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March 2004 issue: DEPAUL SYMPOSIUM DePaul Business and Commercial Law Journal Symposium Emerging Trends in Commercial Law: Surviving Tomorrow’s Challenges April 15, 2004 Topics include : "Post UCITA World"; "Coming Attractions: New Articles 1, 2 and 2A"; "Secret Liens: Liens on "Hot Goods,"Tax Liens, Mechanics Liens and Issues with PACA”; and "Latest Developments in Article 9". All day seminar (includes lunch with keynote speaker): $50 registration fee! Washington Hot News March 26, 2004 The U.S. federal court system set new records for appeals, criminal case, and bankruptcies in fiscal year 2003 (which ended September 30th), but civil case filings dropped from 2002 levels, the Administrative Office of U.S. Courts reported March 16. Want some RECOGNITION? The Bankruptcy Section Newsletter Committee is looking for volunteers to write a Case Analysis for an upcoming edition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although one can use their discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive at www.clla.org. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. Changes to your e-mail address and all other comments can be sent to Editor@clla.org CLLA 205 N. Michigan, Suite 2212, Phone: 312-240-1400 Newsletter design by: |
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the online version can be found here: Sua SponteLouis S. Robin I have three things to note this month: a tribute to the Paige, a recommendation to attend the New England Meeting, and a recap of my and Peter Califano’s recent to Washington, D.C. First, I am pleased to congratulate Paige Barr on her selection as outstanding law student in the 7th Circuit by the American College of Bankruptcy. Paige, for those who don’t know her, is the Editor and Chief for the DePaul Law School’s Business and Commercial Law Journal, which publishes their journal jointly with the League’s Journal. Case Analysis Douglas T. Tabachnik, Esq. In Fleet Bank v. Valente (In re Valente), 2004 U.S. App. LEXIS 3979 (1st Cir. 2004), the application of state law to create a constructive trust captures a fraudulent conveyance that would have escaped under the Uniform Fraudulent Conveyance Act. Summary: The First Circuit reverses the bankruptcy and district courts and permits Fleet Bank to use the Rhode Island common law of resulting trusts to enforce a levy upon real estate that the Debtor transferred to his son in a sham transaction intended to avoid creditors. The blatant fraudulent conveyance failed to meet the literal tests of the Uniform Fraudulent Conveyance Act (“UFTA”) since there was no equity in the property at the time of the transfer to the son and the four year statute of limitations of the UFTA had expired. The First Circuit found reversible error in the bankruptcy court’s failure to consider Fleet Bank’s arguments for the application of Rhode Island common law to impose a resulting trust on the equitable title retained by the Debtor after the transfer of title to the son. Case Law UpdatePaige Barr Withholding Overpayments From Amounts Otherwise Owed to Debtor for Post-Petition Services Does Not Violate Automatic Stay. Debtor operated a nursing home and received payments from Medicare for nursing home care and services provided to its patients. Throughout the year, Medicare made advance payments to debtor based on estimates regarding the amount that would be owed to the debtor in that year. At the end of the year debtor submitted cost reports documenting the care and services provided. That report was audited by Blue Cross, the fiscal intermediary for Medicare. If the amount due differed from the amount already paid, a “retroactive adjustment” was made. Debtor filed bankruptcy in 2001, but continued to operate as a debtor- in- possession. Blue Cross later informed debtor that audits for two previous years revealed overpayments and that Blue Cross intended to “offset” those payments against debtor’s future billings. The court held that the amount withheld was not part of the estate because Medicare had the right to adjust the amount owed to debtor by offsetting it against past overpayments. Furthermore, since the overpayment was never actually owed to the debtor, it was not part of the estate available for distribution to creditors. Thus, § 362(a)(7) was not violated. The court also held that, even if the withholding was viewed as an improper offset, the money could be recouped because the equities weighed heavily in favor of Medicare. Slater Health Center, Inc. v. United States , 2004 U.S. Dist. LEXIS 3091 (D.R.I. Feb. 17, 2004). ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua Sponte
