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In re Kadoch, --- Fed.Appx. ---- (2016)
2016 WL 5817267
Only the Westlaw citation is currently available.
This case was not selected for
publication in West's Federal Reporter.
RULINGS BY SUMMARY ORDER DO NOT HAVE
PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY
1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE
32.1 AND THIS COURT'S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX
OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING
A SUMMARY ORDER MUST SERVE A COPY OF IT
ON ANY PARTY NOT REPRESENTED BY COUNSEL.
United States Court of Appeals,
Second Circuit.
In re: David Kadoch, Debtor.
Laurie Kadoch, Appellant,
v. David D. Kadoch,
Appellee, John R. Canney,
Trustee.
16–143–cv
|
October 5, 2016
Appeal from the United States District Court for the District
of Vermont (Murtha, J.).
UPON DUE CONSIDERATION, IT IS HEREBY
ORDERED, ADJUDGED, AND DECREED that the
judgment of the district court is AFFIRMED.
Attorneys and Law Firms
FOR APPELLANT: JAMES B. ANDERSON, Ryan
Smith & Carbine, Ltd., Rutland, Vermont.
FOR APPELLEE: JENNIFER R. EMENS–BUTLER,
Obuchowski & Emens–Butler, P.C., Bethel, Vermont.
PRESENT: DENNY CHIN, SUSAN L. CARNEY,
Circuit Judges, RICHARD M. BERMAN, District
Judge.*
SUMMARY ORDER
*1 Appellant Laurie Kadoch (“Laurie”) appeals from the
district court's judgment entered December 15, 2015,
affirming the order of the United States Bankruptcy Court for
the District of Vermont (Brown, B.J.) entered April 3, 2015,
and its order entered April 17, 2015, denying her motion for
reconsideration. In its orders, the bankruptcy court overruled
Laurie's objections to the claim of debtor-appellee David
Kadoch (“David”) to a homestead exemption. The district
court explained its reasons in an opinion and order also
entered December 15, 2015. We assume the parties'
familiarity with the underlying facts, the procedural history
of the case, and the issues on appeal.
Laurie and David were married for many years. In 2004 and
2005, they borrowed money from Laurie's parents to renovate
their property in Quechee, Vermont (the “Property”). They
divorced in 2010, and their final divorce decree reflected their
stipulation that David would sell the house and the parties
would use the proceeds to repay the outstanding loan from
Laurie's parents, and that until the Property was sold David
could remain in sole possession. In October 2010, a state
court judgment was entered on the debt against David in favor
of Laurie's mother, and in July 2014, David was found in
contempt of the divorce decree because he failed to sell the
Property.
David filed for bankruptcy on October 10, 2014 and claimed
a homestead exemption in the Property under Vermont law,
Vt. Stat. Ann. tit. 27, § 101; Vt. Stat. Ann. tit. 12, § 3023.
Laurie and her mother objected to the homestead exemption;
the bankruptcy court overruled the objection and ruled
David's homestead exemption effective. After the bankruptcy
court denied Laurie's motion for reconsideration, she
appealed to the district court. The district court affirmed.
Laurie argues that (1) the Rooker–Feldman doctrine deprived
the bankruptcy court of jurisdiction to decide whether David
was entitled to a homestead exemption, (2) Laurie and
David's divorce decree excluded the Property from the
bankruptcy estate, (3) the bankruptcy court erred in its
calculation of equity in the homestead property, and (4) the
bankruptcy court abused its discretion when it denied her
motion to reconsider.
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 In re Kadoch, --- Fed.Appx. ---- (2016)
“The rulings of a district court acting as an appellate court in
a bankruptcy case are subject to plenary review.” In re Stoltz,
315 F.3d 80, 87 (2d Cir. 2002). “[W]e review the bankruptcy
court decision independently, accepting its factual findings
unless clearly erroneous but reviewing its conclusions of law
de novo.” In re Baker, 604 F.3d 727, 729 (2d Cir. 2010). The
bankruptcy court's decision to deny Laurie's motion for
reconsideration is reviewed for abuse of discretion. In re
Coudert Bros. LLP, 673 F.3d 180, 186 (2d Cir. 2012). We
conclude, based on our review of the record and the relevant
case law, that that the district court correctly affirmed the
bankruptcy court's order overruling Laurie and her mother's
objections to David's homestead exemption and the order
denying reconsideration.
*2 First, the Rooker–Feldman doctrine did not bar the
bankruptcy court from determining whether a homestead
exemption applied because David did not lose in the state
family court and the issue of the homestead exemption was
not raised in those proceedings. The state court divorce decree
was a so-ordered stipulation imposing obligations on both
Laurie and David, and by requesting a homestead exemption,
David was not “seeking review and rejection” of the divorce
decree. Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544
U.S. 280, 291, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005).
Second, notwithstanding the divorce decree, the Property
remained property of the bankruptcy estate because it did not
create either a lien on the Property or a debt owed by David
to Laurie; rather, both Laurie and David were required to sell
their interests in their jointly owned Property to pay joint
marital debt. Although the family court determined how
Laurie and David would manage their debts and liabilities,
once David filed in bankruptcy, the family court decree could
not override his discharge in bankruptcy, except as permitted
by the Bankruptcy Code. See In re Palmer, 78 B.R. 402, 406
(Bankr. E.D.N.Y.
1987); see also Ridgway v. Ridgway, 454 U.S. 46, 55, 102
S.Ct. 49, 70 L.Ed.2d 39 (1981) (“[A] state divorce decree,
like other law governing the economic aspects of
Footnotes
domestic relations, must give way to clearly conflicting
federal enactments.”).
Third, the bankruptcy court did not clearly err in concluding
that there was sufficient equity in the Property to which a
homestead exemption could attach or in computing the
allocation of net proceeds from the sale. See In re Kleinfeldt,
No. 06–10415, 2007 WL 2138748, at *4 (Bankr. D. Vt. July
23, 2007).
Finally, the bankruptcy court did not abuse its discretion
when it denied Laurie's motion for reconsideration. The issue
of whether the homestead property was excepted from
discharge because of 11 U.S.C. § 523(a)(15), and the other
issues raised in her motion for reconsideration, could have
been or should have been raised in the original motion. See
Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir.
1995). Moreover, the bankruptcy court considered and
rejected the § 523(a)(15) issue on the merits. See Order
Denying Laurie Kadoch's Motion to Reconsider, App. at 13
(“Even if the Court were to find [David's] obligation to
[Laurie's mother] was nondischargeable pursuant to §
523(a)(15), this would not alter the Court's conclusion that
[David] is entitled to a homestead exemption to which
[Laurie's mother]'s debt is subject. Dischargeability and
enforcement of debts are distinct questions.”). The
bankruptcy court did not err in holding that the divorce decree
did not preclude David's invocation of the homestead
exemption in subsequent bankruptcy proceedings.
Accordingly, we affirm substantially for the reasons stated by
the district court in its thorough and wellreasoned December
15, 2015 opinion and order. We have considered all of
Laurie's remaining arguments and find them to be without
merit. Accordingly, we AFFIRM the judgment of the district
court.
All Citations
--- Fed.Appx. ----, 2016 WL 5817267
* Judge Richard M. Berman, United States District Judge for
the Southern District of New York, sitting by designation.
End of Document © 2016 Thomson Reuters. No claim to original
U.S. Government Works.
© 2016 Thomson Reuters. No claim to original U.S.
Government Works. 2
In re: Lehman Brothers Holdings Inc., --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3
2016 WL 5853265
Only the Westlaw citation is currently available.
This case was not selected for
publication in West's Federal Reporter.
RULINGS BY SUMMARY ORDER DO NOT HAVE
PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY
1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE
32.1 AND THIS COURT'S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX
OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING
A SUMMARY ORDER MUST SERVE A COPY OF IT
ON ANY PARTY NOT REPRESENTED BY COUNSEL.
United States Court of Appeals,
Second Circuit.
In re: Lehman Brothers Holdings Inc., Debtor.
344 Individuals, Identified in the Notices of
Appearance of Bankruptcy Court ECF Dkt. Nos.
8234, 8905 and 9459, Plaintiffs–Appellants,
v.
James W. Giddens, as Trustee for
the SIPA Liquidation of Lehman
Brothers Inc., Defendant–Appellee.
15-3480-bk
|
October 6, 2016
Appeal from the United States District Court for the Southern
District of New York (Ramos, J.).
UPON DUE CONSIDERATION, IT IS HEREBY
ORDERED, ADJUDGED, AND DECREED that the
judgment of the district court is AFFIRMED.
Attorneys and Law Firms
FOR PLAINTIFFS–APPELLANTS: RICHARD J.J.
SCAROLA, Alexander Zubatov, Scarola Malone & Zubatov
LLP, New York, New York.
FOR DEFENDANT–APPELLEE: JAMES C.
FITZPATRICK, James B. Kobak, Jr., Marlena C. Frantzides,
Karen M. Chau, Hughes Hubbard & Reed LLP, New York,
New York.
PRESENT: DENNY CHIN, SUSAN L. CARNEY,
Circuit Judges, KATHERINE B. FORREST, District
Judge.*
SUMMARY ORDER
*1 Plaintiffs-appellants (“plaintiffs”) appeal the district
court's September 30, 2015 judgment affirming the order of
the United States Bankruptcy Court for the Southern District
of New York (Chapman, B.J.) entered August 11, 2014
denying plaintiffs' motion to compel arbitration. The district
court explained its reasoning in an opinion and order entered
September 30, 2015. We assume the parties' familiarity with
the underlying facts, the procedural history of the case, and
the issues on appeal.
This case arises out of the Securities Investor Protection Act
(“SIPA”) liquidation proceeding of Lehman Brothers, Inc.
(“LBI”), the largest liquidation proceeding in U.S. history.
Plaintiffs, former employees of LBI's predecessor Shearson
Lehman Brothers, Inc. (“Shearson”), seek deferred
compensation pursuant to employee compensation plan
agreements (the “Agreements”) that they each signed with
Shearson in 1985. Plaintiffs filed proofs of claims in the LBI
liquidation proceeding. Defendant-appellee James W.
Giddens, the SIPA trustee, sought to enforce the provision of
the Agreements that provides that each former employee's
benefits would be subordinated to certain of LBI's other
obligations.
On April 1, 2014, the bankruptcy court converted the trustee's
objections into an adversary proceeding. On June 6, 2014,
plaintiffs moved to stay the adversary proceeding and to
compel arbitration, arguing that, pursuant to an arbitration
clause in the Agreements, their level of priority should be
decided by FINRA arbitrators, not by the bankruptcy court.
On July 30, 2014, the bankruptcy court heard argument and
denied the motion to compel arbitration, ruling from the
bench. Plaintiffs appealed to the district court, the district
court affirmed, and this appeal followed.
In deciding whether to compel arbitration in a bankruptcy
context, courts apply a two-part test. First, the court must
determine whether the proceeding at issue is core or non-core.
MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir.
2006). If the proceeding is non-core, generally the bankruptcy
court must stay the proceedings in favor of arbitration, as
non-core proceedings usually do not warrant overriding the
presumption in favor of arbitration. In re U.S. Lines, Inc., 197
In re: Lehman Brothers Holdings Inc., --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4
F.3d 631, 640 (2d Cir. 1999); see also In re Crysen/Montenay
Energy Co., 226 F.3d 160, 165–66 (2d Cir. 2000). Second, if
the proceedings are core, a court must consider whether
enforcing the arbitration provisions would seriously
jeopardize “any underlying purpose of the Bankruptcy
Code.” In re U.S. Lines, 197 F.3d at 640 (quoting Hays and
Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d
1149, 1161 (3d Cir. 1989)). This two-part test presents mixed
questions of law and fact, and on review, we accept the
bankruptcy court's factual findings unless they are clearly
erroneous and review its conclusions of law de novo. MBNA
Am. Bank, 436 F.3d at 107.
*2 If arbitration would severely conflict with the text,
history, or purposes of the Bankruptcy Code, the bankruptcy
court has discretion to compel or to stay the arbitration. We
review its exercise of that choice for abuse of discretion.
“Where the bankruptcy court has properly considered the
conflicting policies [of the Federal Arbitration Act and the
Bankruptcy Code] in accordance with law, we acknowledge
its exercise of discretion and show due deference to its
determination that arbitration will seriously jeopardize a
particular core bankruptcy proceeding.” In re U.S. Lines, 197
F.3d at 641.
Here, the bankruptcy court held (1) the proceeding was a core
proceeding, and (2) compelling arbitration of the
subordination claim would jeopardize the objectives of the
Bankruptcy Code. Based on our independent review of the
record and the relevant case law, we conclude that the
bankruptcy court did not abuse its discretion in denying
plaintiffs' motion to compel arbitration. See In re Stoltz, 315
F.3d 80, 87 (2d Cir. 2002) (“The rulings of a district court
acting as an appellate court in a bankruptcy case are subject
to plenary review.”).
First, the bankruptcy court correctly concluded that, in this
SIPA liquidation, the dispute over where plaintiffs' claims fall
in the priority scheme of distributions is a core proceeding.
See In re U.S. Lines, Inc., 197 F.3d at 637 (core bankruptcy
proceedings may include “[f]ixing the order of priority of
creditor claims against a debtor” (internal quotation marks
omitted)). Additionally, the bankruptcy court correctly
concluded that the dispute involving the enforcement of a
contractual subordination agreement is core, especially where
the parties dispute whether the subordination provision may
only be applied by the former entity, Shearson, and not LBI,
and whether they are the same entity. See 28 U.S.C. §
157(b)(2)(A) (“Core proceedings include, but are not limited
to ... matters concerning the administration of the estate.”).
Second, the bankruptcy court did not abuse its discretion in
concluding that, in this case, compelling arbitration would
jeopardize the objectives of the Bankruptcy Code. The
bankruptcy court reasonably determined that “Congress
simply could not have intended to turn over the determination
of the relative priority of claims against the estate and the
equitable distribution of the estate's assets in the largest SIPA
liquidation in U.S. history [to] the financial industry
regulatory authority to be decided under the rules of the New
York Stock Exchange.” App. at 1196. The bankruptcy court
considered the conflicting policies of the Federal Arbitration
Act and the Bankruptcy Code, made a particularized inquiry
into the nature of the claims and the facts of LBI's bankruptcy,
and found that an underlying purpose of the Bankruptcy Code
would be jeopardized by enforcing an arbitration clause in
this case. See MBNA Am. Bank, 436 F.3d at 108. While the
bankruptcy court did not use the phrase “seriously
jeopardized” in its conclusions, it did set forth the proper
standard earlier in its ruling. Moreover, based on our review
of the record, we conclude that arbitration would have
“seriously jeopardize[d]” the objectives of the Bankruptcy
Code. The bankruptcy court therefore had discretion over
whether to permit arbitration of subordination claim.
Accordingly, we must give due deference to the bankruptcy
court's decision to stay arbitration unless appellants show that
it constituted an abuse of discretion. Given the bankruptcy
court's careful analysis of the impact of arbitrating the
subordination claim on the bankruptcy proceeding in this
case, appellants have not overcome that deferential standard.
We therefore agree with the district court that the bankruptcy
court did not abuse its discretion in denying the motion to
compel arbitration.
*3 We have considered all of plaintiffs' arguments and find
them to be without merit. Accordingly, we AFFIRM the
judgment of the district court.
All Citations
--- Fed.Appx. ----, 2016 WL 5853265
In re: Lehman Brothers Holdings Inc., --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 5
Footnotes
* Judge Katherine B. Forrest, of the United States District Court for the Southern District of New York, sitting by designation.
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
In re ADI Liquidation, Inc., Slip Copy (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 6
2016 WL 6126245
Only the Westlaw citation is currently available.
United States Bankruptcy Court, D. Delaware.
In re: ADI Liquidation, Inc. (f/k/ a
AWI Delaware, Inc.), et al.,1 Debtors.
Case No. 14–12092 (KJC)
|
Signed October 19, 2016
Attorneys and Law Firms
Aaron S. Applebaum, Jeffrey C. Hampton, Robyn F.
Pollack, Saul Ewing LLP, Philadelphia, PA, Nathaniel Metz,
Shanna Peterson O'Neal, Saul Ewing LLP, Wayne, PA, Mark
Minuti, Lucian Borders Murley, Teresa K.D. Currier, Saul
Ewing LLP, Monique Bair DiSabatino, Saul Ewing LLP,
Evelyn J. Meltzer, Pepper Hamilton LLP, Wilmington, DE,
for Debtors.
OPINION OVERRULING OBJECTION TO CLAIM
OF MARK R. MANGAN2
BY: KEVIN J. CAREY, UNITED STATES BANKRUPTCY
JUDGE
*1 Before the Court is the Debtors' Eighth Omnibus
(Substantive) Objection to Employee Claims (D.I. 2902)
(the “Objection”),3 which includes an objection to proof of
claim number 1825 (“POC 1825” or the “Claim”) filed by
Mark R. Mangan (“Mangan”). Mangan filed POC 1825 as a
priority claim under Bankruptcy Code § 507(a)(4) for unpaid
wages (severance pay) in the amount of $8,693.70. Mangan
also requests payment of his severance claim in a lump sum
distribution. The Debtors contend that the Claim should be
reclassified as a general unsecured claim.
In his response to the Objection (D.I. 2941) (the “Response”),
Mangan opposed reclassification of his claim, arguing that he
continued to provide services to the Debtors post-termination
and post-petition. He attached lists of phone records to his
Response, showing the post-petition communications. He
also attached a copy the Debtors' severance pay policy dated
June 16, 2014, showing that the Debtors' former policy
provided for a lump sum distribution of a severance benefit
payment. A hearing to consider the Objection was held on
May 24, 2016, at which Mangan appeared pro se.
For the reasons set forth below, the Objection will be
overruled. Mangan's claim will be classified as a fourth
priority claim under the Bankruptcy Code § 507(a)(4).
BACKGROUND
Mangan worked as an advertising group manager for
Associated Wholesalers, Inc. (“AWI”) from June of 1999
until his termination on August 1, 2014.4
His responsibilities
included advertising planning, program execution, marketing
campaigns, vendor promotion planning, media buying,
budget control, and responsibility for the operation of twenty-
eight major fullservice supermarkets.5
By letter dated August 1, 2014, the Debtors terminated
Mangan's employment (the “Termination Letter”).6
AWI had
a policy offering full-time, non-union employees who were
permanently laid off certain severance benefits based upon
their years of continuous service.7 The rates for terminated
employees' severance benefits were as follows:
(1) The employees who served fewer than two years
werenot eligible for severance benefits;
(2) The employees who served between two and
fiveyears were eligible for two weeks of severance
benefits; and
(3) The employees who served more than five years
wereeligible to receive one week of severance benefits
for every completed year of service up to a maximum of
twenty weeks.8
According to the Debtors' policy, and as stated in the
Termination Letter, Mangan was entitled to fifteen weeks of
severance pay.9 The Debtors paid nine weekly severance
payments to Mangan prior to the petition date. The Debtors
do not dispute that the amount of $8,693.70 remains
unpaid.10
*2 On September 9, 2014, the Debtors filed voluntary
chapter 11 bankruptcy petitions. Between August 2, 2014,
and October 16, 2014, the Debtors' employees and
representatives contacted Mangan, through phone calls, text
messages and emails, for assistance in continuing
In re ADI Liquidation, Inc., Slip Copy (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 7
AWI's business operations.11
The contacts related to ongoing
requests for information on the location of AWI company
records, computer files, procedures, location of hardcopy
files, and advice regarding unfinished business from his time
at AWI.12
Mangan argues that AWI's policy since 1997 provided for
payment of severance benefits in a lump sum distribution,
“after all obligations to the Company have been met and at a
time when final termination pay is rendered.”13
AWI
changed its policy on July 30, 2014, to provide for payment
of severance pay on a weekly basis.14
Mangan says that he
was not notified of the change in policy, but “obtained a copy
of this revised policy through a secondary source.”15
Mangan
alleges the change in policy was made on the same day that
AWI finalized a plan to lay off 59 employees, including
him.16
At the hearing, the Debtors conceded that, under the
old severance policy, Mangan would have received his
severance pay in a lump sum distribution.17
DISCUSSION
Mangan opposes reclassification of his severance benefit
claim from a priority claim to a general unsecured claim.
Further, in his Response, he argues that his severance benefit
claim should be a secured claim because he continued to work
for AWI post-petition. He did not address any specific basis
of authority for his argument, beyond checking the box for a
§ 507(a)(4) claim on POC 1825.
(1) The Severance Benefit Claim is a Priority Claim
under Bankruptcy Code § 507(a)(4).
Section 507(a)(4) provides that priority status will be granted
to allowed unsecured claims for “wages, salaries or
commissions, including vacation, severance, and sick leave
pay” earned by an individual “within 180 days before the date
of the filing of the petition,” but “only to extent of
$12,850.”18
The Debtors argue that the terminated employees earn one
week of severance pay as they complete a year of service on
the anniversary date of their employment. This method of
calculation derives from the severance policy itself, under
which an employee in Mangan's position is eligible for an
additional week of severance pay (paid at the employee's base
rate at the time of layoff) only upon each year of completed
service. The Debtors further argue that, if a terminated
employee completes a year of service within 180 days of the
petition date, then that employee earned one week of
severance pay that is entitled to priority status; for any
terminated employee whose work anniversary does not fall
within 180 days of filing, no priority status is accorded to the
employee's severance benefit claim.
The Debtors agree that Mangan completed a year of service
in June 2014 and, since that is within 180 days of the petition
date, Mangan was entitled to priority status for one week of
his severance pay claim. Since the Debtors paid Mangan for
nine weeks of severance pay, the Debtors contend that the
amount of severance pay remaining due is a general
unsecured claim.
Courts have reached varying conclusions on the question of
when an employee earns his or her severance payment.
Several courts have held that severance pay, like vacation
pay, is “earned” over the course of the employee's service
because “the severance pay is a component of compensation
... the amount of severance pay [based on service length]
entitled to priority under § 507(a)(4)(A) is that portion of the
total severance pay attributable to the priority prepetition
period.”19
*3 In In re Garden Ridge Corp., I held that in a “severance
pay for termination without cause” situation, the employee's
“right to receive severance payments was ‘earned’ no earlier
than upon termination of employment...”20
Specifically,
because the debtor incurred contingent obligations when it
entered into the employment agreements, and “the
contingencies actually occurred when the Debtor exercised its
right to terminate the claimants' respective employment
agreements,” the severance pay was earned upon
termination.21
In Garden Ridge, unlike the matter before us,
the terminated employees' entitlement to severance payments
did not accrue over time, but were tied to the employees' base
pay at the time of termination. But the contingency in each
case, termination, is what triggers the right to payment:
Mangan's eligibility for severance accrued over time, but he
earned or became entitled to severance only upon termination
of his employment.22
My decision in Garden
Ridge informs the result here.23
Mangan's severance benefit
claim is entitled to priority treatment under § 507(a)(4).
Mangan earned his severance payment within “180 days of
the date of the filing of the petition,” and the amount of the
In re ADI Liquidation, Inc., Slip Copy (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 8
severance is within the $12,475 statutory cap; therefore, it is
a priority claim.
(2) The Severance Benefit Claim is not an
Administrative Expense Priority Claim.
According to 11 U.S.C. § 503(b)(1)(A), the administrative
expenses include “the actual, necessary costs and expenses of
preserving the estate including ... wages, salaries, and
commissions for services rendered after the commencement
of the case ....” Mangan argues that AWI should compensate
him for his severance claim as an administrative claim
because he rendered post-petition services.24
Mangan
believed that he “was compelled to continue to honor the
request for information and cooperation of the Debtor,” and
that his work was in the normal operation of the Debtors'
business.25
He further elaborates that there was “somewhat
of an obligation to feel compelled to do so” because of the
many responsibilities that he previously performed.26
He also
states that he felt compelled to do so “because a lump sum
distribution [of his severance benefits] was not made.”27
Mangan admits that he had no express agreement with AWI
regarding the services he provided after the termination of his
employment. AWI admits that Mangan provided assistance
after his termination, but claims that their employer-
employee relationship ended on August 1, 2014.
*4 Here, Mangan's severance payment claim derives from
his pre-petition work over the past fifteen years.
Footnotes
The fact that he may have continued to provide services to
AWI after the filing of the petition was not a basis for his
severance payment. AWI did not enter into any post-petition
agreement with Mangan; neither did AWI promise to render
the severance pay in exchange for his post-petition services.
Post-petition, Mangan was not AWI's employee, but
volunteered for the services he provided. A volunteer may not
receive compensation from the Debtors. “The services for
which compensation is requested should have been
performed pursuant to appropriate authority under the Code
and in accordance with an order of the court.
(3) The Severance Benefit Claim is not a Secured Claim.
Mangan also argues that his severance benefit claim is a
secured claim because AWI initiated contact with him
numerous times after terminating his employment by letter,
which (he believes) demonstrates that AWI retained his
services.28
It is clear that Mangan, who is representing
himself, does not understand the nature of a secured claim and
the record supports no basis upon which I can conclude that
his claim is secured.
CONCLUSION
For the reasons set forth above, I conclude that Mangan's
severance benefit claim, totaling $8,693.70, should be
classified as a priority claim under Bankruptcy Code §
507(a)(4). As I confirmed the Debtors' plan in this chapter 11
case on September 30, 2016 (D.I. 3679), Mangan's claim
should be paid in accordance with the treatment of priority
claims under the plan.
An appropriate order follows.
All Citations
Slip Copy, 2016 WL 6126245
1 The Debtors in these chapter 11 cases are: AWI Delaware, Inc.; Associated Wholesalers, Inc.; Nell's, Inc.; Co–Op
Agency Inc.; Associated Logistics, Inc.; White Rose Inc.; Rose Trucking Corp.; WR Service Corp.; WR Service II Corp.;
WR Service V Corp.; and White Rose Puerto Rico, LLC.
2 This Opinion constitutes the findings of fact and conclusions of law, as required by Fed. R. Bankr. P. 7052. This Court
has jurisdiction to decide this claim objection pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant
to 28 U.S.C. § 157(b)(2)(B). Venue is proper in this judicial district under 28 U.S.C. §§ 1408 and 1409.
3 Debtors' Eighth Omnibus (Substantive) Obj. to Employee Claims (Duplicative, Improperly Asserted, No Liability and
Reclassified Claims) and Mot. for Entry of an Order Authorizing and Directing Debtors' Claims Agent to Mark Certain
Claims as Satisfied in Full (D.I. 2902).
4 Hearing Transcript, May 24, 2016 (D.I. 2976), at 9:12–25; Response (D.I. 2941).
5 Id.
6 Objection, ¶ 12.
In re ADI Liquidation, Inc., Slip Copy (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 9
7 Id. ¶ 11.
8 Id.
9 POC 1825.
10 Tr. 6:13–17.
11 Tr. 10:2–25.
12 Tr. 9:15–18.
13 POC 1825. See Response, Ex. D.
14 POC 1825, Ex. E.
15 POC 1825. 16 Id.
17 Tr. 6:22–23.
18 11 U.S.C. § 507(a)(4). The dollar amount is adjusted in 3–year intervals pursuant to 11 U.S.C. § 104.
19 In re Ellipsat, Inc., 480 B.R. 1, 10 (Bankr. D. D.C. 2012) (discussing that traditionally courts have concluded that an
employee “earns” his severance pay over time under the severance policy) (citing In re Russell Cave Co., Inc., 248 B.R.
301, 304–05 (Bankr.E.D.Ky. 2000), In re Yarn Liquidation, Inc., 217 B.R, 544, 546 (Bankr.E.D.Tenn. 1997), Roeder v.
United Steelworkers of Am. (In re Old Electralloy Corp.), 167 B.R. 786, 796 (Bankr.W.D.Pa. 1994), In re Jeannette Corp.,
118 B.R. [327, 330 (Bankr.W.D. Pa. 1990) ], and In re N.W. Eng'g Co., 43 B.R, 603, 605 (Bankr.E.D.Wis. 1984)).
20 In re Garden Ridge Corp., 2006 WL 521914, at *1–2 (Bankr.D.Del. Mar. 2, 2006). In 2006, Bankruptcy Code § 507(a)(3)
governed the priority of severance pay claims, and the Code stated that the “wages, salaries, or commissions, including
vacation, severance, and sick leave pay earned by an individual” within 90 days before the date of the filing of the petition
was a priority claim.
21 Id.
22 Matson v. Alarcon, 651 F.3d 404 (4 th Cir. 2011). The Matson Court decided that “[t]he purpose of such severance
compensation is to ‘alleviate the consequent need for economic readjustment’ and ‘to recompense [the employee] for
certain losses attributable to the dismissal.’ ” (citing Straits–Duparquet, Inc. v. Local Union No. 3, Int'l Bhd of Elec
Workers, 386 F.2d 649, 651 (2d Cir. 1967)). The Matson Court held “that an employee ‘earns' the full amount of
‘severance pay’ on the date the employee becomes entitled to receive such compensation, subject to satisfaction of the
contingencies provided in the applicable severance compensation plan.” Matson, 61 F.3d at 409. The Matson Court also
distinguished cases (including the Third Circuit's decision in Roth American ) which considered the treatment of claims
for severance payment as administrative expense priority, deciding that § 503(b)(1)(A)'s provisions are materially
different from § 507(a) (4); for administrative claim priority, the court must calculate the value of services rendered in a
period of time after the debtor files a bankruptcy petition. Matson, 61 F.3d at 410. See In re Roth American, Inc., 975
F.2d 949 (3d Cir. 1992).
Therefore, Roth American addresses a different issue than the one before me and the reasoning is not applicable here.
23 Curiously, I was unable to find any reference by Debtor's counsel either in the Objection or the hearing record to Garden
Ridge.
24 Tr. 11:2.
25 Tr. 10:17–18; 11:1–2, 11–12.
26 Id. 11:14–17.
27 See Response. This argument has no force legally, but it is understandable that Mangan did not know why he was not
given the lump-sum payment to which he believed he was entitled or what might be required of him to prompt the payment
if, as he states in POC 1825, he was never notified of the change in the severance policy from lump-sum distribution to
payment on a weekly basis. 28 Response, at 3.
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
In re Grant Covert, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 10
2016 WL 5846227
Only the Westlaw citation is currently available.
This case was not selected for
publication in West's Federal Reporter.
See Fed. Rule of Appellate Procedure 32.1
generally governing citation of judicial decisions
issued on or after Jan. 1, 2007. See also U.S.Ct. of
Appeals 3rd Cir. App. I, IOP 5.1, 5.3, and
5.7. United States Court of Appeals, Third
Circuit.
In re: Dana N. Grant–Covert, Appellant
No. 16–1880
|
Submitted Pursuant to Third Circuit
LAR 34.1(a) September 1, 2016
|
(Opinion filed: October 6, 2016)
Synopsis
Background: Bank moved for relief from stay in
debtormortgagor's Chapter 7 case to exercise its rights in
mortgaged property. The United States Bankruptcy Court for
the District of Delaware granted motion, and debtor appealed.
The District Court, Noel L. Hillman, J., affirmed. Debtor
appealed.
[Holding:] The Court of Appeals held that bank to which
Chapter 7 debtor's mortgage was transferred, and which was
also the holder, either in its own capacity or through agent, of
associated mortgage note that was endorsed in blank,
qualified as “real party in interest” with standing to move for
relief from stay.
Affirmed.
On Appeal from the United States District Court for the
District of Delaware, District Judge: Honorable Noel L.
Hillman. (D.C. Civil Action No. 1–15–cv–06018)
Attorneys and Law Firms
Dana N. Grant–Covert, Cherry Hill, NJ, Pro Se.
Barbara K. Hager, Henry F. Reichner, Reed Smith,
Philadelphia, PA.
Before: VANASKIE, SCIRICA and FUENTES, Circuit
Judges
OPINION*
PER CURIAM
*1 Dana N. Grant–Covert appeals from the District
Court's order, which affirmed a bankruptcy court order1
that
vacated the automatic stay in her bankruptcy proceeding. We
will affirm the District Court's judgment.
Because the parties are familiar with the history and facts of
the case, we will limit our discussion to those facts essential
to our decision. Appellant filed a Chapter 7 bankruptcy
proceeding in June of 2015. Wells Fargo Bank, N.A.,
claiming to be a secured creditor based on a first mortgage on
real property, filed a motion for relief from the automatic
stay, see 11 U.S.C. § 362(a), in order to foreclose on the real
property. Grant–Covert opposed the motion, arguing that
Wells Fargo was “not the Real Party in Interest,” that it did
not have standing, that it was a “third Party Interloper,” and
that it had “not filed a Proof of Claim to be considered as
Secured Creditor.” Bankr. Dkt. # 24 at 2.
The Bankruptcy Court held a hearing on the motion. Wells
Fargo did not attend. The Bankruptcy Judge granted Wells
Fargo's motion, informing Grant–Covert that she would have
to raise any defenses she had in the state-court foreclosure
action. Grant–Covert timely appealed.
The District Court affirmed the Bankruptcy Court order. The
Court agreed that Grant–Covert could raise her defenses to
the claim in the foreclosure action, concluded that Wells
Fargo was a real party in interest under 11 U.S.C. § 362(d),
and held that Wells Fargo had shown cause for relief from the
automatic stay. Grant–Covert filed a timely appeal.
The District Court had jurisdiction to review the Bankruptcy
Court's order pursuant to 28 U.S.C. § 158(a), and we have
jurisdiction to review the District Court's order under 28
U.S.C. §§ 158(d) and 1291. Our review of the District Court's
determination is plenary, and we use the same standard of
review as the District Court in reviewing the decision of the
Bankruptcy Court. See Kool, Mann, Coffee & Co. v. Coffey,
300 F.3d 340, 353 (3d Cir. 2002).
Grant–Covert raises four issues in her brief on appeal, but her
argument essentially boils down to this: Wells Fargo could
not properly move to lift the stay because it lacked standing
and/or was not a real party in interest. The Bankruptcy Court
did not address the argument, stating that “[t]here's really no
In re Grant Covert, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 11
basis for this Court to retain the jurisdiction over those
issues.” Tr. at 5. The District Court did consider the
argument, and held that Wells Fargo was a real party in
interest. We agree.
Constitutional standing is a threshold jurisdictional
limitation; federal courts may only decide real cases or
controversies. See Barrows v. Jackson, 346 U.S. 249, 255, 73
S.Ct. 1031, 97 L.Ed. 1586 (1953). Grant–Covert does not
appear to argue that Wells Fargo failed to show constitutional
standing. But even if “the plaintiff has alleged injury
sufficient to meet the ‘case or controversy’ requirement, [the
Supreme] Court has held that the plaintiff generally must
assert his own legal rights and interests, and cannot rest his
claim to relief on the legal rights or interests of third parties.”
Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197, 45
L.Ed.2d 343 (1975).
This prudential aspect of standing is closely related to §
362(d)'s requirement that the party moving to terminate the
automatic stay be “a party in interest.” Because real parties in
interest always have standing, but the converse is not always
true, we focus on whether Wells Fargo is a real party in
interest. See In re Veal, 450 B.R. 897, 907 (9th Cir. BAP
2011) (citing 4 Moore's Fed. Prac. § 17.10[1], at p. 17–
15 (3d ed. 2010)2); see also In re Miller, 666 F.3d 1255, 1261
(10th Cir. 2012) (party seeking relief under § 362(d) must be
either creditor or debtor of bankruptcy estate).
*2 Grant–Covert argues that Wells Fargo is not a real party
in interest because it did not show that it was entitled to
enforce the Note associated with her mortgage. She does not
dispute that her mortgage was transferred to Wells Fargo, but
she argues that it cannot show that it was entitled to enforce
the associated note because it was “indorsed to Wells Fargo
and then indorsed in blank.” Appellant's Br. at 11, quoting
Dist. Ct. Op. at 2.
Under New Jersey law, an instrument that is indorsed in blank
“becomes payable to bearer and may be negotiated by
transfer of possession alone until specially indorsed.”
N.J. Stat. Ann. § 12A:3–205. Thus, whoever was in
possession of the note would become the “holder” of the note,
and would be entitled to enforce the note under N.J. Stat.
Ann. § 12A:3–301. And under common law, if Wells Fargo
held the mortgage but not the underlying note, the mortgage
would have been “a worthless piece of paper.” See Veal, 450
B.R. at 916 (internal quotation and citation omitted). Grant–
Covert argues that the reasoning in Veal should persuade us
and similarly should result in a finding that Wells Fargo did
not show that it is a real party in interest. But we find that
unlike in Veal, Wells Fargo made a sufficient showing here
that it possessed the note as well as the mortgage.
First, in Veal the assignment of the mortgage did “not contain
language effecting an assignment of the Note.” Veal, 450
B.R. at 905. In contrast, the assignment here assigned the
mortgage to Wells Fargo “Together with the bond, Note or
other Obligation therein described, and the money due to
grow due thereon, with the interest.” Bankr. Dkt. # 18–1 at
22. Second, Tiffany Pompey, Vice President Loan
Documentation of Wells Fargo certified that she had
personally reviewed the company's records and certified that
Wells Fargo “directly or through an agent, has possession of
the promissory note.” Id. at 1. And the certification attached
a copy of the Note. Id. at 11–12. Cf. Veal, 450 B.R. at 904
(“Wells Fargo submitted ... no evidence as to who possessed
the Note and no evidence regarding any property interest it
held in the Note.”); Miller, 666 F.3d at 1264 (“While
Deutsche Bank has offered proof that IndyMac assigned the
Note in blank, it elicited no proof that Deutsche Bank in fact
obtained physical possession of the original Note from
IndyMac, either voluntarily or otherwise.”).
