Florida Bankruptcy Case Law Update

Florida Bankruptcy Case Law Update September 2013 Cases Susan Sharp, Michael Hooi, and Amanda Chazal Editors: Bradley M. Saxton and C. Andrew Roy Eleventh Circuit Opinions In re Feingold ---F.3d---, 2013 WL 5194272 (11th Cir. Sept. 17, 2013) Section/Rule/Keywords: 11 U.S.C. 362, 11 U.S.C. 523, automatic stay relief Summary: An attorney disciplinary board moved for stay relief to enforce its judgment against the chapter 7 debtor-attorney, who was disbarred in Pennsylvania. The district court reversed the bankruptcy court's denial of stay relief. The Eleventh Circuit affirmed and reversed in part. It concluded that the costs and expenses assessed against the chapter 7 debtor-attorney were a nondischargeable "fine, penalty or forfeiture" under section 523(a)(7) payable to and for the benefit of a governmental unit. It thus held that the debt was nondischargeable, but that the district court erred by ruling that a debt's dischargeability standing alone constituted cause sufficient for the bankruptcy court to grant stay relief under section 362(a). The Eleventh Circuit remanded the case to the bankruptcy court to determine whether, under the totality of the circumstances, the board was entitled to stay relief. In re NetBank, Inc. ---F.3d---, 2013 WL 4804325 (11th Cir. Sept. 10, 2013) Section/Rule/Keywords: 11 U.S.C. 541, property of the estate, tax refund, agency Summary: The liquidating trustee filed an adversary proceeding against the FDIC, seeking turnover of a tax refund for carryback loses. The trustee asserted that the refund belonged to the bankruptcy estate under the terms of a taxsharing agreement between the debtor and its subsidiaries. The FDIC counterclaimed that the refund belonged to the troubled bank. The district court affirmed the bankruptcy court's summary judgment declaring that the refund was property of the estate. In reversing the district court, the Eleventh Circuit, citing its

recent decision in In re BankUnited Fin. Corp. (see August 2013 cases), concluded that, as a matter of the Georgia state law governing the tax-sharing agreement, the parties to the agreement created an agency relationship, not a debtor-creditor relationship. Thus, the debtor held the refund as agent for the troubled bank and judgment was to be entered in the FDIC's favor. District Court Opinions Soler v. Yip 2013 WL 5446674 (S.D. Fla. Sept. 30, 2013) (Rosenbaum, J.) Section/Rule/Keywords: 11 U.S.C. 727, Fed. R. Bankr. P. 8001, 28 U.S.C. 1292, interlocutory appeal, jurisdiction Summary: The chapter 7 trustee filed an adversary proceeding to object to the debtor's discharge under section 727 one day after the court-imposed deadline. Finding that the trustee's error was excusable neglect, the bankruptcy court retroactively extended the deadline in its previous order, thus extending the time for the trustee to file an adversary proceeding. The debtor appealed. The district court declined to exercise appellate jurisdiction over the order since the order was not a final order, thus requiring the appellant to obtain leave from the district court to appeal a bankruptcy order under Rule 8001(b). The debtor did not meet his burden of establishing that interlocutory appeal of the order is proper. Cadle Co. of Connecticut, Inc. v. Benevento 2013 WL 5408527 (S.D. Fla. Sept. 25, 2013) (Marra, J.) Section/Rule/Keywords: 11 U.S.C. 727, clear error Summary: A judgment creditor objected to the debtor's discharge under section 727 alleging that the debtor had structured his business and personal financial affairs so that he could prevent the creditor from collecting under its judgment. The bankruptcy court resolved the objection to discharge in the debtor's favor. On appeal, the district court found no clear error in the bankruptcy court's finding, based on the testimony and documentary evidence, that the debtor retained no interest in the alleged diverted fruits of his labor.

