Which Court Has Jurisdiction to Determine a Bankruptcy Debtor's Inverse Condemnation Claim Against the U.S.? Ninth Circuit Reverses District Court

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


McGuire v. U.S.
Ninth Circuit Court of Appeals Case No. 06-15812
December 24, 2008

The Facts and the Case Below

The Chapter 11 debtor, a farmer named McGuire, filed an inverse condemnation action against the United States for $2 million in compensation for the Bureau of Indian Affairs ("BIA") dismantling a bridge over a canal, which prevented him from having access to a large portion of a parcel of land he had leased earlier from an Indian tribe with the approval of the BIA. (Inverse condemnation is "the taking of property by a government agency which so greatly damages the use of a parcel of real property that it is the equivalent of condemnation of the entire property.")

The bankruptcy court held, in denying the government's motion to dismiss the case on sovereign immunity grounds, that 1) the Tucker Act, 28 U.S.C. § 1491, waived governmental immunity; 2) the bankruptcy court "should maintain jurisdiction of the action in the interests of judicial economy and not unduly burdening McGuire," and 3) the proceeding was not a "core proceeding" and so it needed to report its findings and recommendations to the district court for action. Accordingly, the district court reviewed the bankruptcy court's findings and recommendations and denied the government's motion to dismiss and remanded to the bankruptcy court for trial.

After trial the bankruptcy court "found that the United States had committed a regulatory taking of McGuire’s leasehold interest and recommended an award of $1,132,059.60 in damages." The district court agreed that there had been a taking, but "that McGuire's claim was not ripe for review because the government never denied an application for a permit to construct a new bridge." McGuire appealed.

Ripeness
The Ninth Circuit panel overturned the district court saying: "we hold that McGuire’s takings claim is ripe because he sufficiently complied with the permitting system as practiced by the BIA." Although the pertinent BIA regulations prescribed a permitting procedure which McGuire had not completely followed, he had followed the "prevailing practice," as had been established at trial, and "tried a variety of additional strategies to maintain access to the Leased Property." "In short, McGuire did everything reasonably within his power to prevent removal of the bridge and, when those efforts proved ineffective, to build a new one."

Sovereign Immunity and Bankruptcy/District Court Jurisdiction: The Tucker and Little Tucker Acts
The United States must have expressly waived its sovereign immunity in order for an action to be maintained against it. The "two principal federal statutes authorizing suit against the United States [are] the Tucker Act and the Little Tucker Act."

These two acts waive sovereign immunity, as specified within each. The Tucker Act states:

The United States Court of Federal Claims shall have jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

The Little Tucker Act is for smaller claims against the U.S. and allows for concurrent district court jurisdiction over

[a]ny . . . civil action or claim against the United States, not exceeding $ 10,000 in amount, founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

The Court concluded:

Read together, these statutes provide for jurisdiction solely in the Court of Federal Claims for Tucker Act claims seeking more than $10,000 in damages, and concurrent district court jurisdiction over claims seeking $10,000 or less.
. . . .
McGuire’s takings claim falls within the scope of the Tucker Act. A takings claim is the type of claim founded on the Constitution for which the Tucker Act grants jurisdiction in the Court of Federal Claims.
. . . .
McGuire claimed $2,000,000 in damages, well in excess of the $10,000 jurisdictional amount. Thus McGuire could have brought his takings claim in the Court of Federal Claims.

But the Ninth Circuit panel also noted that the "statutory basis for federal district court jurisdiction in this case is founded not on the Tucker Act, but on the Bankruptcy" statutes. 28 U.S.C. § 1334(b) provides that

. . . notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.

But while this provision gives the district court jurisdiction, "there is no corresponding statute that provides a waiver of sovereign immunity." As a result, the Tucker Act's provision for the Court of Federal Claims makes it "the proper court to entertain the merits of McGuire's takings claims."

If Sovereign Immunity Prevented Jurisdiction, Why Resolve Ripeness Issue?
In a footnote the Ninth Circuit Panel explained this question as follows:

Although we conclude in Section II that sovereign immunity barred the district and bankruptcy courts from hearing the merits of the claim, we reach the question of ripeness because we consider it a predicate to transferring the case to the Court of Federal Claims.
. . . .
[J]udicial economy and courtesy to transferee courts dictates that we resolve threshold issues first before invoking the transfer statute.

Continued Bankruptcy/District Court Role in spite of Lack of Jurisdiction over Takings Claim
Even though the Ninth Circuit held that the Court of Federal Claims must resolve the merits of McGuire's takings claim, this claim is an asset in his Chapter 11 case over which the bankruptcy court retains jurisdiction.

Dismissal or Transfer?
Given the uncontested district court jurisdiction over the bankruptcy, coupled with authority from the Federal Circuit Court of Appeals [through the opinion Quality Tooling v. United States, 47 F.3d 1569 (Fed. Cir. 1995)] indicating that the district court had jurisdiction over the Tucker Act claim, we conclude it would be in the interest of justice to transfer the action to the Court of Federal Claims, rather than dismissing it.

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

9th Circuit Justifies Payment of Creditors' Atty. Fees Under Sect. 503(b)(4), Based on Case Law on Payment of Debtors' Atty. Fees Under Sect. 303(a)

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

North Sports v. Knupfer (In re Wind N' Wave)
Ninth Circuit Case No. 05-56254
November 1, 2007

Although the context of this case is limited, the implications are broader and worthy of attention. At issue in the opinion is the allowance of attorney fees for creditors in the context of filing an involuntary Chapter 7 case, and specifically the allowance of such fees if incurred in successfully appealing to the BAP the bankruptcy court's denial of attorney fees. Involuntary Chapter 7 cases are rare, with most federal districts having only a handful or two of them each year. However, the Ninth Circuit's holding here, involving the statutory construction of § 503(b)(4), an issue of first impression, applies not only to attorney fees for creditors bringing an involuntary Chapter 7 or 11 case under § 503(b)(3)(A), but also, for example, to fees for "a creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor" under § 503(b)(3)(B), and for fees of a creditor "in making a substantial contribution in a case under chapter 9 or 11" under § 503(b)(3)(D). Also, § 503(b)(4) applies not only to attorney fees but as well to "reasonable compensation for professional services rendered by . . . an accountant" in the same contexts.

The Statutes
"Section 503(b)(3)(A), in combination with 503(b)(4), grants creditors costs incurred in connection with filing an involuntary bankruptcy petition," and in same other contexts indicated above. Section 503(b)(4) reads in relevant part:

(b) After notice and a hearing, there shall be allowed administrative expenses, . . . including

4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under [503(b)(3)], based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant.

