Justia Bankruptcy Opinion Summaries

Highland Capital Management, L.P., a firm co-founded by James Dondero, filed for bankruptcy in 2019 due to litigation claims. As part of a settlement agreement, Dondero relinquished control of Highland to three independent directors, one of whom, James P. Seery, was appointed as Highland’s Chief Executive Officer, Chief Restructuring Officer, and Foreign Representative by the bankruptcy court. To protect Seery from vexatious litigation, the bankruptcy court issued an order that no entity could commence or pursue a claim against Seery relating to his role without the bankruptcy court's prior approval. Despite this, two entities founded by Dondero, the Charitable DAF Foundation and its affiliate CLO Holdco, filed a lawsuit against Highland in district court, alleging that Highland, through Seery, had withheld material information and engaged in self-dealing related to a settlement with one of its largest creditors, HarbourVest.The bankruptcy court held the appellants in civil contempt for violating its order and ordered them to pay $239,655 in compensatory damages. The district court affirmed the bankruptcy court's decision, concluding that the award was compensatory and therefore civil. The appellants appealed to the United States Court of Appeals for the Fifth Circuit, arguing that the sanction was punitive and thus exceeded the scope of the bankruptcy court’s civil contempt powers.The United States Court of Appeals for the Fifth Circuit vacated the district court's decision and remanded the case. The appellate court found that the bankruptcy court had abused its discretion by imposing a punitive sanction that exceeded its civil contempt powers. The court held that the sanction was not compensatory because it was not based on the damages Highland suffered due to the appellants' decision to file the motion in the wrong court. The court instructed the bankruptcy court to limit any sanction award to the damages Highland suffered because of this error. View "Charitable DAF Fund v. Highland Captl Mgmt" on Justia Law

The case involved an appeal from the United States District Court for the Middle District of Florida by Talal Qais Abdulmunem Al Zawawi, a citizen of Oman. Al Zawawi was seeking to overturn the bankruptcy court's decision that recognized foreign proceedings in a Chapter 15 bankruptcy case. The main question was whether 11 U.S.C. § 109(a), which limits the class of persons and entities that could constitute a “debtor,” applied to cases brought under Chapter 15 of the Bankruptcy Code.The United States Court of Appeals for the Eleventh Circuit, in reviewing the case, found that a plain reading of the Bankruptcy Code indicated that § 109(a) did apply to Chapter 15 cases. However, the Court was bound by prior precedent that stated that Chapter 1’s debtor eligibility language did not apply to cases ancillary to a foreign proceeding.The Court found that the former § 304 and Chapter 15 had sufficiently similar purposes such that their decision in a previous case, In re Goerg, controlled their analysis in this case. Based on this reasoning, the Court held that debtor eligibility under Chapter 1 was not a prerequisite for the recognition of a foreign proceeding under Chapter 15. The Court therefore affirmed the bankruptcy court's decision to recognize the foreign proceeding. View "Al Zawawi v. Diss" on Justia Law

In this case, the Supreme Court of Montana reversed and remanded a decision of the Thirteenth Judicial District Court, Yellowstone County. The case involved Saddlebrook Investments (Saddlebrook), assignee of Stuart Simonsen, and Krohne Fund, L.P. (Krohne Fund). Saddlebrook appealed against the district court’s order granting summary judgment in favor of Krohne Fund on Saddlebrook’s claims of malicious prosecution and abuse of process.The Supreme Court found that the district court had erred in applying the doctrine of judicial estoppel to bar Saddlebrook from pursuing its claims. The court noted that a party is not judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor’s schedules or disclosure statements. However, this does not apply when the bankruptcy trustee is pursuing the action for the benefit of creditors. Once substituted, a bankruptcy trustee is free to pursue the debtor’s nondisclosed claim.In this case, the Trustee had knowledge of Simonsen’s claims and authorized the state court suit. The Supreme Court concluded that because the Trustee had control of Simonsen’s abuse of process claim through the bankruptcy estate, the District Court erred when it estopped Saddlebrook from pursuing that claim. Therefore, Saddlebrook is not judicially estopped from pursuing its malicious prosecution and abuse of process claims against Krohne Fund. View "Saddlebrook Investments v. Krohne Fund" on Justia Law