Roberts-Dude v. JPMorgan Chase Bank, N.A., ---B.R.---, 2013 WL 5530049 (S.D. Fla. Sept. 25, 2013) (Rosenbaum, J.) Section/Rule/Keywords: 11 U.S.C. 506, strip off, tenants by the entireties Summary: On the chapter 13 petition date, the debtor-wife and her non-debtor husband owned property as tenants by the entireties. The debtor moved to strip off the junior mortgage lien on the property under section 506, alleging that the lien was wholly unsecured by any equity in the property. The bankruptcy court denied her motion, and the chapter 13 case was later converted to one under chapter 7. After concluding that the conversion did not moot the appeal, the district court affirmed on the merits. Applying Florida law, the district court concluded that the husband's failure to join in his wife's chapter 13 petition prevented her from stripping off the junior lien. DVI Receivables XIV, LLC v. Rosenberg ---B.R.---, 2013 WL 5353713 (S.D. Fla. Sept. 24, 2013) (Rosenbaum, J.) Section/Rule/Keywords: 11 U.S.C. 303, involuntary petition, attorney's fees Summary: The bankruptcy court dismissed the involuntary bankruptcy case initiated against a putative debtor. The putative debtor then sought an award for fees and costs under section 303(i) against the petitioning creditors, which the court awarded. In affirming the award, the district court followed the general principle that an appellate court greatly defers to a lower court's interpretation of its own local rules and concluded that the bankruptcy court did not abuse its discretion by considering the putative debtor's motion for fees and costs more than 21 days after dismissal, outside the time period specified by the local rule. The district court further found that the bankruptcy court had the authority to award fees against the petitioning creditors and the others for the time the putative debtor's attorney spent defending the dismissal on appeal and litigating the debtor's right to fees. Finally, the district court affirmed the $1.032 million award as reasonable.

In re Gonzalez 2013 WL 5308020 (S.D. Fla. Sept. 20, 2013) (Marra, J.) Section/Rule/Keywords: 11 U.S.C. 1327(a), contempt, domestic support obligation Summary: Post confirmation, the Florida Department of Revenue ( FDR ) sent collection letters to a debtor attempting to collect child support delinquencies. The child support delinquency claim was specifically dealt with under the confirmed plan. Therefore, since the debtor and creditors are bound by the terms of the confirmed plan, the bankruptcy court found that the FDR was in violation of the court s confirmation order. On appeal, the district court affirmed finding that it was well within the bankruptcy court s discretion to hold the FDR in contempt and direct the FDR to pay the debtor s attorney s fees. In re Armenta 2013 WL 4786584 (S.D. Fla. Sept. 6, 2013) (Cohn, J.) Section/Rule/Keywords: 28 U.S.C. 157(d), 11 U.S.C. 541, withdrawal of the reference, jury trial Summary: Chapter 7 trustee filed an adversary proceeding against defendant in possession of bearer shares for turnover of the shares and for a determination of the ownership of equity associated with the shares. Defendant filed a motion to withdraw reference to bankruptcy court and his right to a jury trial. The defendant argued that because the dispute was over whether he was the rightful owner of the shares, the issue did not involve property of the estate. The court held that since the adversary proceeding was in its early stages, a withdrawal of the reference was premature. In denying the defendant s motion and referring all pretrial matters to the bankruptcy court, the district court requested that the bankruptcy court issue a report and recommendation on any dispositive pre-trial motions.

Lara v. Specialized Loan Servicing, LLC 2013 WL 4804387 (S.D. Fla. Sept. 6, 2013) (Ungaro, J.) Section/Rule/Keywords: discharge, Fair Debt Collection Practices Act, Florida Consumer Collection Practices Act Summary: Plaintiff received a discharge in bankruptcy, including a discharge of his outstanding mortgage debt. Post-discharge, the loan servicer sent four letters attempting to collect payment of discharged debt. The court found that letters stating a date on which the next payment was due was objectively misleading, as debtor s debt had been discharged in bankruptcy. The court held that lender violated the Fair Debt Collection Practices Act by sending these letters. Further, that an award of $1,000 for damages was proper given the frequency and persistence of the debt collector. The court also found that the servicer was in violation of the Florida Consumer Collection Practices Act and awarded the debtor an additional $1,000. Wolfe v. Solomon Law Group, P.A. 2013 WL 4719343 (M.D. Fla. Sept. 3, 2013) (Kovachevich, J.) Section/Rule/Keywords: Fed. R. Civ. P. 59(e), 11 U.S.C. 554, disclosure Summary: Plaintiff sought review of the court s denial of a motion to reopen a case concerning overtime pay in order to revoke the settlement reached and set the case for trial. Previously, the court was notified of the settlement resolving the issue of overtime pay and the case was administratively closed. After the case was closed, plaintiff filed for bankruptcy. In the chapter 7 bankruptcy case, plaintiff did not list in his schedules the overtime pay case or the settlement. The only reference to the settlement was in the Statement of Financial Affairs, which listed the case number of the overtime pay action with the notation pending trial. Plaintiff did list his counsel s charging lien incurred in the overtime pay case, and that claim was discharged. Under the doctrine of judicial estoppel, the plaintiff was prohibited from reopening the case to pursue trial and retain the proceeds from the lawsuit after having discharged the costs associated with the case.

