Articles Posted in U.S. 6th Circuit Court of Appeals

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Debtor and his wife sought relief under chapter 7 of the Bankruptcy Code. Debtor owns Bradley Machinery, which sells and rents construction equipment. Bradley did not file a bankruptcy petition. Some of Bradley’s equipment was subject to security interests in favor of Lender; Debtor had personally guaranteed payment of the loans. Lender filed an adversary proceeding asserting that Debtor caused Bradley to sell equipment “out of trust,” without remitting the proceeds of the sale of collateral to Lender, constituting embezzlement under 11 U.S.C. 523(a)(4) and willful and malicious injury under section 523(a)(6). Pursuant to section 523(a)(2)(A). Lender asserted that Debtor obtained an extension of credit through false representations to Lender regarding the status of certain pieces of collateral. The Bankruptcy Court held that Lender had failed to show that the debt was nondischargeable. The Sixth Circuit Bankruptcy Appellate Panel affirmed on alternate grounds and remanded for determination of damages. Lender suffered a loss due to Debtor’s misrepresentations regarding the status of the collateral. Debtor’s subjective intent to repay is not a factor under section 523(a)(2)(A) when there is a separate specific false material misrepresentation. Debtor knew that Lender would rely on these misrepresentations when determining whether to continue to extend credit. View "In re: Bradley" on Justia Law

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In 2011 Rizzo filed a voluntary petition for personal Chapter 7 bankruptcy and received a general discharge. Despite his discharge, the Michigan Department of Treasury sent collection letters demanding that he pay $72,286.39 in delinquent Single Business Tax that had been assessed against a company, for which Rizzo had been an officer. Rizzo filed an adversary action, contending that his personal liability for the unpaid SBT had been discharged in bankruptcy. Treasury claimed that liability for the SBT deficiency is a nondischargeable “excise tax” debt under 11 U.S.C. 507(a)(8)(E). The bankruptcy court agreed and dismissed. The district court and Sixth Circuit affirmed, rejecting Rizzo’s argument that the debt was derivative, not primary, and therefore not an excise tax. Rizzo conceded that the unpaid SBT was an “excise tax” deficiency as to the company and did not dispute that he was personally liable for the company’s unpaid tax under state law. Michigan law simply confers derivative liability upon Rizzo for precisely the same excise tax deficiency that was assessed against the company. View "Rizzo v. MI Dep't of Treasury" on Justia Law

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McKenzie’s creditors filed an involuntary Chapter 7 bankruptcy petition in 2008. McKenzie filed a voluntary Chapter 11 petition a month later. The cases were consolidated and converted to a Chapter 7 bankruptcy. Several weeks before the involuntary petition was filed, McKenzie executed a promissory note and a pledge in favor of GKH for unpaid legal fees. The pledge listed several entities in which McKenzie held an interest, ranging from an “auto mall” to a farm. GKH filed a proof of claim for $750,000, describing the collateral as “Real Estate” and “Other” and sought relief from the automatic stay. The Trustee opposed relief on the ground that the pledge constituted a preferential transfer. The bankruptcy court granted relief with respect to certain real estate, but denied relief as to equity interests. The bankruptcy court held that McKenzie had not validly conveyed his equity interests in certain entities to GKH, that the Trustee could use his hypothetical lien-creditor status and avoidance powers defensively to defeat GKH’s security interest, and that the statute of limitations should be equitably tolled because of GKH’s conduct. The district court affirmed. The Sixth Circuit affirmed, holding that GKH had the burden of establishing the validity of its claimed security interest and that a trustee may use his hypothetical lien-creditor status and avoidance powers to oppose relief from the automatic stay after expiration of the statutory limitation on avoidance actions under 11 U.S.C. 546(a)(1)(A). View "In re: Grant, Konvalinka & Harrison v. Still" on Justia Law

