Bankruptcy
| Jurisdiction | United States,Federal |
| Publication year | 2021 |
| Citation | Vol. 72 No. 4 |
Bankruptcy
John T. Laney III
Victoria Barbarino Grantham
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This year's Bankruptcy Law Article surveys include both notable cases and legislation that will have an impact on the practice of bankruptcy law in the United States Court of Appeals for the Eleventh Circuit.1 It will address one Supreme Court of the United States case2 argued in October 2020, which was decided early in 2021, and three Eleventh Circuit Court of Appeals cases3 decided in 2020. This Article will also include a follow up on the Small Business Reorganization Act of 20194 and a glimpse into the CARES Act,5 the most groundbreaking legislation of its kind, and its provisions that directly and indirectly affect the insolvency industry.
In a year not seen for a generation, the bankruptcy industry was deeply affected by the economic shutdowns of 2020. Industries, such as retail, suffered extraordinary hardships and sought relief through Chapter 11 bankruptcies and creditor restructuring,6 and, overall,
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business bankruptcies reached their highest levels since 2013.7 Because of the effect of Covid-19, however, aggregate bankruptcy filings, including personal bankruptcies, decreased roughly thirty percent from 2019 to 2020.8 Bankruptcy professionals, and nearly everyone worldwide, have faced a world with uncertainties, financial and otherwise, instigated by this new virus.
A. Supreme Court Opinion: City of Chicago, Illinois v. Fulton9 Defines a Violation of the Automatic Stay
On October 13, 2020, the Supreme Court heard arguments on City of Chicago, Illinois v. Fulton after the arguments were postponed in April due to COVID-19 restrictions.10 The case delved into the bounds of the automatic stay in addressing rightful possession during a debtor's bankruptcy.11 In this case, the City of Chicago impounded the cars of three named Respondents, Robbin L. Fulton, George Peake, and Timothy Shannon, as well as Jason Howard.12 Subsequently, they filed for Chapter 13 bankruptcy.13 The Respondents and City of Chicago disagreed as to which entity should rightfully possess the vehicles.14
As Respondents, the Debtors argued, under § 362(a)15 , the City of Chicago's continued possession of the vehicles after the debtors' notice of bankruptcy filings violated the automatic stay.16 The automatic stay prohibits, "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the
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estate[.]"17 The Seventh Circuit previously held that a creditor's retention of collateral repossessed pre-petition violates the automatic stay.18
In its response, the City of Chicago as Petitioner first addressed § 362(a)(3), stating the statute's text does not require a creditor in lawful possession of property to surrender it to a debtor in bankruptcy.19 Then, the Petitioner argued that § 542(a)20 controls.21 Section § 542(a) reads, "an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell . . . shall deliver to the trustee, and account for, such property or the value of such property[.]"22 The City claimed that the property should be transferred to the Trustee, not to the debtors.23 However, the City also argued that the transfer of property to the trustee is not, "self-executing," triggered only by the filing of a petition.24 The City agreed to transfer the property after the Trustee demonstrated that the requirements of § 542(a) are met, and the possessing creditor has no defenses to turnover.25
On January 14, 2021, the Court ruled unanimously that the, "mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3)."26 The Court held that the automatic stay prohibits, "affirmative acts" that would "disturb the status quo of [the] estate[,]" but an act, "implies . . . something more" than continued possession of already held property.27 The Court added that this interpretation creates a "[more] natural reading" of the relationship between § 362(a)(3) and § 542(a): § 362(a)(3), "prohibits collection efforts outside the bankruptcy proceeding that would change the status quo" and § 542(a), "works within the bankruptcy process to draw far-flung estate property back into the hands of the debtor or trustee."28
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B. Eleventh Circuit Opinions
The Eleventh Circuit issued three bankruptcy opinions this year: Law Solutions of Chicago, LLC v. Corbett, Whaley v. Guillen (In re Guillen), and In re Feshbach.
