § 364(a). Likewise, before the
trustee’s appointment, [Debtor] could do any of the following, so long as he obtained the bankruptcy court’s approval: hire professionals to assist in the reorganization, id. § 327(a); use, sell, or lease estate property or obtain unsecured credit outside the ordinary course of business, id. §§ 363(b)(1), 364(b); accept and reject executory contracts and unexpired leases to which he was a party, id. § 365(a); and bring most avoidance actions on his own behalf, id. § 544, 548.

When the bankruptcy court appointed a trustee, and thereby deposed [Debtor] as the debtor-in-possession, it stripped him of the ability to do—or to seek permission to do— any of those things. The consequent loss of authority over his estate constitutes an Article III-qualifying injury-in-fact. And to round out the standing analysis, [Debtor’s] injury is “fairly traceable” to the appointment of the trustee, and it is “redress[able],” in the sense that an order removing the trustee would have the effect of restoring him to debtor-in-possession status, with all its attendant rights and responsibilities. [See Friends of the Earth, Inc. v. Laidlaw Envtl. Servs., Inc., 528 U.S. 167, 180–81, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000)]. We thus hold that [Debtor] has Article III standing to pursue his Thirteenth Amendment challenge.

The Panel not-so-subtly expressed skepticism about the Debtor’s 13th Amendment challenge in the Order and concluded:

It’s oh-so tempting to forge ahead and address the merits of [Debtor’s] Thirteenth Amendment claim, but our hands are tied. It’s true, of course, that we can affirm a district court’s judgment based on any ground supported by the record…  But when the district court here held that [Debtor] lacked standing to sue, it dismissed his claim for lack of subject-matter jurisdiction—and thus without prejudice… Were we to range beyond the jurisdictional issue here and reject [Debtor’s] claim on the merits, we would, in effect, be directing a dismissal with prejudice—and thereby altering the district court’s judgment. That, we cannot do.

Reversed and remanded.  Perhaps we will see this case again.

 

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Chapter 11 cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.