To distinguish a 1991 Ninth Circuit case denying attorney fees for unsuccessful litigation about attorney fees which the Court had "refused to adopt a per se rule," here it added in the condition indicated in the Holding section below, that the case “exemplifies a ‘set of circumstances’ where litigation was ‘necessary.’ ”

Although this is a pre-BAPCPA case, the above quoted provision has not changed, except for some greater specificity in the bracketed section, which does not affect this holding.

The Holding
The Ninth Circuit panel held that

creditors who receive compensation under 503(b)(4) [such as for bringing an involuntary petition] should also be compensated for costs incurred in litigating a fee award, so long as the services meet the Section 503(b)(4) requirements [e.g., "reasonable compensation . . . based on the time, the nature, the extent, and the value of such services"] and the case “exemplifies a ‘set of circumstances’ where litigation was ‘necessary’. ”

In applying this standard to the facts of this case, the Court indicated that there was no dispute that the creditors were entitled to attorney fees for filing the involuntary case--an allowable expense enumerated in § 503(b)(3), nor any dispute that the amount of fees for the appellate work at issue was reasonable. So the remaining question was whether the litigation was necessary, not a frivolous appeal "merely to acquire litigation fees." The Court said "yes":

[T]he fact that the Petitioning Creditors were erroneously denied their fee award in the bankruptcy court—notwithstanding Ninth Circuit precedent urging otherwise—suggests that the litigation expenses incurred on appeal were unavoidable, as appeal to the BAP was the only avenue through which the creditors could receive their due compensation.

The Ninth Circuit's Rationale
Briefly, the Court reasoned that § 503(b)(4) regarding certain limited categories of creditors' attorney fees is similar in pertinent ways to § 330(a) regarding debtors' attorney fees, and so used Ninth Circuit and other case law on § 330(a) and analogized these to its statutory interpretation of § 503(b)(4). The Court focused on preventing attorney fee "dilution":

[It would be] both inconsistent with the policy of the Bankruptcy Reform Act and “fundamentally inequitable” to demand that counsel prepare and present extensive fee applications and yet simultaneously “deny[ ] compensation for the efforts necessary to comply with those requirements.” [Citation deleted.] . . . [L]itigation over a fee award should also be compensable, otherwise fee awards would be diluted: “If an attorney is required to expend time litigating his fee claim, yet may not be compensated for that time, the attorney’s effective rate for all the hours expended on the case will be correspondingly decreased.”

To distinguish a 1991 Ninth Circuit case denying attorney fees for unsuccessful litigation about attorney fees which the Court had "refused to adopt a per se rule," here it added in the condition indicated in the Holding section above, that the case “exemplifies a ‘set of circumstances’ where litigation was ‘necessary.’ ”

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Oregon Insurance Licensee Convicted of Bankruptcy Crime and Loses "Resident Insurance Producer" License

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



Last spring a Roseburg, Oregon woman, Brenda Gay Hartman, now known as Brenda Gay Burum, lost her Oregon license as a "resident insurance producer" because she was convicted in 2006 of a bankruptcy crime. Here is the rest of the story.

The Initial Chapter 7 Case
While living in Klamath Falls Hartman filed a voluntary Chapter 7 petition in June of 2000, the trustee filed a no-asset report that August, and about $72,000 of her debts were discharged in October and the case was closed.

The Case Reopened, and Criminal Conviction
But then in 2002, on motion of the U.S. Trustee's office, the case was reopened, two adversary proceedings were initiated by the Chapter 7 trustee against transferees of assets transferred by the debtor, and a turnover order was entered against Hartman. She was charged in federal court in Eugene, Oregon with committing the crime of bankruptcy fraud under 18 U.S.C. §157, and in June 2006 she pled guilty. She had intentionally omitted from her bankruptcy documents information on assets that she owned or controlled, as well as assets that she transferred, she understated her income, falsely stated expenses, and failed to disclose a debt and payments on that debt. She falsely testified under oath at the regular Meeting of Creditors in 2002 that her petition and schedules were accurate, and then after her case was reopened in 2002 she again made false statements under oath and produced false documents about a vehicle transfer.

Oregon Insurance License Statutes and Rules
Under Oregon law a licensed insurance producer must provide the Director of the state's Department of Consumer and Business Services (DCBS) with notice of any criminal prosecution against him or her and with copies of the criminal complaint and other relevant documents, all within 30 days of the criminal pretrail hearing. ORS 744.089(2). Hartman failed to provide this notice and the documents voluntarily, and more than a year later when contacted by the DCBS, she failed to provide all of the required documents.

ORS 731.428(4) requires the DCBS Director to "revoke, suspend, or refuse to renew" the insurance license of a person convicted "of a felony involving dishonesty or a breach of trust." OAR 836-071-0321(1) defines a felony involving dishonesty as “includ[ing] but not limited to any offense constituting or involving theft, burglary, perjury, bribery, forgery, counterfeiting, a false or misleading oral or written statement, deception, fraud, a scheme or artifice to deceive or defraud, a material misrepresentation or the failure to disclose material facts, or any felony the commission of which is determined by the Director to have involved some element of deceit, misrepresentation, untruthfulness or falsification.”

The Administrative Proceeding
When the DCBS gave notice to Hartman of a proposed action about her license last December (2007), she requested an administrative hearing. A hearing was scheduled and Hartman was given notice. One business day before the scheduled hearing the DCBS received a faxed letter from Hartman withdrawing her request for a hearing, so one was not held. Instead the administrative order was promulgated on the basis of the case record for the purpose of making a prima facie determination. Based on the evidence in the record, the Director found "that the record of this proceeding to date . . . proves a prima facie case." Hartman's insurance license was revoked as of the date of the order.

Additional Administrative Options?
ORS 731.428(4) provides the option, as quoted above, to suspend a license, not only to revoke it. But I could not find reference, in either the ORS or the OAR about this suspension option, such as the appropriate lengths or terms of suspensions.

In addition, although the Final Order of the DCBS Director does not make any reference to this, ORS 731.428(4) continues with the sentence: "The person may apply to the director for a written consent as provided in subsection (1) of this section." This subsection in turn refers to applying "for a written consent to engage or participate in the business of insurance." So there is an procedure for getting an exception to the prohibition against these kinds of felony convictions. The procedures for this "written consent" are laid out in detail, including a list of criteria for the Director to use in making these determinations, in OAR 836-071-0323 through 836-071-0346. Query: could Hartman have retained her license had she worked hard to meet the indicated criteria? Note that she did not get her license until 2003, and the criminal conviction in 2006 pertained to her actions back in 2000 and 2002.

Postscript
Google "Brenda Hartman" and, surprise, you'll find a bit of internet leftover, like the space detritus littering low-Earth orbit, her presumably former business website, which ironically states "I'm licensed in the state of: Oregon." Goes to show, don't believe everything you read on the internet. And to kick a dead horse, isn't her failure to terminate this website a continued misrepresentation to the public?

