FOR PUBLICATION
UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT ______
BAP NO. PR 16-034 ______
Bankruptcy Case No. 12-08567-MCF Bankruptcy Case No. 12-08570-MCF (Consolidated) Adversary Proceeding No. 14-00030-MCF ______
COUSINS INTERNATIONAL FOOD, CORP., a/k/a IHOP Caguas, and CIF BARCELONETA CORP., a/k/a IHOP Barceloneta, Debtors. ______
ENCANTO RESTAURANTS, INC., Plaintiff-Appellant,
v.
LUIS S. AQUINO VIDAL, OLGA M. VIDAL, HÉCTOR A. CORTÉS BABILONIA, and GUILLERMO D. RODRÍGUEZ SERRANO, Defendants-Appellees. ______
Appeal from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Mildred Cabán Flores, U.S. Bankruptcy Judge) ______
Before Bailey, Harwood, and Fagone, United States Bankruptcy Appellate Panel Judges. ______
Hermann D. Bauer Alvarez, Esq., Nayuan Zouairabani Trinidad, Esq., and Gabriel L. Olivera Dubón, Esq., on brief for Plaintiff-Appellant. Jacqueline E. Hernandez Santiago, Esq., on brief for Defendants-Appellees. ______
March 21, 2017 ______Fagone, U.S. Bankruptcy Appellate Panel Judge.
Encanto Restaurants, Inc. (“Encanto”), the purchaser of substantially all of the assets of the chapter 11 debtor, Cousins International Food, Corp., a/k/a IHOP Caguas (the “Debtor”), appeals from the bankruptcy court’s June 14, 2016 Opinion and Order (the “June 2016 Order”).1
Encanto also appeals from the bankruptcy court’s June 15, 2016 Judgment (the “Judgment”).
By its appeal, Encanto attempts to challenge two refusals by the bankruptcy court: one relating to Encanto’s requests for relief under § 362, and a second relating to its requests for relief under a certain sale order (the “Sale Order”).2
Encanto lacks standing to pursue an appeal from the June 2016 Order and the
Judgment to the extent that those rulings denied Encanto’s requests for relief for alleged violations of § 362’s automatic stay. Further, the bankruptcy court committed no error when it declined to grant Encanto relief for alleged violations of the Sale Order. Thus, we
DISMISS a portion of this appeal for lack of standing and, as to the remainder of the appeal, we AFFIRM the bankruptcy court’s orders.
1 In that order, the bankruptcy court: (1) denied Encanto’s request for reconsideration of the September 23, 2015 order (the “September 2015 Order”), denying the motion for partial summary judgment (the “Partial Summary Judgment Motion”) filed by Encanto, the Debtor, and CIF Barceloneta Corp. (“CIF”), against the defendants-appellees, Luis S. Aquino, a minor, and his mother, Olga M. Vidal Rodríguez (the “Aquinos”), and their attorneys, Héctor A. Cortés Babilonia and Guillermo D. Rodríguez (the “Attorneys”) (collectively, the “Defendants”), on their Amended Complaint; (2) denied Encanto’s second request for the entry of summary judgment in its favor (the “Second Summary Judgment Motion”); and (3) granted the Defendants’ cross-motion for summary judgment on the Amended Complaint.
2 Unless expressly stated otherwise, all references to “Bankruptcy Code” or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. §§ 101, et seq. All references to “Rule or Rules” are to the Federal Rules of Civil Procedure. References to “Bankruptcy Rule” are to the Federal Rules of Bankruptcy Procedure.
BACKGROUND
I. The Local Court Action
The Debtor, an International House of Pancakes (“IHOP”) franchise operator, employed
Luis S. Aquino (“Luis”) for several months in 2011. In September 2011, the Aquinos, represented by the Attorneys, filed a complaint against the Debtor (the “Local Court Action”) in the Commonwealth of Puerto Rico, Court of First Instance in Arecibo (the “Local Court”), alleging that the Debtor unlawfully terminated Luis’ employment. In its answer to the Aquinos’ complaint, the Debtor denied any wrongdoing and asserted a number of affirmative defenses.
II. The Chapter 11 Filing
In October 2012, the Debtor filed a voluntary petition for chapter 11 relief in the United
States Bankruptcy Court for the District of Puerto Rico.1 The Debtor did not disclose the pendency of the Local Court Action in its Statement of Financial Affairs or list the Aquinos as creditors in its Schedules. Therefore, the Aquinos did not receive notices regarding the proceedings and deadlines in the Debtor’s bankruptcy case.
On November 15, 2012, counsel for the Debtor filed an “informative motion” in the
Local Court Action (the “Informative Motion”), indicating that she had learned “through the press” that the Debtor had filed a chapter 11 petition. In an order entered on December 5, 2012
(the “December 2012 Order”), the Local Court directed the Debtor to submit evidence of its bankruptcy filing and to prove that it listed Luis as a creditor in its bankruptcy case. The Debtor did not comply with that order.
1 On the same date, CIF also filed a voluntary petition for chapter 11 relief. Cousins and CIF were later substantively consolidated. However, CIF was not a defendant in the Local Court Action.
III. The Sale Motion
On December 28, 2012, the Debtor, CIF, and Encanto filed an “urgent joint motion” with the bankruptcy court seeking judicial approval of the sale to Encanto of substantially all of the Debtor’s assets, including two IHOP restaurants (the “Restaurants”), free and clear of all liens, claims, interests, and encumbrances, pursuant to § 363 and § 365 (the “Sale Motion”).
Additionally, they requested a determination that Encanto was a good faith purchaser. The
Asset Purchase Agreement accompanying the Sale Motion provided that Encanto would not assume or be liable for any obligations of the Debtor, including any employee liabilities or causes of action resulting from the Debtor’s operation of the Restaurants. After a hearing, on
February 26, 2013, the bankruptcy court entered an order approving the Asset Purchase
Agreement (as amended) and the Sale Order, thereby approving the proposed sale. The Sale
Order provided, inter alia, that Encanto would not be “liable, either directly or indirectly, as successor, transferee or otherwise, for any liabilities or interests of the Debtor[ ] . . . as a result of the sale or purchase of the Assets or employment of any former employee of the Debtor . . . .”
Pursuant to Encanto’s subsequent motion, the bankruptcy court extended the original sale date to March 13, 2013. The docket reflects that the Aquinos never received notice of the bankruptcy proceedings and orders.
IV. The Local Court Judgment
Meanwhile, as the bankruptcy proceedings advanced, so, too, did the Local Court Action.
On January 18, 2013, the Defendants requested the entry of a default judgment against the
Debtor in the Local Court Action due to the Debtor’s various omissions, including its failure to comply with the December 2012 Order. Thereafter, the Local Court scheduled a pretrial conference, at which the Debtor failed to appear. Accordingly, the Local Court entered a judgment against the Debtor in May 2013 (the “Local Court Judgment”); the following month, the Local Court assessed damages against the Debtor in the amount of $60,000.00 and awarded
Luis additional remedies, including the reinstatement of his job. The Aquinos attempted to enforce the Local Court Judgment against Encanto by filing a motion for contempt and execution of judgment in the Local Court Action on October 23, 2013. They asserted that
Encanto was liable for the entire amount of the Local Court Judgment pursuant to “the doctrine of successor employer [liability].”
One week later, the Local Court entered an amended judgment (the “Amended Local
Court Judgment”). Although it is unclear whether Encanto was named as a party defendant in the Amended Local Court Judgment, Encanto maintains that the purpose of the amendment was to enable the Defendants to enforce the original Local Court Judgment against it.
In December 2013, Encanto filed a “notification” in the Local Court Action, in which it asked the Local Court to take notice of the Sale Order and of the “nullity” of any procedural events in the Local Court Action that post-dated the petition date, including, but not limited to, the Local Court Judgment. Additionally, Encanto requested the dismissal of the Local Court
Action pursuant to § 362(a)(1). Together with the Debtor, Encanto also filed an Urgent Joint
Motion for an Order to Show Cause in the bankruptcy court, asking that court to compel the
Aquinos and Attorney Cortés Babilonia to demonstrate why they should not be found in contempt for violating the automatic stay and the Sale Order. The bankruptcy court denied the motion due to the movants’ failure to commence an adversary proceeding against the Aquinos.
V. Encanto’s Adversary Proceeding
Thus, in February 2014, Encanto—acting alone—commenced an adversary proceeding against the Defendants by filing a Complaint for Injunctive and Other Relief (the “Complaint”), setting forth three separate counts. In the first count, Encanto requested an order “enjoining
[the] Defendants from any further litigation of the” Local Court Action and from enforcing the Local Court Judgment and the Amended Local Court Judgment (collectively, the “Judgments”) pursuant to § 362(a). In the second count, Encanto sought, also pursuant to § 362(a), a declaratory judgment that the Judgments were “null, void and unenforceable” because they were entered in violation of the automatic stay. And in the third count, Encanto requested “an order finding the Defendants in contempt” and imposing sanctions against them for their willful violation of the automatic stay and the Sale Order.
In their answer to the Complaint, the Defendants asserted, among other things, that:
(1) Encanto was not entitled to injunctive relief, as it was not a debtor and, moreover, the
Defendants did not levy on any property of the Debtor’s bankruptcy estate; (2) Encanto was not entitled to declaratory relief because the Defendants were never included as creditors in the Debtor’s bankruptcy schedules; (3) the automatic stay did not apply to the Defendants; and
(4) the Defendants’ claims were not subject to discharge, as they were known creditors without actual notice of the Debtor’s bankruptcy petition.
In July 2014—seven months after Encanto filed the Complaint—Encanto, the Debtor, and CIF filed an Amended Complaint, without seeking the bankruptcy court’s leave or the
Defendants’ consent to add the Debtor and CIF as co-plaintiffs.2 The Amended Complaint added a fourth count, seeking actual damages in the approximate amount of $222,000.00, as well as punitive damages for the Defendants’ alleged violations of the automatic stay and of various court orders, including the order approving the Asset Purchase Agreement and the Sale
Order.
2 Rule 15, made applicable to adversary proceedings by Bankruptcy Rule 7015, provides, in relevant part, that a “party may amend its pleading once as a matter of course within . . . 21 days after serving it” or with “the opposing party’s written consent or the court’s leave.” See Fed. R. Civ. P. 15(a)(1)-(2).
VI. The Motion for Partial Summary Judgment
Several months later, the Debtor, Encanto, and CIF filed the Partial Summary Judgment
Motion on all counts of the Amended Complaint (except with regard to the imposition of the requested sanctions and attorneys’ fees), arguing that the Defendants had either constructive or actual knowledge of the Debtor’s bankruptcy case as early as November 15, 2012—the date of the Informative Motion.
The Defendants filed an opposition to the Partial Summary Judgment Motion (the
“Opposition”), reiterating that: (1) they were “known creditors” of the Debtor without notice of the Debtor’s bankruptcy case; (2) because Encanto was not a debtor, it was not protected by a co-debtor stay; and (3) absent notice of the Debtor’s chapter 11 filing, the Defendants could not have violated the automatic stay and their claims survived the Debtor’s bankruptcy.
Encanto was the only plaintiff to file a reply to the Opposition. Reiterating its contention that the Aquinos’ “first actual notice” of the Debtor’s bankruptcy occurred on
November 15, 2012, Encanto accused the Defendants of refusing to appear or take any action in the Debtors’ bankruptcy case, despite their awareness of its pendency.
After conducting hearings and requiring supplemental briefing, the bankruptcy court denied the Partial Summary Judgment Motion in the September 2015 Order, stating in pertinent part:
The Debtor/Co-Plaintiff admitted that the Defendants were known creditors at the time the petition was filed. The Debtor did not include the Defendants in the schedules, the statement of financial affairs nor in the creditor’s mailing matrix. Known creditors are entitled to receive formal notice of bankruptcy proceedings and deadlines. In addition, the local court ordered the local attorney to submit evidence of the bankruptcy filing. The local attorney ignored the local court’s order.
The Defendants did not receive proper notice of the filing of the petition, of the claims bar date nor of the sale. Therefore, Plaintiffs’ Motion for Partial Summary Judgment . . . is DENIED as a matter of law.
VII. The Reconsideration Motion and the Cross-Motions for Summary Judgment
In October 2015, Encanto filed a motion to alter or amend the September 2015 Order
(the “Reconsideration Motion”), pursuant to Rule 59(e). As grounds for reconsideration,
Encanto complained that in the September 2015 Order, the bankruptcy court failed to address its request for a declaratory judgment. According to Encanto, this omission constituted “a manifest error of law.” Encanto further asserted that the equities in the case supported its request for declaratory judgment, claiming it had “taken every precaution possible in the acquisition of the
Debtors’ assets.” Accordingly, Encanto asked the bankruptcy court to “reverse, alter, and/or amend” the September 2015 Order, and grant its request for a declaratory judgment as set forth in the Partial Summary Judgment Motion.
The Defendants filed a cross-motion for summary judgment (the “Cross-Motion”) as to all plaintiffs in the adversary proceeding, seeking dismissal of the adversary proceeding and a ruling that: (a) as known creditors, the Defendants “were entitled to actual notice”; (b) the
Defendants never received actual notice of the bar date for filing proofs of claims, the reorganization plan, the confirmation hearing, the confirmation order, or the Asset Purchase
Agreement; (c) the Defendants did not violate the automatic stay; and (d) the Defendants’ claim was excluded from discharge.
In addition to the Cross-Motion, the Defendants also filed an opposition to the
Reconsideration Motion, asserting Encanto’s reconsideration request was filed outside the 14- day period prescribed by Bankruptcy Rule 9023 and Rule 59(e). They further argued that even if the court were to treat the Reconsideration Motion as one filed pursuant to Rule 60(b), it should still deny the motion for failure to allege the existence of new evidence, an intervening change in the controlling law, or the need to correct a clear error of law or prevent a manifest injustice.
Encanto countered with an opposition to the Cross-Motion, which included the Second
Summary Judgment Motion.3 Encanto insisted it was “a good faith purchaser who took as many precautions as possible to put all current and former employees and creditors of the Debtors on notice regarding the sale of the IHOP restaurants.” Encanto made no effort, however, to reconcile this assertion with the bankruptcy court’s docket, which discloses that the Aquinos were omitted from the certificate of service relating to the Asset Purchase Agreement, the Sale
Order, and notice of the hearing regarding the same. In support of its standing to seek redress for the Aquinos’ alleged stay violation, Encanto advanced a “broad” interpretation of § 362(k), which, by its terms, permits only “an individual injured by any willful violation of a stay” to
“recover actual damages . . . and, in appropriate circumstances . . . punitive damages.” 11
U.S.C.
§ 362(k) (emphasis added).
VIII. June 2016 Order and the Judgment
Following a hearing, the court issued the June 2016 Order. First, the court denied the
Reconsideration Motion (the “Denial of Reconsideration”), declaring at the outset that
“Encanto’s reliance on the . . . [S]ale [O]rder and [A]sset [P]urchase [A]greement is not convincing for the court to reconsider—let alone grant—the declaratory-relief requested . . . .”
The court elaborated:
Encanto contends that successor liability is a type of interest that may be eliminated in a bankruptcy sale, pursuant to 11 U.S.C. §§ 363(b)(1) and 363(f). However, the court was not called upon to make a determination of which
3 The other co-plaintiffs, the Debtor and CIF, did not join in the Second Summary Judgment Motion. Neither the bankruptcy court nor the Defendants questioned Encanto’s ability to file successive motions for summary judgment. interests may or may not be cut off in a bankruptcy sale. The court is not prompted to resolve the state law issue of successor liability because its threshold inquiry in the matter is with regard to the Aquinos’ due-process rights to receive notice of the sale in the first place.
The court concluded that “general awareness” of a bankruptcy proceeding did not satisfy due process requirements and that as known creditors, the Aquinos were “entitled to receive notice of Debtor’s bankruptcy filing and plaintiffs’ asset-sale agreement prior to the court’s approval of it.” Unpersuaded by Encanto’s argument that “the equities in the case” weighed in its favor, the court stated that Encanto “assumed the risks” associated with inadequate notice of the sale.
On the basis of the Aquinos’ lack of notice, the bankruptcy court went on to grant the
Cross-Motion and deny the Second Summary Judgment Motion, reasoning:
[T]he Aquinos did not violate the automatic stay or the [S]ale [O]rder by continuing to prosecute their prepetition damages action against the Debtor.
Because as known creditors the Aquinos were not provided with adequate notice of the bankruptcy filing, the claims bar date, the plan for confirmation, nor the bankruptcy sale, we further rule that the Aquinos’ claims are not discharged in this bankruptcy proceeding. The Aquinos’ lack of adequate notice is a “defect which precludes discharge of a claim.”
(citation omitted). On June 15, 2016, the bankruptcy court entered the Judgment, granting the Cross-
Motion and denying the Second Summary Judgment Motion.4 Encanto filed this appeal. The
Debtor has not appealed.
POSITIONS OF THE PARTIES
I. Encanto
In defense of its appellate standing, Encanto asserts it “has a pecuniary interest in the outcome of the appeal” as the purchaser of the Debtor’s assets. Encanto maintains that the
4 Although the Judgment references “Plaintiffs,” as noted above, only a single plaintiff moved for summary judgment—Encanto. bankruptcy court erred in declining to rule that the Judgments were “void ab initio,” regardless of notice, because they were entered in violation of the automatic stay, which took effect as soon as the bankruptcy petition was filed. Further, Encanto rejects the notion that the Aquinos lacked notice of the bankruptcy proceedings, contending that while “[e]ven a simple verbal notification” would have sufficed, the Defendants actually received formal written notification on November 15, 2012 via the Informative Motion.
Encanto asks the Panel to: (1) reverse the June 2016 Order and the Judgment; (2) declare the Judgments void ab initio; (3) remand for a hearing on damages resulting from the
Defendants’ willful violation of the automatic stay; (4) rule that it was entitled to acquire the
Restaurants free and clear of the Defendants’ claims; and (5) declare the Sale Order enforceable against the Defendants.
II. The Defendants
On appeal, the Defendants dispute Encanto’s claim that it was “diligent in notifying” creditors of the Sale Motion and the Sale Order; they also continue to maintain that, as known creditors, they were entitled to actual notice. As in the proceedings below, they argue there could be no stay violation absent proper notice.
JURISDICTION
I. Finality
A bankruptcy appellate panel is duty-bound to determine its jurisdiction before proceeding to the merits, even if the issue is not raised by the litigants. Rivera Siaca v. DCC
Operating, Inc. (In re Olympic Mills Corp.), 333 B.R. 540, 546-47 (B.A.P. 1st Cir. 2005) (citing
Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226
B.R. 724 (B.A.P. 1st Cir. 1998)). A panel may hear appeals from final judgments, orders, and decrees of the bankruptcy court. See 28 U.S.C. § 158(a). “An order granting summary judgment is a final order where no counts against any defendants remain.” Bartel v. Walsh (In re Bartel), 404 B.R. 584, 588 (B.A.P. 1st Cir. 2009) (citation omitted). Here, the June 2016
Order and the Judgment disposed of all counts as to all of the Defendants. As such, those rulings are final and, subsume all interlocutory orders, including the Denial of Reconsideration contained in the June 2016 Order. See Wiscovitch-Rentas v. Villa Blanca VB Plaza LLC (In re
PMC Mktg. Corp.),
543 B.R. 345, 354 n.7 (B.A.P. 1st Cir. 2016) (citing Boyd v. Kmart Corp., No. 96-7065, 1997
WL 158183, at *6 (10th Cir. Apr. 2, 1997)).
II. Standing
The Panel’s jurisdiction, however, “does not rest on finality alone . . . .” Melo v. GMAC
Mortg., LLC (In re Melo), 496 B.R. 253, 256 (B.A.P. 1st Cir. 2013) (citation omitted).
“[P]rinciples of requisite standing” also “delimit” the Panel’s jurisdiction. Pinpoint IT Servs.,
LLC v. Atlas IT Export, LLC (In re Atlas IT Export, LLC), 491 B.R. 192, 194 (B.A.P. 1st Cir.
2013) (citation omitted), appeal dismissed, 761 F.3d 177 (1st Cir. 2014). Therefore, before addressing the merits, the Panel must first consider the threshold issue of whether Encanto has standing to pursue this appeal. See Eldorado Canyon Props., LLC v. JPMorgan Chase Bank,
N.A. (In re Eldorado Canyon Props., LLC), 505 B.R. 598, 599-600 (B.A.P. 1st Cir. 2014)
(citations omitted). If Encanto lacks standing to bring this appeal, then the Panel lacks jurisdiction to decide it upon the merits. Id. at 600 (citing Zambrana Arroyo v. Scotiabank de
P.R. (In re Zambrana Arroyo), 489 B.R. 486, 488 (B.A.P. 1st Cir. 2013)). “As in other jurisdictional contexts, of course, the party asserting appellate jurisdiction . . . bears the burden.”
Spenlinhauer v. O’Donnell, 261 F.3d 113, 118 (1st Cir. 2001) (citations omitted). This means, in the context of this appeal, that Encanto must establish that it has standing to appeal every aspect of the June 2016 Order and the Judgment—including both the denial of relief under §
362 and the denial of relief relating to the Sale Order.
A. The “Person Aggrieved” Standard
It is well settled that only a “person aggrieved” by a bankruptcy court order has standing to appeal, and that a “person aggrieved” is one whose pecuniary interests are “directly and adversely” affected by an order of the bankruptcy court. Id. at 117-18 (citations omitted)
(internal quotations omitted). “A litigant qualifies as a ‘person aggrieved’ if the order diminishes his property, increases his burdens, or impairs his rights.” In re El San Juan Hotel,
809 F.2d 151, 154 (1st Cir. 1987) (footnote omitted) (citation omitted). “To be directly affected by the order, the appellant’s pecuniary interests . . . cannot be merely contingent or speculative.”
Orion Fitness Grp., LLC v. River Valley Fitness One Ltd. P’ship, No. Civ. 03-474-JD, 2004 WL
524430, at *1 (D.N.H. Mar. 17, 2004) (citing Davis v. Cox, 356 F.3d 76, 93 n.15 (1st Cir. 2004);
Travelers Ins. Co. v. H.K. Porter Co., 45 F.3d 737, 742-43 (3d Cir. 1995); In re El San Juan
Hotel, 809 F.2d at 154-55)); see also Gentile v. DeGiacomo (In re Gentile), 492 B.R. 580, 585
(B.A.P. 1st Cir. 2013) (citations omitted).
B. The Standing Analysis
As an initial matter, we reject Encanto’s argument that its “party in interest” standing as an asset purchaser in the bankruptcy case is sufficient to confer unequivocal and unfettered appellate standing here. This argument is unpersuasive, as “[w]e apply a ‘person[ ] aggrieved standard,’ not a ‘party in interest’ standard, to determine bankruptcy appellate standing.” Hlatky v. Murphy (In re Genesys Research Inst., Inc.), BAP No. MB 16-027, slip op. at 13-14 (B.A.P. 1st Cir. Sept. 12, 2016) (citing In re Combustion Eng’g, Inc., 391 F.3d 190, 217 (3d Cir. 2004)).
Qualifying as an interested party with standing to participate in bankruptcy court proceedings is not necessarily synonymous with being a “person aggrieved” for appellate standing purposes.
See Sears v. Badami (In re Afy, Inc.), No. 8:10CV214, 2011 WL 1791651, at *2 (D. Neb. May
11, 2011) (stating that “merely being a party in interest is insufficient to confer appellate standing”) (citation omitted) (internal quotations omitted); see also Advantage Healthplan, Inc. v. Potter, 391 B.R. 521, 541 (D.D.C. 2008), aff’d, Greater S.E. Cmty. Hosp. Found., Inc. v.
Potter,
586 F.3d 1 (D.C. Cir. 2009); Unsecured Creditors Comm. v. Leavitt Structural Tubing Co., 55
B.R. 710, 711 (N.D. Ill. 1985), aff’d, 796 F.2d 477 (7th Cir. 1986).
Two theories support a conclusion that Encanto lacks standing to seek redress for a stay violation. First, § 362(k) permits only “an individual injured by any willful violation of a stay” to recover actual damages, and, in some instances, punitive damages. 11 U.S.C. § 362(k)
(emphasis added).5 Although the Bankruptcy Code does not define “individual,” the First
Circuit has held that the term “was not meant to include corporations,” such as Encanto.
Spookyworld, Inc. v. Town of Berlin (In re Spookyworld, Inc.), 346 F.3d 1, 7 (1st Cir. 2003).
Secondly, and perhaps more importantly, Encanto, as a non-debtor, cannot be aggrieved by the bankruptcy court’s refusal to grant it relief under § 362. See Austin v. Unarco Indus.,
Inc., 705 F.2d 1, 4 (1st Cir. 1983) (stating that “the automatic stay provisions of . . . § 362(a) apply only to the bankrupt debtor”); Codfish Corp. v. F.D.I.C. (In re Codfish Corp.), 97 B.R.
132, 135 (Bankr. D.P.R. 1988) (“As a general rule the automatic stay . . . is limited to debtors
5 Encanto does not cite a particular subsection of § 362 to support its request for relief. However, it is § 362(k) that provides an express private right of action to seek damages for alleged violations of the automatic stay. See Alley v. Saxon Mortg. Servs., Inc. (In re Alley), Adv. No. 13-2070, 2014 WL 2987656, at *2 n.9 (Bankr. D. Me. July 1, 2014). and does not protect codebtors.”) (footnote omitted) (citations omitted). The automatic stay is one of the most “fundamental [ ] protections” of a debtor in a bankruptcy case. Lynch v.
Johns-Manville Sales Corp., 710 F.2d 1194, 1197 (6th Cir. 1983) (quoting S. Rep. No. 95-989, at 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840-5841). Indeed, the principal function of the stay is to protect the debtor and property of the estate. See id. As the Sixth
Circuit stated, “[n]othing in the legislative history counsels that the automatic stay should be invoked in a manner which would advance the interests of some third party . . . .” Id.
Encanto lacks standing to appeal the bankruptcy court’s order to the extent that the bankruptcy court declined to find a stay violation, declined to enjoin the state court litigation, and declined to award damages based on § 362. Once the Debtor sold substantially all of its assets to Encanto, the Debtor was divested of all right, title, and interest in those assets and they ceased to be a part of the estate. They were no longer protected by the automatic stay. Encanto is not the debtor for purposes of § 362 and therefore, it is not the beneficiary of the automatic stay’s protections. Encanto points to no controlling authority extending the automatic stay to protect a purchaser in a transaction authorized under § 363. In view of the limitations on the automatic stay, the bankruptcy court did not affect Encanto’s rights in a detrimental way, did not increase Encanto’s burdens, and did not diminish Encanto’s property interests when it declined to grant § 362 relief to Encanto.6 Having concluded that Encanto lacks standing to appeal issues related to the bankruptcy court’s refusal to grant any form of relief under § 362, this appeal is
6 We are mindful that other courts have been “reluctant to give redress under § 362 to third parties” (other than pre-petition creditors) for stay violations on the theory that such parties lack prudential standing to seek relief. Rushing v. Green Tree Servicing, LLC (In re Rushing), 443 B.R. 85, 100 (Bankr. E.D. Tex. 2010) (internal quotations omitted) (ruling that non-debtor/non-creditor spouse lacked prudential standing to seek relief under § 362). However, we adhere to our circuit’s traditional “person aggrieved” test for appellate standing. dismissed, in part. In other words, to the extent that the June 2016 Order and the Judgment operated to deny § 362 relief, we are without jurisdiction to review those decisions.7
We reach a different conclusion, however, as to Encanto’s standing to appeal from the bankruptcy court’s refusal to grant relief under the Sale Order. As noted above, the Sale Order authorized the sale of property of the estate to Encanto free and clear of liens, claims, and encumbrances under § 363(f), and that authorization is broad enough to extend to the
Defendants’ claims against the Debtor. When the Defendants sought to enforce their claims against the Debtor against Encanto in the Local Court Action, Encanto looked to the “free and clear” provisions of the Sale Order. This, we believe, is sufficient to confer appellate standing on Encanto, but only with respect to the bankruptcy court’s refusal to grant relief under the Sale
Order. Encanto’s efforts in this respect do not suffer from the same defects that defeated its efforts to appeal the bankruptcy court’s refusal to grant relief under the automatic stay. This conclusion leaves us to consider those portions of the June 2016 Order and the Judgment which amounted to a refusal to grant relief pursuant to the Sale Order. As with all grants of summary judgment, we review those aspects of the bankruptcy court’s decision de novo. See In re PMC
Mktg. Corp., 543 B.R. at 354 (citing Redondo Constr. Corp. v. Izquierdo, 746 F.3d 21, 26 (1st
7 Despite Encanto’s assertion to the contrary, the Second Circuit’s ruling in Church Mutual Ins. Co. v. American Home Assurance Co. (In re Heating Oil Partners, LP), 422 Fed. App’x 15 (2d Cir. 2011), does not affect the outcome of our standing analysis. There, the court ruled that the debtor’s liability insurer, which was contractually obligated to satisfy the post-petition state court judgment entered against the debtor, was a “party in interest” with standing to raise the automatic stay issue. See id. at 17. That decision is distinguishable on two grounds. First, the Heating Oil court did not apply the “person aggrieved” standard which governs bankruptcy appellate standing in this circuit. Further, unlike the insurer in Heating Oil, Encanto’s liability is neither contractual nor certain but, rather, dependent upon principles of successor liability.
Cir. 2014)); see also Roman Catholic Bishop of Springfield v. City of Springfield, 724 F.3d 78,
89 (1st Cir. 2013) (stating that where, as here, the appeal is “from cross-motions for summary judgment, the standard [of review] does not change”) (citation omitted).8
DISCUSSION
I. The Standard
“In bankruptcy, summary judgment is governed in the first instance by Bankruptcy Rule
7056.” Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 762 (1st Cir. 1994). “By its express terms, the rule incorporates into bankruptcy practice the standards of Rule 56 of the Federal
Rules of Civil Procedure.” Id. (citations omitted). “It is apodictic that summary judgment should be bestowed only when no genuine issue of material fact exists and the movant has successfully demonstrated an entitlement to judgment as a matter of law.” Id. at 763 (citing
Fed. R. Civ. P. 56([a])).
II. The Standard Applied
Although Encanto strenuously urged it to do so, the bankruptcy court refused to grant any form of relief pursuant to the terms of the approved Asset Purchase Agreement or the Sale
Order.
In denying the Second Summary Judgment Motion and declining to grant declaratory and injunctive relief, the bankruptcy court offered a single rationale: failure to provide proper notice of the bankruptcy proceedings to the Aquinos, who were known creditors, as required by the
8 We do not review the Denial of Reconsideration, as Encanto neither listed that issue in its designation of issues on appeal nor briefed it. See United States v. Bayard, 642 F.3d 59, 63 (1st Cir. 2011) (providing that the appellant’s failure to brief an issue waives it) (citation omitted). Even if the issue had been preserved, Encanto did not clear the high bar for reconsideration. See Ramirez Rosado v. Banco Popular de P.R. (In re Ramirez Rosado), 561 B.R. 598, 608 (B.A.P. 1st Cir. 2017). law of this circuit. Indeed, the First Circuit makes it plain that a “creditor has a right to assume that proper and adequate notice will be provided before his claims are forever barred.” Arch
Wireless, Inc. v. Nationwide Paging, Inc. (In re Arch Wireless, Inc.), 534 F.3d 76, 83 (1st Cir.
2008) (citation omitted) (internal quotations omitted). Encanto’s efforts to distinguish Arch
Wireless from the instant case on the grounds that the former involved a “discharge injunction, not the automatic stay” are unavailing. The requirements of due process do not recognize this distinction. As the Supreme Court stated:
An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections. The notice must be of such nature as reasonably to convey the required information, and it must afford a reasonable time for those interested to make their appearance.
Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) (emphasis added)
(citations omitted).
Further, notwithstanding Encanto’s assertion to the contrary, a creditor’s “general[ ] aware[ness] of the pending reorganization, does not of itself impose upon him an affirmative burden to intervene in that matter and present his claim . . . .” In re Arch Wireless, Inc., 534
F.3d at 83 (citation omitted) (internal quotations omitted). Rather, it is the duty of sale proponents such as Encanto to ensure that interested parties are afforded appropriate notice of the material terms of an all-asset transfer and the chapter 11 plan. W. Auto Supply Co. v.
Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 722-23 (1st Cir. 1994). Therefore, we find no error in the bankruptcy court’s refusal, on cross-motions for summary judgment, to accord any relief pursuant to the Sale Order or Asset Purchase Agreement as against a known creditor of the Debtor who should have received proper notice of the sale proceedings but did not. We express no opinion as to the validity or enforceability of the Amended Local Court
Judgment.
CONCLUSION
Based on the foregoing, we DISMISS IN PART and AFFIRM IN PART. Due to
Encanto’s lack of standing, we DISMISS so much of this appeal of the June 2016 Order and the
Judgment as relates to the bankruptcy court’s refusal to grant relief under § 362. As to the bankruptcy court’s refusal to grant relief relating to the Sale Order, we AFFIRM.
In re Dreier LLP, --- Fed.Appx. ---- (2017)
2017 WL 1087945 Appeal from a judgment of the United States Only the Westlaw citation is currently available. District Court for the Southern District of New This case was not selected for York (Swain, J.). publication in West's Federal Reporter. UPON DUE CONSIDERATION, IT IS RULINGS BY SUMMARY ORDER DO NOT HAVE HEREBY ORDERED, ADJUDGED AND PRECEDENTIAL EFFECT. CITATION TO A DECREED that the judgment of the district SUMMARY ORDER FILED ON OR AFTER JANUARY court be AFFIRMED. 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF Attorneys and Law Firms APPELLATE PROCEDURE 32.1 AND THIS COURT'S LOCAL RULE 32.1.1. FOR APPELLANTS: HOWARD M. FILE, WHEN CITING A SUMMARY ORDER IN A Staten DOCUMENT FILED WITH THIS COURT, A PARTY Island, NY. MUST CITE EITHER THE FEDERAL APPENDIX FOR APPELLEE: BRENDAN M. SCOTT, OR AN ELECTRONIC DATABASE (WITH THE Klestadt NOTATION “SUMMARY ORDER”). A PARTY CITING Winters Jureller Southard & Stevens, LLP, New A SUMMARY ORDER MUST SERVE A York, NY. COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. PRESENT: DENNIS JACOBS, ROBERT D. United States Court of Appeals, SACK, Second Circuit. Circuit Judges, PAUL A. ENGELMAYER, IN RE DREIER LLP, Debtor. District Cosmetic Plus Group Ltd, Robin Bartosh, Toby Bartosh, Claimants-Appellants, Judge.1 v. Sheila M. Gowan, in her capacity as Plan Administrator for Dreier LLP, Appellee.
16 SUMMARY ORDER - 2827 *1 Cosmetics Plus Group Ltd. (“CPG”) and its | secured creditors, Robin Bartosh and Toby March 21, 2017 Bartosh, appeal from the judgment of the United
States District Court for the Southern District of New York (Swain, J.), which affirmed the order In October 2008, the bankruptcy judge in the of the Bankruptcy Court for the Southern District CPG bankruptcy dismissed the proceeding and of New York (Bernstein, J.) granting the plan directed CPG to pay various expenses and fees administrator's objections and reclassifying as and distribute the remaining cash to secured unsecured claims the proofs of claim filed by creditors Robin and Toby Bartosh. By that time, appellants. We assume the parties' familiarity the Dreier LLP account had been replenished. with the underlying facts, the procedural history, However, no money was paid to the Bartoshes and the issues presented for review. out of the Dreier LLP trust account. On
This appeal arises in the bankruptcy of the law December 2, 2008, Mark Dreier was arrested. firm Dreier LLP, but it stems from the 2001 Dreier LLP partners Paul Traub and Steven Fox bankruptcy of one of that firm's clients, CPG, (who represented CPG) consulted the firm about which in 2003 filed an adversary proceeding releasing client funds, and on December 4, 2008, against its insurer. That suit settled, and in March Dreier LLP transferred $441,145.58 to an outside
2008 the insurer issued a check for $350,000 to account —an amount that was intended to
Dreier LLP, as attorneys for CPG. These funds include $350,000 for CPG. After Dreier LLP were deposited in an attorney trust account that filed a Chapter 11 petition (on December 16, commingled client funds with operating funds— 2008), the bankruptcy trustee requested the return as well as the proceeds of attorney Mark Dreier's of the $441,145.58, which was transferred to the note-fraud scheme. By midAugust 2008, the trustee in February 2009. account was depleted and had a negative balance.
In re Dreier LLP, --- Fed.Appx. ---- (2017)
In March 2009, CPG and Robin and Toby antecedent debt, (iv) while the debtor was
Bartosh filed proofs of claim in the Dreier insolvent, (v) within 90 days of filing for bankruptcy, each asserting a $350,000 secured bankruptcy, (vi) allowing the creditor to receive claim based upon Dreier's retention of CPG's more than it would receive in Chapter 7 settlement proceeds. The plan administrator liquidation if the transfer had not been made. objected on the ground that the proceeds had *2 The bankruptcy court held that all elements become “hopelessly commingled” with other were satisfied and that the December 4 transfer funds and that the claims should therefore be was therefore properly avoided. Appellants argue reclassified as general unsecured claims. that the transferred funds were never the
Following a trial, the bankruptcy court sustained “property of the debtor,” but were instead held in the objection and reclassified the claims as trust for CPG as proceeds of litigation settlement. unsecured. The district court affirmed. We disagree.
On appeal from the district court, we make an It is not disputed that in March 2008 Dreier LLP independent and plenary review of the received $350,000 of settlement proceeds to be bankruptcy court's decision. Celli v. First Nat'l held in trust for CPG. But Dreier failed to honor
Bank, 460 F.3d 289, 292 (2d Cir. 2006). We that obligation: the bankruptcy court found that, review conclusions of law de novo and findings by mid-August 2008, the account into which of fact for clear error. Id. those funds were deposited had a negative
1. Appellants' principal argument is that the balance. That finding is supported by bank bankruptcy court (and the district court) erred by holding that Dreier LLP's December 4, 2008, Footnotes records and is not clearly erroneous. It follows transfer of funds to an outside account was an that well before the December 1 transfer, the avoidable preference under 11 U.S.C. § 547(b). settlement proceeds had been converted, and That bankruptcy provision allows a trustee to were gone. Although CPG was injured by this avoid any transfer (i) of property of the debtor, dissipation of funds, and has a claim for its (ii) made for benefit of a creditor, (iii) for an injury, that claim is not for a traceable res. The 135, 140 (2d Cir. 1985). Appellants funds that later replenished the Dreier LLP mischaracterize the December 4 transfer as being account and which were transferred on December a transfer of the settlement funds. By mid-August
4 to satisfy the debt to CPG are not traceable to 2008, the settlement funds had been dissipated.
CPG's settlement proceeds. They are from other No part of the funds transferred on December 4 sources, and were at the time of the transfer was traceable to them. Those funds are properly a
Dreier LLP's property. Appellants have no part of Dreier LLP's estate, subject to the claims greater right to those particular funds than other of all of its creditors; imposing a constructive unsecured creditors. trust would merely advantage appellants at the
All of the § 547(b) elements are satisfied, and expense of other creditors.
Dreier LLP's December 4 transfer was an Accordingly, and finding no merit in appellants' avoidable preference. We find no error in the other arguments, we hereby AFFIRM the holding of the bankruptcy court and district judgment of the district court. court.
2. Appellants argue that the bankruptcy and All Citations district courts should have imposed a --- Fed.Appx. ----, 2017 WL 1087945 (Mem) constructive trust on what they characterize as
“the settlement funds transferred” on December
4, 2008. This argument fails for the reason already discussed. “It is hornbook law that before a constructive trust may be imposed, a claimant to a wrongdoer's property must trace his own property into a product in the hands of the wrongdoer.” United States v. Benitez, 779 F.2d 1 Judge Paul A. Engelmayer, United States District Judge for the Southern District of New York, sitting by designation.
In re Dunne, --- Fed.Appx. ---- (2017)
2017 WL 1164379 Appeal from a judgment of the United States Only the Westlaw citation is currently available. District Court for the District of Connecticut This case was not selected for (Jeffrey Alker Meyer, Judge; Alan H. W. Shiff, publication in West's Federal Reporter. Bankruptcy Judge). RULINGS BY SUMMARY ORDER DO NOT HAVE *1 UPON DUE CONSIDERATION, IT IS PRECEDENTIAL EFFECT. CITATION TO A HEREBY ORDERED, ADJUDGED, AND SUMMARY ORDER FILED ON OR AFTER JANUARY DECREED that the appeal from the judgment of 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF the bankruptcy court entered on November 25, APPELLATE PROCEDURE 32.1 AND 2015, is DISMISSED for lack of standing. THIS COURT'S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A Attorneys and Law Firms DOCUMENT FILED WITH THIS COURT, A PARTY APPEARING FOR APPELLANT: ALEC P. MUST CITE EITHER THE FEDERAL OSTROW, APPENDIX OR AN ELECTRONIC DATABASE Becker, Glynn, Muffly, Chassin & Hosinski LLP, (WITH THE NOTATION “SUMMARY ORDER”). A New York, New York. PARTY CITING A SUMMARY ORDER MUST SERVE A APPEARING FOR APPELLEE: TIMOTHY D. COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. MILTENBERGER, Coan, Lewendon, Gulliver United States Court of Appeals, Second Circuit. &
IN RE: Sean DUNNE, Debtor. Miltenberger, LLC, New Haven, Connecticut. Gayle Killilea Dunne, Appellant, v. PRESENT: REENA RAGGI, DEBRA ANN Richard M. Coan, Trustee, Appellee, LIVINGSTON, SUSAN L. CARNEY, Circuit Ulster Bank Ireland Limited, National Judges. Asset Loan Management Limited, Creditors. SUMMARY ORDER No. 16 Plaintiff Gayle Killilea Dunne (“Killilea”), the - 1778 wife of the Chapter 7 Debtor, Sean Dunne, -bk appeals from the district court's affirmance of the | March 28, 2017 bankruptcy court's grant of the Trustee's motion which we reference only as necessary to explain for relief from the automatic stay nunc pro tunc our decision to dismiss for lack of bankruptcy with regard to litigation commenced by the appellate standing. equivalent of the trustee in the debtor's Irish As this court has explained, although “[t]he bankruptcy case, the “Official Assignee,” against current Bankruptcy Code prescribes no limits on Killilea (the “OA litigation”). In addition to standing beyond those implicit in Article III of granting relief from the stay, the bankruptcy the United States Constitution[,] ... for practical court ruled that Killilea lacked standing to reasons this Court and others have adopted the challenge the Trustee's motion. The district court general rule, loosely modeled on the former affirmed the grant of relief from the stay but Bankruptcy Act, that in order to have standing to declined to reach the question of Killilea's appeal from a bankruptcy court ruling, an standing. Killilea here argues that she has appellant must be a person aggrieved—a person standing to challenge the bankruptcy court's directly and adversely affected pecuniarily by the order and that the order manifests abuse of challenged order of the bankruptcy court.” In re discretion in several respects. DBSD N. Am., Inc., 634 F.3d 79, 88–89 (2d Cir.
Because standing is a question of law, our review 2011) (citations, footnote, and internal quotation is de novo, see In re Lehman Bros. Holdings Inc., marks omitted). As such, to pursue this appeal,
761 F.3d 303, 308 (2d Cir. 2014), and because Killilea must establish, in addition to Article we conclude that Killilea lacks appellate standing, we dismiss her appeal, leaving in place the order of the bankruptcy court lifting the automatic stay. We assume the parties' familiarity with the facts and procedural history of this case,
In re Dunne, --- Fed.Appx. ---- (2017)
III standing, that the bankruptcy court's order caused her a suffer financial injury as a result of a future adverse decision in the no-longer-stayed OA litigation is not “direct” and “financial” injury. See id.; Kane v. Johns- directly attributable to the bankruptcy court order, but Manville Corp., 843 F.2d 636, 642 n.2 (2d Cir. 1988) remote and speculative. See, e.g., In re Barnet, 737 F.3d at 243 (stating that “potential harm” from a bankruptcy court (stating that this limitation is “more exacting” than Article order is inadequate for appellate standing). Indeed, the challenged stay order dictated no relief that directly and III standing because constitutional injury in fact need not be adversely affected Killilea's pecuniary interests. See id. financial and need be fairly traceable only to alleged illegal (explaining that pecuniary harm required for bankruptcy appellate standing must be evident in “relief directed by a action); see also In re Barnet, 737 F.3d 238, 242 (2d Cir. Bankruptcy Court”). Thus, the mere fact that the bankruptcy court lifted the automatic stay despite Killilea's 2013) (explaining that appellate standing rule is “rooted in a objection is not enough, by itself, to demonstrate her direct, concern that freely granting openended appeals to those financial injury.1 Accordingly, Killilea lacks standing to appeal the bankruptcy court's order, and we therefore persons affected by bankruptcy court orders will sound the DISMISS her appeal for lack of bankruptcy appellate death knell of the orderly disposition of bankruptcy matters” standing.
