Thursday, February 25, 2016

Fifth Circuit Report: Oct.-Dec. 2015

Originally published by Steve Sather.

The Fifth Circuit decided cases dealing with appellate procedure, exemptions, judicial estoppel, jurisdiction, sanctions, standing and surcharging collateral during the fourth quarter of 2015.  A common theme among the cases is parties being disappointed in a variety of contexts, including having an appeal dismissed on procedural grounds, having a lawsuit dismissed based on incomplete filings in a bankruptcy case, losing exemptions based on unfortunate timing and failure to establish damages after dismissal of an involuntary petition.  
Appellate Procedure
Neurology andNeurophysiology Associates, P.A. v. Tarbox (Matter of Neurology andNeurophysiology Associates, P.A.), 2015 U.S. App. LEXIS 18007 (5thCir. 10/15/15).

Debtor’s charter was forfeited in 2009.   Under Texas law, it remained as a legal entity for three years for purposes of winding up.   Five years later, debtor filed a chapter 7 petition.     Case was dismissed on motion of a creditor.  

Debtor then appealed the dismissal but failed to file a timely brief in the district court.   Creditor moved to dismiss the appeal.   Several days later, debtor filed a motion to extend time and a proposed brief.   Debtor contended that its counsel did not receive the Notice of Docketing Record because notice was sent to an outdated email address.    District court dismissed the appeal.    The Fifth Circuit found that the district court did not abuse its discretion in denying the request to extend the deadline to file the brief.  


Brown v. Sommers(Matter of Brown), 2015 U.S. App. LEXIS 20457 (5th Cir. 11/24/15).

Chapter 11 debtor who was domiciled in Florida died during pendency of case.  Court converted case to chapter 7 and appointed a personal representative to assert the interest of the debtor.  Personal representative asserted an exemption under the Texas Estates Code and spouse asserted her own allowance under the Texas Estates Code.  Bankruptcy Court entered final order providing that surviving spouse could not be paid out of bankruptcy estate and submitted proposed findings and conclusions to district court on allowance to be granted from probate estate.  Surviving spouse appealed from District Court’s order adopting bankruptcy court’s findings but not from bankruptcy court’s separate final order.  As a result, surviving spouse forfeited appeal on issue of whether widow’s allowance could be paid from bankruptcy estate.

Although debtor was domiciled in Florida at time of his filing, he had not lived there for two years.  Because he lived in Texas for the 180 days preceding two years before the filing date, his exemptions were determined by Texas law.  However, personal representative could not claim allowance under Texas Estates Code because debtor was alive on date of petition and snapshot rule applied.  Court held that Frost and Zibman did not abrogate the snapshot rule but instead operated to limit exemption based on subsequent events.

Surviving spouse was not entitled to allowance under Texas Estates Code because debtor was not domiciled in Texas at time of death.  Instead, allowance was governed by Florida law where he was domiciled.  Florida only allowed a widow’s allowance of $18,000.  Further, this amount could only be paid from the probate estate, not the bankruptcy estate.

Judicial Estoppel
Allen v. C &H Distributors, LLC, 2015 U.S. App. LEXIS 22567 (5th Cir. 12/23/15)

Debtors filed chapter 13 in 2009 and confirmed a plan. Approximately a year and a half into their chapter 13 case, the debtors filed a personal injury suit.   They did not disclose the suit in their pending bankruptcy.  In April 2014, the bankruptcy court closed the case without a discharge due to failure to complete a financial management course.    In September 2014, the defendants filed a motion for summary judgment based on judicial estoppel.   The district court granted this motion.

The Fifth Circuit affirmed, finding that the debtors had taken inconsistent positions, that the bankruptcy court had accepted the debtors’ position in confirming the plan and that the failure to disclose was not inadvertent.   

The court rejected the argument that the debtors had no motive to conceal the asset since their case was closed without a discharge.   However, the court found that the relevant time frame is when the debtors failed to make the disclosure so that the subsequent failure to receive a discharge was not material.

The Fifth Circuit modified the district court’s order to allow the case to be reopened in the event that the debtor’s bankruptcy was re-opened and a chapter 7 trustee chose to intervene.     


