Bankruptcy Answers with Reno Fernandez

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Latest Episodes:

Third Party Payoff Under Factoring Agreement Not Avoidable Despite Ponzi Scheme Connection Jul 04, 2023

Mann v. LSQ Funding Group, L.C., No. 22-2436 (7th Cir. June 22, 2023)

TRANSCRIPT

Hello to all the lawyers, fiduciaries, students, and bankruptcy fans out there. Today we are talking about Mann v. LSQ Funding Group.

On June 22, 2023, the U.S. Court of Appeals for the Seventh Circuit affirmed summary judgment in favor of LSQ Funding Group, L.C., a creditor in the Engstrom, Inc. bankruptcy case. Summary judgment was entered against Douglas Mann, chapter 7 trustee for the bankruptcy estate. The case revolved around an alleged preferential and fraudulent transfer from a third party, namely Millennium Funding, to LSQ, which the court determined did not involve "an interest of the debtor in property."

Engstrom had entered into an invoice-factoring agreement with LSQ. The trustee alleged that the CEO of Engstrom was running a Ponzi scheme based on fraudulent invoices. LSQ terminated its agreement with Engstrom upon discovering the scheme. This left Engstrom in debt to LSQ for a sum of $10.3 million. To rectify this, Millennium paid LSQ this sum directly, and LSQ then released its rights in Engstrom's invoices to Millennium. Engstrom declared bankruptcy within three months of the transaction.

The trustee filed a complaint against LSQ, seeking to avoid the payment made by Millennium as a preferential or fraudulent transfer. The bankruptcy court, however, granted summary judgment in LSQ's favor. This decision was upheld by the district court.

On further appeal, the Seventh Circuit focused on the language of the bankruptcy code, in particular, the phrase "an interest of the debtor in property." The court applied a two-pronged test considering whether the debtor had control over the funds transferred and whether the transfer reduced the property of the estate. The Seventh Circuit found that, while a jury could conclude that Engstrom selected LSQ to receive the payment from Millennium, there was little evidence suggesting that Engstrom had control over the disposition of the funds or the accounts.

Moreover, all parties agreed that neither the $10.3 million nor the accounts transferred from LSQ to Millennium were part of Engstrom's estate, and the funds never passed through any of Engstrom's accounts. Also, the trustee admitted that the transaction did not negatively affect other creditors. The trustee could not establish that reversing the payment would make the funds part of Engstrom's estate. Therefore, the Seventh Circuit concluded that the transfer did not involve "an interest of the debtor in property," and thus it was not avoidable under the bankruptcy code.

Of course, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I represent bankruptcy trustees, receivers, assignees, and other fiduciaries. Thank you.

Fifth Circuit Rules Bankruptcy Court Lacked Jurisdiction to Approve Post-Confirmation Settlement That Conflicted With Plan Jun 28, 2023

Sarnosky v. Chesapeake Energy Corp. (In re Chesapeake Energy Corp.), No. 21-20323 (5th Cir. June 8, 2023)

TRANSCRIPT

Hello lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about Sarnosky v. Chesapeake Energy Corporation.

On June 8, 2023, the U.S. Court of Appeals for the Fifth Circuit vacated a judgment approving a settlement agreement, entered into after confirmation of a chapter 11 plan of reorganization, that conflicted with the plan and was not supported by any proofs of claim. In a dispute involving Pennsylvania oil and gas lessors, as well as the state's attorney general, the debtors were accused of underpaying royalties prior to their bankruptcy filing. After entering bankruptcy, some lessors filed proofs of claim, whereas others did not. Those who filed proofs of claim were slated to receive approximately 0.01% of their claims under the confirmed chapter 11 plan, while the claims that were not filed were discharged.

It was assumed that the oil and gas leases would persist unaffected by the bankruptcy. According to the settlements, the lessors could secure well over 20% of their claims, albeit at the cost of substantial alterations to the lease terms.

The debtors attempted to gain bankruptcy court approval for two class-action settlements regarding pre-petition claims, which did not have any proofs of claim filed. These efforts were met with opposition from creditors in similar situations who had filed proofs of claim.

Despite this, the bankruptcy court ruled that it had “core” jurisdiction over the settlements, determined that the settlements were in the best interests of the debtors' estates, and approved the settlements. While the District Court affirmed these decisions, it clarified that the bankruptcy court had "related to" jurisdiction as opposed to "core" jurisdiction.

However, the Fifth Circuit vacated and remanded the decisions with instructions to dismiss. The Fifth Circuit determined that the bankruptcy court lacked jurisdiction to approve post-confirmation settlements of discharged claims. It was particularly problematic that these settlements conflicted with the confirmed chapter 11 plan and disclosure statement, especially given the fact that no proofs of claim had been filed for these claims.

As always, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I represent bankruptcy trustee, receivers, assignees, and other fiduciaries. Thank you.

Bankruptcy Judge Converts Motion for Rule 2004 Exam Into Motion for Post-Judgment Discovery Jun 26, 2023

Richardson v. Younce (In re Nail), No. 22-01379 (Bankr. W.D.Mich. June 8, 2023)

TRANSCRIPT

Good morning attorneys, fiduciaries, students, and bankruptcy fans. Today we are talking about Richardson v. Younce.

On June 8, 2023, the U.S. Bankruptcy Court for the Western District of Michigan issued a memorandum decision and order dealing with a motion by the chapter 7 trustee, who had prevailed in litigation, for authority to conduct an examination of the judgment debtor pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure. To begin with, the court explained that Rule 2004 does not apply for two reasons. First, Rule 2004 does not apply in pending litigation, where Rule 30 of the Federal Rules of Civil Procedure applies (through Rule 7030 of the Federal Rules of Bankruptcy Procedure).

Second, Rule 2004 does not apply to discovery in aid of judgment. Instead, Rule 69 of the Federal Rules of Civil Procedure (through Rule 7069 of the Federal Rules of Bankruptcy Procedure) applies. Although Rule 69 allows a judgment creditor to employ state-court procedure as well as any procedure “provided in these rules…” this naturally refers to the Federal Rules of Civil Procedure, not the Federal Rules of Bankruptcy Procedure.

However, in a show of extraordinary practicality, the court did not deny the motion. Instead, the court converted it to a motion under Rule 69 and granted the motion.

In dicta, the court offered some advice. The court noted that enforcement of judgments under federal law is “confusing, even difficult, for the federal courts and litigants.” Accordingly, the court suggested that the Trustee consider domesticating the judgment under the Uniform Enforcement of Foreign Judgments Act and utilize state court to enforce the judgment.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I represent trustees, receivers, assignees, and other fiduciaries. Thank you.

Ninth Circuit BAP Overturns Summary Judgment Due to Misapplication of Issue Preclusion Under Ohio Law Jun 21, 2023

Westhuizen v. Sky (In re Westhuizen), No. 22-1133 (9th Cir. BAP June 2, 2023)

TRANSCRIPT

Hello to all the lawyers, fiduciaries, students, and bankruptcy fans out there. Today we are talking about In re Westhuizen.

On June 2, 2023, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit overturned a bankruptcy court entry of summary judgment for nondischargeability under Bankruptcy Code § 523(a)(6). The panel ruled that the bankruptcy court erroneously applied issue preclusion under Ohio law.

This case originated from a dispute between two friends, who both were involved in the breeding and showing of Birman cats. Their relationship eventually deteriorated because of competition and a purported violation of a breeding contract.

The plaintiff contended that the debtor started to discredit and defame her through derogatory emails and online reviews about her cat breeding business and medical practice. This prompted the plaintiff to file an action in Ohio based on claims for defamation, tortious interference, intentional infliction of emotional distress, and a violation of the Ohio Deceptive Trade Practices Act. The court ultimately awarded the plaintiff approximately $300,000 by default judgment.

Thereafter, the debtor moved to California and filed for chapter 7 bankruptcy. In response, the plaintiff initiated a nondischargeability adversary proceeding under Bankruptcy Code §§ 523(a)(2)(A) and 523(a)(6) and moved for summary judgment on the section 523(a)(6) claim for willful and malicious injury. The bankruptcy court determined that issue preclusion applies and bars relitigation of the state-court claims. Accordingly, the court granted summary judgment.

On appeal, the issue under consideration was whether the bankruptcy court had erred in awarding summary judgment to the plaintiff based on issue preclusion. The bankruptcy appellate panel determined that the bankruptcy court failed to assess whether the issues were "actually and directly litigated," a requirement under Ohio law. Accordingly, the panel reversed.