(internal quotation marks omitted)). All Citations
The principal purpose of an automatic stay is to protect the --- Fed.Appx. ----, 2017 WL 1164379 (Mem) debtor and “to preserve the property of the debtor's estate for the benefit of all the creditors.” In re AMR Corp., 730 F.3d 88, 112 (2d Cir. 2013) (internal quotation marks omitted). Killilea is neither a creditor nor a co-debtor of the estate at issue. She asserts no direct pecuniary interest in the bankruptcy proceeding. Moreover, the possibility that Killilea could Footnotes 1 While in light of our decision on appellate standing we need not address Killilea's standing in the bankruptcy court, we note that we have long held that only creditors and the debtor (or, equivalently, the trustee) have party-in-interest standing to request relief from the automatic stay or challenge a bankruptcy settlement. See In re Refco, Inc., 505 F.3d 109, 116– 17 (2d Cir. 2007); In re Comcoach Corp., 698 F.2d 571, 573–74 (2d Cir. 1983).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 850 F.3d 150 Conrad, Jr., J., 2015 WL 8328823, affirmed. United States Court of Appeals, Fourth Circuit. Insurer Appealed.
IN RE: JEMSEK CLINIC, P.A.; Joseph Jemsek, Debtors. Blue Cross Blue Shield of North Holdings: The Court of Appeals, Diana Gribbon Carolina, Plaintiff–Appellant, Motz, Circuit Judge, held that: v. Jemsek Clinic, P.A.; Joseph G. Jemsek, [1] bankruptcy court did not clearly err in M.D., an individual, Defendants–Appellees. finding thathealth insurer, by continuing to litigate counterclaims that bankrupt medical No. 16-1030 clinic had filed against it, and which it strongly | suspected were barred by terms of class action Argued: December 7, 2016 settlement, until well after expiration of deadline | for debtor-clinic to opt out of class settlement, Decided: March 3, 2017 had thereby wasted court resources and abuse Synopsis litigation process in manner that subjected it to award of sanctions; Background: Chapter 11 debtors that, after [2] bankruptcy court abused its discretion litigating their counterclaims against insurer for when, assanction imposed it exercise of its more than a year, learned that counterclaims were inherent authority, it dismissed insurer's multimillion claim against estate; and identical to claims asserted against insurer in [3] bankruptcy court abused its discretion undisclosed class action pending in another forum, when, assanction imposed it exercise of its and that their failure to opt out of class settlement inherent authority, it awarded any attorney fees beyond those incurred by debtor in adversary barred them from pursuing majority of these proceeding in bankruptcy court after class settlement went into effect. counterclaims on res judicata grounds, moved to impose sanctions on insurer for its alleged breach Vacated and remanded. of its disclosure obligations. The United States
Bankruptcy Court for the Western District of West Headnotes (16) North Carolina, J. Craig Whitley, Chief Judge, 441
B.R. 756, entered order awarding sanctions, and [1] Bankruptcy Discretion insurer appealed. The District Court, Robert J.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 28 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 Court of Appeals reviews bankruptcy action, and did not violate injunction
court's sanctions order for abuse of by pursuing claims against medical
discretion. provider that was member of plaintiff
class based on its alleged overbilling Cases that cite this headnote for medical services that it had [2] Bankruptcy provided. Discretion Court abuses its discretion when its Cases that cite this headnote conclusion is guided by erroneous [4] Bankruptcy legal principles or rests upon clearly Frivolity or bad faith; s anctions erroneous factual finding. Bankruptcy courts have inherent power to
sanction parties who abuse the litigation 1 Cases that cite this headnote process in bad faith. [3] Injunction Trade or business 1 Cases that cite this headnote Injunction Other particular cases [5] Federal Courts Health insurer named as defendant in Inherent powers Courts' inherent powers exist to preserve class action brought by medical integrity of judicial process and the providers, complaining of allegedly resources needed to resolve disputes in underhanded business practices used orderly and expeditious manner. by insurer to deny, delay and reduce
payments for medical treatments Cases that cite this headnote
based solely on considerations of cost, [6] Federal Civil Procedure was not among the “releasing parties” Dilatory or untimely conduct Federal Civil Procedure enjoined by injunction entered Violation of court orders following settlement of this class
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 29 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 Federal court may wield its inherent Frivolity or bad faith; s anctions While health insurer had no duty to sanctioning powers when a party exhibits remind bankrupt medical clinic of bad faith by delaying or disrupting deadline to opt out of settlement of litigation or by hampering enforcement of class action that health care providers court order. had brought against insurer or of 1 Cases that cite this headnote court's injunction of class members'
[7] Bankruptcy claims as part of this settlement, it did Frivolity or bad faith; s anctions have duty not to waste bankruptcy Party undermines integrity of judicial court's time and resources by litigating process, and quite obviously wastes judicial counterclaims which debtor-clinic had resources, in manner possibly warranting filed against it, and which it knew or sanctions, when he uses court's resources to suspected had been enjoined. litigate claims that he knows or suspects
another court has already resolved or Cases that cite this headnote
enjoined. [10] Bankruptcy Power and Authority Cases that cite this headnote Bankruptcy Frivolity or bad faith; s anctions [8] Process Bankruptcy court did not clearly err in Particular cases It is an abuse of litigation process for finding that health insurer, by
party to conceal from court the fact continuing to litigate counterclaims
that its opponent's claims have been that bankrupt medical clinic had filed
enjoined. against it, and which it strongly
suspected were barred by terms of Cases that cite this headnote class action settlement, until well after [9] Bankruptcy expiration of deadline for debtor-clinic
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 30 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221
to opt out of class settlement, had [13] Federal Civil Procedure Non-monetary sanctions thereby wasted court resources and Prior to dismissing action with prejudice as abused litigation process in manner sanction imposed in exercise of its inherent that subjected it to award of sanctions authority for abuse of litigation process, in exercise of bankruptcy court's federal court must first weigh several inherent authority. factors:
Cases that cite this headnote (1) the degree of the wrongdoer's
culpability; (2) the extent of the client's [11] Bankruptcy Frivolity or bad faith; s anctions blameworthiness if the wrongful conduct is Even when court properly concludes committed by its attorney; (3) the prejudice that sanctions are warranted, it abuses to the judicial process and the its discretion when it imposes administration of justice; (4) the prejudice sanctions disproportionate to severity to the victim; (5) the availability of other of party's misconduct. sanctions to rectify the wrong by punishing Cases that cite this headnote culpable persons, compensating harmed
[12] Federal Civil Procedure persons, and deterring similar conduct in Non-monetary sanctions the future; and (6) the public interest. Federal courts have inherent power to
dismiss action with prejudice as sanction; Cases that cite this headnote
however, because it is the most extreme [14] Bankruptcy sanction, dismissal with prejudice is Power and Authority Bankruptcy appropriate only in the most egregious Pleading; d ismissal cases. While bankruptcy court did not clearly err
in finding that health insurer had abused Cases that cite this headnote litigation process by continuing to litigate
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 31 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 counterclaims that bankrupt medical clinic Cases that cite this headnote
had filed against it, and which it strongly [16] Bankruptcy suspected were barred by terms of class Power and Authority Bankruptcy action settlement, until well after expiration Frivolity or bad faith; s anctions of deadline for debtor-clinic to opt out of While bankruptcy court did not
class settlement, bankruptcy court abused clearly err in finding that health
its discretion when, as sanction imposed in insurer had abused litigation process
exercise of its inherent authority, it by continuing to litigate
dismissed insurer's multimillion claim counterclaims that bankrupt medical
against estate; primary responsibility for clinic had filed against it, and which it
keeping informed of progress of class strongly suspected were barred by
action and of deadline for opting out of terms of class action settlement, until
class settlement was on debtorclinic, as well after expiration of deadline for
class member, and any misconduct by debtor-clinic to opt out of class
insurer did not warrant extreme sanction of settlement, bankruptcy court abused
dismissal with prejudice. its discretion when, as sanction
imposed in exercise of its inherent Cases that cite this headnote authority, it awarded any attorney fees [15] Federal Civil Procedure beyond those incurred by debtor in Reasonableness or bad faith in general; o bjective or subjective adversary proceeding in bankruptcy standard Federal Civil Procedure court after class settlement went into Computation; i tems and services effect. compensable Federal court may order a party to pay Cases that cite this headnote an opponent's attorney fees as
sanction for bad faith conduct.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 32 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 *153 Appeal from the United States District In this case, the bankruptcy court imposed
Court for the Western District of North Carolina, staggering sanctions on a creditor. It dismissed at Charlotte. Robert J. Conrad, Jr., District with prejudice claims that the creditor valued at
Judge; J. Craig Whitley, Chief Bankruptcy over $10 million, and it ordered the creditor to pay
Judge. (3:14–cv–00417–RJC; 07– 03006) the debtor $1.29 million in attorneys' fees and
costs. Although the bankruptcy court did not Attorneys and Law Firms clearly err in finding that the creditor acted in bad ARGUED: Christopher Grafflin Browning, Jr., TROUTMAN SANDERS LLP, Raleigh, North faith, these sanctions were excessive. We therefore
Carolina, for Appellant. William D. Blakely, vacate the judgment of the district court adopting
POLSINELLI PC, Washington, D.C., for the bankruptcy court's sanctions order and remand
Appellees. ON BRIEF: J. Nick Phillips, for further proceedings consistent with this
TROUTMAN SANDERS LLP, Atlanta, Georgia, opinion. for Appellant. Lauren P. Desantis– Then,
Washington, D.C., Mit S. Winter, POLSINELLI I. PC, Kansas City, Missouri, for Appellees. In May 2003, a group of doctors filed a nationwide
Before WILKINSON, MOTZ, and FLOYD, class action against the Blue Cross and Blue Shield
Circuit Association and its member entities, including
Judges. Blue Cross Blue Shield of North Carolina (“Blue
Cross NC”). The doctors brought the case—styled Opinion *154 Love v. Blue Cross and Blue Shield Ass'n, Vacated and remanded by published opinion. No. 03–21296–CIV (S.D. Fla. filed May 22, Judge Motz wrote the opinion, in which Judge 2003)—in the Southern District of Florida. Wilkinson and Judge Floyd joined. In their complaint, the doctors alleged that the Blue
DIANA GRIBBON MOTZ, Circuit Judge: Cross companies used several underhanded
business practices to deny, delay, and reduce
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 33 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 payments for medical treatments based solely on Jemsek received more than $10 million in considerations of cost. The doctors alleged that, as improper payments. part of the scheme, the Blue Cross companies Jemsek responded by filing for Chapter 11 refused to pay for covered and medically necessary bankruptcy for himself and on behalf of his treatments, misrepresented the criteria used to clinic. He then removed Blue Cross NC's suit to determine payments, and unlawfully terminated the bankruptcy court, where it continued as an provider agreements. adversary proceeding. On January 24, 2007,
In September 2006, three years after the Jemsek filed his answer, affirmative defenses, initiation of the Love case in Florida, Blue Cross and nine counterclaims.
NC sued Dr. Joseph Jemsek and the Jemsek Seven of Jemsek's counterclaims alleged
Clinic in North Carolina state court. In its essentially the same underhanded practices at complaint, Blue Cross NC asserted several state- issue in Love. Jemsek claimed that Blue Cross law claims, including breach of contract and NC denied claims for reimbursement; fraud. At the time, Jemsek ran a clinic in terminated the parties' provider agreement “not
Huntersville, North Carolina that specialized in based upon medical evidence, but upon a desire the treatment of Lyme disease. According to to limit its costs”; and misrepresented whether
Blue Cross NC, Jemsek improperly billed it for Jemsek's treatments were covered or medically hundreds of Lyme disease treatments that were necessary. The remaining two counterclaims, medically unnecessary or not covered by the asserting defamation and tortious interference parties' provider agreement. Blue Cross NC also with a business relationship, related to alleged that Jemsek fraudulently “upcoded” statements Blue Cross NC allegedly made about many of his treatments, assigning them a billing Jemsek's practice to the North Carolina Medical code corresponding to treatments that were more Board and the Centers for Disease Control and expensive than those he actually provided. Blue Prevention. In total, Jemsek claimed he suffered
Cross NC estimates that from 2000 to 2005, at least $20 million in damages.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 34 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 On April 27, 2007, a few days before discovery other matters referenced in the began in the North Carolina bankruptcy [a]ction.... proceedings, the Love parties reached a tentative It is now undisputed that Jemsek was a putative settlement in Florida. Under the terms of the member of the Love class and that this injunction settlement agreement, the Blue Cross companies applied to his first seven counterclaims. agreed to pay $130 million and change their *155 In July 2007, the Love court mailed a notice business practices. In exchange, the Love of the class settlement to putative class members plaintiffs released their claims against the Blue and published the notice in several major news and Cross companies. trade publications. The notice informed putative On May 31, 2007, the Love court preliminarily class members of their right to opt out of the Love approved the settlement and enjoined the plaintiffs settlement. The deadline to opt out was September from litigating any released claims pending final 14, 2007. Although Jemsek received the notice, he approval. Specifically, the Love court enjoined apparently did not understand its significance and plaintiffs from pursuing “any aspect of any fee for never told his counsel about it. As a result, Jemsek service claim” that never opted out of the Love settlement.
are, were or could have been In the meantime, the bankruptcy court in North
asserted ... by reason of, arising Carolina continued to referee the parties'
out of, or in any way related to “extensive and rancorous discovery efforts.” By
any of the facts, acts, events, the bankruptcy court's reckoning, this involved
transactions, occurrences, “multiple sets of discovery, motions to compel,
courses of conduct, business several hearings and a lengthy in camera document
practices, representations, review” by the court.
omissions, circumstances or On March 31, 2008—ten months after the Love
court had issued its May 31 injunction—Blue
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 35 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 Cross NC informed the bankruptcy court about the In November 2009, after a nearly two-year
Love injunction. At that point, the bankruptcy hiatus in the North Carolina bankruptcy court had stayed discovery pending the district proceedings, Jemsek filed a motion for sanctions court's resolution of yet another discovery dispute. against Blue Cross NC. The bankruptcy court
After receiving an adverse ruling, Blue Cross NC granted the motion. In a lengthy and strongly moved to amend that stay order. In its motion, worded opinion, it found that Blue Cross NC
Blue Cross NC's local counsel reported that it had purposefully avoided informing the court and just learned that Jemsek's counterclaims had been Jemsek about the Love settlement and the May enjoined by the Love court. 31 injunction. “As a result,” the bankruptcy
The bankruptcy court granted Blue Cross NC's court concluded, “counterclaims worth motion to amend the stay order, and the parties potentially millions of dollars were lost, this repaired to the Southern District of Florida. Blue litigation was delayed for more than two years,
Cross NC moved the Love court to enforce its sizeable attorneys fees and costs were injunction against Jemsek and order Jemsek to necessitated for [Blue Cross NC's] opponents withdraw his counterclaims. The Love court and an inordinate amount of court time was agreed that its injunction applied to Jemsek's needlessly consumed.” first seven counterclaims and granted the The bankruptcy court dismissed Blue Cross motion. Love v. Blue Cross & Blue Shield Ass'n, NC's claims with prejudice and ordered it to pay
No. 03-21296-CIV, 2008 WL 4097607, at *1 Jemsek a total of $1.29 million in attorneys' fees
(S.D. Fla. Sept. 4, 2008). Jemsek appealed to the and costs. This included nearly all of the
Eleventh Circuit, which affirmed. Thomas v. attorneys' fees and costs Jemsek incurred in the
Blue Cross & Blue Shield Ass'n, 333 Fed.Appx. bankruptcy proceedings and while defending
414, 415 (11th Cir. 2009) (per curiam). He then against Blue Cross NC in Florida, including the withdrew the seven enjoined counterclaims. appellate litigation.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 36 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 Blue Cross NC sought interlocutory review of 1159, 1169 (4th Cir. 1997). A court abuses its the sanctions order, but the district court denied discretion when its conclusion is “guided by the request. In January 2014, Jemsek amended erroneous legal principles” or “rests upon a clearly his remaining counterclaims for defamation and erroneous factual finding.” Westberry v. Gislaved tortious interference. Blue Cross NC filed a Gummi AB, 178 F.3d 257, 261 (4th Cir. 1999). motion with the Love court to enjoin these The bankruptcy court gave several reasons for amended counterclaims. The Love court granted imposing sanctions. It explained that, in its view, the motion and ordered Jemsek to withdraw Blue Cross NC violated discovery rules by failing those remaining counterclaims, which he did. to mention the Love case as part of its initial
The bankruptcy court then issued its proposed disclosures, failing to amend its initial disclosures findings of fact and conclusions of law and after the Love court issued its May 31 injunction, recommended entry of final *156 judgment. Blue and failing to disclose the Love case in response
Cross NC filed a motion with the district court to to an interrogatory. The court also concluded that vacate the bankruptcy court's sanctions order. The Blue Cross NC violated the Love court's district court denied Blue Cross NC's motion and preliminary injunction, its local rules, and the entered final judgment, adopting the bankruptcy disclosure rules of the Judicial Panel on court's proposed findings of fact and conclusions Multidistrict Litigation. Finally, the bankruptcy of law. Blue Cross NC timely noted this appeal. court found that Blue Cross NC acted in bad faith
by intentionally withholding information about
the Love case. II.
[1] [2] We first consider whether the bankruptcy On appeal, Blue Cross NC contends that it had no court erred when it decided to sanction Blue Cross duty under the rules of discovery to disclose the
NC. We review the bankruptcy court's sanctions Love settlement or preliminary injunction. It also order for abuse of discretion. McGahren v. First contends that the Love court's injunction did not
Citizens Banks & Tr. Co. (In re Weiss), 111 F.3d apply to its claims and that the bankruptcy court
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 37 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 lacked the power to sanction it for violating the [5] [6] Federal courts have the inherent power to sanction this type of conduct. The courts' rules and orders of courts in other jurisdictions. inherent powers exist to preserve the integrity of the
[3] We agree that Blue Cross NC did not violate judicial process and the resources needed to resolve the Love court's injunction. The Love court enjoined disputes in an orderly and expeditious manner— only the “Releasing Parties” from litigating any of two indispensable assets in any nation dedicated to their released claims against the defendant “Blue the rule of law. See Chambers v. NASCO, Inc., 501 Parties.” The settlement agreement defines U.S. 32, 43–46, 111 S.Ct. 2123, 115 “Releasing Parties” as the class member doctors L.Ed.2d 27 (1991); United States v. Shaffer and certain “Signatory Medical Societies,” who all Equip. Co., 11 F.3d 450, 457–59 (4th Cir. 1993). agreed to release their claims against the Blue Parties, including Blue Cross NC. The bankruptcy And it is well established that a federal court court erred in finding that Blue Cross NC was one may wield its inherent sanctioning powers of these Signatory Medical Societies. As Jemsek conceded in the bankruptcy court, Blue Cross NC “when a party ‘shows bad faith by delaying or was not a Signatory Medical Society and thus was not one of the releasing parties covered by the disrupting the litigation or by hampering injunction. Accordingly, Blue Cross NC did not enforcement of a court order.’ ” Chambers, 501 violate the Love court's May 31 injunction by pursuing its claims against Jemsek after that date. U.S. at 46, 111 S.Ct. 2123 (quoting Hutto v.
[4] We need not consider most of Blue Cross Finney, 437 U.S. 678, 689 n.14, 98 S.Ct. 2565, NC's other contentions because bankruptcy courts have the inherent power to sanction parties who 57 L.Ed.2d 522 (1978)). abuse the litigation process in bad faith. In re Weiss, [7] [8] [9] A party undermines the integrity of the 111 F.3d at 1171; see Law v. Siegel, ––– U.S. –––– , 134 S.Ct. 1188, 1194, 188 L.Ed.2d 146 (2014); judicial process by using a court's resources to Marrama v. Citizens Bank of Mass., 549 U.S. 365, litigate claims that it knows or suspects another 375–76, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). Here, the bankruptcy court found that Blue Cross court has already resolved or enjoined, and it quite NC kept mum about the Love court's injunction and thus allowed the bankruptcy court to continue obviously wastes scarce judicial resources. adjudicating counterclaims that had already been Accordingly, it is an abuse of the litigation process enjoined. The court found that by litigating various discovery disputes as though the Love court's for a client to conceal from the court the fact that injunction did not exist, Blue Cross NC, among other things, prolonged the proceedings in the its opponents' claims have been enjoined. Blue bankruptcy court and *157 thereby wasted “an Cross NC had no duty to remind Jemsek about the inordinate amount of court time.” Love court's injunction or the opt-out deadline. But
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 38 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 it did have a duty not to waste the bankruptcy settlement had long passed. It contends only that it could not reasonably have known that Jemsek's court's time and resources by litigating against counterclaims had been enjoined. But for the counterclaims it knew or suspected had been reasons already discussed, that appears not to be so. Insofar as there was some doubt about the scope of enjoined in light of the pending Love settlement the Love court's injunction, Blue Cross NC never explains why it waited so long to inform the agreement. Cf. In re Cellular 101, Inc., 539 F.3d bankruptcy court about this potential development. 1150, 1154 (9th Cir. 2008) (“The obligation to On this evidence, the bankruptcy court could inform the court of a potential settlement is of such reasonably infer that Blue Cross NC acted in bad critical importance to the maintenance of orderly faith in failing to inform the court of the Love proceedings and to the prevention of needless court's injunction earlier.* Under our deferential delay that a lawyer who fails to fulfill that standard of review, *158 we have no basis to obligation may be personally subject to conclude that this finding constituted error. See sanctions.”); Gould v. Bowyer, 11 F.3d 82, 84 (7th Easley v. Cromartie, 532 U.S. 234, 242, 121 S.Ct. Cir. 1993) (“[I]n order to spare busy courts 1452, 149 L.Ed.2d 430 (2001) (explaining that a unnecessary work, parties must advise a court court reviewing for clear error will not reverse when settlement is imminent.”). simply because the reviewing court “would have [10] The bankruptcy court found that Blue Cross NC did just this, and its finding was not clearly decided the case differently”). erroneous. First, notwithstanding its lawyers' lack of knowledge, it seems highly likely that Blue Cross NC knew about the Love court's injunction III. well before its lawyers informed the bankruptcy court about it on March 31, 2008. Second, although [11] Although the bankruptcy court did not Blue Cross NC might not have known exactly clearly err in invoking its inherent powers, our which counterclaims the Love court's injunction review is not yet complete. Even when a court covered, it seems likely that Blue Cross NC knew properly concludes that sanctions are warranted, it or suspected that several of Jemsek's counterclaims abuses its discretion when it imposes sanctions shared a common nucleus of operative fact and disproportionate to the severity of a party's asserted many of the same legal theories as the Love misconduct. United States v. Rhynes, 218 F.3d 310, complaint. Finally, Blue Cross NC offered no 321–22 (4th Cir. 2000) (en banc); see Chambers, credible, good-faith explanation for why it kept 501 U.S. at 44–45, 111 S.Ct. 2123. We consider in silent until Jemsek's deadline to opt out of the Love turn whether dismissal with prejudice or an award
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 39 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 of $1.29 million in attorneys' fees and costs were harmed persons, and excessive under the circumstances. deterring similar conduct in
the future; and (6) the public A. interest. [12] [13] Federal courts have the inherent power to dismiss an action with prejudice as a sanction. Id. at 462–63. Shaffer, 11 F.3d at 462. But because it is “the most extreme sanction,” dismissal with prejudice is [14] We do not think Blue Cross NC's conduct appropriate only in the most egregious cases. See id. Even then, a court must first weigh several called for the most extreme sanction available. The factors: bankruptcy court's conclusion to the contrary rests (1) the degree of the primarily on its belief that Blue Cross NC bears wrongdoer's culpability; (2) responsibility for Jemsek's failure to opt out of the the extent of the client's Love settlement. blameworthiness if the Blue Cross NC certainly wasted the time and wrongful conduct is resources of Jemsek and, most importantly, the committed by its attorney, bankruptcy court. But the only party responsible recognizing that we seldom for the loss of Jemsek's counterclaims is Jemsek dismiss claims against himself. It is undisputed that Jemsek received blameless clients; (3) the adequate notice of the Love settlement in July prejudice to the judicial 2007 and that he had the benefit of counsel at the process and the time. As the Eleventh Circuit noted when it administration of justice; (4) considered the issue, “[i]f Jemsek wished to the prejudice to the victim; preserve his counterclaims, he could have done so (5) the availability of other quite easily by opting out of the Love action.” sanctions to rectify the wrong Thomas, 333 Fed.Appx. at 422. Jemsek simply did by punishing culpable
persons, compensating
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 40 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 not appreciate the significance of the notice and so Blue Cross NC's claims were still properly before never told his lawyers about it. the bankruptcy court. Blue Cross NC's did not
This decision was unwise, of course, and it led impair the court's ability to adjudicate those
Jemsek to commit a critical error in this litigation. claims.
But the error is Jemsek's, and Blue Cross NC had The fourth factor—prejudice to the victim— no duty to correct *159 it. Under our adversarial similarly disfavors dismissal with prejudice. As system, litigants are not their opponents' keepers. discussed above, and contrary to the bankruptcy
They have no duty to help their opponents court's conclusion, Blue Cross NC did not cause maximize their recovery or prevent them from Jemsek to lose his counterclaims. And Blue Cross losing their claims. Therefore, the bankruptcy NC's reticence did not affect Jemsek's ability to court erred when it determined that it could defend against Blue Cross NC's claims against sanction Blue Cross NC for Jemsek's loss of his him. Accordingly, we fail to see how Blue Cross counterclaims. NC prejudiced Jemsek in this case.
Once we remove this error, it becomes apparent As for the fifth factor—the availability of less that the Shaffer factors do not favor dismissal with severe sanctions—the bankruptcy court prejudice. Aside from the second factor— concluded that no lesser sanction would suffice culpability of the client —none of the six Shaffer because Blue Cross NC caused “extreme factors favor the bankruptcy court's decision to prejudice” to Jemsek by “manag[ing] to bar impose the most extreme sanction available. [Jemsek's] compulsory counterclaims even as it
The first and third factors—the degree of Blue seeks recovery on its own claims.” This
Cross NC's culpability and the prejudice to the conclusion is mistaken, and once corrected, we judicial process arising from its delay—weigh see no reason why a lesser sanction could not against dismissal with prejudice. Although the adequately compensate for any actual harm Blue bankruptcy court wasted some of its resources Cross NC caused and deter similar misconduct dealing with Jemsek's enjoined counterclaims, in the future.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 41 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 Finally, regarding the sixth factor, public policy awarding fees related to discovery before May 31, 2007 because Jemsek incurred these expenses strongly favors deciding cases on the merits. before the Love court preliminarily approved the Shaffer, 11 F.3d at 462. That preference has not settlement and enjoined litigation of the released claims. Until then, Blue Cross NC *160 had every been overcome here, given the absence of right to defend against Jemsek's counterclaims. prejudice to Jemsek or any connection between With respect to the expenses related to the Florida
Blue Cross NC's misconduct and its claims and Eleventh Circuit litigation, Jemsek incurred against Jemsek. these expenses because he failed to opt out of the
Under these circumstances, dismissal with Love settlement. He could have easily avoided this prejudice was unduly severe. error by telling his lawyers about the notice he
received. Because Jemsek's expenses are not fairly
B. attributable to Blue Cross NC's misconduct, the
[15] Of course, a federal court may also order a bankruptcy court exceeded its sanctioning powers party to pay an opponent's attorneys' fees as a by taxing Blue Cross NC with them. sanction for bad-faith conduct. See Chambers, 501 U.S. at 45–46, 111 S.Ct. 2123. Here, the We recognize that a bankruptcy court has bankruptcy court's award included the expenses Jemsek incurred: “1) in connection with this considerable leeway to fashion an appropriate Adversary Proceeding from May 31, 2007 sanction. But in this case, those sanctions were forward, 2) pursuing discovery responses prior to May 31, 2007, and 3) defending against [Blue excessive and based on a faulty Cross NC] after March 31, 2008 in the Florida Court and on appeal during the Love injunction proceedings.” Footnotes premise: that Blue Cross NC bore the [16] We take no issue with the first component of this award. Blue Cross NC should have responsibility for Jemsek's lack of diligence. informed the bankruptcy court about the Love court's injunction on May 31, 2007 or shortly thereafter. However, for the reasons already IV. discussed, the bankruptcy court abused its discretion when it awarded the second and third For the foregoing reasons, we vacate the components, which represent a sizable portion of the total award. The court abused its discretion by judgment of the district court and remand the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 42 In re Jemsek Clinic, P.A., 850 F.3d 150 (2017) 63 Bankr.Ct.Dec. 221 case for further proceedings consistent with this All Citations opinion. 850 F.3d 150, 63 Bankr.Ct.Dec. 221
VACATED AND REMANDED
* Jemsek suggests that Blue Cross NC delayed revealing the Love injunction because it wanted to avoid reminding Jemsek about the opt-out deadline. Jemsek's failure to opt out apparently limited his recovery to an amount less than what he sought as damages in the bankruptcy proceedings. Blue Cross NC contends that its North Carolina lawyers did not know about the Love injunction until March 2008 and that Blue Cross NC could not reasonably have known that the Love injunction applied to Jemsek's counterclaims. The district court appears to have agreed with Jemsek's view. The record itself yields no definitive answer as to the reason for the delay—it may have been a litigation strategy, or it may have been negligence. Under our deferential standard of review, however, we cannot say the bankruptcy court erred in finding that Blue Cross NC lacked a good-faith reason for failing to inform the court about the Love injunction for ten months.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 43 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 2017 WL 1190965 | United States Court of Appeals, Amended: April 6, 2017 Fourth Circuit. Synopsis LVNV FUNDING, LLC, its successors and Background: Chapter 13 debtors objected, assigns as assignee of CitiFinancial, Inc., Creditor–Appellant, postconfirmation, to admittedly stale proof of v. claim filed by creditor, and creditor responded by Derrick Allen HARLING; Teresa Stevens Harling, Debtors–Appellees, asserting that debtors' objection was barred by res v. Pamela Simmons-Beasley; Joy S. judicata effect of their confirmed plan. The United Goodwin; U. S. Trustee's OFFICE, States Bankruptcy Court for the District of South Trustees. Pamela Simmons-Beasley; National Carolina, David R. Duncan, Chief Judge, 541 B.R. Association of Consumer Bankruptcy Attorneys, Amici Supporting 330, entered order disallowing claim, and creditor Appellees. LVNV Funding, LLC, its successors appealed directly to the Court of Appeals. In and assigns as assignee of Citibank separate case, the Bankruptcy Court, Helen E. (South Dakota), N.A., Creditor–Appellant, Burris, J., 2016 WL 192273, again entered order v. Jeffrey Jerel Rhodes, a/k/a Jeff disallowing claim, despite confirmed Chapter 13 Rhodes, a/ k/a Jeffery Jerel Rhodes, Debtor–Appellee, plan's allegedly preclusive effects, and creditor v. appealed directly to the Court of Appeals. Gretchen D. Holland; U. S. Trustee's Office, Trustees. Pamela Simmons-Beasley; National Association of Consumer Bankruptcy [Holding:] The Court of Appeals, Agee, Circuit Attorneys, Amici Supporting Judge, held that prior orders confirming debtors' Appellees. proposed Chapter 13 plans were not res judicata No. 16 on allowability of proofs of unsecured claim - 1346 filed prior to confirmation of plans. , No. 16-1347 | Argued: January 24, 2017 Affirmed. | Decided: March 30, 2017
44 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 West Headnotes (8) those matters actually and necessarily
resolved in the first adjudication. [1] Bankruptcy
Conclusions of law; d e novo review Cases that cite this headnote On appeal, the Court of Appeals [4] Judgment reviews bankruptcy court's application Nature and requisites of former of res judicata de novo. recovery as bar in general Res judicata applies upon satisfaction of the Cases that cite this headnote following three conditions: (1) there is prior
[2] Bankruptcy judgment, which was final, on the merits,
Conclusiveness; r es judicata; c and rendered by court of competent ollateral estoppel Chapter 13 plan confirmation order is jurisdiction in accordance with
“final determination” as to those requirements of due process; (2) the parties
matters which it actually addresses to the second matter are identical to, or in
and is entitled to preclusive effect on privity with, the parties in the first action;
those issues litigated by or determined and (3) the claims in the second matter are
at confirmation. 11 U.S.C.A. § based upon same cause of action involved
1327(a). in the earlier proceeding; if judgment satisfies these three conditions, it is both Cases that cite this headnote claim and issue preclusive. U.S. Const.
[3] Judgment Amend. 5. Nature and elements of bar or estoppel by former adjudication Cases that cite this headnote Under doctrine of res judicata, prior [5] Bankruptcy judgment between the same parties Discretion; m andatory confirmation can preclude subsequent litigation on
45 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 Requirements for confirmation of Chapter which had to address only the
13 plan are set forth in bankruptcy statute, collective amount that all the Chapter
and the bankruptcy court lacks authority to 13 debtors' unsecured creditors as
impose any additional requirements. 11 class would receive after satisfaction
U.S.C.A. § 1325(a). of any secured or priority debts. 11
U.S.C.A. § 1327(a). Cases that cite this headnote
Cases that cite this headnote [6] Judgment
Nature and requisites of former [8] Bankruptcy recovery as bar in general Discretion; m andatory confirmation For res judicata to apply, there must be an At hearing on confirmation of initial final judgment involving the same proposed Chapter 13 plan, bankruptcy parties as are present in a later proceeding court must determine whether the plan that is based upon the same cause of action meets statutory confirmation as in the first proceeding. requirements; if so, then bankruptcy
Cases that cite this headnote court is required to confirm the plan.
11 U.S.C.A. § 1325(a). [7] Bankruptcy
Conclusiveness; r es judicata; c Cases that cite this headnote ollateral estoppel Prior orders confirming debtors'
proposed Chapter 13 plans were not Appeal from the United States Bankruptcy Court
res judicata on allowability of proofs for the District of South Carolina, at Columbia.
of unsecured claim filed prior to David R. Duncan, Chief Bankruptcy Judge. (15-
confirmation of plans; allowability of 03369-dd) Appeal from the United States
individual unsecured claims was no Bankruptcy Court for the District of South
part of process of confirming plans,
46 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 Carolina, at Spartanburg. Helen E. Burris, AGEE, Circuit Judge:
Bankruptcy Judge. (14-03965-hb) *1 LVNV Funding, LLC (“LVNV”) appeals from
Attorneys and Law Firms orders of the United States Bankruptcy Court for
ARGUED: Adam C. Bach, ELLER TONNSEN the District of South Carolina, which disallowed its
BACH, Greenville, South Carolina, for Appellant. claims as an unsecured creditor in two proceedings
Jane H. Downey, MOORE TAYLOR LAW FIRM, under Chapter 13 of the United States Bankruptcy
P.A., West Columbia, South Carolina, for Code (the “Bankruptcy Code”). See generally 11
Appellees. U.S.C. ch. 13. On appeal, LVNV contends that the
ON BRIEF: Robert H. Cooper, THE COOPER bankruptcy court's Chapter 13 plan confirmation
LAW FIRM, Greenville, South Carolina, for orders (the “Confirmation Orders”) barred the
Appellee Jeffrey Jerel Rhodes. John B. Butler, objections to LVNV's claims because those
III, Columbia, South Carolina, for Amicus objections were filed after entry of the
Pamela Simmons-Beasley. Tara Twomey, Allan Confirmation Orders. For the reasons set out
L. Gropper, NATIONAL CONSUMER below, we disagree with LVNV and affirm the
BANKRUPTCY RIGHTS CENTER, judgments of the bankruptcy court.
San Jose, California, for Amicus National
Association of Consumer Bankruptcy Attorneys. I. Before AGEE, KEENAN, and THACKER, Circuit A. Judges. This appeal arises out of two separate Chapter 13
Opinion bankruptcy proceedings that followed a similar
Affirmed by published opinion. Judge Agee wrote pattern. On July 11, 2014, Jeffrey Rhodes the opinion, in which Judge Keenan and Judge (“Rhodes”) filed in the United States Bankruptcy
Thacker joined. Court for the District of South Carolina a voluntary petition for relief under Chapter 13. Rhodes'
47 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 Chapter 13 plan was confirmed on October 17, confirmation: “Confirmation of this plan does not
2014. On June 26, 2015, Derrick and Teresa bar a party in interest from objecting to a claim.”
Harling (the “Harlings”; collectively with Rhodes, E.g., J.A. 157 (a “reservation of rights” clause). the “Debtors”) filed in that same court their own
Chapter 13 bankruptcy petition. The bankruptcy B. court confirmed the Harlings' Chapter 13 plan on LVNV filed proofs of claim in each case before
August 20, 2015. entry of the Confirmation Orders. In Rhodes'
The Debtors used “form” Chapter 13 plans, which case, LVNV filed proof of an unsecured claim in are utilized by the bankruptcy courts in the District the amount of $761.44 on August 1, 2014. In the of South Carolina. In their respective plans, the Harlings' case, LVNV filed proof of an
Debtors scheduled their secured debts individually, unsecured claim in the amount of $3,878.86 on naming each of their secured creditors, the value of July 8, 2015. Neither the Debtors, nor their each secured creditor's claim, the value of the lien trustees, took any action regarding LVNV's each secured creditor held in the collateral securing claims before the respective Confirmation Orders the Debtors' particular obligation, and the amount were entered. of each secured creditor's claim that was unsecured As is typical in Chapter 13 proceedings, the by operation of 11 U.S.C. § 506. In contrast to the claim bar date in each case was later than the specific provisions for secured creditors, each plan date of plan confirmation. Under the Bankruptcy provided for treatment of unsecured creditors as a Code's timeline in a Chapter 13 bankruptcy single class, so that: “General unsecured creditors proceeding, plan confirmation and the deadline shall be paid allowed claims pro rata by the trustee to file proofs of claim are set relative to the § 341 to the extent that funds are available after payment meeting of creditors. 11 U.S.C. § 341; Fed. R. of all other allowed claims.” E.g., J.A. 158. In Bankr. P. 2003(a). Federal Rule of Bankruptcy addition, the Debtors' plans contained a provision Procedure 2003(a) sets the § 341 meeting reserving the right to object to claims after plan twenty-one to fifty days after the debtor's petition
48 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 for relief. Under § 1324, the plan confirmation interposed the defense that the Debtors' objections hearing follows twenty to forty-five days after were invalid and of no effect under the doctrine of the § 341 meeting, 11 U.S.C. § 1324(b), while res judicata. According to LVNV, the the claim bar date is ninety days after the Confirmation Orders were final judgments on the creditor's meeting, Fed. R. Bankr. P. 3002(c). As validity of LVNV's claims and, therefore, res a consequence, it is common in a Chapter 13 judicata precluded the Debtors' later objections. proceeding that the bar date to file claims by The bankruptcy courts disagreed with LVNV and unsecured creditors occurs after plan sustained the Debtors' objections to LVNV's claims confirmation. In Rhodes' case, the claim bar date in reliance on the reservation of rights clauses in was November 13, 2014, almost a month after the respective Chapter 13 plans. As a consequence, his Confirmation Order was entered. In the LVNV's claims were barred by the applicable state
Harlings' case, the bar date was October 26, statute of limitations, and it will not receive any
2015, more than two months after the distribution from the Debtors' Chapter 13 estates.
Confirmation Order was entered. LVNV now appeals from both decisions. In
*2 Rhodes filed his objection to LVNV's proof Rhodes' case, the parties jointly moved the of claim under 11 U.S.C. § 502 on October 9, bankruptcy court for leave to bypass the district
2015, contending that claim was barred by the court and appeal directly to this Court under 28 relevant statute of limitations. U.S.C. § 158(d)(2)(A), representing the case
Likewise, on August 27, 2015, one week after the presented a question of law as to which there was
Confirmation Order in their case was entered, the no controlling decision and that resolution of the
Harlings objected to LVNV's proof of claim on the issue presented would materially advance the same ground. progress of Rhodes' individual case. The
LVNV conceded in the bankruptcy court, as it does bankruptcy court granted the motion, and we here, that its claims would ordinarily be barred by accepted jurisdiction.1 See Fed. R. App. P. 5; Fed. the statute of limitations. However, LVNV R. Bankr. P. 8006.
49 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 Meanwhile, LVNV appealed the Harlings' case to contradicts the plain language of the Bankruptcy the United States District Court for the District of Code and the plan set out by Congress governing
South Carolina under 28 U.S.C. § 158(a). Shortly Chapter 13 proceedings. after filing its notice of appeal in the district court, [1] We review the bankruptcy court's application of res judicata de novo. First Union however, LVNV and the Harlings filed a joint Commercial Corp. v. Nelson, Mullins, Riley & motion for leave to appeal directly to this Court Scarborough (In re Varat Enters., Inc.), 81 F.3d 1310, 1314 (4th Cir. 1996). under 28 U.S.C. § 158(d)(2)(A). The district court granted the motion, and again we accepted A. jurisdiction. See Fed. R. App. P. 5; Fed. R. Bankr. [2] A debtor's bankruptcy case “involves an P. 8006. aggregation of individual controversies, many of which would exist as stand-alone lawsuits but for We consolidated the Debtors' cases for purposes of the bankrupt status of the debtor.” Bullard v. Blue Hills Bank, 575 U.S. ----, 135 S.Ct. 1686, 1692, this appeal, over which we have jurisdiction 191 L.Ed.2d 621 (2015) (internal quotations pursuant to 28 U.S.C. § 158(d)(2)(A). omitted). In view of this unique status, a bankruptcy case may contain many “final decisions” that do not necessarily fit squarely into the conventional formulation of res judicata, which II. is a product of “ordinary civil litigation.” See id. at On appeal, LVNV contends that the bankruptcy 1691–92. Nonetheless, Chapter 13 confirmation orders have a preclusive effect on those issues court erred in approving the Debtors' objections to litigated by or determined at confirmation, as the plan confirmation order is a “final determination” its unsecured claims, thereby disallowing those as to those matters it actually addresses. See 11 claims, because the Debtors' objections came after U.S.C. § 1327(a) (“The provisions of a confirmed plan bind the debtor and each creditor, whether or entry of the Confirmation Orders. LVNV maintains not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected that confirmation of a Chapter 13 bankruptcy plan to, has accepted, or has rejected the plan.”); In re has a res judicata effect on all creditor claims filed Varat, 81 F.3d at 1315 (“[T]he confirmation order constitutes a final judgment on the merits with res prior to issuance of the confirmation order. We judicata effect.”). find that LVNV's position does not satisfy the requirements for the application of res judicata and
50 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 *3 [3] [4] In bankruptcy, “[w]e look to res judicata n.2, 196 L.Ed.2d 242 (2016) (stating that “res principles developed in our own case law to judicata ... embraces both claim and issue determine whether an earlier federal judgment, preclusion”). LVNV contends the Confirmation including the judgment of a bankruptcy court, bars Orders meet the three requirements of res judicata a claim asserted in a later action.” Grausz v. so that the Debtors' objections, coming after the
Englander, 321 F.3d 467, 472 (4th Cir. 2003). Confirmation Orders were entered, are thus barred.
Under the doctrine of res judicata, “a prior The query before us in this case is what issues were judgment between the same parties can preclude determined by the Confirmation Orders, and, subsequent litigation on those matters actually and specifically, did the bankruptcy court adjudicate necessarily resolved in the first adjudication.” In re the merits of any individual unsecured creditor's
Varat, 81 F.3d at 1314–15. Res judicata applies claim? It is to that question that we now turn. where three conditions are met: (1) there is a prior judgment, which was final, on the merits, “and B. rendered by a court of competent jurisdiction in [5] The determination of the application of res accordance with the requirements of due process”; judicata begins with the Bankruptcy Code's
(2) the parties to the second matter are identical to, statutory scheme. That scheme reflects a careful or in privity with, the parties in the first action; and and structured framework set out by Congress.
