Justia Bankruptcy Opinion Summaries

Watson’s companies, Cyberco and Teleservices, defrauded lending institutions and other businesses that provided funding for Cyberco to purchase computer equipment from Teleservices. Cyberco never actually received any equipment, but the lending institutions forwarded funds to Teleservices based on phony invoices Watson arranged. Watson packed Cyberco’s computer room with fake servers and swapped serial numbers among those servers to deceive the victims when they attempted to audit their collateral. Teleservices “funneled” the funds back to Cyberco, which used them to make payments to allow the fraud to continue and to pay Watson and others substantial salaries. The payments were made through Huntington Bank, which also facilitated payments through its cash management services, but Cyberco owed Huntington more than $16 million. Teleservices, which had no banking relationship with Huntington, made payments so that Huntington could reduce its exposure to about $600,000 in a few months, just weeks before the FBI raided Cyberco. After that raid, creditors commenced an involuntary Chapter 7 proceeding against Cyberco. A state-appointed receiver filed a voluntary Chapter 7 bankruptcy petition for Teleservices. The bankruptcy court dismissed Huntington’s motions for substantive consolidation of the Chapter 7 petitions. The Bankruptcy Appellate Panel determined that the denials were not final appealable orders. The Sixth Circuit affirmed. View "In re: Cyberco Holdings, Inc." on Justia Law

American loaned $429,991 to Saberline to pay an insurance premium; Saberline agreed that, if it defaulted on the loan, American could cancel the policy and obtain return of any unearned premiums. USIG brokered the deal. American would deliver funds to USIG’s account at Cornerstone; USIG would forward the money to the insurer. Instead of placing the money in a trust account for Saberline, USIG told American to deposit the funds in USIG’s general operating account at Cornerstone. USIG was indebted to Cornerstone and had authorized it to sweep the operating account and apply anything over $50,000 to the debt. As a result, when American deposited Saberline’s premiums, Cornerstone reduced USIG’s debt. Saberline defaulted. American canceled the policy and attempted to recover the premium. USIG repaid American with funds drawn from a different bank, but then filed for bankruptcy, turning that transfer into a preference payment. American settled with the bankruptcy trustee, reserving its right to pursue a conversion claim against Cornerstone. A magistrate judge issued a declaratory judgment that American had a superior security interest in the disputed funds and that Cornerstone was liable for conversion. The Sixth Circuit affirmed. The Premium Finance Company Act, Tenn. Code 56-37-101, gave American a senior perfected security interest in the contested funds. View "American Bank, FSB v. Cornerstone Cmty. Bank" on Justia Law

This case involved the allocation of tax refunds pursuant to a Tax Sharing Agreement (TSA) between two members of a Consolidated Group, the parent corporation (the Holding Company), and one of its subsidiaries (the Bank), the principal operating entity for the Consolidated Group. At issue on appeal was whether the Bankruptcy Court erred in declaring the tax refunds an asset of the bankruptcy estate. The court concluded that the relationship between the Holding Company and the Bank is not a debtor-creditor relationship; when the Holding Company received the tax refunds it held the funds intact - as if in escrow - for the benefit of the Bank and thus the remaining members of the Consolidated Group; the parties intended that the Holding Company would promptly forward the refunds to the Bank so that the Bank could, in turn, forward them on to the Group's members; and in the Bank's hands, the tax refunds occupied the same status as they did in the Holding Company's hands - they were tax refunds for distribution in accordance with the TSA. Accordingly, the court reversed the Bankruptcy Court's judgment and directed that court to vacate it decision declaring the tax refunds the property of the bankruptcy estate and to instruct the Holding Company to forward the funds held in escrow to the FDIC, as receiver, for distribution to the members of the Group in accordance with the TSA. View "Zucker, et al. v. FDIC" on Justia Law

For nearly twenty years, Plaintiff, Condominium Associations, and several IDC development entities disputed the ownership and use of certain property in Rhode Island. IDC Properties constructed and Defendant, IDC Clambakes, operated the Newport Regatta Club on the contested property after Plaintiff asserted that the rights of the IDC entities to own or develop the property had lapsed. The Rhode Island Supreme Court found in favor of Plaintiff. Defendant later declared bankruptcy. This case came to the First Circuit Court of Appeals from a bankruptcy court decision and concerned the question whether Defendant trespassed on Plaintiff's property or whether, through its actions during the pendency of the litigation, Plaintiff impliedly consented to operation of the Club by Defendant while title to the property was in dispute. The First Circuit affirmed the bankruptcy court's decision that Plaintiff impliedly consented to Defendant's operation of the Club, holding that the bankruptcy court's decision was fully reasoned and supported by the evidence. Remanded for a determination whether compensation was owed for Defendant's authorized use and occupancy. View "Goat Island S. Condo., Inc. v. IDC Clambakes, Inc." on Justia Law

