Bankruptcy

Fifth Circuit Bankruptcy Report: August-September 2015

 The summer months have been slow at the Fifth Circuit. August and September's opinions include an update on a prior opinion about abstention related to a chapter 15, judicial estoppel, mootness of an appeal of a sale order, a motion to compromise, removal of a trustee, recognition of a foreign judgment and issues relating to a homestead. 
  
Bankruptcy; Abstention; Remand 

Firefighters Retirement System v. Citco Group, Limited, No. 14-30857 (5th Cir. 8/6/15) [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]

I previously wrote about this case here. On August 6, 2015, the Fifth Circuit withdrew its prior opinion and issued the present opinion. The new opinion reaches the same result but clarifies the Court's ability to review an order remanding a case. Specifically, the Court stated:

We therefore recognize a limited exception to the nonreviewability provisions of §§ 1334(c)(1) and 1452(b), but only for cases that involve permissive abstention and are related to Chapter 15 bankruptcies.

Opinion, p. 7. 

Judicial Estoppel

United States v. GSDMIDEA City, LLC, No. 14-10999 (5th Cir. 8/13/15) [lexis.com | Lexis Advance]

This is a particularly harsh result in a judicial estoppel case. The Debtor filed chapter 13 in 2009 and confirmed a plan which paid creditors 100% of their claims. In 2011,while  he filed a False Claims Act case against GSD&M with regard to negotiations over a contract with the Air Force. In 2013, he completed his plan and received a discharge. He did not disclose the claims. Shortly before trial, GSD&M discovered the bankruptcy and moved to dismiss based on judicial estoppel. The District Court gave the chapter 13 trustee seven days to decide whether to pursue the claims but the trustee declined to do so. The District Court dismissed and the Fifth Circuit affirmed. The courts both found that the failure to disclose was not inadvertent and that even though the Debtor paid his unsecured creditors their principal, he did not pay interest on the claims. As a result, he benefited from concealing the lawsuit.

Bankruptcy; Mootness

Petfinders, LLC v. Sherman (Matter of Ondova Limited Company), No. 13-10120 (5th Cir. 8/14/15) (unpublished) [lexis.com | Lexis Advance]

Trustee sold domain name petfinders.com over objection of Petfinders, LLC which claimed an ownership interest. Petfinders appealed and requested an emergency stay. The Fifth Circuit granted and then vacated the stay. After the stay was vacated, the Trustee closed the sale. The District Court found that the appeal was moot and the Fifth Circuit affirmed. This case illustrates a very real problem. Petfinders claimed that it owned the domain name. However, because the name was sold and the stay was vacated, the appeal was dismissed as moot. This raises the question of whether this result allowed the bankruptcy estate to arguably sell property it did not own.

Bankruptcy; Compromise

Official Committee of Unsecured Creditors v. Chase Capital Corporation (Matter of Age Refining, Incorporated), No. 14-50046 (5th Cir. 9/16/15) [lexis.com | Lexis Advance]

This case involved a chapter 11 trustee's settlement with a secured creditor. Chase asserted that it was oversecured and thus entitled to post-petition interest or that it had an administrative claim for failure of adequate protection. The Committee asserted that Chase was undersecured and not entitled to post-petition interest. The chapter 11 trustee reached an agreement with Chase to give it a post-petition claim of $5 million, of which $3.6 million would be secured and $1.4 million would be administrative. The Court approved the settlement over the Committee's objection. The Court also declined to rule upon a motion to determine secured claim filed by the Committee. The trustee then proposed a plan which Chase voted to approve. The Committee argued that Chase was not impaired and should not be allowed to vote. The Court confirmed the Plan. The District Court affirmed. The Fifth Circuit found that the issue on impairment was waived. The Court found that the settlement was within the range of reasonable outcomes because there was some probability that the trustee could lose.