(3) “the claims in the second matter are based upon Section 1325 lays out the requirements for plan the same cause of action involved in the earlier confirmation. Under that statute, the bankruptcy proceeding.” Covert v. LVNV Funding, LLC, 779 court “shall confirm” a debtor's Chapter 13 plan if
F.3d 242, 246 (4th Cir. 2015) (internal quotations it meets the specific requirements therein and omitted). A judgment satisfying those three factors “complies with the [other] provisions of” Chapter is both “claim” and “issue” preclusive. See In re 13. 11 U.S.C. § 1325(a). Consequently, Chapter 13
Varat, 81 F.3d at 1315; see also Bravo-Fernandez plans must comply with the plan content v. United States, 580 U.S. ----, 137 S.Ct. 352, 358 requirements set forth in § 1322, meaning the plan:
51 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 (1) must be proposed in good faith; (2) must not the class of unsecured creditors only to the extent
“discriminate unfairly” between different classes of the funds of the bankruptcy estate are available unsecured creditors; and (3) must be in the best after the plan obligations to secured or priority interest of the debtor's creditors. See, e.g., id. §§ creditors are satisfied. Accordingly, in
1322, 1325(a)(3), (4), (7). These requirements are confirming a Chapter 13 plan, the bankruptcy statutory mandates, and the bankruptcy court lacks court need only determine that the funds the authority to impose additional requirements. available to the class of unsecured creditors are
See Petro v. Mishler, 276 F.3d 375, 378 (7th Cir. equivalent to or greater than the amount that
2002) (“[B]y creating a finite list of ... affirmative class would be paid in the course of a Chapter 7 requirements necessary for a plan's confirmation, proceeding. See, e.g., In re Cole, 548 B.R. 132, we assume that Congress intended to exclude other 142 (Bankr. E.D. Va. 2016) (“[Section requisites from being grafted onto section 1325(a)(4) ] requires that creditors receive
1325(a).”). payments having a present value at least equal to
Section 1322 allows a debtor's Chapter 13 plan to what they would receive in a [C]hapter 7 case.”). treat unsecured creditors as a single class.2 See In other words, the Bankruptcy Code requires the
11 U.S.C. § 1322(b)(1) (allowing the plan to proposed plan to address at plan confirmation
“designate a class or classes of unsecured only the collective amount that all the Chapter 13 claims”). When the plan does so, as do the debtor's unsecured creditors as a class will
Debtors' plans here, the bankruptcy court receive after satisfaction of any secured or examines only the “pool” of funds available to priority debts. No provision of the Bankruptcy the class as a whole during plan confirmation. Code provides for the determination of the merits
See id. § 1322(a)(3) (stating that a debtor's of an individual unsecured claim within the class proposed Chapter 13 plan must “provide the of unsecured claims as part of plan confirmation. same treatment for each claim within a particular To the contrary, as discussed below, that class”). Most Chapter 13 plans propose to pay function is reserved by statute for the claims
52 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 allowance procedure, which stands separate and As noted above, the Bankruptcy Code sets out a apart under the Bankruptcy Code from plan specific claim determination process for confirmation. See 11 U.S.C. §§ 501–502. adjudicating contested claims. Upon filing, a
*4 Chapter 13 plan confirmation as to unsecured claim is “deemed allowed” under § 502(a). At creditors contrasts with the treatment and that point, the debtor, trustee, or other interested determination of secured claims. Unlike the party may file an objection, and the bankruptcy general provision for the class of unsecured court proceeds under § 502 to adjudicate the creditors, a Chapter 13 plan must address the validity and amount of the claim vel non. rights of each secured creditor individually by Nothing in either § 502, § 1325, or elsewhere in setting out the mode of satisfying that claim in the Bankruptcy Code ties adjudication of the relation to the secured creditor's collateral. Id. § allowance of an unsecured creditor's claim to the
1325(a)(5) (requiring an analysis for “each process or event of Chapter 13 plan allowed secured claim provided for by the confirmation. plan”). Of significance is that Chapter 13 plan An unsecured creditor's claim, if filed before confirmation requires that “the holder of such plan confirmation, has already been “deemed
[secured] claim has accepted the plan.” Id. § allowed” under § 502(a) without any action of
1325(a)(5)(A). No parallel provision exists for the bankruptcy court. Thus, there is nothing unsecured creditors' claims, so whether an under the Bankruptcy Code for the bankruptcy unsecured creditor “consents” to a Chapter 13 court to adjudicate at plan confirmation plan is irrelevant for purposes of plan regarding an individual unsecured creditor's confirmation. Thus, as a matter of statutory claim. That matter can only arise should an direction, the treatment of each individual objection be made under § 502, which sets in secured creditor's claim is bound up in plan motion a determination process under that statute confirmation, while an individual unsecured and the Bankruptcy Rules with no relation to creditor's claim is not. plan confirmation.
53 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 With this statutory structure of the Bankruptcy [8] When the bankruptcy court entered the
Code in mind we now turn to the application of Confirmation Orders, it was required to determine res judicata based on the effect of a Chapter 13 whether the respective plans met the requirements plan confirmation order. of § 1322 and § 1325. If so, the bankruptcy court
was required to confirm the plans. See 11 U.S.C. §
1325(a). Thus, the “cause of action” in the first C.
[6] [7] For res judicata to apply, there must be an proceeding was whether the Debtors' plans met initial final judgment involving the same parties as the requirements for plan confirmation. They did. are present in a later proceeding that is based upon Indeed, LVNV did not contend before the the same cause of action as in the first proceeding. bankruptcy court, and does not contend now, that
In re Varat, 81 F.3d at 1314–15. The Debtors and the Debtors' plans failed to meet any of the
LVNV agree that the Confirmation Orders are final requirements for plan confirmation. Accordingly, judgments as to their subject matter and that the the issue for res judicata purposes is whether the
Debtors and LVNV were before the bankruptcy “cause of action” in the later proceeding—the court when the Confirmation Orders were entered. validity of the Debtors' objections to LVNV's
Thus, the first two elements of res judicata are met: claims—was any part of the cause of action in the a prior final judgment with the same parties as now first proceeding, plan confirmation. As to contest an issue in a later proceeding. The question unsecured creditors, it was not. All the bankruptcy to resolve is whether the objections to LVNV's court adjudicated in the Confirmation Orders as to claims by the Debtors raise the same cause of unsecured creditors was whether, as a class, that action as before the bankruptcy court in plan class would be paid “to the extent that funds confirmation. The plain language of the [we]re available after payment of all other allowed
Bankruptcy Code and clear structure of the claims.” E.g., J.A. 95. bankruptcy process set out by Congress confirm *5 As foreshadowed in the earlier discussion, that they do not. this conclusion is compelled by the plain
54 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 language of the Bankruptcy Code and Rules, rules and statutes, there is no deadline for the which govern the allowance of claims and initiation of such an objection. Nothing in the
“contested matters.” Upon filing, a claim or Bankruptcy Code ties contested matters for interest is “deemed allowed, unless a party in unsecured claims to a timeline related to plan interest ... objects.” 11 U.S.C. § 502(a). Thus, confirmation.
LVNV's claims were already “deemed allowed” This specific statutory structure for the by the Bankruptcy Code when they were filed adjudication of objections to claims leads to the before plan confirmation. This “deemed conclusion that Congress has made Chapter 13 allowance” was subject to statutory divestiture plan confirmation and claim-allowance on under § 502(b) if an objection was filed and then contested unsecured claims to be separate and sustained by the bankruptcy court. Only when an distinct actions within a debtor's bankruptcy objection to a claim is filed does the bankruptcy proceeding. See Bullard, 135 S.Ct. at 1692 court “determine the amount of such claim” and (observing that bankruptcy involves the
“allow [that] claim in such amount.” See id. § “aggregation of individual controversies”). The
502(b). The filing of an objection to claim begins Chapter 13 plan confirmation only adjudicates a “contested matter,” governed by Federal Rules whether the plan meets the requirements of § 1322 of Bankruptcy Procedure 3007 and 9014. See, and § 1325. Neither statute vests in the bankruptcy e.g., Gentry v. Siegel, 668 F.3d 83, 92 (4th Cir. court the adjudication of the merits of an individual
2012) (observing that a contested matter arises unsecured creditor's claim as part of plan once “an objection to [a] claim has been confirmation. Such a determination is specifically interposed”). See generally Fed. R. Bankr. P. allocated by the Bankruptcy Code to a separate
3007(a) (establishing the procedure for filing proceeding under § 502. Thus, for res judicata objections to claims); id. 9014 (establishing the purposes, a bankruptcy court's later § 502 procedure for the adjudication of “contested determination to allow or disallow an unsecured matters”). Under the plain text of the relevant creditor's claim is not based on any matter that was
55 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 before the bankruptcy court as part of plan LVNV's argument conflates the separate and confirmation. In effect, whether an objection to an distinct proceedings of § 1325 plan confirmation unsecured creditor's claim is filed before or after and a § 502 contested claim.3 Congress plan confirmation makes no difference in the plan purposefully created these events as two separate confirmation proceeding. and distinct proceedings. The Confirmation Orders
There is no “prior judgment,” final or otherwise, only affected those matters that were decided under
“on the merits” as to any individual unsecured § 1325 as part of the plan confirmation, which did creditor's claims in the Confirmation Orders. The not consider anything regarding the validity of a second cause of action —the determination of the contested individual unsecured claim regardless of validity of LVNV's claims— could not be based on when that claim was filed. Thus, considered under the same cause of action in the plan confirmation the clear framework of the Bankruptcy Code, res proceeding because the issue of claim allowance judicata cannot apply to bar the Debtors' objections was never before the court. See In re Varat, 81 to LVNV's claims.
F.3d at 1314–15 (setting out the requirements for res judicata in a bankruptcy case). At no point in D. the § 502 contested matter regarding the allowance *6 Notwithstanding this statutory framework, of LVNV's claims was the bankruptcy court LVNV contends that our opinion in Covert v. required, or even asked, to reconsider the matters LVNV Funding, LLC, 779 F.3d 242 (4th Cir. decided by the Confirmation Orders: the 2015), and the Seventh Circuit's opinion in D & fulfillment by the Debtors' plans of the § 1322 and K Properties Crystal Lake v. § 1325 requirements. As a consequence, the Mutual Life Insurance Co. of New York, 112 F.3d Confirmation Orders cannot be res judicata as to an 257 (7th Cir. 1997), compel a different unsecured creditor's claim because an essential conclusion. LVNV argues these cases stand for element of res judicata is absent. the proposition that confirmation of a debtor's
Chapter 13 plan is a final adjudication on the
56 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 merits of all creditor claims filed prior to entry of of claim —a defense that could and should have the confirmation order, not just the claims of been asserted through the claims-allowance secured creditors. We disagree. process under § 502, but also an asset that should
In Covert, the plaintiffs brought a class action have been included as part of the plaintiffs' suit in federal district court against LVNV under bankruptcy estates. 11 U.S.C. §§ 541(a), 1306(a) the Fair Debt Collection Practices Act (1). For res judicata purposes, Covert reflects only
(“FDCPA”) and other consumer-protection that debtors who do not object to proofs of claim statutes. 779 F.3d at 244–45. The plaintiffs during their bankruptcy proceeding are precluded alleged that, in their prior individual bankruptcy from later litigating the subject matter of those proceedings, LVNV's proofs of claim violated claims for personal gain outside the Chapter 13 the FDCPA and gave them a cause of action bankruptcy proceeding as a way to avoid including against LVNV. Id. However, the plaintiffs never the claim as an asset in their bankruptcy estate. objected to LVNV's unsecured claims in their Had the Covert plaintiffs met their obligations as bankruptcy proceedings and did not include the Chapter 13 debtors, the FDCPA claims would have
FDCPA claim as an asset of their Chapter 13 been part of their Chapter 13 estates and included estates. See id. Instead, the plaintiffs waited for in the § 1325(a)(4) determination—whether the their Chapter 13 plans to pay out and obtained § debtors' proposed plans were in the “best interest”
1328 discharges for any liability to LVNV before of their creditors—by the bankruptcy court in plan making their claims outside the bankruptcy court confirmation. However, the Covert plaintiffs failed against LVNV. See id. at 245, 247–49. The to comply with the requirements of the Bankruptcy district court dismissed the plaintiffs' claims Code for their Chapter 13 plans. Therefore, the against LVNV, and we affirmed based on the Court in Covert was correct to reject the plaintiffs' doctrine of res judicata. Id. at 245. claims.
In effect, the Covert plaintiffs raised outside of Here, the Debtors have timely objected to LVNV's the bankruptcy court a defense to LVNV's proof claim in the bankruptcy court. And they have not
57 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 brought a proceeding outside of the bankruptcy district court, which held that D & K Properties' court to circumvent the requirements of their suit was barred under the doctrine of res judicata.
Chapter 13 plans to obtain a personal benefit to the The Seventh Circuit affirmed, ruling that res detriment of their other creditors. judicata “ordinarily would bar [D & K Properties]
Likewise, D & K Properties is neither on point nor from bringing the action after the confirmation of persuasive. There, the Seventh Circuit recognized the plan.” Id. that a debtor's collateral suit against one of its secured creditors was barred under the doctrine of Footnotes *7 Again, the case at bar has no correlation to D res judicata. See D & K Props., 112 F.3d at 259– & K Properties. LVNV is an unsecured creditor, 60. D & K Properties sued one of its secured not a secured creditor, which would be bound by creditors, Mutual Life Insurance Company a confirmed Chapter 13 plan. More importantly, (“Mutual Life”), in an Illinois state court, alleging, D & K Properties represents classic res judicata. in essence, a breach of contract and bad faith. Id. at D & K Properties' post-bankruptcy action in 258– 59. When D & K Properties later filed for district court clearly covered the prior cause of bankruptcy, Mutual Life removed D & K action actually litigated to a final, prior judgment Properties' suit to the bankruptcy court, which in a contested matter by the bankruptcy court. No ruled in favor of Mutual Life on the merits. Id. at such connection is present in the case before us. 259. D & K Properties did not appeal that ruling, * * * * but instead paid Mutual Life's claim as part of its In sum, we hold that the Debtors' objections to bankruptcy plan. Id. As in Covert, after D & K LVNV's proofs of claim as an unsecured creditor Properties received a discharge from bankruptcy, it are not barred by the doctrine of res judicata. again brought suit against Mutual Life in an Illinois When the bankruptcy court confirmed the state court, alleging the same breach of contract, as Debtors' Chapter 13 plans, it only considered well as a related tortious interference with contract treatment of unsecured creditors as a single class. claim. Id. Mutual Life removed the case to federal
58 LVNV Funding, LLC v. Harling, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 244 There was no adjudication of the claim of any determination of contested unsecured claims individual unsecured creditor as part of plan under § 502.4 confirmation. Determining the validity of individual unsecured claims is a distinctly III. separate process under § 502 both in procedure Based on the foregoing, the judgments of the and timing. Therefore, an essential element for bankruptcy court are application of res judicata—that the later AFFIRMED. proceeding is the same cause of action as in the All Citations prior case —is simply absent from the Chapter --- F.3d ----, 2017 WL 1190965, 63 Bankr.Ct.Dec. 13 plan confirmation as to unsecured creditors 244 like LVNV. Thus, res judicata cannot be said to apply in the bankruptcy court's later
1 On November 9, 2016, Rhodes filed a notice of conversion to Chapter 7 pursuant to 11 U.S.C. § 1307(a). Any issues in Rhodes' Chapter 7 case are not before us and are not relevant to the issues raised in this appeal. 2 If a debtor's Chapter 13 plan divides unsecured creditors into more than one class, each class must be considered on its own. See 11 U.S.C. § 1322(a)(3). 3 Further illustrating the dissonance between LVNV's position and Congress' intent, as expressed in the Bankruptcy Code, is the fact that LVNV would create two classes of unsecured creditors from the single class of unsecured creditors set out in the Debtors' confirmed plans—a result at odds with the terms of the Confirmation Orders, as well as 11 U.S.C. § 1322(a) (3) and (b)(1). On the one hand, LVNV would create a class of favored unsecured creditors whose claims were filed prior to plan confirmation and made final at that point in its view. On the other hand, LVNV would create a separate class of disfavored unsecured creditors whose claims are filed after confirmation and, therefore, are open to challenge at any time prior to the debtor's § 1328 discharge, which may come several years after plan confirmation. Nothing in the Bankruptcy Code authorizes that result and contradicts the single class of unsecured creditors approved by the bankruptcy court in the Confirmation Orders. To its credit, LVNV has abandoned the argument that plan confirmation would be res judicata as to all unsecured creditors' claims, even those filed after plan confirmation. That argument would lead to the absurd result that plan confirmation would be res judicata for claims not yet filed when the bankruptcy court confirmed a plan. 4 Both the parties and the bankruptcy court addressed the res judicata issue in terms of the adequacy of the reservation of rights clauses. For the reasons noted above, we find it unnecessary to address the issue in that way as the application of res judicata is plainly answered under the text and structure of the Bankruptcy Code and Rules.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
59 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... 2017 WL 1066259 Bankruptcy Code's ordinary priority rules Only the Westlaw citation is currently without the affected creditors' consent. available. Supreme Court of the United States Reversed and remanded. Casimir CZYZEWSKI, et al., Petitioners Justice Thomas filed a dissenting opinion in v. JEVIC HOLDING CORP., et al. which Justice Alito joined. No. 15–649. | Argued Dec. 7, 2016. West Headnotes (21) | Decided March 22, 2017. [1] Bankruptcy Synopsis Types of Cases Background: Order was entered by the United Business may file for bankruptcy States Bankruptcy Court for the District of under either Chapter 7 or Chapter Delaware, approving settlement that resulted in 11 of the Bankruptcy Code. structured dismissal of Chapter 11 case, and former Cases that cite this headnote employees of debtor appealed. The District Court,
Sue L. Robinson, J., 2014 WL 268613, affirmed, [2] Bankruptcy Liquidation, Distribution, and Closing and former employees appealed. The Third Circuit In a Chapter 7 case, a trustee Court of Appeals, Hardiman, Circuit Judge, 787 liquidates the debtor's assets and F.3d 173, affirmed. Certiorari was granted. distributes them to creditors.
Cases that cite this headnote Holdings: The Supreme Court, Justice Breyer, held that: [3] Bankruptcy In General; N ature and Purpose [1] former employees had Article III standing, and In a Chapter 11 case, debtor and
[2] a bankruptcy court may not approve a creditors try to negotiate a plan that structureddismissal of a Chapter 11 case that provides for distributions that do not follow the will govern the distribution of
valuable assets from the debtor's
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 60 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... estate and often keep the business to other persons. 11 U.S.C.A. §§
operating as a going concern. 11 363(c)(1), 547, 548, 1106–1108.
U.S.C.A. §§ 1121, 1123, 1129, 1141. Cases that cite this headnote
1 Cases that cite this headnote [6] Bankruptcy Notice to Creditors; C [4] Bankruptcy ommencement Creation of Estate; T ime Bankruptcy Bankruptcy Proceedings, Acts, or Persons Interest of Debtor in General Affected Upon filing a Chapter 11 petition, an estate Upon the filing of a Chapter 11 petition,
is created comprising all property of the an “automatic stay” of all collection
debtor. 11 U.S.C.A. § 541(a)(1). proceedings against the debtor takes
effect. 11 U.S.C.A. § 362(a). Cases that cite this headnote
Cases that cite this headnote [5] Bankruptcy Debtor in Possession [7] Bankruptcy Bankruptcy Debtor in Possession, in General Confirmation; O bjections After a Chapter 11 petition is filed, a Bankruptcy In General; G rounds in General fiduciary, often the debtor's existing Chapter 11 foresees three possible
management team, is installed to outcomes: confirmation of a court-
manage the estate in the interest of the approved plan that may keep the
creditors; acting as “debtor in business operating while helping
possession,” this fiduciary may operate creditors by providing for payments,
the business and perform certain conversion of the case to Chapter 7 for
bankruptcyrelated functions, such as liquidation of the business and
seeking to recover for the estate distribution of its assets, or dismissal of
preferential or fraudulent transfers made
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1112(a, b), 1123, 1129, 1141. 11 U.S.C.A. § 349(b).
Cases that cite this headnote Cases that cite this headnote
[8] Bankruptcy [10] Bankruptcy Effect; P roceedings in Converted Case Compromises, Releases, and Dismissal of a Chapter 11 case typically Stipulations Bankruptcy revests the property of the estate in the entity Effect; P roceedings in Converted Case in which such property was vested “Structured dismissal” is a dismissal immediately before the commencement of of a Chapter 11 case that alters a the case; in other words, it aims to return to dismissal's ordinary consequences the prepetition financial status quo. 11 of restoration of the prepetition U.S.C.A. § 349(b)(3). financial status quo, or which has
Cases that cite this headnote other special conditions attached. 11
U.S.C.A. § 349(b). [9] Bankruptcy Judicial Authority or Approval Cases that cite this headnote Bankruptcy Effect; P roceedings in Converted Case Recognizing that conditions may have [11] Bankruptcy Priorities changed in ways that make a perfect Bankruptcy Code sets forth a basic
restoration of the status quo difficult or system of priority, which ordinarily
impossible, the Bankruptcy Code determines the order in which the
permits the bankruptcy court, for cause, bankruptcy court will distribute
to alter a Chapter 11 dismissal's ordinary assets of the estate: secured
restorative consequences, so as to creditors are highest on the priority
list, for they must receive the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 62 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... proceeds of the collateral that secures plan that contains priority-violating
their debts, special classes of creditors, distributions over the objection of an
such as those who hold certain claims impaired creditor class. 11 U.S.C.A. §
for taxes or wages, come next in a listed 1129(a)(7), (b)(2).
order, followed by low-priority Cases that cite this headnote creditors, including general unsecured [14] Corporations and Business creditors, and then equity holders, who Organizations receive nothing until all previously listed Sale or Transfer of All or Controlling creditors have been paid in full. 11 Interest of Stock In a “leveraged buyout,” the buyer (B) U.S.C.A. §§ 507, 725, 726. typically borrows from a third party (T) Cases that cite this headnote a large share of the funds needed to
[12] Bankruptcy purchase a company (C), and B then Order of Distribution pays the money to C's shareholders; Distributions of assets in a Chapter 7 having bought the stock, B owns C, and liquidation must follow the order prescribed B then pledges C's assets to T so that T by the Bankruptcy Code. 11 U.S.C.A. §§ 725, will have security for its loan. 726.
Cases that cite this headnote Cases that cite this headnote
[15] Labor and Employment Time [13] Bankruptcy Federal Worker Adjustment and Preservation of Priority Although, with the consent of affected Retraining Notification (WARN) Act
parties, Chapter 11 plans may impose a and similar New Jersey act require a
different ordering of distributions than that company to give workers at least 60
set forth in the Bankruptcy Code's priority days' notice before their termination.
scheme, a bankruptcy court cannot confirm a Worker Adjustment and Retraining
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N.J.S.A. 34:21–2. be paid; former employees suffered
a loss, in that, as a consequence of Cases that cite this headnote bankruptcy court's approval of [16] Bankruptcy structured dismissal, they lost Employees' Claims That portion of former employees' judgment chance to obtain a settlement that
against Chapter 11 debtor that counted as a respected their priorities or, if not
priority wage claim was entitled to payment that, the power to assert the
ahead of general unsecured claims against fraudulent-conveyance claim
the estate. 11 U.S.C.A. § 507(a)(4). themselves, and a decision in former
employees' favor was likely to Cases that cite this headnote redress that loss. U.S.C.A. Const.
[17] Bankruptcy Art. 3, § 1 et seq.; 11 U.S.C.A. § Right of Review and Persons Entitled; P arties; W aiver or Estoppel 507; Worker Adjustment and Chapter 11 debtor's former employees, Retraining Notification Act, § 3, 29 who held priority wage claims against U.S.C.A. § 2102. debtor by virtue of their WARN Act Cases that cite this headnote judgment against it, had Article III
standing to challenge bankruptcy court's [18] Federal Civil Procedure In General; I njury or Interest approval of settlement agreement that For standing purposes, a loss of settled fraudulentconveyance proceeding even a small amount of money is and resulted in structured dismissal of ordinarily an “injury.” U.S.C.A. case, and that provided that former Const. Art. 3, § 1 et seq. employees would receive nothing on Cases that cite this headnote their WARN claims but lower-priority
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 64 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613...
[19] Bankruptcy Syllabus* Judicial Authority or Approval *1 There are three possible conclusions to a Bankruptcy Effect; P roceedings in Converted Case Chapter 11 bankruptcy. First, debtor and Bankruptcy court may not approve a creditors may negotiate a plan to govern the structured dismissal of a Chapter 11 case distribution of the estate's value. See, e.g., 11 that provides for distributions that do not U.S.C. §§ 1121, 1123, 1129, 1141. Second, the follow the Bankruptcy Code's ordinary bankruptcy court may convert the case to priority rules without the affected Chapter 7 for liquidation of the business and creditors' consent. distribution of its assets to creditors. §§ 1112(a),
Cases that cite this headnote (b), 726. Finally, the bankruptcy court may
dismiss the case. § 1112(b). A court ordering a [20] Bankruptcy Order of Distribution dismissal ordinarily attempts to restore the In Chapter 7 liquidations, priority is an prepetition financial status quo. § 349(b)(3). Yet absolute command; lower priority if perfect restoration proves difficult or creditors cannot receive anything until impossible, the court may, “for cause,” alter the higher priority creditors have been paid in dismissal's normal restorative consequences, § full. 11 U.S.C.A. §§ 725, 726. 349(b)—i.e., it may order a “structured
Cases that cite this headnote dismissal.” The Bankruptcy Code also
establishes basic priority rules for determining [21] Bankruptcy Priorities the order in which the court will distribute an
Courts cannot alter the balance struck by estate's assets. The Code makes clear that
the Bankruptcy Code's priority provisions, distributions in a Chapter 7 liquidation must
not even in “rare cases.” follow this prescribed order. §§ 725, 726.
Cases that cite this headnote Chapter 11 permits some flexibility, but a court still cannot confirm a plan that contains priority-
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 65 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... violating distributions over the objection of an the proposed structured dismissal, petitioners impaired creditor class. §§ 1129(a)(7), (b)(2). The would receive nothing on their WARN
Code does not explicitly state what priority rules—if claims, but lower-priority general unsecured any—apply to the distribution of assets in a creditors would be paid. Petitioners argued structured dismissal. that the distribution scheme accordingly
Respondent Jevic Transportation filed for Chapter violated the Code's priority rules by paying
11 bankruptcy after being purchased in a general unsecured claims ahead of their own. leveraged buyout. The bankruptcy prompted two The Bankruptcy Court nevertheless approved lawsuits. In the first, a group of former Jevic the settlement agreement and dismissed the truckdrivers, petitioners here, was awarded a case, reasoning that because the proposed judgment against Jevic for Jevic's failure to payouts would occur pursuant to a structured provide proper notice of termination in violation dismissal rather than an approved plan, the of state and federal Worker Adjustment and failure to follow ordinary priority rules did
Retraining Notification (WARN) Acts. Part of not bar approval. The District Court and the that judgment counted as a priority wage claim Third Circuit affirmed. under § 507(a)(4), entitling the workers to *2 Held : payment ahead of general unsecured claims 1. Petitioners have Article III standing. Respondentsargue that petitioners have not against the Jevic estate. In the second suit, a court- “suffered an injury in fact,” or at least one authorized committee representing Jevic's “likely to be redressed by a favorable judicial decision,” Spokeo, Inc. v. Robins, 578 U.S. ––– unsecured creditors sued Sun Capital and CIT –, ––––, 136 S.Ct. 1540, 1547, 194 L.Ed.2d 635 because petitioners would have gotten nothing Group, respondents here, for fraudulent even if the Bankruptcy Court had never conveyance in connection with the leveraged approved the structured dismissal and will still get nothing if the structured dismissal is undone buyout of Jevic. These parties negotiated a now. That argument rests upon the assumptions that (1) without a violation of ordinary priority settlement agreement that called for a structured rules, there will be no settlement, and (2) dismissal of Jevic's Chapter 11 bankruptcy. Under without a settlement, the fraudulent-conveyance
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 66 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... lawsuit has no value. The record, however, indicates Chapter 11 plan or Chapter 7 liquidation. both that a settlement that respects ordinary priorities remains a reasonable possibility and that Precedent does not support a contrary position. the fraudulentconveyance claim could have E.g., In re Iridium Operating LLC, 478 F.3d litigation value. Therefore, as a consequence of the Bankruptcy Court's approval of the structured 452 (C.A.2), distinguished. Cases in which dismissal, petitioners lost a chance to obtain a settlement that respected their priorities or, if not courts have approved deviations from ordinary that, the power to assert the fraudulent-conveyance priority rules generally involve interim claim themselves. A decision in their favor is likely to redress that loss. Pp. –––– – ––––. distributions serving significant Code-related
2. Bankruptcy courts may not approve objectives. That is not the case here, where, e.g., structureddismissals that provide for distributions the priority-violating distribution is attached to that do not follow ordinary priority rules without the consent of affected creditors. Pp. –––– – ––––. a final disposition, does not preserve the debtor
(a) Given the importance of the priority system, this as a going concern, does not make the
Court looks for an affirmative indication of intent disfavored creditors better off, does not promote before concluding that Congress means to make a the possibility of a confirmable plan, does not major departure. See Whitman v. American Trucking help to restore the status quo ante, and does not
Assns., Inc., 531 U.S. 457, 468, 121 S.Ct. 903, 149 protect reliance interests. Pp. –––– – ––––.
L.Ed.2d 1. Nothing in the statute evinces such *3 (b) Congress did not authorize a “rare case” intent. Insofar as the dismissal sections of Chapter exception that permits courts to disregard
11 foresee any transfer of assets, they seek a priority in structured dismissals for “sufficient restoration of the prepetition financial status quo. reasons.” The fact that it is difficult to give
Read in context, § 349(b), which permits a precise content to the concept of “sufficient bankruptcy judge, “for cause, [to] orde[r] reasons” threatens to turn the court below's otherwise,” seems designed to give courts the exception into a more general rule, resulting in flexibility to protect reliance interests acquired in the uncertainty that has potentially serious bankruptcy, not to make general end-of-case consequences —e.g., departure from the distributions that would be flatly impermissible in a protections granted particular classes of
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 67 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... creditors, changes in the bargaining power of Goldblatt, Joel Millar, Jonathan Seymour, different classes of creditors even in bankruptcies Wilmer Cutler Pickering Hale and Dorr LLP, that do not end in structured dismissals, risks of Washington, DC, for Petitioners. collusion, and increased difficulty in achieving Christopher Landau, P.C., James P. Gillespie, settlements. Courts cannot deviate from the P.C., Jason M. Wilcox, Kirkland & Ellis LLP, strictures of the Code, even in “rare cases.” Pp. –––– Washington, DC, for Respondents Sun – ––––. Capital Partners, Inc., Sun Capital Partners 787 F.3d 173, reversed and remanded. IV, LP & Sun Capital Partners Management BREYER, J., delivered the opinion of the Court, IV, LLC. in which ROBERTS, C.J., and KENNEDY, Domenic E. Pacitti, Linda Richenderfer, GINSBURG, SOTOMAYOR, and KAGAN, JJ., Klehr Harrison Harvey, Branzburg LLP, joined. THOMAS, J., filed a dissenting opinion, in Wilmington, DE, for Respondents Jevic which ALITO, J., joined. Holding Corp., Jevic Transportation, Inc. &
Attorneys and Law Firms Creek Road Properties, LLC.
Danielle Spinelli, Washington, DC, for Petitioners. Peter S. Partee, Sr., Richard P. Norton,
Sarah E. Harrington for the United States as Hunton & Williams LLP, New York, NY, for amicus curiae, by special leave of the Court, Respondent CIT Group / Business Credit, supporting the Petitioners. Inc., as Agent for the Lender Group. Robert J. Feinstein, James E. O'Neill, Christopher Landau, P.C., Washington, DC, for Pachulski Stang Ziehl &, Jones LLP, Respondents. Wilmington, DE, for Respondent Official
Jack A. Raisner, Rene S. Roupinian, Robert N. Committee of Unsecured Creditors. Fisher, Outten & Golden LLP, New York, NY, Christopher D. Loizides, Loizides P.A.,
Wilmington, DE, Danielle Spinelli, Craig
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 68 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... Opinion priority-skipping kind of distribution scheme
Justice BREYER delivered the opinion of the Court. in connection with a Chapter 11 dismissal.
*4 In our view, a bankruptcy court does not Bankruptcy Code Chapter 11 allows debtors and have such a power. A distribution scheme their creditors to negotiate a plan for dividing an ordered in connection with the dismissal of a estate's value. See 11 U.S.C. §§ 1123, 1129, 1141. Chapter 11 case cannot, without the consent But sometimes the parties cannot agree on a plan. of the affected parties, deviate from the basic If so, the bankruptcy court may decide to dismiss priority rules that apply under the primary the case. § 1112(b). The Code then ordinarily mechanisms the Code establishes for final provides for what is, in effect, a restoration of the distributions of estate value in business prepetition financial status quo. § 349(b). bankruptcies. In the case before us, a Bankruptcy Court dismissed a Chapter 11 bankruptcy. But the court did not simply restore the prepetition status quo. I
Instead, the court ordered a distribution of estate A assets that gave money to high-priority secured 1 creditors and to low-priority general unsecured [1] [2] [3] We begin with a few creditors but which skipped certain dissenting fundamentals: A mid-priority creditors. The skipped creditors business may file for bankruptcy under either would have been entitled to payment ahead of the Chapter 7 or Chapter 11. In Chapter 7, a trustee general unsecured creditors in a Chapter 11 plan liquidates the debtor's assets and distributes (or in a Chapter 7 liquidation). See §§ 507, 725, them to creditors. See § 701 et seq. In Chapter 726, 1129. The question before us is whether a 11, debtor and creditors try to negotiate a plan bankruptcy court has the legal power to order this that will govern the distribution of valuable
assets from the debtor's estate and often keep
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 69 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... the business operating as a going concern. See, e.g., help creditors by providing for payments,
§§ 1121, 1123, 1129, 1141 (setting out the perhaps over time. See §§ 1123, 1129, 1141. framework in which the parties negotiate). The second possible outcome is conversion of
[4] [5] [6] Filing for Chapter 11 bankruptcy has the case to a Chapter 7 proceeding for several relevant legal consequences. First, an estate liquidation of the business and a distribution of is created comprising all property of the debtor. § its remaining assets. §§ 1112(a), (b), 726. That
541(a)(1). Second, a fiduciary is installed to manage conversion in effect confesses an inability to the estate in the interest of the creditors. §§ 1106, find a plan. The third possible outcome is
1107(a). This fiduciary, often the debtor's existing dismissal of the Chapter 11 case. § 1112(b). A management team, acts as “debtor in possession.” §§ dismissal typically “revests the property of the
1101(1), 1104. It may operate the business, §§ estate in the entity in which such property was
363(c)(1), 1108, and perform certain bankruptcy- vested immediately before the commencement related functions, such as seeking to recover for the of the case”—in other words, it aims to return to estate preferential or fraudulent transfers made to the prepetition financial status quo. § 349(b)(3). other persons, § 547 (transfers made before *5 [9] [10] Nonetheless, recognizing that bankruptcy that unfairly preferred particular conditions may have changed in ways that make creditors); § 548 (fraudulent transfers, including a perfect restoration of the status quo difficult or transfers made before bankruptcy for which the impossible, the Code permits the bankruptcy debtor did not receive fair value). Third, an court, “for cause,” to alter a Chapter 11
“automatic stay” of all collection proceedings dismissal's ordinary restorative consequences. § against the debtor takes effect. § 362(a). 349(b). A dismissal that does so (or which has
[7] [8] It is important to keep in mind that Chapter other special conditions attached) is often
11 foresees three possible outcomes. The first is a referred to as a “structured dismissal,” defined bankruptcy-court-confirmed plan. Such a plan may by the American Bankruptcy Institute as a keep the business operating but, at the same time,
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 70 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613...
“hybrid dismissal and confirmation order ... that [12] [13] The Code makes clear that distributions of assets in a Chapter 7 liquidation ... typically dismisses the case while, among must follow this prescribed order. §§ 725, 726. It other things, approving certain distributions to provides somewhat more flexibility for distributions pursuant to Chapter 11 plans, which creditors, granting certain third-party releases, may impose a different ordering with the consent of the affected parties. But a bankruptcy court enjoining certain conduct by creditors, and not cannot confirm a plan that contains priority- necessarily vacating orders or unwinding violating distributions over the objection of an impaired creditor class. §§ 1129(a)(7), transactions undertaken during the case.” 1129(b)(2).
American Bankruptcy Institute Commission To The question here concerns the interplay
Study the Reform of Chapter 11, 2012–2014 between the Code's priority rules and a
Final Report and Recommendations 270 (2014). Chapter 11 dismissal. Here, the Bankruptcy
Court neither liquidated the debtor under Although the Code does not expressly mention Chapter 7 nor confirmed a Chapter 11 plan. structured dismissals, they “appear to be But the court, instead of reverting to the increasingly common.” Ibid., n. 973. prebankruptcy status quo, ordered a
distribution of the estate assets to creditors by 2 attaching conditions to the dismissal (i.e., it [11] The Code also sets forth a basic system of priority,which ordinarily determines the order in ordered a structured dismissal). The Code does which the bankruptcy court will distribute assets of not explicitly state what priority rules—if the estate. Secured creditors are highest on the priority list, for they must receive the proceeds of the any—apply to a distribution in these collateral that secures their debts. 11 U.S.C. § 725. Special classes of creditors, such as those who hold circumstances. May a court consequently certain claims for taxes or wages, come next in a listed provide for distributions that deviate from the order. §§ 507, 726(a)(1). Then come low-priority creditors, including general unsecured creditors. § ordinary priority rules that would apply to a 726(a)(2). The Code places equity holders at the bottom of the priority list. They receive nothing until Chapter 7 liquidation or a Chapter 11 plan? all previously listed creditors have been paid in full. § Can it approve conditions that give estate 726(a)(6). assets to members of a lower priority class
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 71 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... while skipping objecting members of a higher go to T to pay back T's loan—the loan that priority class? allowed B to buy C. (T will receive what
remains of C's assets because T is now a
secured creditor, putting it at the top of the B
*6 [14] In 2006, Sun Capital Partners, a private priority list). Since C's shareholders receive equity firm, acquired Jevic Transportation money while C's creditors lose their claim to
Corporation with money borrowed from CIT C's remaining assets, unsuccessful leveraged
Group in a “leveraged buyout.” In a leveraged buyouts often lead to fraudulent conveyance buyout, the buyer (B) typically borrows from a suits alleging that the purchaser (B) transferred third party (T) a large share of the funds needed to the company's assets without receiving fair purchase a company (C). B then pays the money to value in return. See Lipson & Vandermeuse,
C's shareholders. Having bought the stock, B owns Stern, Seriously: The Article I Judicial Power,
C. B then pledges C's assets to T so that T will Fraudulent Transfers, and Leveraged Buyouts, have security for its loan. Thus, if the selling price 2013 Wis. L.Rev. 1161, 1220–1221. for C is $50 million, B might use $10 million of its This is precisely what happened here. Just own money, borrow $40 million from T, pay $50 two years after Sun's buyout, Jevic (C in our million to C's shareholders, and then pledge C leveraged buyout example) filed for Chapter assets worth $40 million (or more) to T as security 11 bankruptcy. At the time of filing, it owed for T's $40 million loan. If B manages C well, it $53 million to senior secured creditors Sun might make enough money to pay T back the $40 and CIT (B and T in our example), and over million and earn a handsome profit on its own $10 $20 million to tax and general unsecured million investment. But, if the deal sours and C creditors. descends into bankruptcy, beware of what might [15] [16] The circumstances surrounding happen: Instead of C's $40 million in assets being Jevic's distributed to its existing creditors, the money will
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 72 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... bankruptcy led to two lawsuits. First, petitioners, a Sun was not the workers' employer at the group of former Jevic truckdrivers, filed suit in relevant times. See In re Jevic Holding Corp., bankruptcy court against Jevic and Sun. Petitioners 656 Fed.Appx. 617 (C.A.3 2016). pointed out that, just before entering bankruptcy, Second, the Bankruptcy Court authorized a
Jevic had halted almost all its operations and had committee representing Jevic's unsecured told petitioners that they would be fired. Petitioners creditors to sue Sun and CIT. The Bankruptcy claimed that Jevic and Sun had thereby violated Court and the parties were aware that any state and federal Worker Adjustment and proceeds from such a suit would belong not to
Retraining Notification (WARN) Acts—laws that the unsecured creditors, but to the bankruptcy require a company to give workers at least 60 days' estate. See §§ 541(a)(1), (6); Official Comm. of notice before their termination. See 29 U.S.C. § Unsecured Creditors of Cybergenics Corp. v.
2102; N.J. Stat. Ann. § 34:21–2 (West 2011). The Chinery, 330 F.3d 548, 552– 553 (C.A.3 2003)
Bankruptcy Court granted summary judgment for (en banc) (holding that a creditor's committee petitioners against Jevic, leaving them (and this is can bring a derivative action on behalf of the the point to remember) with a judgment that estate). The committee alleged that Sun and petitioners say is worth $12.4 million. See In re CIT, in the course of their leveraged buyout,
Jevic Holding Corp., 496 B.R. 151 had “hastened Jevic's bankruptcy by saddling
(Bkrtcy.Ct.D.Del.2013). Some $8.3 million of that it with debts that it couldn't service.” In re judgment counts as a priority wage claim under 11 Jevic Holding Corp., 787 F.3d 173, 176 (C.A.3
U.S.C. § 507(a)(4), and is therefore entitled to 2015). In 2011, the Bankruptcy Court held that payment ahead of general unsecured claims against the committee had adequately pleaded claims the Jevic estate. of preferential transfer under § 547 and of
*7 Petitioners' WARN suit against Sun continued fraudulent transfer under § 548. In re Jevic throughout most of the litigation now before us. Holding Corp., 2011 WL 4345204
But eventually Sun prevailed on the ground that (Bkrtcy.Ct.D.Del., Sept. 15, 2011).
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 73 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... Sun, CIT, Jevic, and the committee then tried to suit against Sun was still pending and Sun did negotiate a settlement of this “fraudulent- not want to help finance that litigation. See conveyance” lawsuit. By that point, the depleted 787 F.3d, at 177–178, n. 4 (Sun's counsel
Jevic estate's only remaining assets were the acknowledging before the Bankruptcy Court fraudulent-conveyance claim itself and $1.7 that “ ‘Sun probably does care where the million in cash, which was subject to a lien held by money goes because you can take judicial
Sun. notice that there's a pending WARN action
The parties reached a settlement agreement. It against Sun by the WARN plaintiffs. And if provided (1) that the Bankruptcy Court would the money goes to the WARN plaintiffs, then dismiss the fraudulent-conveyance action with you're funding someone who is suing you prejudice; (2) that CIT would deposit $2 million who otherwise doesn't have funds and is into an account earmarked to pay the committee's doing it on a contingent fee basis' ”). The legal fees and administrative expenses; (3) that essential point is that, regardless of the
Sun would assign its lien on Jevic's remaining reason, the proposed settlement called for a
$1.7 million to a trust, which would pay taxes and structured dismissal that provided for administrative expenses and distribute the distributions that did not follow ordinary remainder on a pro rata basis to the low-priority priority rules. general unsecured creditors, but which would not *8 Sun, CIT, Jevic, and the committee asked distribute anything to petitioners (who, by virtue the Bankruptcy Court to approve the of their WARN judgment, held an $8.3 million settlement and dismiss the case. Petitioners mid-level-priority wage claim against the estate); and the U.S. Trustee objected, arguing that and (4) that Jevic's Chapter 11 bankruptcy would the settlement's distribution plan violated the be dismissed. Code's priority scheme because it skipped
Apparently Sun insisted on a distribution that petitioners —who, by virtue of their WARN would skip petitioners because petitioners' WARN judgment, had midlevel priority claims
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 74 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... against estate assets—and distributed estate [the settlement] is not a reorganization plan.” In money to low-priority general unsecured creditors. re Jevic Holding Corp., 2014 WL 268613, *3
The Bankruptcy Court agreed with petitioners that (D.Del., Jan. 24, 2014). the settlement's distribution scheme failed to The Third Circuit affirmed the District Court by follow ordinary priority rules. App. to Pet. for a vote of 2 to 1. 787 F.3d, at 175; id., at 186
Cert. 58a. But it held that this did not bar (Scirica, J., concurring in part and dissenting in approval. Ibid. That, in the Bankruptcy Court's part). The majority held that structured view, was because the proposed payouts would dismissals need not always respect priority. occur pursuant to a structured dismissal of a Congress, the court explained, had only
Chapter 11 petition rather than an approval of a “codified the absolute priority rule ... in the
Chapter 11 plan. Ibid. The court accordingly specific context of plan confirmation.” Id., at decided to grant the motion in light of the “dire 183. As a result, courts could, “in rare instances circumstances” facing the estate and its creditors. like this one, approve structured dismissals that
Id., at 57a. Specifically, the court predicted that do not strictly adhere to the Bankruptcy Code's without the settlement and dismissal, there was priority scheme.” Id., at 180.
