San Antonio bar association meeting Hon. Craig A. Gargotta United States Bankruptcy Judge, Western District of Texas

Bankruptcy Case Law Update The United States Supreme Court has recently granted certiorari in three bankruptcy cases: In re Jevic Holding Corp., 787 F.3d 173 (3rd Cir. 2015). In re The Vill. at Lakeridge, LLC, 814 F.3d 993 (9th Cir. 2016). Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016).

In re Jevic Holding Corp., 787 F.3d 173 (3d Cir. 2015). The case involved a trucking company that was the subject of a leveraged buyout resulting in revolving credit and first priority liens in favor of buyer and financier in all of the company’s assets. The company then filed for bankruptcy under Chapter 11 with debtor owing 53 million to the buyer and 20 million to general unsecured creditors and priority tax liens. Two lawsuits were subsequently filed: Class action by the drivers for the company for WARN Act claims. Committee alleging avoidance actions. This lawsuit settled, but the Trustee and drivers for the company objected, alleging that: 1) The settlement violated the absolute priority rule; and 2) The committee breached its fiduciary duty by entering into a settlement that did not include the drivers.

In re Jevic Holding Corp., 787 F.3d 173 (3d Cir. 2015). The Third Circuit held that although the Bankruptcy Code does not expressly authorize structured dismissals, it does not prohibit them. Unless the structured dismissal creates a complete evasion of the protections of the plan, a bankruptcy court has discretion to order the dismissal. Further, the court found that structured dismissals do not need to follow the absolute priority rule. The drivers had argued that the absolute priority rule did apply to structured dismissal and further argued that the requirement that plans of reorganization be “fair and equitable” should also apply to settlements and compromises.

In re Jevic Holding Corp., 787 F.3d 173 (3d Cir. 2015). In deciding the application of the absolute priority rule to structured dismissals, the Third Circuit analyzed two cases. Matter of Aweco, 725 F.2d 293 (5th Cir. 1984): Held that the “fair and equitable” standard for settlements means that they must be compliant with the absolute priority rule. In re Iridium Operating, 478 F.3d 452 (2d. Cir. 2007): The 3rd Circuit based its holding in Jevic on this case. The Second Circuit held that the “fair and equitable” standard for settlements does not mean settlements that do not comply with the absolute priority rules are not approvable.

In re Jevic Holding Corp., 787 F.3d 173 (3d Cir. 2015). The Jevic Court limited its holding by emphasizing that compliance with the priority scheme is usually dispositive of the “fair and equitable” question, but in limited circumstances, deviations were appropriate In this case, the drivers admitted that a plan could not be confirmed and Chapter 7 conversion would net zero to any unsecured creditors.

In re The Vill. at Lakeridge, LLC, 814 F.3d 993 (9th Cir. 2016). The case involved an LLC debtor who filed a Chapter 11 case. The LLC was managed by a single member, MBP Equity Partners 1 LLC. Both MBP and U.S. Bank held sizeable claims against debtor’s assets. After debtor filed bankruptcy, MBP sold its claim to Dr. Robert Rabkin, who did not have a relationship or connection with MBP outside of a business and personal relationship an MBP board member. Rabkin paid $5,000 for MBP’s 2.76 million claim, and under the proposed reorganization plan, stood to receive a $30,000 distribution. The problem arose because at least one of the two creditors (Dr. Rabkin or U.S. Bank) needed to vote to accept the plan in order for the plan to be confirmed under § 1129(a)(10) of the Bankruptcy Code.

In re The Vill. at Lakeridge, LLC, 814 F.3d 993 (9th Cir. 2016). A vote by an insider, however, does not count for the purpose of satisfying § 1129(a)(10). Therefore, Rabkin’s vote would only satisfy § 1129(a)(10) if he were not an insider. U.S. Bank used Rabkin’s insider status to move to disallow his claim, and the bankruptcy court agreed. The Ninth Circuit held, in this case, that “a person does not become a statutory insider solely by acquiring a claim from a statutory insider.” The Court based its holding on two factors. First, insider status attaches to the claimant, not the claim. Second, it cannot be determined that someone is an insider by just acquiring an insider claim. A “fact-intensive inquiry” must be conducted.

Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016). The issues in this case were as follows: 1) Did the bankruptcy code repeal the FDCPA and; 2) Whether filing of a knowingly time barred proof of claim violates the FDCPA. Consumer in this case filed for bankruptcy relief under Chapter 13 and the debt collector subsequently filed a proof of claim. This proof was barred by the statute of limitations, and it was clear from the face of the document. Consumer sued debt collector on the basis that the filing of this proof of claim was a violation of the FDCPA because it was “deceptive and misleading” and “unfair and unconscionable.” The district court determined that debt collector had a right to payment, even if time- barred, and that there exists a conflict between the bankruptcy code and the FDCPA. Consumer then appealed to the Eleventh Circuit.

Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016). The Eleventh Circuit based its holding in this case on its earlier holding in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014). The court reaffirmed that the filing of a time-barred proof of claim is prohibited by the FDCPA. Further, the court determined that the Bankruptcy Code and the FDCPA can be reconciled. However, the Eleventh Circuit is mostly alone in its conclusion. The Fourth, Seventh, and Eighth Circuits do not follow the Eleventh Circuit’s holding. The Fifth Circuit currently has a case on appeal that deals with this issue. Robinson v. JH Portfolio Debt Equities, LLC (In re Robinson), 2016 WL 4069395 (W.D. La. July 28, 2016).

Excusable Neglect: Standard and Usage Under Federal Rule of Bankruptcy Procedure 1007(c), a debtor must file “the schedules, statements, and other documents required by subdivision (b)(1), (4), (5), and (6) . . . with the petition or within 14 days thereafter . . . .” Once the fourteen-day deadline for a debtor to file his schedules and statements expires, the Court may not enlarge the time in which to file except where the debtor shows that the failure to act was the result of excusable neglect. See Fed. R. Bankr. P. 9006(b)(1). Thus, a debtor must demonstrate that their failure to act within the deadline was the result of excusable neglect in order to seek an extension of time after the 14-day deadline.

Responding to Trustee’s Motion to Dismiss In Responding to a Trustee’s Motion to Dismiss for failure to file Annual Statement of Income and Expenses Pursuant to 11 U.S.C.§521(f)(4)(B), simply filing the statement with the Court is not enough to overcome dismissal. Debtor must file a response to Trustee’s motion. Once a response is filed, this issue can either be settled in open court or through a conference with the Trustee. If a response is not filed, the Court will grant Trustee’s dismissal.

Kessler and Heinzle Opinions In the Matter of Kessler, 2016 WL 3667575 (5th Cir. 2016). In re Heinzle, 511 B. R. 69 (Bankr. W. D. Tex. 2014). Both opinions deal with denial of the Chapter 13 discharge when the debtor fails to make all direct payments required under the plan. The debtors, in both cases, did not qualify for discharge because both failed to make direct payments to home mortgage lenders.

Kessler and Heinzle Opinions Both cases held that direct payments qualify as payments under the plan. What are direct payments: Payments that are paid directly by debtor to the creditor without involvement of the Trustee. Why do these holdings matter: because §1328 purports that a debtor must make “all payments under the plan” in order to get a discharge.