As Wells Fargo provided evidence that it had been assigned
the mortgage, and that it was in possession of the Note
indorsed in blank, it produced sufficient evidence to allow the
Bankruptcy Court to find that it was a party in interest,
entitling it to ask that court to lift the automatic stay.
For the foregoing reasons, we will affirm the District Court's
judgment.
All Citations
--- Fed.Appx. ----, 2016 WL 5846227
Footnotes * This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding
precedent.
1 See In re: Dana N. Grant–Covert, No. 15–20394–ABA (Bankr. D.N.J. July 22, 2015).
2 The same concept now appears at 2–13 Moore's Manual—Federal Practice and Procedure § 13.01[1] (2016).
In re Grant Covert, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 12
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
In re W.R. Grace & Co., Slip Copy (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 13
2016 WL 6137275
Only the Westlaw citation is currently available.
United States Bankruptcy Court, D. Delaware.
In re: W.R. Grace & Co., et
al.,1 Reorganized Debtors
Ralph Hutt and Carl Osborn, Plaintiffs,
v.
Maryland Casualty Company, Defendants.
Case No. 01–01139 (KG) (Jointly Administered)
|
Adv. Proc. No. 14–50867 (KJC)
|
Signed October 17, 2016
Attorneys and Law Firms
James E. O'Neill, Pachulski Stang Ziehl & Jones LLP,
Wilmington, DE, for Reorganized Debtors/Plaintiffs.
Michael G. Busenkell, Gellert Scali Busenkell & Brown,
LLC, Wilmington, DE, Daniel C. Cohn, Ryan M.
MacDonald, Keri L. Wintle, Murtha Cullina LLP, Boston,
MA, for Plaintiffs.
Gabriella V. Cellarosi, Gabriella Cellarosi Daniel,
Edward J. Longosz, II, Eckert Seamans Cherin & Mellott,
LLC, Washington, DC, Jeffrey C. Wisler, Connolly
Gallagher, Wilmington, DE, for Defendants.
OPINION2
KEVIN J. CAREY, UNITED
STATES BANKRUPTCY JUDGE
*1 Ralph Hutt and Carl Osborn (the “Plaintiffs”) filed an
adversary complaint (the “Adversary Complaint”) seeking a
declaratory judgment that their claims against Maryland
Casualty Company (“MCC”), as set forth in a proposed
complaint to be filed in Montana state court, attached as
Exhibit A to the Adversary Complaint (the “State Court
Complaint”), are not barred by the Asbestos PI Channeling
Injunction that was established in the Debtor's confirmed plan
of reorganization. The Plaintiffs have moved for summary
judgment (Adv. D.I. 14) (the “Summary Judgment Motion”),
which is opposed by
MCC.3 The Court heard oral argument on the Summary
Judgment Motion and took the matter under advisement.
For the reasons set forth below, the Plaintiffs' Summary
Judgment Motion will be granted, in part, and denied, in part.
BACKGROUND AND UNDISPUTED FACTS4
The Debtors manufactured and sold specialty chemicals and
construction materials for more than a century and, in the
1970's, began to face asbestos-related lawsuits.5
“Those
lawsuits were based on harm allegedly caused by a number
of Grace's products and activities, including its operation of a
vermiculite mine in Libby, Montana” (the
“Libby Facility”).6 “Grace operated the mine from 1963 to
1990, and during that period the mining process released
asbestos-containing dust into the atmosphere and allegedly
sickened hundreds of area residents.”7
On April 2, 2001, the Debtors filed voluntary chapter 11
petitions in this Court. The Debtors' First Amended Plan of
Reorganization (the “Plan”) took effect on February 3,
2014 (the “Effective Date”).8 The Plan was supported by the
Debtors and the Court-appointed representatives of the
interests of existing and future asbestos claimants. The Plan
creates the “WRG Asbestos PI Trust” (the “Asbestos PI
Trust”), “a Delaware statutory trust, established pursuant to
section 524(g) of the Bankruptcy Code9 and in accordance
with the Asbestos PI Trust Agreement.”10
*2 The Plan's channeling injunction limits all holders of
Asbestos PI Claims11
to recovery from the Asbestos PI Trust
after the Plan's Effective Date, and enjoins those claim
holders from pursuing recovery from the Debtors and any
other Asbestos Protected Party. More particularly, Section
8.2.1 of the Plan, entitled “Asbestos PI Channeling
Injunction,” provides, in pertinent part, that:
On and after the Effective Date, the
sole recourse of the Holder of an
Asbestos PI Claim or a Successor
Claim arising out of or based on any
Asbestos PI Claim on account thereof
shall be to the Asbestos PI Trust
pursuant to the provisions of the
In re W.R. Grace & Co., Slip Copy (2016)
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Asbestos PI Channeling Injunction
and the Asbestos PI TDP [Trust
Distribution Procedures] .... Without
limiting the foregoing, from and after
the Effective Date, the Asbestos PI
Channeling Injunction shall apply to
all present and future Holders of
Asbestos PI Claims ... and all such
Holders permanently and forever shall
be stayed, restrained, and enjoined
from taking any and all legal or other
actions or making any Demand
against any Asbestos Protected Party
or any property or interest (including
Distributions made pursuant to this
Plan) in property of any Asbestos
Protected Party for the purpose of,
directly or indirectly, claiming,
collecting, recovering, or receiving
any payment, recovery, satisfaction,
or any other relief whatsoever on, of,
or with respect to any Asbestos PI
Claims ... other than from the
Asbestos PI Trust in accordance with
the Asbestos PI Channeling Injunction
and pursuant to the Asbestos PI Trust
Agreement and the Asbestos PI TDP
....12
The Plan defines an “Asbestos Protected Party” to include the
“Settled Asbestos Insurance Companies,”13
which are
defined as;
any Asbestos Insurance Entity14
that has
entered into an Asbestos
Insurance Settlement Agreement;15
but only with respect to, and only to
the extent of, any
Asbestos Insurance Policy (or any
portion thereof) identified as the
subject of an Asbestos Insurance
Settlement Agreement in Exhibit 5 in
the Exhibit Book.... and further
provided, for the avoidance of doubt
that an Asbestos Insurance Entity is a
Settled Asbestos Insurance Company
to the fullest extent, but only to the
extent provided by section 524(g) in
respect of any claim that arises by
reason of one of the activities
enumerated in section
524(g)(4)(A)(ii).16
Under the Plan, an “Asbestos Insurance Policy” is a policy
that provides “insurance coverage for any Asbestos Claim”
but an Asbestos Insurance Policy does not include Workers'
Compensation Claims.17
*3 “MCC was Grace's primary general liability and workers'
compensation insurer from 1962 to 1973.”18
At least one of
the workers' compensation policies granted MCC the right to
inspect the Debtors' premises, but also include language
intended to limit the legal effect of any inspections.19
In 1991, after numerous asbestos-related law suits were filed
against Grace, MCC entered into a settlement agreement with
Grace to settle various coverage demands under its primary
general liability policies.20
“After filing for bankruptcy,
Grace entered into settlements with several other insurers.
These settlements, as well as Grace's own contributions,
[were] used to fund the [Asbestos] PI Trust. As a result, these
other insurers and MCC were all designated as Settled
Asbestos Insurance Companies under the terms of the Joint
Plan, meaning that they were entitled to injunctive relief
under § 524(g).”21
The Plaintiffs' State Court Complaint, attached to the
Adversary Complaint, alleges that the Plaintiffs were workers
at the Libby Facility who suffer from asbestos disease and
asbestos-related bodily injuries as a result of being exposed
to highly toxic asbestos.22
The claims asserted against MCC
in the State Court Complaint are summarized as follows:
(1) Negligence in provision of industrial
hygiene services:23
MCC's industrial hygienist and others in MCC's Accident
Prevention Department knew that the workers had
“pneumoconisosis occupational disease exposure” and that
there were “30 employees who lacked normal lung function.”
As part of its industrial hygiene services MCC undertook to
design a program for control and prevention of asbestos dust
and disease for the benefit of workers that would address dust
control and personal protection from asbestos dust. MCC was
negligent in the design of the industrial hygiene program and
In re W.R. Grace & Co., Slip Copy (2016)
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in failing to disclose and disseminate to the workers, the
nature and degree of the asbestos hazard that MCC had
acquired and analyzed.
(2) Bad Faith Treatment of Workers with
Rights to Occupational Disease Benefits (Breach
of Fiduciary Duty, Deceit, Bad Faith, Negligent
Misrepresentation and Constructive Fraud):24
(a) MCC contracted to provide workers'
compensation/occupational disease coverage to
employees under statutorily defined “compensation
plan No. 2” which required that MCC “shall be
directly and primarily liable to and will pay directly
to the employee” the medical and disability
compensation owed under the Montana Occupational
Disease Act (“MODA”).25
*4 (b) Because of the ... special relationship, MCC had
a fiduciary duty to disclose and not to suppress
information necessary to the insured employees'
rights as injured workers with injurious exposures
and, therefore, their rights to occupational disease
benefits for latent disease.26
(c) MCC suppressed, and failed to disclose
theknowledge of the facts, degree and expected
consequences of the asbestos hazard. Its safety
program failed to provide for worker education and
warnings, and it failed to report to the workers known
and ongoing hazardous conditions. MCC concealed
the expected course of latent disease process in
workers. Further MCC knew that workers were being
advised that the dust was not dangerous, and that
workers were not aware of the extreme asbestos dust
concerns raised in reports of periodic inspections by
the Montana State Board of Health.27
(d) MCC sought to avoid disclosure to the
MontanaIndustrial Accident Board, the entity charged
with addressing compensability of occupational
disease claims, the facts of the degree of disease-
causing asbestos-laden dust in order to avoid MCC's
liability on existing claim, the expected “good many
claims involving asbestosis” ... as well as the future
liability for benefits for workers with latent disease.28
(e) Plaintiffs' rights to occupational disease medicaland
disability benefits for their injurious exposure were
lost after the expiration of the prescribed period for
presentation of a claim for benefits and before they
had knowledge that they had sustained injurious
exposures to occupational disease qualifying them for
benefits under MODA.29
(f)MCC's conduct constituted a breach of itsfiduciary
duties as a workers' compensation and occupational
disease insurer of workers including Plaintiffs.30
(g) MCC's conduct constituted deceit within
themeaning of 27–1–712, M.C.A.; constituted bad
faith and a breach of the duty of good faith and fair
dealing; and constituted constructive fraud within the
meaning of 28–2–406, M.C.A. and negligent
misrepresentation.31
(h) MCC's conduct... constituted malice such thatan
assessment of punitive damages, sufficient to punish,
deter and make example of such malicious conduct is
appropriate.32
The Adversary Complaint contains six counts. The first three
counts ask the Court to declare that the channeling injunction
does not enjoin the Plaintiffs from filing the Negligence
Claim in Montana state court because:
• Count I: Bankruptcy Code § 524(g)(4)(A)(ii) limits the
channeling injunction so that it does not apply to the
Negligence Claim;
• Count II: the Negligence Claim arises under
workers'compensation policies that were not listed on
Exhibit 5 to the Plan and, therefore, not protected by the
channeling injunction; and
• Count III: the Negligence Claim arises under
workers'compensation policies that are specifically
excluded from the channeling injunction.
Likewise, the second three counts ask the Court to declare
that the channeling injunction does not enjoin the Plaintiffs
from filing the Bad Faith Claim in Montana state court
because:
*5 • Count IV: the Bad Faith Claim arises under workers'
compensation policies that were not listed on Exhibit 5
to the Plan and, therefore, not protected by the
channeling injunction;
In re W.R. Grace & Co., Slip Copy (2016)
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• Count V: the Bad Faith Claim arises under
workers'compensation policies that are specifically
excluded from the channeling injunction; and
• Count VI: Bankruptcy Code § 524(g)(4)(A)(ii) limits the
channeling injunction so that it does not apply to the Bad
Faith Claim.
MCC opposes the Plaintiffs' Summary Judgment Motion and
asks that the Court deny it and enter an order barring the relief
sought by the Plaintiffs.
II. STANDARD FOR SUMMARY JUDGMENT
Rule 56 of the Federal Rules of Civil Procedure, made
applicable hereto by Federal Rule of Bankruptcy Procedure
7056, provides that “[t]he court shall grant summary
judgment if the movant shows that there is no genuine dispute
as to any material fact and the movant is entitled to judgment
as a matter of law.”33
At the summary judgment stage, the
court's function is not to weigh the evidence and determine
the truth of the matter, but to determine whether there is a
genuine issue for trial.34
The moving party bears the burden of establishing the
absence of a genuine dispute as to a material fact.35
“[A]
party seeking summary judgment always bears the initial
responsibility of informing the district court of the basis for
its motion, and identifying those portions of ‘the pleadings,
depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any,’ which it believes
demonstrate the absence of a genuine issue of material
fact.”36
When the nonmoving party bears the burden of
persuasion at trial, the moving party “may meet its burden ...
by showing that the nonmoving party's evidence is
insufficient to carry that burden.”37
Once the moving party has carried its initial burden, the
opposing party “must do more than simply show that there is
some metaphysical doubt as to the material facts.”38
Summary judgment cannot be avoided by introducing only “a
mere scintilla of evidence,”39
or by relying on “conclusory
allegations, improbable inferences and unsupported
speculation.”40
“Brash conjecture coupled with earnest hope
that something concrete will materialize, is insufficient to
block summary judgment.”41
*6 Substantive law determines which facts are material;
“[o]nly disputes over facts that might affect the outcome of
the suit will preclude summary judgment.”42
Moreover, a
dispute over a material fact is genuine “if the evidence is such
that a reasonable jury could return a verdict for the
nonmoving party.”43
The Court must resolve all doubts and
consider the evidence in the light most favorable to the
nonmoving party.44
III. DISCUSSION The Plaintiffs'
Summary Judgement Motion, and MCC's response thereto,
raise the following issues: first, whether the Negligence
Claim and the Bad Faith Claim (together, the “Plaintiffs'
Claims”) fall within the scope of the Asbestos PI Injunction,
as limited by Bankruptcy Code
§ 524(g)(4),45
and, second, whether claims based on MCC's
workers' compensation policies are excluded from the
Asbestos PI Channeling Injunction because (i) the Asbestos
PI Channeling Injunction specifically excludes workers'
compensation claims, and (ii) those policies were not
identified in Exhibit 5 to the Plan.
A. The limitations of Section 524(g)(4) do not
prevent the Asbestos PI Channeling Injunction
from applying to the Plaintiffs' Claims
“Section 524(g) provides a special form of supplemental
injunctive relief for an insolvent debtor facing the unique
problems and complexities associated with asbestos
liability.”46
As further explained by the Third Circuit:
Channeling asbestos-related claims to
a personal injury trust relieves the
debtor of the uncertainty of future
asbestos liabilities. This helps achieve
the purpose of Chapter 11 by
facilitating the reorganization and
rehabilitation of the debtor as an
economically viable entity. At the
same time, the rehabilitation process
served by the channeling injunction
supports the equitable resolution of
asbestos-related claims. In theory, a
debtor emerging from a Chapter 11
reorganization as a going-concern
cleansed of asbestos liability will
provide the asbestos personal injury
In re W.R. Grace & Co., Slip Copy (2016)
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trust with an “evergreen” source of
funding to pay future claims. This
unique funding mechanism makes it
possible for future asbestos claimants
to obtain substantially similar
recoveries as current claimants in a
manner consistent with due process.
To achieve this relief, a debtor must
satisfy the prerequisites set forth in §
524(g) in addition to the standard plan
confirmation requirements.47
Subsection 524(g)(4) extends an asbestos channeling
injunction in limited situations to enjoin actions against non-
debtors, providing in pertinent part:
Notwithstanding the provisions of section 524(e),48
such
an injunction may bar any action directed against a third
party who is identifiable from the terms of such injunction
(by name or as part of an identifiable group) and is alleged
to be directly or indirectly liable for the conduct of, claims
against, or demands on the debtor to the extent such
alleged liability of such third party arises by reason of—
....
*7 (III) the third party's provision of insurance to the
debtor or a related party ....49
About ten years before the Debtors' bankruptcy filing, the
Debtors and MCC entered into a settlement agreement
regarding coverage and payment obligations under the
various insurance policies issued by MCC to the Debtors.
MCC falls within the Plan's definitions of an “Asbestos
Insurance Entity” that entered into an “Asbestos Insurance
Settlement,” thereby becoming a “Settled Asbestos Insurance
Company.” The District Court affirmed the Bankruptcy
Court's determination that it was fair and equitable to include
MCC as a Settled Asbestos Insurance Company entitled to
receive the injunctive protection of § 524(g)(4), writing: “as
long as a party has contributed reasonable value to the
reorganization plan, whether through its own direct
contribution or by those made indirectly on its behalf by
another party, then it is fair and equitable to future claimants
for that party to receive the injunctive protection afforded by
§ 524(g).”50
The District Court then found that MCC's
settlement payment enabled the Debtors to contribute assets
to the trust fund:
[C]ontributions to the asbestos trust
directly made by Grace include, to
some degree, an amount originally
contributed by MCC. Without MCC's
previous payments, Grace would not
be able to donate as much as it
presently can to the trust, As such,
Grace's direct contributions to the trust
reflect, as provided for in § 524(g), an
amount made “on behalf of” MCC,
Therefore, extending injunctive
protection to MCC is fair and
equitable under these circumstances.
In fact, not enjoining future claims
against MCC could render a
potentially unfair result since MCC
could actually be responsible for
double the amount of any other party
given its previous significant
monetary contribution to Grace.51
Accordingly, it has already been decided that it is fair and
equitable for MCC to be a Settled Asbestos Insurance
Company under the Plan.52
Whether the Plaintiffs' Claims fall within the scope of the
Asbestos PI Channeling Injunction, as limited by language of
§ 524(g)(4)(A), requires consideration of the following
questions: (i) do the Plaintiffs' Claims allege that MCC is
directly or indirectly liable for the conduct of, claims against,
or demands on, the Debtors, and (ii) does the liability alleged
in the Plaintiffs' Claims arise by reason of MCC's provision
of insurance to the Debtors?
(1) The Plaintiffs' Claims seek to hold MCC “indirectly
liable” for the Debtors' products or conduct.
The Plaintiffs argue that the Negligence Claim and the Bad
Faith Claim allege that MCC is liable for its own actions or
omissions in connection with (i) MCC's design and
implementation of an inadequate industrial hygiene program,
(ii) MCC's failure to conduct proper inspections, sampling
and/or testing at the Libby Facility, and (iii) MCC's failure to
warn the Plaintiffs of the danger of asbestos exposure. They
assert that these claims are independent and wholly separate
from any claims against the Debtors.
*8 MCC argues in response that the Plaintiffs' Claims seek
recovery indirectly for injuries arising out of Grace's asbestos
products or Grace's operations at the Libby Facility. MCC
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also asserts that earlier decisions of the bankruptcy court and
district court have already determined that similar claims
asserting “independent” liability against MCC were
derivative of the Debtors' liability. However, those decisions
were made in the context of evaluating the “probability of
success on the merits” prong of a preliminary injunction
analysis. I disagree that either court made a final ruling on
this issue.53
Section 524(g)(4) permits a channeling injunction to protect
non-debtor third parties from law suits that are derivative of
a debtor's conduct or claims against the debtors.54
In
Combustion Engineering, the Third Circuit noted that the
asbestos-related personal injury claims asserted against the
debtors' affiliates arose from “different products, involved
different asbestoscontaining materials and were sold to
different markets,”55
and were “wholly separate” from any
liability involving the debtors.56
The Court then determined
that the § 524(g)(4)(A) channeling injunction did not protect
the non-debtor affiliates.57
In Pittsburgh Corning, the
bankruptcy court determined that a § 524(g) (4)(A) injunction
properly channeled claims against the debtors' affiliates that
were based upon injuries caused by the debtor's products
(known as “PC–Relationship Claims”), or were “conspiracy
theory claims” based on joint and several liability theories
with the debtor.58
However, the court ruled that the
Pittsburgh Corning channeling injunction had to be tailored
to exclude claims against affiliates involving asbestos
products that were not manufactured, marketed or sold by the
debtor.59
Here, the injuries giving rise to the Plaintiffs' Claims are
based on exposure to Grace's asbestos products or operations
at the Libby Facility. There are no allegations that MCC
produced, mined or marketed any of its own asbestos
products. Therefore, I conclude that the Plaintiffs' Claims
seek to hold MCC indirectly liable for the Debtors' conduct
and products.60
(2) The Plaintiffs' Claims allege that
MCC's liability arises by reason of MCC's provision
of insurance to the Debtors
*9 Section 524(g)(4) provides that the channeling injunction
protects a non-debtor third party only to the extent that the
direct or indirect liability “arises by reason of” a particular
relationship between the debtor and the third party.61
In this
case, the relevant relationship is based on MCC's provision of
insurance to the Debtors. There are no allegations that MCC
has any connection to the Debtors' products or operations,
except as an insurer. The Plaintiffs' Claims, however, assert
that MCC breached certain duties that arise from that
relationship and the rights it reserved for itself as an insurer
under the relevant insurance policies, including any failure to
(i) properly inspect the Libby Facility, (ii) provide adequate
industrial hygiene services for the benefit of Grace's
employees, and (iii) warn Grace's employees of the dangers
of exposure to asbestos-laden dust.
At first blush, it seems clear that the Plaintiffs' Claims against
MCC fall within the plain language and natural reading of the
statute, i.e., the claims arise by reason of MCC's provision of
insurance to the Debtors. However, the Plaintiffs argue that
MCC's alleged liability for the Plaintiffs' Claims does not
arise by reason of MCC's provision of insurance to Grace
because the connection between MCC's provision of
insurance and the claims is factual, not legal. The Plaintiffs
rely upon a Second Circuit decision, Quigley, in which the
Court concluded that “the phrase ‘by reason of,’ as employed
in 11 U.S.C. § 524(g) (4)(A)(ii), requires that the alleged
liability of a third party for the conduct of or claims against
the debtor arises, in the circumstances, as a legal consequence
of one of the four relationships between the debtor and the
third party enumerated in subsections (I) through (IV).”62
In Quigley, the Court decided that a preliminary injunction,
which tracked the language of § 524(g)(4)(A) (ii). did not
cover claims alleging that the debtor's parent corporation was
liable as an “apparent manufacturer” of the debtor's asbestos
products, since the parent's name and logo appeared on those
products.63
The parent corporation argued that it would not
have applied its name and logo to the products absent its
ownership interest in the debtor; therefore, liability would not
arise “but for” the factual relationship between the parent and
debtor. The Court rejected this argument, deciding that the
parent's ownership of the debtor was “legally irrelevant” to
the apparent manufacturer claims.64
The Quigley Court noted that “[s]ection 524(g) does not
explicitly indicate whether the phrase ‘by reason of’ refers to
legal or factual causation, or some combination of the two.”65
However, the Court recognized that “[e]ach of the four
relationships enumerated in subsections (I) through (IV) ... is
a relationship between one party and another that, in
appropriate circumstances, has commonly given rise to the
liability of the one party for the conduct of or claims or
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demands against the other, long before § 524(g) came into
being.”66
Moreover,
*10 Section 524(g) is designed to “facilitat[e] the
reorganization and rehabilitation of the debtor as an
economically viable entity,” as well as “make[ ] it possible
for future asbestos claimants to obtain substantially similar
recoveries as current claimants.” In re Combustion Eng'g,
Inc., 391 F.3d 190, 234 (3d Cir.2004). Needless to say,
barring the prosecution of claims bearing only an
accidental nexus to an asbestos bankruptcy is less than
tangentially related to that objective.... “The test for
determining whether litigation has a significant connection
with a pending bankruptcy [sufficient to confer bankruptcy
jurisdiction] is whether its outcome might have any
conceivable effect on the bankrupt estate.” ... We are
unpersuaded that Congress intended with its use of the
phrase “by reason of” to produce the peculiar results and
jurisdictional difficulties that [the parent's] construction of
this phrase would bring about.67
When the parent corporation in Quigley placed its name and
logo on the asbestos products, the parent corporation intended
that the third party buyer or user would see the name and logo
and rely on its participation in marketing or approval of the
products. The nexus between the parent/subsidiary
relationship and the claim was not relevant. Here, MCC's
actions (or omissions) are inextricably linked to the Debtors
and the insurance relationship. I disagree with the Plaintiffs'
assertion that MCC's provision of insurance to the Debtors is
not legally relevant to the Plaintiffs' Claims, or that there is
only some accidental nexus between the insurance
relationship and the claims. The basis for the alleged
undertakings by MCC in the Negligence Claim (i.e.,
industrial hygiene services or inspections of Grace's
facilities) arise wholly out of the insurance relationship.
Similarly, the allegations underlying the Bad Faith Claim
(i.e., MCC's failure to warn employees or suppressing
information) also arise out of information available to MCC
because of the insurer/ insured relationship with the Debtors.
However, and perhaps more importantly, the Quigley Court's
relationship analysis also addresses the jurisdictional
concerns of applying § 524(g)(4) to grant an overly broad
injunction for the protection of nondebtor third parties. In the
Johns–Manville line of cases,68
the Second Circuit held that
“[a] bankruptcy court only has jurisdiction to enjoin third-
party non-debtor claims that directly affect the res of the
bankruptcy estate.”69
The Court determined that the
insurance policies issued to the debtor were the most valuable
assets of the bankruptcy estate.70
The Second Circuit then
“held that the bankruptcy court's in rem jurisdiction was
insufficient to allow it to enjoin Direct Actions based on state-
law legal theories that seek to impose liability on [the insurer]
as a separate entity rather than on the policies that it issued to
[the debtor].”71
*11 Accordingly, a bankruptcy court's injunction can reach
only as far as its jurisdictional limits. The inquiry must be
whether the third-party non-debtor claims affect the res of the
bankruptcy estate.72
“One of the central purposes—perhaps
the central purpose—of extending bankruptcy jurisdiction to
actions against certain third parties, as well as suits against
debtors themselves, is to ‘protect[ ] the assets of the estate’ so
as to ensure a fair distribution of those assets at a later point
in time.”73
In this case, there is an express agreement in the 1991
Settlement Agreement giving rise to indemnification
obligations owed by the Debtors to MCC arising from any
liability, loss, cost or expense imposed upon or incurred by
MCC as a result of claims asserted by any Person, including
any “Bodily Injury Claims Plaintiffs” that arise out of, among
other things, “the existence or extent of Maryland's
obligations to any person with respect to Asbestos–Related
Claims that are covered, or have been or may be alleged by
Grace–Conn. to be covered, by any of the Primary Policies
....”74
MCC's indemnification claims, to the extent they can
be asserted, will affect the res of the Debtors' estates because
the Plan provides that indemnification claims are channeled
to the Asbestos PI Trust, and, therefore, would decrease the
amount of funds available for other claimants.
Moreover, MCC paid a settlement amount to Grace– Conn.
in 1991 which, in part, paid Grace–Conn. for amounts already
expended for Asbestos Related Bodily Injury Claims and
other claims, but also to establish a special account for
payment of losses incurred by Grace– Conn. in connection
with pending Asbestos–Related
Bodily Injury Claims.75
MCC's settlement payment also
enabled the Debtors to contribute assets to the Asbestos PI
Trust. Encouraging insurers to contribute to a debtor's trust
also affects the res of the estate. Granting a § 524(g)
(4)(A)(ii)(III) channeling injunction provides insurers with
an incentive to contribute to a debtor's trust in exchange for
finality,76
Statements by Senator Graham found in the
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legislative history of this Bankruptcy Code section
underscore this purpose:
To those companies willing to submit to the stringent
requirements in this section designed to ensure that the
interests of asbestos claimants are protected, the
bankruptcy courts' injunctive power will protect those
debtors and certain third parties, such as their insurers,
from future asbestos product litigation of the type
which forced them into bankruptcy in the first place.
....
By providing a trust to pay claims and an injunction
channeling the present and future asbestos claims to that
trust, the debtor and third parties who are alleged to be
liable for the asbestos claims against the debtor will be
encouraged to participate in a system that will maximize
the assets available to pay asbestos claims, present and
future, and provide for an equitable distribution and
method of payment.77
*12 The Plaintiffs' Claims seek additional and alternative
forums for Asbestos PI Claims arising out of Grace's
products and conduct. While I am sympathetic that
individuals may have suffered serious injuries, the purpose of
the Asbestos PI Trust is to ensure that there is a fund available
to compensate the victims, as well as future claimants, while
also providing finality to insurers who contribute to the trust.
Accordingly, I reject the Plaintiffs' argument (asserted in
Count I and Count VI of the Adversary Complaint) that
Bankruptcy Code § 524(g)(4)(A)(ii) limits the reach of the
Asbestos PI Channeling Injunction and prevents the
injunction from enjoining the Plaintiffs' Claims. The
Plaintiffs' Claims seek to hold MCC indirectly liable for the
conduct of, claims against or demands on the Debtors. Also,
MCC's provision of insurance to the Debtors is legally
relevant to (or, at the very least, a close nexus to) the
Plaintiffs' Claims. Because MCC's liability could affect the
res of the Debtors' estate, determining that § 524(g)(4)(A)(ii)
protects an insurer from claims, such as the Negligence Claim
and the Bad Faith Claim, is not beyond the jurisdiction of this
Court.
B. The Asbestos Channeling Injunction's
exception for Workers' Compensation Claims
does not apply to the Plaintiffs' Claims
Because the Plaintiffs were former employees of Grace, they
argue that the Negligence Claim and the Bad Faith Claim
must arise from the workers' compensation policies provided
by MCC to Grace. Therefore, the Plaintiffs argue, the
Asbestos PI Channeling Injunction is not applicable to the
Plaintiffs' Claims because (i) the Plan specifically provides
that the injunction does not enjoin claims under a workers'
compensation policy, and (ii) MCC's workers' compensation
policies were not listed on Exhibit 5 to the Plan.
Under the Plan, an “Asbestos Insurance Policy” includes
policies that provide “insurance coverage for any Asbestos
Claim,” but does not include Workers' Compensation
Claims.78
The Plan defines “Workers' Compensation
Claims” as:
any Claim: (i) for benefits under a
state-mandated workers'
compensation system, which a past,
present, or future employee of the
debtors or their predecessors is
receiving, or may in the future have a
right to receive and/or (ii) for
reimbursement brought by any
insurance company or state agency as
a result of payments made to or for the
benefit of such employees under such
a system and fees and expenses
incurred under any insurance policies
or laws or regulations covering such
employee claims.79
The Plaintiffs are not asserting workers' compensation claims
for statutory benefits. The channeling injunction's exception
for workers' compensation claims is not applicable to the
Plaintiffs' Claims. I reject the Plaintiffs' argument (asserted in
Count III and Count V of the Adversary Complaint) that the
workers' compensation claim exception to the channeling
injunction allows the Plaintiffs' Claims to be filed in state
court.
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C. Plaintiffs' Claims are not barred by the
Asbestos PI Channeling Injunction to the extent
the Plaintiffs can state a valid claim under MCC's
workers' compensation policies, which were not
listed on the Exhibit attached to the Debtors' Plan
The Asbestos PI Channeling Injunction enjoins Holders of
Asbestos PI Claims from taking any legal action or making
any demand against an “Asbestos Protected Party,” which is
defined to include a Settled Asbestos Insurance Company. As
discussed earlier, MCC is a Settled Asbestos Insurance
Company under the Plan.
*13 However, the Plan's definition of a Settled Asbestos
Insurance Company limits the extent of protection that the
insurance company will receive under the channeling
injunction, by providing that the term means:
any Asbestos Insurance Entity that has
entered into an Asbestos Insurance
Settlement Agreement; but only with
respect to, and only to the extent of,
any Asbestos Insurance Policy (or
any portion thereof) identified as
the subject of an Asbestos Insurance
Settlement Agreement in Exhibit 5
in the Exhibit Book (as the same
may be amended from time to time,
including after the Effective Date);
provided, however, that (i) each such
Asbestos Insurance Settlement
Agreement is listed by Grace with the
consent of the ACC and the PI FCR,
or, from and after the Effective Date,
by the Asbestos PI Trust, in Exhibit 5;
and (ii) any Asbestos Insurance
Settlement Agreement entered into
after the Petition Date has been
approved by the Court after notice and
a hearing (which approval may be
contained in the Confirmation Order
or any other order of the Court); and
further provided, for the avoidance of
doubt that an Asbestos Insurance
Entity is a Settled Asbestos Insurance
Company to the fullest extent, but
only to the extent provided by section
524(g) in respect of any claim that
arises by reason of one of the activities
enumerated in section
524(g)(4)(A)(ii).80
The first limitation in the above definition provides that the
Asbestos Insurance Entity is protected “only with respect to,
and only to the extent of” policies that are identified as the
subject of an Asbestos Insurance Settlement Agreement listed
in Exhibit 5 of the Exhibit Book. The parties agree that
MCC's workers' compensation policies were not listed in
Exhibit 5. MCC noted that “[t]he insurance policies between
Grace and MCC identified in Exhibit 5 include the primary
general liability policies listed and any and all primary
general liability policies issued by MCC to Grace prior to
1973 and all known and unknown excess insurance policies
issued by MCC to Grace.”81
MCC explains that the workers'
compensation policies were not included in Exhibit 5 because
the Plan did not discharge liabilities pertaining to claims for
statutory workers' compensation benefits. Further, MCC
points out that the remainder of the definition of Settled
Asbestos Insurance Policy addresses any “ambiguity” in the
definition by stating:
further provided, for the avoidance of doubt that an
Asbestos Insurance Entity is a Settled Asbestos Insurance
Company to the fullest extent, but only to the extent
provided by section 524(g) in respect of any claim that
arises by reason of one of the activities enumerated in
section 524(g)(4)(A)(ii).
In other words, MCC argues that the channeling injunction
enjoins claims arising out of insurance policies, even those
policies that are not listed on Exhibit 5, as long as the
requirements of Bankruptcy Code § 524(g)(4) (A)(ii) are met.
This interpretation, however, makes the Exhibit 5
requirement a nullity. Although I was not the presiding judge
on this case at the time of confirmation, it is apparent that the
parties negotiated many provisions, including the definition
of Settled Asbestos Insurance Company. I do not think it is a
proper exercise to look beyond the express terms of the
confirmed plan; no part of that definition should be ignored
or rendered a nullity.
*14 Therefore, the channeling injunction does not protect a
Settled Asbestos Insurance Company from claims arising out
of insurance policies that are not listed on Exhibit 5 to the
Plan. The Plaintiffs contend that, as employees, the
Negligence Claim and the Bad Faith Claim must arise under
MCC's worker's compensation policies. To the extent that the
Plaintiffs can demonstrate that the Plaintiffs' Claims arise out
of or are based upon MCC's workers' compensation policies,
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the claims are not barred by the Asbestos PI Channeling
Injunction and may be filed in state court, I will grant the
relief requested in Count II and Count IV of the Adversary
Complaint.
Footnotes
MCC also argues, however, that the Plaintiffs should be
barred from asserting claims in state court because the
Plaintiffs have failed to state a duty that arises out of the
workers' compensation policies. The Plaintiffs argue in
response that their claims have a sound basis under the
Restatement of Torts82
and Montana case law. My limited
function here is to determine whether the Plaintiffs' proposed
claims are barred by the Asbestos PI Channeling Injunction.
I do not make any determination about whether the Plaintiffs'
Claims state a valid cause of action against MCC under the
workers' compensation insurance policies or under state law.
I leave those determinations to the appropriate state court.
V. CONCLUSION
For the reasons stated above, the Plaintiffs' Summary
Judgment Motion will be granted, in part, as to Count II and
Count IV, and denied, in part, on the remaining Counts I, III,
V, and VI. An appropriate order follows.
All Citations
Slip Copy, 2016 WL 6137275
1 The Reorganized Debtors are W. R. Grace & Co. (f/k/a Grace Specialty Chemicals, Inc.) (“Grace”) and W. R. Grace &
Co.–Conn. (together, the “Reorganized Debtors”). The chapter 11 cases of Grace and 62 related entities (the “Debtors”)
were jointly administered pursuant to an order of this Court dated April 2, 2001 (D.I. 9). See In re W R. Grace & Co., 446
B.R. 96, 102 n.2 (Bankr. D. Del. 2011) (listing those 62 entities).
2 This Opinion constitutes the findings of fact and conclusions of law, as required by Fed. R. Bankr. P. 7052. This Court
has jurisdiction to decide this matter pursuant to 28 U.S.C. § 157 and § 1334. A bankruptcy court has jurisdiction to
interpret and enforce its own prior orders. Travelers Indem. v. Bailey, 557 U.S. 137, 151, 129 S. Ct. 2195, 2205, 174
L.Ed.2d 99 (2009). “[T]he jurisdiction of the non-Article III bankruptcy courts is limited after confirmation of a plan. But
where there is a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation,
implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust
agreement, retention of post-confirmation bankruptcy court jurisdiction is normally appropriate.” Binder v. Price
Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 168–69 (3d Cir. 2004). This is a core proceeding pursuant
to 28 U.S.C. § 157(b)(2)(A). 3 MCC filed a brief opposing the Summary Judgment Motion (Adv. D.I. 21) and the Plaintiffs
filed a Reply Brief (Adv. D.I. 27). 4 The Plaintiffs filed a Statement of Undisputed Facts along with their brief in support
of the Summary Judgment Motion (Adv. D.I. 23). MCC filed a Counter–Statement of Material Facts in Dispute (Adv. D.I.
23), arguing that most of the Plaintiffs' “undisputed facts” were statements made by Plaintiff's counsel without personal
knowledge of the facts asserted therein, or were unsupported allegations asserted in the State Court Complaint. The
facts I rely on herein are based upon my review of documents supplied by the parties, if there are no objections to
authenticity, facts of record in the Debtors' chapter 11 bankruptcy case, and factual findings made in previous decisions
in this case.