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In 2009, Debtor had received an IRS Notice of Deficiency for tax year 2004, claiming additional taxes of $143,445.00, plus penalties of $28,689.00. Debtor filed a voluntary Chapter 7 petition in 2011. In 2011, Debtor received a Notice of Deficiency for tax years 2007 and 2008 claiming that $138,907.00 in additional taxes for 2007, plus penalties of $27,781.40, and an additional $109,648.00 in taxes for 2008, plus penalties of $21,929.60. Debtor challenged the notices. The Tax Court dismissed with respect to the notices for 2007-2008 because of the automatic stay. Post-petition, the Debtor received a $86,512.32 tax refund, based on his 2005 tax return. The Trustee claimed the refund, but Debtor returned the check to the IRS. The Trustee sought turnover of the refund; Debtor objected. The IRS tendered a check for $32,555.15 to Debtor, relating to 2005 taxes, which was received by the Trustee. Debtor sought a determination of tax liability pursuant to 11 U.S.C. 505(a)(1) and turnover of funds if the IRS’s claim was disallowed. The bankruptcy court held that the IRS’s claim of $226,142.85, pertaining to 2004 taxes, was nondischargeable and that the tax refund check for $86,512.32, which erroneously issued to the Debtor, was not property of the estate. The Sixth Circuit Bankruptcy Appellate Panel reversed as to priority and nondischargeability, because the lower court did not address the limitations period. View "In re: Winter" on Justia Law

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Debtors owed delinquent real estate taxes to Summit County, Ohio, which sells outstanding tax obligations to investors as tax lien certificates. An investor purchasing such a certificate obtains a lien against the property and the right to pursue the taxpayer for the unpaid taxes, O.R.C. 5721.30-43. Plymouth filed a certificate showing its purchase of the Debtors’ tax obligation for $4,083.73 with a negotiated interest rate of 0.25%, “offered, sold, and delivered on November 3, 2010.” On October 3, 2011, Plymouth filed a second certificate, with a price of $2,045.44 and a negotiated interest rate of 18.00%. On April 17, 2012, Summit County filed a tax lien foreclosure complaint against the Debtors pursuant to pursuant to Plymouth's request for foreclosure. In May, 2012, the Debtors filed a chapter 13 plan and petition, proposing to pay interest on the tax certificates at the interest rates listed on the certificates. Plymouth filed a proof of claim based on both certificates in the amount of $10,521.46, including $2,120.00 in fees and the principal balance of $7,781.19 plus 18% interest from June 1, 2012 on both certificates. The Bankruptcy Court held that under Ohio law the appropriate interest rate for Plymouth’s tax claim was 0.25%. The Bankruptcy Appellate Panel affirmed. View "In re: Bowers" on Justia Law

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The bankruptcy court held that a district court judgment entered against the Debtor was nondischargeable under 11 U.S.C. 523(a)(6). The Sixth Circuit Bankruptcy Appellate Panel affirmed, holding that the bankruptcy court properly gave the district court’s findings preclusive effect as to whether the judgment was the result of the Debtor’s willful and malicious injury. View "In re: Barlow" on Justia Law

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In 2004, Lampe won a $25,000 judgment against Kash. Kash could not pay his debts and sought bankruptcy protection in 2012. When he submitted a list of creditors, under Bankruptcy Rule 1007(a) Kash omitted Lampe’s residential address, listing her in care of the law firm that represented her eight years earlier. The firm stopped working for Lampe in 2004, and the notice never reached Lampe, who did not participate in the bankruptcy case, which discharged the judgment debt. After the discharge, Lampe returned to the district court, seeking to revive her judgment. The district court rejected her claim. The Sixth Circuit reversed. A debt is a creditor’s property, and the Due Process Clause entitles her to service of notice “reasonably calculated” to reach her before she is deprived of that property. Notification to a former attorney provides little assurance that the notice will reach the creditor. Lawyers have “no general continuing obligation” to pass information along to people they no longer represent. Nothing in the record suggested that the search for Lampe’s address would have imposed an unreasonable burden on Kash; without further investigation, any belief that the firm still worked for Lampe in 2012 was unreasonable. View "Lampe v. Kash" on Justia Law

