Justia Bankruptcy Opinion Summaries

The debtor in this case voluntarily filed for Chapter 7 bankruptcy and listed his anticipated 2021 federal and state income tax refunds as assets, asserting that they were fully exempt from the bankruptcy estate under Colorado law. The debtor and his spouse, who did not join the bankruptcy petition, filed joint tax returns. The returns showed a federal refund of $1,455 and a state refund of $554, with the federal refund paid to the bankruptcy trustee and the state refund paid to the debtor. The parties stipulated that the debtor would file his tax returns and turn over any refunds to the trustee, who would return any exempt portion to the debtor.After receiving the refunds, the trustee moved to compel turnover of the non-exempt portion of the federal tax refund, arguing that only a portion of the refund was exempt and that a pro-rata calculation should be used to determine the exempt amount. The United States Bankruptcy Court for the District of Colorado denied the trustee’s motion, concluding that the entire federal refund was exempt because it was caused by a refundable child tax credit. The trustee appealed, and the United States District Court for the District of Colorado affirmed the bankruptcy court’s decision.The United States Court of Appeals for the Tenth Circuit reviewed the case de novo and affirmed the district court’s judgment. The Tenth Circuit held that, under Colorado law, the phrase “attributed to” in the relevant exemption statute means “caused by,” and that the full amount of a federal income tax refund is exempt if it would not have occurred but for the refundable child tax credit. The court rejected the trustee’s argument for a pro-rata method and emphasized that Colorado law requires liberal construction of exemption statutes in favor of debtors. View "In re: Garcia-Morales" on Justia Law

A debtor filed for Chapter 7 bankruptcy and sought to discharge student loan debts owed to both the Department of Education and a private lender, the Bank of North Dakota. The debtor, a 50-year-old woman with degrees in physics, education, communication, and mechanical engineering, had a history of mental health challenges and an unconventional work history, including periods of unemployment and underemployment. She consistently sought employment in her fields of study but often had to accept lower-paying or unrelated jobs. At the time of the proceedings, she was employed as an engineer earning $78,000 annually, with modest assets, minimal retirement savings, and reasonable living expenses.The United States Bankruptcy Court for the Northern District of Iowa held a trial and a supplemental evidentiary hearing. The court found that the debtor’s federal student loan debt was not dischargeable, but the private student loan debt owed to the Bank of North Dakota was dischargeable under 11 U.S.C. § 523(a)(8), concluding that repayment of the Bank’s loan would impose an undue hardship. The court based its decision on the debtor’s financial resources, reasonable expenses, lack of significant assets, ongoing mental health needs, and the inflexibility of the Bank’s repayment terms. The Bank of North Dakota appealed the dischargeability determination.The United States Bankruptcy Appellate Panel for the Eighth Circuit reviewed the bankruptcy court’s legal conclusions de novo and its factual findings for clear error. The panel affirmed the bankruptcy court’s decision, holding that the debtor met her burden of proving undue hardship under the totality-of-the-circumstances test. The panel agreed that the Bank’s student loan was dischargeable, while the Department of Education loan was not, and found no error in the bankruptcy court’s analysis or application of the law. View "Duncanson v. Bank of North Dakota" on Justia Law

Twelve days before filing for bankruptcy, the debtors purchased a new property in New Hampton, Iowa, but did not list this property in their bankruptcy schedules. Instead, they listed their Waucoma property, consisting of three contiguous parcels totaling just under 30 acres, as their residence and claimed it as fully exempt under Iowa’s homestead laws. No objections were filed to this exemption. The debtors later sold two of the three Waucoma parcels, retaining only a vacant lot (Parcel A). After their bankruptcy discharge, a creditor, AgVantage, sought to execute a pre-petition judgment lien against Parcel A, ultimately acquiring it at a sheriff’s sale.The United States Bankruptcy Court for the Northern District of Iowa denied the debtors’ motion to avoid AgVantage’s judicial lien, finding that the debtors had abandoned the Waucoma property as their homestead by purchasing and using the New Hampton property. The court also dismissed the debtors’ adversary complaint seeking contempt sanctions against AgVantage for violating the discharge injunction, concluding that AgVantage held a valid lien and was enforcing in rem rights, not collecting a discharged debt. The bankruptcy court further denied the debtors’ motion to amend the judgment.On appeal, the United States Bankruptcy Appellate Panel for the Eighth Circuit found that the bankruptcy court’s factual findings regarding the debtors’ homestead status on the petition date were not supported by the record. The panel held that the debtors’ exemption claim was presumptively valid and that AgVantage had not met its burden to rebut this presumption. The panel also determined that the bankruptcy court erred in granting a motion to dismiss the adversary proceeding without affording the debtors the procedural presumptions required at that stage. The panel reversed the bankruptcy court’s decision and remanded for further proceedings, including an evidentiary hearing. View "Jencks v. AgVantage FS" on Justia Law

