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Preliminary Injunctions in Bankruptcy Courts: Can a Litigant Get a Second Opinion?

November 27, 2016


District courts can hear an appeal from any interlocutory order, as long as they agree to accept the appeal.  28 U.S.C. § 158(a)(3).  Final judgments, orders and decrees are always immediately appealable.  28 U.S.C. § 158(a)(1).  Certain interlocutory orders, such as orders increasing or reducing the exclusive time periods for a debtor to file and obtain acceptance of a plan for reorganization under Chapter 11 are also immediately appealable.  28 U.S.C. § 158(a)(2).  Other interlocutory orders are appealable only “with leave of the court.”  Preliminary injunctions are interlocutory orders that fall into the last category.

The timing and process for perfecting an appeal of a preliminary injunction is not certain.  Recently, Judge James Zagel in the Northern District of Illinois declined to grant leave to appeal a preliminary injunction entered in the bankruptcy court, finding the debtor had no automatic right to appeal.  Gilman v. Goldberg (In re Goldberg), Case No. 16 CV 6993 (N.D. Ill. October 17, 2016) (J. Zagel) (a link to the case is here: in-re-goldberg).  Generally, leave to take an interlocutory appeal is granted for the same reasons that an interlocutory appeal to the court of appeals may be taken from an order of the district court.  For bankruptcy appeals, district courts seek guidance from 28 U.S.C. § 1292 which guides courts of appeals when considering interlocutory appeals.  Goldberg grappled with the analogy to this statute as the court considered the debtor’s efforts to appeal the grant of a preliminary injunction against it.

Background of the Case

The debtor filed a Chapter 11 bankruptcy in August, 2015.  Among the debtor’s assets were membership interests in two real estate entities.  The debtor was the only individual authorized to act for either entity.  The entities leased the real properties to unrelated third parties who also had an option to purchase the real properties.

The debtor’s father loaned the debtor substantial sums of money.  After the debtor’s father passed away in 2010, the debtor entered into a settlement agreement with his mother, siblings, and his father’s estate.  The settlement required debtor to repay the loans he borrowed from his father totaling about $5 million.  The settlement agreement was secured by a security interest in the debtor’s two real estate entities and the collateral assignments of rents and other payments from the tenants.

The debtor proposed a plan of reorganization funded by the rents from the tenants.  The father’s estate filed an adversary proceeding challenging whether the debtor could use the rents because the funds were earmarked for repayment of the settlement agreement.  The debtor moved to dismiss, but the bankruptcy court denied the motion and found that the plaintiff alleged sufficient facts to state a claim for relief, and if the settlement agreement was construed as alleged by the plaintiff, then the bankruptcy court might find the plaintiff entitled to an injunction prohibiting the debtor from receiving the using the rents.

After denying the motion to dismiss, the bankruptcy court entered a temporary injunction enjoining the debtor from disbursing and transferring the rents until the bankruptcy court determined the plaintiff’s rights, if any, to the rents.  The bankruptcy court specifically limited the injunction to four months and set the matter for a hearing that would determine if the injunction would be allowed to expire.  The debtor requested an appeal of the preliminary injunction.

Holding: No Automatic Appeal of the Interlocutory Order

The District Court turned immediately to 28 U.S.C. § 1292.  No certification by the bankruptcy court was necessary.  In re CIS Corp., 188 B.R. 873, 878 (S.D.N.Y. 1995) (agreeing with Third, Seventh, Ninth, and Tenth circuit courts that district court may grant leave to appeal without certification by the bankruptcy court); but see In re General Dev. Corp., 179 B.R. 335, 337 (S.D. Fla. 1995) (district court lacks jurisdiction over interlocutory order unless bankruptcy court certifies that there was no just cause for delay of the appeal).

Section 1292 “guides” the district court’s discretion in whether to grant leave to appeal an interlocutory order.  In re Reserve Production, Inc., 190 B.R. 287, 289-90 (E.D. Tex. 1995). Goldberg quoted Reserve Production for the premise that an appeal of a preliminary injunction should be allowed because “[a]s a policy matter, the rulings of an non-Article III bankruptcy court should not be more insulated from appellate review than the rulings of an Article III district court.”  Section 1292(a)(1) provides that a preliminary injunction is appealable as a matter of right.  But Section 1292(b) provides that leave to hear an appeal of an interlocutory appeal should only be granted if the “order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.  Section 158 does not distinguish between preliminary injunctions and other interlocutory orders as does Section 1292.  Goldberg determined that Section 1292(b) rather than Section 1292(a)(1) applied, and that the court would need to first consider whether it should even hear the appeal before reaching the merits.

