June 24, 2024
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In re: Wireless Systems Solutions LLC |
Bankr. ED NC |
The court finds that abandonment does not terminate the bankruptcy court's jurisdiction over abandoned assets:
The coin of property in bankruptcy cases has two sides: the estate and the debtor. When property is abandoned by a trustee pursuant to section 554, it ceases to be property of the bankruptcy estate, and as a result, a trustee has no further authority to administer the abandoned asset. However, despite the abandonment and loss of trustee/estate standing, the affected asset remains property of the bankruptcy debtor. Therefore, pursuant to 28 U.S.C. § 1334(e)(1), the Bankruptcy Code, and consequently, the jurisdiction of this bankruptcy court, continues to extend post-abandonment over debtor assets even if the jurisdiction ceased over the estate’s side of the interest due to abandonment. |
The court also finds that because abandonment did not eliminate the debtor's interest in the abandoned assets (here, litigation claims) a stay violation occurred when the debtor's owners pursued the abandoned claim post-abandonment:
As to the applicable sections relevant to actions against property of the debtor, Section § 362(a)(5) stays “any act to create, perfect, or enforce against property of the debtor any lien” to the extent it secures a prepetition claim; and § 362(a)(6) stays “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.”
The claims in the District Court Action arose prepetition. By first claiming to obtain the Potential Claims via the Transfer Document, regardless of whether that transfer was successful, and then by bringing the District Court Action, regardless of whether they assert the estate’s Intellectual Property rights therein, Mr. and Mrs. Gross, attempt for themselves to “collect, assess, or recover a claim” that belonged to the debtor WSS prepetition. These actions violate the automatic stay as imposed by section 362(a)(6).
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Whether by (1) an invalid transfer under state law, leaving the Potential Claims with WSS only; (2) the transfer of debtor property interests in the Potential Claims existing prepetition without obtaining stay relief as required by the Bankruptcy Code; or (3) the Intellectual Property aspects specifically retained by the bankruptcy estate (as acknowledged by Mr. and Mrs. Gross) being asserted in the District Court Action, Mr. and Mrs. Gross have violated the automatic stay of 11 U.S.C. § 362(a), and they continue to violate the stay by asserting ownership over the Potential Claims by pursuing recovery tied to the Intellectual Property in the District Court Action.
* * *
For the reasons expressed below, the court will order Mr. and Mrs. Gross cease pursuing any aspects of the WSS Intellectual Property in the District Court Action, but declines to impose fines, attorney fees, or other monetary sanctions retroactively at this time, holding the matter open pending further outcome of the District Court Action.
Despite the litany of violations described above, according to their Response and statements made at the hearing (as proffer, not testimony), the court finds that Mr. and Mrs. Gross subjectively believed that the Order Abandoning Property, minus the stated exceptions, abandoned the remaining tangible and intangible assets including the claims they assert in the District Court Action While they are sorely mistaken in failing to recognize those claims include the WSS Intellectual Property, and that the WSS Potential Claims were not transferred to them, nothing in this bankruptcy case prevents Mr. and Mrs. Gross from pursuing claims in the District Court Action (or elsewhere) that solely belong to them personally. Further, Mr. and Mrs. Gross explicitly asserted in their Response that they do not seek redress related to WSS’s intellectual property as part of the estate retained by the Trustee, but rather seek redress for damages suffered in their personal capacity They are now placed on notice, however, that the claims asserted include bankruptcy estate assets. |
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In re: Mudd |
Bankr. WD OK |
The en banc bankruptcy court puts a stop to abusive Ch. 7 practices by debtors' attorneys:
"Few matters before bankruptcy courts are as distasteful as the duty to examine transactions between a debtor and its attorney .... Fulfilling this duty, though unpleasant, is also one of the most integral parts of the bankruptcy system." In re Chris Pettit & Assocs., P.C., No. 22-50591-CAG, 2022 WL 17722853, at *8 (Bankr. W.D. Tex. Dec. 13, 2022). This Miscellaneous Proceeding was commenced because the structure of attorney client relationships between Chris Mudd ("Mudd") and the bulk of his chapter 7 debtor clients raised multiple red flags after investigation and review by the United States Trustee ("UST") and this Court. The exact claims raised are set forth in the Agreed Order Establishing Issues for Review and Determination [Doc. 2] (the "Agreed Order").
