Articles Posted in Bankruptcy

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Reid founded Capitol, which owned commmunity banks, and served as its chairman and CEO. His daughter and her husband served as president and general counsel. Capitol accepted Federal Reserve oversight in 2009. In 2012, Capitol sought Chapter 11 bankruptcy reorganization and became a “debtor in possession.” In 2013, Capitol decided to liquidate and submitted proposals that released its executives from liability. The creditors’ committee objected and unsuccessfully sought derivative standing to sue the Reids for breach of their fiduciary duties. The Reids and the creditors continued negotiation. In 2014, they agreed to a liquidation plan that required Capitol to assign its legal claims to a Liquidating Trust; the Reids would have no liability for any conduct after the bankruptcy filing and their pre-petition liability was limited to insurance recovery. Capitol had a management liability insurance policy, purchased about a year before it filed the bankruptcy petition. The liquidation plan required the Reids to sue the insurer if it denied coverage. The policy excluded from coverage “any claim made against an Insured . . . by, on behalf of, or in the name or right of, the Company or any Insured,” except for derivative suits by independent shareholders and employment claims (insured-versus-insured exclusion). The Liquidation Trustee sued the Reids for $18.8 million and notified the insurer. The Sixth Circuit affirmed a declaratory judgment that the insurer had no obligation with respect to the lawsuit, which fell within the insured-versus-insured exclusion. View "Indian Harbor Insurance Co. v. Zucker" on Justia Law

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The Debtor owned nonresidential real estate that FNB sold in a pre-petition foreclosure sale. Before Debtor's bankruptcy filing, FNB obtained a deficiency judgment and filed two judicial liens. During her chapter 7 case, Debtor moved, under 11 U.S.C. 522(f)(1)(A), to avoid those liens as impairing Debtor’s Ohio homestead exemption in her residence. The bankruptcy court denied Debtor’s motion, ruling that section 522(f)(2)(C) specifically prohibits the avoidance of a deficiency judgment lien because it is a lien based on a judgment arising out of a mortgage foreclosure. The Sixth Circuit Bankruptcy Appellate Panel reversed, finding that section 522(f)(2)(C) is not ambiguous, so reference to either state law or legislative history is not required to interpret it. Section 522(f)(2)(C) does not preclude avoidance of mortgage deficiency judgment liens but “clarifi[es] that the entry of a foreclosure judgment does not convert the underlying consensual mortgage into a judicial lien which may be avoided.” The court noted that most courts hold that mortgage deficiency liens are not "judgments [that] aris[e] out of a mortgage foreclosure" and are therefore avoidable. View "In re: Pace" on Justia Law

Posted in: Bankruptcy

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Debtor-landlord did not retain sufficient rights in rents assigned to lender for those rents to be included in landlord's bankruptcy estate. Town Center owns a 53-unit Shelby Township residential complex; its construction was financed by a $5.3 million loan owned by ECP. The mortgage included an assignment of rents to the creditor in the event of default. Rents from the complex are Town Center’s only income. Town Center defaulted. ECP sent notice to tenants in compliance with the agreement and with Mich. Comp. Laws 554.231, which allows creditors to collect rents directly from tenants of certain mortgaged properties. ECP recorded the notice documents as required by the statute. ECP filed a foreclosure complaint. A week later, Town Center filed for Chapter 11 bankruptcy relief, then owing ECP $5,329,329 plus fees and costs. The parties reached an agreement to allow Town Center to collect rents, with $15,000 per month to pay down the debt to ECP and the remainder for authorized expenses. Town Center’s bankruptcy petition resulted in an automatic stay on the state-court case, 11 U.S.C. 362(a). ECP unsuccessfully moved to prohibit Town Center from using rents collected after the petition was filed. The district vacated. The Sixth Circuit reversed; Town Center did not retain sufficient rights in the assigned rents under Michigan law for those rents to be included in the bankruptcy estate. View "In re: Town Center Flats, LLC" on Justia Law

