Articles Posted in US Court of Appeals for the Sixth Circuit

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The Burkes filed a Chapter 7 bankruptcy petition, listing their Chattanooga home as worth $108,000, with a $91,581 mortgage debt. Jahn, the appointed trustee, sought an eviction order, stating that he could not sell the property with the debtors living there and that its value was about $200,000. The Burkes moved to compel the trustee to abandon the property, alleging that their equity would provide little value to creditors. Jahn tendered a check for $7,500, the value of their Tennessee statutory homestead exemption. The Burkes rejected the tender; their first witness estimated that the residence would be worth $171,000 after repairs related to mold and roofing that would cost $63,000, leaving a net value of $108,000. The Burkes’ second appraiser valued the home at $185,000 after making repairs estimated at $60,000, for a final appraisal of $125,000. Jahn’s realtor testified that the Burkes’ residence was worth $204,000, based on his tour of the property. Jahn's home inspector testified that there was no problem with the roof and that the mold issue had been overstated. The bankruptcy court granted the Burkes’ motion to abandon, noting that houses are often sold while occupied by their owners. The district court and Sixth Circuit affirmed. Under these circumstances, the trustee cannot simply tender the homestead exemption and cause the debtors to “skedaddle.” View "Jahn v. Burke" on Justia Law

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The Isaacs executed a mortgage to GMAC encumbering their Kentucky property. It states: “The lien ... will attach on the date this Mortgage is recorded.” The Isaacses filed a Chapter 7 bankruptcy petition in March 2004, listing the GMAC mortgage debt as secured debt. GMAC did not record the Mortgage until June 2004. GMAC did not seek relief from the automatic stay. No party sought to avoid the Mortgage. The Isaacses obtained a discharge; the case closed. Months later, the bankruptcy court reopened the case at the request of the Isaacses, avoided two judgment liens, and closed the case again. About 10 years later, GMAC’s successor obtained a default foreclosure Judgment and Order of Sale. Immediately before the scheduled sale date, wife (without husband) filed a chapter 13 petition, seeking to avoid the GMAC lien (11 U.S.C. 522(f)). In an adversary proceeding, the bankruptcy court found that GMAC was an unsecured creditor in the chapter 7 case, which discharged the debt; the foreclosure judgment was an improper modification of the discharge order, so that the Rooker-Feldman doctrine did not apply. The Sixth Circuit Bankruptcy Appellate Panel reversed. The bankruptcy court lacked subject matter jurisdiction under the Rooker-Feldman doctrine, precluding it from avoiding the state foreclosure judgment because the mortgage was enforceable against the Isaacses’ interests on the chapter 7 petition date. Since unavoided pre-petition liens pass through bankruptcy unaffected, the foreclosure judgment could not violate the chapter 7 discharge. View "In re: Isaacs" on Justia Law

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Reid founded Capitol, which owned commmunity banks, and served as its chairman and CEO. His daughter and her husband served as president and general counsel. Capitol accepted Federal Reserve oversight in 2009. In 2012, Capitol sought Chapter 11 bankruptcy reorganization and became a “debtor in possession.” In 2013, Capitol decided to liquidate and submitted proposals that released its executives from liability. The creditors’ committee objected and unsuccessfully sought derivative standing to sue the Reids for breach of their fiduciary duties. The Reids and the creditors continued negotiation. In 2014, they agreed to a liquidation plan that required Capitol to assign its legal claims to a Liquidating Trust; the Reids would have no liability for any conduct after the bankruptcy filing and their pre-petition liability was limited to insurance recovery. Capitol had a management liability insurance policy, purchased about a year before it filed the bankruptcy petition. The liquidation plan required the Reids to sue the insurer if it denied coverage. The policy excluded from coverage “any claim made against an Insured . . . by, on behalf of, or in the name or right of, the Company or any Insured,” except for derivative suits by independent shareholders and employment claims (insured-versus-insured exclusion). The Liquidation Trustee sued the Reids for $18.8 million and notified the insurer. The Sixth Circuit affirmed a declaratory judgment that the insurer had no obligation with respect to the lawsuit, which fell within the insured-versus-insured exclusion. View "Indian Harbor Insurance Co. v. Zucker" on Justia Law

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The Debtor owned nonresidential real estate that FNB sold in a pre-petition foreclosure sale. Before Debtor's bankruptcy filing, FNB obtained a deficiency judgment and filed two judicial liens. During her chapter 7 case, Debtor moved, under 11 U.S.C. 522(f)(1)(A), to avoid those liens as impairing Debtor’s Ohio homestead exemption in her residence. The bankruptcy court denied Debtor’s motion, ruling that section 522(f)(2)(C) specifically prohibits the avoidance of a deficiency judgment lien because it is a lien based on a judgment arising out of a mortgage foreclosure. The Sixth Circuit Bankruptcy Appellate Panel reversed, finding that section 522(f)(2)(C) is not ambiguous, so reference to either state law or legislative history is not required to interpret it. Section 522(f)(2)(C) does not preclude avoidance of mortgage deficiency judgment liens but “clarifi[es] that the entry of a foreclosure judgment does not convert the underlying consensual mortgage into a judicial lien which may be avoided.” The court noted that most courts hold that mortgage deficiency liens are not "judgments [that] aris[e] out of a mortgage foreclosure" and are therefore avoidable. View "In re: Pace" on Justia Law