Justia Bankruptcy Opinion Summaries

ASARCO hired the law firms to assist it in carrying out its duties as a Chapter 11 debtor in possession, 11 U.S.C. 327(a). When ASARCO emerged from bankruptcy, the law firms filed fee applications requesting fees under section 330(a)(1), which permits bankruptcy courts to “award . . . reasonable compensation for actual, necessary services rendered by” professionals. The Bankruptcy Court rejected ASARCO’s objections and awarded fees for time spent defending the applications. The district court held that the firms could be awarded fees for defending their fee applications. The Fifth Circuit reversed. The Supreme Court affirmed. Section330(a)(1) does not permit bankruptcy courts to award fees to section 327(a) professionals for defending fee applications. The American Rule provides the basic point of reference for attorney’s fees: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise. Congress did not depart from the American Rule in section 330(a)(1) for fee-defense litigation. The phrase “reasonable compensation for services rendered” necessarily implies “loyal and disinterested service in the interest of” a client, Time spent litigating a fee application against the bankruptcy estate’s administrator cannot be fairly described as “labor performed for”—let alone “disinterested service to”—that administrator. Requiring bankruptcy attorneys to bear the costs of their fee-defense litigation under section 330(a)(1) creates no disincentive to bankruptcy practice. View "Baker Botts L.L.P. v. ASARCO LLC" on Justia Law

The chapter 7 trustee paid the 2005 federal income taxes of a bankruptcy estate without first providing notice to a creditor of the estate, requesting a hearing to determine the appropriate amount of those taxes, or obtaining an order of the bankruptcy court authorizing the payment of those taxes. At issue was whether section 503 of the Bankruptcy Code, 11 U.S.C. 503(b), requires a chapter 7 trustee to provide notice to creditors, and obtain a hearing, before paying taxes incurred by the estate. The court held that the plain language of section 503 requires that notice and a hearing be provided before the payment of taxes as administrative expenses, and that this requirement does not impose inconsistent obligations on trustees under other provisions of the Bankruptcy Code or the Internal Revenue Code. Accordingly, the court remanded with directions for the bankruptcy court to determine the amount of 2005 federal income taxes due from the estate and to conduct other appropriate proceedings. View "Dreyfuss v. Cory" on Justia Law

Appellants William Karl Jenkins and M. Earlene Jenkins (collectively, Mr. Jenkins) appealed an order of the Bankruptcy Appellate Panel (BAP) that affirmed the bankruptcy court’s dismissal of their claim for the payment of certain secured promissory notes. Alternate Fuels, Inc. (AFI) was a Kansas corporation that formerly engaged in surface coal mining operations. On December 9, 1992, AFI filed a petition under Chapter 11 of the Bankruptcy Code in the District of Kansas. AFI briefly continued its coal mining operations under the terms of a confirmed plan of reorganization. At that time, John Warmack acquired 100% of the stock of AFI and assumed control. Mr. Warmack then formed Cimarron Energy Co., LLC to handle the mining operations for which AFI still held permits. Mr. Warmack owned 99% of Cimarron. Twenty-four certificates of deposit, valued at approximately $1.4 million, were pledged to secure multiple reclamation bonds. Then, Cimarron recommenced mining operations. AFI’s equipment was released to AFI’s secured creditors, who ultimately foreclosed and sold the equipment back to Cimarron. Mr. Jenkins entered into an agreement to purchase Mr. Warmack’s interest in AFI. Mr. Jenkins did not intend to resume mining operations or otherwise operate AFI. Instead, Mr. Jenkins believed that, through his political connections, he could fulfill AFI’s remaining reclamation obligations and obtain the proceeds of the release of the 24 certificates of deposit and the sale of Cimarron’s mining equipment. Mr. Jenkins testified that he knew AFI had no prospect of repaying two promissory noted from its own funds; his only prospects for future payment were the certificates of deposit. The bankruptcy court found that Mr. Jenkins’ claims were not allowed claims because the transfers alleged to be consideration for the notes should have been recharacterized as equity contributions. In the alternative, the court found that Mr. Jenkins failed to sustain his burden of proof as to the validity and amount of his claim, or that Mr. Jenkins putatively secured claim should have been subordinated to the status of an unsecured claim. The Tenth Circuit reversed, finding that Mr. Jenkins' transfers did not meet the criteria for either recharacterization or equitable subordination, and he satisfied his burden of proof as to the validity and amount of his claim. View "Redmond v. Jenkins" on Justia Law