“no realistic prospect” of a meaningful Petitioners (the workers with the WARN distribution for anyone other than the secured judgment) sought certiorari. We granted their creditors. Id., at 58a. A confirmable Chapter 11 petition. plan was unattainable. And there would be no funds to operate, investigate, or litigate were the II case converted to a proceeding in Chapter 7. Ibid. [17] Respondents initially argue that petitioners
The District Court affirmed the Bankruptcy Court. It lack standing because they have suffered no recognized that the settlement distribution violated injury, or at least no injury that will be remedied ordinary priority rules. But those rules, it wrote, by a decision in their favor. See Spokeo, Inc. v. were “not a bar to the approval of the settlement as Robins, 578 U.S. ––––, ––––, 136 S.Ct. 1540,
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 75 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... 1547, 194 L.Ed.2d 635 (2016) (explaining that, for no lawsuit money to distribute. And in the
Article III standing, a plaintiff must have “(1) absence of lawsuit money, Jevic's assets suffered an injury in fact, (2) that is fairly traceable amount to about $1.7 million, all pledged to to the challenged conduct of the defendant, and (3) Sun, leaving nothing for anyone else, let that is likely to be redressed by a favorable judicial alone petitioners. Thus, even if petitioners are decision”). Respondents concede that the structured right that the structured dismissal was dismissal approved by the Bankruptcy Court impermissible, it cost them nothing. And a contained distribution conditions that skipped over judicial decision in their favor will gain them petitioners, ensuring that petitioners received nothing. No loss. No redress. nothing on their multimillion-dollar WARN claim This argument, however, rests upon against the Jevic estate. But respondents still assert respondents' claims (1) that, without a that petitioners suffered no loss. violation of ordinary priority rules, there will
*9 The reason, respondents say, is that petitioners be no settlement, and (2) that, without a would have gotten nothing even if the Bankruptcy settlement, the fraudulent-conveyance lawsuit
Court had never approved the structured dismissal has no value. In our view, the record does not in the first place, and will still get nothing if the support either of these propositions. structured dismissal is undone now. Reversal will As to the first, the record indicates that a eliminate the settlement of the committee's settlement that respects ordinary priorities fraudulent-conveyance lawsuit, which was remains a reasonable possibility. It makes conditioned on the Bankruptcy Court's approval of clear (as counsel made clear before our Court, the priority-violating structured dismissal. If the see Tr. of Oral Arg. 58) that Sun insisted
Bankruptcy Court cannot approve that dismissal, upon a settlement that gave petitioners respondents contend, Sun and CIT will no longer nothing only because it did not want to help agree to settle. Nor will petitioners ever be able to fund petitioners' WARN lawsuit against it. obtain a litigation recovery. Hence there will be See 787 F.3d, at 177–178, n. 4. But, Sun has
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 76 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... now won that lawsuit. See 656 Fed.Appx. 617. If something. They lost a chance to obtain a
Sun's given reason for opposing distributions to settlement that respected their priority. Or, if not petitioners has disappeared, why would Sun not that, they lost the power to bring their own settle while permitting some of the settlement lawsuit on a claim that had a settlement value of money to go to petitioners? $3.7 million. For standing purposes, a loss of
As to the second, the record indicates that the even a small amount of money is ordinarily an fraudulentconveyance claim could have litigation “injury.” See, e.g., McGowan v. Maryland, 366 value. CIT and Sun, after all, settled the lawsuit U.S. 420, 430–431, 81 S.Ct. 1101, 6 L.Ed.2d for $3.7 million, which would make little sense if 393 (1961) (finding that appellants fined $5 plus the action truly had no chance of success. The costs had standing to assert an Establishment
Bankruptcy Court could convert the case to Clause challenge). And the ruling before us
Chapter 7, allowing a Chapter 7 trustee to pursue could well have cost petitioners considerably the suit against Sun and CIT. Or the court could more. See Clinton v. City of New York, 524 U.S. simply dismiss the Chapter 11 bankruptcy, 417, 430–431, 118 S.Ct. 2091, 141 L.Ed.2d 393 thereby allowing petitioners to assert the (1998) (imposition of a “substantial contingent fraudulent-conveyance claim themselves. Given liability” qualifies as an injury). A decision in these possibilities, there is no reason to believe petitioners' favor is likely to redress that loss. that the claim could not be pursued with counsel We accordingly conclude that petitioners have obtained on a contingency basis. Of course, the standing. lawsuit—like any lawsuit —might prove fruitless, but the mere possibility of failure does not III eliminate the value of the claim or petitioners' *10 [19] We turn to the basic question injury in being unable to bring it. presented: Can a bankruptcy court approve a
[18] Consequently, the Bankruptcy Court's approval structured dismissal that provides for of the structured dismissal cost petitioners distributions that do not follow ordinary priority
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 77 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... rules without the affected creditors' consent? Our Priority: How Rent–Seeking Upends The simple answer to this complicated question is “no.” Creditors' Bargain, 99 Va. L. Rev. 1235,
[20] The Code's priority system constitutes a basic 1243, 1236 (2013) (arguing that the first underpinning of business bankruptcy law. principle of bankruptcy is that “distribution
Distributions of estate assets at the termination of a conforms to predetermined statutory and business bankruptcy normally take place through a contractual priorities,” and that priority is,
Chapter 7 liquidation or a Chapter 11 plan, and both “quite appropriately, bankruptcy's most are governed by priority. In Chapter 7 liquidations, important and famous rule”); Markell, priority is an absolute command —lower priority Owners, Auctions, and Absolute Priority in creditors cannot receive anything until higher Bankruptcy Reorganizations, 44 Stan. L. Rev. priority creditors have been paid in full. See 11 69, 123 (1991) (stating that a fixed priority
U.S.C. §§ 725, 726. Chapter 11 plans provide scheme is recognized as “the cornerstone of somewhat more flexibility, but a priority-violating reorganization practice and theory”). plan still cannot be confirmed over the objection of The importance of the priority system leads an impaired class of creditors. See § 1129(b). us to expect more than simple statutory
The priority system applicable to those silence if, and when, Congress were to intend distributions has long been considered a major departure. See Whitman v. American fundamental to the Bankruptcy Code's operation. Trucking Assns., Inc., 531 U.S. 457, 468, 121
See H.R.Rep. No. 103–835, p. 33 (1994) S.Ct. 903, 149 L.Ed.2d 1 (2001) (“Congress
(explaining that the Code is “designed to enforce a ... does not, one might say, hide elephants in distribution of the debtor's assets in an orderly mouseholes”). Put somewhat more directly, manner ... in accordance with established we would expect to see some affirmative principles rather than on the basis of the inside indication of intent if Congress actually influence or economic leverage of a particular meant to make structured dismissals a creditor”); Roe & Tung, Breaking Bankruptcy backdoor means to achieve the exact kind of
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 78 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... nonconsensual priority-violating final (1977) (dismissal's “basic purpose ... is to distributions that the Code prohibits in Chapter 7 undo the bankruptcy case, as far as liquidations and Chapter 11 plans. practicable, and to restore all property rights
We can find nothing in the statute that evinces this to the position in which they were found at intent. The Code gives a bankruptcy court the the commencement of the case”). power to “dismiss” a Chapter 11 case. § 1112(b). Section 349(b), we concede, also says that a
But the word “dismiss” itself says nothing about bankruptcy judge may, “for cause, orde[r] the power to make nonconsensual priority- otherwise.” But, read in context, this provision violating distributions of estate value. Neither the appears designed to give courts the flexibility to word “structured,” nor the word “conditions,” nor “make the appropriate orders to protect rights anything else about distributing estate value to acquired in reliance on the bankruptcy case.” creditors pursuant to a dismissal appears in any H.R.Rep. No. 95–595, at 338; cf., e.g., Wiese v. relevant part of the Code. Community Bank of Central Wis., 552 F.3d 584,
*11 Insofar as the dismissal sections of Chapter 590 (C.A.7 2009) (upholding, under § 349(b), a
11 Bankruptcy Court's decision not to reinstate a
foresee any transfer of assets, they seek a debtor's claim against a bank that gave up a lien restoration of the prepetition financial status quo. in reliance on the claim being released in the
See § 349(b)(1) (dismissal ordinarily reinstates a debtor's reorganization plan). Nothing else in variety of avoided transfers and voided liens); § the Code authorizes a court ordering a dismissal
349(b)(2) (dismissal ordinarily vacates certain to make general end-of-case distributions of types of bankruptcy orders); § 349(b)(3) estate assets to creditors of the kind that
(dismissal ordinarily “revests the property of the normally take place in a Chapter 7 liquidation estate in the entity in which such property was or Chapter 11 plan—let alone final distributions vested immediately before the commencement of that do not help to restore the status quo ante or the case”); see also H.R.Rep. No. 95– 595, p. 338 protect reliance interests acquired in the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 79 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... bankruptcy, and that would be flatly impermissible Partners, L. P., 2014 WL 3735804 in a Chapter 7 liquidation or a Chapter 11 plan (Bkrtcy.Ct.N.D.Tex., July 28, 2014). The court because they violate priority without the impaired in that case approved a structured dismissal. creditors' consent. That being so, the word “cause” (We express no view about the legality of is too weak a reed upon which to rest so weighty a structured dismissals in general.) But at the power. See United Sav. Assn. of Tex. v. Timbers of same time it pointed out “that not one party with
Inwood Forest Associates, Ltd., 484 U.S. 365, an economic stake in the case has objected to
371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (noting the dismissal in this manner.” Id., at *4. that “[s]tatutory construction ... is a holistic The Third Circuit also relied upon In re endeavor” and that a court should select a “meanin[g Iridium Operating LLC, 478 F.3d 452 (C.A.2 that] produces a substantive effect that is compatible 2007). But Iridium did not involve a with the rest of the law”); Kelly v. Robinson, 479 structured dismissal. It addressed an interim
U.S. 36, 43, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986) distribution of settlement proceeds to fund a
(in interpreting a statute, a court “must not be guided litigation trust that would press claims on the by a single sentence or member of a sentence, but estate's behalf. See id., at 459–460. The look to the provisions of the whole law, and to its Iridium court observed that, when evaluating object and policy” (internal quotation marks this type of preplan settlement, “[i]t is omitted)); cf. In re Sadler, 935 F.2d 918, 921 (C.A.7 difficult to employ the rule of priorities”
1991) (“ ‘Cause’ under § 349(b) means an because “the nature and extent of the Estate acceptable reason. Desire to make an end run around and the claims against it are not yet fully a statute is not an adequate reason”). resolved.” Id., at 464 (emphasis added). The
*12 We have found no contrary precedent, either decision does not state or suggest that the from this Court, or, for that matter, from lower court Code authorizes nonconsensual departures decisions reflecting common bankruptcy practice. from ordinary priority rules in the context of a
The Third Circuit referred briefly to In re Buffet dismissal—which is a final distribution of
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 80 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... estate value—and in the absence of any further “permitting business debtors to reorganize unresolved bankruptcy issues. and restructure their debts in order to revive
We recognize that Iridium is not the only case in the debtors' businesses” and “maximizing the which a court has approved interim distributions value of the bankruptcy estate” as purposes of that violate ordinary priority rules. But in such the Code). By way of contrast, in a structured instances one can generally find significant Code- dismissal like the one ordered below, the related objectives that the priority-violating priority-violating distribution is attached to a distributions serve. Courts, for example, have final disposition; it does not preserve the approved “first-day” wage orders that allow debtor as a going concern; it does not make payment of employees' prepetition wages, “critical the disfavored creditors better off; it does not vendor” orders that allow payment of essential promote the possibility of a confirmable plan; suppliers' prepetition invoices, and “roll-ups” that it does not help to restore the status quo ante ; allow lenders who continue financing the debtor and it does not protect reliance interests. In to be paid first on their prepetition claims. See short, we cannot find in the violation of
Cybergenics, 330 F.3d, at 574, n. 8; D. Baird, ordinary priority rules that occurred here any
Elements of Bankruptcy 232–234 (6th ed. 2014); significant offsetting bankruptcyrelated
Roe, 99 Va. L. Rev., at 1250–1264. In doing so, justification. these courts have usually found that the *13 Rather, the distributions at issue here more distributions at issue would “enable a successful closely resemble proposed transactions that reorganization and make even the disfavored lower courts have refused to allow on the creditors better off.” In re Kmart Corp., 359 F.3d ground that they circumvent the Code's
866, 872 (C.A.7 2004) (discussing the procedural safeguards. See, e.g., In re Braniff justifications for critical-vendor orders); see also Airways, Inc., 700 F.2d 935, 940 (C.A.5 1983)
Toibb v. Radloff, 501 U.S. 157, 163–164, 111 (prohibiting an attempt to “short circuit the
S.Ct. 2197, 115 L.Ed.2d 145 (1991) (recognizing requirements of Chapter 11 for confirmation of
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 81 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... a reorganization plan by establishing the terms of the reasons” to disregard priority. 787 F.3d, at 175, plan sub rosa in connection with a sale of assets”); 186. Despite the “rare case” limitation, we still
In re Lionel Corp., 722 F.2d 1063, 1069 (C.A.2 cannot agree.
1983) (reversing a Bankruptcy Court's approval of For one thing, it is difficult to give precise an asset sale after holding that § 363 does not content to the concept “sufficient reasons.” That
“gran[t] the bankruptcy judge carte blanche ” or fact threatens to turn a “rare case” exception
“swallo[w] up Chapter 11's safeguards”); In re into a more general rule. Consider the present
Biolitec, Inc., 528 B.R. 261, 269 case. The Bankruptcy Court feared that (1)
(Bkrtcy.Ct.N.J.2014) (rejecting a structured without the worker-skipping distribution, there dismissal because it “seeks to alter parties' rights would be no settlement, (2) without a without their consent and lacks many of the Code's settlement, all the unsecured creditors would most important safeguards”); cf. In re Chrysler LLC, receive nothing, and consequently (3) its
576 F.3d 108, 118 (C.A.2 2009) (approving a § 363 distributions would make some creditors (high- asset sale because the bankruptcy court and low-priority creditors) better off without demonstrated “proper solicitude for the priority making other (mid-priority) creditors worse off between creditors and deemed it essential that the (for they would receive nothing regardless).
[s]ale in no way upset that priority”), vacated as But, as we have pointed out, the record provides moot, 592 F.3d 370 (C.A.2 2010) (per curiam ). equivocal support for the first two propositions.
See supra, at –––– – ––––. And, one can readily
imagine other cases that turn on comparably IV
We recognize that the Third Circuit did not approve dubious predictions. The result is uncertainty. nonconsensual priority-violating structured And uncertainty will lead to similar claims dismissals in general. To the contrary, the court held being made in many, not just a few, cases. See that they were permissible only in those “rare Rudzik, A Priority Is a Priority Is a Priority— case[s]” in which courts could find “sufficient Except When It Isn't, 34 Am. Bankr. Inst. J. 16,
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 82 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... 79 (2015) (“[O]nce the floodgates are opened, Partnership, 526 U.S. 434, 444, 119 S.Ct. debtors and favored creditors can be expected to 1411, 143 L.Ed.2d 607 (1999) (discussing make every case that ‘rare case’ ”). how the absolute priority rule was developed
*14 The consequences are potentially serious. in response to “concern with ‘the ability of a
They include departure from the protections few insiders, whether representatives of
Congress granted particular classes of creditors. management or major creditors, to use the
See, e.g., United States v. Embassy Restaurant, reorganization process to gain an unfair
Inc., 359 U.S. 29, 32, 79 S.Ct. 554, 3 L.Ed.2d 601 advantage’ ” (quoting H.R. Doc. No. 93–137,
(1959) (Congress established employee wage pt. I, p. 255 (1973))). And they include priority “to alleviate in some degree the hardship making settlement more difficult to achieve. that unemployment usually brings to workers and See Landes & Posner, Legal Precedent: A their families” when an employer files for Theoretical and Empirical Analysis, 19 J. bankruptcy); H.R.Rep. No. 95–595, at 187 Law & Econ. 249, 271 (1976) (arguing that
(explaining the importance of ensuring that “the ratio of lawsuits to settlements is mainly employees do not “abandon a failing business for a function of the amount of uncertainty, fear of not being paid”). They include changes in which leads to divergent estimates by the the bargaining power of different classes of parties of the probable outcome”); see also creditors even in bankruptcies that do not end in RadLAX Gateway Hotel, LLC v. structured dismissals. See Warren, A Theory of Amalgamated Bank, 566 U.S. 639, 649, 132
Absolute Priority, 1991 Ann. Survey Am. L. 9, S.Ct. 2065, 182 L.Ed.2d 967 (2012) (noting
30. They include risks of collusion, i.e., senior the importance of clarity and predictability in secured creditors and general unsecured creditors light of the fact that the “Bankruptcy Code teaming up to squeeze out priority unsecured standardizes an expansive (and sometimes creditors. See Bank of America Nat. Trust and unruly) area of law”).
Sav. Assn. v. 203 North LaSalle Street
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 83 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... [21] For these reasons, as well as those set forth in persuaded us to grant certiorari on one question,
Part III, we conclude that Congress did not authorize petitioners chose to argue a different question a “rare case” exception. We cannot “alter the on the merits. In light of that switch, I would balance struck by the statute,” Law v. Siegel, 571 dismiss the writ of certiorari as improvidently
U.S. ––––, ––––, 134 S.Ct. 1188, 1198, 188 L.Ed.2d granted.
146 (2014), not even in “rare cases.” Cf. Norwest We granted certiorari to decide “[w]hether a
Bank Worthington v. Ahlers, 485 U.S. 197, 207, 108 bankruptcy court may authorize the distribution
S.Ct. 963, 99 L.Ed.2d 169 (1988) (explaining that of settlement proceeds in a manner that violates courts cannot deviate from the procedures “specified the statutory priority scheme.” Pet. for Cert. i. by the Code,” even when they sincerely “believ[e] According to petitioners, the decision below that ... creditors would be better off”). The judgment “deepened an existing ... split” among the of the Court of Appeals is reversed, and the case is Courts of Appeals on this question. Id., at 8; see remanded for further proceedings consistent with id., at 15–16 (citing In re AWECO, Inc., 725 this opinion. F.2d 293, 298 (C.A.5 1984), and In re Iridium
*15 It is so ordered. Operating LLC, 478
Justice THOMAS, with whom Justice ALITO joins, Footnotes F.3d 452, 464 (C.A.2 2007)). After we dissenting. granted certiorari, however, petitioners recast *15 Today, the Court answers a novel and the question presented to ask “[w]hether a important question of bankruptcy law. Chapter 11 case may be terminated by a Unfortunately, it does so without the benefit of any ‘structured dismissal’ that distributes estate reasoned opinions on the dispositive issue from the property in violation of the Bankruptcy courts of appeals (apart from the Court of Appeals' Code's priority scheme.” Brief for Petitioners opinion in this case) and with briefing on that issue i. Although both questions involve from only one of the parties. That is because, having
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 84 Czyzewski v. Jevic Holding Corp., --- S.Ct. ---- (2017) 2017 WL 1066259, 63 Bankr.Ct.Dec. 242, 41 IER Cases 1613... priorityskipping distributions of estate assets, the Second, deciding this question may invite recast question is narrower—and different—than future petitioners to seek review of a circuit the one on which we granted certiorari. It is also conflict only then to change the question to not the subject of a circuit conflict. one that seems more favorable. “I would not
I think it is unwise for the Court to decide the reward such bait-and-switch tactics.” City and reformulated question today, for two reasons. County of San Francisco v. Sheehan, 575
First, it is a “novel question of bankruptcy law” U.S. ––––, ––––, 135 S.Ct. 1765, 1779, 191 arising in the rapidly developing field of L.Ed.2d 856 (2015) (Scalia, J., concurring in structured dismissals. In re Jevic Holding Corp., part and dissenting in part); see also Visa, Inc.
787 F.3d 173, 175 (C.A.3 2015). Experience v. Osborn, ––– U.S. ––––, ––––, 136 S.Ct. shows that we would greatly benefit from the 2543, 195 L.Ed.2d 867 (2016) post, p. ––––. views of additional courts of appeals on this *16 Accordingly, I would dismiss the writ as question. We also would have benefited from full, improvidently granted. I respectfully dissent. adversarial briefing. In reliance on this Court's
Rules prohibiting parties from changing the All Citations substance of the question presented, see Rule --- S.Ct. ----, 2017 WL 1066259, 63
24.1(a); see also Rule 14.1(a), respondents Bankr.Ct.Dec. 242, 41 declined to brief the question that the majority IER Cases 1613, 17 Cal. Daily Op. Serv. 2766 now decides, see Brief for Respondents 52.
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50 L.Ed. 499.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 85 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 2017 WL 1130861 Magistrate Judge, 2016 WL 1212067, and United States Court of Appeals, Fifth Circuit. denied claimant's motion, granted insurer's
KIPP FLORES ARCHITECTS, motion, and dismissed the action. Claimant L.L.C., Plaintiff–Appellant appealed. v. MID–CONTINENT CASUALTY COMPANY, Defendant–Appellee [Holding:] The Court of Appeals, Edith H. No. 16-20255 | Jones, Circuit Judge, held that in this no-asset FILED March 24, 2017 case, claimant did not have a “deemed allowed” Synopsis Background: After claimant, an architectural firm claim that constituted res judicata against that created and marketed home designs, brought insurer. prepetition copyright infringement action against Affirmed. Chapter 7 debtor, a Texas homebuilder, debtor commenced its “no-asset” bankruptcy case and West Headnotes (20) claimant filed a proof of claim for copyright [1] Bankruptcy infringement damages. Relying on the purported Summary allowance; n ecessity for objection “deemed allowed” status of its claim, claimant then Judgment Courts or Other Tribunals Rendering brought action for breach of contract against debtor's Judgment liability insurer, asserting that its unobjectedto claim Claimant, which had filed an constituted a final judgment and was res judicata as unobjected-to proof of claim for to insurer, and that it triggered insurer's duty to copyright infringement damages in indemnify debtor. On the parties' crossmotions for Chapter 7 debtor's “no-asset” case, summary judgment, the United States District Court did not have a “deemed allowed” for the Southern District of Texas, Lee H. Rosenthal, claim that constituted res judicata
Chief Judge, 2016 WL 1246096, adopted the report against debtor's liability insurer; in and recommendation of Mary Milloy, United States the no-asset case, nothing in the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 86 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 court proceedings required claims Determination Claims “allowance” covers the approval, allowance, no notice was provided to revision, or rejection of filed claims, and parties in interest to object to claims, the process afforded by the bankruptcy and no bankruptcy purpose would have rules, as effectuated in court orders. been served by the bankruptcy court's Cases that cite this headnote adjudication of claimant's claim. 11
U.S.C.A. §§ 501, 502(a). [5] Bankruptcy Distribution Cases that cite this headnote Creditor whose claim is allowed may
[2] Bankruptcy participate in the ultimate distribution of Claims allowable; w hat constitutes ‘claim.‘ the debtor's assets. Definition of a “claim” in bankruptcy is Cases that cite this headnote extremely broad, encompassing all [6] Statutes rights to payment, of whatever nature, Mandatory or directory statutes
whether fixed, liquidated, contingent, Word “may,” as used in a statute, is not
matured, disputed, legal, equitable, or “must”; rather, “may” can mean “is
secured. 11 U.S.C.A. § 101(5)(A). permitted to,” or “possibly,” as in “may
Cases that cite this headnote or may not.” Cases that cite this headnote [3] Bankruptcy
Property of Estate in General [7] Bankruptcy Job of the bankruptcy courts is to Necessity of Filing; E ffect of Failure
oversee trustees' marshalling of a Section of the Bankruptcy Code
debtor's assets for appropriate governing the filing of proofs of claims
distribution among the creditors. or interests permits, but does not require,
Cases that cite this headnote a creditor to file a proof of claim. 11 U.S.C.A. § 501. [4] Bankruptcy
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 87 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 Cases that cite this headnote Cases that cite this headnote
[8] Bankruptcy [12] Bankruptcy Secured claims Necessity of Filing; E ffect of Failure Secured creditors are not required to file Creditors who are told there are no
proofs of claim in order to protect their assets available for distribution in a
security interests. 11 U.S.C.A. § 506(d). Chapter 7 case may be instructed
Cases that cite this headnote that it is unnecessary to file claims.
Fed. R. Bankr. P. 2002(e). [9] Bankruptcy Necessity of Filing; E ffect of Failure Cases that cite this headnote Proof of claim should be filed only when [13] Bankruptcy some purpose would be served. Extension of Time; E xcuse for Delay Cases that cite this headnote Bankruptcy rule governing the [10] Bankruptcy filing of proofs of claim or interest Necessity of Filing; E ffect of Failure Bankruptcy dictates procedures if assets are Time for Filing later discovered in what initially In no-asset bankruptcy cases it is appeared to be a no-asset case. Fed. unnecessary for creditors to file claims, R. Bankr. P. 3002(c)(5). and bankruptcy courts therefore set no Cases that cite this headnote deadline for filing such claims.
Cases that cite this headnote [14] Bankruptcy Time for Filing [11] Bankruptcy If there are assets in a bankruptcy Necessity of Filing; E ffect of Failure case and distribution “appears If bankruptcy trustee has determined possible,” the clerk shall give that there are no assets to distribute in a notice and establish a deadline; no Chapter 7 case, the requirement to file a permissive language eliminates the proof of claim is meaningless. trustee's obligation to give notice
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 88 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 and set a claims deadline in an asset Although the Bankruptcy Code does not
case. Fed. R. Bankr. P. 3002. provide an exclusive definition of a
Cases that cite this headnote “party in interest,” the Code broadly
includes debtors, creditors, trustees, [15] Bankruptcy Necessity of Filing; E ffect of Failure indenture trustees, and equity security Bankruptcy holders among the parties entitled to, for Determination Whether claims “may” be filed in a example, notice of proceedings in the
bankruptcy case is generally contingent on case. Fed. R. Bankr. P. 2002.
the possibility of asset distribution; likewise, Cases that cite this headnote
the necessity for creditors to file and the [18] Bankruptcy courts to adjudicate claims depends on the Objections generally; t ime, form, and sufficiency; p leading existence of assets in the debtor's estate. 11 Any “party in interest” may object to a U.S.C.A. § 502(a); Fed. R. Bankr. P. 3002. proof of claim and request the court to
Cases that cite this headnote determine its correct amount. Fed. R.
[16] Bankruptcy Bankr. P. 3007(a). Determination Cases that cite this headnote Bankruptcy rules plainly contemplate
pretermitting claims allowance and objection [19] Bankruptcy Particular proceedings or issues procedures when there are no distributable That a bankruptcy case is filed as assets. 11 U.S.C.A. § 502(a); Fed. R. Bankr. or becomes a “no-asset” case does P. 2002(e), 3002. not deprive the bankruptcy court
Cases that cite this headnote of subject matter jurisdiction for
[17] Bankruptcy many administrative purposes. Notice Cases that cite this headnote
[20] Bankruptcy
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 89 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 Individual Debt Adjustment companies in the homebuilding business. Chapter 13 case, by definition, has assets. After Kipp Flores Architects (“KFA”) sued Cases that cite this headnote Hallmark Collection of Homes, L.L.C., for
copyright infringement, Hallmark Collection
Appeal from the United States District Court for commenced a “no asset” bankruptcy case. the Southern District of Texas, Lee H. Rosenthal, KFA filed a bankruptcy proof of claim for Chief Judge Attorneys and Law Firms copyright infringement damages. Relying on Louis Karl Bonham, Osha Liang, L.L.P., Patrick Zummo, its “deemed allowed” claim, 11 U.S.C. § Law Offices of Patrick Zummo, Houston, TX, 502(a), as a final judgment, KFA sued Louis Karl Bonham, Osha Liang, L.L.P., Austin, appellee Mid–Continent Casualty Company, TX, for Plaintiff– Appellant. the debtor's liability insurer. KFA argues that Robert Sullivan Gebhard, Sedgwick, Detert, the unobjected-to claim constitutes a final Moran & Arnold, San Francisco, CA, Douglas J. judgment and is res judicata as to Mid– Collodel, Esq., Sedgwick, L.L.P., Los Angeles, Continent. The question on appeal is what CA, Timothy Brian “deemed allowed” means when a proof of Poteet, Chamberlain McHaney, Austin, TX, claim is filed in a no-asset bankruptcy case, Sherman Vance Wittie, Esq., Counsel, Sedgwick no deadline is set for objections to claims, LLP, Dallas, TX, for Defendant–Appellee. and no “party in interest” objects? We Before JONES, BARKSDALE, and COSTA, Circuit conclude that the text and structure of the Judges. Bankruptcy Code, Rules and Official Forms, Opinion and relevant case law all support affirming EDITH H. JONES, Circuit Judge: the district court's summary judgment against *1 This is the third appeal arising out of an KFA. architectural copyright infringement action and subsequent Chapter 7 bankruptcies of two related
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 90 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 BACKGROUND will be no funds available for distribution to
Appellant KFA creates and markets proprietary unsecured creditors.” KFA's copyright suit was home designs and plans. In a series of licensing stayed pending the bankruptcy cases on agreements, KFA prepared twenty-one different November 23, 2009. 11 U.S.C. § 362(a). architectural designs for Texas-based Hallmark Hallmark Collection's schedules disclosed Collection of Homes, L.L.C. (“Hallmark liabilities in excess of $2.5 million but listed no Collection”). Hallmark Collection obtained a license assets available for distribution to creditors. to build one, and only one, house per plan —unless KFA was listed as a creditor with an unsecured Hallmark Collection compensated KFA for each nonpriority claim for an unknown amount based additional house built from that plan. Hallmark on the copyright suit. In early January 2010, the Collection, however, built several hundred houses Chapter 7 Trustee distributed the following from the licensed plans without paying KFA. notice to creditors:
KFA filed suit in March 2009 for violations of It having appeared from the schedules of federal copyright law and actual or statutory [Hallmark Collection] at the time of filing damages under 17 U.S.C. § 504. The defendants that there was no estate from which any included Hallmark Collection, the limited dividend could be paid to creditors, the partnership Hallmark Design Homes, L.P. notice to creditors advised that it was
(“Hallmark Design”), and Joe Partain, an owner of unnecessary for any creditor to file his
Hallmark Collection. In the midst of the copyright claim at that time. lawsuit, Hallmark Collection and Hallmark Design It appearing subsequently that there is an filed separately for Chapter 7 bankruptcy protection estate from which a dividend to creditors in November 2009. Both bankruptcy filings stated on may be paid, creditors must now file
Form B1 that, “after any exempt property is claims in this case in order to share in any excluded and administrative expenses paid, there distribution from the estate. CLAIMS
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 91 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 MUST BE FILED ON OR BEFORE NINETY Chapter 7 bankruptcy cases. KFA persuaded
(90) DAYS FROM THE ISSUANCE OF THIS the district court in August 2011 to withdraw
NOTICE. the reference to the bankruptcy court of
*2 Claims which are not filed timely as set claims against Hallmark Design, Joe Partain,
forth above will not be allowed, except as and Laura Partain in the underlying copyright
otherwise provided by law. suit. See 28 U.S.C. § 157(d). KFA never
Responding to this notice, KFA timely filed a made a similar request with respect to the proof of claim for $63,471,000 against Hallmark claim against Hallmark Collection.
Collection. (This amount was based on the In November 2011, KFA amended its proof debtor's gross receipts from sales of the infringing of claim in the Hallmark Design bankruptcy homes.) No deadline was set by the court for case, seeking over $83 million, and filed an objecting to claims. Unsurprisingly, neither the identical claim in the Partain case. The trustee nor any other party in interest objected to respective Chapter 7 Trustees' objections to KFA's proof of claim. The bankruptcy court KFA's claims were consolidated with the entered no order allowing or disallowing the underlying copyright action. After the district claim. But in August 2010, the Chapter 7 Trustee court lifted the automatic stay, KFA submitted a No Asset Report, stating that there prevailed in a jury trial of the copyright suit were no proceeds from the Hallmark Collection that yielded a finding of $3,231,084.00 estate for distribution to creditors. The damages against Hallmark Design but bankruptcy court closed the case five weeks later. imposed no liability on the individual
While Hallmark Collection's case was pending, defendants. KFA was granted an “allowed
KFA amended its complaint in the copyright unsecured claim” for $3,239,688.40 in the lawsuit and added individual defendants Laura Hallmark Design bankruptcy. Hallmark
Partain and William Graper, each of whom filed Design appealed, and the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 92 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 Fifth Circuit affirmed.1 Following protracted proceedings, the parties
filed cross-motions for summary judgment. Appellee Mid–Continent, Hallmark Design's insurer, had been approved to represent the trustee in KFA's *3 Citing precedent from multiple bankruptcy litigation. The insurer next filed a declaratory courts around the country, the magistrate judge judgment action in January 2013 to challenge its concluded that “KFA's proof of claim was not policy coverage of the judgment against Hallmark ‘deemed allowed,’ as a matter of law.” In part,
Design. KFA counterclaimed and prevailed in the the magistrate judge reasoned that in cases district court.2 The Fifth where there are no assets available for
distribution to creditors, the bankruptcy claims Circuit affirmed that judgment3, and Mid–Continent allowance process “was never ‘triggered’ at all.” paid KFA $3,031,563.12. After reviewing KFA's objections to the
While litigation over the Hallmark Design judgment magistrate judge's recommendation, the district was pending, KFA made demand on Mid–Continent court adopted it with one modification that is to pay off KFA's “final judgment” obtained for its irrelevant here. KFA appealed. proof of claim in the Hallmark Collection STANDARD OF REVIEW bankruptcy. KFA sought payment of the Mid– The standard of review for a district court's
Continent policies' $6 million face value. grant of summary judgment is de novo,
Sossamon v. Lone Star State of Tex., 560 When Mid–Continent refused to pay, KFA filed this F.3d 316, 326 (5th Cir. 2009), applying the action in September 2014 for breach of contract as a usual standards under Federal Rule of Civil judgment creditor of Hallmark Collection and Procedure 56. RSR Corp. v. Int'l Ins. Co., 612 thirdparty beneficiary under Mid–Continent's F.3d 851, 857 (5th Cir. 2010). policies. The district court referred the matter for pretrial management, pursuant to 28 U.S.C. §
636(b)(1)(A) and (B), to a magistrate judge.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 93 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 DISCUSSION bankruptcy court adjudication in the claims
KFA contends that the district court judgment process only when assets are available or are created a “no asset case” exception to 11 U.S.C. § thought to be forthcoming for distribution.
502(a) contrary to the provision's plain language. [1] This appeal raises an intriguing question According to KFA, the Bankruptcy Code is of statutory interpretation. We conclude that unambiguous: any proof of claim is deemed Mid–Continent has the better of the argument allowed if no party in interest objects. Because no when Section 502 is read in tandem with other party objected to KFA's proof of claim in the provisions of the Bankruptcy Code. Further Hallmark Collection bankruptcy case, the claim light is shed on the question by the relevant was “deemed allowed,” became a final judgment Bankruptcy Rules and Official Forms, which against Hallmark Collection, and under principles are promulgated under the auspices of the U.S. of res judicata, suffices to trigger Mid– Supreme Court and approved by Congress. Continent's duty to indemnify its insured, See 28 U.S.C. § 2075 (“Bankruptcy Rules”). Hallmark Collection.
The core of KFA's case is Section 502(a), which Mid–Continent responds that KFA's proof of states: claim did not result in a final judgment in A claim or interest, proof Hallmark Collection's no asset Chapter 7 case. of which is filed under The allowance of KFA's claim for copyright section 501 of this title, is infringement damages served no bankruptcy deemed allowed, unless a purpose because there were no assets to be party in interest, including marshalled and distributed among creditors. a creditor of a general According to Mid– Continent, the Bankruptcy partner in a partnership that Code, read as a whole, provides that proofs of is a debtor in a case under claim may be filed and become subject to
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 94 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 chapter 7 of this title, objects. The job of the bankruptcy courts is to oversee
11 U.S.C § 502(a). Standing alone, the provision trustees' marshalling of a debtor's assets for appears to say that any bankruptcy proof of claim appropriate distribution among the creditors. not objected to by a “party in interest” is “deemed Pioneer Invest. Serv. Co. v. Brunswick Assoc. allowed.” KFA would have the analysis stop here. Ltd. P'ship, 507 U.S. 380, 389, 113 S.Ct. 1489,
But interpretations of the Bankruptcy Code, many 123 L.Ed.2d 74 (1993). Claims “allowance” of whose terms are subject to further explication, covers the approval, revision, or rejection of rarely end with a single sentence. This provision filed claims, and the process afforded by the deems proofs of claim “allowed” only when the Bankruptcy Rules, as effectuated in court orders. claims are “filed under [11 U.S.C.] Section 501,” [5] [6] [7] A creditor whose claim is allowed and the claims are not objected to by “any party in may participate in the ultimate distribution of the interest.” “An understanding of the codal structure debtor's assets. Prefatory to allowance, however, for the allowance or disallowance of creditors' Section 501 states that a creditor “may” file a claims is critical to a proper understanding and proof of claim. 11 U.S.C. § 501(a). In fact, that analysis of this case.” In re Simmons, 765 F.2d section uses the term “may” six times. Id. §§ 547, 551 (5th Cir. 1985). Section 502(a) cannot be 501(b), (c), (d), (e). “May” is not “must;” “may” correctly understood without examining the can mean “is permitted to,”4 or “possibly” (as in context in which “filing,” “allowance,” and “party “may or may not”).5 That filing a claim is in interest” are used throughout the Code. described in permissive or contingent terms
*4 [2] [3] [4] The definition of a “claim” in contrasts with the mandatory language prevalent bankruptcy is extremely broad, encompassing all elsewhere in Title 11. For example, if an rights to payment, of whatever nature, whether fixed, objection is made to a filed claim, the liquidated, contingent, matured, disputed, legal, bankruptcy court “shall determine the amount of equitable, or secured. See 11 U.S.C. § 101(5)(A). the claim and allow the claim in such amount.”
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 95 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 11 U.S.C. § 502(b) (emphasis added); see also § *5 [12] Indeed, creditors are often discouraged from filing claims by the issuance 502(b), (c), (d). of a standard “no asset” notice:
In a chapter 7 liquidation [8] [9] [10] [11] Relevant here, courts have case, if it appears from the frequently held that creditors “may” choose not to schedules that there are no file claims in a bankruptcy case with no assets assets from which a available for distribution.6 “A proof of claim should dividend can be paid, the be filed only when some purpose would be served.” notice of the meeting of In re Simmons, 765 F.2d at 551; see also Matter of creditors may include a Smith, 21 F.3d 660, 663 (5th Cir. 1994) (holding statement to that effect; creditors are not obliged to file proofs of claim in no that it is unnecessary to asset cases).7 “[I]n no-asset cases it is unnecessary file claims; and that if for creditors to file claims and the bankruptcy court sufficient assets become therefore sets no deadline for filing such claims.” available for the payment Eide v. Colltech, Inc., 987 F.Supp.2d 951, 958 (D. of a dividend, further Minn. 2013). “Courts have consistently viewed notice will be given for noasset cases differently” because “proofs of claim the filing of claims. are either unnecessary or not accepted for filing.” In Fed. R. Bankr. P. 2002(e) (emphasis added). re Anderson, 72 B.R. 783, 787 (Bankr. D. Minn. Creditors who are told there are no assets 1987). “If a trustee has determined that there are no available for distribution may be instructed assets to distribute in a Chapter 7 case, the that it is unnecessary to file claims. There's requirement to file a proof of claim is meaningless.” the contingency again. “Indeed, creditors in In re Baskowitz, 194 B.R. 839, 845 (Bankr. E.D. Mo. noasset chapter seven cases are not even 1996). required to file proofs of claim.” In re Mesa
Bus. Park P'ship, 127 B.R. 144, 148 (Bankr.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 96 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 W.D. Tex. 1991) (emphasis original). See also In Fed. R. Bankr. P. 3002(c)(5) (emphasis added). re Beezley, 994 F.2d 1433, 1436 (9th Cir. 1993) Thus, if there are assets and distribution
(“The bankruptcy rules ... permit the court to “appears possible,” the clerk shall give notice dispense with the filing of proofs of claim in a and establish a deadline. Fed. R. Bankr. P. no-asset case.”). “Since most Chapter 7 cases 3002. No permissive language eliminates the begin and end as no asset cases, the Rule [Bankr. trustee's obligation to give notice and set a
Rule 2002(e) ] has saved substantial time and claims deadline in an asset case. storage space for bankruptcy clerks throughout [15] [16] In sum, whether or not claims “may” the country.” In re Corgiat, 123 B.R. 388, 389 be filed pursuant to Section 502(a) is generally (Bankr. E.D. Cal. 1991). contingent on the possibility of asset
[13] [14] The other side of the same coin appears in distribution. Likewise, the necessity for creditors
Bankruptcy Rule 3002(c)(5), which dictates to file and the courts to adjudicate claims procedures if assets are later discovered in what depends on the existence of assets in the debtor's initially appeared to be a no-asset case: estate. See In re Mesa, 127 B.R. at 150, n.8
If notice of insufficient assets to (“Chapter seven trustees ... are discouraged from
pay a dividend was given to objecting to ordinary unsecured claims even in
creditors under Rule 2002(e), asset cases if the claims will not receive a
and subsequently the trustee distribution in any event.”). The Bankruptcy
notifies the court that payment of Rules plainly contemplate pretermitting claims
a dividend appears possible, the allowance and objection procedures when there
clerk shall give at least 90 days' are no distributable assets.
notice by mail to creditors of that The current Official Bankruptcy Forms8— fact and of the date by which critical to everyday bankruptcy practice— proofs of claim must be filed. reinforce that Section 502(a) is directed to
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 97 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 deeming claims “allowed” where a debtor's estate Not only the Official Bankruptcy Forms, but may afford a distribution on account of those the “General Information” instructions claims. Form 9D provides notice of the meeting of included with them consistently distinguish creditors and filing deadlines in a Chapter 7 between asset and no-asset cases for business case and is parenthetically titled purposes of claims filing. For example,
“Corporation/Partnership Asset Case.” Form 9D at “[f]orms 9A, 9B, 9C and 9D —used only for
1 (emphasis added). This form is specific to cases chapter 7 cases,—vary based on whether with assets. Similarly, the default setting on the there are assets available to pay creditors.” form applicable to corporate Chapter 7 cases, Instructions, Form B9(A–I), 12.01.09, at 1
Official Form 9C (for Corporations and (emphasis added). The instructions later
Partnerships), line 8, “Proof of claim,” states: state:
“Please do not file a proof of claim unless you In the forms used in no- receive a notice to do so.” Later, Form 9C states: asset cases —Forms 9A
*6 No property appears to be and 9B, there is no
available to pay creditors. deadline for filing a proof
Therefore, please do not file a of claims. In its place,
proof of claim now. If it later creditors are instructed not
appears that assets are to file a proof of claim
available to pay creditors, the unless they receive a
clerk will send you another notice to do so.
notice telling you that you may Id. at 3. Unless the Official Forms are
file a proof claim and stating inconsistent with Section 502(a), a
the deadline. contention not made by KFA, they explain
Id. (emphasis added). No assets means no proofs of that proofs of claim need only be filed in claim should be filed. assetholding bankruptcy cases, for it is only
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 98 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 in such cases that the claims allowance process is asset case, no party in interest, including Mid– required.9 Continent, had any reason to ascertain that KFA
filed a proof of claim, much less to object to the [17] [18] According to these standard procedures, superfluous claim. when creditors in a no asset case are instructed not to file proofs of claim, they are effectively deterred *7 Section 502 would be significantly from exercising their rights as “parties in interest” transformed if, under KFA's reading, certain to object to others' claims. The Bankruptcy Code “parties in interest” in no asset cases would be does not provide an exclusive definition of a party required to monitor, object to, and litigate proofs in interest,10 but the Code broadly includes debtors, of claim that need not even be filed. Those creditors, trustees, indenture trustees, and equity parties would have to invoke the claims security holders among the parties entitled, e.g., to allowance process, not to affect non-existent notice of proceedings in the case. See, e.g., Fed. R. distributions from the debtor's estate, but solely
Bankr. P. 2002. Any “party in interest” may object to prevent collateral consequences in other to a proof of claim and request the court to litigation. Not only insurers like Mid–Continent, determine its correct amount. See Fed. R. Bankr. P. but also parties in the position of sureties,
3007(a). Objections are often filed by the trustee or guarantors, general partners, and other entities other parties in order to prevent unauthorized that might share liability for claims against a distributions to creditors. KFA contends that Mid– debtor would risk suffering adverse judgments
Continent was a “party in interest” in the Hallmark in the form of “deemed allowed” claims. Since
Collection case not only because it is the debtor's the bankruptcy courts “shall” adjudicate claims liability insurer but because it specifically sought to which an objection has been filed, 11 U.S.C. notices in the case and in fact participated in the § 502(b), the courts' workload would increase substantially without yielding any benefit Hallmark Design case.11 Regardless, after learning whatsoever to the debtor or the debtor's estate. that the Hallmark Collection bankruptcy was a no
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 99 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253
[19] Mid–Continent emphasizes the lack of benefit particularly when the claims are already the to the bankruptcy process to argue that in this case, the subject of pending litigation. See, e.g., In re bankruptcy court lacked jurisdiction to adjudicate KFA's claim against Hallmark Collection because the Xenon Anesthesia of Texas, 510 B.R. 106, outcome of the dispute could have no conceivable impact on the non-existent debtor's estate. See Matter 112 (Bankr. S.D. Tex. 2014). In the Hallmark of Wood, 825 F.2d 90, 93 (5th Cir. 1987) (holding the Design case, this is what happened, and KFA outer limit of the bankruptcy court's subject matter jurisdiction involves matters which have a recovered a judgment, which it then enforced “conceivable effect” on the estate's administration); In re Skuna River Lumber, LLC, 564 F.3d 353, 357 (5th to the extent of that debtor's policy from Cir. 2009) (holding that a bankruptcy court lacked Mid–Continent. KFA could have sought subject matter jurisdiction to impose Bankruptcy Code surcharge after property was transferred from the relief from the automatic stay to pursue its estate); In re Mesa, 127 B.R. at 147–78 (declining to value lender's deficiency claim as advisory opinion in claim against Hallmark Collection in the absence of any assets available for distribution to litigation. In fact, requesting such relief creditors). We do not agree. That a bankruptcy case is filed as or becomes a no asset case does not deprive the might not have been necessary inasmuch as bankruptcy court of subject matter jurisdiction for the stay terminates against a non-individual many administrative purposes. The bankruptcy court had subject matter jurisdiction over this no asset case, debtor, like this L.L.C., when the case is but the Bankruptcy Code affords discretion with regard to claims allowance, and no claims allowance closed or dismissed. 11 U.S.C. § 362(c)(2). procedures took place here. There cannot be a “deemed Such a debtor, unlike an individual debtor, is allowed” claim where there were no distributable assets, no other bankruptcy-related purpose for claims not entitled to a discharge or to protection “allowance,” and parties in interest were not on notice of the obligation to file objections to claims. against later litigation, 11 U.S.C. § 727(a), and the statute of limitations is suspended It is additionally worth observing that filing a during the bankruptcy case. 11 U.S.C. § 108. proof of claim in the Hallmark Collection case The Bankruptcy Code did not (and still does was not only superfluous but wholly unnecessary not) interfere with KFA's right to pursue its to preserve KFA's ultimate rights. Courts often claims against Hallmark Collection, and grant creditors relief from the automatic stay so subsequently its insurer, for their full value they can adjudicate their unliquidated claims without more than a temporary hindrance against a debtor outside of bankruptcy court,
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 100 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 from the automatic stay. These facts further debtor outside of the bankruptcy court. undermine the argument that KFA should benefit KFA's interpretation of Section 502(a), in from having filed a superfluous proof of claim. contrast, invokes the claims allowance
procedure in a no-asset case unnecessarily *8 KFA relies on a body of cases that simply and solely for its offensive purposes in quote or rephrase Section 502(a) where the extrinsic litigation. provision's meaning for no asset cases was not at issue. See, e.g., In re Taylor, 132 F.3d 256, 261 Just one appellate court case, Siegel v. Federal
(5th Cir. 1998) (in a Chapter 11 tax liability Home Loan Mortg. Corp., 143 F.3d 525 (9th dispute, “[o]nce a proof of claim is filed, the debt Cir. 1998), superficially supports KFA's is considered allowed unless the debtor or another interpretation of Section 502(a). There, the party in interest files an objection to the proof of Ninth Circuit held that because a mortgagee's claim”). KFA attaches to these holdings the proof of claim had been “deemed allowed” in general principle that judicial interpretation of a the absence of an objection, the debtor was statute should be limited to “the words of the precluded from pursuing a later state court suit statute, which are assumed to carry their ordinary arising out of the mortgagee's foreclosure. Id., meaning.” Stanford v. Comm'r, 152 F.3d 450, 143 F.3d at 529–30. Siegel states that proofs of
455–456 (5th Cir. 1998). This approach, however, claim not objected to are deemed allowed. fails to address the whole context covered by Siegel does not, however, discuss the claims
Sections 501 and 502 as elucidated in the allowance process for a no asset case.12
Bankruptcy Rules and Official Forms and case Moreover, as Mid–Continent correctly notes, law. It also fails to account for the fact, evidenced Siegel concerned a potentially valuable asset of by the Hallmark Design case, that lifting the the debtor's estate: lender liability claims against
Section 362 automatic stay allows a creditor even the creditor. The Ninth Circuit reasoned that if in a no-asset case to litigate its dispute with the the causes of action could have been
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 101 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 successfully prosecuted, the debtor “could even have to an IRS tax claim as “deemed allowed” that come out solidly solvent,” rather than bankrupt. had been filed in the debtor's Chapter 13 case
Siegel, 143 F.3d at 531. The lender liability suit and was not objected to until a year later and might, in other words, have conceivably affected the following subsequent conversions to Chapter debtor's estate. The situation here is the opposite. As 11 and Chapter 7. A Chapter 13 case, by the magistrate judge noted, no matter what the definition, has assets. Moreover, the court outcome of KFA's lawsuit, Hallmark Collection's ruled on the merits of IRS's claim rather than bankruptcy estate would have remained insolvent resting on the claim's “deemed allowed” and without assets. Siegel is both distinguishable and status. Geisler is inapposite. Finally, 11 non-dispositive for KFA.13 U.S.C. § 505 expressly authorizes
bankruptcy courts to determine all debtors' [20] KFA also contends that rejecting its narrow textual interpretation would have unintended tax liability within certain parameters. consequences for IRS's “routine” filing of proofs of Second, Section 521(a)(6) requires particular claim in no asset secured creditors of individual debtors to
Footnotes have an “allowed claim” as a predicate for cases and for claims arising from individual reaffirmation or redemption agreements that debtors' personal property that is subject to must be approved by the bankruptcy court. security interests. 11 U.S.C. § 521(a)(6). Both By specifying how the claims allowance propositions are incorrect, and both are based on procedure operates in particular instances, the premise, not adopted here, that the bankruptcy Section 521(a)(6) as well as Section 505 court lacked jurisdiction to rule on claims in a no confirm rather than undermine the asset case. First, KFA cites only one case in conclusion that the necessity for claims support of its contention about IRS practice. In re allowance procedures must be interpreted in Geisler, 539 B.R. 253 (W.D. Pa. 2015), aff'd. sub light of the Bankruptcy Code as a whole. nom. In re Geisler, 667 Fed.Appx. 781 (3d Cir.