Adopting the plain language approach, Goldberg concluded the debtor did not have an automatic right to appeal a bankruptcy preliminary injunction under Section 158(a)(3).  Instead, the court found Section 158(a) requires leave of the district court before jurisdiction is appropriate.  An interlocutory appeal under Section 158(a) must therefore meet Section 1292(b) standards.

Turning to Section 1292(b), Goldberg found the debtor failed to raise a controlling question of law which, if resolved, would speed up the litigation.  Thus, the debtor failed to show an immediate appeal would assist the proceedings in the bankruptcy court below.  The District Court found the injunctive order was set to expire in October, 2016; thus, the appeal would not materially advance the proceedings and remanded the case to the bankruptcy court.

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Creditors Beware: Fifth Circuit Court of Appeals Expands Purview Of Potential FDCPA Violations And Furthers Circuit Split

October 23, 2016


In Daugherty v. Convergent Outsourcing, Inc., No. 15-20392 (5th Cir. Sept. 8, 2016) the Fifth Circuit Court of Appeals recently joined the circuit split interpreting the Fair Debt Collections Practices Act (“FDCPA”) in a way that further limits debts collectors.

Under the FDCPA the term “debt collectors” is not limited to those collecting debts for others –  certain creditors collecting debts directly owed to them can be bound by the FDCPA.   This statute prohibits debt collectors from using “false, deceptive, or misleading representation or means in connection with the collection of any debt.”  A debt collector who violates the FDCPA can be forced to pay actual damages, costs, reasonable attorney’s fees and up to $1,000 of additional damages if the plaintiff is an individual or up to $500,000 or one percent of the debt collector’s net worth in a class action.

In Daugherty, the Fifth Circuit considered whether a collection letter for a time-barred debt which contained a discounted “settlement offer” but which was silent as to the unenforceability of the debt and did not threaten litigation could mislead an unsophisticated consumer to believe that the debt could be enforceable in court and thus violate the FDCPA.

There, the debt collector sent the debtor a collection letter which presented three settlement options for the debtor to pay to resolve the debt.  The collection letter did not threaten litigation.  However, the letter also did not disclose that the statute of limitations had run rendering the debt unable to be collected through litigation.  Additionally, the letter did not warn the consumer that a partial payment on the debt could revive the statute of limitations and allow a debt collector to pursue collecting that debt in court.  The debtor sued the debt collector for violating the FDCPA.  The district court dismissed debtor’s complaint, holding that efforts to collect time-barred debts do not violate the FDCPA if the debt collector does not threaten suit.

The Fifth Circuit reversed the district court and ruled that, regardless of whether litigation is threatened, a collection letter violates the FDCPA if its statements could mislead an unsophisticated consumer to believe that the time-barred debt is legally enforceable.

The Daugherty decision furthered the pending circuit split.  The Third and Eighth Circuits have taken a more restrictive view of the FDCPA by holding that a debt collector is permitted to seek a debtor’s voluntary repayment of a time-barred debt so long as the communications to the debtor do not initiate or threaten litigation.  However, the Sixth and Seventh Circuits have taken a more expansive view of the FDCPA in favor of debtors by holding that collection letters offering to settle time-barred debts which do not disclose that the debt is legally unenforceable can violate the FDCPA even without threatening litigation.  (More about the Sixth and Seventh Circuit’s position on this can be found here.)  Now, the Fifth Circuit has joined with the Sixth and Seventh Circuits in its recent ruling.

The FDCPA, always an active statutory scheme for the courts, will also be front and center next year as the Supreme Court determines whether filing a proof of claim on account of time-barred debt violates the FDCPA, as discussed here.

In sum, debt collectors must be compliant with varying legal requirements in multiple jurisdictions. Collection letters should contain sufficient information to avoid being exposed to litigation and potential damages for violating the FDCPA.

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Madoff Continues On: Recent Tax Court Case Rules on Treatment of Madoff Account

Editor’s Note:  Our colleagues in Bryan Cave’s Private Client practice are on the cutting edge of tax matters, estate administration, challenging end-of-life matters, and other issues of estate and family law.  This area of law evolves at just about the speed of light.  Their leading blog, Life, Death, and Taxes demonstrates a commitment to thought leadership in this area, and we at The Bankruptcy Cave were excited to see this discussion of a recent Madoff-related ruling.  Kudos to Stacie Rottenstreich and Karin Barkhorn from Bryan Cave’s New York Private Client group for this interesting writeup.

