Justia Bankruptcy Opinion Summaries

Articles Posted in US Court of Appeals for the Fourth Circuit
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Plaintiff sued three defendants under 11 U.S.C. Section 362 for violating a bankruptcy stay by their participation in the foreclosure and sale of her home while her bankruptcy petition was pending. The district court dismissed the claims against the first defendant but not the other two, and Plaintiff appealed the dismissal order, even though it was interlocutory. While her appeal was pending before the Fourth Circuit, however, the district court dismissed the claims against the other two defendants and entered a final judgment in the case. That final judgment saved her appeal from dismissal in our court under the doctrine of “cumulative finality,” as the district court had at that point adjudicated all claims as to all parties in the case.   The Fourth Circuit reviewed the order dismissing the first defendant and remanded the case for further proceedings against that defendant. Because Plaintiff never appealed the dismissal of the other two defendants, however, the court never had those defendants before it. Thus the court concluded that it lacks jurisdiction over Plaintiff’s appeal of the final judgment in favor of the other two defendants, as it was untimely. The court explained the fact that the February 2014 judgment was a final judgment sufficient to grant cumulative finality means that Plaintiff’s appeal of that judgment was subject to the time requirements of Section 2107(a), which she failed to satisfy. View "Diana Houck v. LifeStore Bank" on Justia Law

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When Cleary Packaging, LLC, filed a petition in bankruptcy under Subchapter V of Chapter 11 as a “small business debtor,” seeking to discharge a $4.7 million judgment that Cantwell-Cleary Co., Inc. had obtained against it for intentional interference with contracts and tortious interference with business relations, Cantwell-Cleary opposed the effort. It argued that 11 U.S.C. Section 1192(2), provides that small business debtors are not entitled to discharge any debt of the kind specified in section 523(a). And that Section 523(a) in turn lists 21 categories of debt that are non-dischargeable, including debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.”   The bankruptcy court agreed with Cleary Packaging and concluded that its $4.7 million debt was dischargeable. The Fourth Circuit disagreed with the bankruptcy court and reversed the court’s ruling and remanded. The court found more harmony from following a close textual analysis and contextual review of Section 1192(2) and thus concluded that it provides discharges to small business debtors, whether they are individuals or corporations, except with respect to the 21 kinds of debts listed in Section 523(a). Finally, the court concluded that its interpretation serves fairness and equity in circumstances where a small business corporate debtor, in particular, is given greater priority over creditors than would ordinarily apply and thus should not especially benefit from the discharge of debts incurred in circumstances of fraud, willful and malicious injury, and the other violations of public policy reflected in Section 523(a)’s list of exceptions. View "Cantwell-Cleary, Co., Inc. v. Cleary Packaging, LLC" on Justia Law

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Appellants filed for Chapter 11 bankruptcy in 2009. The bankruptcy court approved a repayment plan which allowed Appellants to retain possession of a beach house, with the creditor retaining a secured claim for the total outstanding mortgage balance. Several years later, Appellees took as loan servicer for the mortgage. Despite Appellant's timely payments, Appellees mistakenly believed that the account was past due. Eventually, Appellees initiated foreclosure proceedings. Appellants filed an emergency motion for content, which the bankruptcy court granted. However, the district court reversed under Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), finding Appellees acted in good faith because the error involved the previous loan servicer and Appellees based their actions on the advice of counsel.The Fourth Circuit found that both the bankruptcy court and district court erred. The standard announced in Taggart applies to an action to hold a creditor in civil contempt for violating a plan of reorganization of debts entered under Chapter 11. Nothing in the Taggart decision limits the case to Chapter 7 bankruptcy proceedings. While there are differences between Chapter 7 and Chapter 11 bankruptcies, the power of a bankruptcy court in either type of case derives from the same statutes and the same general principles.However, the Fourth Circuit also held that the district court erred in its application of Taggart. Thus, the court remanded the case for further proceedings. View "Gordon Beckhart, Jr. v. Newrez, LLC" on Justia Law

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The Fourth Circuit concluded on the merits that, under the Bankruptcy Code and the applicable state fraudulent transfer statutes, tax penalty obligations are not voidable, and relatedly, tax penalty payments are not recoverable. Accordingly, the court affirmed the district court's decision upholding the bankruptcy court's dismissal of the trustee's claims seeking to void tax penalty obligations owed by the debtor to the IRS and to recover prior payments made by the debtor to the IRS upon such obligations.The court found the Sixth Circuit's decision in In re Southeast Waffles, LLC, 702 F.3d 850 (6th Cir. 2012), persuasive and concluded that tax penalties do not fit within the obligations contemplated in the North Carolina Uniform Voidable Transactions Act. Because tax penalties are not obligations incurred as contemplated by the Act, it cannot be the "applicable law" required for the trustee to bring this action under 11 U.S.C. 544(b)(1). If there is no applicable law for the trustee's section 544(b)(1) claim, the court concluded that the claim must be dismissed. The court noted that its conclusion about the tax penalty payments turns on the legitimacy of the underlying tax penalty obligation; not the fact that the payments reduced the amount of the tax penalty obligations dollar for dollar. Since the underlying tax penalty obligation is not voidable, neither are Yahweh Center’s payments on that obligation. View "Cook v. United States" on Justia Law

