Justia Bankruptcy Opinion Summaries

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Stergiadis, Dimas, and Theo formed 1600 South LLC, executed an operating agreement, purchased land on which to build a fruit market, and began construction. The 2008 recession stopped construction and eventually led to the LLC’s 2009 dissolution. The partners disagreed about whether they impliedly agreed to equalize their capital contributions. The operating agreement provided that the three each held a one-third membership interest in the LLC; each member agreed to make an initial capital contribution on the date of execution but the amount was left blank. In 2008 Stergiadis sued Dimas in state court seeking to equalize the capital contributions. Dimas filed for bankruptcy, triggering the automatic stay. Dimas ultimately filed seven such petitions and received a discharge in 2016. The U.S. Trustee moved to reopen the bankruptcy to recover the value of an undisclosed property. The bankruptcy court agreed. Stergiadis filed a proof of claim in Dimas’s reopened bankruptcy seeking the same amount he was seeking in state court. The partners disputed the amounts of their respective contributions.The bankruptcy court allowed Stergiadis’s claim, awarding $618,974, finding that the members had an implied equalization agreement. The district court and Seventh Circuit affirmed, rejecting an argument that the LLC’s operating agreement precluded an implied equalization contract. The bankruptcy court properly relied on extrinsic evidence in finding such a contract. View "Dimas v. Stergiadis" on Justia Law

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The First Circuit dismissed Appellant's appeal of an order issued by the Bankruptcy Appellate Panel for the First Circuit (BAP) that found Appellant, a Chapter 7 debtor, had no standing to appeal a bankruptcy court order overruling his objection to a proof of claim filed by Scotiabank de Puerto Rico, holding that this Court lacked jurisdiction.The BAP concluded that Appellant did not have appellate standing to challenge the subject order because he had failed to demonstrate that the order had directly or adversely affected his pecuniary interests. Accordingly, the BAP entered judgment dismissing the appeal. The First Circuit dismissed Appellant's appeal, holding that Appellant failed to establish that the challenged order had a direct and immediate impact on his pecuniary interests. View "Neira Rivera v. Scotiabank de Puerto Rico" on Justia Law

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The Supreme Court affirmed the judgment of the district court exercising jurisdiction over the underlying fraudulent conveyance action and avoiding all of Paul Morabito's transfers to Superpumper, Inc., Sam Morabito, Snowshoe Petroleum, Inc., and Edward Bayer, individually and as trustee of the Bayuk Trust (collectively, Superpumper) and awarding Paul Morabito's bankruptcy trustee (Trustee) the subject property or the value thereof, holding that the district court did not err.Paul and Consolidated Nevada Corporation entered into a settlement agreement with JH Inc., Jerry Herbst, and Berry-Hinckley Industries (collectively, the Herbsts) for $85 million and later defaulted on the agreement. After a bankruptcy court adjudicated Paul as a Chapter 7 debtor the Herbsts filed a fraudulent transfer action against Paul and Superpumper, the transferees of Paul's assets. The state district court avoided all of Morabito's transfers to Superpumper and awarded the Trustee the subject property or the value thereof. The Supreme Court affirmed, holding (1) the district court had subject matter jurisdiction over the fraudulent conveyance action; (2) Superpumper waived its in rem jurisdiction argument; and (3) the district court did not abuse its discretion in allowing attorney-client communications to be admitted into evidence at trial. View "Superpumper, Inc. v. Leonard" on Justia Law

