BANKRUPTCY LAW UPDATE
Prepared for the Federal Bar Association
Seventh Annual Southern Utah Federal Law Symposium May 16, 2014
Chief Judge William T. Thurman United States Bankruptcy Court
District of Utah
Judge Joel T. Marker United States Bankruptcy Court
District of Utah
Peggy Hunt Partner
Individual Chapter 11 Cases
Absolute priority rule applies in individual Chapter 11 cases. The 2005 amendments to the Bankruptcy Code did not repeal the absolute priority rule as applied to individual Chapter 11 debtors. Section 1129(b) provides a “cram-down” mechanism whereby a plan may be confirmed without the consent of each class if, among other things, the plan is “fair and equitable.” Section 1129 outlines the “fair and equitable” criteria, which include the absolute priority rule that bars junior claimants, including debtors, from retaining any interest in property when a dissenting class of senior creditors has not been paid in full. Plan under which the debtors would retain possession and control of their property, while paying objecting class only 1% of their unsecured claim, did not satisfy the absolute priority rule. Dill Oil Company, LLC v.
Stephens (In re Stephens), 704 F.3d 1279 (10th Cir. 2013).
Equitable Powers
Bankruptcy courts may not “surcharge” statutory exemptions to provide for administrative expenses. The bankruptcy court lacks the authority to issue an equitable order if it contravenes a specific provision of the Bankruptcy Code. The Bankruptcy Code entitles the debtor to exercise state law exemptions. 11 U.S.C. § 522(b)(3)(A). Exempt property may not be liable for the payment of administrative expenses. 11 U.S.C. § 522(k). Ordering exempt property to be used for the payment of administrative expenses, including expenses incurred as a result of the debtor’s egregious misconduct, would contravene 11 U.S.C. § 522. Law v. Siegel, 134 S. Ct. 1188 (2014).
Automatic Stay
Bankruptcy petition filed by taxpayer did not operate under Bankruptcy Code to stay taxpayer’s appeal from Tax Court proceedings initiated by the taxpayer. Noting a split in the circuits, the Tenth Circuit applied a bright-line rule that a petition filed in Tax Court is an independent judicial proceeding initiated by the debtor, not the continuation of an administrative proceeding against the debtor. In doing so, the court reviewed its recent decision in TW Telecom Holdings Inc. v. Carolina Internet, Ltd., 661
F.3d 495 (10th Cir. 2011), in which it explained that § 362 should be read to stay all
appeals in proceedings that were originally brought against the debtor, regardless of whether the debtor is the appellant or the appellee. Thus whether a case is subject to the automatic stay must be determined at its inception. Schoppe v. Commissioner of
Preclusive Effect of Default/Consent Judgments
In classic default context the nature of the defendant’s conduct was never “actually litigated” such that the judgment was not entitled to collateral estoppel effect in subsequent nondischargeability action. Mere fact that debtor had initially participated in state court action against him, by filing answer, before he ultimately declined to participate in discovery and allowed entry of default, would not alter the fact that willful and malicious nature of his conduct was never actually litigated. The court distinguished the preclusive effect of defaults entered as a sanction for litigation misconduct as described in Melnor, Inc. v. Corey, 583 F.3d 1249 (10th Cir. 2009).
Application of the doctrines of claim preclusion and issue preclusion in subsequent bankruptcy proceedings is also discussed in Clark v. Zwanziger, 467 B.R. 475 (10th Cir.
BAP 2012). Shulman v. Lamphere, 2011 WL 1667169 (10th Cir. May 11, 2011).
Consent judgments may be given preclusive effect if the parties manifested an intention to be bound in subsequent actions. A fact-intensive analysis determines whether the parties manifested such intent. Compare EnTitle Insurance Company v.
Durling, 2013 WL 5524809 (Bankr. D.Utah Oct. 3, 2013) with In re Hauck, 541 F. App’x 898 (10th Cir. 2013) (unpublished disposition).
Religious and Charitable Contributions
The trustee may avoid the entire religious or charitable contribution under 11 U.S.C. § 548. 11 U.S.C. § 548 gives the trustee the power to avoid fraudulent transfers. 11 U.S.C. § 548(a)(2)(A) provides a safe harbor provision, exempting transfers of charitable contributions to qualified religious or charitable organizations so long as the contribution does not exceed 15% of the debtor’s gross annual income. Relying on the statute’s plain language, the Tenth Circuit reasoned that the safe harbor’s 15% limit establishes when a transfer is subject to the trustee’s avoidance powers, not the
amount of the transfer protected. In re McGough, 737 F.3d 1268 (10th Cir. 2013).