Bankruptcy Court Opinions In re Engler 2013 WL 5441730 (Bankr. M.D. Fla. Sept. 30, 2013) (Williamson, J.) Section/Rule/Keywords: 11 U.S.C. 503(b)(3)(A), 11 U.S.C. 503(b)(3)(B), administrative expenses, involuntary Summary: Creditors who filed an involuntary case against debtor are entitled to an administrative expense claim for fees and expenses directly related to preparing and filing an involuntary petition pursuant to section 503(b)(3)(A), but not for pre-petition fees incurred investigating the debtor s Ponzi scheme. The court fashioned a test whereby petitioning creditors would not be entitled to recover any pre-petition fees under section 503(b)(3)(A) for work it would have done had the involuntary case not been filed, rather than developing a bright-line test based solely on the timing of when services were performed. Petitioning creditors also sought an administrative expense under section 503(b)(3)(B) for taking action to recover property of the estate, which the court denied petitioning creditors did not obtain prior court approval. In re England ---B.R.---, 2013 WL 5397703, (Bankr. M.D. Fla. Sept, 27, 2013) (Williamson, J.) Section/Rule/Keywords: 11 U.S.C. 109(h), credit counseling Summary: Chapter 13 debtor did not timely receive credit counseling as required by section 109(h), therefore, the debtor was not eligible to be a debtor and could not commence a case under the Code. As a result, there was no case for the court to dismiss. Instead, the debtors petition was stricken. In re Cooper 2013 WL 5278933 (Bankr. M.D. Fla. Sept. 19, 2013) (Jennemann, J.) Section/Rule/Keywords: Fed. R. Bankr. P. 7012, strike defenses Summary Although a party filed an untimely motion to strike affirmative defenses, the court could sua sponte strike matters in a pleading at any time pursuant to Fed.R.Civ.P.12(f)(2) made applicable by Rule 7012. In addition, the

court found that the defendants would not be prejudiced by the delay in filing the motion to strike. In re Martin 497 B.R. 349, 2013 WL 5229816 (Bankr. M.D. Fla. Sept. 17, 2013) (Williamson, J.) Section/Rule/Keywords: 11 U.S.C. 1129(b), 11 U.S.C. 1115, Absolute Priority Rule, Individual Chapter 11 case, cramdown Summary: Court denied confirmation of individual debtor s Chapter 11 plan where the plan violated the absolute priority rule. Court thoroughly analyzed the applicability of the absolute priority rule in individual cases, examining the law prior to and after the enactment of BAPCPA. The Court adopted the narrow view of the applicability of the absolute priority rule, basing its reasoning on the plain meaning of section 1129 and section 115. The Court then supported its ruling by principles of statutory construction, congressional history, and the overall effect and purpose of the BAPCPA amendments. In this case, the individual debtor was seeking to retain three investment properties, yet pay only $8,500, approximately a 5% distribution, to unsecured creditors. When the holder of a claim of nearly 40% of the amount of the unsecured creditors did not vote to accept the plan, the debtor was then forced to resort to cramdown to confirm the plan. The absolute priority rule prohibited cramdown where the dissenting class of creditors is not being paid in full and the debtor s plan proposes that the debtor will continue to own non-exempt property. In re New River Dry Dock, Inc. 497 B.R. 359, 2013 WL 5236679 (Bankr. S.D. Fla. Sept. 16, 2013) (Olson, J.) Section/Rule/Keywords: 11 U.S.C. 328, 11 U.S.C. 330, disgorgement Summary: After bankruptcy court found real estate broker in contempt of court for fraudulent misrepresentations made to the court and ordered the broker to disgorge his commission, which decisions were affirmed by the Eleventh Circuit, broker requested court to vacate the writs of bodily attachment issued to enforce the court s order. The broker argued that bankruptcy court lacked subject matter jurisdiction to enforce the terms of the disgorgement orders. The bankruptcy court disagreed and found that it had jurisdiction to enforce its own orders. The broker s motion to vacate the writs was denied.

