May 28, 2024
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In re: Highland Capital Management, L.P. |
Bankr. ND TX |
In a confirmed Ch. 11 case where former equity interest holders in the reorganized debtor now hold unvested contingent interests in a plan trust, the court rejects the effort of the unvested interest holders to discover information from the trust regarding the likelihood of their interests vesting:
The Claimant Trust was created for the benefit of “Claimant Trust Beneficiaries,” which was defined under the Plan and the Claimant Trust Agreement to be the holders of allowed general unsecured (Class 8) and subordinated claims (Class 9) against Highland.
The Adversary Proceeding was brought more than two-years post-confirmation by Plaintiffs Hunter Mountain Investment Trust (“HMIT”) and The Dugaboy Investment Trust (“Dugaboy,” and, together with HMIT, the “Plaintiffs”).3 These two Plaintiffs are controlled by Highland’s co-founder and former President and Chief Executive Officer, James D. Dondero (“Dondero”). The Plaintiffs held equity interests (i.e., limited partnership interests) in Highland. Pursuant to the terms of the Highland Plan, Plaintiffs now hold unvested contingent interests in the Claimant Trust—since the limited partnership interests in Highland were cancelled in exchange for unvested contingent interests in the Claimant Trust. These contingent interests will vest if, and only if, the Claimant Trustee certifies that the Claimant Trust Beneficiaries (i.e., the Class 8 general unsecured claims and Class 9 subordinated claims under the Plan), have been paid in full and certain other obligations – primarily, the Claimant Trust’s significant indemnity obligations – have been satisfied.
In this Adversary Proceeding, Plaintiffs seek: (1) an order from the bankruptcy court compelling the Reorganized Debtor and the Claimant Trustee to disclose certain information about the assets and liabilities remaining in the Claimant Trust, and, if they are compelled to disclose that information, (2) a declaratory judgment regarding the relative value of those assets and liabilities, and (3) if assets exceed liabilities, a declaratory judgment that HMIT’s and Dugaboy’s unvested contingent interests in the Claimant Trust are likely to vest at some point in the future.
To be clear, it is undisputed that neither HMIT nor Dugaboy are currently Claimant Trust Beneficiaries under the terms of the Plan and Claimant Trust Agreement and that the vesting conditions under the terms of the Plan and Claimant Trust Agreement have not occurred.
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Now, as before, the court finds and concludes that under the terms of the CTA and Delaware law, Plaintiffs are not beneficiaries or “beneficial owners” of the Claimant Trust who would be entitled to assert rights under the CTA. The court specifically rejects an argument of Plaintiffs that Delaware trust law does not define “beneficiary,” so the court should ignore the terms of the CTA and look to the definition of “beneficiary” under the Restatement (Third) of Trusts, under which they would be considered “beneficiaries” of the Claimant Trust, albeit a contingent beneficiary, who would be entitled under Delaware law to the relief they are requesting.
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Plaintiffs ask the court to ignore the plain terms of the CTA and to grant them the relief they have requested on an equitable basis because they “are unable to determine whether their Contingent Claimant Trust Interests may vest into Claimant Trust Interests.” But, they have not alleged any set of facts that would entitled them to equitable relief either. The court makes the same observation regarding Plaintiffs as it made in its Order Denying Valuation Motion: It appears that Plaintiffs “may be frustrated that they did not negotiate or obtain the same oversight rights as the actual Claimant Trust Beneficiaries in the Plan and CTA.” The Plan with the incorporated CTA was confirmed over three years ago now, and neither of the Plaintiffs objected to or appealed the terms of the Plan or CTA that dictate oversight rights.75 The Fifth Circuit, in September 2022, affirmed the Confirmation Order and the terms of the Plan and its incorporated documents, including the CTA, in all respects other than striking certain exculpations As was the case when the court entered its Order Denying Leave to Bring Claims Pertaining to Claims Trading, “[i]t is undisputed that HMIT’s [and Dugaboy’s] Contingent Trust Interest[s] ha[ve] not vested under the terms of the Plan and the CTA, and the court does not have the power to equitably deem HMIT’s [and Dugaboy’s] Contingent Trust Interest[s] to be vested.” 76 The court did not have that power back in August 2023 (when it entered the Order Denying Leave to Bring Claims Pertaining to Claims Trading), and the court does not have that power now. Equitable relief is not available where, as here, the parties’ rights and obligations at issue are set forth in the Plan and the CTA. |
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In re: Davis |
Bankr. NM |
In a Ch. 13 confirmation dispute, the court rejects the debtor's argument that separate classification and more-favorable treatment of student loan debt is "fair discrimination":
Before the Court is whether to confirm Debtor’s chapter 13 plan. The chapter 13 trustee objected to confirmation because the Plan separately classifies Debtor’s student loan debt and treats it much more favorably than Debtor’s other unsecured debt. The trustee also objected to the proposed payment of interest on the student loan debt. The Court concludes that the Debtor has not carried his burden of showing that the separate classification and favored treatment of the student loan debt is “fair” discrimination, nor that the proposed interest payment is permissible. His plan therefore cannot be confirmed.
