Much blame, but lame claim.

An architecture firm held a large judgment against a bankruptcy debtor, and contended that the failure of the debtor’s insurer to object to that claim barred further dispute about the insurer’s liability. The Fifth Circuit disagreed, concluding that “in this no asset bankruptcy case, nothing in the court proceedings required claims allowance, no notice was provided to parties in interest to object to claims, and no bankruptcy purpose would have been served by the bankruptcy court’s adjudicating [the firm’s claim.” Kipp Flores Architects v. Mid-Continent Casualty Co., No. 16-20255 (March 24, 2017).

To every garnishment there is a season –

Tower Credit garnished the debtor’s wages. In defense of a later preference action, Tower argued that its garnishment was effective when served (taking it outside the preference period), not when the debtor in fact received money. The Fifth Circuit disagreed: “The combination of Supreme Court precedent and the overwhelming weight of persuasive authority applying § 547(e)(3) make clear that a debtor’s wages cannot be transferred until they are earned. Thus, we hold that a creditor’s collection of garnished wages earned during the preference period is an avoidable transfer made during the preference period even if the garnishment was served prior to that period.” Tower Credit v. Schott, No. 16-30274 (March 13, 2017).

Hot Potatoes

Gatheright bought sweet potatoes from Clark, paying with two post-dated checks. When they were returned for insufficient funds, Clark instituted criminal proceedings against Gatheright, which were ultimately dismissed after Gatheright spent several weeks in jail. Gatheright then sued Clark for malicious prosecution and abuse of process. The Fifth Circuit affirmed summary judgment for Clark, observing that “$16,000 in bad checks . . . [is] a sum greater than what the Mississippi Supreme Court has previously found would prompt a reasonable person to institute criminal proceedings.” Based on that observation, the Court rejected arguments about whether a post-dated check was a proper basis for a “false pretenses” prosecution in Mississippi, and about the effect of Gatheright’s filing for personal bankruptcy. Gatheright v. Clark, No. 16-60364 (Feb. 23, 2017, unpublished).

A house divided against itself cannot transfer.

Just before filing for bankruptcy, Mr. Wiggins signed a “Partition Agreement” in which he and his wife divided their ownership of their home into two separate property interests. The Fifth Circuit affirmed the bankruptcy court’s conclusion that this was a fraudulent transfer: “When it became clear that Mr. Wiggains would file bankruptcy to satisfy his outstanding debts, the couple entertained various options and made their best estimate on ultimate financial benefits by having only Mr. Wiggains file after the Partition Agreement was recorded. Allowing Mrs. Wiggains to sidestep the statutory limits for homestead exemptions and obtain approximately $500,000 in proceeds that otherwise are for creditors would lay waste to the provisions of the Bankruptcy Code involved here.” Wiggains v. Reed, No. 15-11249 (Feb. 14, 2017).

Watch the clock on BK notices of appeal.

In Netsch v. Sherman, the appellants’ counsel missed the 14-day deadline for an appeal from bankruptcy court. The district court denied relief and the Fifth Circuit affirmed; while noting that all relevant factors were either neutral or favored appellants, it concluded:”[T]he bankruptcy court concluded that the reason for the delay weighed strongly against finding excusable neglect. In its analysis of this factor, the bankruptcy court emphasized that the parties had been subject to the Federal Rules of Bankruptcy Procedure throughout the adversary proceeding, these rules were unambiguous, and Appellants’ counsel confused the Federal Rules of Bankruptcy Procedure with the Federal Rules of Civil Procedure. The bankruptcy court also indicated that confusing bankruptcy procedure with civil procedure does not constitute excusable neglect. Consequently, the court held that the reason for the delay should be given greater weight than other factors.” No. 16-10432 (Dec. 22, 2016, unpublished).

Not estopped against Pop.

stopsignThe parties to McCloskey v. McCloskey disputed whether a debt was non-dischargeable as a child support obligation. Rejecting the application of the somewhat protean doctrine of judicial estoppel, the Fifth Circuit held: “Bankruptcy courts must ‘look beyond the labels which state courts—and even parties themselves—give obligations which debtors seek to discharge.’  A party may argue in bankruptcy TexasBarToday_TopTen_Badge_VectorGraphiccourt that an obligation constitutes support even if she has urged to the contrary in state court. Therefore, appellees are not judicially estopped from bringing this claim.” No. 16-20079 (Oct. 31, 2016, unpublished). (Compare the recent case of Galaz v. Katona, which applied judicial estoppel in a bankruptcy case based on inconsistent statements made in earlier state court litigation about ownership interests. No. 15-50919 (Oct. 28, 2016, unpublished).

