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Revocation of Bankruptcy Discharge Statute of Limitations Is Not Jurisdictional

In Weil v. Elliott, decided June 14, 2017, the Ninth Circuit Court of Appeals decided the statute of limitations for the filing of an action to revoke a debtor's discharge is not jurisdictional and can be waived if not timely raised as an affirmative defense.

Debt Non-Dischargeable Without Making False Representation to Creditor

In Husky International Electronics, Inc. v. Ritz published on May 16, 2016, the Supreme Court of the United States ("SCOTUS") found a debt not dischargeable because of the debtor's intercompany transfer scheme to avoid paying the debt. The debt was owed by Chrysalis Manufacturing Corp. but its director Daniel Lee Ritz, Jr. ("Ritz") drained any assets available to pay that debt by transferring money to other entities owned by Ritz. Ritz then filed for bankruptcy when Husky came after him to recover the debt. Reversing the lower courts, the SCOTUS found the debt non-dischargeable. Even though Ritz made no direct false representation to Husky, the SCOTUS found his intercompany transfer scheme constituted actual fraud such that the debt was non-dischargeable, holding that that Section 523(a)(2)(A) "encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation." 

ESTOPPEL TO THE RESCUE: OBJECTIONS TO EXEMPTIONS ON THE BASIS OF BAD FAITH MAY SURVIVE LAW V. SIEGEL IN CALIFORNIA

On March 4, 2014, the Supreme Court of the United States struck down the Ninth Circuit's imposition of an equitable surcharge on the basis of bad faith against a debtor's exempt property in Law v. Siegel, 134 S.Ct. 1188 (2014). The Supreme Court held that the general equitable powers of Bankruptcy Code Section 105(a) did not provide authority for judge-made exemptions to explicit mandates of the Bankruptcy Code. The Supreme Court emphasized that "federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code," and that any basis for denial of a state law exemption must arise under state law. Id. at 1197-98. As a result of Law v. Siegel, a growing number of cases have held that bankruptcy courts lack the authority to disallow a debtor's claimed homestead exemption based on Section 105(a), whether indirectly by denying leave to amend, or directly by disallowing the exemption; therefore, effectively rendering an objection to claimed exemptions on the basis of bad faith a nullity.

BANKRUPTCY PROFESSIONALS MUST WORK PRO BONO BEFORE GETTING PAID

On June 15, 2015, contrary to the standing authority in the Ninth Circuit and a majority of lower courts, the United States Supreme Court in Baker Botts L.L.P. v. ASARCO LLC, 2015 U.S. LEXIS 3920 (June 15, 2015) ruled in a 6-3 decision that 11 U.S.C. §330(a) does not authorize compensation for attorney fees incurred in defending fee applications.

NINTH CIRCUIT EMBRACES THE PURE DOMINION TEST FOR INITIAL TRANSFEREE STATUS UNDER 11 U.S.C § 550

In Mano-Y&M Ltd. v. Field (In re Mortgage Store, Inc.), 2014 U.S. App. LEXIS 22981 (9th Cir. Haw. Dec. 5, 2014), the Ninth Circuit explicitly rejected the control test's flexible, equitable approach and embraced the pure "dominion test" adopted in Universal Serv. Admin. Co. v. Post-Confirmation Comm. of Unsecured Creditors of Incomnet Commc'n Corp. (In re Incomnet), 463 F.3d 1064, 1071 (9th Cir. 2006). In so doing, the Ninth Circuit clarified that the touchstones in the Ninth Circuit for initial transferee status are legal title and the ability of the transferee to freely appropriate the transferred funds. The Court explicitly rejected the reasoning in McCarty v. Richard James Enters. (In re Presidential Corp.), 180 B.R. 233, (9th Cir. B.A.P. 1995), insofar as the Bankruptcy Appellate Panel's ruling conflicts with the pure dominion test articulated in Incomnet

VALIDATION OF A FORECLOSURE SALE THROUGH RETROACTIVE ANNULMENT OF THE AUTOMATIC STAY

In Cruz v. Strauss (In re Cruz), 2014 Bankr. LEXIS 3687(B.A.P. 9th Cir. Aug. 29, 2014), the Bankruptcy Appellate Panel for the Ninth Circuit recently affirmed retroactive annulment of the automatic stay to validate a foreclosure sale. In Cruz, a five-percent interest in residential real property was transferred to the debtor post-petition. The deed transferring the five-percent interest to the debtor was recorded at 12:52 p.m. on July 15, 2013, and on the same day, at approximately 2:18 p.m., the property was sold at a trustee's sale. At the time of the sale, the trustee was unaware of the debtor's bankruptcy; however, after becoming aware of the debtor's bankruptcy filing, the trustee moved the bankruptcy court to annul the automatic stay to validate the sale or, in the alternative, to confirm that no stay was in effect at the time of the sale. The Court held that a stay violation could be cured by retroactive annulment where cause exists to annul the stay pursuant to 11 U.S.C. § 362(d). The Court reasoned that although the property interest was transferred post-petition, the automatic stay was in effect at the time of the trustee's sale pursuant to 11 U.S.C. § 362(a)(5); however, the Court further reasoned that an action taken in violation of the automatic stay that would otherwise be void may be declared valid if cause exists for retroactive annulment of the stay pursuant to 11 U.S.C. § 362(d). The Court concluded that a bankruptcy court could find that cause existed where a debtor, who had filed a skeletal chapter 7 case in bad faith, took a fractionalized interest in residential property on the day it was sold in foreclosure, the buyer had no knowledge of the stay at the time of sale, and the buyer acted promptly to obtain relief from stay once it learned of the debtor's bankruptcy.

