Justia Bankruptcy Opinion Summaries

In this PROMESA action the First Circuit affirmed in part and vacated in part the decision of the the lower court denying Plaintiffs' petition for relief from an automatic stay of collection actions against the Commonwealth of Puerto Rico to allow them to bring an enforcement action against the Commonwealth, holding that remand was required to determine whether the contested funds were Plaintiffs'.Plaintiffs, motor vehicle owners and operators who paid duplicate premiums to the Commonwealth in accordance with the Commonwealth's compulsory automobile-insurance law, entered into a settlement agreement pursuant to which the Commonwealth agreed to establish a notice and claim-resolution process for the motorists. Thereafter, the Financial Oversight and Management Board for Puerto Rico initiated Title III debt-adjustment proceedings on behalf of the Commonwealth pursuant to the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), triggering an automatic stay of collection actions against the Commonwealth. The Commonwealth subsequently halted its implementation of the settlement agreement's notice and claim resolution process. Plaintiffs unsuccessfully petitioned the Title III court for relief from the automatic stay. The First Circuit remanded the case, holding that the Title III court abused its discretion by not first addressing Plaintiffs' claim that the contested funds were their personal property and were merely being held in trust by the Commonwealth. View "Gracia-Gracia v. Commonwealth of Puerto Rico" on Justia Law

The Bushes owed $100,000 in taxes. The IRS sought a 75% fraud penalty (26 U.S.C. 6663(a)); the Bushes proposed a 20% negligence penalty (section 6662(a)). On the date set for Tax Court trial, the Bushes filed for bankruptcy. The automatic stay prevented the Tax Court from proceeding. The government filed a proof of claim, proposing that the tax debt be given priority over other unsecured debts and that the penalty was nondischargeable. The Bushes initiated an adversary proceeding, asking for a 20% penalty, citing 11 U.S.C. 505(a)(1), which states that the court may determine the amount or legality of any tax, any fine or penalty relating to a tax ... whether or not contested before … [an] administrative tribunal. The IRS argued that section 505 does not grant subject-matter jurisdiction to bankruptcy judges and that only a potential effect on creditors’ distributions justifies a decision by a bankruptcy judge about any tax dispute. The Seventh Circuit held that a bankruptcy court can determine the amount of a debtor’s tax obligations. Section 505 does not address jurisdiction bu simply sets out a task for bankruptcy judges. Whether the judge should exercise that authority to determine tax liability is a distinct question. The bankruptcy is apparently done; the estate’s available assets have been used to pay debts and the stay has expired. This residual dispute should not remain with the bankruptcy judge but should be left to the Tax Court. View "Bush v. United States" on Justia Law

Arianna Holding Company purchased a tax lien on a piece of property owned by the Hacklers and eventually obtained title to the Hacklers’ property via foreclosure proceedings. Shortly after Arianna obtained title, the Hacklers filed for Chapter 13 bankruptcy and sought to void the transfer of the title as preferential, 11 U.S.C. 547(b). The Bankruptcy Court and the district court ruled in favor of the Hacklers. The Third Circuit affirmed. The title transfer meets 547(b)’s requirements for avoidance. The transfer was made to or for the benefit of a creditor, was made for an antecedent debt, was made while the debtor was insolvent, was made on or within 90 days before filing for bankruptcy, and enabled the creditor to receive more than it would have received in a Chapter 7 liquidation proceeding. The petition and schedules listed the value of the property at $335,000, which far exceeded the value of the liens against the property; Arianna filed a proof of claim for $42,561.21 and other liens totaled no more than $89,000. The Hacklers’ Chapter 13 plan proposed to pay Arianna’s claim in full. Federalism concerns raised by Arianna cannot overcome the plain language of the Code. View "In Re: Hackler" on Justia Law

Debtors appealed the district court's decision affirming the bankruptcy court's order deeming nondischargeable a prior default judgment against debtors in favor of plaintiffs in the Eastern District Judgment. The lower courts had relied in part on the preclusive effect of the Eastern District Judgment, which arose from a dispute between the families regarding two real estate projects.While a default judgment generally lacks preclusive effect because the underlying merits of the case are not actually litigated, the Second Circuit held that where, as here, the default judgment is entered as a sanction, it may be afforded preclusive effect. The court also held that the lower courts erred in treating the Eastern District Judgment as a whole, rather than analyzing each of the two underlying debts for nondischargeability separately. Accordingly, the court affirmed in part, vacated in part, and remanded in part. View "In re: Stuart Scott Snyder" on Justia Law

The debtor obtained a commercial loan from Bank. The agreement dated March 9, 2015, granted Bank a security interest in substantially all of the debtor’s assets, described in 26 categories of collateral, such as accounts, cash, equipment, instruments, goods, inventory, and all proceeds of any assets. Bank filed a financing statement with the Illinois Secretary of State, to cover “[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015.” Two years later, the debtor defaulted and filed a voluntary Chapter 7 bankruptcy petition. Bank sought to recover $7.6 million on the loan and filed a declaration that its security interest was properly perfected and senior to the interests of all other claimants. The trustee countered that the security interest was not properly perfected because its financing statement did not independently describe the underlying collateral, but instead incorporated the list of assets by reference, and cited 11 U.S.C. 544(a), which empowers a trustee to avoid interests in the debtor’s property that are unperfected as of the petition date. The bankruptcy court ruled that ”[a] financing statement that fails to contain any description of collateral fails to give the particularized kind of notice” required by UCC Article 9. The trustee sold the assets for $1.9 million and holds the proceeds pending resolution of this dispute. The Seventh Circuit reversed, citing the plain and ordinary meaning of the Illinois UCC statute, and how courts typically treat financing statements. View "First Midwest Bank v. Reinbold" on Justia Law

