Justia Bankruptcy Opinion Summaries

Debtors filed for Chapter 7 bankruptcy; each owned a house encumbered by a senior mortgage lien and by a junior mortgage lien held by Bank of America. Because the amount owed on each senior mortgage is greater than each house’s current market value, the bank would receive nothing if the properties were sold today. The debtors sought to void their junior mortgage liens under 18 U.S.C. 506, which provides, “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In each case, the Bankruptcy Court granted the motion; the district court and the Eleventh Circuit affirmed. The Supreme Court reversed and remanded. A debtor in a Chapter 7 bankruptcy may not void a junior mortgage lien under section 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under Bankruptcy Code section 502. The bank’s claims are “allowed” under the Code. Acknowledging the statutory reference to “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim,” the Court stated that a “secured claim” is supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. The Court declined to distinguish between debts that are partially and those that are entirely “underwater.” View "Bank of America, N. A. v. Caulkett" on Justia Law

Plaintiffs filed suit against the bankruptcy trustee of BFG's estate under 28 U.S.C. 1334(c), alleging that the trustee committed gross negligence and breached his fiduciary duty while acting as trustee by failing to pursue an action against Nationwide. Section 1334(c) provides that district courts may hear proceedings “arising under title 11 or arising in or related to a case under title 11." The district court dismissed the case because plaintiffs failed to obtain leave from the bankruptcy court that appointed the trustee before filing suit against him. The court concluded that the Barton doctrine continues to apply regardless of whether plaintiffs’ claims qualify as Stern claims. The court rejected plaintiffs' contention that the Barton doctrine does not apply when a party brings suit in the court that exercises supervisory authority over the bankruptcy court that appointed the trustee. Accordingly, the court affirmed the judgment, rejecting plaintiffs' argument that Barton is satisfied by filing suit in the district court with supervisory authority over the bankruptcy court. View "Villegas v. Schmidt" on Justia Law

Sharif tried to discharge a debt to Wellness in his Chapter 7 bankruptcy. Wellness argued that a trust Sharif claimed to administer was actually Sharif’s alter ego, and that its assets were part of his bankruptcy estate. The Bankruptcy Court entered default judgment against Sharif. While appeal was pending, but before briefing concluded, the Supreme Court held (Stern v. Marshall) that Article III forbids bankruptcy courts to enter final judgment on claims that seek only to “augment” the bankruptcy estate and would otherwise “exis[t] without regard to any bankruptcy proceeding.” The district court denied Sharif permission to file a supplemental brief and affirmed. The Seventh Circuit determined that Sharif’s “Stern” objection could not be waived and reversed, holding that the Bankruptcy Court lacked constitutional authority to enter judgment on the alter ego claim. The Supreme Court reversed. Article III permits bankruptcy judges to adjudicate Stern claims with the parties’ knowing and voluntary consent. The right to adjudication before an Article III court is “personal” and “subject to waiver,” unless Article III’s structural interests as “an inseparable element of the constitutional system of checks and balances” are implicated; parties “cannot by consent cure the constitutional difficulty.” Allowing bankruptcy courts to decide Stern claims by consent does not usurp the constitutional prerogatives of Article III courts. Bankruptcy judges are appointed and may be removed by Article III judges, hear matters solely on a district court’s reference, and possess no free-floating authority to decide claims traditionally heard by Article III courts. Consent to adjudication by a bankruptcy court need not be express, but must be knowing and voluntary. The Seventh Circuit should decide on remand whether Sharif’s actions evinced the requisite knowing and voluntary consent and whether Sharif forfeited his Stern argument. View "Wellness Int’l Network, Ltd. v. Sharif" on Justia Law

