Attorneys are entrusted with a lot of sensitive information. The attorney-client privilege exists to allow clients to speak candidly with their attorneys. However, when the same attorney represents multiple parties, the privilege may not be so absolute. In the case of In re Crescent Resources, LLC, No. 09-11507 (Bankr. W.D. Tex. 7/22/11), Bankruptcy Judge Craig Gargotta was asked to decide who could access the attorney files in a billion dollar dispute. You can find the opinion here. What Happened Crescent Resources was a real estate development and management organization. It was formed by Duke Energy Corporation to manage and develop approximately 300,000 acres of real estate owned by Duke. Crescent grew over the years, eventually operating about 100 projects through over 120 entities. In 2006, Duke, Crescent and several real estate investment entities entered into a series of transactions where the Crescent entities pledged their assets to secure a loan from Bank of America in the amount of $1.225 billion, much of which was upstreamed to Duke. By June 2009, the Crescent entities had filed for chapter 11 in Austin, Texas. The Court confirmed a plan which created a litigation trust. The litigation trust sued Duke Energy Corporation, et al alleging that the 2006 transaction rendered the debtors insolvent. Shortly after filing suit, Dan Bensimon, the litigation trustee, filed a motion to compel a firm named Robinson, Bradshaw & Hinton, P.A. (RBH) to turn over its files with regard to work done for the debtors. RBH responded that it had concerns about Duke's rights to keep the files confidential. After five months of procedural wrangling, the Court conducted a hearing and took the matter under advisement. The files at issue fell into three categories: 1) pre-2006 files from the period when Crescent was a subsidiary of Duke; 2) files related to the 2006 transaction (known as Project Galaxy); and 3) files subsequent to 2006 when Crescent was no longer a Duke subsidiary. On July 22, 2011, the Court delivered its decision. Based on stipulations, it was largely clear that Crescent was a joint client with Duke for the pre-2006 files and was the sole client for the post 2006 files. That left the Project Galaxy files. The Court ruled that the Trust was a joint client and thus entitled to use the files in its litigation with Duke. Turnover/Burden of Proof Section 542 has two relevant subsections relating to turnover. Sec. 542(a) provides that a person in possession of property which the trustee may use, sell or lease shall turn over such property to the trustee. On the other hand, Sec. 542(e) provides that "(s)ubject to any applicable privilege . . . an attorney, accountant, or other person that holds recorded information . . . related to the debtor's property or financial affairs" can be ordered to "turn over or disclose such recorded information to the trustee." The Court found that the Trust had the initial burden to establish that the files "related to the debtor's property or financial affairs." At that point, the burden would shift to Duke to show that there was an attorney-client privilege between Duke and the law firm. The Court also rejected arguments from Duke that the Trust's burden had to be met by clear and convincing evidence. Instead, it found that the preponderance standard applied. Project Galaxy Having established this framework, the Court, following the lead of the parties, apparently assumed that the Trust had met its burden to show that the files related to the debtor's property or financial affairs. As a result, the Court spent the rest of its opinion discussing whether the Trust was "a joint or sole client, or no client at all, of RBH with respect to the Project Galaxy files." Opinion, p. 13. Duke made an interesting argument. It suggested that RBH represented Crescent prior to Project Galaxy and after Project Galaxy, but that Crescent was not represented at all during Project Galaxy. The Trust argues that RBH represented Crescent Resources, while Duke would have the Court believe that RBH jointly represented Crescent Resources before the 2006 Duke Transaction and after the 2006 Duke Transaction, but not during the 2006 Duke Transaction. Duke further alleges that Crescent Resources was not represented by counsel at all during the 2006 Duke Transaction. Opinion, p. 14. The Court had to analyze North Carolina law to determine whether Crescent had an attorney client relationship with RBH. North Carolina considers the question to be primarily one of fact and does not rely on formalities. The Trust was able to bring forward some pretty good evidence. In its