In a recent Tax Court decision, Harry H. Falk, and Steven P. Heller, Co-Executors, v. Commissioner of the Internal Revenue, the United States Tax Court ruled that in the case of the Madoff Ponzi scheme, an estate which paid estate tax on Madoff assets which subsequently have become worthless can claim a theft deduction.

James Heller, a New York state decedent, died in January 2008 owning a 99% interest in James Heller Family, LLC (the “LLC”).  The only asset held by the LLC was an account with Bernard L. Madoff Investment Securities, LLC.  In November of 2008, the Executors of Mr. Heller’s estate withdrew some money from the LLC’s Madoff account in order to pay estate taxes and other administrative expenses.  Shortly thereafter, the news of the Madoff Ponzi scheme became public. Suddenly, the LLC’s interest and the estate’s interest in the LLC became worthless.

In April 2009, the Executors of the Estate filed an estate tax return which included the decedent’s 99% interest in the LLC – as valued at the date of his death – in his gross estate.  But the estate also claimed a theft loss deduction relating to the Ponzi scheme in an amount equal to the difference between the values of the estate’s interest in the LLC at death and the estate’s share of the amount withdrawn from the LLC’s Madoff account.  The Internal Revenue Service issued a notice of deficiency, claiming the estate was not entitled to the theft loss deduction because the estate did not incur a theft loss.

Internal Revenue Code Section 2054 allows a deduction from the value of a gross estate of “losses incurred during the settlement of estates arising from…theft.”  The Internal Revenue Service argued that the LLC incurred the loss, not the estate, and as such the theft deduction is not appropriate.  However, the Court determined that the loss suffered by the estate related directly to its LLC interest, the worthlessness of which arose from the theft.  The theft extinguished the value of the estate’s LLC interest, thereby diminishing the value of the property available to the decedent’s heirs.  As such, the Court determined a theft deduction appropriate.

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Non-Final Finality: Does One Interlocutory Issue Resolved in a Bankruptcy Court Order Render All Issues Addressed in the Order Non-Appealable?

appellate court concept with gavel. 3D rendering

As the Supreme Court recently reminded us in Bullard v. Blue Hills Bank, not all orders in bankruptcy cases are immediately appealable as a matter of right.  Only those orders deemed sufficiently “final” may be appealed without leave under 28 U.S.C. § 158(a).  In light of the numerous parties and controversies involved in a typical bankruptcy case, determining whether an order is “final” can be complicated affair.  Thus, finality in bankruptcy is a “flexible standard” applied to discrete disputes that arise within the larger case. See generally 14 Wright, Miller & Cooper, Federal Practice and Procedure § 3926.2 (collecting examples of final and non-final orders).  That flexibility, however, has led to disparate results.

In In re Wolff, B.A.P. No. CO-16-016 (B.A.P. 10th Cir. Jul. 18, 2016), the Tenth Circuit Bankruptcy Appellate Panel (the “BAP”) dismissed an appeal filed by debtors Deris and Cheryl Wolff (the “Debtors”) on the grounds that the appeal was taken from an order that was interlocutory, and thus, non-appealable absent leave.  That order resolved two issues, one of which was interlocutory and the other of which ordinarily would be entitled to immediate appellate review.  The Wolff decision is an interesting example of what can occur when a single bankruptcy-court order resolves a typically final matter in connection with a non-final one.

An Order Determining Property of the Estate Is Interlocutory?

In Wolff, the Debtors filed a voluntary chapter 13 case, but their case was later converted to chapter 7.  The Debtors’ schedules listed two parcels of real property as assets, but the Debtors failed to claim either property as exempt.  The chapter 7 trustee filed two separate motions seeking approval to retain real estate brokers to market the properties.  The Debtors objected to the motion as to the first property and filed a motion for reconsideration of the order granting retention of the broker as to the second property.  In both the objection and the motion to reconsider, the Debtors argued that the properties could not be sold because they were not property of the bankruptcy estate, and that any post-petition appreciation in value belonged to the Debtors rather than the estate.

The bankruptcy court entered an order overruling the objection, denying the motion for reconsideration, and approving the trustee’s retention of a real estate broker to market and sell both properties. The bankruptcy court rejected the Debtors’ arguments that the properties were not part of the estate because 11 U.S.C. § 348(f)(1) provides that when a case is converted from chapter 13 to chapter 7, “property of the estate in the converted case shall consist of property of the estate, as of the date of the filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”  Because the two parcels of real property were scheduled as estate property on the date of filing, they remained estate property upon conversion.  Moreover, the Debtors’ failure to claim any exemptions relating to the properties was binding upon them, and was ultimately inapposite, as the court concluded that the trustee could sell the property even if the exemption had been claimed.  The Debtors appealed.