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The Sixth Circuit affirmed the Bankruptcy Court’s order in Conco’s Chapter 11 bankruptcy, interpreting Conco’s Confirmed Plan to prohibit the sale of the Employee Stock Ownership Plan (ESOP)-held Conco stock (Equity Interests) and enjoining any such sale through December 31, 2018. The creditor’s committee had agreed to support the Plan, which provided both defined distributions and contingent distributions, to be funded by the operation of the Conco’s business, to continue through December 31, 2018. The Plan guaranteed the creditors a higher recovery than if the business were sold. ESOP participants sued Conco, its Board of Directors, the ESOP, and ESOP Trustees (ERISA Litigation) claiming breach of fiduciary duties by not evaluating and responding to offers by to purchase the Equity Security Interests. The Bankruptcy Court found, and the Sixth Circuit agreed, that the four corners of the Confirmed Plan, and the creditors’ abandonment of an objection under the absolute priority rule of 11 U.S.C. 1129(b)1 to the ESOP’s retention of the Equity Interests, evidenced an intent for the Equity Interests not to be sold through December 31, 2018. View "In re: Conco, Inc." on Justia Law

Posted in: Bankruptcy, ERISA

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In his 2010 Chapter 7 petition, the debtor listed a claim against Simms based on an injury while under Simms’ employ, but did not claim an exemption on Schedule C. In 2011, a complaint was filed against Simms; in 2012, a companion action was filed against BWC. The debtor filed amended schedules, valuing the Simms claim at $21,625, but claiming no exemption. The debtor never listed the BWC claim. In 2013, the certified that the estate had been fully administered except for the Simms claim, stating: The ... settlement shall remain property of the bankruptcy estate upon the entry of a final decree; if money becomes available ... the case will be re-opened. The bankruptcy court closed the case; the order contained no reservations regarding the claim. In 2015, the trustee was notified of a settlement offer and moved to reopen the case. The debtor argued that the trustee had abandoned any interest in the personal injury litigation and that the settlement encompassed the claim against BWC in which the trustee had no interest. The court approved a settlement of $180,000. At a hearing, without evidence or testimony, the bankruptcy court found that the claims were not abandoned. The Sixth Circuit Bankruptcy Appellate Panel reversed in part. The court made no findings to support approval of the settlement over the debtor’s objections. Because no court order preserved the personal injury claim as an asset, the bankruptcy court erred by holding that the trustee did not abandon that claim under 11 U.S.C. 554(c); the unscheduled BWC claim was not abandoned. View "In re: Wayne Wright" on Justia Law

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In 2014, Brown filed a voluntary Chapter 7 bankruptcy petition, disclosing her ownership of a residence in Ypsilanti, Michigan, valued at $170,000 and subject to $219,000 in secured mortgage claims held by two separate creditors. Brown’s initial petition stated her intent to surrender her residence to the estate and did not claim any exemptions for the value of her redemption rights under Michigan law. The Trustee sought the court’s permission to sell the house for $160,000 and to distribute the proceeds among Brown’s creditors and professionals involved in selling the home. Brown objected and sought to amend her initial disclosures to claim exemptions for the value of her redemption rights (about $23,000) under Mich. Comp. Laws 600.3240, citing 11 U.S.C. 522(d). The bankruptcy court granted the Trustee permission to sell the property and denied Brown’s requested exemptions. The district court and Sixth Circuit affirmed, reasoning that Brown lacked any equity in the property after it sold for substantially less than the value of the secured claims. View "Brown v. Ellmann" on Justia Law

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Stubbs filed a pro se Chapter 7 petition before she filed her 2014 tax returns. The Trustee completed the creditors’ meeting in February 2015, instructing Stubbs to send him a copy of her tax returns when filed and to not spend any refund. Stubbs received her discharge in April 2015. The Trustee did not receive the tax returns nor hear from Stubbs by September; he obtained an order for a Rule 2004 examination, requiring Stubbs to bring copies of her returns. Stubbs did not appear. The Trustee filed an adversary proceeding to revoke Stubbs’ discharge. Despite proper service, Stubbs failed to respond. The Trustee moved for default judgment. Stubbs did not appear. The court entered a sua sponte order to show cause why she should not be found in contempt. Stubbs did not respond nor appear at a subsequent hearing. The court sua sponte vacated the order scheduling the Rule 2004 examination; denied the default motion, and dismissed the adversary proceeding. The order criticized the Trustee for not seeking to hold Stubbs in contempt for failure to cooperate (11 U.S.C. 521) or otherwise preventing her discharge, indicating a preference to have the case dismissed. The Sixth Circuit Bankruptcy Appellate Panel vacated. A 2004 examination is a reasonable and usual method to compel a Chapter 7 debtor to provide information that a trustee or creditor cannot obtain voluntarily. View "In re Stubbs" on Justia Law

