Justia Bankruptcy Opinion Summaries

The Trustee for McKenzie’s bankruptcy estate filed an adversary proceeding against GKH, McKenzie’s law firm (and a creditor), seeking records pertaining to entities in which McKenzie allegedly had an interest (11 U.S.C. 542). The parties entered into an agreed order. The Trustee then filed other actions, arising from the same post-petition transfer of 50 acres from the Cleveland Auto Mall, an entity in which McKenzie had a 50% interest, to a newly formed entity in which McKenzie had no interest. The Trustee alleged violation of the automatic stay, 11 U.S.C. 362(k) and preferential or fraudulent transfer, 11 U.S.C. 547(b) and 544(g)). The Bankruptcy Court dismissed, finding that under Tennessee law and notwithstanding prior dissolution, CAM existed as a separate legal entity such that the land remained its separate property. The Trustee then filed a state court action, alleging breach of fiduciary duty and civil conspiracy to commit fraud; GKH allegedly represented McKenzie under a conflict of interest in drafting the transfer documents. Several claims were dismissed as untimely. GKH then sued the Trustee alleging malicious prosecution and abuse of process. The Bankruptcy Court dismissed GKH’s adversary proceeding alleging claims, citing quasi-judicial immunity and failure to state a claim, and denied GKH’s motion for leave to file a complaint in state court. The district court and Seventh Circuit affirmed. View "In re McKenzie" on Justia Law

Seven affiliated debtors are entities that conducted deep and strip coal mining and operated coal prep plants and loading facilities in three states. The bankruptcy court authorized joint procedural administration, but not substantive consolidation. The administrative expense claims at issue arise from environmental damage. The land and the coal were subject to leases that terminated before commencement of bankruptcy proceedings. The West Virginia Department of Environmental Protection (WVDEP) issued mining permits and National Pollutant Discharge Elimination System permits to the debtors and affiliated entities for the operations. The bankruptcy court denied WVDEP’s application for administrative expenses against two debtors. The Sixth Circuit Bankruptcy Appellate Panel held that the court failed to properly analyze the debtors’ potential liability for reclamation obligations associated with permits owned by their affiliate. WVDEP’s administrative expense claims were properly denied to the extent they were based on derivative liability for the debts of the affiliate, either based on veil piercing or substantive consolidation. The court abused its discretion in denying the claims that were based on direct liability for reclamation obligations associated with the permits owned by the affiliate and in denying claims that were independent of the threshold question of joint and several liability for reclamation obligations associated with the permits owned by an affiliate. View "In re: Appalachian Fuels, LLC" on Justia Law

The Debtors, five single-asset limited partnerships holding apartment complexes developed under the Low-Income Housing Tax Credit Program, 26 U.S.C. 42, filed for relief under Chapter 11 in 2010. The properties were put into service in 2005 and 2006, and their tax credit recapture periods expire in 2019 and 2020. The bankruptcy court conducted a valuation hearing and concluded that, for purposes of determining the value of the secured portion of the (mortgage holder) Bank’s claims under 11 U.S.C. 506(a), a determination of the fair market value of the properties included consideration of the remaining federal low-income housing tax credits. The Bankruptcy Panel affirmed the bankruptcy court’s Valuation Order. The Debtors failed to amend their plan or disclosure statement to reflect the values set by the bankruptcy court until ordered to do so in 2012. The court ultimately dismissed the petitions, based on continuing loss to or diminution of the estate, coupled with absence of a reasonable likelihood of rehabilitation; the Debtors’ inability to effectuate a plan; and bad faith under 11 U.S.C. 1112(b). The Sixth Circuit Bankruptcy Appellate Panel affirmed. View "In re: Creekside Senior Apts." on Justia Law

Between 1982 and 1997, Alfes took out student loans funded by FFELP. Alfes consolidated his student-loan debt; SunTrust was the lender and obligee on the consolidated note and the Pennsylvania Higher Education Assistance Agency was the guarantor. Alfes sought relief under Chapter 7 of the Bankruptcy Code. The bankruptcy court entered a general discharge in 2005. Subsequently, Alfes sought a declaration that the debt under the consolidated note had been discharged, arguing that the consolidated note no longer constituted an “educational loan” under 11 U.S.C. 523(a)(8)(A) and had been discharged with his ordinary debt. The bankruptcy court initially entered a default judgment against the defendants. Following a series of transfers, reopening, and various motions, the bankruptcy court ultimately held that a holder of consolidated student loans is an educational lender and that the consolidated loan was, therefore, not dischargeable absent a showing of undue hardship. The district court and Sixth Circuit affirmed. View "Alfes v. Educ. Credit Mgmt. Corp." on Justia Law