Construction trust fun

trust fundIn Monaco v. TAG Investments, the parties disputed the dischargeability of a $171,942.03 debt, based on the alleged misapplication of funds subject to Texas’s powerful Construction Trust Fund Act. The Fifth Circuit focused on a defense provided by that statute, which applies when “the trust funds not paid to the beneficiaries of the trust were used by the trustee to pay the trustee’s actual expenses directly related to the construction or repair of the improvement.” The Court accepted the explanation that “$124,053 went to salaries and overhead and an additional $50,400.00 went to superivision of this project,” noting that “payment of these sums as reasonable was approved by TAG’s architect.” Accordingly, the defense applied and the debt was dischargeable. No. 15-51085 (Oct. 6, 2016).

A-peel of attorneys fee award in food fight —

veggie talesIn Kingdom Fresh Produce, Inc. v. Stokes Law Office LLP, the Fifth Circuit tended the garden of the obscure but important Perishable Agricultural Commodities Act, a Depression-era statute designed to defend vulnerable sellers of perishable produce from sharp dealing.  To do so, PACA creates a “trust fund” obligation for produce buyers; here, a bankruptcy court authorized the payment of special counsel from monies in a debtor’s fund.

Three fee applications were at issue.  As to the first two, the Court found that the district TexasBarToday_TopTen_Badge_Smallcourt had not granted leave to appeal and thus did not have jurisdiction to uproot the bankruptcy court’s rulings.  “With these jurisdictional issues peeled away,” and after “a bit more paring” of the remaining issue, the Court held that “PACA’s unequivocal language requires that a PACA trustee—or in this case, its functional equivalent—may not be paid from trust assets ‘until full payment of the sums owing’ is paid to all claimants.”  Nos. 14-51079 & 14-51080 (March 11, 2016).  (Readers’ Note: 600Camp will publicly recognize the blog reader who finds all of the vegetabilia in the well-written opinion.)

When is a claim illusory?

illusionistCollins challenged bankruptcy court jurisdiction over “illusory indemnity and contribution claims” that he alleged had no conceivable effect on the bankruptcy estate due to their lack of merit.  The Fifth Circuit rejected his argument: “Both the Supreme Court and this court have gravitated away from conflating jurisdiction and merits, and Collins’s proposed standard results in exactly that conflation.”  The Court also noted that the claims, based on a principal’s alleged commitment to indemnify its agent, were not “wholly insubstantial and frivolous” on their merits.  Collins v. Sidharthan, No. 14-41226 (Dec. 15, 2015).

Not all appraisals are the same.

sameness graphicA creditor argued that the bankruptcy court should have used the same property valuation in both the debtor’s bankruptcy case and the creditor’s adversary proceeding against the debtor, citing the doctrines of judicial estoppel and res judicata. The Fifth Circuit disagreed: “The district court correctly held that the valuations under [Bankruptcy Code] §§ 1129 and 506 are two distinct, separate valuations required for different purposes. The feasibility projections under § 1129 were based on [the debtor’s] estimate of ‘monies to be realized from the sale of lots over time’ and anticipated continued development of the Property. The estimate under § 506, on the other hand, was based on an appraisal of the present fair market value of the Property. As a result, [the debtor] did not assume inconsistent positions by presenting two different valuations for two different purposes, nor does the bankruptcy court’s acceptance of a § 1129 feasibility plan constitute a final judgment on the value of the Property under § 506. The doctrines of judicial estoppel and res judicata are not applicable.”  Gold Star Construction, Inc. v. Cavu Rock Properties Project I, LLC, No. 15-50455 (Jan. 4, 2015, unpublished).

Which end of the candle should burn?

2 end candleThe bankruptcy debtor owned a large candle factory; after a year of effort, the trustee gave up trying to realize more value on the factory property than what was owed on the outstanding mortgages, and abandoned the property to Southwest Securities.  The remaining legal issue was: “Should the estate or the secured creditor pay the property’s maintenance expenses incurred while the trustee was trying to sell the property?”