5 In re W. R. Grace & Co., 729 F.3d 311, 314 (3d Cir. 2013).
6 Id.
7 Id.
8 The Bankruptcy Court's confirmation of the Plan was affirmed on appeal by the District Court and the Court of Appeals
for the Third Circuit. In re W. R. Grace & Co., 446 B.R. 96 (Bankr. D. Del. 2011) aff'd 475 B.R. 34 (D. Del. 2012) aff'd
729 F.3d 311 (3d Cir. 2013).
9 Bankruptcy Code § 524(g)(1) provides, in part, that “a court that enters an order confirming a plan of reorganization
under chapter 11 may issue, in connection with such order, an injunction ... to supplement the injunctive effect of a
discharge.” 11 U.S.C. § 524(g)(1). If certain requirements of § 524(g) are met, “the injunction is to be implemented in
connection with a trust that, pursuant to the plan of reorganization ... is to assume the liabilities of a debtor which at the
time of entry of the order for relief has been named as a defendant in personal injury, wrongful death, or property-
damage actions seeking recovery for damages allegedly caused by the presence of, or exposure to, asbestos or
asbestos-containing products ...” 11 U.S.C. § 524(g)(2)(B).
10 Plan § 1.1.43. 11 The Plan defines an “Asbestos PI Claim” as: a Claim ... or Demand against... any of the Debtors or
the Asbestos Protected Parties ... based on, arising out of, resulting from, or attributable to, directly or indirectly: (a)
death, wrongful death, personal or bodily injury ... sickness, disease, loss of consortium, survivorship, medical
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monitoring, or other personal injuries ... or other damages ... and (b) the presence or exposure at any time to: (1)
asbestos or any products or materials containing asbestos that were mined, processed, consumed, used, stored,
manufactured, designed, sold, assembled, supplied, produced, specified, selected, distributed, disposed of, installed
by, or in any way marketed by, or on behalf of, one or more of the Debtors ... or (2) asbestos-containing vermiculite
mined, milled or processed by the Debtors.... Notwithstanding the foregoing or anything else to the contrary, “Asbestos
PI Claim” as defined herein does not include Worker's Compensation Claims....
Plan § 1.1.34.
12 Plan § 8.2.1.
13 Plan § 1.1.51.
14 The Plan defines an “Asbestos Insurance Entity” as “any Entity, including any insurance company, broker, or guaranty
association, that has issued, or that has or had actual or potential liability, duties or obligations under or with respect to,
any Asbestos Insurance Policy.” Plan § 1.1.11.
15 The Plan defines “Asbestos Insurance Settlement Agreement” as “any settlement agreement between or among any of
the Debtors ... involving any Asbestos Insurance Policy ....” Plan § 1.1.16.
16 Plan § 1.1.209 (emphasis in original).
17 Plan § 1.1.13.
18 Defendant Maryland Casualty Company's Brief in Support of its Opposition to Plaintiff's Motion for Summary Judgment
(Adv. D.I. 21) (“MCC Brief”), at 1.
19 At least one of MCC's workers' compensation policies provided: We have the right, but are not obliged to inspect your workplaces at any time. Our inspections are not safety
inspections. They relate to the insurability of the workplaces and the premiums to be charged. We may give you
reports on the conditions we find. We may also recommend changes. While they may help reduce losses, we do
not undertake to perform the duty of any person to provide for the health or safety of your employees or the public.
We do not warrant that your workplaces are safe or healthful or that they comply with laws, regulations, codes or
standards.
Affidavit of Jon L. Heberling, Ex. B, at 5 (Adv. D.I. 17).
20 MCC Brief, at 1–2.
21 Grace, 475 B.R. at 101.
22 State Court Complaint (Adv. D.I. 1–1), ¶¶ 1, 5, 7, 32.
23 State Court Complaint, ¶¶ 9–32 (the “Negligence Claim”).
24 State Court Complaint, ¶¶ 33–62 (the “Bad Faith Claim”).
25 State Court Complaint, ¶ 36.
26 State Court Complaint, ¶ 38.
27 State Court Complaint, ¶ 46.
28 State Court Complaint, ¶ 54.
29 State Court Complaint, ¶ 55.
30 State Court Complaint, ¶ 56.
31 State Court Complaint, ¶ 57–59.
32 State Court Complaint, ¶ 61.
33 Fed. R. Civ. P. 56(a).
34 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).
35 Celolex Corp. v. Catrett, 477 U.S. 317, 322–24, 106 S.Ct. 2548, 2552–53 91 L.Ed.2d 265 (1986) 36 Id., 477 U.S. at
323, 106 S.Ct. at 2553.
37 Foulk v. Donjon Marine Co., Inc., 144 F.3d 252, 258 n.5 (3d Cir. 1998) (quoting Wetzel v. Tucker, 139 F.3d 380, 383
n.2 (3d Cir. 1998)).
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38 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538
(1986).
39 Sarko v. Penn–Del Directory Co., 968 F.Supp. 1026, 1031 (E.D. Pa. 1997) (citation omitted), aff'd 189 F.3d 464 (3d
Cir. 1999).
40 J.Geils Band Emp. Benefit Plan v. Smith Barney Shearson, Inc., 76 F.3d 1245, 1251 (1st Cir. 1996) (quoting Medina–
Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).
41 J. Geils Band, 76 F.3d at 1251 (quoting Dow v. United Bhd. of Carpenters, 1 F.3d 56, 58 (1st Cir. 1993)).
42 Anderson, 477 U.S. at 248, 106 S.Ct. at 2510.
43 Id. See also Delta Mills, Inc. v. GMAC Comm. Fin., LLC (In re Delta Mills, Inc.), 404 B.R. 95, 105 (Bankr. D. Del. 2009)
(An issue is genuine “when reasonable minds could disagree on the result.”).
44 Anderson, 477 U.S. at 255, 106 S.Ct. at 2505 (“[T]he evidence of the nonmovant is to be believed, and all justifiable
inferences are to be drawn in his favor.”).
45 The Plan's definition of Settled Asbestos Insurance Company specifically provides that the injunction applies “only to
the extent provided by § 524(g) in respect of any claim that arises by reason of one of the activities enumerated in §
524(g)(4)(A)(ii).” Plan § 1.1.209.
46 In re Combustion Engineering, Inc., 391 F.3d 190, 234 (3d Cir. 2004).
47 Id. (footnotes omitted).
48 11 U.S.C. § 524(e) provides that “discharge of a debt of the debtor does not affect the liability of any other entity on, or
the property of any other entity for, such debt.” 49 11 U.S.C. § 524(g)(4)(A)(ii)(III).
50 Grace, 475 B.R. at 102.
51 Id.
52 The Plan's definition of “Settled Asbestos Insurance Company” limits on the scope of protection. These limitations are
discussed in Part C, infra.
53 At a hearing on August 26, 2002, Judge Fitzgerald extended an injunction barring lawsuits against MCC based upon
claims that MCC acted negligently in designing and implementing a dust control system. App. to MCC Brief (Adv. D.I.
22, Ex, 1). In evaluating the “probability of success on the merits” prong, Judge Fitzgerald combed through documents
submitted under seal and decided that “[t]here is nothing in the documents that were sent to me that establishes that
Maryland was acting as anything other at any time than as an agent for the Debtor,” Id. at 15:16–18. She also stated,
“I'm not foreclosing at some point your opportunity to prove the case ....” Id. at 19:14–16. In 2011, the District Court noted
that “the issue of whether MCC has independent liability for its part in developing Grace's dust control system at the
Libby, Montana, mine remains at issue. We concluded, based on argument at the time, that it appeared that MCC's
liability was derivative and[,] for purposes of extending the preliminary injunction to MCC, that was sufficient.” Grace, 446
B.R. at 118 n. 32.
54 Combustion Eng'g, 391 F.3d at 235.
55 Id. at 231.
56 Id. at 235.
57 Id.
58 In re Pittsburgh Corning Corp., 453 B.R. 570, 595–600 (Bankr. W.D. Pa. 2011). The Pittsburgh Corning Court defined
“conspiracy theory claims” as claims alleging the affiliates were liable with the debtor based on allegations of conspiracy,
alter ego, piercing the corporate veil, domination and control, concert of action, common enterprise, aiding and abetting,
respondeat superior, negligent provision of services, principal and agent, successor in interest and other joint and/or
several liability theories. Id. at 576.
59 Pittsburgh Corning, 453 B.R. at 595, 598, 600.
60 The Third Circuit interpreted similar language found in § 524(g)(1)(B) when considering the scope of the Asbestos PI
Channeling Injunction on appeal of the order confirming the Debtors' Plan. The State of Montana (“Montana”) and Her
Majesty Queen Elizabeth II in Right of Canada (the “Crown”) argued that the Plan improperly channeled their contribution
In re W.R. Grace & Co., Slip Copy (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 25
and indemnification claims against Grace to the Trust. In re W.R. Grace & Co., 729 F.3d 311 (3d Cir. 2013). Third-party
plaintiffs sued Montana and the Crown for allegedly failing to warn their citizens of the risks posed by Grace's products
and activities. Id. at 315. Montana and the Crown argued that only personal injury, wrongful death and property damage
actions should be subject to the channeling injunction. The Third Circuit noted that § 524(g)(1)(B) expressly provided
that a court can “enjoin entities from taking legal action for the purpose of directly or indirectly collecting, recovering, or
receiving payment or recovery with respect to any claim or demand that, under a plan of reorganization, is to be paid in
whole or part by a trust ....” 11 U.S.C. § 524(g)(1)(B) (emphasis added). The Third Circuit decided that the contribution
and indemnification claims were properly channeled to the Trust, writing:
[B]ehind each failure-to-warn suit against Montana and the Crown is a plaintiff with a personal injury, wrongful death,
or property damage claim against Grace. More precisely, there must be such a plaintiff in order for Montana and the
Crown to have a basis for their claims at all. Montana's and the Crown's actions against Grace therefore are brought
“for the purpose of ... indirectly ... receiving payment or recovery” for asbestos-related personal injury and property
damage claims against the debtor, and thus are subject to the § 524(g) channeling injunction under the plain
language of that statute.
Id. at 324. Similarly, here, behind the Negligence Claim and the Bad Faith Claim are Plaintiffs with personal injury
claims against Grace.
61 Section 524(g) extends the injunction to bar claims against a third party “to the extent such alleged liability of such third
party arises by reason of—
(I) the third party's ownership of a financial interest in the debtor, a past or present affiliate of the debtor, or a
predecessorin interest of the debtor;
(II) the third party's involvement in the management of the debtor or a predecessor in interest of the debtor, or
serviceas an officer, director or employee of the debtor or a related party;
(III) the third party's provision of insurance to the debtor or a related party; or
(IV) the third party's involvement in a transaction changing the corporate structure, or in a loan or other
financialtransaction affecting the financial condition, of the debtor or a related party, including but not limited to—
(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or
(bb) acquiring or selling a financial interest in an entity as part of such a transaction.
11 U.S.C.A. § 524(g)(4)(A)(ii).
62 In re Quigley Co., Inc., 616 F.3d 45, 62 (2d Cir. 2012). See n. 61, supra.
63 Id. at 60.
64 Id.
65 Id.
66 Id. at 61.
67 Id. at 61–62 (quoting Publicker Indus., Inc. v. U.S. (In re Cuyahoga Equip. Corp.), 980 F.2d 110, 114 (2d Cir. 1992)).
68 Johns–Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns–Manville Corp.), 517 F.3d 52 (2d Cir. 2008) (“Manville III”),
rev'd sub nom. Travelers Indem. Co. v. Bailey, 557 U.S. 137, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009), on remand Johns–
Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns–Manville Corp.), 600 F.3d 135 (2d Cir. 2010) (“Manville IV”).
69 Manville IV, 600 F.3d at 152 citing Manville III, 517 F.3d at 66. The District Court opinion in the Manville line of cases
observed that “the Direct Action Suits [against Travelers] at issue here ... do not seek the proceeds of the insurance
policies or involve injuries from Manville products, but rather allege that Travelers breached its statutory duties or
engaged in independent tortious conduct in defending insureds other than Manville.” In re Johns–Manville Corp., 340
B.R. 49, 63 (S.D.N.Y. 2006) (emphasis added).
70 Manville IV, 600 F.3d at 152. Similarly, here, the insurance policies and proceeds were valuable assets of the Debtors'
estates. Grace, 475 B.R. at 81–82,
71 Manville IV, 600 F.3d at 152. The insurer, Travelers, admitted that the state-law actions were unrelated to the insurance
policy proceeds. Manville III, 517 F.3d at 63. The Supreme Court reversed Manville III, on narrow grounds in Travelers
Indem. Co. v. Bailey, holding that the jurisdictional issue was not subject to collateral attack, stating that “once the 1986
Orders [which confirmed the debtors' plan and approved the insurance settlement agreements] became final on direct
review (whether or not proper exercises of bankruptcy court jurisdiction and power), they became res judicata to the
‘parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat
In re W.R. Grace & Co., Slip Copy (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 26
the claim or demand, but as to any other admissible matter which might have been offered for that purpose.’ ” Bailey,
557 U.S. at 152, 129 S.Ct. at 2205, quoting Nevada v. United States, 463 U.S. 110, 130, 103 S.Ct. 2906, 77 L.Ed.2d
509 (1983). On remand to consider whether Chubb Indemnity Insurance Company was bound by the 1986 Orders (and
deciding that Chubb was not), the Second Circuit noted that “[t]he Bailey Court did not contradict the conclusion of our
jurisdictional inquiry.” Manville IV, 600 F.3d at 152.
72 The Second Circuit later remarked that “the salience of Manville III's inquiry as to whether Travelers' liability was
derivative of the debtor's rights and liabilities was that, in the facts and circumstances of Manville III, cases alleging
derivative liability would affect the res of the bankruptcy estate, whereas cases alleging non-derivative liability would not.”
Quigley, 676 F.3d at 56–57.
73 Quigley, 676 F.3d at 57 (quoting In re Zarnel, 619 F.3d 156, 171 (2d Cir. 2010)).
74 See App. to MCC's Brief in Opposition to Plaintiffs' Summary Judgment Motion (Adv. D.I. 22), Ex. 2, Settlement
Agreement, ¶¶ 1(F) and (N), ¶ 7 (the “Settlement Agreement”).
75 See Settlement Agreement, ¶ 4.
76 In Plant Insulation, the Ninth Circuit considered appeals by non-settling insurers to confirmation of a plan that included a
§ 524(g) trust and channeling injunction, The Ninth Circuit noted that the bankruptcy court “found that in order to persuade
insurers to settle, they need to be able to obtain finality from the settlement. Without this feature, Settling Insurers would
always be exposed to indirect asbestos liability through contribution suits. There would never be finality, the Trust would
be underfunded, and asbestos claimants would continue to suffer from the vagaries of the tort system.” Fireman's Fund
Ins. Co. v. Onebeacon Ins. Co. (In re Plant Insulation Co.), 734 F.3d 900, 909 (9th Cir. 2013). While the Ninth Circuit
ultimately remanded the case because the trust did not comply with all of the § 524 requirements, the Court approved
the bankruptcy court's determination regarding the § 524(g)(4) injunction, stating that “in light of the purposes of § 524(g),
enjoining the Non–Settling Insurers' contribution claims was “fair and equitable” to future asbestos plaintiffs and, in
providing the finality and protection from future suit, supplied the necessary incentive for insurers to settle in the first
place. This inquiry sufficiently satisfies the statutory scheme.” Id. at 913.
77 140 Cong. Rec. S4521–01, S4523, 1994 WL 139961 (daily ed. Apr. 20, 1994) (emphasis added). 78 Plan § 1.1.13.
79 Plan § 1.1.230.
80 Plan § 1.1.209 (ital. in original; emphasis on bold text added).
81 MCC's Brief in Opposition to Plaintiffs' Summary Judgment Motion, at 34 n. 18.
82 The Restatement (Second) of Torts, § 324A, provides:
One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as
necessary for the protection of a third person or his things, is subject to liability to the third person for physical harm
resulting from his failure to exercise reasonable care to protect his undertaking, if
(a) his failure to exercise reasonable care increases the risk of such harm, or
(b) he has undertaken to perform a duty owed by the other to the third person, or
(c) the harm is suffered because of reliance of the other or the third person upon the undertaking.
Restatement (Second) of Torts § 324A (1965, update through June 2016).
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
In Matter of Galaz, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 27
2016 WL 6407211
Only the Westlaw citation is currently available.
United States Court of Appeals, Fifth Circuit.
In the Matter of: Lisa Ann Galaz, Debtor
Alfred Galaz, Appellant
v.
Lisa A. Katona, formerly known as
Lisa Ann Galaz, Appellee
No. 15–50919
|
FILED October 28, 2016
Synopsis
Background: Chapter 13 debtor brought adversary proceeding
to enjoin creditor from violating her discharge rights by
pursuing state court action. The United States Bankruptcy
Court for the Western District of Texas entered order enjoining
creditor from pursuing this cause of action, and creditor
appealed. The District Court, David Alan Ezra, J., 2015 WL
5565266, affirmed. Creditor appealed.
Holdings: The Court of Appeals, Edith Brown Clement,
Circuit Judge, held that:
[1] creditor's alleged violation of debtor's discharge
rights,in pursuing state court action to recover on claim that
arose pre-confirmation, brought adversary proceeding filed by
debtor to enjoin creditor from pursuing this state court action
within the bankruptcy court's postconfirmation jurisdiction;
[2] bankruptcy court did not have to abstain,
undermandatory abstention provision, from hearing debtor's
proceeding;
[3] broad release from liability to creditor's predecessor-
in-interest granted to Chapter 13 debtor in settlement approved
by bankruptcy court prevented creditor, after exercising rights
that he acquired by means of assignment to foreclose on
purported interest in closely-held company possessed by third
party, from commencing suit against debtor for nonpayment of
profits to which this third party was allegedly entitled; and
[4] bankruptcy court did not abuse its discretion in
findingthat creditor was judicially estopped.
Affirmed.
Appeal from the United States District Court for the
Western District of Texas
Attorneys and Law Firms
David Clay Snell, Bayne, Snell & Krause, San Antonio, TX,
for Appellant.
Royal B. Lea, III, Bingham & Lea, P.C., San Antonio, TX, for
Appellee.
Before WIENER, CLEMENT, and COSTA, Circuit
Judges.
Opinion
EDITH BROWN CLEMENT, Circuit Judge:
*1 The bankruptcy court enjoined Alfred Galaz (“Galaz”)
from pursuing any claims related to Worldwide Subsidy
Group against his former daughter-in-law, Lisa Katona
(“Katona”). Galaz appealed the bankruptcy court judgment
to the district court. The district court affirmed, finding that
the bankruptcy court had jurisdiction to decide the case and
that the bankruptcy court properly barred Galaz's claims.
Galaz appeals to this court. We
AFFIRM.
I.
Raul Galaz (“Raul”) and his legal assistant, Marian Oshita
(“Oshita”), formed two limited liability companies,
collectively called Worldwide Subsidy Group (“WSG”), to
collect royalties owed to film and television distributors.
Raul owned a 75 percent interest in WSG, and Oshita
owned a 25 percent interest in WSG. At the time of WSG's
formation, Raul was married to Lisa Katona (formerly
Galaz). When Raul and Katona subsequently divorced,
Katona received half of Raul's interest in WSG. Raul then
sold his remaining 37.5 percent WSG interest to Oshita for
$50,000. She paid for his interest from WSG's accounts as
an offset against unreimbursed expenses purportedly owed
to her. After Raul transferred his remaining interest to
Oshita, Katona owned a 37.5 percent interest in WSG and
Oshita owned a 62.5 percent interest in WSG.
Shortly thereafter, Katona learned that Oshita's claim for
unreimbursed expenses was fraudulent, and Katona filed suit
against her in California state court. Following a jury trial, the
state court awarded Katona the 37.5 percent interest that Raul
had sold to Oshita, as well as $18,750 in damages—which
In Matter of Galaz, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 28
Oshita failed to pay. This judgment left Katona with a 75
percent interest and Oshita with a 25 percent interest in WSG.
After the judgment, Katona assigned half of her interest to
Raul's sister, Denise Vernon (“Vernon”). Vernon then filed suit
against Katona in Texas state court to determine ownership and
control of WSG. Vernon and Raul, a third-party defendant in
the case, argued that Oshita had withdrawn from the company
and was not entitled to her 25 percent interest.
Before the case was resolved, Katona filed for Chapter 13
bankruptcy and the WSG litigation was removed to bankruptcy
court as a separate adversary proceeding. The bankruptcy court
approved a settlement between Raul, Vernon, and Katona
regarding that litigation (“2008 Settlement Agreement”). The
2008 Settlement Agreement provided for: (1) a one-time
distribution from WSG of $50,000 to Katona; (2) monthly
payments from WSG of $4,300 to Katona; (3) a one-time
distribution from WSG of $83,000 to Vernon; (4) monthly
payments from WSG of $5,000 to Vernon; and (5) an annual
salary of $67,500 and back-pay of $221,000 from WSG to
Raul. As part of the settlement, Brian Boydston was appointed
Business Manager of WSG. The bankruptcy court confirmed
Katona's Chapter 13 plan.
Katona and Vernon disagreed over WSG's operations, and
Katona brought another adversary proceeding against WSG
and Vernon. Katona requested that the bankruptcy court
remove Boydston as Business Manager, appoint a receiver for
WSG, and liquidate the company. Katona and Vernon reached
a settlement in that action (“2011 Settlement Agreement”). The
2011 Settlement Agreement provided, in part, that Vernon
purchase Katona's interest in WSG and “any unliquidated
claims against third parties relating to WSG, including claims
against Marian Oshita.” Katona was thus “deemed to have sold,
transferred, and assigned to Denise Vernon any and all of [her]
rights, title, and interest in WSG, including but not limited to
... any claims against third parties relating to WSG, including
claims against Marian Oshita.” The 2011 Settlement
Agreement also provided that Vernon release all present and
future claims against and rights to sue Katona. After the
bankruptcy court approved the 2011 Settlement Agreement,
Vernon assigned all claims against Oshita that she received
under the agreement to her and Raul's father, Alfred Galaz. In
2012, Katona received a discharge and her bankruptcy case was
closed.
*2 Galaz then filed suit in California state court to enforce
Katona's unpaid money judgment against Oshita, which he
believed he had received through Vernon's assignment.1
The state court found in his favor and foreclosed on Oshita's
WSG interest to satisfy the judgment. As successor-in-
interest to Oshita, Galaz then sued Katona in Texas state
court, alleging that Katona owed past monetary
distributions on Oshita's interest in WSG (“Oshita claims”).
Katona removed the case to bankruptcy court as an
adversary proceeding in her Chapter 13 bankruptcy suit.
Galaz then moved to remand. The bankruptcy court granted
Galaz's motion, finding that it did not have jurisdiction
because Galaz's complaint raised only state-law claims. The
bankruptcy court noted, however, that it arguably would
have jurisdiction if Katona had sued for declaratory
judgment.
Katona thus began an adversary proceeding against Galaz
in bankruptcy court, seeking to enjoin him from pursing the
Oshita claims. The parties filed crossmotions for summary
judgment. The bankruptcy court granted Katona's motion,
in part, and enjoined Galaz from pursuing any WSG-related
actions against her. Specifically, the bankruptcy court
found that the 2011 Settlement Agreement, which
discharged Vernon and Katona's rights to sue one another,
barred Galaz's claims. Galaz appealed to the district court,
challenging the bankruptcy court's jurisdiction and its
determination that his claims were barred. The district court
affirmed. Galaz appeals.
II.
[1] [2] “Subject-matter jurisdiction is a question of law which
we review de novo.” Beitel v. OCA, Inc. (In re OCA, Inc.), 551
F.3d 359, 366 (5th Cir. 2008). “When reviewing a district
court's affirmance of a bankruptcy court's judgment, this court
applies the same standard of review to the bankruptcy court
decision that the district court applied.” Galaz v. Galaz (In re
Galaz), 765 F.3d 426, 429 (5th Cir. 2014) (internal quotation
marks omitted). We review findings of fact for clear error and
legal conclusions de novo. Id.
III.
A.
[3] [4] Galaz first argues that the bankruptcy court lacked
jurisdiction to enjoin his state-law claims. His arguments rest
primarily on the fact that the bankruptcy court closed Katona's
Chapter 13 bankruptcy in 2012. Katona contends that the
bankruptcy court had jurisdiction because Galaz violated her
In Matter of Galaz, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 29
discharge rights under title 11. A bankruptcy court's
jurisdiction extends to “all civil proceedings arising under title
11, or arising in or related to cases under title 11.” See 28
U.S.C. § 1334(b). Before confirmation of the bankruptcy plan,
a proceeding is related to the bankruptcy case if the “outcome
could conceivably have any effect on the estate being
administered in bankruptcy.” Fire Eagle,
L.L.C. v. Bischoff (In re Spillman Dev. Grp., Ltd.), 710 F.3d
299, 304 (5th Cir. 2013) (internal quotation marks omitted).
After confirmation, “the debtor's estate, and thus
bankruptcy jurisdiction, ceases to exist, other than for
matters pertaining to the implementation or execution of
the plan.” Newby v. Enron Corp. (In re Enron Corp. Sec.),
535 F.3d 325, 335 (5th Cir. 2008) (quoting Craig's Stores
of Tex., Inc. v. Bank of La. (In re Craig's Stores of Tex.,
Inc.), 266 F.3d 388, 390 (5th Cir. 2001)).
[5] [6] A bankruptcy court maintains “jurisdiction to interpret
and enforce its own prior orders.” Travelers Indem. Co. v.
Bailey, 557 U.S. 137, 151, 129 S.Ct. 2195, 174 L.Ed.2d 99
(2009). Subject matter jurisdiction remains in the bankruptcy
court, even after a bankruptcy case is closed, “to assure that
the rights afforded to a debtor by the Bankruptcy Code are
fully vindicated.” Padilla v. Wells Fargo Home Mortg., Inc.
(In re Padilla), 379 B.R. 643, 652 n.4 (Bankr. S.D. Tex. 2007)
(relying on Bradley v. Barnes (In re Bradley), 989 F.2d 802,
804 (5th Cir. 1993)).
*3 [7] [8] [9] Here, Galaz's underlying state court action
alleges that Katona controlled WSG's finances and failed to pay
out proceeds from WSG in accordance with Oshita's
membership interest. Even viewed through the narrower lens of
post-confirmation bankruptcy jurisdiction, Galaz's Oshita
claims relate principally to pre-confirmation activity between
the parties. There was discord between Oshita and Katona
during the reorganization as to the respective ownership
interests in WSG. Indeed, that dispute formed the basis of the
2008 Settlement Agreement, which provided funds for Katona
to pay off her debts under the plan. Galaz's cause of action for
nonpayment is a preconfirmation claim that —according to
Katona—was subject to the bankruptcy court's discharge
order.2
[10] Galaz's suit in state court is arguably a violation of
Katona's discharge rights, directly implicating the
bankruptcy court's “arising under” jurisdiction. See Ins. Co.
of N. Am. v. NGC Settlement Trust & Asbestos Claim Mgmt.
Co. (In re Nat'l Gypsum Co.), 118 F.3d 1056, 1064 (5th Cir.
1997). The state law causes of action asserted by Galaz bear
on the interpretation and execution of Katona's plan. Even
though Katona's bankruptcy case was closed, the bankruptcy
court retains jurisdiction to consider violations of the
discharge order; the order of discharge necessarily implicates
the implementation or execution of the plan. See Bradley, 989
F.2d at 804. The alleged violation of Katona's discharge
rights brings this case within the bankruptcy court's post-
confirmation jurisdiction. See Local Loan Co. v. Hunt, 292
U.S. 234, 241, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (“[It is]
the authority of the bankruptcy court to entertain the present
proceeding, determine the effect of the adjudication and
[discharge] order, and enjoin petitioner from its threatened
interference therewith.”).
B.
[11] [12] Galaz next contends that the bankruptcy court
lacked statutory authority to enter final judgment because
these proceedings do not constitute a “core” claim. Katona
counters that her action for declaratory relief and an
injunction is a core proceeding that provides the bankruptcy
court statutory authority. “A bankruptcy court's statutory
authority derives from 28 U.S.C. § 157(b) (1), which
designates certain matters as ‘core proceedings' and
authorizes a bankruptcy court to determine the matters and
enter final judgments.” Galaz, 765 F.3d at 431. “If the
proceeding involves a right created by the federal bankruptcy
law, it is a core proceeding.” Spillman Dev. Grp., 710 F.3d at
305. For non-core proceedings, a bankruptcy judge shall
“submit proposed findings of fact and conclusions of law to
the district court, and any final order or judgment shall be
entered by the district judge....” 28 U.S.C. § 157(c)(1).
[13] Galaz argues that the claims asserted here are statelaw
defenses that cannot constitute core proceedings. “[B]ut even
such claims may be considered core if they are dependent
upon the rights created in bankruptcy.” Spillman Dev. Grp.,
710 F.3d at 305 (internal quotation marks omitted) (quoting
Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.
1987)). Katona alleges in her claim for declaratory relief that
her discharge rights— statutory rights provided for under the
Bankruptcy Code —are being violated. The bankruptcy
court decided that the 2011 Settlement Agreement, which the
bankruptcy court approved and is the source of Galaz's
ownership to the Oshita claims, bars his suit. This action
presents a core proceeding over which a bankruptcy court
may enter final judgment. See Nat'l Gypsum, 118 F.3d at
1063–64 (“Although a discharge in bankruptcy can
In Matter of Galaz, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 30
constitute an affirmative defense to a state law contract
claim, [a debtor's] action to enforce the discharge injunction
... assert[s] a statutory right under the Bankruptcy Code ....”);
Harris v. Wittman (In re Harris), 590 F.3d 730, 741 (9th Cir.
2009) (reasoning that a dispute over a post-petition
settlement agreement “is much more like a public rights case
than a private rights case” and is a “core” proceeding). The
bankruptcy court's interpretation of the 2011 Settlement
Agreement is determinative of Katona's claim, and the
bankruptcy court's order was within its statutory authority.
C.
*4 [14] [15] [16] Galaz next argues that the bankruptcy court
was required by the mandatory abstention provision to abstain
from adjudicating this case.3 This court reviews the decision
not to abstain for abuse of discretion. See Edge Petroleum
Operating Co. v. GPR Holdings, L.L.C. (In re TXNB Internal
Case), 483 F.3d 292, 299 (5th Cir. 2007). This court has
interpreted 28 U.S.C. § 1334(c)(2) to mandate federal court
abstention where, among other things, “the claim is a non-core
proceeding.” Id. at 300. Here, the bankruptcy court did not
abuse its discretion in refusing to abstain because, as previously
discussed, the proceeding at issue is “core” under § 157(b). See
Gober v. Terra + Co. (In re Gober), 100 F.3d 1195, 1206 (5th
Cir. 1996) (“Mandatory abstention applies only to non-core
proceedings ....”).
D.
Galaz argues that the bankruptcy court erred in finding his
Oshita claims barred by res judicata, compromise and
settlement, and accord and satisfaction because (1) Katona
did not raise these defenses in her pleadings and (2) these
defenses are meritless. We address each of Galaz's
arguments in turn.
1.
[17] [18] “Bankruptcy Rule 8006 provides that in an appeal
to a district court, the appellant must file a statement of the
issues to be presented.”4 McClendon v. Springfield (In re
McClendon), 765 F.3d 501, 506 (5th Cir. 2014). “It is clear
under the law of this circuit that an issue that is not designated
in the statement of issues in the district court is waived on
appeal ....” Id. (internal quotation marks omitted). Bankruptcy
Rule 8006 serves a specific purpose: it enables a redesignation
of the appellate record assembled in the bankruptcy court. See
M.A. Baheth & Co. v. Schott (In re M.A. Baheth Const. Co.),
118 F.3d 1082, 1085 n.2 (5th Cir. 1997). “After an immediate
appeal, a party may well narrow the focus of its efforts on the
second appeal and a redesignation of the record may eliminate
unnecessary material.” Id.
[19] [20] When Galaz appealed to the district court, he filed
a Bankruptcy Rule 8006 statement of the issues that raised, in
relevant part, this question:
Whether the Bankruptcy Court erred
by rendering judgment in favor of
Plaintiff and against Defendant
Alfred Galaz where
Plaintiff failed to meet her summary
judgment burden of establishing the
grounds presented in her Motion for
Summary Judgment and where
Defendants raised a genuine,
material issue of fact as to Plaintiff's
claims against them.
Galaz argues that this issue naturally encompasses the
argument that he later briefed before the district court:
Whether “the bankruptcy court erred in granting summary
judgment based upon res judicata, compromise and
settlement, and accord and satisfaction because these
defenses were never raised in Katona's pleadings.” But this
assertion construes his statement of the issues too broadly.
The purpose of Bankruptcy Rule 8006 is to narrow the
record on appeal. Drafting a sweeping statement of issues
flouts that purpose. The statement of the issues need not “be
precise to the point of pedantry” to avoid waiver. In re Am.
Cartage, Inc., 656 F.3d 82, 91 (1st Cir. 2011). There is no
indication in Galaz's statement of the issues, however, that
he intended to challenge the bankruptcy court's grant of
summary judgment on grounds not urged by Katona. His
statement of the issues concerns only whether Katona met
her summary judgment burden. His statement of the issues
does not fairly encompass his later argument that the
bankruptcy court should not have granted summary
judgment on arguments that Katona did not raise. See
McClendon, 765 F.3d at 506. Galaz failed to identify the
particular issue that he sought to appeal: whether the
bankruptcy court erred in granting summary judgment on
defenses not presented in Katona's motion for summary
judgment. We hold that Galaz waived that issue.
2.
In Matter of Galaz, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 31
*5 [21] [22] [23] “Once a final judgment on the merits of a
prior action is entered, the parties and those in privity with them
may not relitigate issues that either were or at least could have
been brought in the action.” Cooper v. Int'l Offshore Servs.,
L.L.C., 390 Fed.Appx. 347, 351 (5th Cir. 2010) (relying on
Oreck Direct, LLC v. Dyson, Inc., 560 F.3d 398, 401 (5th Cir.
2009)). “[A] bankruptcy order is entitled to the effect of res
judicata ....” Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1051
(5th Cir. 1987). The bankruptcy court here found that the 2011
Settlement Agreement provided a broad release of liability to
Katona and thus res judicata, compromise and settlement, and
accord and satisfaction functioned to bar Galaz from bringing
the Oshita claims. Galaz argues that these defenses are
inapplicable because he brings his claims as a successor-in-
interest to Oshita, not a successor-in-interest to Vernon, and
thus the 2011 Settlement Agreement does not bar his claims.
Because Galaz's claims arose through rights assigned from
Vernon, however, this court finds that his claims are barred by
res judicata.
Galaz was awarded Oshita's ownership interest in WSG by
a foreclosure judgment in California state court on Katona's
unpaid money judgment. He inherited the right to foreclose
against Oshita through Vernon's assignment. Vernon
inherited those rights from Katona by virtue of the 2011
Settlement Agreement, which also provided that Vernon
release all present and future claims against and rights to
sue Katona. This broad and exhaustive release included any
claims related to or arising out of any event, act, omission,
or condition involving WSG. As the district court correctly
identified, this assignment history presents two issues: (1)
whether Vernon's release carries over to Galaz; and (2) if
so, whether the ownership interest in WSG that Galaz
obtained is a substitute for the unpaid money judgment or a
legally distinct right.
[24] [25] [26] Under Texas law, an assignment is a
“transfer of some right or interest.” Shipley v. Unifund CCR
Partners, 331 S.W.3d 27, 28 (Tex. App. 2010). It “operates
to transfer to the assignee no greater right or interest than
was possessed by the assignor ....” Fla. Bahamas Lines,
Ltd. v. The Steel Barge “Star 800” of Nassau, 433 F.2d
1243, 1246 (5th Cir. 1970). But “[a]n assignee's rights are
also subject to defenses existing at the time of the
assignment that would have been available against the
assignor had there been no assignment.” Forex Capital
Mkts., LLC v. Crawford, No. 05–14–00341–CV, 2014 WL
7498051, at *2 (Tex. App. Dec. 31, 2014). Galaz received
his right to the unpaid money judgment upon assignment
from Vernon subject to the release of liability against
Katona.
[27] Galaz maintains that, even if he took subject to release,
the claims he is now asserting never belonged to Vernon.
Acknowledging that Vernon “might have been precluded
from bringing certain claims against Katona due to the
release,” he argues that he is instead “stepping into Oshita's
shoes” and asserting her rights. But Galaz cites no authority
for the proposition that this foreclosure judgment allows him
to kick off Vernon's shoes and the accompanying liability
release. Nor does he point to any precedent that this
judgment grants him a distinct legal right. An assignee of a
claim may not receive more than the assignor would have
been entitled to. See Fla. Bahamas Lines, Ltd., 433 F.2d at
1246. Galaz took Vernon's interest subject to the legal and
equitable defenses that existed at the time of the assignment;
the transfer does not function to deprive Katona of defenses
that she has against Vernon, the original assignor. Galaz's
claims are barred by res judicata, compromise and
settlement, and accord and satisfaction.
E.
Galaz argues that the bankruptcy court erred in finding his
Oshita claims barred by judicial estoppel because
(1) Katona did not raise this defense in her pleadings, (2)
neither Galaz nor Oshita took inconsistent positions as to
Oshita's ownership interest, and (3) Katona took
inconsistent positions as to Oshita's ownership interest and
her “unclean hands” prohibit judicial estoppel. For the
reasons discussed, we hold that Galaz's Bankruptcy Rule
8006 statement of the issues does not encompass Galaz's
argument that the bankruptcy court erred in considering
judicial estoppel when Katona did not raise it. We hold that
Galaz waived this issue.
