Justia Bankruptcy Opinion Summaries

Morrison Informatics, Inc. (the “Company”) filed a petition for Chapter 7 Bankruptcy relief in September 2009. In May 2011, the Company and two shareholders, who also were officers of the corporation, commenced a civil action in the court of common pleas against Members 1st Federal Credit Union, Mark Zampelli, and Scott Douglass. In the ensuing complaint, the Company and the Shareholders asserted that, beginning sometime after January 2005 and continuing into 2009, the Company’s finance manager, Zampelli, had colluded with a Credit Union relationships officer, Douglass, to embezzle Company funds. The complaint advanced claims against the Credit Union, Zampelli, and Douglass variously sounding in fraud, conversion, civil conspiracy, and negligence. The question this case presented for the Supreme Court's review concerned whether a federal bankruptcy trustee could be substituted as a plaintiff in a civil action previously commenced by the debtor in bankruptcy in a Pennsylvania state court, although the statutory limitations period expired prior to the attempted substitution. "Although we recognize that the interests of a debtor and a trustee may diverge in some respects, we find it most important that trustees’ interests are derivative, and accordingly, they generally cannot assert any greater rights as against defendants than debtors could have in the first instance." The Supreme Court departed from the Superior Court’s focus on the continued “existence” of the Company after the initiation of insolvency proceedings, and the Court rejected a strict rule foreclosing a relation-back approach to substitution of a bankruptcy trustee for a debtor. Instead, the Court held that relation back in favor of a federal bankruptcy trustee was appropriate, at least where the trustee has acted in a reasonably diligent fashion to secure his or her substitution, and there is no demonstrable prejudice to defendants. View "Morrison Info. v. Members 1st FCU" on Justia Law

In Crawford v. LVNV Funding, LLC, the court held that a debt collector violates the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. 1692e, when it files a proof of claim in a bankruptcy case on a debt that it knows to be time-barred. The district court in these cases interpreted the Crawford ruling as having placed the FDCPA and the Bankruptcy Code in irreconcilable conflict. The court concluded that, although the Code allows all creditors to file proofs of claim in bankruptcy cases, the Code does not at the same time protect those creditors from all liability. A particular subset of creditors - debt collectors - may be liable under the FDCPA for bankruptcy filings they know to be time-barred. Therefore, the court found no irreconcilable conflict between the FDCPA and the Code. The court reversed and remanded. View "Johnson v. Midland Funding, LLC" on Justia Law

Castaic, debtors, challenged the district court's dismissal of this bankruptcy appeal as moot under 11 U.S.C. 363(m). During the pendency of the appeal, the bankruptcy court dismissed the underlying bankruptcy cases as well. Castaic did not appeal those dismissals, and after 14 days, they became final. Therefore, the court concluded that there is no longer any case or controversy, and the court has no power to grant Castaic any effective relief. The court dismissed the appeal as moot under Article III. View "In the matter of Castaic Partners II, LLC" on Justia Law

Plaintiffs filed a health care liability suit against defendants in federal court under the court’s bankruptcy jurisdiction. Section 74.351 of the Texas Civil Practice and Remedies Code requires plaintiffs in health care liability cases to serve an expert report within 120 days after the filing of a defendant’s original answer. Following limited discovery, defendants moved to dismiss because plaintiffs had failed to serve an expert report in accordance with section 74.351’s requirements. The district court ultimately dismissed the case with prejudice. The court held that section 74.351 answers the same question as Federal Rules of Civil Procedure 26 and 37, and these Rules represent a valid exercise of Congress’ rulemaking authority. Accordingly, a federal court entertaining state law claims may not apply section 74.351. The court reversed and remanded for further proceedings. View "Passmore v. Baylor Health Care" on Justia Law

The trustee for PCI and eight associated special-purpose entities (SPEs) filed Chapter 11 bankruptcy petitions in the aftermath of Thomas Petters' Ponzi scheme. The bankruptcy court consolidated the bankruptcy estates of PCI and the SPEs “for all purposes substantive and administrative.” Lenders to PCI and the SPEs appealed. The district court dismissed, holding the Lenders did not have standing to appeal the consolidation order because they were not “persons aggrieved.” The court concluded that the district court did not abuse its discretion in declining to estop the trustee from asserting that the Lenders are not persons aggrieved; having held that the persons aggrieved doctrine survives the 1978 amendments to the Bankruptcy Code, the court declined to reconsider the doctrine; and the district court did not err in dismissing the Lenders under the persons aggrieved doctrine. In this case, the Lenders’ interests here are not central to the bankruptcy process, and allowing them to appeal the bankruptcy court’s order would completely undermine the rationale behind the standard and bring bankruptcy proceedings to a grinding halt. Accordingly, the court affirmed the judgment. View "Opportunity Finance, LLC v. Kelley" on Justia Law