!. Law Solutions of Chicago, LLC v. Corbett Affirms the Bankruptcy Court's Power to Sanction
The Eleventh Circuit addressed the bankruptcy court's jurisdiction and sanctioning power in Law Solutions of Chicago, LLC v. Corbett. Law Solutions of Chicago LLC and UpRight Law LLC joined to create "The UpRight Law Firm" (UpRight), an internet-based debt relief agency based in Chicago.29 It operates by referring consumer bankruptcy cases to a national network of local lawyers who represent the debtors in bankruptcy courts.30 The contract that a debtor signs for representation comes directly from UpRight Law Firm, not the local attorneys.31
In April 2016, the Bankruptcy Administrator ("BA") for the Northern District of Alabama filed two adversary proceedings regarding UpRight's involvement in a repossession scheme that deprived creditors of secured collateral.32 The BA and UpRight settled the cases in October, presenting the bankruptcy court with a settlement agreement.33 At the time, the UpRight contract for the clients in the Northern District of Alabama included a provision that limited the services UpRight would provide for its clients included in the "flat fee" paid by the debtor to UpRight; other services that exceeded the contractual bounds were excluded from the representation or would cost the debtor more. The settlement agreement between the BA and UpRight included a provision that stated UpRight could no longer use the service-limiting language in its contract with clients in the Northern District of Alabama. The bankruptcy court, without reiterating the settlement agreement's contents, signed an order approving the agreement.34
Roughly seven months after the settlement agreement and subsequent court approval, the BA audited UpRight's cases and found three open cases in which UpRight used the old contractual language, in violation of
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the settlement agreement between the BA and UpRight.35 The BA filed a motion to examine, which the court heard in July 2017.36 During the hearing, the BA asserted that UpRight violated § 707,37 § 526,38 and Rule 2016,39 and UpRight admitted it made mistakes in the three cases.40 The BA also made the court aware of three additional closed cases in which UpRight had used the old contractual language. At the end of the hearing, the bankruptcy court remarked that more testimony and review was needed to determine whether UpRight violated the settlement agreement and the proper recourse if so.41 The bankruptcy court entered an "Order to Appear and Show Cause" and scheduled an evidentiary hearing.42
During the evidentiary hearing, the BA put forth evidence that UpRight used contractual language that violated the settlement agreement in at least six cases. UpRight's representative testified that it made mistakes in the contested filings and, in those cases, UpRight did not charge the debtors for additional services; however, UpRight also admitted that the debtors had not asked for those services and, if they had, UpRight would have charged the debtors extra for those services.43 After the hearing, the BA and UpRight briefed the issues, including whether UpRight had violated §§ 526 and 707.44
The bankruptcy court determined that UpRight violated Rule 901145 , and §§ 526 and 707.46 It imposed sanctions of $150,000 and suspended UpRight's ability to file cases in the Northern District of Alabama for eighteen months.47 UpRight appealed to the district court, and the district court affirmed. UpRight then appealed to the Eleventh Circuit.48
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The Eleventh Circuit first addressed whether the bankruptcy court had the authority to impose sanctions under § 526(a)(2).49 Section 526(a)(2) prohibits debt relief agencies from making statements in bankruptcy courts that they know or should have known were untrue or misleading.50 The bankruptcy court can impose sanctions if it finds the agency violated § 526(a)(2) or, "engaged in a 'clear and consistent pattern or practice' of doing so[.]"51 The Eleventh Circuit found the language used in the contracts with clients, which allowed UpRight to charge for additional services, misleading and in violation of § 526(a)(2).52
UpRight argued that the bankruptcy court did not have subject matter jurisdiction to impose sanctions. UpRight posited that the bankruptcy court sanctioned UpRight for three closed cases and, because the cases were not reopened, the court had no jurisdiction over the cases.53 The Eleventh Circuit quickly disposed of that argument, stating a court's jurisdiction to sanction does not end when a case is closed.54
UpRight also claimed that because the bankruptcy court's order did not expressly incorporate the terms of the settlement agreement, the court could not enforce the agreement.55 UpRight relied on Kokkonen v. Guardian Life Insurance Co. of America,56 which found that an order approving a settlement is not sufficient to establish jurisdiction to enforce the settlement.57 However, the Eleventh Circuit held that the bankruptcy court relied on Rule 9011 and §§ 526 and 707 of the Bankruptcy Code to impose sanctions, providing the bankruptcy court independent grounds for jurisdiction.58 Further, the Eleventh Circuit added that the settlement agreement and order were drafted to comply with the federal Bankruptcy Code and rules and affected UpRight's filings in the bankruptcy...
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