Justia Bankruptcy Opinion Summaries

Tommy Sundy petitioned for a writ of mandamus to direct the circuit court to dismiss third-party claims asserted against him by accounting firm Frost Cummings Tidwell Group, LLC ("FCT"). Adams Produce Company, Inc. ("APCI"), purchased Crestview Produce of Destin, Inc., from Sundy. As part of the transaction, APCI and Sundy executed a promissory note in the amount of $850,000, and Sundy became an employee of APCI. FCT alleges that, based on representations from APCI and Sundy, certain budget and bonus projections were set for APCI, but those goals were not met. Because of that failure, Sundy was not entitled to bonuses that had been paid to him throughout 2009. With the alleged help and direction of FCT, APCI recharacterized the bonuses as repayments of principal on the promissory note. The nonpayment of certain amounts to Sundy in the context of this action effectively increased APCI's income and decreased its indebtedness. APCI also allegedly entered into an oral, undocumented agreement with Sundy stipulating that it would make him whole in future years for the forfeited bonus payments. In 2009, APCI's shareholders decided to sell the company to API Holdings, LLC. API Holdings alleges that it discovered that, contrary to representations made by FCT in an audit report, APCI's financial statements were fraudulent, causing API Holdings to believe that APC was worth more than it actually was. API Holdings sued FCT asserting claims of negligent misrepresentation, auditing malpractice, fraud, and other claims of professional malfeasance. Among several other claims, API Holdings alleged that FCT had failed to uncover misrepresentations by Sundy and APCI and that FCT had acted fraudulently in confirming the recharacterization of Sundy's bonuses as payments on principal of the promissory note. A few months later, APC filed for Chapter 11 bankruptcy protection. APC filed an adversarial complaint in FCT's bankruptcy case, alleging that FCT's audit work had painted a false financial picture of APC upon which APC had relied in continuing to operate its business even after reaching the point of insolvency. FCT filed a third-party complaint with the bankruptcy court against Sundy and others. FCT's complaint alleged various theories under Alabama law as bases for FCT to "recover over" against Sundy. Sundy subsequently moved to dismiss FCT's third-party complaint on the basis of 6-5-440, Ala. Code 1975, Alabama's abatement statute. The circuit court denied the motion, and Sundy then filed his petition for a writ of mandamus seeking to have the Supreme Court direct the circuit court to vacate its judgment denying his motion to dismiss and to order the circuit court to dismiss FCT's claims against Sundy asserted in its third-party complaint at circuit court. The Supreme Court concluded that FCT's third-party claims against Sundy were not barred by the abatement statute. The circuit court properly declined to dismiss those claims. Therefore, the Court denied the petition for a writ of mandamus. View "In re: API Holdings, LLC v. Frost Cummings Tidwell Group, LLC" on Justia Law

Richardson, apparently a lawyer who has been suspended several times, incurred educational debt in 1988 but did not pay. Indiana University, the creditor, sued in 1998. Richardson filed a bankruptcy petition days before trial but did not tell the court, the University, or its counsel. Nor did he appear for trial. The state judge entered a default judgment, which the law firm tried unsuccessfully to collect. After learning about the bankruptcy, the law firm stopped collection efforts. The bankruptcy ended in 2001, and the firm resumed collection efforts, relying on 11 U.S.C. 523(a)(8), which makes most educational debts nondischargeable. Richardson filed a second bankruptcy in 2002 that lasted until 2007. Again the law firm ceased its efforts until after its end. The post-2007 efforts resulted in Richardson’s claim that the law firm violated the Fair Debt Collection Practices Act, 15 U.S.C. 1692e, 1692f, by trying to enforce a judgment that had been entered in violation of the Bankruptcy Code’s automatic stay. The district court treated the suit as a collateral attack on the state court’s judgment and dismissed for want of jurisdiction, invoking the Rooker-Feldman doctrine. The Seventh Circuit held that the dismissal should be on the merits, noting that the state court judgment was vacated at the request of Indiana University.View "Richardson v. Koch Law Firm, P.C." on Justia Law