On appeal, the BAP considered whether the order was interlocutory because it involved the employment of a broker, or whether the bankruptcy court’s ruling on property of the estate rendered the entire order final for appeal purposes. The BAP reasoned that an interlocutory order is one that constitutes part of the “process” of a bankruptcy case but does not otherwise substantively alter the rights of the parties.

Despite the ruling regarding property of the estate, the BAP concluded that the order was not final and appealable as a matter of right. Sales of estate property in a chapter 7 case involve a two-step process, according to the BAP.  First, the trustee must retain a broker with court approval.  Second, only after that broker has marketed the property in question, the trustee must file a separate motion for approval of the sale.  In this case, the bankruptcy court’s order represented only the first step in the process.  The BAP concluded that the Debtors’ rights were not substantively affected by the order because any decision as to the sale of the properties would require a separate motion, notice, and hearing.  “As a result,” concluded the BAP, “Appellants’ rights in the Colorado and Nebraska Properties, and any equity associated therewith, are not yet altered.”  The BAP also indicated that the Debtors would be able to seek review of “prior intermediate orders” if an order approving a sale were eventually entered.

Analysis and Conclusion

The Wolff decision is puzzling.  It certainly did not help the Debtors that they failed to claim the real property as exempt, and that their substantive arguments on the property-of-the-estate issue appeared to be weak.  Still, it is difficult to conceive of an order more “final” than one determining that an asset is property of the estate within the meaning of section 541 of the Bankruptcy Code.  Under the Wolff decision, such a determination may be deemed non-final if it is tied to a matter (e.g., retention of a broker) typically the subject of interlocutory orders.  Crafty litigants could use such a rule to deprive affected parties of immediate appellate review, even with respect to key issues if they are included in an order resolving other, interlocutory matters.

Moreover, the BAP failed to consider the impact of its ruling on the value of the properties. No rational buyer will bid as much when they learn that their bid could be held up in litigation, and appeals, over whether the property can be sold at all.  Buyers will discount their price for the likely attendant risk, and the fact that they may be “on hold” for months or years of litigation and appeals over a threshold issue.  If that threshold issue had been resolved, much of the cloud would be lifted over the property, and buyers obviously tend to bid more for a certainty.

In Wolff, the BAP appears to have justified the inclusion of a section 541 finding in a broker’s retention order on the rationale that if an asset “is not property of the estate, generally there would be no reason for a trustee to retain a broker to sell the property and the bankruptcy court would not approve a sale.”  But that somewhat circular reasoning does not consider the procedurally proper (and arguably more orderly) possibility of resolving the threshold question—whether the real estate was property of the estate—in an adversary proceeding and deferring the motion to retain a broker until after resolution of that fundamental question.[1]  As a middle ground, the court perhaps could have approved the broker’s retention conditionally, pending a ruling on property of the estate.  In fairness, the Debtors do not appear to have raised these possibilities, nor did they insist that resolution of a section 541 issue requires a properly filed adversary proceeding.  Had they done so, the result may have been quite different.

As the Wolff decision demonstrates, litigants in bankruptcy cases would be wise to identify important issues that a debtor, trustee, or other adverse party might attempt to bootstrap into a non-final order.  In particular, litigants should identify and zealously guard those matters subject to adversary-proceeding requirements under Federal Rule of Bankruptcy Procedure 7001.  Absent resolution of “final” matters in separate proceedings and orders, litigants could find themselves forced to await appellate review on key issues until far later in a bankruptcy case, when subsequent events could weaken the relevance of their appeal or simply render the appeal moot.

[1]    Contested issues regarding property of the estate generally require an adversary proceeding and all of the procedural safeguards associated therewith. See Fed. R. Bankr. P. 7001(2).

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Are Those Taxes Owing On Your Late-Filed Tax Return Dischargeable? Maybe, But You Better Be In The Right Circuit

File Tax Return!

Individual debtors with old tax debts relating to late-filed tax returns may be surprised to find that those tax debts may not be dischargeable under section 523(a) of the Bankruptcy Code due to the lateness of the tax filing.  There is a current Circuit split regarding whether a late tax filing constitutes a “return” at all, which is critical to the dischargeability inquiry.  The Ninth Circuit weighed in last week in In re Smith, 2016 WL 3749156 (9th Cir. July 13, 2016), further cementing the split.  Individuals considering whether to file bankruptcy to obtain a discharge of old tax debts would be well-advised to assess the current legal landscape and plan accordingly.

