Bankruptcy - Hon. James D. Walker, Jr. and Amber Nickell

• Publication year: 2009

Bankruptcyby Hon. James D. Walker, Jr.^* and Amber Nickell^**

I. Introduction

Bankruptcy law has had a heightened presence in the national consciousness recently due to the downturn in the economy and high profile filings, such as Lehman Brothers and Chrysler. The negative effect on the housing market and increasing defaults by homeowners have renewed interest in primary residence mortgage cram-down legislation. However, except for an increase in overall filings, the recession has yet to have a significant impact on the development of bankruptcy law—at least with respect to cases arising in the Eleventh Circuit in 2008, as this Article demonstrates.¹

II. Administration and Procedure

A. Jurisdiction

Four years into an involuntary bankruptcy case, the debtor in Trusted Net Media Holdings, LLC v. The Morrison Agency, Inc. (In re Trusted Net Media Holdings, LLC)² sought a dismissal for lack of subject matter jurisdiction because the petitioning creditor did not satisfy Sec. 303(b),³ which provides that an involuntary petition may be "commenced" "(1) by three or more creditors holding non-contingent, undisputed claims against th[e] debtor, or (2) by a single holder of a non-contingent, undisputed claim" if the debtor has fewer than twelve creditors.⁴ The United States Court of Appeals for the Eleventh Circuit concluded that these requirements do not implicate subject matter jurisdiction.⁵

Preliminarily, the court noted that bankruptcy jurisdiction is established in Title 28 and generally covers all cases and proceedings under Title 11.⁶ The provision at issue, Sec. 303(b), merely "sets forth the prerequisites for commencing an involuntary petition, specifically who is qualified to do so."⁷ Although circuit courts are split on the is-sue—with the United States Court of Appeals for the Ninth Circuit holding that Sec. 303(b) does not implicate subject matter jurisdiction⁸ and the United States Court of Appeals for the Second Circuit holding that it does⁹ —the weight of authority favors the nonjurisdictional conclu- sion.¹⁰

The Eleventh Circuit agreed with the majority view.¹¹ "To implicate subject matter jurisdiction, a statutory requirement must speak not just to the parties' substantive rights, but also to a particular court's power."¹² In this case, Sec. 303(b) contains no jurisdictional language.¹³ In fact, the language it does use—"commencement of a case"—had previously been deemed nonjurisdictional by the court as used in Sec. 546(a)¹⁴ and Sec. 549(d).¹⁵ Furthermore, 28 U.S.C. Sec. 157(a)¹⁶ grants bankruptcy courts the power to hear all cases under Title 11, which "unquestionably" includes involuntary cases.¹⁷ For those reasons, the court held that Sec. 303(b) is nonjurisdictional and that its requirements can be waived.¹⁸

The Eleventh Circuit considered a different aspect of jurisdiction in Futch v. Roberts (In re Roberts).¹⁹ In this case, the United States Bankruptcy Court for the Southern District of Georgia disallowed a creditor's untimely proofofclaim. The creditor appealed the ruling, and while his appeal was pending, the bankruptcy court granted the debtor's voluntary dismissal of her case. The creditor argued that the court lacked jurisdiction to dismiss the case while his appeal was pending.²⁰ The circuit court rejected this argument.²¹ As a general rule, a notice of appeal "'divests the [lower] court of its control over those aspects of the case involved in the appeal'" but does not prevent it from overseeing collateral matters.²² In this case, the order dismissing the case was unrelated to the matter on appeal—the disallowance of the creditor's claim.²³ Thus, the bankruptcy court's jurisdiction was not affected by the appeal.²⁴ Furthermore, because the dismissal of the bankruptcy case prevented the circuit court from providing the creditor with any relief, the creditor's appeal of the disallowance of his claim was moot.²⁵

B. Settlement Agreements

Pursuant to Federal Rule of Bankruptcy Procedure 9019,²⁶ a bankruptcy court may approve a settlement agreement "[o]n motion by the trustee and after notice and a hearing."²⁷ Two cases from Florida considered the effectiveness of a settlement agreement in the absence of full compliance with the rule.