A compromise has been reached between Mudd and the UST, which will be approved. However, (i) the nature and extent of the statutory and rule violations identified in his attorney client relationships, and (ii) the proliferation of similar unpalatable practices by other attorneys representing chapter 7 debtors in the Western District of Oklahoma designed to generate more clients, thereby threatening the integrity of the system, mandates an order from the Court, sitting en bane, identifying the objectionable practices and clearly establishing prohibited practices in the context of attorneys' representation of chapter 7 debtors in the Western District of Oklahoma. This Order, which takes effect immediately, addresses such conduct and establishes benchmarks for attorney conduct in representing chapter 7 debtors in the Western District of Oklahoma, specifically the Court will address: (i) unbundled essential bankruptcy legal services; (ii) bifurcated fee contracts; (iii) attorney disclosure to the Court; (iv) attorney disclosure to the client; (v) payment of filing fees in installments; and (vi) attorney advancement of filing fees. |
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In re: Roman Catholic Church of the Archdiocese of Santa Fe |
Bankr. NM |
In a confirmed archdiocese case, the plan requires the debtor to:
Keep and update a list of “all known past and present alleged clergy perpetrators of [Debtor], who have been determined by the Archbishop in consultation with the Independent Review Board to be credibly accused of sexual abuse.” |
The court rejects the motion of an abuse victim to force the debtor to add to the list a priest named in an abuse victim's proof of claim:
Movant asks that the Court require Debtor to add to the list the name of a priest she identified in her proof of claim as having abused her. Debtor opposes the request, saying that movant lacks standing to enforce the covenants. Debtor further argues that the priest should not be added to the list because he was determined not to have been “credibly accused” of sexual abuse.
The Court has reviewed the covenants, the confirmed plan, and related documents and has heard oral argument on the dispute. It now rules that movant lacks standing to enforce the particular covenant in question. Alternatively, on the merits, the Court rules that the covenants do not obligate Debtor to add a priest to the list unless Debtor has made a “credibly accused” finding for that priest. |
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In re: Galleria 2425 Owner, LLC |
Bankr. SD TX |
The court confirms a creditor's plan in a single asset real estate case involving an office building in Houston, Texas. The court rejects several plan objection raised by companies controlled by the debtor's indirect owner.
The Debtor’s principal strongly feels that he is a victim of unusual circumstance, COVID but mostly the actions of NBK. He strongly complains that the actions of NBK have caused him to default, face foreclosure and that it should pay for its actions [whatever they may be]. However, this totally ignores two distinct facts (1) that the Debtor via his principal has never been able to pay the original note, or his Confidential Settlement Payment or his extended Confidential Settlement Payment which was a sizable discount on the original amount of the Note; (2) the record in this case does not support his sizable but implausible claims. The Court notes two specific allegations. First, the allegation that NBK faces a large lender liability claim based on the CSA and second, that NBK breached that agreement first and therefore the Debtor’s breach of the CSA by not paying over $26 million dollars was somehow acceptable. The Court invites the parties to examine the record to find any evidence that either of these facts are true. Yes, the Debtor had lawyers testify that the Debtor had claims but they never explained how or why these claims arose, just that they existed. Additionally, the Court notes that the Chapter 11 Trustee interviewed these attorneys and discounted their claims. Their testimony was incomplete and not believable given the lack of documentary evidence. Just because a lawyer tells this Court or any Court that its client or potential client has a great claim for damages does not make it so or the presentation of evidence in hearings would become superfluous.
This Court having spent considerable time attempting to evaluate the actions and testimony of Ali Choudhri in this case both as a witness and as a pro se litigant The Court, based on this analysis, holds that Choudhri must at times believe what he is telling the Court. Unfortunately, what he has told the Court, often in broad terms, is not supported by rational facts or any documentary evidence. It additionally often is totally untrue. The Chapter 11 Trustee found that Choudhri’s veracity was troubling, the Court strongly agrees with this assessment. Based on the testimony of the Chapter 11 Trustee the Court believes that, in part, Choudhri’s reputation in the community for a lack of veracity has damaged his ability to conduct business as a real estate developer. The Court can only look to repeated promises of payment to NBK, that were repeatedly broken to make such a holding.