As always, I’ll put a link to the opinion in the show notes. I am Reno Fernandez, and I represent bankruptcy trustees, receivers, assignees, and other fiduciaries. Thank you.

Rule 41’s “Two-Dismissal” Rule Does Not Apply to Prior Contested Matter Where Objection is Filed Jun 21, 2023

Airport Business Center v. Alfahel (In re Alfahel), No. 22-1219 (9th Cir. BAP June 1, 2023)

TRANSCRIPT

Hello you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about In re Alfahel.

On June 1, 2023, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit upheld the decision of the U.S. Bankruptcy Court for the Northern District of California, which avoided a judicial lien held by Airport Business Center (ABC) pursuant to Bankruptcy Code § 522(f), which permits the avoidance of a lien that impairs an exemption. In this case, chapter 7 debtors Emad Aziz Masoud Alfahel and Lina Nadim Fahel claim an exemption on their residence. ABC's argument that the court should have excluded allegedly usurious interest from its computation of the total amount of senior liens was rejected. The court also elected to hear and resolve the dispute despite the fact that the debtors previously brought and dismissed the same motion twice.

In May 2016, the debtors filed their chapter 7 petition, listing their home with a value of $630,000 and claiming an exemption of $3,354 under California’s wildcard exemption. They also disclosed three deeds of trust and four judicial liens, including ABC’s judgment lien. A discharge was entered and the case was closed in August 2016.

In the fall of 2016, the debtors filed a motion to reopen the case, which was granted. In February 2017, the debtors filed motions to avoid each of the four judicial liens, but after ABC objected, they withdrew their motion and the case was closed once again. The same process repeated in May 2018 with the help of new counsel.

In April 2021, the debtors moved a third time to reopen their case. The court granted the request but imposed a 30-day deadline to file the avoidance motion. The debtors met the deadline, and ABC objected on three grounds. First, ABC asserted that certain written requests for admission that the debtors failed to respond to should be deemed admitted. Second, ABC argued that the "two-dismissal rule" under Rule 41(a)(1)(B) of the Federal Rules of Civil Procedure should bar the debtors from filing a third avoidance motion. Finally, ABC objected on the grounds of laches. However, the court rejected all of ABC’s arguments and avoided its judicial lien, except for about $12,000.

The court ruled that Rule 41(a)(1)(B), commonly known as the "two-dismissal rule," did not apply. Specifically, the rule applies only to dismissals either by stipulation or prior to the filing of an answer or motion for summary judgment. In this case, ABC objected to the first motion, which was equivalent to filing an answer. With respect to ABC’s objection that claims secured by senior liens included usurious interest, the court determined that ABC lacked standing to object, because standing to raise usury claims belongs solely to the borrower. Finally, ABC argued that the five-year delay was per se prejudicial but failed to articulate any particular facts, as is necessary to support laches.

Finding no fault with the bankruptcy court’s reasoning, the bankruptcy appellate panel affirmed. I will put a link to the opinion in the show notes. I am Reno Fernandez, and I represent bankruptcy trustees, receivers, assignees, and other fiduciaries. Thank you.

Eighth Circuit BAP Holds Increase in Equity Belongs to Estate in Converted Case Jun 19, 2023

Goetz v. Weber (In re Goetz), No. 22-6009 (8th Cir. BAP June 1, 2023)

TRANSCRIPT

Hello to all the lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about Goetz v. Weber.

On June 1, 2023, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit affirmed a bankruptcy court’s denial of a motion by the Debtor Machele Goetz to compel abandonment of the estate's interest in her home. The panel agreed with the lower court's adoption of the majority position that, under Bankruptcy Code §§ 348(f)(1)(A) and 541(a)(1), any increase in equity after the petition date in a chapter 13 case later converted to chapter 7 belongs to the estate.

The events leading to this decision started when Goetz, after having her chapter 13 case confirmed, sought to convert it to a chapter 7 case. At that point, the value of the property that Freedom Mortgage had a lien on had increased from $130,000 to $205,000. Meanwhile, the mortgage had marginally decreased by about $1,000 to about $107,000. Before the conversion, a property sale would not have yielded proceeds beyond the debt, exemption, and sale costs. However, after the conversion, a sale would have generated more than $62,000 after covering the mortgage, the $15,000 homestead exemption, and sale costs.

When the trustee indicated a plan to sell the property, Goetz moved to compel its abandonment, but the Bankruptcy Court denied her request. The court concluded that the increase in equity between the petition and conversion dates was part of the chapter 7 bankruptcy estate and that the residence held more than an "inconsequential value and benefit to the estate" under Bankruptcy Code § 554. Although there is a split of authorities, the bankruptcy court, identified and sided with a slight majority position holding that the increase in value belongs to the estate.

Goetz appealed, with the National Association of Consumer Bankruptcy Attorneys and National Consumer Bankruptcy Rights Center supporting her as amici. On appeal, the Debtor argued that the bankruptcy court was mistaken in concluding that market appreciation and an equity increase before the conversion date belong to the estate. She further argued that her residence was removed from the bankruptcy estate when it transferred to her or when she claimed an exemption for it. The bankruptcy appellate panel disagreed with both arguments and affirmed.

As always, I’ll put a link to the opinion in the show notes. I am Reno Fernandez, and I represent bankruptcy trustees, receivers, and fiduciaries. Thank you.

Sixth Circuit BAP Rules Email Accusing Counterparty of Default is Not Anticipatory Breach Jun 16, 2023

OGGUSA, Inc. v. Luisville Dryer Co. (In re OGGUSA, Inc.), No. 22-8010 (6th Cir. BAP June 1, 2023)

TRANSCRIPT

Good afternoon to all of the lawyers, fiduciaries, students, and bankruptcy fans out there. Today we are talking about OGGUSA.

On June 1, 2023, the U.S. Bankruptcy Appellate Panel for the Sixth Circuit affirmed an order of a bankruptcy court holding that a certain email accusing a counterparty of default was not an anticipatory breach. Specifically, OGGUSA, Inc., formerly known as GenCanna, contracted with Louisville Dryer Company to manufacture equipment to be used in GenCanna’s cannabinoid business. But GenCanna began to experience financial difficulty, including one of its warehouses burning down.

Concerned about GenCanna’s ability to pay, Louisville Dryer sent an email to GenCanna, followed by a letter, that accused GenCanna of being in default of progress payments. Later, however, it was determined that GenCanna was not in default.

Eventually, GenCanna was forced into an involuntary chapter 11 bankruptcy case. Thereafter, it sought to reject its contract with Louisville Dryer and recover the approximately $1.8 million it had paid so far based on an argument that Louisville Dyer’s email and letter constituted anticipatory breach. To the contrary, Louisville Dryer argued that rejection of the executory contract in bankruptcy by GenCanna was the first breach.

Under Kentucky law, the first party to breach cannot recover contract damages. Also, anticipatory breach is an unequivocal repudiation or renunciation of a contract in advance of the time for performance.

The bankruptcy court determined that the pre-petition correspondence was not an unequivocal repudiation or renunciation. Accordingly, the court declined to award any damages to GenCanna. Finding a sufficient basis for the bankruptcy court’s decision, the Sixth Circuit BAP affirmed.

I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. If you have questions or would just like to chat, please feel free to reach out. Thank you.

U.S. Supreme Court Holds Bankruptcy Code Waives Sovereign Immunity of Native American Tribes Jun 15, 2023

Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, --- U.S. --- (2023)

TRANSCRIPT

Hello to all you bankruptcy lawyers, students, and fiduciaries. Today we have breaking news.

On June 15, 2023, the U.S. Supreme Court handed down an opinion holding that the bankruptcy code waives sovereign immunity for Native American tribes. The opinion involves the Lac du Flambeau Band of Lake Superior Chippewa Indians.

One of the tribe’s businesses, called Lendgreen, extended a payday loan to Brian Coughlin. Thereafter, Mr. Coughlin filed a chapter 13 bankruptcy case. Nevertheless, Lendgreen continued to pursue Mr. Coughlin, who filed a motion to enforce the automatic stay and recover damages.

The bankruptcy court dismissed the matter on tribal sovereign immunity grounds. The U.S. Court of Appeals for the First Circuit reversed, holding that the bankruptcy code unequivocally strips tribes of their immunity.

The Supreme Court granted certiorari and proceeded to analyze Bankruptcy Code §§ 101(27) and 106(a), which provide for a broad waiver of sovereign immunity for all governments, including federally-recognized Native American tribes. Accordingly, the Supreme Court affirmed the First Circuit’s decision.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I represent bankruptcy trustees, receivers, assignees, and other fiduciaries. Thank you.

