In re Kadoch, --- Fed.Appx. ---- (2016)

2016 WL 5817267

Only the Westlaw citation is currently available.

This case was not selected for

publication in West's Federal Reporter.

RULINGS BY SUMMARY ORDER DO NOT HAVE

PRECEDENTIAL EFFECT. CITATION TO A

SUMMARY ORDER FILED ON OR AFTER JANUARY

1, 2007, IS PERMITTED AND IS GOVERNED BY

FEDERAL RULE OF APPELLATE PROCEDURE

32.1 AND THIS COURT'S LOCAL RULE 32.1.1.

WHEN CITING A SUMMARY ORDER IN A

DOCUMENT FILED WITH THIS COURT, A PARTY

MUST CITE EITHER THE FEDERAL APPENDIX

OR AN ELECTRONIC DATABASE (WITH THE

NOTATION “SUMMARY ORDER”). A PARTY CITING

A SUMMARY ORDER MUST SERVE A COPY OF IT

ON ANY PARTY NOT REPRESENTED BY COUNSEL.

United States Court of Appeals,

Second Circuit.

In re: David Kadoch, Debtor.

Laurie Kadoch, Appellant,

v. David D. Kadoch,

Appellee, John R. Canney,

Trustee.

16–143–cv

|

October 5, 2016

Appeal from the United States District Court for the District

of Vermont (Murtha, J.).

UPON DUE CONSIDERATION, IT IS HEREBY

ORDERED, ADJUDGED, AND DECREED that the

judgment of the district court is AFFIRMED.

Attorneys and Law Firms

FOR APPELLANT: JAMES B. ANDERSON, Ryan

Smith & Carbine, Ltd., Rutland, Vermont.

FOR APPELLEE: JENNIFER R. EMENS–BUTLER,

Obuchowski & Emens–Butler, P.C., Bethel, Vermont.

PRESENT: DENNY CHIN, SUSAN L. CARNEY,

Circuit Judges, RICHARD M. BERMAN, District

Judge.*

SUMMARY ORDER

*1 Appellant Laurie Kadoch (“Laurie”) appeals from the

district court's judgment entered December 15, 2015,

affirming the order of the United States Bankruptcy Court for

the District of Vermont (Brown, B.J.) entered April 3, 2015,

and its order entered April 17, 2015, denying her motion for

reconsideration. In its orders, the bankruptcy court overruled

Laurie's objections to the claim of debtor-appellee David

Kadoch (“David”) to a homestead exemption. The district

court explained its reasons in an opinion and order also

entered December 15, 2015. We assume the parties'

familiarity with the underlying facts, the procedural history

of the case, and the issues on appeal.

Laurie and David were married for many years. In 2004 and

2005, they borrowed money from Laurie's parents to renovate

their property in Quechee, Vermont (the “Property”). They

divorced in 2010, and their final divorce decree reflected their

stipulation that David would sell the house and the parties

would use the proceeds to repay the outstanding loan from

Laurie's parents, and that until the Property was sold David

could remain in sole possession. In October 2010, a state

court judgment was entered on the debt against David in favor

of Laurie's mother, and in July 2014, David was found in

contempt of the divorce decree because he failed to sell the

Property.

David filed for bankruptcy on October 10, 2014 and claimed

a homestead exemption in the Property under Vermont law,

Vt. Stat. Ann. tit. 27, § 101; Vt. Stat. Ann. tit. 12, § 3023.

Laurie and her mother objected to the homestead exemption;

the bankruptcy court overruled the objection and ruled

David's homestead exemption effective. After the bankruptcy

court denied Laurie's motion for reconsideration, she

appealed to the district court. The district court affirmed.

Laurie argues that (1) the Rooker–Feldman doctrine deprived

the bankruptcy court of jurisdiction to decide whether David

was entitled to a homestead exemption, (2) Laurie and

David's divorce decree excluded the Property from the

bankruptcy estate, (3) the bankruptcy court erred in its

calculation of equity in the homestead property, and (4) the

bankruptcy court abused its discretion when it denied her

motion to reconsider.

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 In re Kadoch, --- Fed.Appx. ---- (2016)

“The rulings of a district court acting as an appellate court in

a bankruptcy case are subject to plenary review.” In re Stoltz,

315 F.3d 80, 87 (2d Cir. 2002). “[W]e review the bankruptcy

court decision independently, accepting its factual findings

unless clearly erroneous but reviewing its conclusions of law

de novo.” In re Baker, 604 F.3d 727, 729 (2d Cir. 2010). The

bankruptcy court's decision to deny Laurie's motion for

reconsideration is reviewed for abuse of discretion. In re

Coudert Bros. LLP, 673 F.3d 180, 186 (2d Cir. 2012). We

conclude, based on our review of the record and the relevant

case law, that that the district court correctly affirmed the

bankruptcy court's order overruling Laurie and her mother's

objections to David's homestead exemption and the order

denying reconsideration.

*2 First, the Rooker–Feldman doctrine did not bar the

bankruptcy court from determining whether a homestead

exemption applied because David did not lose in the state

family court and the issue of the homestead exemption was

not raised in those proceedings. The state court divorce decree

was a so-ordered stipulation imposing obligations on both

Laurie and David, and by requesting a homestead exemption,

David was not “seeking review and rejection” of the divorce

decree. Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544

U.S. 280, 291, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005).

Second, notwithstanding the divorce decree, the Property

remained property of the bankruptcy estate because it did not

create either a lien on the Property or a debt owed by David

to Laurie; rather, both Laurie and David were required to sell

their interests in their jointly owned Property to pay joint

marital debt. Although the family court determined how

Laurie and David would manage their debts and liabilities,

once David filed in bankruptcy, the family court decree could

not override his discharge in bankruptcy, except as permitted

by the Bankruptcy Code. See In re Palmer, 78 B.R. 402, 406

(Bankr. E.D.N.Y.

1987); see also Ridgway v. Ridgway, 454 U.S. 46, 55, 102

S.Ct. 49, 70 L.Ed.2d 39 (1981) (“[A] state divorce decree,

like other law governing the economic aspects of

Footnotes

domestic relations, must give way to clearly conflicting

federal enactments.”).

Third, the bankruptcy court did not clearly err in concluding

that there was sufficient equity in the Property to which a

homestead exemption could attach or in computing the

allocation of net proceeds from the sale. See In re Kleinfeldt,

No. 06–10415, 2007 WL 2138748, at *4 (Bankr. D. Vt. July

23, 2007).

Finally, the bankruptcy court did not abuse its discretion

when it denied Laurie's motion for reconsideration. The issue

of whether the homestead property was excepted from

discharge because of 11 U.S.C. § 523(a)(15), and the other

issues raised in her motion for reconsideration, could have

been or should have been raised in the original motion. See

Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir.

1995). Moreover, the bankruptcy court considered and

rejected the § 523(a)(15) issue on the merits. See Order

Denying Laurie Kadoch's Motion to Reconsider, App. at 13

(“Even if the Court were to find [David's] obligation to

[Laurie's mother] was nondischargeable pursuant to §

523(a)(15), this would not alter the Court's conclusion that

[David] is entitled to a homestead exemption to which

[Laurie's mother]'s debt is subject. Dischargeability and

enforcement of debts are distinct questions.”). The

bankruptcy court did not err in holding that the divorce decree

did not preclude David's invocation of the homestead

exemption in subsequent bankruptcy proceedings.

Accordingly, we affirm substantially for the reasons stated by

the district court in its thorough and wellreasoned December

15, 2015 opinion and order. We have considered all of

Laurie's remaining arguments and find them to be without

merit. Accordingly, we AFFIRM the judgment of the district

court.

All Citations

--- Fed.Appx. ----, 2016 WL 5817267

* Judge Richard M. Berman, United States District Judge for

the Southern District of New York, sitting by designation.

End of Document © 2016 Thomson Reuters. No claim to original

U.S. Government Works.

© 2016 Thomson Reuters. No claim to original U.S.

Government Works. 2

In re: Lehman Brothers Holdings Inc., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

2016 WL 5853265

Only the Westlaw citation is currently available.

This case was not selected for

publication in West's Federal Reporter.

RULINGS BY SUMMARY ORDER DO NOT HAVE

PRECEDENTIAL EFFECT. CITATION TO A

SUMMARY ORDER FILED ON OR AFTER JANUARY

1, 2007, IS PERMITTED AND IS GOVERNED BY

FEDERAL RULE OF APPELLATE PROCEDURE

32.1 AND THIS COURT'S LOCAL RULE 32.1.1.

WHEN CITING A SUMMARY ORDER IN A

DOCUMENT FILED WITH THIS COURT, A PARTY

MUST CITE EITHER THE FEDERAL APPENDIX

OR AN ELECTRONIC DATABASE (WITH THE

NOTATION “SUMMARY ORDER”). A PARTY CITING

A SUMMARY ORDER MUST SERVE A COPY OF IT

ON ANY PARTY NOT REPRESENTED BY COUNSEL.

United States Court of Appeals,

Second Circuit.

In re: Lehman Brothers Holdings Inc., Debtor.

344 Individuals, Identified in the Notices of

Appearance of Bankruptcy Court ECF Dkt. Nos.

8234, 8905 and 9459, Plaintiffs–Appellants,

v.

James W. Giddens, as Trustee for

the SIPA Liquidation of Lehman

Brothers Inc., Defendant–Appellee.

15-3480-bk

|

October 6, 2016

Appeal from the United States District Court for the Southern

District of New York (Ramos, J.).

UPON DUE CONSIDERATION, IT IS HEREBY

ORDERED, ADJUDGED, AND DECREED that the

judgment of the district court is AFFIRMED.

Attorneys and Law Firms

FOR PLAINTIFFS–APPELLANTS: RICHARD J.J.

SCAROLA, Alexander Zubatov, Scarola Malone & Zubatov

LLP, New York, New York.

FOR DEFENDANT–APPELLEE: JAMES C.

FITZPATRICK, James B. Kobak, Jr., Marlena C. Frantzides,

Karen M. Chau, Hughes Hubbard & Reed LLP, New York,

New York.

PRESENT: DENNY CHIN, SUSAN L. CARNEY,

Circuit Judges, KATHERINE B. FORREST, District

Judge.*

SUMMARY ORDER

*1 Plaintiffs-appellants (“plaintiffs”) appeal the district

court's September 30, 2015 judgment affirming the order of

the United States Bankruptcy Court for the Southern District

of New York (Chapman, B.J.) entered August 11, 2014

denying plaintiffs' motion to compel arbitration. The district

court explained its reasoning in an opinion and order entered

September 30, 2015. We assume the parties' familiarity with

the underlying facts, the procedural history of the case, and

the issues on appeal.

This case arises out of the Securities Investor Protection Act

(“SIPA”) liquidation proceeding of Lehman Brothers, Inc.

(“LBI”), the largest liquidation proceeding in U.S. history.

Plaintiffs, former employees of LBI's predecessor Shearson

Lehman Brothers, Inc. (“Shearson”), seek deferred

compensation pursuant to employee compensation plan

agreements (the “Agreements”) that they each signed with

Shearson in 1985. Plaintiffs filed proofs of claims in the LBI

liquidation proceeding. Defendant-appellee James W.

Giddens, the SIPA trustee, sought to enforce the provision of

the Agreements that provides that each former employee's

benefits would be subordinated to certain of LBI's other

obligations.

On April 1, 2014, the bankruptcy court converted the trustee's

objections into an adversary proceeding. On June 6, 2014,

plaintiffs moved to stay the adversary proceeding and to

compel arbitration, arguing that, pursuant to an arbitration

clause in the Agreements, their level of priority should be

decided by FINRA arbitrators, not by the bankruptcy court.

On July 30, 2014, the bankruptcy court heard argument and

denied the motion to compel arbitration, ruling from the

bench. Plaintiffs appealed to the district court, the district

court affirmed, and this appeal followed.

In deciding whether to compel arbitration in a bankruptcy

context, courts apply a two-part test. First, the court must

determine whether the proceeding at issue is core or non-core.

MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir.

2006). If the proceeding is non-core, generally the bankruptcy

court must stay the proceedings in favor of arbitration, as

non-core proceedings usually do not warrant overriding the

presumption in favor of arbitration. In re U.S. Lines, Inc., 197

In re: Lehman Brothers Holdings Inc., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4

F.3d 631, 640 (2d Cir. 1999); see also In re Crysen/Montenay

Energy Co., 226 F.3d 160, 165–66 (2d Cir. 2000). Second, if

the proceedings are core, a court must consider whether

enforcing the arbitration provisions would seriously

jeopardize “any underlying purpose of the Bankruptcy

Code.” In re U.S. Lines, 197 F.3d at 640 (quoting Hays and

Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d

1149, 1161 (3d Cir. 1989)). This two-part test presents mixed

questions of law and fact, and on review, we accept the

bankruptcy court's factual findings unless they are clearly

erroneous and review its conclusions of law de novo. MBNA

Am. Bank, 436 F.3d at 107.

*2 If arbitration would severely conflict with the text,

history, or purposes of the Bankruptcy Code, the bankruptcy

court has discretion to compel or to stay the arbitration. We

review its exercise of that choice for abuse of discretion.

“Where the bankruptcy court has properly considered the

conflicting policies [of the Federal Arbitration Act and the

Bankruptcy Code] in accordance with law, we acknowledge

its exercise of discretion and show due deference to its

determination that arbitration will seriously jeopardize a

particular core bankruptcy proceeding.” In re U.S. Lines, 197

F.3d at 641.

Here, the bankruptcy court held (1) the proceeding was a core

proceeding, and (2) compelling arbitration of the

subordination claim would jeopardize the objectives of the

Bankruptcy Code. Based on our independent review of the

record and the relevant case law, we conclude that the

bankruptcy court did not abuse its discretion in denying

plaintiffs' motion to compel arbitration. See In re Stoltz, 315

F.3d 80, 87 (2d Cir. 2002) (“The rulings of a district court

acting as an appellate court in a bankruptcy case are subject

to plenary review.”).

First, the bankruptcy court correctly concluded that, in this

SIPA liquidation, the dispute over where plaintiffs' claims fall

in the priority scheme of distributions is a core proceeding.

See In re U.S. Lines, Inc., 197 F.3d at 637 (core bankruptcy

proceedings may include “[f]ixing the order of priority of

creditor claims against a debtor” (internal quotation marks

omitted)). Additionally, the bankruptcy court correctly

concluded that the dispute involving the enforcement of a

contractual subordination agreement is core, especially where

the parties dispute whether the subordination provision may

only be applied by the former entity, Shearson, and not LBI,

and whether they are the same entity. See 28 U.S.C. §

157(b)(2)(A) (“Core proceedings include, but are not limited

to ... matters concerning the administration of the estate.”).

Second, the bankruptcy court did not abuse its discretion in

concluding that, in this case, compelling arbitration would

jeopardize the objectives of the Bankruptcy Code. The

bankruptcy court reasonably determined that “Congress

simply could not have intended to turn over the determination

of the relative priority of claims against the estate and the

equitable distribution of the estate's assets in the largest SIPA

liquidation in U.S. history [to] the financial industry

regulatory authority to be decided under the rules of the New

York Stock Exchange.” App. at 1196. The bankruptcy court

considered the conflicting policies of the Federal Arbitration

Act and the Bankruptcy Code, made a particularized inquiry

into the nature of the claims and the facts of LBI's bankruptcy,

and found that an underlying purpose of the Bankruptcy Code

would be jeopardized by enforcing an arbitration clause in

this case. See MBNA Am. Bank, 436 F.3d at 108. While the

bankruptcy court did not use the phrase “seriously

jeopardized” in its conclusions, it did set forth the proper

standard earlier in its ruling. Moreover, based on our review

of the record, we conclude that arbitration would have

“seriously jeopardize[d]” the objectives of the Bankruptcy

Code. The bankruptcy court therefore had discretion over

whether to permit arbitration of subordination claim.

Accordingly, we must give due deference to the bankruptcy

court's decision to stay arbitration unless appellants show that

it constituted an abuse of discretion. Given the bankruptcy

court's careful analysis of the impact of arbitrating the

subordination claim on the bankruptcy proceeding in this

case, appellants have not overcome that deferential standard.

We therefore agree with the district court that the bankruptcy

court did not abuse its discretion in denying the motion to

compel arbitration.

*3 We have considered all of plaintiffs' arguments and find

them to be without merit. Accordingly, we AFFIRM the

judgment of the district court.

All Citations

--- Fed.Appx. ----, 2016 WL 5853265

In re: Lehman Brothers Holdings Inc., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 5

Footnotes

* Judge Katherine B. Forrest, of the United States District Court for the Southern District of New York, sitting by designation.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re ADI Liquidation, Inc., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 6

2016 WL 6126245

Only the Westlaw citation is currently available.

United States Bankruptcy Court, D. Delaware.

In re: ADI Liquidation, Inc. (f/k/ a

AWI Delaware, Inc.), et al.,1 Debtors.

Case No. 14–12092 (KJC)

|

Signed October 19, 2016

Attorneys and Law Firms

Aaron S. Applebaum, Jeffrey C. Hampton, Robyn F.

Pollack, Saul Ewing LLP, Philadelphia, PA, Nathaniel Metz,

Shanna Peterson O'Neal, Saul Ewing LLP, Wayne, PA, Mark

Minuti, Lucian Borders Murley, Teresa K.D. Currier, Saul

Ewing LLP, Monique Bair DiSabatino, Saul Ewing LLP,

Evelyn J. Meltzer, Pepper Hamilton LLP, Wilmington, DE,

for Debtors.

OPINION OVERRULING OBJECTION TO CLAIM

OF MARK R. MANGAN2

BY: KEVIN J. CAREY, UNITED STATES BANKRUPTCY

JUDGE

*1 Before the Court is the Debtors' Eighth Omnibus

(Substantive) Objection to Employee Claims (D.I. 2902)

(the “Objection”),3 which includes an objection to proof of

claim number 1825 (“POC 1825” or the “Claim”) filed by

Mark R. Mangan (“Mangan”). Mangan filed POC 1825 as a

priority claim under Bankruptcy Code § 507(a)(4) for unpaid

wages (severance pay) in the amount of $8,693.70. Mangan

also requests payment of his severance claim in a lump sum

distribution. The Debtors contend that the Claim should be

reclassified as a general unsecured claim.

In his response to the Objection (D.I. 2941) (the “Response”),

Mangan opposed reclassification of his claim, arguing that he

continued to provide services to the Debtors post-termination

and post-petition. He attached lists of phone records to his

Response, showing the post-petition communications. He

also attached a copy the Debtors' severance pay policy dated

June 16, 2014, showing that the Debtors' former policy

provided for a lump sum distribution of a severance benefit

payment. A hearing to consider the Objection was held on

May 24, 2016, at which Mangan appeared pro se.

For the reasons set forth below, the Objection will be

overruled. Mangan's claim will be classified as a fourth

priority claim under the Bankruptcy Code § 507(a)(4).

BACKGROUND

Mangan worked as an advertising group manager for

Associated Wholesalers, Inc. (“AWI”) from June of 1999

until his termination on August 1, 2014.4

His responsibilities

included advertising planning, program execution, marketing

campaigns, vendor promotion planning, media buying,

budget control, and responsibility for the operation of twenty-

eight major fullservice supermarkets.5

By letter dated August 1, 2014, the Debtors terminated

Mangan's employment (the “Termination Letter”).6

AWI had

a policy offering full-time, non-union employees who were

permanently laid off certain severance benefits based upon

their years of continuous service.7 The rates for terminated

employees' severance benefits were as follows:

(1) The employees who served fewer than two years

werenot eligible for severance benefits;

(2) The employees who served between two and

fiveyears were eligible for two weeks of severance

benefits; and

(3) The employees who served more than five years

wereeligible to receive one week of severance benefits

for every completed year of service up to a maximum of

twenty weeks.8

According to the Debtors' policy, and as stated in the

Termination Letter, Mangan was entitled to fifteen weeks of

severance pay.9 The Debtors paid nine weekly severance

payments to Mangan prior to the petition date. The Debtors

do not dispute that the amount of $8,693.70 remains

unpaid.10

*2 On September 9, 2014, the Debtors filed voluntary

chapter 11 bankruptcy petitions. Between August 2, 2014,

and October 16, 2014, the Debtors' employees and

representatives contacted Mangan, through phone calls, text

messages and emails, for assistance in continuing

In re ADI Liquidation, Inc., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 7

AWI's business operations.11

The contacts related to ongoing

requests for information on the location of AWI company

records, computer files, procedures, location of hardcopy

files, and advice regarding unfinished business from his time

at AWI.12

Mangan argues that AWI's policy since 1997 provided for

payment of severance benefits in a lump sum distribution,

“after all obligations to the Company have been met and at a

time when final termination pay is rendered.”13

AWI

changed its policy on July 30, 2014, to provide for payment

of severance pay on a weekly basis.14

Mangan says that he

was not notified of the change in policy, but “obtained a copy

of this revised policy through a secondary source.”15

Mangan

alleges the change in policy was made on the same day that

AWI finalized a plan to lay off 59 employees, including

him.16

At the hearing, the Debtors conceded that, under the

old severance policy, Mangan would have received his

severance pay in a lump sum distribution.17

DISCUSSION

Mangan opposes reclassification of his severance benefit

claim from a priority claim to a general unsecured claim.

Further, in his Response, he argues that his severance benefit

claim should be a secured claim because he continued to work

for AWI post-petition. He did not address any specific basis

of authority for his argument, beyond checking the box for a

§ 507(a)(4) claim on POC 1825.

(1) The Severance Benefit Claim is a Priority Claim

under Bankruptcy Code § 507(a)(4).

Section 507(a)(4) provides that priority status will be granted

to allowed unsecured claims for “wages, salaries or

commissions, including vacation, severance, and sick leave

pay” earned by an individual “within 180 days before the date

of the filing of the petition,” but “only to extent of

$12,850.”18

The Debtors argue that the terminated employees earn one

week of severance pay as they complete a year of service on

the anniversary date of their employment. This method of

calculation derives from the severance policy itself, under

which an employee in Mangan's position is eligible for an

additional week of severance pay (paid at the employee's base

rate at the time of layoff) only upon each year of completed

service. The Debtors further argue that, if a terminated

employee completes a year of service within 180 days of the

petition date, then that employee earned one week of

severance pay that is entitled to priority status; for any

terminated employee whose work anniversary does not fall

within 180 days of filing, no priority status is accorded to the

employee's severance benefit claim.

The Debtors agree that Mangan completed a year of service

in June 2014 and, since that is within 180 days of the petition

date, Mangan was entitled to priority status for one week of

his severance pay claim. Since the Debtors paid Mangan for

nine weeks of severance pay, the Debtors contend that the

amount of severance pay remaining due is a general

unsecured claim.

Courts have reached varying conclusions on the question of

when an employee earns his or her severance payment.

Several courts have held that severance pay, like vacation

pay, is “earned” over the course of the employee's service

because “the severance pay is a component of compensation

... the amount of severance pay [based on service length]

entitled to priority under § 507(a)(4)(A) is that portion of the

total severance pay attributable to the priority prepetition

period.”19

*3 In In re Garden Ridge Corp., I held that in a “severance

pay for termination without cause” situation, the employee's

“right to receive severance payments was ‘earned’ no earlier

than upon termination of employment...”20

Specifically,

because the debtor incurred contingent obligations when it

entered into the employment agreements, and “the

contingencies actually occurred when the Debtor exercised its

right to terminate the claimants' respective employment

agreements,” the severance pay was earned upon

termination.21

In Garden Ridge, unlike the matter before us,

the terminated employees' entitlement to severance payments

did not accrue over time, but were tied to the employees' base

pay at the time of termination. But the contingency in each

case, termination, is what triggers the right to payment:

Mangan's eligibility for severance accrued over time, but he

earned or became entitled to severance only upon termination

of his employment.22

My decision in Garden

Ridge informs the result here.23

Mangan's severance benefit

claim is entitled to priority treatment under § 507(a)(4).

Mangan earned his severance payment within “180 days of

the date of the filing of the petition,” and the amount of the

In re ADI Liquidation, Inc., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 8

severance is within the $12,475 statutory cap; therefore, it is

a priority claim.

(2) The Severance Benefit Claim is not an

Administrative Expense Priority Claim.

According to 11 U.S.C. § 503(b)(1)(A), the administrative

expenses include “the actual, necessary costs and expenses of

preserving the estate including ... wages, salaries, and

commissions for services rendered after the commencement

of the case ....” Mangan argues that AWI should compensate

him for his severance claim as an administrative claim

because he rendered post-petition services.24

Mangan

believed that he “was compelled to continue to honor the

request for information and cooperation of the Debtor,” and

that his work was in the normal operation of the Debtors'

business.25

He further elaborates that there was “somewhat

of an obligation to feel compelled to do so” because of the

many responsibilities that he previously performed.26

He also

states that he felt compelled to do so “because a lump sum

distribution [of his severance benefits] was not made.”27

Mangan admits that he had no express agreement with AWI

regarding the services he provided after the termination of his

employment. AWI admits that Mangan provided assistance

after his termination, but claims that their employer-

employee relationship ended on August 1, 2014.

*4 Here, Mangan's severance payment claim derives from

his pre-petition work over the past fifteen years.

Footnotes

The fact that he may have continued to provide services to

AWI after the filing of the petition was not a basis for his

severance payment. AWI did not enter into any post-petition

agreement with Mangan; neither did AWI promise to render

the severance pay in exchange for his post-petition services.

Post-petition, Mangan was not AWI's employee, but

volunteered for the services he provided. A volunteer may not

receive compensation from the Debtors. “The services for

which compensation is requested should have been

performed pursuant to appropriate authority under the Code

and in accordance with an order of the court.

(3) The Severance Benefit Claim is not a Secured Claim.

Mangan also argues that his severance benefit claim is a

secured claim because AWI initiated contact with him

numerous times after terminating his employment by letter,

which (he believes) demonstrates that AWI retained his

services.28

It is clear that Mangan, who is representing

himself, does not understand the nature of a secured claim and

the record supports no basis upon which I can conclude that

his claim is secured.

CONCLUSION

For the reasons set forth above, I conclude that Mangan's

severance benefit claim, totaling $8,693.70, should be

classified as a priority claim under Bankruptcy Code §

507(a)(4). As I confirmed the Debtors' plan in this chapter 11

case on September 30, 2016 (D.I. 3679), Mangan's claim

should be paid in accordance with the treatment of priority

claims under the plan.

An appropriate order follows.

All Citations

Slip Copy, 2016 WL 6126245

1 The Debtors in these chapter 11 cases are: AWI Delaware, Inc.; Associated Wholesalers, Inc.; Nell's, Inc.; Co–Op

Agency Inc.; Associated Logistics, Inc.; White Rose Inc.; Rose Trucking Corp.; WR Service Corp.; WR Service II Corp.;

WR Service V Corp.; and White Rose Puerto Rico, LLC.

2 This Opinion constitutes the findings of fact and conclusions of law, as required by Fed. R. Bankr. P. 7052. This Court

has jurisdiction to decide this claim objection pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant

to 28 U.S.C. § 157(b)(2)(B). Venue is proper in this judicial district under 28 U.S.C. §§ 1408 and 1409.

3 Debtors' Eighth Omnibus (Substantive) Obj. to Employee Claims (Duplicative, Improperly Asserted, No Liability and

Reclassified Claims) and Mot. for Entry of an Order Authorizing and Directing Debtors' Claims Agent to Mark Certain

Claims as Satisfied in Full (D.I. 2902).

4 Hearing Transcript, May 24, 2016 (D.I. 2976), at 9:12–25; Response (D.I. 2941).

5 Id.

6 Objection, ¶ 12.

In re ADI Liquidation, Inc., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 9

7 Id. ¶ 11.

8 Id.

9 POC 1825.

10 Tr. 6:13–17.

11 Tr. 10:2–25.

12 Tr. 9:15–18.

13 POC 1825. See Response, Ex. D.

14 POC 1825, Ex. E.

15 POC 1825. 16 Id.

17 Tr. 6:22–23.

18 11 U.S.C. § 507(a)(4). The dollar amount is adjusted in 3–year intervals pursuant to 11 U.S.C. § 104.

19 In re Ellipsat, Inc., 480 B.R. 1, 10 (Bankr. D. D.C. 2012) (discussing that traditionally courts have concluded that an

employee “earns” his severance pay over time under the severance policy) (citing In re Russell Cave Co., Inc., 248 B.R.

301, 304–05 (Bankr.E.D.Ky. 2000), In re Yarn Liquidation, Inc., 217 B.R, 544, 546 (Bankr.E.D.Tenn. 1997), Roeder v.

United Steelworkers of Am. (In re Old Electralloy Corp.), 167 B.R. 786, 796 (Bankr.W.D.Pa. 1994), In re Jeannette Corp.,

118 B.R. [327, 330 (Bankr.W.D. Pa. 1990) ], and In re N.W. Eng'g Co., 43 B.R, 603, 605 (Bankr.E.D.Wis. 1984)).

20 In re Garden Ridge Corp., 2006 WL 521914, at *1–2 (Bankr.D.Del. Mar. 2, 2006). In 2006, Bankruptcy Code § 507(a)(3)

governed the priority of severance pay claims, and the Code stated that the “wages, salaries, or commissions, including

vacation, severance, and sick leave pay earned by an individual” within 90 days before the date of the filing of the petition

was a priority claim.

21 Id.

22 Matson v. Alarcon, 651 F.3d 404 (4 th Cir. 2011). The Matson Court decided that “[t]he purpose of such severance

compensation is to ‘alleviate the consequent need for economic readjustment’ and ‘to recompense [the employee] for

certain losses attributable to the dismissal.’ ” (citing Straits–Duparquet, Inc. v. Local Union No. 3, Int'l Bhd of Elec

Workers, 386 F.2d 649, 651 (2d Cir. 1967)). The Matson Court held “that an employee ‘earns' the full amount of

‘severance pay’ on the date the employee becomes entitled to receive such compensation, subject to satisfaction of the

contingencies provided in the applicable severance compensation plan.” Matson, 61 F.3d at 409. The Matson Court also

distinguished cases (including the Third Circuit's decision in Roth American ) which considered the treatment of claims

for severance payment as administrative expense priority, deciding that § 503(b)(1)(A)'s provisions are materially

different from § 507(a) (4); for administrative claim priority, the court must calculate the value of services rendered in a

period of time after the debtor files a bankruptcy petition. Matson, 61 F.3d at 410. See In re Roth American, Inc., 975

F.2d 949 (3d Cir. 1992).

Therefore, Roth American addresses a different issue than the one before me and the reasoning is not applicable here.

23 Curiously, I was unable to find any reference by Debtor's counsel either in the Objection or the hearing record to Garden

Ridge.

24 Tr. 11:2.

25 Tr. 10:17–18; 11:1–2, 11–12.

26 Id. 11:14–17.

27 See Response. This argument has no force legally, but it is understandable that Mangan did not know why he was not

given the lump-sum payment to which he believed he was entitled or what might be required of him to prompt the payment

if, as he states in POC 1825, he was never notified of the change in the severance policy from lump-sum distribution to

payment on a weekly basis. 28 Response, at 3.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Grant Covert, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 10

2016 WL 5846227

Only the Westlaw citation is currently available.

This case was not selected for

publication in West's Federal Reporter.

See Fed. Rule of Appellate Procedure 32.1

generally governing citation of judicial decisions

issued on or after Jan. 1, 2007. See also U.S.Ct. of

Appeals 3rd Cir. App. I, IOP 5.1, 5.3, and

5.7. United States Court of Appeals, Third

Circuit.

In re: Dana N. Grant–Covert, Appellant

No. 16–1880

|

Submitted Pursuant to Third Circuit

LAR 34.1(a) September 1, 2016

|

(Opinion filed: October 6, 2016)

Synopsis

Background: Bank moved for relief from stay in

debtormortgagor's Chapter 7 case to exercise its rights in

mortgaged property. The United States Bankruptcy Court for

the District of Delaware granted motion, and debtor appealed.

The District Court, Noel L. Hillman, J., affirmed. Debtor

appealed.

[Holding:] The Court of Appeals held that bank to which

Chapter 7 debtor's mortgage was transferred, and which was

also the holder, either in its own capacity or through agent, of

associated mortgage note that was endorsed in blank,

qualified as “real party in interest” with standing to move for

relief from stay.

Affirmed.

On Appeal from the United States District Court for the

District of Delaware, District Judge: Honorable Noel L.

Hillman. (D.C. Civil Action No. 1–15–cv–06018)

Attorneys and Law Firms

Dana N. Grant–Covert, Cherry Hill, NJ, Pro Se.

Barbara K. Hager, Henry F. Reichner, Reed Smith,

Philadelphia, PA.

Before: VANASKIE, SCIRICA and FUENTES, Circuit

Judges

OPINION*

PER CURIAM

*1 Dana N. Grant–Covert appeals from the District

Court's order, which affirmed a bankruptcy court order1

that

vacated the automatic stay in her bankruptcy proceeding. We

will affirm the District Court's judgment.

Because the parties are familiar with the history and facts of

the case, we will limit our discussion to those facts essential

to our decision. Appellant filed a Chapter 7 bankruptcy

proceeding in June of 2015. Wells Fargo Bank, N.A.,

claiming to be a secured creditor based on a first mortgage on

real property, filed a motion for relief from the automatic

stay, see 11 U.S.C. § 362(a), in order to foreclose on the real

property. Grant–Covert opposed the motion, arguing that

Wells Fargo was “not the Real Party in Interest,” that it did

not have standing, that it was a “third Party Interloper,” and

that it had “not filed a Proof of Claim to be considered as

Secured Creditor.” Bankr. Dkt. # 24 at 2.

The Bankruptcy Court held a hearing on the motion. Wells

Fargo did not attend. The Bankruptcy Judge granted Wells

Fargo's motion, informing Grant–Covert that she would have

to raise any defenses she had in the state-court foreclosure

action. Grant–Covert timely appealed.

The District Court affirmed the Bankruptcy Court order. The

Court agreed that Grant–Covert could raise her defenses to

the claim in the foreclosure action, concluded that Wells

Fargo was a real party in interest under 11 U.S.C. § 362(d),

and held that Wells Fargo had shown cause for relief from the

automatic stay. Grant–Covert filed a timely appeal.

The District Court had jurisdiction to review the Bankruptcy

Court's order pursuant to 28 U.S.C. § 158(a), and we have

jurisdiction to review the District Court's order under 28

U.S.C. §§ 158(d) and 1291. Our review of the District Court's

determination is plenary, and we use the same standard of

review as the District Court in reviewing the decision of the

Bankruptcy Court. See Kool, Mann, Coffee & Co. v. Coffey,

300 F.3d 340, 353 (3d Cir. 2002).

Grant–Covert raises four issues in her brief on appeal, but her

argument essentially boils down to this: Wells Fargo could

not properly move to lift the stay because it lacked standing

and/or was not a real party in interest. The Bankruptcy Court

did not address the argument, stating that “[t]here's really no

In re Grant Covert, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 11

basis for this Court to retain the jurisdiction over those

issues.” Tr. at 5. The District Court did consider the

argument, and held that Wells Fargo was a real party in

interest. We agree.

Constitutional standing is a threshold jurisdictional

limitation; federal courts may only decide real cases or

controversies. See Barrows v. Jackson, 346 U.S. 249, 255, 73

S.Ct. 1031, 97 L.Ed. 1586 (1953). Grant–Covert does not

appear to argue that Wells Fargo failed to show constitutional

standing. But even if “the plaintiff has alleged injury

sufficient to meet the ‘case or controversy’ requirement, [the

Supreme] Court has held that the plaintiff generally must

assert his own legal rights and interests, and cannot rest his

claim to relief on the legal rights or interests of third parties.”

Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197, 45

L.Ed.2d 343 (1975).

This prudential aspect of standing is closely related to §

362(d)'s requirement that the party moving to terminate the

automatic stay be “a party in interest.” Because real parties in

interest always have standing, but the converse is not always

true, we focus on whether Wells Fargo is a real party in

interest. See In re Veal, 450 B.R. 897, 907 (9th Cir. BAP

2011) (citing 4 Moore's Fed. Prac. § 17.10[1], at p. 17–

15 (3d ed. 2010)2); see also In re Miller, 666 F.3d 1255, 1261

(10th Cir. 2012) (party seeking relief under § 362(d) must be

either creditor or debtor of bankruptcy estate).

*2 Grant–Covert argues that Wells Fargo is not a real party

in interest because it did not show that it was entitled to

enforce the Note associated with her mortgage. She does not

dispute that her mortgage was transferred to Wells Fargo, but

she argues that it cannot show that it was entitled to enforce

the associated note because it was “indorsed to Wells Fargo

and then indorsed in blank.” Appellant's Br. at 11, quoting

Dist. Ct. Op. at 2.

Under New Jersey law, an instrument that is indorsed in blank

“becomes payable to bearer and may be negotiated by

transfer of possession alone until specially indorsed.”

N.J. Stat. Ann. § 12A:3–205. Thus, whoever was in

possession of the note would become the “holder” of the note,

and would be entitled to enforce the note under N.J. Stat.

Ann. § 12A:3–301. And under common law, if Wells Fargo

held the mortgage but not the underlying note, the mortgage

would have been “a worthless piece of paper.” See Veal, 450

B.R. at 916 (internal quotation and citation omitted). Grant–

Covert argues that the reasoning in Veal should persuade us

and similarly should result in a finding that Wells Fargo did

not show that it is a real party in interest. But we find that

unlike in Veal, Wells Fargo made a sufficient showing here

that it possessed the note as well as the mortgage.

