Articles Posted in U.S. Supreme Court

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Filing a bankruptcy proof of claim that is obviously time-barred is not a false, deceptive, misleading, unfair, or unconscionable practice under the Fair Debt Collection Practices Act (FDCPA). Midland filed a proof of claim in Johnson’s Chapter 13 bankruptcy case, asserting a credit-card debt and noting that the last time any charge appeared on Johnson’s account was more than 10 years ago. The Alabama limitations period is six years. The Bankruptcy Court disallowed the claim. Johnson filed suit under the FDCPA, 15 U.S.C. 1692. The Supreme Court reversed the Eleventh Circuit. The Bankruptcy Code defines “claim” as a “right to payment,” 11 U.S.C. 101(5)(A); state law usually determines whether a person has such a right. Alabama law provides that a creditor has the right to payment of a debt even after the limitations period has expired. The word “enforceable” does not appear in the Code’s definition. The law treats unenforceability of a claim due to the expiration of the limitations period as an affirmative defense. There is nothing misleading or deceptive in filing a proof of claim that follows the Code’s similar system. Concerns that a consumer might unwittingly repay a time-barred debt have diminished force in a Chapter 13 bankruptcy, where: the consumer initiates the proceeding; a knowledgeable trustee is available; procedural rules guide evaluation of claims; and the claims resolution process is “less unnerving” than facing a collection lawsuit. View "Midland Funding, LLC v. Johnson" on Justia Law

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Jevic filed for Chapter 11 bankruptcy after its purchase in a leveraged buyout. Former Jevic drivers were awarded a judgment for violations of state and federal Worker Adjustment and Retraining Notification (WARN) Acts, part of which was a priority wage claim under 11 U.S.C. 507(a)(4), entitling them to payment ahead of general unsecured claims. In another suit, a court-authorized committee representing unsecured creditors sued Sun Capital and CIT for fraudulent conveyance in the buyout; the parties negotiated a structured dismissal of Jevic’s bankruptcy, under which the drivers would receive nothing on their WARN claims, but lower-priority general unsecured creditors would be paid. The Bankruptcy Court reasoned that the proposed payouts would occur under a structured dismissal rather than an approved plan, so failure to follow ordinary priority rules did not bar approval. The district court and Third Circuit affirmed. The Supreme Court reversed. The drivers have standing, having “suffered an injury in fact,” or “likely to be redressed by a favorable judicial decision.” A settlement that respects ordinary priorities remains a reasonable possibility and the fraudulent-conveyance claim could have litigation value. Bankruptcy courts may not approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of affected creditors. Section 349(b), which permits a bankruptcy judge, “for cause, [to] orde[r] otherwise,” gives courts flexibility to protect reliance interests, not to make general end-of-case distributions that would be impermissible in a Chapter 11 plan or Chapter 7 liquidation. Here, the priority-violating distribution is attached to a final disposition and does not preserve the debtor as a going concern, nor make the disfavored creditors better off, promote the possibility of a confirmable plan, help to restore the status quo ante, or protect reliance interests. There is no “rare case” exception, permitting courts to disregard priority in structured dismissals for “sufficient reasons.” View "Czyzewski v. Jevic Holding Corp. " on Justia Law

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Parts of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. mirrored Chapters 9 and 11 of the Federal Bankruptcy Code and enabled Puerto Rico’s public utility corporations to restructure their debt. The First Circuit affirmed an injunction, concluding that the Act is preempted by 11 U.S.C. 903(1). The Supreme Court affirmed, analyzing three federal municipal bankruptcy provisions. The “gateway” provision, section 109(c), requires a Chapter 9 debtor to be an insolvent municipality that is “specifically authorized” by a state “to be a debtor.” The pre-emption provision, 903(1), expressly bars states from enacting municipal bankruptcy laws. The definition of “State,” 101(52), “includes . . . Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9.” The definition excludes Puerto Rico for the single purpose of defining who may be a Chapter 9 debtor, an unmistakable reference to the gateway provision. The definition of “State” does not exclude Puerto Rico from all of Chapter 9’s provisions. Puerto Rico is bound by the pre-emption provision, even though Congress removed its gateway provision authority to authorize its municipalities to seek Chapter 9 relief. An argument that the Recovery Act is not a “State law” that can be pre-empted is based on technical amendments to the terms “creditor” and “debtor” that are too “subtle” to support such a “[f]undamental chang[e] in the scope” of Chapter 9’s pre-emption provision. View "Puerto Rico v. Franklin Cal. Tax-Free Trust" on Justia Law