Doubts About Lawful Possession of Cattle Prevent Perfection of Veterinary Lien Jun 14, 2023

In re Kern, No. 22-40437 (Bankr. D.Kan. May 26, 2023)

TRANSCRIPT

Greetings lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about In re Kern.

On May 26, 2023, the U.S. Bankruptcy Court for the District of Kansas entered a memorandum opinion and order disallowing a secured claim asserted by a veterinarian. Briefly, Section 47-836 of the Kansas Statutes Annotated confers a lien to secure the just and reasonable charges of a veterinarian who bestows care “at the request of the owner or lawful possessor” provided that notice is filed with the county within sixty days.

Here, veterinarian Burlington came into possession of 27 heads of cattle and rendered care to them. Meanwhile, the Debtors claimed to have no knowledge of delivering the cattle or requesting care. Accordingly, the Debtors objected to Burlington’s secured claim of about $20,000.

The Debtors succeeded in creating doubt about the circumstances under which Burlington came into possession of the cattle. The Debtors did this by offering evidence that, on the day the cattle were purportedly delivered, the Debtors had no employees, the cattle driver was unidentified, the truck purportedly used for delivery was out of commission in another county, and the Debtors’ own truck was incapable of hauling the load. With this, the Debtors overcame the presumption of the validity of Burlington’s claim, and Burlington was not able to bear the burden of proof once it was shifted to him.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the county, including all the way up to the U.S. Supreme Court. Thank you.

Debtor Improperly Colludes with Buyers, then Sues Them; Complaint Dismissed Upon In Pari Delicto Defense Jun 12, 2023

Kwok v. Li (In re Kwok), No. 22-1152 (9th Cir. BAP May 23, 2023)

TRANSCRIPT

Hello to all you attorneys, fiduciaries, students, and bankruptcy fans. Today we are talking about Kwok v. Li.

On May 23, 2023, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit issued an opinion agreeing with a bankruptcy court’s dismissal of an action based on the defense of in pari delicto but remanding for further findings to support an award of sanctions.

The opinion involves an adversary proceeding brought by the debtor and the defendants' motion to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, incorporated in Rule 7012 of the Federal Rules of Bankruptcy Procedure.

The Debtor, namely David Kwok, operated a company, namely Shorb DCE, LLC, which owned 100% of the equity interests in an apartment building. After Shorb filed a chapter 11 bankruptcy petition in 2017 and had its case converted to chapter 7, the bankruptcy court approved the sale of the apartment building to the Buyers, who were the sole bidders, for approximately $2.5 million. This property held significant equity.

Unbeknownst to Shorb's chapter 7 trustee, Kwok and his girlfriend were promised payment under a $150,000 "Secret Note" signed by the Buyers.

In less than a year, Kwok filed a chapter 13 bankruptcy petition that was later converted to chapter 7. When Kwok's chapter 7 trustee learned of the Secret Note, an adversary proceeding was initiated against the Buyers. Despite this, Kwok's attorney failed to amend Kwok's schedules to include the Secret Note. The Kwok trustee subsequently moved to abandon the Secret Note and the litigation against the Buyers, anticipating a 100% dividend to unsecured creditors, which the bankruptcy court granted.

Kwok then replaced himself as the plaintiff in the litigation and filed an amended complaint, alleging that the Buyers had proposed the Secret Note at a time when he was recovering from a severe heart attack and unaware that Shorb's bankruptcy case had been converted to chapter 7. The amended complaint also alleged financial elder abuse and sought return of the property under various theories, including that there was collusion among the Buyers.

The Buyers filed a motion to dismiss Kwok's amended complaint under Rule 12(b)(6), arguing various legal issues, and also sent a safe-harbor sanctions letter to Kwok under Rule 9011 of the Federal Rules of Bankruptcy Procedure. Kwok only filed a brief response to the Rule 12(b)(6) motion and did not meaningfully counter any of the Buyers' arguments. The Buyers eventually filed a motion for sanctions under Rule 9011.

The bankruptcy court granted the motion and dismissed the complaint. The court also awarded sanctions against Kwok in the amount of about $21,000. Kwok took an appeal.

The bankruptcy court’s ruling was based on the fact that Kwok participated with the defendants in the illicit conduct which formed the basis for the adversary proceeding. The principle of in pari delicto, which prevents a court from aiding one participant in a wrongful action to recover from another participant, was the basis for the decision.

The opinion also discusses Kwok's appeal of the sanctions award. He argued that the bankruptcy court erred in granting sanctions. The court determined that there were insufficient findings to support the amount of the award and remanded for further proceedings.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

Bankruptcy Court Rules Horse Breeding is Not Farming Under Chapter 12 Jun 08, 2023

In re Leonaggeo, No. 23-35092, --- B.R. --- (Bankr. S.D.N.Y. May 24, 2023)

TRANSCRIPT

Hello to all the attorneys, fiduciaries, students, and bankruptcy fans out there. Today we are talking about In re Leonaggeo.

On May 24, 2023, the U.S. Bankruptcy Court for the Southern District of New York held that ordinary horse breeding, without more, does not constitute farming activity under chapter 12 of the Bankruptcy Code. Certain creditors filed a motion to dismiss the case or, in the alternative, for relief from the automatic stay. Specifically, they contested the debtor's eligibility under sections 109(f) and 101(18) of the Bankruptcy Code. In defense, Leonaggeo maintained that she qualifies for chapter 12 relief because she operates a horse farm and derives all her income from the farm. The court noted that Leonaggeo is a serial filer.

The court considered whether the debtor is a "family farmer," defined as someone "engaged in a farming operation." Most courts look to whether the activity in question involves risks similar to traditional farming, such as raising crops or livestock.

The court noted that there is a split of authorities over whether whether horse breeding, boarding, and training can be categorized as a "farming operation." Ultimately, the court distinguished the authorities on one side of the split because they involved debtors engaged in other operations in addition to horse raising.

Here, the debtor was involved in breeding, training, and boarding horses as well as rider instruction. But the court found this to be insufficient. Accordingly, the court dismissed the case.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy appeals throughout the country. If you would like to discuss, please feel free to reach out. Thank you.

Court Dismisses Chicago Hotel Bankruptcy Case for Lack of Authority to File Jun 06, 2023

In re Chicago South Loop Hotel Owner, LLC, No. 23-02595 (Bankr. N.D.Ill. May 24, 2023)

TRANSCRIPT

Hello to all you attorneys, fiduciaries, students, and bankruptcy fans. Today we are talking about In re Chicago South Loop Hotel Owner, LLC.

On May 24, 2023, the U.S. Bankruptcy Court for the Northern District of Illinois filed a memorandum opinion dismissing the chapter 11 case of Chicago South Loop Hotel Owner, LLC, for lack of proper authority to have filed the case.

U.S. Bank had moved to dismiss the case, arguing that the debtor lacked the appropriate authority because the debtor’s parent company, Chicago South Loop Hotel, LLC, did not adhere to its own operating agreement. This noncompliance was evident in the parent company's unilateral decision to make several amendments and resolutions without obtaining the unanimous consent of all members—a requirement specified in the operating agreement.

This transgression led to an invalid acquisition of a significant membership interest by the manager of the parent company, Vickie White. Since this interest was unlawfully obtained, she did not have the authority to transfer it to Chicago South Loop Hotel Holdings, LLC. For the same reasons, Todd Hansen, who was elected as a manager by Vickie White, did not possess the necessary authority to sign the chapter 11 petition on behalf of the Debtor. Accordingly, the court granted U.S. Bank’s motion to dismiss.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

Court Declines to Award Punitive Damages for Mortgagee’s Violation of Rule 3002.1 Jun 02, 2023

In re Dewitt, No. 11-36341 (Bankr. S.D.Ohio May 19, 2023)

TRANSCRIPT

Hello to you attorneys, fiduciaries, students, and bankruptcy fans. Today we are talking about In re Dewitt.

On May 19, 2023, the U.S. Bankruptcy Court for the Southern District of Ohio entered a decision on a motion for summary judgment that provides a comprehensive analysis of Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. The opinion investigates the meaning of the rule, available remedies, and the jurisdiction of bankruptcy courts to impose damages or penalties for breaches of the rule.

