Justia Bankruptcy Opinion Summaries

Edward Johnson filed for bankruptcy relief under Chapter 13 and made payments to the bankruptcy trustee, Marilyn O. Marshall, under his proposed repayment plan. However, the bankruptcy court never confirmed his plan due to his inability to address an outstanding loan and his domestic support obligations, and ultimately dismissed his case for unreasonable delay. Before returning Johnson's undisbursed payments, the trustee deducted a percentage fee as compensation. Johnson filed a motion requesting that the trustee disgorge her fee, which the bankruptcy court granted, reasoning that the trustee did not have statutory authority to deduct her fee because Johnson's plan was not confirmed. The trustee appealed this decision.The United States Court of Appeals for the Seventh Circuit reviewed the case de novo. The court analyzed the statutory text and agreed with the Ninth and Tenth Circuits that the United States Bankruptcy Code requires the Chapter 13 trustee to return her fee when the debtor's plan is not confirmed. The court found that neither of the two exceptions in § 1326(a)(2) of the Bankruptcy Code applied to the trustee's fee. The court also rejected the trustee's argument that § 1326(b) authorized her to keep her fee when making pre-confirmation adequate protection payments to creditors, as this provision only addresses payments made after a plan has been confirmed. The court further found that the trustee had no right to keep her fee under 28 U.S.C. § 586(e)(2), which only addresses the source of funds that may be accessed to pay standing trustee fees.The court concluded that the Chapter 13 trustee must return her fee when the debtor's plan is not confirmed, affirming the decision of the bankruptcy court. View "Marshall v. Johnson" on Justia Law

A group of retirement and pension funds filed a consolidated putative securities class action against PG&E Corporation and Pacific Gas & Electric Co. (collectively, PG&E) and some of its current and former officers, directors, and bond underwriters (collectively, Individual Defendants). The plaintiffs alleged that all the defendants made false or misleading statements related to PG&E’s wildfire-safety policies and regulatory compliance. Shortly after the plaintiffs filed the operative complaint, PG&E filed for Chapter 11 bankruptcy, automatically staying this action as against PG&E but not the Individual Defendants. The district court then sua sponte stayed these proceedings as against the Individual Defendants, pending completion of PG&E’s bankruptcy case.The district court for the Northern District of California issued a stay of the securities fraud action against the Individual Defendants, pending the completion of PG&E's Chapter 11 bankruptcy case. The court reasoned that the stay would promote judicial efficiency and economy, as well as avoid the potential for inconsistent judgments. The plaintiffs appealed this decision, arguing that the district court abused its discretion by entering the stay.The United States Court of Appeals for the Ninth Circuit held that it had jurisdiction over this interlocutory appeal under the Moses H. Cone doctrine because the stay was both indefinite and likely to be lengthy. The appellate court found that the district court abused its discretion in ordering the stay as to the Individual Defendants. The court held that when deciding to issue a docket management stay, the district court must weigh three non-exclusive factors: the possible damage that may result from the granting of a stay, the hardship or inequity that a party may suffer in being required to go forward, and judicial efficiency. The appellate court vacated the stay and remanded for the district court to weigh all the relevant interests in determining whether a stay was appropriate. View "PUBLIC EMPLOYEES RETIREMENT ASS'N OF NEW MEXICO V. EARLEY" on Justia Law

