Justia Bankruptcy Opinion Summaries

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

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