The case under review centers around certain Chapter 7 debtors and their creditor. The debtors filed for Chapter 7 bankruptcy relief, but provided an incorrect mailing address for their creditor's attorney in their schedule of creditors. As a result, the creditor didn't file a claim in the bankruptcy case. The creditor later sought a determination that its default judgment in an unlawful detainer case wasn't discharged due to lack of notice of the bankruptcy.The bankruptcy court ruled in favor of the creditor, stating that no portion of the unlawful detainer judgment was dischargeable. This decision was affirmed by the Bankruptcy Appellate Panel. The debtors argued that all but a certain amount of the judgment, which they calculated to be what the creditor would have received had it filed a timely claim, was discharged. They also contended that the creditor seeking to recover the full amount would constitute a windfall.However, the United States Court of Appeals for the Ninth Circuit affirmed the lower courts' decisions. It concluded that a debtor’s failure to properly schedule a debt renders that debt nondischargeable in its entirety, rejecting the debtors' arguments. The court clarified that the issue of whether the debt could be enforced against the debtors is a matter of state law and interpretation of the prior state court judgment, and should be resolved by the state court. View "In re Licup v. Jefferson Avenue Temecula LLC" on Justia Law

The case involves a dispute between the Trustee for the bankrupt company BWGS, LLC and BMO Harris Bank N.A. and Sun Capital Partners VI, L.P. The Trustee sought to avoid a payment made by BWGS to BMO Harris, which was used to finance the acquisition of BWGS by Sun Capital's subsidiary. The Trustee argued that the payment constituted a constructively fraudulent transfer under the U.S. Bankruptcy Code and Indiana state law.The United States Court of Appeals for the Seventh Circuit had to address two novel issues: whether Section 546(e) of the Bankruptcy Code, which protects certain transactions made “in connection with a securities contract,” applies to transactions involving private securities; and, if so, whether it also preempts state law claims seeking similar relief.The Court held that Section 546(e) does apply to transactions involving private securities and does preempt state law claims seeking similar relief. Consequently, the Trustee's attempt to avoid the payment under the Bankruptcy Code and Indiana law was barred by Section 546(e). The Court also rejected the Trustee's argument that he could recover the value of the payment from Sun Capital under a different provision of the Bankruptcy Code, holding that this claim was also preempted by Section 546(e). The Court thus affirmed the lower court's decision to dismiss the Trustee's complaint with prejudice. View "Petr v. BMO Harris Bank N.A." on Justia Law

Creditors obtained a $1.6 million default judgment against Rodney Dorand and sought to satisfy the judgment with funds from Dorand's individual retirement account, held by Morgan Stanley. An Alabama court approved the transfer of funds, but before the transfer occurred, Dorand filed for Chapter 7 bankruptcy, asserting that the retirement account was exempt property of his bankruptcy estate. The bankruptcy court agreed with Dorand. The United States Court of Appeals for the Eleventh Circuit affirmed this decision, stating that the Alabama judgment did not extinguish Dorand’s interest in his account before he filed his bankruptcy petition.Rodney Dorand had been sued by creditors for damages arising from a failed condominium development. After the state court issued a writ of garnishment to Morgan Stanley, Dorand argued that the retirement account was exempt from garnishment, but the state court rejected this argument. However, before the funds were transferred, Dorand filed for bankruptcy. The bankruptcy court determined that the retirement account was Dorand’s exempt property and that the Alabama judgment against garnishee Morgan Stanley “does not affect the [retirement account’s] exempt status.”The Alabama judgment did not terminate all of Dorand's interests in his property. While the judgment had given Morgan Stanley a limited right to transfer Dorand’s funds, it had not exercised that right before Dorand filed for bankruptcy. The Court of Appeals affirmed that the retirement account was part of Dorand’s bankruptcy estate, as Dorand had an interest in the retirement account when he filed for bankruptcy. View "The Alabama Creditors v. Dorand" on Justia Law

The Supreme Court of the State of Montana affirmed a lower court decision that granted Dr. Gregory S. Tierney's motion to dismiss a medical malpractice lawsuit filed by Janice M. Dodds for insufficient service of process. Dodds initially filed the suit against Dr. Tierney and Benefis Health System in 2013, alleging medical malpractice related to a knee replacement surgery. She failed to serve the defendants in time. Dr. Tierney later filed for bankruptcy, which invoked an automatic stay, halting the lawsuit. After his bankruptcy discharge, Dodds attempted to serve Dr. Tierney but failed to do so within the required 30-day timeframe following the discharge.Dodds further sought to join Dr. Tierney's malpractice insurance company as the real party in interest, but the court denied the motion. Upon review, the Supreme Court found that Dodds had not proven Dr. Tierney's liability, thus the insurer had no duty to indemnify him. The court also rejected Dodds' argument that Dr. Tierney lacked standing after his Chapter 7 discharge. The court held that Dr. Tierney maintained a personal stake in demonstrating he was not liable for medical malpractice and that his insurer would only have a duty to indemnify him once Dodds proved her malpractice claims. View "Dodds v. Tierney" on Justia Law