(Please see my last Litigation Report, dated 12/1/08, about a Ninth Circuit opinion from last year, U. S. v. Milwitt, in which the court overturned a criminal conviction based on the same bankruptcy crime statute, 18 U.S.C. §157. Click on its title: 9th Circuit Overturns B'cy Criminal Conviction of Defendant Pretending to Be Attorney, Who Filed Ch. 13 Cases Without the Knowledge of His "Clients".)




by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

9th Circuit Overturns B'cy Criminal Conviction of Defendant Pretending to Be Attorney, Who Filed Ch. 13 Cases Without the Knowledge of His "Clients"

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



U. S. v. Milwitt
9th Circuit Case No. 05-10344
February 5, 2007


Although bankruptcy attorneys, representing either debtors or creditors, do not often deal directly with bankruptcy crimes, and would generally refer such a case to a criminal defense attorney or to the U.S. attorney, respectively, it is nevertheless extremely important to "know it when you see it."

This Ninth Circuit opinion from last year sheds some light on but one of a number of potential bankruptcy crime statutes, 18 U.S.C. § 157. "As opposed to the historic bankruptcy crimes . . which concerns acts committed in the bankruptcy context, the focus of § 157 is a fraudulent scheme outside the bankruptcy which uses the bankruptcy as a means of executing or concealing the artifice." In this case the egregious "truth is stranger than fiction" facts of the crime alone make looking further worthwhile, heightened by the curiosity of finding out why this 9th Circuit panel overturned the defendant's two-year prison conviction, notwithstanding the earnest efforts of the dissenting judge.

The Amazing Facts

In early 1997 the defendant Milwitt put an ad in the "Landlord Tenant Law" heading under the "Attorneys" section of a phone book yellow pages, with the business name "AP Assistance," suggesting that the company provided both legal services through attorneys and pro bono help with "tenants' rights." Milwitt was not admitted to practice law, and never even attended law school. He represented himself as an attorney to tenants having problems with their landlords, and collected fees from them with their understanding that he would represent them in the unlawful detainer actions against them by their landlords. He instructed them not to pay their landlords and at least in some cases had them pay him instead. He filed pro se papers on their behalf in the unlawful retainer actions but, contrary to the tenants' beliefs, did not appear at court on their behalf, and judgments were entered against all the tenants. Then

Milwitt filed bankruptcy petitions on behalf of several of the tenants, without their authorization or knowledge. These bankruptcy petitions listed the relevant landlords as well as fabricated creditors. While the tenants did not know about or authorize the filing of these petitions, Milwitt did tell them that for various reasons they did not have to pay judgments entered against them or move out after receiving eviction notices. The petitions were filed under Chapter 13 of the United States Bankruptcy Code, and the petitions indicated that the debtors would be filing a plan for repayment of the debts.

After being convicted of the unauthorized practice of law in state court and being released from state custody he was immediately indicted by the U.S. Attorney on six counts of bankruptcy fraud in violation of 18 U.S.C. § 157, and was convicted in a jury trial on five counts. He appealed. Through the defendant's apparently very able representation by the former prominent (and very recently dissolved!) San Francisco firm of Heller Ehrman, but mostly because of the prosecution's unfamiliarity with bankruptcy crimes, the Ninth Circuit overturned his conviction. About the only thing the majority and dissenting opinions could agree upon was that the prosecution could have done a much better job with both framing the indictments and presenting the evidence at trial.

The Short Answer Why

The conviction was overturned because the Ninth Circuit here determined that "[i]n enacting § 157, Congress made it quite clear that the new crime was a specific intent crime," meaning that it "requires the prosecution to prove that the defendant intended to defraud an identifiable individual." The simple and decisive problem, in the eyes of the majority, was that all the evidence put forward by the prosecution at trial showed how the tenants were victims of Milwitt's fraudulent scheme of fake Chapter 13 petitions, whereas the indictment charged him with fraudulently obstructing the creditors' legal rights. Without any "proof that there was a scheme to defraud the landlords, much less that the bankruptcy petitions had been filed as a means of executing or concealing the scheme," "the evidence presented was insufficient to sustain the verdict, [and so] we reverse the conviction."

This was a case of first impression for the Ninth Circuit but it arrived at this conclusion about the need for "specific intent" by analogizing to its and the U.S. Supreme Court's prior holdings on the wire and mail fraud crimes, upon which § 157 was modeled according to this opinion.

The Disconnect Between the Criminal Statute, the Indictment and the Evidence at Trial

The version of 18 U.S.C. § 157 applicable to this case (subsequently changed by BAPCPA in ways not pertinent) is:

A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so—
(1) files a petition under title 11;
(2) files a document in a proceeding under title 11; or
(3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title,
shall be fined under this title, imprisoned not more than 5 years, or both.

The pertinent language of the indictment is as follows:

By filing the sham petitions, the defendant . . . fraudulently obstructed the creditors’ legal right to collect back rents, and repossess the properties.

In contrast, according to the majority "[n]o evidence was presented concerning any scheme to defraud creditors, only debtors. There was no proof that Milwitt received or sought any money or other consideration from the landlords, only that he defrauded the tenants."

The Dissent

The dissenting judge focused on the highly deferential standard of appellate review of a jury verdict, that the Court "must defer to a jury's guilty verdict if, 'after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.' ” He accused the majority arriving at its "specific intent" holding unnecessarily since it was not raised by either party, and then he interpreted the same 9th Circuit and U.S. Supreme Court case law as NOT requiring "that the government prove intent to defraud a specific victim or class of victims." He concluded that with the evidence presented, "a reasonable jury could have found that Milwitt possessed an intent to defraud the landlords."

The majority also appears to believe that Milwitt could not simultaneously possess the intent to defraud the tenants and the landlords. . . . [T]he evidence reveals that Milwitt possessed no shortage of fraudulent intent. . . . .The case went to the jury under proper instructions requiring proof beyond a reasonable doubt that Milwitt defrauded the landlords. Because a reasonable jury could have concluded that Milwitt’s fraudulent intent was not solely directed toward the tenants, but also toward the landlords, Milwitt's conviction must be affirmed.