First, in Veal the assignment of the mortgage did “not contain

language effecting an assignment of the Note.” Veal, 450

B.R. at 905. In contrast, the assignment here assigned the

mortgage to Wells Fargo “Together with the bond, Note or

other Obligation therein described, and the money due to

grow due thereon, with the interest.” Bankr. Dkt. # 18–1 at

22. Second, Tiffany Pompey, Vice President Loan

Documentation of Wells Fargo certified that she had

personally reviewed the company's records and certified that

Wells Fargo “directly or through an agent, has possession of

the promissory note.” Id. at 1. And the certification attached

a copy of the Note. Id. at 11–12. Cf. Veal, 450 B.R. at 904

(“Wells Fargo submitted ... no evidence as to who possessed

the Note and no evidence regarding any property interest it

held in the Note.”); Miller, 666 F.3d at 1264 (“While

Deutsche Bank has offered proof that IndyMac assigned the

Note in blank, it elicited no proof that Deutsche Bank in fact

obtained physical possession of the original Note from

IndyMac, either voluntarily or otherwise.”).

As Wells Fargo provided evidence that it had been assigned

the mortgage, and that it was in possession of the Note

indorsed in blank, it produced sufficient evidence to allow the

Bankruptcy Court to find that it was a party in interest,

entitling it to ask that court to lift the automatic stay.

For the foregoing reasons, we will affirm the District Court's

judgment.

All Citations

--- Fed.Appx. ----, 2016 WL 5846227

Footnotes * This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding

precedent.

1 See In re: Dana N. Grant–Covert, No. 15–20394–ABA (Bankr. D.N.J. July 22, 2015).

2 The same concept now appears at 2–13 Moore's Manual—Federal Practice and Procedure § 13.01[1] (2016).

In re Grant Covert, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 12

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 13

2016 WL 6137275

Only the Westlaw citation is currently available.

United States Bankruptcy Court, D. Delaware.

In re: W.R. Grace & Co., et

al.,1 Reorganized Debtors

Ralph Hutt and Carl Osborn, Plaintiffs,

v.

Maryland Casualty Company, Defendants.

Case No. 01–01139 (KG) (Jointly Administered)

|

Adv. Proc. No. 14–50867 (KJC)

|

Signed October 17, 2016

Attorneys and Law Firms

James E. O'Neill, Pachulski Stang Ziehl & Jones LLP,

Wilmington, DE, for Reorganized Debtors/Plaintiffs.

Michael G. Busenkell, Gellert Scali Busenkell & Brown,

LLC, Wilmington, DE, Daniel C. Cohn, Ryan M.

MacDonald, Keri L. Wintle, Murtha Cullina LLP, Boston,

MA, for Plaintiffs.

Gabriella V. Cellarosi, Gabriella Cellarosi Daniel,

Edward J. Longosz, II, Eckert Seamans Cherin & Mellott,

LLC, Washington, DC, Jeffrey C. Wisler, Connolly

Gallagher, Wilmington, DE, for Defendants.

OPINION2

KEVIN J. CAREY, UNITED

STATES BANKRUPTCY JUDGE

*1 Ralph Hutt and Carl Osborn (the “Plaintiffs”) filed an

adversary complaint (the “Adversary Complaint”) seeking a

declaratory judgment that their claims against Maryland

Casualty Company (“MCC”), as set forth in a proposed

complaint to be filed in Montana state court, attached as

Exhibit A to the Adversary Complaint (the “State Court

Complaint”), are not barred by the Asbestos PI Channeling

Injunction that was established in the Debtor's confirmed plan

of reorganization. The Plaintiffs have moved for summary

judgment (Adv. D.I. 14) (the “Summary Judgment Motion”),

which is opposed by

MCC.3 The Court heard oral argument on the Summary

Judgment Motion and took the matter under advisement.

For the reasons set forth below, the Plaintiffs' Summary

Judgment Motion will be granted, in part, and denied, in part.

BACKGROUND AND UNDISPUTED FACTS4

The Debtors manufactured and sold specialty chemicals and

construction materials for more than a century and, in the

1970's, began to face asbestos-related lawsuits.5

“Those

lawsuits were based on harm allegedly caused by a number

of Grace's products and activities, including its operation of a

vermiculite mine in Libby, Montana” (the

“Libby Facility”).6 “Grace operated the mine from 1963 to

1990, and during that period the mining process released

asbestos-containing dust into the atmosphere and allegedly

sickened hundreds of area residents.”7

On April 2, 2001, the Debtors filed voluntary chapter 11

petitions in this Court. The Debtors' First Amended Plan of

Reorganization (the “Plan”) took effect on February 3,

2014 (the “Effective Date”).8 The Plan was supported by the

Debtors and the Court-appointed representatives of the

interests of existing and future asbestos claimants. The Plan

creates the “WRG Asbestos PI Trust” (the “Asbestos PI

Trust”), “a Delaware statutory trust, established pursuant to

section 524(g) of the Bankruptcy Code9 and in accordance

with the Asbestos PI Trust Agreement.”10

*2 The Plan's channeling injunction limits all holders of

Asbestos PI Claims11

to recovery from the Asbestos PI Trust

after the Plan's Effective Date, and enjoins those claim

holders from pursuing recovery from the Debtors and any

other Asbestos Protected Party. More particularly, Section

8.2.1 of the Plan, entitled “Asbestos PI Channeling

Injunction,” provides, in pertinent part, that:

On and after the Effective Date, the

sole recourse of the Holder of an

Asbestos PI Claim or a Successor

Claim arising out of or based on any

Asbestos PI Claim on account thereof

shall be to the Asbestos PI Trust

pursuant to the provisions of the

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 14

Asbestos PI Channeling Injunction

and the Asbestos PI TDP [Trust

Distribution Procedures] .... Without

limiting the foregoing, from and after

the Effective Date, the Asbestos PI

Channeling Injunction shall apply to

all present and future Holders of

Asbestos PI Claims ... and all such

Holders permanently and forever shall

be stayed, restrained, and enjoined

from taking any and all legal or other

actions or making any Demand

against any Asbestos Protected Party

or any property or interest (including

Distributions made pursuant to this

Plan) in property of any Asbestos

Protected Party for the purpose of,

directly or indirectly, claiming,

collecting, recovering, or receiving

any payment, recovery, satisfaction,

or any other relief whatsoever on, of,

or with respect to any Asbestos PI

Claims ... other than from the

Asbestos PI Trust in accordance with

the Asbestos PI Channeling Injunction

and pursuant to the Asbestos PI Trust

Agreement and the Asbestos PI TDP

....12

The Plan defines an “Asbestos Protected Party” to include the

“Settled Asbestos Insurance Companies,”13

which are

defined as;

any Asbestos Insurance Entity14

that has

entered into an Asbestos

Insurance Settlement Agreement;15

but only with respect to, and only to

the extent of, any

Asbestos Insurance Policy (or any

portion thereof) identified as the

subject of an Asbestos Insurance

Settlement Agreement in Exhibit 5 in

the Exhibit Book.... and further

provided, for the avoidance of doubt

that an Asbestos Insurance Entity is a

Settled Asbestos Insurance Company

to the fullest extent, but only to the

extent provided by section 524(g) in

respect of any claim that arises by

reason of one of the activities

enumerated in section

524(g)(4)(A)(ii).16

Under the Plan, an “Asbestos Insurance Policy” is a policy

that provides “insurance coverage for any Asbestos Claim”

but an Asbestos Insurance Policy does not include Workers'

Compensation Claims.17

*3 “MCC was Grace's primary general liability and workers'

compensation insurer from 1962 to 1973.”18

At least one of

the workers' compensation policies granted MCC the right to

inspect the Debtors' premises, but also include language

intended to limit the legal effect of any inspections.19

In 1991, after numerous asbestos-related law suits were filed

against Grace, MCC entered into a settlement agreement with

Grace to settle various coverage demands under its primary

general liability policies.20

“After filing for bankruptcy,

Grace entered into settlements with several other insurers.

These settlements, as well as Grace's own contributions,

[were] used to fund the [Asbestos] PI Trust. As a result, these

other insurers and MCC were all designated as Settled

Asbestos Insurance Companies under the terms of the Joint

Plan, meaning that they were entitled to injunctive relief

under § 524(g).”21

The Plaintiffs' State Court Complaint, attached to the

Adversary Complaint, alleges that the Plaintiffs were workers

at the Libby Facility who suffer from asbestos disease and

asbestos-related bodily injuries as a result of being exposed

to highly toxic asbestos.22

The claims asserted against MCC

in the State Court Complaint are summarized as follows:

(1) Negligence in provision of industrial

hygiene services:23

MCC's industrial hygienist and others in MCC's Accident

Prevention Department knew that the workers had

“pneumoconisosis occupational disease exposure” and that

there were “30 employees who lacked normal lung function.”

As part of its industrial hygiene services MCC undertook to

design a program for control and prevention of asbestos dust

and disease for the benefit of workers that would address dust

control and personal protection from asbestos dust. MCC was

negligent in the design of the industrial hygiene program and

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 15

in failing to disclose and disseminate to the workers, the

nature and degree of the asbestos hazard that MCC had

acquired and analyzed.

(2) Bad Faith Treatment of Workers with

Rights to Occupational Disease Benefits (Breach

of Fiduciary Duty, Deceit, Bad Faith, Negligent

Misrepresentation and Constructive Fraud):24

(a) MCC contracted to provide workers'

compensation/occupational disease coverage to

employees under statutorily defined “compensation

plan No. 2” which required that MCC “shall be

directly and primarily liable to and will pay directly

to the employee” the medical and disability

compensation owed under the Montana Occupational

Disease Act (“MODA”).25

*4 (b) Because of the ... special relationship, MCC had

a fiduciary duty to disclose and not to suppress

information necessary to the insured employees'

rights as injured workers with injurious exposures

and, therefore, their rights to occupational disease

benefits for latent disease.26

(c) MCC suppressed, and failed to disclose

theknowledge of the facts, degree and expected

consequences of the asbestos hazard. Its safety

program failed to provide for worker education and

warnings, and it failed to report to the workers known

and ongoing hazardous conditions. MCC concealed

the expected course of latent disease process in

workers. Further MCC knew that workers were being

advised that the dust was not dangerous, and that

workers were not aware of the extreme asbestos dust

concerns raised in reports of periodic inspections by

the Montana State Board of Health.27

(d) MCC sought to avoid disclosure to the

MontanaIndustrial Accident Board, the entity charged

with addressing compensability of occupational

disease claims, the facts of the degree of disease-

causing asbestos-laden dust in order to avoid MCC's

liability on existing claim, the expected “good many

claims involving asbestosis” ... as well as the future

liability for benefits for workers with latent disease.28

(e) Plaintiffs' rights to occupational disease medicaland

disability benefits for their injurious exposure were

lost after the expiration of the prescribed period for

presentation of a claim for benefits and before they

had knowledge that they had sustained injurious

exposures to occupational disease qualifying them for

benefits under MODA.29

(f)MCC's conduct constituted a breach of itsfiduciary

duties as a workers' compensation and occupational

disease insurer of workers including Plaintiffs.30

(g) MCC's conduct constituted deceit within

themeaning of 27–1–712, M.C.A.; constituted bad

faith and a breach of the duty of good faith and fair

dealing; and constituted constructive fraud within the

meaning of 28–2–406, M.C.A. and negligent

misrepresentation.31

(h) MCC's conduct... constituted malice such thatan

assessment of punitive damages, sufficient to punish,

deter and make example of such malicious conduct is

appropriate.32

The Adversary Complaint contains six counts. The first three

counts ask the Court to declare that the channeling injunction

does not enjoin the Plaintiffs from filing the Negligence

Claim in Montana state court because:

• Count I: Bankruptcy Code § 524(g)(4)(A)(ii) limits the

channeling injunction so that it does not apply to the

Negligence Claim;

• Count II: the Negligence Claim arises under

workers'compensation policies that were not listed on

Exhibit 5 to the Plan and, therefore, not protected by the

channeling injunction; and

• Count III: the Negligence Claim arises under

workers'compensation policies that are specifically

excluded from the channeling injunction.

Likewise, the second three counts ask the Court to declare

that the channeling injunction does not enjoin the Plaintiffs

from filing the Bad Faith Claim in Montana state court

because:

*5 • Count IV: the Bad Faith Claim arises under workers'

compensation policies that were not listed on Exhibit 5

to the Plan and, therefore, not protected by the

channeling injunction;

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 16

• Count V: the Bad Faith Claim arises under

workers'compensation policies that are specifically

excluded from the channeling injunction; and

• Count VI: Bankruptcy Code § 524(g)(4)(A)(ii) limits the

channeling injunction so that it does not apply to the Bad

Faith Claim.

MCC opposes the Plaintiffs' Summary Judgment Motion and

asks that the Court deny it and enter an order barring the relief

sought by the Plaintiffs.

II. STANDARD FOR SUMMARY JUDGMENT

Rule 56 of the Federal Rules of Civil Procedure, made

applicable hereto by Federal Rule of Bankruptcy Procedure

7056, provides that “[t]he court shall grant summary

judgment if the movant shows that there is no genuine dispute

as to any material fact and the movant is entitled to judgment

as a matter of law.”33

At the summary judgment stage, the

court's function is not to weigh the evidence and determine

the truth of the matter, but to determine whether there is a

genuine issue for trial.34

The moving party bears the burden of establishing the

absence of a genuine dispute as to a material fact.35

“[A]

party seeking summary judgment always bears the initial

responsibility of informing the district court of the basis for

its motion, and identifying those portions of ‘the pleadings,

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any,’ which it believes

demonstrate the absence of a genuine issue of material

fact.”36

When the nonmoving party bears the burden of

persuasion at trial, the moving party “may meet its burden ...

by showing that the nonmoving party's evidence is

insufficient to carry that burden.”37

Once the moving party has carried its initial burden, the

opposing party “must do more than simply show that there is

some metaphysical doubt as to the material facts.”38

Summary judgment cannot be avoided by introducing only “a

mere scintilla of evidence,”39

or by relying on “conclusory

allegations, improbable inferences and unsupported

speculation.”40

“Brash conjecture coupled with earnest hope

that something concrete will materialize, is insufficient to

block summary judgment.”41

*6 Substantive law determines which facts are material;

“[o]nly disputes over facts that might affect the outcome of

the suit will preclude summary judgment.”42

Moreover, a

dispute over a material fact is genuine “if the evidence is such

that a reasonable jury could return a verdict for the

nonmoving party.”43

The Court must resolve all doubts and

consider the evidence in the light most favorable to the

nonmoving party.44

III. DISCUSSION The Plaintiffs'

Summary Judgement Motion, and MCC's response thereto,

raise the following issues: first, whether the Negligence

Claim and the Bad Faith Claim (together, the “Plaintiffs'

Claims”) fall within the scope of the Asbestos PI Injunction,

as limited by Bankruptcy Code

§ 524(g)(4),45

and, second, whether claims based on MCC's

workers' compensation policies are excluded from the

Asbestos PI Channeling Injunction because (i) the Asbestos

PI Channeling Injunction specifically excludes workers'

compensation claims, and (ii) those policies were not

identified in Exhibit 5 to the Plan.

A. The limitations of Section 524(g)(4) do not

prevent the Asbestos PI Channeling Injunction

from applying to the Plaintiffs' Claims

“Section 524(g) provides a special form of supplemental

injunctive relief for an insolvent debtor facing the unique

problems and complexities associated with asbestos

liability.”46

As further explained by the Third Circuit:

Channeling asbestos-related claims to

a personal injury trust relieves the

debtor of the uncertainty of future

asbestos liabilities. This helps achieve

the purpose of Chapter 11 by

facilitating the reorganization and

rehabilitation of the debtor as an

economically viable entity. At the

same time, the rehabilitation process

served by the channeling injunction

supports the equitable resolution of

asbestos-related claims. In theory, a

debtor emerging from a Chapter 11

reorganization as a going-concern

cleansed of asbestos liability will

provide the asbestos personal injury

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 17

trust with an “evergreen” source of

funding to pay future claims. This

unique funding mechanism makes it

possible for future asbestos claimants

to obtain substantially similar

recoveries as current claimants in a

manner consistent with due process.

To achieve this relief, a debtor must

satisfy the prerequisites set forth in §

524(g) in addition to the standard plan

confirmation requirements.47

Subsection 524(g)(4) extends an asbestos channeling

injunction in limited situations to enjoin actions against non-

debtors, providing in pertinent part:

Notwithstanding the provisions of section 524(e),48

such

an injunction may bar any action directed against a third

party who is identifiable from the terms of such injunction

(by name or as part of an identifiable group) and is alleged

to be directly or indirectly liable for the conduct of, claims

against, or demands on the debtor to the extent such

alleged liability of such third party arises by reason of—

....

*7 (III) the third party's provision of insurance to the

debtor or a related party ....49

About ten years before the Debtors' bankruptcy filing, the

Debtors and MCC entered into a settlement agreement

regarding coverage and payment obligations under the

various insurance policies issued by MCC to the Debtors.

MCC falls within the Plan's definitions of an “Asbestos

Insurance Entity” that entered into an “Asbestos Insurance

Settlement,” thereby becoming a “Settled Asbestos Insurance

Company.” The District Court affirmed the Bankruptcy

Court's determination that it was fair and equitable to include

MCC as a Settled Asbestos Insurance Company entitled to

receive the injunctive protection of § 524(g)(4), writing: “as

long as a party has contributed reasonable value to the

reorganization plan, whether through its own direct

contribution or by those made indirectly on its behalf by

another party, then it is fair and equitable to future claimants

for that party to receive the injunctive protection afforded by

§ 524(g).”50

The District Court then found that MCC's

settlement payment enabled the Debtors to contribute assets

to the trust fund:

[C]ontributions to the asbestos trust

directly made by Grace include, to

some degree, an amount originally

contributed by MCC. Without MCC's

previous payments, Grace would not

be able to donate as much as it

presently can to the trust, As such,

Grace's direct contributions to the trust

reflect, as provided for in § 524(g), an

amount made “on behalf of” MCC,

Therefore, extending injunctive

protection to MCC is fair and

equitable under these circumstances.

In fact, not enjoining future claims

against MCC could render a

potentially unfair result since MCC

could actually be responsible for

double the amount of any other party

given its previous significant

monetary contribution to Grace.51

Accordingly, it has already been decided that it is fair and

equitable for MCC to be a Settled Asbestos Insurance

Company under the Plan.52

Whether the Plaintiffs' Claims fall within the scope of the

Asbestos PI Channeling Injunction, as limited by language of

§ 524(g)(4)(A), requires consideration of the following

questions: (i) do the Plaintiffs' Claims allege that MCC is

directly or indirectly liable for the conduct of, claims against,

or demands on, the Debtors, and (ii) does the liability alleged

in the Plaintiffs' Claims arise by reason of MCC's provision

of insurance to the Debtors?

(1) The Plaintiffs' Claims seek to hold MCC “indirectly

liable” for the Debtors' products or conduct.

The Plaintiffs argue that the Negligence Claim and the Bad

Faith Claim allege that MCC is liable for its own actions or

omissions in connection with (i) MCC's design and

implementation of an inadequate industrial hygiene program,

(ii) MCC's failure to conduct proper inspections, sampling

and/or testing at the Libby Facility, and (iii) MCC's failure to

warn the Plaintiffs of the danger of asbestos exposure. They

assert that these claims are independent and wholly separate

from any claims against the Debtors.

*8 MCC argues in response that the Plaintiffs' Claims seek

recovery indirectly for injuries arising out of Grace's asbestos

products or Grace's operations at the Libby Facility. MCC

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 18

also asserts that earlier decisions of the bankruptcy court and

district court have already determined that similar claims

asserting “independent” liability against MCC were

derivative of the Debtors' liability. However, those decisions

were made in the context of evaluating the “probability of

success on the merits” prong of a preliminary injunction

analysis. I disagree that either court made a final ruling on

this issue.53

Section 524(g)(4) permits a channeling injunction to protect

non-debtor third parties from law suits that are derivative of

a debtor's conduct or claims against the debtors.54

In

Combustion Engineering, the Third Circuit noted that the

asbestos-related personal injury claims asserted against the

debtors' affiliates arose from “different products, involved

different asbestoscontaining materials and were sold to

different markets,”55

and were “wholly separate” from any

liability involving the debtors.56

The Court then determined

that the § 524(g)(4)(A) channeling injunction did not protect

the non-debtor affiliates.57

In Pittsburgh Corning, the

bankruptcy court determined that a § 524(g) (4)(A) injunction

properly channeled claims against the debtors' affiliates that

were based upon injuries caused by the debtor's products

(known as “PC–Relationship Claims”), or were “conspiracy

theory claims” based on joint and several liability theories

with the debtor.58

However, the court ruled that the

Pittsburgh Corning channeling injunction had to be tailored

to exclude claims against affiliates involving asbestos

products that were not manufactured, marketed or sold by the

debtor.59

Here, the injuries giving rise to the Plaintiffs' Claims are

based on exposure to Grace's asbestos products or operations

at the Libby Facility. There are no allegations that MCC

produced, mined or marketed any of its own asbestos

products. Therefore, I conclude that the Plaintiffs' Claims

seek to hold MCC indirectly liable for the Debtors' conduct

and products.60

(2) The Plaintiffs' Claims allege that

MCC's liability arises by reason of MCC's provision

of insurance to the Debtors

*9 Section 524(g)(4) provides that the channeling injunction

protects a non-debtor third party only to the extent that the

direct or indirect liability “arises by reason of” a particular

relationship between the debtor and the third party.61

In this

case, the relevant relationship is based on MCC's provision of

insurance to the Debtors. There are no allegations that MCC

has any connection to the Debtors' products or operations,

except as an insurer. The Plaintiffs' Claims, however, assert

that MCC breached certain duties that arise from that

relationship and the rights it reserved for itself as an insurer

under the relevant insurance policies, including any failure to

(i) properly inspect the Libby Facility, (ii) provide adequate

industrial hygiene services for the benefit of Grace's

employees, and (iii) warn Grace's employees of the dangers

of exposure to asbestos-laden dust.

At first blush, it seems clear that the Plaintiffs' Claims against

MCC fall within the plain language and natural reading of the

statute, i.e., the claims arise by reason of MCC's provision of

insurance to the Debtors. However, the Plaintiffs argue that

MCC's alleged liability for the Plaintiffs' Claims does not

arise by reason of MCC's provision of insurance to Grace

because the connection between MCC's provision of

insurance and the claims is factual, not legal. The Plaintiffs

rely upon a Second Circuit decision, Quigley, in which the

Court concluded that “the phrase ‘by reason of,’ as employed

in 11 U.S.C. § 524(g) (4)(A)(ii), requires that the alleged

liability of a third party for the conduct of or claims against

the debtor arises, in the circumstances, as a legal consequence

of one of the four relationships between the debtor and the

third party enumerated in subsections (I) through (IV).”62

In Quigley, the Court decided that a preliminary injunction,

which tracked the language of § 524(g)(4)(A) (ii). did not

cover claims alleging that the debtor's parent corporation was

liable as an “apparent manufacturer” of the debtor's asbestos

products, since the parent's name and logo appeared on those

products.63

The parent corporation argued that it would not

have applied its name and logo to the products absent its

ownership interest in the debtor; therefore, liability would not

arise “but for” the factual relationship between the parent and

debtor. The Court rejected this argument, deciding that the

parent's ownership of the debtor was “legally irrelevant” to

the apparent manufacturer claims.64

The Quigley Court noted that “[s]ection 524(g) does not

explicitly indicate whether the phrase ‘by reason of’ refers to

legal or factual causation, or some combination of the two.”65

However, the Court recognized that “[e]ach of the four

relationships enumerated in subsections (I) through (IV) ... is

a relationship between one party and another that, in

appropriate circumstances, has commonly given rise to the

liability of the one party for the conduct of or claims or

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 19

demands against the other, long before § 524(g) came into

being.”66

Moreover,

*10 Section 524(g) is designed to “facilitat[e] the

reorganization and rehabilitation of the debtor as an

economically viable entity,” as well as “make[ ] it possible

for future asbestos claimants to obtain substantially similar

recoveries as current claimants.” In re Combustion Eng'g,

Inc., 391 F.3d 190, 234 (3d Cir.2004). Needless to say,

barring the prosecution of claims bearing only an

accidental nexus to an asbestos bankruptcy is less than

tangentially related to that objective.... “The test for

determining whether litigation has a significant connection

with a pending bankruptcy [sufficient to confer bankruptcy

jurisdiction] is whether its outcome might have any

conceivable effect on the bankrupt estate.” ... We are

unpersuaded that Congress intended with its use of the

phrase “by reason of” to produce the peculiar results and

jurisdictional difficulties that [the parent's] construction of

this phrase would bring about.67

When the parent corporation in Quigley placed its name and

logo on the asbestos products, the parent corporation intended

that the third party buyer or user would see the name and logo

and rely on its participation in marketing or approval of the

products. The nexus between the parent/subsidiary

relationship and the claim was not relevant. Here, MCC's

actions (or omissions) are inextricably linked to the Debtors

and the insurance relationship. I disagree with the Plaintiffs'

assertion that MCC's provision of insurance to the Debtors is

not legally relevant to the Plaintiffs' Claims, or that there is

only some accidental nexus between the insurance

relationship and the claims. The basis for the alleged

undertakings by MCC in the Negligence Claim (i.e.,

industrial hygiene services or inspections of Grace's

facilities) arise wholly out of the insurance relationship.

Similarly, the allegations underlying the Bad Faith Claim

(i.e., MCC's failure to warn employees or suppressing

information) also arise out of information available to MCC

because of the insurer/ insured relationship with the Debtors.

However, and perhaps more importantly, the Quigley Court's

relationship analysis also addresses the jurisdictional

concerns of applying § 524(g)(4) to grant an overly broad

injunction for the protection of nondebtor third parties. In the

Johns–Manville line of cases,68

the Second Circuit held that

“[a] bankruptcy court only has jurisdiction to enjoin third-

party non-debtor claims that directly affect the res of the

bankruptcy estate.”69

The Court determined that the

insurance policies issued to the debtor were the most valuable

assets of the bankruptcy estate.70

The Second Circuit then

“held that the bankruptcy court's in rem jurisdiction was

insufficient to allow it to enjoin Direct Actions based on state-

law legal theories that seek to impose liability on [the insurer]

as a separate entity rather than on the policies that it issued to

[the debtor].”71

*11 Accordingly, a bankruptcy court's injunction can reach

only as far as its jurisdictional limits. The inquiry must be

whether the third-party non-debtor claims affect the res of the

bankruptcy estate.72

“One of the central purposes—perhaps

the central purpose—of extending bankruptcy jurisdiction to

actions against certain third parties, as well as suits against

debtors themselves, is to ‘protect[ ] the assets of the estate’ so

as to ensure a fair distribution of those assets at a later point

in time.”73

In this case, there is an express agreement in the 1991

Settlement Agreement giving rise to indemnification

obligations owed by the Debtors to MCC arising from any

liability, loss, cost or expense imposed upon or incurred by

MCC as a result of claims asserted by any Person, including

any “Bodily Injury Claims Plaintiffs” that arise out of, among

other things, “the existence or extent of Maryland's

obligations to any person with respect to Asbestos–Related

Claims that are covered, or have been or may be alleged by

Grace–Conn. to be covered, by any of the Primary Policies

....”74

MCC's indemnification claims, to the extent they can

be asserted, will affect the res of the Debtors' estates because

the Plan provides that indemnification claims are channeled

to the Asbestos PI Trust, and, therefore, would decrease the

amount of funds available for other claimants.

Moreover, MCC paid a settlement amount to Grace– Conn.

in 1991 which, in part, paid Grace–Conn. for amounts already

expended for Asbestos Related Bodily Injury Claims and

other claims, but also to establish a special account for

payment of losses incurred by Grace– Conn. in connection

with pending Asbestos–Related

Bodily Injury Claims.75

MCC's settlement payment also

enabled the Debtors to contribute assets to the Asbestos PI

Trust. Encouraging insurers to contribute to a debtor's trust

also affects the res of the estate. Granting a § 524(g)

(4)(A)(ii)(III) channeling injunction provides insurers with

an incentive to contribute to a debtor's trust in exchange for

finality,76

Statements by Senator Graham found in the

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 20

legislative history of this Bankruptcy Code section

underscore this purpose:

To those companies willing to submit to the stringent

requirements in this section designed to ensure that the

interests of asbestos claimants are protected, the

bankruptcy courts' injunctive power will protect those

debtors and certain third parties, such as their insurers,

from future asbestos product litigation of the type

which forced them into bankruptcy in the first place.

....

By providing a trust to pay claims and an injunction

channeling the present and future asbestos claims to that

trust, the debtor and third parties who are alleged to be

liable for the asbestos claims against the debtor will be

encouraged to participate in a system that will maximize

the assets available to pay asbestos claims, present and

future, and provide for an equitable distribution and

method of payment.77

*12 The Plaintiffs' Claims seek additional and alternative

forums for Asbestos PI Claims arising out of Grace's

products and conduct. While I am sympathetic that

individuals may have suffered serious injuries, the purpose of

the Asbestos PI Trust is to ensure that there is a fund available

to compensate the victims, as well as future claimants, while

also providing finality to insurers who contribute to the trust.

Accordingly, I reject the Plaintiffs' argument (asserted in

Count I and Count VI of the Adversary Complaint) that

Bankruptcy Code § 524(g)(4)(A)(ii) limits the reach of the

Asbestos PI Channeling Injunction and prevents the

injunction from enjoining the Plaintiffs' Claims. The

Plaintiffs' Claims seek to hold MCC indirectly liable for the

conduct of, claims against or demands on the Debtors. Also,

MCC's provision of insurance to the Debtors is legally

relevant to (or, at the very least, a close nexus to) the

Plaintiffs' Claims. Because MCC's liability could affect the

res of the Debtors' estate, determining that § 524(g)(4)(A)(ii)

protects an insurer from claims, such as the Negligence Claim

and the Bad Faith Claim, is not beyond the jurisdiction of this

Court.

B. The Asbestos Channeling Injunction's

exception for Workers' Compensation Claims

does not apply to the Plaintiffs' Claims

Because the Plaintiffs were former employees of Grace, they

argue that the Negligence Claim and the Bad Faith Claim

must arise from the workers' compensation policies provided

by MCC to Grace. Therefore, the Plaintiffs argue, the

Asbestos PI Channeling Injunction is not applicable to the

Plaintiffs' Claims because (i) the Plan specifically provides

that the injunction does not enjoin claims under a workers'

compensation policy, and (ii) MCC's workers' compensation

policies were not listed on Exhibit 5 to the Plan.

Under the Plan, an “Asbestos Insurance Policy” includes

policies that provide “insurance coverage for any Asbestos

Claim,” but does not include Workers' Compensation

Claims.78

The Plan defines “Workers' Compensation

Claims” as:

any Claim: (i) for benefits under a

state-mandated workers'

compensation system, which a past,

present, or future employee of the

debtors or their predecessors is

receiving, or may in the future have a

right to receive and/or (ii) for

reimbursement brought by any

insurance company or state agency as

a result of payments made to or for the

benefit of such employees under such

a system and fees and expenses

incurred under any insurance policies

or laws or regulations covering such

employee claims.79

The Plaintiffs are not asserting workers' compensation claims

for statutory benefits. The channeling injunction's exception

for workers' compensation claims is not applicable to the

Plaintiffs' Claims. I reject the Plaintiffs' argument (asserted in

Count III and Count V of the Adversary Complaint) that the

workers' compensation claim exception to the channeling

injunction allows the Plaintiffs' Claims to be filed in state

court.

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 21

C. Plaintiffs' Claims are not barred by the

Asbestos PI Channeling Injunction to the extent

the Plaintiffs can state a valid claim under MCC's

workers' compensation policies, which were not

listed on the Exhibit attached to the Debtors' Plan

The Asbestos PI Channeling Injunction enjoins Holders of

Asbestos PI Claims from taking any legal action or making

any demand against an “Asbestos Protected Party,” which is

defined to include a Settled Asbestos Insurance Company. As

discussed earlier, MCC is a Settled Asbestos Insurance

Company under the Plan.

*13 However, the Plan's definition of a Settled Asbestos

Insurance Company limits the extent of protection that the

insurance company will receive under the channeling

injunction, by providing that the term means:

any Asbestos Insurance Entity that has

entered into an Asbestos Insurance

Settlement Agreement; but only with

respect to, and only to the extent of,

any Asbestos Insurance Policy (or

any portion thereof) identified as

the subject of an Asbestos Insurance

Settlement Agreement in Exhibit 5

in the Exhibit Book (as the same

may be amended from time to time,

including after the Effective Date);

provided, however, that (i) each such

Asbestos Insurance Settlement

Agreement is listed by Grace with the

consent of the ACC and the PI FCR,

or, from and after the Effective Date,

by the Asbestos PI Trust, in Exhibit 5;

and (ii) any Asbestos Insurance

Settlement Agreement entered into

after the Petition Date has been

approved by the Court after notice and

a hearing (which approval may be

contained in the Confirmation Order

or any other order of the Court); and

further provided, for the avoidance of

doubt that an Asbestos Insurance

Entity is a Settled Asbestos Insurance

Company to the fullest extent, but

only to the extent provided by section

524(g) in respect of any claim that

arises by reason of one of the activities

enumerated in section

524(g)(4)(A)(ii).80

The first limitation in the above definition provides that the

Asbestos Insurance Entity is protected “only with respect to,

and only to the extent of” policies that are identified as the

subject of an Asbestos Insurance Settlement Agreement listed

in Exhibit 5 of the Exhibit Book. The parties agree that

MCC's workers' compensation policies were not listed in

Exhibit 5. MCC noted that “[t]he insurance policies between

Grace and MCC identified in Exhibit 5 include the primary

general liability policies listed and any and all primary

general liability policies issued by MCC to Grace prior to

1973 and all known and unknown excess insurance policies

issued by MCC to Grace.”81

MCC explains that the workers'

compensation policies were not included in Exhibit 5 because

the Plan did not discharge liabilities pertaining to claims for

statutory workers' compensation benefits. Further, MCC

points out that the remainder of the definition of Settled

Asbestos Insurance Policy addresses any “ambiguity” in the

definition by stating:

further provided, for the avoidance of doubt that an

Asbestos Insurance Entity is a Settled Asbestos Insurance

Company to the fullest extent, but only to the extent

provided by section 524(g) in respect of any claim that

arises by reason of one of the activities enumerated in

section 524(g)(4)(A)(ii).

In other words, MCC argues that the channeling injunction

enjoins claims arising out of insurance policies, even those

policies that are not listed on Exhibit 5, as long as the

requirements of Bankruptcy Code § 524(g)(4) (A)(ii) are met.

This interpretation, however, makes the Exhibit 5

requirement a nullity. Although I was not the presiding judge

on this case at the time of confirmation, it is apparent that the

parties negotiated many provisions, including the definition

of Settled Asbestos Insurance Company. I do not think it is a

proper exercise to look beyond the express terms of the

confirmed plan; no part of that definition should be ignored

or rendered a nullity.

*14 Therefore, the channeling injunction does not protect a

Settled Asbestos Insurance Company from claims arising out

of insurance policies that are not listed on Exhibit 5 to the

Plan. The Plaintiffs contend that, as employees, the

Negligence Claim and the Bad Faith Claim must arise under

MCC's worker's compensation policies. To the extent that the

Plaintiffs can demonstrate that the Plaintiffs' Claims arise out

of or are based upon MCC's workers' compensation policies,

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 22

the claims are not barred by the Asbestos PI Channeling

Injunction and may be filed in state court, I will grant the

relief requested in Count II and Count IV of the Adversary

Complaint.

Footnotes

MCC also argues, however, that the Plaintiffs should be

barred from asserting claims in state court because the

Plaintiffs have failed to state a duty that arises out of the

workers' compensation policies. The Plaintiffs argue in

response that their claims have a sound basis under the

Restatement of Torts82

and Montana case law. My limited

function here is to determine whether the Plaintiffs' proposed

claims are barred by the Asbestos PI Channeling Injunction.

I do not make any determination about whether the Plaintiffs'

Claims state a valid cause of action against MCC under the

workers' compensation insurance policies or under state law.

I leave those determinations to the appropriate state court.

V. CONCLUSION

For the reasons stated above, the Plaintiffs' Summary

Judgment Motion will be granted, in part, as to Count II and

Count IV, and denied, in part, on the remaining Counts I, III,

V, and VI. An appropriate order follows.

All Citations

Slip Copy, 2016 WL 6137275

1 The Reorganized Debtors are W. R. Grace & Co. (f/k/a Grace Specialty Chemicals, Inc.) (“Grace”) and W. R. Grace &

Co.–Conn. (together, the “Reorganized Debtors”). The chapter 11 cases of Grace and 62 related entities (the “Debtors”)

were jointly administered pursuant to an order of this Court dated April 2, 2001 (D.I. 9). See In re W R. Grace & Co., 446

B.R. 96, 102 n.2 (Bankr. D. Del. 2011) (listing those 62 entities).

2 This Opinion constitutes the findings of fact and conclusions of law, as required by Fed. R. Bankr. P. 7052. This Court

has jurisdiction to decide this matter pursuant to 28 U.S.C. § 157 and § 1334. A bankruptcy court has jurisdiction to

interpret and enforce its own prior orders. Travelers Indem. v. Bailey, 557 U.S. 137, 151, 129 S. Ct. 2195, 2205, 174

L.Ed.2d 99 (2009). “[T]he jurisdiction of the non-Article III bankruptcy courts is limited after confirmation of a plan. But

where there is a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation,

implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust

agreement, retention of post-confirmation bankruptcy court jurisdiction is normally appropriate.” Binder v. Price

Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 168–69 (3d Cir. 2004). This is a core proceeding pursuant

to 28 U.S.C. § 157(b)(2)(A). 3 MCC filed a brief opposing the Summary Judgment Motion (Adv. D.I. 21) and the Plaintiffs

filed a Reply Brief (Adv. D.I. 27). 4 The Plaintiffs filed a Statement of Undisputed Facts along with their brief in support

of the Summary Judgment Motion (Adv. D.I. 23). MCC filed a Counter–Statement of Material Facts in Dispute (Adv. D.I.