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Chrysalis incurred a debt of $164,000 to Husky. Ritz, Chrysalis’ director and then-part-owner, drained Chrysalis of assets available to pay the debt by transferring large sums to other entities Ritz controlled. Husky sued Ritz, who then filed for Chapter 7 bankruptcy. Husky filed a complaint in Ritz’ bankruptcy case, asserting “actual fraud” under the Code’s discharge exceptions, 11 U.S.C. 523(a)(2)(A). The district court held that Ritz was personally liable under state law but that the debt was not “obtained by . . . actual fraud” and could be discharged. The Fifth Circuit affirmed. The Supreme Court reversed. The term “actual fraud” encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation. The term “fraud” has, since the beginnings of bankruptcy practice, been used to describe asset transfers that, like Ritz’ scheme, impair a creditor’s ability to collect a debt. This interpretation is not incompatible with Section 523(a)(2)(A)’s “obtained by” requirement. Even though the transferor of a fraudulent conveyance does not obtain assets or debts through the fraudulent conveyance, the transferee—who, with the requisite intent, also commits fraud—does. Reading the phrase “actual fraud” to restrict, rather than expand, the discharge exception’s reach would untenably require reading the disjunctive “or” in the phrase “false pretenses, a false representation, or actual fraud” to mean “by.” View "Husky Int’l Electronics, Inc. v. Ritz" on Justia Law

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When petitioners filed for Chapter 7 bankruptcy, they sought to exclude $300,000 in an inherited individual retirement account (IRA) from the bankruptcy estate using the “retirement funds” exemption, 11 U.S.C. 522(b)(3)(C). The Bankruptcy Court concluded that an inherited IRA does not share the same characteristics as a traditional IRA and disallowed the exemption. The district court reversed. The Seventh Circuit reversed the district court. The Supreme Court affirmed, holding that funds in inherited IRAs are not “retirement funds” within the meaning of the code, based on three characteristics. The holder of an inherited IRA may never invest additional money in the account; is required to withdraw money from the account, no matter how far the holder is from retirement; and may withdraw the entire account at any time and use it for any purpose without penalty. Allowing debtors to protect funds in traditional and Roth IRAs ensures that debtors will be able to meet their basic needs during their retirement, but nothing about an inherited IRA’s legal characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption. The “retirement funds” exemption should not be read to create a “free pass,” The possibility that an account holder can leave an inherited IRA intact until retirement and take only the required minimum distributions does not mean that an inherited IRA bears the legal characteristics of retirement funds. View "Clark v. Rameker" on Justia Law

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BIA filed a voluntary chapter 7 bankruptcy petition. The bankruptcy trustee filed a complaint alleging fraudulent conveyance of assets. The bankruptcy court granted the trustee summary judgment. The district court affirmed. While appeal was pending, the Supreme Court held, in Stern v. Marshall, that Article III did not permit a bankruptcy court to enter final judgment on a counterclaim for tortious interference, even though final adjudication of that claim by the bankruptcy court was authorized by statute. The Ninth Circuit affirmed, acknowledging the trustee’s claims as “Stern claims,” i.e., claims designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way under Article III, but concluding that defendants had impliedly consented to jurisdiction. The court stated that the bankruptcy court’s judgment could be treated as proposed findings of fact and conclusions of law, subject to de novo review by the district court. A unanimous Supreme Court affirmed. Under 28 U.S.C. 157, federal district courts have original jurisdiction in bankruptcy cases and may refer to bankruptcy judges “core” proceedings and “non-core” proceedings. In core proceedings, a bankruptcy judge “may hear and determine . . . and enter appropriate orders and judgments,” subject to the district court’s traditional appellate review. In non-core proceedings—those that are “otherwise related to a case under title 11,” final judgment must be entered by the district court after de novo review of the bankruptcy judge’s proposed findings of fact and conclusions of law, except that the bankruptcy judge may enter final judgment if the parties consent. Lower courts have described Stern claims as creating a statutory gap, since bankruptcy judges are not explicitly authorized to propose findings of fact and conclusions of law in a core proceeding. However, the gap is closed by the Act’s severability provision; when a court identifies a Stern claim, the bankruptcy court should simply treat that claim as non-core. The fraudulent conveyance claims, which Article III does not permit to be treated as “core” claims are “related to a case under title 11” and fit comfortably within the category of claims governed by section 157(c)(1). View "Exec. Benefits Ins. Agency v. Arkison" on Justia Law

