By Reno Fernandez
5
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The podcast currently has 37 episodes available.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
The podcast currently has 37 episodes available.