Posted in: Bankruptcy

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Bratt filed for Chapter 13 bankruptcy, proposing to pay overdue taxes to Nashville, which held a $5,136 over-secured lien on Bratt’s real property. Under 11 U.S.C. 511(a), the interest rate for tax claims should “enable a creditor to receive the present value of the allowed amount of a tax claim” and be “determined under applicable nonbankruptcy law.” The Code does not allow assessment of post-petition penalties. Tennessee Code 67-5-2010 set an interest rate of 12% per year for overdue taxes, with a 6% per year penalty. A Tennessee bankruptcy court held that only the post-petition interest and not the penalty portion could be collected for over-secured claims in bankruptcy proceedings. In response, the Tennessee legislature added subsection (d): For purposes of any claim in a bankruptcy proceeding pertaining to delinquent property taxes, the assessment of penalties pursuant to this section constitutes the assessment of interest. Bratt argued that the amendment should not apply. Tennessee admitted that the 18% rate exceeded what was required to maintain the tax claim's present value. The bankruptcy court held that subsection (d) violated the Supremacy Clause. The Bankruptcy Appellate Panel affirmed that 12% was the appropriate interest rate, reasoning that subsection (d) is not a “nonbankruptcy law” and is not applicable for determining the interest rate under section 511(a). The Sixth Circuit affirmed, adopting the BAP’s reasoning. View "Tennessee v. Corrin" on Justia Law

Posted in: Bankruptcy, Tax Law

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Watson, the chairman of Cyberco, created Teleservices as a “paper company” to run a Ponzi scheme. Teleservices had no separate officers, directors, or employees. Watson borrowed money and instructed lenders to send the money to Teleservices to pay for computer equipment. Watson then moved the money from Teleservices account to Cyberco’s account at Huntington. He used that money to pay salaries and earlier debts. By 2004, Cyberco owed Huntington $16 million. In September 2003, Cyberco tried to deposit a $2.3 million Teleservices check; the check bounced. Huntington employees became suspicious. In January 2004, Huntington asked Cyberco to find a new bank, noting “‘red flags.” As Huntington investigated, Cyberco paid its debt to Huntington. Later, the FBI raided Cyberco’s offices. Watson committed suicide. Cyberco’s creditors commenced an involuntary Chapter 7 proceeding; an appointed receiver filed for Teleservices’s bankruptcy. Teleservices’s bankruptcy trustee sought to recover from Huntington all direct and indirect loan repayments and excess deposits. The bankruptcy court concluded that the trustee could recover $72 million; that Huntington had received transfers in good faith until April 2004; but that Huntington gained inquiry notice of Cyberco’s fraud on September 2003. The district court affirmed. The Sixth Circuit reversed, in part. Cyberco, free to withdraw money from its account, retained “dominion and control,” despite Huntington’s security interest. Huntington gained dominion and control only over money that it received in satisfaction of Cyberco’s debt to it; Huntington was a transferee of direct and indirect loan repayments, but not of the excess deposits. Huntington failed to prove that it received transfers from Teleservices in good faith after April, but precedent does not require recoverability of earlier transfers, just because Huntington had earlier inquiry notice. View "Meoli v. Huntington National Bank" on Justia Law

Posted in: Banking, Bankruptcy

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Qi obtained a $2,500,000 state court judgment against the Zengas and filed involuntary chapter 7 bankruptcy petitions against them. They moved to dismiss, asserting that because they had 12 or more creditors, the involuntary petitions required at least three petitioning creditors (11 U.S.C. 303(b)(1)), and that the cases were not in the best interest of creditors. Qi argued that the Zengas were estopped from presenting evidence that they had more than 11 creditors due to their responses to post-judgment sworn interrogatories in the state court proceedings. The bankruptcy court denied the motions to dismiss and entered orders for relief against the Zengas. The Sixth Circuit Bankruptcy Appellate Panel vacated, holding that the threshold number of petitioning creditors is not jurisdictional. The Supreme Court’s 2014 holding in Law v. Siegel cannot be extended to prevent use of equitable doctrines when the statutory provision is not jurisdictional. Given the bankruptcy court’s failure to find actual and substantial detriment to Qi and Qi’s inability to point to any detriment other than loss of time, the court held that the bankruptcy court erred in applying equitable estoppel to bar the Zengas from introducing evidence of the existence of more than 11 creditors. View "In re: Zenga" on Justia Law

Posted in: Bankruptcy