2016). Read carefully, however, Geisler referred
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 102 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253 CONCLUSION served by the bankruptcy court's adjudicating
*9 We hold that KFA did not have a “deemed KFA's claim. The district court's judgment in allowed” claim that constitutes res judicata favor of Mid–Continent is against Mid–Continent because in this no asset AFFIRMED. bankruptcy case, nothing in the court proceedings All Citations required claims allowance, no notice was --- F.3d ----, 2017 WL 1130861, 63 provided to parties in interest to object to claims, Bankr.Ct.Dec. 253 and no bankruptcy purpose would have been
1 Kipp Flores Architects, L.L.C. v. Hallmark Design Homes, L.P., 544 Fed.Appx. 553, 554 (5th Cir.2013). 2 See Mid–Continent Cas. Co. v. Kipp Flores Architects, LLC, No. 1:13-CV-60-JRN, 2014 WL 3417544 (W.D. Tex. Apr. 3, 2014). 3 See Mid–Continent Cas. Co. v. Kipp Flores Architects, LLC, 602 Fed.Appx. 985 (5th Cir. 2015). 4 “Section 501 permits, but does not require, a creditor to file a proof of claim.” In re Thomas, 883 F.2d 991, 996 (11th Cir. 1989). 5 See “May,” The Random House Dictionary of the English Language (1966). See also “May,” Merriam–Webster's Dictionary of the English Language, http://www.merriamwebster.com/dictionary/may, accessed Mar. 22, 2017 (defining “may” as “used to indicate possibility or probability”). 6 Secured creditors, for instance, are also not required to file proofs of claim in order to protect their security interests. 11 U.S.C. § 506(d). See In re Be–Mac Transp. Co., Inc., 83 F.3d 1020, 1025 (8th Cir. 1996) (“a secured creditor need not file a claim in a bankruptcy proceeding to preserve its lien”); In re Kleibrink, No. 3:07-CV-0088-K, 2007 WL 2438359, at *10 (N.D. Tex. Aug. 28, 2007) (“the bankruptcy code does not require a secured creditor to file proof of claim to preserve a lien.”). 7 See also In re Mendiola, 99 B.R. 864, 867 (Bankr. N.D. Ill. 1989) (“[A] proof of claim serves only one purpose in a Chapter 7 case: it is the creditor's assertion of a right to participate in the distribution of the assets of the estate. In a case without assets to distribute the right to file a proof of claim is meaningless and worthless.”). Indeed, the bankruptcy hornbook answer to the question in this appeal is that the only purpose of a Chapter 7 case is to distribute whatever assets the trustee marshals on a pro rata basis among the creditors: In no-asset chapter 7 liquidation cases, the filing of a proof of claim serves no practical purpose since there will be no distribution from the estate in which to participate. In such cases, the notice of the meeting of creditors may include a statement that it is unnecessary to file claims. If a trustee subsequently notifies the bankruptcy court that a dividend may be possible, Bankruptcy Rule 3002(c)(5) provides that notice may be sent to creditors informing them of the need to file a proof of claim. 4 Collier on Bankruptcy ¶ 501.01, at 501–3[b] (16th ed. 2011). Rather than reflecting a “purposivist” interpretation of claims filing, however, the hornbook applies “may” in Section 502 consistently with related provisions as detailed in text above. 8 See “United States Courts Services & Forms,” where users can search for and find national federal court forms that can be used in all federal courts, available at http://www.uscourts.gov/services-forms/forms, last accessed Mar. 22, 2017. 9 “A bankruptcy court will normally not involve itself in fixing the amounts of claims in no-asset cases. Bankruptcy procedure is structured so that there will not be a claims resolution process in a no-asset chapter 7 case.” In re Shapiro, 188 B.R. 140, 148 (Bankr. E.D. Pa. 1995).
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 103 Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Company, --- F.3d ---- (2017) 2017 WL 1130861, 63 Bankr.Ct.Dec. 253
10 “The list of potential parties in interest in [11 U.S.C.] § 1109(b) is not exclusive.” In re Glob. Indus. Techs., Inc., 645 F.3d 201, 210 (3d Cir. 2011). 11 “[C]ourts are generally in agreement that an insurance policy will be considered property of the estate ... Any rights the debtor has against the insurer, whether contractual or otherwise, become property of the estate.” Matter of Edgeworth, 993 F.2d 51, 55 (5th Cir. 1993). See also In re Davis, 730 F.2d 176, 184 (5th Cir.1984); Homsy v. Floyd (In re Vitek, Inc.), 51 F.3d 530, 533 (5th Cir. 1995). Liability insurance, however, is a different matter. “We have held that while insurance policies are generally property of the estate, the proceeds of liability insurance policies, unlike first party policies, generally are not.” Sosebee v. Steadfast Ins. Co., 701 F.3d 1012, 1023 (5th Cir. 2012). See also Landry v. Exxon Pipeline Co., 260 B.R. 769, 801 (Bankr. M.D. La. 2001) (“[T]he proceeds of liability insurance payable to non- debtor parties are not property of the debtor's estate under 11 U.S.C. § 541, or any other provision of the Code.”). 12 KFA urges this court to take judicial notice of a PACER filing showing, in the underlying bankruptcy, that Siegel did indeed concern a no-asset case. But regardless whether the Siegel bankruptcy was, in fact, a no-asset case, the specific question of whether claims should be deemed allowed in a no-asset case was not addressed by the Ninth Circuit. 13 KFA contends that Siegel has been adopted in this circuit, but Siegel was cited only for a general proposition while this court was deciding whether a debtor has standing to pursue the appeal of a claim allowance. In re Mandel, 641 Fed.Appx. 400, 403 (5th Cir. 2016) (per curiam, unpublished).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 104 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 850 F.3d 811 Debtors and their daughters, proceeding pro se, United States Court of Appeals, Fifth Circuit. appealed. The District Court, John W. de
In the MATTER OF: William Douglas Gravelles, J., 2016 WL 4127768, affirmed, and CARROLL and Carolyn K. Carroll, Debtors appeal was taken. William Douglas Carroll; Carolyn K. Carroll; Pamela K. Alonso; Cynthia G. O'Neal, Appellants v. Holdings: The Court of Appeals held that: Samera L. Abide, Appellee
No. 16-30996 [1] the bankruptcy court did not abuse its | discretion inimposing the pre-filing injunction, Summary Calendar and | FILED March 13, 2017 [2] the bankruptcy court did not abuse its discretion inordering debtors to pay $49,432, Synopsis which represented the amount of attorney fees Background: In case converted from Chapter 13 to incurred by trustee in responding to certain Chapter 11 and then to Chapter 7, Chapter 7 trustee instances of debtors' bad faith conduct. sought declaration that debtors and their adult Affirmed. daughters were vexatious litigants, order barring West Headnotes (15) them from seeking relief against her individually and [1] Bankruptcy as trustee of consolidated estates of debtors and their Interlocutory orders; c ollateral limited liability company (LLC) in any judicial or order doctrine Bankruptcy court's order, which non-judicial forum, and award of attorney fees. The labeled Chapter 7 debtors and their United States Bankruptcy Court for the Middle adult daughters vexatious litigants, District of Louisiana, Douglas D. Dodd, J., 2016 WL enjoined them from future filings, 1084287, granted motion in part, declaring debtors and awarded attorney fees to and their daughters to be vexatious litigants, issuing trustee, was appealable collateral a pre-filing injunction, and sanctioning debtors, order under the Cohen doctrine. jointly and severally, in the amount of $49,432.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 105 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 Cases that cite this headnote including inherent powers, such as the
authority to sanction a party or attorney [2] Bankruptcy Discretion when necessary to achieve the orderly Court of Appeals reviews the and expeditious disposition of their bankruptcy court's imposition of dockets. sanctions for an abuse of discretion. Cases that cite this headnote Cases that cite this headnote [6] Bankruptcy [3] Bankruptcy Power and Authority Discretion Bankruptcy Bankruptcy court does not abuse its Frivolity or bad faith; s anctions Bankruptcy court's inherent powers to discretion unless its ruling is based on sanction may be exercised only if an erroneous review of the law or on a essential to preserve the authority of the clearly erroneous assessment of the court, and the sanction chosen must evidence. employ the least possible power adequate Cases that cite this headnote to the end proposed. [4] Bankruptcy Cases that cite this headnote Particular cases and issues Court of Appeals reviews the facts that [7] Bankruptcy form the basis of the bankruptcy court's Power and Authority Bankruptcy decision to sanction for clear error. Frivolity or bad faith; s anctions Cases that cite this headnote Bankruptcy court must make a specific
finding of bad faith in order to impose [5] Bankruptcy Power and Authority sanctions under its inherent power. Bankruptcy Cases that cite this headnote Frivolity or bad faith; s anctions Bankruptcy courts have numerous tools by [8] Bankruptcy which to sanction the conduct of individuals,
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 106 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 Conclusions of law; d e novo review provisions of the Code. 11 Bankruptcy U.S.C.A. § 105. Particular cases and issues When sanctions are imposed under the Cases that cite this headnote
bankruptcy court's inherent power, the Court [11] Injunction of Appeals' investigation of legal and Abusive, Vexatious, or Harassing Litigation evidentiary sufficiency is particularly When considering whether to probing, and the appellate court must probe enjoin future filings, as a sanction the record in detail to get at the underlying for the conduct of vexatious facts and ensure the legal sufficiency of their litigants, the bankruptcy court must support for the lower court's more generalized consider the circumstances of the finding of “bad faith.” case, including four factors: (1) the Cases that cite this headnote party's history of litigation, in [9] Federal Courts Writs in general particular, whether he has filed Federal courts have authority to enjoin vexatious, harassing, or duplicative vexatious litigants under the All Writs lawsuits, (2) whether the party had Act. 28 U.S.C.A. § 1651. a good faith basis for pursuing the
Cases that cite this headnote litigation, or simply intended to
[10] Bankruptcy harass, (3) the extent of the burden Carrying out provisions of Code on the courts and other parties Bankruptcy Contempt resulting from the party's filings,
Under the Bankruptcy Code, a and (4) the adequacy of alternative
bankruptcy court can issue any order, sanctions.
including a civil contempt order, Cases that cite this headnote necessary or appropriate to carry out the [12] Injunction
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 107 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 Particular cases proceedings that do not threaten the Bankruptcy court did not abuse its court's own judicial authority or discretion in imposing pre-filing proceedings. injunction against Chapter 7 debtors and Cases that cite this headnote their adult daughters, upon determining [14] Bankruptcy that they were vexatious litigants; court Carrying out provisions of Code considered the relevant factors, pro se Bankruptcy Frivolity or bad faith; s anctions status of debtors and their daughters did Section of the Bankruptcy Code not preclude imposition of sanctions, authorizing bankruptcy courts to issue and court's finding of bad faith was any order that is necessary or appropriate supported by evidence that debtors and to carry out the provisions of title 11 their daughters engaged in conduct supports the inherent authority of the intended to harass or delay, including courts to impose civil sanctions for by repeatedly attempting to litigate abuses of the bankruptcy process. 11 issues that had been conclusively U.S.C.A. § 105. resolved against them or that they Cases that cite this headnote lacked standing to assert and by their [15] Bankruptcy numerous unsupported attempts to Frivolity or bad faith; s anctions remove trustee. Bankruptcy court did not abuse its
Cases that cite this headnote discretion in ordering Chapter 7 debtors,
who had been found by the court to be [13] Bankruptcy Power and Authority vexatious litigants, to pay $49,432, Bankruptcy which represented the amount of attorney Frivolity or bad faith; s anctions Bankruptcy court's inherent power to impose fees incurred by trustee in responding to
sanctions does not extend to collateral
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 108 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 certain instances of debtors' bad faith It also sanctioned the Carrolls, jointly and
conduct. 11 U.S.C.A. § 105. severally, in the amount of $49,432. The
Cases that cite this headnote district court affirmed, and we affirm for
substantially the same reasons.
*813 Appeal from the United States District Court for the Middle District of Louisiana, John W. I. deGravelles, Appellants in this matter are William
U.S. District Judge Douglas Carroll and Carolyn K. Carroll
Attorneys and Law (collectively, the Carrolls) and their
Firms daughters, Pamela K. Alonso and Cynthia G.
William Douglas Carroll, Pro Se. O'Neal (collectively, the Carroll Daughters).
Carolyn K. Carroll, Pro Se. The Carrolls filed their bankruptcy petition
Pamela K. Alonso, Pro Se. on May 21, 2008. RedPen Properties, L.L.C.,
Cynthia G. O'Neal, Pro Se. whose membership consists solely of the
Steven Paul Lemoine, Esq., Law Offices of Robert Carrolls, filed its bankruptcy petition that
H. Schmolke, Baton Rouge, LA, for Appellee. same year. The trustee in both of these
Before HIGGINBOTHAM, PRADO, and bankruptcy cases was Samera L. Abide, and HAYNES, the cases were substantially consolidated in Circuit Judges. 2014. Opinion On October 5, 2015, Abide sought relief against PER CURIAM: the Carrolls and the Carroll Daughters due to **1 The bankruptcy court declared William their conduct in the bankruptcy cases. In Douglas Carroll, Carolyn K. Carroll, Pamela K. granting Abide's motion in part, the bankruptcy Alonso, and Cynthia G. O'Neal vexatious litigants court carefully laid out the troublesome conduct and set forth a pre-filing injunction against them.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 109 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 of Appellants in a thorough, twenty-two-page Accordingly, the bankruptcy court “enjoin[ed] opinion. The bankruptcy court detailed a series of them and anyone acting on their behalf from notable actions by Appellants that demonstrated their filing any pleading or document in this case or pattern of harassment, which included: seeking to its associated cases or adversary proceedings, frustrate the sale of a five-acre tract of land, filings and from filing any future cases in [the
*814 related to a movables adversary brought by the Bankruptcy Court for the Middle District of
Carroll Daughters Louisiana], without first obtaining bankruptcy
court permission.” The bankruptcy court then (“Movables Adversary”),1 orders of contempt assessed monetary sanctions, under 11 U.S.C. § entered against Appellants, attempts to frustrate the 105, in the amount of $49,432 against the sale of the Carrolls' residence and movables, and two Carrolls. This figure represented the attorneys' attempts to remove Abide that were wholly fees incurred “in defending the trustee removal unsupported by evidence. motions and the injunction complaint, along
After recounting the bad faith conduct of Appellants, with the Carrolls' motion for stay pending the bankruptcy court determined that “the Carrolls' appeal.” true motives [were] to harass the trustee and thereby **2 The Carrolls and the Carroll Daughters delay the proper administration of the estate in the appealed to the district court, which affirmed the hope that they would be able to retain their assets, or bankruptcy court's order in a similarly detailed make pursuit of the assets so unappealing that the twenty-five-page opinion. On appeal to us, the trustee would be compelled to settle on terms Carrolls and the Carrol Daughters challenge the favorable to the [appellants].” The court specifically pre-filing injunction against them, and the found that Appellants were bad faith filers and noted Carrolls additionally challenge the imposition of that Appellants' failure to pay previous contempt monetary sanctions. sanctions ordered against them “demonstrates that II. monetary sanctions alone will not deter them.”
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 110 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 [1] Although it is not altogether clear whether party or attorney when necessary to achieve the jurisdiction is proper under 28 U.S.C. § 158, the orderly and expeditious disposition of their bankruptcy court's order is a collateral order under dockets.” Scaife v. Associated Air Ctr. Inc., 100 the Cohen doctrine. See Markwell v. Cty. of Bexar, F.3d 406, 411 (5th Cir. 1996) (citation omitted);
878 F.2d 899, 901 (5th Cir. see also Citizens Bank & Tr. Co. v. Case (In re
1989); see also Chaves v. M/V Medina Star, 47 F.3d Case), 937 F.2d 1014, 1023 (5th Cir. 1991). 153, “Such powers may be exercised only if essential 156 (5th Cir. 1995).2 to preserve the authority of the court and the [2] [3] [4] “We review the imposition of sanctions sanction chosen must employ the least possible for an abuse of discretion.” Chaves, 47 F.3d at 156 power adequate to the end proposed.” Nat'l Gas (citation omitted). “A Bankruptcy Court does not Pipeline Co. of Am. v. Energy Gathering, Inc., abuse its discretion unless its ruling is based on an 86 F.3d 464, 467 (5th Cir. 1996) (quoting erroneous review of the law or on a clearly erroneous Anderson v. Dunn, 19 U.S. 6 Wheat. 204, 231, 5 assessment of the evidence.” In re Yorkshire, LLC, L.Ed. 242 (1821)). A court must make a specific 540 F.3d 328, 331 (5th Cir. 2008) (quoting Chaves, finding of bad faith in order to impose sanctions 47 F.3d at 156). *815 Furthermore, we review the under its inherent power. See Chaves, 47 F.3d at facts that form the basis of the court's decision to 156. Moreover, when sanctions are imposed sanction for clear error. FDIC v. Maxxam, Inc., 523 under the inherent power, this court's F.3d 566, 576–77 (5th Cir. 2008). “investigation of legal and evidentiary
sufficiency is particularly probing” and this III. court must “probe the record in detail to get at [5] [6] [7] [8] We begin by noting the bankruptcy the underlying facts and ensure the legal court has numerous tools by which to sanction the sufficiency of their support for the district court's conduct of individuals. “Federal courts have inherent more generalized finding of ‘bad faith.’ ” Crowe powers which include the authority to sanction a v. Smith, 151 F.3d 217, 236 (5th Cir. 1998).
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 111 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 [9] [10] [11] Federal courts also have authority to filings; and (4) the enjoin vexatious litigants under the All Writs Act, 28 adequacy of alternative
U.S.C. § 1651. See Newby v. Enron Corp., 302 F.3d sanctions.
295, 302 (5th Cir. 2002). Moreover, under 11 U.S.C. Baum v. Blue Moon Ventures, LLC, 513 F.3d 181, 189 (5th Cir. 2008) (quoting Cromer v. § 105, “a bankruptcy court can issue any order, Kraft Foods N. Am., Inc., 390 F.3d 812, 818 (4th Cir. 2004)). including a civil contempt order, necessary or appropriate to carry out the provisions of the [12] With these legal principles in mind, we turn to the arguments on appeal and affirm for bankruptcy code.” Placid Refining Co. substantially the same reasons asserted by the district court. Addressing the prefiling injunction v. Terrebonne Fuel and Lube, Inc. (In re first, the bankruptcy court considered the Terrebonne Fuel & Lube, Inc.), 108 F.3d 609, 613 relevant factors in issuing its pre-filing injunction. See Baum, 513 F.3d at 189. To the (5th Cir. 1997). When considering whether to extent that appellants maintain that sanctions cannot be imposed against them because they are enjoin future filings, the court must consider the pro se litigants, they are incorrect. See Farguson circumstances of the case, including four factors: v. MBank Hous., N.A., 808 F.2d 358, 359 (5th Cir. 1986); see also Clark v. Mortenson, 93 **3 (1) the party's history of Fed.Appx. 643, 652 (5th Cir. 2004).
litigation, in particular whether [13] To the extent that Appellants challenge he has filed vexatious, the bankruptcy court's finding that they acted in harassing, or duplicative bad faith, our probing review of the record lawsuits; (2) whether the party establishes that the finding of bad faith is well had a good faith basis for supported. As both the bankruptcy court and pursuing the litigation, or the district court meticulously explained, simply intended to harass; (3) Appellants have engaged in conduct intended the extent of the burden on the to harass *816 and courts and other parties
resulting from the party's Footnotes
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 112 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 delay. Appellants' suggestion that their conduct **4 [14] [15] We next address the bankruptcy was not done in bad faith is belied by their court's order that the Carrolls pay $49,432, repeated attempts to litigate issues that have been which represents the amount of attorneys' fees conclusively resolved against them or that they incurred by Abide in responding to certain had no standing to assert and by their instances of the Carrolls' bad faith conduct. unsupported and multiple attempts to remove “[Section 105] has been interpreted as
Abide as the trustee. Although it is correct that supporting the inherent authority of the the conduct of the Carroll Daughters was less bankruptcy courts to impose civil sanctions for pervasive than that of the Carrolls, their conduct abuses of the bankruptcy process.” In re Clark, was still in bad faith. Specifically, the bankruptcy 223 F.3d 859, 864 (8th Cir. 2000) (citation court discussed the Carroll Daughters' conduct in omitted); see also In re Tucker, 224 F.3d 766, the Movables Adversary, in which the district at *3 (5th Cir. 2000) (unpublished) (rejecting court had to hold the Carroll Daughters in the argument that the bankruptcy court erred in contempt and order them to make Abide whole as holding that section 105 authorized the to all costs involved in filing her motions to imposition of sanctions where the sanctioned compel.3 Yet, the Carroll Daughters remained individuals participated in an abuse of process). undeterred, persisted in their unsupported filings, The Carrolls appear to argue that this sanction and eventually triggered another motion for was erroneous because the estate has already contempt by failing to pay the attorneys' fees as incurred these attorneys' fees. This argument ordered. At bottom, the record fully supports the misunderstands that the purpose of ordering the bankruptcy court's determination of bad faith, and Carrolls to pay these fees is to prevent the
Appellants have not established that any of the estate from bearing the costs of their vexatious bankruptcy court's findings were clearly conduct. Accordingly, the attorneys' fees award erroneous. is not erroneous.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 113 Matter of Carroll, 850 F.3d 811 (2017) 2017 WL 963141, 63 Bankr.Ct.Dec. 232 AFFIRMED. All Citations
850 F.3d 811, 2017 WL 963141, 63
Bankr.Ct.Dec. 232
1 In the Movables Adversary, the Carroll Daughters sought to establish their ownership in certain antiques and other movable property that was in the Carrolls' possession at the time of the Carrolls' bankruptcy filing. The Carroll Daughters claimed that this property was transferred to them in 2005. Due to concerns regarding the ability of the bankruptcy court to hear this claim under Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), the district court withdrew the reference. The case was then heard by the district court, which, in granting summary judgment in favor of Abide, stated that it “seriously question[ed] the legality of the actions taken by [the Carroll Daughters] and the Carrolls.” We affirmed. Alonso v. Abide (In re RedPen Properties, L.L.C.), 568 Fed.Appx. 338 (5th Cir. 2014). 2 We need not decide if an award of attorneys' fees alone would constitute a collateral order in this context because here the bankruptcy court's order labeled the Appellants vexatious litigants and enjoined them from future filings. See generally Ali v. Quarterman, 607 F.3d 1046, 1048 (5th Cir. 2010). 3 Construing their pro se brief liberally, see Price v. Digital Equip. Corp., 846 F.2d 1026, 1028 (5th Cir. 1988), Appellants maintain that the bankruptcy court could not sanction the Carroll Daughters for conduct that occurred before the district court in the Movables Adversary once the order of reference was withdrawn because the Movables Adversary is a separate proceeding. We have determined that “the inherent power does not extend to collateral proceedings that do not threaten the court's own judicial authority or proceedings.” Positive Software Sols., Inc. v. New Century Mortg. Corp., 619 F.3d 458, 460–61 (5th Cir. 2010) (quoting Maxxam, 523 F.3d at 593). Here, by contrast, the conduct by the Carroll Daughters in the district court occurred in the same bankruptcy case. See 2 COLLIER ON BANKRUPTCY § 301.03 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2015) (“The term ‘case’ ... refers to the overall spectrum of legal action taken under one of the debtor relief chapters. It is the widest term functionally. The term ‘proceeding,’ by contrast, refers to any particular action raised or commenced within the case, including motions and adversary proceedings, whether such actions raise disputed or consensual matters.”). Accordingly, the bankruptcy court could sanction the Carroll Daughters for their conduct in the Movables Adversary.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 114 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 850 F.3d 800 interest; United States Court of Appeals, Fifth Circuit. [2] as damages under the Texas Uniform FraudulentTransfer Act (TUFTA), debtor was In the MATTER OF: Lisa Ann GALAZ, Debtor entitled to 25% of royalties generated between Raul Galaz and Segundo Suenos, L.L.C., time of transfer and trial of her fraudulent Appellants transfer claim; v. Lisa Ann Galaz and Julian Jackson, Appellees [3] damages award did not have to be reduced by expensesallegedly associated with producing No. 15-51194 these royalties; and | FILED March 10, 2017 [4] debtor was entitled to exemplary damages. Synopsis Background: Chapter 13 debtor brought adversary Affirmed. proceeding, on theory that her ex-husband's West Headnotes (12) fraudulent transfer of assets of limited liability [1] Bankruptcy company (LLC) in which she had 25% interest had Review adversely affected property included in bankruptcy When district court enters final estate. The United States Bankruptcy Court for the judgment in bankruptcy case, the
Western District of Texas, Ronald B. King, J., 2015 Court of Appeals reviews district
WL 457850, issued proposed findings of fact and court's findings of fact for clear conclusions of law, which were adopted by the error and its conclusions of law de
District Court. Defendants appealed. novo.
Cases that cite this headnote
Holdings: The Court of Appeals, Edith Brown [2] Federal Courts Clement, Circuit Judge, held that: ‘Clearly erroneous‘ standard of review in general [1] district court did nor clearly err in finding that In examining factual finding for Chapter13 debtor's ex-husband had acted with actual fraudulent intent in gratuitously transferring clear error, the Court of Appeals royalty rights of limited liability company (LLC) in which debtor had a 25% reviews record as whole and not
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 115 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 just the evidence supporting the finding. (TUFTA). Tex., Bus. & C. Code §
24.005(b). Cases that cite this headnote
Cases that cite this headnote [3] Federal Courts Conflicting or undisputed evidence [6] Fraudulent Conveyances When there are two permissible views Conclusiveness and effect of the evidence, factfinder's choice Under Texas law, while individual badge
between them cannot be clearly of fraud is not conclusive on whether
erroneous. transfer was made with actual fraudulent
intent, a concurrence of many badges in Cases that cite this headnote the same case will always make out a [4] Bankruptcy strong case of fraud. Tex., Bus. & C. Particular cases and issues Court of Appeals review for clear error Code § 24.005(b).
a factual finding as to whether transfer Cases that cite this headnote was made with actual intent to defraud [7] Fraudulent Conveyances creditors. Fed. R. Bankr. P. 8013. Weight and Sufficiency Burden to proof, by preponderance of the Cases that cite this headnote evidence, is on creditor seeking to avoid [5] Fraudulent Conveyances Intent of Grantor transfer under the Texas Uniform Texas courts may consider Fraudulent Transfer Act (TUFTA). Tex., circumstantial evidence in deciding Bus. & C. Code § 24.001 et seq. whether transfer was made with actual
fraudulent intent, of kind permitting Cases that cite this headnote
avoidance of transfer under the Texas [8] Bankruptcy Uniform Fraudulent Transfer Act Trustee as representative of debtor or creditors Corporations and Business Organizations
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 116 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 Property, funds, and conveyances possessed by limited liability District court did nor clearly err in finding company (LLC) in which Chapter that Chapter 13 debtor's ex-husband had 13 debtor had 25% interest, in acted with actual fraudulent intent in attempt to deprive debtor of her gratuitously transferring royalty rights of interest therein, debtor was entitled limited liability company (LLC) in which to 25% of royalties generated debtor had a 25% interest to newly formed between time of transfer and trial of entity controlled by his father, and that this her fraudulent transfer claim, transfer was subject to avoidance as actually despite defendants' contention that fraudulent transfer under Texas law, given debtor should be limited to value of that transfer was to insider, that ex-husband royalty rights at time of transfer, retained possession or control following which was allegedly nominal. Tex., transfer, that transfer was concealed and Bus. & C. Code § 24.008(a)(3)(C). involved substantially all of the LLC's assets, Cases that cite this headnote and that LLC did not receive reasonably
equivalent value in return and was rendered [10] Bankruptcy Trustee as representative of debtor or insolvent as result. Tex., Bus. & C. Code § creditors 24.005(b). Corporations and Business Organizations Cases that cite this headnote Trial, judgment, and relief Damages awarded to Chapter 13 [9] Bankruptcy debtor under the Texas Uniform Trustee as representative of debtor or creditors Fraudulent Transfer Act (TUFTA), Corporations and Business Organizations Trial, judgment, and relief for fraudulent transfer of royalty
As damages under the Texas Uniform rights possessed by limited liability
Fraudulent Transfer Act (TUFTA) for company (LLC) in which Chapter fraudulent transfer of royalty rights
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 117 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 13 debtor had 25% interest, in mount of Transfer Act (TUFTA). Tex., Bus. &
25% of royalties generated between C. Code § 24.008(a)(3)(C).
time of transfer and trial of her Cases that cite this headnote fraudulent transfer claim, did not have [12] Bankruptcy to be reduced by expenses allegedly Right of review and persons incurred in generating these royalties, entitled; p arties; w aiver or estoppel On appeal from district court order where defendants did not introduce adopting bankruptcy court's proposed sufficient evidence of amount of any findings of fact and conclusions of such expenses. Tex., Bus. & C. Code § law, the Court of Appeals would not 24.008(a)(3)(C). consider any arguments that were not Cases that cite this headnote adequately briefed, which had to be
[11] Bankruptcy regarded as waived. Trustee as representative of debtor or creditors Cases that cite this headnote Corporations and Business Organizations Trial, judgment, and relief
Ex-husband's actually fraudulent transfer of *802 Appeal from the United States District
royalty rights of limited liability company Court for the Western District of Texas, Harry
(LLC) in which Chapter 13 debtor had Lee Hudspeth, U.S. District Judge 25% interest, in attempt to deprive debtor Attorneys and Law Firms of this interest, was characterized by David Clay Snell, Bayne, Snell & Krause, San sufficient fraud or malice to support award Antonio, TX, for Appellants. of exemplary damages, in amount of
$250,000, an amount roughly equal to Raul Galaz, Pro Se.
district court's compensatory damages
award under the Texas Uniform Fraudulent
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 118 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 *803 Royal B. Lea, III, Benjamin R. Bingham, membership interest in ARF. When Lisa
Bingham & Lea, P.C., San Antonio, TX, for divorced Raul in 2002, she obtained a 25
Appellee Lisa Ann Galaz. percent economic interest in ARF—half of
his 50 percent interest. ARF's assets Julian Jackson, Pro Se. consisted of the rights to the royalties from Before SMITH, CLEMENT, and SOUTHWICK, the music of the Ohio Players, a former funk Circuit Judges. band. Opinion In June 2005, without the knowledge of EDITH BROWN CLEMENT, Circuit Judge: Jackson or Lisa, Raul transferred ARF's **1 Appellants Raul Galaz (“Raul”) and Segundo royalty rights to “Segundo Suenos”—which
1 Suenos, LLC appeal the district court's judgment at the time, “was not organized as a business awarding actual and exemplary damages to entity under the laws of any state.” In re debtor Lisa Ann Katona, formerly known as Lisa Galaz I, 765 F.3d at 428. In September 2005,
Galaz (“Lisa”). We AFFIRM the judgment of the Raul assisted his father, Alfredo Galaz district court. (“Alfredo”) in establishing Segundo Suenos,
LLC (“Segundo”) in Texas. Raul asserts that
I Alfredo is the “sole owner” of Segundo.
This case is on appeal before this court for the Soon after the transfer, the royalties began to second time. See Galaz v. Galaz (In re Galaz I), generate a substantial amount of revenue.
765 F.3d 426 (5th Cir. 2014). It is just the latest Segundo received nearly a million dollars episode in a series of lawsuits dating back ten from the transfer until trial in February 2010. years. Lisa did not receive any share of the revenue,
Raul founded Artist Rights Foundation, LLC despite her 25 percent interest in ARF. Raul
(“ARF”) with Julian Jackson (“Jackson”) in unilaterally dissolved ARF in December
1998, and each originally held a 50 percent 2006.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 119 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 Lisa filed for Chapter 13 bankruptcy in December actual and exemplary damages consistent with
2007. In April 2008, Lisa brought this adversary the district court's instructions. Id. Appellants proceeding against Raul, Alfredo, and Segundo, *804 again appealed to the district court, alleging that they fraudulently transferred the which affirmed. Id. Appellants then appealed assets of ARF to Segundo and defrauded Lisa of to this court. Id. her interest. Raul, Alfredo, and Segundo filed a **2 This court vacated and remanded the third-party complaint against Jackson, and bankruptcy court's judgment on jurisdictional
Jackson asserted seven counterclaims against grounds, with instructions to dismiss Jackson's them. Id. at 429. third-party counterclaims for lack of subject-
“After a five-day bench trial, the bankruptcy court matter jurisdiction. Id. at 431, 434. This court found that the transfer of assets from ARF to also determined that Lisa's claims were non-
Segundo Suenos was invalid, that it constituted a core bankruptcy claims, and remanded for the fraudulent transfer under TUFTA, that Raul owed district court to enter final judgment after fiduciary duties to [Jackson] and had breached further consideration. Id. those duties, and that Raul owed no fiduciary On remand, the district court referred this duties to Lisa.” Id. The bankruptcy court held Raul adversary proceeding to the bankruptcy court. and Segundo liable, but held Alfredo not liable. Id. The bankruptcy court submitted proposed at 429 & n.4. The bankruptcy court awarded actual findings of fact and conclusions of law and exemplary damages to Lisa and Jackson. Id. at pursuant to 28 U.S.C. § 157(c)(1). After de
429. novo review, the district court adopted those
Raul and Segundo appealed to the district court, findings of fact and conclusions of law, which affirmed the bankruptcy court's judgment as invalidating the transfer of assets from ARF to to liability but vacated and remanded for Segundo and awarding Lisa actual and redetermination of actual and exemplary damages. exemplary damages. Raul and Segundo again
Id. On remand, the bankruptcy court awarded appeal.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 120 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 II The district court explicitly adopted the
[1] [2] [3] When the district court enters final bankruptcy court's finding that Raul acted judgment in a bankruptcy case, this court “review[s] with actual intent to defraud Lisa. We affirm. the district court's findings of fact for clear error and [4] [5] [6] [7] We review for clear error its conclusions of law de novo.” Monge v. Rojas (In because re Monge), 826 F.3d 250, 254 (5th Cir. 2016). “In “whether the transfer was made with the examining for clear error, we review the record as a actual intent to defraud creditors is a fact whole and not just the evidence supporting the question.” Walker v. Anderson, 232 S.W.3d finding.” Stanley v. U.S. Bank Nat'l Ass'n (In re 899, 914 (Tex. Ct. App. 2007). Because
TransTexas Gas Corp.), 597 F.3d 298, 304 (5th Cir. “direct proof of fraudulent intent is often
2010). “Where there are two permissible views of the unavailable,” courts may consider evidence, the factfinder's choice between them circumstantial evidence to determine whether cannot be clearly erroneous.” Anderson v. City of the transfer was made with fraudulent intent.
Bessemer City, N.C., 470 U.S. 564, 574, 105 S.Ct. Id. Section 24.005(b) of TUFTA sets forth a
1504, 84 L.Ed.2d 518 (1985). “non-exhaustive list of facts and
circumstances, which are known as the
III ‘badges of fraud,’ to be considered in determining whether a transfer was made A with actual intent to defraud.” Id. (citing § The district court held that the purported transfer 24.005(b)). “An individual badge of fraud is of the music rights from ARF to Segundo was not conclusive, but a concurrence of many fraudulent under the Texas Uniform Fraudulent badges in the same case will always make out Transfers Act (“TUFTA”), Tex. Bus. & Com. a strong case of fraud.” Id. “The judgment Code § 24.001 et seq. TUFTA allows a court to creditor has the burden to prove the set aside a fraudulent transfer. § 24.008(a)(1).
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 121 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 fraudulent transfer by a preponderance of the Segundo and the royalty rights after the transfer. evidence.” Id. at 913. Raul admitted that he consulted with Alfredo
[8] Although the district court did not explicitly and helped him with the process of creating identify which badges of fraud are present, it Segundo. He testified at trial that he “heavily emphasized the following facts: “Raul transferred influenced” Alfredo's decisions in Segundo. all of ARF's royalty rights to Segundo Suenos”; Appellants introduced no convincing evidence
“Segundo Suenos was not organized as a business that Alfredo exercised any control over the entity under the laws of any state” until three royalty rights. months after the transfer; “Raul assisted his father Third, Raul “concealed” the transfer from Lisa. § in filing the documents required to establish 24.005(b)(3). Appellants do not argue that Raul
Segundo Suenos as a *805 Texas LLC”; Raul did told Lisa about the transfer. not tell Lisa or Jackson about the transfer; and Fourth, the transfer was of substantially all of
Segundo gave no consideration to ARF for the ARF's assets. § 24.005(b)(5). Appellants do not transfer of the royalty rights. Reviewing the record dispute this fact. as a whole, the district court did not clearly err in Fifth, ARF did not receive “reasonably determining that Raul acted with actual intent to equivalent” consideration for the transfer of the defraud in transferring the royalty rights from ARF royalty rights. § 24.005(b)(8). Neither Alfredo to Segundo. nor Segundo—which was not formed as a Texas
**3 At least six badges of fraud are present. First, entity until three months after the purported
Raul transferred ARF's assets to “an insider”—his transfer—paid “any money at all” to ARF at the father, Alfredo, who purportedly owns Segundo.2 time of the transfer. Instead, “[t]he terms of the
See § 24.005(b)(1). transfer purportedly obligated Alfredo and
Second, Raul “retained possession or control of the Segundo Suenos to pay the liability that Raul property transferred after the transfer.” § recited in the Demand Letter: Raul's out-of-
24.005(b)(2). There is evidence that Raul managed pocket expenses, expenses for Raul's ‘services,’
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 122 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 and the past-due California franchise taxes.” It is true B that Segundo paid ARF's tax obligations to **4 [9] The district court awarded Lisa
California, totaling $11,793.05, in November and $241,309.10 in actual damages. The royalties
December 2006. But Segundo paid those obligations generated $969,317.93 in gross income from revenue generated by the royalty rights. There between the time of the fraudulent transfer and is no evidence that ARF received any consideration trial. To restore Lisa to the position she would for the transfer of the royalty rights that was have had if the fraudulent transfer had not independent of revenue generated by the royalty occurred, the district court awarded Lisa 25 rights. percent of the gross income—which was
Sixth, ARF “was insolvent or became insolvent $242,329.48—less certain allowable and shortly after the transfer was made.” § 24.005(b)(9). reasonable expenses.6 The district court
Raul unilaterally dissolved ARF in December 2006.3 declined to reduce Lisa's actual damages by
When ARF was dissolved, it had no assets and no Segundo's alleged expenses because Segundo liabilities. is “a wholly distinct entity formed for the
The district court did not clearly err in adopting purpose of defrauding [Lisa] of her share of the bankruptcy court's finding of fraudulent revenue.” Appellants also failed to produce intent. The presence of these badges of fraud is credible evidence of those alleged expenses. sufficient evidence that Raul transferred ARF's We affirm. royalty rights with the actual intent of defrauding Section 24.008(a)(3)(C) of TUFTA is an
Lisa of her 25 percent economic interest in ARF. equitable provision which states that a
Appellants' arguments to the contrary are entirely creditor may obtain “any other relief the unavailing.4 The district court did *806 not err in circumstances may require.” This equitable invalidating the purported transfer.5 provision “is quite broad.” Airflow Hous., Inc. v. Theriot, 849 S.W.2d 928, 934 (Tex.