The opinion revolves around an ongoing conflict between a debtor and a mortgagee, involving an alleged violation of Rule 3002.1(g) by the mortgagee due to the non-disclosure of a tax payment made on behalf of the debtor. The debtor sought an injunction from the court to prevent the Mortgagee from presenting evidence or referring to the charge as an act of default. The Mortgagee, on the other hand, contended that such relief is unwarranted, claiming that its actions had caused no harm.

The bankruptcy court commented that Rule 3002.1 enhances transparency in chapter 13 cases and facilitates a final reconciliation. With this in mind, the court considered whether a violation could result in the exclusion of evidence of the fee charged, compensatory damages, or punitive damages, and whether the court has the power to award such relief under Bankruptcy Code § 105(a).

Ultimately, the court granted the debtor’s motion for summary judgment, in part, and scheduled an evidentiary hearing on remaining issues. The court agreed with the debtor’s position, including the debtor's request for an injunction against introducing evidence of default. But the court ruled out the recovery of damages beyond attorney fees and costs.

Of course, I will put a link to the opinion down in the show notes. I am Reno Fernandez, and I handle bankruptcy appeals across the country, all the way up to the U.S. Supreme Court. If you would like to chat, please do not hesitate to reach out. Thank you.

Bankruptcy Court Rules Violation of Uniform Voidable Transfer Act is Not Embezzlement or Larceny May 31, 2023

Garven v. Paczkowski (In re Paczkowski), No. 19-04140 (Bankr. D.Minn. May 22, 2023)

TRANSCRIPT

Hello to all the lawyers, fiduciaries, students and bankruptcy fans out there. Today we are talking about Garven v. Paczkowski. On May 22, 2023, the U.S. Bankruptcy Court for the District of Minnesota issued a memorandum decision on the dischargeability of a debt in bankruptcy, specifically two exceptions to discharge and the possible application of the doctrine of collateral estoppel.

The issue is whether findings from a state court case can serve as evidence that the debtor committed embezzlement or larceny under Bankruptcy Code § 523(a)(4) or caused willful and malicious injury under § 523(a)(6). In state court, a default judgment was entered, followed by a jury verdict.

The procedural posture of the case involves two motions for summary judgment. After a hearing, the court took the first motion under advisement, while the second motion was partially granted and partially denied. Specifically, the court refused to grant summary judgment for embezzlement or larceny, but the court did grant summary judgment for willful and malicious injury.

The underlying litigation resulted in a default judgment on construction-defect allegations, followed by litigation under the Minnesota Uniform Voidable Transfer Act where the jury found the defendant had intentionally transferred assets to hinder, delay, or defraud the plaintiffs.

The court applied the doctrine of collateral estoppel. With respect to the transfer of assets, the court determined that violation of the Uniform Voidable Transfer Act cannot be categorized as larceny or embezzlement.

The court then scrutinized the plaintiffs' claim for willful and malicious injury. Three elements need to be satisfied for the exception under § 523(a)(6) to apply: first, the debtor caused an injury to the creditor; second, the injury was willfully inflicted; and third, the debtor acted with malice. The court found that all three elements are satisfied by the underlying default judgment and jury verdict.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, including all the way up to the U.S. Supreme Court. If you have questions or would like to chat, please feel free to reach out. Thank you.

Second Circuit Upholds Non-Consensual Third-Party Releases in Purdue Pharma Case May 30, 2023

In re Purdue Pharma L.P., No. 22-110, --- F.4th --- (2d Cir. 2023)

TRANSCRIPT

Hello to all you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about Purdue Pharma.

On May 30, 2023, the U.S. Court of Appeals for the Second Circuit delivered an opinion holding that Bankruptcy Code §§ 105(a) and 1123(b)(6) enable Purdue Pharma L.P. and associated entities to include in their Chapter 11 plan, non-consensual third-party releases of direct claims against non-debtors. The circuit court reversed the district court's contrary decision and upheld the bankruptcy court's order confirming the plan.

The U.S. District Court for the Southern District of New York had overturned the bankruptcy court's order approving the Purdue plan. The district court found that the bankruptcy court lacked express or implied statutory authority under the Bankruptcy Code to approve non-consensual releases of direct third-party claims against non-debtors. Furthermore, the district court determined that the bankruptcy court lacked residual equitable authority to approve these releases, and that the necessary authority for such approval was not obtained merely because the plan required the releases for confirmation.

As is now familiar, Purdue and members of the Sackler family were caught up in mass tort litigation related to the effects of OxyContin. In order to settle these civil claims, a deal was made whereby Purdue would file for bankruptcy, and in return, the Sacklers would personally contribute billions of dollars to the bankruptcy if all civil claims against them were released. As such, Purdue and related entities filed Chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the Southern District of New York, while the Sackler family did not. After extensive action in the bankruptcy court, the court approved Purdue's proposed plan of reorganization. This plan included a non-consensual third-party release of claims against the Sacklers, which directly affected Purdue's estate. In exchange, the Sacklers agreed to contribute between $5.5 and $6 billion to the bankruptcy.

Multiple parties, including the Office of the United States Trustee, appealed the confirmation ruling to the district court. As mentioned, the district court reversed but was then itself reversed by the Second Circuit.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

Vehicle Lien Release in Chapter 13 Plan Does Not Apply to Co-Debtor’s Interests May 29, 2023

In re Buttel, No. 22-40542 (Bankr. D.Kan. May 18, 2023)

TRANSCRIPT

Hello to all the lawyers, fiduciaries, students, and bankruptcy fans out there. Today we are talking about In re Buttel.

Specifically, on May 18, 2023, the U.S. Bankruptcy Court for the District of Kansas entered a memorandum opinion denying confirmation of a chapter 13 plan. The issue was whether a creditor is obligated to release a lien on a vehicle when one of two co-debtors completes a Chapter 13 plan and is granted a discharge. There was also a dispute over the value of the vehicle.

In this case, debtor Vicki Lyn Buttel and co-debtor Kerry H. Kuehn jointly purchased a 2019 Mitsubishi Eclipse with financing provided by Lawrence Mitsubishi. The sales contract was subsequently assigned to Regional Acceptance Corporation (the creditor), which perfected a lien under Kansas law.

When the debtor filed for Chapter 13 bankruptcy relief, she proposed a three-year plan to cram down the secured claim by paying the present value of the vehicle and releasing the lien. The creditor, however, objected to the plan, arguing that the lien should not be released until the full balance was paid.

The court found that the value of the collateral must be at least the value of the debtor's one-half interest in the vehicle and ruled that the lien release at discharge only applies to the lien granted by the debtor, not the co-debtor.

The opinion also discusses the requirements for cramdown under Bankruptcy Code § 1325(a)(5), which provides that the holder of a secured claim retains the lien until either the underlying debt is paid or a discharge under section 1328 occurs. The debtor and creditor disagreed over the timing of the lien release, with the debtor advocating for a release upon discharge and the creditor maintaining that the lien should remain until the co-debtor pays the outstanding debt.

The court found this to be a matter of statutory construction of § 1325 and related sections, resulting in the conclusion that the lien release only applies to the debtor's one-half interest in the vehicle, not the co-debtor's interest. Consequently, the court denied confirmation of the debtor's plan, deeming that it did not sufficiently address lien release in line with the court's interpretation. The debtor was instructed to submit an amended plan with non-standard provisions regarding release of the lien.

Of course, I will put a link to the opinion in the show notes.

I am Reno Fernandez, and I handle bankruptcy-related appellate matters throughout the country, all the way up to the Supreme Court. If you would like to chat, please feel free to reach out. Thank you.

Bankruptcy Court Rules Contiguous Properties Under Common Ownership are Not Single Asset Real Estate May 26, 2023

In re Nuovo Ciao-Di, LLC, No. 23-10068 (Bankr. S.D.N.Y. May 19, 2023)

TRANSCRIPT

Hello you bankruptcy attorneys, fiduciaries, and students. Today we are talking about In re Nuovo Ciao-Di, LLC. On May 19, 2023, the U.S. Bankruptcy Court for the Sothern District of New York entered a memorandum opinion examining whether two contiguous commercial condominiums can be classified as "single asset real estate" under the Bankruptcy Code, specifically under 11 U.S.C. § 101(51B). The opinion concludes that they do not meet this definition.

Specifically, creditor DCC Vigilant, LLC filed a motion to classify the debtor as a "single asset real estate" debtor. DCC argued that the two units should be regarded as a "single property" because they have never been owned separately, were transferred under a single deed, and they both are collateral for a single mortgage. Furthermore, DCC suggests that these units should be seen as a "single project" since they resemble an office building or shopping mall where the rental units are part of a unified plan.