Bankruptcy; Trustee Removal

Smith v. Robbins (Matter of IFS Financial Corporation), No. 14-20588 (5th Cir. 9/25/15) [lexis.com | Lexis Advance]

This is the case of a chapter 7 trustee who was removed from all of his cases after he requested reimbursement for travel expenses which included expenses for an extended trip to New Orleans to prepare for an oral argument. Although the Trustee's wife was to argue the case, both the trustee, his wife and their two children accompanied him. In total, the family spent five days in New Orleans, including two days where no work was done on the case. When the trustee asked to be reimbursed for his firm's expenses, he did not itemize the costs. When he did itemize the costs, he lumped all of the travel expenses together, even though he had broken them out separately in seeking reimbursement from his firm. The Court disallowed most of the travel costs and issued a show cause order as to why the trustee should be removed. It was not until the hearing on the show cause order that the trustee disclosed that he had brought his children along. The Court found that the Trustee had breached his fiduciary duty to the estate by not objecting to his firm's expenses. The Court found that this was intentional, based in part, upon two prior incidents in which the Trustee had placed his firm's interests ahead of those of the estate. The Fifth Circuit affirmed, finding that the Trustee had adequate notice and that cause had been shown. The Court found that 11 U.S.C. Sec. 324(b), which requires that a trustee be removed from all of his cases if he is removed from one case was constitutional.

The Court concluded its opinion with the observation that:

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.

Opinion, p. 23.

Recognition of Foreign Judgment

Dejoria v. Maghreb Petroleum Exploration, S.A., No. 14-51022 (5th Cir. 9/30/15) [lexis.com | Lexis Advance]

This was not a bankruptcy decision, but it raises interesting issues about recognition of foreign judgments. Dejoria was sued in Morocco over a failed business deal. The Moroccan Court ruled against him and granted judgment for 122.9 million. Dejoria sued to prevent domestic recognition of the Moroccan judgment under the Texas  Uniform Foreign Country Money Judgment Act. The case was removed to U.S. District Court. Dejoria argued that the Moroccan judicial system does not provide due process, that Morocco lack personal jurisdiction over him and that the Court should decline to recognize the judgment because Morocco does not recognize Texas judgments. The District Court denied recognition of the judgment on the basis that the procedures followed by the Moroccan court were not compatible with due process. It did not reach Dejoria's other arguments. 

Under the Texas statute, a judgment can be denied recognition if the "system does not provide impartial tribunals or procedures compatible with the requirements of due process of law."    The Court found that while concerns have been raised about the independence of Morocco's courts that there was not pervasive anti-American sentiment, that American law firms do business in Morocco, that Moroccan attorneys are willing to represent unpopular figures and that the Courts do not routinely disregard constitutional provisions or the rule of law. The Court also found that Dejoria's personal jurisdiction and non-recognition of Texas judgment arguments were not supported by the record.

Bankruptcy; Lien Avoidance; Homestead 

Moser v. Schachar (Matter of Thaw), No. 15-40321 (5th Cir. 9/30/15) (unpublished) [lexis.com | Lexis Advance]

Trustee and debtor's spouse claimed that judgment lien was canceled under Texas statute when debtor received discharge. The Court found that Texas Property Code Sec. 52.042 "acts on the status of any liens against the land or assets held by the debtor after the bankruptcy process has come to a close."    Opinion, p. 7. As a result, Trustee could not sell property and distribute proceeds free and clear of interest of judgment lien holder. The Court cited a recent decision from the Bankruptcy Court for the Western District of Texas, Studensky v. Buttery Company (In re Argubright), 532 B.R. 888 (Bankr. W.D. Tex. 2015) in reaching its conclusion. 

Separately, the Court ruled that the property in question was not the debtor's homestead where they still resided in their previous residence at the time of bankruptcy. Because the debtor had not abandoned the existing homestead, the second property could not become homestead.

Final Note:

A paragraph or two is not sufficient to do justice to many of the opinions discussed here. When the attorneys spend hundreds of hours in briefing and the court spends months reviewing and deciding, a lot of thought went into the controversy. Unfortunately time and space do not allow me to give the opinions the attention they might deserve. Please consider these summaries an invitation to click on the link to the case and read further.

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