|
|
|
Recent Developments in Business Bankruptcy By Montali, Honorable Dennis, Dumas, Cecily & Oliner, Ron*
[It is once again the pleasure of the
Receivership News to provide excerpts for our readers from the annual
“Recent Developments in Business Bankruptcy” presentation of the Bay Area
Chapter of the California Bankruptcy Forum and the Commercial Law and
Business Section of the Bay Area Bar Association. As the reader will see,
it has not been a particularly good year for commercial lenders. Our
thanks to the Hon. Dennis Montali, Ron Oliner and Cecily Dumas for
allowing us to share in their work. Ed.] The Ninth Circuit also held that
punitive damages may be awarded in an involuntary case even absent an
award of actual damages. The Ninth Circuit, however, reversed in part the
sanctions against the principals of the petitioning creditors, holding
that the court’s inherent powers did not permit it to sanction the
principals for costs not directly caused by the improper filing (i.e.,
costs for post-dismissal preparation of motion for sanctions). Orange
Blossom Ltd. P’ship v. S. Cal. Sunbelt Developers, Inc. (In re S. Cal.
Sunbelt Developers, Inc.), 608 F.3d 456 (9th Cir. 2010). The BAP reversed, observing that exempted property does not leave the estate until it revests in the debtor, which cannot happen until the time for objecting to the exemption has passed, and maybe not even then, as suggested by the Supreme Court’s recent decision in Schwab v. Reilly, 130 S. Ct. 2652 (2010). And although a bank is permitted to impose a temporary hold on a debtor’s assets in anticipation of exercising its setoff rights, see Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995), the bank here by its own admission had no such intention. The bank insisted that its only obligation was to the trustee, and that the debtors therefore had no standing to move for sanctions. But the court found that the debtors’ claim of exemption gave them an interest in the estate property over which the bank was exercising control, and so they had standing to seek a remedy for the harm they suffered thereby. Mwangi v. Wells Fargo Bank (In re Mwangi), 432 B.R. 812 (9th Cir. BAP 2010). Show Me Your Papers! The bankruptcy court confirmed that the validity of the underlying claim is not adjudicated at a relief from stay hearing. However, a movant must establish standing to bring the motion (i.e., that it has a colorable claim and is a real party in interest). In this instance, the court rejected all of GMAC's standing arguments. First, although GMAC was in possession of the note, under Arizona law GMAC did not establish it was the holder because the endorsement to GMAC was not “affixed” to the note. Second, relying on case law from other states, the court found that MERS held only legal title to the instrument, and had no financial interest in the note; hence, because MERS lacked standing, GMAC, as its assignee, also lacked standing. Third, although the court confirmed that a servicer has standing (because it suffers injury by not being able to collect servicing fees), GMAC failed to “connect the dots” and produce documents demonstrating transfers of the subject note and deed of trust through various intermediary entities to the trust for which GMAC was servicer. Accordingly, GMAC's motion was denied for lack of standing. In re Weisband, 427 B.R. 13 (Bankr. D. Ariz. 2010). Under Schwab v.
Reilly, a Fully-Exempted Homestead Can Be Forceably Sold if it
Appreciates Postpetition In the Gebhardt case, the debtor
claimed that the trustee had intentionally left the case open for longer
than necessary, and should be estopped from proceeding with the sale. The
court found that the debtor had failed to meet the requirement for
estoppel to apply, and further opined that had the trustee committed
misconduct, requiring the trustee to abandon the homestead property would
not be an appropriate remedy as it would only harm creditors. Gebhart
v. Gaughan (In re Gebhart), ---F.3d---, 2010 WL 3547641 (9th Cir.