Lindsey filed a voluntary Chapter 11 petition for bankruptcy relief. His reorganization plan identified 12 classes of creditors. Lindsey sought to retain most of his assets, including several pieces of real estate, so three banks, all impaired creditors, opposed the plan, 11 U.S.C. § 1129(b)(1) as not complying with the absolute priority rule, which bars debtors from retaining any property unless the reorganization plan pays all dissenting creditors in full. Lindsey argued that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 abrogated the absolute priority rule with respect to individual debtors. The bankruptcy court refused to confirm the plan. The district court affirmed. The Sixth Circuit dismissed an appeal for lack of jurisdiction. Rejection of a reorganization plan did not create a final appealable order. View "Lindsey v. Pinnacle Nat'l Bank" on Justia Law

Lamesa filed suit against Liberty Mutual alleging that Liberty Mutual was liable under a federally-required surety bond for the alleged misconduct of its principal, a trustee in a Chapter 7 bankruptcy proceeding. On appeal, Liberty Mutual appealed the district court's decision to affirm the bankruptcy court's judgment that the trustee had committed gross negligence and Liberty Mutual, as the trustee's surety, was liable for damages under the terms of the bond. The court held that the controlling limitations period in this case was provided by 11 U.S.C. 322(d). Because Liberty Mutual did not contest that Lamesa's claim was timely under that provision, the court affirmed the bankruptcy court's conclusion that Lamesa's suit was not time-barred. On the merits, the court concluded that the bankruptcy court's finding that the trustee was grossly negligent in performing her duties was not clearly erroneous; expert testimony was not necessary to establish that the trustee failed to meet her standard of care; and Liberty Mutual failed to demonstrate that the district court's damage award was clearly erroneous. Accordingly, the court affirmed the judgment of the district court. View "Liberty Mutual Ins. Co. v. USA by Lamesa National Bank" on Justia Law

Debtor appealed the bankruptcy court's order allowing a claim filed by the DHHS as a priority debt in the nature of a domestic support obligation. The court affirmed the judgment, concluding that the debt owed to DHHS was a debt in the nature of support of a child under 11 U.S.C. 101(14A)(B). The court concluded that debtor's remaining arguments lacked merit. View "Hernandez v. Dept. of Health & Human Serv." on Justia Law

These consolidated appeals concerned a home previously owned by debtor. On appeal, the Trustee challenged the bankruptcy court's order holding that he recover nothing from defendants on his action to avoid a transfer which occurred when defendants perfected their liens on estate property postpetition. GMAC challenged the part of the order holding that the automatic stay was not violated and that GMAC lacked standing in the matter. The bankruptcy appellate panel (BAP) concluded that GMAC did not have standing to appeal any violation of the stay because, if GMAC was aggrieved, it was either by a wrongful foreclosure by U.S. Bank or by its own failure to protect its interests, not by the registration of the judgments or the order. Therefore, the court dismissed GMAC's appeal. In regards to the Trustee's claim, the BAP affirmed the bankruptcy court's awarding of nothing to the Trustee where the estate's interest had no value in and of itself, and the loss of a right to use some sort of "leverage" to get money to which the estate was not entitled was not the basis for a cause of action. View "Seaver v. New Buffalo Auto Sales, LLC, et al." on Justia Law

Bank of America lost approximately $34 million when the Knight companies went bankrupt. BOA sued, claiming that Knight’s directors and managers looted the firm and that its accountants failed to detect the embezzlement. The district court dismissed. The accountants invoked the protection of Illinois law, 225 ILCS 450/30.1, which provides that an accountant is liable only to its clients unless the accountant itself committed fraud (not alleged in this case) or “was aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action” The court found that BOA did not plausibly allege that the accountants knew that Knight’s “primary intent” was to benefit the Bank in alleging that the accountants knew that Knight would furnish copies of the financial statements to lenders. The Seventh Circuit affirmed, noting BOA’s choice not to pursue its claims in the bankruptcy process. View "Bank of America, N.A. v. Knight" on Justia Law

SWT appealed the district court's holding that a lien on its principal asset held by Acceptance survived confirmation of a Chapter 11 bankruptcy reorganization plan. In light of the court's interpretation of the definition of the word "participate" and in accordance with persuasive authority from its sister circuits, the court held that meeting the participation requirement in In re Ahern Enterprises required more than mere passive receipt of effective notice. Accordingly, the court held that Acceptance's passive receipt of notice did not constitute participation within the meaning of this test and affirmed the judgment of the district court. View "Acceptance Loan Co., Inc. v. S. White Transp., Inc." on Justia Law