*6 [28] [29] [30] This court reviews a determination of judicial
estoppel for abuse of discretion. Love v. Tyson Foods, Inc., 677
F.3d 258, 262 (5th Cir. 2012). “The doctrine of judicial estoppel
is equitable in nature and can be invoked by a court to prevent
a party from asserting a position in a legal proceeding that is
inconsistent with a position taken in a previous proceeding.” Id.
at 261. This court looks to the following elements in deciding
whether to apply judicial estoppel: “(1) the party against whom
judicial estoppel is sought has asserted a legal position which
is plainly inconsistent with a prior position; (2) a court accepted
the prior position; and (3) the party did not act inadvertently.”
Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en
banc). These elements, however, are neither inflexible nor
In Matter of Galaz, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 32
exhaustive and “numerous considerations may inform the
doctrine's application in specific factual contexts.” Love, 677
F.3d at 261 (internal quotation marks omitted).
[31] Here, the bankruptcy court took judicial notice of
all the filings in the bankruptcy case, the adversary
proceedings, the filings and decisions in the appeals of the
bankruptcy case, and the decisions in the California state
court litigation. Upon review, the bankruptcy court noted
several instances where Vernon asserted that Oshita did not
have an ownership interest in WSG. Because Galaz is
Vernon's successor-in-interest, he inherits the positions that
she has taken throughout the litigation. See Adelphia
Recovery Tr. v. Goldman, Sachs & Co., 748 F.3d 110, 120
(2d Cir. 2014) (finding appellants judicially estopped by
actions of predecessors in interest). He cannot now contend
that Oshita has an ownership interest in WSG, because that
position is plainly inconsistent with Vernon's prior position.
The bankruptcy court did not abuse its discretion in finding
Galaz judicially estopped.
[32] A party cannot rely on judicial estoppel if it comes
to the court with unclean hands. Reg'l Props., Inc. v. Fin. &
Real Estate Consulting Co., 752 F.2d 178, 183 (5th Cir.
1985). Galaz contends that Katona similarly took
inconsistent positions regarding Oshita's ownership interest
and thus judicial estoppel cannot apply. The bankruptcy
court reviewed these allegedly inconsistent statements made
by Katona, but found that Katona had maintained that
Oshita's interest was disputed, whereas Vernon had
definitively asserted that Oshita had no interest. Because
Galaz provides no basis for concluding that the bankruptcy
court erred in its factual findings, this court holds that the
bankruptcy court did not abuse its discretion in applying
judicial estoppel.
F.
As a final argument, Galaz contends that the bankruptcy
court erred in denying his motion for summary judgment
and requests that this court reverse and render judgment in
his favor. Galaz reiterates, as the basis for rendering
judgment in his favor, the many arguments that he levied
against the bankruptcy court's order granting Katona's
motion for summary judgment. For the reasons set forth
above, Galaz's arguments fail.
IV.
We AFFIRM the judgment of the district court.
All Citations
--- F.3d ----, 2016 WL 6407211
Footnotes
1 The parties dispute whether, as part of the settlement, Katona assigned her right to the money judgment against Oshita. 2
The bankruptcy court explicitly declined to make any findings on whether the Oshita claims were discharged, and dismissed
Katona's claims for discharge violations without prejudice. But jurisdiction to hear and decide a proceeding attaches before—
and regardless of how—a court rules on the merits of the claim. See Bradley, 989 F.2d at 804–05 (finding that the bankruptcy
court had subject matter jurisdiction even though the bankruptcy court did not rule on the merits of the disputed debt). When a
federal claim appears on the face of the complaint, dismissal for want of jurisdiction is proper only when the claim is “patently
without merit.” Young v. Hosemann, 598 F.3d 184, 188 (5th Cir. 2010). Katona alleges that the Oshita claims were discharged
in her bankruptcy proceedings, in part, because Oshita had constructive or actual notice of her bankruptcy and failed to assert a
claim. We hold that Katona's allegations meet the low pleading burden sufficient to establish jurisdiction.
3 Galaz also argues that the bankruptcy court should have abstained from hearing this case under the permissive
abstention statute. See 28 U.S.C. § 1334(c)(1). This court, however, lacks jurisdiction to review that decision. Id. §
1334(d); see Baker v. Simpson, 613 F.3d 346, 352 (2d Cir. 2010) (“[D]ecisions on permissive abstention, which lie within
the discretion of the bankruptcy court, are not subject to review by the court of appeals. We therefore lack jurisdiction to
decide whether the district court's decision on permissive abstention was correct.”).
4 As part of the December 2014 amendments to the Federal Rules of Bankruptcy, Rule 8006 became Rule 8009. Galaz
filed his statement of issues before the amendments and thus the parties and courts below refer to Rule 8006.
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
In Matter of McCloskey, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 33
2016 WL 6436844
Only the Westlaw citation is currently available.
This case was not selected for
publication in West's Federal Reporter.
See Fed. Rule of Appellate Procedure 32.1
generally governing citation of judicial decisions
issued on or after Jan. 1, 2007. See also
U.S.Ct. of App. 5th Cir. Rules 28.7 and
47.5. United States Court of Appeals, Fifth
Circuit.
In the Matter of: Christopher J. McCloskey, Debtor.
Christopher J. McCloskey, Appellant,
v.
Anne Miriam McCloskey;
Michael A. Craig, Appellees.
No. 16-20079
|
Date Filed: 10/31/2016
Appeal from the United States District Court for the
Southern District of Texas, USDC No. 4:15–CV–742
Attorneys and Law Firms
Leonard Harvey Simon, Esq., Pendergraft & Simon, L.L.P.,
Houston, TX, William Pimlott Haddock, Houston, TX, for
Appellant
Joelle Grace Nelson, Lewis, Brisbois, Bisgaard & Smith,
L.L.P., Houston, TX, Branch Masterson Sheppard,
Galloway, Johnson, Tompkins, Burr & Smith, Houston, TX,
for Appellee Anne Miriam McCloskey
Larry A. Vick, Esq., Houston, TX, for Appellee Michael A.
Craig
Before STEWART, Chief Judge, SMITH and DENNIS,
Circuit Judges.
Opinion
PER CURIAM:*
*1 A divorce proceeding began in 1998, and the parties
continue a fight over attorneys' fees awarded in 2001.
Appellant claims that he should have been able to discharge
the award after he filed for bankruptcy in 2005. Appellees
respond that the debt is a non-dischargeable support
obligation under 11 U.S.C. § 523(a)(5). The bankruptcy court
granted appellees' motion for summary judgment and denied
appellant's motion for summary judgment and his motion for
contempt, sanctions, and damages. The district court
affirmed. Finding no error, we also affirm.
I.
Appellant Christopher McCloskey is the ex-husband of
appellee Anne McCloskey. The second appellee, Michael
Craig, is Anne's lawyer. In 1998, Anne filed for divorce. In
January 2001, a Texas state trial court awarded Anne $50,398
in attorneys' fees plus interest for conservatorship, support,
and property-division proceedings arising from the divorce.
Christopher appealed. In June 2003, a state appellate court
remanded because Texas law does not allow parties to be
reimbursed for fees relating to property division.
Things got complicated after Christopher filed for bankruptcy
in January 2005 and appellees took steps to prevent him from
discharging his debt. In January 2006, a federal bankruptcy
court granted appellees' motion for relief from the automatic
stay so that the trial court could reconsider the fee award. In
April 2006, the trial court issued a reformed final judgment,
again awarding Anne $50,398 in fees plus interest, but this
time only for conservatorship and child support. Christopher
appealed and moved for limited relief from the automatic stay
so that the state appellate court could consider his appeal. In
April 2009, the state appellate court upheld the award of
attorneys' fees but struck the reference to “child support”; the
final judgment deemed the attorneys' fees as necessary solely
for the “conservatorship of the children.”
In the meantime, appellees sought to garnish Christopher's
Fidelity IRA investment account. In December 2007, a state
trial court authorized the garnishment. Christopher appealed,
and in March 2010, a state appellate court affirmed.
In July 2007, the bankruptcy court granted appellees' motion
for summary judgment, denying the dischargeability of the
attorneys' fees. Christopher appealed to the federal district
court, which affirmed. He then appealed to this court, which,
in September 2009, vacated the district court's judgment
affirming the summary judgment. We remanded for the
bankruptcy court to reconsider in light of the April 2009 state
appellate court decision finding that appellees' attorneys' fees
are not “child support” under Texas law.
Both sides moved for summary judgment. The bankruptcy
court issued a detailed opinion in March 2015 granting
In Matter of McCloskey, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 34
appellees' motion for summary judgment, finding that,
although the attorneys' fees were not incurred for
childsupport enforcement, they nevertheless qualify as a
nondischargeable support obligation under 11 U.S.C. §
523(a) (5). Christopher appealed that decision, and the
district court affirmed, whereupon Christopher appealed to
this court.
II.
*2 Christopher urges that the bankruptcy court's decision is
mistaken because (1) appellees lack standing, (2) the
attorneys' fees are not a “support” obligation, (3) appellees'
state-court actions violated the automatic stay, and (4)
appellees are judicially estopped from asserting that the
attorneys' fees are related to child support. We address each
argument in turn.
A.
Regarding Christopher's contention that appellees do not
have standing to challenge the dischargeability of the debt,
creditors can establish standing in a bankruptcy case through
an informal proof of claim. See Nikoloutsos v. Nikoloutsos (In
re Nikoloutsos), 199 F.3d 233, 236 (5th Cir. 2000). They must
show that (1) the claim is in writing;
(2) the writing contains a demand on the debtor's estate; (3)
the writing evidences an intent to hold the debtor liable; (4)
the writing is filed with the bankruptcy court; and (5)
allowance of the claim is equitable under the circumstances.
Id.
Appellees met each of these requirements. They objected to
Christopher's proposed bankruptcy plan shortly after it was
filed in June 2005. In August 2005, they filed their Creditor's
Response to Debtor's Proof of Claim, explaining that “the
previously filed proof of claim is urged by Michael A. Craig
and Craig & Heallen, LLP on behalf of Anne Miriam
McCloskey.” In December 2005, appellees filed a Motion for
Relief from Stay.
And, in January 2006, they brought an adversarial case
against Christopher in bankruptcy court. Those written
demands on Christopher, filed with the bankruptcy court,
evidenced appellees' intent to hold him liable for his debt. The
claim was equitable under the circumstances.
B.
The Bankruptcy Code prevents debtors from discharging
marital or child-support obligations in bankruptcy.1 The
bankruptcy court found that the attorneys' fees at issue qualify
as support and are therefore non-dischargeable. Christopher
points to a state-court decision finding that appellees'
attorneys' fees were not in the nature of support,2 as well as
two recent Texas Supreme Court opinions that limit the
circumstances under which Texas state courts can award
attorneys' fees for child support.3
The bankruptcy court,
however, was not constrained by those state-court rulings.
“Whether a particular debt is a support obligation, excepted
from discharge under 11 U.S.C. § 523(a)(5), is a question of
federal bankruptcy law, not state law.” Hudson v. Raggio &
Raggio, Inc. (In re Hudson), 107
F.3d 355, 356 (5th Cir. 1997). The text of section 523(a) (5),
as it existed when the bankruptcy case was filed, is broadly
worded: Any debt that is owed to a former spouse “for
alimony to, maintenance for, or support of such spouse or
child, in connection with a separation agreement, divorce
decree or other order of a court of record” is nondischargeable
(emphasis added).4 Courts in this circuit have consistently
read that text to mean that attorneys' fees incurred for the
conservatorship of children are not dischargeable.5
C.
*3 Filing for bankruptcy automatically stays “a wide array of
collection and enforcement proceedings against the debtor
and his property.” Pa. Dep't of Pub. Welfare v. Davenport,
495 U.S. 552, 560, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990).
Christopher filed for bankruptcy in January 2005. In the
months and years that followed, the state courts issued a
number of orders, including a garnishment judgment, which
Christopher maintains violated the automatic stay.
There are three problems with that theory. First, the
bankruptcy court granted three motions for relief from the
stay so that the state proceedings could go forward. Those
orders allowed the state courts to issue orders without
violating the stay. Second, at the time Christopher filed for
bankruptcy, the Bankruptcy Code included exceptions to the
automatic stay for “the establishment or modification of an
order for alimony, maintenance, or support”6 and for “the
collection of alimony, maintenance, or support from property
In Matter of McCloskey, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 35
that is not property of the estate.”7
Those two exceptions
cover all of the relevant statecourt orders.8 Third,
Christopher's arguments about the appropriateness of specific
state-court orders are foreclosed by the Rooker–Feldman
doctrine and res judicata. The Rooker–Feldman doctrine bars
the lower federal courts from modifying or reversing state-
court judgments. See Ingalls v. Erlewine (In re Erlewine), 349
F.3d 205, 209 (5th Cir. 2003). Res judicata prevents parties
from re-trying claims that they have already litigated where,
as here, there was a final judgment on the merits. See Barr v.
Resolution Trust Corp., 837 S.W.2d 627, 628 (Tex. 1992).
D.
In June 2003, a state appellate court reviewing Christopher's
state-law claims decided that Texas law does not allow
parties to be reimbursed for attorneys' fees relating to
property division. The trial court had awarded
Footnotes
fees to appellees for child-support-related and
propertydivision-related costs, so the appellate court
remanded with instruction to segregate the fees, stating that
“Anne is willing to rectify the matter by classifying the fees
as part of the division of property [rather than as child
support].”9
“Judicial estoppel ... prevent[s] a litigant from contradicting
its previous, inconsistent position when a court has adopted
and relied on it.” Afram Carriers, Inc. v. Moeykens, 145 F.3d
298, 303 (5th Cir. 1998). Christopher argues that appellees
are judicially estopped from claiming that the attorneys' fees
should qualify as support, given that Anne has already
admitted in state court that the fees were not entirely support-
related. Again, we disagree. Bankruptcy courts must “look
beyond the labels which state courts—and even parties
themselves —give obligations which debtors seek to
discharge.” Dennis v. Dennis (In re Dennis), 25 F.3d 274, 277
(5th Cir.
1994).10
A party may argue in bankruptcy court that an
obligation constitutes support even if she has urged to the
contrary in state court. Id. at 278. Therefore, appellees are not
judicially estopped from bringing this claim.
*4 In sum, the award is non-dischargeable under 11 U.S.C.
§ 523(a)(5). The judgment of the district court, affirming the
bankruptcy court, is AFFIRMED.
All Citations
--- Fed.Appx. ----, 2016 WL 6436844
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
1 11 U.S.C. § 523(a)(5) (2000), amended by 11 U.S.C. § 523(a)(5) (Supp. V 2005) (“[D]ischarge under section 727,
1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt ... for alimony to,
maintenance for, or support of such spouse or child, in connection with a separate agreement, divorce decree or other
order of a court of record....”).
2 See McCloskey v. McCloskey, No. 14–06–00470–CV, 2009 WL 3335868, at *2 (Tex. App.–Houston [14th Dist.] Apr.
2, 2009).
3 Tedder v. Gardner Aldrich, LLP, 421 S.W.3d 651, 655–56 (Tex. 2013) (finding that a person can be held liable for a
spouse's attorneys' fees only if he either acts as an agent for the spouse or the fees are for “necessaries” such as
“food, clothing, and habitation”); Tucker v. Thomas, 419 S.W.3d 292, 295 (Tex. 2013) (stating that “in the absence of
express statutory authority, a trial court may not award attorney's fees recoverable by a party in a non-enforcement
modification suit as necessaries or additional child support”).
4 See also Biggs v. Biggs (In re Biggs), 907 F.2d 503, 505 (5th Cir. 1990) (“[N]othing in the language of section 523(a)
(5) indicates that the dischargeability of an obligation turns on state laws regulating alimony and support.”); Browning v. Navarro, 887 F.2d 553, 561 (5th Cir. 1989) (“[B]ankruptcy courts have a job to do and sometimes they must ignore res
judicata in order to carry out Congress' mandate.”).
5 See, e.g., Sonntag v. Prax (In re Sonntag), 115 Fed.Appx. 680, 681–82 (5th Cir. 2004) (per curiam); In re Hudson, 107 F.3d at 357; Dvorak v. Carlson (In re Dvorak), 986 F.2d 940, 941 (5th Cir. 1993); Hill v. Snider (In re Snider), 62 B.R.
In Matter of McCloskey, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 36
382, 387 (Bankr. S.D. Tex. 1986); Hack v. Laney (In re Laney), 53 B.R. 231, 235 (Bankr. N.D. Tex. 1985).
6 See 11 U.S.C. § 362(b)(2)(A)(ii) (2000), amended by 11 U.S.C. § 362(b)(2)(A)(ii) (Supp. V 2005).
7 See 11 U.S.C. § 362(b)(2)(B) (2000), amended by 11 U.S.C. § 362(b)(2)(B) (Supp. V 2005).
8 Christopher voluntarily exempted his Fidelity IRA investment account (the subject of the garnishment proceedings)
from his bankruptcy estate in early 2006, before the garnishment proceedings began.
9 McCloskey v. McCloskey, No. 14–00–01300–CV, 2003 WL 21354709, at *5 (Tex. App.–Houston [14th Dist.] June 12,
2003).
10 See also Benich v. Benich (In re Benich), 811 F.2d 943, 945–46 (5th Cir. 1987) (finding that monthly payments to
exspouse agreed to in a property-settlement agreement qualify as non-dischargeable support).
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 37
2016 WL 6276051
Only the Westlaw citation is currently available.
United States Court of Appeals, Fifth Circuit.
Ralph S. Janvey, In His Capacity as Court–
Appointed Receiver for the Stanford International
Bank, Limited, et al., Plaintiff–Appellant
v.
Libyan Investment Authority, Defendant–Appellee
Ralph S. Janvey, In His Capacity as Court–
Appointed Receiver for the Stanford International
Bank, Limited, et al., Plaintiff–Appellee
v.
Libyan Foreign Investment
Company, Defendant–Appellant
No. 15-10545
|
Cons. w/ No. 15-10548
|
Filed October 26, 2016
Synopsis
Background: Receiver of financially troubled bank used by its
principal to perpetrate massive Ponzi scheme brought
“clawback” actions to recover sums paid to investors in scheme,
including action against defendants who moved to dismiss based
on the Foreign Sovereign Immunities Act (FSIA). The United
States District Court for the Northern District of Texas, David
C. Godbey, J., 164 F.Supp.3d 910, ruled that one of defendant's
was immune from suit, but the other was not, and granted motion
to dismiss in part. Both parties appealed.
Holdings: The Court of Appeals held that:
[1] while Libyan Investment Authority (LIA),
ascorporation solely owned by the Libyan government,
was “agency or instrumentality” of foreign state under the
FSIA, the Libyan Foreign Investment Company (LFICO),
as corporation solely owned by the LIA and only
indirectly owned by the Libyan government, was not, at
least not on majority ownership theory;
[2] district court's acceptance of parties stipulation
thatboth defendants were “agencies or instrumentalities”
of Libyan government necessitated remand for further
factual development;
[3] even assuming that corporation wholly ownedby
another corporation that was wholly owned by Libyan
government was itself “agency or instrumentality” of
Libyan government, trading activity conducted by
corporation wholly outside the United States did not have
“direct effect” in the United States, as required for this
trading activity to trigger “commercial activity” exception
to immunity under the FSIA;
[4] whatever control the parent exercised over
subsidiarywith regard to its investment decisions was
insufficient to permit court to disregard their legal
separateness and to treat acts of subsidiary as those of
parent, in conducting its FSIA analysis; and
[5] corporate parent's status as sole shareholder of
whollyowned subsidiary to which allegedly fraudulent
transfer was made was insufficient, without more, to make
it liable as “entity for whose benefit” this allegedly
fraudulent transfer was made, as that term was used in the
Texas Uniform Fraudulent Transfer Act (TUTFA).
Affirmed in part, vacated in part, and remanded.
Appeals from the United States District Court for the Northern
District of Texas, David C. Godbey, J.
Attorneys and Law Firms
Kevin M. Sadler, Baker Botts, L.L.P., Palo Alto, CA,
Scott Daniel Powers, Baker Botts, L.L.P., Austin, TX, for
Plaintiff–Appellant.
Warren W. Harris, Yvonne Y. Ho, Esq., Bracewell, L.L.P.,
Houston, TX, Joseph Marion Cox, Attorney,
Bracewell, L.L.P., Shana Lynn Merman, Squire Patton
Boggs, L.L.P., Dallas, TX, Brian H. Polovoy, Henry
Sabath Weisburg, Attorney, Shearman & Sterling, L.L.P.,
New York, NY, for Defendant–Appellee.
Before WIENER, PRADO, and OWEN, Circuit Judges.
Opinion
PER CURIAM:
*1 Ralph S. Janvey, the court-appointed receiver (“the
receiver”) for a Ponzi scheme orchestrated by Allen Stanford
(the “Stanford scheme”), brought claims against the Libyan
Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 38
Investment Authority (“LIA”) and the Libyan Foreign
Investment Company (“LFICO”) in the district court, seeking to
recover the proceeds of certificates of deposit (“CDs”)
previously transferred to LFICO by the Stanford International
Bank, Ltd. (“SIB”). LIA and LFICO moved to dismiss the
receiver's claims, insisting that they were immune from the
court's jurisdiction under the Foreign Sovereign Immunities Act
(“FSIA”). The receiver opposed dismissal, asserting that the
commercial activity exception to FSIA immunity applied. After
the parties conducted limited jurisdictional discovery, the district
court ruled that LIA was immune but that LFICO was not. Both
the receiver and LFICO timely filed appeals, which have been
consolidated. We affirm in part and vacate and remand in part.
I.
FACTS & PROCEEDINGS
Stanford and his associates perpetrated the Stanford scheme
through a group of entities (collectively, the “Stanford entities”)
that, inter alia, sold sham CDs issued by SIB to unsuspecting
investors. The Stanford entities promised those investors that the
CDs from SIB would yield extraordinarily high rates of return.
Rather than investing the funds they received from later
investors, however, the Stanford entities paid those funds to
earlier investors, redeeming their maturing CDs. In so doing, the
Stanford entities made it appear that the CDs from SIB were
producing the phenomenal rates of return they had promised.1
In early 2009, the Securities and Exchange Commission (“SEC”)
filed suit against the Stanford entities, including SIB. The
Stanford entities were then placed in receivership, and Janvey
was appointed their receiver. The receiver is responsible for
bringing claims on behalf of the Stanford entities to recover
assets for distribution to their defrauded investors.
The instant consolidated appeals relate to the Stanford
entities' transfer of funds to LFICO, an earlier investor that
had redeemed some of its maturing CDs.
In 2006, LFICO had developed relationships with SIB, a
Stanford entity based in Antigua, and Stanford Group
(Suisse) S.A. (“SGS”), a Stanford entity based in
Switzerland. LFICO's relationship with SIB related solely
to its purchase of $138 million in CDs from SIB. LFICO's
relationship with SGS related solely to a discretionary
management agreement between itself and SGS, under
which SGS managed $100 million of LFICO's funds in an
account it held in Switzerland. The agreement was formed
in Libya and governed by Swiss law.
These relationships were ongoing when, in 2007, two SGS
financial advisors accompanied two LFICO analysts on a
training program conducted by SIB. The program began
and ended in Switzerland but included visits to Antigua
and the United States—in particular, to Houston,
Memphis, Washington, and Miami. Otherwise, LFICO's
relationship with the Stanford entities did not include any
other acts or activities in the United States.2
*2 In 2008, LFICO decided to divest its SIB-issued CDs,
“given the size of [these] deposits and the problems facing
the international financial market.”3 It instructed SGS in
Switzerland to redeem its SIB-issued CDs as they matured
rather than to repurchase them at that time. (In a single
exception, LFICO instructed SGS to repurchase $50
million in CDs from SIB several months later.) SGS
appears to have complied with these requests: As the CDs
matured, SIB transferred their proceeds from its accounts
in Canada and England to LFICO's accounts in Libya and
Switzerland. None of these accounts was held in the
United States.4 When SIB entered receivership, LFICO
had already received about $50 million in redemption
proceeds, far less than it had paid for all of its CDs. As a
result, it suffered a greater loss than any other investor in
the Stanford scheme.
LFICO's only shareholder is LIA, whose only shareholder
is Libya. Both LFICO and LIA are based in Libya. Unlike
LFICO, LIA never purchased SIB-issued CDs, although it
apparently considered doing so. LIA asserts that it was
wholly uninvolved in LFICO's purchases and redemptions
of the SIB-issued CDs.5 LIA is not referenced in the
discretionary management agreement between LFICO
and SGS or in the CDs themselves, which were
agreements between SIB and LFICO. After Stanford's
arrest, the then-chief investment officer of LIA stated that
LIA itself had not purchased any SIB-issued CDs but that
he “suspect[ed] a[n] LIA affiliate or [s]ubsidiary may
have [$]150 million at most” invested.6
In 2009, the receiver filed suit against investors, including
LFICO, that had purchased SIB-issued CDs and later had
redeemed them. He sought disgorgement of any proceeds of
those CDs, but in Janvey v. Adams, this court precluded such
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claims, holding that the investors had a legitimate ownership
interest in those proceeds.7 The receiver then made new claims
against some of those investors for fraudulent transfer and unjust
enrichment. Eventually, he asserted such claims against LFICO
and LIA, too, alleging that LFICO was LIA's alter ego. The
receiver filed a motion for a preliminary injunction on those
claims. The district court denied the receiver's motion, and we
affirmed the district court's denial.
LIA and LFICO eventually filed a motion to dismiss under
Federal Rule of Civil Procedure 12(b)(1) and (2), claiming that
the district court lacked personal and subject matter jurisdiction
because (1) they had presumptive immunity under the FSIA as
agents or instrumentalities of a foreign state and (2) the
commercial activity exception to immunity under the FSIA did
not apply. The parties conducted jurisdictional discovery
regarding whether LIA and LFICO engaged in activities that fall
within the scope of the commercial activity exception under the
FSIA.
*3 When that discovery was complete, the district court denied
the motion to dismiss as to LFICO. In so doing, it ruled that (1)
LFICO had engaged in commercial activity by purchasing,
repurchasing, and redeeming the SIBissued CDs and (2) this
activity, which occurred outside the United States, had a “direct
effect” on the United States because the Stanford scheme was
based in the United States. The court concluded that the
commercial activity exception to immunity under FSIA gave it
personal and subject matter jurisdiction over LFICO.
The district court granted the motion to dismiss as to LIA. The
court concluded that LIA had not engaged in commercial
activity at all and that, although LFICO had engaged in such
activity, its acts were not attributable to LIA. The court ruled that
LFICO was not LIA's agent or alter ego in purchasing,
repurchasing, or redeeming the SIB-issued CDs and that the
proceeds of those CDs were not redeemed for LIA's benefit.
Both LFICO and the receiver then appealed.
II.
ANALYSIS
A. STANDARD OF REVIEW
[1] [2] [3] [4] [5] We have appellate jurisdiction over any final
order that grants immunity under the FSIA8
and over any
collateral order that denies it.9 We also have pendant appellate
jurisdiction over any closely related issues.10
In exercising that
jurisdiction, we review the district court's conclusions of law de
novo,11
and, to the extent it makes any findings of fact,12
we
review them for clear error.13
A finding of fact is clearly
erroneous if it is inconsistent with the record in its entirety.14
Such a finding may be clearly erroneous if (1) it is not based on
“substantial evidence,” (2) it is based on a misinterpretation of
the evidence, or (3) it is inconsistent with “the preponderance of
credible testimony.”15
If the district court's conclusions of law
“affected” its findings of fact, “remand is the proper course
unless the record permits only one resolution of the [fact].”16
[6] [7] These appeals require us to determine whether there
is any basis for personal and subject matter jurisdiction over
LIA and LFICO. The FSIA provides “the sole basis for
obtaining jurisdiction over a foreign state in [federal and
state] courts.”17
It furnishes both the immunity itself, which
applies to any “foreign state,”18
and the only exceptions to
that immunity.19
If an exception applies, the FSIA also
specifies the only basis for personal and subject matter
jurisdiction over the foreign state. That jurisdiction extends
to “any nonjury civil action against a foreign state ... as to
any claim for relief in personam....”20
If no exception
applies, there is no other basis for personal or subject matter
jurisdiction over a foreign state.21
*4 [8] [9] [10] The parties claiming immunity under the FSIA—
here, LIA and LFICO—have the initial burden of persuasion that
they are foreign states and therefore entitled to a presumption of
immunity.22
If they bear that burden, then the party opposing
immunity— here, the receiver—has the burden of producing
evidence that LIA and LFICO fall within an exception
enumerated in the FSIA, refuting the presumption of
immunity.23
If the receiver bears his burden, LIA and LFICO
then have the ultimate burden of persuasion that the exception
does not apply to them and that they are entitled to immunity.24
B. WHETHER LFICO AND LIA ARE
“FOREIGN STATES” UNDER THE FSIA
“[m]ajority ownership by [the] foreign state, not control,
is the benchmark.”33
As “only direct ownership”
counts,34
“a subsidiary of an [agency or] instrumentality
[of the state] is not itself entitled to [such] status.”35
LIA is majority owned by Libya itself and thus is an [11] [12]
[13] [14] The parties agreed that both LIA
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Therefore, “[a] corporation is an [agency or an]
instrumentality of a foreign state under the FSIA only if
the foreign state itself owns a majority of the corporation's
shares.”36
It is not an agency or instrumentality on the
basis of majority ownership, however, if the “the foreign
state does not own a majority of its shares but does own a
majority of the shares of a corporate parent one or more
tiers above the subsidiary.”37
and LFICO are “foreign states” under the FSIA. Relying on the
parties' agreement, the district court determined that LIA and
LFICO “qualify as foreign states.” Subject matter jurisdiction,
however, “can never be forfeited or waived.”25
We therefore
“have an independent obligation to determine whether [it]
exists, even in the absence of a challenge from any party.”26
Accordingly, we must determine whether LIA and LFICO are
“foreign states” under the FSIA.
[15] In the context of the FSIA, the term “foreign state” refers
not only to the state itself, viz., the “body politic that governs a
particular territory,”27
but also to its “agenc[ies] or
instrumentalit[ies].”28
Absent a clear distinction between the
terms “agency” and “instrumentality,”29
they are read together
or treated interchangeably.30
*5 [16] An agency or instrumentality of a foreign state is a
separate entity, “corporate or otherwise,” that is either (1)
majority owned by a foreign state or (2) an “organ” of a foreign
state.31
There is a distinction between those agencies or
instrumentalities that qualify because they are “organs” of a
foreign state and those that qualify because they are “majority
owned” by one.32
In some instances, however, an agency or
instrumentality may be both and thus qualify as either.
1. MAJORITY OWNED BY A FOREIGN STATE
[17] [18] The Supreme Court has clarified that, because
“[c]ontrol and ownership ... are distinct concepts,” agency or
instrumentality of Libya.38
LFICO, however, does not qualify
on that basis because it is not majority owned by Libya directly,
but by LIA. LFICO is merely a subsidiary of LIA, and that is
not sufficient.
2. ORGAN OF A FOREIGN STATE
[19] [20] LFICO could qualify as an agency or
instrumentality, however, if it is an organ of Libya. We have
suggested that there is no clear test for determining whether
an entity is an organ of a state but that the following factors
are useful: “(1) whether the foreign state created the entity
for a national purpose; (2) whether the foreign state actively
supervises the entity; (3) whether the foreign state requires
the hiring of public employees and pays their salaries; (4)
whether the entity holds exclusive rights to some right in the
[foreign] country; and (5) how the entity is treated under
foreign state law.”39
Considering whether an entity is an
“organ” is, in some respects, similar to considering whether
it is an “agent.” (We note that the term “agent” should not
to be confused with the term “agency” in the phrase “agency
or instrumentality.”)
*6 [21] Because the parties agreed that LFICO is a “foreign
state” under the FSIA, they did not address whether LFICO
is an organ, and thus an agency or instrumentality, of Libya.
The district court did determine, in another context, that
LFICO was not LIA's agent but was Libya's agent. The court
explained that “there is a sufficient connection between
LFICO and [Libya] such that LFICO can be considered
Libya's agent.”40
In so doing, the court determined: “LFICO
operates solely in the national interest of Libya”; “LFICO
possesses ‘special status and is treated as an organ of ...
Libya’ ”; “LFICO is comprised in large part of government
representatives”; and “the Libyan legislature has the power to
appoint members of ... LFICO['s board] and to fix their
salaries, and [its board] is subordinate to the Libyan
legislature.”
[22] [23] The district court, however, erred by relying on a
description of the act that created LFICO initially rather than the
description of the subsequent act that transferred LFICO to LIA.
The subsequent act disentangled LFICO from Libya itself. As a
result, LIA became—and remains —Libya's subsidiary, and
LFICO became—and remains —LIA's subsidiary. This is
significant because, as with subsidiaries, “duly created [agencies
or] instrumentalities of a foreign state are to be accorded a
presumption of independent status.”41
The party opposing
immunity— here, the receiver—“can overcome that presumption
... by demonstrating that the [agency or] instrumentality is the
agent or alter ego of the foreign state.”42
The theories underlying
alter egos and agents are “distinct” and, for this reason, are not to
be applied “as if they were interchangeable.”43
Alter egos are
created equitably; agents are created contractually.44
Both,
however, are bases for overcoming the presumption that an
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agency or instrumentality of a foreign state is separate from the
foreign state itself.45
LIA is majority owned by Libya proper and therefore an
agency or instrumentality of a foreign state. In contrast, LFICO
is not majority owned by Libya proper. As noted above, the
parties agreed that, in addition to LIA, LFICO is a foreign state
under the FSIA, so the parties did not develop the record on
the precise issue of whether LFICO is an organ of Libya and
thus a “foreign state” under the FSIA. Accordingly, we vacate
the district court's ruling that it had jurisdiction over the claims
against LFICO under the FSIA and remand for development
of the factual record on this issue and for a determination
whether LFICO is an organ, and thus an agent or
instrumentality, of Libya under the FSIA.
C. WHETHER THE CLAIMS AGAINST LFICO
ARE SUBJECT TO THE COMMERCIAL
ACTIVITY EXCEPTION TO THE FSIA If we were
to assume arguendo that LFICO is an agency or
instrumentality of Libya proper and therefore presumptively
entitled to immunity under the FSIA, there would be no basis
for jurisdiction over the receiver's claims against LFICO under
the commercial activity exception to the FSIA. The FSIA
provides an exception to sovereign immunity “in any case in
which the action is based upon commercial activity that has a
jurisdictional nexus with the United States.”46
The commercial
activity exception contains three clauses, each identifying a
type of act that is sufficiently connected to the United States to
satisfy the jurisdictional nexus requirement: (1) “a commercial
activity carried on in the United States by the foreign state”;
(2) “an act performed in the United States in connection with
a commercial activity of the foreign state elsewhere”; and (3)
“an act outside the territory of the United States in connection
with a commercial activity of the foreign state elsewhere and
that act causes a direct effect in the United States.”47
*7 The parties dispute whether LFICO's activity—
purchasing, repurchasing, and redeeming SIB-issued CDs
—fell within any of the clauses of FSIA's commercial
activity exception. LFICO argues that the district court erred
in determining that it had jurisdiction to hear the receiver's
claims against it under any clause of the commercial activity
exception. Because the district court based its decision on
the third clause, we begin there.
1. THIRD CLAUSE
[24] The third clause of the exception applies when a claim
“is [i] based ... upon an act outside ... of the United States
[ii] in connection with a commercial activity”48
—“either a
regular course of commercial conduct or a particular
commercial transaction or act”49
—“of the foreign state
elsewhere and [iii] that act causes a direct effect in the
United States.”50
The parties do not dispute that the
receiver's claim is based “upon an act outside the territory
of the United States in connection with [LFICO's]
commercial activity [outside the United States].”51
[25] [26] [27] The district court determined, however, that the
third clause applied because it concluded that LFICO's acts
caused a direct effect in the United States. An effect is “direct”
if it follows as an immediate consequence of the foreign state's
activity.52
“[A] consequence is ‘immediate’ if no intervening
act breaks ‘the chain of causation leading from the asserted
wrongful act to its impact in the United States.’ ”53
In
considering
the effect, we must “isolate those specific acts of the [agency or
instrumentality] that form the basis of the plaintiff's [claims].”54
As the Second Circuit has noted, “even if ... a particular effect
might be foreseeable,” such an effect is not “direct” if it “hinge[s]
on third parties' independent ... conduct.”55
“[T]he mere fact that
[an agency or instrumentality]'s commercial activity outside of
the United States caused ... financial injury to a United States
citizen is not itself sufficient to constitute a direct effect in the
United States.”56
Such an injury will constitute a direct effect
only if the agency or instrumentality of a foreign state causes the
injury through its failure to perform an obligation that it was
required to perform in the United States.57
*8 The district court determined that LFICO's acts, which
occurred outside the United States, had a “direct effect” in the
United States. The district court explained that, “by doing
business with SIB in Antigua, LFICO was in reality doing
business with Stanford in [the United States].” It concluded that,
“as an immediate consequence of LFICO's investments [in
Antigua], the [U.S.]-based Stanford Ponzi scheme slipped further
into insolvency and received funds it needed to keep its scheme
afloat.” This assumption is erroneous.
LFICO purchased, repurchased, and redeemed the CDs from SIB,
which was based in Antigua; all of LFICO's acts occurred in
Switzerland and Libya; and all of SIB's acts occurred in Antigua,
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Canada, and England. LFICO had nothing to do with SIB's
transfer of funds to or from other Stanford entities as part of the
scheme. The district court observed that “[m]oney put into and
taken out of SIB's coffers in Antigua was money being funneled
through Stanford's [U.S.]-based enterprise.” It did not state that
LFICO was funneling that money. In fact, it did not identify who
was doing the funneling but ducked that issue by relying on the
passive voice: “[m]oney ... was being funneled.”