Plaintiffs filed suit against Abide, alleging that Abide violated their Fourth Amendment rights while serving as the bankruptcy trustee for plaintiffs’ bankrupt estate and the bankrupt estate of their closely held corporation. The district court dismissed the complaint for lack of subject-matter jurisdiction. The court held that when a bankruptcy trustee acts pursuant to an order by the district court, and the trustee’s actions pursuant to that order are the basis of the claim, the district court has jurisdiction to entertain a suit with respect to that conduct. Because the court held that the district court should not have dismissed plaintiffs’ complaint, the district court may consider Abide’s 12(b)(6) motion in the first instance. The court vacated and remanded for further proceedings. View "Carroll, Jr. v. Abide" on Justia Law

Carhart and Halaska own CHI. CHI terminated its sales agent, MRO, which filed a federal suit for breach of contract. Carhart bought MRO’s claim for $150,000 and became the plaintiff in a suit against a company of which he was a half owner. Halaska then sued Carhart in Wisconsin state court for breach of fiduciary duties to CHI and Halaska by becoming the plaintiff and by writing checks on CHI bank accounts without approval, depositing payments owed CHI into Carhart’s own account, and withholding accounting and other financial information from Halaska. A receiver was appointed, informed the federal court that CHI had no assets out of which to pay a lawyer, and consented to entry of a $242,000 default judgment (the amount sought by Carhart), giving Carhart a potential profit of $92,000 on his purchase of MRO’s claim. In Carhart’s suit to execute that judgment, CHI’s only asset was its Wisconsin suit against Carhart. The court ordered the sale of CHI’s lawsuit at public auction; Carhart, the only bidder, bought it for $10,000, ending all possibility that CHI could proceed against him for his alleged plundering of the company. The Seventh Circuit reversed. Auctioning off the lawsuit placed Carhart ahead of CHI’s other creditors. Carhart was not a purchaser in good faith. No valid interest is impaired by rescinding the sale, enabling CHI to prosecute its suit against Carhart. View "Carhart v. Carhart-Halaska Int'l, LLC" on Justia Law

After attorney Michael Beyries stole $25,000 from his client, Northbay, he filed for bankruptcy and Northbay sought a determination that the debt was nondischargeable. The bankruptcy court applied the doctrine of unclean hands and held that Northbay's illegal marijuana sales prevented it from obtaining relief. The court reversed, concluding that Beyries's wrongdoing outweighed Northbay's and that application of the unclean hands doctrine to absolve an attorney of responsibility for stealing for his client would be contrary to the public interest. View "Northbay Wellness v. Beyries" on Justia Law

This appeal arose when plaintiffs filed suit against defendants, alleging that defendants violated various Louisiana securities laws, among other state law claims. On appeal, defendants challenged the district court's order of remand on the basis that the district court lacked the discretion to abstain from hearing the case. The court concluded that the district court could not permissively abstain and equitably remand under 28 U.S.C. 1334(c)(1) and 1452(b) without considering the Chapter 15 bankruptcies at issue. Accordingly, the court reversed the district court’s decision to remand the case to state court and remanded to the district court for consideration under its bankruptcy jurisdiction. View "Firefighters' Retirement Sys, v. Citco Group" on Justia Law