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Grace operated a Montana asbestos facility, 1963-1990. Facing thousands of asbestos-related suits, Grace filed for Chapter 11 bankruptcy. Its reorganization plan provided for a several-billion-dollar asbestos personal-injury trust to compensate existing and future claimants. All asbestos-related personal injury claims were to be channeled through the trust (“Grace Injunction,” 11 U.S.C. 524(g)(4)). CNA provided Grace's general liability, workers’ compensation, employers’ liability, and umbrella insurance policies, 1973-1996 and had the right to inspect the operation and to make loss-control recommendations. After 26 years of litigation regarding the scope of CNA’s coverage of Grace’s asbestos liabilities, a settlement agreement ensured that CNA would be protected by Grace’s channeling injunction. CNA agreed to contribute $84 million to the trust.The “Montana Plaintiffs,” who worked at the Libby mine and now suffer from asbestos disease, sued in state court, asserting negligence against CNA based on a duty to protect and warn the workers, arising from the provision of “industrial hygiene services,” and inspections. The Bankruptcy Court initially concluded that the claims were barred by the Grace Injunction but on remand granted the Montana Plaintiffs summary judgment.The Third Circuit vacated. Section 524(g) channeling injunction protections do not extend to all claims brought against third parties. To conform with the statute, these claims must be “directed against a third party who is identifiable from the terms of such injunction”; the third party must be “alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor”; and “such alleged liability” must arise “by reason of” one of four statutory relationships, including the provision of insurance to the debtor. The Bankruptcy Court erred in anlyzing the “derivative liability” and “statutory relationship” requirements. While the claims meet the derivative liability requirement, it is unclear whether they meet the statutory relationship requirement. View "In re: WR Grace & Co" on Justia Law

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The Sixth Circuit affirmed the district court's decision rejecting the bankruptcy trustee's efforts seeking to avoid payments from Fair Finance to Textron as fraudulent transfers under Ohio's Uniform Fraudulent Transfer Act (OUFTA).The court concluded that the district court correctly rejected the trustee's bad-faith-invalidation argument at summary judgment. In this case, Textron's actions did not render its perfected interest ineffective against the holder of a judicial lien subsequently obtained in a hypothetical UCC priority contest. Therefore, Textron enjoyed a valid lien under OUFTA. The court explained that its conclusion is grounded in the nature of the UCC's priority test as well as critical distinctions between normal priority disputes and the OUFTA valid-lien test. The court also concluded that loan payments encumbered by the perfected 2002 security interest are not transfers under OUFTA and thus cannot be avoided as fraudulent transfers. The court disagreed with the trustee that the jury erred in determining that the 2004 changes did not amount to a novation and concluded that, to the extent there was an error in the jury instruction, it was harmless. The court rejected the trustee's additional argument to the contrary. View "Bash v. Textron Financial Corp." on Justia Law

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When Aleckna filed for Chapter 13 bankruptcy, she still owed the University (CCU) tuition. The filing of her bankruptcy petition imposed an “automatic stay” of all collection actions against her. While her case was pending, Aleckna, who had completed her coursework, asked CCU for a copy of her transcript. The University would only provide her with an incomplete transcript that did not include her graduation date, explaining that a “financial hold” had been placed on her account. Aleckna filed a counterclaim in the Bankruptcy Court arguing that CCU violated the automatic stay by refusing to provide her with a complete certified transcript, 11 U.S.C. 362(a)(6).The Bankruptcy Court found in Aleckna’s favor, concluding that she was entitled to receive her complete transcript, plus damages and attorneys’ fees because CCU’s violation was “willful.” The district court and Third Circuit affirmed. Section 362(k) provides that an individual who commits a willful violation is liable for damages and attorneys’ fees unless “such violation is based on an action taken by an entity in the good faith belief” that the stay had terminated. Precedent establishes a “willfulness” defense that is distinct from one of good faith but CCU failed to show that the law regarding the transcript issue was sufficiently unsettled to establish a lack of willfulness within the meaning of that precedent. View "In re: Aleckna" on Justia Law

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Big Shoulders sued the railroads (SLRG), with federal jurisdiction ostensibly based on diversity of citizenship, and requested that the district court appoint a receiver to handle SLRG’s assets. That court did so, which brought the case to the attention of several creditors. One of them, Sandton, intervened and challenged the appointment of the receiver and the district court’s jurisdiction. Sandton alleged that Big Shoulders failed to join necessary parties who, if added, would destroy diversity of citizenship. Meanwhile, other creditors (Petitioning Creditors) filed an involuntary bankruptcy petition on behalf of SLRG in federal bankruptcy court in Colorado. The receiver objected. Because the judicially approved receivership agreement contained an anti-litigation injunction, the district court initially concluded that the bankruptcy petition was void. On reconsideration, however, the district court determined that it did not have the authority to enjoin the bankruptcy. The bankruptcy continued. After Big Shoulders refused to continue to fund the receivership, the district court approved its termination.The Seventh Circuit consolidated several appeals, each of which involved questions of standing or mootness. The court concluded that those justiciability questions required the dismissal of all but Sandton’s appeal. As for Sandton’s argument that diversity jurisdiction is lacking, the court remanded to the district court for an application in the first instance of the “nerve center test” to determine if SLRG and Mt. Hood are citizens of Illinois. View "Sandton Rail Company LLC v. San Luis & Rio Grande Railroad, Inc." on Justia Law