23), arguing that most of the Plaintiffs' “undisputed facts” were statements made by Plaintiff's counsel without personal

knowledge of the facts asserted therein, or were unsupported allegations asserted in the State Court Complaint. The

facts I rely on herein are based upon my review of documents supplied by the parties, if there are no objections to

authenticity, facts of record in the Debtors' chapter 11 bankruptcy case, and factual findings made in previous decisions

in this case.

5 In re W. R. Grace & Co., 729 F.3d 311, 314 (3d Cir. 2013).

6 Id.

7 Id.

8 The Bankruptcy Court's confirmation of the Plan was affirmed on appeal by the District Court and the Court of Appeals

for the Third Circuit. In re W. R. Grace & Co., 446 B.R. 96 (Bankr. D. Del. 2011) aff'd 475 B.R. 34 (D. Del. 2012) aff'd

729 F.3d 311 (3d Cir. 2013).

9 Bankruptcy Code § 524(g)(1) provides, in part, that “a court that enters an order confirming a plan of reorganization

under chapter 11 may issue, in connection with such order, an injunction ... to supplement the injunctive effect of a

discharge.” 11 U.S.C. § 524(g)(1). If certain requirements of § 524(g) are met, “the injunction is to be implemented in

connection with a trust that, pursuant to the plan of reorganization ... is to assume the liabilities of a debtor which at the

time of entry of the order for relief has been named as a defendant in personal injury, wrongful death, or property-

damage actions seeking recovery for damages allegedly caused by the presence of, or exposure to, asbestos or

asbestos-containing products ...” 11 U.S.C. § 524(g)(2)(B).

10 Plan § 1.1.43. 11 The Plan defines an “Asbestos PI Claim” as: a Claim ... or Demand against... any of the Debtors or

the Asbestos Protected Parties ... based on, arising out of, resulting from, or attributable to, directly or indirectly: (a)

death, wrongful death, personal or bodily injury ... sickness, disease, loss of consortium, survivorship, medical

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 23

monitoring, or other personal injuries ... or other damages ... and (b) the presence or exposure at any time to: (1)

asbestos or any products or materials containing asbestos that were mined, processed, consumed, used, stored,

manufactured, designed, sold, assembled, supplied, produced, specified, selected, distributed, disposed of, installed

by, or in any way marketed by, or on behalf of, one or more of the Debtors ... or (2) asbestos-containing vermiculite

mined, milled or processed by the Debtors.... Notwithstanding the foregoing or anything else to the contrary, “Asbestos

PI Claim” as defined herein does not include Worker's Compensation Claims....

Plan § 1.1.34.

12 Plan § 8.2.1.

13 Plan § 1.1.51.

14 The Plan defines an “Asbestos Insurance Entity” as “any Entity, including any insurance company, broker, or guaranty

association, that has issued, or that has or had actual or potential liability, duties or obligations under or with respect to,

any Asbestos Insurance Policy.” Plan § 1.1.11.

15 The Plan defines “Asbestos Insurance Settlement Agreement” as “any settlement agreement between or among any of

the Debtors ... involving any Asbestos Insurance Policy ....” Plan § 1.1.16.

16 Plan § 1.1.209 (emphasis in original).

17 Plan § 1.1.13.

18 Defendant Maryland Casualty Company's Brief in Support of its Opposition to Plaintiff's Motion for Summary Judgment

(Adv. D.I. 21) (“MCC Brief”), at 1.

19 At least one of MCC's workers' compensation policies provided: We have the right, but are not obliged to inspect your workplaces at any time. Our inspections are not safety

inspections. They relate to the insurability of the workplaces and the premiums to be charged. We may give you

reports on the conditions we find. We may also recommend changes. While they may help reduce losses, we do

not undertake to perform the duty of any person to provide for the health or safety of your employees or the public.

We do not warrant that your workplaces are safe or healthful or that they comply with laws, regulations, codes or

standards.

Affidavit of Jon L. Heberling, Ex. B, at 5 (Adv. D.I. 17).

20 MCC Brief, at 1–2.

21 Grace, 475 B.R. at 101.

22 State Court Complaint (Adv. D.I. 1–1), ¶¶ 1, 5, 7, 32.

23 State Court Complaint, ¶¶ 9–32 (the “Negligence Claim”).

24 State Court Complaint, ¶¶ 33–62 (the “Bad Faith Claim”).

25 State Court Complaint, ¶ 36.

26 State Court Complaint, ¶ 38.

27 State Court Complaint, ¶ 46.

28 State Court Complaint, ¶ 54.

29 State Court Complaint, ¶ 55.

30 State Court Complaint, ¶ 56.

31 State Court Complaint, ¶ 57–59.

32 State Court Complaint, ¶ 61.

33 Fed. R. Civ. P. 56(a).

34 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).

35 Celolex Corp. v. Catrett, 477 U.S. 317, 322–24, 106 S.Ct. 2548, 2552–53 91 L.Ed.2d 265 (1986) 36 Id., 477 U.S. at

323, 106 S.Ct. at 2553.

37 Foulk v. Donjon Marine Co., Inc., 144 F.3d 252, 258 n.5 (3d Cir. 1998) (quoting Wetzel v. Tucker, 139 F.3d 380, 383

n.2 (3d Cir. 1998)).

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 24

38 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538

(1986).

39 Sarko v. Penn–Del Directory Co., 968 F.Supp. 1026, 1031 (E.D. Pa. 1997) (citation omitted), aff'd 189 F.3d 464 (3d

Cir. 1999).

40 J.Geils Band Emp. Benefit Plan v. Smith Barney Shearson, Inc., 76 F.3d 1245, 1251 (1st Cir. 1996) (quoting Medina–

Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).

41 J. Geils Band, 76 F.3d at 1251 (quoting Dow v. United Bhd. of Carpenters, 1 F.3d 56, 58 (1st Cir. 1993)).

42 Anderson, 477 U.S. at 248, 106 S.Ct. at 2510.

43 Id. See also Delta Mills, Inc. v. GMAC Comm. Fin., LLC (In re Delta Mills, Inc.), 404 B.R. 95, 105 (Bankr. D. Del. 2009)

(An issue is genuine “when reasonable minds could disagree on the result.”).

44 Anderson, 477 U.S. at 255, 106 S.Ct. at 2505 (“[T]he evidence of the nonmovant is to be believed, and all justifiable

inferences are to be drawn in his favor.”).

45 The Plan's definition of Settled Asbestos Insurance Company specifically provides that the injunction applies “only to

the extent provided by § 524(g) in respect of any claim that arises by reason of one of the activities enumerated in §

524(g)(4)(A)(ii).” Plan § 1.1.209.

46 In re Combustion Engineering, Inc., 391 F.3d 190, 234 (3d Cir. 2004).

47 Id. (footnotes omitted).

48 11 U.S.C. § 524(e) provides that “discharge of a debt of the debtor does not affect the liability of any other entity on, or

the property of any other entity for, such debt.” 49 11 U.S.C. § 524(g)(4)(A)(ii)(III).

50 Grace, 475 B.R. at 102.

51 Id.

52 The Plan's definition of “Settled Asbestos Insurance Company” limits on the scope of protection. These limitations are

discussed in Part C, infra.

53 At a hearing on August 26, 2002, Judge Fitzgerald extended an injunction barring lawsuits against MCC based upon

claims that MCC acted negligently in designing and implementing a dust control system. App. to MCC Brief (Adv. D.I.

22, Ex, 1). In evaluating the “probability of success on the merits” prong, Judge Fitzgerald combed through documents

submitted under seal and decided that “[t]here is nothing in the documents that were sent to me that establishes that

Maryland was acting as anything other at any time than as an agent for the Debtor,” Id. at 15:16–18. She also stated,

“I'm not foreclosing at some point your opportunity to prove the case ....” Id. at 19:14–16. In 2011, the District Court noted

that “the issue of whether MCC has independent liability for its part in developing Grace's dust control system at the

Libby, Montana, mine remains at issue. We concluded, based on argument at the time, that it appeared that MCC's

liability was derivative and[,] for purposes of extending the preliminary injunction to MCC, that was sufficient.” Grace, 446

B.R. at 118 n. 32.

54 Combustion Eng'g, 391 F.3d at 235.

55 Id. at 231.

56 Id. at 235.

57 Id.

58 In re Pittsburgh Corning Corp., 453 B.R. 570, 595–600 (Bankr. W.D. Pa. 2011). The Pittsburgh Corning Court defined

“conspiracy theory claims” as claims alleging the affiliates were liable with the debtor based on allegations of conspiracy,

alter ego, piercing the corporate veil, domination and control, concert of action, common enterprise, aiding and abetting,

respondeat superior, negligent provision of services, principal and agent, successor in interest and other joint and/or

several liability theories. Id. at 576.

59 Pittsburgh Corning, 453 B.R. at 595, 598, 600.

60 The Third Circuit interpreted similar language found in § 524(g)(1)(B) when considering the scope of the Asbestos PI

Channeling Injunction on appeal of the order confirming the Debtors' Plan. The State of Montana (“Montana”) and Her

Majesty Queen Elizabeth II in Right of Canada (the “Crown”) argued that the Plan improperly channeled their contribution

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 25

and indemnification claims against Grace to the Trust. In re W.R. Grace & Co., 729 F.3d 311 (3d Cir. 2013). Third-party

plaintiffs sued Montana and the Crown for allegedly failing to warn their citizens of the risks posed by Grace's products

and activities. Id. at 315. Montana and the Crown argued that only personal injury, wrongful death and property damage

actions should be subject to the channeling injunction. The Third Circuit noted that § 524(g)(1)(B) expressly provided

that a court can “enjoin entities from taking legal action for the purpose of directly or indirectly collecting, recovering, or

receiving payment or recovery with respect to any claim or demand that, under a plan of reorganization, is to be paid in

whole or part by a trust ....” 11 U.S.C. § 524(g)(1)(B) (emphasis added). The Third Circuit decided that the contribution

and indemnification claims were properly channeled to the Trust, writing:

[B]ehind each failure-to-warn suit against Montana and the Crown is a plaintiff with a personal injury, wrongful death,

or property damage claim against Grace. More precisely, there must be such a plaintiff in order for Montana and the

Crown to have a basis for their claims at all. Montana's and the Crown's actions against Grace therefore are brought

“for the purpose of ... indirectly ... receiving payment or recovery” for asbestos-related personal injury and property

damage claims against the debtor, and thus are subject to the § 524(g) channeling injunction under the plain

language of that statute.

Id. at 324. Similarly, here, behind the Negligence Claim and the Bad Faith Claim are Plaintiffs with personal injury

claims against Grace.

61 Section 524(g) extends the injunction to bar claims against a third party “to the extent such alleged liability of such third

party arises by reason of—

(I) the third party's ownership of a financial interest in the debtor, a past or present affiliate of the debtor, or a

predecessorin interest of the debtor;

(II) the third party's involvement in the management of the debtor or a predecessor in interest of the debtor, or

serviceas an officer, director or employee of the debtor or a related party;

(III) the third party's provision of insurance to the debtor or a related party; or

(IV) the third party's involvement in a transaction changing the corporate structure, or in a loan or other

financialtransaction affecting the financial condition, of the debtor or a related party, including but not limited to—

(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or

(bb) acquiring or selling a financial interest in an entity as part of such a transaction.

11 U.S.C.A. § 524(g)(4)(A)(ii).

62 In re Quigley Co., Inc., 616 F.3d 45, 62 (2d Cir. 2012). See n. 61, supra.

63 Id. at 60.

64 Id.

65 Id.

66 Id. at 61.

67 Id. at 61–62 (quoting Publicker Indus., Inc. v. U.S. (In re Cuyahoga Equip. Corp.), 980 F.2d 110, 114 (2d Cir. 1992)).

68 Johns–Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns–Manville Corp.), 517 F.3d 52 (2d Cir. 2008) (“Manville III”),

rev'd sub nom. Travelers Indem. Co. v. Bailey, 557 U.S. 137, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009), on remand Johns–

Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns–Manville Corp.), 600 F.3d 135 (2d Cir. 2010) (“Manville IV”).

69 Manville IV, 600 F.3d at 152 citing Manville III, 517 F.3d at 66. The District Court opinion in the Manville line of cases

observed that “the Direct Action Suits [against Travelers] at issue here ... do not seek the proceeds of the insurance

policies or involve injuries from Manville products, but rather allege that Travelers breached its statutory duties or

engaged in independent tortious conduct in defending insureds other than Manville.” In re Johns–Manville Corp., 340

B.R. 49, 63 (S.D.N.Y. 2006) (emphasis added).

70 Manville IV, 600 F.3d at 152. Similarly, here, the insurance policies and proceeds were valuable assets of the Debtors'

estates. Grace, 475 B.R. at 81–82,

71 Manville IV, 600 F.3d at 152. The insurer, Travelers, admitted that the state-law actions were unrelated to the insurance

policy proceeds. Manville III, 517 F.3d at 63. The Supreme Court reversed Manville III, on narrow grounds in Travelers

Indem. Co. v. Bailey, holding that the jurisdictional issue was not subject to collateral attack, stating that “once the 1986

Orders [which confirmed the debtors' plan and approved the insurance settlement agreements] became final on direct

review (whether or not proper exercises of bankruptcy court jurisdiction and power), they became res judicata to the

‘parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat

In re W.R. Grace & Co., Slip Copy (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 26

the claim or demand, but as to any other admissible matter which might have been offered for that purpose.’ ” Bailey,

557 U.S. at 152, 129 S.Ct. at 2205, quoting Nevada v. United States, 463 U.S. 110, 130, 103 S.Ct. 2906, 77 L.Ed.2d

509 (1983). On remand to consider whether Chubb Indemnity Insurance Company was bound by the 1986 Orders (and

deciding that Chubb was not), the Second Circuit noted that “[t]he Bailey Court did not contradict the conclusion of our

jurisdictional inquiry.” Manville IV, 600 F.3d at 152.

72 The Second Circuit later remarked that “the salience of Manville III's inquiry as to whether Travelers' liability was

derivative of the debtor's rights and liabilities was that, in the facts and circumstances of Manville III, cases alleging

derivative liability would affect the res of the bankruptcy estate, whereas cases alleging non-derivative liability would not.”

Quigley, 676 F.3d at 56–57.

73 Quigley, 676 F.3d at 57 (quoting In re Zarnel, 619 F.3d 156, 171 (2d Cir. 2010)).

74 See App. to MCC's Brief in Opposition to Plaintiffs' Summary Judgment Motion (Adv. D.I. 22), Ex. 2, Settlement

Agreement, ¶¶ 1(F) and (N), ¶ 7 (the “Settlement Agreement”).

75 See Settlement Agreement, ¶ 4.

76 In Plant Insulation, the Ninth Circuit considered appeals by non-settling insurers to confirmation of a plan that included a

§ 524(g) trust and channeling injunction, The Ninth Circuit noted that the bankruptcy court “found that in order to persuade

insurers to settle, they need to be able to obtain finality from the settlement. Without this feature, Settling Insurers would

always be exposed to indirect asbestos liability through contribution suits. There would never be finality, the Trust would

be underfunded, and asbestos claimants would continue to suffer from the vagaries of the tort system.” Fireman's Fund

Ins. Co. v. Onebeacon Ins. Co. (In re Plant Insulation Co.), 734 F.3d 900, 909 (9th Cir. 2013). While the Ninth Circuit

ultimately remanded the case because the trust did not comply with all of the § 524 requirements, the Court approved

the bankruptcy court's determination regarding the § 524(g)(4) injunction, stating that “in light of the purposes of § 524(g),

enjoining the Non–Settling Insurers' contribution claims was “fair and equitable” to future asbestos plaintiffs and, in

providing the finality and protection from future suit, supplied the necessary incentive for insurers to settle in the first

place. This inquiry sufficiently satisfies the statutory scheme.” Id. at 913.

77 140 Cong. Rec. S4521–01, S4523, 1994 WL 139961 (daily ed. Apr. 20, 1994) (emphasis added). 78 Plan § 1.1.13.

79 Plan § 1.1.230.

80 Plan § 1.1.209 (ital. in original; emphasis on bold text added).

81 MCC's Brief in Opposition to Plaintiffs' Summary Judgment Motion, at 34 n. 18.

82 The Restatement (Second) of Torts, § 324A, provides:

One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as

necessary for the protection of a third person or his things, is subject to liability to the third person for physical harm

resulting from his failure to exercise reasonable care to protect his undertaking, if

(a) his failure to exercise reasonable care increases the risk of such harm, or

(b) he has undertaken to perform a duty owed by the other to the third person, or

(c) the harm is suffered because of reliance of the other or the third person upon the undertaking.

Restatement (Second) of Torts § 324A (1965, update through June 2016).

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In Matter of Galaz, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 27

2016 WL 6407211

Only the Westlaw citation is currently available.

United States Court of Appeals, Fifth Circuit.

In the Matter of: Lisa Ann Galaz, Debtor

Alfred Galaz, Appellant

v.

Lisa A. Katona, formerly known as

Lisa Ann Galaz, Appellee

No. 15–50919

|

FILED October 28, 2016

Synopsis

Background: Chapter 13 debtor brought adversary proceeding

to enjoin creditor from violating her discharge rights by

pursuing state court action. The United States Bankruptcy

Court for the Western District of Texas entered order enjoining

creditor from pursuing this cause of action, and creditor

appealed. The District Court, David Alan Ezra, J., 2015 WL

5565266, affirmed. Creditor appealed.

Holdings: The Court of Appeals, Edith Brown Clement,

Circuit Judge, held that:

[1] creditor's alleged violation of debtor's discharge

rights,in pursuing state court action to recover on claim that

arose pre-confirmation, brought adversary proceeding filed by

debtor to enjoin creditor from pursuing this state court action

within the bankruptcy court's postconfirmation jurisdiction;

[2] bankruptcy court did not have to abstain,

undermandatory abstention provision, from hearing debtor's

proceeding;

[3] broad release from liability to creditor's predecessor-

in-interest granted to Chapter 13 debtor in settlement approved

by bankruptcy court prevented creditor, after exercising rights

that he acquired by means of assignment to foreclose on

purported interest in closely-held company possessed by third

party, from commencing suit against debtor for nonpayment of

profits to which this third party was allegedly entitled; and

[4] bankruptcy court did not abuse its discretion in

findingthat creditor was judicially estopped.

Affirmed.

Appeal from the United States District Court for the

Western District of Texas

Attorneys and Law Firms

David Clay Snell, Bayne, Snell & Krause, San Antonio, TX,

for Appellant.

Royal B. Lea, III, Bingham & Lea, P.C., San Antonio, TX, for

Appellee.

Before WIENER, CLEMENT, and COSTA, Circuit

Judges.

Opinion

EDITH BROWN CLEMENT, Circuit Judge:

*1 The bankruptcy court enjoined Alfred Galaz (“Galaz”)

from pursuing any claims related to Worldwide Subsidy

Group against his former daughter-in-law, Lisa Katona

(“Katona”). Galaz appealed the bankruptcy court judgment

to the district court. The district court affirmed, finding that

the bankruptcy court had jurisdiction to decide the case and

that the bankruptcy court properly barred Galaz's claims.

Galaz appeals to this court. We

AFFIRM.

I.

Raul Galaz (“Raul”) and his legal assistant, Marian Oshita

(“Oshita”), formed two limited liability companies,

collectively called Worldwide Subsidy Group (“WSG”), to

collect royalties owed to film and television distributors.

Raul owned a 75 percent interest in WSG, and Oshita

owned a 25 percent interest in WSG. At the time of WSG's

formation, Raul was married to Lisa Katona (formerly

Galaz). When Raul and Katona subsequently divorced,

Katona received half of Raul's interest in WSG. Raul then

sold his remaining 37.5 percent WSG interest to Oshita for

$50,000. She paid for his interest from WSG's accounts as

an offset against unreimbursed expenses purportedly owed

to her. After Raul transferred his remaining interest to

Oshita, Katona owned a 37.5 percent interest in WSG and

Oshita owned a 62.5 percent interest in WSG.

Shortly thereafter, Katona learned that Oshita's claim for

unreimbursed expenses was fraudulent, and Katona filed suit

against her in California state court. Following a jury trial, the

state court awarded Katona the 37.5 percent interest that Raul

had sold to Oshita, as well as $18,750 in damages—which

In Matter of Galaz, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 28

Oshita failed to pay. This judgment left Katona with a 75

percent interest and Oshita with a 25 percent interest in WSG.

After the judgment, Katona assigned half of her interest to

Raul's sister, Denise Vernon (“Vernon”). Vernon then filed suit

against Katona in Texas state court to determine ownership and

control of WSG. Vernon and Raul, a third-party defendant in

the case, argued that Oshita had withdrawn from the company

and was not entitled to her 25 percent interest.

Before the case was resolved, Katona filed for Chapter 13

bankruptcy and the WSG litigation was removed to bankruptcy

court as a separate adversary proceeding. The bankruptcy court

approved a settlement between Raul, Vernon, and Katona

regarding that litigation (“2008 Settlement Agreement”). The

2008 Settlement Agreement provided for: (1) a one-time

distribution from WSG of $50,000 to Katona; (2) monthly

payments from WSG of $4,300 to Katona; (3) a one-time

distribution from WSG of $83,000 to Vernon; (4) monthly

payments from WSG of $5,000 to Vernon; and (5) an annual

salary of $67,500 and back-pay of $221,000 from WSG to

Raul. As part of the settlement, Brian Boydston was appointed

Business Manager of WSG. The bankruptcy court confirmed

Katona's Chapter 13 plan.

Katona and Vernon disagreed over WSG's operations, and

Katona brought another adversary proceeding against WSG

and Vernon. Katona requested that the bankruptcy court

remove Boydston as Business Manager, appoint a receiver for

WSG, and liquidate the company. Katona and Vernon reached

a settlement in that action (“2011 Settlement Agreement”). The

2011 Settlement Agreement provided, in part, that Vernon

purchase Katona's interest in WSG and “any unliquidated

claims against third parties relating to WSG, including claims

against Marian Oshita.” Katona was thus “deemed to have sold,

transferred, and assigned to Denise Vernon any and all of [her]

rights, title, and interest in WSG, including but not limited to

... any claims against third parties relating to WSG, including

claims against Marian Oshita.” The 2011 Settlement

Agreement also provided that Vernon release all present and

future claims against and rights to sue Katona. After the

bankruptcy court approved the 2011 Settlement Agreement,

Vernon assigned all claims against Oshita that she received

under the agreement to her and Raul's father, Alfred Galaz. In

2012, Katona received a discharge and her bankruptcy case was

closed.

*2 Galaz then filed suit in California state court to enforce

Katona's unpaid money judgment against Oshita, which he

believed he had received through Vernon's assignment.1

The state court found in his favor and foreclosed on Oshita's

WSG interest to satisfy the judgment. As successor-in-

interest to Oshita, Galaz then sued Katona in Texas state

court, alleging that Katona owed past monetary

distributions on Oshita's interest in WSG (“Oshita claims”).

Katona removed the case to bankruptcy court as an

adversary proceeding in her Chapter 13 bankruptcy suit.

Galaz then moved to remand. The bankruptcy court granted

Galaz's motion, finding that it did not have jurisdiction

because Galaz's complaint raised only state-law claims. The

bankruptcy court noted, however, that it arguably would

have jurisdiction if Katona had sued for declaratory

judgment.

Katona thus began an adversary proceeding against Galaz

in bankruptcy court, seeking to enjoin him from pursing the

Oshita claims. The parties filed crossmotions for summary

judgment. The bankruptcy court granted Katona's motion,

in part, and enjoined Galaz from pursuing any WSG-related

actions against her. Specifically, the bankruptcy court

found that the 2011 Settlement Agreement, which

discharged Vernon and Katona's rights to sue one another,

barred Galaz's claims. Galaz appealed to the district court,

challenging the bankruptcy court's jurisdiction and its

determination that his claims were barred. The district court

affirmed. Galaz appeals.

II.

[1] [2] “Subject-matter jurisdiction is a question of law which

we review de novo.” Beitel v. OCA, Inc. (In re OCA, Inc.), 551

F.3d 359, 366 (5th Cir. 2008). “When reviewing a district

court's affirmance of a bankruptcy court's judgment, this court

applies the same standard of review to the bankruptcy court

decision that the district court applied.” Galaz v. Galaz (In re

Galaz), 765 F.3d 426, 429 (5th Cir. 2014) (internal quotation

marks omitted). We review findings of fact for clear error and

legal conclusions de novo. Id.

III.

A.

[3] [4] Galaz first argues that the bankruptcy court lacked

jurisdiction to enjoin his state-law claims. His arguments rest

primarily on the fact that the bankruptcy court closed Katona's

Chapter 13 bankruptcy in 2012. Katona contends that the

bankruptcy court had jurisdiction because Galaz violated her

In Matter of Galaz, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 29

discharge rights under title 11. A bankruptcy court's

jurisdiction extends to “all civil proceedings arising under title

11, or arising in or related to cases under title 11.” See 28

U.S.C. § 1334(b). Before confirmation of the bankruptcy plan,

a proceeding is related to the bankruptcy case if the “outcome

could conceivably have any effect on the estate being

administered in bankruptcy.” Fire Eagle,

L.L.C. v. Bischoff (In re Spillman Dev. Grp., Ltd.), 710 F.3d

299, 304 (5th Cir. 2013) (internal quotation marks omitted).

After confirmation, “the debtor's estate, and thus

bankruptcy jurisdiction, ceases to exist, other than for

matters pertaining to the implementation or execution of

the plan.” Newby v. Enron Corp. (In re Enron Corp. Sec.),

535 F.3d 325, 335 (5th Cir. 2008) (quoting Craig's Stores

of Tex., Inc. v. Bank of La. (In re Craig's Stores of Tex.,

Inc.), 266 F.3d 388, 390 (5th Cir. 2001)).

[5] [6] A bankruptcy court maintains “jurisdiction to interpret

and enforce its own prior orders.” Travelers Indem. Co. v.

Bailey, 557 U.S. 137, 151, 129 S.Ct. 2195, 174 L.Ed.2d 99

(2009). Subject matter jurisdiction remains in the bankruptcy

court, even after a bankruptcy case is closed, “to assure that

the rights afforded to a debtor by the Bankruptcy Code are

fully vindicated.” Padilla v. Wells Fargo Home Mortg., Inc.

(In re Padilla), 379 B.R. 643, 652 n.4 (Bankr. S.D. Tex. 2007)

(relying on Bradley v. Barnes (In re Bradley), 989 F.2d 802,

804 (5th Cir. 1993)).

*3 [7] [8] [9] Here, Galaz's underlying state court action

alleges that Katona controlled WSG's finances and failed to pay

out proceeds from WSG in accordance with Oshita's

membership interest. Even viewed through the narrower lens of

post-confirmation bankruptcy jurisdiction, Galaz's Oshita

claims relate principally to pre-confirmation activity between

the parties. There was discord between Oshita and Katona

during the reorganization as to the respective ownership

interests in WSG. Indeed, that dispute formed the basis of the

2008 Settlement Agreement, which provided funds for Katona

to pay off her debts under the plan. Galaz's cause of action for

nonpayment is a preconfirmation claim that —according to

Katona—was subject to the bankruptcy court's discharge

order.2

[10] Galaz's suit in state court is arguably a violation of

Katona's discharge rights, directly implicating the

bankruptcy court's “arising under” jurisdiction. See Ins. Co.

of N. Am. v. NGC Settlement Trust & Asbestos Claim Mgmt.

Co. (In re Nat'l Gypsum Co.), 118 F.3d 1056, 1064 (5th Cir.

1997). The state law causes of action asserted by Galaz bear

on the interpretation and execution of Katona's plan. Even

though Katona's bankruptcy case was closed, the bankruptcy

court retains jurisdiction to consider violations of the

discharge order; the order of discharge necessarily implicates

the implementation or execution of the plan. See Bradley, 989

F.2d at 804. The alleged violation of Katona's discharge

rights brings this case within the bankruptcy court's post-

confirmation jurisdiction. See Local Loan Co. v. Hunt, 292

U.S. 234, 241, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (“[It is]

the authority of the bankruptcy court to entertain the present

proceeding, determine the effect of the adjudication and

[discharge] order, and enjoin petitioner from its threatened

interference therewith.”).

B.

[11] [12] Galaz next contends that the bankruptcy court

lacked statutory authority to enter final judgment because

these proceedings do not constitute a “core” claim. Katona

counters that her action for declaratory relief and an

injunction is a core proceeding that provides the bankruptcy

court statutory authority. “A bankruptcy court's statutory

authority derives from 28 U.S.C. § 157(b) (1), which

designates certain matters as ‘core proceedings' and

authorizes a bankruptcy court to determine the matters and

enter final judgments.” Galaz, 765 F.3d at 431. “If the

proceeding involves a right created by the federal bankruptcy

law, it is a core proceeding.” Spillman Dev. Grp., 710 F.3d at

305. For non-core proceedings, a bankruptcy judge shall

“submit proposed findings of fact and conclusions of law to

the district court, and any final order or judgment shall be

entered by the district judge....” 28 U.S.C. § 157(c)(1).

[13] Galaz argues that the claims asserted here are statelaw

defenses that cannot constitute core proceedings. “[B]ut even

such claims may be considered core if they are dependent

upon the rights created in bankruptcy.” Spillman Dev. Grp.,

710 F.3d at 305 (internal quotation marks omitted) (quoting

Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.

1987)). Katona alleges in her claim for declaratory relief that

her discharge rights— statutory rights provided for under the

Bankruptcy Code —are being violated. The bankruptcy

court decided that the 2011 Settlement Agreement, which the

bankruptcy court approved and is the source of Galaz's

ownership to the Oshita claims, bars his suit. This action

presents a core proceeding over which a bankruptcy court

may enter final judgment. See Nat'l Gypsum, 118 F.3d at

1063–64 (“Although a discharge in bankruptcy can

In Matter of Galaz, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 30

constitute an affirmative defense to a state law contract

claim, [a debtor's] action to enforce the discharge injunction

... assert[s] a statutory right under the Bankruptcy Code ....”);

Harris v. Wittman (In re Harris), 590 F.3d 730, 741 (9th Cir.

2009) (reasoning that a dispute over a post-petition

settlement agreement “is much more like a public rights case

than a private rights case” and is a “core” proceeding). The

bankruptcy court's interpretation of the 2011 Settlement

Agreement is determinative of Katona's claim, and the

bankruptcy court's order was within its statutory authority.

C.

*4 [14] [15] [16] Galaz next argues that the bankruptcy court

was required by the mandatory abstention provision to abstain

from adjudicating this case.3 This court reviews the decision

not to abstain for abuse of discretion. See Edge Petroleum

Operating Co. v. GPR Holdings, L.L.C. (In re TXNB Internal

Case), 483 F.3d 292, 299 (5th Cir. 2007). This court has

interpreted 28 U.S.C. § 1334(c)(2) to mandate federal court

abstention where, among other things, “the claim is a non-core

proceeding.” Id. at 300. Here, the bankruptcy court did not

abuse its discretion in refusing to abstain because, as previously

discussed, the proceeding at issue is “core” under § 157(b). See

Gober v. Terra + Co. (In re Gober), 100 F.3d 1195, 1206 (5th

Cir. 1996) (“Mandatory abstention applies only to non-core

proceedings ....”).

D.

Galaz argues that the bankruptcy court erred in finding his

Oshita claims barred by res judicata, compromise and

settlement, and accord and satisfaction because (1) Katona

did not raise these defenses in her pleadings and (2) these

defenses are meritless. We address each of Galaz's

arguments in turn.

1.

[17] [18] “Bankruptcy Rule 8006 provides that in an appeal

to a district court, the appellant must file a statement of the

issues to be presented.”4 McClendon v. Springfield (In re

McClendon), 765 F.3d 501, 506 (5th Cir. 2014). “It is clear

under the law of this circuit that an issue that is not designated

in the statement of issues in the district court is waived on

appeal ....” Id. (internal quotation marks omitted). Bankruptcy

Rule 8006 serves a specific purpose: it enables a redesignation

of the appellate record assembled in the bankruptcy court. See

M.A. Baheth & Co. v. Schott (In re M.A. Baheth Const. Co.),

118 F.3d 1082, 1085 n.2 (5th Cir. 1997). “After an immediate

appeal, a party may well narrow the focus of its efforts on the

second appeal and a redesignation of the record may eliminate

unnecessary material.” Id.

[19] [20] When Galaz appealed to the district court, he filed

a Bankruptcy Rule 8006 statement of the issues that raised, in

relevant part, this question:

Whether the Bankruptcy Court erred

by rendering judgment in favor of

Plaintiff and against Defendant

Alfred Galaz where

Plaintiff failed to meet her summary

judgment burden of establishing the

grounds presented in her Motion for

Summary Judgment and where

Defendants raised a genuine,

material issue of fact as to Plaintiff's

claims against them.

Galaz argues that this issue naturally encompasses the

argument that he later briefed before the district court:

Whether “the bankruptcy court erred in granting summary

judgment based upon res judicata, compromise and

settlement, and accord and satisfaction because these

defenses were never raised in Katona's pleadings.” But this

assertion construes his statement of the issues too broadly.

The purpose of Bankruptcy Rule 8006 is to narrow the

record on appeal. Drafting a sweeping statement of issues

flouts that purpose. The statement of the issues need not “be

precise to the point of pedantry” to avoid waiver. In re Am.

Cartage, Inc., 656 F.3d 82, 91 (1st Cir. 2011). There is no

indication in Galaz's statement of the issues, however, that

he intended to challenge the bankruptcy court's grant of

summary judgment on grounds not urged by Katona. His

statement of the issues concerns only whether Katona met

her summary judgment burden. His statement of the issues

does not fairly encompass his later argument that the

bankruptcy court should not have granted summary

judgment on arguments that Katona did not raise. See

McClendon, 765 F.3d at 506. Galaz failed to identify the

particular issue that he sought to appeal: whether the

bankruptcy court erred in granting summary judgment on

defenses not presented in Katona's motion for summary

judgment. We hold that Galaz waived that issue.

2.

In Matter of Galaz, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 31

*5 [21] [22] [23] “Once a final judgment on the merits of a

prior action is entered, the parties and those in privity with them

may not relitigate issues that either were or at least could have

been brought in the action.” Cooper v. Int'l Offshore Servs.,

L.L.C., 390 Fed.Appx. 347, 351 (5th Cir. 2010) (relying on

Oreck Direct, LLC v. Dyson, Inc., 560 F.3d 398, 401 (5th Cir.

2009)). “[A] bankruptcy order is entitled to the effect of res

judicata ....” Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1051

(5th Cir. 1987). The bankruptcy court here found that the 2011

Settlement Agreement provided a broad release of liability to

Katona and thus res judicata, compromise and settlement, and

accord and satisfaction functioned to bar Galaz from bringing

the Oshita claims. Galaz argues that these defenses are

inapplicable because he brings his claims as a successor-in-

interest to Oshita, not a successor-in-interest to Vernon, and

thus the 2011 Settlement Agreement does not bar his claims.

Because Galaz's claims arose through rights assigned from

Vernon, however, this court finds that his claims are barred by

res judicata.

Galaz was awarded Oshita's ownership interest in WSG by

a foreclosure judgment in California state court on Katona's

unpaid money judgment. He inherited the right to foreclose

against Oshita through Vernon's assignment. Vernon

inherited those rights from Katona by virtue of the 2011

Settlement Agreement, which also provided that Vernon

release all present and future claims against and rights to

sue Katona. This broad and exhaustive release included any

claims related to or arising out of any event, act, omission,

or condition involving WSG. As the district court correctly

identified, this assignment history presents two issues: (1)

whether Vernon's release carries over to Galaz; and (2) if

so, whether the ownership interest in WSG that Galaz

obtained is a substitute for the unpaid money judgment or a

legally distinct right.

[24] [25] [26] Under Texas law, an assignment is a

“transfer of some right or interest.” Shipley v. Unifund CCR

Partners, 331 S.W.3d 27, 28 (Tex. App. 2010). It “operates

to transfer to the assignee no greater right or interest than

was possessed by the assignor ....” Fla. Bahamas Lines,

Ltd. v. The Steel Barge “Star 800” of Nassau, 433 F.2d

1243, 1246 (5th Cir. 1970). But “[a]n assignee's rights are

also subject to defenses existing at the time of the

assignment that would have been available against the

assignor had there been no assignment.” Forex Capital

Mkts., LLC v. Crawford, No. 05–14–00341–CV, 2014 WL

7498051, at *2 (Tex. App. Dec. 31, 2014). Galaz received

his right to the unpaid money judgment upon assignment

from Vernon subject to the release of liability against

Katona.

[27] Galaz maintains that, even if he took subject to release,

the claims he is now asserting never belonged to Vernon.

Acknowledging that Vernon “might have been precluded

from bringing certain claims against Katona due to the

release,” he argues that he is instead “stepping into Oshita's

shoes” and asserting her rights. But Galaz cites no authority

for the proposition that this foreclosure judgment allows him

to kick off Vernon's shoes and the accompanying liability

release. Nor does he point to any precedent that this

judgment grants him a distinct legal right. An assignee of a

claim may not receive more than the assignor would have

been entitled to. See Fla. Bahamas Lines, Ltd., 433 F.2d at

1246. Galaz took Vernon's interest subject to the legal and

equitable defenses that existed at the time of the assignment;

the transfer does not function to deprive Katona of defenses

that she has against Vernon, the original assignor. Galaz's

claims are barred by res judicata, compromise and

settlement, and accord and satisfaction.

E.