Since 1989 Sveum and his brother owned a Wisconsin home-building company, Kegonsa. Kegonsa’s creditor, Stoughton Lumber had sued Sveum and his brother and Kegonsa under Wisconsin law, alleging breach of contract and theft by contractors. Under Wisconsin law, money paid to a contractor by an owner for improvements, constitutes a trust fund in the hands of the contractor until all claims have been paid. The use of such money by a contractor for any other purpose until claims have been paid, is theft by contractor. The suit settled for $650,000. Sveum violated the settlement agreement. Stoughton sued again and obtained a $589,638.10 default judgment. Sveum filed for Chapter 7 bankruptcy, seeking to discharge his debts, including the debt to Stoughton. Stoughton responded with an adversary proceeding, claiming that Sveum’s debt to Staughton was not dischargeable. The bankruptcy judge agreed and denied discharge. The district court affirmed. The Seventh Circuit affirmed, noting Sveum’s false representations and use of funds held in trust for Stoughton to pay other creditors ahead of Stoughton. The Bankruptcy Code forbids discharge of a debt under those circumstances, 11 U.S.C. 523(a)(4).“ View "Stoughton Lumber Co., Inc. v. Sveum" on Justia Law

Hardy filed for Chapter 13 bankruptcy relief. On her Schedule B, Hardy stated that she would be receiving a 2012 tax refund. On her Schedule C, Hardy claimed the majority of the refund as exempt. She noted that $2,000 of the refund was attributable to federal Child Tax Credit (CTC), 26 U.S.C. 24(d). She claimed that the CTC was a "public assistance benefit" that would be exempt from the bankruptcy estate under Missouri law. The bankruptcy court sustained the trustee’s objection, finding that the CTC was not a public assistance benefit because the purpose of the credit was to "reduce the tax burden on working parents and to promote family values" and because the full credit was available to head-of-household filers with Modified Adjusted Gross Incomes (MAGI) of up to $75,000 and joint-married filers with MAGIs of up to $110,000. The Bankruptcy Appellate Panel affirmed, stating Hardy did not present evidence that only lower income families were eligible for the refundable portion of the credit. The Eighth Circuit reversed, reasoning that Congress demonstrated intent to help low-income families through amendments to the Additional Child Tax Credit statute, sp the credit at issue qualifies as a public assistance benefit. View "Hardy v. Fink" on Justia Law

This appeal stemmed from plaintiffs' complaint to cancel and discharge a creditor's judgment lien held by defendant Citi Mortgage, Inc. (Citi). Following the conclusion of Chapter 7 bankruptcy proceedings the Superior Court entered a default judgment in favor of Citi against plaintiffs, and by virtue of its docketing of that judgment, Citi obtained a lien on all of plaintiffs real property in New Jersey. Four years later, plaintiffs instituted a Chapter 7 bankruptcy proceeding in the United States Bankruptcy Court. Because plaintiffs listed the law firm that had represented Citi, rather than Citi itself in their Chapter 7 petition, the bankruptcy court did not provide notice of the proceeding to Citi. After the bankruptcy trustee abandoned two of plaintiffs' New Jersey properties, the bankruptcy court discharged plaintiffs' debt and closed their Chapter 7 case. Citi did not attempt to levy on plaintiffs property at any time prior to the bankruptcy filing and did not seek to enforce its lien in the wake of plaintiffs bankruptcy discharge. More than three years after the bankruptcy discharge, plaintiffs filed this action under N.J.S.A. 2A:16-49.1, which permits a debtor whose debts have been discharged in bankruptcy, to apply to the state court that has entered a judgment against the debtor, or has docketed the judgment, for an order directing the judgment to be canceled and discharged. The trial court granted Citi's motion for summary judgment and dismissed plaintiffs' claim. The court acknowledged that a judgment creditor, such as Citi, who has not levied on the debtor's property prior to the debtor's filing of a bankruptcy petition, may enforce its valid lien following the bankruptcy discharge, but must do so within the year following the discharge. The Appellate Division affirmed the trial court. Finding no reversible error, the Supreme Court affirmed the Appellate Division for substantially the same reasons. View "Gaskill v. Citi Mortgage, Inc." on Justia Law