Section 506(c) of the Bankruptcy Code provides: “The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of
preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property.” The Fifth Circuit found that Southwest benefited, and that the costs were fairly taxed against it from sales proceeds: “[W]e accept that an expense which was not incurred primarily to preserve or dispose of encumbered property cannot meet the requirement of being incurred primarily for the benefit of the secured creditor. But we also accept the inverse: that an expense incurred primarily to preserve or dispose of encumbered property meets the requirement. The necessary direct relationship between the expenses and the collateral is obvious here; all of the surcharged expenses related only to preserving the value of the Property and preparing it for sale.”  Southwest Securities v. Segner, No. 14-41463 (Dec. 29, 2015).

Estopped by nondisclosure in bankruptcy.

stopsignThe Allens filed for Chapter 13 bankruptcy protection; during the pendency of that case, they sued Mrs. Allen’s employer for injuries allegedly suffered in the workplace.  The Fifth Circuit affirmed summary judgment for the employer, finding the three elements of judicial estoppel satisfied by the Allens’ failure to disclose the personal injury suit in the bankruptcy – (1) inconsistent positions, (2) one of which was accepted by a court, and (3) lack of inadvertence by the Allens. The Court also found that the overall balance of equities weighed against the Allens, given the importance of full disclosure to the bankruptcy process.  The Court modified the judgment to be without prejudice so the Allens’ trustee could pursue the suit if he or she so desired (although acknowledging potential limitations issues).  Allen v. C&H Distributors, Inc., No. 15-30330 (Dec. 23, 2015).  The opinion is of broad interest because of its detailed analysis of judicial estoppel under the general three-part test, rather than a more truncated version sometimes employed in bankruptcy cases.

Creditor injured, but not injured enough for standing

decomFortune Natural Resources made a claim in the bankruptcy of an oil exploration company for roughly $3 million related to decommisioning a lease.  Fortune alleged that adjustments to a sale order hurt its right of recovery on that claim. The Fifth Circuit disagreed and found no standing, observing: “Fortune’s argument that it meets the ‘person aggrieved’ standard because it has already received a letter from . . . mandating that it decommission its Lease misses the mark. Fortune’s payment of decommissioning costs may show an injury, but it does not show that the bankruptcy court’s order caused this injury. This court’s jurisprudence states that the order of the bankruptcy court must directly and adversely affect the appellant pecuniarily.  Having failed to present sufficient evidence to show that Fortune was directly and adversely affected pecuniarily by the order of the bankruptcy court, Fortune does not meet the ‘person aggrieved” test.”  Fortune Natural Resources Corp. v. United States Dep’t of the Interior, No. 15-20151 (Nov. 19, 2015, unpublished).

Bad trip

The district court removed a bankruptcy trustee after he sought to bill a family trip to New Orleans to the estate, noting two past situations where the court had an issue with the trustee’s practices.  The Fifth Circuit affirmed, rejecting several challenges to that ruling based primarily on the consideration of the past situations, holding: “The district courts and in turn the bankruptcy courts are the keepers of the temple. These courts rely on the bar to abide by its strict rules and norms of conduct. Bankruptcy practice presents many tasks attended and girded by strict identity of duty and diligence by its officers. The courts below were only minding their role: not to end, but to redirect a distinguished presence at the bar, and to give sustenance to necessarily demanding norms of practice. That this is expected does not diminish its importance.”  Smith v. Robbins, No. 14-20588 (Sept. 25, 2015).

No “pyrrhic” bankruptcy filings, please.

220px-PyrrhusCypress Financial invested in Petters Company.  Petters turned out to be a Ponzi scheme and its bankruptcy trustee sought to recover money transferred from Petters to Cypress. Cypress filed for Chapter 7 protection but its case was dismissed because it “serves only to delay the prosecution of a lawsuit against the debtor.”  In re Cypress Financial, No. 14-10956 (Aug. 12, 2015, unpublished).  “Everyone agrees there are no assets to marshal or liquidate, and applicable statutes of limitations bar any preference or fraudulent transfer actions that might lead to additional assets. . . . With no benefit conferred but considerable harm inflicted by Cypress’s Chapter 7 case, the district court properly concluded that the bankruptcy court abused its discretion. . . Even if we were to agree with Cypress that the bankruptcy court had no ’cause’ [under § 707(a)] to dismiss the case, its victory is pyrrhic.”