Justia Bankruptcy Opinion Summaries

Sentinel specialized in short-term cash management, promising to invest customers’ cash in safe securities for good returns with high liquidity. Customers did not acquire rights to specific securities, but received a pro rata share of the value of securities in an investment pool (Segment) based on the type of customer and regulations that applied to that customer. Segment 1 was protected by the Commodity Exchange Act; Segment 3 customers by the Investment Advisors Act and SEC regulations. Despite those laws, Sentinel lumped cash together, used it to purchase risky securities, and issued misleading statements. Some securities were collateral for a loan (BONY). In 2007 customers began demanding cash and BONY pressured Sentinel for payment. Sentinel moved $166 million in corporate securities out of a Segment 1 trust to a lienable account as collateral for BONY and sold Segment 1 and 3 securities to pay BONY. Sentinel filed for bankruptcy after returning $264 million to Segment 1 from a lienable account and moving $290 million from the Segment 3 trust to the lienable account. After informing customers that it would not honor redemption requests, Sentinel distributed the full cash value of their accounts to some Segment 1 groups. After filing for bankruptcy Sentinel obtained bankruptcy court permission to have BONY distribute $300 million from Sentinel accounts to favored customers. The trustee obtained district court approval to avoid the transfers, 11 U.S.C. 547; 11 U.S.C. 549. The Seventh Circuit, noting the unique conflict between the rights of two groups of wronged customers, reversed. Sentinel’s pre-petition transfer fell within the securities exception in 11 U.S.C. 546(e); the post-petition transfer was authorized by the bankruptcy court, 11 U.S.C. 549. Neither can be avoided.View "Grede v. FCStone LLC" on Justia Law

Before Paul filed for Chapter 7 bankruptcy, Paul and Candace were in divorce proceedings in New Jersey. No final judgment existed nor was there a division of marital assets. Based on an estimate of her expected share of marital assets, Candace filed a timely proof of claim for $577,935 against Paul’s bankruptcy estate, apparently premised on her stake in a partnership that was legally titled in Paul’s name and, therefore, passed to his bankruptcy estate. It would likely be distributed as shared marital property in a divorce decree. The trustee sought to expunge the claim, arguing that Candace’s interest in equitably dividing marital property in Paul’s bankruptcy estate was not a “claim” under 11 U.S.C. 101(5), because the state court had not entered a final divorce decree before Paul’s filing. The bankruptcy judge found that the claim for equitable distribution arose prepetition and must be allowed. On direct appeal, the Third Circuit affirmed. Although Candace did not have an equitable distribution decree in hand at the time Paul filed for bankruptcy, the focus should not be on when the claim accrues, but whether a claim exists. Given the Bankruptcy Code’s expansive definition of “claim,” a non-debtor spouse has an allowable pre-petition claim against the bankruptcy estate for equitable distribution of marital property when the parties are in divorce proceedings before the bankruptcy petition is filed. View "In re: Paul Ruitenberg, III" on Justia Law

Beginning in 2007, Mississippi Valley agreed to sell cattle to Swift, planning to fulfill that agreement in part with cattle it had received from J&R. Mississippi Valley was merely the holder of J&R’s cattle, not the purchaser or owner. Because the relationship between Swift and J&R had soured, Mississippi Valley did not inform Swift that some of the cattle were actually J&R’s. Swift paid for the purchases with checks made out to Mississippi Valley, which deposited the checks in its general operating account and periodically sent J&R checks for sales of J&R cattle. Mississippi Valley stopped making timely payments. As the debt mounted, J&R sent increasingly frantic demands for payment. Mississippi Valley sent seven checks to J&R totaling $862,747.31. Less than 90 days later, creditors filed an involuntary Chapter 7 bankruptcy petition against Mississippi Valley. The bankruptcy trustee sought to avoid the seven payments as preferential transfers, 11 U.S.C. 547(b), but J&R argued that Mississippi Valley never had a property interest in the funds but only held the sale proceeds for J&R’s benefit. The bankruptcy court granted J&R summary judgment. The district court affirmed. The Seventh Circuit remanded, stating that it is unclear how much money could properly be traced to a constructive trust in favor of J&R.View "In re: MS Livestock, Inc." on Justia Law

Defendant appealed from the bankruptcy court's order imposing sanctions and judgment, and an order denying a motion to vacate or alter or amend judgment. The bankruptcy appellate panel affirmed the bankruptcy court's decision that defendant violated Federal Rule of Bankruptcy Procedure 9011, as well as its imposition of sanctions in connection therewith, including suspension of defendant from practice for six months under Local Rule 2090-2; reversed the bankruptcy court's imposition of sanctions against defendant under 11 U.S.C. 105 and its inherent authority because defendant did not receive separate prior notice and an opportunity to be heard regarding such sanctions; and remanded to the bankruptcy court the decision regarding sanctions for alleged misrepresentations by defendant at the Order to Appear and Show Cause hearing. View "Young v. Cruz" on Justia Law

Debtor challenged the district court's determination that proceeds from the post-certification sale of an exempted homestead revert to the estate if not reinvested within six months. The "snapshot rule" of bankruptcy law holds that all exemptions are determined at the time the bankruptcy petition is filed, and that they do not change due to subsequent events. In re Zibman held that proceeds from the pre-petition of a sale of a Texas homestead are not permanently immune from bankruptcy creditors. Under the court's precedent, the sale of the homestead voided the homestead exemption and the failure to reinvest the proceeds within six months voided the proceeds exemption, regardless of whether the sale occurred pre- or post- petition. This interpretation of 11 U.S.C. 522(c) is in accordance with Texas law and the decisions of the court. Accordingly, the court affirmed the district court's judgment. View "Viegelahn v. Frost" on Justia Law