application to be employed in the Crescent bankruptcy case, RBH stated that it had represented Crescent since 1986. It also presented an Opinion letter in which RBH stated that it had represented Crescent and certain of its subsidiaries in connection with the execution and delivery of a credit agreement. Finally, several of the RBH lawyers stated that they had represented Crescent in $1.5 billion credit transaction. Duke argued that it retained RBH to represent it in the transaction and that everyone but Crescent was represented by counsel. Duke presented evidence such as the engagement letter and declarations from RBH lawyers. However, the Engagement Letter stated that the firm was engaged to represent Duke Energy (or any of its subsidiaries or affiliates)." All invoices were submitted to and paid by Duke. Furthermore, RBH said that it took its direction from Duke and not Crescent and that no one at Crescent ever said that they thought they were represented by RBH. The Court weighed several factors under North Carolina law, finding that: 1. Crescent was not represented by other counsel; 2. Crescent had been represented by RBH in the past; 3. RBH had access to Crescent's confidential information; 4. The services were billed to Duke, not Crescent; 5. RBH represented Crescent after the transaction; 6. There was no withdrawal of representation. Weighing these factors, the Court found that RBH did, in fact, represent Crescent during the Galaxy Project transaction. The Court relied on North Carolina law to find that "where two or more persons employ the same attorney to act for them in some business transaction, their communications to him are not ordinarily privileged inter sese." The Court also relied upon its own decision in In re Bounds, 443 B.R. 729 (Bankr. W.D. Tex. 2010), a case in which I represented the debtor subsequent to the events in the opinion. In the end, the Court found that Crescent was a joint client and could use the files in its litigation with Duke but not otherwise. The Court's order has been appealed and is subject to a stay pending appeal. As a result, it may be a while before the Trustee finds out what, if anything, is contained in the law firm's files. However, given the effort that Duke is taking to keep the files confidential, it may well be interesting. I think the take away from this case is that if you are doing a billion dollar deal, make sure that everyone has their own counsel. It will be more expensive and may be more difficult, but at least your privileged will be protected. Disclosure: My firm has engaged Dan Bensimon as a consultant and expert in several cases. Indeed, I would go so far as to say that he is a friend of the firm and an all around good guy. However, we do not represent him in the Crescent case and this post is based solely on my reading of Judge Gargotta's 39-page opinion. If you want to know as much as I do, read the opinion for yourself.

In an important ruling, the Fifth Circuit Court of Appeals sitting en banc ruled that a debtor's nondisclosure would not bar a trustee from pursuing a large judgment for the benefit of creditors. Reed v. City of Arlington, No. 08-11098 (5th Cir. 8/11/11). The opinion overruled an earlier panel decision. You can read the new opinion here. A Quick Trip Through the Facts Diane G. Reed was appointed chapter 7 trustee for debtor Kim Lubke. When Lubke filed his schedules, he neglected to mention that he had recovered a one million dollar judgment against the City of Arlington. He omitted several other assets as well. While the bankruptcy was proceeding, Lubke's case went up to the Fifth Circuit, which remanded for a new calculation of damages. At this point, the Debtor mentioned his bankruptcy to his trial lawyer, Roger Hurlbut. Hurlbut promptly informed the trustee about the undisclosed claim. However, when the trustee sought to intervene as real party in interest, the City of Arlington withdrew an offer of judgment and sought summary judgment based on judicial estoppel. U.S. District Judge Terry Means rendered a mixed decision. He ruled that the trustee was not barred by judicial estoppel, but that the debtor would be barred from any recovery. On appeal to the Fifth Circuit, Chief Judge Edith Jones authored an opinion finding that both the debtor and the trustee were estopped from pursuing the claim. I wrote about the panel opinion in Fifth Circuit Muddles Judicial Estoppel; En Banc Review Needed. The decision set up a conflict between the circuit's two most prominent bankruptcy experts. Chief Judge Jones dismissed a prior opinion by Judge Carolyn King, In re Kane, 535 F.3d 380 (5th Cir. 