Ct. App. 1993). Section 24.009(c)(1)
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 123 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233 provides that actual damages for the value of documentation.” Segundo requested that the district court, in calculating Lisa's actual damages, property fraudulently transferred are “subject to deduct hundreds of thousands of dollars in adjustment as the equities may require.” unsupported expenses from the revenue generated by the royalty rights. The district court did not err Appellants argue that, as a matter of law, the in declining to reduce Lisa's award by these alleged expenses, especially given the finding of district court should have limited compensatory actual intent to defraud and the broad remedial damages to the value of the royalty rights at the authority conferred by Sections 24.008(a)(3)(c) and 24.009(c)(1) of TUFTA. time of the transfer from ARF to Segundo, and that the value was “nominal” at that time. C Although Appellants acknowledge that Section [11] The district court awarded Lisa $250,000 24.009(c) (1) authorized the district court to in exemplary damages. Appellants *807 argue that the district court clearly erred in awarding adjust the value “as the equities may require,” exemplary damages because: (1) Lisa did not they argue that Section 24.009(c) (2) restricts the establish any actual damages; and (2) no evidence supports exemplary damages. The first argument district court from adjusting the value “to include is unavailing—Lisa is entitled to $241,309.10 in actual damages. The second argument fails the value of improvements made by a good faith because the district court did not clearly err in transferee.” Because the transfer was fraudulent finding that Lisa proved by clear and convincing and Segundo is not a good faith transferee, the Footnotes district court did not err in applying Section evidence that her loss was caused by the
24.009(c)(1) without the restriction in Section Appellants' fraud, malice, or gross
24.009(c)(2). negligence. See Shafer v. Army & Air Force
[10] Appellants also argue that “[c]onsidering all Exch. Serv., 376 F.3d 386, 396 (5th Cir. appropriate expenses, Segundo Suenos actually has 2004) (if the district court applies the correct produced no net operating income”—and thus, Lisa should not receive anything in actual damages. But standard of review, this court “review[s] the Appellants provided insufficient evidence of reasonable expenses. Segundo apparently “did not district court's factual findings for clear regularly keep any profit and loss statements or error”). There is ample evidence supporting balance sheets” and failed to present “any evidence of invoices, receipts, work orders, or other the finding of actual intent to defraud.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 124 Matter of Galaz, 850 F.3d 800 (2017) 2017 WL 955261, 63 Bankr.Ct.Dec. 233
**5 [12] Appellants also summarily argue, without Lisa exemplary damages against both Raul citing any precedent, that “it was error for the and Segundo. lower courts to simply double the already-inflated compensatory damages in order to assess punitive IV damages” and that the district court clearly erred We AFFIRM the judgment of the district court. when it assessed exemplary damages against We make no comment on the effect of the
Segundo because “there was no determination judgment on non-parties. that ... Segundo ... engaged in any objectionable conduct.” These arguments are waived for lack of All Citations adequate briefing. See Procter & Gamble Co. v. 850 F.3d 800, 2017 WL 955261, 63
Amway Corp., 376 F.3d 496, 499 n.1 (5th Cir. Bankr.Ct.Dec. 233
2004). The district court did not err in awarding
1 “Segundo Suenos” was likely formed with the intention of reading “Segundo Sueños,” which is Spanish for “Second Dreams.” This opinion will use the spelling used by the entity itself. 2 Appellants do not argue that the transfer was not to an insider. They argue only, without any precedential support, that transfer to an insider should not be considered a badge of fraud where transfer is first offered to a non-insider. 3 Raul admitted that he “represented to the State of California that the dissolution of [ARF] was by a vote of all the members.” 4 Appellants' argument that Raul had no motive to defraud Lisa defies credulity. Raul transferred the royalty rights from ARF, in which he held only a 25 percent membership interest, to Segundo, a company purportedly owned by Raul's father but apparently completely within Raul's control, as inferred by Segundo's payments to and on behalf of Raul and his friends and family. Because of this transfer, Raul did not account to Lisa for the revenue—almost a million dollars —generated by the royalty rights. 5 We also affirm the district court's determinations that Appellants are collaterally estopped from arguing that the transfer was valid and that Raul did not have the authority to unilaterally transfer the royalty rights. 6 Lisa's actual damages award is reduced by “her proportionate share of reasonable and necessary expenses that were incurred by ARF prior to the date of the transfer.” Between 2003 and 2005, Lisa was responsible for 25 percent of the unpaid franchise taxes—that is, $1,020.38. End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 125 Matter of Jackson, 850 F.3d 816 (2017) 2017 WL 963146, 63 Bankr.Ct.Dec. 231 850 F.3d 816 interest in wages, but only as such an interest was United States Court of Appeals, Fifth Circuit. acquired.
In the MATTER OF: Christon JACKSON, Debtor Affirmed. Tower Credit, Incorporated, Appellant v. Martin A. Schott, Appellee West Headnotes (4) No. 16-30274 | FILED March 13, 2017 [1] Bankruptcy Conclusions of law; d e novo Synopsis review Background: Chapter 7 trustee brought adversary Bankruptcy proceeding to recover wages that had been Clear error On appeal from district court's garnished prepetition, as representing preferential affirmance of judgment of bankruptcy transfers of interest of debtor in property. The court, the Court of Appeals applies same United States Bankruptcy Court for the Middle standard of review that district court District of Louisiana, Douglas D. Dodd, J., applied, reviewing bankruptcy court's granted trustee's motion for summary judgment, factual findings for clear error, and its and creditor appealed. The District Court, John W. legal conclusions and determinations on deGravelles, J., 550 B.R. 299, affirmed. Creditor mixed questions of fact and law de novo. appealed. Fed. R. Bankr. P. 8013.
Cases that cite this headnote [Holding:] The Court of Appeals, James L. [2] Bankruptcy Dennis, Circuit Judge, held that transfer of Nature of Transfer Chapter 7 debtor's wages did not occur when Bankruptcy When Transfer Occurs garnishment order was served, more than 90 days What constitutes a transfer and when prepetition, before debtor had even acquired that transfer is complete, whether
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 126 Matter of Jackson, 850 F.3d 816 (2017) 2017 WL 963146, 63 Bankr.Ct.Dec. 231 inside or outside 90-day preference period when garnishment order was
period, is question of federal law. 11 served. 11
U.S.C.A. § 547(b)(4)(A). U.S.C.A. § 547(b)(4)(A), (e)(3).
Cases that cite this headnote Cases that cite this headnote
[3] Federal Courts Property Appeal from the United States District Court for State law generally determines the the Middle District of Louisiana, John W. nature of property interests involved in deGravelles, U.S. purported transfers, but only in District Judge absence of controlling federal law. Attorneys and Law Firms Cases that cite this headnote Richard D. Bankston, Baton Rouge, LA, for
[4] Bankruptcy Appellant. Judicial liens; g arnishment, attachment, or execution Martin A. Schott, Pro Se. Transfer of Chapter 7 debtor's wages Before DAVIS, DENNIS, and SOUTHWICK, did not occur when garnishment order Circuit Judges. was served, more than 90 days Opinion prepetition, before debtor had even JAMES L. DENNIS, Circuit Judge: acquired interest in wages, but only as **1 In 2009, Tower Credit, Incorporated, such an interest was acquired; obtained a money judgment in a Louisiana state accordingly, trustee was entitled to court against Christon Jackson. Seeking to collect, avoid, as preferences, wages that were Tower obtained a garnishment order, served it on paid over during preference period, Jackson's employer on January 19, 2012, and despite creditor's contention that any began collecting Jackson's garnished wages. On transfer occurred outside preference- November 17, 2012, Jackson filed for Chapter 7
bankruptcy protection in the United States
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 127 Matter of Jackson, 850 F.3d 816 (2017) 2017 WL 963146, 63 Bankr.Ct.Dec. 231 Bankruptcy Court for the Middle District of Mercer, 246 F.3d 391, 402 (5th Cir. 2001) (italics removed). Section 547(b) provides, in relevant part: Louisiana. The bankruptcy court appointed Martin [T]he trustee may avoid any transfer of an Schott as trustee to administer Jackson's estate. In interest of the debtor in property— *818 2014, the trustee initiated this adversary (1) to or for the benefit of a creditor; action, seeking to void the garnishments collected (2) for or on account of an antecedent debt owed by Tower within ninety days prior to Jackson's bythe debtor before such transfer was made; filing for bankruptcy as preferential transfers (3) made while the debtor was insolvent; pursuant to 11 U.S.C. § 547(b). The trustee (4) made— initially sought the return of $2,034.81, but the (A) on or within 90 days before the date of the filingof the petition; ... parties have since stipulated that the actual (B) ... amount at issue is $1,756.04. The bankruptcy (5) that enables such creditor to receive more court ultimately granted summary judgment in thansuch creditor would receive if— favor of the trustee, and the district court affirmed (A) the case were a case under chapter 7 of on appeal. Tower timely appealed to this court, this title; (B) the transfer had not been arguing that the garnished wages should be made; and considered transferred on the date the garnishment (C) such creditor received payment of such order was served, before the preference period, debt to the extent provided by the and therefore that the trustee is not entitled to provisions of this title. recover them. We disagree and therefore affirm. Tower contests only the fourth element, arguing
that Jackson's interest in the garnished wages DISCUSSION was transferred to Tower when it served the [1] On appeal in a bankruptcy case, we apply the same standard of review that the district court garnishment order on Jackson's employer, more applied: “[T]he bankruptcy court's factual findings than ninety days before the filing of Jackson's are reviewed for clear error; its legal conclusions and mixed questions of fact and law, de novo.” In re petition.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 128 Matter of Jackson, 850 F.3d 816 (2017) 2017 WL 963146, 63 Bankr.Ct.Dec. 231
[2] [3] “What constitutes a transfer and when it does not attach to property rights transferred to the is complete is a matter of federal law.” Barnhill v. Johnson, 503 U.S. 393, 397, 112 S.Ct. 1386, 118 Debtor during the preference period” and citing L.Ed.2d 39 (1992) (citation and internal quotation Tabita v. IRS, 38 B.R. 511, 513 (E.D. Pa. 1984) marks omitted). State law generally determines the nature of property interests involved in purported for the proposition that “wages earned within transfers, but only “[i]n the absence of controlling federal law.” See id. at 398, 112 S.Ct. 1386; see also preference period are subject to preference even Local Loan Co. v. Hunt, 292 U.S. 234, 243–45, 54 though writ of attachment was served beyond the S.Ct. 695, 78 L.Ed. 1230 (1934) (declining to adhere to an Illinois state-law fiction that “an assignment of preference period”).1 future wages creates a lien effective from the date of the assignment, which is not invalidated by the Tower contends that as soon as it served the assignor's discharge in bankruptcy” and stating, “Local rules subversive [to the general purpose and garnishment order on Jackson's employer, no policy of the bankruptcy act] cannot be accepted as controlling the action of a federal court.”). creditor on a simple contract could have acquired
a judicial lien superior to Tower's interest. Thus, it **2 [4] Section 547(e) provides the governing argues that the transfer of the interest in Jackson's principles that determine the timing of a transfer. garnished wages was perfected at that time As relevant to the instant case, a transfer is pursuant to § 547(e)(1)(B). That would be true, generally made at the time it is “perfected,” § except for the additional instruction of § 547(e)(2)(B), which, in the context of non-real 547(e)(3), which requires the debtor to have rights property, occurs when “a creditor on a simple in the property before any transfer can occur. contract cannot acquire a judicial lien that is superior to the interest of the transferee.” § In Local Loan, the Supreme Court held, albeit in 547(e)(1)(B). However, § 547(e)(3) qualifies *819 the context of a bankruptcy discharge dispute, that general principle and provides that “a transfer “The earning power of an individual is the power is not made until the debtor has acquired rights in to create property; but it is not translated into the property transferred.” See also In re Latham, property within the meaning of the Bankruptcy 823 F.2d 108, 110 (5th Cir. 1987) (stating, “[A] Act until it has brought earnings into existence.”2 lien that is perfected outside the preference period 292 U.S. at 243, 54 S.Ct. 695. Thus, as the Sixth
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 129 Matter of Jackson, 850 F.3d 816 (2017) 2017 WL 963146, 63 Bankr.Ct.Dec. 231 Circuit explained in In re Morehead, 249 F.3d any transfer is made. That is not to say that state
445, 448 (6th Cir. 2001), in the wage garnishment law is never relevant to the application of § context, a debtor cannot logically obtain rights in 547(e)(3); indeed, in the absence of controlling her future wages until she performs the services federal law, state law will determine whether the that entitle her to receive those wages. 249 F.3d at debtor had acquired rights in the property. See
448. The Morehead court therefore held that *820 Barnhill, 503 U.S. at 397, 112 S.Ct. 1386.
“when wages are earned during the preference There is controlling federal law in the context of a period, transfer of those wages pursuant to a debtor's rights in future wages, however, and it garnishment order is avoidable under ... § 547(b)[ provides that “[t]he earning power of an
].” Id. In other words, because Jackson had not individual ... is not translated into property ... until earned the disputed wages before the ninety-day it has brought earnings into existence.” See Local preference period, he had acquired no rights to loan, 292 U.S. at 243, 54 S.Ct. 695. Moreover, those wages and, under § 547(e)(3), could not Tower has not even contended that Louisiana law have transferred such rights to Tower prior to the provides employees with present rights in their preference period. See Morehead, 249 F.3d at 448; unearned, future wages. see also Local Loan, 292 U.S. at 243, 54 S.Ct. **3 Tower cites three cases from the 1980s in 695; Latham, 823 F.2d at 110. which other circuits held that a transfer of
Tower asserts that Morehead is “limited to states garnished wages occurred at the time the wherein the transfer does not occur when the garnishment was served on the employer. See In garnishment is served.” But it is federal law, not re Conner, 733 F.2d 1560 (11th Cir. 1984); In re state law, that determines when the transfer Coppie, 728 F.2d 951 (7th Cir. 1984); In re occurred, Barnhill, 503 U.S. at 397, 112 S.Ct. Riddervold, 647 F.2d 342 (2d Cir. 1981). In
1386, and § 547(e)(3) requires that a debtor Conner, the Eleventh Circuit relied on § acquire rights in the property in question before 547(e)(1)(B) and held that, because no contract
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 130 Matter of Jackson, 850 F.3d 816 (2017) 2017 WL 963146, 63 Bankr.Ct.Dec. 231 creditor could obtain a superior judicial lien after the debtor “will never acquire rights in the a garnishment was executed, the transfer portion of his or her wages to be garnished in the occurred at the time of the execution. 733 F.2d at future” as those were “irrevocably transferred to
1562. In Riddervold, the Second Circuit held that the garnishment plaintiff.” Id. at the time the garnishment was executed it In our view, the Coppie court's conclusion that the created a “continuing levy,” which under New debtor's rights in his future wages were
York law acted as a novation of all of the “irrevocably transferred” at the time the debtor's rights in his wages, and thus that there garnishment order was entered conflicts with § was no transfer during the preference period. 647 547(e)(3)'s instruction that no transfer of an
F.2d at 346. Importantly, neither Riddervold nor interest in property is made before the debtor
Conner even considered the effect of § 547(e)(3), acquires rights in the property. Like Conner and and both predated Barnhill, in which the Riddervold, Coppie predated Barnhill, and it
Supreme Court held that federal law governs the appears that the Seventh Circuit itself no longer determination of whether and when a transfer considers Coppie's holding good law: that court occurred. See Morehead, 249 F.3d at 448– 49 subsequently concluded that pre-Barnhill cases
(discussing and rejecting Riddervold and holding that a transfer occurs when a notice of
Conner). garnishment is served, including Conner, did not
survive the Supreme Court's decision in Barnhill. In Coppie, the Seventh Circuit held, similar to See In re Freedom Grp., Inc., 50 F.3d 408, 412 Riddervold, that the execution of a garnishment (7th Cir. 1995). acted as a novation of all of the debtor's interests in the wages under Indiana law so that there The trio of cases cited by Tower has been roundly could not have been a transfer within the criticized on the grounds discussed. See, e.g., preference period. 728 F.2d at 953. Addressing § Morehead, 249 F.3d at 448–49; Freedom Group,
547(e)(3), the court found it inapplicable because 50 F.3d at 412; In re White, 258 B.R. 129, 134
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 131 Matter of Jackson, 850 F.3d 816 (2017) 2017 WL 963146, 63 Bankr.Ct.Dec. 231 (Bankr. D.N.J. 2001); In re Mays, 256 B.R. 555, to be paid.”). We join the *821 other courts that at 560 n.7; Tabita, 38 B.R. at 513; In re Dunn, 56 have rejected the cases cited by Tower and
B.R. 275, 278 (Bankr. M.D. La. 1985); In re decline to follow those cases.
Perry, 48 B.R. 591, 598 (Bankr. M.D. Tenn. The combination of Supreme Court precedent 1985); see also 5 Collier on Bankruptcy ¶ 547.05 and the overwhelming weight of persuasive (16th ed.) (“The analysis of these three appellate authority applying § 547(e)(3) make clear that a courts is wrong.... debtor's wages cannot be transferred until they
are earned. Thus, we hold that a creditor's Footnotes The timing scheme in section 547(e) does not collection of garnished wages earned during the exclude garnishment liens. Until the debtor earns preference period is an avoidable transfer made the wages, there is no property that the creditor during the preference period even if the can garnish or that the debtor can transfer. The garnishment was served prior to that period. We creditor's right to the particular funds that are therefore AFFIRM the district court's judgment. garnished exists only because the debtor is entitled to be paid those funds as wages; it does All Citations not exist unless the debtor first acquires the right 850 F.3d 816, 2017 WL 963146, 63 Bankr.Ct.Dec.
231
1 Latham's favorable citation of Tabita for this proposition is arguably dicta, as Latham did not involve wage garnishment. See 823 F.2d at 109. 2 The Bankruptcy Act was repealed in 1978 and replaced by the current Bankruptcy Code. See Bankruptcy Reform Act of 1978, 112 Stat. 2549, 2682. However, the Court in Local Loan grounded its holding in the purpose of the Bankruptcy Act to “relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” See 292 U.S. 234 at 244, 54 S.Ct. 695 (internal quotation marks omitted). This remains a primary purpose of the Bankruptcy Code as well, and the courts have continued to cite and apply Local Loan for this proposition. See, e.g., Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Shcolnik, 670 F.3d 624, 632 (5th Cir. 2012). We therefore conclude that Local Loan's holding that unearned, future wages are not property within the meaning of the bankruptcy laws remains valid and binding upon us.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 132
Netzer v. Office of Lawyer Regulation, --- F.3d ---- (2017) 63 Bankr.Ct.Dec. 235
2017 WL 961740 [Holding:] The Court of Appeals, Easterbrook, United States Court of Appeals, Seventh Circuit. Circuit Judge, held that, regardless of whether 14- Randy Joseph NETZER, Plaintiff- day time limit on notice of appeal from order of Appellant, v. bankruptcy court was jurisdictional or could be OFFICE OF LAWYER REGULATION and Matthew F. Anich, Defendants-Appellees. equitably tolled, debtor-attorney waited too long
Nos. 16-3236 & 16-3713 to appeal in not filing notice of appeal until 41 | days after bankruptcy court's judgment. Submitted March 8, 2017 | Decided March 13, 2017 Affirmed. Synopsis Background: Debtor-attorney brought adversary proceeding for determination that debt which he West Headnotes (2) owed to Wisconsin's Office of Lawyer [1] Bankruptcy Regulation was dischargeable in bankruptcy. The Relief from limitation; e xcusable United States Bankruptcy Court for the Western neglect District of Wisconsin determined that debt, for Regardless of whether 14-day time limit sanction imposed in disciplinary proceeding, was on notice of appeal from order of in nature of government fine and thus was bankruptcy court was jurisdictional or nondischargeable. Debtor-attorney appealed. The could be equitably tolled, debtor-
District Court, William M. Conley, Chief Judge, attorney's alleged lack of notice of entry
2016 WL 5317873, dismissed appeal as untimely of bankruptcy court order excepting filed. Debtorattorney appealed. debt from discharge did not relieve him
of obligation to monitor bankruptcy
court's electronic docket at least once a
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 133
month or allow him to wait 41 days Sean Michael Murphy, Attorney, OFFICE OF
prior to filing notice of appeal from THE ATTORNEY GENERAL, Wisconsin
nondischargeability finding, in Department of
contravention of Bankruptcy Rule Justice, for Appellees.
specifying that “[l]ack of notice of the Before Bauer, Easterbrook, and Rovner, Circuit
entry does not affect the time to appeal” Judges.
unless court decides to extend time for
appeal on motion filed no more than 35 Opinion
days after order's entry. Fed. R. Bankr. Easterbrook, Circuit Judge.
P. 8002(a)(1), (d)(1), 9022(a). *1 Randy Netzer, a debtor in bankruptcy, asked
2 Cases that cite this headnote the court to discharge a debt to Wisconsin's
Office of Lawyer Regulation. Bankruptcy Judge [2] Bankruptcy Furay concluded in this adversary proceeding that Equitable powers and principles Courts lack equitable power to the approximately $9,200 the Supreme Court of
contradict bankruptcy statutes and Wisconsin imposed as costs in a disciplinary
rules. 11 U.S.C.A. § 101 et seq.; Fed. proceeding against a member of the state's bar is a
R. Bankr. P. 1001 et seq. “fine, penalty, or forfeiture” under 11 U.S.C. §
1 Cases that cite this headnote
523(a)(7) and therefore is not dischargeable. 545 B.R. 254 (Bankr. W.D. Wis. 2016). Appeals from the United States District Court for The bankruptcy court entered its decision on the Western District of Wisconsin. No. 16-cv- February 3, 2016, and Netzer had 14 days to 175-wmc— William M. Conley, Chief Judge. appeal. Fed. R. Bankr. P. 8002(a)(1). He took 41, Attorneys and Law Firms filing a notice on March 15. He asked the district Randy Joseph Netzer, Pro Se. judge to excuse his tardiness, contending that
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 134 until a few days earlier he had not known of the limit in Fed. R. Bankr. P. 4004 is not bankruptcy court's decision. But the district court jurisdictional); Eberhart v. United States, 546 dismissed the appeal as untimely. 2016 U.S. Dist. U.S. 12, 126 S.Ct. 403, 163 L.Ed.2d 14 (2005)
LEXIS 84260 (W.D. Wis. June 29, 2016), (time limit in Fed. R. Crim. P. 33(a) is not reconsideration denied, 2016 U.S. Dist. LEXIS jurisdictional); United States v. Neff, 598 F.3d 320
129476 (Sept. 22, 2016). The judge stated that he (7th Cir. 2010) (time limit in Fed. R. App. P. 4(b) lacks authority to extend the time on equitable is not jurisdictional). grounds, because the 14-day period is We need not hold these appeals for Hamer, jurisdictional. however, or revisit the issue resolved in Sobczak-
[1] In re Sobczak-Slomczewski, 826 F.3d 429 (7th Slomczewski.
Cir. 2016), holds that the 14-day period in Rule For whether or not a given rule is “jurisdictional”
8002(a)(1) is jurisdictional, and Bowles v. Russell, it is still a rule, and when invoked it must be
551 U.S. 205, 213–14, 127 S.Ct. 2360, 168 enforced. Appellees have claimed the benefit of
L.Ed.2d 96 (2007), holds that there cannot be the 14-day limit for bankruptcy appeals. equitable exceptions to jurisdictional rules. The Bankruptcy Rule 9022(a), which requires grant of review in Hamer v. Neighborhood bankruptcy courts to notify litigants of judicial
Housing Services of Chicago, 835 F.3d 761 (7th orders, also provides: “Lack of notice of the entry
Cir. 2016), cert. granted, No. 16–658 (U.S. Feb. does not affect the time to appeal or relieve or
27, 2017), which poses the question whether Fed. authorize the court to relieve a party for failure to
R. App. P. 4(a)(5)(C) sets a jurisdictional time appeal within the time allowed, except as limit, suggests that the Supreme Court may soon permitted in Rule 8002.” This takes us to Rule decide how far rules about the times for appeal, as 8002(d), which specifies the conditions under opposed to statutory limits, can affect a court's which a bankruptcy judge may extend the time jurisdiction. See also Kontrick v. Ryan, 540 U.S. for appeal. Rule 8002(d)(1) permits a bankruptcy
443, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004) (time judge to allow a belated appeal if application is © 2017 Thomson Reuters. No claim to original U.S. Government Works. 135 made within 35 days after the order's entry. All Citations
Netzer missed that deadline—and, even if he had --- F.3d ----, 2017 WL 961740, 63 Bankr.Ct.Dec. asked in time, still the power to decide would 235 have belonged to the bankruptcy judge, not to the district judge or the court of appeals.
*2 [2] Courts lack an “equitable” power to contradict the bankruptcy statutes and rules. Law v. Siegel, ––– U.S. ––––, 134 S.Ct. 1188, 188
L.Ed.2d 146 (2014); In re Kmart Corp., 359 F.3d
866, 871 (7th Cir. 2004). Rule 9022(a) says that lack of notice authorizes additional time only to the extent allowed by Rule 8002, and Rule
8002(d) (1) sets a limit of 35 days from the decision for such a request to be made. Those rules promote expeditious resolution of bankruptcy appeals. Litigants have only to check the court's electronic docket once a month in order to protect their interests; this step will ensure that, even if notice miscarries, a request for additional time can be made within the 35 days allowed by Rule 8002(d)(1).
AFFIRMED
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 136 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 2017 WL 1192205 reversed and remanded with directions. Creditor United States Court of Appeals, Ninth Circuit. appealed.
IN RE Larry MILLER, Debtor, First Community Bank, Plaintiff–Appellant, v. Holdings: The Court of Appeals, Edward R. Maureen Gaughan, Chapter 7 Korman, Senior District Judge, sitting by Trustee, Defendant–Appellee. designation, held that: No. 14–16854 | Argued and Submitted October [1] under California law, the co-op apartment 18, 2016 San Francisco, California did notconstitute community property, but was a | tenancy-incommon; Filed March 31, 2017 [2] creditor's registration of the judgment Synopsis against debtorpursuant to the federal statute Background: In case converted from Chapter 11 governing registration of judgments for to Chapter 7, creditor brought adversary enforcement in other districts did not obviate the need for a choice-of-law analysis; and proceeding seeking declaration that registration [3] under California's choice-of-law rules, and recordation in California of Arizona federal Californialaw, not Arizona law, governed whether judgment against debtor, which arose from the co-op was community property and, thus, whether the judgment could be enforced against the guaranty of business loan signed by debtor but not co-op. by his nondebtor wife, created an enforceable District court's judgment reversed and remanded. judgment lien against California cooperative apartment that was owned by debtor and wife, both of whom were Arizona domiciliaries. West Headnotes (21)
Applying California law, the United States [1] Marriage and Cohabitation Bankruptcy Court for the District of Arizona Real property in general If Arizona law applied to case, entered summary judgment in favor of creditor, California cooperative apartment held and trustee appealed. Applying Arizona law, the in Arizona domiciliaries' names, as District Court, Neil V. Wake, J., 517 B.R. 145,
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 137 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144
husband and wife, would be treated as [4] Tenancy in Common Incumbrances, taxes, and assessments community property. Ariz. Rev. Stat. Tenancy in Common Ann. § 25-211. Sales and conveyances to third persons
Cases that cite this headnote Under California law, tenants in common
[2] Marriage and Cohabitation may each unilaterally alienate their shares Guaranty or suretyship through sale or gift or place encumbrances Under Arizona law, a guaranty that is upon these shares. Cal. Civ. Code § 685. signed by only one of two spouses is Cases that cite this headnote not binding on the couple's community
property. [5] Common Interest Communities Cases that cite this headnote Nature and Status of Cooperative Ownership [3] Marriage and Cohabitation California law treats corporations formed Community property Tenancy in Common primarily for the purpose of holding title to Creation of cotenancy improved real property, and in which all or Under California law, California substantially all of the shareholders of the cooperative apartment held in Arizona corporation receive a right of exclusive domiciliaries' names, as husband and occupancy in a portion of the real property, wife, would not constitute community as real property, and the correlative interest property where the coop was not in the stock cooperative corporation is also acquired by the couple while they treated as an interest in real property. Cal. were domiciled in California; instead, Civ. Code §§ 783.1, 6566. the property would constitute a Cases that cite this headnote tenancy-incommon. Cal. Civ. Code §
685; Cal. Fam. Code § 760. [6] Judgment Estate or Interest of Judgment Debtor Cases that cite this headnote Tenancy in Common
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 138 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 Amount of respective shares of cotenants remain subject to the even-handed Under California law, the interests of a control of forum law. 28 U.S.C.A. § cotenant in tenancies-in-common, which 1963. are presumed to be held in equal shares, Cases that cite this headnote are subject to the enforcement of a [9] Marriage and Cohabitation judgment lien. Cal. Civ. Code § 685. Individual debts and expenses Cases that cite this headnote Under California law, when creditor
registered the judgment rendered [7] Federal Civil Procedure Entry, Record and Docketing against debtor by the federal district Creditor's registration in California of court in Arizona in the Northern Arizona federal judgment against debtor District of California, and formally pursuant to the federal statute governing recorded such judgment with the registration of judgments for enforcement county recorder's office, it acquired a in other districts did not obviate the need judgment lien on the cooperative for a choice-of-law analysis where another apartment owned by debtor and his state, Arizona, had an interest in non-debtor wife. 28 U.S.C.A. § 1963; application of its laws. 28 U.S.C.A. § Cal. Civ. Proc. Code § 697.310(a). 1963. Cases that cite this headnote Cases that cite this headnote [10] Liens [8] Judgment Enforcement Enforcement in other states Under California law, perfection of a When a federal judgment has been lien alone does not ensure that such a registered in another district, lien can be enforced against a particular enforcement measures do not travel piece of property; the property must be with the sister-state judgment as subject to enforcement of the money preclusive effects do; such measures
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 139 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144
judgment. Cal. Civ. Proc. Code §§ [13] Federal Courts Conflict of Laws; C hoice of Law 695.010(a), 697.310(a). Federal choice-of-law rules are based on Cases that cite this headnote the Restatement (Second) of Conflict of
[11] Execution Laws. Restatement (Second) of Conflict of Property whose sale is prohibited Laws § 1 et seq. Under California law, the term “except Cases that cite this headnote as otherwise provided by law,” as used
in the statute providing that all property [14] Action What law governs of a judgment debtor is subject to California applies the governmental enforcement of a money judgment interests mode of analysis to resolve except as otherwise provided by law, choice-of-law problems, under which refers not just to the local law of courts analyze three related questions: (1) California, but also to the laws of other whether the relevant law varies between states that may apply as a result of the the potentially affected jurisdictions, (2) if application of California's choice-of- there is a difference in law, whether a true law rules. Cal. Civ. Proc. Code § conflict exists such that each of the states 695.010(a). involved has a legitimate but conflicting Cases that cite this headnote interest in applying its own law, and (3) if
[12] Bankruptcy there is a true conflict, which state's Application of state or federal law in interest would be more impaired if its general In federal question cases with exclusive policy were subordinated to the policy of
jurisdiction in federal court, such as the other state.
bankruptcy, courts apply federal choice- Cases that cite this headnote
oflaw rules. [15] Marriage and Cohabitation Cases that cite this headnote Community property
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 140 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 Under California's choice-of-law rules, Cases that cite this headnote
California law, not Arizona law, governed [16] Marriage and Cohabitation whether California cooperative apartment Guaranty or suretyship In Arizona, any transaction of guaranty, held in names of Chapter 7 debtor and his indemnity, or suretyship requires the nondebtor wife, both Arizona joinder of both spouses, a requirement domiciliaries, was community property, that has been construed to mean the and thus whether Arizona federal judgment signature of both spouses on the against debtor alone, which arose from guaranty contract. Ariz. Rev. Stat. Ann. guaranty of business loan signed by debtor § 25-214(C)(2). but not by wife, could be enforced against Cases that cite this headnote the co-op; relevant law varied between the
states, as Arizona law barred collection of [17] Marriage and Cohabitation Guaranty or suretyship guaranteed debt from community property Arizona law bars collection of a unless both spouses signed guaranty while guaranteed debt from community California had no such dual-signature property unless both spouses sign the requirement for this tenancy-by-the- guaranty. Ariz. Rev. Stat. Ann. § 25- entireties property, California had 214(C)(2). significant interests in effectuating its Cases that cite this headnote policy regarding enforcement of judgments
in favor of California creditors against real [18] Marriage and Cohabitation Guaranty or suretyship property located there, as well as in Under California law, community
fostering growth of commercial activities property, joint property, and tenancy-
that required ready access to credit, and the in-common property is subject to the
parties chose California law to govern their enforcement of a money judgment,
contract. Cal. Civ. Code § 685. even where a guaranty underlying the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 141 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 judgment is signed by only one of two Under California law, for choice-of-law
spouses. purposes, California has a substantial
Cases that cite this headnote interest in the economic health of
corporations which do business within [19] Marriage and Cohabitation Guaranty or suretyship its borders, as well as an interest in Under Arizona law, the policy fostering the growth of commercial underlying the dual-signature activities that require ready access to requirement for guaranties, that is, the credit. requirement that both spouses sign the Cases that cite this headnote guaranty contract, is to ensure that a
spouse who lacks knowledge of, and Appeal from the United States District Court for does not acquiesce to, a guaranty is not the District of Arizona, Neil V. Wake, District bound. Ariz. Rev. Stat. Ann. § 25- Judge, 214(C)(2). Presiding, D.C. No. 2:13–cv–02050–NVW Cases that cite this headnote Attorneys and Law Firms
[20] Marriage and Cohabitation Joseph E. Cotterman (argued), Andante Law Guaranty or suretyship Under Arizona law, a guaranty without Group PLLC, Scottsdale, Arizona, for Plaintiff–
the required signatures of both spouses Appellant.
is not per se void, only voidable by the Steven J. Brown (argued), Steven J. Brown &
non-signing spouse. Ariz. Rev. Stat. Associates LLC, Phoenix, Arizona, for
Ann. § 25-214(C)(2). Defendant–Appellee.
Cases that cite this headnote Before: A. Wallace Tashima and Milan D. Smith, Jr.,
** [21] Action Circuit Judges, and Edward R. Korman, District What law governs Judge.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 142 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 OPINION California law would permit the judgment lien to
KORMAN, District Judge: be enforced against Larry Miller's sole and
Larry and Kari Miller, both Arizona separate interest in the co-op, because “[t]enants domiciliaries, owned a cooperative apartment in common may each unilaterally alienate their located at 2170 Jackson Street in San Francisco, shares through sale or gift or place encumbrances
California. The co-op was held in each of their upon these shares.” United States v. Craft, 535 names, as husband and wife. First Community U.S. 274, 280, 122 S.Ct. 1414, 152 L.Ed.2d 437
Bank, a judgment creditor of Larry Miller, (2002) (emphasis supplied). Thus, if California obtained a lien against the Millers' co-op. law applies, a judgment against Larry Miller
would be enforceable only against his interest in [1] [2] Under Arizona law, the co-op would be the apartment, but not Kari Miller's separate treated as community property. See A.R.S. § 25– interest. 211. If Arizona law applies, FCB's judgment lien could not be enforced against the co-op, because FACTUAL BACKGROUND the judgment upon which the lien was based arose Against this backdrop for the choice-of-law issue from a guaranty signed by Larry Miller and not presented by this case, we turn to a more detailed Kari Miller, and a guaranty that is signed by only discussion of the underlying facts. Larry Miller one of two spouses is not binding on the couple's was the President of Miller Holding Investments, community property under Arizona law. Inc., which in turn was the General Partner of both
[3] [4] Under California law, the co-op would not El Paseo Partners, L.P. and El Rancho Partners, constitute community property because it was not LP, both limited partnerships organized under acquired by the Millers while they were domiciled California law. First Community Bank (“FCB”) is in California. See CAL. FAM. CODE § 760. a California corporation, doing business in the
Instead, it would constitute a tenancy-in-common. State of California, with its principal place of
See CAL. CIV. CODE § 685. The application of business in Sonoma County, California.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 143 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 *2 In December 2006, FCB extended credit to judgment as to liability and damages on Larry
Paseo and Rancho in exchange for a Business Miller's breach of the Commercial Guaranty, and
Loan Agreement, a Promissory Note in the also requested a “[r]uling that Kari Miller has original principal amount of $5,744,000, and a received notice and due process in connection
Commercial Guaranty from Miller that personally with this legal action, to the extent that any of the secured repayment of all obligations owed to FCB property subject or potentially subject to under the Note and the Loan Agreement. All three enforcement and execution upon the judgment, of these contracts selected California's local law as whether located in the State of Arizona, the State the governing law. The Business Loan Agreement of California or elsewhere, is asserted to belong in and the Promissory Note both stated on their face whole or in part to her marital community.” that they were accepted by FCB in California. Complaint at 7, First Community Bank v. Larry L.
Indeed, the guaranty given by Miller not only Miller and Kari Miller, No. 2:08–cv–01952– selected California as the governing law, it also NVW (D. Ariz. 2009), ECF No. 1. While the provided that “[a]ny married person who signs this answer filed to the complaint alleged that neither
Guaranty hereby expressly agrees that recourse the “Miller[s'] marital community property, nor under this Guaranty may be had against both his Kari Miller's sole and separate property, is subject or her separate property and community property.” to the claims in [First Community] Bank's
Unfortunately, Paseo and Rancho could not live complaint,” Answer at ¶ 4, id., ECF No. 11, the up to their obligations on the loans, and Miller Millers' “only legal opposition” to FCB's motion defaulted on the guaranty. for summary judgment was that “California law
requires [FCB] first to execute on collateral
securing the loan,” before making their motion. PROCEDURAL HISTORY Order Granting Motion for Summary Judgment as On October 24, 2008, FCB sued Larry and Kari to Liability at 2–3, id., ECF No. 23. Miller in the United States District Court for the
District of Arizona. FCB moved for summary
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 144 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 The district court rejected this argument, and Jackson Street, San Francisco, California, which entered judgment against Larry Miller for the consisted of their ownership share in Twenty–One principal amount of $5.744 million plus accrued Seventy Jackson Street Corporation and a interest and ancillary damages, for a total leasehold in an apartment owned by the co-op.1 judgment of $6.373 million (the “Arizona On June 23, 2009, consistent with the manner in judgment”). Judgment, id., ECF No. 36. The which a judgment lien is obtained, FCB recorded judgment made no reference to the Millers' the California judgment in the Official Records of community property, although the order granting the San Francisco County Recorder's Office. the motion observed, in dictum and without *3 Several years later, Larry Miller filed a undertaking a choice-oflaw analysis, that “any petition for reorganization under Chapter 11 of [liability of the marital community] appears to be the Bankruptcy Code in the District of Arizona. precluded by A.R.S. § 25–214(C)(2).” Order Miller's proceeding was later converted to a Granting Motion for Summary Judgment as to Chapter 7 liquidation. In the course of Liability at 3, id., ECF No. 23. FCB registered administering the Miller estate, the Chapter 7 this judgment in the United States District Court Trustee, Maureen Gaughan, sold the Millers' co- for the Northern District of California pursuant op. FCB filed an adversary proceeding seeking a to 28 U.S.C. § 1963. See Certification of a declaration that it held an enforceable judgment Judgment to be Registered in Another District, lien on the co-op, thereby granting it priority First Community Bank v. Miller, No. 09–mc– over the proceeds of the sale. 80131–PJH (N.D. Cal. 2009), ECF No. 1. The bankruptcy court held that, “[b]ecause the
[5] As of the time that FCB registered its Miller Judgment was registered in California, judgment in California, Larry and Kari Miller held California law governs the enforceability of the an ownership interest, to which reference was Miller Judgment against Debtors' community made earlier, in real property located at 2170 property located in California, and under
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 145 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 California law, Debtors' community property that “California has no interest in ousting Arizona located in California is liable for satisfaction of marital law concerning obligations between the Miller Judgment.” Judgment in Favor of First husband and wife and of persons contracting with
Community Bank at 4, First Community Bank v. one spouse, and the California community
Miller, No. 2:13–ap–00436– EPB (Bankr. D. property statute by its terms does not purport to do
Ariz. 2013), ECF No. 25. The Millers appealed to so.” Id. the district court. [6] We reverse the judgment of the district court.
