Articles Posted in US Court of Appeals for the Sixth Circuit

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Seven Counties, a nonprofit provider of mental health services, attempted to file for Bankruptcy Code Chapter 11 reorganization. For decades, Seven Counties has participated in Kentucky’s public pension plan (KERS). Because the rate set for employer contributions has drastically increased in recent years, Seven Counties sought to reject its relationship with KERS in bankruptcy. The bankruptcy court and the district court both held that Seven Counties is eligible to file under Chapter 11 and that the relationship between Seven Counties and KERS is based on an executory contract that can be rejected. The Sixth Circuit affirmed in part. Seven Counties is only eligible to be a Chapter 11 debtor if it is a “person” under 11 U.S.C. 109(a); a “governmental unit” is generally excluded from the category of “person.” Because the Commonwealth does not exercise the necessary forms of control over Seven Counties for it to be considered an instrumentality of the Commonwealth, Seven Counties is eligible to file. Seven Counties characterized its relationship with KERS as contractual, such that, to the extent it is executory, it may be rejected in bankruptcy, 11 U.S.C. 365. KERS argued the relationship is purely statutory, similar to an assessment, such that it cannot be rejected. The Sixth Circuit certified the question of the nature of the relationship to the Kentucky Supreme Court. View "Kentucky Employees. Retirement System v. Seven Counties.Services, Inc." on Justia Law

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The Isaacs took out a home-equity loan, secured by a mortgage on their home. GMAC did not immediately record the mortgage. While the mortgage remained unrecorded, the Isaacs filed for Chapter 7 bankruptcy. GMAC recorded the mortgage after the automatic bankruptcy stay was in effect, without obtaining an order modifying or lifting the stay. The mortgage was listed as a secured claim. In 2004, the bankruptcy court entered a discharge order; the case closed. A decade later, the mortgage's new owner (DBI’s predecessor) obtained a Kentucky state court foreclosure order. Before the sale, Linda Isaacs filed a voluntary Chapter 13 petition, with an adversary complaint seeking to avoid the mortgage through the “strong-arm” power (11 U.S.C. 544(a)), which permits the trustee to “avoid transfers of property that would be avoidable by certain hypothetical parties,” arguing that it was never properly perfected and would lose under state priority law to the hypothetical parties. Isaacs alternatively argued that the lien had never attached because it contained conflicting language: one clause indicated that the lien attached once the Isaacs signed the mortgage another section stated the lien would attach upon recording. DBI contended that the bankruptcy court lacked jurisdiction under the Rooker-Feldman doctrine because Isaacs was effectively asking it to sit as an appellate court over the state court’s foreclosure judgment. The bankruptcy court granted Isaacs summary judgment. The Bankruptcy Appellate Panel reversed, holding that the bankruptcy court lacked jurisdiction under the Rooker-Feldman doctrine. The Sixth Circuit agreed but remanded. The primary claim, seeking avoidance under the strong-arm provision, was independent of the validity of the state-court judgment. View "Isaacs v. DBI-ASG Coinvestor Fund, III, LLC" on Justia Law

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Debtor filed a chapter 7 bankruptcy petition, seeking the discharge of his student loan debt as an “undue hardship,” 11 U.S.C. 523(a)(8). Debtor graduated with an architectural drafting certification in 2008 and, since then, the loan has been in forbearance, deferment or an income-driven repayment plan. The U.S. Department of Education intervened as a Party-Defendant and sought dismissal or summary judgment. Debtor filed an objection, not refuting the facts alleged in the motion, but arguing undue delay. The bankruptcy court allowed Debtor to amend his complaint, which did not state sufficient facts to meet the second prong of the Brunner test: “that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.” Debtor filed an amended complaint with exhibits showing proof of the Debtor’s status as a parolee, but did not otherwise correct the deficiencies. The court dismissed, finding that Debtor “only [made] conclusory statements about his inability to pay, without offering facts that may support these conclusions” and that status as a parolee, alone, was not “beyond the debtor’s control” as required under the third prong of the Brunner test. The Bankruptcy Appellate Panel affirmed, concluding that Debtor did not plead sufficient facts to support a discharge of his student loan debt notwithstanding the exception to discharge that would otherwise apply. View "In re Chenault" on Justia Law

