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 v. United States Dep’t of the Interior, No. 15-20151 (Nov. 19, 2015, unpublished).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.”

Bankruptcy schedule = judicial estoppel of FCA claim — UPDATED

Johnny Long, a former bankruptcy debtor, sought to bring FCA claims against his former employer.  The defendant successfully obtained dismissal on the ground of judicial estoppel  because the claim was not listed on Long’s bankruptcy schedules.  After reminding that judicial estoppel, as a flexible and equitable doctrine, does not automatically compel dismissal in such a situation, the Fifth Circuit affirmed.  The elements are that “(1) the party against whom judicial estoppel is sought has asserted a legal position which is plainly inconsistent with a prior position, (2) a court accepted the prior position, and (3) the party did not act inadvertently.”  The specific issue was the third element, and whether Long had a motivation to conceal.  The Court noted three advantageous features the payment terms in Long’s Chapter 13 plan, which disclosure could have endangered — and further noted that after judicial estoppel was raised, Long sought to reopen his case so “he may pay interest to his creditors” if he recovered on his FCA claim.  United States ex rel Long v. GSD&M Idea City, LLC, 798 F.3d 265 (5th Cir. 2015).  A later award to the defendant of roughly $200,000 in costs was substantially affirmed in United States ex rel Long v. GSDMidea City, LLC, No. 14-11049 (Dec. 1, 2015).

Golf Channel gets a mulligan.

mulliganAn earlier panel opinion found the Golf Channel liable for $5.9 million under the Texas Uniform Fraudulent Transfer Act (“TUFTA”), even though it delivered airtime with that market value, because the purchaser was Allen Stanford while running a Ponzi scheme. Accordingly, the airtime had no value to creditors, despite its market value.  On rehearing, the Fifth Circuit vacated its initial opinion and certified the controlling issue to the Texas Supreme imageCourt: “Considering the definition of ‘value’ in section 24.004(a) of the Texas Business and Commerce Code, the definition of ‘reasonably equivalent value’ in section 24.004(d) of the Texas Business and Commerce Code, and the comment in the Uniform Fraudulent Transfer Act stating that ‘value’ is measured ‘from a creditor’s viewpoint,’ what showing of ‘value’ under TUFTA is sufficient for a transferee to prove the elements of the affirmative defense under section 24.009(a) of the Texas Business and Commerce Code?”  Janvey v. The Golf Channel, No. 13-11305 (June 30, 2015).

“Good faith”

A revised Templeton v. O’Cheskey did not alter the Fifth Circuit’s analysis about proof of a Ponzi scheme, but slightly clarified the scope of its holding about “good faith” under the fraudulent transfer provision of the Bankruptcy Code.  That holding was that the “good faith test under Section 548(c) is generally presented as a “two-step inquiry” into (1) whether the transferee had “inquiry notice” of the transferor’s possible insolvency or possible fraud and (2) if so, whether the transferee then satisfied a “diligent investigation” requirement.  No. 14-10563 (June 8, 2015).  (The Fifth Circuit addressed the related “good faith” requirement under TUFTA in GE Capital v. Worthington National Bank, 754 F.3d 297 (5th Cir. 2014)).

How not to reserve a claim in bankruptcy.

Adler, the distributing agent for a bankrupt business, sought to sue a law firm for allegedly mishandling its affairs and causing its financial problems.  The business’s Third Amended Plan of Reorganization had a provision that retained its standing to pursue avoidance and fraudulent transfer actions against a list of named defendants (which did not include the law firm).  The Plan also had a provision reserving “[a]ny and all other claims and causes of action which may have been asserted by the Debtor prior to the Effective Date.”  The Fifth Circuit held that this was “exactly the sort of blanket reservation that is insufficient to preserve the debtor’s standing.”  (citing Dynasty Oil & Gas LLC v. Citizens Bank, 540 F.3d 551 (5th Cir. 2008)). On waiver grounds, he Court declined to consider whether such a reservation would be sufficient if “(1) the defendant is a non-creditor [and thus not entitled to vote on the plan] and (2) the reorganization plan clearly identifies how the proceeds of the claim will be distributed.”  Adler v. Frost, No. 14-31109 (June 11, 2015, unpublished).

Today, leave NOT needed to sue bankruptcy trustee

As a counterpoint to the recent case of Alonso v. Abide — which required leave of court to sue a bankruptcy trustee for alleged negligence in handling a claim against a debtor’s insurer — in Carroll v. Abide, the Fifth Circuit reversed the dismissal of a claim against a trustee because leave was not required.  No. 14-31230 (June 11, 2015). The debtors sued, alleging that the trustee violated their Fourth Amendment rights in seizing a computer.  Again applying Barton v. Barbour, 104 U.S. 126 (1881), the Court concluded: “[B]ecause the [debtors] complain of the bankruptcy trustee’s conduct while carrying out district court orders, we conclude that the plaintiffs were not required to seek permission from the bankruptcy court before filing suit in the district court regarding the challenged conduct.”  (emphasis added).

Suit against bankruptcy trustee dealt with Stern-ly.

justicewoodsFormer bankruptcy debtors sued their trustee, alleging that he failed to sue an insurer who could have satisfied many creditors’ claims.  The district court dismissed because the plaintiffs did not first get leave from the bankruptcy court that appointed the trustee, and the Fifth Circuit affirmed under Barton v. Barbour, 104 U.S. 126, 128 (1881) (an opinion by the otherwise unmemorable William Burnham Woods, right).

The debtors contended that Stern v. Marshall implicitly overruled Barton, in part, because the bankruptcy court would lack final adjudicative authority over their state law tort claims.  The Fifth Circuit disagreed, holding that under Barton: “If a bankruptcy court concludes that the claim against a trustee is one that the court would not itself be able to resolve under Stern, that court can make the initial decision on the procedure to follow.  Once a bankruptcy court makes such a determination, this court can review the utilized procedure.”  Villegas v. Schmidt, No. 14-40423 (May 28, 2015).

SCOTUS: Postpetition wages escape the trustee

In Harris v. Viegelahn, No. 14-400 (May 18, 2015), the Supreme Court resolved a split between the Third and Fifth Circuits and held 9-0 (contrary to the Fifth’s position) that “by excluding postpetition wages from the converted Chapter 7 estate (absent a bad-faith conversion), 11 U.S.C. § 348(f) removes those earnings from the pool of assets that may be liquidated and distributed to creditors.”