Section 523(a)(1)(B)(i) Exemption From Discharge For Tax Debts

Section 523(a)(1)(B)(i) of the Bankruptcy Code exempts from discharge any debt for a tax “with respect to which a return, or equivalent report or notice, if required . . . was not filed or given.”  In other words, a debtor may not obtain a discharge for taxes where it has failed to file a required tax return.  For a late-filed tax return, the issue becomes whether it is a “return” at all.

Prior to the 2005 BAPCPA amendments, the Bankruptcy Code did not define “return.”  Courts generally adopted the Tax Court’s definition of return set out in Beard v. Comm’r of Internal Revenue, 82 T.C. 766 (1984), which is commonly articulated as a tax filing that: (1) purports to be a return; (2) is executed under penalty of perjury; (3) contains sufficient data to allow calculation of tax; and (4) represents an honest and reasonable attempt to satisfy the requirements of the tax law.  Where a debtor files a late Form 1040 or similar tax form, elements one through three generally will be satisfied. It is element four that has been the subject of significant dispute.

In the 2005 BAPCPA amendments, Congress defined “return” in a new hanging paragraph at the end of section 523(a).  Under this definition, a return is “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”  This new definition has given rise to a significant split in authority regarding late-filed tax returns.

The Majority View.

Under the majority view followed in the Fourth, Sixth, Seventh, Eighth, Ninth, and Eleventh Circuits,[1] the Beard test governs the “return” inquiry.  As elements one through three are usually satisfied where a tax payer files an appropriate tax form, even if late, the inquiry inevitably becomes whether the debtor’s late filing represents an honest and reasonable attempt to satisfy the tax law requirements.  The timing of the late filing is generally considered relevant,[2] as is the debtor’s justification for the late filing, whether the IRS has already assessed the past-due taxes, and whether the late filing serves the purposes of the tax system.

The Ninth Circuit’s recent In re Smith decision is instructive.  There, the debtor failed to timely file his 2001 federal tax return.  The IRS calculated the debtor’s 2001 tax liability based on information gathered from other sources, and in 2006 assessed a deficiency against him.  In 2009, the debtor filed a Form 1040 for the 2001 tax year and thereafter sought to reach a compromise with the IRS on the 2001 taxes.  Unable to do so, the debtor filed his chapter 7 petition and sought a discharge of the 2001 taxes.  The bankruptcy court granted the discharge, and the district court reversed.

In affirming the district court, the Ninth Circuit considered the fourth Beard element and ruled that the debtor’s “belated acceptance of responsibility” was not a reasonable attempt to comply with the tax laws where, without justification, he waited three years after the IRS assessment and seven years after the tax return due date to file his Form 1040.  To the court, this simply was not a close case.  Because the debtor’s late-filed Form 1040 did not constitute a “return,” the debtor’s 2001 tax debt was exempt from discharge under section 523(a)(1)(B)(i).

The test adopted by the majority is fact-intensive, but provides an avenue for the honest but unfortunate debtor to obtain a discharge of tax debts where there is some justifiable excuse for the untimely tax filing.  This is not the case under the minority view.

The Minority View.

Under the minority view adopted in the First, Fifth, and Tenth Circuits, tax debts are not dischargeable if the tax return is filed after the applicable deadline—even if late by a single day.[3]  The rationale for this so-called “one-day-late rule” is that, under the plain language of the BAPCPA amendments’ new definition, a tax filing is only a return if it satisfies the requirements of the applicable nonbankruptcy law, “including applicable filing requirements.”  Under this view, the applicable filing requirements include filing deadlines.  Thus, late tax filings simply do not constitute returns for purposes of section 523(a).

The minority view is quite hostile even to the most honest debtor seeking to discharge tax debts for which he or she filed a late return.  But, to these courts, Congress has determined that debtors who miss tax filing deadlines simply are not entitled to a discharge of the associated tax debts.


The Ninth Circuit’s In re Smith decision reaffirms the stark divide between the majority and minority views on the dischargeability of tax debts where the debtor failed to timely file a return.  Unless and until the split is resolved by the Supreme Court, an individual debtor with significant tax liabilities should consider carefully whether a bankruptcy filing is appropriate in light of the current legal landscape.


[1]           In re Moroney, 352 F.3d 902 (4th Cir. 2003); In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999); In re Payne, 431 F.3d 1055 (7th Cir. 2005); In re Colsen, 446 F.3d 836 (8th Cir. 2006); In re Smith, 2016 WL 3749156 (9th Cir. July 13, 2016); In re Hatton, 220 F.3d 1057 (9th Cir. 2000); In re Justice, 817 F.3d 738 (11th Cir. 2016).