A Critical Consideration

As I stated at the outset, this opinion fixates on 18 U.S.C. § 157, which is a relatively new bankruptcy crime, enacted in 1994 as the "centerpiece" of a new bankruptcy crime statute. In contrast, ever since "[t]he bankruptcy act passed by Congress in 1841 was the first in world history allowing individuals to obtain voluntary discharge of their debts," "Congress has always provided for the imposition of criminal penalties for those who abuse the bankruptcy system. . . . . With some modifications, these core bankruptcy criminal provisions have remained intact to this date, with the essential components codified into 18 U.S.C. § 152." I will address this more common and generally more easily proven bankruptcy criminal provision of § 152 in a future Litigation Report, but mention it here to make clear that this Milwitt opinion provides just a small window into this bankruptcy crimes arena.


by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Oversecured Creditor Entitled to Contractual Default Interest Rate: Ninth Circuit Narrows Its Prior Per Se Rule Against Default Rate

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


GECC v. Future Media Productions Inc.
9th Circuit Case # 07-55694

Second Amendment October 24, 2008; Amended August 7, 2008; originally filed July 3, 2008
(On direct appeal from the bankruptcy court under BAPCPA's new subsection 28 U.S.C. § 158(d)(2), providing for discretionary appellate jurisdiction over non-final orders of the bankruptcy court upon proper certification of that court or of all parties.)

The Ninth Circuit considered here whether an oversecured creditor, GECC, was entitled to its pre-default or rather its higher default rate of interest under § 506(b), which provides that such creditor “shall be allowed . . . interest . . . provided for under the agreement or State statute under which such claim arose.” The difference between the two rates of interest was only 2%, but since the debt at issue was nearly $6 million, about $165,000 of interest differential was at issue.

The Court's decision turned on whether or not this case was distinguishable from Ninth Circuit precedent as established in In re Entz-White Lumber and Supply, Inc., 850 F.2d 1338 (9th Cir. 1988), and whether that precedent and this case were affected by last year's U.S. Supreme Court opinion in Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 127 S. Ct. 1199 (2007).

The Ninth Circuit distinguished this case from Entz-White, by restricting that precedent to "the rule that an oversecured creditor was not entitled to interest at the default rate when its claim was paid in full pursuant to the terms of a Chapter 11 plan." This is the so-called per se rule against using a default interest rate. Here to the contrary, GECC's claim was NOT paid off through the Chapter 11 plan but rather "as a result of a series of asset sales outside of a Chapter 11 plan." Therefore the Court held that the per se rule against use of the default interest rate was not applicable here, and remanded to the bankruptcy court "to decide whether the default rate should apply under the rule adopted by the majority of federal courts . . . : The bankruptcy court should apply a presumption of allowability for the contracted for default rate, 'provided that the rate is not unenforceable under applicable nonbankruptcy law'."

The Ninth Circuit also held that this "majority rule" is consistent with the Travelers Supreme Court opinion (which specifically addressed creditors' attorney fees), but Entz-White is not overturned by Travelers either. Let me explain.

The Essential Facts
Future Media owed a substantial commercial loan to GECC, secured by a first priority security interest on substantially all of Future Media's assets. The loan's terms included a default interest rate: a 2% increase in the rate if Future Media defaulted on loan payments. Future did default, which triggered the interest rate increase. Future Media then filed a liquidating Chapter 11 case, having "executed an agency agreement to sell its assets in an auction." It immediately arranged to enter into a "cash collateral" agreement with GECC--allowing it to use cash, which was collateral on the GECC debt, for winding down its business and preparing for the auction. The cash collateral agreement was delayed by objections from unsecured creditors, including an objection about GECC's right to impose the higher default interest rate (thereby reducing what was available to unsecured creditors from the liquidating auction). An amended cash collateral agreement was entered into allowing the default interest rate issue to be decided separately. On a subsequent motion raising that issue, the bankruptcy court decided that GECC was only entitled to the lower pre-default interest rate pursuant to the Entz-White opinion, and GECC appealed.

The Ninth Circuit's Rationale
In Travelers the Supreme Court said that “[c]reditors’ entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor’s obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.” The Ninth Circuit said that the facts in Entz-White fit within such a "qualifying or contrary provision" of the Code, but the present case did not. In Entz-White the specific issue was whether a creditor's claim was considered "impaired" for purposes of voting on a Chapter 11 plan, which it is not if the debtor "cures" any pre- or post-petition defaults. And since the Code permits "cures" under § 1124(2)(A) to negate all consequences of default including the imposition of a default interest rate, the debtor was permitted to avoid this higher rate "to cure a default to render it unimpaired for voting on a Chapter 11 plan." In the present case in contast, "GECC's oversecured claim was paid through a sale of assets governed by § 363, outside the context of a Chapter 11 plan" and so "the facts of Entz-White are distinguishable, and thus our per se rule from that case is inapplicable." "Because the Bankruptcy Code does not provide a 'qualifying or contrary provision' to the underlying substantive law here [as now required by Travelers], the bankruptcy court's extension of Entz-White to the loan agreement's default rate was error." Instead The Ninth Circuit remanded to the bankruptcy court to apply the federal majority rule as quoted above.

Applicability to Chapter 13?
This Future Media case and Entz-White are both Chapter 11 cases, referring to sections of the Code which are unique to Chapter 11. But are their holdings also applicable to Chapter 13 cases? Are Chapter 13 oversecured creditors, whose claims are after all also covered by § 506(b), entitled to their default interest rate, and do the same rules specified above govern this question? To quote a controversial remark by a former Presidential candidate now President-elect, that question is "above my pay grade" at least for purposes of this Bulletin. My suspicion is that fully secured creditors paid through a Chapter 13 plan, such as a vehicle loan paid in full through the plan, are not entitled to a default interest rate but a creditor not being paid through the Plan, such as a current home mortgage, is entitled to default interest. But I could very well be wrong. I would appreciate comments from any readers who know.

Note that although Travelers was also a Chapter 11 case, the Supreme Court's overturning of the 9th Circuit's Fobian rule on creditor's attorney fees does apply to Chapter 13 since it involves interpretation of §502(b) of the Code, applicable to all Chapters. Please see my earlier Bulletin on Travelers entitled: Reminder about U.S. Supreme Ct's Reversal of 9th Circuit's Fobian Rule on Creditors' Atty Fees: Fees Recoverable Even on Issues Peculiar to B'cy Law

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Retroactive Effect of U.S. Supreme Court Opinion Decided During Pendency of Unrelated Bankruptcy Case on Appeal

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Ditto v. McCurdy (In re McCurdy)
Ninth Circuit Case No. 02-16252
December 14, 2007

This Ninth Circuit opinion addressed both substantive issues about nondischargeability "for willful and malicious injury by the debtor" under § 523(a)(6) of the Bankruptcy Code, and various procedural issues including 1) the retroactive effect of a Supreme Court opinion decided during the pendency of a case, and 2) amending a complaint to add a § 727 discharge objection to the § 523 dischargeabililty claim. The substantive nondischargeability matters are addressed in this website's Bulletin article of 11/13/08 entitled After 18 Years of Litigation Ninth Circuit Holds $2.8 Million Medical Malpractice Judgment "Not Non-Dischargeable" Under Section 523(a)(6). The two procedural issues are dealt with here in this Litigation Report.

