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Recent Opinions from the United States Bankruptcy Court for the Western District of TexasSajita v. United States (In re Colliau), No. 16–01102–TMD, 2017 WL 2589337 (Bankr. W.D. Tex June 14, 2017).Issue: Whether an estimated tax payment can be avoided from the Internal Revenue Service (IRS) by the trustee as a fraudulent transfer. More specifically, whether an estimated tax payment is a payment of “present or antecedent debt” and therefore meets the definition of “value,” or a payment of future debt that does not constitute “value.”Facts: In September 2015, one day before filing for relief under chapter 7, Debtors made a payment of $28,000 to the IRS for their estimated 2015 taxes. The Trustee sought to recover the $28,000 payment from the IRS as a fraudulent transfer. Holding: An estimated tax payment is not avoidable by the Trustee as a fraudulent transfer only to the extent that the payment is “due” under the terms of the Internal Revenue Code. When the payment is due under the terms of the statute, the payment is a payment of present debt and therefore the transfer was made for a reasonably equivalent value for purposes of 11 U.S.C. § 548(a)(1)(B).In re Kara, No. 16-51059-CAG, 2017 WL 2992727 (Bankr. W.D. Tex. July 13, 2017).Issue: Whether, in Texas, an inherited individual retirement account (IRA) from a non-spouse qualifies as a valid use of state exemptions under 11 U.S.C. § 522(b)(2).Facts: Debtor inherited an IRA from her aunt and argued that the inherited IRA was exempt property.Holding: The claim of exemption in the inherited IRA is a valid use of state exemptions under 11 U.S.C. § 522(b)(2). The inherited IRA did not qualify as “retirement funds” within the meaning of the bankruptcy exemption under § 522(b)(3)(C). Because Texas is an opt-in state—meaning that debtors that are Texas residents may elect to use either state exemptions or the federal exemption scheme—the Debtor’s inherited IRA did receive exempt status under Texas Property Code § 42.0021(a) which specifically identifies inherited IRAs as exempt property.In re Pustejovsky, No. 16-60352-RBK, 2017 WL 3841743 (Bankr. W.D. Tex. Sept. 1, 2017).Issue: Whether a chapter 13 debtor has an absolute right to dismiss a case under 11 U.S.C. § 1307(b) of the Bankruptcy Code where the debtor has acted in bad faith and failed to disclose property of the state.Facts: Chapter 13 Debtor failed to schedule assets, failed to seek approval to employ special counsel, delayed producing financial records, failed to produce discovery to a related probate case, and failed to fully list creditors. Further, Debtor’s initial plan was not confirmed and Debtor subsequently failed to submit a feasible plan. Debtor sought to dismiss her chapter 13 case under § 1307(b).Holding: A Debtor’s right to dismiss under § 1307(b) is conditional because it is subject to a bad faith exception under § 1307(c). Despite the presence of the term “shall” in §?1307(b), § 1307(c) permits a court to convert or dismiss a case for “cause” and courts have found that lack of good faith constitutes cause. Furthermore, by operation of §§ 1307(b), (c) and 105(a), the court was able to sua sponte convert the case to chapter 7.Roth Capital Partners, LLC v. Valence Technology, Inc. (In re Valence Technology, Inc.), No. A–14–CA–0949–LY, 2017 WL 4544678, (W.D. Tex. Oct. 10, 2017). Issue: Whether a professional employed by a debtor can recover attorney’s fees incurred while defending a fee application where the agreement between the parties contains a prevailing-party-fee-shifting provision.Facts: The bankruptcy court approved a chapter 11 debtor’s request to employ an investment banking firm until confirmation of its reorganization plan. The terms of the agreement included a success fee provision and stated:[T]he [s]uccess fee . . . is not fully paid when due, [the debtor] agrees to pay all costs of collection . . . including but not limited to attorney’s fees and expenses.The investment banking firm sought compensation for a success fee. After a substantial amount of litigation defending the bankruptcy court’s award of a success fee, the investment banking firm sought compensation for attorney’s fees and costs associated with litigating the success fee. Despite the recent United States Supreme Court case, Baker Botts L.L.P. v ASARCO LLC, 135 S.Ct. 2158 (2015), holding that litigation fees incurred defending a fee application are not recoverable, the investment banking firm in the instant case contended that it was entitled to reimbursement of its litigation attorney’s fees and costs pursuant to the original retention agreement which contains a prevailing-party fee-shifting provision.Holding: The investment banking firm’s litigation fees incurred while defending a success fee are not recoverable under the ASARCO opinion. Section 330 of the bankruptcy code allows for reasonable compensation for professionals only for “actual, necessary services rendered” by the professional for the estate administrator. Despite the presence of the prevailing-party-fee-shifting provision, litigating a fee application is not a service incurred for labor performed for the debtor-in-possession, and therefore the fees are not recoverable under ASARCO.Prado v. Erickson (In re Erickson), No. 16-10437-TMD, 2017 WL 4404286, (Bankr. W.D. Tex. Sept. 29, 2017).Issue: Whether, under Husky International Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016), a debt can be excepted from discharge where the alleged fraudulent transfer scheme has no connection to the debt.Facts: Plaintiff and her husband owned a company. In 2007, the company sold its assets to another company which was formed by Debtors. The consideration for the sale included a promissory note, payable by the company, but guaranteed by Debtors. Plaintiff sued the company and Debtors on the note. Parties entered into a mediated settlement agreement where the debt was reduced to $475,000 and Debtors agreed to sign a new note and grant a lien on their vacation home. The note and mortgage was never signed and Plaintiff sought and obtained a $475,000 judgment against the company and Debtors. The company filed chapter 11 bankruptcy. Subsequently, Debtors filed chapter 7 bankruptcy. Plaintiff sought to except her claim from discharge and prevent Debtors from receiving a discharge on their other debts on the basis of certain alleged fraudulent transfers.Holding: Applying the principles in Husky, the debt must be at least “traceable to” the fraudulent transfer. Thus, the debt could not be excepted on this basis because the pleadings did not allege that alleged fraudulent transfers were connected to the pre-existing debt owed by debtors to plaintiff. Viegelahn v. Randolph Brooks Federal Credit Union (In re Guiles), No. 16-05097-CAG, 2017 WL 4570704, (Bankr. W.D. Tex. Oct. 12, 2017).Issue: Whether a trustee can avoid a security interest that (1) secures two different loans and (2) is subject to a security agreement that contained a future advances clause where the funds from the first loan are used to pay off the balance of the second loan.Facts: Debtor took out a fifty-four-month loan secured by a 2007 Chevrolet Silverado from Randolph Brooks Federal Credit Union (RBFCU). RBFCU properly perfected the security interest. Almost four years later, Debtor took out a second loan from RBFCU secured by the same collateral. Debtor used money from the second loan to pay off the remaining balance on the first loan. RBFCU did not change the lien date on certificate of title. The security agreement between Debtor and RBFCU contained a future advances provision, which state the following:You are giving this Interest to secure repayment for our loan as well as any other amounts you now owe the Credit Union in the future. The collateral also secures your performance of all other obligations under your loan, this security agreement and any other agreement you have with the Credit Union.The trustee sought to avoid the lien arguing that the second loan created a new, unperfected security interest rather than a future advance covered by the agreement’s future advances provision.Holding: The security interest in the vehicle remained perfected after the second loan was granted and therefore is not avoidable. From the moment of the first loan to the issuance of the second loan, the debtor owed a debt to RBFCU. The day the second loan was issued and used to pay off the remainder of the first loan and advance additional funds, the debtor continued to owe an obligation to RBFCU. Because RBFCU’s security agreement contained a future advances clause that stated the vehicle would secure present and future indebtedness, RBFCU’s extension of additional funds to the debtor did not create a new security interest, but rather sustained its existing interest. The repayment of the first loan did not satisfy the indebtedness or demand release of the security interest because the second loan operated as a future advance under the agreement’s future advance clause. In re Buffets, LLC, No. 16-50557-RBK, 16-50557-RBK, (Bankr. W.D. Tex. Sept. 18, 2017).Issue: Whether attorney fees were reasonable and necessary in light of the work and representation required.Facts: Counsel for the Official Committee of Unsecured Creditors submitted its fee application for compensation and reimbursement of expenses for the period of representation from March 22, 2016, to May 17, 2017. The application requested $2,200,485.00 in fees and $87,005.04 in reimbursable expenses. Debtor and United States Trustee objected to the fee application. The court entertained four arguments: (1) disparities between Counsel’s fees and Debtor counsel’s fees demonstrates excessive compensation; (2) the blended rate used by Counsel’s firm was functionally more expensive than an hourly rate would have been; (3) Counsel overstaffed the case with young professionals with hourly rates less than the blended rate, thereby over-charging for the services; and (4) Counsel’s travel expenses were unreasonably high.Holding: Counsel’s fee application was reasonable in its entirety. The fee disparity represented work and time Counsel spent facing intense opposition and short-notice motions from Debtors’ counsel and the equity holders, reworking the debtors’ original insufficient proposal, negotiating with multiple sets of attorneys, and responding to expedited motions “at the drop of a hat.” Stated differently, Counsel’s fees were driven up by the actions of Debtors’ counsel. Next, Counsel’s blended rate resulted in a net savings for the estate because Counsel, while not prohibited from adjusting its standard billing rate to reflect its 2017 rate increase, did not do so. Third, examination