Justia Bankruptcy Opinion Summaries

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Beaulieu Group, LLC (“Beaulieu”), was “engaged in the distribution of carpet and hard surface flooring products in both residential and commercial markets in the United States and many foreign countries.” Beaulieu added new members to its board of directors but had insufficient borrowing power and liquidity to complete its turnaround efforts. Beaulieu and its affiliates each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.   The bankruptcy court subsequently approved a plan of liquidation that involved transferring all of Beaulieu’s assets to a liquidating trust. PMCM 2, LLC (the “Trustee”), is the liquidating trustee for the Beaulieu Liquidating Trust. The creditor is Auriga Polymers Inc. (“Auriga”), which sold Beaulieu polyester resins and specialty polymers used in a range of products, including textiles, before the bankruptcy.   At issue was whether post-petition transfers made under 11 U.S.C. Section 503(b)(9) will reduce the creditor’s new value defense. The Eleventh Circuit held that, for purposes of Section 547(c)(4)(B), “otherwise unavoidable transfers” made after the debtor has filed for bankruptcy do not affect a creditor’s new value defense. Thus, the court affirmed in part and reversed in part the bankruptcy court’s order on appeal.   The court wrote that the Bankruptcy Code empowers a trustee to claw back “preferences”. But the creditor who gives new value to the debtor after receiving a preference may use that new value to offset its preference liability. This “new value” defense, however, is itself offset to the extent that the debtor later makes an “otherwise unavoidable transfer” to the creditor on account of the value received. View "Auriga Polymers Inc. v. PMCM2, LLC" on Justia Law

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After filing for bankruptcy, the Terrells proposed a plan that classified about $30,000 they owed to Wisconsin as a “priority debt,” 11 U.S.C. 507(a)(1)(B) based on an overpayment of public assistance. The existence of a priority debt meant that the Chapter 13 plan had to continue for 60 months, after which unpaid debts would be discharged. After the plan was confirmed, the Seventh Circuit held that public assistance debts are not entitled to priority status, which raised the possibility of cutting the duration of the Terrell plan to 36 months and reducing the amount they paid. The bankruptcy court eventually amended the plan accordingly.The Seventh Circuit reversed, noting that the Terrells waited almost two years after the confirmation of their plan to seek a modification. A bankruptcy court needs authority from a statute, a rule, or the litigants’ consent to modify a confirmed plan. The Terrells acted too late to use Rule 60(b), the best and possibly the only source of authority for the relief they sought. View "State of Wisconsin Department of Children and Families v. Terrell" on Justia Law

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Appellee held a 99% interest in 72 Grandview LLC, which in turn owned a residential property that Appellee occupied as her primary residence. Appellant Bayview Loan Servicing LLC  (“Bayview”) initiated a foreclosure action in which both 72 Grandview LLC and Appellee were named as defendants. After Bayview obtained a judgment that authorized it to proceed with a foreclosure sale, Appellee a Chapter 7 bankruptcy petition and notified Bayview that, in her view, proceeding with the foreclosure sale would violate the automatic stay that took effect when she filed her bankruptcy petition. Nonetheless, Bayview proceeded with the foreclosure sale without relief from the automatic stay from the bankruptcy court.   Appellee then sought sanctions against Bayview, arguing that Bayview willfully violated the automatic stay. The bankruptcy court denied Appellee’s motion, but the district court reversed that decision and remanded for the calculation of fees and other damages that would be charged as sanctions.   Bayview appealed and the Second Circuit affirmed the district court’s order. The court held that two of the Bankruptcy Code’s automatic stay provisions, 11 U.S.C. Sections 362(a)(1) and (a)(2), are violated by an entity that proceeds with the foreclosure sale of a property when the debtor is a named party in the foreclosure proceedings, even if the debtor holds only a possessory interest in the property. Bayview willfully violated the automatic stay when it proceeded with the foreclosure sale while knowing that Appellee had filed a bankruptcy petition. View "In re: Eileen Fogarty" on Justia Law

