Justia Bankruptcy Opinion Summaries

The Bankruptcy Code provides preferential treatment to domestic support obligations. Young filed for bankruptcy shortly after he and his wife, Stephens, divorced. The divorce decree required Young to pay alimony. Young did not pay. Stephens filed contempt proceedings in state court and Young was jailed. Young responded by filing an adversary proceeding against Stephens in the bankruptcy court, alleging a violation of the stay. In the bankruptcy, including the adversary proceeding, attorney Cruz represented Young. She repeatedly mischaracterized past-due post-petition alimony obligations as past-due prepetition obligations and falsely asserted Young was current on his alimony payments, representing that Young would "continue" to make alimony payments. In reliance on these representations, the bankruptcy court confirmed a plan. After discovering Cruz's false statements, the court entered a show-cause order and concluded that Cruz had no basis in law or fact for her assertions. Citing Federal Rule of Bankruptcy Procedure 9011, the court imposed, and the Bankruptcy Appellate Panel and Eighth Circuit affirmed, sanctions; suspending Cruz from practice in the Arkansas bankruptcy courts for six months, fining her $1,000, and directing her to attend CLE. Rule 9011 required Cruz to "make a reasonable inquiry into whether . . . a factual and legal basis" supported her assertions. View "In re: Cruz" on Justia Law

This dispute stemmed from a house that Debra Stevenson and her son Eugene Smith both own. After Stevenson refinanced her mortgage twice and then filed for bankruptcy, HSBC filed suit in Bankruptcy Court seeking equitable subrogation, which permits courts to declare that the owner of a mortgage (HSBC) has the same rights as an earlier-in-time owner of another mortgage (Wells Fargo). Only Stevenson signed the paperwork for the second refinancing with HSBC and Smith refused to sign because he thought the interest rate was too high. HSBC went ahead with the mortgage in full without Smith's signature. The court affirmed the Bankruptcy Court's conclusion that HSBC is entitled to equitable subrogation and rejected Stevenson and Smith’s claims that the mortgage is invalid under D.C. and federal lending laws. The court affirmed the judgment. View "In Re: Debra M. Stevenson" on Justia Law

Debtor filed a voluntary petition for Chapter 13 bankruptcy. The bankruptcy court appointed a Trustee and confirmed Debtor’s Chapter 13 plan, which contained a tax return production requirement. When the Trustee received neither a copy of Debtor’s tax return under the tax return production requirement nor a request for an extension, the Trustee filed a motion alerting the bankruptcy court to Debtor’s failure to comply with the tax return production requirement. When Debtor belatedly furnished Trustee with a copy the extension request, the bankruptcy court imposed a $100 sanction on Debtor. The district court upheld the sanction. the First Circuit rejected Debtor’s challenge to the sanction, holding that the district court did not err in upholding it. View "Charbono v. Sumski" on Justia Law

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