Res Judicata Part 2: What about Bankruptcy Court?

Remember a few months ago, when I talked about the concept of res judicata in Tennessee and how, in some situations, a smart plaintiff will include all relevant causes of action in its initial action? That way, the plaintiff may be able to avoid re-litigating similar issues later.

In that post, I noted that it can be a critical issue in bankruptcy cases, where a state court judgment for fraud can potentially fast-track a non-dischargeability finding under 11 U.S.C. Sec. 523.

Specifically, to do that, the plaintiff needs to plead specific facts and causes of action that would satisfy the elements of 11 U.S.C. Sec. 523 (but in the state court proceeding). In order to convince the bankruptcy courts, however, to apply issue preclusion, the plaintiff generally also has to actually litigate the matter, i.e. the judgment can’t have been based on a default judgment.

As a quick recap, here’s the typical checklist that a bankruptcy court may consider. Were the issues in the prior proceeding:

  • identical with those in the subsequent proceeding;
  • actually litigated;
  • necessarily decided in a final judgment on the merits; and
  • asserted against the same party or someone in privity.

The question that comes up, then, is whether a default judgment has issue preclusive effect? As you can guess from the above, in most cases, a default judgment (i.e. one that is entered solely because the defendant doesn’t respond) is not deemed to be “actually litigated.”

But, two pending cases from August 2019 suggest that courts are looking at these issues.

They are: Creech v. Viruet (In re Creech), 18-12584 (11th Cir. Aug. 7, 2019) (full copy here); the Draka v. Andrea (In re Andrea), 18-96014 (N.D. Ill. Aug. 6, 2019) (full copy here).

These are really interesting cases, and they are worth a reivew, if only to see the heightened standards that a bankruptcy court will apply in 523 actions. Which, by itself, is the primary reason so many creditors want courts to grant issue preclusive effect to default judgments.

In the end, it’s a short-circuit to avoid the relief that the Bankruptcy Code provides to debtors, so it’s a disfavored move. I’d be surprised if a default judgment will satisfy that burden.

Everybody Loves “It City”: United States Supreme Court to hear dispute over land deal in The Nations in November.

The Nashville Bankruptcy Bar got some exciting news from the United States Supreme Court recently, as the Big Court granted certiorari to consider a novel issue of law: Whether an order denying a motion for relief from the automatic stay is a “final order” under 28 U.S.C. § 158(a)(1).

For you real law nerds out there, here’s a copy of the case schedule.

You’ll note that cert was granted in May 2019, and the oral argument is set for November 13, 2019. (I have no idea why this news from May 2019 is just now hitting the local news.)

But, to our local bar, this is newsworthy because the United States Supreme Court is said to grant “cert” in extremely rare circumstances, said to be less than 0.01% of matters presented to it. Continue reading “Everybody Loves “It City”: United States Supreme Court to hear dispute over land deal in The Nations in November.”

Highlights from the Creditors Practice Annual Forum 2018: Stay Relief Violations

Last month, I taught a session at the Tennessee Bar Association’s Creditors Practice Annual Forum 2018.  My section was called “Litigating Stay Violations.”

The CLE was on September 26, 2018, so, sorry, you missed it. But, to get more mileage out of the materials I prepared, I’m going to post some of the info here.

First off, the automatic stay at 11 U.S.C. § 362 operates as a stay of most collection activity against the debtor in bankruptcy.

When the stay is violated, 11 U.S.C. § 362(k) comes into play, which provides in part that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

And, no, a violation doesn’t have to mean that the creditor had bad intent.

Actually, a willful violation of the automatic stay requires only that: (i) the creditor knew of the stay and (ii) acted intentionally in violation of the stay. TranSouth Financial Corp. v. Sharon (In re  Sharon), 234 B.R. 676, 687 (B.A.P. 6th Cir. 1999). “[P]roof of a specific intent to violate the stay” is not required, but instead only “an intentional violation by a party aware of the bankruptcy filing.” Id.

Basically, the debtor has to prove that the creditor had notice of the Bankruptcy and took intentional action that violated the stay. Long story short, it’s not a high bar to prove those factors.

Will an Adversary Proceeding Survive the Dismissal of the Bankruptcy Case? Maybe.

Eight years ago (8 years! You are reading a law blog that has lasted for 8 years!), I talked about the difference between a bankruptcy discharge and a dismissal.

The tl;dr version for creditors? Discharge is bad; dismissal is good.

But, what if you’re a creditor and the debtor has filed an adversary proceeding against you, but then the bankruptcy case is dismissed?

The tl;dr version? It depends.

Generally, the dismissal of the underlying bankruptcy case results in the dismissal of related adversary proceedings because federal jurisdiction is “premised upon the nexus between the underlying bankruptcy case and the related proceedings.” But, there are exceptions.