The case involves a dispute arising from the financial fallout of Winter Storm Uri, which severely impacted Texas's electrical grid in 2021. The Electric Reliability Council of Texas (ERCOT), responsible for managing the grid, took measures including manipulating energy prices to incentivize production. This resulted in Entrust Energy, Inc., receiving an electricity bill from ERCOT of nearly $300 million, leading to Entrust's insolvency and subsequent bankruptcy filing. ERCOT filed a claim seeking payment of the invoice, which was challenged by Anna Phillips, the trustee of the Entrust Liquidating Trust. The trustee argued that ERCOT's price manipulation violated Texas law, that ERCOT was grossly negligent in its handling of the grid during the storm, and that ERCOT's transitioning of Entrust’s customers to another utility was an uncompensated taking in violation of the Fifth Amendment.The bankruptcy court declined to abstain from the case and denied ERCOT’s motion to dismiss all claims except for the takings claim. ERCOT appealed to the United States Court of Appeals for the Fifth Circuit, arguing that the bankruptcy court should have abstained under the Burford doctrine, which allows federal courts to abstain from complex state law issues to avoid disrupting state policies.The Fifth Circuit found that the bankruptcy court erred in refusing to abstain under the Burford doctrine. The court reversed the bankruptcy court's denial of ERCOT’s motion to abstain and its denial of ERCOT’s motion to dismiss the trustee’s complaint. The court also vacated the bankruptcy court’s order dismissing the takings claim with prejudice. The court remanded the case with instructions to dismiss certain counts and stay others pending the resolution of related state proceedings. View "Electric Reliability Council of Texas v. Phillips" on Justia Law

The case involves Bestwall, LLC, a company that filed for Chapter 11 bankruptcy in November 2017. The company sought to establish a trust to pay current and future asbestos-related claims against it. As part of this process, Bestwall requested all persons with pending mesothelioma claims against it to complete a personal injury questionnaire. Several individual claimants and the Official Committee of Asbestos Claimants objected to this request. The bankruptcy court granted Bestwall's motion and ordered all current mesothelioma claimants to complete the questionnaire. Some claimants, represented by the law firm of Maune, Raichle, Hartley, French & Mudd, LLC, filed a lawsuit in Illinois seeking an injunction to prevent Bestwall from enforcing the questionnaire order. In response, Bestwall moved in the bankruptcy court to enforce the order.The bankruptcy court held the claimants and their law firm in contempt for violating the questionnaire order. The court later sanctioned them jointly and severally in the amount of $402,817.70 for fees and expenses Bestwall incurred in defending the Illinois lawsuit and enforcing the questionnaire order. The claimants and their law firm appealed both the contempt order and the sanctions order to the district court, which dismissed the appeals for lack of jurisdiction.The United States Court of Appeals for the Fourth Circuit affirmed the district court's judgment. The court held that the contempt and sanctions orders were not final appealable orders because they did not terminate a procedural unit separate from the remaining bankruptcy case. The court noted that in normal civil litigation, a party may not immediately appeal a civil contempt order or attendant sanctions but must wait until final judgment to appeal. The same rule applies in bankruptcy, except the relevant final judgment may be a decree ending the entire case or a decree ending a discrete proceeding within the bankruptcy case. The court concluded that the contempt and sanctions orders did not terminate a procedural unit separate from the remaining bankruptcy case, and therefore, they were not final appealable orders. View "Blair v. Bestwall, LLC" on Justia Law

The case revolves around a dispute between Sanofi-Aventis U.S. LLC and Mallinckrodt PLC. Sanofi sold its rights in a drug to Mallinckrodt for $100,000 and a perpetual annual royalty. The drug was successful, but Mallinckrodt filed for bankruptcy and sought to convert Sanofi's right to royalties into an unsecured claim. Mallinckrodt aimed to discharge all future royalty payments and continue selling the drug without paying royalties, leaving Sanofi with only an unsecured claim.The bankruptcy court approved Mallinckrodt's discharge, ruling that since Sanofi had fully transferred ownership years ago, the contract was not executory. It also held that Sanofi's remaining contractual right to future royalties was an unsecured, contingent claim, which Mallinckrodt could discharge. The District Court affirmed these rulings.The United States Court of Appeals for the Third Circuit reviewed these rulings de novo. The court held that Sanofi's right to payment arose before Mallinckrodt filed for bankruptcy, making its royalties dischargeable in bankruptcy. The court rejected Sanofi's argument that the future royalties were too indefinite to be a claim, stating that the Bankruptcy Code allows for claims that are both contingent and unliquidated. The court also disagreed with Sanofi's assertion that bankruptcy cannot resolve its royalties claim because it will not exist until Mallinckrodt hits the sales trigger each year. The court ruled that a claim can arise before it is triggered, and most contract claims arise when the parties sign the contract. The court affirmed the lower courts' decisions, ruling that Sanofi's contingent claim arose before Mallinckrodt went bankrupt and is therefore dischargeable in bankruptcy. View "In re Mallinckrodt PLC" on Justia Law