Galaz argues that the bankruptcy court erred in finding his

Oshita claims barred by judicial estoppel because

(1) Katona did not raise this defense in her pleadings, (2)

neither Galaz nor Oshita took inconsistent positions as to

Oshita's ownership interest, and (3) Katona took

inconsistent positions as to Oshita's ownership interest and

her “unclean hands” prohibit judicial estoppel. For the

reasons discussed, we hold that Galaz's Bankruptcy Rule

8006 statement of the issues does not encompass Galaz's

argument that the bankruptcy court erred in considering

judicial estoppel when Katona did not raise it. We hold that

Galaz waived this issue.

*6 [28] [29] [30] This court reviews a determination of judicial

estoppel for abuse of discretion. Love v. Tyson Foods, Inc., 677

F.3d 258, 262 (5th Cir. 2012). “The doctrine of judicial estoppel

is equitable in nature and can be invoked by a court to prevent

a party from asserting a position in a legal proceeding that is

inconsistent with a position taken in a previous proceeding.” Id.

at 261. This court looks to the following elements in deciding

whether to apply judicial estoppel: “(1) the party against whom

judicial estoppel is sought has asserted a legal position which

is plainly inconsistent with a prior position; (2) a court accepted

the prior position; and (3) the party did not act inadvertently.”

Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en

banc). These elements, however, are neither inflexible nor

In Matter of Galaz, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 32

exhaustive and “numerous considerations may inform the

doctrine's application in specific factual contexts.” Love, 677

F.3d at 261 (internal quotation marks omitted).

[31] Here, the bankruptcy court took judicial notice of

all the filings in the bankruptcy case, the adversary

proceedings, the filings and decisions in the appeals of the

bankruptcy case, and the decisions in the California state

court litigation. Upon review, the bankruptcy court noted

several instances where Vernon asserted that Oshita did not

have an ownership interest in WSG. Because Galaz is

Vernon's successor-in-interest, he inherits the positions that

she has taken throughout the litigation. See Adelphia

Recovery Tr. v. Goldman, Sachs & Co., 748 F.3d 110, 120

(2d Cir. 2014) (finding appellants judicially estopped by

actions of predecessors in interest). He cannot now contend

that Oshita has an ownership interest in WSG, because that

position is plainly inconsistent with Vernon's prior position.

The bankruptcy court did not abuse its discretion in finding

Galaz judicially estopped.

[32] A party cannot rely on judicial estoppel if it comes

to the court with unclean hands. Reg'l Props., Inc. v. Fin. &

Real Estate Consulting Co., 752 F.2d 178, 183 (5th Cir.

1985). Galaz contends that Katona similarly took

inconsistent positions regarding Oshita's ownership interest

and thus judicial estoppel cannot apply. The bankruptcy

court reviewed these allegedly inconsistent statements made

by Katona, but found that Katona had maintained that

Oshita's interest was disputed, whereas Vernon had

definitively asserted that Oshita had no interest. Because

Galaz provides no basis for concluding that the bankruptcy

court erred in its factual findings, this court holds that the

bankruptcy court did not abuse its discretion in applying

judicial estoppel.

F.

As a final argument, Galaz contends that the bankruptcy

court erred in denying his motion for summary judgment

and requests that this court reverse and render judgment in

his favor. Galaz reiterates, as the basis for rendering

judgment in his favor, the many arguments that he levied

against the bankruptcy court's order granting Katona's

motion for summary judgment. For the reasons set forth

above, Galaz's arguments fail.

IV.

We AFFIRM the judgment of the district court.

All Citations

--- F.3d ----, 2016 WL 6407211

Footnotes

1 The parties dispute whether, as part of the settlement, Katona assigned her right to the money judgment against Oshita. 2

The bankruptcy court explicitly declined to make any findings on whether the Oshita claims were discharged, and dismissed

Katona's claims for discharge violations without prejudice. But jurisdiction to hear and decide a proceeding attaches before—

and regardless of how—a court rules on the merits of the claim. See Bradley, 989 F.2d at 804–05 (finding that the bankruptcy

court had subject matter jurisdiction even though the bankruptcy court did not rule on the merits of the disputed debt). When a

federal claim appears on the face of the complaint, dismissal for want of jurisdiction is proper only when the claim is “patently

without merit.” Young v. Hosemann, 598 F.3d 184, 188 (5th Cir. 2010). Katona alleges that the Oshita claims were discharged

in her bankruptcy proceedings, in part, because Oshita had constructive or actual notice of her bankruptcy and failed to assert a

claim. We hold that Katona's allegations meet the low pleading burden sufficient to establish jurisdiction.

3 Galaz also argues that the bankruptcy court should have abstained from hearing this case under the permissive

abstention statute. See 28 U.S.C. § 1334(c)(1). This court, however, lacks jurisdiction to review that decision. Id. §

1334(d); see Baker v. Simpson, 613 F.3d 346, 352 (2d Cir. 2010) (“[D]ecisions on permissive abstention, which lie within

the discretion of the bankruptcy court, are not subject to review by the court of appeals. We therefore lack jurisdiction to

decide whether the district court's decision on permissive abstention was correct.”).

4 As part of the December 2014 amendments to the Federal Rules of Bankruptcy, Rule 8006 became Rule 8009. Galaz

filed his statement of issues before the amendments and thus the parties and courts below refer to Rule 8006.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In Matter of McCloskey, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 33

2016 WL 6436844

Only the Westlaw citation is currently available.

This case was not selected for

publication in West's Federal Reporter.

See Fed. Rule of Appellate Procedure 32.1

generally governing citation of judicial decisions

issued on or after Jan. 1, 2007. See also

U.S.Ct. of App. 5th Cir. Rules 28.7 and

47.5. United States Court of Appeals, Fifth

Circuit.

In the Matter of: Christopher J. McCloskey, Debtor.

Christopher J. McCloskey, Appellant,

v.

Anne Miriam McCloskey;

Michael A. Craig, Appellees.

No. 16-20079

|

Date Filed: 10/31/2016

Appeal from the United States District Court for the

Southern District of Texas, USDC No. 4:15–CV–742

Attorneys and Law Firms

Leonard Harvey Simon, Esq., Pendergraft & Simon, L.L.P.,

Houston, TX, William Pimlott Haddock, Houston, TX, for

Appellant

Joelle Grace Nelson, Lewis, Brisbois, Bisgaard & Smith,

L.L.P., Houston, TX, Branch Masterson Sheppard,

Galloway, Johnson, Tompkins, Burr & Smith, Houston, TX,

for Appellee Anne Miriam McCloskey

Larry A. Vick, Esq., Houston, TX, for Appellee Michael A.

Craig

Before STEWART, Chief Judge, SMITH and DENNIS,

Circuit Judges.

Opinion

PER CURIAM:*

*1 A divorce proceeding began in 1998, and the parties

continue a fight over attorneys' fees awarded in 2001.

Appellant claims that he should have been able to discharge

the award after he filed for bankruptcy in 2005. Appellees

respond that the debt is a non-dischargeable support

obligation under 11 U.S.C. § 523(a)(5). The bankruptcy court

granted appellees' motion for summary judgment and denied

appellant's motion for summary judgment and his motion for

contempt, sanctions, and damages. The district court

affirmed. Finding no error, we also affirm.

I.

Appellant Christopher McCloskey is the ex-husband of

appellee Anne McCloskey. The second appellee, Michael

Craig, is Anne's lawyer. In 1998, Anne filed for divorce. In

January 2001, a Texas state trial court awarded Anne $50,398

in attorneys' fees plus interest for conservatorship, support,

and property-division proceedings arising from the divorce.

Christopher appealed. In June 2003, a state appellate court

remanded because Texas law does not allow parties to be

reimbursed for fees relating to property division.

Things got complicated after Christopher filed for bankruptcy

in January 2005 and appellees took steps to prevent him from

discharging his debt. In January 2006, a federal bankruptcy

court granted appellees' motion for relief from the automatic

stay so that the trial court could reconsider the fee award. In

April 2006, the trial court issued a reformed final judgment,

again awarding Anne $50,398 in fees plus interest, but this

time only for conservatorship and child support. Christopher

appealed and moved for limited relief from the automatic stay

so that the state appellate court could consider his appeal. In

April 2009, the state appellate court upheld the award of

attorneys' fees but struck the reference to “child support”; the

final judgment deemed the attorneys' fees as necessary solely

for the “conservatorship of the children.”

In the meantime, appellees sought to garnish Christopher's

Fidelity IRA investment account. In December 2007, a state

trial court authorized the garnishment. Christopher appealed,

and in March 2010, a state appellate court affirmed.

In July 2007, the bankruptcy court granted appellees' motion

for summary judgment, denying the dischargeability of the

attorneys' fees. Christopher appealed to the federal district

court, which affirmed. He then appealed to this court, which,

in September 2009, vacated the district court's judgment

affirming the summary judgment. We remanded for the

bankruptcy court to reconsider in light of the April 2009 state

appellate court decision finding that appellees' attorneys' fees

are not “child support” under Texas law.

Both sides moved for summary judgment. The bankruptcy

court issued a detailed opinion in March 2015 granting

In Matter of McCloskey, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 34

appellees' motion for summary judgment, finding that,

although the attorneys' fees were not incurred for

childsupport enforcement, they nevertheless qualify as a

nondischargeable support obligation under 11 U.S.C. §

523(a) (5). Christopher appealed that decision, and the

district court affirmed, whereupon Christopher appealed to

this court.

II.

*2 Christopher urges that the bankruptcy court's decision is

mistaken because (1) appellees lack standing, (2) the

attorneys' fees are not a “support” obligation, (3) appellees'

state-court actions violated the automatic stay, and (4)

appellees are judicially estopped from asserting that the

attorneys' fees are related to child support. We address each

argument in turn.

A.

Regarding Christopher's contention that appellees do not

have standing to challenge the dischargeability of the debt,

creditors can establish standing in a bankruptcy case through

an informal proof of claim. See Nikoloutsos v. Nikoloutsos (In

re Nikoloutsos), 199 F.3d 233, 236 (5th Cir. 2000). They must

show that (1) the claim is in writing;

(2) the writing contains a demand on the debtor's estate; (3)

the writing evidences an intent to hold the debtor liable; (4)

the writing is filed with the bankruptcy court; and (5)

allowance of the claim is equitable under the circumstances.

Id.

Appellees met each of these requirements. They objected to

Christopher's proposed bankruptcy plan shortly after it was

filed in June 2005. In August 2005, they filed their Creditor's

Response to Debtor's Proof of Claim, explaining that “the

previously filed proof of claim is urged by Michael A. Craig

and Craig & Heallen, LLP on behalf of Anne Miriam

McCloskey.” In December 2005, appellees filed a Motion for

Relief from Stay.

And, in January 2006, they brought an adversarial case

against Christopher in bankruptcy court. Those written

demands on Christopher, filed with the bankruptcy court,

evidenced appellees' intent to hold him liable for his debt. The

claim was equitable under the circumstances.

B.

The Bankruptcy Code prevents debtors from discharging

marital or child-support obligations in bankruptcy.1 The

bankruptcy court found that the attorneys' fees at issue qualify

as support and are therefore non-dischargeable. Christopher

points to a state-court decision finding that appellees'

attorneys' fees were not in the nature of support,2 as well as

two recent Texas Supreme Court opinions that limit the

circumstances under which Texas state courts can award

attorneys' fees for child support.3

The bankruptcy court,

however, was not constrained by those state-court rulings.

“Whether a particular debt is a support obligation, excepted

from discharge under 11 U.S.C. § 523(a)(5), is a question of

federal bankruptcy law, not state law.” Hudson v. Raggio &

Raggio, Inc. (In re Hudson), 107

F.3d 355, 356 (5th Cir. 1997). The text of section 523(a) (5),

as it existed when the bankruptcy case was filed, is broadly

worded: Any debt that is owed to a former spouse “for

alimony to, maintenance for, or support of such spouse or

child, in connection with a separation agreement, divorce

decree or other order of a court of record” is nondischargeable

(emphasis added).4 Courts in this circuit have consistently

read that text to mean that attorneys' fees incurred for the

conservatorship of children are not dischargeable.5

C.

*3 Filing for bankruptcy automatically stays “a wide array of

collection and enforcement proceedings against the debtor

and his property.” Pa. Dep't of Pub. Welfare v. Davenport,

495 U.S. 552, 560, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990).

Christopher filed for bankruptcy in January 2005. In the

months and years that followed, the state courts issued a

number of orders, including a garnishment judgment, which

Christopher maintains violated the automatic stay.

There are three problems with that theory. First, the

bankruptcy court granted three motions for relief from the

stay so that the state proceedings could go forward. Those

orders allowed the state courts to issue orders without

violating the stay. Second, at the time Christopher filed for

bankruptcy, the Bankruptcy Code included exceptions to the

automatic stay for “the establishment or modification of an

order for alimony, maintenance, or support”6 and for “the

collection of alimony, maintenance, or support from property

In Matter of McCloskey, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 35

that is not property of the estate.”7

Those two exceptions

cover all of the relevant statecourt orders.8 Third,

Christopher's arguments about the appropriateness of specific

state-court orders are foreclosed by the Rooker–Feldman

doctrine and res judicata. The Rooker–Feldman doctrine bars

the lower federal courts from modifying or reversing state-

court judgments. See Ingalls v. Erlewine (In re Erlewine), 349

F.3d 205, 209 (5th Cir. 2003). Res judicata prevents parties

from re-trying claims that they have already litigated where,

as here, there was a final judgment on the merits. See Barr v.

Resolution Trust Corp., 837 S.W.2d 627, 628 (Tex. 1992).

D.

In June 2003, a state appellate court reviewing Christopher's

state-law claims decided that Texas law does not allow

parties to be reimbursed for attorneys' fees relating to

property division. The trial court had awarded

Footnotes

fees to appellees for child-support-related and

propertydivision-related costs, so the appellate court

remanded with instruction to segregate the fees, stating that

“Anne is willing to rectify the matter by classifying the fees

as part of the division of property [rather than as child

support].”9

“Judicial estoppel ... prevent[s] a litigant from contradicting

its previous, inconsistent position when a court has adopted

and relied on it.” Afram Carriers, Inc. v. Moeykens, 145 F.3d

298, 303 (5th Cir. 1998). Christopher argues that appellees

are judicially estopped from claiming that the attorneys' fees

should qualify as support, given that Anne has already

admitted in state court that the fees were not entirely support-

related. Again, we disagree. Bankruptcy courts must “look

beyond the labels which state courts—and even parties

themselves —give obligations which debtors seek to

discharge.” Dennis v. Dennis (In re Dennis), 25 F.3d 274, 277

(5th Cir.

1994).10

A party may argue in bankruptcy court that an

obligation constitutes support even if she has urged to the

contrary in state court. Id. at 278. Therefore, appellees are not

judicially estopped from bringing this claim.

*4 In sum, the award is non-dischargeable under 11 U.S.C.

§ 523(a)(5). The judgment of the district court, affirming the

bankruptcy court, is AFFIRMED.

All Citations

--- Fed.Appx. ----, 2016 WL 6436844

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except

under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

1 11 U.S.C. § 523(a)(5) (2000), amended by 11 U.S.C. § 523(a)(5) (Supp. V 2005) (“[D]ischarge under section 727,

1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt ... for alimony to,

maintenance for, or support of such spouse or child, in connection with a separate agreement, divorce decree or other

order of a court of record....”).

2 See McCloskey v. McCloskey, No. 14–06–00470–CV, 2009 WL 3335868, at *2 (Tex. App.–Houston [14th Dist.] Apr.

2, 2009).

3 Tedder v. Gardner Aldrich, LLP, 421 S.W.3d 651, 655–56 (Tex. 2013) (finding that a person can be held liable for a

spouse's attorneys' fees only if he either acts as an agent for the spouse or the fees are for “necessaries” such as

“food, clothing, and habitation”); Tucker v. Thomas, 419 S.W.3d 292, 295 (Tex. 2013) (stating that “in the absence of

express statutory authority, a trial court may not award attorney's fees recoverable by a party in a non-enforcement

modification suit as necessaries or additional child support”).

4 See also Biggs v. Biggs (In re Biggs), 907 F.2d 503, 505 (5th Cir. 1990) (“[N]othing in the language of section 523(a)

(5) indicates that the dischargeability of an obligation turns on state laws regulating alimony and support.”); Browning v. Navarro, 887 F.2d 553, 561 (5th Cir. 1989) (“[B]ankruptcy courts have a job to do and sometimes they must ignore res

judicata in order to carry out Congress' mandate.”).

5 See, e.g., Sonntag v. Prax (In re Sonntag), 115 Fed.Appx. 680, 681–82 (5th Cir. 2004) (per curiam); In re Hudson, 107 F.3d at 357; Dvorak v. Carlson (In re Dvorak), 986 F.2d 940, 941 (5th Cir. 1993); Hill v. Snider (In re Snider), 62 B.R.

In Matter of McCloskey, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 36

382, 387 (Bankr. S.D. Tex. 1986); Hack v. Laney (In re Laney), 53 B.R. 231, 235 (Bankr. N.D. Tex. 1985).

6 See 11 U.S.C. § 362(b)(2)(A)(ii) (2000), amended by 11 U.S.C. § 362(b)(2)(A)(ii) (Supp. V 2005).

7 See 11 U.S.C. § 362(b)(2)(B) (2000), amended by 11 U.S.C. § 362(b)(2)(B) (Supp. V 2005).

8 Christopher voluntarily exempted his Fidelity IRA investment account (the subject of the garnishment proceedings)

from his bankruptcy estate in early 2006, before the garnishment proceedings began.

9 McCloskey v. McCloskey, No. 14–00–01300–CV, 2003 WL 21354709, at *5 (Tex. App.–Houston [14th Dist.] June 12,

2003).

10 See also Benich v. Benich (In re Benich), 811 F.2d 943, 945–46 (5th Cir. 1987) (finding that monthly payments to

exspouse agreed to in a property-settlement agreement qualify as non-dischargeable support).

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 37

2016 WL 6276051

Only the Westlaw citation is currently available.

United States Court of Appeals, Fifth Circuit.

Ralph S. Janvey, In His Capacity as Court–

Appointed Receiver for the Stanford International

Bank, Limited, et al., Plaintiff–Appellant

v.

Libyan Investment Authority, Defendant–Appellee

Ralph S. Janvey, In His Capacity as Court–

Appointed Receiver for the Stanford International

Bank, Limited, et al., Plaintiff–Appellee

v.

Libyan Foreign Investment

Company, Defendant–Appellant

No. 15-10545

|

Cons. w/ No. 15-10548

|

Filed October 26, 2016

Synopsis

Background: Receiver of financially troubled bank used by its

principal to perpetrate massive Ponzi scheme brought

“clawback” actions to recover sums paid to investors in scheme,

including action against defendants who moved to dismiss based

on the Foreign Sovereign Immunities Act (FSIA). The United

States District Court for the Northern District of Texas, David

C. Godbey, J., 164 F.Supp.3d 910, ruled that one of defendant's

was immune from suit, but the other was not, and granted motion

to dismiss in part. Both parties appealed.

Holdings: The Court of Appeals held that:

[1] while Libyan Investment Authority (LIA),

ascorporation solely owned by the Libyan government,

was “agency or instrumentality” of foreign state under the

FSIA, the Libyan Foreign Investment Company (LFICO),

as corporation solely owned by the LIA and only

indirectly owned by the Libyan government, was not, at

least not on majority ownership theory;

[2] district court's acceptance of parties stipulation

thatboth defendants were “agencies or instrumentalities”

of Libyan government necessitated remand for further

factual development;

[3] even assuming that corporation wholly ownedby

another corporation that was wholly owned by Libyan

government was itself “agency or instrumentality” of

Libyan government, trading activity conducted by

corporation wholly outside the United States did not have

“direct effect” in the United States, as required for this

trading activity to trigger “commercial activity” exception

to immunity under the FSIA;

[4] whatever control the parent exercised over

subsidiarywith regard to its investment decisions was

insufficient to permit court to disregard their legal

separateness and to treat acts of subsidiary as those of

parent, in conducting its FSIA analysis; and

[5] corporate parent's status as sole shareholder of

whollyowned subsidiary to which allegedly fraudulent

transfer was made was insufficient, without more, to make

it liable as “entity for whose benefit” this allegedly

fraudulent transfer was made, as that term was used in the

Texas Uniform Fraudulent Transfer Act (TUTFA).

Affirmed in part, vacated in part, and remanded.

Appeals from the United States District Court for the Northern

District of Texas, David C. Godbey, J.

Attorneys and Law Firms

Kevin M. Sadler, Baker Botts, L.L.P., Palo Alto, CA,

Scott Daniel Powers, Baker Botts, L.L.P., Austin, TX, for

Plaintiff–Appellant.

Warren W. Harris, Yvonne Y. Ho, Esq., Bracewell, L.L.P.,

Houston, TX, Joseph Marion Cox, Attorney,

Bracewell, L.L.P., Shana Lynn Merman, Squire Patton

Boggs, L.L.P., Dallas, TX, Brian H. Polovoy, Henry

Sabath Weisburg, Attorney, Shearman & Sterling, L.L.P.,

New York, NY, for Defendant–Appellee.

Before WIENER, PRADO, and OWEN, Circuit Judges.

Opinion

PER CURIAM:

*1 Ralph S. Janvey, the court-appointed receiver (“the

receiver”) for a Ponzi scheme orchestrated by Allen Stanford

(the “Stanford scheme”), brought claims against the Libyan

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 38

Investment Authority (“LIA”) and the Libyan Foreign

Investment Company (“LFICO”) in the district court, seeking to

recover the proceeds of certificates of deposit (“CDs”)

previously transferred to LFICO by the Stanford International

Bank, Ltd. (“SIB”). LIA and LFICO moved to dismiss the

receiver's claims, insisting that they were immune from the

court's jurisdiction under the Foreign Sovereign Immunities Act

(“FSIA”). The receiver opposed dismissal, asserting that the

commercial activity exception to FSIA immunity applied. After

the parties conducted limited jurisdictional discovery, the district

court ruled that LIA was immune but that LFICO was not. Both

the receiver and LFICO timely filed appeals, which have been

consolidated. We affirm in part and vacate and remand in part.

I.

FACTS & PROCEEDINGS

Stanford and his associates perpetrated the Stanford scheme

through a group of entities (collectively, the “Stanford entities”)

that, inter alia, sold sham CDs issued by SIB to unsuspecting

investors. The Stanford entities promised those investors that the

CDs from SIB would yield extraordinarily high rates of return.

Rather than investing the funds they received from later

investors, however, the Stanford entities paid those funds to

earlier investors, redeeming their maturing CDs. In so doing, the

Stanford entities made it appear that the CDs from SIB were

producing the phenomenal rates of return they had promised.1

In early 2009, the Securities and Exchange Commission (“SEC”)

filed suit against the Stanford entities, including SIB. The

Stanford entities were then placed in receivership, and Janvey

was appointed their receiver. The receiver is responsible for

bringing claims on behalf of the Stanford entities to recover

assets for distribution to their defrauded investors.

The instant consolidated appeals relate to the Stanford

entities' transfer of funds to LFICO, an earlier investor that

had redeemed some of its maturing CDs.

In 2006, LFICO had developed relationships with SIB, a

Stanford entity based in Antigua, and Stanford Group

(Suisse) S.A. (“SGS”), a Stanford entity based in

Switzerland. LFICO's relationship with SIB related solely

to its purchase of $138 million in CDs from SIB. LFICO's

relationship with SGS related solely to a discretionary

management agreement between itself and SGS, under

which SGS managed $100 million of LFICO's funds in an

account it held in Switzerland. The agreement was formed

in Libya and governed by Swiss law.

These relationships were ongoing when, in 2007, two SGS

financial advisors accompanied two LFICO analysts on a

training program conducted by SIB. The program began

and ended in Switzerland but included visits to Antigua

and the United States—in particular, to Houston,

Memphis, Washington, and Miami. Otherwise, LFICO's

relationship with the Stanford entities did not include any

other acts or activities in the United States.2

*2 In 2008, LFICO decided to divest its SIB-issued CDs,

“given the size of [these] deposits and the problems facing

the international financial market.”3 It instructed SGS in

Switzerland to redeem its SIB-issued CDs as they matured

rather than to repurchase them at that time. (In a single

exception, LFICO instructed SGS to repurchase $50

million in CDs from SIB several months later.) SGS

appears to have complied with these requests: As the CDs

matured, SIB transferred their proceeds from its accounts

in Canada and England to LFICO's accounts in Libya and

Switzerland. None of these accounts was held in the

United States.4 When SIB entered receivership, LFICO

had already received about $50 million in redemption

proceeds, far less than it had paid for all of its CDs. As a

result, it suffered a greater loss than any other investor in

the Stanford scheme.

LFICO's only shareholder is LIA, whose only shareholder

is Libya. Both LFICO and LIA are based in Libya. Unlike

LFICO, LIA never purchased SIB-issued CDs, although it

apparently considered doing so. LIA asserts that it was

wholly uninvolved in LFICO's purchases and redemptions

of the SIB-issued CDs.5 LIA is not referenced in the

discretionary management agreement between LFICO

and SGS or in the CDs themselves, which were

agreements between SIB and LFICO. After Stanford's

arrest, the then-chief investment officer of LIA stated that

LIA itself had not purchased any SIB-issued CDs but that

he “suspect[ed] a[n] LIA affiliate or [s]ubsidiary may

have [$]150 million at most” invested.6

In 2009, the receiver filed suit against investors, including

LFICO, that had purchased SIB-issued CDs and later had

redeemed them. He sought disgorgement of any proceeds of

those CDs, but in Janvey v. Adams, this court precluded such

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 39

claims, holding that the investors had a legitimate ownership

interest in those proceeds.7 The receiver then made new claims

against some of those investors for fraudulent transfer and unjust

enrichment. Eventually, he asserted such claims against LFICO

and LIA, too, alleging that LFICO was LIA's alter ego. The

receiver filed a motion for a preliminary injunction on those

claims. The district court denied the receiver's motion, and we

affirmed the district court's denial.

LIA and LFICO eventually filed a motion to dismiss under

Federal Rule of Civil Procedure 12(b)(1) and (2), claiming that

the district court lacked personal and subject matter jurisdiction

because (1) they had presumptive immunity under the FSIA as

agents or instrumentalities of a foreign state and (2) the

commercial activity exception to immunity under the FSIA did

not apply. The parties conducted jurisdictional discovery

regarding whether LIA and LFICO engaged in activities that fall

within the scope of the commercial activity exception under the

FSIA.

*3 When that discovery was complete, the district court denied

the motion to dismiss as to LFICO. In so doing, it ruled that (1)

LFICO had engaged in commercial activity by purchasing,

repurchasing, and redeeming the SIBissued CDs and (2) this

activity, which occurred outside the United States, had a “direct

effect” on the United States because the Stanford scheme was

based in the United States. The court concluded that the

commercial activity exception to immunity under FSIA gave it

personal and subject matter jurisdiction over LFICO.

The district court granted the motion to dismiss as to LIA. The

court concluded that LIA had not engaged in commercial

activity at all and that, although LFICO had engaged in such

activity, its acts were not attributable to LIA. The court ruled that

LFICO was not LIA's agent or alter ego in purchasing,

repurchasing, or redeeming the SIB-issued CDs and that the

proceeds of those CDs were not redeemed for LIA's benefit.

Both LFICO and the receiver then appealed.

II.

ANALYSIS

A. STANDARD OF REVIEW

[1] [2] [3] [4] [5] We have appellate jurisdiction over any final

order that grants immunity under the FSIA8

and over any

collateral order that denies it.9 We also have pendant appellate

jurisdiction over any closely related issues.10

In exercising that

jurisdiction, we review the district court's conclusions of law de

novo,11

and, to the extent it makes any findings of fact,12

we

review them for clear error.13

A finding of fact is clearly

erroneous if it is inconsistent with the record in its entirety.14

Such a finding may be clearly erroneous if (1) it is not based on

“substantial evidence,” (2) it is based on a misinterpretation of

the evidence, or (3) it is inconsistent with “the preponderance of

credible testimony.”15

If the district court's conclusions of law

“affected” its findings of fact, “remand is the proper course

unless the record permits only one resolution of the [fact].”16

[6] [7] These appeals require us to determine whether there

is any basis for personal and subject matter jurisdiction over

LIA and LFICO. The FSIA provides “the sole basis for

obtaining jurisdiction over a foreign state in [federal and

state] courts.”17

It furnishes both the immunity itself, which

applies to any “foreign state,”18

and the only exceptions to

that immunity.19

If an exception applies, the FSIA also

specifies the only basis for personal and subject matter

jurisdiction over the foreign state. That jurisdiction extends

to “any nonjury civil action against a foreign state ... as to

any claim for relief in personam....”20

If no exception

applies, there is no other basis for personal or subject matter

jurisdiction over a foreign state.21

*4 [8] [9] [10] The parties claiming immunity under the FSIA—

here, LIA and LFICO—have the initial burden of persuasion that

they are foreign states and therefore entitled to a presumption of

immunity.22

If they bear that burden, then the party opposing

immunity— here, the receiver—has the burden of producing

evidence that LIA and LFICO fall within an exception

enumerated in the FSIA, refuting the presumption of

immunity.23

If the receiver bears his burden, LIA and LFICO

then have the ultimate burden of persuasion that the exception

does not apply to them and that they are entitled to immunity.24

B. WHETHER LFICO AND LIA ARE

“FOREIGN STATES” UNDER THE FSIA

“[m]ajority ownership by [the] foreign state, not control,

is the benchmark.”33

As “only direct ownership”

counts,34

“a subsidiary of an [agency or] instrumentality

[of the state] is not itself entitled to [such] status.”35

LIA is majority owned by Libya itself and thus is an [11] [12]

[13] [14] The parties agreed that both LIA

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 40

Therefore, “[a] corporation is an [agency or an]

instrumentality of a foreign state under the FSIA only if

the foreign state itself owns a majority of the corporation's

shares.”36

It is not an agency or instrumentality on the

basis of majority ownership, however, if the “the foreign

state does not own a majority of its shares but does own a

majority of the shares of a corporate parent one or more

tiers above the subsidiary.”37

and LFICO are “foreign states” under the FSIA. Relying on the

parties' agreement, the district court determined that LIA and

LFICO “qualify as foreign states.” Subject matter jurisdiction,

however, “can never be forfeited or waived.”25

We therefore

“have an independent obligation to determine whether [it]

exists, even in the absence of a challenge from any party.”26

Accordingly, we must determine whether LIA and LFICO are

“foreign states” under the FSIA.

[15] In the context of the FSIA, the term “foreign state” refers

not only to the state itself, viz., the “body politic that governs a

particular territory,”27

but also to its “agenc[ies] or

instrumentalit[ies].”28

Absent a clear distinction between the

terms “agency” and “instrumentality,”29

they are read together

or treated interchangeably.30

*5 [16] An agency or instrumentality of a foreign state is a

separate entity, “corporate or otherwise,” that is either (1)

majority owned by a foreign state or (2) an “organ” of a foreign

state.31

There is a distinction between those agencies or

instrumentalities that qualify because they are “organs” of a

foreign state and those that qualify because they are “majority

owned” by one.32

In some instances, however, an agency or

instrumentality may be both and thus qualify as either.

1. MAJORITY OWNED BY A FOREIGN STATE

[17] [18] The Supreme Court has clarified that, because

“[c]ontrol and ownership ... are distinct concepts,” agency or

instrumentality of Libya.38

LFICO, however, does not qualify

on that basis because it is not majority owned by Libya directly,

but by LIA. LFICO is merely a subsidiary of LIA, and that is

not sufficient.

2. ORGAN OF A FOREIGN STATE

[19] [20] LFICO could qualify as an agency or

instrumentality, however, if it is an organ of Libya. We have

suggested that there is no clear test for determining whether

an entity is an organ of a state but that the following factors

are useful: “(1) whether the foreign state created the entity

for a national purpose; (2) whether the foreign state actively

supervises the entity; (3) whether the foreign state requires

the hiring of public employees and pays their salaries; (4)

whether the entity holds exclusive rights to some right in the

[foreign] country; and (5) how the entity is treated under

foreign state law.”39

Considering whether an entity is an

“organ” is, in some respects, similar to considering whether

it is an “agent.” (We note that the term “agent” should not

to be confused with the term “agency” in the phrase “agency

or instrumentality.”)

*6 [21] Because the parties agreed that LFICO is a “foreign

state” under the FSIA, they did not address whether LFICO

is an organ, and thus an agency or instrumentality, of Libya.

The district court did determine, in another context, that

LFICO was not LIA's agent but was Libya's agent. The court

explained that “there is a sufficient connection between

LFICO and [Libya] such that LFICO can be considered

Libya's agent.”40

In so doing, the court determined: “LFICO

operates solely in the national interest of Libya”; “LFICO

possesses ‘special status and is treated as an organ of ...

Libya’ ”; “LFICO is comprised in large part of government

representatives”; and “the Libyan legislature has the power to

appoint members of ... LFICO['s board] and to fix their

salaries, and [its board] is subordinate to the Libyan

legislature.”

[22] [23] The district court, however, erred by relying on a

description of the act that created LFICO initially rather than the

description of the subsequent act that transferred LFICO to LIA.

The subsequent act disentangled LFICO from Libya itself. As a

result, LIA became—and remains —Libya's subsidiary, and

LFICO became—and remains —LIA's subsidiary. This is

significant because, as with subsidiaries, “duly created [agencies

or] instrumentalities of a foreign state are to be accorded a

presumption of independent status.”41

The party opposing

immunity— here, the receiver—“can overcome that presumption

... by demonstrating that the [agency or] instrumentality is the

agent or alter ego of the foreign state.”42

The theories underlying

alter egos and agents are “distinct” and, for this reason, are not to

be applied “as if they were interchangeable.”43

Alter egos are

created equitably; agents are created contractually.44

Both,

however, are bases for overcoming the presumption that an

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 41

agency or instrumentality of a foreign state is separate from the

foreign state itself.45

LIA is majority owned by Libya proper and therefore an

agency or instrumentality of a foreign state. In contrast, LFICO

is not majority owned by Libya proper. As noted above, the

parties agreed that, in addition to LIA, LFICO is a foreign state

under the FSIA, so the parties did not develop the record on

the precise issue of whether LFICO is an organ of Libya and

thus a “foreign state” under the FSIA. Accordingly, we vacate

the district court's ruling that it had jurisdiction over the claims

against LFICO under the FSIA and remand for development

of the factual record on this issue and for a determination

whether LFICO is an organ, and thus an agent or

instrumentality, of Libya under the FSIA.

C. WHETHER THE CLAIMS AGAINST LFICO

ARE SUBJECT TO THE COMMERCIAL

ACTIVITY EXCEPTION TO THE FSIA If we were

to assume arguendo that LFICO is an agency or

instrumentality of Libya proper and therefore presumptively

entitled to immunity under the FSIA, there would be no basis

for jurisdiction over the receiver's claims against LFICO under

the commercial activity exception to the FSIA. The FSIA

provides an exception to sovereign immunity “in any case in

which the action is based upon commercial activity that has a

jurisdictional nexus with the United States.”46

The commercial

activity exception contains three clauses, each identifying a

type of act that is sufficiently connected to the United States to

satisfy the jurisdictional nexus requirement: (1) “a commercial

activity carried on in the United States by the foreign state”;

(2) “an act performed in the United States in connection with

a commercial activity of the foreign state elsewhere”; and (3)

“an act outside the territory of the United States in connection

with a commercial activity of the foreign state elsewhere and

that act causes a direct effect in the United States.”47

*7 The parties dispute whether LFICO's activity—

purchasing, repurchasing, and redeeming SIB-issued CDs

—fell within any of the clauses of FSIA's commercial

activity exception. LFICO argues that the district court erred

in determining that it had jurisdiction to hear the receiver's

claims against it under any clause of the commercial activity

exception. Because the district court based its decision on

the third clause, we begin there.

1. THIRD CLAUSE

[24] The third clause of the exception applies when a claim

“is [i] based ... upon an act outside ... of the United States

[ii] in connection with a commercial activity”48

—“either a

regular course of commercial conduct or a particular

commercial transaction or act”49

—“of the foreign state

elsewhere and [iii] that act causes a direct effect in the

United States.”50

The parties do not dispute that the

receiver's claim is based “upon an act outside the territory

of the United States in connection with [LFICO's]

commercial activity [outside the United States].”51

[25] [26] [27] The district court determined, however, that the

third clause applied because it concluded that LFICO's acts

caused a direct effect in the United States. An effect is “direct”

if it follows as an immediate consequence of the foreign state's

activity.52

“[A] consequence is ‘immediate’ if no intervening

act breaks ‘the chain of causation leading from the asserted

wrongful act to its impact in the United States.’ ”53

In

considering

the effect, we must “isolate those specific acts of the [agency or

instrumentality] that form the basis of the plaintiff's [claims].”54

As the Second Circuit has noted, “even if ... a particular effect

might be foreseeable,” such an effect is not “direct” if it “hinge[s]

on third parties' independent ... conduct.”55

“[T]he mere fact that

[an agency or instrumentality]'s commercial activity outside of

the United States caused ... financial injury to a United States

citizen is not itself sufficient to constitute a direct effect in the

United States.”56

Such an injury will constitute a direct effect

only if the agency or instrumentality of a foreign state causes the

injury through its failure to perform an obligation that it was

required to perform in the United States.57

*8 The district court determined that LFICO's acts, which

occurred outside the United States, had a “direct effect” in the

United States. The district court explained that, “by doing

business with SIB in Antigua, LFICO was in reality doing

business with Stanford in [the United States].” It concluded that,

“as an immediate consequence of LFICO's investments [in

Antigua], the [U.S.]-based Stanford Ponzi scheme slipped further

into insolvency and received funds it needed to keep its scheme

afloat.” This assumption is erroneous.