Sammie Smith, Jr. and Elizabeth Smith filed for Chapter 13 bankruptcy three times within approximately two and a half years. Their first case was voluntarily dismissed. In their second case, they changed attorneys multiple times, filed several amended plans, and ultimately had their case dismissed for failure to make plan payments. Shortly after, they filed a third Chapter 13 case, again changing attorneys and submitting multiple amended plans and schedules. The Smiths also filed objections to creditor claims and requested several continuances. They failed to appear at a scheduled hearing on one of their objections, leading the bankruptcy court to issue an order to show cause regarding dismissal for failure to appear.The United States Bankruptcy Court for the Eastern District of Arkansas dismissed the Smiths’ third bankruptcy case, citing unreasonable delay prejudicial to creditors under 11 U.S.C. § 1307. The court also barred the Smiths from filing another bankruptcy case in any jurisdiction for one year. The Smiths appealed, arguing they were denied due process and a fair hearing, particularly objecting to the lack of notice regarding the possibility of a refiling bar.The United States Bankruptcy Appellate Panel for the Eighth Circuit reviewed the case. It held that the bankruptcy court did not abuse its discretion in dismissing the Smiths’ case, as the record supported dismissal for unreasonable delay and failure to appear. However, the appellate panel found that imposing a one-year bar on refiling without prior notice or an opportunity for the Smiths to be heard on that sanction was an abuse of discretion and violated due process. The panel affirmed the dismissal of the bankruptcy case but reversed and vacated the one-year refiling bar. View "Smith v. Gooding" on Justia Law

A dispute arose after a rare vehicle, originally owned by a Wisconsin man, was stolen and shipped to Europe. Richard Mueller inherited the vehicle and sold part of his interest to Joseph Ford. Years later, TL90108 LLC (“TL”) purchased the vehicle overseas and, upon attempting to register it in the United States, was notified that Ford and Mueller were the owners of record. Ford and Mueller sued TL in Wisconsin state court for a declaratory judgment and replevin. The trial court dismissed the case on statute-of-repose grounds, but the Wisconsin Court of Appeals reversed, and the Wisconsin Supreme Court granted review. While the appeal was pending, Ford filed for Chapter 11 bankruptcy but did not list TL as a creditor or provide it with formal notice of the bankruptcy proceedings or relevant deadlines.The United States Bankruptcy Court for the Southern District of Florida set a deadline under Federal Rule of Bankruptcy Procedure 4007(c) for creditors to file complaints objecting to the discharge of debts. TL did not file a complaint before this deadline, as it was unaware of the relevant facts supporting a fraud claim until later discovery in the Wisconsin litigation. After learning of Ford’s alleged fraud, TL moved to extend the deadline and file a complaint under 11 U.S.C. § 523(c), arguing for equitable tolling and asserting a due process violation due to inadequate notice. The bankruptcy court denied the motion, relying on the Eleventh Circuit’s precedent in In re Alton, which held that equitable tolling does not apply to Rule 4007(c) deadlines.On appeal, the United States Court of Appeals for the Eleventh Circuit affirmed the bankruptcy court’s decision. The court held that its prior decision in In re Alton remains binding and precludes equitable tolling of Rule 4007(c)’s deadline, even in light of subsequent Supreme Court decisions. The court also held that TL’s actual notice of the bankruptcy proceeding satisfied due process, and thus, the deadline could not be extended on that basis. View "TL90108 LLC v. Ford" on Justia Law