LFICO acted only pursuant to its obligations under the SIB-
issued CDs, which constituted agreements between LFICO and
SIB. Those instruments did not require any act in the United
States, much less the act of funneling money through the Stanford
scheme or any Stanford entities in the United States.
Accordingly, the district court erred in deciding that the third
clause of the commercial activity exception applied to the
receiver's claims against LFICO.
2. FIRST AND SECOND CLAUSES
[28] The receiver asserts that the district court erred in
determining that the first and second clauses of the
commercial activity exception do not apply. Those clauses
provide exceptions to sovereign immunity when “the action
is based [1] upon a commercial activity carried on in the
United States by the foreign state ... or [2] upon an act
performed in the United States in connection with a
commercial activity of the foreign state elsewhere....”58
The
receiver contends that SIB was, in fact, the Stanford scheme
itself. But, as discussed above, LFICO's commercial activity
was limited to its obligations and rights under the SIB-issued
CDs, which were contracts between LFICO and SIB. The
CDs did not require any activity in the United States. LFICO
properly assumed that its relationship was with SIB and that
SIB was what it represented itself to be, i.e., a bank based in
Antigua. Even though a few of LFICO's analysts participated
in SIB's training program, which included a visit to the United
States, there is nothing to suggest that this activity was related
to LFICO's relevant acts made pursuant to its obligations or
rights under the SIB-issued
CDs.59
Thus, if LFICO is an agency or instrumentality of a
foreign state, the commercial activity exception would not
strip it of its presumptive immunity under the FSIA.
D. WHETHER THE CLAIMS AGAINST LIA ARE
SUBJECT TO THE COMMERCIAL
ACTIVITY EXCEPTION UNDER THE FSIA
The receiver insists that, even though LIA did not purchase,
repurchase and redeem SIB-issued CDs, or receive proceeds
of such CDs itself, LFICO did and LFICO's acts were
attributable to LIA. He avers specifically that LFICO is
LIA's alter ego or agent and that LIA was the beneficiary of
the transfers from SIB to LFICO. He concludes that, as with
LFICO, the FSIA's commercial activity exception applies to
his claims against LIA.
1. AGENT OR ALTER EGO
*9 [29] [30] [31] [32] The parties do not appear to dispute the
relationship between LIA and Libya. Instead, they dispute the
relationship between LIA and LFICO. Specifically, they disagree
on whether LFICO's
acts are attributable to LIA. As we observed above, “[a]
corporate parent which owns the shares of a subsidiary does
not, for that reason alone, own or have legal title to the assets
of the subsidiary....”60
“The fact that the shareholder is [an
agency or instrumentality of a foreign state] does not change
the analysis.”61
Subsidiaries that are “established as juridical
entities distinct and independent ... should normally be treated
as such.”62
In the context of the FSIA, a court must apply “the
general rules regarding corporate formalities.”63
For this
reason, “duly created [agencies or] instrumentalities of a
foreign state are to be accorded a presumption of independent
status.”64
“A plaintiff can overcome that presumption,
however, in certain circumstances by demonstrating that the
instrumentality is the agent or alter ego of the foreign state.”65
Yet, the theories underlying alter egos and agents are “distinct”
and are therefore not to be applied “as if they were
interchangeable.”66
Again, alter egos are created equitably;
agents are created contractually.67
Each is a basis for
overcoming the presumption that an agency or instrumentality
of a foreign state is separate from the foreign state itself.68
In
both instances, the analysis is conducted with reference to
federal law, not foreign law or state law.69
[33] [34] To determine if one entity is the alter ego of another,
“[t]he corporate veil may be pierced to hold a[ parent] liable for
the [acts] of its [subsidiary] only if (1) the [parent] exercised
complete control over the [subsidiary] with respect to the [acts]
at issue and (2) such control was used to commit a fraud or wrong
that injured the party seeking to pierce the veil.”70
In contrast,
when determining whether one entity is the agent of another, it is
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necessary to consider “whether the [parent] exercises day-to-day
control over the [subsidiary].”71
In the context of the commercial
activity exception, we further consider “whether the commercial
activity is ‘of the foreign state.’ ”72
Thus, both the principal-agent
and alter ego relationships require an element of control.
[35] A declaration provided by LIA, and which the district court
credited, states:
LFICO has always operated
independently of LIA as described in
the [Layas and Mokhtar declarations].
For the avoidance of doubt: (a) LIA has
no right to manage LFICO's
investments directly. (b) LIA has no
right to actually own and deal directly
with LFICO's assets. (c) LIA has no
right to hold LFICO's assets as LIA's
own. (d) LIA has no right to assign
LFICO's personnel, choose its
managers, prepare its accounts, or
determine with what third parties
LFICO will contract for services.73
Considering this declaration offered by LIA, it is apparent
that LIA and LFICO are entitled to the presumption that they
are separate entities. There is nothing to indicate that LIA
had or exercised any significant control over LFICO, either
generally or with specific regard to LFICO's purchase,
repurchase, or redemption of the SIBissued CDs or the
receipt of proceeds from such CDs. Any control that LIA
might have exercised was not nearly enough to justify
disregarding the legal distinction between them. The district
court did not err in determining that LFICO was not LIA's
agent or its alter ego.
2. TRANSFER BENEFICIARY UNDER TUFTA
[36] The receiver further argues that LIA is liable for the
transfer from SIB to LFICO because, under the Texas
Uniform Fraudulent Transfer Act (“TUFTA”), LIA was the
“person” for whose benefit the transfer was made. The district
court rejected this contention.
*10 TUFTA provides that a transfer from a debtor to a
creditor is fraudulent if made with actual intent to hinder,
delay, or defraud any other creditor of that debtor.74
In
relevant part, it states that either “the first transferee of the
asset or the person for whose benefit the transfer was made”
may be held liable for such a transfer.75
Regardless of
whether LIA is a beneficiary of the transfer, under TUFTA,
we must consider whether the commercial activity exception
to the FSIA provides a source of subject matter jurisdiction
over such a claim.
As discussed above, the commercial activity exception
focuses on the acts or activities of the agency or
instrumentality of the foreign state. The receiver's TUFTA
claim is based on SIB's transfer of proceeds to LFICO,
allegedly for the benefit of LIA. As alleged, LIA neither
made nor received the transfer. It merely benefited from it.
Notably, “[TUFTA] and the ... Bankruptcy Code are of common
ancestry; cases under one are considered authoritative under the
other.”76
Both refer to the person
“for whose benefit [a] transfer was made.”77
In the context of
bankruptcy, a transfer beneficiary is typically the guarantor of a
debt that was extinguished by the transfer.78
The obligation of
the insolvent debtor in such a circumstance would generally be
the guarantor's obligation, as well. Absent the transfer from
debtor to creditor, the guarantor would have had to make the
transfer itself. As the transfer beneficiary, it avoids that
obligation.
The receiver nevertheless insists that when a debtor makes a
transfer to a creditor, that creditor's shareholder may also be
considered a transfer beneficiary. The receiver relies on Esse v.
Empire Energy III, Ltd.79
and Citizens
National Bank of Texas v. NXS Construction, Inc.,80
but both are
inapplicable. The Esse court determined that shareholders were
transfer beneficiaries because they had “ ‘assented to and
benefitted from these transfers' and knowingly participated in the
wrongdoing.”81
Those shareholders had also waived any
argument that they were not transfer beneficiaries.82
The Citizens
National Bank court determined that a shareholder was a transfer
beneficiary because the shareholder was actually involved with
the transfer.83
By contrast, LIA insists that, without more, a shareholder is not a
beneficiary of a transfer made to the corporation. It notes, for
instance, that in In re Hansen, a bankruptcy court held that the
creditor's majority shareholder was not a transfer beneficiary.84
The court explained:
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Nothing in [§] 550(a)(1) [of the Bankruptcy Code] indicates
that corporate form can be thrust aside and all voidable
transfers to a corporation recovered from its shareholders on
the mere assumption that shareholders somehow automatically
“benefit” from such transfers. If corporate existence is to be
observed, transfers cannot be recovered even from a
shareholder who by virtue of his majority ownership
ostensibly “controls” the corporation. Something more than
mere status as a shareholder, officer, or director must be
shown.
*11 The better view—and the one consistent with
corporate law—is that shareholders, officers, and
directors are not liable for transfers to their corporation
unless they actually received distributions of the
transferred property ... or a showing can be made to pierce
the corporate veil.85
This appears to be the right approach. When a debtor
transfers assets to a creditor to satisfy a guaranteed debt,
there are independent benefits: The creditor, as transferee,
receives the assets, and the guarantor, as the beneficiary,
retains assets that he would otherwise have lost as a result
of the debtor's insolvency. Another creditor might seek to
recover either the assets transferred by the debtor or the
assets saved by the creditor, or both. This is because the
transferee and beneficiary have independent obligations.
Here, only LFICO, as the transferee, has an obligation.
LIA's obligation is merely derivative of that obligation, not
independent of it. LIA did not receive an independent
benefit as a result of the transfer from SIB to LFICO. Even
if LIA itself owned and controlled LFICO's assets, either
LIA or LFICO would have received the benefit of the
transfer, but not both. Further, when a debtor transfers assets
to a creditor to satisfy a guaranteed debt, the guarantor is
involved as a party, or at least an independent obligor, to the
contract giving rise to the transfer. But LIA was not a party
to the subject contract.
As Collier on Bankruptcy explains, any “approach that
permits recovery based merely on the intent of the debtor/
transferor without any benefit being conferred on the third
party results in the harsh outcome that the third party can be
liable for the return of an avoidable transfer without having
received any benefit, which is generally contrary to the
disgorgement remedy of avoidance actions.”86
Because LIA was not a transfer beneficiary under TUFTA,
we do not consider LIA and LFICO's contention that
TUFTA may not be applied extraterritorially. Neither do we
consider whether, if LIA were a transfer beneficiary, its
status as such would be a basis for jurisdiction under the
FSIA.
III.
CONCLUSION
We hold that the FSIA provides no basis for jurisdiction over
LIA. We therefore AFFIRM the district court's holding that it had
no jurisdiction over the claims against LIA under the FSIA.
However, we VACATE the district court's holding that it had
jurisdiction over the claims against LFICO under the FSIA and
REMAND to the
Footnotes
district court for it to determine in the first place whether
LFICO is an “organ” of Libya, and thus a “foreign state,”
under the FSIA.
All Citations
--- F.3d ----, 2016 WL 6276051
1 In addition to transferring funds to earlier investors, the Stanford entities also transferred funds to other persons and
entities, often for divergent purposes.
2 In late 2008, the then-chairperson of LIA visited the United States for meetings of the International Monetary Fund
(“IMF”) and, while here, met with Stanford himself. There is no indication that they discussed LFICO's purchase,
repurchase, or redemption of SIB-issued CDs.
3 The management committee's decision to redeem the CDs in 2008 appears to have been unrelated to the analysts'
visit to the United States in 2007.
Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 45
4 Although Stanford himself briefly visited Libya several days before SIB transferred the proceeds of these CDs to LFICO
in 2009, this was months after LFICO had decided to divest and notified SIB that it would redeem its SIB-issued CDs
rather than repurchase them as they matured.
5 The receiver suggests that LFICO has stated that LIA was uninvolved with LFICO's purchase of SIB-issued CDs but
has not stated that it was uninvolved with the redemption of those same CDs. This too closely parses LFICO's
language, which actually states that LIA was uninvolved with LFICO's investment in SIB-issued CDs; use of the term
“investment” is sufficiently broad to encompass both LFICO's purchase and subsequent redemption of the CDs.
6 Notably, the Libyan–African Investment Portfolio (“LAP”), an entity similar to LFICO, also purchased SIB-issued CDs
between 2007 and 2008. Unlike LFICO, however, it repurchased about $50 million in CDs from SIB as they matured in
late 2008. As a result, SIB never transferred any proceeds to LAP.
7 588 F.3d 831, 834 (5th Cir. 2009).
8 28 U.S.C. § 1291.
9 See Stena Rederi AB v. Comision de Contratos del Comite Ejecutivo General del Sindicato Revolucionario de
Trabajadores Petroleros de la Republica Mexicana, S.C., 923 F.2d 380, 385 (5th Cir. 1991).
10 See Walter Fuller Aircraft Sales, Inc., v. Rep. of Phil., 965 F.2d 1375, 1387 (5th Cir. 1992) (“In the exercise of [this
Court's] discretion and in the interest of judicial economy ..., we may consider claims under our pendent appellate
jurisdiction that are closely related to the order properly before us.”); Morin v. Caire, 77 F.3d 116, 119 (5th Cir. 1996).
11 Bd. of Regents of Univ. of Tex. Sys. v. Nippon Tel. & Tel. Corp., 478 F.3d 274, 279 (5th Cir. 2007); see Ynclan v. Dep't
of Air Force, 943 F.2d 1388, 1390 (5th Cir. 1991).
12 Bd. of Regents of Univ. of Tex. Sys., 478 F.3d at 279; see Moran v. Kingdom of Saudi Arabia, 27 F.3d 169, 171–72
(5th Cir. 1994).
13 Moran, 27 F.3d at 171–72.
14 Hollinger v. Home State Mut. Ins. Co., 654 F.3d 564, 569 (5th Cir. 2011).
15 Ball v. LeBlanc, 792 F.3d 584, 592 (5th Cir. 2015) (internal quotation marks omitted).
16 Id. at 596 (quoting Pullman–Standard v. Swint, 456 U.S. 273, 292, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982)).
17 Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434 & n.2, 109 S.Ct. 683, 102 L.Ed.2d 818 (1989).
18 28 U.S.C. §§ 1602–11.
19 Id. § 1605(a). 20 Id. § 1330(a).
21 Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 489, 103 S.Ct. 1962, 76 L.Ed.2d 81 (1983). See also Argentine
Republic, 488 U.S. at 435 n.3, 109 S.Ct. 683 (“Subsection (b) of 28 U.S.C. § 1330 provides that ‘[p]ersonal jurisdiction
over a foreign state shall exist as to every claim for relief over which the district courts have [subject-matter] jurisdiction
under subsection (a) where service has been made under [28 U.S.C. § 1608].’ Thus, personal jurisdiction, like subject-
matter jurisdiction, exists only when one of the exceptions to foreign sovereign immunity ... applies.” (alterations in
original)).
22 See United States v. Moats, 961 F.2d 1198, 1205 (5th Cir. 1992).
23 Id.
24 Id.
25 Arbaugh v. Y & H Corp., 546 U.S. 500, 514, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006). Importantly, the subject matter
jurisdiction inquiry under the FSIA involves determining first whether a party is a “foreign state” to which the Act
applies, and then whether any exception to the presumption of foreign sovereign immunity applies under the
circumstances. See Verlinden, 461 U.S. at 488–89, 103 S.Ct. 1962. Whether the party is a “foreign state” clearly
cannot be waived by the parties, just as is the case with any typical question regarding subject matter jurisdiction. A
foreign state entitled to immunity under the FSIA, however, may waive its immunity. See 28 U.S.C. § 1605(a)(1)
(providing that a party can expressly or implicitly waive its immunity from the jurisdiction of the United States courts). In
Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 46
this case, when we state that subject matter jurisdiction can never be waived, our statement applies only to whether a
party is a “foreign state” under the FSIA.
26 Arbaugh, 546 U.S. at 514, 126 S.Ct. 1235.
27 Samantar v. Yousuf, 560 U.S. 305, 314, 130 S.Ct. 2278, 176 L.Ed.2d 1047 (2010).
28 28 U.S.C. § 1603(a).
29 See Agency, BLACK'S LAW DICTIONARY (10th ed. 2014) (defining “agency,” in relevant part, as “[a]n official body,
esp. within the government, with the authority to implement and administer particular legislation”); see Instrumentality,
BLACK'S LAW DICTIONARY (10th ed. 2014) (defining “instrumentality,” in relevant part, as “[a] means or agency
through which a function of another entity is accomplished, such as a branch of a governing body”).
30 We have previously explained: “The use of the single term ‘agency’ for two purposes in the context of this case may
cause some confusion. The FSIA uses it to determine whether an ‘agency’ of the state may potentially qualify for
foreign sovereign immunity itself under the FSIA. This is a completely different question from ... whether or not [such
an agency] enjoyed an alter ego relationship with the [foreign state] so that it could bind [the foreign state as a result of
its acts]. Although such an alter ego relationship may be described in terms of ‘agency,’ it is a completely different
inquiry than that which might be conducted under [the FSIA's ‘agency or instrumentality’ requirement].... [T]he level of
state control required to establish an ‘alter ego’ relationship is more extensive than that required to establish FSIA
‘agency.’ ” Hester Int'l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 176 n.5 (5th Cir. 1989).
31 28 U.S.C. § 1603(b) (“An ‘agency or instrumentality of a foreign state’ means any entity ... (1) which is a separate legal
person, corporate or otherwise, and ... (2) which is an organ of a foreign state ... or a majority of whose shares or other
ownership interest is owned by a foreign state....” (emphasis added)).
32 Kelly v. Syria Shell Petroleum Dev. B.V., 213 F.3d 841, 846 (5th Cir. 2000) (“[B]ecause we conclude that [the entity] is
an organ of a foreign state, we need not consider [the] ownership requirements.”).
33 Dole Food Co. v. Patrickson, 538 U.S. 468, 477, 123 S.Ct. 1655, 155 L.Ed.2d 643 (2003).
34 Id. at 474, 123 S.Ct. 1655.
35 Id. at 473, 123 S.Ct. 1655. The Supreme Court discusses only “instrumentalities” in this context, and it does not
distinguish agencies from instrumentalities. As discussed above, these appear to be synonymous.
36 Id. at 477, 123 S.Ct. 1655 (emphasis added).
37 Id. at 471, 123 S.Ct. 1655.
38 As another panel noted, LIA is “an agency of the Libyan government.” Janvey v. Libyan Inv. Auth., 478 Fed.Appx. 233,
236 (5th Cir. 2012).
39 Bd. of Regents of Univ. of Tex. Sys., 478 F.3d at 279 (alteration in original) (quoting Kelly, 213 F.3d at 846–47 (5th Cir.
2000))
40 Notably, LFICO is owned by LIA, not by Libya proper.
41 First Inv. Corp. of Marsh. Is. v. Fujian Mawei Shipbuilding, Ltd., 703 F.3d 742, 752 (5th Cir. 2012) (quoting First Nat'l
City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 627, 103 S.Ct. 2591, 77 L.Ed.2d 46 (1983)).
42 Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006); see First Inv. Corp. of Marsh. Is., 703 F.3d at 753.
43 Bridas S.A.P.I.C. v. Gov't of Turkm., 345 F.3d 347, 358 (5th Cir. 2003).
44 Id. at 359 (“The laws of agency, in contrast, are not equitable in nature, but contractual, and do not necessarily bend in
favor of justice.”).
45 First Nat'l City Bank, 462 U.S. at 633, 103 S.Ct. 2591.
46 Stena Rederi AB, 923 F.2d at 386 (citing 28 U.S.C. § 1605(a)(2)).
47 28 U.S.C. § 1605(a); see Stena Rederi AB, 923 F.2d at 386.
48 28 U.S.C. § 1605(a).
Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)
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49 Id. § 1603(d) (emphasis added) (defining “commercial activity”).
50 Id. § 1605(a)(2).
51 Id. There is a “difference between [claims] ‘based upon’ commercial activity and [those] ‘based upon’ acts performed ‘in
connection with’ such activity.” Saudi Arabia v. Nelson, 507 U.S. 349, 358, 113 S.Ct. 1471, 123 L.Ed.2d 47 (1993)
(emphasis added). The third clause of the commercial activity exception provides that the claim must be “based ...
upon an act outside the territory of the United States in connection with a commercial activity of the foreign state
elsewhere” and that the act “causes a direct effect in the United States.” 28 U.S.C. § 1605(a)(2) (emphasis added). In
contrast, the first clause specifies that the claim must be “based upon a commercial activity ... by the foreign state.” Id.
(emphasis added). Because “[d]istinctions among descriptions juxtaposed against each other are naturally understood
to be significant,” the first clause “calls for something more than a mere connection with, or relation to, commercial
activity.” Nelson, 507 U.S.
at 357–58, 113 S.Ct. 1471.
52 Republic of Arg. v. Weltover, Inc., 504 U.S. 607, 618, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992).
53 Terenkian v. Republic of Iraq, 694 F.3d 1122, 1133 (9th Cir. 2012) (quoting Lyon v. Agusta S.P.A., 252 F.3d 1078,
1083 (9th Cir. 2001)); see also Odhiambo v. Republic of Kenya, 764 F.3d 31, 41 (D.C. Cir. 2014).
54 de Sanchez v. Banco Cent. de Nicar., 770 F.2d 1385, 1391 (5th Cir. 1985); see Guirlando v. T.C. Ziraat Bankasi A.S.,
602 F.3d 69, 75 (2d Cir. 2010) (“[T]he requisite immediacy is lacking where the alleged effect depends crucially on
variables independent of the conduct of the [agency or instrumentality].” (internal quotation marks omitted)).
55 Virtual Countries v. Republic of S. Afr., 300 F.3d 230, 238 (2d Cir. 2002) (“Defining ‘direct effect’ to permit jurisdiction
when [an agency or instrumentality]'s actions precipitate reactions by third parties, which reactions then have an impact
on a plaintiff, would foster uncertainty in both [agencies or instrumentalities] and private counter-parties. Neither could
predict when an action would create jurisdiction, which would hinge on third parties' independent reactions and
conduct, even if in individual cases, such as the one at bar, a particular effect might be foreseeable. To permit
jurisdiction in such cases would thus be contrary to the predictability interest fostered by the [FSIA].”).
56 Guirlando, 602 F.3d at 78; see also Westfield v. Fed. Republic of Ger., 633 F.3d 409, 417 (6th Cir. 2011) (“[A]n
American entity's mere financial loss is insufficient to establish a direct effect in the United States.”). If financial injury to
a United States citizen were considered a sufficiently direct effect, “the commercial activity exception would in large
part eviscerate the FSIA's provision of immunity for foreign states.” Antares Aircraft, L.P. v. Fed. Republic of Nigeria,
999 F.2d 33, 36 (2d Cir. 1993).
57 Weltover, 504 U.S. at 619, 112 S.Ct. 2160; see Energy Allied Int'l Corp. v. Petroleum Oil & Gas Corp. of S. Afr., No. H–
08–2387, 2009 WL 2923035, at *4 (S.D. Tex. Sept. 4, 2009); Voest–Alpine Trading USA Corp. v. Bank of China, 142
F.3d 887, 896 (5th Cir. 1998) (noting that there was a direct effect in the United States because an agency or
instrumentality of the foreign state failed to perform its obligation to transfer assets to an entity in the United States);
Callejo v. Bancomer, S.A., 764 F.2d 1101 (5th Cir. 1985) (same); UNC Lear Servs., Inc. v. Kingdom of Saudi Arabia,
581 F.3d 210, 218–19 (5th Cir. 2009) (same); Westfield, 633 F.3d at 415 (noting that there was no direct effect in the
United States because the foreign state “had not obligated itself to do anything in the United States”); Peterson v.
Royal Kingdom of Saudi Arabia, 416 F.3d 83, 90–91 (D.C. Cir. 2005).
58 28 U.S.C. § 1605(a)(2).
59 Arriba Ltd. v. Petroleos Mexicanos, 962 F.2d 528, 533 (5th Cir. 1992) (“Isolated or unrelated commercial actions by a
foreign sovereign in the United States do not authorize the exception.”).
60 Dole Food Co., 538 U.S. at 475, 123 S.Ct. 1655.
61 Id.
62 First Nat'l City Bank, 462 U.S. at 626–27, 103 S.Ct. 2591.
63 Dole Food Co., 538 U.S. at 476, 123 S.Ct. 1655.
64 First Inv. Corp. of Marsh. Is., 703 F.3d at 752–53 (quoting First Nat'l City Bank, 462 U.S. at 627, 103 S.Ct. 2591).
Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)
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65 Dale, 443 F.3d at 429; see First Inv. Corp. of Marsh. Is., 703 F.3d at 753.
66 Bridas, 345 F.3d at 358.
67 Id. at 359 (“The laws of agency, in contrast, are not equitable in nature, but contractual, and do not necessarily bend in
favor of justice.”).
68 First Nat'l City Bank, 462 U.S. at 633, 103 S.Ct. 2591.
69 See, e.g., id. at 622 n.11, 103 S.Ct. 2591 (“[M]atters bearing on the nation's foreign relations should not be left to
divergent and perhaps parochial state interpretations.” (internal quotation marks omitted)).
70 Bridas, 345 F.3d at 359.
71 Dale, 443 F.3d at 429.
72 Id.
73 The receiver submitted his own contrary declaration, but the district court discredited it and its reasons for doing so
were sound.
74 TEX. BUS. & COM. CODE ANN. § 24.005.
75 Id. § 24.009(b)(1).
76 GE Capital Commercial, Inc. v. Wright & Wright, Inc., No. 3:09–CV–572–L, 2009 WL 5173954, at *7 n.1 (N.D. Tex.
Dec. 31, 2009).
77 11 U.S.C. § 550(a)(1); TEX. BUS. & COM. CODE ANN. § 24.009(b)(1).
78 See, e.g., In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52, 57 (2d Cir. 1997);
In re Columbia Data Prods., Inc., 892 F.2d 26, 29 (4th Cir. 1989); see also COLLIER ON BANKRUPTCY ¶ 550.02[4]
(16th ed. 2011) (“Two frequently cited examples of an entity for whose benefit the transfer was made are (1) a third-
party guarantor of the debtor whose liability is reduced by the debtor's payment of the guaranteed debt and (2) a third
party whose debt is paid by the debtor (with payment going to the third party's creditor as the initial transferee).”).
79 333 S.W.3d 166, 181 (Tex. App. 2010).
80 387 S.W.3d 74 (Tex. App. 2012).
81 333 S.W.3d at 174.
82 Id. at 181.
83 387 S.W.3d at 85.
84 341 B.R. 638, 644 (Bankr. N.D. Ill. 2006).
85 Id. at 645–46 (citations omitted).
86 COLLIER ON BANKRUPTCY ¶ 550.02[4].
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
Matter of Monaco, --- F.3d ---- (2016)
63 Bankr.Ct.Dec. 44
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 49
2016 WL 5864090
United States Court of Appeals,
Fifth Circuit.
In the Matter of: Martha L. Monaco; Adam
L. Monaco; Hope Elaine Monaco, Debtors.
Adam L. Monaco, Appellant,
v.
Tag Investments, Limited, Appellee.
No. 15-51085
|
Filed October 6, 2016
Synopsis
Background: In consolidated adversary proceedings, creditor
sought nondischargeability of debt stemming from Chapter 7
debtors' construction of residence. The United States
Bankruptcy Court for the Western District of Texas, Ronald
B. King, Chief Judge, ruled that debt of $171,942.03 was
nondischargeable for defalcation while acting in a fiduciary
capacity, and debtors appealed. The District Court, Harry Lee
Hudspeth, J., affirmed, and debtors appealed.
Holdings: The Court of Appeals, Edith H. Jones, Circuit
Judge, held that:
[1] issue of debtors' entitlement to the Texas
ConstructionTrust Fund Act's (CTFA) affirmative defense for
actual payments directly related to construction project was
properly preserved and raised, and
[2] based on that affirmative defense, debtors should
nothave been held liable for misapplication of construction
trust funds under the CTFA, and the debt claimed by creditor
should have been discharged.
Reversed and remanded with directions.
Appeal from the United States District Court for the Western
District of Texas, Harry Lee Hudspeth, U.S.
District Judge
Attorneys and Law Firms
Dean William Greer, Law Offices of Dean W. Greer, San
Antonio, TX, for Appellant.
Michael James O'Connor, Law Offices of Michael J.
O'Connor, San Antonio, TX, for Appellee.
Before REAVLEY, DAVIS, and JONES, Circuit Judges.
Opinion
EDITH H. JONES, Circuit Judge:
*1 This appeal arises out of a construction contract gone
awry and subsequently complicated by bankruptcy. The
district court opinion held that Monaco individually owes
TAG Investments, Ltd. (“TAG”) $171,942.03, a
nondischargeable debt under bankruptcy law (11 U.S.C. §
523(a)(4)) arising from the Texas Construction Trust Fund
Act (“CTFA”), Tex. Prop. Code Ann. § 162.001. Monaco
appeals on several bases, most notably for our purposes
relying on the affirmative defense built into the CTFA (§
162.031(b)). Based on that defense, we reverse and remand
with directions to discharge the debt.
BACKGROUND
In 2004, TAG entered into a stipulated sum contract with
Buildings by Monaco, Inc. (“BBM”). The contract called for
the construction of a luxury home in San Antonio, Texas.
BBM served as the general contractor on the project and the
contract called for progress payments which required BBM
to submit an application to the architect for approval and
swear that all subcontractors and supplies had been paid and
lien releases had been obtained.
Despite BBM's certifications, TAG began to receive lien
notices from BBM's subcontractors and suppliers in 2005
and fired BBM. At that time, TAG had paid BBM
$1,783,662.40, and BBM had dispensed $1,600,377.78 to its
subcontractors and suppliers.
TAG hired a new contractor, San Antonio Realease
Management, Inc. (“SARMECO”), to assume BBM's
subcontracts and to pay off the liens. TAG then reimbursed
SARMECO in the amount of $171,942.03, and TAG
demanded payment from BBM.
Four years later, Monaco individually and BBM filed
Chapter 7 bankruptcy cases. Neither had paid TAG the
$171,942.03 that TAG had paid SARMECO and that TAG
believed it was due. TAG filed an adversary proceeding
against Monaco for his misapplication of trust funds, Tex.
Matter of Monaco, --- F.3d ---- (2016)
63 Bankr.Ct.Dec. 44
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 50
Prop. Code Ann. § 162.031 (extending liability to officers of
the “trustee”), and alleged that the debt Monaco owed was
nondischargeable under 11 U.S.C. § 523(a)(4), which
excepts from discharge debts for “for fraud or defalcation
while acting in a fiduciary capacity, embezzlement, or
larceny.” The bankruptcy court agreed and rendered
judgment in favor of TAG and against Monaco in the amount
of $171,942.03.
On appeal, the district court initially vacated the bankruptcy
court's judgment and remanded the case with instructions to
address: (1) whether TAG has standing to recover for
payments made by SARMECO; (2) if so, whether Monaco is
entitled to a setoff for amounts withheld as retainage; and (3)
the basis for the calculation of actual damages owed to TAG.
On remand, the bankruptcy court concluded that TAG has
standing, via equitable subrogation, to recover for payments
made by SARMECO and that Monaco is not entitled to a
setoff for amounts withheld as retainage, and it clarified the
debt calculation. The district court then affirmed the
bankruptcy court's judgment on October 21, 2015.
On appeal, Monaco raises several issues. He disputes that the
CTFA authorizes TAG's standing via equitable subrogation
and complains that TAG's recovery would violate the one
satisfaction rule. Monaco contends he did not violate the
CTFA, but in any event, CTFA § 162.031(b) provides an
affirmative defense that relieves Monaco of the judgment.
Because we hold that the affirmative defense is applicable in
this case, we need not rule on the other three bases for
Monaco's appeal.
STANDARD OF REVIEW
*2 [1] We review de novo a district court's decision affirming
a bankruptcy court's application of the law and review its
findings of fact for clear error. Richmond Leasing Co. v.
Capital Bank, N.A., 762 F.2d 1303, 1307– 08 (5th Cir.1985).
DISCUSSION
The CTFA holds liable any “trustee who, intentionally or
knowingly or with intent to defraud, directly or indirectly
retains, uses, disburses, or otherwise diverts trust funds
without first fully paying all current or past due obligations
incurred by the trustee to the beneficiaries of the trust funds.”
Tex. Prop. Code Ann. § 162.031(a). The bankruptcy court
concluded that “Monaco acted intentionally to obtain further
payments from TAG despite not paying the subcontractors
and suppliers in violation of the CTFA.” In re Monaco, 514
B.R. 477, 481 (Bankr. W.D. Tex. 2014).
Monaco contests this conclusion, arguing that both the
bankruptcy court and the district court misinterpreted the
certifications he attested to as a condition of payment. We
need not determine whether the lower courts erred on this
issue, as the statutory scheme of the CTFA also contains two
affirmative defenses, one of which resolves the present case.
Section 162.031(b) of the CTFA holds that “[i]t is an
affirmative defense to prosecution or other action ... that the
trust funds not paid to the beneficiaries of the trust were used
by the trustee to pay the trustee's actual expenses directly
related to the construction or repair of the improvement.”
Tex. Prop. Code Ann. § 162.031(b). This affirmative defense
raises two questions: (1) were the activities Monaco claims
to have spent the money on within the scope of the
affirmative defense, and (2) has TAG made a sufficient
showing that Monaco is not eligible for the affirmative
defense?
[2] First, however, we briefly address the absence of any
discussion of the affirmative defense in the bankruptcy court
or district court opinions. Despite not appearing in the district
court's opinion, both parties briefed the issue before that court.
Brief of Appellant at 4–5, Adam Monaco v. TAG Investments,
LTD, No. SA–14–CA–882 (W.D. Tex. 2015) (“The evidence
shows that BBM not only spent every cent it received for
third-party expenses, salaries, overhead and supervision on
the project, but also used approximately $70,000.00 of its
profit to pay for expenses incurred on the project.”); Brief of
Appellee at 4–5, Adam Monaco v. TAG Investments, LTD, No.
SA–14–CA–882 (W.D. Tex. 2015) (“Overhead and profit
components of draws are not authorized exceptions under §
162.031 of the Act, and are not a basis for offset.”);
Appellant's Reply Brief at 2–7, Adam Monaco v. TAG
Investments, LTD, No. SA–14–CA–882 (W.D. Tex. 2015)
(“However, [TAG] insists that the $124,053 paid as salaries
and overhead ... and the $77,776 paid as contractual profits to
BBM were improper and constituted defalcation on the part of
Adam Monaco”).
Further, Monaco raised it from the very beginning before the
bankruptcy court in 2011, when TAG first filed an objection
to the discharge of its debt. TAG Investments, Ltd v. Martha
L. Monaco, et al., No. 10–05026 (Bankr. W.D. Tex. Nov. 23,
2011), ECF No. 52 at ¶ 7 (“Under Fifth Circuit case of In re
Matter of Monaco, --- F.3d ---- (2016)
63 Bankr.Ct.Dec. 44
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 51
Nicholas ... there is no liability imposed on a Contractor if he
uses all the monies to pay actual expenses directly related to
the construction of the project, whether or not such expenses
were owed to ‘beneficiaries' of the trust fund.”). As this
argument has been properly preserved and raised, we may
address it on appeal.
*3 [3] Turning to the scope of the affirmative defense, this
court's precedent on what qualifies for “trustee's actual
expenses” under the statute's affirmative defense is clear.
“Under the affirmative defense to the Texas Construction
Trust Fund Statute ... general contractors may use the
payments they receive from construction projects to keep
those projects going even if, in some instances, the
beneficiaries are not paid first.” In re Nicholas, 956 F.2d 110,
113 (5th Cir. 1992). This includes payment of “expenses such
as telephone bills, salaries, and other overhead.” In re Pledger,
592 Fed.Appx.
296, 302 (5th Cir. 2015).1 Nicholas explains that “the Texas
statute's affirmative defense for payment of actual expenses
directly related to the construction or improvement of the
project is ... open-ended.” Nicholas, 956 F.2d at 113. See also
Holladay v. CW&A, Inc., 60 S.W.3d 243, 248 (Tex. Civ.
App–Corpus Christi 2001, pet. denied). Monaco could assert
the affirmative defense for overhead costs of the project.
TAG requests instead that we rely on a bankruptcy decision
holding that “[t]he affirmative defense at section 162.031(b)
for ‘actual expenses directly related to the construction or
repair of the improvement’ is limited to costs actually and
directly tied to the improvement in question and does not
include ‘indirect’ expenses, such as overhead to the
contractor in question, or ‘profit’ built into the job's price.”
In re Coley, 354 B.R. 813, 816 (Bankr. N.D. Tex. 2006)
(quoting In re Faulkner, 213 B.R. 660
(Bankr.W.D.Tex.1997)). In re Faulkner, another bankruptcy
court decision, engages in statutory interpretation, looking at
legislative history and Attorney General Opinion JM–945
(1988), but its ruling on this point is dicta: “[b]ecause we find
that the defendant lacked the requisite level of ‘mental
culpability’ to trigger liability for purposes of section
523(a)(4), we need not decide whether the defendant could
make out a successful defense to liability under section
162.031(b) of the state statute.” Faulkner, 213 B.R. at 667.
What is dispositive, however, is that Coley postdates
Nicholas and directly conflicts with this court's jurisprudence
interpreting the affirmative defense.
[4] Monaco explains that $124,053.00 went to salaries
and overhead and an additional $50,400.00 went to
supervision of this project. Tellingly, payment of these sums
as reasonable was approved by TAG's architect. These are
expenses allowable under our precedents and qualify as a
“trustee's actual expenses directly related to the construction
or repair of the improvement,” as required by the affirmative
defense under the CTFA. Tex. Prop. Code Ann. § 162.031(b).
[5] Moreover, TAG had the burden to prove that
Monaco misapplied the funds. Nicholas, 956 F.2d at 114
(“[A]lthough initially requiring the debtor to make a prima
facie showing that he is entitled to a discharge, [federal law]
ultimately places the burden on the creditor to prove that the
debt falls within the § 523(a)(4) exception.”). Simply
showing that the progress payment certifications were false
is insufficient to overcome the affirmative defense. “Because
the Texas statute permits application of trust fund receipts for
‘actual expenses directly related’ to the project, ... a
beneficiary seeking to avail itself of § 523(a)(4) must adduce
some evidence that funds were misapplied under this test.”