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Beginning in 2004, 1st Source Bank entered into secured transactions with the debtors for the sale or lease of tractors and trailers. The agreements granted 1st Source a security interest in the tractors and/or trailers, accounts, and in proceeds from that collateral. 1st Source filed financing statements that identified the collateral as including the specified tractors/and or trailers, and “all proceeds thereof, including rental and/or lease receipts.” The financing statements did not refer to “accounts,” “accounts receivable,” or any similar language. Later, defendant banks also entered into secured transactions with the debtors and filed financing statements that specifically referred to a security interest in “all accounts receivable now outstanding or hereafter arising.” In 2009, the debtors defaulted. 1st Source undertook repossession of the collateral securing the agreements and attempted to claim a perfected security interest and first priority in debtors’ accounts, arguing that the term “and all proceeds thereof” included accounts receivable. The district court granted defendants summary judgment, finding that 1st Source’s financing statements were not sufficient to put defendants on notice that 1st Source claimed a security interest in accounts receivable, and holding, as a matter of Tennessee law, that “proceeds,” as used in a company’s financing statement, does not include its accounts receivable. The Sixth Circuit affirmed. View "1st Source Bank v. Wilson Bank & Trust" on Justia Law

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In 2009, Tyler had accumulated $1,041 of debt on his Chase credit card. DHC, assignee of the debt, filed suit in Kentucky, seeking collection of the debt, plus 21% interest, and attorney’s fees. The complaint had not been served when Tyler filed for Chapter 7 bankruptcy, three months after the suit was filed. Tyler did not list this suit as debt or his potential Fair Debt Collection Practices Act counterclaims as assets on the bankruptcy schedules. Tyler did list a debt owed on a Chase credit card, of “Unknown” amount. Chase did not participate and Tyler was granted a discharge. Eight days later, DHC served process on Tyler. DHC filed a voluntary Notice of Dismissal without prejudice after it learned of Tyler’s bankruptcy, but Tyler filed a purported federal class action, alleging violations of the FDCPA and Kentucky’s usury laws. The district court dismissed, finding that Tyler “elected to forego filing compulsory counterclaims” and that Tyler’s claims were “rooted in the allegations in DHC’s state court complaint” and thus part of the bankruptcy estate. The Sixth Circuit affirmed. While the claim was not barred under res judicata principles, the claim was based on a pre-petition violation and, thus, property of the bankruptcy estate. View "Tyler v. DH Capital Mgmt., Inc." on Justia Law

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Debtor was married to Plaintiff’s son, John. Plaintiff and John had an extensive model train collection. After John died, Plaintiff sued, seeking $25,000 for Debtor’s alleged conversion of the collection. Debtor was appointed administratrix of John’s probate estate. After completion of an inventory, Plaintiff and Debtor, individually and as administratrix, entered into a settlement resolving the state court litigation and matters in Probate Court, identifying parts of the collection as belonging to Plaintiff and requiring Debtor to surrender possession of those parts. The remainder of the collection was to be sold at auction and the proceeds were to be split. The court subsequently entered multiple orders directing Debtor to turn over certain trains and accessories to Plaintiff and imposed penalty of $100.00 per day. Finally, the court entered judgment in the amount of $32,186.90 plus interest based on Debtor’s “willful contempt.” Debtor then filed a bankruptcy petition and Plaintiff sought to except from discharge the entire debt owed to him pursuant to 11 U.S.C. 523(a)(2)(A) and (a)(7). The bankruptcy court held that the entire amount ($32,186), not just $9,386.90, was nondischargeable under 523(a)(2)(A). The bankruptcy appellate panel affirmed. View "In re: Nicodemus" on Justia Law