of the time billed by each professional shows that the case was not overstaffed with young professionals. Rather, the top biller, billing more than 25% of the total work done, was an of-counsel commercial bankruptcy attorney with nearly thirty years of experience. Furthermore, a shareholder billed more than 500 hours and his 2016 hourly rate of $875 and 2017 hourly rate of $985 were both reduced to the bended hourly rate. Further, while associates were staffed to the case, assignments such as document review and legal research are expected tasks for younger attorneys. Finally, while counsel’s hotel expenditures were costlier than those of other attorneys in the case, counsel addressed this concern by reducing its requested compensation and expenses by $50,000.Lain v. Watt (In re Dune Energy, Inc.), No. 17-01052-HCM, 2017 WL 3701860, (Bankr. W.D. Tex. Aug. 24, 2017).Issue: Whether a court should remand a suit to state court where the suit alleging pre-confirmation conduct and activities was filed post-confirmation by a plan trustee. Facts: Debtors’ chapter 11 plan created a liquidating trust to pursue Debtors’ causes of action for the benefit of creditors. Almost two years after the plan was confirmed, the Trustee filed suit in state court against eighteen directors and officers of Debtors’ setting forth multiple causes of action for director and officer misconduct. Subsequently, Defendants removed the suit to federal court where the suit ultimately ended up in a Western District of Texas Bankruptcy Court. The Trustee then sought remand of the suit back to state court based on lack of subject matter jurisdiction, mandatory abstention, and/or permissive abstention/equitable remand.Holding: While the court had subject matter jurisdiction, the court either (1) was required to remand the case back to state court because each of the requirements for mandatory abstention were satisfied, or in the alterative, (2) should exercise its discretion to permissively abstain and equitably remand the suit to state court. The court had subject matter jurisdiction under 28 U.S.C. § 1334(b) (original, but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11) because in the Fifth Circuit, bankruptcy jurisdiction continues to exist post-confirmation over suits based on pre-confirmation claims and activities brought by a plan trustee appointed under a bankruptcy plan, as was the case here. Despite this, the court was required to abstain from deciding the suit under 28 U.S.C. § 1334(c)(2) because the Fifth Circuit requirements for mandatory abstention were met. The court focused mostly on whether the claims were “related to” causes of action. Because the causes of action were premised on pre-bankruptcy claims based on state law, the causes of action constituted “related to”/non-core proceedings. Finally, even if the court had not found that the requirements of mandatory abstention had been met, the court concluded that it should exercise its discretion to permissively abstain the case because a majority of the factors considered by Fifth Circuit courts weighed in favor of permissive abstention. Specifically, the court found that (1) the state court was well positioned to promptly adjudicate the suit; (2) state issues predominated the suit; (3) a related state-court proceeding existed; (4) no federal jurisdiction exists over the suit other than bankruptcy jurisdiction; (5) the lawsuit is remote from bankruptcy case; (6) the suit is not a core proceeding; (7) the burden on the district court’s docket is high; (8) the parties have demanded a jury trial which the bankruptcy court cannot provide; and (9) the lawsuit involves state law issues and deference should be given to the state court to decide state law issues even though the complaint alleges both Texas and Delaware state law causes of action.Bankruptcy Cases at the United States Supreme CourtCert Granted:15-1509: U.S. National Bank Association v. Village at LakeridgeIssue Presented: Whether the appropriate standard of review for determining non-statutory insider status is the?de novo?standard of review applied by the U.S. Courts of Appeals for the 3rd, 7th and 10th Circuits, or the clearly erroneous standard of review adopted for the first time by the U.S. Court of Appeals for the 9th Circuit in this action.Lower Court Decision: Village at Lakeridge, LLC v. Rabkin, 814 F.3d 993 (9th Cir.).Issue: Whether an insider’s status transfers to a third party when he sells or assigns the claim to that third party. Facts: Debtor had one member who is managed by a five-member board. One of the members, Bartlett, had a close business and personal relationship with Rabkin that was unrelated to Bartlett’s board position. Rabkin purchased the Board’s claim—worth $2.76 million—for $5,000. In its disclosure statement, Debtor classified the claim as a class 3 general unsecured claim. One of Debtor’s creditors moved to designate Rabkin’s claim and disallow it for plan voting purposes arguing that he was both a statutory and non-statutory insider and the assignment was made in bad faith. The bankruptcy court held that Rabkin was not a non-statutory insider and that he did not purchase the claim in bad faith. The bankruptcy court, however, designated his claim and disallowed it for plan voting because it determined Rabkin became a statutory insider by acquiring a claim from the Board. The Bankruptcy Appellate Panel for the Ninth Circuit reversed the finding that Rabkin became a statutory insider holding that insider status cannot be assigned and must be determined for each individual on a case-by-case basis after consideration of various factors.Holding: Rabkin did not become a “statutory insider” because he did not fall within one of the categories listed in 11 U.S.C. § 101(31). Applying a clearly erroneous standard of review, the court held that Rabkin did not become a non-statutory insider, because he and Debtor did not have a close relationship similar to the relationships identified in § 101(31). 