Nicholas, 956 F.2d at 114. TAG was unable to show that the
funds received by BBM were spent on impermissible
expenses under the
CTFA.
*4 For the foregoing reasons, Monaco should not have been
held liable for misapplication of construction trust funds
under the CTFA and the debt claimed by TAG should have
been discharged. The judgment of the lower courts holding
the debt nondischargeable is REVERSED and we
REMAND with directions to discharge.
All Citations
--- F.3d ----, 2016 WL 5864090, 63 Bankr.Ct.Dec. 44
Footnotes
1 See also In re Swor, 347 Fed.Appx. 113, 116 (5th Cir. 2009) (“Nor must these funds be spent only on the project for which
they were received—they may be spent on other projects or on expenses related to general business overhead.”). We
Matter of Monaco, --- F.3d ---- (2016)
63 Bankr.Ct.Dec. 44
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 52
cite unpublished opinions in this decision not because they are precedential, which they are not, see 5th Cir. Local Rule
47.5.4, but to show the consistency of our dispositions.
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 53
2016 WL 5939415
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See Fed. Rule of Appellate Procedure 32.1
generally governing citation of judicial decisions
issued on or after Jan. 1, 2007. See also
U.S.Ct. of App. 5th Cir. Rules 28.7 and
47.5. United States Court of Appeals, Fifth
Circuit.
In the Matter of: Skyport Global
Communications,
Incorporated, formerly known as Skyport
International, Incorporated, doing business as
SkyPort International PC, doing business as
SkyComm International, Incorporated,
Debtor.
Samuel Goldman; Franklin Craig, Appellants,
v.
Bankton Financial Corporation, L.L.C.;
Robert Kubbernus; Balaton Group,
Incorporated; Bankton Financial Corporation;
Trustcomm, Incorporated, Appellees.
In the matter of: Skyport Global
Communications,
Incorporated, formerly known as Skyport
International, Incorporated, doing business as
SkyPort International PC, doing business as
SkyComm International, Incorporated,
Debtor.
Franklin Craig, Appellant,
v. TrustComm, Incorporated; Robert
Kubbernus; Balaton Group, Incorporated,
Appellees.
In the matter of: Skyport Global
Communications,
Incorporated, formerly known as Skyport
International, Incorporated, doing business as
SkyPort International PC, doing business as
SkyComm International, Incorporated,
Debtor.
Samuel Goldman; Franklin Craig, Appellants,
v.
TrustComm, Incorporated, formerly known as
Skyport Global Communications,
Incorporated;
Robert Kubbernus; Balaton Group,
Incorporated;
Bankton Financial Corporation, L.L.C.,
Bankton Financial Corporation, Appellees.
No. 15-20243
|
Date Filed: 10/12/2016
Appeal from the United States District Court for the Southern
District of Texas, USDC Nos. 4:13–CV–3041,
4:13–CV–3044, 4:13–CV–3047
Attorneys and Law Firms
H. Miles Cohn, Esq., Crain, Caton & James, P.C., Houston,
TX, for Appellants.
Walter J. Cicack, Hawash Meade Gaston Neese & Cicack,
L.L.P., Houston, TX, for Appellees.
Before ELROD, GRAVES, and COSTA, Circuit Judges.
Opinion
JAMES E. GRAVES, JR., Circuit Judge:*
*1 This is an appeal stemming from a bankruptcy court's order
holding attorney Samuel Goldman and Franklin Craig in
contempt for violating the court's preliminary injunction and
assessing attorneys' fees and expenses against them. The
district court affirmed the bankruptcy court. We AFFIRM.
I. Facts
This appeal involves one of many disputes arising out of the
bankruptcy proceedings of SkyPort Global Communications,
Inc., now known as TrustComm, Inc. (SkyPort). SkyPort filed
for Chapter 11 bankruptcy relief in the United States
Bankruptcy Court for the Southern District of Texas. SkyPort's
reorganization plan provided for SkyPort's merger with its sole
shareholder, SkyComm Technologies Corporation
(SkyComm), with all shares of stock owned by SkyComm's
shareholders to be canceled and all shares of SkyPort to be
reissued to Balaton Group, Inc. The bankruptcy court
confirmed SkyPort's reorganization plan in August 2009. Its
confirmation order enjoined derivative claims filed on behalf
of SkyPort or SkyComm, but did not enjoin direct claims
against third parties.
In February 2010, a group of 49 investors, collectively referred
to as the Schermerhorn parties, filed a Texas state court
Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 54
petition seeking $32 million in damages for various
misdeeds allegedly committed in connection with
investments in and management of SkyPort and
SkyComm. Appellant Samuel Goldman represented the
Schermerhorn parties. The defendants removed the state
court action to the bankruptcy court and sought a
preliminary injunction to preserve the status quo pending
a determination by the bankruptcy court as to which
claims included in the petition were barred by the
injunction contained in the confirmation order.
At the bankruptcy court's preliminary injunction hearing,
Robert Kubbernus, one of the state court defendants and
the Chairman of the Board of Directors at
SkyPort, testified that the Schermerhorn parties had been
contacting people associated with SkyPort, including its
former president, Dawn Cole. The bankruptcy court
announced at the hearing that it was granting the motion
for a preliminary injunction. On June 10, 2010, the
bankruptcy court entered its preliminary injunction. The
injunction order temporarily enjoined the Schermerhorn
parties from pursuing any and all claims or causes of
action, derivative or otherwise, against the defendants,
and from contacting SkyPort's former or current vendors,
employees, and customers without permission of
SkyPort's counsel or the bankruptcy court.1 The
preliminary injunction contained Goldman's signature,
which indicated his agreement as to the form of the order.
The Schermerhorn parties never appealed the injunction.
*2 Beginning the day the injunction was entered, and
continuing over the next several months, Goldman,
Craig, and Cole engaged in extensive communication that
gave rise to the sanctions in this case. Craig was an
investment advisor to several of the Schermerhorn parties
and had accused Kubbernus of fraud and ousted him from
management of another fund. He was also a personal
friend of Goldman's. Although Craig was not a party to
the litigation in this case, his e-mails reveal his awareness
of the injunction.
Specifically, Cole sent Goldman and Craig an e-mail
complaining that information she had provided to Craig
was being used by Goldman against Kubbernus without
her permission. Further, Craig and Goldman
communicated by telephone and e-mail about contacting
Cole. Craig sent Cole an e-mail describing Kubbernus as
a “desperate criminal” and urging her that “[w]e need to
do the right thing and put this criminal away.” Cole called
Craig twice the next day and Craig reported on the
conversations to Goldman. Among other communications,
Craig e-mailed Cole on June 18, telling her to call Goldman
and stating that “[h]e may need some info from you” and that
she would “do better on our side.” Craig forwarded Cole's
response e-mail to Goldman. Goldman sent Craig an e-mail
asking about Cole's claims against Kubbernus and stating that
he could help her get a lawyer. Craig forwarded the e-mail to
Cole. The same day, Craig wrote to Cole that he had talked
with Goldman, that Cole should “join our ranks NOW,” that
the Schermerhorn parties' expense account might be used to
pay for Cole's attorney, and that “I am sure that Sam
[Goldman] and I, we can find a deal ... but Sam needs your
100% cooperation.” Craig forwarded his message to Goldman.
This pattern of Craig communicating separately with Goldman
and Cole, then forwarding their communication to each other,
continued through June, July, and
August.2 On June 20, Goldman wrote to Craig that he did not
want Craig talking to Cole except at her initiative, but also
asked questions about Cole's possible help. Craig conveyed
these questions to Cole and then forwarded her response to
Goldman. Ultimately, after a series of e-mails, Goldman wrote
to Craig that “I do not want to create an appearance that we are
using you to communicate with [Cole].” Nevertheless, the
communications continued, and Craig continued to forward his
e-mail conversations with Cole to Goldman.
On July 1, after Craig and Cole spoke by telephone, Craig
wrote to Goldman that he had spoken to Cole, that she was
willing to “join our side” and “go [ ] after” Kubbernus, and that
she was “very interested in the prospect of our lawyers
representing her” and of suing Kubbernus. Craig then asked
Goldman, “How do you want to proceed?” In the following
four days, Cole, Craig, and Goldman exchanged over 50 e-
mails discussing how to convey Cole's information to the
bankruptcy judge and obtain permission for Goldman to talk
to her without disclosing their communications. In one of these
e-mails, Craig wrote to Goldman, “I just lied to [Cole] about
sending you the emails so PLEASE don't use them w/o her
express permission” and noted that Cole was right in that “you
shouldn't be seeing anything BEFORE the judge gives you
permission to talk to her.”
Over the next month, Cole and Craig exchanged more than 30
e-mails about the provision of legal representation to Cole,
which included an agreement by Craig to provide her $10,000
for a legal retainer. Goldman was aware of these
Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 55
communications and ultimately located legal counsel to
represent Cole.
II. Bankruptcy Court Proceedings
*3 In April 2011, the Schermerhorn parties moved to
dissolve the preliminary injunction. At the motion
hearing, as part of its third motion for contempt, SkyPort
announced the discovery of 46 instances in which the
Schermerhorn parties had violated the bankruptcy court's
injunction by communicating with Cole, a former
SkyPort employee. In support of this assertion, SkyPort
introduced into evidence many of the e-mails between
Craig and Cole. The bankruptcy court denied the
Schermerhorn parties' request to dissolve the injunction
and continued the hearing on the contempt motion to
allow the parties to address the e-mails. After discovery,
the bankruptcy court held seventeen days of evidentiary
hearings spanning eleven months on the motion to
dissolve the injunction, the contempt motion, and other
pending motions.
On August 7, 2013, the bankruptcy court issued a 187–
page opinion finding Goldman and Craig in contempt.
The bankruptcy court stated that the purpose of its
opinion was “to discuss Goldman's and Craig's
contumacious conduct, to restore integrity to the judicial
process, and most importantly, to affirm that its orders
cannot be ‘flouted, obstructed, and violated with
impunity.’ ” Although the bankruptcy court found that
“[t]he SkyPort parties have not demonstrated that they
suffered harm as a result of Goldman and Craig's
conduct,” it nevertheless awarded them attorneys' fees
and costs as “compensation” for their expenses incurred
in “bringing Goldman and Craig's contempt to this
Court's attention.” The bankruptcy court declined to
award punitive damages, recognizing that sanctions for
civil contempt could only be compensatory or coercive,
and declined to award a coercive bond against future
violations or to impose a permanent injunction. A month
later, after a hearing on the amount of damages, the
bankruptcy court awarded monetary sanctions to the
SkyPort parties. The award was one quarter of the
requested attorneys' fees and 95% of the requested
expenses, in the total amount of $137,513, for which
Goldman and Craig were held jointly and severally liable.
III. District Court Proceedings
Goldman and Craig appealed the bankruptcy court's ruling to
the district court, which affirmed the bankruptcy court's ruling
in all respects. The district court's 119–page opinion affirmed
fifteen orders of the bankruptcy court— including the orders at
issue in this case—that had been appealed as part of four civil
actions in the district court, and dismissed all four cases. A
separate panel of our court affirmed the judgment of the district
court as it related to an order of the bankruptcy court imposing
sanctions on the Schermerhorn parties for filing a state court
petition that contained misrepresentations and claims barred
by the reorganization plan. See In re Skyport Glob. Commc'n,
Inc., 642 Fed.Appx. 301 (5th Cir. 2016) (unpublished).
IV. Analysis
Goldman and Craig now argue that: (1) the bankruptcy court
lacked jurisdiction because the nature of the contempt
proceeding was criminal; (2) the attorneys' fees assessed were
not reasonable and necessary because neither compensatory
damages nor coercive relief was granted; (3) the award was
erroneous because the preliminary injunction was dissolved;
and (4) Goldman and Craig did not violate the preliminary
injunction as they reasonably understood it.
A.
“Like the district court, this court reviews a bankruptcy court's
findings of fact for clear error, and its legal conclusions de
novo.” In re Bradley, 588 F.3d 254, 261 (5th Cir. 2009).
“Where the district court has affirmed the bankruptcy court's
factual findings, we will only reverse if left with a firm
conviction that error has been committed.” Id. (citation
omitted). We review a bankruptcy court's discretionary
assessment of monetary sanctions for contempt under an abuse
of discretion standard, id. but our review is not perfunctory,
Hornbeck Offshore Servs., L.L.C. v. Salazar, 713 F.3d 787,
792 (5th Cir. 2013) (discussing preliminary injunctions in the
district court). “A court abuses its discretion when its ruling is
based on an erroneous view of the law or on a clearly erroneous
assessment of the evidence.” Chaves v. M/V Medina Star, 47
F.3d 153, 156 (5th Cir. 1995).
B.
*4 The bankruptcy court issued a written injunction order
under Rule 65 of the Federal Rules of Civil Procedure. The
court, in its own words, “issued the injunction in order to
Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 56
prevent irreparable harm to the reorganized debtor,”
SkyPort. Goldman and Craig conspired to thwart this
order by pursuing barred claims and impermissibly
contacting a former employee of SkyPort. They now
contend that the bankruptcy court exceeded its authority
in sanctioning them. We do not agree.
“ ‘A party commits contempt when he violates a definite
and specific order of the court requiring him to perform
or refrain from performing a particular act or acts with
knowledge of the court's order.’ ” Hornbeck Offshore
Servs., L.L.C., 713 F.3d at 792 (quoting Travelhost, Inc.
v. Blandford, 68 F.3d 958, 961 (5th Cir. 1995)). “The first
duty of an appellate court in reviewing a contempt
judgment is to determine whether the nature of the
contempt proceeding was civil or criminal.” Smith v.
Sullivan, 611 F.2d 1050, 1052 (5th Cir. 1980); accord
Bradley, 588 F.3d at 263.
A bankruptcy judge has jurisdiction to impose civil
sanctions, but not criminal sanctions. In re Hipp, Inc.,
895 F.2d 1503, 1521 (5th Cir. 1990). Goldman and Craig
maintain that the bankruptcy court exceeded its authority
and conducted a criminal contempt proceeding.
As we explained in depth in Bradley, to determine
whether a contempt order or judgment is criminal or civil,
we look to its primary purpose. 588 F.3d at 263; accord
Lamar Fin. Corp. v. Adams, 918 F.2d 564, 566 (5th Cir.
1990). The bankruptcy court characterized the
proceedings as “concern[ing] compensatory or remedial
civil contempt.”3 “Civil contempt ... can be used to
compensate a party who has suffered unnecessary
injuries or costs because of contemptuous conduct.”
Travelhost, Inc., 68 F.3d at 961–62 (5th Cir. 1996).
“[R]emedial contempt is civil, because it remedies the
consequences of defiant conduct on an opposing party,
rather than punishing the defiance per se.” Bradley, 588
F.3d at 263–
64.4
We agree with the bankruptcy court's characterization.
Essentially, the sanction restores the SkyPort parties to
where they were before they incurred attorneys' fees in
an attempt to ensure compliance with the injunction. See
Cook v. Ochsner Found. Hosp., 559 F.2d 270, 272 (5th
Cir. 1977) (observing that courts may “order[ ] the award
of attorneys' fees for compensatory purposes” where a
party “necessarily expended [fees] in bringing an action
to enforce” the injunction); see also A.S. Klein, Annotation,
Allowance of Attorneys' Fees in Civil Contempt Proceedings,
43 A.L.R.3d 793, § 2 (1972) ( “Almost without exception it is
within the discretion of the trial court to include, as an element
of damages assessed against the defendant found guilty of civil
contempt, the attorneys' fees incurred in the investigation and
prosecution of the contempt proceedings. ...”). Because the
sanction compensated the SkyPort parties for their
enforcement of the injunction, we hold that the bankruptcy
court had jurisdiction to impose it.
C.
*5 Next, Goldman and Craig argue that the attorneys' fees
assessed were not reasonable and necessary because neither
compensatory damages nor coercive relief was granted.
Specifically, they argue that the “amount involved and the
result obtained” was zero. We disagree.
As previously stated, the bankruptcy court's contempt order
compensates the SkyPort parties for the attorneys' fees that
they incurred in seeking compliance with the bankruptcy
court's order and protecting the debtor. Here, the bankruptcy
court carefully calculated the fees and awarded far less than
was requested.5 The contempt order reasonably compensates
the SkyPort parties for a portion of the fees and expenses they
incurred as a result of Goldman and Craig's conduct.
D.
Goldman and Craig also argue that the preliminary injunction
was dissolved, and thereafter no relief could be awarded. It is
true that “[i]f the civil contempt proceeding is coercive in
nature, the general rule is that it is mooted when the proceeding
out of which it arises is terminated.” Travelhost, Inc., 68 F.3d
at 962 (quoting Petroleos Mexicanos v. Crawford Enterprises,
Inc., 826
F.2d 392, 400 (5th Cir. 1987)). “However, if the contempt
order is compensatory in nature, it is not mooted by
termination of the underlying action.” Id.
Here, the contempt order relates directly to a prolonged
bankruptcy proceeding and compensates the SkyPort parties
for attorneys' fees resulting from Goldman and Craig's
contemptuous conduct. Thus, the preliminary injunction's
dissolution does not change our analysis.
Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 57
E.
*6 Goldman and Craig also argue that they did not
violate the preliminary injunction as they reasonably
understood it. Rule 65(d) provides that the order must
“state its terms specifically; and describe in reasonable
detail ... the act or acts restrained or required.” FED. R.
CIV. P. 65(d).
Here, the language and terms of the order are clear. The
preliminary injunction states, “Plaintiffs may contact
former and current ... employees ... of the Debtor if and
only if a written request is made by Plaintiffs' counsel to
counsel for SkyPort, and counsel for SkyPort either a)
agrees to the proposed contact or b) does not respond
within 1 business day.” The injunction also provides that
the “Plaintiffs are temporarily enjoined from: pursuing
any and all claims or causes of action, derivative or
direct, against all of the Defendants.”
Despite the clear terms of the injunction, Goldman and
Craig continued to pursue evidence and witnesses—
namely Cole. They encouraged Cole to pursue her own
claims against Kubbernus in other courts by arranging for
her counsel, providing for a “loan” for her counsel's
retainer, and pursuing financial backing and support for
the state court litigation. Goldman and Craig's attempts
to implicate Cole as the primary communicator fail—
they
Footnotes
initiated contact with her on numerous occasions. They
did not “inadvertently” violate the injunction.
F.
Finally, Craig contends that he was not bound by the injunction
because he was not specifically named in the order. The
Federal Rules of Civil Procedure specifically mandate that an
injunction binds “other persons who are in active concert or
participation with [the parties and their attorneys].” FED. R.
CIV. P. 65(d)(2)(C); see also Whitcraft v. Brown, 570 F.3d
268, 272 (5th Cir. 2009) (“A court order binds not only the
parties subject thereto, but also non-parties who act with the
enjoined party.”). Craig was actively involved in the case,
knew about the injunction, and knew that he was restrained
from contacting Cole and other employees. Goldman wrote to
Craig that “I do not want to create an appearance that we are
using you to communicate with [Cole].” Yet, that is exactly
what happened. Accordingly, Craig was also bound by the
injunction and improperly colluded with Goldman to violate it.
V. Conclusion
The record reveals that Goldman and Craig repeatedly violated
the injunction. The record also demonstrates that they were
aware of the terms of the injunction, yet they willfully violated
it. The SkyPort parties spent a substantial amount to ensure
compliance and the bankruptcy court acted appropriately in
awarding fees in a civil contempt proceeding. Accordingly, we
AFFIRM.
All Citations
--- Fed.Appx. ----, 2016 WL 5939415
6 Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
1 The order specifically states that “Plaintiffs may contact former and current vendors, employees, and customers of the
Debtor if and only if a written request is made by Plaintiffs' counsel to counsel for SkyPort, and counsel for SkyPort either
a) agrees to the proposed contact or b) does not respond within 1 business day.”
2 The bankruptcy court extensively chronicled these communications in thirty-seven pages of its opinion imposing
contempt sanctions. We include only a sampling of the most significant communications.
3 “ ‘[A] court's characterization of its proceedings [as civil or criminal] is a factor to be considered in determining the
character of a contempt, although it is not conclusive.’ ” Id. at 263 n.7 (quoting Lewis v. S.S. Baune, 534 F.2d 1115, 1119
(5th Cir. 1976)).
4 A criminal contempt sanction serves “to punish the contemnor and vindicate the authority of the court,” while a civil
contempt sanction serves “to coerce the contemnor into compliance with a court order, or to compensate another party
for the contemnor's violation.” Id. at 263.
Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 58
5 “In this circuit, courts apply a two-step method for determining a reasonable attorney's fee award.” Combs v. City of
Huntington, Texas, 829 F.3d 388, 391 (5th Cir. 2016) (citation omitted). “The court must first calculate the lodestar, ‘which
is equal to the number of hours reasonably expended multiplied by the prevailing hourly rate in the community for similar
work.’ ” Id. at 392 (quoting Jimenez v. Wood Cty., 621 F.3d 372, 379 (5th Cir. 2010)). “In calculating the lodestar, ‘[t]he
court should exclude all time that is excessive, duplicative, or inadequately documented.’ ” Id. (quoting Jimenez, 621
F.3d at 379–80). “[T]he lodestar is presumed reasonable. ...” Id. (citing Perdue v. Kenny A. ex rel. Winn, 559 U.S. 542,
553– 54, 130 S.Ct. 1662, 176 L.Ed.2d 494 (2010)). The court may, however, “enhance or decrease it based on the twelve
Johnson factors.” Id. (citing Jimenez, 621 F.3d at 380). “The court must provide a reasonably specific explanation for all
aspects of a fee determination.” Id. (quotations and citations omitted).
The Johnson factors are: (1) the time and labor required; (2) the novelty and difficulty of the issues in the case; (3)
the skill requisite to perform the legal services properly; (4) the preclusion of other employment by the attorney due
to acceptance of the case; (5) the customary fee charged for those services in the relevant community; (6) whether
the fee is fixed or contingent; (7) time limitations imposed by the client or the circumstances; (8) the amount involved
and the results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the undesirability of the
case; (11) the nature and length of the professional relationship with the client; and (12) awards in similar cases.
Id. at 391, n.1 (citing Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717–19 (5th Cir. 1974)). The bankruptcy
court properly reduced the fee based upon the success of the SkyPort parties and its denial of some of the requested
relief.
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 59
2016 WL 6068126
Only the Westlaw citation is currently available.
This case was not selected for
publication in West's Federal Reporter.
See Fed. Rule of Appellate Procedure 32.1
generally governing citation of judicial decisions
issued on or after Jan. 1, 2007. See also
U.S.Ct. of App. 5th Cir. Rules 28.7 and
47.5. United States Court of Appeals, Fifth
Circuit.
Joanna Marie Wilson; Ashley Rachel
DeLeon; Steve Vinkler; Sheila Collins;
Jeff Svehlak; et al., Plaintiffs–Appellants,
v.
Navika Capital Group, L.L.C.; Pearl Hospitality,
L.L.C.; Ruby Hospitality, Incorporated;
Naveen C. Shah; Emerald Hospitality Tulsa,
Incorporated, Defendants–Appellees.
No. 15-20204
|
Date Filed: 10/14/2016
Appeal from the United States District Court for the
Southern District of Texas, USDC 4:10–CV–1569
Attorneys and Law Firms
Howard L. Steele, Jr., Shreedhar Rajnikant Patel, Steele
Law Group, P.L.L.C., Houston, TX, for Plaintiffs–
Appellants
Michael J. Sheppeard, Esq., Ballon Stoll Bader & Nadler,
P.C., New York, NY, for Defendants–Appellees
Before PRADO, OWEN, and HAYNES, Circuit Judges.
Opinion
PER CURIAM:*
*1 The motion for rehearing is DENIED. The following
opinion is substituted in place of our prior opinion.
This appeal arises from a collective action brought under the
Fair Labor Standards Act (“FLSA”). A group of hotel
employees brought suit against Defendants–Appellees
(collectively, “Navika”) seeking overtime pay and unpaid
wages. On March 14, 2015, the district court granted two
pending motions—a motion for reconsideration of a prior
equitable tolling ruling and a motion to dismiss, each
involving distinct groups of plaintiffs.1 Plaintiffs– Appellants
have challenged both rulings on appeal. For the reasons stated
below, we affirm in part and dismiss in part.
FACTUAL AND PROCEDURAL BACKGROUND
In May 2010, Joanna Wilson and Ashley DeLeon filed suit
against Navika under the FLSA to recover overtime pay and
unpaid wages “on behalf of themselves and other similarly
situated persons.” The district court conditionally certified a
class of current and former Navika employees, and
approximately 330 individuals joined the class. This appeal
involves the district court's ruling on two distinct motions: 1)
Navika's Motion for Reconsideration of Order on Motion for
Extension of Time (“Motion for Reconsideration”) and 2)
Navika's Motion in Limine to Dismiss (“Motion to Dismiss”).
A. Motion for Reconsideration On June 4,
2014, the district court decertified the class and dismissed
without prejudice the claims of all plaintiffs that had opted to
join. In order “[t]o avoid prejudice to individual opt-in
Plaintiffs who have been dismissed,” the court “invoke[d] its
equity powers to toll the applicable statute of limitations for
30 days,” which gave the decertified plaintiffs the opportunity
to file individual suits.
On July 7, 2014, the Opt–In Plaintiffs filed for a seven-day
extension of the district court's equitable tolling ruling,
explaining that it had “dutifully filed lawsuits in the local
jurisdictions where the consenting plaintiffs reside” but that
filing problems in the United States District Court for the
Western District of Missouri prevented them from timely
filing suit in that jurisdiction. Before the district court ruled
on this motion, the Opt–In Plaintiffs filed an amended motion
(“Motion to Extend Equitable Tolling”), citing “filing
complications” with several jurisdictions and requesting a
fourteen-day extension. Before Navika filed a response, the
district court granted the Motion to Extend
Equitable Tolling.2
On July 24, 2014, Navika filed a Motion for
Reconsideration of the district court's ruling, arguing that the
extension should not have been granted because the Opt–In
Plaintiffs failed to diligently file their individual suits. On
March 14, 2015, the district court granted the Motion for
Reconsideration and denied the Opt–In Plaintiffs' Motion to
Extend Equitable Tolling, stating that, as a result, the
Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 60
equitable tolling deadline actually expired on July 7, 2014—
thirty days after decertification. The Opt–In Plaintiffs now
appeal.
B. Motion to Dismiss
*2 In January 2014, the district court ordered “that all
Plaintiffs who remain a party to this action ... are required to
provide Defendants with individual damages computations
within twenty (20) days of entry of this order.” The court
further ordered that “Plaintiffs who do not provide an
individual computation of damages will be dismissed without
prejudice.” On March 31, 2014, Navika moved to dismiss any
plaintiffs that had failed to provide an individualized damages
computation pursuant to Federal Rules of Civil Procedure 37
and 41(b) and the January 2014 order. On March 14, 2015,
the district court granted Navika's motion and dismissed all
remaining plaintiffs without prejudice pursuant to Federal
Rules of Civil Procedure 37 and 41(b). Two plaintiffs
dismissed in that order, Ashley DeLeon and Joanna Wilson,
now appeal.
DISCUSSION
The district court had jurisdiction under 28 U.S.C. § 1331.
This court has jurisdiction to review the district court's final
judgment pursuant to 28 U.S.C. § 1291.
A. Notice of Appeal As a preliminary
matter, Navika contends that the notice of appeal filed by
Plaintiffs–Appellants did not comply with Federal Rule of
Appellate Procedure 3(c)(1). The caption of the notice of
appeal states the names of five individuals: Joanna Marie
Wilson, Ashley Rachel DeLeon, Sheila Collins, Steve
Vinkler, and Jeff Svehlack. The body of the notice of appeal
provides:
Notice is hereby given that Plaintiffs
Wilson et al. hereby appeal to the
United States Court of Appeals for the
Fifth Circuit from the Final Order of
Dismissal (Doc. #468) entered March
14, 2015 and the Opinion and Order
(Doc. #467) entered March 14, 2015
granting Defendants' Motion in
Limine to Dismiss, granting
Defendants' Motion for
Reconsideration, denying Plaintiffs'
Motion for Reconsideration and
Extension and Plaintiffs' Amended
Motion for Reconsideration and
Extension, the revocation of equitable
tolling.
Federal Rule of Appellate Procedure 3(c)(1) “identifies the
minimum prerequisites for a sufficient notice” of appeal.
Kinsley v. Lakeview Reg'l Med. Ctr. LLC, 570 F.3d 586, 589
(5th Cir. 2009). Rule 3(c)(1)(A) states that a notice of appeal
must “specify the party or parties taking the appeal by naming
each one in the caption or body of the notice.” Fed. R. App.
P. 3(c)(1)(A). However, “an attorney representing more than
one party may describe those parties with such terms as ‘all
plaintiffs,’ ‘the defendants,’ ‘the plaintiffs A, B, et al.,’ or ‘all
defendants except X.’ ” Id. Because one attorney represents
all potential plaintiffs in this appeal, Plaintiffs–Appellants
argue that the use of “Plaintiffs Wilson et al.” is sufficient to
comply with the requirements of Rule 3(c).
Although courts should “liberally construe” the requirements
of Rule 3, “[t]his principle of liberal construction does not ...
excuse noncompliance with the Rule.” Smith v. Barry, 502
U.S. 244, 248, 112 S.Ct. 678, 116 L.Ed.2d 678 (1992); see
also Bailey v. Cain, 609 F.3d 763, 767 (5th Cir. 2010). In this
case, Plaintiffs–Appellants' use of “Plaintiffs Wilson et al.”
does little to “specify the party or parties taking the appeal,”
Fed. R. App. P. 3(c)(1) (A). As explained in the advisory
committee notes to Rule 3(c), “Plaintiffs Wilson et al.” is only
a sufficient descriptor if “it is objectively clear that a party
intended to appeal.” Fed. R. App. P. 3(c) advisory
committee's note to 1993 amendment; cf. Kinsley, 570 F.3d
at 589 (“[T]he notice afforded by the document, not litigant's
motivation in filing it, determines the document's sufficiency
as a notice of appeal.” (quoting Smith, 502 U.S. at 248, 112
S.Ct. 678)).3
*3 As evidenced by a review of the district court record, the
briefing on appeal, and the oral argument it is anything but
clear which individuals “Plaintiffs Wilson et al.”
encompasses. The lawyers on the appellant side of the table
here (“Appellants' Side Counsel”) arguably represented 330
opt-in plaintiffs (people turning in consent forms) at some
point in the case. But, by their own admission, they were not
appealing on behalf of all 330 opt-in plaintiffs. Thus, “et al.”
cannot refer to all 330 “opt-ins,” some of whom had settled
or moved on after dismissal. The district court's order on the
motion for reconsideration (the order from which the appeal
was taken) references 29 plaintiffs who submitted “proper
Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)
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responses” to discovery, 130 who submitted “untimely ...
responses” some of whom were then dismissed over a year
before the order being appealed, 26 plaintiffs who lost on
summary judgment, 14 who failed to provide verifications, 17
who conceded that they had no damages, and 8 who were
“unable to attend trial.” To sum up, then, there is no readily
discernable, coherent list of plaintiffs who are appealing
extant at the time of the notice of appeal, even giving the most
liberal construction to the phrase “et al.” Cf. Vallejo v.
Santini–Padilla, 607 F.3d 1, 7 n.3 (1st Cir. 2010) (“As the
plaintiffs on appeal are the same three plaintiffs who have
litigated this case from the outset, this filing [which stated
‘Robert Vallejo and other plaintiffs'] provided defendants
sufficient notice of their opponents on appeal.”).
Even the Appellants' Side Counsel do not appear to be certain
of the identity of the parties on appeal. Appellants' Side
Counsel termed the situation a “kind of a quilt” and explained
that who was in and out of the case in the district court was a
“discombobulated list.” The initial brief filed by Appellants'
Side Counsel did not address the parties appealing at all,
except to list a confusing subset of the optin plaintiffs (a total
of 45 plaintiffs in all) in the certificate of interested parties.
In the reply brief, Appellants' Side Counsel attempted to list
the parties appealing in response to the Appellees' argument
that the notice was ineffective as to all but the Properly
Named Appellants.4 That list matches up to absolutely
nothing else in the district court record. The mystery was not
even solved at oral argument on this point. Appellants' Side
Counsel was repeatedly asked how he derived the list
provided in footnote 1 of the reply brief, but none of his
answers yielded that precise list; it was more in the nature of
concentric circles with some, but not total, overlap. Indeed,
Appellants' Side Counsel admitted that who was “in” the case
at the time of the order on the motion for reconsideration was
“not as clear as it should have been.” The explanation was so
muddled that a member of this panel ordered the parties to
submit a document identifying by name the exact parties on
appeal, explaining that our judgment needs to be precise. So,
here we were, at oral argument in the Fifth Circuit, some eight
months after the notice of appeal was filed and after full
briefing, and we still did not know who the parties appealing
were.
The supplemental briefing that followed was also of little
help. Appellants' Side Counsel filed an eight-page letter that
included five pages of tables. Counsel for Appellees, while
maintaining the position that the notice of appeal was
inadequate, listed who “was left” at the time of the most
recent district court orders. These contradictory and
confusing submissions speak volumes about why the notice
of appeal in this case is completely inadequate under Rule 3,
however liberally construed. Simply put, the provision of the
Rule that allows “et al.” is meant to allow a lawyer who
represents a clearly identifiable group of parties to appeal as
to that group without the need to list each individual. It is not
meant to allow a lawyer to file an appeal and decide later who
he still represents and which of those parties are interested in
appealing.
*4 But the notice of appeal is not deficient as to all Plaintiffs–
Appellants. We hold, and both parties agree, that the parties
named in the caption properly gave notice of their intent to
appeal the district court's ruling on Navika's Motion to
Dismiss. See Fed. R. App. P. 3(c) (1)(A) (“The notice of
appeal must: specify the party or parties taking the appeal by
naming each one in the caption or body of the notice.”
(emphasis added)). Therefore, with the exception of Ashley
DeLeon, Joanna Wilson, Sheila Collins, Steve Vinkler, and
Jeff Svehlack all other Plaintiffs–Appellants are dismissed for
want of jurisdiction.5 Because DeLeon and Wilson, the only
Plaintiffs–Appellants that have neither been dismissed for
want of jurisdiction nor abandoned their appeal, only
challenge the district court's order on Navika's Motion to
Dismiss, we need not address any arguments related to
Navika's Motion for Reconsideration.
B. Motion to Dismiss Named plaintiffs
DeLeon and Wilson argue that the district court abused its
discretion in dismissing their claims under Federal Rule of
Civil Procedure 37(c)(1). On March 14, 2015, the district
court dismissed DeLeon and Wilson without prejudice
“pursuant to Fed. R. Civ. P. 37 and/or 41(b).” But, in their
brief DeLeon and Wilson only contest the district court's
dismissal pursuant to Rule 37. Because DeLeon and Wilson
failed to raise any challenge to the district court's dismissal
pursuant to Rule 41(b), they have waived the issue on appeal.
See, e.g., Kleibrink v. Kleibrink (In re Kleibrink), 621 F.3d
370, 371 n.1 (5th Cir. 2010). Accordingly, this Court need not
reach the parties' arguments related to Rule 37.
CONCLUSION
For the foregoing reasons, the district court's dismissal of
DeLeon and Wilson is AFFIRMED, and we dismiss for want
of jurisdiction all other Plaintiffs–Appellants.
Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)
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PRISCILLA R. OWEN, Circuit Judge, concurring in part and
dissenting in part:
I fully join part II(B) of the court's opinion. But I disagree
with the majority opinion's conclusion that the notice of
appeal was effective only as to the five plaintiffs named in its
caption. I accordingly dissent from the dismissal of the appeal
for lack of jurisdiction as to certain plaintiffs other than the
named plaintiffs.
As the majority opinion reflects, the notice of appeal sought
review of the district court's rulings on two distinct motions
filed by the defendants: a motion to dismiss for failure to
provide damage calculations and a motion to reconsider the
extension of an equitable tolling period that permitted certain
plaintiffs to refile individual actions in other jurisdictions. It
is undisputed that the motion to dismiss for failure to provide
damage calculations involved only the five plaintiffs named
in the caption of the notice of appeal.1 There has never been
any confusion about that. The district court's order granting
the motion to dismiss for failure to furnish damage
calculations reflects that the motion to dismiss, as
supplemented, pertained “to Sheila Collins ... [and] the four
other named plaintiffs.” It is also undisputed that none of the
five named plaintiffs were affected, in any manner, by the
extension of the tolling period to permit refiling in other
jurisdictions. Again, there has never been any confusion
about that. The orders regarding an equitable tolling period
pertained only to unnamed plaintiffs. The district court ruled
on the motion to dismiss, involving only named plaintiffs,
and the motion for reconsideration, involving only unnamed
plaintiffs, in orders that issued March 14, 2015.
*5 The five plaintiffs named in the caption of the notice of
appeal would, of course, be appealing only the motion to
dismiss for failure to provide damage calculations because
the order reconsidering the extension of the tolling period did
not pertain to them. Yet, the notice of appeal expressly listed
the order granting the motion for reconsideration and
revoking the extension of the equitable tolling period as a
ruling that was being appealed. The notice said:
Notice is hereby given that Plaintiffs
Wilson et al. hereby appeal to the
United States Court of Appeals for the
Fifth Circuit from the Final Order of
Dismissal (Doc. #468) entered March
14, 2015 and the Opinion and Order
(Doc. #467) entered March 14, 2015
granting Defendants' Motion in
Limine to Dismiss, granting
Defendants' Motion for
Reconsideration, denying Plaintiffs'
Motion for Reconsideration and
Extension and Plaintiffs' Amended
Motion for Reconsideration and
Extension, the revocation of equitable
tolling.