One such exception is for proceedings to enforce sanctions and contempt for violation of the automatic stay. A Bankruptcy Court will retain jurisdiction “for the purpose of vindicating the court’s own authority and to enforce its own orders.” See In re Bankston, 1:12-BK-14022-SDR, 2015 WL 6126440, at *2 (Bankr. E.D. Tenn. Oct. 15, 2015)

Basically, the reasoning goes, an action for contempt of court resulting from a party’s blatant disregard of the Bankruptcy Code and the authority of the Bankruptcy Court is something that the Bankruptcy Court takes very seriously and will enforce, independent of whether the underlying case still exists.

The reasoning is different for other types of proceedings that are dependent on the underlying case, like actions to recover avoidance preferences.

 

Beware of the 2018 Changes to the Bankruptcy Proof of Claim Bar Date

One of the biggest, most irreversible, mistakes a creditor lawyer can make is to miss the deadline for filing a Proof of Claim in Bankruptcy Court.

I’ve represented creditors who have done that, and I’ve researched excusable neglect, failure of notice, and every other legal theory out there, and, honestly, the creditor is toast.

So, my advice is: File your claims by the Claims Bar Date. Easy advice, right?

Well, a few days ago, I got a jolt of shock, remembering (the hard way) that they’ve changed the Bankruptcy rules related to filing of claims to shorten the deadline. I thought I had time, because the case was relatively new.

Effective December 1, 2017, in voluntary Chapter 7, 12 or 13 cases, pursuant to Federal Rule of Bankruptcy Procedure 3002(c), a proof of claim must be filed no later than 70 days after the bankruptcy filing date.

Under the prior version of Rule 3002(c), the creditor’s claim had to be filed no longer than 90 days after the first date set for the meeting of creditors. So, essentially, under the old law, you had about 130 days to file the Proof of Claim in bankruptcy cases.

In the past, my creditor and bank clients would receive a Notice of Bankruptcy Case Filing, process it internally, and then aim to refer the case to me in advance of the debtor’s Meeting of Creditors or, worst case, before the case was confirmed.

Now, I’m telling all my clients (and you, reader) file your claim or hire your attorney (me) as fast as possible.

 

Leases Can be Assigned in Bankruptcy Court, No Matter What the Lease Says

If you’re a smart commercial landlord (or you have smart drafting counsel), you’ll include a provision in your commercial lease agreement that prohibits transfers or assignments of the lease without the landlord’s consent.

The reasoning is obvious: Not all tenants are created equal, and it should be the landlord who gets to pick the tenants, not the tenants.

Despite an otherwise valid “anti-assignment” provision in a lease, a lease can be assigned by a bankruptcy debtor-in-possession or trustee under the Bankruptcy Code.

Specifically, 11 U.S.C. § 365(f) provides that:

(1) Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.

(2) The trustee may assign an executory contract or unexpired lease of the debtor only if–

(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and

(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.

This will most likely come up in an Section 363 sale of the assets of the debtor, where a buyer gets the assets, along with certain court ordered benefits and protections (this subsection included).

No matter how well crafted certain documents are (whether it’s a note, deed of trust, or lease), there are certain situations in which a Bankruptcy Court will pre-empt state law. This is one of them.

 

Holding a Car Pursuant to a Mechanic’s Lien Doesn’t Violate the Automatic Stay

Generally, if you’re a creditor and you have possession of a bankrupt debtor’s possessions, you have to give it back when they file bankruptcy. But not always.

Today, I’m talking about mechanic’s liens.

As you’ll remember in Tennessee, Tenn. Code Ann. § 66-19-101 allows a mechanic to assert a lien for repairs performed on a vehicle, and, in order to preserve the super-priority perfection in the vehicle, the mechanic has to retain actual, physical possession of the car.

But, what about when the customer files bankruptcy, and the demand to turnover the vehicle comes from a Bankruptcy Attorney, alleging a violation of the automatic stay?

Bankruptcy Courts say that the mechanic can still hold on to the car.

Certain actions are excepted from the automatic stay, including “any act to perfect, or to maintain or continue the perfection of an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b)”  11 U.S.C.A. § 362(b)(3). Section 546(b) limits a trustee’s avoidance powers under 11 U.S.C.A. § 549 with respect to “the maintenance or continuation of perfection of an interest in property … [i]f a law … requires seizure of such property … to accomplish such perfection, or maintenance or continuation of perfection of an interest in property[.]” 11 U.S.C.A. § 546(b). Statutory liens such as mechanics liens fall within the scope of this exception.

That’s a lot of legal citations, so here’s the take away: if the repairman holds a statutory mechanics lien upon the vehicle for the repairs done, then the retention of the vehicle–even after the Bankruptcy Case is filed–does not violate the automatic stay.

In that case, the Debtor must either propose to pay the lien, fight it,  or give up the car. Good news for mechanics.