A party moving for substantive consolidation must give notice of the motion to creditors of a putative consolidated non-debtor. The Ninth Circuit affirmed the bankruptcy appellate panel's (BAP) decision affirming the bankruptcy court's denial of a Chapter 7 trustee's motion to substantively consolidate debtor's estate with the estates of various non-debtors. The panel held that there was no notice given in this case and the panel rejected the trustee's argument that he provided notice to the same extent as was provided in In re Bonham. Furthermore, the BAP did not err by concluding that the trustee failed to adequately research and serve non-debtors' creditors. View "Leslie v. Mihranian" on Justia Law

After a creditor in a closed Chapter 7 bankruptcy case tried for a third time to bring a price-fixing claim against BMS, the district court granted BMS's motion to dismiss. The Seventh Circuit affirmed, holding that the creditor did not participate in the market for bankruptcy software services in any way that would make it a proper plaintiff to bring an antitrust claim against a firm that provides those services to bankruptcy trustees. Therefore, the creditor's injury was entirely derivative of the estate's injury and merely derivative injuries sustained by creditors of an injured company did not constitute antitrust injury sufficient to confer antitrust standing. View "McGarry & McGarry, LLC v. Bankruptcy Management Solutions, Inc." on Justia Law

Payments owed to a shareholder by a bankrupt debtor, which are not quite dividends but which certainly look a lot like dividends, should be treated like the equity interests of a shareholder and subordinated to claims by creditors of the debtor. The Fifth Circuit affirmed the district court's judgment and held that the deemed dividends gave the Estate benefits normally reserved for equity investors and thus subordination of all of the Estate's claims was appropriate. The court also held that the bankruptcy court did not abuse its discretion in denying discovery. Likewise, the court held that the Estate's due process right to discovery was not violated. View "French v. Linn Energy, LLC" on Justia Law

Debtor sold her home to the Deans; they discovered mold in the basement. A court entered judgment on an arbitration award to the Deans: $28,172.99, plus attorney fees of $98,722.58. The Deans filed a lien against the Debtor’s current residence. Debtor filed a bankruptcy petition, listing the Deans as secured creditors. The Bankruptcy confirmed the Debtor’s chapter 13 plan. Debtor is paying the Deans’ claim in full, with interest. The Deans filed an Adversary Proceeding, claiming damages for Sarah Dean’s respiratory problems. The Bankruptcy Court dismissed that Proceeding; the Deans did not appeal. After the confirmation of Debtor’s Plan, the Deans unsuccessfully moved to dismiss the bankruptcy case. Meanwhile, Debtor sent the Deans a letter offering a proposed payout. The letter explained that it was not admissible as evidence (Rule 408). The Deans filed the letter on the docket, unaccompanied by any pleading or explanation, then designated the letter as part of the record on appeal for their unsuccessful motion to dismiss. Debtor sought sanctions for rules violations by filing the letter and moved to strike the letter. The Bankruptcy Court granted those motions, sanctioned the Deans $5,000, and awarded Debtor attorney fees. The Deans filed another Adversary Proceeding, seeking revocation of the confirmation order (11 U.S.C. 1330(a)). Debtor filed another sanctions motion, for “meritless pleadings.” The Bankruptcy Court dismissed the second adversary proceeding and ordered the Deans to pay $2,641 in attorney’s fees for their frivolous filing. The Sixth Circuit Bankruptcy Appellate Panel affirmed. Not understanding the purpose of Chapter 13 and without legal guidance, the Deans increased expenses and delayed payment of their own claim. View "In re: Lane" on Justia Law

The Supreme Court accepted certificate of a question of law from a federal district court and answered that Seven Counties Services, Inc.'s participation in and its contributions to the Kentucky Employees Retirement System (KERS) are based on a statutory obligation, rather than a contractual obligation.In 1979, the then-Governor designated Seven Counties, a non-profit provider of mental health services, a "department" for purposes of participating in KERS, a public pension system. Thereafter, Seven Counties paid into KERS to secure retirement benefits for its employees. In 2013, Seven Counties initiated bankruptcy proceedings primarily to reject its relationship with KERS as an executory contract. KERS countered that Seven Counties should be required to comply with its statutory obligations to contribute to KERS. The bankruptcy court determined that Seven Counties' relationship with KERS was contractual and, therefore, that Seven Counties could reject the contract in bankruptcy and leave the retirement system. The Supreme Court disagreed, holding that the relationship between KERS and Seven Counties was statutory. View "Kentucky Employees Retirement System v. Seven Counties Services, Inc." on Justia Law