[2]           In the Eighth Circuit, “the honesty and genuineness of the filer’s attempt to satisfy the tax laws should be determined from the face of the form itself, not from the filer’s delinquency or the reasons for it. The filer’s subjective intent is irrelevant.” In re Colsen, 446 F.3d at 840.

[3]           In re Fahey, 779 F.3d 1 (1st Cir. 2015); In re McCoy, 666 F.3d 924 (5th Cir. 2012); In re Mallo, 774 F.3d 1313 (10th Cir. 2014).

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Snooze Alert (but you really have to read this) – Bankruptcy Forms and Various Dollar Amounts Changing on April 1

On April 1, a bevy of dollar amounts set forth in the Bankruptcy Code will change. Some of these are quite important to substantive relief, and others are quite important to making sure you don’t look bad in front of the client or your favorite (least favorite?) judge. We have Section 104 of the Bankruptcy Code to thank for this malpractice-inducing enterprise, which we enjoy every three years. See 11 U.S.C. § 104 (a) (“On April 1, 1998, and at each 3-year interval ending on April 1 thereafter, each dollar amount in effect under sections . . . shall be adjusted . . . .”).

At some point in the careers of the contributors to The Bankruptcy Cave, we would love to speak to the legislative scribes who meticulously cross-referenced all of BAPCPA’s new dollar figures to Section 104, but still managed to give us the hanging paragraph of Section 1325 (see the oldie but goodie by our good friend Steve Jakubowksi, one of the original bankruptcy bloggers, right here), and also possibly eliminated the absolute priority rule from individual Chapter 11 cases, as our Bryan Cave colleagues have written.  (On that point, see also the great recent post on absolute priority in individual chapter 11s by our friends at Stone & Baxter, at the Plan Proponent blog.)  But let us not digress or unduly criticize, that is not why you are here today.

The helpful souls from the Federal Register published a super-handy list (including a chart!) of all Bankruptcy Code dollar figures that are changing on April 1 pursuant to Section 104.  You can see it here.

In addition, these revised dollar amounts create changes in the corresponding bankruptcy forms. Here is a great link, including to pdfs of the revised forms.

Like we said, this is a snoozer, but kind of important.

–Your friends at the Bankruptcy Cave.


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Click To Appeal: Recent Second Circuit Decision A Cautionary Tale Regarding Electronically Filed Notices Of Appeal

mouse click

A recent Second Circuit Court of Appeals decision, Franklin v. McHugh, 2015 WL 6602023 (2d Cir. 2015), illustrates the dire consequences of failing to comply fully with all electronic filing requirements for a notice of appeal. Although appellant’s counsel in that case attempted to file a timely notice of appeal, properly initiated the electronic filing process, paid the filing fee, and received payment confirmation, the Second Circuit dismissed the appeal for lack of appellate jurisdiction due to the technical failure of appellant’s counsel to “click all the buttons” required to complete the filing. In jurisdictions that require electronic filing, counsel must be mindful not only of the applicable procedural rules but also of the electronic filing requirements.

The Applicable Rules Minefield

Appeals are rule intensive, particularly in the bankruptcy context where several sets of rules may dovetail with, complement, or exclude one another. For instance, the time for filing a notice of appeal from a bankruptcy court decision is generally 14 days, a period substantially shorter than in federal civil appeals. Compare Fed. R. Bankr. P. 8002(a) with Fed. R. App. P. 4(a). Further complicating matters, an appellant in an appeal from a bankruptcy court may choose to appeal to a district court acting as an appellate court or to a bankruptcy appellate panel (BAP), if a BAP exists in the relevant judicial circuit. 28 U.S.C. § 158(c)(1). Even if the appellant chooses to appeal to the BAP, any other party to the appeal may elect to have the appeal heard by the district court. Id.

Once the appellate venue is determined, application of the Federal Rules of Bankruptcy Procedure, the Federal Rules of Appellate Procedure, and the Federal Rules of Civil Procedure (or some combination thereof) largely depends on, and those rules often are modified by, the applicable local rules adopted by the district court or BAP. The same applies for appeals taken from a district court or BAP to a circuit court of appeals. These courts often also adopt standing orders and guidance manuals regarding practices and procedures. The astute practitioner, of course, will always ensure compliance with the applicable rules and procedures.