A medical device distributor sued a former employee, alleging that he breached a non-compete agreement, his duty of loyalty, and misappropriated trade secrets after joining a competitor. The employee responded with counterclaims and third-party claims. During the litigation, the employee filed for Chapter 7 bankruptcy, which stayed the district court proceedings. In the bankruptcy case, the distributor filed a proof of claim for damages, which the employee did not contest. The bankruptcy court allowed the claim, and the distributor received a partial distribution from the bankruptcy estate. The employee also waived his right to discharge, leaving him potentially liable for the remaining balance.After the bankruptcy case closed, the United States District Court for the District of Vermont lifted the stay. The distributor sought summary judgment for the balance of its allowed claim, arguing that the bankruptcy court’s allowance of its claim should have preclusive effect. Initially, the district court denied this request, finding that using claim preclusion offensively would be unfair. Upon reconsideration, however, the district court reversed itself and granted summary judgment to the distributor for the remaining balance, holding that claim preclusion applied.On appeal, the United States Court of Appeals for the Second Circuit reviewed the district court’s grant of summary judgment de novo. The Second Circuit held that, even if claim preclusion could sometimes be used offensively, it could not be applied in this case because it would be unfair to the employee, who had less incentive to contest the claim in bankruptcy. The court vacated the district court’s judgment in favor of the distributor and remanded the case for further proceedings. The main holding is that claim preclusion cannot be used offensively to secure a judgment for the balance of an allowed bankruptcy claim under these circumstances. View "Thermal Surgical, LLC v. Brown" on Justia Law

Several investment funds based in the British Virgin Islands invested heavily in Bernard L. Madoff Investment Securities and were forced into liquidation after the Madoff Ponzi scheme was exposed in 2008. Liquidators were appointed in the BVI insolvency proceedings. Before the collapse, certain investors redeemed their shares in the funds for cash, receiving over $6 billion in payments. The liquidators, seeking to recover these redemption payments for equitable distribution among all investors, initiated approximately 300 actions in the United States, alleging that the payments were inflated due to fictitious Net Asset Value (NAV) calculations based on Madoff’s fraudulent statements.The U.S. Bankruptcy Court for the Southern District of New York consolidated the actions after recognizing the BVI proceedings under Chapter 15 of the Bankruptcy Code. The bankruptcy court dismissed most claims, finding it lacked personal jurisdiction over some defendants, that the liquidators were bound by the NAV calculations, and that the safe harbor for securities transactions under § 546(e) of the Bankruptcy Code barred the claims. However, it allowed constructive trust claims to proceed against certain defendants alleged to have known the NAVs were inflated. The U.S. District Court for the Southern District of New York affirmed the bankruptcy court’s judgment, leaving only the constructive trust claims.On appeal, the United States Court of Appeals for the Second Circuit held that all of the liquidators’ claims, including the constructive trust claims, should have been dismissed under the safe harbor provision of § 546(e), which applies extraterritorially via § 561(d) in Chapter 15 cases. The court concluded that the safe harbor bars both statutory and common-law claims seeking to avoid covered securities transactions, regardless of the legal theory or proof required. The Second Circuit reversed the district court’s judgment allowing the constructive trust claims and otherwise affirmed the dismissal of the remaining claims. View "In re Fairfield Sentry Ltd." on Justia Law

Stanley Watson, a former county commissioner, accused Sheneeka Bradsher and Zarinah Ali of stealing his wallet at a bar. Despite no evidence, he repeatedly demanded their arrest and threatened police officers who did not comply. Bradsher was arrested for disorderly conduct, but later released when Watson's wallet was found in his car. Bradsher and Ali sued Watson for slander, battery, and false imprisonment, winning a $150,500 judgment.Watson filed for bankruptcy, and Bradsher and Ali sought to except their judgment from discharge. The bankruptcy court found Watson genuinely believed the women stole his wallet, discharging the slander and battery debts but ruling the false imprisonment debts nondischargeable. The district court affirmed the nondischargeability of the false imprisonment debts but remanded for further clarification on the slander claim. On remand, the bankruptcy court found the slander debt dischargeable, attributing two-thirds of the damages to false imprisonment and one-third to slander.The United States Court of Appeals for the Eleventh Circuit reviewed the case. It held that the bankruptcy court did not clearly err in finding Watson willfully and maliciously caused the women’s confinement, making the false imprisonment debts nondischargeable under 11 U.S.C. § 523(a)(6). The court also upheld the bankruptcy court’s allocation of damages, finding it supported by the evidence. The Eleventh Circuit affirmed the judgments in favor of Bradsher and Ali. View "Watson v. Bradsher" on Justia Law