While we agree that the co-op apartment does not THE DISTRICT COURT'S DECISION come within the definition of community property, The district court framed the issue presented as as that term is defined in Section 760 of the “whether an Arizona judgment against a husband California Family Code, it does come within the on his sole and separate debt may be executed definition of a tenancy-in-common. See CAL. against the Arizona couple's community property CIV. CODE § 685. The interests of a co-tenant in in California.” In re Miller, 517 B.R. 145, 147 (D. such tenancies, which are presumed to be held in Ariz. 2014). Answering this question in the equal shares, see Caito v. United California Bank, negative, the district court held that “the Arizona 20 Cal.3d 694, 705, 144 Cal.Rptr. 751, 576 P.2d federal judgment against the husband alone, later 466 (1978), are subject to the enforcement of a registered in a California federal court and judgment lien. The issue, then, is whether recorded in California, does not lien their California should yield to Arizona's community community real property in California.” Id. property law, and treat the Millers' co-op as Moreover, it continued that “[t]his is the rule by community property not subject to the Arizona statute, and California choice of law enforcement of a judgment. Applying California's principles yield to the Arizona rule concerning choice-of-law rules, we hold that California law Arizona domiciliaries.” Id. Presumably drawing governs, and that the co-op would be treated as upon those principles, the district court concluded
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 146 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 a tenancy-in-common, as defined in Section 685 preclusive effects do; such measures remain subject to the evenhanded control of forum law.” Baker v. of the California Civil Code, making Larry Gen. Motors Corp., 522 U.S. 222, 235, 118 S.Ct. Miller's interest in the co-op subject to 657, 139 L.Ed.2d 580 (1998). enforcement of the judgment lien.2 [9] [10] Thus, under California's enforcement procedures, when FCB registered the judgment rendered by the federal district court in Arizona in the Northern District of California, and formally DISCUSSION recorded such judgment with the San Francisco I. 28 U.S.C. § 1963 Does Not Obviate the Need County Recorder's Office, it acquired a judgment for a Choice–of–Law Analysis lien on the Millers' co-op. See CAL. CIV. PROC. CODE § 697.310(a). Nevertheless, perfection of a *4 [7] FCB's principal argument on appeal is that lien alone does not ensure that such a lien can be the registration of the judgment against Larry enforced against a particular piece of property—the property must be “subject to enforcement of the Miller, pursuant to 28 U.S.C. § 1963, in the money judgment.” See Lezine v. Sec. Pac. Fin., 14 Cal.4th 56, 65, 58 Cal.Rptr.2d 76, 925 P.2d 1002 Northern District of California, was sufficient, by (1996). Under California law, “[e]xcept as itself, to create an enforceable lien against the co- otherwise provided by law, all property of the judgment debtor is subject to enforcement of a op. While FCB is correct that § 1963 requires the money judgment.” CAL. CIV. PROC. CODE § use of California's lien creation rules, it does not 695.010(a) (emphasis supplied). [11] While we are not aware of any California do away with the task of conducting a choice-of- case that construes the term “except as otherwise law analysis in the event that another state has an provided by law” in a comparable context, the most reasonable construction suggests that it refers not interest in application of its law. just to the local law of California, but also to the laws of other states that may apply as a result of the [8] A party may register and enforce a federal application of California's choice-of-law rules. Our judgment in another district, and “[a] judgment so construction of the term is informed by a registered shall have the same effect as a judgment comparison with a similar term, which appears in of the district court of the district where registered the same Article of the California Code of Civil and may be enforced in like manner.” 28 U.S.C. § Procedure (“Enforcement of Money Judgments”) 1963. “This system of enforcing federal judgments as does § 695.010. California Code of Civil parallels the California and Arizona systems for Procedure § 697.310(a), which provides the rule on enforcing sister state judgments.” In re Miller, 517 the creation of judgment liens, contains an B.R. at 154. Moreover, “[e]nforcement measures exception for circumstances “as otherwise provided do not travel with the sister state judgment as by statute,” rather than “as otherwise provided by
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 147 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 law.” CAL. CIV. PROC. CODE § 697.310(a) II. Choice–of–Law Analysis (emphasis supplied). This difference suggests to us *5 [14] California applies the governmental that while the California Legislature intended to limit the exception in § 697.310(a) to certain interests mode of analysis to resolve choice-of- express statutory carve-outs, it intended to make the exception contained in § 695.010(a) encompass law problems. See McCann v. Foster Wheeler California's whole law, including its choice-of-law LLC, 48 Cal.4th 68, 87, 105 Cal.Rptr.3d 378, 225 rules. Cf. RESTATEMENT (SECOND) OF CONFLICT OF LAWS (1971) (“Restatement”) § P.3d 516 (2010). Under this approach, we analyze 4(2) (“As used in the Restatement of this Subject, the ‘law’ of a state is that state's local law, together three related questions: (1) does relevant law vary with its rule of Conflict of Laws.”). between the potentially affected jurisdictions?; (2)
[12] [13] Our discussion would end here if this If there is a difference in law, does a true conflict case were being litigated in California. Some exist such that “each of the states involved has a additional discussion, however, is required. While California's choice-of-law rules apply here, they do legitimate but conflicting interest in applying its so as a result of a somewhat indirect path, which we now trace. “In federal question cases with exclusive own law[?]”; (3) If there is a true conflict, “which jurisdiction in federal court, such as bankruptcy,” state's interest would be more impaired if its including this case, we apply federal choiceof-law rules. See In re Lindsay, 59 F.3d 942, 948 (9th Cir. policy were subordinated to the policy of the other 1995). Federal choice-of-law rules are based on the Restatement (Second) of Conflict of Laws. See In state[?]” See Kearney v. Salomon Smith Barney, re Vortex Fishing Sys., Inc., 277 F.3d 1057, 1069 Inc., 39 Cal.4th 95, 111–12, 45 Cal.Rptr.3d 730, (9th Cir. 2001). Restatement § 230 provides that, “[w]hether a lien creates an interest in land and the 137 P.3d 914 (2006) (citations omitted). nature of the interest created are determined by the law that would be applied by the courts of the [15] We begin our analysis with Arizona law, situs.” Moreover, if the court of the situs “would and more specifically its community property law, have decided the particular question by reference to and then proceed to discuss California law. the local law of some other state, the forum will do likewise.” Restatement § 230, cmt. b. As noted Community property rests on previously, California is the situs of the real a notion that husband and property at issue, so we apply its choice-of-law rules to resolve the conflict in this case. wife are a marital partnership
(a ‘community’) and should
share accordingly.... Because
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 148 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 it can exist only between suretyship” requires the “joinder of both spouses”—a requirement that has been construed to husband and wife and cannot mean the signature of both spouses on the guaranty be converted into separate contract. Ariz. Rev. Stat. (“A.R.S.”) § 25– 214(C)(2). Thus, the statute “bars collection of the property without the consent guaranteed debt from the community's property,” unless both spouses sign the guaranty. See of both spouses, community Rackmaster Sys., Inc. v. Maderia, 219 Ariz. 60, 64, property can be conveyed to a 193 P.3d 314 (Ct. App. 2008).
third person only as an [18] California has no such dual-signature requirement with respect to either community undivided whole.... Prior to property, joint property, or a tenancy-in-common. the 1960s, the husband was Cf. CAL. FAM. CODE § 1102(a); CAL. CIV. PROC. CODE § 695.010. Thus, all such property is deemed to be manager of the subject to the enforcement of a money judgment, community, but beginning in even where a guaranty underlying the judgment is signed by only one of two spouses. The difference the late 1960s, all ... between Arizona and California law, however, does not compel the conclusion that there is a “true community property states conflict,” as that term is understood in the choice- enacted statutes giving the of-law context. The existence of such a conflict turns on whether the circumstances of the case husband and wife equal implicate the policies underlying the ostensibly management powers. These conflicting laws.
statutes, however, differ in [19] Hamada v. Valley National Bank, 27 Ariz.App. 433, 555 P.2d 1121 (1976), contains a many details. helpful discussion of the history and purpose of JESSE DUKEMINIER, PROPERTY 354–55 (2d Arizona's dual-signature requirement. In Hamada, the Arizona Court of Appeals explained that “[t]he ed. husband, as a member of the community, has no power under the law without the knowledge and 1988). consent of his wife, to use community assets to guarantee the payment of a debt of a stranger to the [16] [17] Although Arizona and California both community, it deriving no benefit therefrom.” Id. at have community property laws, there is one 436, 555 P.2d 1121 (emphasis supplied). It difference between the two that gives rise to the continued, “[t]his law has now been codified in necessity of a choice-oflaw analysis. In Arizona, A.R.S. Sec. 25–214(C)(2) which requires both “[a]ny transaction of guaranty, indemnity or spouses to join in any transaction of guaranty,
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 149 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 indemnity or suretyship.” Id. Thus, Hamada makes The complaint filed by FCB in Arizona, which clear that the policy underlying Arizona's ended with the judgment against Larry Miller dualsignature requirement is to ensure that a spouse who lacks knowledge of, and does not acquiesce to, that underlies the lien at issue, put the Millers on a guaranty is not bound. See also Vance–Koepnick v. Koepnick, 197 Ariz. 162, 163, 3 P.3d 1082 (Ct. notice that FCB planned to go after their App. 1999) (“The purpose of such statutes is to community property. Nevertheless, the Millers protect one spouse against obligations undertaken by the other spouse without the first spouse's did not defend on the ground that Kari Miller knowledge and consent.”). lacked “knowledge and acquiescence” sufficient *6 [20] The absence of the signature of one to enable the Millers to rely on the absence of her spouse, however, does not necessarily indicate signature on the guaranty. Indeed, as we that the nonsigning spouse did not know of, or explained earlier, rather than invoking A.R.S. § consent to, the execution of the guaranty. The 25–214 in response to FCB's motion for signature requirement is simply the mechanism for summary judgment in the proceeding on the avoiding a dispute as to this issue. See All–Way guaranty, their only legal opposition was based Leasing, Inc. v. Kelly, 182 Ariz. 213, 216, 895 on FCB's alleged failure to comply with a P.2d 125 (Ct. App. 1984). A guaranty without California procedural rule. See Order Granting both required signatures is “not per se void, only Motion for Summary Judgment as to Liability at voidable by the nonsigning spouse.” Geronimo 2–3, First Community Bank v. Larry L. Miller Hotel & Lodge v. Putzi, 151 Ariz. 477, 479, 728 and Kari Miller, No. 2:08–cv–01952–NVW (D. P.2d 1227 (1986). Thus, the Arizona Court of Ariz. 2009), ECF No. 23. Moreover, although Appeals has recognized that “there may be Larry Miller warranted in the guaranty that he circumstances where a spouse may be estopped had the “full power, right, and authority to enter from disaffirming a contract.” Consol. Roofing & into this guaranty,” the trustee failed to come Supply Co., Inc. v. Grimm, 140 Ariz. 452, 458, forward with any evidence in the bankruptcy 682 P.2d 457 (Ct. App. 1984).3 court to suggest that Kari Miller did not either
know of, or acquiesce to, the guaranty.4
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 150 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 While we do not invoke the doctrines of estoppel taxes, as well as other revenues, directly and or waiver here, our discussion of it is intended to indirectly from a corporation's activities within the underscore the fact that a guaranty, signed by state.” In re Air Crash Disaster Near Chi., Ill. on only one of two spouses, does not necessarily May 25, 1979, 644 F.2d 594, 614 (7th Cir. 1981). implicate the underlying policy of protecting a Moreover, California also has an interest in spouse who lacks knowledge of a guaranty. fostering the growth of commercial activities that
Indeed, here, because of the manner in which the require ready access to credit—a policy that
Millers chose to litigate the complaint that gave would be undermined by limiting the ability of rise to the underlying judgment, we do not know California creditors to enforce obligations for the extent that the underlying policy interest activities undertaken in California and made would be impaired by the enforcement of the subject to the operation of California law by judgment against the couple's community consent of the parties. Indeed, when Larry Miller property. sought credit in California to finance his business
venture, he took advantage of the credit *7 [21] On the other hand, under the environment fostered by what the district court circumstances here, California does have a described as California's “general policy favoring significant interest in effectuating its policy creditors.” In re Miller, 517 B.R. at 149 n.1. regarding enforcement of judgments in favor of
California creditors against real property located These considerations “reflect[ ] the principle there, whether the property constitutes community articulated by the California Supreme Court that property or the policy of protecting the creditors of a spouse a tenancy-in-common. “California, as does every outweighs the policy of protecting family state, has a substantial interest in the economic income.” Ordlock v. Comm'r, 533 F.3d 1136, health of corporations which do business within 1139 (9th Cir. 2008) (internal ellipses and its borders. It derives substantial sales and income alterations omitted). So too does the fact that
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 151 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 California renders the entire community property particular issue is one which the parties could not of a married couple subject to enforcement of a have resolved by an explicit provision in their guaranty—even if the guaranty was made solely agreement directed to that issue.” Restatement § for the benefit of a single spouse. See Lezine v. 187(2). Section 187 is a policy “providing for
Sec. Pac. Fin. Servs., Inc., 14 Cal.4th 56, 64, 58 incorporation by reference” that enables parties
Cal.Rptr.2d 76, 925 P.2d 1002 (1996). While the “to determine the terms of their contractual co-op owned by the Millers did not come within engagements,” not a choice-of-law rule as such. the definition of community property in Id. § 187, cmt. c.
California, we refer to the manner in which The purposes underlying this section “are to community property is treated there simply to protect the justified expectations of the parties illustrate the strength of California's interest in the and to make it possible for them to foretell with enforcement of the judgment lien against the co- accuracy what will be their rights and liabilities op apartment located in San Francisco. under the contract.” Id. § 187, cmt. e. Moreover,
The policy interests discussed above are especially the Restatement recognizes that, in multi-state strong where, as here, the law chosen by the transactions such as the one at issue, “letting the parties in their various agreements (including the parties choose the law to govern the validity of guaranty) includes California's creditor-friendly the contract and the rights created thereby” is the interest described above. Indeed, the Supreme better route to ensure “certainty and
Court of California has adopted § 187 of the predictability of result.” Id. Indeed, an even more
Restatement, see Nedlloyd Lines B.V. v. Superior specific provision, Restatement § 194, provides
Court, 3 Cal.4th 459, 464–65, 11 Cal.Rptr.2d 330, that “[t]he validity of a contract of suretyship and
834 P.2d 1148 (1992), which upholds “[t]he law the rights created thereby are determined, in the of the state chosen by the parties to govern their absence of an effective choice-of-law by the contractual rights and duties ..., even if the parties, by the law governing the principal
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 152 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 obligation which the contract of suretyship was interest is “materially greater ... than [that of] the intended to secure,” subject to exceptions similar chosen state,” particularly where the record does to those applicable to § 187.5 Again, there was an not adequately show whether or not Kari Miller effective choice-of-law made by the parties. had knowledge of, or consented to, the guaranty.
Moreover, “the principal obligation that the Nor, to use the test applied in cases of a true contract of suretyship was intended to secure”— conflict, is Arizona's interest more substantially the Promissory Note—was governed by “the impaired than that of California. laws of the State of California without regard to We recognize that Larry Miller's agreement to its conflicts of law provisions.” Those laws the application of California law does not bind would make the lien enforceable against Larry Kari Miller. Nevertheless, the agreement should Miller's ownership interest as a co-tenant of the bind Larry Miller, and permit the enforcement of co-op apartment. that agreement against him as a tenant-in-
*8 Neither of the exceptions to the incorporation common. Moreover, the enforcement of the by reference rule of § 187, which also apply to agreement in that way protects Kari Miller's the rule of § 194, is present here. Specifically, onehalf interest in the property as a co-tenant. this is not a case in which “the chosen state has Thus, the underlying purpose of A.R.S. § 25– no substantial relationship to the parties or the 214(C)(2), which is “to protect one spouse transaction,” Restatement § 187(2)(a), nor would against obligations undertaken by the other the chosen law “be contrary to a fundamental spouse without the first spouse's knowledge and policy of a state which has a materially greater consent,” see Vance–Koepnick, 197 Ariz. at 163, interest than the chosen state in the determination 3 P.3d 1082, is accommodated to a significant of the particular issue.” Id. § 187(2)(b). While degree, rather than substantially impaired, by
Arizona may have an interest in the application of California law. determination of this issue, we cannot say that its
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 153 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 California's interest is similarly accommodated, with FCB “that California [has] a compelling because FCB, the California creditor that was the interest in applying its law,” under the beneficiary of the guaranty, is able to recover the circumstances presented here. share of proceeds from the sale of the co-op attributable to Larry Miller's interest. Application CONCLUSION of Arizona law would defeat that interest entirely. The judgment of the district court is Under these circumstances, even if there were a REVERSED AND REMANDED for true conflict, we would apply California law proceedings consistent with this opinion.
Footnotes All Citations because its “interest would be more impaired if --- F.3d ----, 2017 WL 1192205, 17 Cal. Daily Op. its policy were subordinated to the policy of the Serv. other state.” See Kearney, 39 Cal.4th at 112, 45 3144 Cal.Rptr.3d 730, 137 P.3d 914. In sum, we agree
** The Honorable Edward R. Korman, Senior District Judge for the U.S. District Court for the Eastern District of New York, sitting by designation. 1 California law treats corporations formed “primarily for the purpose of holding title to ... improved real property, and [in which] all or substantially all of the shareholders of the corporation receive a right of exclusive occupancy in a portion of the real property,” as real property. CAL. CIV. CODE § 6566. “[T]he correlative interest in the stock cooperative corporation” is also treated as an interest in real property. See CAL. CIV. CODE § 783.1. 2 The district court and the trustee relied on Grappo v. Coventry Financial Corp., 235 Cal.App.3d 496, 286 Cal.Rptr. 714 (1991), for the proposition “that the property rights of a husband and wife are governed by the law of the couple's matrimonial domicile at the time of the acquisition of the property regardless of [where] the property is located.” Grappo, however, involved a dispute between a husband and wife regarding their respective rights under family law in a piece of real property held in the wife's name, although claimed by the husband to be community property. After conducting a choice-of-law analysis, id. at 505–06, 286 Cal.Rptr. 714, the California Court of Appeal rejected the husband's claim, based on its conclusion “that California, and not Nevada [where the property was located], is the state which has the most significant relationship to the parties and issues in this case.” Id. at 506, 286 Cal.Rptr. 714. The dispute in the present case involves a claim by a California-based third-party creditor, on property located in California, giving California an interest in the application of its law. 3 Other community property jurisdictions with statutes similar to A.R.S. § 25–214 also recognize that estoppel principles may apply. See, e.g., Miller v. Johnston, 270 Cal.App.2d 289, 300 n.6, 75 Cal.Rptr. 699 (1969) (holding that a spouse was bound by a conveyance of community property to which she was not a party, because of her “knowledge and acquiescence” to the conveyance); Colo. Nat'l Bank of Denver v. Merlino, 35 Wash.App. 610, 616, 668 P.2d 1304 (1983) (“A community is estopped to deny liability due to the failure of one spouse to join a transaction when one spouse permits
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 154 In re Miller, --- F.3d ---- (2017) 2017 WL 1192205, 17 Cal. Daily Op. Serv. 3144 the other to conduct the transaction, both have a general knowledge of the transaction, and both are ready to accept the benefits which may come from it.”). 4 “[T]he ordinary rule, based on considerations of fairness, does not place the burden upon a litigant of establishing facts peculiarly within the knowledge of his adversary.” Campbell v. United States, 365 U.S. 85, 96, 81 S.Ct. 421, 5 L.Ed.2d 428 (1961); see also Nealey v. Transportacion Maritima Mexicana, S.A., 662 F.2d 1275, 1280–81 (9th Cir. 1980). Thus, if Kari Miller had challenged the validity of the lien prior to bankruptcy on the ground that she did not know of or acquiesce to the guaranty, the burden of proof would have been on her. Because the trustee is essentially relying on her asserted interest, the burden in bankruptcy should logically fall to her. 5 “ ‘Suretyship,’ as here used, includes ‘guaranty,’ for ... there has never been general agreement as to what distinction, if any, should be drawn between the two terms.” Restatement § 194, cmt. a.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 155 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 849 F.3d 1231 Jeffrey S. White, J., 2014 WL 4827103, affirmed. United States Court of Appeals, Ninth Circuit. Trustee appealed.
IN RE TENDERLOIN HEALTH, FKA Continuum HIV Day Services, AKA Tenderloin Health Incorporated, Debtor, Holdings: The Court of Appeals, M. Smith, E. Lynn Schoenmann, Trustee, Plaintiff- Circuit Judge, held that: Appellant, v. [1] in deciding whether debtor's prepetition Bank of the West, Defendant-Appellee. paymentto bank enabled bank to receive more than it would otherwise have received in hypothetical No. 14-17090 Chapter 7 liquidation, bankruptcy court could | consider trustee's ability to avoid, as hypothetical Argued and Submitted October preference, debtor's prepetition deposit into its 18, 2016, San Francisco, California account at bank, and | Filed March 7, 2017 [2] deposit that debtor made, less than 90 days Synopsis prepetition,into its account at bank, thereby increasing the secured claim that bank possessed by Background: Chapter 7 trustee brought virtue of its right to set off against account, was adversary proceeding to avoid, as preferential, potentially subject to avoidance as preference and should have been considered by bankruptcy court debtor's prepetition payment to bank on loan. The in applying “greater amount test.”
United States Bankruptcy Court for the Northern Reversed and remanded. District of California granted bank's motion for Korman, District Judge, sitting by designation, summary judgment on theory that debtor's filed opinion concurring in part and concurring in prepetition payment to bank, as creditor with right judgment. of setoff against account that contained sufficient funds to satisfy loan obligation, did not enable bank to receive more than it would otherwise West Headnotes (16) have received in hypothetical Chapter 7 [1] Bankruptcy liquidation. Trustee appealed. The District Court, Conclusions of law; d e novo review
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 156 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 Court of Appeals reviews de novo the bank to receive more than it would
district court's judgment on appeal otherwise have received in
from bankruptcy court, and applies hypothetical Chapter 7 liquidation, as
same de novo standard of review that required for avoidance of payment as
district court used to review preference, bankruptcy court could
bankruptcy court's grant of summary consider trustee's ability to avoid, as
judgment. hypothetical preference, debtor's
prepetition deposit into its account at Cases that cite this headnote bank, as impacting on bank's ability to [2] Bankruptcy receive at least what it received by Effect to give more than under challenged payment by setting off bankruptcy distribution “Greater amount test” for preference against account. 11 U.S.C.A. §
avoidance requires court to construct a 547(b)(5).
hypothetical Chapter 7 case and to Cases that cite this headnote determine what creditor that allegedly [4] Statutes received preferential transfer(s) would Language have received had the case proceeded Statutes as this hypothetical Chapter 7 case. 11 Absence of Ambiguity; A pplication of Clear or Unambiguous Statute or U.S.C.A. § 547(b)(5). Language Statutory interpretation begins with text of Cases that cite this headnote statute, and if that text is unambiguous,
[3] Bankruptcy statute must be enforced according to its
Effect to give more than under terms. bankruptcy distribution In deciding whether Chapter 7 debtor's Cases that cite this headnote prepetition payment to bank enabled
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 157 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 [5] Bankruptcy [7] Set-off and Counterclaim Equitable Set-off Provisions for satisfaction of claims; Right of setoff allows entities that owe r elation to recovery in liquidation Bankruptcy each other money to apply their mutual Relation to recovery in liquidation debts against each other, thereby While hypothetical Chapter 7 liquidation avoiding the absurdity of making A pay analysis that bankruptcy court conducts B when B owes A. when deciding whether proposed plan
satisfies “best interests of creditors” test Cases that cite this headnote
must be based on evidence and not [8] Bankruptcy assumptions, courts, in assessing what Set-off or recoupment in general property creditors would receive in While there is no federal right of setoff,
hypothetical Chapter 7 liquidation, bankruptcy statute, with certain
consider what property would likely be exceptions, preserves whatever right of
recovered by Chapter 7 trustee's use of his setoff otherwise exists. 11 U.S.C.A. §
avoiding powers. 11 U.S.C.A. §§ 553(a).
1129(a)(7) (A)(ii), 1325(a)(4). Cases that cite this headnote
Cases that cite this headnote [9] Banks and Banking Application of Deposits to Debts Due [6] Bankruptcy Bank or Set-off by Bank Disqualifying or limiting factors; California law recognizes a bank's right to a ssignment setoff against a depositor's account. Voluntary turnover to trustee of property
subject to a creditor's right of setoff Cases that cite this headnote
generally precludes any subsequent claim [10] Bankruptcy of setoff by creditor. Set-off or recoupment in general Cases that cite this headnote
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 158 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 Three conditions must be shown for Statute providing for mandatory
exercise of right of setoff in bankruptcy: disallowance of claim filed by creditor
(1) that debtor owes creditor a that has received avoidable transfer until
prepetition debt; (2) that creditor owes transfer is returned is in nature of
debtor a prepetition debt; and (3) that affirmative defense to proof of claim and
the debts are mutual. 11 U.S.C.A. § does not provide independent authority for
553(a). affirmative relief against creditor. 11
U.S.C.A. § 502(d). Cases that cite this headnote
Cases that cite this headnote [11] Bankruptcy
Particular Cases [13] Bankruptcy Bankruptcy Effect to give more than under Necessity for court approval; d iscretion bankruptcy distribution When creditor fails to exercise right of Deposit that Chapter 7 debtor made, less setoff against debtor prior to filing of than 90 days prepetition, into its account bankruptcy petition, it does not lose that at bank, thereby increasing the secured right, but must proceed in bankruptcy claim that bank possessed by virtue of its court by filing motion to lift automatic right to set off against account, was stay so as to be allowed to exercise its potentially subject to avoidance as already existing setoff right. 11 preference and should have been U.S.C.A. § 362(d). considered by bankruptcy court in
Cases that cite this headnote assessing whether debtor's allegedly preferential prepetition payment to bank [12] Bankruptcy on loan enabled bank to receive more than Effect of avoidable transfer and surrender thereof it would otherwise have received in
hypothetical Chapter 7 liquidation;
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 159 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 without deposit, account would not have Cases that cite this headnote
contained sufficient funds to allow bank to [16] Bankruptcy collect the loan obligation that was Record; a ssignments of error; b riefs satisfied by debtor's prepetition payment On appeal in bankruptcy case, the
by setting off against account. 11 U.S.C.A. Court of Appeals would decline to
§ 547(b)(5). address argument that was mentioned
merely in passing and that was not Cases that cite this headnote developed by appellant. [14] Bankruptcy Cases that cite this headnote Ownership of interest transferred Debtor's bank deposit ordinarily
constitutes a “transfer” of debtor's *1233 Appeal from the United States District
property to the title and possession of Court for the Northern District of California,
bank, as the term “transfer” is used in the Jeffrey S. White, District Judge, Presiding, D.C.
Bankruptcy Code. 11 U.S.C.A. § 101(54). No. 4:13-cv-03992-JSW
Cases that cite this headnote Attorneys and Law Firms
[15] Bankruptcy Dennis Davis (argued), Goldberg Stinnett Davis
Elements and Exceptions & Linchey, Petaluma, California, for Plaintiff- Pertinent question for court, in Appellant.
deciding whether debtor's prepetition James A. Tiemstra (argued) and Lisa Lenherr, deposit into bank account was Tiemstra Law Group PC, Oakland, California, for preference, was whether the deposit DefendantAppellee. depleted assets of estate available for
distribution to creditors. 11 U.S.C.A. § Before: A. WALLACE TASHIMA and MILAN D. 547(b). SMITH, JR., Circuit Judges, and EDWARD R.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 160 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 KORMAN,* District Judge. contained at least $190,595.50 on the petition
date. Schoenmann asserts that in the hypothetical
liquidation, the trustee would avoid a $526,402.05 Concurrence by Judge Korman deposit, leaving less than $190,595.50 in
OPINION Tenderloin's account, even allowing for BOTW's
M. SMITH, Circuit Judge: right of setoff. *1234 In order to resolve the issues presented in In this preference action, plaintiff-appellant E. this case, we address whether courts may Lynn Schoenmann (Schoenmann), the trustee in entertain hypothetical preference actions within bankruptcy, seeks to recover for the bankruptcy section 547(b)(5)'s hypothetical chapter 7 estate a $190,595.50 loan payment debtor liquidation, and if so, whether the $526,402.05 Tenderloin Health (Tenderloin) made to deposited in this case would meet the definition of defendant-appellee Bank of the West (BOTW) an avoidable preference. within ninety days of the filing of Tenderloin's We conclude that courts may account for chapter 7 bankruptcy. To succeed, Schoenmann hypothetical preference actions within a must demonstrate that by virtue of that payment hypothetical chapter 7 liquidation when such an BOTW received more than it otherwise would inquiry is factually warranted, is supported by have in a hypothetical chapter 7 liquidation where appropriate evidence, and the action would not the challenged transfer had not been made. This contravene an independent statutory provision. inquiry, required by 11 U.S.C. § 547(b)(5), is We are also satisfied that the $526,402.05 deposit called the “greater amount test.” in this case would constitute an avoidable The bankruptcy court granted BOTW's motion for preference in the hypothetical liquidation at issue summary judgment, finding Schoenmann could here. not satisfy section 547(b)(5), because BOTW had We therefore reverse the district court's judgment a right of setoff, and Tenderloin's account in favor of BOTW and direct that this action be
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 161 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 remanded to the bankruptcy court for further account contained approximately $173,015.00.1 proceedings. That sum shrunk to $52,735.11 on the date of the
two disputed transfers, but grew to $576,603.03
FACTUAL AND PROCEDURAL immediately after the deposit. Tenderloin then BACKGROUND spent some of its funds in the days preceding its In May 2009, BOTW extended a $200,000 line of bankruptcy, so the account contained credit to Tenderloin, a walk-in clinic serving $564,115.92 on the petition date. If we subtract AIDS patients in San Francisco. BOTW loaned from that sum the amount of the disputed another $100,000 to Tenderloin two years later. deposit—$526,402.05 —Tenderloin's account The loans were secured by Tenderloin's personal would have contained only $37,713.87 on the property, including its deposit accounts with petition date. BOTW. Schoenmann sued BOTW on December 12, 2012, In late 2011 or early 2012, Tenderloin elected to alleging that the debt payment was preferential, wind up its affairs. In carrying out that election, it and subject to avoidance under 11 U.S.C. § sold its only real property for $1,295,000. The 547(b). The bankruptcy court granted BOTW's escrow on that sale closed on June 13, 2012. motion for summary judgment on July 31, 2013, Tenderloin used the proceeds of that sale to concluding that Schoenmann could not show that execute two transactions that same day. First, it BOTW received more than it would have in a paid BOTW $190,595.50 from escrow to satisfy hypothetical liquidation where the debt payment fully its outstanding loan obligations (debt had not been made. Schoenmann appealed to the payment). Next, it moved the rest of its net sale district court pursuant to 28 U.S.C. § 158(a)(1). proceeds—$526,402.05— from escrow into its The district court affirmed, and Schoenmann BOTW deposit account (the deposit). timely appealed to our court. On July 20, 2012, Tenderloin filed for chapter 7 bankruptcy. Ninety days prior to filing, its
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 162 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116
JURISDICTION AND STANDARD OF (B) the transfer had not been made; and REVIEW (C) such creditor received payment of such debt [1] We have jurisdiction pursuant to 28 U.S.C. § to theextent provided by the provisions of this title. 158(d) (1). “We review de novo the district 11 U.S.C. § 547(b)(5) (emphasis added). court's judgment in the appeal from the [2] This element—11 U.S.C. § 547(b)(5)— bankruptcy court, and apply the same de novo constitutes the so-called “greater amount test,” standard of review the district court used to which “requires the court to construct a review the bankruptcy court's summary hypothetical chapter 7 case and determine what judgment.” *1235 Suncrest Healthcare Ctr. LLC the creditor would have received if the case had v. Omega Healthcare Inv'rs (In re Raintree proceeded under chapter 7” without the alleged Healthcare Corp.), 431 F.3d 685, 687 (9th Cir. 2 2005). preferential transfer. Alvarado v. Walsh (In re LCO Enters.), 12 F.3d 938, 941 (9th Cir. 1993)
(LCO). Schoenmann challenges the $190,595.50 ANALYSIS debt payment, claiming that section 547(b)(5) is Section 547(b) permits a bankruptcy trustee to satisfied in this case if BOTW “received a greater recover for the benefit of the bankruptcy estate amount than it would have if the [debt payment] preferential payments from a debtor to a creditor had not been made and there had been a made within the ninety days preceding the filing hypothetical chapter 7 liquidation as of the of a bankruptcy. 11 U.S.C. § 547(b). To “avoid” petition date.” Batlan v. TransAmerica such a payment, the trustee must show, among Commercial Fin. Corp. (In re Smith's Home other things: Furnishings, Inc.), 265 F.3d 959, 963 (9th Cir. (5) that [it] enables such creditor to receive 2001) (Smith). more than such creditor would receive if— The bankruptcy court determined that BOTW did
(A) the case were a case under chapter 7 of this not receive more than it would have in a title;
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 163 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 hypothetical liquidation because it maintained a that courts may entertain hypothetical preference right of setoff that entitled it to full payment, and actions within hypothetical chapter 7 liquidations.
Tenderloin's deposit account held the requisite Further, our holding in LCO does not pose an amount of funds on the petition date. obstacle to this conclusion.
Schoenmann argues, however, that the trustee would avoid the $526,402.05 deposit in a A. Text and Legislative History hypothetical liquidation, such that the deposit [4] Statutory interpretation begins with the text. account would contain only $37,713.87 on the Pakootas petition date, a sum far less than the $190,595.50 v. Teck Cominco Metals, Ltd., 830 F.3d 975, 980
BOTW actually received, even allowing for its (9th Cir. 2016). “If the meaning of the text is right of setoff. unambiguous, the statute must be enforced
BOTW objects to Schoenmann's analysis for two according to its terms.” Id. reasons. First, BOTW insists it is impermissible Here, section 547(b)(5) permits the trustee to to entertain a hypothetical preference action avoid any transfer within ninety days of within a hypothetical liquidation. Second, BOTW bankruptcy that enables the creditor “to receive claims that the deposit made by Tenderloin into more than such creditor would receive if—(A) its deposit account would not meet the definition the case were a case under chapter 7 of this title; of an avoidable preference. We find neither (B) the transfer had not been made; and (C) such argument persuasive. creditor received payment of such debt to the
extent provided by the provisions of this title.” 11 I. Section 547(b)(5) Does Not Forbid Courts U.S.C. § 547(b) (5) (emphasis added). The phrase from Considering Hypothetical Preference Actions. “provisions of this title” appears to refer to the [3] The text of the Bankruptcy Code, its totality of Title 11 of the Code, which includes legislative history, and current practice *1236 in the preference provisions appearing in section the bankruptcy courts all support the conclusion 547. Accordingly, the text clearly does not
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 164 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 directly forbid courts from considering Report echoes this language: “A preference is a hypothetical preference actions within a transfer that enables a creditor to receive payment hypothetical chapter 7 liquidation. However, of a greater percentage of his claim against the since the statute treats the issue globally, our debtor than he would have received if the transfer understanding will be refined by considering the had not been made and he had participated in the legislative history of section 547(b)(5). distribution of the assets of the bankrupt estate.”
Section 547 was included in the Bankruptcy H.R. Rep. No. 95-595, at 177 (1977), reprinted in
Reform Act of 1978.3 Pub. L. No. 95-598, 92 1978 U.S.C.C.A.N. 5963, 6138. The phrase
Stat. 2549 (1978). Describing element 547(b)(5), “participate[s] in the distribution” leaves room to the Senate Committee Report states “the transfer assume the hypothetical chapter 7 trustee might must enable the creditor ... to receive a greater initiate preference actions in conjunction with the percentage of his claim than he would receive “distribution” of the assets of the estate. under the distributive provisions of the Evidence bearing more directly on this question bankruptcy code.” S. Rep. No. 95-989, at 87 appears in the paragraphs that follow the general
(1978), reprinted in 1978 U.S.C.C.A.N. 5787, overview of section 547(b)(5). The reports
5873 (emphasis added). The phrase “distributive provide provisions” might be thought to narrow the The phrasing of the final hypothetical liquidation to disbursement under element changes the application chapter 7, but the very next sentence clarifies the of the greater percentage test meaning of the phrase: “Specifically, the creditor from that employed under must receive more than he would if the case were current law. Under this a liquidation case, if the transfer had not been language, the court must focus made, and if the creditor received payment of the on the relative distribution debt to the extent provided by the provisions of between classes as well as the the code.” Id. (emphasis added). The House
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 165 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 amount that will be received by Code,4 but in light of this history, we cannot
the members of the class of exclude section 547 from the hypothetical chapter
which the preferee is a member. 7 “distribution.”
The language also *1237
requires the court to focus on B. Current Practice Under the Bankruptcy the allowability of the claim for Code
which the preference was made. The view that courts may consider hypothetical
If the claim would have been preference actions within hypothetical chapter 7
entirely disallowed, for liquidations is bolstered by the fact that
example, then the test of bankruptcy courts are doing precisely that under
paragraph (5) will be met, two other provisions of the code.
because the creditor would have [5] Section 1129(a)(7)(A)(ii) requires bankruptcy
received nothing under the courts to determine what creditors would receive
distributive provisions of the under a hypothetical chapter 7 liquidation, and
bankruptcy code. then compare that amount to what the same
H.R. Rep. No. 95-595 at 372 (emphasis added); creditors would receive under a chapter 11 accord S. Rep. No. 95-989 at 87. By invoking reorganization. It provides that a bankruptcy court
“allowability,” which refers generally to whether may confirm a chapter 11 plan only if each holder payment of a claim would violate some of an impaired claim “will receive or retain ... independent provision of the Bankruptcy Code, property of a value, as of the effective date of the the report suggests it is appropriate to consider plan, that is not less than the amount that such whether a hypothetical claim would be affected holder would so receive or retain if the debtor by the preference provisions. There are numerous were liquidated under chapter 7 of this title on cases that refer to the greater amount test as such date.” 11 U.S.C. § 1129(a)(7)(A)(ii). implicating the “distributive provisions” of the Although “[t]he hypothetical liquidation analysis
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 166 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 must be based on evidence and not assumptions in then applied two avoidance provisions in the order to meet the best interests of creditors test,” hypothetical liquidation using the facts and
Collier on Bankruptcy ¶ 1129.02 n.98 (Alan N. testimony in the record. See id. at 174–75
Resnick & Henry J. Sommer eds., 16th ed. 2016) (concluding “a competent chapter 7 *1238 trustee
[hereinafter “Collier”] (citing In re MCorp Fin., would be able to recover against [the creditor]
Inc., 137 B.R. 219, 228–29 (Bankr. S.D. Tex. under § 544 and § 549”).
1992)), “a trustee's avoiding powers in a Chapter 13 has a comparable “best interest of the hypothetical chapter 7 creditors” test that requires the same comparison.
case may [ ] affect the analysis,” id. ¶ 1129.02. Section 1325(a)(4) requires a bankruptcy court to
For instance, in In re Affiliated Foods, Inc., 249 confirm a chapter 13 plan if, among other things,
B.R. 770 (Bankr. W.D. Mo. 2000), the court “the value, as of the effective date of the plan, of found the statute “requires an estimation of the property to be distributed under the plan ... is not value of all of the bankruptcy estate's assets, less than the amount that would be paid on such including such hard to determine values as claim if the estate of the debtor were liquidated disputed and contingent claims, the potential under chapter 7 of this title on such date.” When disallowance of claims (under § 502(d)), the administering this provision, “court[s] must probability of success and value of causes of consider property that would be likely to be action held by the estate, and, in this case, recovered by a chapter 7 trustee's use of the potential preference actions.” Id. at 788 (internal avoiding powers.” Collier ¶ 1325.05; see also In citation omitted). Likewise, in In re Sierra-Cal, re Larson, 245 B.R. 609, 614 (Bankr. D. Minn.
210 B.R. 168 (Bankr. E.D. Cal. 1997), the court 2000) (finding that in the hypothetical liquidation, found “all provisions applicable in a chapter 7 the court “must look not only at the Debtor's liquidation are to be taken into account when the assets as listed on his schedules, but [it] must also court determines what sums would be paid to consider the recovery of assets by the trustee whom in a hypothetical liquidation.” Id. at 174. It
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 167 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 through fraudulent transfer and preference days elapsed postpetition had the offset amount as actions”). a secured claim under section 506(a).”); Lingley
Lastly, we note that several courts have applied v. Contractors Grp., Inc. (In re NEPSCO, Inc.), hypothetical setoff analyses under section 553 55 B.R. 574, 576 (Bankr. D. Maine 1985) (“Had within hypothetical chapter 7 liquidations. See the debtor in this case not paid CGI the $6,221.56
Durham v. SMI Indus. Corp., 882 F.2d 881, 884 prior to the filing of the Chapter 7 petition, CGI
(4th Cir. 1989) (“SMI would have been entitled to would have been entitled to a right of setoff under assert its right of setoff under section 553(a) post- 11 U.S.C. § 553(a).”). True, hypothetical setoff petition if the check exchange had not been analyses, unlike preference actions, do not require executed before Continental's petition was filed that we assume a party will initiate an adversary since both debts were incurred pre-petition.”); proceeding. That said, it would be odd to permit
Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 bankruptcy courts conducting hypothetical
F.2d 1030, 1040 n.11 (5th Cir. 1987) (“The fact liquidations to look only to section 553, while that a setoff never actually took place does not ignoring other chapter 5 provisions, like section affect the analysis. The issue is whether Exxon 547. hypothetically had the right to a setoff, and because of this right it was secured and therefore C. Our Prior Holding in LCO poses no bar. the payment received from Braniff was not a In response, BOTW relies on our decision in voidable preference.”); Mason & Dixon Lines, LCO, which held “the hypothetical chapter 7
Inc. v. St. Johnsbury Trucking Co. (In re Mason analysis required by § 547(b)(5) must be based on
& Dixon Lines, Inc.), 65 B.R. 973, 976 (Bankr. the actual facts of the case.” 12 F.3d at 940. Since
M.D.N.C. 1986) (“In the case at bar, had the Schoenmann has not challenged the deposit in debtor not made the payment to the creditor Tenderloin's actual liquidation, BOTW asserts carrier, the creditor could have offset the debt we may not permit such a challenge in a prepetition pursuant to section 553 or if the 30 hypothetical liquidation. A close reading of LCO
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 168 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 reveals that this argument is misguided because it reorganization plan was eventually confirmed by improperly relies on the decision's broad the bankruptcy court. Id. at 940. language divorced from the context of the case. Two months after confirmation, a chapter 11
In LCO, the debtor, LCO Enterprises, leased trustee was appointed to pursue any preferential commercial space from a company named payments. Id. The trustee sued to recover several
Lincoln. Id. LCO fell behind in paying rent and rent payments LCO transmitted to Lincoln in the filed for chapter 11 bankruptcy, leading LCO and ninety days preceding the filing of its bankruptcy.
Lincoln to restructure their relationship. Id. Id. The action turned on the “greater amount
Specifically, they changed the terms of the lease test”; i.e., whether Lincoln received more than it agreement, and LCO disclosed the terms *1239 otherwise would have in a hypothetical chapter 7 of the revised agreement in its chapter 11 plan. liquidation as of the petition date where the
Id. LCO then faced the decision of whether it prepetition rent payment had not been made. Id. would assume or reject the lease in bankruptcy. at 941.
Id. Importantly, under chapter 11, the debtor-in- The trustee argued that in a hypothetical possession (LCO) stands in the shoes of the liquidation, “a hypothetical chapter 7 trustee trustee. 11 U.S.C. § 1107. Additionally, if the might have rejected the lease,” giving Lincoln an debtor was in default on an unexpired lease unsecured claim for its shortfall in rent, rather before filing for bankruptcy, the lease may not be than the full payment it received when the lease assumed “unless, at the time of assumption,” the was assumed and the default was cured. Id. at trustee cures the default and provides adequate 942. The trustee also said the court “should assurance of future performance. 11 U.S.C. § exercise its own independent judgment as to
365(b)(1)(A)–(C). LCO, as trustee, assumed the whether, if the court were administering the estate revised lease and cured the default, in compliance under chapter 7, it would have assumed or with section 365(b). LCO, 12 F.3d at 942. The rejected the lease” at the time of the chapter 11
bankruptcy. Id. We rejected these arguments,
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 169 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 holding “[t]he phrase ‘hypothetical chapter 7’ ... cure the default pursuant to section 365(b). Id. at does not mean that the bankruptcy court can 943. In other words, straying from the actual facts construct its own hypothetical from whole cloth would permit “§ 547(b) to circumvent the or from only some of the facts.” Id. at 944. requirements of § 365(b).” Id. To avoid such a
Rather, “the hypothetical chapter 7 analysis statutory collision, we held “[t]he [t]rustee cannot required by § 547(b)(5) must be based on the have his leased property and his rent payments, actual facts of the case.” Id. at 940. Since the too.” Id. at 943–44. lease had been assumed, “the [bankruptcy] court Mindful of this context, it is apparent that LCO could neither speculate that there was no lease nor required fidelity to the actual facts in the case assume that the lease was rejected.” Id. at 944. because to hold otherwise under those
Those assumptions simply did not “reflect[ ] the circumstances would have violated an facts at any time.” Id. Moreover, under section independent statutory provision of the
365(b), once the lease was assumed, the Bankruptcy Code. Section 365(b) requires the requirement to cure any default was mandated. trustee to pay the landlord all outstanding rent
This gave Lincoln a secured claim for all when a lease is assumed, but a preference action outstanding prepetition rent in the hypothetical would permit the trustee to recover the very liquidation, so it did not receive more than it prepetition *1240 rent payments it owes the otherwise would, precluding satisfaction of the landlord under that provision. In light of this greater amount test.5 conflict, we conclude that LCO must be narrowly
construed. To that end, courts that have followed Importantly, we also noted that if we deviated LCO's holding have done so when presented with from the actual facts in the case, and assumed that the same statutory collision scenario. See In re the hypothetical chapter 7 trustee had rejected the Kiwi Int'l Air Lines, Inc., 344 F.3d at 314 (“[T]he lease, the trustee would be allowed to recover assumption of a contract under 11 U.S.C. § 365 payments it was obligated to make to Lincoln to bars a preference claim by a trustee.”); In re
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 170 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 Superior Toy & Mfg. Co., 78 F.3d 1169, 1174 The court rejected the preference action because
(7th Cir. 1996) (“Section 547 and § 365 are the trustee was seeking to recover payments it mutually exclusive avenues for a trustee. A was obligated to make under the court-approved trustee may not prevail under both. Nor may a stipulation. See id. at 665 (“Pursuant to the subsequent trustee pursue one course, when her section 1110 stipulation, a creditor is entitled to predecessor has pursued another.”). unpaid pre-petition payments, as defaults; a
Adding further support for the interpretation that trustee may not later thwart the effect of the
LCO requires fidelity to the actual facts only statute by challenging the validity of these when doing otherwise would violate an transfers as preferences.”). As in LCO, if the independent statutory provision, the opinion court assumed a hypothetical trustee would have explicitly relies on the Eleventh Circuit's decision rejected the stipulation, it would be permitting a in Seidle v. GATX Leasing Corporation, 778 F.2d preference action that would undermine an
659 (11th Cir. 1985). See LCO, 12 F.3d at 943. independent statutory provision—section 1110.
There, a creditor held a chattel mortgage on a [6] In sum, LCO does not bar us in this case from debtor's aircraft which secured payments due assuming in a hypothetical liquidation that the under a note. Seidle, 778 F.2d at 660. The debtor hypothetical trustee would sue to recover the made partial payments on the note within the $526,402.05 deposit. Unlike in LCO, permitting ninety day period preceding its chapter 11 such an action would not violate any other bankruptcy. Id. Once in bankruptcy, the debtor statutory provision, and it is consistent with the and creditor entered into a court-approved text and legislative history recited above.6 *1241 stipulation under 11 U.S.C. § 1110, obligating the Having established that section 547(b) (5) does debtor to cure its default in exchange for the not forbid courts from entertaining hypothetical debtor's continued use of the aircraft. Id. at 661. preference actions, we next must determine if the
The trustee later sued to recover as preferential deposit in this case would meet the definition of the prepetition payments made on the note. Id. an avoidable preference.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 171 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 II. In the Hypothetical Liquidation, the Trustee creditor, (2) for or on account of an antecedent
Would debt, (3) made while the debtor was insolvent, (4)
Avoid the Deposit as a Preference. made within 90 days of the bankruptcy, and (5) claim. It therefore would consider whether the one which permits the creditor to receive more deposit satisfies the elements of section 547(b). than it would in a hypothetical liquidation where the challenged payment had not been made. 11
U.S.C. § 547(b)(1)–(5). BOTW argues that in the The Section 547(b) Elements. hypothetical preference action it would no longer [13] As previously noted, section 547(b) requires be a “creditor,” the deposit would not be “for or that the “transfer” be (1) to or for the benefit of a on account of have a right of setoff in the hypothetical bankruptcy court by means of a complaint to lift liquidation.7 BOTW asserts it would exercise that the automatic stay so as to be allowed to exercise
[7] [8] [9] [10] Schoenmann concedes BOTW wouldan antecedent debt,” and the deposit would not constitute right sometime after the bankruptcy petition was its already existing right to offset.” *1242 Durham filed. In that scenario, if we permit the v. SMI Indus. Corp., 882 F.2d 881, 884 (4th Cir. hypothetical preference action, BOTW will have 1989) (internal quotation marks omitted). In received more as a result of the debt payment accordance with that procedure, in the post-petition than it would have received in a hypothetical scenario BOTW would move to lift the stay, chapter 7 liquidation.8 submit a proof of claim, and then argue its right of
setoff entitles it to receive $190,595.50.
“Mandatory claim disallowance under § 502(d),” Hypothetical Post-Petition Setoff however, “is one Bankruptcy Code provision that [11] [12] “Where a creditor fails to exercise its applies in chapter 7 liquidations.” In re Sierra-Cal, right of setoff prior to the filing of the petition it 210 B.R. at 173. “It requires that the court disallow does not lose the right, but must proceed in the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 172 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 ‘any claim’ of any entity from which property is preference concept is to avoid prebankruptcy recoverable by a trustee, or that is the transferee of transfers that distort the bankruptcy policy of an avoidable transfer, unless and until the property distribution. Transfers that do distort this policy do is turned over and the transfer is paid.”9 Id. so without regard to the state of mind of either the
Pursuant to this provision, the bankruptcy court debtor or the preferred creditor.”).11 By that likely would decide the trustee's hypothetical measure, in the hypothetical liquidation, the preference action before allowing BOTW's deposit would have the effect of diminishing the a “transfer.”10 We disagree. funds available to Tenderloin's creditors because
it would increase *1243 the size of BOTW's In the hypothetical liquidation where the debt secured claim against the bankruptcy estate. The payment had not been made, BOTW would still be deposit would also constitute a “transfer” under a creditor because it would be owed the the terms of the Bankruptcy Code. It would subject $190,595.50 it loaned to Tenderloin. Though it is the funds to BOTW's security interest, give a closer question, the deposit also would be “for or BOTW title to the funds, and deplete the assets on account of an antecedent debt.” True, available for distribution to Tenderloin's Tenderloin transferred the $526,402.05 in creditors. Tenderloin therefore would be proceeds having already satisfied its preexisting “disposing of or parting with ... an interest in debt, but the 1978 revision to the bankruptcy property.” 11 U.S.C. § 101(54)(D); see also statute defined preferences “solely with respect to Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, a payment's effect on the size of the debtor's 1282 (9th Cir. 1996) (finding that “depositing estate.” Marathon Oil Co. v. Flatau (In re Craig money into a bank account is a transfer” and Oil Co.), 785 F.2d 1563, 1566 (11th Cir. 1986); correspondingly concluding that withdrawing see also Vern Countryman, The Concept of a money from a bank account is a transfer). Voidable Preference in Bankruptcy, 38 Vand. L. Arguing to the contrary, BOTW invokes New York Rev. 713, 748 (1985) (“The function of the County National Bank v. Massey, 192 U.S. 138, 24 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 173 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 S.Ct. 199, 48 L.Ed. 380 (1904). There, the “transfer.”12 S. Rep. No. 95-989 at 27; accord H.R.