In addition to requiring mastery of the applicable rules, most federal jurisdictions require or allow the electronic filing of court documents through the Case Management/Electronic Case Files (CM/ECF) system, which is the “Federal Judiciary’s comprehensive case management system for all bankruptcy, district, and appellate courts.” Case Management/Electronic Case Files, The CM/ECF system “allows courts to accept filings and provides access to filed documents online . . . gives access to case files by multiple parties, and . . . offers the ability to immediately update dockets and download documents and print them directly from the court system.” Id. Use of CM/ECF is generally governed by local rules, which often incorporate a CM/ECF user’s guide, standing administrative order, or other instructions published by the applicable court. See, e.g., D. Ariz. Local Civ. R. 5.5; D. Ariz. Local Bankr. R. 5005-2(a)(1); E.D.N.Y. & S.D.N.Y. Local Civ. R. 5.2(a).

The importance of full and faithful compliance with electronic filing requirements is perhaps nowhere better illustrated than in filing a notice of appeal. Courts generally regard the provisions of Bankruptcy Rule 8002 governing the time for filing a notice of appeal from a bankruptcy court decision to be jurisdictional such that the untimely filing of a notice of appeal deprives the appellate court of jurisdiction to review the bankruptcy court’s order. E.g., In re Coudert Bros. LLP, 673 F.3d 180, 185 (2d Cir. 2012); In re Mouradick, 13 F.3d 326, 327 (9th Cir. 1994). Rigid enforcement of the appeal deadline is “justified by the ‘peculiar demands of a bankruptcy proceeding,’ primarily the need for expedient administration of the Bankruptcy estate aided by certain finality of orders issued by the Court in the course of administration.” In re Nucorp Energy, Inc., 812 F.2d 582, 584 (9th Cir. 1987). An untimely appeal of a district court or BAP order similarly divests a circuit court of appeals of jurisdiction to consider the appeal. Bowles v. Russell, 551 U.S. 205, 214 (2007).

Franklin v. McHugh: Non-Compliance With All Electronic Filing Requirements May Not Be Excusable

In Franklin, the Second Circuit put practitioners on notice that failure to timely and fully complete the electronic filing process implemented by the applicable court may, with respect to a notice of appeal, result in the appellate court lacking jurisdiction to consider the appeal.

In the underlying lawsuit, the district court dismissed the appellant’s complaint for lack of subject matter jurisdiction. Four days before the applicable deadline, appellant’s counsel used the district court’s CM/ECF system to upload a notice of appeal and other required documents, paid the filing fee, and thereafter received email confirmation of payment of the filing fee. Counsel, however, missed the last “click” in the CM/ECF software required to complete the electronic filing, and the notice of appeal was not filed with the district court.

Five days later, and one day after the filing deadline, appellant’s counsel learned that the district court’s docket did not reflect the filing of the notice of appeal. Counsel contacted the district court clerk’s office, which instructed him to refile the documents and pay the fee again. Counsel recounted that the clerk’s office also assured him that the notice of appeal would relate back to the first filing attempt, which was unsuccessful “due to issues with the ECF system.” Counsel refiled the documents and paid the fee as directed, and the notice of appeal thereafter appeared on the district court’s docket.

In the circuit court, the appellee moved to dismiss the appeal as untimely filed. The appellant argued that the notice of appeal was timely filed when his counsel first uploaded the notice of appeal and paid the filing fee, notwithstanding that the notice of appeal was not docketed until after the filing deadline. The Second Circuit granted the appellee’s motion to dismiss the appeal.

The Second Circuit reiterated that the time limits for filing a notice of appeal are jurisdictional and are not subject to “judicially created equitable exceptions.” Franklin v. McHugh, 2015 WL 6602023, at *2 (2d Cir. 2015). In this case, the district court adopted local procedures for electronic filing, which require compliance with the “instructions regarding Electronic Case Filing (ECF) published on the website of [the district court].” Id. According to the applicable instructions, the electronic filing of a document is only deemed complete when “the last screen you see is a Notice [o]f Electronic Filing screen.” Id. at *3. According to the Second Circuit, “[a]lthough the Eastern District’s instruction could have been more explicit, it plainly implies that ‘an electronic filing’ is not ‘complet[e]’ until ‘the last screen,’ called ‘Notice of Electronic Filing,’ appears on the user’s computer.” Id.

Although recognizing that appellant’s counsel intended to timely file, and otherwise took all necessary steps to timely file, the notice of appeal, the Second Circuit ruled that his failure to click the button in the CM/ECF system that would have generated the “critical Notice of Filing screen” and completed the filing process resulted in the notice of appeal not being filed at all on the date of the initial filing attempt. Id. While the situation is understandable and counsel’s position certainly sympathetic, the Second Circuit made clear that it lacks discretion to craft an equitable result despite such understandable circumstances and dismissed the appeal for lack of jurisdiction. Id.

