Appellate Law & Practice

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.

CA1: satisfied liens can be avoided

In Re Wilding, No. 05-9011 holds that under 11 U.S.C. § 522(f), a debtor can avoid a judicial lien if the lien (upon property potentially protected by a homestead exemption) existed at the filing of the bankruptcy petition but was satisfied after the bankruptcy case closed and before the debtor filed a motion to avoid.  It seems that the debtor inadvertently listed a secured debt as unsecured, and after the case was closed, he refinanced the property, satisfied the debt, and filed a motion to re-open, seeking to take advantage of 11 U.S.C. § 522(f).  The bank, however argued that since the lien no longer exists, he can’t avoid it.  But the First sides with the debtor, and after analyzing the grammar of the statute, holds that what matters is whether the lien existed at the time the debt applied. Since it is unclear what all the fuss is about, the court remands to allow the creditor to assert equitable defenses, because the court would be using its power to issue an order nunc pro tunc. 

CA1: Bankruptcy diversity jurisdiction bonanza !

Siaca v. DCC Operating, Inc., 05-9012.  Continuing with the string of BAP cases, Judge Smith starts using big words.

Although an involuntary bankruptcy petition was filed, in a suit in a District Court, non-diverse parties intervened in a diversity action that was pending and in the summary judgment stage (with liability being the only remaining issue), alleging retention of payments in breach of trust.  After the non-diverse parties intervened at the District Court, they asked that the matter matter to the bankruptcy court.  But, while the motion to refer was pending, they initiated an adversarial proceeding in bankruptcy court!  Then, the original motion for referral was granted, and the bankruptcy court docketed a second adversarial proceeding!  The bankruptcy court then determined liability and issued a final judgment under Fed. R. Civ. P. 54(b).

CA1: relation-back in bankruptcy

Ostrander v. Gardner, (In Re Millivision).  No. 06-9006.  This case involves the trustee’s power under 11 U.S.C. § 544(a) to avoid an unperfected and unsecured security interest in assets.  The appellants unsuccessfully argued that the trustee could not invoke this power, because 11 U.S.C. § 547(c) permits the creditors later perfection to “relate back” to the date of the original loan.  (These events took place in under a week.)  The First holds that 11 U.S.C. §§ 547(c), (e) is not “generally applicable [relation-back] law” because other caselaw and legislative history says that reference is to non-bankruptcy relation-back provisions. 

Finally, the equitable arguments are dismissed by pointing out that the creditors could have secured their interests before advancing the money.

CA1: refinancing can get complicated in bankruptcy

In Re: Lazarus, No. 06-1982, vacates the grant of summary judgment to the debtor in a bankruptcy action. This case starts with two sister that bought some property as joint tenants, with a mortgage.  Then they refinanced it.  The holder of the second mortgage, GMAC waited to record the mortgage.  In Bankruptcy, the trustee attempted to avoid GMAC’s mortgage because GMAC waited until within 90 days of the filing of the petition to record (see 11 U.S.C. § 547(b)).  The Bankruptcy court and the District Court disagreed, noting that no debtor could have been prejudiced by GMAC’s laziness.

The says, “...the fact remains that recognizing the mortgage would give GAMC ‘more than it would receive’ without it, which is why it is fighting to retain the mortgage” and because GMAC waited, “section 547(e) requires that the transfer be deemed to have occurred on the date of perfection.” 

The First rejects the “earmarking doctrine” where “courts view the funds as transferred by the guarantor to the creditor through, but not by, the debtor.”  Instead, it breaks down all the elements of a refinancing, and decides that 547 needs to be applied “formally” and “mechanically.” 

The First concludes that the record needs to be more fully developed on the argument that the debt comes under 547(b)’s provisions for “substantially contemporaneous” exchanges of “for new value given to the debtor.”

Jay S. Fleischman, Esq. comments here.

Note: This is a very well-researched and reasoned opinion.

CA1: winners can’t appeal

In Re: Shkolnikov, No. 06-9003, holds a victorious interpleader stakeholder cannot appeal from a BAP’s order that held that the debtor (a tortfeasor with an insurance policy) had conveyed his rights in the policy to the tortfeasors.  “That sort of dissatisfaction, without more, cannot confer a right to appeal upon a successful litigant.”