Articles Posted in U.S. Court of Appeals for the Third Circuit

by
Debtors filed a voluntary Chapter 13 petition. The Bankruptcy Court confirmed a plan that required payments of $2,485 each month for 60 months. Later, because of an increase in mortgage payments, the plan was amended to increase the payments to $3,017 for the remainder of the 60-month period. Debtors made consistent payments and, after 60 months, had paid $174,104, slightly exceeding their projected plan base. The Trustee subsequently moved to dismiss the case under 11 U.S.C. 1307(c), alleging that Debtors still owed $1,123 to complete their plan base. Debtors cured the arrears within 16 days. The motion had been joined by an unsecured creditor, who claimed that the plan and the Code required completion within 60 months. The Bankruptcy Court agreed that the failure to completely fund the plan base within 60 months was a material default constituting cause for dismissal, but found that the default was not the result of Debtors' unreasonable delay, that Debtors promptly corrected the deficiency, and that the delay did not significantly alter the timing of distributions. The district court and Third Circuit affirmed and rejected an adversary proceeding, objecting to the discharge. Bankruptcy courts have discretion to grant a brief grace period and discharge debtors who cure an arrearage in their plan shortly after the expiration of the plan term. View "In re: Klaas" on Justia Law

by
IRS Form 1040, filed after the IRS made an assessment of the taxpayer’s liability, did not constitute “returns” for purposes of determining the dischargeability in bankruptcy of tax debts under 11 U.S.C. 523(a)(1)(B). Giacchi filed his tax returns on time for the years 2000, 2001, and 2002 years after they were due and after the IRS had assessed a liability against him. In 2010, Giacchi filed for Chapter 7 bankruptcy; in 2012 he filed a Chapter 13 petition and brought an adversary proceeding seeking a judgment that his tax liability for the years in question had been discharged in the Chapter 7 proceeding. The district court and Third Circuit affirmed the bankruptcy court’s order denying the discharge. The tax debt was nondischargeable under 11 U.S.C. 523(a)(1)(B) because Giacchi had failed to file tax returns for 2000, 2001, and 2002, and Giacchi’s belatedly filed documents were not “returns” within the meaning of section 523(a)(1)(B) and other applicable law. View "Giacchi v. United States" on Justia Law

by
The Lansaws operated a daycare in space leased from Zokaites. After they entered into a new lease with a different landlord, but before they moved, Zokaites served them with a Notice for Distraint, claiming a lien against personal property for unpaid rent. The following day, the Lansaws filed for bankruptcy, triggering the automatic stay, 11 U.S.C. 362(a). Zokaites’s attorney was notified of the filing on August 17, 2006. On August 21, Zokaites and his attorney entered the daycare during business hours, by following a parent, and photographed the Lansaws’ personal property. On August 27, Zokaites entered after business hours, using his key, then padlocked the doors, leaving a note stating that Zokaites would not unchain the doors unless Mrs. Lansaw’s mother agreed that she had not been assaulted by Zokaites, the Lansaws reaffirmed their lease with Zokaites, and the Lansaws ceased removing property from the daycare. The Lansaws removed the chains and slept in the building. Zokaites locked the door from the outside and left with the Lansaws’ keys. The Lansaws called the police. Meanwhile, Zokaites attorney communicated by phone and letter with the new landlord, stating that, if the new lease was not terminated, Zokaites would sue the new landlord. In an adversary proceeding, the Bankruptcy Court awarded the Lansaws attorney fees ($2,600), emotional-distress damages ($7,500) and punitive damages ($40,000) under 11 U.S.C. 362(k)(1). The district court and Third Circuit affirmed. Section 362(k)(1) authorizes the award of emotional-distress damages; the Lansaws presented sufficient evidence to support the award. View "In re: Lansaw" on Justia Law