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Debtor’s $75 a month, 40-month plan is a half-hearted effort to minimize the pain of being in chapter 13 rather than where Debtor wants to be—in his fourth no-asset chapter 7 case. Part of Debtor’s design to achieve a somewhat chapter 7-like result is a plan that pays only his lawyer, the trustee, and his nondischargeable student loan debt (with interest). The plan cannot be confirmed because it unfairly discriminates against Debtor’s credit card debt and violates the prohibition against paying interest on unsecured debt unless all debts are paid in full. |
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In re: 530 Donelson, LLC |
Bankr. MD TN |
The court rejects a motion to dismiss a Ch. 11 case filed by one of the debtor's members who prefers to be in state court:
Mr. Ghodasara argues that the state court already has a process underway to determine the best use for the Debtor’s property, and the state court proceedings have been going on for two years so they should remain with the state court. He argues that dismissal and allowing the state court to determine what happens with the property will be less expensive, but he offered no evidence on that point.
The Court considers disposition of the Debtor’s property to be distinct from the members’ litigation among themselves. The fact that the state court has been involved with the members’ litigation for two years might factor more strongly in the Court’s consideration of Mr. Ghodasara’s motion for remand.
Ultimately, the Court looks at the best interests of the Debtor and creditors. While Mr. Ghodasara prefers to remain in state court, he has not presented any evidence to support that the Debtor’s and creditors’ interests are best served in state court. To the contrary, FirstBank clearly prefers to be in bankruptcy court and has argued strongly against dismissal. The Debtor also benefits economically from remaining in bankruptcy due to FirstBank’s waiver of default interest and due to the potential for a more expedient sale process with the benefit of a sale free and clear of interests under § 363 of the Bankruptcy Code. |
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In re: Carraman |
Bankr. WD TX |
The court grants a Ch. 13 trustee's motion for summary judgment avoiding a title lender's lien on the debtor's vehicle:
The basic facts are uncontested, even though the parties characterize the same facts differently. The Debtors entered into a Loan Agreement, Promissory Note and Security Agreement with TitleMax (collectively, “First Loan”). The First Loan lent the Debtors $5,571.00 at an interest rate of 176.06% per year, with TitleMax retaining a security interest in the Debtors’ vehicle. The Documents did not contain a “future advance” or “dragnet” clause.3 Less than a month later the Debtors entered into yet another set of financing documents (“Second Documents”) with TitleMax (collectively, “Second Loan”). This time, TitleMax advanced $9,988.00 at an interest rate of 181.55% annually. The Second Loan satisfied the First Loan and increased Debtors’ obligations to TitleMax by an additional $4,417 over the balance of the First Loan. On September 7, the Debtors filed bankruptcy in the Western District of Texas (Case No. 22-51009, the “Main Case”). Main Case, ECF No. 1. The next day, the Texas Department of Motor Vehicles issued a certificate of title covering the Chevrolet Traverse, which identified TitleMax as a lienholder and identified the “lien date” as August 2, 2022 (reflecting the date of the First Loan). After it advanced funds for the Second Loan, TitleMax never filed the Second Documents with the Texas Department of Motor Vehicles seeking to obtain a new lien notation on the Chevrolet Traverse certificate of title, which would have again identified TitleMax as a lienholder, but would have also identified a new lien date, corresponding to the Second Loan date.
Both parties move for summary judgment. The Trustee asserts TitleMax’s failure to record its Second Loan security interest on the Chevrolet Traverse certificate of title renders TitleMax unperfected, and that the Trustee may avoid the security interest created by the Second Loan under § 544.4 The Trustee asserts the security interest created by the First Loan was extinguished when TitleMax funded the Second Loan and used part of the Second Loan proceeds to satisfy and extinguish the First Loan and its security interest.