BAP holds that post-petition earnings earned during Chapter 11 revert to debtors upon conversion to Chapter 7

The U.S. Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") recently held in Wu v. Markosian (In re Markosian), BAP No. NC-13-1339-JuKiD (9th Cir. BAP March 12, 2014), that a bonus earned by the debtor by his employer for services performed while the case was pending in Chapter 11 reverted to the debtors upon conversion of the case to Chapter 7 and was not property of the Chapter 7 bankruptcy estate. Earnings received post-petition in a Chapter 11 case are generally property of the estate under Section 1115(a)(2) of the Bankruptcy Code but are not property of the estate in a Chapter 7 case under Section 541(a)(6) of the Bankruptcy Code. The BAP based its decision on Section 348(f)(1)(A) of the Bankruptcy Code which excludes a debtor's post-petition earnings from property of a Chapter 7 estate upon conversion from a Chapter 13 case. The BAP found no difference between the conversion of a Chapter 13 case to a Chapter 7 case versus the conversion of a Chapter 11 case to a Chapter 7 case. However, in Markosian, the case was originally filed as a Chapter 7, converted to Chapter 11, and then converted back to Chapter 7. The BAP, citing to Magallanes v. Williams (In re Magallanes), 96 B.R. 253, 255 (9th Cir. BAP 1988), found that property of the estate is determined as of the filing date of the Chapter 11 petition, not the conversion date. In this case, on the Petition Date, the case was originally filed as a Chapter 7 case, so Section 541(a)(6) of the Bankruptcyh Code excluded post-petition earnings from the estate. Thus, income that came into the Chapter 11 estate is recharacterized as property of the debtor upon conversion. Query whether the Court would come to the same result if the filing was originally commenced as a Chapter 11 such that on the petition date, post-petition earnings were property of the Chapter 11 estate.

The Ninth Circuit's Bankruptcy Appellate Panel Holds That a Creditor Does Not Violate Automatic Stay By Maintaining Contempt Proceeding Against the Debtor

The Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") recently issued the opinion, Yellow Express LLC v. Dingley (In re Dingley), BAP No. NV-13-1261-KiJuTa (9th Cir. BAP Aug. 6, 2014), which held that a creditor does not violate the automatic stay by maintaining a state court contempt proceeding against the debtor because the state court contempt proceedings related to court-ordered sanctions for the debtor's discovery violations. In 2009, the appellants had filed a state court action against the debtor and two LLCs he owned and controlled. One year prior to the bankruptcy filing, the state court ordered the debtor and his two LLCs to pay sanctions to appellants for their willful failure to appear for depositions. The debtor and the two LLCs did not pay the sanctions. On April 2, 2013, the state court judge issued an order to show cause ("OSC") why the debtor and the LLCs should not be held in contempt for nonpayment. The debtor filed a Chapter 7 proceeding on April 8, 2013.

BAP Upholds Bankruptcy Court Decision to Reject a Lease Retroactively Where Subtenant Had Not Vacated Premises

In an unpublished opinion filed on May 30, 2014 in the case of Boyle Avenue Properties v. New Meatco Provisions, LLC, et. al., the Ninth Circuit BAP upheld the Bankruptcy Court's decision and found that a lease could be rejected retroactively to the date of the filing of the motion to reject the lease instead of the date of entry of an order rejecting the lease, even where the leased space had not been vacated by the debtor's subtenant. The Bankruptcy Court found that the Debtor met the 4 part test for "exceptional circumstances" as set forth in In re At Home Corp., 392 F.3d 1064 (9th Cir. 2004) to allow retroactive rejection of a lease. The Bankruptcy Court focused on the third factor of whether a debtor has vacated the premises or is receiving a benefit from the premises in meeting the "exceptional circumstances" test. In cases where the debtor's subtenant had not vacated the premises and was past due on rent, the Bankruptcy Court found, and the BAP affirmed, that because the debtor had vacated and because the subtenant was not paying rent, the debtor was not receiving a benefit from the premises. Therefore, the lease could be rejected retroactively to the date of the filing of the motion to reject the lease.

DEFENSE OF PREFERENCE ACTIONS THROUGH THE CONSTRUCTIVE TRUST DOCTRINE

The District Court for the District of Nebraska recently upheld the application of a constructive trust as a means to shield payments made by a bailee-debtor from avoidance as a preferential transfer. In re Big Drive Cattle, L.L.C. v. Overcash, 2014 U.S. Dist. LEXIS 80853 (D. Neb. June 13, 2014). In In re Big Drive Cattle, a rancher shipped cattle to a commercial feedlot. The feedlot would keep the cattle for feeding and care unt il they reached the appropriate weight, at which point they were sold to third parties on the rancher's behalf. The feedlot then, without the rancher's consent, deposited the proceeds from the sale of the cattle with one of its lenders. The lender applied the deposited proceeds against the feedlot's debt. Thereafter, the feedlot paid an equivalent amount of the cattle-proceeds, minus the cost of feed, to the rancher. The feedlot filed for bankruptcy under Chapter 11 on September 9, 2011, and the trustee sought to avoid the payments made to rancher, one year preceding the bankruptcy filing, as a preferential transfer.

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