LFICO purchased, repurchased, and redeemed the CDs from SIB,

which was based in Antigua; all of LFICO's acts occurred in

Switzerland and Libya; and all of SIB's acts occurred in Antigua,

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 42

Canada, and England. LFICO had nothing to do with SIB's

transfer of funds to or from other Stanford entities as part of the

scheme. The district court observed that “[m]oney put into and

taken out of SIB's coffers in Antigua was money being funneled

through Stanford's [U.S.]-based enterprise.” It did not state that

LFICO was funneling that money. In fact, it did not identify who

was doing the funneling but ducked that issue by relying on the

passive voice: “[m]oney ... was being funneled.”

LFICO acted only pursuant to its obligations under the SIB-

issued CDs, which constituted agreements between LFICO and

SIB. Those instruments did not require any act in the United

States, much less the act of funneling money through the Stanford

scheme or any Stanford entities in the United States.

Accordingly, the district court erred in deciding that the third

clause of the commercial activity exception applied to the

receiver's claims against LFICO.

2. FIRST AND SECOND CLAUSES

[28] The receiver asserts that the district court erred in

determining that the first and second clauses of the

commercial activity exception do not apply. Those clauses

provide exceptions to sovereign immunity when “the action

is based [1] upon a commercial activity carried on in the

United States by the foreign state ... or [2] upon an act

performed in the United States in connection with a

commercial activity of the foreign state elsewhere....”58

The

receiver contends that SIB was, in fact, the Stanford scheme

itself. But, as discussed above, LFICO's commercial activity

was limited to its obligations and rights under the SIB-issued

CDs, which were contracts between LFICO and SIB. The

CDs did not require any activity in the United States. LFICO

properly assumed that its relationship was with SIB and that

SIB was what it represented itself to be, i.e., a bank based in

Antigua. Even though a few of LFICO's analysts participated

in SIB's training program, which included a visit to the United

States, there is nothing to suggest that this activity was related

to LFICO's relevant acts made pursuant to its obligations or

rights under the SIB-issued

CDs.59

Thus, if LFICO is an agency or instrumentality of a

foreign state, the commercial activity exception would not

strip it of its presumptive immunity under the FSIA.

D. WHETHER THE CLAIMS AGAINST LIA ARE

SUBJECT TO THE COMMERCIAL

ACTIVITY EXCEPTION UNDER THE FSIA

The receiver insists that, even though LIA did not purchase,

repurchase and redeem SIB-issued CDs, or receive proceeds

of such CDs itself, LFICO did and LFICO's acts were

attributable to LIA. He avers specifically that LFICO is

LIA's alter ego or agent and that LIA was the beneficiary of

the transfers from SIB to LFICO. He concludes that, as with

LFICO, the FSIA's commercial activity exception applies to

his claims against LIA.

1. AGENT OR ALTER EGO

*9 [29] [30] [31] [32] The parties do not appear to dispute the

relationship between LIA and Libya. Instead, they dispute the

relationship between LIA and LFICO. Specifically, they disagree

on whether LFICO's

acts are attributable to LIA. As we observed above, “[a]

corporate parent which owns the shares of a subsidiary does

not, for that reason alone, own or have legal title to the assets

of the subsidiary....”60

“The fact that the shareholder is [an

agency or instrumentality of a foreign state] does not change

the analysis.”61

Subsidiaries that are “established as juridical

entities distinct and independent ... should normally be treated

as such.”62

In the context of the FSIA, a court must apply “the

general rules regarding corporate formalities.”63

For this

reason, “duly created [agencies or] instrumentalities of a

foreign state are to be accorded a presumption of independent

status.”64

“A plaintiff can overcome that presumption,

however, in certain circumstances by demonstrating that the

instrumentality is the agent or alter ego of the foreign state.”65

Yet, the theories underlying alter egos and agents are “distinct”

and are therefore not to be applied “as if they were

interchangeable.”66

Again, alter egos are created equitably;

agents are created contractually.67

Each is a basis for

overcoming the presumption that an agency or instrumentality

of a foreign state is separate from the foreign state itself.68

In

both instances, the analysis is conducted with reference to

federal law, not foreign law or state law.69

[33] [34] To determine if one entity is the alter ego of another,

“[t]he corporate veil may be pierced to hold a[ parent] liable for

the [acts] of its [subsidiary] only if (1) the [parent] exercised

complete control over the [subsidiary] with respect to the [acts]

at issue and (2) such control was used to commit a fraud or wrong

that injured the party seeking to pierce the veil.”70

In contrast,

when determining whether one entity is the agent of another, it is

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 43

necessary to consider “whether the [parent] exercises day-to-day

control over the [subsidiary].”71

In the context of the commercial

activity exception, we further consider “whether the commercial

activity is ‘of the foreign state.’ ”72

Thus, both the principal-agent

and alter ego relationships require an element of control.

[35] A declaration provided by LIA, and which the district court

credited, states:

LFICO has always operated

independently of LIA as described in

the [Layas and Mokhtar declarations].

For the avoidance of doubt: (a) LIA has

no right to manage LFICO's

investments directly. (b) LIA has no

right to actually own and deal directly

with LFICO's assets. (c) LIA has no

right to hold LFICO's assets as LIA's

own. (d) LIA has no right to assign

LFICO's personnel, choose its

managers, prepare its accounts, or

determine with what third parties

LFICO will contract for services.73

Considering this declaration offered by LIA, it is apparent

that LIA and LFICO are entitled to the presumption that they

are separate entities. There is nothing to indicate that LIA

had or exercised any significant control over LFICO, either

generally or with specific regard to LFICO's purchase,

repurchase, or redemption of the SIBissued CDs or the

receipt of proceeds from such CDs. Any control that LIA

might have exercised was not nearly enough to justify

disregarding the legal distinction between them. The district

court did not err in determining that LFICO was not LIA's

agent or its alter ego.

2. TRANSFER BENEFICIARY UNDER TUFTA

[36] The receiver further argues that LIA is liable for the

transfer from SIB to LFICO because, under the Texas

Uniform Fraudulent Transfer Act (“TUFTA”), LIA was the

“person” for whose benefit the transfer was made. The district

court rejected this contention.

*10 TUFTA provides that a transfer from a debtor to a

creditor is fraudulent if made with actual intent to hinder,

delay, or defraud any other creditor of that debtor.74

In

relevant part, it states that either “the first transferee of the

asset or the person for whose benefit the transfer was made”

may be held liable for such a transfer.75

Regardless of

whether LIA is a beneficiary of the transfer, under TUFTA,

we must consider whether the commercial activity exception

to the FSIA provides a source of subject matter jurisdiction

over such a claim.

As discussed above, the commercial activity exception

focuses on the acts or activities of the agency or

instrumentality of the foreign state. The receiver's TUFTA

claim is based on SIB's transfer of proceeds to LFICO,

allegedly for the benefit of LIA. As alleged, LIA neither

made nor received the transfer. It merely benefited from it.

Notably, “[TUFTA] and the ... Bankruptcy Code are of common

ancestry; cases under one are considered authoritative under the

other.”76

Both refer to the person

“for whose benefit [a] transfer was made.”77

In the context of

bankruptcy, a transfer beneficiary is typically the guarantor of a

debt that was extinguished by the transfer.78

The obligation of

the insolvent debtor in such a circumstance would generally be

the guarantor's obligation, as well. Absent the transfer from

debtor to creditor, the guarantor would have had to make the

transfer itself. As the transfer beneficiary, it avoids that

obligation.

The receiver nevertheless insists that when a debtor makes a

transfer to a creditor, that creditor's shareholder may also be

considered a transfer beneficiary. The receiver relies on Esse v.

Empire Energy III, Ltd.79

and Citizens

National Bank of Texas v. NXS Construction, Inc.,80

but both are

inapplicable. The Esse court determined that shareholders were

transfer beneficiaries because they had “ ‘assented to and

benefitted from these transfers' and knowingly participated in the

wrongdoing.”81

Those shareholders had also waived any

argument that they were not transfer beneficiaries.82

The Citizens

National Bank court determined that a shareholder was a transfer

beneficiary because the shareholder was actually involved with

the transfer.83

By contrast, LIA insists that, without more, a shareholder is not a

beneficiary of a transfer made to the corporation. It notes, for

instance, that in In re Hansen, a bankruptcy court held that the

creditor's majority shareholder was not a transfer beneficiary.84

The court explained:

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 44

Nothing in [§] 550(a)(1) [of the Bankruptcy Code] indicates

that corporate form can be thrust aside and all voidable

transfers to a corporation recovered from its shareholders on

the mere assumption that shareholders somehow automatically

“benefit” from such transfers. If corporate existence is to be

observed, transfers cannot be recovered even from a

shareholder who by virtue of his majority ownership

ostensibly “controls” the corporation. Something more than

mere status as a shareholder, officer, or director must be

shown.

*11 The better view—and the one consistent with

corporate law—is that shareholders, officers, and

directors are not liable for transfers to their corporation

unless they actually received distributions of the

transferred property ... or a showing can be made to pierce

the corporate veil.85

This appears to be the right approach. When a debtor

transfers assets to a creditor to satisfy a guaranteed debt,

there are independent benefits: The creditor, as transferee,

receives the assets, and the guarantor, as the beneficiary,

retains assets that he would otherwise have lost as a result

of the debtor's insolvency. Another creditor might seek to

recover either the assets transferred by the debtor or the

assets saved by the creditor, or both. This is because the

transferee and beneficiary have independent obligations.

Here, only LFICO, as the transferee, has an obligation.

LIA's obligation is merely derivative of that obligation, not

independent of it. LIA did not receive an independent

benefit as a result of the transfer from SIB to LFICO. Even

if LIA itself owned and controlled LFICO's assets, either

LIA or LFICO would have received the benefit of the

transfer, but not both. Further, when a debtor transfers assets

to a creditor to satisfy a guaranteed debt, the guarantor is

involved as a party, or at least an independent obligor, to the

contract giving rise to the transfer. But LIA was not a party

to the subject contract.

As Collier on Bankruptcy explains, any “approach that

permits recovery based merely on the intent of the debtor/

transferor without any benefit being conferred on the third

party results in the harsh outcome that the third party can be

liable for the return of an avoidable transfer without having

received any benefit, which is generally contrary to the

disgorgement remedy of avoidance actions.”86

Because LIA was not a transfer beneficiary under TUFTA,

we do not consider LIA and LFICO's contention that

TUFTA may not be applied extraterritorially. Neither do we

consider whether, if LIA were a transfer beneficiary, its

status as such would be a basis for jurisdiction under the

FSIA.

III.

CONCLUSION

We hold that the FSIA provides no basis for jurisdiction over

LIA. We therefore AFFIRM the district court's holding that it had

no jurisdiction over the claims against LIA under the FSIA.

However, we VACATE the district court's holding that it had

jurisdiction over the claims against LFICO under the FSIA and

REMAND to the

Footnotes

district court for it to determine in the first place whether

LFICO is an “organ” of Libya, and thus a “foreign state,”

under the FSIA.

All Citations

--- F.3d ----, 2016 WL 6276051

1 In addition to transferring funds to earlier investors, the Stanford entities also transferred funds to other persons and

entities, often for divergent purposes.

2 In late 2008, the then-chairperson of LIA visited the United States for meetings of the International Monetary Fund

(“IMF”) and, while here, met with Stanford himself. There is no indication that they discussed LFICO's purchase,

repurchase, or redemption of SIB-issued CDs.

3 The management committee's decision to redeem the CDs in 2008 appears to have been unrelated to the analysts'

visit to the United States in 2007.

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 45

4 Although Stanford himself briefly visited Libya several days before SIB transferred the proceeds of these CDs to LFICO

in 2009, this was months after LFICO had decided to divest and notified SIB that it would redeem its SIB-issued CDs

rather than repurchase them as they matured.

5 The receiver suggests that LFICO has stated that LIA was uninvolved with LFICO's purchase of SIB-issued CDs but

has not stated that it was uninvolved with the redemption of those same CDs. This too closely parses LFICO's

language, which actually states that LIA was uninvolved with LFICO's investment in SIB-issued CDs; use of the term

“investment” is sufficiently broad to encompass both LFICO's purchase and subsequent redemption of the CDs.

6 Notably, the Libyan–African Investment Portfolio (“LAP”), an entity similar to LFICO, also purchased SIB-issued CDs

between 2007 and 2008. Unlike LFICO, however, it repurchased about $50 million in CDs from SIB as they matured in

late 2008. As a result, SIB never transferred any proceeds to LAP.

7 588 F.3d 831, 834 (5th Cir. 2009).

8 28 U.S.C. § 1291.

9 See Stena Rederi AB v. Comision de Contratos del Comite Ejecutivo General del Sindicato Revolucionario de

Trabajadores Petroleros de la Republica Mexicana, S.C., 923 F.2d 380, 385 (5th Cir. 1991).

10 See Walter Fuller Aircraft Sales, Inc., v. Rep. of Phil., 965 F.2d 1375, 1387 (5th Cir. 1992) (“In the exercise of [this

Court's] discretion and in the interest of judicial economy ..., we may consider claims under our pendent appellate

jurisdiction that are closely related to the order properly before us.”); Morin v. Caire, 77 F.3d 116, 119 (5th Cir. 1996).

11 Bd. of Regents of Univ. of Tex. Sys. v. Nippon Tel. & Tel. Corp., 478 F.3d 274, 279 (5th Cir. 2007); see Ynclan v. Dep't

of Air Force, 943 F.2d 1388, 1390 (5th Cir. 1991).

12 Bd. of Regents of Univ. of Tex. Sys., 478 F.3d at 279; see Moran v. Kingdom of Saudi Arabia, 27 F.3d 169, 171–72

(5th Cir. 1994).

13 Moran, 27 F.3d at 171–72.

14 Hollinger v. Home State Mut. Ins. Co., 654 F.3d 564, 569 (5th Cir. 2011).

15 Ball v. LeBlanc, 792 F.3d 584, 592 (5th Cir. 2015) (internal quotation marks omitted).

16 Id. at 596 (quoting Pullman–Standard v. Swint, 456 U.S. 273, 292, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982)).

17 Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434 & n.2, 109 S.Ct. 683, 102 L.Ed.2d 818 (1989).

18 28 U.S.C. §§ 1602–11.

19 Id. § 1605(a). 20 Id. § 1330(a).

21 Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 489, 103 S.Ct. 1962, 76 L.Ed.2d 81 (1983). See also Argentine

Republic, 488 U.S. at 435 n.3, 109 S.Ct. 683 (“Subsection (b) of 28 U.S.C. § 1330 provides that ‘[p]ersonal jurisdiction

over a foreign state shall exist as to every claim for relief over which the district courts have [subject-matter] jurisdiction

under subsection (a) where service has been made under [28 U.S.C. § 1608].’ Thus, personal jurisdiction, like subject-

matter jurisdiction, exists only when one of the exceptions to foreign sovereign immunity ... applies.” (alterations in

original)).

22 See United States v. Moats, 961 F.2d 1198, 1205 (5th Cir. 1992).

23 Id.

24 Id.

25 Arbaugh v. Y & H Corp., 546 U.S. 500, 514, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006). Importantly, the subject matter

jurisdiction inquiry under the FSIA involves determining first whether a party is a “foreign state” to which the Act

applies, and then whether any exception to the presumption of foreign sovereign immunity applies under the

circumstances. See Verlinden, 461 U.S. at 488–89, 103 S.Ct. 1962. Whether the party is a “foreign state” clearly

cannot be waived by the parties, just as is the case with any typical question regarding subject matter jurisdiction. A

foreign state entitled to immunity under the FSIA, however, may waive its immunity. See 28 U.S.C. § 1605(a)(1)

(providing that a party can expressly or implicitly waive its immunity from the jurisdiction of the United States courts). In

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 46

this case, when we state that subject matter jurisdiction can never be waived, our statement applies only to whether a

party is a “foreign state” under the FSIA.

26 Arbaugh, 546 U.S. at 514, 126 S.Ct. 1235.

27 Samantar v. Yousuf, 560 U.S. 305, 314, 130 S.Ct. 2278, 176 L.Ed.2d 1047 (2010).

28 28 U.S.C. § 1603(a).

29 See Agency, BLACK'S LAW DICTIONARY (10th ed. 2014) (defining “agency,” in relevant part, as “[a]n official body,

esp. within the government, with the authority to implement and administer particular legislation”); see Instrumentality,

BLACK'S LAW DICTIONARY (10th ed. 2014) (defining “instrumentality,” in relevant part, as “[a] means or agency

through which a function of another entity is accomplished, such as a branch of a governing body”).

30 We have previously explained: “The use of the single term ‘agency’ for two purposes in the context of this case may

cause some confusion. The FSIA uses it to determine whether an ‘agency’ of the state may potentially qualify for

foreign sovereign immunity itself under the FSIA. This is a completely different question from ... whether or not [such

an agency] enjoyed an alter ego relationship with the [foreign state] so that it could bind [the foreign state as a result of

its acts]. Although such an alter ego relationship may be described in terms of ‘agency,’ it is a completely different

inquiry than that which might be conducted under [the FSIA's ‘agency or instrumentality’ requirement].... [T]he level of

state control required to establish an ‘alter ego’ relationship is more extensive than that required to establish FSIA

‘agency.’ ” Hester Int'l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 176 n.5 (5th Cir. 1989).

31 28 U.S.C. § 1603(b) (“An ‘agency or instrumentality of a foreign state’ means any entity ... (1) which is a separate legal

person, corporate or otherwise, and ... (2) which is an organ of a foreign state ... or a majority of whose shares or other

ownership interest is owned by a foreign state....” (emphasis added)).

32 Kelly v. Syria Shell Petroleum Dev. B.V., 213 F.3d 841, 846 (5th Cir. 2000) (“[B]ecause we conclude that [the entity] is

an organ of a foreign state, we need not consider [the] ownership requirements.”).

33 Dole Food Co. v. Patrickson, 538 U.S. 468, 477, 123 S.Ct. 1655, 155 L.Ed.2d 643 (2003).

34 Id. at 474, 123 S.Ct. 1655.

35 Id. at 473, 123 S.Ct. 1655. The Supreme Court discusses only “instrumentalities” in this context, and it does not

distinguish agencies from instrumentalities. As discussed above, these appear to be synonymous.

36 Id. at 477, 123 S.Ct. 1655 (emphasis added).

37 Id. at 471, 123 S.Ct. 1655.

38 As another panel noted, LIA is “an agency of the Libyan government.” Janvey v. Libyan Inv. Auth., 478 Fed.Appx. 233,

236 (5th Cir. 2012).

39 Bd. of Regents of Univ. of Tex. Sys., 478 F.3d at 279 (alteration in original) (quoting Kelly, 213 F.3d at 846–47 (5th Cir.

2000))

40 Notably, LFICO is owned by LIA, not by Libya proper.

41 First Inv. Corp. of Marsh. Is. v. Fujian Mawei Shipbuilding, Ltd., 703 F.3d 742, 752 (5th Cir. 2012) (quoting First Nat'l

City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 627, 103 S.Ct. 2591, 77 L.Ed.2d 46 (1983)).

42 Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006); see First Inv. Corp. of Marsh. Is., 703 F.3d at 753.

43 Bridas S.A.P.I.C. v. Gov't of Turkm., 345 F.3d 347, 358 (5th Cir. 2003).

44 Id. at 359 (“The laws of agency, in contrast, are not equitable in nature, but contractual, and do not necessarily bend in

favor of justice.”).

45 First Nat'l City Bank, 462 U.S. at 633, 103 S.Ct. 2591.

46 Stena Rederi AB, 923 F.2d at 386 (citing 28 U.S.C. § 1605(a)(2)).

47 28 U.S.C. § 1605(a); see Stena Rederi AB, 923 F.2d at 386.

48 28 U.S.C. § 1605(a).

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 47

49 Id. § 1603(d) (emphasis added) (defining “commercial activity”).

50 Id. § 1605(a)(2).

51 Id. There is a “difference between [claims] ‘based upon’ commercial activity and [those] ‘based upon’ acts performed ‘in

connection with’ such activity.” Saudi Arabia v. Nelson, 507 U.S. 349, 358, 113 S.Ct. 1471, 123 L.Ed.2d 47 (1993)

(emphasis added). The third clause of the commercial activity exception provides that the claim must be “based ...

upon an act outside the territory of the United States in connection with a commercial activity of the foreign state

elsewhere” and that the act “causes a direct effect in the United States.” 28 U.S.C. § 1605(a)(2) (emphasis added). In

contrast, the first clause specifies that the claim must be “based upon a commercial activity ... by the foreign state.” Id.

(emphasis added). Because “[d]istinctions among descriptions juxtaposed against each other are naturally understood

to be significant,” the first clause “calls for something more than a mere connection with, or relation to, commercial

activity.” Nelson, 507 U.S.

at 357–58, 113 S.Ct. 1471.

52 Republic of Arg. v. Weltover, Inc., 504 U.S. 607, 618, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992).

53 Terenkian v. Republic of Iraq, 694 F.3d 1122, 1133 (9th Cir. 2012) (quoting Lyon v. Agusta S.P.A., 252 F.3d 1078,

1083 (9th Cir. 2001)); see also Odhiambo v. Republic of Kenya, 764 F.3d 31, 41 (D.C. Cir. 2014).

54 de Sanchez v. Banco Cent. de Nicar., 770 F.2d 1385, 1391 (5th Cir. 1985); see Guirlando v. T.C. Ziraat Bankasi A.S.,

602 F.3d 69, 75 (2d Cir. 2010) (“[T]he requisite immediacy is lacking where the alleged effect depends crucially on

variables independent of the conduct of the [agency or instrumentality].” (internal quotation marks omitted)).

55 Virtual Countries v. Republic of S. Afr., 300 F.3d 230, 238 (2d Cir. 2002) (“Defining ‘direct effect’ to permit jurisdiction

when [an agency or instrumentality]'s actions precipitate reactions by third parties, which reactions then have an impact

on a plaintiff, would foster uncertainty in both [agencies or instrumentalities] and private counter-parties. Neither could

predict when an action would create jurisdiction, which would hinge on third parties' independent reactions and

conduct, even if in individual cases, such as the one at bar, a particular effect might be foreseeable. To permit

jurisdiction in such cases would thus be contrary to the predictability interest fostered by the [FSIA].”).

56 Guirlando, 602 F.3d at 78; see also Westfield v. Fed. Republic of Ger., 633 F.3d 409, 417 (6th Cir. 2011) (“[A]n

American entity's mere financial loss is insufficient to establish a direct effect in the United States.”). If financial injury to

a United States citizen were considered a sufficiently direct effect, “the commercial activity exception would in large

part eviscerate the FSIA's provision of immunity for foreign states.” Antares Aircraft, L.P. v. Fed. Republic of Nigeria,

999 F.2d 33, 36 (2d Cir. 1993).

57 Weltover, 504 U.S. at 619, 112 S.Ct. 2160; see Energy Allied Int'l Corp. v. Petroleum Oil & Gas Corp. of S. Afr., No. H–

08–2387, 2009 WL 2923035, at *4 (S.D. Tex. Sept. 4, 2009); Voest–Alpine Trading USA Corp. v. Bank of China, 142

F.3d 887, 896 (5th Cir. 1998) (noting that there was a direct effect in the United States because an agency or

instrumentality of the foreign state failed to perform its obligation to transfer assets to an entity in the United States);

Callejo v. Bancomer, S.A., 764 F.2d 1101 (5th Cir. 1985) (same); UNC Lear Servs., Inc. v. Kingdom of Saudi Arabia,

581 F.3d 210, 218–19 (5th Cir. 2009) (same); Westfield, 633 F.3d at 415 (noting that there was no direct effect in the

United States because the foreign state “had not obligated itself to do anything in the United States”); Peterson v.

Royal Kingdom of Saudi Arabia, 416 F.3d 83, 90–91 (D.C. Cir. 2005).

58 28 U.S.C. § 1605(a)(2).

59 Arriba Ltd. v. Petroleos Mexicanos, 962 F.2d 528, 533 (5th Cir. 1992) (“Isolated or unrelated commercial actions by a

foreign sovereign in the United States do not authorize the exception.”).

60 Dole Food Co., 538 U.S. at 475, 123 S.Ct. 1655.

61 Id.

62 First Nat'l City Bank, 462 U.S. at 626–27, 103 S.Ct. 2591.

63 Dole Food Co., 538 U.S. at 476, 123 S.Ct. 1655.

64 First Inv. Corp. of Marsh. Is., 703 F.3d at 752–53 (quoting First Nat'l City Bank, 462 U.S. at 627, 103 S.Ct. 2591).

Janvey v. Libyan Investment Authority, --- F.3d ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 48

65 Dale, 443 F.3d at 429; see First Inv. Corp. of Marsh. Is., 703 F.3d at 753.

66 Bridas, 345 F.3d at 358.

67 Id. at 359 (“The laws of agency, in contrast, are not equitable in nature, but contractual, and do not necessarily bend in

favor of justice.”).

68 First Nat'l City Bank, 462 U.S. at 633, 103 S.Ct. 2591.

69 See, e.g., id. at 622 n.11, 103 S.Ct. 2591 (“[M]atters bearing on the nation's foreign relations should not be left to

divergent and perhaps parochial state interpretations.” (internal quotation marks omitted)).

70 Bridas, 345 F.3d at 359.

71 Dale, 443 F.3d at 429.

72 Id.

73 The receiver submitted his own contrary declaration, but the district court discredited it and its reasons for doing so

were sound.

74 TEX. BUS. & COM. CODE ANN. § 24.005.

75 Id. § 24.009(b)(1).

76 GE Capital Commercial, Inc. v. Wright & Wright, Inc., No. 3:09–CV–572–L, 2009 WL 5173954, at *7 n.1 (N.D. Tex.

Dec. 31, 2009).

77 11 U.S.C. § 550(a)(1); TEX. BUS. & COM. CODE ANN. § 24.009(b)(1).

78 See, e.g., In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52, 57 (2d Cir. 1997);

In re Columbia Data Prods., Inc., 892 F.2d 26, 29 (4th Cir. 1989); see also COLLIER ON BANKRUPTCY ¶ 550.02[4]

(16th ed. 2011) (“Two frequently cited examples of an entity for whose benefit the transfer was made are (1) a third-

party guarantor of the debtor whose liability is reduced by the debtor's payment of the guaranteed debt and (2) a third

party whose debt is paid by the debtor (with payment going to the third party's creditor as the initial transferee).”).

79 333 S.W.3d 166, 181 (Tex. App. 2010).

80 387 S.W.3d 74 (Tex. App. 2012).

81 333 S.W.3d at 174.

82 Id. at 181.

83 387 S.W.3d at 85.

84 341 B.R. 638, 644 (Bankr. N.D. Ill. 2006).

85 Id. at 645–46 (citations omitted).

86 COLLIER ON BANKRUPTCY ¶ 550.02[4].

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

Matter of Monaco, --- F.3d ---- (2016)

63 Bankr.Ct.Dec. 44

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 49

2016 WL 5864090

United States Court of Appeals,

Fifth Circuit.

In the Matter of: Martha L. Monaco; Adam

L. Monaco; Hope Elaine Monaco, Debtors.

Adam L. Monaco, Appellant,

v.

Tag Investments, Limited, Appellee.

No. 15-51085

|

Filed October 6, 2016

Synopsis

Background: In consolidated adversary proceedings, creditor

sought nondischargeability of debt stemming from Chapter 7

debtors' construction of residence. The United States

Bankruptcy Court for the Western District of Texas, Ronald

B. King, Chief Judge, ruled that debt of $171,942.03 was

nondischargeable for defalcation while acting in a fiduciary

capacity, and debtors appealed. The District Court, Harry Lee

Hudspeth, J., affirmed, and debtors appealed.

Holdings: The Court of Appeals, Edith H. Jones, Circuit

Judge, held that:

[1] issue of debtors' entitlement to the Texas

ConstructionTrust Fund Act's (CTFA) affirmative defense for

actual payments directly related to construction project was

properly preserved and raised, and

[2] based on that affirmative defense, debtors should

nothave been held liable for misapplication of construction

trust funds under the CTFA, and the debt claimed by creditor

should have been discharged.

Reversed and remanded with directions.

Appeal from the United States District Court for the Western

District of Texas, Harry Lee Hudspeth, U.S.

District Judge

Attorneys and Law Firms

Dean William Greer, Law Offices of Dean W. Greer, San

Antonio, TX, for Appellant.

Michael James O'Connor, Law Offices of Michael J.

O'Connor, San Antonio, TX, for Appellee.

Before REAVLEY, DAVIS, and JONES, Circuit Judges.

Opinion

EDITH H. JONES, Circuit Judge:

*1 This appeal arises out of a construction contract gone

awry and subsequently complicated by bankruptcy. The

district court opinion held that Monaco individually owes

TAG Investments, Ltd. (“TAG”) $171,942.03, a

nondischargeable debt under bankruptcy law (11 U.S.C. §

523(a)(4)) arising from the Texas Construction Trust Fund

Act (“CTFA”), Tex. Prop. Code Ann. § 162.001. Monaco

appeals on several bases, most notably for our purposes

relying on the affirmative defense built into the CTFA (§

162.031(b)). Based on that defense, we reverse and remand

with directions to discharge the debt.

BACKGROUND

In 2004, TAG entered into a stipulated sum contract with

Buildings by Monaco, Inc. (“BBM”). The contract called for

the construction of a luxury home in San Antonio, Texas.

BBM served as the general contractor on the project and the

contract called for progress payments which required BBM

to submit an application to the architect for approval and

swear that all subcontractors and supplies had been paid and

lien releases had been obtained.

Despite BBM's certifications, TAG began to receive lien

notices from BBM's subcontractors and suppliers in 2005

and fired BBM. At that time, TAG had paid BBM

$1,783,662.40, and BBM had dispensed $1,600,377.78 to its

subcontractors and suppliers.

TAG hired a new contractor, San Antonio Realease

Management, Inc. (“SARMECO”), to assume BBM's

subcontracts and to pay off the liens. TAG then reimbursed

SARMECO in the amount of $171,942.03, and TAG

demanded payment from BBM.

Four years later, Monaco individually and BBM filed

Chapter 7 bankruptcy cases. Neither had paid TAG the

$171,942.03 that TAG had paid SARMECO and that TAG

believed it was due. TAG filed an adversary proceeding

against Monaco for his misapplication of trust funds, Tex.

Matter of Monaco, --- F.3d ---- (2016)

63 Bankr.Ct.Dec. 44

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 50

Prop. Code Ann. § 162.031 (extending liability to officers of

the “trustee”), and alleged that the debt Monaco owed was

nondischargeable under 11 U.S.C. § 523(a)(4), which

excepts from discharge debts for “for fraud or defalcation

while acting in a fiduciary capacity, embezzlement, or

larceny.” The bankruptcy court agreed and rendered

judgment in favor of TAG and against Monaco in the amount

of $171,942.03.

On appeal, the district court initially vacated the bankruptcy

court's judgment and remanded the case with instructions to

address: (1) whether TAG has standing to recover for

payments made by SARMECO; (2) if so, whether Monaco is

entitled to a setoff for amounts withheld as retainage; and (3)

the basis for the calculation of actual damages owed to TAG.

On remand, the bankruptcy court concluded that TAG has

standing, via equitable subrogation, to recover for payments

made by SARMECO and that Monaco is not entitled to a

setoff for amounts withheld as retainage, and it clarified the

debt calculation. The district court then affirmed the

bankruptcy court's judgment on October 21, 2015.

On appeal, Monaco raises several issues. He disputes that the

CTFA authorizes TAG's standing via equitable subrogation

and complains that TAG's recovery would violate the one

satisfaction rule. Monaco contends he did not violate the

CTFA, but in any event, CTFA § 162.031(b) provides an

affirmative defense that relieves Monaco of the judgment.

Because we hold that the affirmative defense is applicable in

this case, we need not rule on the other three bases for

Monaco's appeal.

STANDARD OF REVIEW

*2 [1] We review de novo a district court's decision affirming

a bankruptcy court's application of the law and review its

findings of fact for clear error. Richmond Leasing Co. v.

Capital Bank, N.A., 762 F.2d 1303, 1307– 08 (5th Cir.1985).

DISCUSSION

The CTFA holds liable any “trustee who, intentionally or

knowingly or with intent to defraud, directly or indirectly

retains, uses, disburses, or otherwise diverts trust funds

without first fully paying all current or past due obligations

incurred by the trustee to the beneficiaries of the trust funds.”

Tex. Prop. Code Ann. § 162.031(a). The bankruptcy court

concluded that “Monaco acted intentionally to obtain further

payments from TAG despite not paying the subcontractors

and suppliers in violation of the CTFA.” In re Monaco, 514

B.R. 477, 481 (Bankr. W.D. Tex. 2014).

Monaco contests this conclusion, arguing that both the

bankruptcy court and the district court misinterpreted the

certifications he attested to as a condition of payment. We

need not determine whether the lower courts erred on this

issue, as the statutory scheme of the CTFA also contains two

affirmative defenses, one of which resolves the present case.

Section 162.031(b) of the CTFA holds that “[i]t is an

affirmative defense to prosecution or other action ... that the

trust funds not paid to the beneficiaries of the trust were used

by the trustee to pay the trustee's actual expenses directly

related to the construction or repair of the improvement.”

Tex. Prop. Code Ann. § 162.031(b). This affirmative defense

raises two questions: (1) were the activities Monaco claims

to have spent the money on within the scope of the

affirmative defense, and (2) has TAG made a sufficient

showing that Monaco is not eligible for the affirmative

defense?

[2] First, however, we briefly address the absence of any

discussion of the affirmative defense in the bankruptcy court

or district court opinions. Despite not appearing in the district

court's opinion, both parties briefed the issue before that court.

Brief of Appellant at 4–5, Adam Monaco v. TAG Investments,

LTD, No. SA–14–CA–882 (W.D. Tex. 2015) (“The evidence

shows that BBM not only spent every cent it received for

third-party expenses, salaries, overhead and supervision on

the project, but also used approximately $70,000.00 of its

profit to pay for expenses incurred on the project.”); Brief of

Appellee at 4–5, Adam Monaco v. TAG Investments, LTD, No.

SA–14–CA–882 (W.D. Tex. 2015) (“Overhead and profit

components of draws are not authorized exceptions under §

162.031 of the Act, and are not a basis for offset.”);

Appellant's Reply Brief at 2–7, Adam Monaco v. TAG

Investments, LTD, No. SA–14–CA–882 (W.D. Tex. 2015)

(“However, [TAG] insists that the $124,053 paid as salaries

and overhead ... and the $77,776 paid as contractual profits to

BBM were improper and constituted defalcation on the part of

Adam Monaco”).

Further, Monaco raised it from the very beginning before the

bankruptcy court in 2011, when TAG first filed an objection

to the discharge of its debt. TAG Investments, Ltd v. Martha

L. Monaco, et al., No. 10–05026 (Bankr. W.D. Tex. Nov. 23,

2011), ECF No. 52 at ¶ 7 (“Under Fifth Circuit case of In re

Matter of Monaco, --- F.3d ---- (2016)

63 Bankr.Ct.Dec. 44

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 51

Nicholas ... there is no liability imposed on a Contractor if he

uses all the monies to pay actual expenses directly related to

the construction of the project, whether or not such expenses

were owed to ‘beneficiaries' of the trust fund.”). As this

argument has been properly preserved and raised, we may

address it on appeal.

*3 [3] Turning to the scope of the affirmative defense, this

court's precedent on what qualifies for “trustee's actual

expenses” under the statute's affirmative defense is clear.

“Under the affirmative defense to the Texas Construction

Trust Fund Statute ... general contractors may use the

payments they receive from construction projects to keep

those projects going even if, in some instances, the

beneficiaries are not paid first.” In re Nicholas, 956 F.2d 110,

113 (5th Cir. 1992). This includes payment of “expenses such

as telephone bills, salaries, and other overhead.” In re Pledger,

592 Fed.Appx.

296, 302 (5th Cir. 2015).1 Nicholas explains that “the Texas

statute's affirmative defense for payment of actual expenses

directly related to the construction or improvement of the

project is ... open-ended.” Nicholas, 956 F.2d at 113. See also

Holladay v. CW&A, Inc., 60 S.W.3d 243, 248 (Tex. Civ.

App–Corpus Christi 2001, pet. denied). Monaco could assert

the affirmative defense for overhead costs of the project.

TAG requests instead that we rely on a bankruptcy decision

holding that “[t]he affirmative defense at section 162.031(b)

for ‘actual expenses directly related to the construction or

repair of the improvement’ is limited to costs actually and

directly tied to the improvement in question and does not

include ‘indirect’ expenses, such as overhead to the

contractor in question, or ‘profit’ built into the job's price.”

In re Coley, 354 B.R. 813, 816 (Bankr. N.D. Tex. 2006)

(quoting In re Faulkner, 213 B.R. 660

(Bankr.W.D.Tex.1997)). In re Faulkner, another bankruptcy

court decision, engages in statutory interpretation, looking at

legislative history and Attorney General Opinion JM–945

(1988), but its ruling on this point is dicta: “[b]ecause we find

that the defendant lacked the requisite level of ‘mental

culpability’ to trigger liability for purposes of section

523(a)(4), we need not decide whether the defendant could

make out a successful defense to liability under section

162.031(b) of the state statute.” Faulkner, 213 B.R. at 667.

What is dispositive, however, is that Coley postdates

Nicholas and directly conflicts with this court's jurisprudence

interpreting the affirmative defense.

[4] Monaco explains that $124,053.00 went to salaries

and overhead and an additional $50,400.00 went to

supervision of this project. Tellingly, payment of these sums

as reasonable was approved by TAG's architect. These are

expenses allowable under our precedents and qualify as a

“trustee's actual expenses directly related to the construction

or repair of the improvement,” as required by the affirmative

defense under the CTFA. Tex. Prop. Code Ann. § 162.031(b).