1) Retroactive Effect of US Supreme Court Opinion on Pending Unrelated Cases
This case had a torturous procedural history spanning 18 years and including three different journeys up the chain of appellate courts, to the Hawaii Supreme Court once and to the Ninth Circuit twice. It is no wonder that the applicable case law changed in the interim.

Without detailing all the twists and turns of this history, here are the salient events for our purpose: a) After plaintiff won a large judgment in Hawaii state court against debtor in 1992, debtor both appealed that judgment and filed a Chapter 7 bankruptcy. b) In Plaintiff's adversary proceeding against the debtor for the nondischargeability of her claim based on her state court judgment, she won a summary judgment in her favor in 1996; she prevailed because of 9th Circuit case law of the time that "willful and malicious injury" under § 523(a)(6) meant that plaintiff did not have to show that "debtor acted with intent to injure" but only that he "committed a wrongful act . . . , done intentionally, necessarily produc[ing] harm and . . . without just cause or excuse, . . . even absent proof of a specific intent to injure." c) The following year the state trial court judgment found its way to the Hawaii Supreme Court, which affirmed the gross negligent portion of the judgment but reversed the fraud portion. d) Debtor filed a motion in bankruptcy court to set aside the nondischargeability summary judgment in light of this Hawaii Supreme Court decision. The bankruptcy court denied the motion, and debtor appealed to the U.S. District Court and then to the Ninth Circuit. e) But before this Court ruled on that motion, in 1998 the U.S. Supreme Court held in Kawaauhau v. Geiger, 523 U.S. 57 that “debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” f) As a consequence this Court overturned the bankruptcy court and U.S. District Court decisions, setting aside the summary judgment against debtor which had been based on pre-Geiger law. g) Debtor then prevailed in bankruptcy court in a summary judgment establishing the dischargeability of plaintiff's debt against him, the U.S. District Court affirmed, and plaintiff appealed to this Court, which is the matter now before it.

As to whether the Geiger decision should be applied to this case, generally speaking "a federal court must applly a new and supervening rule of federal law when applicable to the issues in the case." Accordingly the Ninth Circuit had applied Geiger retroactively in a number of cases. But this present case is distinguishable in that plaintiff "had already obtained a final judgment in 1996, which became non-appealable as of January 19, 1997—more than a year before Geiger was decided. [Plaintiff] maintains that the law as of that date ought to apply to this case, even after the former judgment was vacated following [debtor's] successful Rule 60(b) motion" to set it aside.

But instead the Ninth Circuit decided to the contrary, applying its own rationale that "[w]hen a judgment has been set aside pursuant to Rule 60(b), the case stands as if that judgment had never occurred in the first place. The case remains open on direct review, and the court must apply the law as it stands, including any intervening precedents," such as Geiger.

Note that the Court did not cite any case law in support for this analysis, only a reference in a footnote to Am. Jur. 2nd Judgments about the setting aside of a judgment placing "the parties in the position they occupied before entry of the judgment," without any reference to the applicability of an intervening change in the case law.

2) Amending a Complaint to Add a § 727 Claim to a § 523 One
Referring (much more briefly!) to the procedural history above, plaintiff's original adversary proceeding complaint in 1992 contained not just a § 523(a)(6) nondischargeability claim but also § 727(a)(4) and (7) objections to discharge. After winning summary judgment in her favor on the § 523(a)(6) claim, she dismissed the § 727 claims. But then after that judgment was eventually set aside on remand from this Court in 2000, and the bankruptcy court granted debtor a discharge in February 2000, in May 2001 plaintiff moved to amend her complaint to add back her § 727 claim.

In determining whether to give plaintiff leave of court to amend the complaint, the Court referred to "[f]our factors . . commonly used to determine the propriety of a motion for leave to amend. These are: bad faith, undue delay, prejudice to the opposing party, and futility of amendment." But the appellate standard for reviewing how these rather vague factors were weighed by the bankruptcy court is whether the bankruptcy court abused its discretion, that is, whether the Ninth Circuit has "a definite and firm conviction that the district court committed a clear error of judgment in the conclusion it reached."

Noting that plaintiff had waited "more than fifteen months" between the discharge granted in 2000 and her motion to amend complaint, the Court held that the bankruptcy court had not abused its discretion in not permitting this amendment. It reasoned: "If the ordinary action of § 727(a) is extreme, it must surely be still more extreme to order, retroactively, a revocation of the discharge. Given the value of finality in bankruptcy, as well as the difficulty of unscrambling an egg by effectively revoking discharge . . . , we hold that the bankruptcy court did not err in denying [plaintiff] leave to amend her complaint."

Comment
Chapter 7 trustees commonly file motions to revoke the discharge when debtors fail to pay their oblgations to the estate, and no one complains then about "the difficulty of unscrambling an egg." And given that about eight years had passed between the filing of the Chapter 7 case in 1992 and the granting of the discharge in 2000, and given that the discharge of this debt continued to be under appeal for another seven years, the fifteen months that the Ninth Circuit considered to be excessive delay does not seem to be so in this context. At the very least, the Court does not explain its position well, although given the low "abuse of discretion" standard perhaps it does not need to beyond what it did.

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

What are the Standards for Motions for Reconsideration?: Judge Dunn's Suggestions in Schacher v. Dolph

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Schacher v. Dolph (In re Dolph)
Oregon Bankruptcy Court Adversary Proceeding No. 07-3326-rld
June 11, 2008 opinion; July 24, 2008 reconsideration denied
Unpublished

The Oregon Bankruptcy Court's website entry under this adversary proceeding in fact contains two separate Memorandum Opinions by Judge Randall Dunn, the first consisting of his decisions resolving issues from the adversary proceeding trial, and the second his denial of plaintiff's motion for reconsideration of the first. Inexplicably, these two opinions were uploaded to the Court's website just last week although they were filed last June and July. This Litigation Report addresses the Memorandum Opinion on the motion for reconsideration.

(This website's Bankruptcy Bulletin dated November 4, 2008 will review the first Memorandum Opinion.)

Background
The litigation is part of a lengthy inheritance fight among stepbrothers and stepsisters: plaintiff Jim Schacher is a stepson of decedent Patricia Schacher, while defendant Donald Dolph, the Chapter 13 debtor, is a son. Plaintiff seeks to impose a constructive trust on assets of defendant, particularly his residence, because of transfers made by the decedent to defendant allegedly in violation of a 1988 Agreement to Execute Wills between the decedent and her husband, plaintiff's father. After trial in the adversary proceeding, Judge Dunn imposed a constructive trust on defendant's residence, but in the amount of only about $1,850 instead of the $90,000 amount plaintiff wanted. Before judgment was entered, plaintiff filed a motion for reconsideration on the amount of the constructive trust.