Debtor moved for sanctions after Stephen Wyse, representing on of debtor's creditors, filed suit in state court seeking in part to recover a debt discharged by debtor in bankruptcy. Wyse and his client, Frank Williams, failed to appear in opposition and the bankruptcy court granted the motion. Wyse and Williams subsequently appealed the orders granting in part their first motion for relief and denying the second motion for rehearing or relief. The court concluded that the bankruptcy court did not err in finding a portion of the debt Williams sought to collect in the state court action was debtor's pre-conversion debt. The bankruptcy court maintained the order of sanctions against Wyse for seeking to collect the portion of the $76,200 derived from debtor's pre-conversion debt to Williams, not for seeking to collect the post-discharge debts in the state court action. The bankruptcy court was perfectly within its discretion to impose the sanction. Given William's failure to introduce any other evidence regarding the specific amount of money he provided to debtor on April 19, 2010, the bankruptcy court did not clearly err in finding Williams had not proven the exact amount of post-conversion debt debtor had incurred on that date. The court also concluded that the bankruptcy court did not abuse its discretion in denying the second motion for relief brought solely to raise neglected arguments in the first motion for relief. Accordingly, the court affirmed the judgment of the bankruptcy court. View "Williams, et al. v. King" on Justia Law

Law filed for Chapter 7 bankruptcy. He valued his home at $363,348, claiming that $75,000 of the value was covered by California’s homestead exemption and exempt from the bankruptcy estate under 11 U.S.C. 522(b)(3)(A). He claimed that the sum of two liens, including a mortgage in favor of Lin, exceeded the home’s nonexempt value, leaving no equity for other creditors. Siegel, the bankruptcy trustee, challenged the Lin lien in an adversary proceeding. Protracted litigation followed when “Lili Lin” in China claimed to be the beneficiary of Law’s deed of trust. The Bankruptcy Court concluded that the loan was a fiction created to preserve equity in the house and granted Siegel’s motion to “surcharge” Law’s $75,000 homestead exemption, to defray fees incurred in challenging Law’s misrepresentations. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed. The Supreme Court reversed. A bankruptcy court may not exercise its authority to carry out the provisions of the Code, 11 U.S.C. 105(a), or its inherent power to sanction abusive litigation practices by taking action prohibited elsewhere in the Code; the “surcharge” contravened section 522, which (by reference to California law) entitled Law to exempt $75,000 of equity in his home and which made that $75,000 “not liable for payment of any administrative expense,” including attorney’s fees. An argument that equated the surcharge with denial of Law’s homestead exemption was not supported by the history of the case. No one timely objected to the exemption, so it became final before the surcharge was imposed. In addition, federal law provides no authority for denial of an exemption on a ground not specified in the Code. The Court acknowledged that its ruling may produce inequitable results, but noted that ample authority remains to address debtor misconduct, including denial of discharge, sanctions for bad-faith litigation conduct, or enforcement of monetary sanctions through the normal procedures for collecting judgments. View "Law v. Siegel" on Justia Law

Amzak appealed the district court's summary judgment on its loan loss claims against its title insurance policy provider and related entities. The court concluded that Amzak failed to show that it suffered actual loss because of a failure of title and STL could not be held responsible for any harm suffered by Amzak. The court formalized the holding in First State Bank v. American Title and likewise rejected the guarantee rationale of Citicorp Savings of Illinois v. Stewart Title Guaranty Co., and agreed with the district court's rejection of Amzak's argument that STL breached the title policy at the time of the loan because its mortgage was voidable at that time. The court also disposed of Amzak's negligence claim where STL's delay in making a complete filing of Amzak's mortgage was not a legal cause of Amzak's loss. Accordingly, the court affirmed the judgment of the district court. View "Amzak Capital Mgmt. v. Stewart Title" on Justia Law

Hope 7 entered into bankruptcy in 2009 and RIASO was Hope 7's largest creditor. The bankruptcy court subsequently approved the settlement of Hope 7's fraud-based claims against RIASO, approved RIASO's proof of claim against Hope 7, and directed the payment of funds from Hope 7's estate to RIASO. Hope 7 subsequently found additional evidence relevant to RIASO's alleged fraud and moved for relief of judgment under Rule 60(b) and asked the bankruptcy court to reopen its earlier orders. The court concluded that Hope 7 had not demonstrated that it had standing to challenge the bankruptcy court's settlement order or, with regard to the remaining claims, that the bankruptcy court abused its discretion in denying the Rule 60(b) motion for relief. The district court did not err in affirming the bankruptcy court's decision, and therefore, the court dismissed in part and affirmed in part. View "In re: Hope 7 Monroe Street Ltd." on Justia Law

Appellant appealed the Bankruptcy Appellate Panel's (BAP) judgment holding that the bankruptcy estate of her former employer, Racing Services, was entitled to the liquidation proceeds of a cash-value life insurance policy the employer purchased for her. Because the trustee had presented no evidence demonstrating that appellant could have demonstrated insurability, the court rejected the argument that the purported "equities" of this case required that the court deem appellant's failure to reinstate the policy as an act of surrender. The terms of the agreement between appellant and Racing Services granted Racing Services only the limited right to receive a repayment of policy premiums from the cash value upon surrender of the policy. Accordingly, the court reversed where appellant at no time surrendered the policy and the estate did not possess a right to control the policy or receive its liquidation proceeds. View "Kaler v. Bala" on Justia Law