The notice of appeal objectively indicates that someone is
appealing from the grant of the Motion for Reconsideration
and the revocation of the equitable tolling period. All of the
parties knew that none of the five plaintiffs were appealing
that ruling, and the district court record is plain that none of
the named plaintiffs were subject to that ruling. So it follows
that all of the parties had to have known that plaintiffs other
than the named plaintiffs were appealing the revocation of the
extended equitable tolling period. It is also objectively
ascertainable from the district court's March 14, 2015 order
that the universe of unnamed plaintiffs who were aggrieved
by the revocation of the extended equitable tolling period was
limited to the plaintiffs named in three lawsuits filed in other
jurisdictions that the district court's order identifies with
specificity. The district court's March 14, 2015 order recites:
A current search on PACER Case Locator shows five cases
filed by 55 (out of 330) individual Plaintiffs against
Defendant subsequent to the June 4, 2014 decertification
order. Doc. 460.
1) Johnson et al v. Navika, LLC et al, No. 4:14– cv–
144–BAE–GRS (S.D. Ga. July 7, 2014) (four
plaintiffs)
2) Anne Bond, et al. v. Navika Capital Group, LLC, et
al., No. 1:14–cv–00627–SS (W.D. Tex. July 7, 2014)
(twenty-one plaintiffs)
3) Carrier et al v. Navika Capital Group, LLC et al,
No. 1:14–cv–311–KD–C (S.D. Ala. July 8, 2014)
(fourteen plaintiffs)
4) Cassandra Botello, et al. v. Navika Capital Group,
LLC, et al., No. 4:14–cv–378 (N.D. Okla. July 9, 2014)
(eleven plaintiffs)
5) Chappell et al v. Navika Capital Group, LLC et al,
No. 2:14–cv–04199–SRB (W.D. Mo. July 28, 2014)
(five plaintiffs)
Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)
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The latter three cases were filed after the original 30– day
tolling period, which expired July 7, 2014, but within the
14–day extension, which expired July 28, 2014.
Withdrawing equitable tolling in the latter three cases
could result in dismissal of the claims of thirty plaintiffs in
Alabama, Oklahoma, and Missouri.
This order makes clear that the only plaintiffs who were
subject to the revocation of the extended equitable tolling
period were those plaintiffs who filed the three lawsuits (the
“latter three cases”) after July 7, 2014, in the three
jurisdictions listed (Alabama, Oklahoma, and Missouri). So,
there is a discrete number of identifiable plaintiffs who were
aggrieved by the order granting the motion for
reconsideration and revoking the extended equitable tolling
period.
*6 The notice of appeal did not identify by name who was
appealing the order revoking the extended equitable tolling
period, but it stated that “[n]otice is hereby given that
Plaintiffs Wilson et al. hereby appeal,” and, as discussed, the
notice then identified the order revoking the tolling period
with specificity. This is adequate under Federal Rule of
Appellate Procedure 3(c).
Rule 3(c) states that a notice of appeal must “specify the party
or parties taking the appeal by naming each one in the caption
or body of the notice, but an attorney representing more than
one party may describe those parties with such terms as ...
‘the plaintiffs A, B, et al.’ ”2
The same attorney represented
all plaintiffs in the district court and in the appeal. In
determining the sufficiency of the identification of parties,
“the test ... is whether it is objectively clear that a party
intended to appeal.”3 The Advisory Committee notes state
that “the rule makes it clear that dismissal of an appeal should
not occur when it is otherwise clear from the notice that the
party intended to appeal.”4 It is “objectively clear” from the
notice of appeal and the district court's May 14, 2015 Opinion
and Order that the plaintiffs who refiled suit in other
jurisdictions after July 7, 2014, intended to appeal the
revocation of equitable tolling.
The majority opinion's attempt to distinguish a footnote in the
unpublished decision in Dodson v. Hillcrest Securities
Corp.,5 which indicates that Rule 3(c) would be satisfied in
the present appeal, is unconvincing. The Dodson decision
involved a 1992 notice of appeal in the context of a putative
class action that the district court did not certify.6 Through
subsequent pleadings and dismissals, plaintiffs were added
while others withdrew or were dismissed prior to the filing of
the notice of appeal.7 The caption of the notice contained the
named plaintiffs and “et al.,” and the body referred to “all
plaintiffs,” but it was clear that some of the dismissed
plaintiffs were not appealing.8 While the court recognized
that the phrase “all plaintiffs” could satisfy the specificity
requirement “if [the notice] leaves no room for doubt” as to
which plaintiffs intended to appeal, it concluded that it was
“impossible to tell” who the plaintiffs appealing were.9
However, the court was applying the version of Rule 3 in
effect prior to its amendment in 1993. In a footnote, the
opinion stated that the notice would have been sufficient
under Rule 3(c) as amended in 1993.10
The majority opinion
in the present case says that Dodson “did not have the
opportunity to address the advisory committee notes as
applied to non-class action cases like this one.”11
This
statement is puzzling for three reasons. First, the advisory
committee notes that are referenced have been in existence
since 1993, and Dodson was decided in 1996. Second, neither
Dodson nor the present case involved a class action by the
time that the orders appealed from had issued. In Dodson, the
court was addressing an unwieldy set of individuals,
numbering in the hundreds.12
The class in the present case
had been decertified well before the orders at issue here were
handed down, and the district court was dealing with
individual claims, as in Dodson. Third, JUDGE GARWOOD,
who wrote the opinion in Dodson, was a member of the Rules
of Appellate Procedure Advisory Committee of the Judicial
Conference of the
United States when he authored Dodson;13
it is highly
unlikely that he was unaware of the import of the Advisory
Committee's commentary to Rule 3(c).
*7 The majority opinion's statement that Dodson is
inapplicable because the panel in that case “did not have the
benefit of case law elaborating on the proper application of
Rule 3(c), on which [the majority] opinion relies” is also
puzzling. None of the cases cited by the majority opinion shed
any light on the issue presently before us. The decision in
Kinsley v. Lakeview Regional Medical Center LLC concerned
the timeliness of a filing.14
The opinions in Smith v. Barry
and Bailey v. Cain both concerned inmate notices of appeal
with irregularities as to form or identification of the court.15
Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)
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Accordingly, while Dodson did apply pre–1993 law to decide
the notice of appeal was insufficient, the Dodson decision was
unequivocal that the notice satisfied the new
Footnotes
1993 rule. Though Dodson is not binding precedent, its
reasoning is persuasive.
I share the frustration expressed in the majority opinion with
the conflicting statements and representations that counsel for
the plaintiffs has made to this court regarding the identity of
the unnamed plaintiffs who intended to appeal. But the
discrepancies that have occurred after the notice of appeal
was filed should not have any impact on the state of the record
at the time the notice was filed. We cannot lose jurisdiction
over parties who were adequately identified in a notice of
appeal simply because counsel argues that other individuals
who were not identified in that notice should also be
considered as parties to the appeal.
I would hold that the notice of appeal was sufficient as to the
parties who filed the three lawsuits the district court identified
as potentially affected by the revocation of equitable tolling,
as of March 15, 2014. Accordingly, I would consider the
merits of the arguments concerning the motion for
reconsideration as to those unnamed plaintiffs, and I dissent
from the dismissal of those plaintiffs' claims for lack of
appellate jurisdiction.
All Citations
--- Fed.Appx. ----, 2016 WL 6068126
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
1 This appeal involves a complex mix of parties and claims. The plaintiffs purportedly appealing the motion for
reconsideration are referred to as the “Opt–In Plaintiffs.” The plaintiffs appealing the motion to dismiss are referred to by
name, Joanna Wilson and Ashley DeLeon. When discussing both sets of plaintiffs, we refer to “Plaintiffs–Appellants.”
2 Five lawsuits were filed by different groups of Opt–In Plaintiffs, two within the original thirty-day equitable tolling deadline
and three during the fourteen-day extension.
3 While we recognize that our previous opinion in Dodson v. Hillcrest Securities Corp., 95 F.3d 52, 1996 WL 459770 (5th
Cir. 1996) (unpublished), in dicta suggested that a notice of appeal somewhat similar to the one in this case could be
adequate under Rule 3(c), the holding in Dodson was limited to Rule 3(c) as it existed before the 1993 amendment. See
id. at *2–4 & n.4. The panel in Dodson also did not have the benefit of case law elaborating on the proper application of
Rule 3(c), on which this opinion relies, and did not have the opportunity to address the advisory committee notes as
applied to non-class action cases like this one. Thus, Dodson does not change the outcome of this case.
4 The reply brief footnote 1 states: “The Appellants challenging the Order on Reconsideration are: Theresa Ford, Jamie
Franklin, Cynthia Knight, Linda Law, Aundrea Poellnitz, Jauran Portis, Lakitha Reed, Robbie Williams, Antonio Proctor,
Wanda Rivera, Marisha White, Tyshella Harvey, Glynna Kyle, LaToya Maxwell, Adrianne Mc'Ferrim, Ashley Welch,
Amanda Arnold, Elizabeth Howk, Stephanie Kennedy, Bobby Kenyon, Victoria Shea Martin, Bobby Smith, Anne Bond,
Rosa Joanne Alvarado, Ramario Armstrong, Brandon Batchelor (who has now settled his case), Esmerelda Carrizales,
Dany Cruz, Ashley Foege, Ashton Forbes, Jamilla Garcia, Kaylynn Garcia, Ashley Mars, Eric Nordheim, Nicolas Pereyra,
Shenika Preston, Russell Smith, Matthew Stephenson, and Stephanie Weber.”
5 However, as Plaintiffs–Appellants brief contains no arguments related to Sheila Collins, Steven Vinkler, and Jeff
Svehlack, these individuals have abandoned their appeal. See Cinel v. Connick, 15 F.3d 1338, 1345 (5th Cir. 1994).
1 Joanna Marie Wilson, Ashley Rachel DeLeon, Steve Vinkler, Sheila Collins, and Jeff Svehlak.
2 FED. R. APP. P. 3(c)(1)(A).
3 FED. R. APP. P. 3(c) advisory committee's note to 1993 amendment.
4 Id.
5 95 F.3d 52, 1996 WL 459770, at *2 n.4 (5th Cir. 1996) (unpublished).
6 Id. at *2–4.
7 Id. at *4.
8 Id. at *4.
9 Id. at *3–4.
Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)
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10 Id. at *2 n.4.
11 Ante at ––––.
12 See Dodson, 1996 WL 459770, at *1.
13 1 PRELIMINARY DRAFT OF PROPOSED AMENDMENTS TO THE BANKRUPTCY FORMS: REQUEST FOR COMMENTS 57 (1996) (listing JUDGE GARWOOD as a member of the Advisory Committee on Appellate Rules).
14 570 F.3d 586, 588–89 (5th Cir. 2009).
15 Smith v. Barry, 502 U.S. 244, 248–50, 112 S.Ct. 678, 116 L.Ed.2d 678 (1992); Bailey v. Cain, 609 F.3d 763, 766–67
(5th Cir. 2010).
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
In re Barker, --- F.3d ---- (2016)
2016 WL 6276078
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2016 WL 6276078
Only the Westlaw citation is currently available.
United States Court of Appeals, Ninth Circuit.
In re Marcella Lee Barker, aka Marci
Barker, aka Marci Vanni Barker, Debtor,
Spokane Law Enforcement
Federal Credit Union, Appellant,
v.
Marcella Lee Barker; Robert Drummond, Chapter
13 Trustee; Ocwen Loan Servicing, LLC, Appellees.
No. 14-60028
|
Argued and Submitted October
3, 2016, Seattle, Washington
|
Filed October 27, 2016
Synopsis
Background: Trustee objected to untimely proofs of claim
filed by creditor in debtor's Chapter 13 case. The United States
Bankruptcy Court for the District of Montana, Ralph B.
Kirscher, J., entered order disallowing claims, and creditor
appealed. The United States Bankruptcy Appellate Panel of the
Ninth Circuit, 2014 WL 1273765, affirmed. Creditor appealed.
Holdings: The Court of Appeals, N.R. Smith, Circuit Judge,
held that:
[1] creditor that wishes to participate in Chapter 13
planhas affirmative duty to file proof of claim, and debtor's
acknowledgment of debt in bankruptcy schedule, whether in
nature of binding judicial admission or not, does not satisfy that
affirmative duty;
[2] debtor's scheduling of prepetition debt owed to
creditordid not qualify as informal proof of claim;
[3] debtor's scheduling of prepetition debt owed to
creditordid not qualify as proof of claim timely filed by debtor
on creditor's behalf; and
[4] deadline to file proofs of claim in Chapter 13 case
wasrigid, and bankruptcy court lacked equitable power to
extend deadline after the fact.
Affirmed.
Appeal from the Ninth Circuit, Bankruptcy Appellate
Panel, Pappas, Kurtz, and Jury, Bankruptcy Judges,
Presiding, BAP No. 13–1393.
Attorneys and Law Firms
Quentin M. Rhoades (argued) and Francesca di Stefano,
Sullivan Tabaracci & Rhoades P.C., Missoula, Montana,
for Appellant.
Robert Drummond (argued), Great Falls, Montana; Kraig
C. Kazda, Kazda Law Firm P.C., Great Falls, Montana; for
Appellees.
Before: William A. Fletcher, Ronald M. Gould, and N.
Randy Smith, Circuit Judges.
OPINION
N.R. SMITH, Circuit Judge:
If a creditor wishes to participate in the distribution of a
debtor's assets under a Chapter 13 plan, it must file a timely
proof of claim. The debtor's acknowledgment of debt owed
to the creditor in a bankruptcy schedule does not relieve the
creditor of this affirmative duty.
BACKGROUND FACTS
On September 6, 2012, debtor Marcella Lee Barker filed a
Chapter 13 bankruptcy petition in the United States
Bankruptcy Court for the District of Montana. Later that
day, in response to the filed petition, the bankruptcy court
issued an Official Form B9I, titled “Notice of Chapter 13
Bankruptcy Case, Meeting of Creditors, & Deadlines”
(“Notice”). The Notice stated that the deadline for
creditors1 to file a proof of claim was January 8, 2013. On
September 8, 2012, the Bankruptcy Noticing Center sent
the Notice to the Appellee, Spokane Law Enforcement
Federal Credit Union (“Credit Union”), by first class mail.
On September 19, 2012, Barker timely filed her Chapter 13
plan with the bankruptcy court.2
According to her attached
certificate of mailing filed with the court, the plan was also
sent to the Credit Union that day via first class mail.
In re Barker, --- F.3d ---- (2016)
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On September 19, 2012, Barker also properly filed schedules
of her assets and liabilities.3 In these schedules, Barker listed
the Credit Union as a secured creditor holding a $6,646.00
purchase money security interest in a 2004 Ford F–150. Barker
also listed the Credit Union as an unsecured creditor holding a
$47,402.00 claim that had previously been secured by an
unidentified automobile, which Barker's ex-husband had sold.
Barker moved to amend and modify the Chapter 13 plan several
times over the next few months. Each time such a motion was
filed, Barker sent a notice to the Credit Union. In addition, each
time the bankruptcy court entered an order confirming the
amended plan, the Bankruptcy Noticing Center notified the
Credit Union.
*2 On May 30, 2013, more than four months after the deadline
to file a proof of claim expired, the Credit Union filed three
claims with the bankruptcy court: a secured claim for $5,490.78
and unsecured claims for
$28,293.94 and $24,587.47.4 In accordance with the Local
Bankruptcy Rules for the United States Bankruptcy Court for
the District of Montana, the Trustee sent a “Notice of
Late Filed Claims” to the Credit Union on June 7, 2013.5
On June 10, 2013, the Credit Union requested a hearing “to
contest the tardy response.” In this request, the Credit Union
asserted that the claims were belated, because a “disgruntled
employee” failed to timely file the claim. On July 31, 2013, the
Credit Union filed a formal motion with the bankruptcy court
requesting the court to allow the three claims. The court held a
hearing on the matter on August 2, 2013. The court denied the
Credit Union's motion and disallowed the claims because the
proofs of claims were not timely filed.
On August 12, 2013, the Credit Union filed a notice of appeal
with the bankruptcy court, and the appeal was taken to the
Ninth Circuit Bankruptcy Appellate Panel (“BAP”). On March
28, 2014, the BAP affirmed the bankruptcy court's decision to
disallow the late filed claims. On April 24, 2014, the Credit
Union filed a timely notice of appeal to this court.
STANDARD OF REVIEW
[1] [2] “Whether a claim may be disallowed in a bankruptcy
proceeding on the ground that the proof of claim was not
timely filed pursuant to Rule 3002(c), Fed.R.Bankr.P., is a
question of law subject to de novo review.” IRS v. Osborne
(In re Osborne), 76 F.3d 306, 307 (9th Cir. 1996) (italics
omitted). Whether the Credit Union has asserted an informal
proof of claim is also a question of law subject to de novo
review. See Wright v. Holm (In re Holm), 931 F.2d 620, 622
(9th Cir. 1991).
DISCUSSION
In order to fully understand the intricacies of the legal
questions presented in this case, a short summary of
Chapter 13 bankruptcy proceedings is helpful.
A petition filed under Chapter 13 helps overextended
debtors reorganize their debt—while allowing them to keep
their assets—by using “current and future income to repay
creditors in part, or in whole, over the course of a three-to
five-year period.” HSBC Bank USA, Nat'l Ass'n v.
Blendheim (In re Blendheim), 803 F.3d 477, 485 (9th Cir.
2015). A Chapter 13 case begins, like all other bankruptcy
cases, “with the filing of a petition and the creation of an
estate, which comprises the debtors' legal and equitable
interests in property.” Id. at 484 (citing 11 U.S.C. § 541;
Fed. R. Bankr. P. 1002(a)). As soon as a debtor files a
bankruptcy petition, all entities are immediately prohibited
from further pursuing collection efforts against the debtor
or the debtor's estate. Id. (citing 11 U.S.C. § 362). Along
with the petition, a debtor must also file a schedule of assets
and liabilities and a statement of financial affairs. Fed. R.
Bankr. P. 1007(b)(1).
*3 [3] [4] [5] In order to collect a debt from a debtor filing a
Chapter 13 bankruptcy petition, an unsecured creditor must file
a valid “proof of claim,” which has gone through the
“allowance process set forth in 11 U.S.C. § 502.” In re
Blendheim, 803 F.3d at 484–85. A secured creditor, who wishes
to receive distributions under a Chapter 13 plan, must also file
a valid proof of claim. See id. at 485; see also Schlegel v.
Billingslea (In re Schlegel), 526 B.R. 333, 342–43 (9th Cir.
BAP 2015). However, a secured creditor, who does not wish to
participate in a Chapter 13 plan or who fails to file a timely
proof of claim, does not forfeit its lien. In re Blendheim, 803
F.3d at 485 (“A creditor with a lien on a debtor's property may
generally ignore the bankruptcy proceedings and decline to file
a claim without imperiling his lien, secure in the in rem right
that the lien guarantees him under nonbankruptcy law: the right
of foreclosure.”).
A bankruptcy court may disallow a claim for many reasons,
including if the proof of claim was untimely. 11 U.S.C. §
502(b)(9); In re Blendheim, 803 F.3d at 485. In order for a
In re Barker, --- F.3d ---- (2016)
2016 WL 6276078
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proof of claim to be timely, a creditor generally must file it
within “90 days after the first date set for the meeting of
creditors.”6 Fed. R. Bankr. P. 3002(c). If a creditor fails to
file a timely proof of claim, a debtor or trustee may file a
claim on the creditor's behalf within thirty days after the
creditor's ninety-day clock has expired. Fed. R. Bankr. P.
3004.
The Credit Union admits that it filed its proofs of claims late.
Thus, the bankruptcy court properly rejected the claims.
However, it argues that the bankruptcy court still should
have allowed it to participate in the Chapter 13 plan, because
Barker listed the debt she owed the Credit Union in her
bankruptcy schedules. We disagree.
[6] [7] The Federal Rules of Bankruptcy Procedure clearly
provide that, in the Chapter 13 context, “[a]n unsecured creditor
or an equity security holder must file a proof of claim or interest
for the claim or interest to be allowed.” Fed. R. Bankr. P.
3002(a) (emphasis added). The Ninth Circuit has made it clear
that this straightforward language should be given its “plain
meaning” and enforced accordingly. Gardenhire v. IRS (In re
Gardenhire), 209 F.3d 1145, 1148 (9th Cir. 2000). In addition,
“in a highly statutory area such as bankruptcy,” the Ninth
Circuit prescribes “[c]lose adherence to the text of the relevant
statutory provisions.” Id. (“[I]n a Chapter 13 proceeding:
‘Where the statutory language is clear, our “sole function ... is
to enforce it according to its terms.” ’ ”) (quoting Rake v. Wade,
508 U.S. 464, 471, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993)).
A plain reading of the applicable statutes and rules places a
burden on each Chapter 13 creditor to file a timely proof of
claim. A claim will not be allowed if this burden is not satisfied.
[8] There is other evidence, besides the plain language of the
statute, that indicates Congress intended to place such a
burden on the creditor. Specifically, a creditor in the Chapter
11 context is not always required to file a proof of claim.
Varela v. Dynamic Brokers, Inc. (In re Dynamic Brokers,
Inc.), 293 B.R. 489, 495 (9th Cir. BAP 2003). Both the Federal
Rules of Bankruptcy Procedure and the federal statutes
governing Chapter 11 bankruptcy make clear that “in chapter
11 cases ‘it shall not be necessary for a creditor’ to file a proof
of claim unless the claim is either not scheduled or is
scheduled as disputed, contingent or unliquidated.” Id.; Fed.
R. Bankr. P. 3003(c)(2); 11 U.S.C. § 1111(a). Similar
language (relieving a creditor of the burden of filing a proof
of claim if the debtor has scheduled the claim) is absent from
the rules and statutes governing Chapter 13 bankruptcy. This
purposeful omission indicates Congress's intent to require all
creditors wishing to enforce their claims to file a proof of
claim in the Chapter 13 context. See Russello v. United States,
464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983)
(“[W]here Congress includes particular language in one
section of a statute but omits it in another section of the same
Act, it is generally presumed that Congress acts intentionally
and purposely in the disparate inclusion or exclusion.”)
(quoting United States v. Wong Kim Bo, 472 F.2d 720, 722
(5th Cir. 1972)).
*4 [9] [10] [11] Bankruptcy schedules serve multiple purposes
independent of a proof of claim and are as vital to the
bankruptcy plan as the proof of claim. Bankruptcy courts use
debtors' schedules to determine whether debtors are eligible for
the particular relief they seek. Guastella v. Hampton (In re
Guastella), 341 B.R. 908, 918 (9th Cir. BAP 2006) (“The
debtors' schedules should be the starting point to a
determination of the debtor's aggregate debts. ... However, the
schedules are not dispositive. If the debtors' schedules were
dispositive, then eligibility could be created by improper or
incomplete scheduling of creditors.” (omission in original)
(quoting Quintana v. IRS (In re Quintana), 107 B.R. 234, 238–
39 n.6 (9th Cir. BAP 1989), aff'd, 915 F.2d 513 (9th Cir. 1990)).
Creditors also “rel[y] on the schedules to determine what
action, if any, they [will] take in the matter.” Hamilton v. State
Farm Fire & Cas. Co., 270 F.3d 778, 785 (9th Cir. 2001). A
creditor may chose not to pursue a claim after evaluating all of
a Chapter 13 debtor's debts and the proposed repayment plan.
Perry v. Certificate Holders of Thrift Sav., 320 F.2d 584, 589
(9th Cir. 1963) (“There are many cases where creditors,
although listed on the books of a bankrupt as such, will not be
able to participate on an equal basis with other general
creditors.”). The proof of claim plays the important role of
“alert[ing] the court, trustee, and other creditors, as well as the
debtor, to claims against the estate,” and the creditor's intention
to enforce the claims. In re Daystar of Cal., Inc., 122 B.R. 406,
408 (Bankr. C.D. Cal. 1990); see also Adair v. Sherman, 230
F.3d 890, 896 (7th Cir. 2000). Simply put, “[t]he requirement
that creditors be scheduled is not a substitute for the further
provision ... that creditors' claims be proved.” Perry, 320 F.2d
at 589.
[12] A variety of courts have disallowed creditors' late
filed claims despite the fact that they were listed on the
debtor's bankruptcy schedules. See, e.g., Bowden v.
Structured Invs. Co. (In re Bowden), 315 B.R. 903, 907
(Bankr. W.D. Wash. 2004); In re Greenig, 152 F.3d 631, 632–
34 (7th Cir. 1998) (disallowing late filed claim even though
debtor listed the debt in a bankruptcy schedule and the
In re Barker, --- F.3d ---- (2016)
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bankruptcy court confirmed the debtor's reorganization plan,
which included the debt at issue). We agree with these courts.
In a Chapter 13 case, a creditor must file a timely proof of
claim in order to participate in the distribution of the debtor's
assets, even if the debt was listed in the debtor's bankruptcy
schedules.
I. Whether or not Barker's listing of debt
owedto the Credit Union was a judicial
admission, it is not sufficient to meet the
Credit Union's burden
of affirmatively filing a timely proof of claim.
[13] [14] [15] The Credit Union argues first that, under
the doctrine of judicial admissions, Barker must pay all the
debts she listed in her bankruptcy schedules. The Ninth
Circuit has acknowledged the doctrine of judicial admissions.
See Am. Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226
(9th Cir. 1988). “Judicial admissions are formal admissions in
the pleadings which have the effect of withdrawing a fact
from issue and dispensing wholly with the need for proof of
the fact.” Id. (quoting Dery v. Gen. Motors Corp. (In re
Fordson Eng'g Corp.), 25 B.R. 506, 509 (Bankr. E.D. Mich.
1982)). Judicial admissions are “conclusively binding on the
party who made them.” Id.
Although we have acknowledged this doctrine, we have
never declared that a bankruptcy schedule constitutes the
“formal admission” required for the application of the
doctrine. We need not reach this question here either. As
outlined above, a creditor who wishes to participate in a
Chapter 13 plan has an affirmative duty to file a proof of
claim. A debtor's acknowledgment of debt in a bankruptcy
schedule—whether or not that is a judicial admission—
does not satisfy this affirmative duty. Congress chose to
require Chapter 13 creditors to file proofs of claims that
demonstrate their intent to enforce their claims; a judicial
admission by a debtor does not fulfill this strict requirement
or its purpose.
II. Barker's listing of debt owed to the
Credit
Union in her bankruptcy schedules
does not constitute an informal proof of
claim.
[16] [17] Creditors, failing to file a timely formal proof of
claim, often assert that an informal proof of claim can function
to establish the creditor's claims. See Cty. of Napa v.
Franciscan Vineyards, Inc. (In re Franciscan Vineyards,
Inc.), 597 F.2d 181, 183 (9th Cir. 1979). The Ninth Circuit has
two requirements for a document to qualify as an informal
proof of claim: (1) the document “must state an explicit
demand showing the nature and amount of the claim against
the estate,” and (2) the document must “evidence an intent to
hold the debtor liable.” Sambo's Restaurants, Inc. v. Wheeler
(In re Sambo's Rests., Inc.), 754 F.2d 811, 815 (9th Cir. 1985).
Examples of an informal proof of claim are “demands against
the estate” or “correspondence between a creditor and the
trustee or debtor-in-possession which demonstrate an intent
on the part of the creditor to assert a claim against the
bankruptcy estate.” Sullivan v. Town & Country Home
Nursing Servs., Inc. (In re Town & Country Home Nursing
Servs., Inc.), 963 F.2d 1146, 1153 (9th Cir. 1991).
*5 The Credit Union argues that Barker's listing of debt she
owed to the Credit Union in her bankruptcy schedules
constitutes an informal proof of claim, which is sufficient
to preserve its claims. More specifically, the Credit Union
asserts that there is no requirement that the writing
establishing the informal proof of claim must come from
the creditor.
[18] The Credit Union's argument ignores the explicit
requirement that the creditor must somehow demonstrate its
intent to hold the debtor liable. As explained above, the filing
of a proof of claim (which evidences the creditor's decision
to hold the debtor liable) plays an important role in Chapter
13 bankruptcy proceedings. This function applies equally to
an informal proof of claim. In order to establish an informal
proof of claim, a creditor must have taken some affirmative
action to assert its claim within the statutorily prescribed
time frame. In re Bowden, 315 B.R. at 907 (rejecting
argument that debtor's schedules alone suffice to establish an
informal proof of claim). The Credit Union has failed to cite
any legal authority that has held that a debtor's bankruptcy
schedules alone qualify as an informal proof of claim.
Moreover, in all of the cases the Credit Union cites in support
of its position, the creditors took some sort of affirmative
action to demonstrate their intent to enforce their claims prior
to the filing deadline. See, e.g., Fyne v. Atlas Supply Co., 245
F.2d 107, 108 (4th Cir. 1957) (“We agree that mere
knowledge on the part of the trustee or of the referee in
bankruptcy as to the existence of a claim is not sufficient
basis for allowing the filing of an amended claim nor is the
listing of the claim in the bankrupt's schedules sufficient.
Here, however, there is much more than this.”); Scottsville
Nat'l Bank v. Gilmer (In re Pitts), 37 F.2d 227, 229 (4th Cir.
1930) (allowing late filed claim where “the trustee conferred
In re Barker, --- F.3d ---- (2016)
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with the officers and the attorney for the bank frequently with
regard to matters connected with the estate”); Clapp v.
Norwest Bank Hastings, N.A. (In re Clapp), 57 B.R. 921, 924
(Bankr. D. Minn. 1986) (allowing late filed claim where
creditor “clearly and frequently asserted its intention to
pursue its claim” in letters to the debtor's attorney and in
interactions with the court).
Barker's bankruptcy schedules simply do not meet either of
the prongs required to establish an informal proof of claim.
The Barker-drafted documents are not an explicit demand and
do not demonstrate the Credit Union's intent to hold Barker
liable for the listed debt. Accordingly, we affirm the
bankruptcy court's conclusion that the informal proof of claim
doctrine does not apply in this case.
III. Barker's listing of debt owed to the
Credit Union in her bankruptcy schedules
does not constitute a debtor's proof of claim.
[19] Federal Rule of Bankruptcy Procedure 3004 and 11
U.S.C. § 501(c) provide that, if a creditor does not file a timely
proof of claim, the debtor or trustee may file a proof of claim
for the creditor. The Bankruptcy Rules specifically require that
the debtor's proof of claim be filed in the thirty day period
immediately following the creditors' deadline to file their
proofs of claims. Fed. R. Bankr. P. 3004. In this case, the Credit
Union's deadline to file was January 8, 2013. Therefore,
Barker, or the Trustee, had from January 9, 2013, until
February 7, 2013, to file a proof of claim on behalf of any
creditors.
*6 The Credit Union argues that Barker's bankruptcy
schedules constitute a debtor's proof of claim. This argument
is not persuasive. First, the bankruptcy schedules
(acknowledging the debt at issue) were not filed within the
applicable thirty-day time frame. Thus, just considering the
issue of timing, Barker's bankruptcy schedules do not meet the
requirements of Rule 3004.
Timing aside, Barker's bankruptcy schedules do not qualify
as a debtor's proof of claim. Congress adopted Rule 3004
in addition to the Rules requiring Chapter 13 debtors to file
schedules of their assets and liabilities. Therefore, Rule
3004 requires that debtors make an additional showing of
their desire to include an unasserted claim in their Chapter
13 plan after receiving notice of which creditors intend to
enforce their claims. Barker never made this additional
showing. Therefore, the filing requirements of Rule 3004
have not been satisfied, and Barker's bankruptcy schedules
do not constitute a debtor's proof of claim.
IV. The principles of equity do not permit the
bankruptcy court to retroactively extend the
deadline
for the Credit Union to file its proofs of claims.
[20] Finally, the Credit Union argues that equity favors
allowing its claims. Specifically, the Credit Union argues that,
if its claims are not allowed, it will suffer a severe loss while
the other creditors receive an undeserved windfall. While this
may be true, the Ninth Circuit has repeatedly held that the
deadline to file a proof of claim in a Chapter 13 proceeding is
“rigid,” and the bankruptcy court lacks equitable power to
extend this deadline after the fact. In re Gardenhire, 209 F.3d
at 1148 (“Our precedents support the conclusion that a
bankruptcy court lacks equitable discretion to enlarge the time
to file proofs of claim; rather, it may only enlarge the filing
time pursuant to the exceptions set forth in the Bankruptcy
Code and Rules.”); In re Osborne, 76 F.3d at 308; Zidell, Inc.
v. Forsch (In re
Coastal Alaska Lines, Inc.), 920 F.2d 1428, 1431–33 (9th
Cir. 1990); Ledlin v. United States (In re Tomlan), 102 B.R.
790, 792, 796 (E.D. Wash. 1989), aff'd, 907 F.2d 114 (9th
Cir. 1990).
[21] Further, allowing the bankruptcy
court to
retroactively extend the deadline in this case would thwart the
purpose of Chapter 13:
The purpose of Chapter 13 is ‘to serve as a flexible
vehicle for the repayment of part or all of the allowed
claims of the debtor.’ (Emphasis added.) Sen. Rept. No.
95–989, Pub.L. 95–598, 92 Stat. 2549, 95th Cong., 2d
Sess. (1978), p. 141, reprinted in U.S. Code Cong. &
Admin. News 1978 at 5787, 5927. In order to effectuate
this purpose, it is essential that all unsecured creditors
seeking payment under the plan file a proof of claim. A
date certain for such filings is crucial to the ability to
determine the full extent of the debts and evaluate the
efficacy of the plan in light of the debtor's assets and
foreseeable future earnings.
In re Tomlan, 102 B.R. at 792 (alteration in orginal). Barker's
Chapter 13 plan will only be successful if she and the Trustee
“know, early on, what claims must be paid.” Id. at 794 (quoting
In re Goodwin, 58 B.R. 75, 77 (Bankr. D. Me. 1986)). Barker
will not get the “fresh start” she seeks if creditors are
In re Barker, --- F.3d ---- (2016)
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continually allowed to add additional claims far after the
deadline to file has expired. Id. (quoting In re Goodwin, 58 B.R.
at 77).
Footnotes
CONCLUSION
*7 In order to participate in distributions of Barker's assets
under her Chapter 13 plan, the Credit Union was required
to file a proof of claim by the prescribed deadline. Because
the Credit Union's proof of claims were untimely, the
bankruptcy court properly rejected them.
AFFIRMED.
All Citations
--- F.3d ----, 2016 WL 6276078
1 As noted in the Notice, a different deadline applies to a proof of claim filed by a “governmental unit.” See Fed. R. Bankr.
P. 3002(c)(1). This alternative deadline is not relevant in this case as Appellee is not a governmental unit.
2 A Chapter 13 debtor must file a Chapter 13 plan within fourteen days after filing a Chapter 13 petition. Fed. R. Bankr. P.
3015(b).
3 In 2012, the Federal Rules of Bankruptcy Procedure required Chapter 13 debtors to list their assets and liabilities on
Official Form B6, and its subparts. See Fed. R. Bankr. P. 9009. On December 1, 2015, Official Form B6 was replaced
by Official Form B 106. 6 West's Fed. Forms, Bankruptcy Courts § 1:20 (4th ed.).
4 The copies of the proofs of claims submitted in the excerpts of record appear to assert two unsecured claims for
$28,293.94 and $24,587.47. These numbers are inconsistent with the Appellant's brief which list the amount of the
unsecured claims as $28,293.84 and $24,597.47.
5 Rule 3002–1 of the Local Bankruptcy Rules for the United States Bankruptcy Court for the District of Montana provides
as follows:
Late filed proofs of claim in Chapter 12 or 13 cases shall be deemed disallowed, without need for formal objection
by the trustee or a hearing, if the trustee sends a notice to the late filing creditor using Mont. LBF 21. If a creditor
files a response and requests a hearing within thirty (30) days of the date of the notice, then the creditor shall notice
the contested matter for hearing pursuant to Mont. LBR 9013–1.... If the creditor fails to file a written response to
the objection to the late filed claim within thirty (30) days of the date of the notice provided by Mont. LBF 21, the
failure to respond shall be deemed an admission that the objection should be sustained by the Court without further
notice or hearing.
6 There are a handful of exceptions to the deadline for filing proofs of claims, none of which apply here.
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
In re Failla, 838 F.3d 1170 (2016)
63 Bankr.Ct.Dec. 46
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 72
KeyCite Yellow Flag - Negative Treatment
Disagreed With by In re Ryan, Bankr.D.Hawai'i, October 19, 2016
838 F.3d 1170
United States Court of Appeals,
Eleventh Circuit.
In re: David A. Failla, Donna N. Failla, Debtors.
David A. Failla and Donna N.
Failla, Plaintiffs–Appellants,
v.
Citibank, N.A., Defendant–Appellee.
No. 15-15626
|
Date Filed: 10/04/2016
Synopsis
Background: Residential mortgagee filed motion to compel
Chapter 7 debtors to surrender mortgaged property pursuant
to their filed statement of intention. The United States
Bankruptcy Court for the Southern District of Florida, Paul G.
Hyman, Jr., Chief Judge, 529 B.R. 786, granted motion, and
debtors appealed. The District Court, Kenneth A. Marra, J.,
542 B.R. 606, affirmed. Debtors appealed.
Holdings: The Court of Appeals, William Pryor, Circuit
Judge, held that:
[1] debtors who file a statement of intent to surrenderthe
property that collateralizes secured debt must perform that
intent by surrendering the property both to trustee and to
creditor;
[2] to “surrender” real property securing
residentialmortgage debt, in accordance with their stated
intent, Chapter 7 debtors had to drop their opposition to state
court foreclosure action;
[3] bankruptcy judge had authority to remedy
debtors'abuse of bankruptcy process by directing debtors to
withdraw their affirmative defenses and dismiss their
counterclaim in state court foreclosure action.