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Fountain of praise, a church, leased space to Central Care Integrated Health Services. Shortly after the execution of the lease, the relationship soured when the parties disagreed on the frequency and amount of rent payments. Eventually, Fountain of Praise terminated the lease and successfully evicted Central Care from the premises.Subsequently, Central Care filed for Chapter 11 reorganization. Central Care then sued Fountain of Praise in state court, claiming breach of contract and unjust enrichment. Fountain of Praise then removed the case to bankruptcy court as an adversary proceeding. The bankruptcy court entered judgment in favor of Fountain of Praise, finding that any breach was excusable due to Central Care's failure to make timely rent payments and that Central Care lacked the requisite interest in the property for an unjust enrichment claim.Central Care appealed, and the district court judge assigned to the case reassigned the case to a magistrate judge who affirmed the bankruptcy court's judgment.On appeal, the Fifth Circuit vacated the magistrate judge's order, finding that the district court improperly authorized referral of the appeal from a bankruptcy court decision to a magistrate judge. Under 28 U.S.C. Section 158, appeals from a bankruptcy court must be heard either by the district court or a panel of bankruptcy court judges. View "South Central v. Oak Baptist" on Justia Law

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A group of insurance companies appealed an order appointing a representative for the interests of unidentified future asbestos and talc claimants in an ongoing bankruptcy proceeding. According to these insurers, who fund the asbestos claims trust established under 11 U.S.C. 524(g), this “future claimants’ representative” (FCR) has a conflict of interest precluding him from serving in this role because the FCR’s law firm also represented two of the insurance companies in a separate asbestos-related coverage dispute.The Third Circuit held that the Bankruptcy Court did not abuse its discretion in appointing the FCR. The court gave due consideration to the purported conflict, and correctly determined that the interests of both the insurance companies and the future claimants were adequately protected. View "In re: Imerys Talc America, Inc." on Justia Law

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Plaintiffs owned a home in Ontario County, New York. Following foreclosure, the couple filed for protection under Chapter 13 of the Bankruptcy Code and filed a complaint seeking to avoid the loss of their home on the grounds that it was a fraudulent conveyance. The Bankruptcy Court set aside the transfer, and the County appealed, raising two questions. The first is whether the Plaintiffs had standing to bring the avoidance proceeding. The second is whether the transfer effected by Ontario County in foreclosing on the lien was entitled to the presumption of having yielded “reasonably equivalent value” under Section 548 of the Bankruptcy Code.   The Second Circuit affirmed the district court’s judgment finding that the district court correctly held that the transfer of Plaintiffs’ home to the County was not entitled to the presumption of having provided “reasonably equivalent value” under Section 548.   The court explained that the County incorrectly interprets Section 522(c)(2)(B) as barring Plaintiffs from claiming the federal homestead exemption when it merely provides that exempt property remains liable for a tax lien. They are not attempting to avoid paying the tax lien; they are attempting to avoid a transfer of the property. Accordingly, Section 522(c)(2)(B) does not deprive the Plaintiffs of standing under Section 522(h).   The court further wrote that the County’s position would produce results that are fundamentally at odds with the goals of bankruptcy law. Here, it would give the County a windfall at the expense of the estate, the other creditors, and the debtor which is precisely what the Code’s fraudulent conveyance provisions are intended to prevent. View "Gunsalus v. County of Ontario" on Justia Law

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Defendant and her then-husband bought a condo for $525,000 with the intention of making it their primary residence. To finance the purchase, the couple took out a mortgage with the Plaintiff bank. Defendant did not sign the note but consented to her husband doing so. The mortgage contained a "future advances" clause, which granted Plaintiff a security interest in the Mortgage covering future funds Defendant's husband might borrow.Four years later, Defendant's husband borrowed additional funds from Plaintiff to keep his business afloat. Defendant did not sign the note. A few months later, Defendant's husband filed for Chapter 7 bankruptcy and the condo was sold for $650,000, approximately $250,000 of which was deposited in escrow. The couple divorced and Defendant moved out of the state.In Defendant's husband's bankruptcy case, the court held a portion of the escrowed sale proceeds must pay down his business notes pursuant to the mortgage’s future advances clause and that he could not claim a homestead exemption. Plaintiff was granted summary judgment on its claims that Defendant's proceeds were also subject to the future advances clause and that Plaintiff could apply those proceeds to Defendant's husband's business note.Defendant appealed on several grounds, including unconscionability, contract formation, and public policy, all of which the court rejected, affirming the district court's granting of summary judgment to Plaintiff. View "Sanborn Savings Bank v. Connie Freed" on Justia Law