In re Cutuli 2013 WL 5236711 (Bankr. S.D. Fla. Sept. 16, 2013) (Cristol, J.) Section/Rule/Keywords: attorney-client privilege, crime fraud exception Summary: Law firm that represented the debtor prepetition objected to trustee s subpoena duces tecum based on attorney-client privilege. The bankruptcy court overruled law firm s objection since the trustee, standing in the shoes of the debtor, is entitled to invoke the co-client exception to obtain otherwise privileged documents. In addition, there was sufficient evidence already in the record that indicated that the debtor sought advice regarding fraudulent asset protection. Therefore, the crime fraud exception also applied in overruling the objection to subpoena. In re: LDB Media, LLC ---B.R.---, 2013 WL 4865125 (Bankr. M.D. Fla. Sept. 12, 2013) (Williamson, J.) Section/Rule/Keywords: 11 U.S.C. 547, preference, sufficient description, perfection Summary: The debtor sought to avoid a preferential transfer to a creditor that perfected its interest within the 90-day period before filing. The creditor s interest was a lien on equipment contained on news trucks. The creditor argued that the equipment on the news trucks was a deemed a fixture, or in the alternative, was covered in its security agreement under the description equipment. Either way, the creditor s alleged form of perfection was deemed insufficient. First, the creditor failed to note its interest on the on the certificate of title for the vehicle until during the preference period. Therefore, to the extent the equipment was a fixture, or accession, it was not properly perfected. Second, the court also considered whether the equipment on the truck was covered under the creditor s UCC-1. The court held that the description in the UCC-1 was insufficient to create security interest in equipment; security agreement merely described news trucks and did not mention, either generally or specifically, the equipment located in them. Thus, the creditor s lien was avoided as a preferential transfer.

In re Fundamental Long Term Care, Inc. ---B.R.---, 2013 WL 4866336 (Bankr. M.D. Fla. Sept. 12, 2013) (Williamson, J.) Section/Rule/Keywords: 11 U.S.C. 105, 28 U.S.C. 1334(e), 11 U.S.C. 541, fraudulent transfer, alter ego, jurisdiction, injunction, property of the estate Summary: The bankruptcy court enjoined various judgment creditors from pursuing fraudulent transfer and alter ego claims under the finding that such claims were property of the estate. The court found that continuation of state court proceedings against an entity that was arguably related in alter ego theory with the debtor entity, would interfere with the trustee s administration of the estate. Pursuit of such claims in state court would essentially result in dual litigation of the same claims. As such, due to the potential for inconsistent results and the potential for setting a condition precedent for claim that was property of the estate, the bankruptcy court had the authority to enjoin the judgment creditors from pursuing state court action. In re Beback 2013 WL 5156706 (Bankr. M.D. Fla. Sept. 12, 2013) (Funk, J.) Section/Rule/Keywords: 11 U.S.C. 524, discharge injunction Summary: Debtors sought sanctions for violation of discharge injunction. Receipt of notice of a debtor's discharge is sufficient to establish the knowledge element of the Eleventh Circuit's two-part test creditor s conduct is willful if the creditor 1) knew that the discharge injunction was invoked; and 2) intended the actions, which violated the discharge injunction. However, the debtors presented no evidence regarding to whom notice of discharge was sent. Since Debtors failed to prove that the creditor willfully violated the discharge injunction the Debtors were not entitled to damages.

In re Milich 2013 WL 4835102 (Bankr. S.D. Fla. Sept. 10, 2013) (Kimball, J.) Section/Rule/Keywords: Fed. R. Bankr. P. 7056, collateral estoppel, 11 U.S.C. 523 Summary: Bankruptcy court permitted state court civil theft action against debtor to continue to trial. After trial resulted in judgment for the plaintiff and against the debtor, including award of treble damages, plaintiff moved for summary judgment in adversary proceeding to determine dischargeability of judgment. Court granted summary judgment in favor of plaintiff. The Court applied collateral estoppel principles in determining that the debt represented by the state court judgment was a debt for actual fraud within the meaning of section 523(a)(2)(A) and also a debt for larceny within the meaning of section 523(a)(4) and therefore, non-dischargeable. In re Valone ---B.R.---, 2013 WL 4757842 (Bankr. M.D. Fla. Sept. 4, 2013) (Delano, J.) Section/Rule/Keywords: Fla Stat. 222.25(4), 11 U.S.C. 1325 Summary: A chapter 13 debtor who retains his residence during the term of the chapter 13 plan is not entitled to the wild card exemption of Fla. Stat. 222.25(4) since the debtor still receives the protection of the automatic stay during the duration of the case. Thus, best interest of creditors test required debtor to pay unsecured creditors more over life of plan.