On the other hand, the debtor argued that the two units are discrete entities, each having different tenants, divergent commercial uses, separate plans for future sale and development, and unique listings as separate lots by the New York City Department of Finance.

The court explained the test for "single asset real estate" cases as defined in the Bankruptcy Reform Act of 1994. It clarified that "single asset real estate" refers to real property that comprises a single property or project, which substantially generates all the gross income of a debtor. The designation of real property as a "single property or project" is a factual matter, and the responsibility falls on the movant to prove that multiple parcels amount to a "single property or project."

It is true that courts consider the proximity of the parcels, their common ownership, and whether they were transferred under a single deed subject to a single mortgage. However, the court ruled that the two units do not constitute a "single property" due to their differing lot numbers and unique characteristics. The court also concluded that these units do not form a "single project" since DCC has not successfully shown that the properties are united by a common plan or scheme. As a result, the court denied DCC's motion to designate Nuovo Ciao-Di, LLC as a "single asset real estate" debtor.

Of course, I will put a link to the opinion in the show notes.

I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the county, all the way up to the U.S. Supreme Court. If you’d like to chat or you have any questions, please feel free to reach out. Thank you.

Eighth Circuit BAP Holds Substantial Change of Circumstances is Necessary to Modify Chapter 12 Plan May 25, 2023

In re Swackhammer, --- B.R. ---, 2023 WL 3591920 (8th Cir. May 23, 2023)

TRANSCRIPT

Greetings lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about In re Swackhammer.

On May 23, 2023, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit upheld the ruling of the U.S. Bankruptcy Court for the Southern District of Iowa approving a debtor's fourth modified repayment plan under Bankruptcy Code § 1229. The BAP found that according to § 1229 and Eighth Circuit case law, a debtor is implicitly required to demonstrate that they've undergone a significant change in circumstance. It also agreed with the Bankruptcy Court's factual findings related to the modification of the plan, indicating they were not clearly erroneous.

In the original case, the debtors had put forth a fourth request to adjust their chapter 12 repayment plan. Farm Credit, a secured creditor of the debtors, opposed this modification. They argued that the debtors hadn't proven any substantial and unanticipated change in circumstances and claimed that the proposed adjustment lacked feasibility.

The Bankruptcy Court overruled Farm Credit's objections but acknowledged concerns about the plan's feasibility. As a result, the court determined that if the debtors failed to meet any term of the fourth revised plan, their case would be dismissed. Displeased with this outcome, Farm Credit appealed.

The case began in September 2018 when the debtors filed a bankruptcy petition under chapter 12 and confirmed a consensual second modified plan a year later. Over the following years, they proposed multiple modifications to extend payment deadlines, citing unanticipated changes such as wet weather, equipment failure, employee illness, and farmland losses. Each time, Farm Credit opposed the modifications but failed to prevent their approval.

Eventually, the Bankruptcy Court ordered all parties to convene and agree on the terms of a fourth amendment, which was confirmed following a telephonic hearing. Despite objections from Farm Credit, the court held that the evidence of a substantial change in circumstances and measures to improve feasibility, such as the waiver of unpaid fees by the debtors' counsel, made the fourth modified plan viable.

On appeal, the BAP upheld the lower court's ruling, stating it had not abused its discretion. The opinion analyses § 1229 and compares it to § 1329, which governs modification of chapter 13 plans. The BAP noted a split among courts over the interpretation of § 1229(a) and § 1329(a), which hasn't been directly addressed by the Eighth Circuit. At least one case states that modification of a confirmed chapter 13 plan should only happen when substantial changes in circumstances occur. Another suggests the possibility of later creditor-driven modifications should the debtor's ability to pay undergo significant changes. Ultimately, the BAP concluded that a "significant change in circumstances" is necessary to justify a modification to the repayment plan.

The opinion discusses how the bankruptcy court found the Swackhammers successfully demonstrated an unanticipated, substantial change in their circumstances. It also notes that the fourth modified plan was deemed feasible and confirmable. Therefore, the Bankruptcy Appellate Panel for the Eighth Circuit affirmed the decision of the lower court, asserting that it had exercised its discretion appropriately.

As usual, I will put an opinion link in the show notes. I am Reno Fernandez, and I handle bankruptcy related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

Sears Bankruptcy Judge Holds Electricity is Not a Good Under UCC and Section 503(b)(9) May 24, 2023

In re Sears Holdings Corporation, No. 18-23538 (Bankr. S.D.N.Y. May 15, 2023)

TRANSCRIPT

Hello to all you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about a memorandum opinion entered in the Sears’ bankruptcy cases on May 15, 2023. Specifically, the U.S. Bankruptcy Court for the Southern District of New York held that electricity is not a "good" under the Uniform Commercial Code, and claims for providing power are not entitled to administrative priority under Section 503(b)(9) of the Bankruptcy Code. This issue is closely linked to claims lodged by the Puerto Rico Electric Power Authority (PREPA) against Sears Holdings Corporation and Kmart, which, as a result, are ultimately designated as general unsecured claims.

The issue was an objection to two claims lodged by PREPA against Sears and its affiliates. PREPA advocated for administrative priority status for two claims amounting to about $530,000. These claims represent unpaid electricity expenses that had accrued before the Debtors filed for bankruptcy. However, the Debtors disputed this, arguing that the claims shouldn't be accorded administrative priority status, contending that electric energy is not a "good" as defined by Section 503(b)(9). Agreeing with the Debtors, the court sustained their objection and reclassified the claims as general unsecured claims.

The court's determination is heavily based on the definition of "goods" under the UCC. The opinion comments that it is common practice for bankruptcy courts to utilize the UCC's definition of "goods" when applying Section 503(b)(9).

PREPA, on the other hand, pushes for the court to adopt the perspective of bankruptcy courts in certain other jurisdictions that have classified electric energy as a good under the UCC. However, the court dismissed this argument, highlighting that an equal number of cases have arrived at the contrary conclusion. PREPA also argued that Puerto Rico law should be applied, but the court dismissed this suggestion as well, observing that it would conflict with the objective of maintaining uniformity in bankruptcy law.

As usual, I will put a link to the opinion in the show notes. Thank you.

Directors of SVB Financial Group May Use Insurance Defense Funds Despite Creditor Committee’s Objections May 23, 2023

In re SVB Financial Group, No. 21-10367 (Bankr. S.D.N.Y. May 22, 2023)

TRANSCRIPT

Greetings to all you attorneys, fiduciaries, students, and bankruptcy fans. Today we are talking about the SVB Financial Group bankruptcy case again.

On May 22, 2023, the U.S. Bankruptcy Court for the Southern District of New York entered a memorandum opinion granting a motion by sixteen current and former directors for relief from the automatic stay to allow the payment of defense costs under certain directors and officers insurance policies.

The official committee of unsecured creditors objected, raising multiple concerns. Among other things, the committee argued that the proceeds of the so-called “ABC” policies are property of the estate. The committee was particularly concerned about “side C” coverage, the purpose of which is to protect the debtor entity itself. The committee also raised fears that unchecked payment of defense costs could drastically reduce the available proceeds, especially given that they are “wasting policies,” meaning that the available coverage diminishes with each payout.

This is amidst the context of several securities class actions that have been filed against the movants and the debtor, and additional similar lawsuits that are sure to follow, plus ongoing regulatory investigations concerning the events leading up to Silicon Valley Bank’s collapse.

The movants countered that the estate would benefit from a robust defense by the insureds, asserting that without protection from the D&O policies, the directors’ attention might be diverted from the debtor's operations.

As a backup position, the committee requested safeguards be put in place, and the movants agreed to provide quarterly reporting and to seek further relief before using policy proceeds to pay any settlement.

In the end, the court agreed with the movants that the balance of harms favored lifting the stay, stating that denying access to defense costs would cause imminent and significant harm, and that potential harm to the debtor was speculative. The court adopted the movants' proposed requirements of reporting and settlement approval but declined to impose any cap.

As usual, I will put a link to the opinion in the show notes. I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. Thank you.

Ninth Circuit Rejects “Person Aggrieved” Test for Standing in Bankruptcy May 22, 2023

Clifton Capital Group, LLC v. Sharp (In re East Coast Foods, Inc.), --- F.4th ---, 2023 WL 3296746, at *1 (9th Cir. May 8, 2023)

TRANSCRIPT

Hello to all the attorneys, fiduciaries, students, and bankruptcy fans out there. Today we are talking about East Coast Foods. The case is about a very famous Los Angeles restaurant. Specifically, in reaction to a $3.2 million judgment for racial discrimination, the operator of Roscoe’s House of Chicken & Waffles in Los Angeles, California, commenced a chapter 11 bankruptcy case. Nevertheless, the restaurant is extremely popular, having catered to President Obama, being referred to in several movies and songs, and having received Snoop Dogg’s interest in purchasing it.