2008), on the basis that it "purported" to distinguish prior precedents. The Trustee, supported by the Commercial Law League of America as amicus curiae, sought en banc review. On August 11, 2011, the full court released its opinion. Judge Carolyn King, joined by eleven other judges wrote the majority opinion, while Chief Judge Edith Jones, joined by two other judges penned the dissent. The Majority Opinion The majority set the tone for its opinion with a statement of purpose. Here, we apply judicial estoppel “against the backdrop of the bankruptcy system and the ends it seeks to achieve.” (citation omitted). These ends are to “bring about an equitable distribution of the bankrupt’s estate among creditors holding just demands,” (citation omitted), and to “grant a fresh start to the honest but unfortunate debtor,” citation . Therefore, judicial estoppel must be applied in such a way as to deter dishonest debtors, whose failure to fully and honestly disclose all their assets undermines the integrity of the bankruptcy system, while protecting the rights of creditors to an equitable distribution of the assets of the debtor’s estate. Opinion, p. 4. The Court cited the three-part test which has been a consistent factor in its decisions: (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. In applying the test, the Court found that four factors supported a decision that the trustee was not bound by the debtor's omission: 1. The result followed from bankruptcy law; 2. The result followed from equity; 3. The result was consistent with the Court's prior precedents; and 4. The result was consistent with other circuits. A. Judicial Estoppel and Bankruptcy Law The Court wrote: Judicial estoppel, as an equitable remedy, must be consistent with the law. (citations omitted). In this case, the relevant law is the Bankruptcy Code, which distinguishes between the debtor and the debtor’s estate immediately upon the filing of a Chapter 7 bankruptcy. Therefore, while Lubke himself was properly estopped for his dishonesty, his post-petition misconduct does not adhere to the Trustee, who received the judgment asset free and clear of a defense that arose exclusively from Lubke’s post-petition actions.Opinion, p. 5. The Court walked through a series of Code sections with regard to property of the estate, the role of the trustee and preservation of undisclosed causes of action. The Court noted that the trustee inherits causes of action subject only to defenses existing on the petition date. As a result, the debtor's post-petition misconduct in concealing a cause of action could not bind the trustee. B. Equity Judge King found that equity favored the trustee as well. She wrote: Because judicial estoppel is an equitable doctrine, courts may apply it flexibly to achieve substantial justice. (citation omitted). “The challenge is to fashion a remedy that does not do inequity by punishing the innocent.” (citation omitted). Estopping the Trustee from pursuing the judgment against the City would thwart one of the core goals of the bankruptcy system—obtaining a maximum and equitable distribution for creditors—by unnecessarily “vaporizing” the assets effectively belonging to innocent creditors. Lubke’s unsecured creditors, including his FMLA attorney Roger Hurlbut, filed timely proofs of claim in the reopened bankruptcy case in the sum of $504,951.87. Other creditors filed late claims in the sum of $84,846.61. Those creditors having meritorious claims are entitled to an equitable distribution of the estate’s assets, which include the judgment against the City. Opinion, pp. 8-9. In its equitable analysis, the Court rejected an argument that it was inequitable to allow a claim to be pursued where an attorney would be the primary benefactor: The City argues that equity does not favor the Trustee. Chief among its complaints is the fact that Roger Hurlbut, whose claim for legal fees stemming from the FMLA action makes him the primary creditor of Lubke’s estate, is an attorney. Section 726 of the Bankruptcy Code requires the property of the estate to be distributed without considering whether the debt is owed to an attorney, a credit card company, or any other type of creditor. (citation omitted). Unable to articulate why Hurlbut’s occupation is relevant here, the City suggests that Hurlbut is somehow associated with Lubke’s deception and is therefore not an innocent creditor. The district court explicitly found otherwise, (citation omitted), and we find no reason to doubt its conclusion. Opinion, p. 9. As an attorney, I am encouraged that the court rejected the appeal to attorney bashing. C. Prior Precedents