The Standard for Motions for Reconsideration
Federal Rule of Bankrutpcy Procedure 9023 incorporates Rule 59 F.R.Civ.P. into cases under the Bankruptcy Code, making motions for reconsideration "analogous to a motion for a new trial or to alter or amend the judgment pursuant to FRCP 59." Rule 59(a)(2) specifies the grounds for granting a new trial, where the trial was without a jury: "for any of the reasons for which rehearings have heretofore been granted in suits of equity in the courts of the United States . . . ." Judge Dunn referred to three reasons cited by the Ninth Circuit under Rule 59(a)(2): "(1) manifest error of law; (2) manifest error of fact; and (3) newly discovered evidence.”

Application of the Standard for Motion for Reconsideration

1) "Newly discovered evidence": The judge dispensed with this potential reason for reconsideration by stating that he had "closed the evidentiary record" immediately after the trial, had reminded plaintiff's counsel of this at the scheduling hearing on this motion, but plaintiff made no request under FRCP 59 to reopen the evidentiary record. So there is no "newly discovered evidence" here. (Had additional evidence been offered, the judge would have "need[ed] to evaluate whether any additional evidence offered is 'new' evidence that was not available at the time of Trial.")

2) "Manifest error of law," "manifest error of fact":
First, plaintiff contends that the calculations for determining the constructive trust amount should take into account "the cost to the Probate Estate inherent in the delay in recovering the funds wrongfully received by Mr. Dolph."
To the contrary, Judge Dunn held that a constructive trust does not "affect rights in the res until it is imposed," and therefore property appreciation or other impacts on the property prior to a court imposition of the constructive trust on the property do not benefit the plaintiff.

Second, plaintiff argues that the calculation should not include a credit for defendant's "legitimate share of the Probate Estate, either because that share cannot be determined at this time or, alternatively, because Mr. Dolph has waived that share through his confirmed chapter 13 plan."

As to the defendant's plan's purported waiver of his claim against plaintiff, the judge ruled that this was specifically a waiver "by Mr. Dolph of the right to receive any additional distribution he otherwise might be entitled to receive from the Probate Estate," and the plan provision did NOT "preclude Mr. Dolph from asserting, as an offset for purposes of calculating the amount by which he was unjustly enriched."

As to plaintiff's objection to crediting defendant's legitimate share of the estate, "[i]n order to calculate the amount Mr. Dolph was unjustly enriched, I am required to subtract the amount Mr. Dolph was entitled to receive from the Probate Estate from the amount he actually received."

Since the only evidence presented at trial of Mr. Dolph's legitimate share was plaintiff's proof of claim, the judge used this for his calculations over plaintiff's objections. Plaintiff argued that the appropriate offset amount would not be known until the other potential wrongdoers--Mr. Dolph's two sisters--had paid their obligations back to the estate. Judge Dunn rejected this, saying that if he accepted that argument, the various siblings would be dead before the matter was resolved! Since the plaintiff failed to provide evidence of the diminished value of the probate estate, he cannot now argue that as a consequence the constructive trust was larger than the evidence indicated.

With a lack of "newly discovered evidence" or of any "manifest error of law or fact," the judge denied plaintiff's motion for reconsideration.

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

The Last Ten Litigation Reports On Bankruptcy Litigation and Procedure from Recent Ninth Circuit and BAP Opinions

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



This website has published ten weekly Litigation Reports. They are all summaries of recent 9th Circuit and Bankruptcy Appellate Panel (BAP) opinions on important issues about bankruptcy litigation and procedure. Together they comprise an essential recent package of law that every bankruptcy attorney practicing in Oregon or anywhere in the Ninth Circuit should know. To help get to that knowledge quickly and easily, here is a list of these ten Litigation Reports with a short descriptive excerpt from each, with convenient links BOTH to the Reports (click on the Report title) as well as directly to the full opinions themselves (click on the case name). The opinions are in reverse chronological order of court publication, with the most recent one on top, the 9th Circuit ones separate from the BAP ones.


Ninth Circuit Opinions

October 10, 2008
American Sports Radio Network v. Krause (In re Krause)
Litigation Report Title: 9th Circuit Certifies Question of Law to State Supreme Court on Capacity of Administratively Dissolved Corporation to Prosecute Adversary Proceeding Excerpt: "This is not an opinion, merely a lengthy order certifying a question to the Nevada Supreme Court. And yet the 9th Circuit takes 13 pages to do this. The Court's discussion is valuable from a bankruptcy litigation perspective both for its substantive issue--the capacity of an administratively dissolved corporation to file an adversary proceeding against a debtor, and the appellate procedural one--when is it appropriate for a bankruptcy appellate court to seek formal assistance from a state supreme court in interpreting that state's laws. Oh, and by the way: 'several million dollars' are at stake in this Chapter 7 nondischargeability adversary proceeding."

September 23, 2008
Barboza v. New Form, Inc.
Litigation Report Title: Ninth Circuit Reverses Both B'cy Court's & BAP's Summary Judgment on "Willful & Malicious Injury" Under § 523(a)(6) Excerpt: "Last week the 9th Circuit issued its second opinion in as many months interpreting the 'willful and malicious injury' language in § 523(a)(6) of the Bankruptcy Code. The Litigation Report in this website for the week of September 21 - 28 highlighted the 1st of these two opinions, Lockerby.v. Sierra, on the necessary elements for an intentional breach of contract to be a nondischargeable 'willful and malicious injury.' Now in Barboza, the 9th Circuit comes back to this same 'willful and malicious injury' language, although not in the narrow breach of contract context. Here the Court reversed both the bankruptcy court and the BAP, primarily by finding that neither court applied the 9th Circuit's law on § 523(a)(6)'s "willful and malicious injury" language accurately."

September 4, 2008
Burkart v. Coleman (In re Tippett)
Litigation Report Title: The Rights of a Bona Fide Purchaser Buying Estate Assets Without Knowledge of Debtor's B'cy: Are State BFP Statutes Preempted by the Bankruptcy Code?
Excerpt: "A recent Bankruptcy Bulletin on this website (entitled "New 9th Circuit Opinion Adjusts the Line Between Void & Voidable Transfers in Violation of the Automatic Stay: Bona Fide Purchaser Defeats Trustee," dated 9/8/08) summarized this Burkart opinion and but reserved discussion about the federal preemption argument there for this Litigation Report."