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In 2007, NLG sold a Fisher Island home to Hazan for $5,100,000, receiving a purchase money note and mortgage in return. The Property was then the subject of years of protracted litigation in two states, resulting in various orders addressing the rights of NLG, Hazan, and Selective, a company owned and controlled by Hazan’s husband. One day before the property was to be sold, Hazan filed for Chapter 11 bankruptcy relief. NLG filed a proof of claim. Hazan and Selective began adversary proceedings asserting that NLG no longer retained any rights or claims to the Property; the bankruptcy court agreed.The district court rejected an argument that the Rooker-Feldman doctrine prevented the bankruptcy court from considering any of the issues raised during the adversary proceedings and dismissed NLG’s claims on the ground of equitable mootness. The Eleventh Circuit affirmed. The bankruptcy court had jurisdiction to consider the issues raised by Hazan and Selective The parties in the state court foreclosure action and the bankruptcy case were not the same. Neither Hazan nor Selective sought to have the bankruptcy court overturn the foreclosure judgment but only asked the bankruptcy court to determine the rights of NLG, Hazan, and Selective based on the previously rendered judgments. NLG’s delay in seeking a stay was unreasonable and the Plan has been substantially consummated. View "NLG, LLC v. Horizon Hospitality Group, LLC" on Justia Law

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The Nichols filed a Chapter 13 bankruptcy petition and later were indicted on federal charges for their alleged participation in a scheme to defraud Marana Stockyard. To avoid disclosure of information that might compromise their position in the criminal proceedings, the Nicholses declined to complete steps required by the Bankruptcy Code to advance their case. They refused to hold a meeting with creditors, to file outstanding tax returns, or to propose an appropriate repayment plan. Marana, which had filed a claim in the Nicholses’ bankruptcy case, moved (11 U.S.C. 1307(c)) for the case to be converted to a Chapter 7 liquidation. The Nicholses unsuccessfully requested a stay of the bankruptcy case during the pendency of the criminal proceedings. The bankruptcy court determined that conversion to a Chapter 7 liquidation was justified by the Nicholses’ “unwarranted” delays and would have been proper, in the alternative, under section 1307(e), because the Nicholses failed to file tax returns for several years.The Nicholses did not comply with the bankruptcy court’s requirements but moved to dismiss voluntarily their bankruptcy case under section 1307(b). The Ninth Circuit’s Bankruptcy Appellate Panel affirmed the denial of the dismissal motion and conversion of the case. The Ninth Circuit reversed. A bankruptcy court may not invoke equitable considerations to contravene section 1307(b)’s express language fiving Chapter 13 debtors an absolute right to dismiss their case. View "Nichols v. Marana Stockyard & Livestock Market, Inc." on Justia Law

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Picard was appointed as the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS) pursuant to the Securities Investor Protection Act, 15 U.S.C. 78aaa, to recover funds for victims of Bernard Madoff’s Ponzi scheme. SIPA empowers trustees to recover property transferred by the debtor where the transfers are void or voidable under the Bankruptcy Code, 11 U.S.C. 548, 550, to the extent those provisions are consistent with SIPA. Under Sections 548 and 550, a transferee may retain transfers it took “for value” and “in good faith.” Picard sued to recover payments the defendants received either directly or indirectly from BLMIS. The district court held that a lack of good faith in a SIPA liquidation requires that the defendant-transferee has acted with “willful blindness” and that the trustee bears the burden of pleading the transferee’s lack of good faith. Relying on the district court’s legal conclusions, the bankruptcy court dismissed the actions, finding Picard did not plausibly allege the defendants were willfully blind to the fraud at BLMIS.The Second Circuit vacated. Nothing in SIPA compels departure from the well-established rule that the defendant bears the burden of pleading an affirmative defense. The district court erred by holding that the trustee bears the burden of pleading a lack of good faith under Sections 548(c) and 550(b)(1). View "In Re Bernard L. Madoff Investment Securities, LLC" on Justia Law