Georgia-Pacific LLC, a large corporation in the pulp and paper industry, acquired Bestwall Gypsum Co. in 1965, inheriting significant asbestos-related liabilities. By 2017, Bestwall faced around 64,000 pending asbestos claims, prompting Georgia-Pacific to implement a divisional merger known as the Texas two-step. This maneuver split Georgia-Pacific into two entities: Georgia-Pacific retained most assets, while Bestwall assumed the asbestos liabilities and filed for Chapter 11 bankruptcy to manage these claims through a § 524(g) trust.The United States Bankruptcy Court for the Western District of North Carolina granted Bestwall's motion for an injunction to prevent asbestos claimants from pursuing claims outside the bankruptcy process. The Official Committee of Asbestos Claimants opposed this and moved to dismiss the bankruptcy case, arguing it was filed in bad faith since Bestwall was solvent. The bankruptcy court denied the motion, stating that filing for Chapter 11 to resolve asbestos claims is a valid purpose, even for solvent debtors.The Committee later moved to dismiss the case for lack of subject-matter jurisdiction, arguing that the Constitution does not grant jurisdiction over bankruptcy cases involving solvent debtors. The bankruptcy court rejected this argument, holding that Congress has the authority to define bankruptcy jurisdiction, which includes cases filed by solvent debtors.The United States Court of Appeals for the Fourth Circuit reviewed the case and affirmed the bankruptcy court's decision. The Fourth Circuit held that federal courts have subject-matter jurisdiction over bankruptcy cases involving solvent debtors because the Bankruptcy Code is a federal law, and petitions for relief under it arise under the laws of the United States. The court clarified that challenges to a debtor's eligibility for bankruptcy protection are not jurisdictional issues. View "Bestwall LLC v. Official Committee of Asbestos Claimants" on Justia Law

Absolute Pediatric Therapy, owned by Anthony Christopher, hired LaDonna Humphrey in May 2018 but terminated her four months later. In October 2018, Absolute and Christopher sued Humphrey in Arkansas state court, alleging various tort claims and accusing her of stealing information and making false accusations. Humphrey counterclaimed under the False Claims Act, alleging her termination was for reporting illegal activities. The litigation was contentious, and in August 2019, the state court found Humphrey in contempt and liable on all counts, awarding $3.57 million in damages to the plaintiffs.Following the state court's decision, Humphrey filed for Chapter 7 bankruptcy in September 2019. The Trustee of her bankruptcy estate proposed selling her claims, including her counterclaim and defensive appellate rights, to Absolute for $12,500. Humphrey objected to the sale of her defensive appellate rights. The bankruptcy court approved the sale, finding it reasonable and negotiated at arm's length. Humphrey did not obtain a stay of the sale but did secure a stay of the state court appeal.Humphrey appealed the bankruptcy court's order to the United States District Court for the Western District of Arkansas, which reversed the bankruptcy court's decision. The district court held that defensive appellate rights are not property of the estate under Arkansas law and found the sale not in the best interest of the estate. The district court also rejected the argument that the appeal was moot under 11 U.S.C. § 363(m) because Humphrey had obtained a stay of the state court proceedings.The United States Court of Appeals for the Eighth Circuit reviewed the case and concluded that the absence of a stay of the sale itself rendered the appeal statutorily moot under 11 U.S.C. § 363(m). The court vacated the district court's order and dismissed Humphrey's appeal from the bankruptcy court. View "Humphrey v. Christopher" on Justia Law