Bankruptcy Answers with Reno Fernandez

• Third Party Payoff Under Factoring Agreement Not Avoidable Despite Ponzi Scheme Connection

  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.

  --------  

  2:50
• Fifth Circuit Rules Bankruptcy Court Lacked Jurisdiction to Approve Post-Confirmation Settlement That Conflicted With Plan

  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.

  --------  

  2:19
• Bankruptcy Judge Converts Motion for Rule 2004 Exam Into Motion for Post-Judgment Discovery

  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.

  --------  

  2:02
• Ninth Circuit BAP Overturns Summary Judgment Due to Misapplication of Issue Preclusion Under Ohio Law

  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.

  --------  

  2:15
• Rule 41’s “Two-Dismissal” Rule Does Not Apply to Prior Contested Matter Where Objection is Filed

  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.

  --------  

  3:28

More Government podcasts

Trending Government podcasts

About Bankruptcy Answers with Reno Fernandez