First, I am pleased to congratulate Paige Barr on her selection as outstanding law student in the 7th Circuit by the American College of Bankruptcy. Paige, for those who don’t know her, is the Editor and Chief for the DePaul Law School’s Business and Commercial Law Journal, which publishes their journal jointly with the League’s Journal. Additionally, she assists the League in a variety of projects, including drafting of position papers and other related items. The honor, based upon my personal work with her, is well earned. The American College of Bankruptcy College had its annual ceremony two weeks ago. Paige was one of five students selected The Second matter I want to discuss is the New England Region’s Annual Meeting. As a former Chair of the New England Region, I want to urge all of you to take a look at this meeting. This meeting is held every year over Memorial Day Weekend, and, while it provides important educational sessions, the focus is on spending quality family time. Each year the New England Region finds a different location that is always perfect. This year the site is the Water's Edge Resort & Spa in Westbrook, Connecticut. Nestled on a bluff overlooking Connecticut 's Long Island Sound, you can enjoy Mystic Seaport with its 19th Century ships, take a ride on the Essex steam train, try your luck at one of the two Connecticut Casinos, or spend some time on a wine tasting tour at local vineyards. There is also the traditional banquet, a clam bake, and a dessert party. But most of all, you can expect to have a wonderful time with your family, at a price that is always less than any other of the Region’s meetings. If you haven’t had the chance to experience a New England meeting, please consider. I would also suggest that you might consider the New England meeting for a firm retreat or related event – it provides a perfect setting. For more information, please contact Marc D. Wallick, Wallick & Associates, 51 Jefferson Boulevard, Warwick, RI 02888, 401-461-0100 . wallicklaw@aol.com. Marc is this year’s New England Chair, and a former Recording Secretary of the League. The third and final matter that I want to discuss is Peter Califano and my trip to Washington, D.C. on March 1, 2004. We first attended the Supreme Court oral argument on Hood v. Tennessee Student Assistance Corp., 319 F.3d 755 (6th Cir. 2003). This Sixth Circuit case rejected the State’s assertion of sovereign immunity as a defense to a debtor’s complaint to have a student loan. The League had filed an amicus brief rewritten by Lawrence Kaiser. Eleventh Amendment’s protection of states' sovereign immunity was argued before the high court by Daryl J. Brand, Associate Solicitor General on behalf of the State of Tennessee and Leonard H. Gerson on behalf of Ms. Hood. The Court appeared most anxious to engage and question the Petitioner ( Tennessee). Justice O’Connor immediately engaged the Petitioner by inquiring whether a Bankruptcy Court’s in rem jurisdiction permitted a discharge order over a state’s assertion of sovereign immunity. Justice Kennedy questioned whether it was the petitioner’s position that a state could never be subject to a discharge order. Chief Justice Rhenquist asked whether the statute or rules could be rewritten to provide no need for action by the Bankruptcy Court, at least in the first instance. Justice Scalia similarly questioned whether this issue merely arose due to the statute’s requirement that the debtor commence an adversary action, and that this was possibly overcome by providing different procedural rules. Following this thought, Justice Breyer asked whether Congress couldn’t set a different standard to correct any jurisdictional issue. Justice O’Connor also returned with queries as to whether the state’s position extended to prohibiting the discharge of state liens, a position that could upset sales in the bankruptcy forum. Justice Kennedy questioned whether the United States Trustee was involved in student loan discharge litigation. I also remember Justices Breyer raising the possibility of utilizing Section 105’s equitable powers. One question by Justice Ginsburg (and similar thoughts by the other Justices) may have come from our amicus brief (or at least is addressed in our brief). She asked whether the states should complain that they are parties to an adversary proceeding where, by simple change in statutory language, Congress could have made the discharge automatic or effective if the state had simple notice but then chose not to object or raise the issue on its own. She asked petitioner in substance whether the states should object that Congress actually gave the states greater deference than such a language change would involve. In our brief, we said: “Congress unquestionably has the power under the bankruptcy clause – should it choose to exercise that power – to eliminate or discharge fully and unconditionally a debtor’s obligations or debts to the states. By choosing not to exercise the greater power, but rather to establish a procedure and a standard as a predicate to the unqualified relief that could be imposed Constitutionally, Congress has actually conferred or accorded greater dignity to the States than they would otherwise have and more than the Eleventh Amendment and sovereign immunity require.” Regarding the respondent, there were lesser inquiries. These questions were primarily limited to the role of the