Between 1999 and 2010, the Fifth Circuit decided four cases involving judicial estoppel in bankruptcy. Those cases can be summarized as follows: In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999). Debtor's insider failed to disclose claim and then bought assets of the debtor. Purchasing company entered into a sharing agreement with the trustee where the trustee would receive only 15% of the proceeds. Judicial estoppel applied because the "recovery would benefit the individual who actually perpetrated the bankruptcy fraud in great disproportion to the bankruptcy estate." In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004). Debtors did not schedule the claim and incorrectly told the trustee that the claim was proscribed by the statute of limitations. As a result, the trustee abandoned the claim. The Court held that the debtors were estopped to pursue the undisclosed/mis-disclosed claims. Kane v. National Union Fire Insurance Co., 535 F.3d 380 (5th Cir. 2008). Debtor failed to disclose claim. Trustee sought to pursue claim. Judicial estoppel was not applied. Reed v. City of Arlington, 620 F.3d 477 (5th Cir. 2010). Debtor failed to disclose claim. Trustee sought to pursue claim. Judicial estoppel applied to trustee. In analyzing the precedents, the Court concluded that the common factor was that the cases turned on whether an innocent trustee sought to pursue claims for the benefit of innocent creditors. Under this test, the panel opinion in Reed v. City of Arlington was the odd case out. D. Other Circuits The Court noted that its ruling was consistent with rulings in the Seventh, Tenth and Eleventh Circuits. Biesek v. Soo Line Railroad Co., 440 F.3d 410 (7th Cir. 2006); Eastman v. Union Pacific Railroad Co., 493 F.3d 1151 (10th Cir. 2007); Parker v. Wendy's International, Inc., 365 F.3d 1268 (11th Cir. 2004). By harmonizing its result with sister circuits, the Fifth Circuit avoided a circuit split and reduced the likelihood of a trip to the Supreme Court. The Bottom Line Absent unusual circumstances, an innocent bankruptcy trustee may pursue for the benefit of creditors a judgment or cause of action that the debtor—having concealed that asset during bankruptcy—is himself estopped from pursuing.Opinion, p. 13. The Dissent In dissent, Chief Judge Jones argued that the majority's bankruptcy centered inquiry was too narrow. She wrote: With due respect to my brethren, I respectfully dissent from their balancing of the equities in this case and from one significant legal point. We do not disagree on the general principles governing judicial estoppel except for one thing. The majority posits that only the interests of the bankruptcy process are involved here. I would contend that the federal district and circuit courts are part of the relevant judicial process, and that a broader view should have been taken of the impact of satellite litigation generated by Lubke’s deception. First, our court had to expend significant resources concluding an opinion in the original appeal of this case, only to find that the plaintiff was no longer the proper party. Accordingly, we were required to remand for reconsideration by the district court a plethora of procedural issues made necessary only by Lubke’s deception. These events necessitated a special oral argument hearing, another appellate opinion, and eventually, an en banc decision attempting to resolve our conflicting precedents. Second, because this two-party dispute evolved into a protracted three-party dispute with the trustee and her counsel, the fairness of the fee award exacted against the taxpayers of the City of Arlington has been seriously compromised, contrary to the courts’ duty to impose reasonable fees on a defendant. This may be brushed off as simply the logical consequence of the convoluted legal proceedings, but it is Lubke’s deception that set them in motion,not the City’s violation of his FMLA rights. Thus, the majority’s reasoning purports to protect the interests of creditors in general, while overlooking that the goal of judicial estoppel is to protect the integrity of the entire judicial process. * * * One may extol the virtues of “innocent” trustees, and I do not question the integrity of this trustee at all, but let us not romanticize what’s going on here. Lubke is going on with his life, effectively freed by the passage of time from the claims of unsecured creditors. It is pure speculation to say, as does the majority, that he has “no assets.” He was not honest about this litigation, why not about other assets? The expressed concern for “the creditors” lacks a certain depth of feeling. Those