Lastly, the Court must comment on Choudhri’s claims that the process of confirming this Chapter 11 Plan has been unfair, rushed, not transparent, that he and the debtor have not been afforded due process or that this Court is prejudiced against him personally. This debtor has been in two bankruptcies. The first was filed on July 5, 2023, and the second will conclude with the confirmation of the plan in this case. This is a span of almost a year, and his ongoing litigation with NBK spans multiple years. During that time the debtor and Choudhri have failed to propose a viable plan of reorganization for the debtor because they are incapable of proposing one. Additionally, they have been unable to pay what they have promised on multiple occasions. The claims that this process have been rushed or lack due process given the timeline are not credible. That this Court is simply doing what it is constitutionally tasked to do and that Choudhri is by appearance very unhappy with the results does not give rise to his numerous false claims of denial of procedural due process. |
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In re: Heartwise, Inc. |
9th Cir. |
The bankruptcy court did not err in finding that it had jurisdiction to adjudicate a dispute between a judgment creditor and the creditor's counsel over rights in a judgment against the debtor:
Here, both VOL and MCG filed a proof of claim for the full amount of the money judgment and an objection to each other’s claims. By doing so, they initiated a core “allowance or disallowance of claims” proceeding as contemplated by § 157(b)(2)(B). Under 11 U.S.C. § 502, proofs of claim are “deemed allowed[] unless a party in interest … objects,” id. § 502(a), in which case “the court, after notice and a hearing, shall determine the amount of such claim … and shall allow such claim in such amount,” id. § 502(b).
Where, as here, claims and objections thereto have been filed in a Chapter 11 proceeding, it is a core function of the bankruptcy court to determine whether such claims should be allowed and in what amount, pursuant to the procedure laid out in § 502. That is true even if adjudicating the underlying dispute regarding the engagement letter is “a non-core issue.” |
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In re: Aarons |
Bankr. CD CA |
Pre-petition, an individual Ch. 11 debtor filed litigation against her home insurer arising from a water leak at her home. When she filed Ch. 11, the insurer removed the litigation to bankruptcy court. When the case was converted to Ch. 7 , her trustee inherited the claims and, after hiring her counsel, settled them, with court approval and with opposition from the debtor. The settlement approval order specifically provided that the settlement was without prejudice to the debtor's post-conversion claims against the insurer, if any.
Over a year later, the debtor filed a reconsideration motion in bankruptcy court alleging that the settlement improperly affected her post-conversion claims. The court denies the motion:
Debtor’s primary argument is that Trustee was not authorized to stipulate to dismissal of the Complaint with prejudice, because not all claims asserted in the Complaint are owned by the estate. According to Debtor, some claims against Lexington accrued after conversion of her chapter 11 case to chapter 7, and such postconversion claims are owned by Debtor, not the estate.
This Court disagrees. All of the claims at issue belonged to the bankruptcy estate, and Trustee was authorized to settle them and dismiss the Lexington Action with prejudice.
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Debtor apparently asserts that her claims accrued post-conversion because, although the water intrusion and balcony collapse occurred prepetition and preconversion, Lexington’s handling of that claim may have included allegedly wrongful acts or omissions both pre- and post-conversion. Debtor’s arguments fail both factually and legally.
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As a legal matter, even supposing that there were some disputes with Lexington post-conversion (which, so far as the record before this Court reveals, there were not), such post-conversion disputes are inseparable from the pre-conversion claims.
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Debtor’s argument would also lead to an absurdity. Under her approach, Trustee would own claims for the entire amount of damages arising from the water intrusion and balcony collapse claims, and yet Debtor would own overlapping claims that Lexington, for example, had under-paid for repairs arising from the same water intrusion. It would make no sense to read the statute in a way that would create overlapping ownership of claims, which would effectively bar Trustee from ever settling with Lexington. |
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In re: JLM Coture, Inc. |
Bankr. DE |
Previously, the court rejected a landlord's section 365(d)(3) administrative claim for treble rent based on the debtor's post-termination failure to surrender the premises. The court ruled that the treble rent was a penalty for a non-monetary default (i.e. failure to vacate), removing the rent from the scope of section 365(d)(3). The court now explains its rationale again when it denies a motion for reconsideration:
Section 365(d)(3) of the Bankruptcy Code provides "[t]he trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(l) of this title."18 Section 365(b)(2) states: "Paragraph ( 1) of this subsection," which addresses the cure of defaults under a contract or lease that the debtor seeks to assume, "does not apply to a default that is a breach of a provision relating to ... ( d) the satisfaction of any penalty rate or penalty provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease." Based on the plain language of the statute, this subsection only applies if a default has occurred.