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After the Circuit City Trustee sought a ruling in 2019 on his liability for quarterly fees assessed under a 2017 Amendment to the bankruptcy fees provisions of the United States Code (28 U.S.C. 1930(a)(6)(B)), the Bankruptcy Court for the Eastern District of Virginia ruled that the fees aspect of the 2017 Amendment is unconstitutional. The U.S. Trustee appealed and the Circuit City Trustee cross-appealed, jointly certifying these appeals to the Fourth Circuit, which the court granted and consolidated.The Fourth Circuit ruled in favor of the U.S. Trustee in both appeals, reversing the Bankruptcy Opinion's uniformity decision challenged by the U.S. Trustee, and affirming the Opinion's retroactivity decision challenged by the Circuit City Trustee. The court concluded that the 2017 Amendment does not contravene the uniformity mandate of either the Uniformity Clause or the Bankruptcy Clause. The court also concluded that Congress clearly intended for the 2017 Amendment to apply to all disbursements made after its effective date, and it intended for the Amendment to be prospective. Accordingly, the court remanded to the bankruptcy court for further proceedings. View "Siegel v. Fitzgerald" on Justia Law

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To finance the purchase of a home in 2008, Wood borrowed $39,739.44. About six years later, Wood defaulted, with an unpaid balance of $23,066.66. The Department of Housing and Urban Development (HUD), which had insured the loan, paid that amount and sent Wood a Notice of Intent to Collect by Treasury Offset, using income tax overpayments. In 2017, Treasury offset Wood's federal tax overpayment of $9,961 toward the debt. In 2018, Wood filed a Chapter 7 bankruptcy petition, opting to exempt any 2017 income tax overpayment. Treasury nonetheless offset a $6,086 overpayment.Wood requested that the bankruptcy court void HUD’s lien and order a return of the $6,086. The court concluded that a debtor’s tax overpayment becomes property of the estate, protected by the stay, and the debtor may exempt the overpayments and defeat a governmental creditor’s right to setoff. The district court agreed, stating that because Treasury had knowingly intercepted the overpayments after the Woods filed for bankruptcy, equity did not favor granting permission to seek relief from the automatic stay.The Fourth Circuit remanded. The protections typically accorded properly exempted property under 11 U.S.C. 522(c) do not prevail over the government’s 26 U.S.C. 6402(d) right to offset mutual debts. Although the government exercised that right before requesting relief from the automatic stay, there is no reason to abridge the government’s 11 U.S.C. 362(d) right to seek the stay’s annulment. View "Wood v. United States Department of Housing and Urban Development" on Justia Law

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Under the federal tax offset program, the Secretary of the Treasury has the discretion to set-off "any" tax overpayment against a taxpayer's preexisting tax liabilities, and the bankruptcy code provides that exempt property cannot be used to satisfy "any" of the bankruptcy debtor's prepetition debts. At issue was which of these statutory directives controls when a bankruptcy debtor claims, as exempt property, a tax overpayment that the government seeks to set-off under the offset program.The Fourth Circuit agreed that debtors' interest in their tax overpayment became part of the bankruptcy estate. However, based on the plain language of the various statutes, particularly the plain language of 11 U.S.C. 553(a), the court held that the government's right to offset the debtors' tax overpayment under 26 U.S.C. 6402(a) cannot be subordinated or otherwise affected by debtors' attempts to claim the overpayment as exempt property. Accordingly, the court vacated the district court's judgment, remanding for further proceedings. View "Copley v. United States" on Justia Law

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After entering a settlement that released certain tort claims, plaintiff filed for Chapter 7 bankruptcy. When her debts were discharged and the bankruptcy proceedings closed, she filed suit seeking to rescind her settlement agreement as fraudulently induced and to pursue a tort action. The district court entered judgment in favor of defendants.The Fourth Circuit held that the district court's standing determination conflates Article III requirements with the distinct real-party-in-interest analysis. Rather, plaintiff has both Article III standing and the legal entitlement to pursue tort claims on her own behalf. In regard to judicial estoppel, the court also held that the district court relied on an improper presumption of bad faith, and therefore reached its conclusion without fully engaging in the necessary inquiry. Therefore, the court remanded to the district court for it to evaluate the appropriateness of judicial estoppel in light of all facts and circumstances without recourse to a presumption of bad faith. View "Martineau v. Wier" on Justia Law

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The plain text of 11 U.S.C. 1322(c)(2) authorizes modification of covered homestead mortgage claims, not just payments, including bifurcation of undersecured homestead mortgages into secured and unsecured components. The Fifth Circuit overruled Witt v. United Cos. Lending Corp., 113 F.3d 508 (4th Cir. 1997), which held that Chapter 13 debtors may not bifurcate a narrow subset of undersecured home mortgage loans into separate secured and unsecured claims and cram down the unsecured portion of such loans. Accordingly, the court reversed and remanded for further proceedings. View "Hurlburt v. Black" on Justia Law

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The Fourth Circuit reversed the district court's decision affirming the bankruptcy court's conclusion that Alaska's award of damages to TKCA necessarily meant that debtor willfully and maliciously injured TKCA for purposes of section 523(a)(6) of the Bankruptcy Code. The Supreme Court, in Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998), held that section 523(a)(6) requires "a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury."The court held that, because neither the Alaska district court, nor the bankruptcy court, determined the precise issue of whether debtor intended to injure TKCA, collateral estoppel and summary judgment were inappropriate. Therefore, the court remanded to the district court with instructions to remand to the bankruptcy court for further proceedings. View "TKC Aerospace Inc. v. Muhs" on Justia Law