[5] Moreover, TAG had the burden to prove that

Monaco misapplied the funds. Nicholas, 956 F.2d at 114

(“[A]lthough initially requiring the debtor to make a prima

facie showing that he is entitled to a discharge, [federal law]

ultimately places the burden on the creditor to prove that the

debt falls within the § 523(a)(4) exception.”). Simply

showing that the progress payment certifications were false

is insufficient to overcome the affirmative defense. “Because

the Texas statute permits application of trust fund receipts for

‘actual expenses directly related’ to the project, ... a

beneficiary seeking to avail itself of § 523(a)(4) must adduce

some evidence that funds were misapplied under this test.”

Nicholas, 956 F.2d at 114. TAG was unable to show that the

funds received by BBM were spent on impermissible

expenses under the

CTFA.

*4 For the foregoing reasons, Monaco should not have been

held liable for misapplication of construction trust funds

under the CTFA and the debt claimed by TAG should have

been discharged. The judgment of the lower courts holding

the debt nondischargeable is REVERSED and we

REMAND with directions to discharge.

All Citations

--- F.3d ----, 2016 WL 5864090, 63 Bankr.Ct.Dec. 44

Footnotes

1 See also In re Swor, 347 Fed.Appx. 113, 116 (5th Cir. 2009) (“Nor must these funds be spent only on the project for which

they were received—they may be spent on other projects or on expenses related to general business overhead.”). We

Matter of Monaco, --- F.3d ---- (2016)

63 Bankr.Ct.Dec. 44

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 52

cite unpublished opinions in this decision not because they are precedential, which they are not, see 5th Cir. Local Rule

47.5.4, but to show the consistency of our dispositions.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 53

2016 WL 5939415

Only the Westlaw citation is currently

available.

This case was not selected for

publication in West's Federal Reporter.

See Fed. Rule of Appellate Procedure 32.1

generally governing citation of judicial decisions

issued on or after Jan. 1, 2007. See also

U.S.Ct. of App. 5th Cir. Rules 28.7 and

47.5. United States Court of Appeals, Fifth

Circuit.

In the Matter of: Skyport Global

Communications,

Incorporated, formerly known as Skyport

International, Incorporated, doing business as

SkyPort International PC, doing business as

SkyComm International, Incorporated,

Debtor.

Samuel Goldman; Franklin Craig, Appellants,

v.

Bankton Financial Corporation, L.L.C.;

Robert Kubbernus; Balaton Group,

Incorporated; Bankton Financial Corporation;

Trustcomm, Incorporated, Appellees.

In the matter of: Skyport Global

Communications,

Incorporated, formerly known as Skyport

International, Incorporated, doing business as

SkyPort International PC, doing business as

SkyComm International, Incorporated,

Debtor.

Franklin Craig, Appellant,

v. TrustComm, Incorporated; Robert

Kubbernus; Balaton Group, Incorporated,

Appellees.

In the matter of: Skyport Global

Communications,

Incorporated, formerly known as Skyport

International, Incorporated, doing business as

SkyPort International PC, doing business as

SkyComm International, Incorporated,

Debtor.

Samuel Goldman; Franklin Craig, Appellants,

v.

TrustComm, Incorporated, formerly known as

Skyport Global Communications,

Incorporated;

Robert Kubbernus; Balaton Group,

Incorporated;

Bankton Financial Corporation, L.L.C.,

Bankton Financial Corporation, Appellees.

No. 15-20243

|

Date Filed: 10/12/2016

Appeal from the United States District Court for the Southern

District of Texas, USDC Nos. 4:13–CV–3041,

4:13–CV–3044, 4:13–CV–3047

Attorneys and Law Firms

H. Miles Cohn, Esq., Crain, Caton & James, P.C., Houston,

TX, for Appellants.

Walter J. Cicack, Hawash Meade Gaston Neese & Cicack,

L.L.P., Houston, TX, for Appellees.

Before ELROD, GRAVES, and COSTA, Circuit Judges.

Opinion

JAMES E. GRAVES, JR., Circuit Judge:*

*1 This is an appeal stemming from a bankruptcy court's order

holding attorney Samuel Goldman and Franklin Craig in

contempt for violating the court's preliminary injunction and

assessing attorneys' fees and expenses against them. The

district court affirmed the bankruptcy court. We AFFIRM.

I. Facts

This appeal involves one of many disputes arising out of the

bankruptcy proceedings of SkyPort Global Communications,

Inc., now known as TrustComm, Inc. (SkyPort). SkyPort filed

for Chapter 11 bankruptcy relief in the United States

Bankruptcy Court for the Southern District of Texas. SkyPort's

reorganization plan provided for SkyPort's merger with its sole

shareholder, SkyComm Technologies Corporation

(SkyComm), with all shares of stock owned by SkyComm's

shareholders to be canceled and all shares of SkyPort to be

reissued to Balaton Group, Inc. The bankruptcy court

confirmed SkyPort's reorganization plan in August 2009. Its

confirmation order enjoined derivative claims filed on behalf

of SkyPort or SkyComm, but did not enjoin direct claims

against third parties.

In February 2010, a group of 49 investors, collectively referred

to as the Schermerhorn parties, filed a Texas state court

Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 54

petition seeking $32 million in damages for various

misdeeds allegedly committed in connection with

investments in and management of SkyPort and

SkyComm. Appellant Samuel Goldman represented the

Schermerhorn parties. The defendants removed the state

court action to the bankruptcy court and sought a

preliminary injunction to preserve the status quo pending

a determination by the bankruptcy court as to which

claims included in the petition were barred by the

injunction contained in the confirmation order.

At the bankruptcy court's preliminary injunction hearing,

Robert Kubbernus, one of the state court defendants and

the Chairman of the Board of Directors at

SkyPort, testified that the Schermerhorn parties had been

contacting people associated with SkyPort, including its

former president, Dawn Cole. The bankruptcy court

announced at the hearing that it was granting the motion

for a preliminary injunction. On June 10, 2010, the

bankruptcy court entered its preliminary injunction. The

injunction order temporarily enjoined the Schermerhorn

parties from pursuing any and all claims or causes of

action, derivative or otherwise, against the defendants,

and from contacting SkyPort's former or current vendors,

employees, and customers without permission of

SkyPort's counsel or the bankruptcy court.1 The

preliminary injunction contained Goldman's signature,

which indicated his agreement as to the form of the order.

The Schermerhorn parties never appealed the injunction.

*2 Beginning the day the injunction was entered, and

continuing over the next several months, Goldman,

Craig, and Cole engaged in extensive communication that

gave rise to the sanctions in this case. Craig was an

investment advisor to several of the Schermerhorn parties

and had accused Kubbernus of fraud and ousted him from

management of another fund. He was also a personal

friend of Goldman's. Although Craig was not a party to

the litigation in this case, his e-mails reveal his awareness

of the injunction.

Specifically, Cole sent Goldman and Craig an e-mail

complaining that information she had provided to Craig

was being used by Goldman against Kubbernus without

her permission. Further, Craig and Goldman

communicated by telephone and e-mail about contacting

Cole. Craig sent Cole an e-mail describing Kubbernus as

a “desperate criminal” and urging her that “[w]e need to

do the right thing and put this criminal away.” Cole called

Craig twice the next day and Craig reported on the

conversations to Goldman. Among other communications,

Craig e-mailed Cole on June 18, telling her to call Goldman

and stating that “[h]e may need some info from you” and that

she would “do better on our side.” Craig forwarded Cole's

response e-mail to Goldman. Goldman sent Craig an e-mail

asking about Cole's claims against Kubbernus and stating that

he could help her get a lawyer. Craig forwarded the e-mail to

Cole. The same day, Craig wrote to Cole that he had talked

with Goldman, that Cole should “join our ranks NOW,” that

the Schermerhorn parties' expense account might be used to

pay for Cole's attorney, and that “I am sure that Sam

[Goldman] and I, we can find a deal ... but Sam needs your

100% cooperation.” Craig forwarded his message to Goldman.

This pattern of Craig communicating separately with Goldman

and Cole, then forwarding their communication to each other,

continued through June, July, and

August.2 On June 20, Goldman wrote to Craig that he did not

want Craig talking to Cole except at her initiative, but also

asked questions about Cole's possible help. Craig conveyed

these questions to Cole and then forwarded her response to

Goldman. Ultimately, after a series of e-mails, Goldman wrote

to Craig that “I do not want to create an appearance that we are

using you to communicate with [Cole].” Nevertheless, the

communications continued, and Craig continued to forward his

e-mail conversations with Cole to Goldman.

On July 1, after Craig and Cole spoke by telephone, Craig

wrote to Goldman that he had spoken to Cole, that she was

willing to “join our side” and “go [ ] after” Kubbernus, and that

she was “very interested in the prospect of our lawyers

representing her” and of suing Kubbernus. Craig then asked

Goldman, “How do you want to proceed?” In the following

four days, Cole, Craig, and Goldman exchanged over 50 e-

mails discussing how to convey Cole's information to the

bankruptcy judge and obtain permission for Goldman to talk

to her without disclosing their communications. In one of these

e-mails, Craig wrote to Goldman, “I just lied to [Cole] about

sending you the emails so PLEASE don't use them w/o her

express permission” and noted that Cole was right in that “you

shouldn't be seeing anything BEFORE the judge gives you

permission to talk to her.”

Over the next month, Cole and Craig exchanged more than 30

e-mails about the provision of legal representation to Cole,

which included an agreement by Craig to provide her $10,000

for a legal retainer. Goldman was aware of these

Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 55

communications and ultimately located legal counsel to

represent Cole.

II. Bankruptcy Court Proceedings

*3 In April 2011, the Schermerhorn parties moved to

dissolve the preliminary injunction. At the motion

hearing, as part of its third motion for contempt, SkyPort

announced the discovery of 46 instances in which the

Schermerhorn parties had violated the bankruptcy court's

injunction by communicating with Cole, a former

SkyPort employee. In support of this assertion, SkyPort

introduced into evidence many of the e-mails between

Craig and Cole. The bankruptcy court denied the

Schermerhorn parties' request to dissolve the injunction

and continued the hearing on the contempt motion to

allow the parties to address the e-mails. After discovery,

the bankruptcy court held seventeen days of evidentiary

hearings spanning eleven months on the motion to

dissolve the injunction, the contempt motion, and other

pending motions.

On August 7, 2013, the bankruptcy court issued a 187–

page opinion finding Goldman and Craig in contempt.

The bankruptcy court stated that the purpose of its

opinion was “to discuss Goldman's and Craig's

contumacious conduct, to restore integrity to the judicial

process, and most importantly, to affirm that its orders

cannot be ‘flouted, obstructed, and violated with

impunity.’ ” Although the bankruptcy court found that

“[t]he SkyPort parties have not demonstrated that they

suffered harm as a result of Goldman and Craig's

conduct,” it nevertheless awarded them attorneys' fees

and costs as “compensation” for their expenses incurred

in “bringing Goldman and Craig's contempt to this

Court's attention.” The bankruptcy court declined to

award punitive damages, recognizing that sanctions for

civil contempt could only be compensatory or coercive,

and declined to award a coercive bond against future

violations or to impose a permanent injunction. A month

later, after a hearing on the amount of damages, the

bankruptcy court awarded monetary sanctions to the

SkyPort parties. The award was one quarter of the

requested attorneys' fees and 95% of the requested

expenses, in the total amount of $137,513, for which

Goldman and Craig were held jointly and severally liable.

III. District Court Proceedings

Goldman and Craig appealed the bankruptcy court's ruling to

the district court, which affirmed the bankruptcy court's ruling

in all respects. The district court's 119–page opinion affirmed

fifteen orders of the bankruptcy court— including the orders at

issue in this case—that had been appealed as part of four civil

actions in the district court, and dismissed all four cases. A

separate panel of our court affirmed the judgment of the district

court as it related to an order of the bankruptcy court imposing

sanctions on the Schermerhorn parties for filing a state court

petition that contained misrepresentations and claims barred

by the reorganization plan. See In re Skyport Glob. Commc'n,

Inc., 642 Fed.Appx. 301 (5th Cir. 2016) (unpublished).

IV. Analysis

Goldman and Craig now argue that: (1) the bankruptcy court

lacked jurisdiction because the nature of the contempt

proceeding was criminal; (2) the attorneys' fees assessed were

not reasonable and necessary because neither compensatory

damages nor coercive relief was granted; (3) the award was

erroneous because the preliminary injunction was dissolved;

and (4) Goldman and Craig did not violate the preliminary

injunction as they reasonably understood it.

A.

“Like the district court, this court reviews a bankruptcy court's

findings of fact for clear error, and its legal conclusions de

novo.” In re Bradley, 588 F.3d 254, 261 (5th Cir. 2009).

“Where the district court has affirmed the bankruptcy court's

factual findings, we will only reverse if left with a firm

conviction that error has been committed.” Id. (citation

omitted). We review a bankruptcy court's discretionary

assessment of monetary sanctions for contempt under an abuse

of discretion standard, id. but our review is not perfunctory,

Hornbeck Offshore Servs., L.L.C. v. Salazar, 713 F.3d 787,

792 (5th Cir. 2013) (discussing preliminary injunctions in the

district court). “A court abuses its discretion when its ruling is

based on an erroneous view of the law or on a clearly erroneous

assessment of the evidence.” Chaves v. M/V Medina Star, 47

F.3d 153, 156 (5th Cir. 1995).

B.

*4 The bankruptcy court issued a written injunction order

under Rule 65 of the Federal Rules of Civil Procedure. The

court, in its own words, “issued the injunction in order to

Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 56

prevent irreparable harm to the reorganized debtor,”

SkyPort. Goldman and Craig conspired to thwart this

order by pursuing barred claims and impermissibly

contacting a former employee of SkyPort. They now

contend that the bankruptcy court exceeded its authority

in sanctioning them. We do not agree.

“ ‘A party commits contempt when he violates a definite

and specific order of the court requiring him to perform

or refrain from performing a particular act or acts with

knowledge of the court's order.’ ” Hornbeck Offshore

Servs., L.L.C., 713 F.3d at 792 (quoting Travelhost, Inc.

v. Blandford, 68 F.3d 958, 961 (5th Cir. 1995)). “The first

duty of an appellate court in reviewing a contempt

judgment is to determine whether the nature of the

contempt proceeding was civil or criminal.” Smith v.

Sullivan, 611 F.2d 1050, 1052 (5th Cir. 1980); accord

Bradley, 588 F.3d at 263.

A bankruptcy judge has jurisdiction to impose civil

sanctions, but not criminal sanctions. In re Hipp, Inc.,

895 F.2d 1503, 1521 (5th Cir. 1990). Goldman and Craig

maintain that the bankruptcy court exceeded its authority

and conducted a criminal contempt proceeding.

As we explained in depth in Bradley, to determine

whether a contempt order or judgment is criminal or civil,

we look to its primary purpose. 588 F.3d at 263; accord

Lamar Fin. Corp. v. Adams, 918 F.2d 564, 566 (5th Cir.

1990). The bankruptcy court characterized the

proceedings as “concern[ing] compensatory or remedial

civil contempt.”3 “Civil contempt ... can be used to

compensate a party who has suffered unnecessary

injuries or costs because of contemptuous conduct.”

Travelhost, Inc., 68 F.3d at 961–62 (5th Cir. 1996).

“[R]emedial contempt is civil, because it remedies the

consequences of defiant conduct on an opposing party,

rather than punishing the defiance per se.” Bradley, 588

F.3d at 263–

64.4

We agree with the bankruptcy court's characterization.

Essentially, the sanction restores the SkyPort parties to

where they were before they incurred attorneys' fees in

an attempt to ensure compliance with the injunction. See

Cook v. Ochsner Found. Hosp., 559 F.2d 270, 272 (5th

Cir. 1977) (observing that courts may “order[ ] the award

of attorneys' fees for compensatory purposes” where a

party “necessarily expended [fees] in bringing an action

to enforce” the injunction); see also A.S. Klein, Annotation,

Allowance of Attorneys' Fees in Civil Contempt Proceedings,

43 A.L.R.3d 793, § 2 (1972) ( “Almost without exception it is

within the discretion of the trial court to include, as an element

of damages assessed against the defendant found guilty of civil

contempt, the attorneys' fees incurred in the investigation and

prosecution of the contempt proceedings. ...”). Because the

sanction compensated the SkyPort parties for their

enforcement of the injunction, we hold that the bankruptcy

court had jurisdiction to impose it.

C.

*5 Next, Goldman and Craig argue that the attorneys' fees

assessed were not reasonable and necessary because neither

compensatory damages nor coercive relief was granted.

Specifically, they argue that the “amount involved and the

result obtained” was zero. We disagree.

As previously stated, the bankruptcy court's contempt order

compensates the SkyPort parties for the attorneys' fees that

they incurred in seeking compliance with the bankruptcy

court's order and protecting the debtor. Here, the bankruptcy

court carefully calculated the fees and awarded far less than

was requested.5 The contempt order reasonably compensates

the SkyPort parties for a portion of the fees and expenses they

incurred as a result of Goldman and Craig's conduct.

D.

Goldman and Craig also argue that the preliminary injunction

was dissolved, and thereafter no relief could be awarded. It is

true that “[i]f the civil contempt proceeding is coercive in

nature, the general rule is that it is mooted when the proceeding

out of which it arises is terminated.” Travelhost, Inc., 68 F.3d

at 962 (quoting Petroleos Mexicanos v. Crawford Enterprises,

Inc., 826

F.2d 392, 400 (5th Cir. 1987)). “However, if the contempt

order is compensatory in nature, it is not mooted by

termination of the underlying action.” Id.

Here, the contempt order relates directly to a prolonged

bankruptcy proceeding and compensates the SkyPort parties

for attorneys' fees resulting from Goldman and Craig's

contemptuous conduct. Thus, the preliminary injunction's

dissolution does not change our analysis.

Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 57

E.

*6 Goldman and Craig also argue that they did not

violate the preliminary injunction as they reasonably

understood it. Rule 65(d) provides that the order must

“state its terms specifically; and describe in reasonable

detail ... the act or acts restrained or required.” FED. R.

CIV. P. 65(d).

Here, the language and terms of the order are clear. The

preliminary injunction states, “Plaintiffs may contact

former and current ... employees ... of the Debtor if and

only if a written request is made by Plaintiffs' counsel to

counsel for SkyPort, and counsel for SkyPort either a)

agrees to the proposed contact or b) does not respond

within 1 business day.” The injunction also provides that

the “Plaintiffs are temporarily enjoined from: pursuing

any and all claims or causes of action, derivative or

direct, against all of the Defendants.”

Despite the clear terms of the injunction, Goldman and

Craig continued to pursue evidence and witnesses—

namely Cole. They encouraged Cole to pursue her own

claims against Kubbernus in other courts by arranging for

her counsel, providing for a “loan” for her counsel's

retainer, and pursuing financial backing and support for

the state court litigation. Goldman and Craig's attempts

to implicate Cole as the primary communicator fail—

they

Footnotes

initiated contact with her on numerous occasions. They

did not “inadvertently” violate the injunction.

F.

Finally, Craig contends that he was not bound by the injunction

because he was not specifically named in the order. The

Federal Rules of Civil Procedure specifically mandate that an

injunction binds “other persons who are in active concert or

participation with [the parties and their attorneys].” FED. R.

CIV. P. 65(d)(2)(C); see also Whitcraft v. Brown, 570 F.3d

268, 272 (5th Cir. 2009) (“A court order binds not only the

parties subject thereto, but also non-parties who act with the

enjoined party.”). Craig was actively involved in the case,

knew about the injunction, and knew that he was restrained

from contacting Cole and other employees. Goldman wrote to

Craig that “I do not want to create an appearance that we are

using you to communicate with [Cole].” Yet, that is exactly

what happened. Accordingly, Craig was also bound by the

injunction and improperly colluded with Goldman to violate it.

V. Conclusion

The record reveals that Goldman and Craig repeatedly violated

the injunction. The record also demonstrates that they were

aware of the terms of the injunction, yet they willfully violated

it. The SkyPort parties spent a substantial amount to ensure

compliance and the bankruptcy court acted appropriately in

awarding fees in a civil contempt proceeding. Accordingly, we

AFFIRM.

All Citations

--- Fed.Appx. ----, 2016 WL 5939415

6 Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except

under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

1 The order specifically states that “Plaintiffs may contact former and current vendors, employees, and customers of the

Debtor if and only if a written request is made by Plaintiffs' counsel to counsel for SkyPort, and counsel for SkyPort either

a) agrees to the proposed contact or b) does not respond within 1 business day.”

2 The bankruptcy court extensively chronicled these communications in thirty-seven pages of its opinion imposing

contempt sanctions. We include only a sampling of the most significant communications.

3 “ ‘[A] court's characterization of its proceedings [as civil or criminal] is a factor to be considered in determining the

character of a contempt, although it is not conclusive.’ ” Id. at 263 n.7 (quoting Lewis v. S.S. Baune, 534 F.2d 1115, 1119

(5th Cir. 1976)).

4 A criminal contempt sanction serves “to punish the contemnor and vindicate the authority of the court,” while a civil

contempt sanction serves “to coerce the contemnor into compliance with a court order, or to compensate another party

for the contemnor's violation.” Id. at 263.

Matter of Skyport Global Communications, Incorporated, --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 58

5 “In this circuit, courts apply a two-step method for determining a reasonable attorney's fee award.” Combs v. City of

Huntington, Texas, 829 F.3d 388, 391 (5th Cir. 2016) (citation omitted). “The court must first calculate the lodestar, ‘which

is equal to the number of hours reasonably expended multiplied by the prevailing hourly rate in the community for similar

work.’ ” Id. at 392 (quoting Jimenez v. Wood Cty., 621 F.3d 372, 379 (5th Cir. 2010)). “In calculating the lodestar, ‘[t]he

court should exclude all time that is excessive, duplicative, or inadequately documented.’ ” Id. (quoting Jimenez, 621

F.3d at 379–80). “[T]he lodestar is presumed reasonable. ...” Id. (citing Perdue v. Kenny A. ex rel. Winn, 559 U.S. 542,

553– 54, 130 S.Ct. 1662, 176 L.Ed.2d 494 (2010)). The court may, however, “enhance or decrease it based on the twelve

Johnson factors.” Id. (citing Jimenez, 621 F.3d at 380). “The court must provide a reasonably specific explanation for all

aspects of a fee determination.” Id. (quotations and citations omitted).

The Johnson factors are: (1) the time and labor required; (2) the novelty and difficulty of the issues in the case; (3)

the skill requisite to perform the legal services properly; (4) the preclusion of other employment by the attorney due

to acceptance of the case; (5) the customary fee charged for those services in the relevant community; (6) whether

the fee is fixed or contingent; (7) time limitations imposed by the client or the circumstances; (8) the amount involved

and the results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the undesirability of the

case; (11) the nature and length of the professional relationship with the client; and (12) awards in similar cases.

Id. at 391, n.1 (citing Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717–19 (5th Cir. 1974)). The bankruptcy

court properly reduced the fee based upon the success of the SkyPort parties and its denial of some of the requested

relief.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 59

2016 WL 6068126

Only the Westlaw citation is currently available.

This case was not selected for

publication in West's Federal Reporter.

See Fed. Rule of Appellate Procedure 32.1

generally governing citation of judicial decisions

issued on or after Jan. 1, 2007. See also

U.S.Ct. of App. 5th Cir. Rules 28.7 and

47.5. United States Court of Appeals, Fifth

Circuit.

Joanna Marie Wilson; Ashley Rachel

DeLeon; Steve Vinkler; Sheila Collins;

Jeff Svehlak; et al., Plaintiffs–Appellants,

v.

Navika Capital Group, L.L.C.; Pearl Hospitality,

L.L.C.; Ruby Hospitality, Incorporated;

Naveen C. Shah; Emerald Hospitality Tulsa,

Incorporated, Defendants–Appellees.

No. 15-20204

|

Date Filed: 10/14/2016

Appeal from the United States District Court for the

Southern District of Texas, USDC 4:10–CV–1569

Attorneys and Law Firms

Howard L. Steele, Jr., Shreedhar Rajnikant Patel, Steele

Law Group, P.L.L.C., Houston, TX, for Plaintiffs–

Appellants

Michael J. Sheppeard, Esq., Ballon Stoll Bader & Nadler,

P.C., New York, NY, for Defendants–Appellees

Before PRADO, OWEN, and HAYNES, Circuit Judges.

Opinion

PER CURIAM:*

*1 The motion for rehearing is DENIED. The following

opinion is substituted in place of our prior opinion.

This appeal arises from a collective action brought under the

Fair Labor Standards Act (“FLSA”). A group of hotel

employees brought suit against Defendants–Appellees

(collectively, “Navika”) seeking overtime pay and unpaid

wages. On March 14, 2015, the district court granted two

pending motions—a motion for reconsideration of a prior

equitable tolling ruling and a motion to dismiss, each

involving distinct groups of plaintiffs.1 Plaintiffs– Appellants

have challenged both rulings on appeal. For the reasons stated

below, we affirm in part and dismiss in part.

FACTUAL AND PROCEDURAL BACKGROUND

In May 2010, Joanna Wilson and Ashley DeLeon filed suit

against Navika under the FLSA to recover overtime pay and

unpaid wages “on behalf of themselves and other similarly

situated persons.” The district court conditionally certified a

class of current and former Navika employees, and

approximately 330 individuals joined the class. This appeal

involves the district court's ruling on two distinct motions: 1)

Navika's Motion for Reconsideration of Order on Motion for

Extension of Time (“Motion for Reconsideration”) and 2)

Navika's Motion in Limine to Dismiss (“Motion to Dismiss”).

A. Motion for Reconsideration On June 4,

2014, the district court decertified the class and dismissed

without prejudice the claims of all plaintiffs that had opted to

join. In order “[t]o avoid prejudice to individual opt-in

Plaintiffs who have been dismissed,” the court “invoke[d] its

equity powers to toll the applicable statute of limitations for

30 days,” which gave the decertified plaintiffs the opportunity

to file individual suits.

On July 7, 2014, the Opt–In Plaintiffs filed for a seven-day

extension of the district court's equitable tolling ruling,

explaining that it had “dutifully filed lawsuits in the local

jurisdictions where the consenting plaintiffs reside” but that

filing problems in the United States District Court for the

Western District of Missouri prevented them from timely

filing suit in that jurisdiction. Before the district court ruled

on this motion, the Opt–In Plaintiffs filed an amended motion

(“Motion to Extend Equitable Tolling”), citing “filing

complications” with several jurisdictions and requesting a

fourteen-day extension. Before Navika filed a response, the

district court granted the Motion to Extend

Equitable Tolling.2

On July 24, 2014, Navika filed a Motion for

Reconsideration of the district court's ruling, arguing that the

extension should not have been granted because the Opt–In

Plaintiffs failed to diligently file their individual suits. On

March 14, 2015, the district court granted the Motion for

Reconsideration and denied the Opt–In Plaintiffs' Motion to

Extend Equitable Tolling, stating that, as a result, the

Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 60

equitable tolling deadline actually expired on July 7, 2014—

thirty days after decertification. The Opt–In Plaintiffs now

appeal.

B. Motion to Dismiss

*2 In January 2014, the district court ordered “that all

Plaintiffs who remain a party to this action ... are required to

provide Defendants with individual damages computations

within twenty (20) days of entry of this order.” The court

further ordered that “Plaintiffs who do not provide an

individual computation of damages will be dismissed without

prejudice.” On March 31, 2014, Navika moved to dismiss any

plaintiffs that had failed to provide an individualized damages

computation pursuant to Federal Rules of Civil Procedure 37

and 41(b) and the January 2014 order. On March 14, 2015,

the district court granted Navika's motion and dismissed all

remaining plaintiffs without prejudice pursuant to Federal

Rules of Civil Procedure 37 and 41(b). Two plaintiffs

dismissed in that order, Ashley DeLeon and Joanna Wilson,

now appeal.

DISCUSSION

The district court had jurisdiction under 28 U.S.C. § 1331.

This court has jurisdiction to review the district court's final

judgment pursuant to 28 U.S.C. § 1291.

A. Notice of Appeal As a preliminary

matter, Navika contends that the notice of appeal filed by

Plaintiffs–Appellants did not comply with Federal Rule of

Appellate Procedure 3(c)(1). The caption of the notice of

appeal states the names of five individuals: Joanna Marie

Wilson, Ashley Rachel DeLeon, Sheila Collins, Steve

Vinkler, and Jeff Svehlack. The body of the notice of appeal

provides:

Notice is hereby given that Plaintiffs

Wilson et al. hereby appeal to the

United States Court of Appeals for the

Fifth Circuit from the Final Order of

Dismissal (Doc. #468) entered March

14, 2015 and the Opinion and Order

(Doc. #467) entered March 14, 2015

granting Defendants' Motion in

Limine to Dismiss, granting

Defendants' Motion for

Reconsideration, denying Plaintiffs'

Motion for Reconsideration and

Extension and Plaintiffs' Amended

Motion for Reconsideration and

Extension, the revocation of equitable

tolling.

Federal Rule of Appellate Procedure 3(c)(1) “identifies the

minimum prerequisites for a sufficient notice” of appeal.

Kinsley v. Lakeview Reg'l Med. Ctr. LLC, 570 F.3d 586, 589

(5th Cir. 2009). Rule 3(c)(1)(A) states that a notice of appeal

must “specify the party or parties taking the appeal by naming

each one in the caption or body of the notice.” Fed. R. App.

P. 3(c)(1)(A). However, “an attorney representing more than

one party may describe those parties with such terms as ‘all

plaintiffs,’ ‘the defendants,’ ‘the plaintiffs A, B, et al.,’ or ‘all

defendants except X.’ ” Id. Because one attorney represents

all potential plaintiffs in this appeal, Plaintiffs–Appellants

argue that the use of “Plaintiffs Wilson et al.” is sufficient to

comply with the requirements of Rule 3(c).

Although courts should “liberally construe” the requirements

of Rule 3, “[t]his principle of liberal construction does not ...

excuse noncompliance with the Rule.” Smith v. Barry, 502

U.S. 244, 248, 112 S.Ct. 678, 116 L.Ed.2d 678 (1992); see

also Bailey v. Cain, 609 F.3d 763, 767 (5th Cir. 2010). In this

case, Plaintiffs–Appellants' use of “Plaintiffs Wilson et al.”

does little to “specify the party or parties taking the appeal,”

Fed. R. App. P. 3(c)(1) (A). As explained in the advisory

committee notes to Rule 3(c), “Plaintiffs Wilson et al.” is only

a sufficient descriptor if “it is objectively clear that a party

intended to appeal.” Fed. R. App. P. 3(c) advisory

committee's note to 1993 amendment; cf. Kinsley, 570 F.3d

at 589 (“[T]he notice afforded by the document, not litigant's

motivation in filing it, determines the document's sufficiency

as a notice of appeal.” (quoting Smith, 502 U.S. at 248, 112

S.Ct. 678)).3

*3 As evidenced by a review of the district court record, the

briefing on appeal, and the oral argument it is anything but

clear which individuals “Plaintiffs Wilson et al.”

encompasses. The lawyers on the appellant side of the table

here (“Appellants' Side Counsel”) arguably represented 330

opt-in plaintiffs (people turning in consent forms) at some

point in the case. But, by their own admission, they were not

appealing on behalf of all 330 opt-in plaintiffs. Thus, “et al.”

cannot refer to all 330 “opt-ins,” some of whom had settled

or moved on after dismissal. The district court's order on the

motion for reconsideration (the order from which the appeal

was taken) references 29 plaintiffs who submitted “proper

Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 61

responses” to discovery, 130 who submitted “untimely ...

responses” some of whom were then dismissed over a year

before the order being appealed, 26 plaintiffs who lost on

summary judgment, 14 who failed to provide verifications, 17

who conceded that they had no damages, and 8 who were

“unable to attend trial.” To sum up, then, there is no readily

discernable, coherent list of plaintiffs who are appealing

extant at the time of the notice of appeal, even giving the most

liberal construction to the phrase “et al.” Cf. Vallejo v.

Santini–Padilla, 607 F.3d 1, 7 n.3 (1st Cir. 2010) (“As the

plaintiffs on appeal are the same three plaintiffs who have

litigated this case from the outset, this filing [which stated

‘Robert Vallejo and other plaintiffs'] provided defendants

sufficient notice of their opponents on appeal.”).

Even the Appellants' Side Counsel do not appear to be certain

of the identity of the parties on appeal. Appellants' Side

Counsel termed the situation a “kind of a quilt” and explained

that who was in and out of the case in the district court was a

“discombobulated list.” The initial brief filed by Appellants'

Side Counsel did not address the parties appealing at all,

except to list a confusing subset of the optin plaintiffs (a total

of 45 plaintiffs in all) in the certificate of interested parties.

In the reply brief, Appellants' Side Counsel attempted to list

the parties appealing in response to the Appellees' argument

that the notice was ineffective as to all but the Properly

Named Appellants.4 That list matches up to absolutely

nothing else in the district court record. The mystery was not

even solved at oral argument on this point. Appellants' Side

Counsel was repeatedly asked how he derived the list

provided in footnote 1 of the reply brief, but none of his

answers yielded that precise list; it was more in the nature of

concentric circles with some, but not total, overlap. Indeed,

Appellants' Side Counsel admitted that who was “in” the case

at the time of the order on the motion for reconsideration was

“not as clear as it should have been.” The explanation was so

muddled that a member of this panel ordered the parties to

submit a document identifying by name the exact parties on

appeal, explaining that our judgment needs to be precise. So,

here we were, at oral argument in the Fifth Circuit, some eight

months after the notice of appeal was filed and after full

briefing, and we still did not know who the parties appealing

were.

The supplemental briefing that followed was also of little

help. Appellants' Side Counsel filed an eight-page letter that

included five pages of tables. Counsel for Appellees, while

maintaining the position that the notice of appeal was

inadequate, listed who “was left” at the time of the most

recent district court orders. These contradictory and

confusing submissions speak volumes about why the notice

of appeal in this case is completely inadequate under Rule 3,

however liberally construed. Simply put, the provision of the

Rule that allows “et al.” is meant to allow a lawyer who

represents a clearly identifiable group of parties to appeal as

to that group without the need to list each individual. It is not

meant to allow a lawyer to file an appeal and decide later who

he still represents and which of those parties are interested in

appealing.

*4 But the notice of appeal is not deficient as to all Plaintiffs–

Appellants. We hold, and both parties agree, that the parties

named in the caption properly gave notice of their intent to

appeal the district court's ruling on Navika's Motion to

Dismiss. See Fed. R. App. P. 3(c) (1)(A) (“The notice of

appeal must: specify the party or parties taking the appeal by

naming each one in the caption or body of the notice.”

(emphasis added)). Therefore, with the exception of Ashley

DeLeon, Joanna Wilson, Sheila Collins, Steve Vinkler, and

Jeff Svehlack all other Plaintiffs–Appellants are dismissed for

want of jurisdiction.5 Because DeLeon and Wilson, the only

Plaintiffs–Appellants that have neither been dismissed for

want of jurisdiction nor abandoned their appeal, only

challenge the district court's order on Navika's Motion to

Dismiss, we need not address any arguments related to

Navika's Motion for Reconsideration.

B. Motion to Dismiss Named plaintiffs

DeLeon and Wilson argue that the district court abused its

discretion in dismissing their claims under Federal Rule of

Civil Procedure 37(c)(1). On March 14, 2015, the district

court dismissed DeLeon and Wilson without prejudice

“pursuant to Fed. R. Civ. P. 37 and/or 41(b).” But, in their

brief DeLeon and Wilson only contest the district court's

dismissal pursuant to Rule 37. Because DeLeon and Wilson

failed to raise any challenge to the district court's dismissal

pursuant to Rule 41(b), they have waived the issue on appeal.

See, e.g., Kleibrink v. Kleibrink (In re Kleibrink), 621 F.3d

370, 371 n.1 (5th Cir. 2010). Accordingly, this Court need not

reach the parties' arguments related to Rule 37.

CONCLUSION

For the foregoing reasons, the district court's dismissal of

DeLeon and Wilson is AFFIRMED, and we dismiss for want

of jurisdiction all other Plaintiffs–Appellants.

Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 62

PRISCILLA R. OWEN, Circuit Judge, concurring in part and

dissenting in part:

I fully join part II(B) of the court's opinion. But I disagree

with the majority opinion's conclusion that the notice of

appeal was effective only as to the five plaintiffs named in its

caption. I accordingly dissent from the dismissal of the appeal

for lack of jurisdiction as to certain plaintiffs other than the

named plaintiffs.

As the majority opinion reflects, the notice of appeal sought

review of the district court's rulings on two distinct motions

filed by the defendants: a motion to dismiss for failure to

provide damage calculations and a motion to reconsider the

extension of an equitable tolling period that permitted certain

plaintiffs to refile individual actions in other jurisdictions. It

is undisputed that the motion to dismiss for failure to provide

damage calculations involved only the five plaintiffs named

in the caption of the notice of appeal.1 There has never been

any confusion about that. The district court's order granting

the motion to dismiss for failure to furnish damage

calculations reflects that the motion to dismiss, as

supplemented, pertained “to Sheila Collins ... [and] the four

other named plaintiffs.” It is also undisputed that none of the

five named plaintiffs were affected, in any manner, by the

extension of the tolling period to permit refiling in other

jurisdictions. Again, there has never been any confusion

about that. The orders regarding an equitable tolling period

pertained only to unnamed plaintiffs. The district court ruled

on the motion to dismiss, involving only named plaintiffs,

and the motion for reconsideration, involving only unnamed

plaintiffs, in orders that issued March 14, 2015.

*5 The five plaintiffs named in the caption of the notice of

appeal would, of course, be appealing only the motion to

dismiss for failure to provide damage calculations because

the order reconsidering the extension of the tolling period did

not pertain to them. Yet, the notice of appeal expressly listed

the order granting the motion for reconsideration and

revoking the extension of the equitable tolling period as a

ruling that was being appealed. The notice said:

Notice is hereby given that Plaintiffs

Wilson et al. hereby appeal to the

United States Court of Appeals for the

Fifth Circuit from the Final Order of

Dismissal (Doc. #468) entered March

14, 2015 and the Opinion and Order

(Doc. #467) entered March 14, 2015

granting Defendants' Motion in

Limine to Dismiss, granting

Defendants' Motion for

Reconsideration, denying Plaintiffs'

Motion for Reconsideration and

Extension and Plaintiffs' Amended

Motion for Reconsideration and

Extension, the revocation of equitable

tolling.