In this case, Aquila Alpha LLC (Aquila) appealed against a judgment from the United States District Court for the Eastern District of New York, affirming a bankruptcy court’s decision to deny Aquila’s motion to vacate a default judgment. The default judgment was obtained by Howard M. Ehrenberg, as the liquidating trustee of several debtors, and granted the debtors the ownership of a $23.7 million mortgage purchased by Aquila.Aquila argued that the default judgment should be vacated due to lack of personal jurisdiction and misapplication of the relevant Rule 60(b) factors. Aquila posited that it was improperly included in the First Amended Complaint without leave from the bankruptcy court and was not correctly served.However, the United States Court of Appeals for the Second Circuit affirmed the judgment of the district court. The appellate court concurred with the district court that the bankruptcy court had personal jurisdiction over the parties and had correctly applied the Rule 60(b) factors to deny Aquila’s motion to vacate default.The appeals court ruled that Aquila was correctly added to the First Amended Complaint as of right pursuant to Rule 15(a). The court also concluded that Aquila was properly served. It was further determined that Aquila’s default was willful, and the district court did not abuse its discretion in declining to set aside the default judgment. View "In re Orion HealthCorp, Inc." on Justia Law

In August 2020, Machele Goetz filed a Chapter 13 bankruptcy petition and plan. She owned a residence worth $130,000 and claimed a $15,000 homestead exemption under Missouri law. It was agreed that if the trustee liquidated the residence on the date of the petition, the estate would have received nothing net of the exemption, the lien, and the sale expenses. On April 5, 2022, the bankruptcy court granted Goetz’s motion to convert her case from Chapter 13 to Chapter 7. Between the Chapter 13 filing and the date of the conversion order, Goetz’s residence had increased in value by $75,000, and she had paid down a further $960.54 on the mortgage.Goetz moved for the bankruptcy court to compel the trustee to abandon the property, arguing that the residence was of “inconsequential value and benefit to the estate” under 11 U.S.C. § 554(b). The trustee resisted Goetz’s motion, asserting that the bankruptcy estate in a converted case includes post-petition, pre-conversion increase in equity. The bankruptcy court agreed with the trustee, and this decision was affirmed by the Bankruptcy Appellate Panel for the Eighth Circuit.On appeal to the United States Court of Appeals for the Eighth Circuit, the court held that the post-petition, pre-conversion increase in equity in Goetz’s residence is property of the converted Chapter 7 estate. The court reasoned that, under the plain text of 11 U.S.C. § 348(f)(1)(A) and § 541, the equity in Goetz’s residence was property of her converted estate because it was property of the estate that she owned on the date of her petition and which she retained at conversion. The court rejected Goetz's arguments that this result punishes the good-faith debtor who attempts a Chapter 13 plan, pays down their mortgage, and then converts to Chapter 7. Instead, the court held that the Code’s values are not monolithic and balance multiple, often competing interests. View "Goetz v. Weber" on Justia Law

In this case, the Supreme Court of Arizona was asked to clarify whether Proposition 209, a voter initiative, repealed or affected the validity of a particular portion of the Arizona Revised Statutes (A.R.S. § 33-1126(A)(11)). The Court held that Proposition 209 neither expressly nor implicitly repealed A.R.S. § 33-1126(A)(11), which was enacted by the Arizona legislature after the drafting of Proposition 209 but before it was voted on.The case arose when Erica Riggins filed for Chapter 7 bankruptcy and claimed an exemption under A.R.S. § 33-1126(A)(11), which was an exemption for certain types of federal and state tax credits. The Chapter 7 Trustee objected, arguing that Proposition 209, which amended a number of debt collection statutes and was passed by voters after the enactment of A.R.S. § 33-1126(A)(11), repealed the tax credit exemption.Upon review, the Court found that the voters did not expressly repeal A.R.S. § 33-1126(A)(11) by passing Proposition 209, as the proposition did not contain any language suggesting such a repeal. The Court also found that Proposition 209 did not implicitly repeal A.R.S. § 33-1126(A)(11) because the two did not conflict with each other. Both sought to enhance debtor protections, with Proposition 209 increasing the value of certain exemptions while A.R.S. § 33-1126(A)(11) added a new exemption for tax credits. As such, the Court declared A.R.S. § 33-1126(A)(11) to be still operative. View "In re: RIGGINS" on Justia Law