A chapter 11 trustee was eventually appointed to displace management. Ultimately, a chapter 11 plan was confirmed that promises to pay the claims of all creditors in full, with interest.

The bankruptcy court awarded fees of over $1 million to the trustee, including an enhancement of 65% for exceptional services. Clifton Capital Group, an unsecured creditor, objected to the award of compensation, arguing that it was unreasonable and that it created a risk of diminished or delayed recovery for unsecured creditors.

“Injury in fact” is a crucial element of Article III standing. Here, the court found Clifton's alleged injury to be hypothetical and conjectural as the confirmed plan promised full payment to creditors. Thus, the award of compensation to the trustee did not diminish Clifton’s recovery.

The court rejected the less demanding "person aggrieved" test for standing. The opinion points out the confusion surrounding the historical application of this test, a prudential requirement found in the Bankruptcy Act of 1898, which continued to be used despite the act's repeal in 1978. Although not expressly stated in the opinion, presumably the “person aggrieved” test survives as a prudential standing doctrine. But in a footnote, the court commented that it need not address prudential standing because it determined that Clifton lacks Article III standing.

As usual, I’ll put a link to the opinion in the show notes.

My name is Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. If you have a question or would just like to chat, please feel free to reach out. Thank you.

Bankruptcy Court Denies FDIC’s Attempt to Escrow Tax Refunds in SVB Financial Group Case May 19, 2023

In re SVB Financial Group, No. 23-10367 (Bankr. S.D.N.Y. May 17, 2023)

TRANSCRIPT

Greetings to all you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about an opinion issued on May 17, 2023, in the SVB Financial Group case, which arises from the failure of Silicon Valley Bank.

Specifically, the FDIC brought a motion requesting to escrow tax refunds totaling about $10.7 million. This was opposed by the Debtor, the Official Committee of Unsecured Creditors, and other parties.

The FDIC’s motion was based on a tax sharing agreement with the Debtor. But the Debtor argued that the tax refunds are property of the estate, that the FDIC violated the automatic stay by opening the Debtor’s mail and intercepting refund checks, and that the motion is procedurally improper and should have been brought as an adversary proceeding.

The court determined that the FDIC’s arguments ignore the procedures to be followed under the tax-sharing agreement before receiving a share of the refunds. The court also found that the FDIC interfered with property of the estate without expressly stating that the FDIC violated the automatic stay. Ultimately, the court ordered the FDIC to turn over the tax refund checks.

Of course, I will put a link to the opinion in the show notes.

I am Reno Fernandez, and I handle bankruptcy-related appeals throughout the country, including all the way up to the U.S. Supreme Court. If you have questions or would just like to chat, please feel free to reach out. Thank you.

Bankruptcy Court Refuses to Reopen Case for Reaffirmation Agreement May 19, 2023

In re Uzcanga-Ramirez, No. 22-31705 (Bankr. D.Or. May 9, 2023)

TRANSCRIPT

Hello to all you lawyers, fiduciaries, students, and bankruptcy fans out there. Today we are talking about In re Uzcanga-Ramirez. On May 9, 2023, the U.S. Bankruptcy Court for the District of Oregon entered an opinion, approved by all of the active judges of the district, to accompany an order denying the debtor’s motion to reopen her chapter 7 case. The motion would have been a prelude to the debtor moving to vacate her discharge so that she may enter into a reaffirmation agreement, the details of which are not given.

The court held that it lacked the authority to vacate the debtor’s discharge under the circumstances. First, one of the statutory predicates for approval of a reaffirmation agreement is that it be made before entry of the discharge under Bankruptcy Code § 524(c). Once a discharge is granted, the court lacks jurisdiction to approve a reaffirmation agreement.

Second, there is a procedure for extending the time for approval of a reaffirmation agreement while also delaying entry of discharge, which was not done here.

The court acknowledged a prior prevailing practice of vacating a discharge under Rule 9024 of the Federal Rules of Bankruptcy Procedure in order to accommodate such a request but stated that this practice has been foreclosed.

As usual, I will put a link to the opinion in the show notes. Thank you.

Bankruptcy Court Applies 10-Year Tax Claim Lookback Period to Fraudulent Transfer Action May 17, 2023

Fogel v. Specialty Industries II, LLC (In re Palmieri), No. 22-A-00177 (Bankr. N.D.Ill. May 15, 2023)

TRANSCRIPT

Hello you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about Fogel v. Specialty Industries II, LLC. On May 15, 2023, the U.S. Bankruptcy Court for the Northern District of Illinois entered a memorandum opinion applying the ten-year lookback period for tax claims to a fraudulent-transfer action under Bankruptcy Code § 544.

The opinion concerns a dispute between Richard Fogel, the chapter 7 trustee for the estate of Michael J. Palmieri, on one hand, and Specialty Industries II, LLC, Karen Witt, and Nicholas R. Recchia, on the other hand. At the center of the case is Fogel's motion to avoid what he alleges are fraudulent transfers of real property. He brings this claim under the Illinois Uniform Fraudulent Transfer Act (UFTA) and § 544 of the Bankruptcy Code. The defendants moved to dismiss the action as untimely.

The defendants argued that Fogel's complaint is time-barred due to the UFTA's four-year statute of limitations, whereas the transfers occurred outside this timeframe. Fogel, however, asserts that he can use the ten-year statute of limitations available to the IRS under 26 U.S.C. § 6502(a)(1) by virtue of § 544(b) of the Bankruptcy Code. This is in the context of the debtor’s own history of tax fraud.

Although there is a split of authority on the issue, the majority of courts have found that § 544(b) allows the trustee to use the extended statute of limitations. The defendants, referencing a case from the Bankruptcy Court in New Mexico, argue that the trustee is bound by the four-year statute of limitations. However, the court rejects this argument, pointing out the clear language of § 544(b) that allows the trustee to take advantage of the extended limitations period.

Lastly, the defendants contend that the complaint should be dismissed because the debtor did not personally own the property at the time of the transfer. But the court concluded that Fogel sufficiently alleged facts to state a reverse veil-piercing claim, thereby overcoming this objection.

As always, I’ll put a link to the opinion in the show notes. Thanks.

Seventh Circuit Rules Preponderance of the Evidence Standard Applies in Turnover Actions May 16, 2023

On April 27, 2023, the U.S. Court of Appeals for the Seventh Circuit issued an opinion holding that the preponderance of the evidence standard, rather than clear and convincing evidence, applies in turnover actions under Bankruptcy Code § 542.

Dordevic v. Paloian (In re Dordevic), --- F.4th --- (7th Cir. 2023)

TRANSCRIPT

Hello to all you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about Paloian v. Dordevic. On April 27, 2023, the Seventh Circuit issued an opinion holding that the preponderance of the evidence standard suffices in turnover actions under Bankruptcy Code § 542.

Jelena Dordevic's bankruptcy case involves her mother, Jorgovanka, legal owner of a 50% stake in PHMX LLC. Trustee Gus A. Paloian argues that Jorgovanka is Jelena's nominee, and the property should return to the bankruptcy estate. Jorgovanka counters that the court applied an incorrect standard of proof, favoring "clear and convincing evidence." The bankruptcy and district courts sided with the trustee.

The opinion explores the summary turnover procedure's history, the Bankruptcy Code, and relevant Supreme Court decisions. It argues for the preponderance standard, referencing cases like Kelley v. Stevanovich, although clarifying Kelley didn't address turnovers under Sections 542 and 541. The opinion upholds the bankruptcy court's finding of Jelena's equitable ownership of the PHMX stake.

Using the Szaflarski factors to determine actual property ownership, the opinion supports Jelena's equitable ownership, scrutinizing and dismissing Jorgovanka's claims about her financial contributions. It dismisses theories from Jorgovanka and Zaric arguing their equitable ownership.

The opinion returns to the standard of proof debate, discussing evidence and conflicting testimonies about Zaric's involvement in PHMX. It concludes the evidence and Szaflarski factors support the court's finding of Jelena's equitable ownership.