In Stathopoulos v. Leader Healthcare Management, Inc. (In re Safe Harbour Florida Health Care Properties, Inc.),²⁸ the parties announced at a hearing that they had reached a settlement in a dispute over certain executory contracts. The United States Bankruptcy Court for the Middle District of Florida stated that the settlement would bind all the parties and ordered the debtor to file and send notice of the necessary motion to approve the settlement. More than six months later, no such motion had been filed, and the case converted from Chapter 11 to Chapter 7. The Chapter 7 trustee then filed suit against a party to the settlement agreement. The defendant filed a motion for summary judgment, claiming equitable estoppel based on the settlement agreement.²⁹ The court rejected the defense because despite its pronouncement that the settlement agreement would be binding, the debtor never filed a motion to approve, the debtor never provided notice of the settlement terms to the appropriate parties, and the court never entered an order approving the settlement.³⁰

In Musselman v. Stanonik (In re Seminole Walls & Ceilings Corp.),³¹ the motion and notice requirements were satisfied, but the Middle District of Florida Bankruptcy Court never entered an order. The case involved a dispute over the bankruptcy estate's interest in a collection ofcelebrity photographs. In the course ofproceedings, the photographer, one of the defendants in the dispute, and the trustee entered into and executed a written settlement agreement. The trustee filed a motion to approve the agreement, but a guardian for the photographer sought to rescind the agreement on grounds of incapacity and mistake.³² The bankruptcy court granted the motion to rescind and denied the motion to approve the settlement.³³ Although the court rejected incapacity and mistake as grounds for recission, it stated that the photographer could "unilaterally rescind the agreement" because it had not been approved by the court.³⁴ The trustee appealed.³⁵

The United States District Court for the Middle District of Florida noted that the Eleventh Circuit had not ruled on the issue of "whether parties are bound to a settlement agreement submitted for approval before the bankruptcy judge passes on it," and that bankruptcy courts across the country are split on the issue.³⁶ In reaching a decision, the court noted that "in other areas where court approval of settlements is required, the Eleventh Circuit has held that one party may not unilaterally repudiate the agreement before the court has a chance to approve it or even before it is submitted for court approval."³⁷ Further- more, policy considerations support a limitation on unilateral repudiation to protect parties who may act in reliance on the agreement, for example, by terminating discovery.³⁸ For those reasons, the court held that the right to unilaterally repudiate a settlement agreement is cut off at the time the motion to approve is filed, even though the agreement may not yet be enforceable.³⁹

C. Final Orders

In Barben v. Donovan (In re Donovan),⁴⁰ the Eleventh Circuit held that a denial of an involuntary dismissal is not a final, appealable order.⁴¹ The debtor filed a Chapter 13 case prior to the 2005 amendments to the Bankruptcy Code and made regular plan payments for approximately one year. After the amendments became effective, fluctuations in his income affected his ability to make his monthly plan payments, and consequently, he converted his case to Chapter 7. His former wife, as an unsecured creditor, filed a motion to dismiss on the ground that the conversion was presumptively abusive because the debtor's income exceeded the state's median income. The Middle District ofFlorida Bankruptcy Court denied the motion because the 2005 law did not apply to the case. The ex-wife appealed.⁴²

The circuit court noted that it only has jurisdiction over final judgments, which in the bankruptcy context requires an order that " 'completely resolve[s] all of the issues pertaining to a discrete claim, including issues as to the proper relief.'"⁴³ In this case, the order denying dismissal for abuse was not final because the bankruptcy case continued to move forward.⁴⁴ "The court did not conclusively resolve the bankruptcy case as a whole, nor did the court resolve any adversary proceeding or claim."⁴⁵ The court noted that its conclusion is consistent with at least three other circuit court decisions that considered the issue.⁴⁶

III. Professionals

In In re Casavalencia,⁴⁷ the United States Bankruptcy Court for the Southern District of Florida held that the debtor's Chapter 13 petition was filed in bad faith to evade creditors who he induced to purchase fraudulent securities.⁴⁸ The bankruptcy petition contained gross inaccuracies, including the debtor's name and details about his assets.⁴⁹ The court held the debtor's attorney responsible for the bad faith filing, stating, "No reasonable or responsible lawyer could have filed a petition and schedules so replete with misstatements if that lawyer had done anything approaching the 'reasonable inquiry' requirements of Federal Rule of Bankruptcy Procedure 9011."⁵⁰ In addition, at least some of the misrepresentation—particularly the debtor's false name—would have been discovered "'upon the exercise of reasonable care'" by the debtor's attorney as required by Sec. 526(a)(2).⁵¹ Because the attorney shared in the responsibility for the bad faith filing, the court awarded sanctions against the debtor and his attorney, jointly and severally, for the opponent's attorney fees and costs of $8,739.56.⁵²

In In re Haque,⁵³ it was the creditor's counsel, Florida Default Law Group (FDLG), who faced sanctions for lackadaisical work—in this...