Justia Bankruptcy Opinion Summaries

Plaintiff, an attorney who handled Chapter 11 proceedings for a client, submitted a petition for fees after the case was converted to a Chapter 7 proceeding. The bankruptcy court denied the petition because of the attorney's failure to comply with disclosure rules, abusive conduct toward others involved in the case, excessive or incomplete billing, and disruptive behavior. The Sixth Circuit affirmed, noting the attorney's "flagrant" disregard of deadlines and the rules for appeal.

Plaintiff filed a lawsuit against defendant alleging that defendant had discriminated against him because of his bankruptcy, in violation of 11 U.S.C. 525(b), by refusing to hire him and alternatively, by terminating him from the job after it had hired him. The primary issue was whether section 525(b) prohibited a private employer from denying employment to an individual on the ground that he was or has been in bankruptcy. The court applied elementary principles of statutory construction and common sense, holding that section 525(b) did not prohibit private employers from denying employment to persons because of their status as a bankruptcy debtor. The court also held that the evidence was more than enough for the jury to discredit appellant's contrary testimony and found that no employment relationship was formed. Accordingly, the court held that the district court did not err in denying plaintiff's renewed motion for judgment as a matter of law and in denying plaintiff's motion for a new trial where the jury's verdict was not against the great weight of the evidence.

Appellee initially filed for bankruptcy protection under Chapter 13 but after one of his creditors, appellant, filed objections to appellee's Chapter 13 plan, appellee converted the case to a Chapter 7 proceeding. At issue was whether the bankruptcy court erred in ordering appellee to convert his case back to a Chapter 13 proceeding, or to face dismissal, following appellee's failure to rebut a presumption of abuse arising from the means test pursuant to 11 U.S.C. 706(b)(2). The court found no error and held that the bankruptcy court acted pursuant to 11 U.S.C. 707(b)(1) by forcing appellee to either consent to a reconversion or face dismissal because of the unrebutted presumption of abuse that arose in his case.

During 10 years in a 12-year period the defendant, an Ohio physician, filed federal income tax returns that showed she owed taxes â but she failed to pay them. The United States brought an action for judgment and to foreclose on its tax liens on defendant's real property. Defendant argued that her Chapter 7 bankruptcy petition discharged her tax liabilities for some of the years preceding the filing. The district court disagreed and entered a $319,698 judgment in favor of the United States, finding that she had willfully attempted to evade paying taxes for those years, preventing discharge of the obligations through her bankruptcy filing. The Sixth Circuit reversed, holding that the government did not establish willfulness as required by 11 U.S.C. 523(a). There was no evidence that the defendant lived lavishly; the district court incorrectly applied the test applicable only to student loans and made assumptions about her ability to earn more money and her husband's failure to contribute.

The United States has a $60 million judgment against the defendant, who fled the country, for Medicare and Medicaid fraud. The government served a writ of garnishment (28 U.S.C. 3205) against his interest in a Georgia company, which paid secured creditors, liquidated its assets, and placed slightly more than $4 million in escrow for the claim. Creditors of the Georgia company claimed $175,000. The district court ruled in favor of the government because the creditors had not obtained a writ. The Seventh Circuit vacated and remanded, reasoning that the creditors' claim was against the Georgia company, not against the defendant, and that the defendant's equity interest in the company (which was reachable by the government) may have been subordinate to the interests of creditors. The court noted many unanswered questions about the creditors' interest in the company.

In 2004 the bank made a loan secured by a mortgage and all rents from the property. Three years later the borrower defaulted. The IRS filed a tax lien against the property. A receiver, appointed at the request of the bank, rented the property and collected $82,675. The district court held that the IRS lien had priority. The Seventh Circuit reversed and remanded. The bank had perfected its security interest in the rents under Indiana law; 26.U.S.C. 6323 gives such an interest priority over a federal tax lien if the property subject to the interest was "in existence" when the federal tax lien was filed. The property at issue is the real estate, not the rental income, and was in existence at the time the lien was filed.

K&L Gates LLP ("K&L Gates") filed a motion to lift two protective orders prohibiting disclosure of communications made during mediation. Savage & Associates, P.C. ("Savage") filed a cross-motion to enjoin K&L Gates from raising questions about the validity of certain provisions of a settlement agreement as a defense to malpractice in a related action. At issue was whether the district court properly denied both K&L Gates' motion and Savage's cross-motion. The court held that the district court did not err in the denial of K&L Gates' motion where K&L Gates failed to demonstrate a compelling need for the discovery, failed to show that the information was not otherwise available, and failed to establish that the need for the evidence was outweighed by the public interest in maintaining confidentiality. The court also held that the district court did not err in holding that K&L Gates was not barred from asserting a defense challenging the validity of any provision of the settlement agreement in connection with the related malpractice action currently pending against the law firm.

The district court denied insurance companies standing to challenge a Chapter 11 plan of reorganization for a debtor facing asbestos and silica-related injury claims and affirmed the plan. The Third Circuit vacated and remanded, holding that the companies have bankruptcy standing. The availability of hundreds of millions of dollars in insurance cover was a major assumption underlying the plan; insurance policies were assigned to specific trusts created for the injury claims, in contravention of anti-assignment clauses in the policies. The plan puts a "hand in the pocket" of the insurance companies, which, therefore, qualify as parties in interest under 11 U.S.C. 1109(b). Although the plan preserves coverage defenses, it increases the companies' pre-petition liability exposure more than 27 times over. Noting the likely increase in costs of administration and investigation, the court held that the interests are not speculative. The court stated that an allegation that the debtor "sold out" the insurers to gain approval of the plan by plaintiffs' attorneys was "not without record support."

Plaintiffs appealed the judgment of the district court affirming the bankruptcy court's decision to dismiss their petition for Chapter 7 bankruptcy on grounds of abuse. At issue was whether the bankruptcy court erred in its finding that plaintiffs were able to pay their creditors based on the totality of the circumstances of their financial situation. The court affirmed and held that the evidence amply supported the bankruptcy court's findings of abuse where the court need not depend on the additional amount in Social Security benefits to determine that plaintiffs' excessive budge and unjustifiable expenses were an abuse of Chapter 7.

Appellants appealed the district court's order affirming the bankruptcy court's decision to sustain the debtor's, Winn-Dixie Stores, Inc. ("Winn-Dixie"), objections to appellants' attempt to amend their claims post-confirmation of Winn-Dixie's reorganization plan after it filed for Chapter 11 proceedings. At issue was whether the doctrine of res judicata barred appellants' amended claims where the reorganization plan language explicitly set forth that acceptance of the new common stock constituted full satisfaction of a claim. The court affirmed the judgment and held that it could not find any compelling reason that would support amendment of appellants' claims which have been barred by the res judicata effect of Winn-Dixie's confirmed plan.