creditors were, and remain, almost exclusively credit card companies. Two-thirds of their claims will never be repaid because they were not renewed when the case was re-opened long after it had been declared a no asset filing. The record suggests that others cut their losses by bundling and selling their unpaid claims to third parties. As for the lawyers, Hurlbut received over $100,000 from Lubke even before the bankruptcy was filed, yet claims from the estate nearly $450,000 in additional fees. The trustee and her attorney will be reimbursed well into six figures as administrative priority claimants who will be paid ahead of the unsecured creditors. All this is legal, but in the commercial world, the transactional costs of such creditor recovery are wildly disproportionate. Surely courts need not cover our eyes against the real dollar impact of our balancing of “equities.” The majority notes that in “unusual circumstances,” the doctrine of judicial estoppel may occasionally prevent a trustee from recovering on a claim that the debtor concealed from the courts upon filing for bankruptcy relief. Unfortunately, the majority did not balance the factual equities here as I think was obviously appropriate. Opinion, pp. 14-15, 16. The dissent is curious. Its balancing test grants priority to the courts, who were required to spend undue time dealing with the debtor's dishonesty, and the City of Arlington, whose taxpayers will shoulder a greater obligation because its judicial estoppel argument failed. On the other hand, the interest of creditors was minimized because their claims were held by debt buyers and attorneys. It is indisputable that the courts were required to exercise substantial resources to deal with the case. However, the courts were not a party to the dispute; rather, the courts exist for the purpose of resolving disputes. The City expended substantial resources. However, this was a direct result of the unsuccessful legal positions taken by the City. If the City had not withdrawn its Offer of Judgment, its taxpayers would have been better served. Finally, the dissent's argument that the identity of the unsecured creditors is relevant is disturbing. Equal treatment of similar claims is a core principal of bankruptcy. Once we start down the road of dividing creditors between the worthy and the less worthy, we start down a slippery slope. Should we find that it is more equitable to favor trade vendors than banks? Should we look with greater favor on community banks than national banks? Should we look down on the tort victim who hit a home run in the litigation lottery? The majority's emphasis on the equality of creditors is both statutorily correct and practically sound. Congress established priorities among different classes of creditors. It is not for the courts to rewrite those priorities. While I may be biased (see Personal Note and Disclosure below), the dissent seems rather subjective. Equity should be about more than picking winners and losers based on our personal predilections. Indeed, the entire concept of the rule of law over the rule of man seems to be that we make decisions without regard to whether we like the persons who benefit, or perhaps that we make decisions based on fixed rules despite our personal preferences. The dissent seems to be based on the lowest common denominator of deciding who we like and ruling in their favor. We are all subject to subjectivity. If I were a taxpayer in the City of Arlington, I would not like the result in this case. However, the focus of that anger should be at the public officials who caused the liability, not the courts or the trustee or the debtor's creditors. Personal Note and Disclosure: In this blog, I have written favorably about Kane and have critiqued the panel opinion in Reed. I was the principal author of the amicus brief filed by the Commercial Law League of America and participated in oral argument on behalf of the League. I consider the opportunity to argue before the full Court of Appeals, if only for ten minutes, to be one of the most exciting moments of my career. While I am a partisan, my views are my own. No client paid me to blog on this issue and the Commercial Law League did not pay me to write their brief (although they did reimburse my expenses to travel to New Orleans to argue on their behalf--thanks CLLA!). As a lawyer, I am pleased that the majority resisted the urge to find that lawyers are less equal than other creditors. As a bankruptcy lawyer, I am gratified that the majority found that the statutory structure and goals of the bankruptcy system formed an appropriate frame of reference.