Sept. 14, 2010). More recently, though, the Fourth Circuit held that West Virginia's bankruptcy only exemptions were constitutionally permissible, inasmuch as Congress expressly delegated to the states the power to create their own exemption schemes and did not forbid them from making certain exemptions applicable only in bankruptcy cases. See Sheehan v. Peveich (In re Sheehan), 574 F.3d 248 (4th Cir. 2009). A divided BAP panel has now adopted the Fourth Circuit's position, finding there to be “no conflict between the purposes and goals of the Bankruptcy Code and the California bankruptcy only exemption statute.” A dissent, however, would find bankruptcy only exemptions to be outside the intended scope of § 522(b)’s incorporation of state law exemption schemes, and would therefore hold them to be preempted under the Supremacy Clause. Sticka v. Applebaum (In re Applebaum), 422 B.R. 684 (9th Cir. BAP 2009). Don't Wait to Exercise
Your Setoff Rights, Especially If You've Already Accidentally Handed Over
the Assets The chapter 11 debtor and the chapter 11 trustee in related corporate debtor's case each objected to joint claims that were filed in each case by the former attorneys. The former attorneys sought a summary judgment on the grounds of issue and claim preclusion. The bankruptcy court denied summary judgment, holding that § 502(b)(4) preempts state law allowing fees to exceed reasonable value. Consequently, § 502(b)(4)’s limitation on the allowance of claims for services of insiders and attorneys of debtors applied, requiring the bankruptcy court to determine the reasonableness of the fees. The court also held that neither claim
preclusion nor issue preclusion applied, observing that “claim preclusion
is categorically not available with respect to § 502(b)(4) objections to
claim” and that the issue of the “reasonable value” of the services was
not actually litigated or decided in the arbitration. In re Siller, 427
B.R. 872 (Bankr. E.D. Cal. 2010). The district court held that the plaintiffs were judicially estopped from pursuing their claims against Aurora because they had not scheduled the potential asset in one or more of their cases. “In the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor’s schedules or disclosure statements.”
Cross-Defendant’s
Purchase of Cross-Claims from Trustee Had to Be Evaluated as Sale and
Compromise The BAP reversed, finding that the
bankruptcy court abused its discretion in approving the sale. First, the
court failed to make an appropriate inquiry into whether optimal value was
realized by the estate (necessary for a good faith determination). In
particular, although the sale generated sufficient proceeds to create a
solvent estate, the court did not take into account the debtor’s interest
in the surplus. Second, the court failed to evaluate the sale as a both a
sale under § 363 and a compromise under Rule 9019, which is necessary when
a purchaser purchases the estate’s claims against him. Fitzgerald v. Ninn
Worx Sr., Inc. (In re Fitzgerald), 428 B.R. 872 (9th Cir. BAP 2010). But the Ninth Circuit distinguished Kelly as a non-dischargeability case and held that § 547 serves a different purpose. After the State returns the preferential restitution payment it can once again recover the (nondischargeable) debt from the debtors, so the State is not unduly harmed, whereas if the State did not have to return the preference then debtors could game the system by paying nondischargeable debts with non avoidable preferences while not paying their other debts. This holding overrules Becker v. County of Santa Clara (In re Nelson), 91 B.R. 904 (N.D. Cal. 1988). The Ninth Circuit also held that the bankruptcy court (located in the Central District) had not been required to follow Nelson (a district court decision from the Northern District). In so ruling the Ninth Circuit made a number of additional statements that can be read to give bankruptcy courts substantial freedom to disagree with the district court or the BAP. The Ninth Circuit rejected the argument
that the BAP is “inferior” to district courts; it stated, “we have never
held that all bankruptcy courts in the circuit are bound by the BAP”; and
it noted that the doctrine of stare decisis does not compel one district
court judge to follow the decision of another. State Comp. Ins. Fund v.
Zamora (In re Silverman), 616 F.3d 1001 (9th Cir. 2010). The Ninth Circuit, affirming the BAP, held that the debtor’s schedules did not provide the trustee with constructive notice. Accordingly, given the trustee’s strong arm power as a hypothetical bona fide purchaser of the property, the trustee prevailed over the lender. In reaching its holding, the court relied upon the bankruptcy policy of fair distribution pro rata within classes. The court noted that there is no reason
to condition the trustee’s strong arm power on whether the schedules are
filed simultaneously with the petition or later; the statute confers the
strong arm power on the trustee “as of the commencement of the case”—even
though the trustee is not appointed at the time the petition is filed.
