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

• Jurisdiction: United States,Federal
• Publication year: 2005
• Citation: Vol. 56 No. 4

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

I. Introduction

No one topic dominated bankruptcy cases arising in the Eleventh Circuit in 2004, but several developments took center stage. First, judicial estoppel re-emerged as a tool used to prevent a windfall to the debtor when the trustee is the real party in interest.¹ Second, any benefit accruing to debtors after last year's Supreme Court decision² on state sovereign immunity may have been effectively eliminated by a recent circuit court decision.³ Third, student loan creditors endeavored to eviscerate the last remnants of the undue hardship discharge by invoking the availability of the income contingent repayment plan.⁴ This Article addresses these and other recent developments in bankruptcy law. Where applicable, the Article also points out changes resulting from the recent enactment of bankruptcy reform.

II. Procedure

A. Judicial Estoppel

In Parker v. Wendy's International, Inc.⁵ the court of appeals advanced the seemingly straightforward rule that inconsistent positions asserted by a debtor in two different proceedings cannot be the basis of a judicial estoppel defense against the Chapter 7 trustee.⁶ However, judicial estoppel may be effective against the trustee when the nonbank-ruptcy recovery exceeds the total amount of claims, costs, and fees in the Chapter 7 case.⁷ In Parker the court of appeals acknowledged this "unlikely scenario" and stated that "perhaps judicial estoppel could be invoked by the defendant to limit any recovery to only that amount and prevent an undeserved windfall from devolving on the non-disclosing debtor."⁸

In two cases⁹ in which the debtor or trustee sought to reopen the bankruptcy to assert a previously undisclosed cause of action, the courts faced the issue of whether the trustee's recovery should be limited.¹⁰ In In re Huggins,¹¹ the bankruptcy court reopened the case but limited the trustee's authority to recover to no more than "the amount of the proofs of claim filed in this case, reasonable attorney fees and reasonable expenses . . . ."¹² In contrast, the court in In re Upshur¹³ declined to make any findings relating to the judicial estoppel defense. Instead, the court limited its decision to the issue of reopening the bankruptcy case.¹⁴ All questions relating to judicial estoppel—including, presumably, any limitation on the amount of recovery—were for the nonbank-ruptcy court to decide.¹⁵

As these cases demonstrate, the circuit court's "unlikely scenario" is not so unlikely. The cases also show some disagreement among bankruptcy judges about the role of the bankruptcy court in the judicial estoppel analysis.

B. Sovereign Immunity

Last year, in Tennessee Student Assistance Corp. v. Hood,¹⁶ the Supreme Court held that sovereign immunity cannot be raised as a defense to the discharge of student loans because such a proceeding is not a suit within the meaning of the Eleventh Amendment.¹⁷ Instead, the bankruptcy court's power to discharge such a debt derives from its in rem jurisdiction over property of the estate.¹⁸ As it turns out, the decision in Hood may represent an empty victory for debtors. According to the court of appeals, while a bankruptcy court may discharge an obligation owed to the state, a bankruptcy court may not be able to enforce that discharge against the state.¹⁹

In Georgia Higher Education Assistance Corp. v. Crow (In re Crow),²⁰ debtors filed an adversary proceeding to determine if their student loans were dischargeable. The complaint included a request for sanctions for the state's violation of the automatic stay. The issue was whether state sovereign immunity under the Eleventh Amendment precluded such sanctions.²¹ The court said, "[b]ecause count two seeks affirmative relief from the state through a coercive judicial process, the bankruptcy court's jurisdiction over it is premised on the persona of the state, not on the res of the debtor's property."²² Thus, the state could raise sovereign immunity as a defense. However, the defense is only valid if Congress's attempt to abrogate sovereign immunity pursuant to Sec. 106(a) of the Bankruptcy Code²³ was ineffective.²⁴ The court, following the majority of circuits, concluded that Congress has no authority to abrogate state sovereign immunity in bankruptcy proceedings pursuant to either Article I²⁵ or the Fourteenth Amendment.²⁶ Consequently, the court ruled that the debtors' request for sanctions based on a stay violation must be dismissed.²⁷

Although Crow dealt with a stay violation, the same result will likely follow from a violation of the discharge injunction. Once the discharge is entered, no property of the estate exists on which to base in rem jurisdiction. Thus, any efforts to enforce the injunction would be based on in personam jurisdiction. Under Crow sovereign immunity bars such jurisdiction.²⁸ Thus, while a bankruptcy court can rely on Hood to discharge a debt owed to the state, Crow prevents any- effective enforcement of that discharge.