A decision reviewing attorney's fees in a complex Title VII class action may have repercussions for attorney's fees in bankruptcy cases as well. McClain v. Lufkin Industries, Inc., No. 10-40036 (5th Cir. 8/8/11). You can find the opinion here. What Happened The Lufkin Industries case appears to be a David v. Goliath case where David decided he needed reinforcements. Timothy Garrigan, an attorney with a three attorney firm in Nacogdoches, Texas filed a class action suit against Lufkin Industries, Inc. under Title VII, alleging disparate treatment and disparate impact theories. While Mr. Garrigan was found to be well-qualified to handle the class-action, he determined that "it was imperative to associate with co-counsel in order to successfully try this case." The Court wryly noted that, "The case's ultimate trajectory, which spanned a decade and involved thousands of attorney hours, confirmed his initial impression." When Mr. Garrigan went searching for co-counsel, he had to cast a wide net. After being turned down by multiple Texas firms, he ultimately associated Goldstein, Demchak, a firm from Oakland, California. The plaintiffs' team was successful. Although their initial judgment was reversed and paired down, the plaintiff class still recovered $3.3 million in back pay for discriminatorily lost promotions dating back to 1994. The plaintiff's attorneys sought $7.7 million in fees. The Court allowed $4.7 million in fees. In doing so, they calculated the lodestar for both the Texas and the California lawyers at $400.00 per hour. This displeased the California lawyers who had sought an award based on $650.00 per hour. Specifically, the District Court ruled that fees should be awarded based on the prevailing market rate in the relevant legal market. The Ruling On appeal, the Fifth Circuit considered how to calculate the lodestar, that is, the proper hourly rate to be multiplied by the proper number of hours. The Court stated: The precedents and purposes governing fee-shifting awards in civil rights cases are well established. The awards facilitate plaintiffs’ access to the courts to vindicate their rights by providing compensation sufficient to attract competent counsel. Fee awards must, however, be reasonable. (citation omitted). The linchpin of the reasonable fee is the lodestar calculation, a product of the hours reasonably expended by the law firms and the reasonable hourly rate for their services. (citation omitted). Charges for excessive, duplicative, or inadequately documented work must be excluded. (citation omitted). Seminal to this case is the principle that “reasonable” hourly rates “are to be calculated according to the prevailing market rates in the relevant community.” (citation omitted). Further, Blum noted, “the burden is on the applicant to produce satisfactory evidence . . . that the requested rates are in line with those prevailing in the community for similar services by lawyers of reasonably comparable skill, experience and reputation.” (citation omitted). In an unbroken and consistent line of precedent, this court has interpreted rates “prevailing in the community” to mean what it says. Thus, as early as 1974, this court required district courts to consider the customary fee for similar work “in the community.” (citations omitted). Most telling, perhaps, is this court’s decision in a landmark affirmative action case reducing the fee of plaintiffs’ counsel, a former U.S. Assistant Attorney General and subsequent U.S. Solicitor General, from the rates he charged in Washington, D.C., to the prevailing rate in the forum, Austin, Texas. (citation omitted). Opinion, pp. 8-9. In the particular case, the Court found that (W)here, as here, abundant and uncontradicted evidence proved the necessity of Garrigan's turning to out-of-district counsel, the co-counsel's '"home'' rates should be considered as a starting point for calculating the lodestar amount. Opinion, p. 11. What It Means This conclusion is significant for the opposite of what it says. Out of district rates were allowed as the starting point for the lodestar because there was extensive evidence that no Texas lawyer was willing to touch the case. The converse is that an out-of-district lawyer cannot charge out-of-district rates if there was a qualified, local lawyer who could have taken the case. The application to bankruptcy cases (which follow the same lodestar approach) is that a New York lawyer cannot charge New York rates in Houston without showing that a similarly qualified Houston lawyer was not available, or that a Houston lawyer could not charge Houston rates in Austin without showing that a similarly qualified Austin lawyer was not available, or that an Austin lawyer could not charge Austin rates in Waco without showing that a similarly qualified Waco lawyer was not available. If this decision is applied to bankruptcy cases, it could prove to be a boon to local lawyers who are perfectly qualified to handle difficult cases but are willing to charge local rates. After all, if Ted Olson was limited to Austin rates in Hopwood v. State of Texas, why would a bankruptcy court in Austin allow a Washington, D.C. firm to charge D.C. rates in a bankruptcy case in Austin, Texas? The Concurrences Almost as interesting as the majority opinion are the concurrences. Chief Judge Jones and Circuit Judge Dennis each wrote separately to discuss aspects of the case. Since Chief Judge Jones authored the majority opinion, her concurrence in her own opinion is interesting to say the least. Chief Judge Jones wrote to express her concern that the California lawyers were, let's be frank here, being greedy. She stated: It cannot escape the reader’s attention that the Goldstein Demchak firm has been authorized to receive several million dollars in fees, and a million dollars in expenses, for prevailing in this protracted case. But to them, that’s not enough, and they seek an hourly increase that will add $3 million more to their award. If that happens, the attorneys will have received nearly double the dollar award of the plaintiffs. What has fee shifting come to? This is not an appeal about incentivizing modestly compensated attorneys for pursuing noble goals: the $400 hourly rate awarded to Mr. Garrigan is hardly a day laborer’s fee. This appeal is designed simply to enrich, not to enhance or encourage. The Supreme Court holds that fee-shifting cannot bring a windfall to attorneys. (citation omitted). On remand, the district court should exercise its discretion within the parameters we have set out to prevent a windfall recovery. Opinion, at pp. 20-21. While Chief Judge Jones' majority opinion allowed the possibility of higher rates for out of district counsel, her concurrence suggests that she strongly objects to allowing that possibility in practice. Judge Dennis wrote separately to suggest that the "hourly rates charged by the defendant's attorney's provide a helpful guide in determining whether similarly high rates and hours requested by the plaintiffs were reasonable." In the bankruptcy context, if the creditor's lawyers are charging obscene fees, then the debtor's lawyers may charge merely scandalous fees. I think that this opinion, while affirming national rates in the specific case, is a victory for local rates in general.