9th Cir. BAP Denies Attorney's Fees for Litigating Personal Guarantee in Dischargeability Action May 14, 2023

Spartan Tank Lines, Inc. v. Le (In re Le), No. NC-22-1033-BGF (9th Cir. BAP May 11, 2023)

TRANSCRIPT

Hello to you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about a new opinion by the Ninth Circuit’s Bankruptcy Appellate Panel.

On May 11, 2023, the BAP affirmed an order denying a request for attorney's fees incurred in connection with a dischargrability action, finding that the fees were not recoverable under California Civil Code § 1717 or Code of Civil Procedure § 1021 because the proceeding was not an "action on a contract."

Specifically, Spartan Tank Lines, Inc. took an appeal from denial of attorney's fees in connection with a dischargeability proceeding against chapter 7 debtor Annie Kim Le. It originated from a business relationship between Spartan and American Gas & Oil Corp., a company owned and operated by the debtor.

The debtor had issued a personal guarantee of American's debts to Spartan, which included an attorney's fee clause. However, American ceased payments to Spartan for delivered gasoline, and neither American nor the debtor fulfilled the owed debt.

Consequently, Spartan took legal action against American and the debtor in a state court, but proceedings were interrupted by the bankruptcy filing. Spartan countered this by filing an adversary complaint under § 523(a)(2)(A), asserting that its debt was non-dischargeable based on the debtor’s personal guarantee and subsequent fraudulent asset transfers.

The bankruptcy court eventually ruled in favor of Spartan, concluding that the debtor had committed actual fraud. However, when Spartan sought attorney's fees and costs, the bankruptcy court denied the attorney's fees request and awarded a diminished amount for costs. Spartan appealed this, arguing that it could recover attorney's fees under California Civil Code § 1717. The bankruptcy court dismissed this argument, stating that the fraud dischargeability proceeding was not an "action on a contract." Spartan also tried to recover attorney's fees under California Code of Civil Procedure § 1021, but the bankruptcy court did not consider this argument. The bankruptcy appellate panel endorsed the bankruptcy court's decision.

The opinion further delved into the application of California Civil Code § 1717, discussing the three conditions necessary for it to apply. These included that the action must be on a contract, the contract must provide for attorney's fees, and the party seeking fees must have prevailed. The contention lay in whether the dischargeability proceeding was an "action on a contract."

The bankruptcy court had concluded that it was not, as it did not have to determine the breach or enforceability of the personal guarantee. Spartan, however, argued that the bankruptcy court did have to adjudicate the existence, enforceability, and breach of the personal guarantee, but the appellate panel disagreed.

The panel's findings suggested that the bankruptcy court did not "enforce" the contract, did not have to interpret or determine the validity of the personal guarantee, and that the guarantee did not influence the outcome of the summary judgment. The panel drew comparisons between this case and others where California Civil Code § 1717 did or did not apply.

The panel also addressed California Code of Civil Procedure § 1021, which permits attorney's fees by agreement between parties. They found that the bankruptcy court had erred by not considering Spartan's request under this provision. However, the error was deemed harmless as the attorney's fee clauses in the personal guarantee and credit application guarantee were not comprehensive enough to cover tort claims.

Breaking News: Johnson & Johnson's Troubled Talc Business Re-enters Bankruptcy Apr 04, 2023

Hours after its first bankruptcy case was dismissed this afternoon, Johnson & Johnson's talc business filed a new petition for relief under chapter 11 of the Bankruptcy Code.

https://www.calg.com/reno

(415) 649-6700

TRANSCRIPT

Hi, Reno Fernandez here. This just in: On Tuesday, April 4, 2023, Johnson & Johnson’s talc business, namely LTL Management LLC, filed a second chapter 11 bankruptcy petition just hours after a New Jersey bankruptcy judge dismissed its first case. The new case number is 23-12825, and it is before the same bankruptcy judge, namely Judge Michael B. Kaplan.

The judge dismissed LTL Management’s first case under the mandate of the Third Circuit, which ordered the case to be dismissed for bad faith because the business was not in financial distress.

Johnson & Johnson’s strategy depends on the trending “Texas Two-Step” maneuver, in which a problematic business unit is spun off and put into bankruptcy. The bad optics of this maneuver almost certainly played a role in the Third Circuit’s decision.

Now, LTL Management comes back with an $8.9 million settlement with personal injury claimants. We will see whether the result is different this time.

Once again, I am Reno Fernandez. I handle bankruptcy appeals throughout the country, at all levels, including the Supreme Court. I also consult at the trial level on anticipated appellate issues. If you have questions, or you would just like to chat, please feel free to reach out. Thank you.

Stay Breathes New Life into Government's Appeal in Voyager Cryptocurrency Bankruptcy Apr 04, 2023

Bankruptcy appellate attorney Reno Fernandez provides an update on the U.S. Trustee's appeal from an order confirming a chapter 11 plan of reorganization in Voyager's bankruptcy case. https://calg.com/reno (415) 649-6700 BOOK RECOMMENDATION Securities Litigation, Enforcement, and Compliance, 5th Ed. https://amzn.to/3lrl4Ds This book is a must-have for any litigator dealing with securities, including the infinite variety of cryptocurrency coins and tokens that may or may not be securities. Published in 2023, the Fifth Edition is fully up to date. I personally recommend this book, and this is not sponsored. But I must disclose that this is an affiliate link. This means I earn a small commission if you use this link (https://amzn.to/3lrl4Ds) to buy the book. Thank you. Mentioned: Is Voyager Appeal Doomed to Fail?

Bartenwerfer v. Buckley, Opinion Read Aloud Apr 02, 2023

This is the U.S. Supreme Court's opinion in Bartenwerfer v. Buckley, 143 S.Ct. 665 (2023) read aloud without citations or footnotes. You can read about this opinion here: Bartenwerfer v. Buckley: Emerging Creditors’-Rights Court Denies Discharge for Innocent Partner.

Should the U.S. Supreme Court Abolish "Equitable Mootness?" Mar 27, 2023

On Thursday, U.S. Bank filed a petition for certiorari with the U.S. Supreme Court, seeking to abolish the doctrine of "equitable mootness." U.S. Bank, N.A. v. Windstream Holdings, Inc., No. 22-926 (U.S. Mar. 23, 2022).

BOOK RECOMMENDATION

A Practitioner's Guide to Liquidation and Litigation Trusts

This publication by the American Bankruptcy Institute (ABI) offers an overview of using trusts to handle large-scale litigation and asset liquidation for distributing recoveries across multiple claimants. This guide provides solutions for establishing, managing, monitoring, and concluding such trusts. It includes checklists, case citations, references, sample agreements, and suggested terms for plans and disclosure statements. View on Amazon.

I personally recommend this book, and this is not sponsored. But I must disclose that this is an Amazon affiliate link. This means I earn a small commission if you use this link to buy the book. Thank you. TRANSCRIPT

Hi. This is Reno Fernandez, and today we have a Supreme Court update.

On Thursday, March 23, 2023, U.S. Bank filed a petition for certiorari asking the court to discard the doctrine of equitable mootness, which it claims has "wrongfully and unevenly deprived bankruptcy litigants of review by Article III judges. The bank claims that Congress instituted a "comprehensive statutory scheme" to ensure judicial review of bankruptcy decisions, which has increasingly been evaded by the courts via the equitable mootness doctrine. The case is U.S. Bank versus Windstream Holdings, No. 22-926.

In 2015, Windstream sold its real estate holdings to a spinoff and leased back its assets. In 2019, Windstream obtained confirmation of a chapter 11 plan of reorganization providing for a settlement between the spinoff and Windstream that put any outstanding issues to bed. U.S. Bank, which held Windstream notes, contends they should have been permitted to seek to reverse the transaction, but plan confirmation left them with no recourse. The noteholders took an appeal from plan confirmation and approval of the settlement, but the appeal failed for equitable mootness.

The petition for sert calls the Second Circuit's interpretation of the equitable mootness doctrine "unpincipled" and faults the courts for prioritizing certainty over fairness. The bank points to a district court judge's decision to overturn Purdue Pharma's plan as an example of an appropriate judicial response.

In my own observation, mootness is being challenged more and more. I wouldn't be surprised if the Supreme Court takes up the issue, whether now or in another case.

And now for my book recommendation of the day, which is A Practitioner's Guide to Liquidation and Litigation Trusts. This is only slightly related to today's topic, but it is very related to all of the activity surrounding mass-tort cases and third-party releases. I'll post a link to the book in the show notes.

I am Reno Fernandez, and I handle only bankruptcy- and insolvency-related appeals, at all levels, including the U.S. Supreme Court. If you have questions or just want to chat, please feel free to reach out. Thank you.