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Law filed for Chapter 7 bankruptcy. He valued his home at $363,348, claiming that $75,000 of the value was covered by California’s homestead exemption and exempt from the bankruptcy estate under 11 U.S.C. 522(b)(3)(A). He claimed that the sum of two liens, including a mortgage in favor of Lin, exceeded the home’s nonexempt value, leaving no equity for other creditors. Siegel, the bankruptcy trustee, challenged the Lin lien in an adversary proceeding. Protracted litigation followed when “Lili Lin” in China claimed to be the beneficiary of Law’s deed of trust. The Bankruptcy Court concluded that the loan was a fiction created to preserve equity in the house and granted Siegel’s motion to “surcharge” Law’s $75,000 homestead exemption, to defray fees incurred in challenging Law’s misrepresentations. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed. The Supreme Court reversed. A bankruptcy court may not exercise its authority to carry out the provisions of the Code, 11 U.S.C. 105(a), or its inherent power to sanction abusive litigation practices by taking action prohibited elsewhere in the Code; the “surcharge” contravened section 522, which (by reference to California law) entitled Law to exempt $75,000 of equity in his home and which made that $75,000 “not liable for payment of any administrative expense,” including attorney’s fees. An argument that equated the surcharge with denial of Law’s homestead exemption was not supported by the history of the case. No one timely objected to the exemption, so it became final before the surcharge was imposed. In addition, federal law provides no authority for denial of an exemption on a ground not specified in the Code. The Court acknowledged that its ruling may produce inequitable results, but noted that ample authority remains to address debtor misconduct, including denial of discharge, sanctions for bad-faith litigation conduct, or enforcement of monetary sanctions through the normal procedures for collecting judgments. View "Law v. Siegel" on Justia Law

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Petitioner’s father established a trust for the benefit of petitioner and his siblings, and made petitioner the nonprofessional trustee. The trust’s sole asset was the father’s life insurance policy. Petitioner borrowed funds from the trust three times; all borrowed funds were repaid with interest. His siblings obtained a state court judgment for breach of fiduciary duty, though the court found no apparent malicious motive. The court imposed constructive trusts on petitioner’s interests, including his interest in the original trust, to secure payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy. Respondent opposed discharge of debts to the trust. The Bankruptcy Court held that petitioner’s debts were not dischargeable under 11 U. S. C. 523(a)(4), which provides that an individual cannot obtain a bankruptcy discharge from a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The district court and the Eleventh Circuit affirmed. The Supreme Court vacated. The term “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior. The Court previously interpreted the term “fraud” in the exceptions to mean “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong.” The term “defalcation” should be treated similarly. Where the conduct does not involve bad faith, moral turpitude, or other immoral conduct, “defalcation” requires an intentional wrong. An intentional wrong includes not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Where actual knowledge of wrongdoing is lacking, conduct is considered as equivalent if, as set forth in the Model Penal Code, the fiduciary “consciously disregards,” or is willfully blind to, “a substantial and unjustifiable risk” that his conduct will violate a fiduciary duty. View "Bullock v. BankChampaign, N. A." on Justia Law

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Debtors obtained a secured loan from an investment fund, for which the Bank served as trustee. Debtors ultimately became insolvent, seeking relief under 11 U.S.C. 1129(b)(2)(A), where debtors sought to confirm a "cramdown" bankruptcy plan over the Bank's objection. The Bankruptcy Court denied debtors' request, concluding that the auction procedures did not comply with section 1129(b)(2)(A)'s requirements for cramdown plans and the Seventh Circuit affirmed. The Court held that debtors could not obtain confirmation of a Chapter 11 cramdown plan that provided for the sale of collateral free and clear of the Bank's lien, but did not permit the Bank to credit-bid at the sale. Accordingly, the Court affirmed the judgment of the Court of Appeals. View "RadLAX Gateway Hotel, LLC v. Amalgamated Bank" on Justia Law

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This case arose when petitioners filed for Chapter 12 bankruptcy and then sold their farm. Under Chapter 12 of the Bankruptcy Code, farmer debtors could treat certain claims owed to a governmental unit resulting from the disposition of farm assets as dischargeable, unsecured liabilities. 11 U.S.C. 1222(a). The Court held that federal income tax liability resulting from petitioners' post-petition farm sale was not "incurred by the estate" under 11 U.S.C. 503(b) of the Bankruptcy Code and thus was neither collectible nor dischargeable in the Chapter 12 plan. Therefore, the Court affirmed the judgment of the Ninth Circuit. View "Hall v. United States" on Justia Law