Justia U.S. 6th Circuit Court of Appeals Opinion Summaries

In 2006, the Affiliated Group, including AmTrust, entered into a tax-sharing agreement (TSA) to allocate tax liability. In 2009, AFC, the parent of AmTrust, filed for Chapter 11 bankruptcy. The Office of Thrift Supervision closed AmTrust and placed it into FDIC receivership. AFC filed a consolidated 2008 tax return for the Affiliated Group showing a net operating loss of $805 million, with AmTrust’s losses accounting for $767 million of that total. After AFC claimed that any refund would belong to its bankruptcy estate, the parties agreed to deposit refunds in a segregated account pending adjudication. The IRS issued the Affiliated Group’s $194,831,455 refund to AFC. The FDIC claimed that $170,409,422, plus interest, belonged to AmTrust because that portion resulted from offsetting AmTrust’s 2008 net operating loss against its income in prior years. AFC concedes that AmTrust’s tax situation generated the refund. The FDIC sought a declaratory judgment. The district court granted AFC summary judgment, stating that the TSA’s use of terms such as “reimbursement” and “payment” established a debtor-creditor relationship between AFC and its subsidiaries as to tax refunds. The FDIC offered extrinsic evidence that the parties intended to create an agency or trust relationship under Ohio law with respect to tax refunds, but the district court rejected those arguments without analysis. The Sixth Circuit reversed and remanded for consideration of the FDIC’s evidence. View "Fed. Deposit Ins. Corp. v. AmFin Financial Corp." on Justia Law

In 2005 Detroit created not-for-profit corporations and issued debt instruments through those corporations, which passed the proceeds from sales of certificates on to the city, to fund pensions. The city covered the principal and interest payments. Some of the certificates had floating interest rates. To hedge that risk, the service corporations executed interest-rate swaps with banks. When interest rates fell below a threshold, the city had to pay the banks, which was offset by low interest rates owed to investors. If interest rates rose, the city would owe debtholders more interest, but received swap payments. Investors were unwilling to buy certificates and banks were unwilling to execute swaps unless an insurer guaranteed the obligations. Syncora insured the city’s obligations ($176 million in certificates; $100 million in swaps). A 2009 credit downgrade gave the banks the right to terminate the swaps and demand payment ($300 million). To avoid that, the city agreed (Syncora consented) to give the banks an optional early termination right, effectively ending the hedge protection, and established a “lockbox” system, under which the city would place excise taxes it receives from casinos into an account to be held until the city deposits its swap obligations (about $4 million per month). The agreement authorized the banks to “trap” the funds in the event of default or termination. In 2013 Syncora served notice that default had occurred. The city obtained a restraining order requiring release of the funds. The city filed for bankruptcy under Chapter 9 one week later. The bankruptcy court held that Syncora had no right to trap tax revenues, which were protected by the automatic stay under 11 U.S.C. 362(a)(3). The district court declined to consider an appeal, pending appeal of a determination that the city was an eligible debtor. The Sixth Circuit granted a petition for mandamus, requiring the court to rule. View "In re: Syncora Guar. Inc." on Justia Law

Thomas and Jennifer married and purchased a family home with a first mortgage, then obtained a second mortgage. In a 2003 divorce consent decree, Thomas agreed to relinquish any interest in the home. Jennifer agreed to assume and hold him harmless from the obligation to pay both mortgages. Thomas agreed to pay child support. The couple remarried in 2004, but, in 2007, this marriage also ended in divorce. The 2007 consent decree waived spousal support; Thomas again agreed to give up any interest in the house, which he had never conveyed under the 2003 decree. Jennifer agreed to assume the first mortgage. Thomas's child support obligation was reduced and they agreed to split the second mortgage obligation. Thomas deeded his interest in the house. A $8,082.37 judgment lien was not addressed in the 2007 decree although it attached to the property before the second divorce. Jennifer sold the house in 2008. The first and second mortgage debts were satisfied. Jennifer negotiated release of the judgment lien for $5,000.00 and paid $836.14 to close the transaction. The state court entered an order in the 2007 divorce proceeding, requiring Thomas to reimburse Jennifer $7,500.00 for the second mortgage and $5,000.00 for the judgment lien. Thomas filed a petition for Chapter 13 bankruptcy relief, listing an unsecured priority claim for child support and a $15,000.00 unsecured claim on Schedule F. Jennifer asserted a priority unsecured claim for “[a]limony, maintenance, or support” of $12,500.00 for the second mortgage and judgment lien debts. Thomas objected, arguing that the claim was “satisfied when the real estate was sold,” and not a domestic support obligation. The bankruptcy court applied the Calhoun test and found Jennifer’s claim was in the nature of “alimony, maintenance or support.” The Sixth Circuit Bankruptcy Appellate Panel affirmed. View "In re: Thomas" on Justia Law