Husky filed an adversary proceeding against debtor, objecting to the discharge of a contractual debt owed to Husky by Chrysalis - of which debtor was a shareholder. The court affirmed the district court's judgment that the bankruptcy court properly denied all relief sought by Husky because the debt was dischargeable. In this case, the statutory exceptions to discharge raised by Husky are inapplicable, and Husky cannot rely upon general principles of equity to expand those exceptions. Although another provision of the Bankruptcy Code, Section 727(a)(2), may have applied to redress the conduct of which Husky complains, Husky failed to raise that provision. View "Husky Int'l Elec., Inc. v. Ritz" on Justia Law

In Seifert’s chapter 12 bankruptcy petition, sale proceeds from the current year’s crop were described as $134,661 in “farm earnings,” consisting of checks jointly payable to the Farm Services Agency (FSA), CHS, and Seifert. Seifert claimed $91,258 as exempt under Minnesota Statute 550.37(13). FSA was an over-secured creditor and did not object to Seifert’s claimed exemptions or any of the filed plans. CHS and the trustee objected to Seifert’s exemption claim and to each plan, based on 11 U.S.C. 1225(a)(4): A debtor must demonstrate that: “the value, as of the effective date of the plan, of property to be distributed … [for[ each allowed unsecured claim is not less than … would be paid … if the estate … were liquidated under chapter 7.” They argued that because Seifert was not entitled to an exemption in the farm earnings, payments to the unsecured creditors must include that value. After the parties reached an agreement that reserved the issue of the exemption for later determination, CHS asserted that the exemption dispute was moot because the checks from the sale of the crop had been given to FSA and Seifert retained no interest in those funds. The bankruptcy court agreed. The Bankruptcy Appellate Panel reversed and remanded. Payment to FSA did not override the parties’ stipulation and did not constitute a determination of what would be paid to unsecured creditors. View "Seifert v. Carlson" on Justia Law

Jevic , a trucking company, was acquired by Sun Capital in a leveraged buyout financed by lenders led by CIT. CIT extended $85 million in revolving credit, which Jevic could access while it maintained at least $5 million in assets. Jevic had to reach a forbearance agreement with CIT, with a $2 million guarantee by Sun, to prevent CIT from foreclosing. In 2008, Jevic’s board authorized a Chapter 11 bankruptcy filing. The company notified employees of their impending terminations. At that point, Jevic owed $53 million to senior secured creditors (CIT and Sun) and $20 million to tax and unsecured creditors. Jevic’s terminated truck drivers filed a class action alleging violations of federal and state Worker Adjustment and Retraining Notification (WARN) Acts. The Committee of Unsecured Creditors brought a fraudulent conveyance action, alleging that Sun, with CIT’s assistance, “acquired Jevic with virtually none of its own money based on baseless projections,” and hastened Jevic’s bankruptcy by saddling it with unmanageable debts. Jevic’s remaining assets were $1.7 million in cash (subject to Sun’s lien) and the action against CIT and Sun. All tangible assets had been liquidated to repay the CIT lenders. The Unsecured Creditors, Jevic, CIT, and Sun reached a settlement that left out the drivers, whose uncontested WARN claim was of higher priority than tax and trade creditors’ claims. The Third Circuit affirmed approval of the settlement, despite deviations from section 507 priorities, based on “sound findings” that traditional routes out of Chapter 11 are unavailable and the settlement was the best feasible way of serving the interests of the estate and creditors. View "Jevic Holding Corp. v.CIT Grp./Business Credit, Inc." on Justia Law