The notice of appeal objectively indicates that someone is

appealing from the grant of the Motion for Reconsideration

and the revocation of the equitable tolling period. All of the

parties knew that none of the five plaintiffs were appealing

that ruling, and the district court record is plain that none of

the named plaintiffs were subject to that ruling. So it follows

that all of the parties had to have known that plaintiffs other

than the named plaintiffs were appealing the revocation of the

extended equitable tolling period. It is also objectively

ascertainable from the district court's March 14, 2015 order

that the universe of unnamed plaintiffs who were aggrieved

by the revocation of the extended equitable tolling period was

limited to the plaintiffs named in three lawsuits filed in other

jurisdictions that the district court's order identifies with

specificity. The district court's March 14, 2015 order recites:

A current search on PACER Case Locator shows five cases

filed by 55 (out of 330) individual Plaintiffs against

Defendant subsequent to the June 4, 2014 decertification

order. Doc. 460.

1) Johnson et al v. Navika, LLC et al, No. 4:14– cv–

144–BAE–GRS (S.D. Ga. July 7, 2014) (four

plaintiffs)

2) Anne Bond, et al. v. Navika Capital Group, LLC, et

al., No. 1:14–cv–00627–SS (W.D. Tex. July 7, 2014)

(twenty-one plaintiffs)

3) Carrier et al v. Navika Capital Group, LLC et al,

No. 1:14–cv–311–KD–C (S.D. Ala. July 8, 2014)

(fourteen plaintiffs)

4) Cassandra Botello, et al. v. Navika Capital Group,

LLC, et al., No. 4:14–cv–378 (N.D. Okla. July 9, 2014)

(eleven plaintiffs)

5) Chappell et al v. Navika Capital Group, LLC et al,

No. 2:14–cv–04199–SRB (W.D. Mo. July 28, 2014)

(five plaintiffs)

Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 63

The latter three cases were filed after the original 30– day

tolling period, which expired July 7, 2014, but within the

14–day extension, which expired July 28, 2014.

Withdrawing equitable tolling in the latter three cases

could result in dismissal of the claims of thirty plaintiffs in

Alabama, Oklahoma, and Missouri.

This order makes clear that the only plaintiffs who were

subject to the revocation of the extended equitable tolling

period were those plaintiffs who filed the three lawsuits (the

“latter three cases”) after July 7, 2014, in the three

jurisdictions listed (Alabama, Oklahoma, and Missouri). So,

there is a discrete number of identifiable plaintiffs who were

aggrieved by the order granting the motion for

reconsideration and revoking the extended equitable tolling

period.

*6 The notice of appeal did not identify by name who was

appealing the order revoking the extended equitable tolling

period, but it stated that “[n]otice is hereby given that

Plaintiffs Wilson et al. hereby appeal,” and, as discussed, the

notice then identified the order revoking the tolling period

with specificity. This is adequate under Federal Rule of

Appellate Procedure 3(c).

Rule 3(c) states that a notice of appeal must “specify the party

or parties taking the appeal by naming each one in the caption

or body of the notice, but an attorney representing more than

one party may describe those parties with such terms as ...

‘the plaintiffs A, B, et al.’ ”2

The same attorney represented

all plaintiffs in the district court and in the appeal. In

determining the sufficiency of the identification of parties,

“the test ... is whether it is objectively clear that a party

intended to appeal.”3 The Advisory Committee notes state

that “the rule makes it clear that dismissal of an appeal should

not occur when it is otherwise clear from the notice that the

party intended to appeal.”4 It is “objectively clear” from the

notice of appeal and the district court's May 14, 2015 Opinion

and Order that the plaintiffs who refiled suit in other

jurisdictions after July 7, 2014, intended to appeal the

revocation of equitable tolling.

The majority opinion's attempt to distinguish a footnote in the

unpublished decision in Dodson v. Hillcrest Securities

Corp.,5 which indicates that Rule 3(c) would be satisfied in

the present appeal, is unconvincing. The Dodson decision

involved a 1992 notice of appeal in the context of a putative

class action that the district court did not certify.6 Through

subsequent pleadings and dismissals, plaintiffs were added

while others withdrew or were dismissed prior to the filing of

the notice of appeal.7 The caption of the notice contained the

named plaintiffs and “et al.,” and the body referred to “all

plaintiffs,” but it was clear that some of the dismissed

plaintiffs were not appealing.8 While the court recognized

that the phrase “all plaintiffs” could satisfy the specificity

requirement “if [the notice] leaves no room for doubt” as to

which plaintiffs intended to appeal, it concluded that it was

“impossible to tell” who the plaintiffs appealing were.9

However, the court was applying the version of Rule 3 in

effect prior to its amendment in 1993. In a footnote, the

opinion stated that the notice would have been sufficient

under Rule 3(c) as amended in 1993.10

The majority opinion

in the present case says that Dodson “did not have the

opportunity to address the advisory committee notes as

applied to non-class action cases like this one.”11

This

statement is puzzling for three reasons. First, the advisory

committee notes that are referenced have been in existence

since 1993, and Dodson was decided in 1996. Second, neither

Dodson nor the present case involved a class action by the

time that the orders appealed from had issued. In Dodson, the

court was addressing an unwieldy set of individuals,

numbering in the hundreds.12

The class in the present case

had been decertified well before the orders at issue here were

handed down, and the district court was dealing with

individual claims, as in Dodson. Third, JUDGE GARWOOD,

who wrote the opinion in Dodson, was a member of the Rules

of Appellate Procedure Advisory Committee of the Judicial

Conference of the

United States when he authored Dodson;13

it is highly

unlikely that he was unaware of the import of the Advisory

Committee's commentary to Rule 3(c).

*7 The majority opinion's statement that Dodson is

inapplicable because the panel in that case “did not have the

benefit of case law elaborating on the proper application of

Rule 3(c), on which [the majority] opinion relies” is also

puzzling. None of the cases cited by the majority opinion shed

any light on the issue presently before us. The decision in

Kinsley v. Lakeview Regional Medical Center LLC concerned

the timeliness of a filing.14

The opinions in Smith v. Barry

and Bailey v. Cain both concerned inmate notices of appeal

with irregularities as to form or identification of the court.15

Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 64

Accordingly, while Dodson did apply pre–1993 law to decide

the notice of appeal was insufficient, the Dodson decision was

unequivocal that the notice satisfied the new

Footnotes

1993 rule. Though Dodson is not binding precedent, its

reasoning is persuasive.

I share the frustration expressed in the majority opinion with

the conflicting statements and representations that counsel for

the plaintiffs has made to this court regarding the identity of

the unnamed plaintiffs who intended to appeal. But the

discrepancies that have occurred after the notice of appeal

was filed should not have any impact on the state of the record

at the time the notice was filed. We cannot lose jurisdiction

over parties who were adequately identified in a notice of

appeal simply because counsel argues that other individuals

who were not identified in that notice should also be

considered as parties to the appeal.

I would hold that the notice of appeal was sufficient as to the

parties who filed the three lawsuits the district court identified

as potentially affected by the revocation of equitable tolling,

as of March 15, 2014. Accordingly, I would consider the

merits of the arguments concerning the motion for

reconsideration as to those unnamed plaintiffs, and I dissent

from the dismissal of those plaintiffs' claims for lack of

appellate jurisdiction.

All Citations

--- Fed.Appx. ----, 2016 WL 6068126

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except

under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

1 This appeal involves a complex mix of parties and claims. The plaintiffs purportedly appealing the motion for

reconsideration are referred to as the “Opt–In Plaintiffs.” The plaintiffs appealing the motion to dismiss are referred to by

name, Joanna Wilson and Ashley DeLeon. When discussing both sets of plaintiffs, we refer to “Plaintiffs–Appellants.”

2 Five lawsuits were filed by different groups of Opt–In Plaintiffs, two within the original thirty-day equitable tolling deadline

and three during the fourteen-day extension.

3 While we recognize that our previous opinion in Dodson v. Hillcrest Securities Corp., 95 F.3d 52, 1996 WL 459770 (5th

Cir. 1996) (unpublished), in dicta suggested that a notice of appeal somewhat similar to the one in this case could be

adequate under Rule 3(c), the holding in Dodson was limited to Rule 3(c) as it existed before the 1993 amendment. See

id. at *2–4 & n.4. The panel in Dodson also did not have the benefit of case law elaborating on the proper application of

Rule 3(c), on which this opinion relies, and did not have the opportunity to address the advisory committee notes as

applied to non-class action cases like this one. Thus, Dodson does not change the outcome of this case.

4 The reply brief footnote 1 states: “The Appellants challenging the Order on Reconsideration are: Theresa Ford, Jamie

Franklin, Cynthia Knight, Linda Law, Aundrea Poellnitz, Jauran Portis, Lakitha Reed, Robbie Williams, Antonio Proctor,

Wanda Rivera, Marisha White, Tyshella Harvey, Glynna Kyle, LaToya Maxwell, Adrianne Mc'Ferrim, Ashley Welch,

Amanda Arnold, Elizabeth Howk, Stephanie Kennedy, Bobby Kenyon, Victoria Shea Martin, Bobby Smith, Anne Bond,

Rosa Joanne Alvarado, Ramario Armstrong, Brandon Batchelor (who has now settled his case), Esmerelda Carrizales,

Dany Cruz, Ashley Foege, Ashton Forbes, Jamilla Garcia, Kaylynn Garcia, Ashley Mars, Eric Nordheim, Nicolas Pereyra,

Shenika Preston, Russell Smith, Matthew Stephenson, and Stephanie Weber.”

5 However, as Plaintiffs–Appellants brief contains no arguments related to Sheila Collins, Steven Vinkler, and Jeff

Svehlack, these individuals have abandoned their appeal. See Cinel v. Connick, 15 F.3d 1338, 1345 (5th Cir. 1994).

1 Joanna Marie Wilson, Ashley Rachel DeLeon, Steve Vinkler, Sheila Collins, and Jeff Svehlak.

2 FED. R. APP. P. 3(c)(1)(A).

3 FED. R. APP. P. 3(c) advisory committee's note to 1993 amendment.

4 Id.

5 95 F.3d 52, 1996 WL 459770, at *2 n.4 (5th Cir. 1996) (unpublished).

6 Id. at *2–4.

7 Id. at *4.

8 Id. at *4.

9 Id. at *3–4.

Wilson v. Navika Capital Group, L.L.C., --- Fed.Appx. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 65

10 Id. at *2 n.4.

11 Ante at ––––.

12 See Dodson, 1996 WL 459770, at *1.

13 1 PRELIMINARY DRAFT OF PROPOSED AMENDMENTS TO THE BANKRUPTCY FORMS: REQUEST FOR COMMENTS 57 (1996) (listing JUDGE GARWOOD as a member of the Advisory Committee on Appellate Rules).

14 570 F.3d 586, 588–89 (5th Cir. 2009).

15 Smith v. Barry, 502 U.S. 244, 248–50, 112 S.Ct. 678, 116 L.Ed.2d 678 (1992); Bailey v. Cain, 609 F.3d 763, 766–67

(5th Cir. 2010).

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Barker, --- F.3d ---- (2016)

2016 WL 6276078

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 66

2016 WL 6276078

Only the Westlaw citation is currently available.

United States Court of Appeals, Ninth Circuit.

In re Marcella Lee Barker, aka Marci

Barker, aka Marci Vanni Barker, Debtor,

Spokane Law Enforcement

Federal Credit Union, Appellant,

v.

Marcella Lee Barker; Robert Drummond, Chapter

13 Trustee; Ocwen Loan Servicing, LLC, Appellees.

No. 14-60028

|

Argued and Submitted October

3, 2016, Seattle, Washington

|

Filed October 27, 2016

Synopsis

Background: Trustee objected to untimely proofs of claim

filed by creditor in debtor's Chapter 13 case. The United States

Bankruptcy Court for the District of Montana, Ralph B.

Kirscher, J., entered order disallowing claims, and creditor

appealed. The United States Bankruptcy Appellate Panel of the

Ninth Circuit, 2014 WL 1273765, affirmed. Creditor appealed.

Holdings: The Court of Appeals, N.R. Smith, Circuit Judge,

held that:

[1] creditor that wishes to participate in Chapter 13

planhas affirmative duty to file proof of claim, and debtor's

acknowledgment of debt in bankruptcy schedule, whether in

nature of binding judicial admission or not, does not satisfy that

affirmative duty;

[2] debtor's scheduling of prepetition debt owed to

creditordid not qualify as informal proof of claim;

[3] debtor's scheduling of prepetition debt owed to

creditordid not qualify as proof of claim timely filed by debtor

on creditor's behalf; and

[4] deadline to file proofs of claim in Chapter 13 case

wasrigid, and bankruptcy court lacked equitable power to

extend deadline after the fact.

Affirmed.

Appeal from the Ninth Circuit, Bankruptcy Appellate

Panel, Pappas, Kurtz, and Jury, Bankruptcy Judges,

Presiding, BAP No. 13–1393.

Attorneys and Law Firms

Quentin M. Rhoades (argued) and Francesca di Stefano,

Sullivan Tabaracci & Rhoades P.C., Missoula, Montana,

for Appellant.

Robert Drummond (argued), Great Falls, Montana; Kraig

C. Kazda, Kazda Law Firm P.C., Great Falls, Montana; for

Appellees.

Before: William A. Fletcher, Ronald M. Gould, and N.

Randy Smith, Circuit Judges.

OPINION

N.R. SMITH, Circuit Judge:

If a creditor wishes to participate in the distribution of a

debtor's assets under a Chapter 13 plan, it must file a timely

proof of claim. The debtor's acknowledgment of debt owed

to the creditor in a bankruptcy schedule does not relieve the

creditor of this affirmative duty.

BACKGROUND FACTS

On September 6, 2012, debtor Marcella Lee Barker filed a

Chapter 13 bankruptcy petition in the United States

Bankruptcy Court for the District of Montana. Later that

day, in response to the filed petition, the bankruptcy court

issued an Official Form B9I, titled “Notice of Chapter 13

Bankruptcy Case, Meeting of Creditors, & Deadlines”

(“Notice”). The Notice stated that the deadline for

creditors1 to file a proof of claim was January 8, 2013. On

September 8, 2012, the Bankruptcy Noticing Center sent

the Notice to the Appellee, Spokane Law Enforcement

Federal Credit Union (“Credit Union”), by first class mail.

On September 19, 2012, Barker timely filed her Chapter 13

plan with the bankruptcy court.2

According to her attached

certificate of mailing filed with the court, the plan was also

sent to the Credit Union that day via first class mail.

In re Barker, --- F.3d ---- (2016)

2016 WL 6276078

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 67

On September 19, 2012, Barker also properly filed schedules

of her assets and liabilities.3 In these schedules, Barker listed

the Credit Union as a secured creditor holding a $6,646.00

purchase money security interest in a 2004 Ford F–150. Barker

also listed the Credit Union as an unsecured creditor holding a

$47,402.00 claim that had previously been secured by an

unidentified automobile, which Barker's ex-husband had sold.

Barker moved to amend and modify the Chapter 13 plan several

times over the next few months. Each time such a motion was

filed, Barker sent a notice to the Credit Union. In addition, each

time the bankruptcy court entered an order confirming the

amended plan, the Bankruptcy Noticing Center notified the

Credit Union.

*2 On May 30, 2013, more than four months after the deadline

to file a proof of claim expired, the Credit Union filed three

claims with the bankruptcy court: a secured claim for $5,490.78

and unsecured claims for

$28,293.94 and $24,587.47.4 In accordance with the Local

Bankruptcy Rules for the United States Bankruptcy Court for

the District of Montana, the Trustee sent a “Notice of

Late Filed Claims” to the Credit Union on June 7, 2013.5

On June 10, 2013, the Credit Union requested a hearing “to

contest the tardy response.” In this request, the Credit Union

asserted that the claims were belated, because a “disgruntled

employee” failed to timely file the claim. On July 31, 2013, the

Credit Union filed a formal motion with the bankruptcy court

requesting the court to allow the three claims. The court held a

hearing on the matter on August 2, 2013. The court denied the

Credit Union's motion and disallowed the claims because the

proofs of claims were not timely filed.

On August 12, 2013, the Credit Union filed a notice of appeal

with the bankruptcy court, and the appeal was taken to the

Ninth Circuit Bankruptcy Appellate Panel (“BAP”). On March

28, 2014, the BAP affirmed the bankruptcy court's decision to

disallow the late filed claims. On April 24, 2014, the Credit

Union filed a timely notice of appeal to this court.

STANDARD OF REVIEW

[1] [2] “Whether a claim may be disallowed in a bankruptcy

proceeding on the ground that the proof of claim was not

timely filed pursuant to Rule 3002(c), Fed.R.Bankr.P., is a

question of law subject to de novo review.” IRS v. Osborne

(In re Osborne), 76 F.3d 306, 307 (9th Cir. 1996) (italics

omitted). Whether the Credit Union has asserted an informal

proof of claim is also a question of law subject to de novo

review. See Wright v. Holm (In re Holm), 931 F.2d 620, 622

(9th Cir. 1991).

DISCUSSION

In order to fully understand the intricacies of the legal

questions presented in this case, a short summary of

Chapter 13 bankruptcy proceedings is helpful.

A petition filed under Chapter 13 helps overextended

debtors reorganize their debt—while allowing them to keep

their assets—by using “current and future income to repay

creditors in part, or in whole, over the course of a three-to

five-year period.” HSBC Bank USA, Nat'l Ass'n v.

Blendheim (In re Blendheim), 803 F.3d 477, 485 (9th Cir.

2015). A Chapter 13 case begins, like all other bankruptcy

cases, “with the filing of a petition and the creation of an

estate, which comprises the debtors' legal and equitable

interests in property.” Id. at 484 (citing 11 U.S.C. § 541;

Fed. R. Bankr. P. 1002(a)). As soon as a debtor files a

bankruptcy petition, all entities are immediately prohibited

from further pursuing collection efforts against the debtor

or the debtor's estate. Id. (citing 11 U.S.C. § 362). Along

with the petition, a debtor must also file a schedule of assets

and liabilities and a statement of financial affairs. Fed. R.

Bankr. P. 1007(b)(1).

*3 [3] [4] [5] In order to collect a debt from a debtor filing a

Chapter 13 bankruptcy petition, an unsecured creditor must file

a valid “proof of claim,” which has gone through the

“allowance process set forth in 11 U.S.C. § 502.” In re

Blendheim, 803 F.3d at 484–85. A secured creditor, who wishes

to receive distributions under a Chapter 13 plan, must also file

a valid proof of claim. See id. at 485; see also Schlegel v.

Billingslea (In re Schlegel), 526 B.R. 333, 342–43 (9th Cir.

BAP 2015). However, a secured creditor, who does not wish to

participate in a Chapter 13 plan or who fails to file a timely

proof of claim, does not forfeit its lien. In re Blendheim, 803

F.3d at 485 (“A creditor with a lien on a debtor's property may

generally ignore the bankruptcy proceedings and decline to file

a claim without imperiling his lien, secure in the in rem right

that the lien guarantees him under nonbankruptcy law: the right

of foreclosure.”).

A bankruptcy court may disallow a claim for many reasons,

including if the proof of claim was untimely. 11 U.S.C. §

502(b)(9); In re Blendheim, 803 F.3d at 485. In order for a

In re Barker, --- F.3d ---- (2016)

2016 WL 6276078

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 68

proof of claim to be timely, a creditor generally must file it

within “90 days after the first date set for the meeting of

creditors.”6 Fed. R. Bankr. P. 3002(c). If a creditor fails to

file a timely proof of claim, a debtor or trustee may file a

claim on the creditor's behalf within thirty days after the

creditor's ninety-day clock has expired. Fed. R. Bankr. P.

3004.

The Credit Union admits that it filed its proofs of claims late.

Thus, the bankruptcy court properly rejected the claims.

However, it argues that the bankruptcy court still should

have allowed it to participate in the Chapter 13 plan, because

Barker listed the debt she owed the Credit Union in her

bankruptcy schedules. We disagree.

[6] [7] The Federal Rules of Bankruptcy Procedure clearly

provide that, in the Chapter 13 context, “[a]n unsecured creditor

or an equity security holder must file a proof of claim or interest

for the claim or interest to be allowed.” Fed. R. Bankr. P.

3002(a) (emphasis added). The Ninth Circuit has made it clear

that this straightforward language should be given its “plain

meaning” and enforced accordingly. Gardenhire v. IRS (In re

Gardenhire), 209 F.3d 1145, 1148 (9th Cir. 2000). In addition,

“in a highly statutory area such as bankruptcy,” the Ninth

Circuit prescribes “[c]lose adherence to the text of the relevant

statutory provisions.” Id. (“[I]n a Chapter 13 proceeding:

‘Where the statutory language is clear, our “sole function ... is

to enforce it according to its terms.” ’ ”) (quoting Rake v. Wade,

508 U.S. 464, 471, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993)).

A plain reading of the applicable statutes and rules places a

burden on each Chapter 13 creditor to file a timely proof of

claim. A claim will not be allowed if this burden is not satisfied.

[8] There is other evidence, besides the plain language of the

statute, that indicates Congress intended to place such a

burden on the creditor. Specifically, a creditor in the Chapter

11 context is not always required to file a proof of claim.

Varela v. Dynamic Brokers, Inc. (In re Dynamic Brokers,

Inc.), 293 B.R. 489, 495 (9th Cir. BAP 2003). Both the Federal

Rules of Bankruptcy Procedure and the federal statutes

governing Chapter 11 bankruptcy make clear that “in chapter

11 cases ‘it shall not be necessary for a creditor’ to file a proof

of claim unless the claim is either not scheduled or is

scheduled as disputed, contingent or unliquidated.” Id.; Fed.

R. Bankr. P. 3003(c)(2); 11 U.S.C. § 1111(a). Similar

language (relieving a creditor of the burden of filing a proof

of claim if the debtor has scheduled the claim) is absent from

the rules and statutes governing Chapter 13 bankruptcy. This

purposeful omission indicates Congress's intent to require all

creditors wishing to enforce their claims to file a proof of

claim in the Chapter 13 context. See Russello v. United States,

464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983)

(“[W]here Congress includes particular language in one

section of a statute but omits it in another section of the same

Act, it is generally presumed that Congress acts intentionally

and purposely in the disparate inclusion or exclusion.”)

(quoting United States v. Wong Kim Bo, 472 F.2d 720, 722

(5th Cir. 1972)).

*4 [9] [10] [11] Bankruptcy schedules serve multiple purposes

independent of a proof of claim and are as vital to the

bankruptcy plan as the proof of claim. Bankruptcy courts use

debtors' schedules to determine whether debtors are eligible for

the particular relief they seek. Guastella v. Hampton (In re

Guastella), 341 B.R. 908, 918 (9th Cir. BAP 2006) (“The

debtors' schedules should be the starting point to a

determination of the debtor's aggregate debts. ... However, the

schedules are not dispositive. If the debtors' schedules were

dispositive, then eligibility could be created by improper or

incomplete scheduling of creditors.” (omission in original)

(quoting Quintana v. IRS (In re Quintana), 107 B.R. 234, 238–

39 n.6 (9th Cir. BAP 1989), aff'd, 915 F.2d 513 (9th Cir. 1990)).

Creditors also “rel[y] on the schedules to determine what

action, if any, they [will] take in the matter.” Hamilton v. State

Farm Fire & Cas. Co., 270 F.3d 778, 785 (9th Cir. 2001). A

creditor may chose not to pursue a claim after evaluating all of

a Chapter 13 debtor's debts and the proposed repayment plan.

Perry v. Certificate Holders of Thrift Sav., 320 F.2d 584, 589

(9th Cir. 1963) (“There are many cases where creditors,

although listed on the books of a bankrupt as such, will not be

able to participate on an equal basis with other general

creditors.”). The proof of claim plays the important role of

“alert[ing] the court, trustee, and other creditors, as well as the

debtor, to claims against the estate,” and the creditor's intention

to enforce the claims. In re Daystar of Cal., Inc., 122 B.R. 406,

408 (Bankr. C.D. Cal. 1990); see also Adair v. Sherman, 230

F.3d 890, 896 (7th Cir. 2000). Simply put, “[t]he requirement

that creditors be scheduled is not a substitute for the further

provision ... that creditors' claims be proved.” Perry, 320 F.2d

at 589.

[12] A variety of courts have disallowed creditors' late

filed claims despite the fact that they were listed on the

debtor's bankruptcy schedules. See, e.g., Bowden v.

Structured Invs. Co. (In re Bowden), 315 B.R. 903, 907

(Bankr. W.D. Wash. 2004); In re Greenig, 152 F.3d 631, 632–

34 (7th Cir. 1998) (disallowing late filed claim even though

debtor listed the debt in a bankruptcy schedule and the

In re Barker, --- F.3d ---- (2016)

2016 WL 6276078

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 69

bankruptcy court confirmed the debtor's reorganization plan,

which included the debt at issue). We agree with these courts.

In a Chapter 13 case, a creditor must file a timely proof of

claim in order to participate in the distribution of the debtor's

assets, even if the debt was listed in the debtor's bankruptcy

schedules.

I. Whether or not Barker's listing of debt

owedto the Credit Union was a judicial

admission, it is not sufficient to meet the

Credit Union's burden

of affirmatively filing a timely proof of claim.

[13] [14] [15] The Credit Union argues first that, under

the doctrine of judicial admissions, Barker must pay all the

debts she listed in her bankruptcy schedules. The Ninth

Circuit has acknowledged the doctrine of judicial admissions.

See Am. Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226

(9th Cir. 1988). “Judicial admissions are formal admissions in

the pleadings which have the effect of withdrawing a fact

from issue and dispensing wholly with the need for proof of

the fact.” Id. (quoting Dery v. Gen. Motors Corp. (In re

Fordson Eng'g Corp.), 25 B.R. 506, 509 (Bankr. E.D. Mich.

1982)). Judicial admissions are “conclusively binding on the

party who made them.” Id.

Although we have acknowledged this doctrine, we have

never declared that a bankruptcy schedule constitutes the

“formal admission” required for the application of the

doctrine. We need not reach this question here either. As

outlined above, a creditor who wishes to participate in a

Chapter 13 plan has an affirmative duty to file a proof of

claim. A debtor's acknowledgment of debt in a bankruptcy

schedule—whether or not that is a judicial admission—

does not satisfy this affirmative duty. Congress chose to

require Chapter 13 creditors to file proofs of claims that

demonstrate their intent to enforce their claims; a judicial

admission by a debtor does not fulfill this strict requirement

or its purpose.

II. Barker's listing of debt owed to the

Credit

Union in her bankruptcy schedules

does not constitute an informal proof of

claim.

[16] [17] Creditors, failing to file a timely formal proof of

claim, often assert that an informal proof of claim can function

to establish the creditor's claims. See Cty. of Napa v.

Franciscan Vineyards, Inc. (In re Franciscan Vineyards,

Inc.), 597 F.2d 181, 183 (9th Cir. 1979). The Ninth Circuit has

two requirements for a document to qualify as an informal

proof of claim: (1) the document “must state an explicit

demand showing the nature and amount of the claim against

the estate,” and (2) the document must “evidence an intent to

hold the debtor liable.” Sambo's Restaurants, Inc. v. Wheeler

(In re Sambo's Rests., Inc.), 754 F.2d 811, 815 (9th Cir. 1985).

Examples of an informal proof of claim are “demands against

the estate” or “correspondence between a creditor and the

trustee or debtor-in-possession which demonstrate an intent

on the part of the creditor to assert a claim against the

bankruptcy estate.” Sullivan v. Town & Country Home

Nursing Servs., Inc. (In re Town & Country Home Nursing

Servs., Inc.), 963 F.2d 1146, 1153 (9th Cir. 1991).

*5 The Credit Union argues that Barker's listing of debt she

owed to the Credit Union in her bankruptcy schedules

constitutes an informal proof of claim, which is sufficient

to preserve its claims. More specifically, the Credit Union

asserts that there is no requirement that the writing

establishing the informal proof of claim must come from

the creditor.

[18] The Credit Union's argument ignores the explicit

requirement that the creditor must somehow demonstrate its

intent to hold the debtor liable. As explained above, the filing

of a proof of claim (which evidences the creditor's decision

to hold the debtor liable) plays an important role in Chapter

13 bankruptcy proceedings. This function applies equally to

an informal proof of claim. In order to establish an informal

proof of claim, a creditor must have taken some affirmative

action to assert its claim within the statutorily prescribed

time frame. In re Bowden, 315 B.R. at 907 (rejecting

argument that debtor's schedules alone suffice to establish an

informal proof of claim). The Credit Union has failed to cite

any legal authority that has held that a debtor's bankruptcy

schedules alone qualify as an informal proof of claim.

Moreover, in all of the cases the Credit Union cites in support

of its position, the creditors took some sort of affirmative

action to demonstrate their intent to enforce their claims prior

to the filing deadline. See, e.g., Fyne v. Atlas Supply Co., 245

F.2d 107, 108 (4th Cir. 1957) (“We agree that mere

knowledge on the part of the trustee or of the referee in

bankruptcy as to the existence of a claim is not sufficient

basis for allowing the filing of an amended claim nor is the

listing of the claim in the bankrupt's schedules sufficient.

Here, however, there is much more than this.”); Scottsville

Nat'l Bank v. Gilmer (In re Pitts), 37 F.2d 227, 229 (4th Cir.

1930) (allowing late filed claim where “the trustee conferred

In re Barker, --- F.3d ---- (2016)

2016 WL 6276078

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 70

with the officers and the attorney for the bank frequently with

regard to matters connected with the estate”); Clapp v.

Norwest Bank Hastings, N.A. (In re Clapp), 57 B.R. 921, 924

(Bankr. D. Minn. 1986) (allowing late filed claim where

creditor “clearly and frequently asserted its intention to

pursue its claim” in letters to the debtor's attorney and in

interactions with the court).

Barker's bankruptcy schedules simply do not meet either of

the prongs required to establish an informal proof of claim.

The Barker-drafted documents are not an explicit demand and

do not demonstrate the Credit Union's intent to hold Barker

liable for the listed debt. Accordingly, we affirm the

bankruptcy court's conclusion that the informal proof of claim

doctrine does not apply in this case.

III. Barker's listing of debt owed to the

Credit Union in her bankruptcy schedules

does not constitute a debtor's proof of claim.

[19] Federal Rule of Bankruptcy Procedure 3004 and 11

U.S.C. § 501(c) provide that, if a creditor does not file a timely

proof of claim, the debtor or trustee may file a proof of claim

for the creditor. The Bankruptcy Rules specifically require that

the debtor's proof of claim be filed in the thirty day period

immediately following the creditors' deadline to file their

proofs of claims. Fed. R. Bankr. P. 3004. In this case, the Credit

Union's deadline to file was January 8, 2013. Therefore,

Barker, or the Trustee, had from January 9, 2013, until

February 7, 2013, to file a proof of claim on behalf of any

creditors.

*6 The Credit Union argues that Barker's bankruptcy

schedules constitute a debtor's proof of claim. This argument

is not persuasive. First, the bankruptcy schedules

(acknowledging the debt at issue) were not filed within the

applicable thirty-day time frame. Thus, just considering the

issue of timing, Barker's bankruptcy schedules do not meet the

requirements of Rule 3004.

Timing aside, Barker's bankruptcy schedules do not qualify

as a debtor's proof of claim. Congress adopted Rule 3004

in addition to the Rules requiring Chapter 13 debtors to file

schedules of their assets and liabilities. Therefore, Rule

3004 requires that debtors make an additional showing of

their desire to include an unasserted claim in their Chapter

13 plan after receiving notice of which creditors intend to

enforce their claims. Barker never made this additional

showing. Therefore, the filing requirements of Rule 3004

have not been satisfied, and Barker's bankruptcy schedules

do not constitute a debtor's proof of claim.

IV. The principles of equity do not permit the

bankruptcy court to retroactively extend the

deadline

for the Credit Union to file its proofs of claims.

[20] Finally, the Credit Union argues that equity favors

allowing its claims. Specifically, the Credit Union argues that,

if its claims are not allowed, it will suffer a severe loss while

the other creditors receive an undeserved windfall. While this

may be true, the Ninth Circuit has repeatedly held that the

deadline to file a proof of claim in a Chapter 13 proceeding is

“rigid,” and the bankruptcy court lacks equitable power to

extend this deadline after the fact. In re Gardenhire, 209 F.3d

at 1148 (“Our precedents support the conclusion that a

bankruptcy court lacks equitable discretion to enlarge the time

to file proofs of claim; rather, it may only enlarge the filing

time pursuant to the exceptions set forth in the Bankruptcy

Code and Rules.”); In re Osborne, 76 F.3d at 308; Zidell, Inc.

v. Forsch (In re

Coastal Alaska Lines, Inc.), 920 F.2d 1428, 1431–33 (9th

Cir. 1990); Ledlin v. United States (In re Tomlan), 102 B.R.

790, 792, 796 (E.D. Wash. 1989), aff'd, 907 F.2d 114 (9th

Cir. 1990).

[21] Further, allowing the bankruptcy

court to

retroactively extend the deadline in this case would thwart the

purpose of Chapter 13:

The purpose of Chapter 13 is ‘to serve as a flexible

vehicle for the repayment of part or all of the allowed

claims of the debtor.’ (Emphasis added.) Sen. Rept. No.

95–989, Pub.L. 95–598, 92 Stat. 2549, 95th Cong., 2d

Sess. (1978), p. 141, reprinted in U.S. Code Cong. &

Admin. News 1978 at 5787, 5927. In order to effectuate

this purpose, it is essential that all unsecured creditors

seeking payment under the plan file a proof of claim. A

date certain for such filings is crucial to the ability to

determine the full extent of the debts and evaluate the

efficacy of the plan in light of the debtor's assets and

foreseeable future earnings.

In re Tomlan, 102 B.R. at 792 (alteration in orginal). Barker's

Chapter 13 plan will only be successful if she and the Trustee

“know, early on, what claims must be paid.” Id. at 794 (quoting

In re Goodwin, 58 B.R. 75, 77 (Bankr. D. Me. 1986)). Barker

will not get the “fresh start” she seeks if creditors are

In re Barker, --- F.3d ---- (2016)

2016 WL 6276078

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 71

continually allowed to add additional claims far after the

deadline to file has expired. Id. (quoting In re Goodwin, 58 B.R.

at 77).

Footnotes

CONCLUSION

*7 In order to participate in distributions of Barker's assets

under her Chapter 13 plan, the Credit Union was required

to file a proof of claim by the prescribed deadline. Because

the Credit Union's proof of claims were untimely, the

bankruptcy court properly rejected them.

AFFIRMED.

All Citations

--- F.3d ----, 2016 WL 6276078

1 As noted in the Notice, a different deadline applies to a proof of claim filed by a “governmental unit.” See Fed. R. Bankr.

P. 3002(c)(1). This alternative deadline is not relevant in this case as Appellee is not a governmental unit.

2 A Chapter 13 debtor must file a Chapter 13 plan within fourteen days after filing a Chapter 13 petition. Fed. R. Bankr. P.

3015(b).

3 In 2012, the Federal Rules of Bankruptcy Procedure required Chapter 13 debtors to list their assets and liabilities on

Official Form B6, and its subparts. See Fed. R. Bankr. P. 9009. On December 1, 2015, Official Form B6 was replaced

by Official Form B 106. 6 West's Fed. Forms, Bankruptcy Courts § 1:20 (4th ed.).

4 The copies of the proofs of claims submitted in the excerpts of record appear to assert two unsecured claims for

$28,293.94 and $24,587.47. These numbers are inconsistent with the Appellant's brief which list the amount of the

unsecured claims as $28,293.84 and $24,597.47.

5 Rule 3002–1 of the Local Bankruptcy Rules for the United States Bankruptcy Court for the District of Montana provides

as follows:

Late filed proofs of claim in Chapter 12 or 13 cases shall be deemed disallowed, without need for formal objection

by the trustee or a hearing, if the trustee sends a notice to the late filing creditor using Mont. LBF 21. If a creditor

files a response and requests a hearing within thirty (30) days of the date of the notice, then the creditor shall notice

the contested matter for hearing pursuant to Mont. LBR 9013–1.... If the creditor fails to file a written response to

the objection to the late filed claim within thirty (30) days of the date of the notice provided by Mont. LBF 21, the

failure to respond shall be deemed an admission that the objection should be sustained by the Court without further

notice or hearing.

6 There are a handful of exceptions to the deadline for filing proofs of claims, none of which apply here.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Failla, 838 F.3d 1170 (2016)

63 Bankr.Ct.Dec. 46

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 72

KeyCite Yellow Flag - Negative Treatment

Disagreed With by In re Ryan, Bankr.D.Hawai'i, October 19, 2016

838 F.3d 1170

United States Court of Appeals,

Eleventh Circuit.

In re: David A. Failla, Donna N. Failla, Debtors.

David A. Failla and Donna N.

Failla, Plaintiffs–Appellants,

v.

Citibank, N.A., Defendant–Appellee.

No. 15-15626

|

Date Filed: 10/04/2016

Synopsis

Background: Residential mortgagee filed motion to compel

Chapter 7 debtors to surrender mortgaged property pursuant

to their filed statement of intention. The United States

Bankruptcy Court for the Southern District of Florida, Paul G.