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Based on Article 50, the Debtor covenanted to surrender the Premises to the Landlord at the expiration or termination of the Lease term. It is undisputed that the Debtor did not surrender the Premises at the expiration of the Lease term in January 2022. The violation of this covenant constitutes a default under the Lease pursuant to the unambiguous language contained in the introductory paragraph and Articles 17 and 50 of the Lease.
As a penalty for failing to surrender the Premises, Article 50 required the Debtor to pay "a sum equal to three times the average rent and additional rent which was payable per month under this lease during the last six months of the te1m thereof. " The Court dete1mined that the "Monthly Treble Damages" were a penalty rate that did not reflect "the Landlord's actual damages or the loss caused by the Debtor's holdover occupancy." This penalty rate was triggered by the Debtor's failure to surrender the Premises at the expiration of the Lease te1m, which is a non-monetary default. Therefore, the provision requiring the Debtor to pay Monthly Treble Damages was a penalty rate relating to a non-monetary default under the Lease. This places the obligation to pay Monthly Treble Damages squarely within the exception contained section 365(b)(2)(D) of the Bankruptcy Code. Because section 365(d)(3) does not require the Debtor to timely perform obligations that fall under section 365(b )(2), the Debtor was not obligated to pay the Monthly Treble Damages. |
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In re: Wall |
Bankr. ED MI |
In a constructive fraudulent transfer action arising from a Ch. 7 debtor's transfer of his one-third interest in real property to his parents for no value, the court rejects the parents' argument that their original transfer of a one-third interest to the debtor was because he needed a place to live and was never intended by them to be free of any obligation of the debtor to pay them:
As explained below, the Defendants base their argument on “the doctrines of contribution and unjust enrichment.”
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Although the Defendants admit that the Debtor did not receive any value in exchange for the 2020 Transfer, they argue that the Debtor was not entitled to receive any value in exchange for the 2020 Transfer. This is so, according to the Defendants, because the Debtor never contributed any money toward the purchase of the Property. Under these circumstances, the Defendants argue that the equitable doctrines of unjust enrichment and contribution are defenses to the Plaintiff’s constructive fraudulent transfer claim, and prevent the Trustee from avoiding the 2020 Transfer and recovering any portion of the sale proceeds for the benefit of the bankruptcy estate.
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The evidence, including the unambiguous language of the 2017 Quit Claim Deed, establishes beyond any genuine dispute that the Defendants’ March 22, 2017 transfer of a one-third ownership interest in the Property to the Debtor was a gift, and that it made the Debtor a true owner of a one-third ownership interest in the Property. The Defendants intended to, and did, unconditionally give the Debtor such interest, for no consideration. As will be discussed in Part V.E.5 of this Opinion, below, this point alone substantially undermines the Defendants’ contribution and unjust enrichment defenses. |
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In re: Lee |
Bankr. WD MI |
When a pro se discharged Ch. 7 debtor filed a motion to reopen her case to pursue an argument that a secured creditor had: (i) repossessed her vehicle after she fully pad for it and (ii) threatened her with garnishment, the court reopened the case only for purposes of evaluating the garnishment threat:
At that hearing, the court repeatedly reminded the parties that there is no remaining federal interest in the Outlander by operation of 11 U.S.C. § 362(h), which automatically removed it from the bankruptcy estate early in the case, ending the court’s usual in rem jurisdiction over the vehicle. See Memorandum of Decision and Order dated March 20, 2024 (ECF No. 51) at p. 4. Moreover, the court’s order last fall (ECF No. 28) granting Community Promise’s Motion for Relief from Stay expressed the court’s decision to leave the competing interests in the Outlander to applicable non-bankruptcy law and the state courts. The court explained in its Memorandum of Decision and Order dated March 20, 2024, and reiterated in the Combined Order, that it previously reserved the propriety of Community Promise’s repossession and sale of the Outlander for the state courts. In doing so, the court narrowed the issue at this week’s hearing to the questions of (i) whether Community Promise violated the Discharge by threatening to enforce the debt secured by the Outlander as a personal obligation of the Debtor in violation of 11 U.S.C. § 524(a)(2); and (ii) if so, whether the violation amounted to contempt. |
The creditor appeared at the hearing through the debtor's CEO, who did not bring the employee who allegedly made the threat. The court believes the debtor:
The Debtor testified in narrative form that Community Promise’s branch manager, Angela Banuelos, called her in March of this year, threatening to garnish her wages or other property if she did not surrender the Outlander. The court credits her testimony in that respect.