Chrysalis incurred a debt of $164,000 to Husky. Ritz, Chrysalis’ director and then-part-owner, drained Chrysalis of assets available to pay the debt by transferring large sums to other entities Ritz controlled. Husky sued Ritz, who then filed for Chapter 7 bankruptcy. Husky filed a complaint in Ritz’ bankruptcy case, asserting “actual fraud” under the Code’s discharge exceptions, 11 U.S.C. 523(a)(2)(A). The district court held that Ritz was personally liable under state law but that the debt was not “obtained by . . . actual fraud” and could be discharged. The Fifth Circuit affirmed. The Supreme Court reversed. The term “actual fraud” encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation. The term “fraud” has, since the beginnings of bankruptcy practice, been used to describe asset transfers that, like Ritz’ scheme, impair a creditor’s ability to collect a debt. This interpretation is not incompatible with Section 523(a)(2)(A)’s “obtained by” requirement. Even though the transferor of a fraudulent conveyance does not obtain assets or debts through the fraudulent conveyance, the transferee—who, with the requisite intent, also commits fraud—does. Reading the phrase “actual fraud” to restrict, rather than expand, the discharge exception’s reach would untenably require reading the disjunctive “or” in the phrase “false pretenses, a false representation, or actual fraud” to mean “by.” View "Husky Int’l Electronics, Inc. v. Ritz" on Justia Law

Net Pay managed clients’ payrolls and handled their employment taxes pursuant to a “Payroll Services Agreement,” which required clients to provide their employee payroll information and gave clients the option of authorizing Net Pay to transfer funds from their bank accounts into Net Pay’s account and to remit those funds to the clients’ employees, the IRS, and other taxing authorities. The Agreement established an independent contractor relationship between Net Pay and its clients. About three months before it filed its Chapter 7 petition, Net Pay transferred $32,297 on behalf of Altus; $5,338 on behalf of HealthCare Systems; $1,143 on behalf of Project Services; $352.84 for an unknown client; and $281.13 for another unknown client. The next day, Net Pay informed its clients that it was ceasing operations. The trustee for Net Pay sought to recover the five payments, arguing that they were avoidable preferential transfers, 11 U.S.C. 547(b). The district court concluded that four of the transfers were not subject to recovery, being below the minimum amount established by law ($5,850), and that distinct transfers may be aggregated only if “‘transactionally related’ to the same debt.” Because the IRS applied the entire $32,297 toward Altus’s trust fund tax obligations, the court held that the payment was not avoidable. The Third Circuit affirmed. Net Pay lacked an equitable interest in the Altus funds by operation of 26 U.S.C. 7501(a). View "In Re: Net Pay Solutions Inc" on Justia Law

The Partnership and Beher (the Lenders) loaned Community $16 million. Defendant is Community's founder, president and CEO. Defendant signed the identical loan agreements on behalf of Community and as a personal guarantor. On appeal, defendant argued primarily that summary judgment on his guarantor liability was premature because, in the bankruptcy proceedings at issue, he and Community were challenging the extent and validity of the underlying obligations. The court concluded that defendant personally guaranteed the Lenders that he would satisfy the obligations represented by the promissory notes no matter what. In this case, the Lenders presented sufficient evidence to establish defendant's liability as guarantor and they met their burden to recover on the guaranties. Furthermore, defendant has failed to present sufficient evidence to survive summary judgment on the amount of his obligation under the guaranty contracts. Accordingly, the court affirmed the judgment. View "Edwards Family P'ship v. Dickson" on Justia Law

Debtors purchased a home from creditors. The purchase was financed via a loan from creditors. In exchange for the loan, debtors granted creditors a deed of trust on the property and executed a promissory note requiring monthly payments. Where the rate of interest on debtors’ residential mortgage loan was increased upon default, at issue was whether a “cure” under section 1322(b) of the Bankruptcy Code allows their bankruptcy plan to bring post-petition payments back down to the initial rate of interest. The court held that the statute does not allow this, as a change to the interest rate on a residential mortgage loan is a “modification” barred by the terms of section 1322(b)(2). The court affirmed the judgment of the district court insofar as it required that post-petition interest payments be calculated using the seven percent default rate of interest, but reversed that part of the judgment which applied only a five percent rate of interest to payments calculated “for the period between September 16, 2013 and the December 2013, effective date of the plan.” The court remanded the case to the district court for further proceedings. View "Anderson v. Hancock" on Justia Law

Debtors Mathew and Marilynn held title to real property as joint tenants with Marilynn's parents. After debtors filed for bankruptcy, and Marilynn's parents died, the Trustee notified debtors that he intended to sell the real estate and a pickup truck Marilynn and her father owned as joint tenants. The Trustee maintained that the right of survivorship made the bankruptcy estate the sole owner. The court concluded that the Bankruptcy Appellate Panel did not err in affirming the sale of the real property and pickup because the joint tenancies remained intact through creation of the bankruptcy estate and therefore the bankruptcy estate included the joint tenancies. Accordingly, the court affirmed the judgment. View "Peet v. Checkett" on Justia Law