Supreme Court observed that Rep. No. 95-595 at 314. Pursuant to the revision,
“any transfer of an interest in property is a transfer, a deposit of money to one's including a transfer of possession, custody, or credit in a bank does not operate control even if there is no transfer of title, because to diminish the estate of the possession, custody, and control are interests in depositor, for when he parts with property.” Id. Applying that definition, the the money he creates at the same committee reports state squarely that “[a] deposit time, on the part of the bank, an in a bank account or similar account is a transfer.” obligation to pay the amount of Id. The Massey court had no occasion to the deposit as soon as the contemplate these amendments; it considered only depositor may see fit to draw a the Bankruptcy Code's former and narrower check against it. It is not a definition of “transfer.” transfer of property as a We, however, had occasion to consider the revised payment, pledge, mortgage, gift definition of “transfer” in Bernard v. Sheaffer, 96 or security. F.3d at 1282. There, the debtors withdrew money Id. at 147, 24 S.Ct. 199 (emphasis added). For from an account and placed it in a safe. Id. at 1281. several reasons, we are not persuaded by BOTW's They argued that withdrawals did not constitute invocation of Massey. As previously noted, “[i]n transfers because the assets “merely changed 1978, Congress fundamentally restructured form.” Id. at 1282. We held that the debtors' bankruptcy law by passing the new Bankruptcy argument “fail[ed] to take proper account of the Code.” Begier v. Internal Revenue Service, 496 Bankruptcy Code's definition of ‘transfer,’ which U.S. 53, 63, 110 S.Ct. 2258, 110 L.Ed.2d 46 is extremely broad.” Id. (emphasis in original). (1990). Among other changes, Congress elected to Recognizing that title passes to the bank when expand the Code's definition of the term funds are deposited, we said the debtors owned © 2017 Thomson Reuters. No claim to original U.S. Government Works. 174 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 only “claims against their bank.” Id. at 1283. constitutes a transfer,14 even assuming it is, the asserted standard is met here. “When they withdrew from their accounts,”
[15] The pertinent question is whether the deposit however, “they exchanged debt for money” and depletes the assets of the estate available for thus “parted with property, satisfying the Code's distribution to creditors. See Begier, 496 U.S. at 58, 110 S.Ct. 2258 (stating that the preference provision definition of transfer.” Id. “Under the holding in is designed to “preserve the property includable 15 Bernard, there is no ambiguity around the *1244 within the bankruptcy estate”). On the specific facts of this case, as noted before, the deposit would definition of a transfer; withdrawals and deposits have that effect. No bankruptcy creditor had an interest as far as we are aware in Tenderloin's real into bank accounts clearly qualify.” A & H Ins., property. Moreover, if the deposited funds had not Inc. v. Huff (In re Huff), No. 12-05001-BTB, 2014 been transferred—and therefore remained in escrow—they would have passed to the estate and WL 904537, at *6 (9th Cir. BAP Mar. 10, 2014). thus to other *1245 creditors. Through the deposit, As is the case here, a deposit “exchange[s] money however, one creditor—BOTW—gained a beneficial interest in the funds. BOTW also became for debt ... result[ing] in a ‘parting with’ property indebted to Tenderloin for $564,115.92, and correspondingly increased its right to exercise a under the holding in Bernard as a matter of law.” setoff for the full amount of its loan. The deposit Id.; see also Batlan v. Bledsoe (In re Bledsoe), 569 therefore represents the kind of pre-petition “transfer” that the preference provisions target. See, F.3d 1106, 1113 (9th Cir. 2009) (invoking e.g., Meoli v. The Huntington Nat'l Bank (In re Teleservices Grp., Inc.), 469 B.R. 713, 744–47 Bernard's interpretation of “transfer” in the context (W.D. Mich. 2012) (stating that “Massey has of another section of the Bankruptcy Code).13 become an anachronism” and finding that a deposit in a bank account pledged as collateral for a loan fits [14] Next, even though “[a] debtor's bank deposit the definition of an avoidable transfer); Ivey v. First ordinarily constitutes a transfer of the debtor's Citizens Bank & Trust Co., 539 B.R. 77, 87 n.14 property to the title and possession of the bank,” (M.D.N.C. 2015) (noting that in Teleservices “a part some courts nonetheless have asked “whether this of the transfers were deposits into bank accounts that ‘transfer’ is of a kind [that] section 547 invalidates.” themselves served as security for the line of credit Collier ¶ 547.03[1] [b] (emphasis added) (citing New that the defendant bank extended to debtor. Jersey Nat'l Bank v. Gutterman (In re Applied Logic Therefore, whether or not the bank actually Corp.), 576 F.2d 952 (2d Cir. 1978); Katz v. First exercised its rights against the accounts, the deposits Nat'l Bank of Glen Head, 568 F.2d 964 (2d Cir. themselves created an actual or potential diminution 1977)). Though we doubt such an inquiry is of the estate by subjecting the funds to the bank's warranted when deciding whether a transaction power under this credit agreement” (citation omitted)).
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 175 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 [16] The implication of the above is that if BOTW hypothetical liquidation where the debt payment sought to exercise its right of setoff after the had not been made, the hypothetical bankruptcy petition was filed, the hypothetical preference trustee would challenge as preferential the challenge to the deposit would still be successful. $526,402.05 deposit, as would any reasonable As a consequence, Tenderloin's account bankruptcy trustee. Once we permit such a functionally would contain $37,713.87 on the hypothetical preference action, Schoenmann can petition date, a sum far less than the $190,595.50 demonstrate that BOTW received more as a result BOTW received, even allowing for its right of of the debt payment than it would in a hypothetical setoff.16 Under the hypothetical facts, the trustee chapter 7 liquidation. As a consequence, the could demonstrate that the elements of section trustee can prove each required element of his 547(b)(5) would be met.17 claim, and BOTW has not shown it is entitled to
judgment as a matter of law.
CONCLUSION We REVERSE the district court's judgment in
We hold that courts may entertain hypothetical favor of BOTW. BOTW's summary judgment preference actions within section 547(b)(5)'s motion is therefore DENIED, and the matter is hypothetical liquidation when such an inquiry is REMANDED to the district court with directions factually warranted, supported by appropriate to remand the matter to the bankruptcy court for evidence, and so long as the hypothetical further proceedings consistent with this opinion. preference action would not result in a direct Appellee shall bear costs on appeal. Fed. R. App. conflict with another section of the Bankruptcy P. 39(a)(3).
Code. REVERSED and REMANDED. Here, the undisputed facts demonstrate that
BOTW received two transfers simultaneously KORMAN, District Judge, concurring in part and
*1246 within ninety days of Tenderloin's concurring in the judgment: bankruptcy. We are also satisfied that in a
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 176 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 I concur in the decision to reverse and remand to National Bank v. Massey, 192 U.S. 138, 147, 24 the bankruptcy court, and join all but Part II of the S.Ct. 199, 48 L.Ed. 380 (1904). The majority does majority opinion. I agree that, under the not ignore Massey; nevertheless, its treatment of circumstances of this case, applying 11 U.S.C. § that case almost totally elides what Massey has to
547(b)(5)'s “greater amount” test requires us to say about the central question presented here. construct a hypothetical liquidation, and that in so Instead of engaging Massey's analysis of what doing, we may consider whether a reasonable makes a preference, the majority opinion focuses trustee would bring and win a preference action at length on whether, in light of the expanded within the hypothetical Chapter 7 proceedings. I definition of “transfer” that Congress adopted in cannot, however, join in the liquidation that the 1978, Massey still means that deposits are not majority constructs in this case, because I cannot transfers. The trouble is that Massey never meant agree that the entirety of the $526,402.05 deposit that at all. The Massey Court “never said that was itself a preferential transfer subject to customer deposits were not transfers.” Meoli v. clawback under 11 U.S.C. § 547. The Huntington Nat'l Bank (In re Teleservices
The majority is correct that Bernard v. Sheaffer, 96 Grp., Inc.), 469 B.R. 713, 745 (Bankr. W.D. Mich.
F.3d 1279 (9th Cir. 1996), binds us to begin with 2012) (emphasis added), cited at Maj. Op. at the premise that a bank deposit is a “transfer” 1244–45. Rather, it said that such deposits were under the modern not preferential within the meaning of the
bankruptcy laws solely because they create a right Bankruptcy Code, see also Maj. Op. at 1242–44.1 of setoff in a creditor. Massey, 192 U.S. at 147, 24 But the ultimate issue is not merely whether S.Ct. 199 (“[A] deposit of money ... in a bank does Tenderloin's deposit was a transfer, but whether it not operate to diminish the estate of the was a preferential one. On the latter question, the depositor.” (emphasis added)). majority's position runs headlong into Justice *1247 The question is whether Massey's holding, Brandeis's seminal opinion in New York County that the creation of a setoff right does not suffice to
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 177 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 make a preference, has survived Congress's authorizing setoff]” would “defeat” Congress's creation of the contemporary scheme governing choice to preserve setoff under those terms. Id. preferences and setoff. In that respect, the Massey In enacting the 1978 Act, or any of the numerous
Court faced a similar statutory landscape to the one subsequent amendments to the Bankruptcy Code, we do now. The 1898 Act provided that an Congress could have included the creation or insolvent debtor's transfer was preferential only if exercise of a setoff right in the roster of it “enable[d] any one of his creditors to obtain a transactions that are avoidable under § 547, but it greater percentage of his debt than any other of did not. Instead, it preserved the basic feature of such creditors of the same class.” § 60(a), 30 Stat. the 1898 Act on which Massey relied— the
544, 562. Nevertheless, it expressly authorized the treatment of preferential transfers and setoff rights setoff of mutually owing debts without providing in separate provisions subject to different rules. an exception applicable when a setoff would Like § 68(a) of the 1898 Act, § 553 of the post- improve the bank's position. Id. § 68(a), 30 Stat. at 1978 Code is an entirely separate provision that
565. The Court held that the preservation of setoff subjects setoffs, exclusively, to different rules than indicated Congress's intent that the creation and those applicable to the recovery of preferences exercise of a setoff right exist as an exception to generally. See, e.g., Woodrum v. Ford Motor the Act's definition of a preferential transfer. Credit Co. (In re Dillard Ford, Inc.), 940 F.2d
Massey, 192 U.S. at 147, 24 S.Ct. 199. After all, 1507, 1512 (11th Cir. 1991). setoff (and the creation of a setoff right) always Because that structure is unchanged, to hold that favors offsetting creditors, who “receive[ ] a the creation of a setoff right that the Code preference in the fact that, to the extent of the set- preserves under the terms of § 553 may be off [right], [they are] paid in full.” Id. As Justice preferential under § 547 would, as in Massey,
Brandeis explained, to “enlarge the scope of the “operate to enlarge the scope of the statute statute defining preferences so as to prevent setoff defining preferences so as to prevent [the exercise in cases coming within the terms of [the provision of] set-off in cases coming within the terms of [§
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 178 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 553].” As in Massey, a preference is still defined S.Ct. 866, 55 L.Ed.2d 40 (1978). There is no as a transfer that leaves the receiving creditor indication that Congress meant to disrupt Massey's better off than it otherwise would have been. See bedrock holding when it enacted a new bankruptcy
11 U.S.C. § 547(b) (5), see also Maj. Op. at 1244 law, but preserved the structure that formed the
(“The pertinent question is whether the deposit essential basis for the Supreme Court's analysis. In depletes the assets of the estate available for such circumstances, we should be mindful not distribution to creditors.”). Setoff rights are still only of Congress's intent, but of the fact that “only preserved, subject to more forgiving limitations [the Supreme] Court may overrule one of its than transfers generally. Compare 11 U.S.C. § precedents.” See Thurston Motor Lines, Inc. v.
553(b) with § Jordan K. Rand, Ltd., 460 U.S. 533, 535, 103 S.Ct.
1343, 75 L.Ed.2d 260 (1983) (per curiam). 547(b).2 And as a matter of economic *1248 In a footnote, the majority opinion also argues that reality, the creation and exercise of those rights this case is distinguishable from Massey because still advantage some creditors in a way that “the accounts were pledged as security on an would—but for Massey's limiting construction— antecedent loan, and the deposit itself would meet the hornbook definition of a preference. render BOTW fully secure.” Maj. Op. at 1244 Concededly, Massey interpreted the text of a n.13. Certainly, the creation of a new lien would different statute than the one before us today. have made a preferential transfer. Nevertheless, Nevertheless, the ultimate question in any the fact that Tenderloin took the funds out of statutory interpretation case is the intent of escrow and deposited the money made no Congress, and the Supreme Court has instructed difference to the bank's security position. All of that “Congress is presumed to be aware of a[ ] ... Tenderloin's personal property was subject to the judicial interpretation of a statute and to adopt that same floating lien, including its general interpretation when it re-enacts a statute without intangibles. Those included Tenderloin's change.” Lorillard v. Pons, 434 U.S. 575, 580, 98 contractual right to be paid the funds out of
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 179 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 escrow. See In re Merten, 164 B.R. 641, 643 D. Colo. 1983). Much like § 547(b) does for
(Bankr. S.D. Cal. 1994). Tenderloin's interest in transfers, § 553(b) directs us to apply an those funds would have been identically improvement-of-position test —it disallows setoff encumbered, and BOTW identically secured, if the to the extent that the creditor was better secured on money had stayed in escrow indefinitely, or the date of setoff than it *1249 was on the first day transferred out of escrow and into a safe in it became undersecured (or 90 days before
Tenderloin's offices. bankruptcy, if an insufficiency existed at the start
Because Massey's reasoning applies with the same of the preference period). force today as it did in 1904, I cannot join in the To be sure, there is some question whether § majority's holding that the $526,402.05 deposit 553(b) applies to limit actual post-petition setoffs. was a preference subject to attack under § 547. I See COLLIER ON BANKRUPTCY ¶ would have the hypothetical bankruptcy court treat 553.09[2][c] (noting division of authority). But as
Tenderloin's account as containing the full the Fifth Circuit has noted, the safeguards of §
$564,115.92 as of the petition date, and proceed to 553(b) are unnecessary post-petition in an actual apply 11 U.S.C. § 553 to determine what portion liquidation, where the need to proceed by of that amount BOTW could set off against application to lift the automatic stay gives the
Tenderloin's $190,595.50 debt.3 bankruptcy judge an opportunity to weigh the
equities of allowing or denying the creditor's Section 553 does not preserve setoff rights without claim. Braniff Airways, Inc. v. Exxon Co., U.S.A., limitation. Rather, creditors may only set off 814 F.2d 1030, 1041 n.13 (5th Cir. 1987). subject to the strictures imposed by § 553(b), a By contrast, in a hypothetical liquidation, there is “miniature preference provision akin to [§ 547].” no such gatekeeper to protect other claimants. Eckles v. Petco Inc., Interstate (In re Balducci Oil There is of course no actual bankruptcy judge Co., Inc.), 33 B.R. 847, 852 (Bankr. available to exercise discretion in such a case, and
it would push the already somewhat strained
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 180 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 boundaries of our hypothetical analysis too far to stood on the date of the first insufficiency. At all exercise our own discretion, sitting as a three- relevant times, Tenderloin owed BOTW headed hypothetical bankruptcy judge, weighing $190,595.50. Adopting the majority's working the imaginary equities of a fantasy liquidation. The assumption that on the 90th day before the majority asserts that this adds a new variable to petition, Tenderloin's bank balance was what is supposed to be a controlled experiment, $173,015.00, this left an insufficiency of
Maj. Op. at 1245 n.16, but so would exercising our $17,580.50 relative to its debt. Assuming that own discretion—by substituting our judgment for Tenderloin's debt balance remained unchanged that of the real bankruptcy judge. through the petition date, § 553(b) would allow
We cannot construct a hypothetical bankruptcy BOTW to recover at most $173,015.00 in a judge to review a hypothetical application to lift hypothetical post-petition setoff. I assume that, the stay. So to analyze a hypothetical post-petition like any diligent creditor, the bank would take as setoff without applying § 553(b) would allow much as it could, claiming that amount in full. preference defendants to “have it both ways” by Since BOTW received $190,595.50 during the 90 avoiding both the statutory improvement-in- days before bankruptcy, but only would have position test and the bankruptcy court's equitable received $173,015.00 in a hypothetical liquidation, oversight. Braniff Airways, 814 F.2d at 1041 n.13. the trustee has made out a prima facie case that the
Like the Fifth Circuit, I would “decline to let $17,580.50 difference is voidable as a preference.
[BOTW] have it both ways,” and hold that if it So like the majority, I would reverse the judgment wants to defend a preference action by relying “on below and send the case back to the bankruptcy a pre-petition right to setoff pursuant to [§] 553, it court for further proceedings. I would further must comply with ... [§] 553(b).” Id. instruct the bankruptcy court to limit further
The ensuing analysis is straightforward. Section proceedings to considering BOTW's affirmative
553(b) directs that an offsetting creditor cannot defenses, and then— to the extent that those do not improve its secured position relative to where it carry the day on remand, and after resolving any
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 181 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 factual dispute as to the amount of Tenderloin's account balances on the relevant dates— to enter judgment for the trustee in the amount given by All Citations applying the foregoing analysis.
849 F.3d 1231, 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116
Footnotes * The Honorable Edward R. Korman, United States District Judge for the Eastern District of New York, sitting by designation. 1 There appears to be a factual dispute concerning the amount in Tenderloin's deposit accounts on the date ninety days preceding the filing of its bankruptcy. We need not resolve this dispute because the difference in the amounts is not material to the outcome. 2 It may at first blush seem incongruous to ask what the creditor would have received if “the case were a case under chapter 7,” given that this matter is in fact a chapter 7 liquidation. The reference to chapter 7, however, defines the character of the hypothetical bankruptcy, which is then used as a point of comparison to see if the pre-petition payments rendered the preferred creditor better off. We have previously recognized that a preference action is permissible under section 547(b), even when filed in conjunction with a chapter 7 liquidation. See, e.g., USAA Fed. Savings Bank v. Thacker (In re Taylor), 599 F.3d 880, 885–88 (9th Cir. 2010) (affirming decision concerning a preference action brought in the course of a chapter 7 liquidation); Busseto Foods, Inc. v. Charles Laizure (In re Laizure), 548 F.3d 693, 695 (9th Cir. 2008) (chapter 7 trustee brought preference action); Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys., Inc.), 482 F.3d 1118, 1122 (9th Cir. 2007) (same). 3 The preference provisions first appeared as sections 60a and 60b of the Bankruptcy Act of 1898. See The Bankruptcy Act of 1898 § 60, Ch. 541, 30 Stat. 544, 562 (1898). The Bankruptcy Reform Act of 1978 superseded those provisions but retained the same basic elements. 4 See, e.g., Guttman v. Constr. Program Grp. (In re Railworks Corp.), 760 F.3d 398, 402 (4th Cir. 2014) (stating that under section 547(b)(5), a transfer “must enable the creditor to receive a greater percentage of its claim than it would under the normal distributive provisions in a liquidation case under the Bankruptcy Code”); Kimmelman v. Port Auth. of N.Y. & N.J. (In re Kiwi Int'l Air Lines, Inc.), 344 F.3d 311, 321 (3rd Cir. 2003) (observing a “trustee could not satisfy § 547(b)(5) because the pre-petition payments did not improve the creditor's position under the distributive provisions of the Bankruptcy Code”). 5 “If a creditor is fully secured, a prepetition transfer to him is not preferential because the secured creditor is entitled to 100% of his claim.” LCO, 12 F.3d at 941. 6 Additionally, though BOTW is correct that we are permitting the hypothetical trustee to do something the actual trustee did not do, the actual trustee had no incentive to challenge the deposit when the bankruptcy was filed. BOTW turned over the $564,276.83 in Tenderloin's accounts on November 12, 2012. The trustee then brought this action in the bankruptcy court roughly one month later. These facts are significant because the voluntary turnover to the trustee of the property subject to a creditor's right of setoff generally precludes any subsequent claim of setoff by the creditor. See Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 20, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (noting that requiring a creditor immediately to turnover funds on account “would divest the creditor of the very thing that supports the right of setoff”); In re Mauch Chunk Brewing Co., 131 F.2d 48, 49 (3d Cir. 1942) (finding that when trustee withdrew funds from account with bank's knowledge of bankruptcy filing, bank's acquiescence was “tantamount to renunciation of its privilege of setoff”). If BOTW loses this preference action, it might be able revive its right of setoff given “court[s] may remedy the effect of an inadvertent, involuntary or improper dissipation of the creditor's interest.” COLLIER ¶ 553.07; see also In re © 2017 Thomson Reuters. No claim to original U.S. Government Works. 182 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 Archer, 34 B.R. 28, 31 (Bankr. N.D. Tex. 1983) (finding where bank had mistakenly turned over property it did not intentionally waive its right of setoff). Still, even allowing for that possibility, it would not be reasonable to assume the trustee had an incentive to challenge the deposit from the outset of this proceeding. BOTW had turned over the funds that supported the right of setoff, so there was little reason for the trustee to fear BOTW would later assert such a right if the preference action was successful and the bank disgorged the debt payment. 7 “The right of setoff (also called ‘offset’) allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A.” Newbery Corp. v. Fireman's Fund Ins. Co., 95 F.3d 1392, 1398 (9th Cir. 1996) (quotation marks omitted). There is no federal right of setoff, but “11 U.S.C. § 553(a) provides that, with certain exceptions, whatever right of setoff otherwise exists is preserved in bankruptcy.” Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995). California law recognizes a bank's right to setoff against a depositor's account. Kruger v. Wells Fargo Bank, 11 Cal.3d 352, 357–58, 113 Cal.Rptr. 449, 521 P.2d 441 (1974). Accordingly, BOTW's right of setoff is preserved in the hypothetical liquidation if it meets the requirements of section 553. Three conditions must be shown: “(1) the debtor owes the creditor a prepetition debt; (2) the creditor owes the debtor a prepetition debt; and (3) the debts are mutual.” United States v. Carey (In re Wade Cook Fin. Corp.), 375 B.R. 580, 594 (9th Cir. BAP 2007). In a hypothetical liquidation as of the petition date, these requirements are met. Tenderloin, the debtor, would owe BOTW, the creditor, a prepetition debt because the alleged preferential transfer would not have taken place, meaning the loan balance ($190,595.50) would be outstanding. BOTW would owe Tenderloin a prepetition debt arising from the deposit of the property sale proceeds. See Strumpf, 516 U.S. at 21, 116 S.Ct. 286 (explaining banks obtain title to deposited funds subject to a promise to pay the depositor); Bank of Marin v. England, 385 U.S. 99, 101, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966) (“The relationship of bank and depositor is that of debtor and creditor, founded upon contract.”). Finally, the debts are mutual because they involve obligations owed between the same parties. 8 The result would not be different even if BOTW were to argue that it would exercise its hypothetical setoff right prior to the filing of the petition. Prepetition setoffs are generally challenged in three ways, only one of which would apply here. Section 553(b) provides that if a creditor exercises a setoff within ninety days of the bankruptcy, the trustee may recover the amount by which the creditor improved its position between the ninetieth day before the filing and the date of the bankruptcy. See 11 U.S.C. § 553(b). Ninety days before filing, Tenderloin's accounts contained approximately $173,015.00. We also must assume that BOTW would elect to setoff the full $190,595.50. BOTW would thus improve its position by $17,580.50 under this scenario. The trustee would be able to recover that amount from BOTW. At bottom, if BOTW exercised its hypothetical setoff right prior to the filing of the petition, it still received more in reality than it would in the hypothetical liquidation because it actually received $190,595.50, but would receive only $173,015.00 in the hypothetical. 9 “The § 502(d) disallowance is in the nature of an affirmative defense to a proof of claim and does not provide independent authority for affirmative relief against the creditor.” In re Sierra-Cal, 210 B.R. at 173. 10 BOTW does not dispute the other section 547(b) elements, and they appear to be satisfied. The deposit was made on June 13, 2012, so it occurred within ninety days of the filing of the petition. 11 U.S.C. § 547(b)(4)(A). In the absence of the deposit, BOTW would not have been able to setoff the full $190,595.50, so the trustee could satisfy the “greater amount test.” Id. § 547(b)(5). 11 Notably, a debtor's subjective intent may be relevant in determining the applicability of an affirmative defense. See, e.g., 11 U.S.C. § 547(c)(2) (providing there is no preference where a payment was made according to ordinary business terms); In re Craig Oil Co., 785 F.2d at 1566 (“[A] creditor's state of mind is now immaterial in finding a preference. ... It does not follow from the above that a debtor's state of mind or motivation is likewise immaterial in applying the preference exception of § 547(c)(2).”). 12 In 1904, a transfer was defined “to include the sale and every other and different method of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security.” Massey, 192 U.S. at 146, 24 S.Ct. 199; see also The Bankruptcy Act of 1898 § 1, Ch. 541, 30 Stat. 544, 545 (1898). Today, the parting may be with a mere “interest in property” and need not be done “as a payment, pledge, mortgage, gift, or security.” See 11 U.S.C. § 101(54); Smiley v. First Nat'l Bank of Belleville (Matter of Smiley), 864 F.2d 562, 565
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 183 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 (7th Cir. 1989) (“[W]e find that the narrow definition of ‘transfer’ ... can no longer be the law since the Bankruptcy Reform Act took effect.”). 13 Massey is also factually distinguishable. Here, unlike in Massey, the accounts were pledged as security on an antecedent loan, and the deposit itself would render BOTW fully secure. Cf. Smith, 265 F.3d at 964 (“[P]ayments that change the status of a creditor from partially unsecured to fully secured at the time of petition may be preferential.”); Porter v. Yukon Nat'l Bank, 866 F.2d 355, 359 (10th Cir. 1989) (finding transfer preferential where “the effect of the transfer was to change the status of the Bank from that of a partially unsecured creditor to that of a fully secured creditor”). It is also worth noting that the Supreme Court instructs us to look to the “actual effect” of the deposit in bankruptcy, Palmer Clay Prods. Co. v. Brown, 297 U.S. 227, 229, 56 S.Ct. 450, 80 L.Ed. 655 (1936), and as explained further below, the deposit would deplete the estate's assets. The concurrence is simply incorrect in stating that the deposit “made no difference to the bank's security position.” BOTW's security interest only attached because the deposited funds were transferred out of escrow. 14 Both of the cited decisions were decided prior to the 1978 amendments to the Bankruptcy Code. In addition, the “diminution of estate” doctrine is used “to determine whether property that is transferred belongs to the debtor,” not whether a transaction constitutes a transfer. See Adams v. Anderson (In re Superior Stamp & Coin Co.), 223 F.3d 1004, 1007 (9th Cir. 2000). To the extent that BOTW insists the deposit was not a transfer “of an interest of the debtor in property,” see id. that argument has been waived, Officers for Justice v. Civil Serv. Comm'n, 979 F.2d 721, 726 (9th Cir. 1982). Finally, the concurrence concedes that the deposit is a “transfer,” but insists it is not the right kind of transfer because Massey allegedly controls when determining “what makes a preference.” We are convinced that satisfying the elements of § 547(b) “makes” a transfer “a preference,” and the concurrence does not disagree that those elements would be satisfied here. 15 The key aspect of this investigation is not whether the exercise of a setoff right depletes the estate's assets, see Concurrence at 3, as that necessarily is true in every case. The question is whether the deposit depletes the estate's assets because deposits do not always afford the bank a right of setoff, nor are deposit accounts always pledged as security for a loan. 16 We decline to adopt the post-petition setoff analysis suggested by the concurrence. First, though there is no question that setoffs are governed by section 553, the trustee has never argued that it would challenge a hypothetical post-petition setoff. Instead, Schoenmann asserts only that the hypothetical trustee would challenge the deposit as an avoidable preference. Next, while the exercise of a setoff results in a permissible preference because it does not constitute a transfer under the Bankruptcy Code, COLLIER ¶ 553.09[1][a], here we have a pre-petition transfer that renders a creditor fully secure, and thus it is not immune from preference liability. See supra at 27 n.13. Lastly, though the concurrence applies section 553(b) to a hypothetical post-petition setoff, the plain language of the statute indicates that section 553(b) applies only to pre-petition setoffs. See 11 U.S.C. § 553(b)(1) (stating that “if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such a creditor the amount so offset” subject to certain conditions (emphasis added)); see also Collier ¶ 553.09[2][c] (“The better result is to limit section 553(b) to setoffs actually taken prepetition. In addition to remaining true to the language of the text, that result is consistent with the underlying purpose of section 553, which it to encourage creditors not to take setoffs by generally preserving their setoff rights.”). 17 BOTW mentions in passing one hypothetical affirmative defense—that the bank “would not be liable pursuant to 11 U.S.C. § 550.” Since BOTW does not develop the argument, however, we decline to reach it. See W. Watersheds Project v. Kraayenbrink, 632 F.3d 472, 499 (9th Cir. 2010); Int'l Healthcare Mgmt. v. Hawaii Coalition for Health, 332 F.3d 600, 609 (9th Cir. 2003). 1 The circuits are divided on this question. See Ivey v. First Citizens Bank & Trust Co. (In re Whitley), 848 F.3d 205, 208– 10 (4th Cir. 2017) (noting the split and reaffirming the Fourth Circuit's pre-1978 position that deposits into one's own bank account ordinarily are not “transfers”). 2 Indeed, the bankruptcy judge in Meoli v. The Huntington Nat'l Bank (In re Teleservices Grp., Inc.), 469 B.R. 713 (Bankr. W.D. Mich. 2012), quoted by the majority, was discussing § 553(b)'s effect on the treatment of setoffs when it labeled Massey an “anachronism.” Id. at 746, quoted at Maj. Op. at 1244–45. Its point was not that Congress no longer intended
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 184 In re Tenderloin Health, 849 F.3d 1231 (2017) 63 Bankr.Ct.Dec. 236, 17 Cal. Daily Op. Serv. 2116 the law governing setoffs to function as an exception to the law governing preferences generally, but that the enactment of § 553(b) had “addressed preferential setoffs,” by providing special terms on which they, although not subject to § 547, could be clawed back. Id. at 745–46. In any case, the court in Meoli had no cause to consider whether the creation or exercise of a setoff right could render a transfer preferential—the transfers at issue in Meoli were voidable not because they were preferential, but because they were fraudulent. See id. at 747. 3 The majority opinion faults me for analyzing the permissibility of a post-petition setoff when the trustee has not raised the issue (having relied whole-hog on its argument that the deposit itself was a preference). Maj. Op. at 1245 n.16. This case raises the important question of how to measure the preferential impact of commonplace bank deposits, which will often turn on the permissible extent of a hypothetical post-petition setoff. “It is important that we address the proper legal standards” for bankruptcy courts to apply in addressing the ultimate issue presented here, and we may reach questions “intimately bound up with” that issue, though not raised by the parties, in order to do so. See Kolstad v. Am. Dental. Ass'n, 527 U.S. 526, 540, 119 S.Ct. 2118 (1999).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 185 In re: GARY A. FERGUSON, Debtor. DAVID BEEM,..., --- Fed.Appx. ---- (2017) 2017 WL 1173664 2017 WL 1173664 district court challenged several bankruptcy court This case was not selected for publication in West's Federal orders: its order confirming debtor Gary Reporter. Ferguson's Chapter 11 plan of reorganization; its See Fed. Rule of Appellate Procedure 32.1 generally governing order granting Ferguson's motions to strike citation of judicial decisions issued on or after Jan. 1, Beem's ballot purporting to vote against the Plan 2007. See also U.S. Ct. of App. 11th Cir. and to deny his objections to the Plan as Rule 36-2. United States Court of Appeals, Eleventh Circuit. untimely; and two of Beem's motions to
In re: GARY A. FERGUSON, Debtor. reconsider the same. Ferguson moved for this DAVID BEEM, Plaintiff - Appellant, Court to dismiss Beem's appeal for lack of v. GARY A. FERGUSON, Defendant - Appellee. jurisdiction, and we granted the motion in part
No. 15-13358 and carried the motion with the case in part. | March 30, 2017 Beem devotes most of his attention to errors
Appeal from the United States District Court for allegedly committed by the bankruptcy court, but the Southern District of Florida, D.C. Docket No. also assigns error to the district court's decision to
1:15cv-20389-FAM, Bkcy No. 12-bkc-22368- dismiss his appeal. After review,1 we affirm.
LMI FACTUAL BACKGROUND
In May 2012, Ferguson filed a voluntary petition Before TJOFLAT, WILLIAM PRYOR and BLACK, for bankruptcy under Chapter 11 of the Circuit Judges. Bankruptcy Code. After over two years of
Opinion litigation, on July 18, 2014, Ferguson submitted a
PER CURIAM: second amended plan of reorganization (the
Plan). The court scheduled a confirmation *1 Creditor David Beem appeals the district hearing for September 15, 2014 and ordered that court's dismissal of his bankruptcy appeal and its the deadline for objecting to the plan would be order denying his motion for rehearing requesting September 1, 2014. On September 2, one day reconsideration of the same. His appeal to the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 186 In re: GARY A. FERGUSON, Debtor. DAVID BEEM,..., --- Fed.Appx. ---- (2017) 2017 WL 1173664 after the deadline, Beem, a creditor asserting a On November 21, 2014, Beem appealed the claim of approximately $385,000 against the orders striking his ballot and approving the plan bankruptcy estate, field an objection to the and the orders denying reconsideration to the proposed Plan. He also submitted a ballot district court. Beem filed his initial brief and rejecting the Plan. Ferguson moved to strike the appendix on February 24, 2015. Ferguson moved objection and the ballot, contending the objection to strike Beem's brief, arguing the brief was was untimely, and asserting Beem was not impermissibly excessive, that the appeal was entitled to vote on the Plan because he did not untimely as to the ballot strike and ballot have an “allowed claim.” Ferguson noted that as reconsideration orders, and that Beem had once a result, Beem was never served with a ballot. again availed himself of the services of Norkin,
Instead, Ferguson argued, Beem, having been the suspended attorney. The district court granted notified that he was not entitled to a vote, the motion. It stated that Beem's own pleading enlisted Jeffrey Norkin, an attorney suspended indicated Norkin “prepared the brief, [after from the practice of law, to fraudulently which] he gave it to Appellant to file it pro se.”
“concoct[ ] his own purported ballot.” The The court stated it would “not allow Mr. Norkin bankruptcy court granted Ferguson's motion and to circumvent the Florida Bar and this Court's struck the ballot and the objection. The next day, orders of suspension by doing the work and it issued an order confirming the Plan. having his clients file pleadings pro se.” It struck
Beem moved to vacate, rehear, reconsider, or the brief and ordered Beem to “file an initial brief supplement the Plan and for a stay to prevent the consistent with this Order by no later than April enactment of the Plan until the court had resolved 8, 2015,” and noted that “[f]ailure to do so may the motion. Two days later, he filed a similar result in the Court dismissing the appeal.” Beem motion for reconsideration of the order striking filed a new initial brief but did not do so until his ballot. The bankruptcy court denied both April 9. Ferguson moved to dismiss the brief motions. once again, asserting that Beem missed the
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 187 In re: GARY A. FERGUSON, Debtor. DAVID BEEM,..., --- Fed.Appx. ---- (2017) 2017 WL 1173664 deadline to file and that the brief still bore substantially consummated, and so we cannot evidence of Norkin's work. Beem had not grant effective relief. He argues the appeal is opposed the motion when his time for doing so constitutionally moot for the same reasons. Beem had expired, so the district court dismissed the responds that the Plan is not substantially appeal by default. Beem moved for consummated and that in any event he will reconsideration, but the district court denied his recover a larger portion of his judgment if the motion. Beem appealed to this Court the district Plan is unwound. court's dismissal of his appeal and its denial of “Equitable mootness is a discretionary doctrine his motion for reconsideration. He also appealed that permits courts sitting in bankruptcy appeals the orders of the bankruptcy court that were the to dismiss challenges (typically to confirmation subject of his appeal to the district court. plans) when effective relief would be
*2 After Beem filed his initial brief, Ferguson impossible.” In re Bayou Shores SNF, LLC, 828 moved to dismiss the appeal for lack of F.3d 1297, 1328 (11th Cir. 2016). It “reflects a jurisdiction. The motion was granted in part and court's concern for striking the proper balance of carried with the case in part.2 equitable considerations of finality and good
faith reliance on a judgment and the competing
interests that would underlie the right of a party DISCUSSION to seek review of a bankruptcy court order A. Jurisdiction
Before proceeding to the merits of the appeal, we adversely affecting him.” In re Club Assocs., 956 must address subject matter jurisdiction. To that F.2d 1065, 1069 (11th Cir. 1992). In determining end, in this case, we are principally concerned whether to apply the doctrine of equitable with mootness. Ferguson filed a motion to mootness, a court considers a variety of concerns dismiss this appeal in this Court in which he affecting the balance of equities, including contends the order confirming the Plan is whether a stay pending appeal has been obtained equitably moot because it has already been and if not, why not; whether the plan has been
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 188 In re: GARY A. FERGUSON, Debtor. DAVID BEEM,..., --- Fed.Appx. ---- (2017) 2017 WL 1173664 “substantially consummated;” what type of relief Article III case or controversy remains, the is sought; and what the effect of granting such doctrine of equitable mootness is a pragmatic relief would be. Id. at 1069 n.11. principle, grounded in the notion that, with the
Though Ferguson urges us to do so, we will not passage of time after a judgment in equity and undertake such an analysis here because the implementation of that judgment, effective doctrine is discretionary and does not divest us of relief on appeal becomes impractical, jurisdiction. See In re Metromedia Fiber imprudent, and therefore inequitable.
Network, Inc., 416 F.3d 136, 144 (2d Cir. 2005) *3 Mac Panel Co. v. Va. Panel Corp., 283 F.3d (“Equitable mootness is a prudential doctrine that 622, 625 (4th Cir. 2002). Equitable mootness is invoked to avoid disturbing a reorganization “bears only upon the proper remedy, and does not plan once implemented.” (citing In re UNR raise a threshold question of our power to rule.” Indus., 20 F.3d 766, 769 (7th Cir.1994) (“There In re Metromedia, 416 F.3d at 144. is a big difference between inability to alter the Constitutional mootness, on the other hand, outcome (real mootness) and unwillingness to “derives directly from the case-or-controversy alter the outcome (‘equitable mootness').”))); see limitation because an action that is moot cannot also In re Cont'l Airlines, 91 F.3d 553, 571 (3d be characterized as an active case or Cir. 1996) (en banc) (Alito, J., dissenting) controversy.” Fla. Pub. Interest Research Grp. (“[Equitable mootness] does not present a Citizen Lobby, Inc. v. EPA, 386 F.3d 1070, 1086 jurisdictional question; we are not required to (11th Cir. 2004) (quotation omitted). “A case is consider it before proceeding to the merits ....”). moot when the issues presented are no longer The Fourth Circuit succinctly captured the ‘live’ or the parties lack a legally cognizable distinction between equitable and constitutional interest in the outcome.” Id. “As long as the mootness as follows: parties have a concrete interest, however small,
Unlike the constitutional doctrine of mootness, in the outcome of the litigation, the case is not
which bars consideration of appeals because no moot.” Knox v. Serv. Emps. Int'l Union, Local
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 189 In re: GARY A. FERGUSON, Debtor. DAVID BEEM,..., --- Fed.Appx. ---- (2017) 2017 WL 1173664 1000, 567 U.S. 298, 132 S. Ct. 2277, 2287 “concrete interest[s] ... in the outcome of the
(2012) (quotation and alterations omitted). In litigation.” Knox, 567 U.S. 298, 132 S. Ct. at general, a case becomes moot “only when it is 2287 (quotation omitted). The very fact that it impossible for a court to grant any effectual relief could be so imprudent to disturb the Plan is a whatever to the prevailing party.” Cook v. testament to the fact that there is indeed a live
Bennett, 792 F.3d 1294, 1299 (11th Cir. 2015) controversy; the pragmatic doctrine of equitable
(quotation omitted). mootness exists precisely because the vindication
Ferguson states that the same grounds on which of a party's rights must be balanced against the we should find the case equitably moot also show chaos that could result from rescinding a plan of the case is constitutionally moot; namely, that the confirmation in large and complex bankruptcy
Plan has already been substantially consummated cases. Such a decision would not constitute a and it would be cumbersome to unwind each mere “advisory opinion,” Fla. Pub. Interest transaction. Mortgages would have to be Research Grp., 386 F.3d at 1086; quite the modified, liens released, and sums of money opposite—the effects on the parties are all too returned. To the contrary, however, these facts real, In re Pac. Lumber Co., 584 F.3d 229, 240 indicate the case is not constitutionally moot. (5th Cir. 2009) (“[E]quitable mootness applies
Equitable mootness “seeks to avoid an appellate when a judicial ruling might have too much decision that would knock the props out from effect on the parties to a confirmed under the authorization for every transaction that reorganization.” (citation omitted)). Beem has taken place and create an unmanageable, challenges the confirmation of the Plan; uncontrollable situation for the Bankruptcy presumably, if the Plan were unlawful as he
Court.” In re Nica Holdings, Inc., 810 F.3d 781, claims, a different plan could have resulted in
787 (11th Cir. 2015) (quotation omitted). As is more favorable treatment. Beem's claims may or evident, however, the prerequisites for equitable may not be valid, but they are not constitutionally mootness tend to show that there are very real moot.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 190 In re: GARY A. FERGUSON, Debtor. DAVID BEEM,..., --- Fed.Appx. ---- (2017) 2017 WL 1173664 Beem's case was lawfully appealed to the district of suspended attorney Norkin to prepare the court and his appeal of the district court's ruling brief, which he then filed pro se. The court was timely appealed to us. We thus have clearly ordered Beem to file a new initial brief no jurisdiction to hear the appeal and deny later than April 8 without Norkin's assistance and
Ferguson's motion to dismiss the appeal for lack notified him that failure to do so could result in of jurisdiction. dismissal. Beem did not file until April 9 nor did
he file a response to Ferguson's motion to dismiss
B. District Court's Dismissal the appeal. The district court was well within its
*4 Beem asserts the district court erred when it discretion to dismiss the appeal and deny dismissed his appeal because it made its decision reconsideration. See Foudy v. Indian River Cty. based on “facts irrelevant to the issues before the Sheriff's Office, 845 F.3d 1117, 1126 (11th Cir. court.” He contends he was entitled to use 2017) (“Federal courts possess an inherent power
Norkin's services because he did not pay Norkin to dismiss a complaint for failure to comply with to prepare his brief. The district court gave no a court order. (citing Goforth v. Owens, 766 F.2d instructions on how to comply with its order, he 1533, 1535 (11th Cir. 1985)); Degen v. United complains, and deprived him of access to the States, 517 U.S. 820, 827 (1996) (“A federal courts in ordering him to submit a brief prepared court has at its disposal an array of means to without Norkin's assistance. He cites no authority enforce its orders, including dismissal in an for any of these propositions. appropriate case.”); see also S.D. Fla. L.R. 7.1(c)
The district court did not err in dismissing the ( “[E]ach party opposing a motion shall serve an appeal. Beem's contentions are without merit; he opposing memorandum of law no later than simply failed to follow clear court orders given fourteen (14) days after service of the motion. ample opportunity to do so. In its order striking Failure to do so may be deemed sufficient cause
Beem's initial brief, the district court noted that for granting the motion by default.”). Beem himself had indicated he used the services
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 191 In re: GARY A. FERGUSON, Debtor. DAVID BEEM,..., --- Fed.Appx. ---- (2017) 2017 WL 1173664 CONCLUSION AFFIRMED.
Because we hold the district court did not err in All Citations dismissing Beem's appeal, we do not consider his --- Fed.Appx. ----, 2017 WL 1173664 assignments of error to the bankruptcy court.
Footnotes 1 We consider questions of subject matter jurisdiction de novo, Justice Cometh, Ltd. v. Lambert, 426 F.3d 1342, 1343 (11th Cir. 2005), and we review a district court's decision to dismiss a case for failure to comply with an order of the court for an abuse of discretion, Foudy v. Indian River Cty. Sheriff's Office, 845 F.3d 1117, 1122 (11th Cir. 2017). 2 In addition to the orders set forth above, Beem listed two bankruptcy court orders issued during the pendency of his appeal to the district court. We dismissed those appeals for lack of jurisdiction because they were neither appealed to the district court nor certified for direct review.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
© 2017 Thomson Reuters. No claim to original U.S. Government Works. 192