Bankruptcy Court in conducting evidentiary hearings on defaults. The Court seemed concerned with the effect of a discharge order following a default. It is difficult and wrong to discern the Court’s ultimate decision based merely on questioning. However, some of us attending were pessimistic prior to the hearing, but afterwards felt optimistic that at least a ruling on narrow grounds was possible on the issue of a student loan discharge. After the oral argument, Peter and I visited the Hill to discuss the proposed bankruptcy legislation pending in Congress. We met primarily with Senate Majority Committee staff. We discussed the proposed bankruptcy bill, and the League’s positions on the commercial provisions. I am pleased to say that our positions were favorably received, although, as similar to what has been stated before, it would be unfair and wrong to suggest that there were any favorable conclusions that could be relied upon. In a similar vein, it seems that the popular consensus on the Hill is that the bill previously passed by the House might be considered by the Senate either (i) by early April, or (ii) by the end of the year when there is a rush of bills and the bankruptcy bill could be attached to one of these. Concerning the first possibility, since we are nearly through March, it is unlikely that anything will happen in the short term (although anything can always happen). Concerning anything at the end of the year, although I personally think such actions are unlikely, we should all be concerned that anything can happen, so we should stay on “our toes.” My best for a happy Easter – Passover holiday with your families. I hope to see many of you in Chicago. Louis S. Robin Case AnalysisIn Fleet Bank v. Valente (In re Valente), 2004 U.S. App. LEXIS 3979 (1st Cir. 2004), the application of state law to create a constructive trust captures a fraudulent conveyance that would have escaped under the Uniform Fraudulent Conveyance Act. Summary: The First Circuit reverses the bankruptcy and district courts and permits Fleet Bank to use the Rhode Island common law of resulting trusts to enforce a levy upon real estate that the Debtor transferred to his son in a sham transaction intended to avoid creditors. The blatant fraudulent conveyance failed to meet the literal tests of the Uniform Fraudulent Conveyance Act (“UFTA”) since there was no equity in the property at the time of the transfer to the son and the four year statute of limitations of the UFTA had expired. The First Circuit found reversible error in the bankruptcy court’s failure to consider Fleet Bank’s arguments for the application of Rhode Island common law to impose a resulting trust on the equitable title retained by the Debtor after the transfer of title to the son. The Debtor’s attempt to avoid Fleets recovery of a portion of the proceeds of the sale of the property and to hold Fleet in contempt for violating the discharge injunction were ultimately thwarted. Facts: In 1989 Fleet National Bank, lent Paul Valente, $180,000.00 secured by real property in Newport, Rhode Island. Valente defaulted on the loan. After the foreclosure sale, Fleet obtained a deficiency judgment for $ 10,648.50. The resulting execution order levied "the goods and chattels and real estate of [Valente] including any and all real estate located within the Town of Middletown, County of Newport, State of Rhode Island." Fleet filed a copy of that order in the land evidence records on September 9, 1993. On June 30, 1992, approximately one year before Fleet obtained the deficiency judgment, Valente transferred title to the Middletown property to his son for no consideration. The son later described his father’s intent when transferring the real estate: “Because he was trying to scam somebody or scam something, I don’t know beat something. It wasn’t out of the generosity of his heart.” The Middletown property was encumbered by a mortgage loan from Citizens Bank, an IRS lien, and Rhode Island state tax liens. At the time of the transfer, there was no equity in the property since it was only worth about $ 150,000.00 and the Citizens Bank mortgage alone was $168,000.00. Valente filed a Chapter 7 case on January 28, 1994. He claimed that he had no assets available for distribution to his creditors. The IRS and the State of Rhode Island released their tax liens on the Middletown property. Valente received his bankruptcy discharge on April 21, 1994. During and after the bankruptcy proceedings, Valente continued to manage, maintain, and live in the Middletown property as if he were the actual owner. He ran a business on the premises, the Valco Construction Corporation, and paid the utilities and other bills. In April 1996, Valente contracted with a realty firm to list and sell the property. In September 1997, after his attempt to sell the property failed, he leased it. Valente signed all of the lease documents and collected the rent money. On April 14, 1999, Valente's son transferred title to the property back to his father, again without consideration. Valente told his son that "he was going to sell it and get his money so he could move to Florida." Two months later, Valente listed the property again. On August 25, 1999, he was able to sell the property for $200,500.00 cash. His son was not involved in the sale and did not receive any of the proceeds. In preparation for the closing on the property, a title attorney determined that Fleet's 1993 execution encumbered the property and would have to be removed before the sale could be completed. Valente contacted Fleet, and Fleet agreed to release its execution if $ 18,000 of the sale proceeds were put into escrow as security for its claim plus interest. Valente placed $18,000 in escrow and the sale closed. Since the IRS and the State of Rhode Island had released their liens, Valente was able to pay off the Citizens' Bank mortgage and still receive approximately $ 24,850.00, in addition to the amount in escrow. Valente reopened his chapter 7 case on February 15, 2000 and filed a motion to recover the escrow funds. Valente argued that since he did not own any property in Middletown when Fleet executed its judgment, Fleet’s lien never attached to his property. Therefore, Fleet’s claim was unsecured when the bankruptcy court discharged his debts in 1994. In addition to asking for an order that the escrow agent turn over the $18,000.00, Valente asked the bankruptcy court to hold Fleet in contempt for attempting to enforce a discharged debt. Fleet responded with its own turnover motion. The bankruptcy court analyzed Rhode Island’s version of the UFTA to determine whether there was any remedy for Fleet. The bankruptcy court ruled that, since Valente lacked equity in the property at the time of the transfer, the conveyance did not come under the provisions of the UFTA and ordered the escrow funds turned over to the debtor. When denying Fleet's turnover motion and ruling in favor of Valente, the bankruptcy court began its explanation with a lament: "While it is unfortunate that a Debtor playing such a blatant shell game with his real estate might prevail, this one probably gets away with it, strictly by operation of law." Fleet appealed to the district court which affirmed the bankruptcy court’s decision. Analysis: The First Circuit reviewed the Rhode Island version of the UFTA and concluded, as did the two courts below it, that there was no remedy under the UFTA. However, the First Circuit went on to conclude that the UFTA did not replace the common law that existed before its enactment. The bankruptcy court, therefore, should have considered Fleet’s claim that it had a lien on the equitable title retained by Valente after he conveyed the Middletown property to his son for no consideration. The value of that interest had appreciated and now afforded a remedy to Fleet that would satisfy its judgment. The appeals court launched into an extensive analysis of the question of whether the UFTA’s enactment pre-empted other remedies available at common law, and concluded that, without specific language to that effect, no pre-emption occurred: Our own case law rejects the proposition that the adoption of the UFTA by a state preempts all common law remedies relating to fraudulent transfers. In Goya Foods, Inc. v. Unanue, 233 F.3d 38, 44-45 (1st Cir. 2000), a case with some striking similarities to this case, the district court imposed a constructive trust, under New York law, to allow a creditor to execute judgment against properties that the debtor was concealing under his wife's name. The district court concluded that the debtor was the true owner of the properties because he purchased them with his money, lived in the residences, and maintained the properties. Goya Foods, Inc. v. Unanue-Casal, 982 F. Supp. 103, 111-12 (D.P.R. 1997). Accordingly, it awarded judgment to the creditor. On appeal, the debtor argued that New York's fraudulent conveyance statute, with its four year statute of limitations, should have barred recovery. We responded that the ‘lack of an effective conveyance’ meant that the UFTA did not apply. Goya, 233 F.3d at 46. Instead, we held that New York's general statute of limitations for fraudulent actions applied, and concluded that the district court was correct in holding that the assets were held in constructive trust for the creditor. Id. at 9-10 Having determined that the UFTA did not pre-empt the application of common law to the conveyance, the First Circuit then analyzed Rhode Island’s common law of constructive trusts. The court concluded that Fleet was correct when it argued to the courts below that such a trust was available to provide it with a remedy. Fleet has maintained that Valente retained equitable ownership of the transferred property and that this ownership was an attachable interest. This claim has a sound basis in Rhode Island law, which uses the resulting trust doctrine to explain the nature of this equitable interest. For example, when the debtor in Tucker v. Denico, 27 R.I. 239, 61 A. 642, 645 (R.I. 1905), took property in his wife's name in order to keep that property out of the reach of his creditors, the Rhode Island Supreme Court recognized this transaction as a fraudulent transfer and imposed a resulting trust upon the property for the creditors' benefit. Likewise, in Mitchell v. Campbell, 48 R.I. 120, 122, 136 A. 249 (1927), the court effectively imposed a resulting trust by holding that an attachable interest is created "when a conveyance for the purpose of defrauding creditors is made of the legal title to real estate without any intention of passing the beneficial interest therein." The equitable interest found by the courts in these cases sufficed to provide the creditors relief from the debtors' fraudulent attempts to avoid attachment. Id. at 14 (footnote omitted). The First Circuit held that when a party transfers ownership of realty to another without any intent to part with the benefits thereof, the transferor retains an equitable interest which is subject to attachment. The court therefore agreed with Fleet that Valente retained an equitable title when he transferred ownership of the Middletown property to his son for no consideration. Fleet’s execution on that interest would be enforced. The court of appeals also considered the timing of Fleet’s assertion of its remedies and whether Fleet was time barred under the applicable statute of limitations. Valente had argued that the UFTA’s four year limitations period applied. The First Circuit held that since the remedy Fleet sought was one at common law, then the applicable limitations period was the ten years which Rhode Island used for fraud actions. Accordingly, Fleet’s turnover motion was timely. Finally, the court quickly resolved the question of whether it was necessary for Fleet to proceed by adversary proceeding, rather than filing a motion for turnover. The court found that the turnover motion which was governed by Federal Rule of Bankruptcy Procedure 9014 afforded the same due process protections as an adversary proceeding. Accordingly, the court felt that to penalize Fleet for proceeding by motion would elevate form over substance. In the court’s opinion, Valente had received adequate notice and an opportunity to be heard. Comment: This result in this case is a strong reminder to bankruptcy trustees, creditors and debtors to look beyond the technical reach of the UFTA, and to consider the applicable state common law, when evaluating a fraudulent conveyance. The Valente case reinforces that common law remedies, such as the doctrine of constructive trust, remain available in the bankruptcy court. It is particular noteworthy that the time periods reached by the state common law may extend beyond the four year UFTA statute of limitations. The Valente case also shows that a court may not require strict compliance with the proper procedure for asserting a right, and still reach the result it believes is appropriate, provided its due process concerns can be addressed. Douglas T. Tabachnik, Esq. Case Law UpdateWithholding Overpayments From Amounts Otherwise Owed to Debtor for Post-Petition Services Does Not Violate Automatic Stay. Debtor operated a nursing home and received payments from Medicare for nursing home care and services provided to its patients. Throughout the year, Medicare made advance payments to debtor based on estimates regarding the amount that would be owed to the debtor in that year. At the end of the year debtor submitted cost reports documenting the care and services provided. That report was audited by Blue Cross, the fiscal intermediary for Medicare. If the amount due differed from the amount already paid, a “retroactive adjustment” was made. Debtor filed bankruptcy in 2001, but continued to operate as a debtor- in- possession. Blue Cross later informed debtor that audits for two previous years revealed overpayments and that Blue Cross intended to “offset” those payments against debtor’s future billings. The court held that the amount withheld was not part of the estate because Medicare had the right to adjust the amount owed to debtor by offsetting it against past overpayments. Furthermore, since the overpayment was never actually owed to the debtor, it was not part of the estate available for distribution to creditors. Thus, § 362(a)(7) was not violated. The court also held that, even if the withholding was viewed as an improper offset, the money could be recouped because the equities weighed heavily in favor of Medicare. Slater Health Center, Inc. v. United States , 2004 U.S. Dist. LEXIS 3091 (D.R.I. Feb. 17, 2004). 401k Contributions are Disposable Income Under § 707(b). The court upheld the bankruptcy court’s decision that 410k contributions are classified as “disposable income” for purposes of determining the debtors’ ability to pay and in concluding that there was substantial abuse warranting dismissal under § 707(b). The court also held that the ultimate question of whether to dismiss for substantial abuse under § 707(b) is reviewed for abuse of discretion. The court rejected debtors’ arguments that it was error for the bankruptcy court to find substantial abuse in the absence of evidence of unfair dealing or bad faith on their part due to standing case law in the Sixth Circuit (seeIn re Krohn, 886 F.2d 123 (6th Cir. 1989). Since the debtors had accumulated retirement savings as well as other personal and real property of potentially significant future value, the court found that the monthly 401k contribution, which was equal to 6 percent of the debtor’s gross income, should be included as disposable income for purposes of determining the debtors’ ability to pay their creditors out of future earnings. Behlke v. Eisen, 358 F.3d 429 (6th Cir. Feb. 20, 2004). Kmart Not Allowed to Pay Pre-Petition Vendors Under the Critical Vendor Doctrine Due to Unsound Order. The court declined to decide whether § 363(b)(1) could support payment of some pre-petition debts because the critical-vendor order was unsound regardless of one’s interpretation of § 363(b)(1). The bankruptcy court did not find that any firm would have ceased doing business with the debtor if it was not paid for pre-petition services, and the scant record would not have supported such a finding had one been made. The bankruptcy court did not find that discrimination among unsecured creditors was the only way to facilitate a reorganization, and it did not find that the disfavored creditors were at least as well off as they would have been had the critical -vendors order not been entered. Even if § 363(b)(1) allowed critical vendors orders in principle, preferential payments to a class of creditors were proper only if the record showed the prospect of benefit to the other creditors. Since the record did not show this, the critical vendor order was rejected. In re Kmart Corp., 2004 U.S. App. LEXIS 3397 (7th Cir. Feb. 24, 2004). Thirteen Days Late Found Too Late Due to Conduct That Went Beyond Neglect. Claimant was injured on Kmart property and sought to file an administrative expense claim in Kmart’s bankruptcy proceeding. Kmart filed for bankruptcy on January 22, 2002. On May 6, 2003, the bankruptcy court sent notice to Kmart’s creditors that requests for payment of administrative expense claims must be submitted by June 20, 2003. The form made clear that any request that was not timely filed would be automatically disallowed without need for the debtor’s objection. Appellant’s attorney did not submit her claim until July 3, 2003, thirteen days late. Claimant’s attorney explained that the late filing was due to his unfamiliarity with administrative claims and bankruptcy law and that he failed to carefully read the court’s notice. The bankruptcy court judge held that “there is [no finding of] any neglect here … so I don’t even have to rise to the level of whether or not it’s excusable [neglect] or not.” Finding that the bankruptcy court judge meant that the failure to timely file was beyond neglect, the court upheld the denial to file a late claim. Even though the bankruptcy court failed to conduct an equitable inquiry to determine whether debt is excusable under Rule 9006(b)(1), the court’s application of the facts resulted in the same outcome and therefore did not justify overturning the bankruptcy court’s ruling. Langel v. Kmart Corp. (In re Kmart Corp.), 2004 U.S. Dist. LEXIS 3149 (N.D. Ill Mar. 1, 2004). State’s Adoption of the UFTA Did Not Preempt Common Law Remedies Applicable to Fraudulent Transactions. Debtor transferred property to his son in an attempt to avoid claims of creditors, prior to creditor’s judgment. Son then transferred property back to the debtor who sold the property. Debtor contended that, since the debtor had no equity in the property at the time of the transfer to the son, it was not an asset subject to attachment under the UFTA. Court held that, while the UFTA did not provide a remedy for the creditor, the UFTA did not preempt the common law remedy of resulting trust for the benefit of the creditor, and the creditor was entitled to such remedy. While the son held legal title to the property, the debtor retained the equitable interest and the creditor’s lien against the debtor’s property clearly extended to such interest. Furthermore, although such interest had no value at the time of the initial transfer, the appreciation in the property’s value made it available to satisfy the creditor’s judgment at the time of the bankruptcy proceedings. Fleet Nat’l Bank v. Valente (In re Valente), 2004 U.S. App. LEXIS 3979 (1st Cir. Mar. 2, 2004). Status as Creditor Not Sufficient to Allege Contempt of an Order Seeking to Protect the Estate. Creditor was prevented from suing debtor for contempt of a bankruptcy court order to which neither was a party. The bankruptcy court issued an order releasing plaintiffs in a product liability action against the debtor from the automatic stay. The bankruptcy court later approved a settlement, in which the insurer reserved its right to pursue others for subrogation. The corporation, which formerly owned the debtor, had agreed to provide insurance for the debtor. When the insurer moved to recover its settlement payment from the corporation, the corporation claimed that the insurer’s action was in contempt of the bankruptcy court’s order. The court held that an adversary proceeding was not the proper vehicle to present a contempt claim, as civil contempt was a method of enforcing a court order, not an independent cause of action. The proper vehicle to enforce a court order is a motion in the original case. However, the corporation was not the proper party to assert any alleged contempt of the bankruptcy court’s order. Generally, contempt claims may only be brought by the party aggrieved by the contemptuous actions. Thus, status as a creditor was not sufficient to allow the corporation the right to allege contempt of an order seeking to protect the estate. Enodis Corp. v. Employers Ins. of Wausau (In re Consol. Indus. Corp.), 2004 U.S. App. LEXIS 4451 (7th Cir. Mar. 9, 2004). Attorney Sanctioned for Improperly Invoking the Bankruptcy Process. Appellants (attorney and his clients) improperly invoked the bankruptcy court process in an attempt to block the progress of a state court civil action. The obstructionist techniques employed by appellants involved a series of bankruptcy filings and concurrent removal petitions from the state court to the bankruptcy court on behalf of certain of the state-court defendants--each removal delaying trial in the state court until the granting of a remand petition. Appellants claimed on appeal that they were denied due process of law because the bankruptcy court failed to afford them notice of the particular sources of sanctioning authority as required by due process. Appellants pointed out that the bankruptcy court cited Rule 9011 as the ground for imposing sanctions in its OSCs, but later referred to its inherent power in its supplemental memorandum decision. Furthermore, appellants argued that the bankruptcy court did not sufficiently inform them of what alleged conduct was charged as warranting sanctions. The Court of Appeals considered the issue to be whether the bankruptcy court’s inherent power can support the attorney’s fees and costs portion of the sanction imposed to depend on whether the appellants were “provided with sufficient, advance notice of exactly which conduct was alleged to be sanctionable and furthermore … [were] aware that [they] stood accused of having acted in bad faith.” The court found that the bankruptcy court’s failure to specify, in advance of the disciplinary proceedings, that its inherent power was a basis for those proceedings, did not serve to undercut its sanctioning authority, since the two OSCs established that the appellants were fully advised of the conduct charged against them and of the fact that the bankruptcy court deemed the charged conduct to have been pursued in bad faith. The court cautioned that “we do not expect, however, that the result reached here will be often justified in future cases where the sanctioned party was not explicitly informed beforehand of the precise ground for the imposition of sanctions.” The court also rejected appellants’ argument that the existence of Rule 11 of the Federal Rules of Civil Procedure and its bankruptcy twin, Rule 9011, severely limits the court’s authority to impose sanctions via its inherent power, due to the inadequacy of rules and statutes available to sanction the appellants’ misconduct. Lastly, the court ruled that a Rule 9011(c)(2) penalty need not be awarded through contempt proceedings. Smith v. Cardinale (In re Deville), 2004 U.S. App. LEXIS 4805 (9th Cir. Mar. 15, 2004). Paige Barr Washington Hot News March 26, 2004 A. U.S. Courts Showed Record Increases For Appeals, Criminal Cases,
Bankruptcies
March 24, 2004 The Federal Trade Commission yesterday released its 26th Annual Report to Congress on the Enforcement of the Fair Debt Collection Practices Act. In the FTC's report, the FTC stated it believed that the number of consumer "complaints" (with the FTC, often logging a call or inquiry about the FDCPA registers as a complaint), "represents a relatively small percentage of the total number of consumers who actually encounter problems with debt collectors." Notwithstanding that somewhat negative tone, the FTC continued to make recommendations to Congress that could lead to greater clarity about the FDCPA including: Exempting attorneys litigating collection maters; and Clarification about the required notice and ability to collect during the 30 day period. A copy of the report is attached. DePaul Symposium 2003-2004 DePaul Business and Commercial Law Journal Symposium April 15, 2004 Registration fee $50. Please click here to have a brochure faxed to you.
Please note that seating for this event is limited. Cost is $50 per person, and includes lunch. If you would like a brochure faxed to you, please send your fax number to sjolie@clla.org. |
I
have three things to note this month: a tribute to the Paige, a recommendation
to attend the New England Meeting, and a recap of my and Peter Califano’s
recent to Washington, D.C.