The bankruptcy court held that real property transferred in error to the debtor by his father pre-petition was impressed with a constructive trust as a matter of law, and that the bankruptcy estate had no interest in the real property. The Sixth Circuit Bankruptcy Appellate Panel affirmed.View "In re: Thomas III" on Justia Law

The bankruptcy court voided the transfer of $74,102.60 to 1st National Cash Refund pursuant to 11 U.S.C. 549 and ordered recovery of transferred property from 1st National Cash Refund and Woodford pursuant to 11 U.S.C. 550. The Sixth Circuit Bankruptcy Appellate Panel affirmed, upholding determinations that the statutes of limitation found in sections 549 and 550 were equitably tolled and that the trustee had power to avoid and recover the transferred property. View "In re: Anderson" on Justia Law

Ice House manufactures ice-vending machines. Cardin’s machines generated about $264,000 in income in 2012. In 2004, Cardin also agreed to be the exclusive distributor of Ice House’s machines in Tennessee. Four years later Ice House sued for breach, obtaining judgments totaling $1,301,900, without interest. Cardin filed for bankruptcy as an individual debtor under Chapter 11. A Chapter 11 plan of reorganization must identify any claims it will “impair,” 11 U.S.C. 1123(a)(3). The bankruptcy court generally cannot confirm a plan if any impaired creditor votes to reject it. Section 1129(b) permits confirmation of nonconsensual plans (cramdown plan) if the plan is fair and equitable with respect to each class of claims or interests that is impaired and has not accepted the plan. To be “fair and equitable” a plan must satisfy the absolute-priority rule, which provides that every unsecured creditor must be paid in full before the debtor can retain “any property.” The rule was not satisfied with respect to Cardin. Cardin’s plan allowed him to retain several assets after paying off loans they secured, to make a single payment of $124,000 towards Ice House’s unsecured claim of $1.545 million, and to “remit” to Ice House any disposable income that he earns during the five years following confirmation. The bankruptcy court confirmed the plan, construing the 2005 Bankruptcy Code amendments to eliminate the absolute-priority rule for individual debtors. The Sixth Circuit reversed, agreeing with other circuits that the absolute priority rule continues to apply to pre-petition property of individual debtors in Chapter 11 cases. View "Ice House Am., LLC v. Cardin" on Justia Law

Pontiac has experienced significant economic difficulties. In 2011 Michigan’s Governor appointed Schimmel as Pontiac’s emergency manager under then-existing law (Public Act 4), in 2011, Schimmel modified the collective bargaining agreements of retired city employees and severance benefits, including pension benefits, for retirees not covered by collective bargaining agreements. Retired employees sued under the Contracts Clause, the Due Process Clause, and the Bankruptcy Clause. The district court denied an injunction. In 2013, the Sixth Circuit vacated and remanded for expedited consideration of state law issues. Michigan voters later rejected Public Act 4 by referendum. Following rehearing, en banc, the Sixth Circuit again vacated and remanded for consideration of whether, under section 903(1) of the Bankruptcy Code, Public Act 4 prescribed a method of composition of indebtedness that binds the retirees without their consent and, if so, whether principles of state sovereignty preclude application of section 903(1) in this case; whether the emergency manager’s orders were legislative acts under the Contract Clause; whether the reductions and eliminations of health care benefits were “necessary and reasonable” under the Contract Clause; whether the retirees’ procedural due process claim is viable; and, assuming the Due Process Clause’s procedural protections apply, whether the collective bargaining agreements, considered in their entireties, establish protected property rights. View "City of Pontiac Retired Emps. Ass'n v. Schimmel" on Justia Law