This appeal concerns the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS). The liquidator appealed the district court's affirmance of the bankruptcy court's order declining to conduct a section 363 review of a sale of the claims of Sentry in a Chapter 15 ancillary bankruptcy proceeding under the Securities Investor Protection Act (SIPA), 11 U.S.C. 1520. Sentry is a British Virgin Islands investment fund. The court vacated and remanded, concluding that the SIPA sale is subject to review under section 363 and comity is not warranted where the SIPA sale claim is a transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States. View "Krys v. Farnum Place, LLC" on Justia Law

In 1999 ATN fraudulently transferred $6 million to its former owners, including Allen, in a shareholder litigation settlement. ATN avoided the transfer and obtained a recovery order in its separate Florida bankruptcy proceedings. Allen transferred the money to a Cook Islands asset protection trust, filed for bankruptcy in New Jersey, and argued that the funds were never recovered and were property of his estate subject to an automatic stay. After a remand, the Florida Bankruptcy Court avoided the transfers to Allen; entered a $6 million judgment in favor of ATN on its fraudulent transfer claims; and ordered Allen to repatriate the money, provide an accounting, and freeze any other use or transfer of the money. Allen did not comply. ATN filed an adversary proceeding in Allen’s bankruptcy. The New Jersey Bankruptcy Court denied relief, finding that, because ATN had not recovered tangible possession of the funds, they were not property of ATN’s bankruptcy estate, but property of Allen’s estate and subject to the automatic stay and were not held by Allen in constructive trust for ATN. The district court affirmed. The Third Circuit reversed, holding that where a debtor avoids a fraudulent transfer and obtains a recovery order (11 U.S.C. 550) it has sufficiently “recovered” those funds such that they are part of that debtor’s estate. View "In re: Allen" on Justia Law

The case involves statements made by plaintiff Vehicle Market Research, Inc. (VMR) in a breach of contract case that were allegedly inconsistent with earlier statements by its sole owner, John Tagliapietra. VMR developed and owned certain intellectual property, including a software system to calculate the value of a total loss of an automobile for the purposes of the automobile insurance industry and certain “pre-existing software tools, utilities, concepts, techniques, text, research or development” used in the development of the software. When Mr. Tagliapietra filed for personal bankruptcy, he asserted that his shares in VMR were worth nothing. A few years later, as the bankruptcy was winding down, VMR sued Mitchell International, Inc., a company which held an exclusive license to VMR's technology. That case sought $4.5 million in damages for the alleged misappropriation of that technology. The question this case presented to the Tenth Circuit was whether the statements by VMR and Mr. Tagliapietra in the litigation against Mitchell were so clearly contrary to the statements made by Mr. Tagliapietra in his bankruptcy proceeding that VMR should have been judicially estopped from proceeding with its suit against Mitchell. After review, the Court concluded that neither VMR’s litigation claim for payments nor Mr. Tagliapietra’s deposition testimony in that lawsuit was clearly inconsistent with his valuation of 0.00 for his VMR stock at the time of his bankruptcy petition in 2005, the date when the initial bankruptcy representations were made. "If there were grounds for judicial estoppel, it would have to be based on a duty by Mr. Tagliapietra to amend his bankruptcy pleadings to report a possible increased value for his VMR stock at least as of the time that VMR filed its suit against Mitchell in 2009. However, our precedent is not clear on whether a debtor has a continuing duty to amend his bankruptcy schedules when the estate’s assets change in value. Given our reluctance to invoke judicial estoppel, and keeping in mind that judicial estoppel is an affirmative defense that its proponent must prove, we conclude that in this case Mitchell has not met its burden of showing any clearly inconsistent statements that would warrant that relief." View "Vehicle Market Research v. Mitchell International" on Justia Law

Debtors, William M. "Trip" Hawkins - the cofounder of EA and his wife, filed a declaratory action against the IRS and the FTB seeking a determination that their unpaid taxes were covered by the bankruptcy plan discharge. The IRS and FTB counterclaimed, alleging that the tax debts were excepted from discharge under 11 U.S.C. 523(a)(1)(c). The district court and the bankruptcy court held that specific intent to evade taxes was not required in order to except a tax debt from discharge under section 523(a)(1)(C) and the courts relied in large part on debtors' spending beyond their income as the basis for denying tax debt discharge. The court held that the denial of discharge for willfully attempting, in any manner to evade or defeat a tax debt requires that the acts be taken with the specific intent to evade the tax. In this case, neither the district court nor the bankruptcy court had the benefit of the court's holding and therefore, the court vacated and remanded for the courts to reanalyze the case using a specific intent standard. View "Hawkins v. FTB" on Justia Law