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Trustee and Creditor filed an adversary complaint against Debtors and NonDebtor Defendants, including BIT, seeking a declaration that Debtors were not entitled to a discharge, and to recover assets from the Non-Debtors. Creditor and Trustee later entered into an agreement; Creditor purchased the bankruptcy estate’s claims, except Trustee’s objection to discharge, for $100,000 and a reduction to Creditor’s proof of claim. The court authorized the sale and dismissed the purchased claims for lack of subject matter jurisdiction because Trustee no longer owned and lacked standing to assert them but did not dismiss the 2009 Complaint. Creditor then filed the dismissed claims in the Western District of Tennessee, alleging that the BIT was an alter ego of Debtors, such that its assets should be made available to satisfy claims. The district court dismissed the claims because Tennessee law does not recognize reverse-veil-piercing outside of parent-subsidiary corporate relationships. In 2017, Creditor filed a new bankruptcy court complaint, invoking derivative standing and seeking a declaration that the BIT is a self-settled trust so that its assets are not excluded from bankruptcy estate by 11 U.S.C. 541(c)(2). The Sixth Circuit Bankruptcy Appellate Panel affirmed dismissal. The bankruptcy court did not abuse its discretion in interpreting the Sale Order to include the claims asserted in the 2017 Complaint or in concluding that Creditor could not pursue the claims asserted in the 2017 Complaint derivatively on Trustee’s behalf. View "In re Blasingame" on Justia Law

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Giese claimed that HNRC paid royalties derived from coal mining into an escrow account. After buying the property on which the mining occurred, Giese sued, asserting a right to the escrowed royalties. Lexington Coal disputed Giese’s claim, arguing it purchased all cash and accounts of HNRC and HNRC’s parent company during a bankruptcy case involving those entities. Lexington had been a defendant in an interpleader action before the Bankruptcy Court to determine the rightful owner of the funds at issue. Giese’s state court action was removed to the Bankruptcy Court, which declined to abstain from adjudicating two counts of Giese’s Kentucky state court complaint and dismissed his complaint. The Bankruptcy Appellate Panel affirmed. Giese’s claims were inextricably intertwined with the bankruptcy case and would not exist but for the bankruptcy, so the Bankruptcy Court was right to adjudicate them. Sending two claims (breach of contract and royalty claims) to a court that cannot, under any circumstance, adjudicate the other related claims, would pose a great risk to important policy concerns. Upholding the dismissal, the court stated that an order confirming a plan of reorganization constitutes a final judgment in a bankruptcy proceeding, and res judicata bars relitigation of any issues that could have been raised during the confirmation proceeding. View "In re HNRC Dissolution Co." on Justia Law

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Two individuals obtained unemployment benefits from the Michigan Unemployment Insurance Agency to which they were not entitled because they were being paid wages. Each was ordered to pay restitution and a penalty; each subsequently filed for Chapter 13 bankruptcy. The debtors argued that the penalties assessed were dischargeable in a Chapter 13 bankruptcy. Each district court disagreed. The Sixth Circuit affirmed, finding the penalties nondischargeable under 11 U.S.C. 523(a)(2). That section reflects a congressional decision that those who commit fraud are not to be given the same “fresh start” as “honest but unfortunate debtor[s].” A finding that the debt here arises from fraud perpetrated against the Agency makes section 523(a)(2) applicable, regardless of whether the debt could also fit under section 523(a)(7), which applies to government penalties. View "Kozlowski v. Michigan Unemployment Insurance Agency" on Justia Law

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In 2013, Jackson filed a voluntary Chapter 7 bankruptcy petition. The bankruptcy court lifted the automatic stay on Jackson’s residence. The bank foreclosed on Jackson’s residence in May 2014. Jackson’s right to redeem the property expired six months later. In October 2014, the Chapter 7 Trustee filed a no-asset report; in February 2015, Jackson obtained a discharge. Jackson submitted letters to the bankruptcy court in December 2016, stating that the account number for a creditor had changed; requesting “reconsideration of House being exempt in the bankruptcy case”; requesting a “sign[ed] court Order stating that the amended Scheduled have been listed, dismissed and entered”; and requesting reconsideration of an order denying her request to transfer the case. After a hearing, the bankruptcy court denied all of Jackson’s request and directed the Clerk to “prepare and enter a final decree discharging the trustee and closing the case promptly but not earlier than twenty-eight days after the entry” of that January 26, 2017 order. Jackson filed her Notice of Appeal 28 days later on February 23. On February 24, the Clerk docketed a “Text Order of Final Decree” which referenced the discharge and closed the case. The Sixth Circuit Bankruptcy Appellate Panel, sua sponte, raised the issue and found that the appeal was filed late under 28 U.S.C. 158(c)(2), Supreme Court precedent indicates that the statutory time requirements are jurisdictional in nature. View "In re Jackson" on Justia Law