Hyman, Jr., Chief Judge, 529 B.R. 786, granted motion, and

debtors appealed. The District Court, Kenneth A. Marra, J.,

542 B.R. 606, affirmed. Debtors appealed.

Holdings: The Court of Appeals, William Pryor, Circuit

Judge, held that:

[1] debtors who file a statement of intent to surrenderthe

property that collateralizes secured debt must perform that

intent by surrendering the property both to trustee and to

creditor;

[2] to “surrender” real property securing

residentialmortgage debt, in accordance with their stated

intent, Chapter 7 debtors had to drop their opposition to state

court foreclosure action;

[3] bankruptcy judge had authority to remedy

debtors'abuse of bankruptcy process by directing debtors to

withdraw their affirmative defenses and dismiss their

counterclaim in state court foreclosure action.

Affirmed.

*1173 Appeal from the United States District Court for the

Southern District of Florida, D.C. Docket No. 9:15– cv–

80328–KAM, Bkcy No. 9:11–bkc–34324–PGH

Attorneys and Law Firms

Peter David Ticktin, Ticktin Law Group, PA,

DEERFIELD BEACH, FL, Michael E. Zapin, Law Offices

of Michael E. Zapin, BOCA RATON, FL, for Plaintiffs–

Appellants.

John Robert Chiles, Burr & Forman, LLP, FORT

LAUDERDALE, FL, Jonathan Michael Sykes, Burr &

Forman, LLP, ORLANDO, FL, for Defendant–

Appellee.

Before MARCUS and WILLIAM PRYOR, Circuit

Judges, and LAWSON,* District Judge.

Opinion

WILLIAM PRYOR, Circuit Judge:

This appeal requires us to decide whether a person who

agrees to “surrender” his house in bankruptcy may oppose a

foreclosure action in state court. David and Donna Failla

filed for bankruptcy in 2011 and agreed that they would

surrender their house to discharge their mortgage debt. But

the Faillas continued to oppose a foreclosure proceeding in

state court. Citibank then filed a motion to compel surrender

in the bankruptcy court and argued that the Faillas had

breached their duty to surrender the property. The

bankruptcy court granted the motion, and the district court

affirmed. Because the word “surrender” in the bankruptcy

code, 11 U.S.C. § 521(a)(2), requires that debtors relinquish

their right to possess the property, we affirm.

I. BACKGROUND

David and Donna Failla own a house in Boca Raton, Florida.

They financed their purchase with a $500,000 mortgage. The

Faillas defaulted on that mortgage in 2009. Citibank, the

owner of the mortgage and the promissory note, filed a

foreclosure action in a Florida court. The Faillas are

opposing that foreclosure action.

In re Failla, 838 F.3d 1170 (2016)

63 Bankr.Ct.Dec. 46

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 73

The Faillas filed for bankruptcy in 2011. During the

bankruptcy proceedings, the Faillas admitted that they own

the house, that the house is collateral for the mortgage, that

the mortgage is valid, and that the balance of the mortgage

exceeds the value of the house. They also filed a statement

of intention, 11 U.S.C. § 521(a)(2), to surrender the house.

Because the house had a negative value, the trustee

“abandoned” it back to the Faillas, 11 U.S.C. § 554. The

Faillas continue to live in the house while they contest the

foreclosure action.

Citibank filed a motion to compel surrender in the

bankruptcy court. Citibank argued that the Faillas'

opposition to the foreclosure action contradicted their

statement *1174 of intention to surrender the house. The

Faillas argued that their opposition to the foreclosure action

is not inconsistent with surrendering the house.

The bankruptcy court granted Citibank's motion to compel

surrender and ordered the Faillas to stop opposing the

foreclosure action. See In re Failla, 529 B.R. 786, 793

(Bankr. S.D. Fla. 2014). The bankruptcy court explained

that if the Faillas do not comply with its order, it may “enter

an order vacating [their] discharge.” Id. The district court

affirmed on appeal. See Failla v. Citibank, N.A., 542 B.R.

606, 612 (S.D. Fla. 2015).

The Faillas now appeal to this Court. After the parties filed

their briefs, Citibank filed a motion to strike portions of the

Faillas' briefing that were raised for the first time on appeal.

The disputed sections argue that the only remedy available

to the bankruptcy court was lifting the automatic stay for

Citibank, which would allow Citibank to foreclose on the

house in the ordinary course. This Court ruled that the

motion to strike should be carried with the case.

II. STANDARD OF REVIEW

[1] [2] “Because the district court functions as an appellate

court in reviewing bankruptcy court decisions, this court is the

second appellate court to review bankruptcy court cases.” In

re Glados, Inc., 83 F.3d 1360, 1362 (11th Cir. 1996). We

“assess the bankruptcy court's judgment anew, employing the

same standard of review the district court itself used.” In re

Globe Mfg. Corp., 567 F.3d 1291, 1296 (11th Cir. 2009).

“Thus, we review the bankruptcy court's factual findings for

clear error, and its legal conclusions de novo.” Id.

III. DISCUSSION

We divide our discussion in two parts. First, we explain that

section 521(a)(2) prevents debtors who surrender their

property from opposing a foreclosure action in state court.

Second, we explain that the bankruptcy court had the

authority to order the Faillas to stop opposing their

foreclosure action.

A. Debtors Who Surrender Their Property in Bankruptcy

May Not Oppose a Foreclosure Action in State Court.

[3] Section 521(a)(2) states a bankruptcy debtor's

responsibilities when his schedule of assets and liabilities

includes mortgaged property:

(a) The debtor shall ...

(2) if an individual debtor's schedule of assets and

liabilities includes debts which are secured by property

of the estate—

(A) within thirty days after the date of the

filing of apetition under chapter 7 of this title or on

or before the date of the meeting of creditors,

whichever is earlier, or within such additional time

as the court, for cause, within such period fixes, file

with the clerk a statement of his intention with

respect to the retention or surrender of such property

and, if applicable, specifying that such property is

claimed as exempt, that the debtor intends to redeem

such property, or that the debtor intends to reaffirm

debts secured by such property; and

(B) within 30 days after the first date set for

themeeting of creditors under section 341(a), or

within such additional time as the court, for cause,

within such 30-day period fixes, perform his

intention with respect to such property, as specified

*1175 by subparagraph (A) of this paragraph;

except that nothing in subparagraphs (A) and (B) of this

paragraph shall alter the debtor's or the trustee's rights

with regard to such property under this title, except as

provided in section 362(h).

11 U.S.C. § 521(a)(2). Subsection (A) requires the debtor to

file a statement of intention about what he plans to do with the

collateral for his debts. See Fed. R. Bankr. P. 1007(b)(2). The

In re Failla, 838 F.3d 1170 (2016)

63 Bankr.Ct.Dec. 46

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 74

statement of intention must declare one of four things: the

collateral is exempt, the debtor will surrender the collateral,

the debtor will redeem the collateral, or the debtor will

reaffirm the debt. See In re Taylor, 3 F.3d 1512, 1516 (11th

Cir. 1993). After the debtor issues his statement of intention,

subsection (B) requires him to perform the option he declared.

Id.

The question here is whether the Faillas satisfied their

declared intention to surrender their house under section

521(a)(2)(B). To answer that question, we must decide to

whom debtors must surrender their property and whether

surrender requires debtors to acquiesce to a creditor's

foreclosure action. The district court and the bankruptcy

court correctly concluded that the Faillas violated section

521(a)(2) by opposing Citibank's foreclosure action after

filing a statement of intention to surrender their house.

[4] We agree with both the district court and the

bankruptcy court that section 521(a)(2) requires debtors who

file a statement of intent to surrender to surrender the property

both to the trustee and to the creditor. Even if the trustee

abandons the property, the debtors' duty to surrender the

property to the creditor remains. The text and the context of

the statute compel this interpretation.

[5] Reading “surrender” to refer only to the trustee of the

bankruptcy estate renders section 521(a)(2) superfluous with

section 521(a)(4). Under the surplusage canon, no provision

“should needlessly be given an interpretation that causes it to

duplicate another provision.” Antonin Scalia & Bryan A.

Garner, Reading Law 174 (2012). See also Inhabitants of

Montclair Twp. v. Ramsdell, 107 U.S. 147, 152, 2 S.Ct. 391,

27 L.Ed. 431 (1883) (“It is the duty of the court to give effect,

if possible, to every clause and word of a statute....”). Section

521(a)(4) states that “[t]he debtor shall ... surrender to the

trustee all property of the estate.” 11 U.S.C. § 521(a)(4).

Because section 521(a)(4) already requires the debtor to

surrender all of his property to the trustee so the trustee can

decide, for example, whether to liquidate it or abandon it,

section 521(a)(2) must refer to some other kind of surrender.

When the bankruptcy code means a debtor must surrender

his property either to the creditor or the trustee, it says so. On

the one hand, section 1325(a)(5)(C) states that “the debtor

surrenders the property securing such claim to such holder,”

which clearly contemplates surrender to a creditor. 11 U.S.C.

§ 1325(a)(5)(C) (emphasis added). Congress did not use that

language here. On the other hand, section 521(a)(4) states

that “[t]he debtor shall ... surrender to the trustee all property

of the estate,” which clearly contemplates surrender to the

trustee. Id. § 521(a) (4) (emphasis added). Congress did not

use that language either.

[6] What Congress did say in section 521(a)(2) is

“surrender,” without specifying to whom the surrender is

made. But the lack of an object makes sense because a debtor

who decides to surrender his collateral must surrender it to

both the trustee and the creditor. The debtor first surrenders

*1176 it to the trustee, id. § 521(a)(4), who decides whether

to liquidate it, id. § 704(a)(1), or abandon it, id. § 554. If the

trustee abandons it, then the debtor surrenders it to the

creditor, id. § 521(a)(2).

[7] The word “surrender” in section 521(a)(2) is used

with reference to the words “redeem” and “reaffirm,” and

those words plainly refer to creditors. A debtor “redeems”

property by paying the creditor a particular amount, and he

“reaffirms” a debt by renegotiating it with the creditor. See

Taylor, 3 F.3d at 1514 n.2; see also 11 U.S.C. §§ 524(c), 722.

Because “[c]ontext is a primary determinant of meaning,”

Scalia & Garner, supra, at 167, the word “surrender” likely

refers to a relationship with a creditor as well. We said as

much in dicta in Taylor. See 3 F.3d at 1514 n.2 (“Surrender

provides that a debtor surrender the collateral to the lienholder

who then disposes of it pursuant to the requirements of state

law.” (emphasis added)).

Other provisions of the bankruptcy code that provide a

remedy to creditors when a debtor violates section 521(a)(2)

suggest that the word “surrender” does not refer exclusively

to the trustee. The Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005, Pub. L. No. 109–8, § 305,

119 Stat. 23, added two sections to the bankruptcy code that

provide remedies for creditors with respect to personal

property. 11 U.S.C. §§ 362(h), 521(d). Section 362(h)

punishes a debtor who violates section 521(a)(2) by lifting

the automatic stay, which allows the creditor to pursue other

remedies against the debtor immediately. 11 U.S.C. §

362(h)(1). Section 362(h) allows the trustee of the

bankruptcy estate to override this remedy, but only if the

trustee moves the court to “order[ ] appropriate adequate

protection of the creditor's interest.” Id. § 362(h)(2). And

section 521(d) allows a creditor to consider the debtor in

default because he declared bankruptcy if the debtor violates

section 521(a) (2). See id. § 521(d).

In re Failla, 838 F.3d 1170 (2016)

63 Bankr.Ct.Dec. 46

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 75

That these remedies apply only to personal property is

irrelevant. Section 521(a)(2) uses the generic word “property”

and draws no distinction between real and personal property.

Congress provided additional remedies for creditors secured

by personal property, but the contextual clue remains the

same. These remedies for creditors reflect an obvious point

about section 521(a)(2): it is a provision that affects and

protects the rights of creditors.

describes other legal relationships like “reaffirmation” and

“redemption.” This definition is in line with existing

authorities. See In re Pratt, 462 F.3d 14, 18–19 (1st Cir.

2006) (“[T]he most sensible connotation of ‘surrender’ in the

... context [of section 521(a)(2)] is that the debtor agreed to

make the collateral available to the secured creditor—viz., to

cede his possessory rights in the collateral....”); In re White,

487 F.3d 199, 205 (4th Cir. 2007) (“[T]he word ‘surrender’

[in section 1325(a)(5) (C)] means the relinquishment of all

rights in property, including the possessory right, even if

such relinquishment does not always require immediate

physical delivery of

bankruptcy court and the district court that “surrender” requires

debtors to drop their opposition to a foreclosure action. The

bankruptcy code does not define the word “surrender,” so we

give it its “contextually appropriate ordinary meaning.” Scalia

& Garner, supra, at 70; see also In re Piazza, 719 F.3d 1253,

1261 (11th Cir. 2013) (applying this canon to the bankruptcy

code). One meaning of “surrender” is “to give or deliver up

possession of (anything) upon compulsion or demand.”

Surrender, Webster's New International Dictionary 2539 (2d

ed. 1961); see also Surrender, Oxford English Dictionary

(online ed.) (“To give up (something) out of one's own

possession or power into that of another who has or asserts a

claim to it.”) (all Internet materials as visited Sept. 15, 2016,

and available in Clerk of Court's case file). But this meaning is

not contextually appropriate. When the bankruptcy code means

“physically turn over property,” it uses the word “deliver”

instead of “surrender.” See, e.g., 11 U.S.C. §§ 542(a),

543(b)(1); see also id. § 727(d)(2) (using the phrase “deliver or

surrender,” which suggests they are different). The

presumption of consistent usage instructs that “[a] word or

phrase is presumed to bear the same meaning throughout a text”

and that “a material variation in terms suggests a variation in

meaning.” *1177 Scalia & Garner, supra, at 170; see also

Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78

L.Ed.2d 17 (1983).

Another meaning of “surrender” is “[t]he giving up of a right

or claim.” Surrender, Black's Law Dictionary (10th ed. 2014);

see also Surrender, Webster's New International Dictionary

2539 (“To give up completely; to resign; relinquish; as, to

surrender a right, privilege, or advantage.”). This meaning

describes a legal relationship, as opposed to a physical action,

which makes sense in the context of section 521(a)(2)—a

provision that § 1325.06[4] (16th ed.) (“Surrender in th[e]

context [of section 1325(a)(5)(C)] means simply the

relinquishment of any rights in the collateral.”).

[13] Because “surrender” means “giving up of a right or

claim,” debtors who surrender their property can no longer

contest a foreclosure action. When the debtors act to preserve

their rights to the property “by way of adversarial litigation,”

they have not “relinquish[ed] ... all of their legal rights to the

property, including the rights to possess and use it.” White, 487

F.3d at 206 (emphasis omitted). The “retention of property that

is legally insulated from collection is inconsistent with

surrender.” Id. at 207. Ordinarily, when debtors surrender

property to a creditor, the creditor obtains it immediately and is

free to sell it. Assocs. Commercial Corp. v. Rash, 520 U.S. 953,

962, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997). Granted, a

creditor must take some legal action to recover real property—

namely, a foreclosure action. See Fla. Stat. Ann. §§ 702.01–

702.11. Foreclosure proceedings ensure that debtors do not

have to determine unilaterally issues of priority if there are

multiple creditors or surplus if the value of the property

exceeds the liability. See Plummer, 513 B.R. at 144. Debtors

who surrender property must get out of the creditor's way. “[I]n

order for surrender to mean anything in the context of §

521(a)(2), it has to mean that ... debtor[s] ... must not contest

the efforts of the lienholder to foreclose on the property.” In re

Elowitz, 550 B.R. 603, 607 (Bankr. S.D. Fla. 2016). Otherwise,

debtors could obtain a discharge in bankruptcy based, in part,

on their sworn statement to surrender and “enjoy possession of

the collateral indefinitely while hindering and prolonging the

state court process.” Id. (quoting In re Metzler, 530 B.R. 894,

900 (Bankr. M.D. Fla. 2015)).

[14] The hanging paragraph in section 521(a)(2) also does

not give the debtor the right to oppose a foreclosure action. The

hanging paragraph states that “nothing in subparagraphs (A)

and (B) of this paragraph shall alter the debtor's or the trustee's

rights with regard to such property under this title, except as

provided in section 362(h).” 11 U.S.C. § 521(a)(2). The key

words for purposes of this dispute are “under this title.” The

hanging paragraph means that section 521(a)(2) does not affect

the property to another.”); In re Plummer, 513 B.R. 135, [8] [9] [10] [11]

[12] We also agree with th143–44e (Bankr. M.D. Fla. 2014); 8 Collier on Bankruptcy

In re Failla, 838 F.3d 1170 (2016)

63 Bankr.Ct.Dec. 46

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 76

the debtor's or the trustee's bankrupt *1178 cy rights. Section

521(a) (2) does not affect the trustee's bankruptcy rights

because a debtor must first surrender property to the trustee—

who liquidates it or abandons it—before surrendering it to the

creditor. See id. § 521(a)(4). And section 521(a)(2) does not

affect the debtor's bankruptcy rights because a creditor is still

subject to the automatic stay and cannot foreclose on the

property until the trustee decides to abandon it. The hanging

paragraph spells out an order of operations. It does not mean

that a debtor who declares he will surrender his property can

then undo his surrender after the bankruptcy is over and the

creditor initiates a foreclosure action.

[15] Concerns about fairness are not in tension with this

outcome. During the bankruptcy proceedings, the Faillas

declared that they would surrender the property, that the

mortgage is valid, and that Citibank has the right to foreclose.

Compelling them to stop opposing the foreclosure action

requires them to honor that declaration. The Faillas may not say

one thing in bankruptcy court and another thing in state court:

The concern here is that the Debtor is

making a mockery of the legal system

by taking inconsistent positions. In an

effort to obtain her chapter 7 discharge,

the Debtor swears—under the penalty

of perjury—an intention to “surrender”

her property. In other words, the

Debtor is representing to the Court that

she will make her property available to

the Bank by refraining from taking any

overt act that impedes the Bank's

ability to foreclose its interest in the

property. Yet, once she receives her

discharge, the Debtor in fact impedes

the Bank's ability to

foreclose its mortgage.

In re Guerra, 544 B.R. 707, 710 (Bankr. M.D. Fla. 2016).

In bankruptcy, as in life, a person does not get to have his

cake and eat it too.

Section 521(a)(2) requires a debtor to either redeem,

reaffirm, or surrender collateral to the creditor. Having

chosen to surrender, the debtor must drop his opposition to

the creditor's subsequent foreclosure action. Because the

Faillas filed a statement of intention to surrender their

house, they cannot contest the foreclosure action.

B. The Bankruptcy Court Had the Authority to Order the

Faillas to Stop Opposing the State Foreclosure Action.

For the first time on appeal, the Faillas argue that even if

they breached their duty to surrender under section 521(a)

(2), the only remedy available to the bankruptcy court was

to lift the automatic stay for Citibank, which would allow

Citibank to foreclose on the house in the ordinary course.

Citibank asked us to strike this portion of the Faillas' briefs

in their May 25 motion to strike, which was carried with the

case. The Faillas concede that they did not raise this

argument below. They ask us to excuse their forfeiture

because their argument is an important, unsettled question

of law. This argument is not forfeited, but fails on the

merits, rendering Citibank's motion to strike moot.

[16] The Faillas' new argument falls within exceptions to

the general rule that a circuit court will not consider an issue

not raised in the district court. See Access Now, Inc. v. Sw.

Airlines Co., 385 F.3d 1324, 1332 (11th Cir. 2004) (quoting

Wright v. Hanna Steel Corp., 270 F.3d 1336, 1342 (11th Cir.

2001)). It is a “pure question of law” and its “proper resolution

is beyond any doubt.” Id. Moreover, the Faillas' argument is

intertwined with their other arguments. For instance, part of

the reason the Faillas contend the bankruptcy court cannot

order them to stop opposing the foreclosure action is that

section 521(a)(2) *1179 is merely a “notice statute” that does

not affect substantive property rights.

[17] [18] [19] On the merits, however, bankruptcy courts

are not limited to lifting the automatic stay. Bankruptcy courts

have broad powers to remedy violations of the mandatory

duties section 521(a)(2) imposes on debtors. See Taylor, 3

F.3d at 1516. Section 105(a) states that bankruptcy courts can

“issue any order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title,” 11 U.S.C.

§ 105(a), which includes section 521(a)(2). Bankruptcy

judges also have “broad authority ... to take any action that is

necessary or appropriate ‘to prevent an abuse of process.’ ”

Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375, 127

S.Ct. 1105, 166 L.Ed.2d 956 (2007) (quoting 11 U.S.C. §

105(a)). A debtor who promises to surrender property in

bankruptcy court and then, once his debts are discharged,

breaks that promise by opposing a foreclosure action in state

court has abused the bankruptcy process. See Guerra, 544

B.R. at 710.

In re Failla, 838 F.3d 1170 (2016)

63 Bankr.Ct.Dec. 46

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 77

[20] If a bankruptcy court could only lift the automatic stay,

then debtors could violate section 521(a)(2) with impunity. The

automatic stay is always lifted at the end of the bankruptcy

proceedings, see 2 Bankruptcy Law Manual § 10:7 (5th ed.), so

this remedy does nothing to punish debtors who lie to the

bankruptcy court about their intent to surrender property. While

a creditor may be able to invoke the doctrine of judicial

estoppel in state court to force debtors to keep a promise made

in bankruptcy court, its availability does not affect the statutory

authority of

Footnotes

bankruptcy judges to remedy abuses that occur in their

courts. And there is nothing strange about bankruptcy

judges entering orders that command a party to do

something in a nonbankruptcy proceeding. Bankruptcy

courts “regularly exercise jurisdiction to tell parties what

they can or cannot do in a non-bankruptcy forum.” In re

Lapeyre, 544 B.R. 719, 723 (Bankr. S.D. Fla. 2016). Just as

the bankruptcy court may “order [ ] creditors who violate

the automatic stay to take corrective action in the

nonbankruptcy litigation,” the bankruptcy court may “order

the Debtors to withdraw their affirmative defenses and

dismiss their counterclaim in the Foreclosure Case.” Id. The

bankruptcy court had the authority to compel the Faillas to

fulfill their mandatory duty under section 521(a)

(2) not to oppose the foreclosure action in state court.

IV. CONCLUSION

We AFFIRM the order compelling the Faillas to surrender

their home to Citibank. We DENY AS MOOT the motion

to strike.

All Citations

838 F.3d 1170, 63 Bankr.Ct.Dec. 46

* Honorable Roger H. Lawson, Jr., United States District Judge for the Middle District of Georgia, sitting by designation.

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.

In re Stanton, --- B.R. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 78

2016 WL 6299750

Only the Westlaw citation is currently available.

United States Bankruptcy Court,

M.D. Florida,

Tampa Division.

In re: John Dargon Stanton, III, Debtor.

Case No. 8:11-bk-22675

|

Signed October 26, 2016.

Attorneys and Law Firms

Herbert R. Donica, Esq., Donica Law Firm P.A., 106 South

Tampania Avenue, # 250, Tampa, FL 33609, Counsel for the

Chapter 7 Trustee

Benjamin E. Lambers, Esq., Timberlake Annex, 501 E. Polk

Street, Suite 1200, Tampa, FL 33602, Trial Attorney for

United States Trustee—Region 21

MEMORANDUM OPINION ON

FEE APPLICATION

Michael G. Williamson, Chief United States Bankruptcy

Judge

*1 In Baker Botts v. ASARCO, the United States Supreme

Court held that Bankruptcy Code § 330(a) does not authorize

attorney's fees for work performed defending a fee

application because that work is not performed for the estate.1

Here, the U.S. Trustee claims Baker Botts precludes a

professional employed under § 327 from recovering fees for

work supplementing his fee application after the U.S. Trustee

objected to it as deficient. Because the challenged fees were

for work more akin to the preparation—rather than defense—

of a fee application, the Court concludes the work was in

service of the bankruptcy estate and therefore recoverable

under § 330(a).

Background

The Chapter 7 Trustee employed Herb Donica (of the Donica

Law Firm) as his attorney2 and Ed Rice (of Glenn

Rasmussen, P.A.) as special counsel.3 As Trustee's counsel,

Donica and Glenn Rasmussen pursued fraudulent transfer

claims against the Debtor's ex-wife.4

Donica and Glenn

Rasmussen ultimately settled those claims on the estate's

behalf. Under the settlement, the bankruptcy estate recovered

$3.5 million in proceeds from the sale of certain stock, as well

as real property in

California that eventually sold for nearly $3 million.5

After the Court orally approved the proposed settlement,

Donica filed his initial fee application.6

In his first interim fee application, Donica sought

$748,875 in fees.7 Donica's time, which totaled nearly 2,000

hours, was divided into two categories: time spent in the main

bankruptcy case and time spent in the fraudulent transfer

proceeding.8According to his fee application, Donica spent

more than 910 hours in the main case (for a total of $335,550

in fees) and more than 1,085 hours in the fraudulent transfer

proceeding (for a total of $413,325 in fees).

Donica's fee application contained all the information

required for a chapter 7 fee application under Local Rule

2016-1. The fee application included the name of the

individuals who performed the work,9 the amount of time

expended for each item of work,10

the hourly rate

requested,11

the date of employment,12

a discussion of the

criteria relevant in determining compensation to be

awarded,13

a detail of the reimbursable costs,14

and a

verification stating the fees and costs are reasonable for the

work performed and that the application is true and correct.15

The U.S. Trustee objected to Donica's first interim fee

application.16

The U.S. Trustee asserted three grounds for his

objection to Donica's fee application: (1) Donica failed to

provide any meaningful breakdown on how he spent the 900

hours in the main case; (2) Donica failed to describe how he

divided his labor with Glenn Rasmussen in the fraudulent

transfer proceeding or demonstrate that the lawyers did not

unnecessarily duplicate services; and (3) Donica failed to

provide any meaningful narrative regarding the results

obtained from his services.17

In effect, the U.S. Trustee

insisted on the level of detail required for a fee application in

a chapter 11 case.18

*2 In response to the U.S. Trustee's objection, Donica opted

to supplement his initial fee application.19

Although he

believed the time records attached to his initial application

were self-explanatory, Donica filed a detailed 18-page

supplement that addressed the U.S. Trustee's objections.20

In

In re Stanton, --- B.R. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 79

particular, Donica's supplement to his fee application

provided a breakdown of the number of hours spent on eight

different matters, including five adversary proceedings; a

narrative for each of those eight matters; and a description of

how labor was divided between Donica and Glenn

Rasmussen on the fraudulent transfer proceeding.21

At a hearing on Donica's fee application, the U.S. Trustee

conceded the fee supplements largely resolved the

“informational” objections (i.e., failure to provide a

breakdown, description of division of labor, and meaningful

narrative), although there apparently was still some dispute

over the possible duplication of services. So the Court

approved an interim distribution on the application, but

ordered that $75,000 be held back pending further ruling on

the duplication issue.22

After a further hearing, the Court

approved Donica's fee application in its entirety and ruled that

Donica was entitled to the $75,000 originally held back.23

When Donica filed a second interim fee application seeking

$33,840 for time spent on his initial fee application

(among other fees),24

the U.S. Trustee objected that

$27,520 of the fees were unrecoverable under the Supreme

Court's Baker Botts decision.25

In his objection, the U.S.

Trustee advocates a bright-line rule for determining whether

fees are recoverable under Baker Botts: if time is spent on a

fee application after an objection has been lodged, then that

time is necessarily for work defending the fee application and

therefore unrecoverable under §

330(a).26

Here, Donica incurred $27,520 in fees after the U.S.

Trustee objected to his fee application. The U.S. Trustee,

however, reads Baker Botts too broadly.

Conclusions of Law

In Baker Botts, the Supreme Court considered whether time

spent defending a fee application was recoverable under

Bankruptcy Code § 330(a).27

Ordinarily, under the American

Rule, “[e]ach litigant pays his own attorney's fees, win or

lose, unless a statute or contract provides otherwise.”28

The

question before the Court in Baker Botts was whether

Congress intended to depart from the American Rule in

enacting § 330(a), which provides that a bankruptcy court

may award a professional employed under § 327 “reasonable

compensation for actual, necessary services.”29

The Court concluded that § 330's text “neither specifically or

explicitly authorizes courts to shift the costs of adversarial

litigation from one side to the other.”30

Section 330(a)

authorizes reasonable compensation only for “actual,

necessary services rendered,” and the “word

‘services' refers to ‘labor performed for another.’ ”31

Justice

Thomas, writing for the majority, observed that use of the

term “services” imposed a significant qualification on a

court's ability to award fees under § 330(a): only “work done

in service of the estate administrator” is compensable.32

*3 In rejecting the Government's argument that time spent

defending a fee application must be compensable because the

time spent preparing one is, Justice Thomas explained that a

professional's preparation of a fee application is, in fact, a

service to the estate.33

A detailed, itemized bill allows the

trustee to understand the fees incurred. A professional's

defense of a fee application, by contrast, provides no similar

benefit to the estate.

To illustrate the difference between preparing a fee

application and defending one, Justice Thomas offers an

analogy:

By way of analogy, it would be natural

to describe a car mechanic's

preparation of an itemized bill as part

of his “services” to the customer

because it allows a customer to

understand—and, if necessary,

dispute—his expenses. But it would

be less natural to describe a

subsequent court battle over the bill as

part of the “services rendered” to the

customer.34

The touchstone, then, for determining whether fees are

recoverable under Baker Botts is not when the fees were

incurred (i.e., before or after an objection) but rather whether

they were incurred in service to the estate.

Here, the record reflects that the $27,520 in fees Donica

incurred after the U.S. Trustee objected to his first fee

application were for work supplementing his initial fee

application. In particular, Donica filed an 18page supplement

to his fee application35

and a 21page response to the U.S.

Trustee's objection.36

The supplement and response provided

a breakdown of Donica's fees, a description of how labor was

In re Stanton, --- B.R. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 80

divided with Glenn Rasmussen, and a narrative of the results

achieved —information the U.S. Trustee says should have

been in the initial fee applications. To use Justice Thomas'

analogy, Donica's work supplementing his fee application

and responding to the U.S. Trustee's objection was akin to the

mechanic's preparation of an itemized bill as part of his

“services” to the customer.

Had the U.S. Trustee simply objected to Donica's fees

because they were unnecessarily duplicative, the outcome

might be different. A fight over whether fees were

unnecessarily duplicative is more akin to time spent on a

subsequent court battle over the mechanic's bill, which would

not properly be understood as part of his services. Here, the

parties were not fighting over the amount of the bill but

whether it was detailed enough.

Although Donica's fees were incurred after this case was

converted to chapter 7, the U.S. Trustee was asking for the

type of detail required in a chapter 11 case. Under Local Rule

2016-1, fee applications filed by chapter 7 professionals need

only contain the name of the person doing the work, the

amount of time expended for each item of work, the requested

hourly rate, the date of employment, a discussion of the

criteria relevant for determining compensation, a detail of

reimbursable costs, and a verification that the fees and costs

are reasonable and that the application is true and accurate.37

The U.S. Trustee, however, insisted on a detailed description

of the time worked; that the time be itemized by project

category; and that the application contain a narrative of the

services provided and the results obtained—items only

required for chapter 11 cases.38

Given the complexity of this

case and the amount of fees requested (collectively, $1.7

million in the initial fee applications), the Court understands

why the U.S. Trustee insisted on the level of disclosure

required in a chapter 11 case, even if not required.

*4 But the proper way to insist on that level of detail would

have been for the U.S. Trustee to ask that the order approving

Donica's retention require him to comply with Local Rule

2016-1's requirements for fee applications in chapter 11 cases

or to move to compel Donica to do so, either of which the

Court would have readily granted. Had the U.S. Trustee done

so, and had Donica provided the level of detail in his initial

fee application that he did in his supplement, there is no

question he would have been compensated for it. The only

question would have been whether the fees were

commensurate with the level and skill reasonably required to

prepare the application.39

And the U.S. Trustee never

complained that the time spent on the supplement and

response to his objection was unreasonable. The fact that the

U.S. Trustee sought to impose a heightened level of

disclosure through an objection to Donica's fee application

does not change the nature of the work Donica performed and

whether that work should be compensable under § 330(a).

The additional disclosure Donica provided benefitted the

administration of the estate. Among other things, it allowed

the Chapter 7 Trustee, U.S. Trustee, and other parties in

interest to understand the work Donica performed and, if

necessary, the ability to dispute his fees. Under Baker Botts,

it is the nature of the work —not when it was performed—

that determines whether it is compensable. Because Donica's

$27,520 in fees was for work in service of the estate, they are

recoverable as reasonable compensation for services under §

330(a).

The U.S. Trustee worries this ruling will lead to a de facto

two-step fee application process. According to the U.S.

Trustee, § 327 professionals will be encouraged to file “bare-

bones” fee applications. Only when their fee applications are

challenged will professionals supplement their applications

to provide the required level of detail. The U.S. Trustee says

there is no disincentive to discourage professionals from

filing barebones applications since, under this Court's ruling,

they will be compensated for supplementing them. While

understandable, the U.S. Trustee's concerns are misplaced.

For starters, the Court's ruling is not likely to encourage bare-

bones fee applications. As a practical matter, the level of

detail required in chapter 7 cases is not particularly onerous,

and most chapter 7 fee applications are for relatively modest

sums of money. To be sure, this Court's ruling applies to

chapter 11 fee applications—and Local Rule 2016-1 does

impose more onerous requirements in chapter 11 cases. But

the U.S. Trustee overlooks an important fact: professionals

are compensated for their time preparing fee applications.

Because they are compensated for their time, there is no

reason to believe professionals will file bare-bones fee

applications as a matter of course.

Moreover, while the Court certainly is not encouraging a two-

step fee application process, the ultimate harm is minimal.

Assume it should take a professional ten hours to properly

prepare a fee application. Under § 330(a), the professional is

entitled to be compensated for all ten hours. What if the

professional only spends two hours on the fee application

initially, but then spends an additional eight hours

In re Stanton, --- B.R. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 81

supplementing it after an objection by the U.S. Trustee?

Under this Court's ruling, the professional would be

compensated for a total of ten hours—the same as if the

professional had properly prepared the fee application in the

first place. So even if the Court's ruling results in the

occasional two-step fee application process, which the Court

certainly does not encourage, the debtor and the estate are no

worse off.

Finally, the U.S. Trustee's proposed bright-line rule—i.e., any

fees incurred supplementing a fee application after it has been

objected to are unrecoverable—would cause more problems

than the minor ones it solves. Specifically, the U.S. Trustee's

bright-line rule is more likely to require overdisclosure than

it is to prevent underdisclosure since

Footnotes

professionals will know they will not be compensated for any

work once someone lodges an objection to their fee

application. The harm from the overdisclosure caused by the

U.S. Trustee's bright-line rule is primarily twofold: (1)

because professionals are entitled to compensation for

preparing fee applications, overdisclosure will increase the

cost of estate administration; and (2) to the extent the

additional time professionals spend on disclosure is

unreasonable, the Court and parties will face increased time

and expense litigating over the reasonableness of fees. Those

two problems outweigh any benefit from the U.S. Trustee's

proposed bright-line rule.

Conclusion

*5 The takeaway from the Supreme Court's decision in

Baker Botts is clear: it is the nature of the work— not when it

is performed—that determines whether it is compensable.

Only work done in service of the estate administrator is

compensable. Because supplementing the detail provided in

his initial fee application benefitted the estate and was

necessary for the administration of the case, Donica is entitled

to recover $27,520 in fees incurred performing that work. The

Court will approve Donica's second interim fee application in

its entirety, including the $27,520 in fees supplementing his

initial fee application, by separate order.

All Citations

--- B.R. ----, 2016 WL 6299750

1 ––– U.S. ––––, 135 S.Ct. 2158, 2163, 192 L.Ed.2d 208 (2015).

2 Doc. Nos. 68 & 70.

3 Doc. Nos. 208 & 231.

4 Hyman v. Stanton, et al., Adv. No. 8:13–ap–00577–MGW.

5 Doc. No. 554.

6 Doc. Nos. 564. Glenn Rasmussen also filed a fee application. Doc. No. 565. That fee application will be dealt with by a

separate order.

7 Doc. No. 564.

8 Id. at 3.

9 Id.

10 Id. at Ex. B. Donica's fee application attached 158 pages of billing statements detailing the work performed on the case.

Id.

11 Id. at 3–4.

12 Id. at 2–3.

13 Id. at 5–9.

14 Id. at Ex. C.

15 Id.

16 Doc. No. 588.

17 Doc. No. 588 at 1–2. 18 Local Rule 2016-1. Local Rule 2016-1 requires chapter 11 professionals to, among other things,

itemize their time by project categories and provide a narrative of the types of services performed, the necessity for

performing the services, the results obtained, and the benefit to the estate.

In re Stanton, --- B.R. ---- (2016)

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 82

19 Doc. Nos. 593.

20 Id.

21 Id. at 3–18.

22 Doc. No. 609 at ¶¶ 1 & 2.

23 Doc. No. 624. 24 Doc. No. 685.

25 Doc. No. 706. The Department of Justice, on the Internal Revenue Service's behalf, joined in the U.S. Trustee's

objection. Doc. No. 721.

26 Doc. No. 706. The IRS contends it is difficult if not impossible to separate time spent defending a fee application from

time spent supplementing one. Doc. No. 721.

27 135 S.Ct. at 2162–63.

28 Id. at 2164.

29 11 U.S.C. § 330(a).

30 Baker Botts, 135 S.Ct. at 2165.

31 Id. (quoting Webster's New International Dictionary 2288 (def. 4) (2d ed. 1934)). Although not specifically discussed by

the Court, only “services” that are reasonably likely to benefit the debtor's estate or that are necessary to the

administration of the case are compensable. 11 U.S.C. § 330(a)(4).

32 Baker Botts, 135 S.Ct. at 2165.

33 Id. at 2167.

34 Id.

35 Doc. No. 593.

36 Doc. No. 621.

37 Local Rule 2016-1.

38 Id.

39 11 U.S.C. § 330(a)(6).

End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works.