TitleMax contends that there was no need to perfect the Second Loan, because the Second Loan merely “extended and renewed” or “refinanced” the First Loan, and that the security interest created on the Chevrolet Traverse certificate of title remains in effect as originally perfected. TitleMax also argues that because the Debtors’ confirmed chapter 13 Plan5 listed TitleMax as a “secured creditor,” res judicata prevents the Trustee from challenging its secured status. Finally, TitleMax argues that because the Trustee allowed the Debtors to remove the car from the bankruptcy estate via exemption, this security interest avoidance action is not “for the benefit of the estate,” and therefore the Trustee lacks the standing necessary to bring this claim. |
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In re: Deeproot Capital Management, LLC |
Bankr. WD TX |
In malpractice litigation against debtor's pre-petition securities counsel in a Ponzi bankruptcy, the court rejects a personal jurisdiction challenge:
In its Motion to Dismiss, Defendants argue that even if Federal Rule of Bankruptcy Procedure 7004(f) permits nationwide service of process on them, the Trustee must still establish that the Court’s exercise of personal jurisdiction comports with traditional notions of fair play and substantial justice. The Fifth Circuit, however, has held that where a U.S. resident is served pursuant to a nationwide service of process statute, exercising personal jurisdiction over such resident does not offend traditional notions of fair play and substantial justice. What’s more, even if the Trustee had to establish that the exercise of jurisdiction was fair and reasonable, Defendants’ actions (both pre- and post-petition) show purposeful availment of Texas such that this Court’s exercise of personal jurisdiction over them would not offend traditional notions of fair play and substantial justice. |
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In re: Trinity Family Practice & Urgent Care PLLC. |
Bankr. WD TX |
In a Subchapter V case, the court denies confirmation of the debtor's plan on good faith grounds:
This subchapter V bankruptcy case regarding a relatively small medical clinic in Odessa, Texas, requires the Court to decide an important issue regarding the time period for plan payments in a nonconsensual subchapter V plan under 11 U.S.C. § 1191(c)(2)(A)1: how does a bankruptcy court determine whether a proposed three-year period of plan payments is “fair and equitable,” or if it should “fix” a longer period not to exceed five years?
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The debtor in the Urgent Care case was able to show the bankruptcy court that (1) a secured debt was going to mature during the three-year plan payment period, (2) the debtor’s principal was voluntarily deferring some portion of wages during the three-year plan payment period, and (3) a related entity owned by the debtor’s principal agreed to defer the collection of post-petition charges owed by the debtor until after the three-year plan payment period. These were actual, substantiated facts shown by the Debtor that weighed against a longer period of plan payments. The Urgent Care court acknowledged that the “simple math of an extended plan term might seem to generate a higher payment to unsecured creditors” but determined based on the facts of that case that a longer plan payment period would increase the risk of business failure.
The facts in this case are distinguishable from Urgent Care. The Debtor’s principal in this case has proposed a significant raise for himself, and the Plan’s payroll projections for W-2 employees and 1099 contractors in months 1-12 amount to $34,965.76 per month. In the post-petition, pre-confirmation period, the Debtor’s payroll for W-2 employees and 1099 contractors was approximately $28,786.92 per month. In other words, the Debtor’s principal will receive a greater than 100% raise, and the Debtor will increase payments to employees and contractors by roughly 21%. While it is possible that these increases are reasonable and justified, the Debtor did not provide the Court with the necessary evidence to support that conclusion. The Court did not receive any evidence about reasonable explanations for the increases, such as inflation or increased competition in the local job market. The Court declines to assume facts not presented in evidence, and these increases were not sufficiently justified to the Court on the record at the confirmation hearing. Furthermore, unlike the Urgent Care debtor, the Debtor in this case offered no evidence of actual, substantiated risks and consequences that make business failure more likely if a three-year plan payment period is not approved.
Under this factor, the Court also considered the Bank’s argument that the Court should fix a five-year plan payment period in this case simply because it would increase the payment to the unsecured creditors.130 While extending a plan will almost always result in a potentially larger distribution to unsecured creditors, the fact that the Debtor could possibly distribute more over a longer plan payment period should not be the sole deciding factor because of course it would always favor the creditor. The Bank’s argument that the Debtor could pay more if the plan period were longer without any analysis of the risks and consequences of a longer plan payment period is not sufficient for the Court to fix a longer period of plan payments under § 1191(c)(2)(A). |
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In re: Maison Royale, LLC |
ED LA |
The court denies leave to appeal an interlocutory order rejecting an emergency motion to dismiss a Ch. 11 case as a bad faith filing:
In this case, the Court cannot conclude that Sutton has proven all three elements. The appeal he brings involves principles of judicial estoppel related to positions Sutton has taken in past litigation in state court. There is simply no way to characterize such a record-driven and fact-intensive inquiry as a question of pure law. Further, a resolution of this question – whether Sutton is estopped from contesting Polly Point’s interest in the Debtor (or the nature of its interest in the Debtor) – will not reduce the amount of litigation left in this case. First, the bankruptcy court assumed for the purpose of his motion that Sutton is a part owner of the Debtor, but this is a fact highly in dispute. If this Court were to decide the estoppel question either way, for Sutton or against him, the bankruptcy case will continue and Sutton’s ownership will remain in dispute between the parties as they pursue parallel state court litigation as well. Further, should this Court agree with Sutton and find that the bankruptcy court misapplied the judicial estoppel principle in the context of Sutton’s motion to dismiss, this does not automatically require the bankruptcy court to dismiss the case – it merely opens another line of argument, the Polly Point argument, for Sutton to pursue in urging the bankruptcy court to dismiss the case. This is hardly a situation in which resolving the question will reduce future litigation and streamline the case. |
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