As an important practice pointer, this result might have been avoidable under a different procedural mechanism. Although the Second Circuit had no power to correct the untimely filing defect, it did note that the appellant could have moved the district court for an extension of the filing deadline for excusable neglect or good cause under Federal Rule of Appellate Procedure 4. Id. at *4. Unfortunately, in this case the appellant did not do so and the time for seeking such an extension had since expired.

Although Franklin did not involve an appeal from a bankruptcy court order, its lessons are equally applicable in the bankruptcy context. Franklin teaches in vivid terms that counsel must be extremely diligent with electronic filing. One failed or missed mouse click could render an appeal untimely and result in dismissal. Familiarity with the appellate procedural rules is not enough. Counsel must also become a competent computer user under the CM/ECF procedures and any administrative order, user’s guide, or other instructions published by the applicable court.

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Ninth Circuit Holds Twombly / Iqbal “Plausibility” Standard Does Not Apply To Denials

In a seminal pair of decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the United States Supreme Court clarified that the pleading standard under Federal Rule of Civil Procedure 8(a) requires that a complaint contain sufficient factual allegations to state a claim to relief “that is plausible on its face.” Neither Twombly nor Iqbal addressed, however, whether this “plausibility” standard also applies to denials under Federal Rule of Civil Procedure 8(b). In its recent decision in In re Mortgages Ltd., 771 F.3d 623 (9th Cir. 2014), the Ninth Circuit Court of Appeals weighed in and held that the “plausibility” standard does not apply to denials.

The debtor in this case, Mortgages Ltd., was a private lender that made loans secured by real estate located in Arizona. Mortgages Ltd. funded its lending operations, in part, by selling fractional interests in its loans to investors. Under this arrangement, the investors owned their fractional interests in the Mortgages Ltd. loans in which they invested.

After Mortgages Ltd.’s bankruptcy filing, the Bankruptcy Court confirmed a plan that created an entity known as ML Manager LLC to manage and liquidate Mortgages Ltd.’s loan portfolio. Issues arose regarding ML Manager LLC’s authority to manage and liquidate the fractional interests in the Mortgages Ltd. loans owned by various investors, including a group of investors known as the Rev Op Group.

ML Manager LLC eventually filed a complaint seeking a declaratory judgment from the Bankruptcy Court on the issue of its authority to control and sell investors’ loan assets. ML Manager LLC asserted in its complaint that the Rev Op Group and other investors executed certain documents that granted Mortgages Ltd. an irrevocable agency power to manage and liquidate their loan assets, that the agency power was transferred to ML Manager LLC by the confirmed plan, and that ML Manager LLC therefore had authority to control and liquidate the Rev Op Group members’ assets over their objections. In their answers, the Rev Op Group members admitted signing certain documents in connection with their investments, but denied executing documents that granted any agency authority with respect to their loan assets.

In a novel ruling, the Bankruptcy Court held that the Twombly / Iqbal “plausibility” standard applied to the Rev Op Group’s denials and that, based solely on the pleadings, the Rev Op Group’s denials regarding the alleged agency authority were not plausible. Accordingly, the Bankruptcy Court entered judgment in favor of ML Manager LLC on the agency authority issue.

On appeal, the Ninth Circuit held that the “plausibility” standard does not apply to denials and reversed the Bankruptcy Court’s declaratory judgment. In doing so, the Ninth Circuit reasoned that a court may only disregard statements in a pleading under Rule 11 (for bad faith) or under Rule 12(f) (for matters that are scandalous, immaterial, impertinent, etc.), and that the Bankruptcy Court had not tested the Rev Op Group’s denials under either of those standards. “Courts cannot examine statements in an answer or other pleading and decide, on the basis of their own intuition, that the statements are implausible or a sham and thus can be disregarded.” Accordingly, the Bankruptcy Court erred by “effectively resolv[ing] those allegations” in the Rev Op Group’s denials “on the merits.”

With this decision, the Ninth Circuit has now clarified that Rule 8(b) does not require defendants to plead denials under a heightened “plausibility” standard in federal court. This decision is also notable for providing further clarification on other bankruptcy-related issues, including equitable mootness and substantial consummation of a bankruptcy plan.

In the interest of full disclosure, Bryan Cave LLP represented the appellants—the Rev Op Group—in the bankruptcy case and appeal discussed herein.

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