The case involves Appvion, Inc., a Wisconsin-based paper company, which was sold to its employees through an Employee Stock Ownership Plan (ESOP) in 2001. The company declared bankruptcy in 2017. Grant Lyon, acting on behalf of the ESOP, filed a lawsuit against various individuals and corporations, alleging that they fraudulently inflated the price of Appvion in 2001 and that the price remained inflated until Appvion’s bankruptcy. The district court dismissed almost all the claims.On appeal, the United States Court of Appeals for the Seventh Circuit affirmed the dismissal of some claims and reversed and remanded others. The court affirmed the dismissal of claims related to actions before November 26, 2012, as they were time-barred under the Employee Retirement Income Security Act (ERISA). However, the court reversed the dismissal of claims related to actions after November 26, 2012, finding that the plaintiff had adequately alleged that the defendants breached their fiduciary duties under ERISA by failing to ensure that the company's valuations were sound. The court also reversed the dismissal of claims alleging that the defendants engaged in prohibited transactions and co-fiduciary liability. The court affirmed the dismissal of state-law claims against the defendants, finding them preempted by ERISA. View "Appvion, Inc. Retirement Savings and Employee Stock Ownership Plan v. Buth" on Justia Law

The case involves Dr. Euna McGruder, who was terminated from her position as the Executive Officer of Priority Schools for the Nashville public school system, operated by Metro Nashville, after she investigated allegations of racial discrimination at a Nashville middle school. McGruder sued Metro Nashville in 2017, alleging that her termination constituted illegal retaliation in violation of Title VII. In 2021, a jury awarded McGruder $260,000 for her claim, and the district court ordered Metro Nashville to reinstate her to her previous position.After the trial, Metro Nashville discovered that McGruder had failed to disclose the existence of her Title VII claim to the bankruptcy court when she filed for Chapter 7 bankruptcy in 2018. Metro Nashville argued that McGruder's claims should be barred by judicial estoppel due to her failure to disclose her cause of action against Metro Nashville in her bankruptcy filing. The district court concluded that it could not exercise jurisdiction over Metro Nashville’s judicial estoppel claim, given that Metro Nashville’s earlier notice of appeal had divested the court of jurisdiction over the case.The United States Court of Appeals for the Sixth Circuit affirmed the district court's reinstatement order and dismissed Metro Nashville's appeal for lack of jurisdiction. The court held that judicial estoppel does not bar McGruder's reinstatement. The court also found that the district court did not abuse its discretion in ordering McGruder's reinstatement. The court did not have jurisdiction to apply judicial estoppel to the non-final and therefore non-appealable jury award, forthcoming back pay trial, or award of attorneys’ fees. View "McGruder v. Metro. Gov't of Nashville" on Justia Law

The case revolves around Ronald Lee Morgan, who filed for Chapter 7 bankruptcy in North Carolina. Morgan owned a home jointly with his wife as tenants by the entirety. He sought to exempt this home from the bankruptcy estate to the extent of his outstanding tax debt to the Internal Revenue Service (IRS). However, the bankruptcy court disallowed the exemption. Morgan's wife did not jointly owe the debt to the IRS and did not file for bankruptcy. The trustee of the bankruptcy estate objected to Morgan's claim for an exemption, arguing that under North Carolina state law, tenancy by the entireties property is generally exempt from execution by creditors of only one spouse, but this rule does not apply to tax obligations owing to the United States.The bankruptcy court sustained the trustee's objection, and on appeal, the district court affirmed this decision. Morgan then appealed to the United States Court of Appeals for the Fourth Circuit, arguing that for his IRS debt to override the entireties exemption, the IRS must have obtained a perfected tax lien on the property prior to the filing of the bankruptcy petition.The Court of Appeals for the Fourth Circuit affirmed the district court's ruling. The court concluded that Morgan's interest in his home as a tenant by the entirety is not "exempt from process" under "applicable nonbankruptcy law." The court rejected Morgan's argument that the IRS must have actually obtained a lien prior to the bankruptcy filing, stating that the absence of a judgment or lien has no bearing on the hypothetical issue of whether the debtor's interest would be exempt from process. The court also dismissed Morgan's contention that the IRS must perfect a lien against his property before he filed for bankruptcy. The court concluded that nothing in the Supreme Court's decision in United States v. Craft limits its holding to instances where the IRS has perfected a tax lien against the property. View "Morgan v. Bruton" on Justia Law