Collins v.Sidharthan (Matter of KSRP, Ltd.), 2015 U.S. App. LEXIS 21807 (5thCir. 12/15/15)

KSRP owned and operated a hotel in South Padre Island.   It contacted Collins to represent it in making and litigating storm damage claims against insurance companies.    Sidharthan signed a contingency fee agreement on behalf of KSRP.   

However, when Collins attempted to represent KSRP on claims, Sidharthan denied that he was authorized to do so.   Collins sued both KSRP and Sidharthan.    Collins non-suited his claims against KSRP.    Nine days later, KSRP filed for bankruptcy.   Sidharthan removed the state court action to bankruptcy court and asserted an indemnity claim against KSRP.

The bankruptcy court found that it had “related to” jurisdiction because of Sidharthan’s indemnity claim against the estate.    Because the parties did not consent to entry of a final judgment, the bankruptcy court submitted proposed findings of fact and conclusions of law to the district court.   The bankruptcy court found that Collins’s claims were against KSRP and not Sidharthan.   However, since Collins had non-suited the claims against KSRP, he could not recover.   Because KSRP had been dismissed from the state court action and Sidharthan had not filed a claim in the bankruptcy, he did not have a claim.   The district court adopted the bankruptcy court’s findings.

Collins appealed, alleging that the bankruptcy court lacked jurisdiction under 28 U.S.C. §1334.   Collins claimed that the indemnity claim raised by Sidharthan was illusory and should not have conferred jurisdiction on the bankruptcy court.    The Fifth Circuit held that jurisdiction could not be based on the outcome of the case.    There was related to jurisdiction so long as the case could conceivably had an effect on the estate being administered in bankruptcy.   Had the indemnity ot claim been successful, it would have had an effect on the estate.   Therefore, jurisdiction was present. 


Treaty EnergyCorp. v. Hallin (Matter of Treaty Energy Corp.), 619 Fed. Appx. 443 (5th Cir. 10/27/15).

Debtor sought sanctions after involuntary petition against it was dismissed.    Part of its damage claims included an allegation that it was forced to sell restricted shares at a discount due to the bankruptcy.   The bankruptcy court granted summary judgment finding that the restricted shares sold for the same amount before, during and after the involuntary petition.    Additionally, the debtor failed to establish that it lost an actual sale at a higher price.


FortuneNatural Resources Corp. v. United States Department of Justice, 806 F.3d 363 (5th Cir. 11/19/15)

Fortune held a 12.5% interest in a lease operated by ATP Oil & Gas and also filed an unsecured claim in its bankruptcy.   ATP sought to sell substantially all of its assets, but did not seek to sell the lease in which Fortune had an interest.   Fortune objected to the sale.   The bankruptcy court approved the sale over Fortune’s objection.    Fortune appealed to the district court.   However, the sale order was not stayed and the sale closed.   The district court dismissed the appeal on the basis that Fortune lacked standing to appeal and because the appeal was statutorily moot due to the fact that the sale had closed.

The Fifth Circuit affirmed.    The Fifth Circuit held that in order to appeal, the party must be a “person aggrieved,” a standard which requires that the party must be “directly and adversely affected pecuniarily by the order of the bankruptcy court.”    Fortune argued that because prior versions of the sale order arguably provided for payment of decommissioning costs associated with Fortune’s lease that the failure to include this provision in the final order directly and adversely affected its pecuniary interest.    However, the Fifth Circuit held that what was relevant was not whether another possible sale order would have been better for Fortune but whether Fortune could have required payment of the decommissioning costs from the estate if the sale had not taken place.   Because Fortune could not show that it could have accessed the assets of the estate but for the sale order, it lacked standing.   

Surcharge Collateral

SouthwestSecurities, FSB v. Segner (Matter of Domistyle, Inc.). 2015 U.S. App. LEXIS 22787 (5th Cir. 12/29/15)

Trustee attempted to sell property subject to secured creditor’s lien.   However, only offer received was below the amount of secured debt and lender did not agree to sale.    Trustee then abandoned the property.   Trustee sought to surcharge collateral for amounts spent by estate to preserve the property.   Creditor argued that amounts spent while trustee was trying to sell the property were for the benefit of the estate rather than for the creditor and could not be surcharged under 11 U.S.C. §506(c).   Bankruptcy court allowed surcharge as a priming lien.   Fifth Circuit affirmed, finding that creditor’s argument would gut §506(c).   

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

from Texas Bar Today
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