C. Venue

According to the decision in Swinney v. Turner,²⁹ a bankruptcy court lacks the authority to retain a case filed in an improper venue.³⁰ The debtors in Swinney lived in the Middle District of Alabama but filed their bankruptcy case in the Middle District of Georgia because the Georgia bankruptcy court was significantly closer to their home. They acknowledged the improper venue on their bankruptcy petition. The bankruptcy court transferred the case on the motion of the trustee and the debtors appealed, contending that the court could retain the case for the convenience of the parties.³¹

The district court examined three provisions of the Judicial Code³² relating to bankruptcy in determining that the court has no discretion to retain a case filed in an improper venue.³³ Under 28 U.S.C. Sec. 1408,³⁴ venue is proper in the district where the debtor is domiciled.³⁵ Under 28 U.S.C. Sec. 1412,³⁶ a district court may transfer a case to a different venue "in the interest of justice or for the convenience of the parties."³⁷ Under 28 U.S.C. Sec. 1406(a),³⁸ the district court "shall" dismiss or transfer a case filed in an improper venue.³⁹ Based on these provisions, while a court may transfer a case filed in the proper venue on convenience grounds, "no current statutory provision authorizes a court to retain a case in an improper venue for the convenience of the parties."⁴⁰ In fact, a provision of the Judicial Code that had allowed such retention was repealed.⁴¹

Debtors argued that this scheme, which would allow them to file in Alabama and then have the case transferred to Georgia, but would not allow them to file in Georgia, "makes no sense."⁴² While the court acknowledged that the plain language of the statutes "could lead to curious (and some may suggest unjust) results," the court implicitly rejected the assertion that the results were sufficiently absurd to allow the court to look beyond the statutory text for an alternative interpretation.⁴³ Instead, any "perceived problem" must be remedied by Congress rather than by the courts.⁴⁴

III. Debtor Protections

In In re Shell,⁴⁵ the court determined that Chapter 7 debtors' attorneys who are paid via postdated checks risk running afoul of the automatic stay and the discharge injunction.⁴⁶ In Shell the debtor's attorney accepted, but did not negotiate, payment for his fees via checks from the debtor that were dated after the date when the bankruptcy petition was filed.⁴⁷ One circuit court has approved the use of postdated checks to pay Chapter 7 attorney fees under the doctrine of necessity.⁴⁸ However, in this case, the court followed the majority in holding that any effort to collect attorney fees post-discharge would violate the discharge injunction because the attorney fees arise pre-petition and any effort to collect the attorney fees post-petition violates the automatic stay.⁴⁹ Thus, to be paid in full, the Chapter 7 debtor's attorney must receive all payments—meaning checks must be negotiated—prior to the date of filing.⁵⁰ Nevertheless, the court was sympathetic to the practical problems this procedure creates and urged Congress to implement a better system for the payment of Chapter 7 debtors' attorneys.⁵¹

IV. Bankruptcy Estate

A. Property of the Estate

Timing is everything, especially when determining whether an asset is property of the estate. In Bracewell v. Kelley (In re Bracewell),⁵² the debtor planted, harvested, and sold certain crops ("2001 crops") pre-petition. After the debtor filed for bankruptcy and converted his Chapter 12 case to Chapter 7, the President signed the Agricultural Assistance Act,⁵³ which provided disaster payments to farmers who suffered losses for their 2001 crops. The debtor received a disaster payment, and the Chapter 7 trustee contended that the payment was property of the estate. The bankruptcy court found that the payment was property of the estate under Sec. 541(a)(1) because the debtor had a pre-petition right to the payment, but not under Sec. 541(a)(6), which deals with proceeds of estate property.⁵⁴ The district court affirmed in part and reversed in part, holding that the crop payments are not property of the estate under either provision.⁵⁵

The payments are not property of the estate under Sec. 541(a)(1) because no interest was created until the legislation was passed.⁵⁶ Because the legislation in this case was passed pre-petition and post-conversion, no pre-petition interest existed to become property of the estate.⁵⁷ Similarly, because the entitlement to payment did not arise pre-petition, the payment itself was not proceeds of estate property.⁵⁸

B. Turnover

Ownership of repossessed collateral is officially different under Georgia law than under Alabama and Florida law. In Motors Acceptance Corp. v. Rozier (In re Rozier),⁵⁹ the debtor's car was repossessed pre-petition, and the debtor sought turnover of the car, as property of the estate, and sanctions for the creditor's failure to...