by
Suppliers sold electrical materials to Linear, which Linear incorporated into construction projects. The developers did not pay Linear for its work and Linear did not pay Suppliers. In July 2015, Linear filed a voluntary Chapter 11 bankruptcy petition; two weeks later, Suppliers filed construction liens on the developments into which Linear had incorporated the materials purchased from Suppliers. The bankruptcy court discharged the liens as violating the automatic stay that resulted from the bankruptcy petition. Linear then collected the full amounts owed by the developers. The bankruptcy court held that the construction liens were void ab initio for violation of the automatic stay. The district court and Third Circuit affirmed. Under New Jersey law, if a supplier sells materials on credit to a construction contractor and the contractor incorporates those materials into property owned by a third party without paying the supplier, the supplier can file for a lien on the third-party property. The courts rejected Suppliers’ argument that the liens attached to the third-party properties, not to the property of the bankruptcy estate. The courts reasoned that, under state law, the ability to create and the value of the liens depend on the amount that the contractor owes the suppliers--the value of the contractor’s accounts receivable--and fall within the definition of property of the estate, 11 U.S.C. 541. View "In re: Linear Electric Co., Inc." on Justia Law

by
In 2010, EFIH borrowed $4 billion at a 10% interest rate, issuing notes secured by its assets; the Indenture states that EFIH may redeem the notes for the principal amount plus a “make-whole premium” and accrued, unpaid interest. It contains an acceleration provision that makes “all outstanding Notes . . . due and payable immediately” if EFIH files for bankruptcy. Interest rates dropped. Refinancing outside of bankruptcy would have required EFIH to pay the make-whole premium. EFIH disclosed to the Securities and Exchange Commission a “proposal [whereby] . . . EFIH would file for bankruptcy and refinance the notes without paying any make-whole amount.” EFIH later filed Chapter 11 bankruptcy petitions, seeking leave to borrow funds to pay off the notes and to offer a settlement to note-holders who agreed to waive the make-whole. The Trustee sought a declaration that refinancing would trigger the make-whole premium and that it could rescind the acceleration without violating the automatic stay. The Bankruptcy Court granted EFIH’s motion to refinance. EFIH paid off the notes and refinanced at a much lower interest rate; the make-whole would have been approximately $431 million. The Bankruptcy Court and district court concluded that no make-whole premium was due and that the noteholders could not rescind acceleration. The Third Circuit reversed. The premium, meant to give the lenders the interest yield they expect, does not fall away because the full principal amount becomes due and the noteholders are barred from rescinding acceleration of debt. View "In re: Energy Future Holdings Corp." on Justia Law

by
In 2010, Free, as the sole proprietor of Electra Lighting, filed a voluntary bankruptcy petition. He also owns Freedom Firearms, selling WWII-era guns. After Free fell behind on payments on business-related properties, the lender purchased them in foreclosure; Free purportedly filed for bankruptcy in an effort to “stay” the sale and “work out an agreement.” He had sufficient assets to pay his debts. He then hid assets worth hundreds of thousands of dollars from the Bankruptcy Court. Free was eventually convicted for multiple counts of bankruptcy fraud. His creditors received 100 cents on the dollar. The Sentencing Guidelines increase a fraudster’s recommended sentence based on the amount of loss he causes, or intends to cause. The district court treated the estimated value of the assets that Free concealed and the amount of debt sought to be discharged as the relevant “loss” under the Guidelines. The Third Circuit vacated. On remand, the court must determine whether Free intended to cause a loss to his creditors or what he sought to gain from committing the crime. Free will not necessarily receive a lower sentence on remand. Free’s repeated lying to the Bankruptcy Court and his manifest disrespect for the judicial system may merit an upward variance from the Guidelines. View "United States v. Free" on Justia Law

by
Rosenberg is the “principal architect” NMI and NMI Holding, which are affiliated with limited partnerships (LPs) that operate medical imaging centers. To finance the purchase of medical imaging equipment, the LPs entered into leases with DVI entities. DVI Financial was the initial servicer of the leases and U.S. Bank acted as trustee. When DVI Financial entered bankruptcy in 2004, Lyon acquired the servicing contracts. During state court litigation over money owed under the leases, DVI filed involuntary bankruptcy petitions against Rosenberg, NMI, and NMI Holding. The bankruptcy court dismissed the petitions because the DVI entities were not Rosenberg’s creditors. Rosenberg then filed an adversary action under 11 U.S.C. 303(i), alleging bad faith filing. Rosenberg obtained awards of fees and costs, $1.1 million in compensatory damages, and $5 million in punitive damages. Rosenberg’s wife, the Rosenberg Trust, and other Rosenberg Affiliates then sought damages based on the involuntary bankruptcy petitions, alleging tortious interference with contracts and business relationships. NMI Real Estate Partnerships owned the medical imaging facilities subject to mortgages. Rosenberg Affiliates alleged that the involuntary bankruptcy filings were intended to cause those Partnerships to default on their underlying mortgages; all but one of the properties have been lost. The district court dismissed, finding the claim preempted by the Bankruptcy Code. The Third Circuit reversed, stating that section 303(i) does not preempt the state law claims of nondebtors predicated on the filing of an involuntary bankruptcy petition. View "Rosenberg v. DVI Receivables XVII LLC" on Justia Law