For more than 20 years, Kurlemann built and sold luxury homes in Ohio. In 2005-2006 he borrowed $2.4 million to build houses in Mason. When neither sold, he enlisted realtor Duke, who found two straw buyers, willing to lie about their income and assets on loan applications that Duke submitted to Washington Mutual. Both buyers defaulted. Duke pled guilty to seven counts, including loan fraud and making false statements to a lending institution, and agreed to testify at Kurlemann’s trial. A jury convicted Kurlemann of six counts, including making false statements to a lending institution, 18 U.S.C. 1014; and bankruptcy fraud, 18 U.S.C. 157. The district court sentenced Kurlemann to concurrent 24-month sentences and ordered him to pay $1.1 million in restitution. The district court sentenced Duke to 60 months. The Sixth Circuit affirmed the bankruptcy fraud conviction, based on Kurlemann’s concealment of his interest in property, but reversed and remanded his false statements conviction, finding that the trial court improperly instructed the jury that concealment was sufficient to support conviction. The court also reversed Duke’s sentence, finding that the court failed to explain the sentence it imposed. View "United States v. Kurlemann" on Justia Law

The DeGroots divorced; Joel was ordered to pay child support. The court awarded Joy the residence and ordered Joy to pay $48,000 for Joel’s equity in installments. Joy paid $10,000.00. Joel later filed a no-asset chapter 7 petition, listing Joy’s claim of $10,336.33 for unpaid support and medical bills, but not listing the receivable or the lien as assets. Following negotiations, of which the trustee was aware, Joy waived claims to support and Joel released his lien. Neither sought relief from the stay. The Trustee filed notice claiming ownership of the lien for the estate (11 U.S.C. 541(a)(1)). Joy did not receive notice and, when the trustee notified creditors that there might be assets, did not file a claim because she believed it extinguished by the settlement. The trustee later reported no assets and the case closed. Joy attempted to refinance her mortgage and discovered the assignment of lien. The case was reopened (11 U.S.C. 350(b)). The Trustee agreed to subordinate his lien to that of the mortgage company in exchange for $5,000.00. The bankruptcy court concluded that, while the trustee may administer the $5,000.00, the balance should be deemed abandoned under 11 U.S.C. 554(c) and (d). The Bankruptcy Panel of the Sixth Circuit affirmed. View "In re: DeGroot" on Justia Law

SEW operated 113 franchise Waffle House restaurants when it filed its Chapter 11 petition in 2008. From January, 2005, to the Petition Date, SEW did not pay federal income tax withholding, social security (FICA), or unemployment (FUTA) taxes or timely file returns. During four years before the Petition Date, the IRS assessed penalties of more than $1,500,000. SEW subsequently made payments that were applied to its tax obligations and also made undesignated prepetition payments that were applied in partial satisfaction of the assessed penalties. SEW later sought recovery of prepetition tax penalty payments of $637,652.07 or an offset against the tax amounts still owed. SEW alleged that payment of these penalties provided no value to SEW; that SEW did not receive reasonably equivalent value in exchange for the Penalty Payments; that at the time that of the payments, SEW was insolvent; and cited 11 U.S.C. 548 and 544. The government argued that dollar-for-dollar reduction in SEW’s antecedent tax-penalty liabilities constituted reasonably equivalent value. SEW did not allege that the penalty obligations were themselves avoidable. The Bankruptcy court dismissed SEW’s adversary petition for failure to state a clam. The Bankruptcy Appellate Panel and Sixth Circuit affirmed. View "SE Waffles, LLC v. U.S. Dep't of Treasury" on Justia Law

The bankruptcy court held that fees owed to a court-appointed guardian ad litem constitute a “domestic support obligation” under Section 101(14A) of the Bankruptcy Code and are, therefore, a nondischargeable debt under Section 523(a)(5) of the Code. The Sixth Circuit Bankruptcy Appellate Panel affirmed. View "In re: Kassicieh" on Justia Law

In 2000-2001Alioto spent several hundred thousand dollars of his own money on expenses relating to a new business (BRT) involving use of “celebrity talent” to create internet advertising. Alioto became involved in BRT after being approached by the actor, John Ratzenberger, and claims that he believed he would be reimbursed by Ratzenberger for funds expended on behalf of the business, but was never fully repaid. Alioto filed a Chapter 7 bankruptcy petition, listing $341,363 outstanding loans owed to him from BRT as part of his assets. Alioto sought to deduct the unreimbursed funds as losses for tax year 2005 and to carry forward some of these losses as deductions for tax years 2006 and 2007. The IRS denied the deductions and issued notices of deficiency. The Tax Court agreed. The Sixth Circuit affirmed, upholding determinations that any business losses occurred prior to 2005, 26 U.S.C. 165(a) and that the losses did not amount to theft under section 165 (e). View "Alioto v. Comm'r of Internal Revenue" on Justia Law

Al-Mansoob filed a lawsuit concerning a traffic accident in July 2009. When he instituted Chapter 7 bankruptcy proceedings two months later, he did not list his claims against Malloy and Wilburn Archer Trucking, Inc. (Defendants), among his assets, but did list a suit against State Farm, arising out of the same accident. Upon learning of the omission, Defendants sought summary judgment, arguing that Al-Mansoob was judicially estopped from pursuing the claims. Relying on a Sixth Circuit case decided a few days before Al-Mansoob filed his response, the district court granted the motion. The Sixth Circuit reversed, reasoning that judicial estoppel should not apply to the trustee, who had been substituted as real party in interest, and that Al-Mansoob’s failure to disclose the case was inadvertent in any event. View "Al-Mansoob v. Malloy" on Justia Law