Articles Posted in US Supreme Court

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Appling owed about $60,000 to his law firm (Lamar), which threatened to withdraw representation and place a lien on its work product. Appling told Lamar that he could cover owed and future legal expenses with an expected tax refund, so Lamar continued representation. Appling used the refund, which was much less than he had stated, for business expenses, but told Lamar he was still waiting for the refund. Lamar completed pending litigation. Appling never paid. Lamar obtained a judgment. Appling filed for Chapter 7 bankruptcy. Lamar initiated an adversary proceeding, arguing that Appling’s debt was nondischargeable under 11 U.S.C. 523(a)(2). Section 523(a)(2)(A) bars discharge of debts arising from “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s . . . financial condition.” Subparagraph (B) bars discharge of debts arising from a materially false “statement . . . respecting the debtor’s . . . financial condition” if that statement is “in writing.” The Eleventh Circuit found that Appling made a statement “respecting” his “financial condition,” which was not in writing. The Supreme Court affirmed. A statement about a single asset can be a “statement respecting the debtor’s financial condition” under section 523(a)(2). A statement is “respecting” a debtor’s financial condition if it has a direct relation to or impact on the debtor’s overall financial status. A single asset has a direct relation to and impact on aggregate financial condition, so a statement about that asset bears on a debtor’s overall financial condition and can help indicate whether a debtor is solvent or insolvent. View "Lamar, Archer & Cofrin, LLP v. Appling" on Justia Law

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Lakeridge. a corporation with a single owner (MBP), filed for Chapter 11 bankruptcy, owing U.S. Bank $10 million and MBP $2.76 million. Lakeridge submitted a reorganization plan, proposing to impair the interests of both. U.S. Bank refused, blocking Lakeridge’s reorganization through a consensual plan, 11 U.S.C. 1129(a)(8). Lakeridge then turned to a “cramdown” plan, which would require consent by an impaired class of creditors that is not an “insider” of the debtor. An insider “includes” any director, officer, or “person in control” of the entity. MBP, unable to provide the needed consent, sought to transfer its claim to a non-insider. Bartlett, an MBP board member and Lakeridge officer, offered MBP’s claim to Rabkin for $5,000. Rabkin purchased the claim and consented to Lakeridge’s proposed reorganization. U.S. Bank objected, arguing that Rabkin was a nonstatutory insider because he had a “romantic” relationship with Bartlett. The Bankruptcy Court, Ninth Circuit, and Supreme Court rejected that argument. The Ninth Circuit correctly reviewed the Bankruptcy Court’s determination for clear error (rather than de novo), as “mixed question” of law and fact: whether the findings of fact satisfy the legal test for conferring non-statutory insider status. The standard of review for a mixed question depends on whether answering it entails primarily legal or factual work. Using the Ninth Circuit’s legal test for identifying such insiders (whether the transaction was conducted at arm’s length, i.e., as though the parties were strangers) the mixed question became: Given all the basic facts, was Rabkin’s purchase of MBP’s claim conducted as if the two were strangers? Such an inquiry primarily belongs in the court that has presided over the presentation of evidence, i.e., the bankruptcy court. View "U. S. Bank N. A. v. Village at Lakeridge, LLC" on Justia Law

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Valley agreed to purchase Bedford Downs’ stock for $55 million if it got the last harness-racing license in Pennsylvania, Valley got the license and arranged for Credit Suisse to wire $55 million to third-party escrow agent Citizens Bank. Bedford Downs shareholders, including Merit, deposited their stock certificates into escrow. Citizens disbursed the $55 million according to the agreement. Merit received $16.5 million. Valley was unable to achieve its goal of opening a racetrack casino and, with its parent company, Centaur, filed for Chapter 11 bankruptcy. FTI, the trustee, sought to avoid the transfer to Merit for the sale of Bedford stock, arguing that it was constructively fraudulent under 11 U.S.C. 548(a)(1)(B). Merit contended that the section 546(e) safe harbor barred FTI from avoiding the transfer because it was a “settlement payment . . . made by or to (or for the benefit of)” two “financial institutions,” Credit Suisse and Citizens Bank. The Seventh Circuit held that section 546(e) did not protect transfers in which financial institutions served as mere conduits. A unanimous Supreme Court affirmed. The only relevant transfer for purposes of the 546(e) safe harbor is the transfer that the trustee seeks to avoid and not its component parts. FTI sought to avoid the Valley-to-Merit transfer; neither Valley or Merit is a covered entity, so the transfer falls outside of the 546(e) safe harbor. View "Merit Management Group, LP v. FTI Consulting, Inc." on Justia Law