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Rob Viland, Community Promise’s chief executive officer, testified on behalf of the credit union. He explained that Ms. Banuelos was not available to testify because of her pre-planned vacation, but that he was familiar with the Debtor’s file.
Mr. Viland testified that he had no knowledge of threatening phone calls between Ms. Banuelos and the Debtor, nor did he ever instruct her or anyone else at Community Promise to threaten to garnish the Debtor’s wages or other property. Community Promise also introduced two exhibits that Mr. Viland claimed comprised all of the communications between the Debtor and the credit union regarding the Debtor’s loan. (Exhibits 1 and 2, the “Communications”). Nothing in the Communications constituted a threat, after entry of the Discharge, to collect the Debtor’s car loan as her personal obligation.
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The court finds by the requisite proofs that Community Promise violated the Discharge through its agents (Ms. Banuelos and Repocast) first when the branch manager threatened to pursue garnishment -- legal process not directed at the creditor’s collateral but at the Debtor herself -- and again when the repossession company sent the Notice of Lien Holder’s Plan to Sell. The Debtor consistently and credibly testified that Ms. Banuelos raised the specter of garnishment in March, post-discharge, and the Communications demonstrate that Community Promise was aware of the Discharge by then.
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Although the only evidence that Ms. Banuelos threatened to garnish the Debtor’s wages or other property comes from the Debtor’s testimony, the court nevertheless credits that testimony. Community Promise’s counsel conceded that the call in March may have taken place, but its CEO testified that he had no personal knowledge of the existence or content of communications between Ms. Banuelos and the Debtor. Even crediting Mr. Viland’s testimony that he did not instruct Ms. Banuelos to threaten collection activity beyond repossession, it is easy to infer that in the heat of dealing with an uncooperative debtor, a branch manager of a small credit union, under pressure to collect debts for the sake of all credit union members, may fall short of the mark, making less-than-carefully-calibrated word choices. |
The sole relief issued by the court was to enjoin the creditor from violating the discharge again.
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In re: Lyle |
Bankr. ED NC |
The bankruptcy court finds that an air conditioning repair company violated the automatic stay in the debtor's Ch. 13 case by sending 20 invoices to the male debtor during the case. The court rejects the wife's claim for emotional distress damages however:
While Mrs. Lyle may truthfully perceive these mailings were an attempt to collect from her, and the court does not downplay the reality of her serious medical issues or question the credibility of her testimony, the limited evidence from the hearing and the remainder of the case record does not support a finding of damages directly resulting from the invoices, which did not attempt to collect directly from Mrs. Lyle individually. Beyond the invoices, Corey Inc. employed no other method of collection, such as phone calls, threats from a collection agency, a demand letter, or the threat, or filing, of litigation. Her name does not appear on any of the invoices presented into evidence at the hearing, and there is no evidence in the record to show that Corey Inc. was attempting to collect a joint debt that included Mrs. Lyle. She has not shown that any stay violation caused direct and actual damages to her as a debtor individually.
Although the Motion was filed by the Debtors jointly, according to Mrs. Lyle’s testimony, Mr. Lyle was not troubled or bothered by the invoices, and he did not wish to pursue the matter. He did not appear at the hearing to testify, nor did he submit an affidavit to assert a claim for recovery of damages. He has made no effort to pursue this matter and shown no injury sufficient to support a finding of damages resulting from a violation of section 362(a)(6) as a debtor. |
The court: (i) awards $325 in actual damages, (ii) reduces debtor's attorney's fee request from $4,315 to $1,250 and (iii) denies punitive damages.
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