August 22, 2008
McDonald v. Checks-N-Advance, Inc. (In re Ferrell)
Litigation Report Title:
Excerpt:"In this per curiam decision . . . , the Ninth Circuit Court of Appeals held that certain specific violations of the federal Truth in Lending Act (TILA) do not result in the award of actual damages, statutory damages, or attorney fees and costs for the consumer, or specifically in this case for the Chapter 13 trustee acting on behalf of the consumer. The court affirmed the ruling of the Bankruptcy Appellate Panel, which had affirmed the judgment of the bankruptcy court. This was a case of first impression for the Ninth Circuit as to the issue of statutory damages, and precisely as to whether the specific TILA violations.here fell within any of TILA's exceptions to statutory damages."

August 7, 2008
Lockerby v. Sierra (In re Sierra)
Litigation Report Title: When Is Intentional Breach of Contract Nondischargeable Under § 523(a)(6)?: 9th Circuit Proclaims Legal Standard for "Willful & Malicious Injury"
Excerpt: "This is a quick study in two published opinions about what it takes for a breach of contract claim to be nondischargeable under the "willful and malicious injury" provision of § 523(a)(6). One is the Lockerby opinion referenced above; the other is the January 2008 bankruptcy court opinion of Judge Perris' Home Instead Senior Care of Oregon v. Treon (In re Treon). Both of these rely heavily on a 2001 9th Circuit opinion, Petralia v. Jercich (In re Jercich), 238 F.3d 1202. The primary point of this quick study is to determine what if anything the recent Lockerby opinion added to the law on this issue in Oregon that wasn't already in Judge Perris' Home Instead opinion, other than the weight of greater authority."

August 1, 2008
Educational Credit Management Corp. v. Coleman
Litigation Report Title: NOTE: THIS OPINION WAS VACATED: 9th Circuit Holds that Ch. 13 "Undue Hardship" Student Loan Determinations Need NOT Wait Until End-of-Case Discharge
Excerpt: "ON AUGUST 22, 2008 THE 9TH CIRCUIT COURT OF APPEALS VACATED THIS AUGUST 1, 2008 OPINION BECAUSE IT APPARENTLY DETERMINED IN THE INTERIM THAT IT DID NOT HAVE JURISDICTION TO CONSIDER THE APPEAL FROM THE DISTRICT COURT, SINCE THE BANKRUPTCTY COURT'S ORDER BEING APPEALED FROM WAS AN INTERLOCUTORY ORDER. LINK HERE TO SEE THE CIRCUIT COURT'S VACATING ORDER. THE CASE WAS REMANDED TO THE DISTRICT COURT TO DETERMINE WHETHER IT WOULD CERTIFY THE CASE FOR APPEAL. IF THAT COURT DOES SO, AND THE 9TH CIRCUIT THEN DETERMINES IT DOES INDEED HAVE JURISDICTION, THIS NOW-VACATED OPINION MAY BE RE-PUBLISHED. IN THE MEANTIME IT IS NOT GOOD LAW. AT BEST IT IS SOME INDICATION OF HOW THE 9TH CIRCUIT MAY RULE ON THIS ISSUE IN THE FUTURE, IN THIS CASE OR OTHERWISE.
On August 1, 2008 the 9th Circuit Court of Appeals ruled that a Chapter 13 debtor could get a judicial determination whether her student loans constituted an “undue hardship” and were thus dischargeable without waiting until close to or after the discharge at the end of the case. Going against two other Circuits, the Fifth and the Eighth, and joining one other Circuit, the Fourth, the 9th Circuit held that the matter was ripe for adjudication, although the debtor’s Chapter 13 case was less than a year past confirmation of debtor’s five-year plan."

May 6, 2008
Johnson v. Nielson (In re Slatkin)
Litigation Report Title: Transferees Must Pay Chapter 7 Trustee "Millions of Dollars" under § 548(a) with Debtor's Plea Agreement As Sole Evidence of His Fraudulent Intent
Excerpt: "The Circuit Court addressed three issues of interest in this Litigation Report: A) can a debtor's fraudulent intent be based on the sole evidence of his guilty plea and plea agreement in a criminal case, authorizing the trustee's avoidance of transfers arising from such intent; B) can a bankruptcy court deny a transferee's motion for a continuance to conduct further discovery before having the opportunity to depose the debtor-transferor, or to review a transcript of the debtor-transferor's prior testimony; and C) does the bankruptcy court have the authority to grant an award of prejudgment interest if the transferee-defendants have demanded a jury trial?"

April 16, 2008
Barclay v. Mackenzie (In re AFI Holding, Inc.) Litigation Report Title: 9th Circuit on Fraudulent Transfers: "Actual Intent to Hinder, Delay, or Defraud," "Reasonably Equivalent Value," & the "Good Faith Exception"
Excerpt: "In this opinion the 9th Circuit analyzed fraudulent transfers under § 548 of the Code (and its analogous provision in state law) in the form of payments paid out to "investors" in a Ponzi scheme. (A Ponzi scheme involves "paying investors purported interest payments with funds
raised from other investors, rather than from the profits of the . . . business".) The Court focused on the § 548(c) exception to fraudulent transfers for transferees who take "for value and in good faith," and particularly on the "reasonably equivalent value" that transferee received in his role as a limited partner of the debtor."


BAP Opinions (of the 9th Circuit)

August 4. 2008
FDIC v. Kipperman (In re Commercial Money Center, Inc)
Litigation Report Title: The "Law of the Case" Doctrine Applied in the Most Recent 9th Circuit BAP Opinion, Written by Judge Dunn
Excerpt: "This most recent of the 9th Circuit BAP opinions was written by Judge Randall Dunn in his capacity as a BAP judge. The facts and procedural background are so involved that they take the first nearly 18 pages of his opinion, in part because this is the second appeal in the adversary proceeding. But the focus of this Litigation Report is on just one particular aspect: the doctrine of "the law of the case." As stated in this opinion, '[u]nder the law of the case doctrine, a court is barred from reconsidering an issue that already has been decided in the same court or in a higher court on the same case. [Citation omitted.] For the law of case doctrine to apply, the issue must have been decided, either expressly or by necessary implication.' "

April 22, 2008
White v. Brown
Litigation Report Title: Chapter 13 Debtor Must Account for $145,000 in Unreinvested Homestead Proceeds After Converting from Chapter 7 Case Excerpt: "This 9th Circuit BAP opinion addresses this question: what is the effect of an asset turnover order against a Chapter 7 debtor when he responds by converting his case into a Chapter 13? The BAP's discussion of this leads to a better understanding of two concepts that can get tricky especially when combined: asset turnover orders and conversions from Chapter 7 to 13."


by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

9th Circuit on Fraudulent Transfers: "Actual Intent to Hinder, Delay, or Defraud," "Reasonably Equivalent Value," & the "Good Faith Exception"

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


Barclay v. Mackenzie (In re AFI Holding, Inc.)
9th Circuit Case No. 06-55033
April 16, 2008

In this opinion the 9th Circuit analyzed fraudulent transfers under § 548 of the Code (and its analogous provision in state law) in the form of payments paid out to "investors" in a Ponzi scheme. (A Ponzi scheme involves "paying investors purported interest payments with funds
raised from other investors, rather than from the profits of the . . . business".) The Court focused on the § 548(c) exception to fraudulent transfers for transferees who take "for value and in good faith," and particularly on the "reasonably equivalent value" that transferee received in his role as a limited partner of the debtor.