Affirmed.
*1173 Appeal from the United States District Court for the
Southern District of Florida, D.C. Docket No. 9:15– cv–
80328–KAM, Bkcy No. 9:11–bkc–34324–PGH
Attorneys and Law Firms
Peter David Ticktin, Ticktin Law Group, PA,
DEERFIELD BEACH, FL, Michael E. Zapin, Law Offices
of Michael E. Zapin, BOCA RATON, FL, for Plaintiffs–
Appellants.
John Robert Chiles, Burr & Forman, LLP, FORT
LAUDERDALE, FL, Jonathan Michael Sykes, Burr &
Forman, LLP, ORLANDO, FL, for Defendant–
Appellee.
Before MARCUS and WILLIAM PRYOR, Circuit
Judges, and LAWSON,* District Judge.
Opinion
WILLIAM PRYOR, Circuit Judge:
This appeal requires us to decide whether a person who
agrees to “surrender” his house in bankruptcy may oppose a
foreclosure action in state court. David and Donna Failla
filed for bankruptcy in 2011 and agreed that they would
surrender their house to discharge their mortgage debt. But
the Faillas continued to oppose a foreclosure proceeding in
state court. Citibank then filed a motion to compel surrender
in the bankruptcy court and argued that the Faillas had
breached their duty to surrender the property. The
bankruptcy court granted the motion, and the district court
affirmed. Because the word “surrender” in the bankruptcy
code, 11 U.S.C. § 521(a)(2), requires that debtors relinquish
their right to possess the property, we affirm.
I. BACKGROUND
David and Donna Failla own a house in Boca Raton, Florida.
They financed their purchase with a $500,000 mortgage. The
Faillas defaulted on that mortgage in 2009. Citibank, the
owner of the mortgage and the promissory note, filed a
foreclosure action in a Florida court. The Faillas are
opposing that foreclosure action.
In re Failla, 838 F.3d 1170 (2016)
63 Bankr.Ct.Dec. 46
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The Faillas filed for bankruptcy in 2011. During the
bankruptcy proceedings, the Faillas admitted that they own
the house, that the house is collateral for the mortgage, that
the mortgage is valid, and that the balance of the mortgage
exceeds the value of the house. They also filed a statement
of intention, 11 U.S.C. § 521(a)(2), to surrender the house.
Because the house had a negative value, the trustee
“abandoned” it back to the Faillas, 11 U.S.C. § 554. The
Faillas continue to live in the house while they contest the
foreclosure action.
Citibank filed a motion to compel surrender in the
bankruptcy court. Citibank argued that the Faillas'
opposition to the foreclosure action contradicted their
statement *1174 of intention to surrender the house. The
Faillas argued that their opposition to the foreclosure action
is not inconsistent with surrendering the house.
The bankruptcy court granted Citibank's motion to compel
surrender and ordered the Faillas to stop opposing the
foreclosure action. See In re Failla, 529 B.R. 786, 793
(Bankr. S.D. Fla. 2014). The bankruptcy court explained
that if the Faillas do not comply with its order, it may “enter
an order vacating [their] discharge.” Id. The district court
affirmed on appeal. See Failla v. Citibank, N.A., 542 B.R.
606, 612 (S.D. Fla. 2015).
The Faillas now appeal to this Court. After the parties filed
their briefs, Citibank filed a motion to strike portions of the
Faillas' briefing that were raised for the first time on appeal.
The disputed sections argue that the only remedy available
to the bankruptcy court was lifting the automatic stay for
Citibank, which would allow Citibank to foreclose on the
house in the ordinary course. This Court ruled that the
motion to strike should be carried with the case.
II. STANDARD OF REVIEW
[1] [2] “Because the district court functions as an appellate
court in reviewing bankruptcy court decisions, this court is the
second appellate court to review bankruptcy court cases.” In
re Glados, Inc., 83 F.3d 1360, 1362 (11th Cir. 1996). We
“assess the bankruptcy court's judgment anew, employing the
same standard of review the district court itself used.” In re
Globe Mfg. Corp., 567 F.3d 1291, 1296 (11th Cir. 2009).
“Thus, we review the bankruptcy court's factual findings for
clear error, and its legal conclusions de novo.” Id.
III. DISCUSSION
We divide our discussion in two parts. First, we explain that
section 521(a)(2) prevents debtors who surrender their
property from opposing a foreclosure action in state court.
Second, we explain that the bankruptcy court had the
authority to order the Faillas to stop opposing their
foreclosure action.
A. Debtors Who Surrender Their Property in Bankruptcy
May Not Oppose a Foreclosure Action in State Court.
[3] Section 521(a)(2) states a bankruptcy debtor's
responsibilities when his schedule of assets and liabilities
includes mortgaged property:
(a) The debtor shall ...
(2) if an individual debtor's schedule of assets and
liabilities includes debts which are secured by property
of the estate—
(A) within thirty days after the date of the
filing of apetition under chapter 7 of this title or on
or before the date of the meeting of creditors,
whichever is earlier, or within such additional time
as the court, for cause, within such period fixes, file
with the clerk a statement of his intention with
respect to the retention or surrender of such property
and, if applicable, specifying that such property is
claimed as exempt, that the debtor intends to redeem
such property, or that the debtor intends to reaffirm
debts secured by such property; and
(B) within 30 days after the first date set for
themeeting of creditors under section 341(a), or
within such additional time as the court, for cause,
within such 30-day period fixes, perform his
intention with respect to such property, as specified
*1175 by subparagraph (A) of this paragraph;
except that nothing in subparagraphs (A) and (B) of this
paragraph shall alter the debtor's or the trustee's rights
with regard to such property under this title, except as
provided in section 362(h).
11 U.S.C. § 521(a)(2). Subsection (A) requires the debtor to
file a statement of intention about what he plans to do with the
collateral for his debts. See Fed. R. Bankr. P. 1007(b)(2). The
In re Failla, 838 F.3d 1170 (2016)
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statement of intention must declare one of four things: the
collateral is exempt, the debtor will surrender the collateral,
the debtor will redeem the collateral, or the debtor will
reaffirm the debt. See In re Taylor, 3 F.3d 1512, 1516 (11th
Cir. 1993). After the debtor issues his statement of intention,
subsection (B) requires him to perform the option he declared.
Id.
The question here is whether the Faillas satisfied their
declared intention to surrender their house under section
521(a)(2)(B). To answer that question, we must decide to
whom debtors must surrender their property and whether
surrender requires debtors to acquiesce to a creditor's
foreclosure action. The district court and the bankruptcy
court correctly concluded that the Faillas violated section
521(a)(2) by opposing Citibank's foreclosure action after
filing a statement of intention to surrender their house.
[4] We agree with both the district court and the
bankruptcy court that section 521(a)(2) requires debtors who
file a statement of intent to surrender to surrender the property
both to the trustee and to the creditor. Even if the trustee
abandons the property, the debtors' duty to surrender the
property to the creditor remains. The text and the context of
the statute compel this interpretation.
[5] Reading “surrender” to refer only to the trustee of the
bankruptcy estate renders section 521(a)(2) superfluous with
section 521(a)(4). Under the surplusage canon, no provision
“should needlessly be given an interpretation that causes it to
duplicate another provision.” Antonin Scalia & Bryan A.
Garner, Reading Law 174 (2012). See also Inhabitants of
Montclair Twp. v. Ramsdell, 107 U.S. 147, 152, 2 S.Ct. 391,
27 L.Ed. 431 (1883) (“It is the duty of the court to give effect,
if possible, to every clause and word of a statute....”). Section
521(a)(4) states that “[t]he debtor shall ... surrender to the
trustee all property of the estate.” 11 U.S.C. § 521(a)(4).
Because section 521(a)(4) already requires the debtor to
surrender all of his property to the trustee so the trustee can
decide, for example, whether to liquidate it or abandon it,
section 521(a)(2) must refer to some other kind of surrender.
When the bankruptcy code means a debtor must surrender
his property either to the creditor or the trustee, it says so. On
the one hand, section 1325(a)(5)(C) states that “the debtor
surrenders the property securing such claim to such holder,”
which clearly contemplates surrender to a creditor. 11 U.S.C.
§ 1325(a)(5)(C) (emphasis added). Congress did not use that
language here. On the other hand, section 521(a)(4) states
that “[t]he debtor shall ... surrender to the trustee all property
of the estate,” which clearly contemplates surrender to the
trustee. Id. § 521(a) (4) (emphasis added). Congress did not
use that language either.
[6] What Congress did say in section 521(a)(2) is
“surrender,” without specifying to whom the surrender is
made. But the lack of an object makes sense because a debtor
who decides to surrender his collateral must surrender it to
both the trustee and the creditor. The debtor first surrenders
*1176 it to the trustee, id. § 521(a)(4), who decides whether
to liquidate it, id. § 704(a)(1), or abandon it, id. § 554. If the
trustee abandons it, then the debtor surrenders it to the
creditor, id. § 521(a)(2).
[7] The word “surrender” in section 521(a)(2) is used
with reference to the words “redeem” and “reaffirm,” and
those words plainly refer to creditors. A debtor “redeems”
property by paying the creditor a particular amount, and he
“reaffirms” a debt by renegotiating it with the creditor. See
Taylor, 3 F.3d at 1514 n.2; see also 11 U.S.C. §§ 524(c), 722.
Because “[c]ontext is a primary determinant of meaning,”
Scalia & Garner, supra, at 167, the word “surrender” likely
refers to a relationship with a creditor as well. We said as
much in dicta in Taylor. See 3 F.3d at 1514 n.2 (“Surrender
provides that a debtor surrender the collateral to the lienholder
who then disposes of it pursuant to the requirements of state
law.” (emphasis added)).
Other provisions of the bankruptcy code that provide a
remedy to creditors when a debtor violates section 521(a)(2)
suggest that the word “surrender” does not refer exclusively
to the trustee. The Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, Pub. L. No. 109–8, § 305,
119 Stat. 23, added two sections to the bankruptcy code that
provide remedies for creditors with respect to personal
property. 11 U.S.C. §§ 362(h), 521(d). Section 362(h)
punishes a debtor who violates section 521(a)(2) by lifting
the automatic stay, which allows the creditor to pursue other
remedies against the debtor immediately. 11 U.S.C. §
362(h)(1). Section 362(h) allows the trustee of the
bankruptcy estate to override this remedy, but only if the
trustee moves the court to “order[ ] appropriate adequate
protection of the creditor's interest.” Id. § 362(h)(2). And
section 521(d) allows a creditor to consider the debtor in
default because he declared bankruptcy if the debtor violates
section 521(a) (2). See id. § 521(d).
In re Failla, 838 F.3d 1170 (2016)
63 Bankr.Ct.Dec. 46
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 75
That these remedies apply only to personal property is
irrelevant. Section 521(a)(2) uses the generic word “property”
and draws no distinction between real and personal property.
Congress provided additional remedies for creditors secured
by personal property, but the contextual clue remains the
same. These remedies for creditors reflect an obvious point
about section 521(a)(2): it is a provision that affects and
protects the rights of creditors.
describes other legal relationships like “reaffirmation” and
“redemption.” This definition is in line with existing
authorities. See In re Pratt, 462 F.3d 14, 18–19 (1st Cir.
2006) (“[T]he most sensible connotation of ‘surrender’ in the
... context [of section 521(a)(2)] is that the debtor agreed to
make the collateral available to the secured creditor—viz., to
cede his possessory rights in the collateral....”); In re White,
487 F.3d 199, 205 (4th Cir. 2007) (“[T]he word ‘surrender’
[in section 1325(a)(5) (C)] means the relinquishment of all
rights in property, including the possessory right, even if
such relinquishment does not always require immediate
physical delivery of
bankruptcy court and the district court that “surrender” requires
debtors to drop their opposition to a foreclosure action. The
bankruptcy code does not define the word “surrender,” so we
give it its “contextually appropriate ordinary meaning.” Scalia
& Garner, supra, at 70; see also In re Piazza, 719 F.3d 1253,
1261 (11th Cir. 2013) (applying this canon to the bankruptcy
code). One meaning of “surrender” is “to give or deliver up
possession of (anything) upon compulsion or demand.”
Surrender, Webster's New International Dictionary 2539 (2d
ed. 1961); see also Surrender, Oxford English Dictionary
(online ed.) (“To give up (something) out of one's own
possession or power into that of another who has or asserts a
claim to it.”) (all Internet materials as visited Sept. 15, 2016,
and available in Clerk of Court's case file). But this meaning is
not contextually appropriate. When the bankruptcy code means
“physically turn over property,” it uses the word “deliver”
instead of “surrender.” See, e.g., 11 U.S.C. §§ 542(a),
543(b)(1); see also id. § 727(d)(2) (using the phrase “deliver or
surrender,” which suggests they are different). The
presumption of consistent usage instructs that “[a] word or
phrase is presumed to bear the same meaning throughout a text”
and that “a material variation in terms suggests a variation in
meaning.” *1177 Scalia & Garner, supra, at 170; see also
Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78
L.Ed.2d 17 (1983).
Another meaning of “surrender” is “[t]he giving up of a right
or claim.” Surrender, Black's Law Dictionary (10th ed. 2014);
see also Surrender, Webster's New International Dictionary
2539 (“To give up completely; to resign; relinquish; as, to
surrender a right, privilege, or advantage.”). This meaning
describes a legal relationship, as opposed to a physical action,
which makes sense in the context of section 521(a)(2)—a
provision that § 1325.06[4] (16th ed.) (“Surrender in th[e]
context [of section 1325(a)(5)(C)] means simply the
relinquishment of any rights in the collateral.”).
[13] Because “surrender” means “giving up of a right or
claim,” debtors who surrender their property can no longer
contest a foreclosure action. When the debtors act to preserve
their rights to the property “by way of adversarial litigation,”
they have not “relinquish[ed] ... all of their legal rights to the
property, including the rights to possess and use it.” White, 487
F.3d at 206 (emphasis omitted). The “retention of property that
is legally insulated from collection is inconsistent with
surrender.” Id. at 207. Ordinarily, when debtors surrender
property to a creditor, the creditor obtains it immediately and is
free to sell it. Assocs. Commercial Corp. v. Rash, 520 U.S. 953,
962, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997). Granted, a
creditor must take some legal action to recover real property—
namely, a foreclosure action. See Fla. Stat. Ann. §§ 702.01–
702.11. Foreclosure proceedings ensure that debtors do not
have to determine unilaterally issues of priority if there are
multiple creditors or surplus if the value of the property
exceeds the liability. See Plummer, 513 B.R. at 144. Debtors
who surrender property must get out of the creditor's way. “[I]n
order for surrender to mean anything in the context of §
521(a)(2), it has to mean that ... debtor[s] ... must not contest
the efforts of the lienholder to foreclose on the property.” In re
Elowitz, 550 B.R. 603, 607 (Bankr. S.D. Fla. 2016). Otherwise,
debtors could obtain a discharge in bankruptcy based, in part,
on their sworn statement to surrender and “enjoy possession of
the collateral indefinitely while hindering and prolonging the
state court process.” Id. (quoting In re Metzler, 530 B.R. 894,
900 (Bankr. M.D. Fla. 2015)).
[14] The hanging paragraph in section 521(a)(2) also does
not give the debtor the right to oppose a foreclosure action. The
hanging paragraph states that “nothing in subparagraphs (A)
and (B) of this paragraph shall alter the debtor's or the trustee's
rights with regard to such property under this title, except as
provided in section 362(h).” 11 U.S.C. § 521(a)(2). The key
words for purposes of this dispute are “under this title.” The
hanging paragraph means that section 521(a)(2) does not affect
the property to another.”); In re Plummer, 513 B.R. 135, [8] [9] [10] [11]
[12] We also agree with th143–44e (Bankr. M.D. Fla. 2014); 8 Collier on Bankruptcy
In re Failla, 838 F.3d 1170 (2016)
63 Bankr.Ct.Dec. 46
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 76
the debtor's or the trustee's bankrupt *1178 cy rights. Section
521(a) (2) does not affect the trustee's bankruptcy rights
because a debtor must first surrender property to the trustee—
who liquidates it or abandons it—before surrendering it to the
creditor. See id. § 521(a)(4). And section 521(a)(2) does not
affect the debtor's bankruptcy rights because a creditor is still
subject to the automatic stay and cannot foreclose on the
property until the trustee decides to abandon it. The hanging
paragraph spells out an order of operations. It does not mean
that a debtor who declares he will surrender his property can
then undo his surrender after the bankruptcy is over and the
creditor initiates a foreclosure action.
[15] Concerns about fairness are not in tension with this
outcome. During the bankruptcy proceedings, the Faillas
declared that they would surrender the property, that the
mortgage is valid, and that Citibank has the right to foreclose.
Compelling them to stop opposing the foreclosure action
requires them to honor that declaration. The Faillas may not say
one thing in bankruptcy court and another thing in state court:
The concern here is that the Debtor is
making a mockery of the legal system
by taking inconsistent positions. In an
effort to obtain her chapter 7 discharge,
the Debtor swears—under the penalty
of perjury—an intention to “surrender”
her property. In other words, the
Debtor is representing to the Court that
she will make her property available to
the Bank by refraining from taking any
overt act that impedes the Bank's
ability to foreclose its interest in the
property. Yet, once she receives her
discharge, the Debtor in fact impedes
the Bank's ability to
foreclose its mortgage.
In re Guerra, 544 B.R. 707, 710 (Bankr. M.D. Fla. 2016).
In bankruptcy, as in life, a person does not get to have his
cake and eat it too.
Section 521(a)(2) requires a debtor to either redeem,
reaffirm, or surrender collateral to the creditor. Having
chosen to surrender, the debtor must drop his opposition to
the creditor's subsequent foreclosure action. Because the
Faillas filed a statement of intention to surrender their
house, they cannot contest the foreclosure action.
B. The Bankruptcy Court Had the Authority to Order the
Faillas to Stop Opposing the State Foreclosure Action.
For the first time on appeal, the Faillas argue that even if
they breached their duty to surrender under section 521(a)
(2), the only remedy available to the bankruptcy court was
to lift the automatic stay for Citibank, which would allow
Citibank to foreclose on the house in the ordinary course.
Citibank asked us to strike this portion of the Faillas' briefs
in their May 25 motion to strike, which was carried with the
case. The Faillas concede that they did not raise this
argument below. They ask us to excuse their forfeiture
because their argument is an important, unsettled question
of law. This argument is not forfeited, but fails on the
merits, rendering Citibank's motion to strike moot.
[16] The Faillas' new argument falls within exceptions to
the general rule that a circuit court will not consider an issue
not raised in the district court. See Access Now, Inc. v. Sw.
Airlines Co., 385 F.3d 1324, 1332 (11th Cir. 2004) (quoting
Wright v. Hanna Steel Corp., 270 F.3d 1336, 1342 (11th Cir.
2001)). It is a “pure question of law” and its “proper resolution
is beyond any doubt.” Id. Moreover, the Faillas' argument is
intertwined with their other arguments. For instance, part of
the reason the Faillas contend the bankruptcy court cannot
order them to stop opposing the foreclosure action is that
section 521(a)(2) *1179 is merely a “notice statute” that does
not affect substantive property rights.
[17] [18] [19] On the merits, however, bankruptcy courts
are not limited to lifting the automatic stay. Bankruptcy courts
have broad powers to remedy violations of the mandatory
duties section 521(a)(2) imposes on debtors. See Taylor, 3
F.3d at 1516. Section 105(a) states that bankruptcy courts can
“issue any order, process, or judgment that is necessary or
appropriate to carry out the provisions of this title,” 11 U.S.C.
§ 105(a), which includes section 521(a)(2). Bankruptcy
judges also have “broad authority ... to take any action that is
necessary or appropriate ‘to prevent an abuse of process.’ ”
Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375, 127
S.Ct. 1105, 166 L.Ed.2d 956 (2007) (quoting 11 U.S.C. §
105(a)). A debtor who promises to surrender property in
bankruptcy court and then, once his debts are discharged,
breaks that promise by opposing a foreclosure action in state
court has abused the bankruptcy process. See Guerra, 544
B.R. at 710.
In re Failla, 838 F.3d 1170 (2016)
63 Bankr.Ct.Dec. 46
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 77
[20] If a bankruptcy court could only lift the automatic stay,
then debtors could violate section 521(a)(2) with impunity. The
automatic stay is always lifted at the end of the bankruptcy
proceedings, see 2 Bankruptcy Law Manual § 10:7 (5th ed.), so
this remedy does nothing to punish debtors who lie to the
bankruptcy court about their intent to surrender property. While
a creditor may be able to invoke the doctrine of judicial
estoppel in state court to force debtors to keep a promise made
in bankruptcy court, its availability does not affect the statutory
authority of
Footnotes
bankruptcy judges to remedy abuses that occur in their
courts. And there is nothing strange about bankruptcy
judges entering orders that command a party to do
something in a nonbankruptcy proceeding. Bankruptcy
courts “regularly exercise jurisdiction to tell parties what
they can or cannot do in a non-bankruptcy forum.” In re
Lapeyre, 544 B.R. 719, 723 (Bankr. S.D. Fla. 2016). Just as
the bankruptcy court may “order [ ] creditors who violate
the automatic stay to take corrective action in the
nonbankruptcy litigation,” the bankruptcy court may “order
the Debtors to withdraw their affirmative defenses and
dismiss their counterclaim in the Foreclosure Case.” Id. The
bankruptcy court had the authority to compel the Faillas to
fulfill their mandatory duty under section 521(a)
(2) not to oppose the foreclosure action in state court.
IV. CONCLUSION
We AFFIRM the order compelling the Faillas to surrender
their home to Citibank. We DENY AS MOOT the motion
to strike.
All Citations
838 F.3d 1170, 63 Bankr.Ct.Dec. 46
* Honorable Roger H. Lawson, Jr., United States District Judge for the Middle District of Georgia, sitting by designation.
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.
In re Stanton, --- B.R. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 78
2016 WL 6299750
Only the Westlaw citation is currently available.
United States Bankruptcy Court,
M.D. Florida,
Tampa Division.
In re: John Dargon Stanton, III, Debtor.
Case No. 8:11-bk-22675
|
Signed October 26, 2016.
Attorneys and Law Firms
Herbert R. Donica, Esq., Donica Law Firm P.A., 106 South
Tampania Avenue, # 250, Tampa, FL 33609, Counsel for the
Chapter 7 Trustee
Benjamin E. Lambers, Esq., Timberlake Annex, 501 E. Polk
Street, Suite 1200, Tampa, FL 33602, Trial Attorney for
United States Trustee—Region 21
MEMORANDUM OPINION ON
FEE APPLICATION
Michael G. Williamson, Chief United States Bankruptcy
Judge
*1 In Baker Botts v. ASARCO, the United States Supreme
Court held that Bankruptcy Code § 330(a) does not authorize
attorney's fees for work performed defending a fee
application because that work is not performed for the estate.1
Here, the U.S. Trustee claims Baker Botts precludes a
professional employed under § 327 from recovering fees for
work supplementing his fee application after the U.S. Trustee
objected to it as deficient. Because the challenged fees were
for work more akin to the preparation—rather than defense—
of a fee application, the Court concludes the work was in
service of the bankruptcy estate and therefore recoverable
under § 330(a).
Background
The Chapter 7 Trustee employed Herb Donica (of the Donica
Law Firm) as his attorney2 and Ed Rice (of Glenn
Rasmussen, P.A.) as special counsel.3 As Trustee's counsel,
Donica and Glenn Rasmussen pursued fraudulent transfer
claims against the Debtor's ex-wife.4
Donica and Glenn
Rasmussen ultimately settled those claims on the estate's
behalf. Under the settlement, the bankruptcy estate recovered
$3.5 million in proceeds from the sale of certain stock, as well
as real property in
California that eventually sold for nearly $3 million.5
After the Court orally approved the proposed settlement,
Donica filed his initial fee application.6
In his first interim fee application, Donica sought
$748,875 in fees.7 Donica's time, which totaled nearly 2,000
hours, was divided into two categories: time spent in the main
bankruptcy case and time spent in the fraudulent transfer
proceeding.8According to his fee application, Donica spent
more than 910 hours in the main case (for a total of $335,550
in fees) and more than 1,085 hours in the fraudulent transfer
proceeding (for a total of $413,325 in fees).
Donica's fee application contained all the information
required for a chapter 7 fee application under Local Rule
2016-1. The fee application included the name of the
individuals who performed the work,9 the amount of time
expended for each item of work,10
the hourly rate
requested,11
the date of employment,12
a discussion of the
criteria relevant in determining compensation to be
awarded,13
a detail of the reimbursable costs,14
and a
verification stating the fees and costs are reasonable for the
work performed and that the application is true and correct.15
The U.S. Trustee objected to Donica's first interim fee
application.16
The U.S. Trustee asserted three grounds for his
objection to Donica's fee application: (1) Donica failed to
provide any meaningful breakdown on how he spent the 900
hours in the main case; (2) Donica failed to describe how he
divided his labor with Glenn Rasmussen in the fraudulent
transfer proceeding or demonstrate that the lawyers did not
unnecessarily duplicate services; and (3) Donica failed to
provide any meaningful narrative regarding the results
obtained from his services.17
In effect, the U.S. Trustee
insisted on the level of detail required for a fee application in
a chapter 11 case.18
*2 In response to the U.S. Trustee's objection, Donica opted
to supplement his initial fee application.19
Although he
believed the time records attached to his initial application
were self-explanatory, Donica filed a detailed 18-page
supplement that addressed the U.S. Trustee's objections.20
In
In re Stanton, --- B.R. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 79
particular, Donica's supplement to his fee application
provided a breakdown of the number of hours spent on eight
different matters, including five adversary proceedings; a
narrative for each of those eight matters; and a description of
how labor was divided between Donica and Glenn
Rasmussen on the fraudulent transfer proceeding.21
At a hearing on Donica's fee application, the U.S. Trustee
conceded the fee supplements largely resolved the
“informational” objections (i.e., failure to provide a
breakdown, description of division of labor, and meaningful
narrative), although there apparently was still some dispute
over the possible duplication of services. So the Court
approved an interim distribution on the application, but
ordered that $75,000 be held back pending further ruling on
the duplication issue.22
After a further hearing, the Court
approved Donica's fee application in its entirety and ruled that
Donica was entitled to the $75,000 originally held back.23
When Donica filed a second interim fee application seeking
$33,840 for time spent on his initial fee application
(among other fees),24
the U.S. Trustee objected that
$27,520 of the fees were unrecoverable under the Supreme
Court's Baker Botts decision.25
In his objection, the U.S.
Trustee advocates a bright-line rule for determining whether
fees are recoverable under Baker Botts: if time is spent on a
fee application after an objection has been lodged, then that
time is necessarily for work defending the fee application and
therefore unrecoverable under §
330(a).26
Here, Donica incurred $27,520 in fees after the U.S.
Trustee objected to his fee application. The U.S. Trustee,
however, reads Baker Botts too broadly.
Conclusions of Law
In Baker Botts, the Supreme Court considered whether time
spent defending a fee application was recoverable under
Bankruptcy Code § 330(a).27
Ordinarily, under the American
Rule, “[e]ach litigant pays his own attorney's fees, win or
lose, unless a statute or contract provides otherwise.”28
The
question before the Court in Baker Botts was whether
Congress intended to depart from the American Rule in
enacting § 330(a), which provides that a bankruptcy court
may award a professional employed under § 327 “reasonable
compensation for actual, necessary services.”29
The Court concluded that § 330's text “neither specifically or
explicitly authorizes courts to shift the costs of adversarial
litigation from one side to the other.”30
Section 330(a)
authorizes reasonable compensation only for “actual,
necessary services rendered,” and the “word
‘services' refers to ‘labor performed for another.’ ”31
Justice
Thomas, writing for the majority, observed that use of the
term “services” imposed a significant qualification on a
court's ability to award fees under § 330(a): only “work done
in service of the estate administrator” is compensable.32
*3 In rejecting the Government's argument that time spent
defending a fee application must be compensable because the
time spent preparing one is, Justice Thomas explained that a
professional's preparation of a fee application is, in fact, a
service to the estate.33
A detailed, itemized bill allows the
trustee to understand the fees incurred. A professional's
defense of a fee application, by contrast, provides no similar
benefit to the estate.
To illustrate the difference between preparing a fee
application and defending one, Justice Thomas offers an
analogy:
By way of analogy, it would be natural
to describe a car mechanic's
preparation of an itemized bill as part
of his “services” to the customer
because it allows a customer to
understand—and, if necessary,
dispute—his expenses. But it would
be less natural to describe a
subsequent court battle over the bill as
part of the “services rendered” to the
customer.34
The touchstone, then, for determining whether fees are
recoverable under Baker Botts is not when the fees were
incurred (i.e., before or after an objection) but rather whether
they were incurred in service to the estate.
Here, the record reflects that the $27,520 in fees Donica
incurred after the U.S. Trustee objected to his first fee
application were for work supplementing his initial fee
application. In particular, Donica filed an 18page supplement
to his fee application35
and a 21page response to the U.S.
Trustee's objection.36
The supplement and response provided
a breakdown of Donica's fees, a description of how labor was
In re Stanton, --- B.R. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 80
divided with Glenn Rasmussen, and a narrative of the results
achieved —information the U.S. Trustee says should have
been in the initial fee applications. To use Justice Thomas'
analogy, Donica's work supplementing his fee application
and responding to the U.S. Trustee's objection was akin to the
mechanic's preparation of an itemized bill as part of his
“services” to the customer.
Had the U.S. Trustee simply objected to Donica's fees
because they were unnecessarily duplicative, the outcome
might be different. A fight over whether fees were
unnecessarily duplicative is more akin to time spent on a
subsequent court battle over the mechanic's bill, which would
not properly be understood as part of his services. Here, the
parties were not fighting over the amount of the bill but
whether it was detailed enough.
Although Donica's fees were incurred after this case was
converted to chapter 7, the U.S. Trustee was asking for the
type of detail required in a chapter 11 case. Under Local Rule
2016-1, fee applications filed by chapter 7 professionals need
only contain the name of the person doing the work, the
amount of time expended for each item of work, the requested
hourly rate, the date of employment, a discussion of the
criteria relevant for determining compensation, a detail of
reimbursable costs, and a verification that the fees and costs
are reasonable and that the application is true and accurate.37
The U.S. Trustee, however, insisted on a detailed description
of the time worked; that the time be itemized by project
category; and that the application contain a narrative of the
services provided and the results obtained—items only
required for chapter 11 cases.38
Given the complexity of this
case and the amount of fees requested (collectively, $1.7
million in the initial fee applications), the Court understands
why the U.S. Trustee insisted on the level of disclosure
required in a chapter 11 case, even if not required.
*4 But the proper way to insist on that level of detail would
have been for the U.S. Trustee to ask that the order approving
Donica's retention require him to comply with Local Rule
2016-1's requirements for fee applications in chapter 11 cases
or to move to compel Donica to do so, either of which the
Court would have readily granted. Had the U.S. Trustee done
so, and had Donica provided the level of detail in his initial
fee application that he did in his supplement, there is no
question he would have been compensated for it. The only
question would have been whether the fees were
commensurate with the level and skill reasonably required to
prepare the application.39
And the U.S. Trustee never
complained that the time spent on the supplement and
response to his objection was unreasonable. The fact that the
U.S. Trustee sought to impose a heightened level of
disclosure through an objection to Donica's fee application
does not change the nature of the work Donica performed and
whether that work should be compensable under § 330(a).
The additional disclosure Donica provided benefitted the
administration of the estate. Among other things, it allowed
the Chapter 7 Trustee, U.S. Trustee, and other parties in
interest to understand the work Donica performed and, if
necessary, the ability to dispute his fees. Under Baker Botts,
it is the nature of the work —not when it was performed—
that determines whether it is compensable. Because Donica's
$27,520 in fees was for work in service of the estate, they are
recoverable as reasonable compensation for services under §
330(a).
The U.S. Trustee worries this ruling will lead to a de facto
two-step fee application process. According to the U.S.
Trustee, § 327 professionals will be encouraged to file “bare-
bones” fee applications. Only when their fee applications are
challenged will professionals supplement their applications
to provide the required level of detail. The U.S. Trustee says
there is no disincentive to discourage professionals from
filing barebones applications since, under this Court's ruling,
they will be compensated for supplementing them. While
understandable, the U.S. Trustee's concerns are misplaced.
For starters, the Court's ruling is not likely to encourage bare-
bones fee applications. As a practical matter, the level of
detail required in chapter 7 cases is not particularly onerous,
and most chapter 7 fee applications are for relatively modest
sums of money. To be sure, this Court's ruling applies to
chapter 11 fee applications—and Local Rule 2016-1 does
impose more onerous requirements in chapter 11 cases. But
the U.S. Trustee overlooks an important fact: professionals
are compensated for their time preparing fee applications.
Because they are compensated for their time, there is no
reason to believe professionals will file bare-bones fee
applications as a matter of course.
Moreover, while the Court certainly is not encouraging a two-
step fee application process, the ultimate harm is minimal.
Assume it should take a professional ten hours to properly
prepare a fee application. Under § 330(a), the professional is
entitled to be compensated for all ten hours. What if the
professional only spends two hours on the fee application
initially, but then spends an additional eight hours
In re Stanton, --- B.R. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 81
supplementing it after an objection by the U.S. Trustee?
Under this Court's ruling, the professional would be
compensated for a total of ten hours—the same as if the
professional had properly prepared the fee application in the
first place. So even if the Court's ruling results in the
occasional two-step fee application process, which the Court
certainly does not encourage, the debtor and the estate are no
worse off.
Finally, the U.S. Trustee's proposed bright-line rule—i.e., any
fees incurred supplementing a fee application after it has been
objected to are unrecoverable—would cause more problems
than the minor ones it solves. Specifically, the U.S. Trustee's
bright-line rule is more likely to require overdisclosure than
it is to prevent underdisclosure since
Footnotes
professionals will know they will not be compensated for any
work once someone lodges an objection to their fee
application. The harm from the overdisclosure caused by the
U.S. Trustee's bright-line rule is primarily twofold: (1)
because professionals are entitled to compensation for
preparing fee applications, overdisclosure will increase the
cost of estate administration; and (2) to the extent the
additional time professionals spend on disclosure is
unreasonable, the Court and parties will face increased time
and expense litigating over the reasonableness of fees. Those
two problems outweigh any benefit from the U.S. Trustee's
proposed bright-line rule.
Conclusion
*5 The takeaway from the Supreme Court's decision in
Baker Botts is clear: it is the nature of the work— not when it
is performed—that determines whether it is compensable.
Only work done in service of the estate administrator is
compensable. Because supplementing the detail provided in
his initial fee application benefitted the estate and was
necessary for the administration of the case, Donica is entitled
to recover $27,520 in fees incurred performing that work. The
Court will approve Donica's second interim fee application in
its entirety, including the $27,520 in fees supplementing his
initial fee application, by separate order.
All Citations
--- B.R. ----, 2016 WL 6299750
1 ––– U.S. ––––, 135 S.Ct. 2158, 2163, 192 L.Ed.2d 208 (2015).
2 Doc. Nos. 68 & 70.
3 Doc. Nos. 208 & 231.
4 Hyman v. Stanton, et al., Adv. No. 8:13–ap–00577–MGW.
5 Doc. No. 554.
6 Doc. Nos. 564. Glenn Rasmussen also filed a fee application. Doc. No. 565. That fee application will be dealt with by a
separate order.
7 Doc. No. 564.
8 Id. at 3.
9 Id.
10 Id. at Ex. B. Donica's fee application attached 158 pages of billing statements detailing the work performed on the case.
Id.
11 Id. at 3–4.
12 Id. at 2–3.
13 Id. at 5–9.
14 Id. at Ex. C.
15 Id.
16 Doc. No. 588.
17 Doc. No. 588 at 1–2. 18 Local Rule 2016-1. Local Rule 2016-1 requires chapter 11 professionals to, among other things,
itemize their time by project categories and provide a narrative of the types of services performed, the necessity for
performing the services, the results obtained, and the benefit to the estate.
In re Stanton, --- B.R. ---- (2016)
© 2016 Thomson Reuters. No claim to original U.S. Government Works. 82
19 Doc. Nos. 593.
20 Id.
21 Id. at 3–18.
22 Doc. No. 609 at ¶¶ 1 & 2.
23 Doc. No. 624. 24 Doc. No. 685.
25 Doc. No. 706. The Department of Justice, on the Internal Revenue Service's behalf, joined in the U.S. Trustee's
objection. Doc. No. 721.
26 Doc. No. 706. The IRS contends it is difficult if not impossible to separate time spent defending a fee application from
time spent supplementing one. Doc. No. 721.
27 135 S.Ct. at 2162–63.
28 Id. at 2164.
29 11 U.S.C. § 330(a).
30 Baker Botts, 135 S.Ct. at 2165.
31 Id. (quoting Webster's New International Dictionary 2288 (def. 4) (2d ed. 1934)). Although not specifically discussed by
the Court, only “services” that are reasonably likely to benefit the debtor's estate or that are necessary to the
administration of the case are compensable. 11 U.S.C. § 330(a)(4).
32 Baker Botts, 135 S.Ct. at 2165.
33 Id. at 2167.
34 Id.
35 Doc. No. 593.
36 Doc. No. 621.
37 Local Rule 2016-1.
38 Id.
39 11 U.S.C. § 330(a)(6).
End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.