Chase Manhattan Bank, USA, N.A. v. Taxel (In re Deuel), 594 F.3d 1073
(9th Cir. 2010). The district court affirmed, ruling that § 3439.09(c) is a statute of repose that “extinguishes the substantive cause of action as well as the remedy,” and thus “creates an absolute backstop of seven years within which a cause of action for fraudulent transfer must be filed[.]” Based upon this analysis, the court rejected the trustee’s argument that the statute of repose could be equitably tolled, as equitable tolling should not apply if “inconsistent with the text of the relevant statute.” In re JMC Telecom LLC, 416 B.R. 738 (C.D. Cal. 2009). Ninth Circuit Issues
Treatise on Denial of Discharge Among other things, the court held that with respect to allegations of false oath by a debtor, fraudulent intent is usually proven by circumstantial evidence or by inferences drawn from the debtor’s conduct, and reckless indifference or disregard for the truth may be circumstantial evidence of intent. The court also adopted the BAP’s definition of material fact in its false oath inquiry: “A fact is material ‘if it bears a relationship to the debtor's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the debtor's property.’” While a debtor who acts in reliance on
the advice of counsel generally lacks the requisite intent for denial of
discharge, the “advice of counsel is not a defense when the erroneous
information should have been evident to the debtor. ‘A debtor cannot,
merely by playing ostrich and burying his head deeply enough in the sand,
disclaim all responsibility for statements which he has made under oath.’”
The Ninth Circuit also observed that a debtor’s intent need not be
fraudulent to deny a discharge for concealment of assets; mere intent to
delay or hinder a creditor is sufficient. Lack of injury to creditors is
irrelevant. Retz v. Samson (In re Retz), 606 F.3d 1189 (9th Cir.
2010). The court held that to prevail on complaint to except debt from discharge under securities fraud related dischargeability provision, the creditor had to satisfy both statutory requirements by demonstrating not only that a settlement or other final resolution of securities fraud claims was completed, but also that alleged securities violations occurred. The court could not rely on debtor's entry into prepetition settlement of securities fraud claims against him in order to find that alleged securities violations had in fact occurred, where settlement agreement contained a provision expressly stating that fault and liability were not conceded. The court also held that any mistake by
debtor as to legal effect of his entering into settlement of security
fraud claim had no effect on validity of settlement agreement and that the
prepetition settlement agreement fully liquidated amount of claim, thereby
precluding any further litigation on amount of claim even in bankruptcy
context. Mollasgo v. Tills (In re Tills), 419 B.R. 444 (Bankr. S.D.
Cal. 2009). The debtor asked the bankruptcy court to block the collection effort, arguing that it violated the discharge provision of the confirmed plan, which barred “any action by any party against any party based upon a claim, which existed prior to confirmation pursuant to which the [debtor] is the primary obligor.” But the debtor faced an initial hurdle: the Anti Injunction Act of 26 U.S.C. § 7421(a), which, in the BAP’s words, “prohibits the bankruptcy court from exercising jurisdiction over the IRS’s efforts to collect taxes from individuals who are not debtors in bankruptcy.” But, the debtor countered, the IRS did not object to the plan with its discharge provision, so it is bound by that plan even if the provision in question would otherwise be illegal. See Trulis v. Barton, 107 F.3d 685 (9th Cir. 1995). The court was not impressed. Although Trulis held that a confirmed plan has the same preclusive effect as a final judgment, in order for that preclusion to be effective the terms of the plan must be clear. Here, nothing in the discharge provision gave the IRS notice that its protection under the Anti Injunction Act might be compromised. Ultimately, though, it didn't matter,
since the IRS’s right to pursue collection against a “responsible person”
is independent of its claim against the corporation, and the debtor’s
principals therefore had their own primary obligation to the IRS. The
debtor was not the “primary obligor” for purposes of the plan’s discharge
provision, and the IRS was free to pursue its collection effort.. J.J.
Re Bar Corp., Inc. v. U.S. (In re J.J. Re Bar Corp., Inc.), 420 B.R.
496 (9th Cir. BAP 2009). The trustee argued that the bankruptcy court should apply a mechanical test for determining “projected disposable income” even though such an approach does not take into account income and expenses that are known or virtually certain at the time of confirmation. The bankruptcy court (2007 WL 1451999) denied the objection. The 10th Circuit BAP (380 B.R. 17) and the Tenth Circuit (545 F.3d 1269) both affirmed. Following the majority line of cases and
rejecting the Ninth Circuit’s (minority) mechanical approach set forth in
In re Kagenveama, 541 F.3d 868 (9th Cir. 2008), the Supreme Court (in a
8–1 decision) held that bankruptcy courts have discretion (notwithstanding
certain language in BAPCPA) to determine “projected disposable income” on
a forward-looking basis. Hamilton v. Lanning, 130 S. Ct. 2464
(2010). |