The Court's Holdings
1) On the transferee's argument that he was entitled to the "profits" not just the funds "invested", the Court held that no genuine issues of material fact existed as to whether the debtor, a corporation that had been operated by a person who was convicted of federal securities fraud for operating a Ponzi scheme, made the transfers at issue with the "actual intent to hinder, delay, or defraud" a creditor, because: a) " 'the mere existence of a Ponzi scheme' is sufficient to establish actual intent under § 548(a)(1) or a state’s equivalent to that section"; and b) debtor's principal's criminal plea agreement showed his fraudulent intent existed before defendant transferee "invested" in the debtor and before the transfers at issue, when debtor paid him back his "investment" along with the "profits."

2) On trustee's argument that the good faith exception to a fraudulent transfer claim under § 548(c) and its state law equivalent is barred as a matter of law, the Court held that the good faith exception is NOT barred because the transferee received in exchange for the transfers "reasonably equivalent value" in the form of "a proportionately reduced restitution claim" against the debtor. related to his role as a purported limited partner to the debtor.

Statutory Language
The Court pointed out that on one hand § 548 of the Code did not apply because the transfers at issue occurred well beyond its 1-year statute of limitations (extended to 2 years under BAPCPA), but "[w]here state statutes are similar to the Bankruptcy Code, cases analyzing the Bankruptcy Code provisions are persuasive. It then based virtually its entire analysis on 9th Circuit case law primarily interpreting § 548 of the Code.

§ 548(a)(1) and (c) state, as pertinent here:

The trustee may avoid any transfer . . . of an interest of the debtor in property . . . that was made . . within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily-- (A) made such transfer . . . with actual intent to hinder, delay, or defraud any entity to which the debtor was . . . indebted; or (B) received less than a reasonably equivalent value in exchange for such transfer ... .

c) . . . a transferee . . . of such a transfer . . . that takes for value and in good faith . . . may retain any interest transferred . . . to the extent that such transferee . . . gave value to the debtor in exchange for such transfer ... .

Note that the Oregon and California's fraudulent transfer statutes pertinent to this decision are substantively identical, both based on the Uniform Fraudulent Transfer Act. So this opinion applies to Oregon no less than it does to California. Compare 11 U.S.C. § 548(a)(1) with Cal. Civ. Code § 3439.04(a) and ORS 95.230 (allowing a transfer to be avoided when the debtor acted with “actual intent to hinder, delay, or defraud” an entity or creditor, or where indicia of constructive fraud are present); and compare 11 U.S.C. § 548(c) with Cal. Civ. Code §3439.08(a) and ORS §95.270 (the safe harbor good faith exception to transferees who took in good faith and for value).

Actual Intent to Defraud
The transferee argued that there remained a genuine issue of fact on the debtor's actual intent to defraud any entity or creditors, and that therefore he should be entitled to go to trial on the transfer to him of "profits" not just the original "investment." The 9th Circuit disagreed, citing its own case law that fraudulent intent can be found from circumstantial evidence and that " 'the mere existence of a Ponzi scheme' is sufficient to establish actual intent under § 548(a)(1) or a state's equivalent to that section." The opinion pointed out that from the debtor's principal's admissions in his plea agreement, the Ponzi scheme was in effect at the time the transferee "invested" and continued to be throughout the time he received the payment, and that was sufficient to find actual fraudulent intent. So there was no genuine issue of material fact on this and so trustee prevailed as to the "profits," since the "reasonably equivalent value" exception about to be discussed only applied to the "investment" portion.

Existence of Reasonably Equivalent Value
The Court spent most of its analysis on this issue, primarily explaining two of its own precedents interpreting "reasonably equivalent value" in the Ponzi context and their application to the present case. In its own words:

in Agretech [Hayes v. Palm Seedlings Partners-A (In re Agric. Research and Tech. Group, Inc.), 916 F.2d 528 (9th Cir. 1990)], . . . we held that a distribution on account of a partnership interest relative to an investor’s capital contribution was not “reasonably equivalent value” as defined by the Bankruptcy Code and Hawaii’s analog. . . . [I]n United Energy [Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589 (9th Cir. 1991)], . . . we held that a transfer in exchange for a proportionally reduced restitution claim was “reasonably equivalent value” as defined by the Bankruptcy Code and California’s analog. . . . . The question before us today is whether the transfer from [the debtor to the transferee] was a distribution under Agretech, or a transfer in exchange for a proportionally reduced restitution claim under United Energy.

The Court rejected the trustee's arguments that Agretech should control. 1) The fact "that Agretech dealt with affirmative defenses to actually fraudulent transfers [under § 548(a)(1)(A), as in the case here], whereas United Energy dealt with the prima facie case for constructively fraudulent transfers [§ 548(a)(1)(B)], was "a distinction without a difference." 2) "Although limited partnership interests are present in Agretech and in this case, [the transferee] was defrauded by [debtor's principal], creating rights different that the rights held by the limited partners in Agretech."

Instead the Court held that United Energy controls. Quoting the District Court opinion which it affirmed on this issue, the tranferee "exchanged his partnership interest for a proportionately reduced restitution claim." The 9th Circuit acknowledged that this exchange of payments for restitution claim did not occur expressly, but that, as in United Energy "we delve beyond the 'form' to the 'substance' of the transaction." Because debtor's business was a Ponzi scheme by the time transferee invested in it, the transferee"acquired a restitution claim at the time he bought into [the] ... Ponzi scheme, just as the investors in United Energy acquired a restitution claim at the time they bought [the debtor's fraudulently produced equipment]. It is this restitution claim, in toto, that [the transferee] exchanged when [debtor] returned [transferee's] principal 'investment' amount."

Ninth Circuit's Bottom Line
So the Court remanded to the bankruptcy court to determine if transferee took the transfers in good faith. If so, he will be entitled to retain the amount he initially "invested" in with debtor, because that would be covered by his restitution claim, now fully paid off with the debtor's transfers. But the "profits" would be beyond any restitution claim and so must be paid to the trustee.

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys