Appellate Law & Practice

CA1: never too rich to go bankrupt

In Re Capitol Food Corp, 06-2327. A corporate landlord sought to dismiss his corporate tenant’s chapter 11 petition, arguing that it wasn’t filed in good faith. The bankruptcy court held that 11 U.S.C. § 1112(b) contains no “good faith” requirement, and there was no “cause” for relief from the automatic stay. The First notes that there is a split regarding whether “good faith” is required, but concluded that the landlord didn’t even make out a case that the petition was filed in bad faith.  Apparently the best argument he had was the debtor was “Solvent.” But the First points out that there are many reasons that a debtor might seek bankruptcy protection, and then describes the economics of why other debtors might benefit. 

CA1: adventures in the Virgin Islands – a tale of receiverships and abstention

US v. Fairway Capital Corp, No. 06-2023.  The government of the Virgin Islands filed a claim with a receiver.  There were equitable and legal claims.  The District Court stated the procedures for making objections.  There were a number of objections made, including the one that the U.S. District Court for the District of Rhode Island did not have jurisdiction over the equitable claims for possession of land in the Virgin Islands.  Meanwhile, a territorial court was deciding an eviction action over the land. 

So, the first issue is abstention.  The court concludes that Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976) is not required, because although the territorial court was entertaining in rem jurisdiction over the land, “the importance of the Territorial Court's quasi in rem jurisdiction is diminished by the fact that 15 U.S.C. § 687c(b) gives a district court ‘exclusive jurisdiction’ over the property of an SBA receivership estate” (even if Virgin Islands law did govern the effect given to a stipulated settlement) Moreover, the Rhode Island forum was not inconvenient, nor would there be piecemeal litigation.  After going though all the eight factors, the First finds that Colorado abstention is not required, because the only one going for abstention was that the territorial court was first to obtain jurisdiction.

CA1: Collection Due Process, Notice, Mailing, and bankruptcy all collide for tax fun!

Haag v. US, No. 06-2200.  There seem to be a lot of balls dropping in this one.  Unfortunately, despite appearing to be a neat issue of tax procedure, it is just a “notice” and “summary judgment” case, with a two neat twists, one involving how to defeat a “mailing” affidavit and the other involving bankruptcy.  Anyway, some tax payers didn’t pay their taxes.  The government brought suit to reduce to judgment federal tax assessments against them.  It seems that the government prevailed, but it wasn’t appealed.  While that action was pending the defendants sued the US saying that the tax liens were invalid because they didn’t get a Collection Due Process ("CDP") hearing before the IRS, and the IRS didn’t notify them of their right to have one before an “unbiased officer.”  See 26 U.S.C. § 6320.

CA1: burdens of proof and modifying mortgages of straddling properties in bankruptcy

Eastern Savings Bank v. LaFata, No. 05-2510.  In this bankruptcy case, the First deals with the issue of whether, “the Bankruptcy Code's protection of mortgage lenders [in 11 U.S.C. § 1322(b)(2)] against modification of claims secured by a principal residence applies when the residence in fact lies mostly on a lot abutting the mortgaged property.”  The facts of the case read like a law school hypothetical, with everyone (including, it seems the court) making mistakes and building homes on two plots of land.

The statute reads:

[A Chapter 13 plan may] modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.

Read on!

CA1: Old Pennsylvania liquor licenses in bankruptcy

Ground Round Inc. v. Abboud,  No. 06-9002 (3/30/07) Ground Round is a chain of restaurants.  In 1977 they leased some property in Pennsylvania from Howard Johnson (the semi-defunct chain of restaurants) to use a restaurant.  They then got a liquor license, and extended the lease.  Then Ground Round filed for bankruptcy, and “rejected” the lease under 11 U.S.C. § 365, but claimed the right to retain the liquor license.  So, “the partnership” began an adversary proceeding, seeking specific performance of the lease, and return of the liquor license.  But, here is where it gets interesting: What is a liquor license?

CA1: Bankruptcy and divorce differentiate between claims and equitable interests

Ford v. Skorich, No. 06-2395 (3/30/07).  This is where divorce law collides with bankruptcy.  Under New Hampshire law, where a family court issues an order retraining the parties from disposing of property, both parties have an equitable interest in the property.  The divorcing couple had a property in Maine, and the husband nevertheless began to stake steps to sell the property.  The family could got wind of this and because “the debtor had ‘violated almost every order that this Court has made" and had ‘concealed assets and diverted assets, and taken title to assets in the names of third parties’…" it directed that the proceeds be placed in an escrow account controlled by the parties’ counsels.  It gets better?  Keep reading.

CA1: cellular cloning in bankruptcy

PR Telephone Company v. Advanced Cellular, No. 06-1332.  This is a contract dispute that arose in a bankruptcy proceeding between a wholesaler and retailer of cellphone services and number.  Avanced Cellular, the debtor, claims that rather than owing Puerto Rico Telephone, money, Advanced Cellular owed it money, because, amongst other things, PR Telephone Company needed to reimburse it for “cloning” of numbers by third parties.  Just in case you don’t know:

Cloning occurs when a third party uses a device to steal the identifying information of an authorized cellular telephone number through the air waves and then uses the stolen information to make calls that appear to have originated from the authorized number. Cloning surfaced in the cellular telephone industry in the early 1990s. In response to this problem, which placed significant financial strain on Advanced Cellular and Puerto Rico Telephone's other resellers, Puerto Rico Telephone began to reimburse resellers for losses suffered from cloning. To receive reimbursements, Puerto Rico Telephone required resellers to submit claims within 90 days of billing.

PR Telephone Company argues that it had no contractual duty to reimburse at all.  The Bankrupty Court disagreed.  The District Court affirmed based on another provision in the contract.  The First reverses.  It holds that the contract was unambiguous, and therefore all the extrinsic evidence considered by the courts can’t be considered. 

CA1: claims against officers were derivative

In re. Ontos, Inc. Nos. 06-1512 and 06-1513 (3/1/07)  This is a story of a company that constantly failed. Eventually, it was purchased by a company controlled by its new CEO.  Two terminated employees of a brought suit for lost wages asserting various state law claims against the officers in their personal capacity -- including fraudulent transfers and "alter ego" claims in state court.  While their suit was pending, the company filed for bankruptcy, but the bankruptcy court allowed the state-court action to continue.  Eventually, an agreement (with the trustee) was reached.  But, it required the approval of the bankruptcy court.  The trustee argued that it was he that had the exclusive right to compromise claims because they were part of the estate under 11 USC Sec. 541(a), or "could have been asserted at his discretion for the benefit of Ontos's creditors pursuant to § 544."  But, various backers of the company didn't want to compromise.  Applying Delaware law, Bankruptcy Court, District Court, and First sides with the trustee because "fraudulent transfer" is among the things that can be compromised by the trustee, and creditors don't have standing to object unless the "trustee or debtor in possession unjustifiably fails to pursue the claim."  Likewise, the fact that the employees sued the officers does not matter, because the claims they asserted against the officers were derivative of the duties they owed to the corporation.

Regarding the "alter ego and successor liability" claims, the court points out that on the facts of the case, they were derivative, so the trustee can settle them, and these were core proceedings that the Bankruptcy Court had jurisdiction to approve.

CA9: How the government can’t clean up its mess with a perjury charge

US v. Castillo-Basa, No. 05-50768.  This case from the Ninth Appears not to make sense.  Then it makes sense.  Then you realize its sheer elegance.  It involves double jeopardy.  In includes non-lawyerly references to OJ Simpson by a dissent that wants to give the government unlimited bites at the apple.

Marrama affirmed

The Supreme Court affirms the decision in In re: Robert Louis Marrama, No. 05-1858, which we covered here.  The court holds that the debtor forfeited – not waived – his right to convert his bankruptcy to chapter 13.  The court relies on the inherent authority of the bankruptcy judge to prevent an abuse of process, but does not explain what constitutes “bad faith.”  Quizlaw has some commentary.