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NPC’s adversary proceeding against the Chapter 7 Trustee and his surety alleged that the trustee breached his fiduciary duties with respect to one of the Debtor’s assets, a former Benton Harbor manufacturing facility. NPC’s attorney (Demorest) served five non-parties with subpoenas duces tecum under Federal Rule of Civil Procedure 45. The ensuing discovery dispute, including several motions, hearings, and orders, resulted in an award of attorney fees and costs to the non-parties, $104,770.00 to one group and $61,417.50 to another. After a subsequent finding of civil contempt for failure to pay, payment was made and the bankruptcy court ordered payment of an additional $4,725.00 in attorney fees and costs incurred in connection with the contempt proceedings. The district court and Sixth Circuit affirmed. The bankruptcy court specifically found, after a case-specific inquiry, that the subpoenas issued to the non-parties were unduly burdensome, given the undisputedly broad scope of the requests and the temporal reach of the requests. As an experienced commercial litigator, Demorest would have known that complying with such subpoenas would involve considerable time and resources, implicate significant concerns about customer privacy, and require review for privileged communications and attorney work product. The bankruptcy court did not abuse its discretion in finding that sanctions were warranted. View "New Products Corp. v. Dickinson Wright PLLC" on Justia Law

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Debtor, a professional hockey player with the NHL’s Columbus Blue Jackets, filed a voluntary Chapter 11 bankruptcy petition. His Player Contract ends with the 2017–18 NHL season. He had $21,343,723.64 in pre-petition debt. The bankruptcy court denied a subsequent motion to convert to chapter 7 based on Debtor’s bad faith conduct and failure to abide by his fiduciary duties. Debtor and six creditors holding more than $12 million of debt settled. Under the Confirmed Plan, Debtor was required to use post-petition earnings existing as of the Plan's effective date to pay secured creditors the value of their collateral, in kind or in cash payments. Allowed General Unsecured Claims were paid a 35% dividend, bringing them on par with the settling creditors, and claims of $1,000 or less were paid the lesser of their claim or $500. When Debtor’s current Player Contract ends, Debtor must contribute his net earnings (minus living expenses) from any source up to the fifth anniversary of the confirmation order. The Sixth Circuit Bankruptcy Appellate Panel dismissed an appeal as equitably moot. Property has been transferred, a trust has been established and a trustee appointed. Distributions have commenced. That final funding will not occur until future income is received does not alter the fact that all property proposed by the plan to be transferred from debtor’s bankruptcy estate as of the Effective Date was transferred. View "In re Johnson" on Justia Law

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Debtors filed their Chapter 7 bankruptcy petition in Ohio. They had homes in Ohio and Maryland and listed the Ohio Home as their residence, claiming a $265,800 homestead exemption (Ohio Revised Code 2329.66(A)(1)). They asserted their intent surrender their Maryland Home. During the 11 U.S.C. 341 Meeting of Creditors the debtors told the Trustee they wanted to move to Maryland, stating they had been commuting between Ohio and Maryland. They gave confusing responses about where they lived and where they intended to live. Ohio law permits each debtor to claim a $132,9001 exemption in a primary residence, while Maryland limits the exemption to $6,000, which may not be claimed by both spouses in the same proceeding. The bankruptcy court sustained the Trustee’s objection to the homestead exemption because the Ohio home was not their domicile during the 730 days immediately preceding their Chapter 7 filing, as required by 11 U.S.C. 522(b)(3)(A). The Bankruptcy Appellate Panel affirmed. In deciding that the debtors’ domicile was Maryland, the bankruptcy court applied the correct legal standards, noting "the tardy disclosure of an intricate organization that defies all explanation of necessity” and that the “Debtors’ credibility in providing complete and candid answers suffers” and that their “change in heart is a tactic to shield a valuable asset, rather than a valid assertion of domicile.” View "In re Felix" on Justia Law