Debt in Connection with a Separation Agreement
Judgment debt for overpayment of spousal support is non-dischargeable. 11 U.S.C. § 523(a)(15) provides that an individual debtor is not discharged from any debt “incurred by the debtor . . . in connection with a separation agreement . . . .” “[I]n connection with” extends to a state court judgment ordering the debtor-spouse to repay
excess portion of spousal support received pursuant to a separation agreement. In re
Taylor, 737 F.3d 670 (10th Cir. 2013).
Domestic Support Obligation
11 U.S.C. § 523(a)(5) applies only if the debt is in the nature of support to the creditor-spouse. In re Taylor, 737 F.3d 670 (10th Cir. 2013).
Equitable Tolling
The deadline to file a complaint to determine the dischargeability of a debt may be subject to equitable tolling, but the deadline to file a complaint to revoke a discharge is not. Court granted Debtors’ motion to dismiss untimely complaint asserting claims for both nondischargeability (§523) and revocation of discharge (§727(d)). The claims-processing rule of Bankruptcy Rule 4007(c) may be subject to equitable tolling, but the plaintiff failed to show that it was pursuing its rights diligently and that some extraordinary circumstances stood in its way. As to the revocation of discharge claim, the deadline is set forth in the statute itself and is not subject to equitable tolling. Blackstone Financial Group Business Trust v. Myler, 477 B.R. 227 (Bankr.D.Utah 2012).
For a good discussion of the distinction between a statute of limitations (a procedural device that may be tolled for equitable reasons) and a statute of repose (which creates a substantive right in those protected to be free from liability after a legislatively-determined period of time and may not be equitably tolled), check out Judge Matheson’s opinion in National Credit Union Administration Board v. Nomura
Home Equity Loan, Inc., 2013 WL 4516997 (10th Cir. Aug. 27, 2013). And United States
v. Clymore, 245 F.3d 1195 (10th Cir. 2001) provides a defendant-friendly holding of what
a plaintiff must show to be entitled to the benefits of equitable tolling.
Binding Precedent (or, “You’re Not the Boss of Me”)
Bankruptcy Court not bound to follow the decision of a single District Court Judge. Bankruptcy debtors filed a petition for writ of mandamus in the district court, seeking an order compelling a bankruptcy court judge to follow a ruling by a single district court judge in an unrelated proceeding. The debtors, plaintiffs in an adversary proceeding seeking a judgment voiding a junior trust deed lien on their home, liked the ruling of a district court judge in an appeal of an unrelated matter and disliked the legal
rulings of the bankruptcy judge assigned to their case. Judge Jenkins took the opportunity to write about the nature and function of the writ of mandamus in the judicial context and the operation of the doctrine of stare decisis at the federal district court level. While bankruptcy courts are subject to the mandate rule – that a bankruptcy court is bound to follow an appellate court’s prior ruling on a specific issue in the same case – the law of the case and the mandate rule do not extend beyond the boundaries of that particular case. And while principles of stare decisis bind panels of the court of appeals to follow the “law of the circuit” embodied in prior opinions of that court, it is clear that there is no such thing as “the law of the district.” The appellate ruling by a district judge is only binding on the case in which it is made unless the district judges themselves sit en banc and therefore bind themselves to the law enunciated in that opinion. Since decisions of a given district judge are not binding on the other judges of that district, they should not be seen as binding on the bankruptcy judges of that district. Walk v.
Thurman, 2012 WL 3292934 (D.Utah Aug. 10, 2012).
Property of the Estate
Fraudulently transferred property is not property of the estate until recovered. Recognizing a split in the circuits, the Tenth Circuit affirmed the district court’s distribution of property a bankruptcy trustee was seeking to recover for the estate as a fraudulent transfer. The trustee argued that §541(a)(1) (that defines the bankruptcy estate as including all legal or equitable interests the debtor holds) includes property subject to a fraudulent transfer claim – even if the property has been sold to a bona fide purchaser. Instead, the Tenth Circuit focused on the specific language of §541(a)(3) (that includes in the estate property recovered by the trustee) and held that fraudulently transferred property is not property of the estate until recovered. Rajala v. Gardner, 709
F.3d 1031 (10th Cir.2013).