16-784: Merit Management Group v. FTI ConsultingIssue Presented: Whether the safe harbor of 11 U.S.C. § 546(e) prohibits avoidance of a transfer made by or to a financial institution, without regard to whether the institution has a beneficial interest in the property transferred, consistent with decisions from the Second, Third, Sixth, Eighth, and Tenth Circuits, but contrary to decisions from the Eleventh and Seventh Circuits.Lower Court Decision: FTI Consulting, Inc. v. Merit Mgmt. Grp., LP, 830 F.3d 690 (7th Cir. 2016).Issue: Whether the safe harbor of 11 U.S.C. § 546(e) prohibits avoidance of a transfer made by or to a financial institution, without regard to whether the institution has a beneficial interest in the property transferred.Facts: Debtor borrowed money from Credit Suisse and other lenders to pay for 100% of the shares belonging to Bedford Downs, a competitor racetrack. After the transfer of $55 million for the Bedford Downs shares, Debtor failed to secure a necessary harness-racing license, which resulted in its filing for chapter 11 bankruptcy. The Trustee of a litigation trust filed suit pursuant to sections 544 and 548(a)(1)(B) against Merit Management Group, a 30% shareholder in Bedford Downs, to avoid a transfer of approximately $16.5 million made from Bedford to Debtor, and subsequently to Merit. The district court found that the transfers were “made by or to” a financial institution because the funds passed through financial institutions and therefore, prevented the Trustee from avoiding the transfer of $16.5 million. Holding: The transfer was not sheltered from avoidance by the Trustee. After a thorough examination of § 546(e)’s language, the statute’s context and purpose, and its legislative history, the Seventh Circuit reversed the district court and held the safe harbor provision only applied to “cases in which the debtor-transferor or transferee is a financial institution or other named entity.”Cert Denied:16-1136: Leslie v. Hancock Park Capital II, L.P. (In re Fitness Holdings Int’l, Inc.)Issues Presented: What is the court’s authority to recharacterize debt as equity? Specifically, does a bankruptcy court’s authority to recharacterize putative debt as equity arise under 11 U.S.C. § 105(a) (as five circuits have held) or 11 U.S.C § 502(b) thereby restricting the bankruptcy court’s equitable powers to applicable state law (as two circuits have held)?Lower Court Decision: Leslie v. Hackcock Park Capital II (In re Fitness Holdings Int’l, Inc.), 660 Fed. Appx. 546 (9th Cir.).Issue: Whether notes from a debtor to its sole shareholder constituted an equity or a debt.Facts: The Trustee sought to recover a prepetition transfer of approximately $12 million from Debtor to its sole shareholder. The prepetition transfer paid down prior advances from Debtor’s sole shareholder to the debtor. Seeking to recover the transfer under claims of constructive and actual fraud, the Trustee argued that the notes did not create debt and that the transfers were equity infusions in disguise. The district court applied California state law to conclude that the notes were contracts that created a right to payment and therefore, dismissed the Trustee’s fraudulent conveyance claims.Holding: Analyzing the pleadings under California law, the Trustee failed to allege that the notes created an equity and not a debt and therefore, the district court properly dismissed his claims. 16-1236: Quinn v. City of Detroit (In re City of Detroit)Issue Presented: Whether the equitable mootness doctrine is viable, and if so, can it apply to chapter 9 cases?Lower Court Decision: Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d 792 (6th Cir.).Issue: Whether the doctrine of equitable mootness applies in a chapter 9 bankruptcy case.Facts: During bankruptcy, the City of Detroit entered into several complex settlements and agreements with its thousands of creditors and stakeholders and incorporated those agreements into its plan. The bankruptcy court entered an order confirming the City’s plan. The plan reduced certain municipal-employee pension benefits under the City's General Retirement System (GRS). Several GRS pensioners challenged the plan’s confirmation order in the district court. The City moved the district court to dismiss those actions as equitably moot, and the district court agreed.Holding: The district court properly applied doctrine of equitable mootness because this scenario represents the types of scenarios equitable mootness tries to prevent—situations where a court tries to untangle a complex bankruptcy organization after the plan has reached a point where the plan has become extremely difficult to rescind. ................
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