Debtor and his wife sought relief under chapter 7 of the Bankruptcy Code. Debtor owns Bradley Machinery, which sells and rents construction equipment. Bradley did not file a bankruptcy petition. Some of Bradley’s equipment was subject to security interests in favor of Lender; Debtor had personally guaranteed payment of the loans. Lender filed an adversary proceeding asserting that Debtor caused Bradley to sell equipment “out of trust,” without remitting the proceeds of the sale of collateral to Lender, constituting embezzlement under 11 U.S.C. 523(a)(4) and willful and malicious injury under section 523(a)(6). Pursuant to section 523(a)(2)(A). Lender asserted that Debtor obtained an extension of credit through false representations to Lender regarding the status of certain pieces of collateral. The Bankruptcy Court held that Lender had failed to show that the debt was nondischargeable. The Sixth Circuit Bankruptcy Appellate Panel affirmed on alternate grounds and remanded for determination of damages. Lender suffered a loss due to Debtor’s misrepresentations regarding the status of the collateral. Debtor’s subjective intent to repay is not a factor under section 523(a)(2)(A) when there is a separate specific false material misrepresentation. Debtor knew that Lender would rely on these misrepresentations when determining whether to continue to extend credit. View "In re: Bradley" on Justia Law

In 2011 Rizzo filed a voluntary petition for personal Chapter 7 bankruptcy and received a general discharge. Despite his discharge, the Michigan Department of Treasury sent collection letters demanding that he pay $72,286.39 in delinquent Single Business Tax that had been assessed against a company, for which Rizzo had been an officer. Rizzo filed an adversary action, contending that his personal liability for the unpaid SBT had been discharged in bankruptcy. Treasury claimed that liability for the SBT deficiency is a nondischargeable “excise tax” debt under 11 U.S.C. 507(a)(8)(E). The bankruptcy court agreed and dismissed. The district court and Sixth Circuit affirmed, rejecting Rizzo’s argument that the debt was derivative, not primary, and therefore not an excise tax. Rizzo conceded that the unpaid SBT was an “excise tax” deficiency as to the company and did not dispute that he was personally liable for the company’s unpaid tax under state law. Michigan law simply confers derivative liability upon Rizzo for precisely the same excise tax deficiency that was assessed against the company. View "Rizzo v. MI Dep't of Treasury" on Justia Law

McKenzie’s creditors filed an involuntary Chapter 7 bankruptcy petition in 2008. McKenzie filed a voluntary Chapter 11 petition a month later. The cases were consolidated and converted to a Chapter 7 bankruptcy. Several weeks before the involuntary petition was filed, McKenzie executed a promissory note and a pledge in favor of GKH for unpaid legal fees. The pledge listed several entities in which McKenzie held an interest, ranging from an “auto mall” to a farm. GKH filed a proof of claim for $750,000, describing the collateral as “Real Estate” and “Other” and sought relief from the automatic stay. The Trustee opposed relief on the ground that the pledge constituted a preferential transfer. The bankruptcy court granted relief with respect to certain real estate, but denied relief as to equity interests. The bankruptcy court held that McKenzie had not validly conveyed his equity interests in certain entities to GKH, that the Trustee could use his hypothetical lien-creditor status and avoidance powers defensively to defeat GKH’s security interest, and that the statute of limitations should be equitably tolled because of GKH’s conduct. The district court affirmed. The Sixth Circuit affirmed, holding that GKH had the burden of establishing the validity of its claimed security interest and that a trustee may use his hypothetical lien-creditor status and avoidance powers to oppose relief from the automatic stay after expiration of the statutory limitation on avoidance actions under 11 U.S.C. 546(a)(1)(A).View "In re: Grant, Konvalinka & Harrison v. Still" on Justia Law