Judicial Estoppel
Debtors judicially estopped from pursuing personal injury action. After filing a slip and fall case in federal district, court the plaintiffs filed a Chapter 7 bankruptcy case, but did not disclose the lawsuit in their bankruptcy papers. The defendant in the district court action blew the whistle on the debtors by notifying the bankruptcy trustee of the omitted claim. The debtors amended their bankruptcy filings to include the district court action, but they provided an estimate of its value that was far below what they had indicated in the proceedings before the district court and they claimed that the lawsuit was entirely exempt. Noting the three factors that inform the decision to apply the doctrine of judicial estoppel - (1) inconsistent position before two courts, (2) persuading
bankruptcy court to accept that party’s inconsistent position that they were not involved in any lawsuits, and (3) whether the party asserting an inconsistent position would gain an unfair advantage in the litigation if not estopped - the Tenth Circuit affirmed the district court’s dismissal of the lawsuit. Queen v. TA Operating, LLC, 2013 WL 4419322
(10th Cir. Aug. 20, 2013).
Note that several circuits have concluded that judicial estoppel does not bar a bankruptcy trustee from pursuing the claims that the debtor failed to disclose. See
Reed v. City of Arlington, 650 F.3d 571 (5th Cir.2011); Eastman v. Union Pac. R.R. Co.,
493 F.3d 1151, 1155 n.3 (10th Cir.2007); and Stephenson v. Malloy, 700 F.3d 265 (6th
Cir.2012).
Enforcing Settlement Agreements
Attorney with apparent authority bound client to settlement agreement reached in negotiations following mediation. Applying Utah law, the Tenth Circuit affirmed a district court decision granting a motion to enforce a settlement agreement. The parties mediated under an agreement that required each party to attend with a person authorized to resolve the dispute. The defendant attended through in-house counsel and outside counsel. Although the mediation did not result in a settlement, the parties continued to discuss settlement terms through counsel and reached an agreement through an exchange of emails. The defendant refused to sign a settlement agreement, complaining that its attorney had exceeded his settlement authority. The court found that the attorney had apparent authority to bind the principal and that the requirement under Utah law that settlements reached in mediation be written and signed by the parties did not apply. Nature’s Sunshine Products v. Sunrider Corporation, 2013 WL
563309 (10th Cir. Feb. 15, 2013).
Jurisdiction
Bankruptcy courts may not adjudicate fraudulent conveyance actions against non-claimants. There are only three constitutional exceptions to Article III adjudication: territorial courts, military tribunals, and cases involving public rights. The Supreme Court wrote in Granfinanciera, S.A. v. Nordberg that “a bankruptcy trustee’s right to recover a fraudulent conveyance (against a non-claimant) under 11 U.S.C. § 548(a)(2) seems to us more accurately characterized as a private right rather than a public right . . . .” 492
U.S. 33, 55 (1989). Although Granfinanciera addressed only the issue of litigants’
Seventh Amendment rights, the Supreme Court in Stern v. Marshall, 131 S. Ct. 2594
(2011) equated litigants’ Article III rights with their Seventh Amendment jury rights.
Causes of action which must necessarily be resolved in the course of the claims-allowance process, however, may be a public right. Fraudulent conveyance actions
against non-claimants thus do not fall within the public rights exception. In re Bellingham
Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012) cert. granted, 133 S. Ct. 2880, 186 L. Ed. 2d 908 (U.S. 2013).
Bankruptcy courts may submit proposed findings of fact and conclusions of law to the district court for core proceedings. Ruling that bankruptcy courts may not adjudicate fraudulent conveyance actions which do not need to be resolved in the course of the claims-allowance process creates a gap: bankruptcy courts may “hear and determine” core proceedings and may “hear” and “submit proposed findings of fact and conclusions of law to the district court” for non-core proceedings. 28 U.S.C. § 157(b)-(c). To further the statutory objective of vesting bankruptcy courts with as much adjudicatory power as the Constitution will bear, the power to “hear and determine” surely encompasses the power to hear and submit findings of fact and conclusions of law to the district court. In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012) cert.
granted, 133 S. Ct. 2880, 186 L. Ed. 2d 908 (U.S. 2013).
A party may waive their right to adjudication by an Article III court. In re
Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012) cert. granted, 133 S. Ct. 2880, 186 L. Ed. 2d 908 (U.S. 2013).