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JPMorgan loaned the debtors $1.3 million on the security of a Cook County restaurant. After the debtors stopped paying real estate taxes, Wheeler paid on their behalf and received the right to a tax deed once a redemption period expired. JPMorgan did not pay the taxes or redeem from Wheeler. The debtors filed a bankruptcy petition. They listed some tax debts but did not identify Cook County or Wheeler as creditors. Neither was served with notice or a summons. JPMorgan knew about the unpaid taxes but failed to ensure that the County or Wheeler was served. The bankruptcy judge approved a plan of reorganization. The debtors did not pay; Wheeler got the judge to lift the automatic stay in order to get a tax deed. A state judge issued the requested deed. The federal district court held that the stay should have been left in place because the confirmed plan superseded Wheeler’s unpaid lien. On remand, the bankruptcy court declared the tax deed “void” and approved a revised plan of reorganization, calling for JPMorgan to pay Wheeler $65,000.In a second appeal, the district court concluded that the order approving the revised plan and knocking out Wheeler’s lien was valid. The Seventh Circuit affirmed. Wheeler is a party, the plan has been confirmed, and Wheeler has bypassed its principal opportunities to contest the plan. View "Wheeler Financial, Inc. v. J.P. Morgan Chase Bank, N.A." on Justia Law

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Appellant defaulted under her Chapter 11 bankruptcy plan by refusing to pay Appellee Bank of New York Mellon (Bank of NYM) after she lost her adversary proceeding challenging the bank’s secured claim. As a result, the bankruptcy court granted Bank of NYM’s motion to convert the bankruptcy case from Chapter 11 to Chapter 7 and ordered Appellant to turn over undistributed assets in her possession to the Chapter 7 bankruptcy estate. Appellant challenged these two decisions in separate appeals.   The Ninth Circuit affirmed the bankruptcy court’s orders converting Appellant’s bankruptcy case from Chapter 11 to Chapter 7 and ordering her to turn over undistributed assets in her possession to the Chapter 7 bankruptcy estate. The court held the bankruptcy court properly exercised its discretion in converting the case to Chapter 7 for cause under 11 U.S.C. Section 1112(b)(1). The court held that the party seeking relief under Section 1112(b)(1) has the initial burden of persuasion to establish that cause exists for granting such relief. The court held that failing to make required payments can be a material default of a Chapter 11 plan, even if the debtor has made payments for an extended period before the default or taken other significant steps to perform the plan. The court concluded that the bankruptcy court did not err in finding that Appellant’s default in paying Bank of New York Mellon’s secured claim was cause for conversion because both the amount and duration of this default were significant. View "ALLANA BARONI V. DAVID SEROR" on Justia Law

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When Cleary Packaging, LLC, filed a petition in bankruptcy under Subchapter V of Chapter 11 as a “small business debtor,” seeking to discharge a $4.7 million judgment that Cantwell-Cleary Co., Inc. had obtained against it for intentional interference with contracts and tortious interference with business relations, Cantwell-Cleary opposed the effort. It argued that 11 U.S.C. Section 1192(2), provides that small business debtors are not entitled to discharge any debt of the kind specified in section 523(a). And that Section 523(a) in turn lists 21 categories of debt that are non-dischargeable, including debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.”   The bankruptcy court agreed with Cleary Packaging and concluded that its $4.7 million debt was dischargeable. The Fourth Circuit disagreed with the bankruptcy court and reversed the court’s ruling and remanded. The court found more harmony from following a close textual analysis and contextual review of Section 1192(2) and thus concluded that it provides discharges to small business debtors, whether they are individuals or corporations, except with respect to the 21 kinds of debts listed in Section 523(a). Finally, the court concluded that its interpretation serves fairness and equity in circumstances where a small business corporate debtor, in particular, is given greater priority over creditors than would ordinarily apply and thus should not especially benefit from the discharge of debts incurred in circumstances of fraud, willful and malicious injury, and the other violations of public policy reflected in Section 523(a)’s list of exceptions. View "Cantwell-Cleary, Co., Inc. v. Cleary Packaging, LLC" on Justia Law