Plaintiff appealed the bankruptcy court's orders granting a motion to dismiss and denying his motion for retroactive approval to prosecute a derivative action complaint. The panel concluded that, based upon the record and applicable legal standards, the bankruptcy court did not abuse its discretion in denying derivative standing where there is no evidence that the trustee refused to undertake avoidance of the transfer, rather, he merely responded that he would need more information. Further, the bankruptcy court identified the complexity of the matters, including a three step process before any recovery could even be potentially available to the bankruptcy estate; the risks associated with litigation; and the expense of litigation in finding that the trustee was justified in his refusal to pursue avoidance of the partial assignment. These findings conform to the cost benefit analysis mandated by the law in this Circuit. The panel rejected plaintiff's remaining arguments and affirmed the bankruptcy court's orders. View "Larson, III v. Foster, et al." on Justia Law

The trustee appealed from the bankruptcy court's order overruling the trustee's objection to debtor's claimed exemption in the portion of his state income tax refund which came from the Minnesota Education Credit as "government assistance based on need" under section 550.37, subd. 14 of the Minnesota Statutes. The panel concluded that the Education Credit is a direct payment or subsidy to address the basic economic needs of low-income recipients in obtaining such quality education for their children where the Education Credit is available only to individuals with relatively low income, is a refundable credit, and the credit is, in large part, intended to assist low-income individuals in obtaining quality education for their children. Accordingly, the panel affirmed the bankruptcy court's order permitting debtor's claimed exemption. View "Christians v. Dmitruk" on Justia Law

Schwab filed a chapter 11 bankruptcy petition in 2010. HLP was appointed as bankruptcy counsel. Schwab’s individual directors/shareholders filed an adversary proceeding against Attorney Oscar and HLP, asserting malpractice arising from an allegedly undisclosed conflict of interest with Bank of America. The bankruptcy court dismissed, holding that the directors lacked standing to bring the claim directly or derivatively and that the claim was barred by res judicata. They did not appeal. One year after the dismissal, the directors sought to reopen the adversary proceeding on the basis of asserted newly discovered evidence of failure to disclose a conflict with Huntington National Bank. The bankruptcy court denied the motion for relief from judgment, reasoning that the directors had not challenged the prior ruling that they lacked standing and that, although other arguments were immaterial in light of lack of standing, the proffered evidence was neither new nor newly discovered. The directors “had knowledge of the specific conflict at least three years earlier than they’ve claimed in their motion for relief.” The Sixth Circuit Bankruptcy Appellate Panel affirmed. Because the directors lacked standing to be a party in the underlying complaint, they lack standing to bring a motion for relief from judgment. View "In re: SII Liquidation Co." on Justia Law

Debtors developed and sold property in “The Village of Arcadian Springs,” in Anderson, Tennessee. Plaintiffs alleged that they were fraudulently induced to purchase waterfront lots by misrepresentations concerning construction of a lake and other amenities which were never completed. After a hearing on noncompliance with discovery orders, the state court entered default judgment, stating: Plaintiffs are entitled to a Judgment pursuant to ... their Complaint including ... violation of the Tennessee Consumer Protection Act ... negligence; misrepresentation; fraud; conversion; negligent and intentional infliction of emotional distress; outrageous conduct; and deceit. The Debtors filed a Chapter 7 bankruptcy petition before a scheduled state court hearing on damages. In an adversary proceeding, the bankruptcy court compared the elements of 11 U.S.C. 523(a)(2)(A) to those of a cause of action for fraud in Tennessee, found that the fraud claims were actually litigated in the state court, that the finding of fraud was necessary to support the state judgment, and that collateral estoppel applied to the state court fraud claims, rendering them non-dischargeable under 11 U.S.C. 523(a)(2)(A). The Bankruptcy Appellate Panel affirmed, noting that the Debtors retained an attorney, filed an answer, and participated in discovery so that their repeated failures to respond properly resulted in default judgment. The fraud issues were, therefore, actually litigated. View "In re: Anderson" on Justia Law