by
Net Pay managed clients’ payrolls and handled their employment taxes pursuant to a “Payroll Services Agreement,” which required clients to provide their employee payroll information and gave clients the option of authorizing Net Pay to transfer funds from their bank accounts into Net Pay’s account and to remit those funds to the clients’ employees, the IRS, and other taxing authorities. The Agreement established an independent contractor relationship between Net Pay and its clients. About three months before it filed its Chapter 7 petition, Net Pay transferred $32,297 on behalf of Altus; $5,338 on behalf of HealthCare Systems; $1,143 on behalf of Project Services; $352.84 for an unknown client; and $281.13 for another unknown client. The next day, Net Pay informed its clients that it was ceasing operations. The trustee for Net Pay sought to recover the five payments, arguing that they were avoidable preferential transfers, 11 U.S.C. 547(b). The district court concluded that four of the transfers were not subject to recovery, being below the minimum amount established by law ($5,850), and that distinct transfers may be aggregated only if “‘transactionally related’ to the same debt.” Because the IRS applied the entire $32,297 toward Altus’s trust fund tax obligations, the court held that the payment was not avoidable. The Third Circuit affirmed. Net Pay lacked an equitable interest in the Altus funds by operation of 26 U.S.C. 7501(a). View "In Re: Net Pay Solutions Inc" on Justia Law

by
WI buys furniture wholesale. OEC provided WI with non-vessel-operating common carrier transportation services. WI signed an Application for Credit that granted a security interest in WI property in OEC’s possession, custody or control or en route. As required by federal law, OEC also publishes a tariff with the Federal Maritime Commission, which provides for a Carrier’s lien. WI filed voluntary Chapter 11 bankruptcy petitions. OEC sought relief from the automatic stay, arguing that it was a secured creditor with a possessory maritime lien. OEC documented debts of $458,251 for freight and related charges due on containers in OEC’s possession and $994,705 for freight and related charges on goods for which OEC had previously provided services. The estimated value of WIs’ goods in OEC’s possession was $1,926,363. WI filed an adversary proceeding, seeking release of the goods. The bankruptcy court ruled in favor of WI, citing 11 U.S.C. 542. The district court affirmed, holding that OEC did not possess a valid maritime lien on Pre-petition Goods. The Third Circuit reversed, noting the strong presumption that OEC did not waive its maritime liens on the Prepetition Goods, the clear documentation that the parties intended such liens to survive delivery, the familiar principle that a maritime lien may attach to property substituted for the original object of the lien, and the parties’ general freedom to modify or extend existing liens by contract. View "In re: World Imports LTD" on Justia Law

by
Wettach was a partner at theTitus law firm, which rented space from Trizec under a long-term lease. After the firm's 1999 dissolution, Trizec filed suit against Titus’s former partners for unpaid rent. The Pennsylvania court found the partners jointly and severally liable for more than $2,700,000. Before that court entered final judgment Wettach filed a voluntary Chapter 7 bankruptcy petition, listing $3,551,500 in assets, including $2,951,500 in personal property, retirement accounts, insurance, and a checking account held by the entireties with his wife. Wettach claimed all of this property as exempt, primarily relying on the exemption for property held by the entireties, 11 U.S.C. 522(b)(1), (3)(B). Wettach joined another law firm and earned wages that the firm directly deposited into the entireties account. The Trustee claimed that these deposits constituted recoverable fraudulent transfers. Before the bankruptcy court could rule, the case was reassigned. The parties consented to the court issuing findings without a new trial. The court ruled in favor of the Trustee, awarding $428,868.12, plus $37,139.01 in interest. The district court and Third Circuit affirmed, rejecting challenges to allocation of the burdens of persuasion and production on the fraudulent transfer claims; evidentiary findings; and a legal determination that the deposit of wages into an account held by the entireties constituted “transfer” of an “asset” under Pennsylvania state law. View "In re: Wettach" on Justia Law