Fifth Circuit Slashes Bankruptcy Attorney's Compensation for Discourteous Behavior Mar 27, 2023

In Dale & Klein L.L.P. v. Owsley (In re Owsley), No. 22-40283, 2023 WL 2424592 (5th Cir. Mar. 9, 2023), the Fifth Circuit upheld a bankruptcy court's order to cut a law firm's attorney's fees by just under 35% for unethical and discourteous behavior while representing a debtor in a chapter 13 bankruptcy case. You can view the opinion here. And you can view my blog post at HigherCourt.us. BOOK RECOMMENDATION

Today's book recommendation is Jonathan Friedland's Commercial Bankruptcy Litigation. This two-volume set is an essential guide for bankruptcy and non-bankruptcy attorneys. View the book on Amazon. I personally recommend this book, and this is not sponsored. But I must disclose that this is an Amazon affiliate link. This means I earn a small commission if you use this link to buy the book. Thank you. UPCOMING EVENTS

Virtual Happy Hour, American Bankruptcy Institute, March 29, 8:00 pm PDT.

Implications of SVB's Collapse and the Current Banking Crisis, CLE, American Bankruptcy Institute, March 31, 2023, 8:00 am PDT. California Cannabis Operators in Distress, CLE including Elimination of Bias, California Lawyers Association, April 20, 2023, 12:00 pm PDT

TRANSCRIPT

Hello to all you lawyers, fiduciaries, and bankruptcy fans. It is Thursday, March 23, 2023. I am your host, Reno Fernandez. Let’s get on with the show!

In an unpublished decision on March 3, 2023, the Fifth Circuit upheld a bankruptcy court’s order slashing attorney’s fees for discourteous behavior.

We are talking about Dale & Klein v. Owsley. I’ll put a link in the show notes.

This was a chapter 13 case, and the debtor got the bankruptcy court's approval to hire Dale & Klein for work on family law and divorce issues, including conservatorship and child support.

But the firm’s work did not go smoothly. For example, when the ex-husband was deposed, lawyers for both sides were incredibly nasty to one another. From the description in the opinion, it seems like the nastiness was about even on both sides.

But when the firm went to get approval for fees and expenses of about $128,000, the court found the behavior of debtor’s counsel to be “unethical and discourteous.”

Here is the interesting part: the court held that discourteous behavior itself diminishes the value of an attorney’s services. Accordingly, the court disallowed about $44,000, which is just under 35%.

The debtor appealed, and—interestingly—no one defended the appeal. But the Fifth Circuit reviewed the order anyway and affirmed.

Who is to say who is right? I’m no fan of discourteous behavior, but I’m no fan of working for free, either. Anyway, for more on this, check out my article on www.HigherCourt.us.

Now for upcoming events. At the American Bankruptcy Institute, come get virtually happy at their virtual happy hour on March 29, 8:00 pm Pacific, and witness the implications of Silicon Valley Bank’s collapse for CLE credit on March 31, at 8:00 am pacific. Then see Cannabis Operators in Distress by the California Lawyers Association on April 20 at noon. I’ll put links to all the events in the show notes.

And now my book recommendation of the day: the second edition of Jonathan Friedland’s two-volume Commercial Bankruptcy Litigation was just published, and it promises to be extraordinary. It is very fresh, updated, and my copy is already in the mail. I’ll post a link down in the show notes, so you can check it out.

Lastly, if you found this useful, please subscribe and leave a positive review.

Spark Factor Design, Inc. v. Hjelmeset (In re Open Medicine Institute, Inc.), 639 B.R. 169 (9th Cir. BAP 2022) Feb 11, 2023

Bankruptcy appellate attorney Reno Fernandez discusses the U.S. Bankruptcy Appellate Panel for the Ninth Circuit's recent opinion in Spark Factor Design, Inc. v. Hjelmeset (In re Open Medicine Institute, Inc.), 639 B.R. 169 (9th Cir. BAP 2022).

https://calg.com/reno

(415) 649-6700

BOOK RECOMMENDATION The Legacy of Ruth Bader Ginsburg https://amzn.to/3LPrBmj Ruth Bader Ginsburg, a legal icon, significantly impacted law and society through her roles as a lawyer, professor, appellate judge, and US Supreme Court Associate Justice. This book examines Ginsburg's exceptional achievements, featuring contributions from renowned scholars and court-watchers across law, political science, and history. It provides diverse insights on her career and legacy, with this updated edition including a new foreword by Justice Stephen G. Breyer and introduction by editor Scott Dodson. View on Amazon.

https://cdn.ca9.uscourts.gov/datastore/bap/2022/05/27/Open%20Medicine%20Opinion%20w%20Concurrence%2021-1233%2021-1234.pdf

How Long do I Have to Appeal? Feb 08, 2023

Bankruptcy appellate attorney Reno Fernandez discusses the deadline for appealing from a bankruptcy court decision.

www.calg.com/reno

(415) 649 6700

BOOK RECOMMENDATION Debt's Dominion, by David A. Skeel https://amzn.to/3lqQIRt This book has been hugely influential in my career. Bankruptcy in America, unlike in other countries, offers debtors a chance. Professor Skeel's comprehensive account explores American bankruptcy law from its origins in English law to the modern day. View on Amazon.

TRANSCRIPT

How long do I have to take an appeal from a bankruptcy court decision?

If you or your client needs to take an appeal from a bankruptcy court's judgment or order, you have 14 days. Rule 8002 of the Federal Rules of Bankruptcy Procedure governs the time to appeal. Certain things can extend the time to appeal, such as a motion to reconsider the judgment or order, but keep in mind that such a motion must be filed within the first 14-day window, and then you have 14 days after the motion is resolved to file a notice of appeal. This deadline is extremely important, because if it is missed, the appeal will almost certainly be dismissed.

I am Reno Fernandez, and I specialize in bankruptcy-related appeals throughout the country, all the way up to the U.S. Supreme Court. If you have questions, please feel free to reach out to me. Thank you.

What is Relief from the Automatic Stay? Feb 08, 2023

Bankruptcy appellate attorney Reno Fernandez discusses relief from the automatic stay in bankruptcy.

https://calg.com/reno (415) 649-6700

BOOK RECOMMENDATION My Own Words, by Ruth Bader Ginsburg https://amzn.to/3n42xxc My Own Words, by Ruth Bader Ginsburg, is an insightful collection of her writings and speeches on topics such as gender equality, the Supreme Court, being Jewish, opera, and international perspectives on the US Constitution. The audiobook version features original recordings of Ginsburg's speeches and bench announcements. View on Amazon.

What is an "Adversary Proceeding?" Feb 08, 2023

Bankruptcy appellate attorney Reno Fernandez discusses adversary proceedings in bankruptcy.

https://calg.com/reno (415) 649-6700

BOOK RECOMMENDATION

Bankruptcy Code, Rules and Forms - 2023 Edition https://amzn.to/3JL7O5P

Have you got your 2023 Bankruptcy Code yet? With all of the changes during and since COVID-19, including the Small Business Reorganization Act, having a current copy is crucial. This 2023 edition, published by Thompson Reuters, includes the entire Bankruptcy Code, the Federal Rules of Bankruptcy Rules, the Federal Rules of Rules of Civil Procedure, the Federal Rules of Evidence, the official bankruptcy forms, and comments by the Honorable William Houston Brown and Lawrence R. Ahern III. View on Amazon.

What is "Adequate Protection?" Feb 08, 2023

Bankruptcy appellate attorney Reno Fernandez discusses the meaning of "adequate protection" in bankruptcy.

https://calg.com/reno (415) 649-6700

BOOK RECOMMENDATION

The Legacy of Ruth Bader Ginsburg https://amzn.to/3LPrBmj

Ruth Bader Ginsburg, a legal icon, significantly impacted law and society through her roles as a lawyer, professor, appellate judge, and US Supreme Court Associate Justice. This book examines Ginsburg's exceptional achievements, featuring contributions from renowned scholars and court-watchers across law, political science, and history. It provides diverse insights on her career and legacy, with this updated edition including a new foreword by Justice Stephen G. Breyer and introduction by editor Scott Dodson.

What is the "Automatic Stay?" Feb 07, 2023

Bankruptcy appellate attorney Reno Fernandez discusses the meaning of "automatic stay" in bankruptcy.

https://calg.com/reno (415) 649-6700

BOOK RECOMMENDATION

A Practitioner's Guide to Liquidation and Litigation Trusts https://amzn.to/40eRNur