Harris filed a Chapter 13 bankruptcy petition. His court-confirmed plan provided that he would make monthly mortgage payments to Chase, and that $530 per month would be withheld from his post-petition wages and remitted to the Chapter 13 trustee, Viegelah, to pay down the mortgage arrearage, with remaining funds to other creditors. Harris again fell behind on his mortgage payments. Chase foreclosed on his home. Viegelahn continued to receive $530 per month from Harris’ wages, but stopped making the Chase payments. A year after the foreclosure, Harris converted his case to Chapter 7. Viegelahn distributed $5,519.22 in accumulated withheld wages mainly to creditors. Harris obtained an order directing refund. The Fifth Circuit reversed. The Supreme Court unanimously reversed: A debtor who converts to Chapter 7 is entitled to return of post-petition wages not distributed by the Chapter 13 trustee. Absent a bad-faith conversion, 11 U.S.C. 348(f) limits a converted Chapter 7 estate to property belonging to the debtor “as of the date” of the original Chapter 13 filing. By excluding post-petition wages from the converted Chapter 7 estate, the statute removes those earnings from the pool of assets to be liquidated and distributed to creditors. Allowing a terminated Chapter 13 trustee to disburse those earnings to the same creditors would be incompatible with that statutory design. When a case is converted, the Chapter 13 trustee is stripped of authority to distribute “payment[s] in accordance with the plan.” Because Chapter 13 is a voluntary alternative to Chapter 7, a debtor’s post-conversion receipt of some wages he earned and would have kept, had he initially filed under Chapter 7, does not provide a “windfall.” Creditors may protect against excess accumulations in the hands of trustees by seeking to have a Chapter 13 plan include regular disbursement of collected funds. View "Harris v. Viegelahn" on Justia Law

Lake Street was obligated under a $1.5 million loan made by American Chartered Bank, secured by a mortgage. Unable to repay, Lake Street negotiated several forbearance-to-foreclose agreements. One required Lake Street to give the deed to the mortgaged property (its only significant asset) to an escrow agent who, in the event of default, would give the deed to Scherston, the bank’s affiliate. The bank’s charter forbids it to own real estate. Lake Street defaulted, Scherston recorded the deed. Lake Street, a debtor in possession in a Chapter 11 bankruptcy, brought an adversary proceeding against the bank and Scherston. The district court granted the bank summary judgment. The Seventh Circuit affirmed, noting that Lake Street focused on the deed rather than on the mortgage, claiming that the deeded property is worth more than the mortgage. It was Lake Street’s decision to give the deed to the bank; it did so to induce the bank’s forbearance, by giving additional security. There is no contention that the bank employed unlawful or unethical practices to the transfer, or that any unsecured creditors were harmed by the transaction—there is only one unsecured creditor and his claim is worth less than a thousand dollars. View "1756 W. Lake St. LLC v. Am. Chartered Bank" on Justia Law

Slominski (a friend of one of the debtor-partners) and the debtor asserted that the farmland lease between them started as a verbal lease in 2010, but just a few days before the December 6, 2010 involuntary Chapter 11 bankruptcy filing, the lease was reduced to writing and dated December 1, 2010. In an adversary proceeding, the Bankruptcy Court avoided the lease as a fraudulent transfer and held that Slominski was obligated under 11 U.S.C. 550(a) to pay the Trustee the fair market rent for the time he occupied the land prior to the avoidance, rather than the lower rent called for by the lease. The Trustee claimed that the lease was actually executed post-petition (no earlier than April 2011), and that it had been backdated to make it appear to have been entered prepetition. The court awarded Slominski an offset, as a good faith transferee, for the costs of his improvements to the land: the wheat crops he planted there and certain taxes he paid. The Eighth Circuit affirmed the determination that Slominski owes the estate $431,200 in net fair market rent, but reversed as to Slominski’s setoff. Denial of the Trustee’s motions based on newly-discovered evidence was affirmed. View "Kaler v. Slominski" on Justia Law

After Pajian filed for bankruptcy, Lisle Savings Bank, a creditor, filed a proof of claim ($330,472.19) in the bankruptcy court, but missed the bankruptcy court’s filing deadline (set under FED. R. BANKR. P. 3002(c)) by several months. The Bank argued that Rule 3002(c) applies only to unsecured creditors; as a secured creditor, it asserted, it was entitled to file a proof of claim at any time until plan confirmation. The bankruptcy court agreed with the Bank. The Seventh Circuit reversed, holding that a secured creditor must file its proof of claim by the 90-day deadline specified by Rule 3002(c). View "Pijian v. Lisle Savings Bank" on Justia Law