GFS Industries, a Texas limited liability corporation, entered into an agreement with Avion Funding to receive $190,000 in exchange for $299,800 of GFS’s future receivables. GFS stated it had not filed, nor did it anticipate filing, any Chapter 11 bankruptcy petition. However, two weeks after signing the agreement, GFS petitioned for voluntary Chapter 11 bankruptcy in the Western District of Texas and elected to proceed under Subchapter V, a 2019 addition to the Bankruptcy Code designed to streamline the Chapter 11 reorganization process for certain small business debtors. Avion filed an adversary complaint in GFS’s bankruptcy, claiming GFS obtained Avion’s financing by misrepresenting whether it anticipated filing for bankruptcy. Avion sought a declaration that GFS’s debt to Avion was therefore nondischargeable.The bankruptcy court agreed with GFS, ruling that in the Subchapter V context, only individuals, not corporations, can be subject to § 523(a) dischargeability actions. The court followed the reasoning of four bankruptcy courts and declined to follow the Fourth Circuit’s recent decision in Cantwell-Cleary Co. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), which held that the Subchapter V discharge exceptions apply to both individual and corporate debtors. The bankruptcy court ruled GFS’s debt to Avion was dischargeable and dismissed Avion’s complaint. Avion timely appealed to the district court.The United States Court of Appeals for the Fifth Circuit disagreed with the bankruptcy court's interpretation of the interplay between § 523(a) and § 1192(2). The court found that § 1192 governs discharging debts of a “debtor,” which the Code defines as encompassing both individual and corporate debtors. The court also noted that other Code provisions explicitly limit discharges to “individual” debtors, whereas § 1192 provides dischargeability simply for “the debtor.” The court concluded that 11 U.S.C. § 1192(2) subjects both corporate and individual Subchapter V debtors to the categories of debt discharge exceptions listed in § 523(a). Therefore, the court reversed the judgment of the bankruptcy court and remanded for further proceedings. View "Avion Funding v. GFS Industries" on Justia Law

A group of individuals, including D&T Partners LLC and ACET Global LLC, alleged that Baymark Partners Management LLC and others attempted to steal the assets and trade secrets of their e-commerce company through shell entities, corrupt lending practices, and a fraudulent bankruptcy. The plaintiffs claimed that Baymark had purchased D&T's assets and then defaulted on its payment obligations. According to the plaintiffs, Baymark replaced the company's management, caused the company to default on its loan payments, and transferred the company's assets to another entity, Windspeed Trading LLC. The plaintiffs alleged that this scheme violated the Racketeer Influenced and Corrupt Organizations Act (RICO).The case was initially heard in the United States District Court for the Northern District of Texas. The district court dismissed all of the plaintiffs' claims with prejudice, finding that the plaintiffs were unable to plead a pattern of racketeering activity, a necessary element of a RICO claim.The case was then taken to the United States Court of Appeals for the Fifth Circuit. The appellate court agreed with the district court, holding that while the complaint alleges coordinated theft, it does not constitute a "pattern" of racketeering conduct sufficient to state a RICO claim. This is because the alleged victims were limited in number, and the scope and nature of the scheme was finite and focused on a singular objective. Therefore, the appellate court affirmed the district court’s judgment. View "D&T Partners v. Baymark Partners" on Justia Law