Welcome to a new feature of A Texas Bankruptcy Lawyer’s Blog. This will be the first in a series of profiles on the bankruptcy judges in Texas, beginning with H. Christopher Mott. On September 20, 2010, H. Christopher Mott became Texas’s newest bankruptcy judge, holding court in the Austin and El Paso divisions of the Western District of Texas. He grew up in El Paso, graduating from Eastwood High School (a distinction he shares with Jim Wilkins and myself). He earned a B.B.A with Highest Honors from Texas Tech University in 1980 and graduated with High Honors from Texas Tech School of Law in 1983. Private Practice Judge Mott had a twenty-seven year career in private practice in El Paso. He was a founding partner of the firm now known as Gordon, Davis, Johnson and Shane. At the time he graduated, Texas was in the midst of an oil and gas bust. He said I got my start in the bankruptcy arena right out of law school in 1983 with the oil industry bust in Midland/Odessa. Bettina Whyte was a chapter 11 trustee, examiner or Plan Agent in several cases where I was her counsel. Many debtors there were high-flying oilmen and the FDIC had closed the largest banks in the area, forcing debtors (individuals and companies) into bankruptcy. The result was many adventurous cases and quick experience for a young lawyer. His most significant case in private practice was neither a bankruptcy case nor one in Texas. On April 14, 2000, the State Banking Commissioner of Illinois placed Independent Trust Company (known as Intrust) into receivership in Cook County State Court. PriceWaterhouseCoopers was appointed as Receiver and the Receiver hired Judge Mott as its counsel. According to Judge Mott: Intrust was the largest trust company failure in Illinois history and the largest trust company nationally to fail since the Great Depression. Intrust administered approximately $2 billion in assets for over 17,000 account holders. Approximately $70 million in trust assets were missing, haven been stolen over the previous ten years. The case was significant as it involved issues of first impression under Illinois insolvency law, extremely complicated facts, eight months of litigation at the trial court level, expedited appeals and a high profile. The time pressures in the case were tremendous, as trust accounts were frozen due to lack of liquidity and solvency and over 17,000 account holders were impacted. In the end, the Receiver was successful in allocating the loss and selling the trust business and accounts to another trust company. Another significant case that he handled was In re Clay, 35 F.3d 190 (5th Cir. 1994), in which the Fifth Circuit held that Bankruptcy Courts did not have the statutory or constitutional authority to conduct a jury trial absent consent of the parties. Bon Mots from Judge Mott Judge Mott has been a prolific writer and speaker on bankruptcy topics. Here are a few bon mots* from his writings: In some respects, working in a law firm should be like playing a secret agent in a James Bond movie. Secret agents learn confidential information that must be treated as “top secret” and cannot be disclosed. In the course of your law firm job, you become privy to sensitive and confidential information about clients of the law firm. This client information must be treated as “top secret” by law firm employees. Legal secretaries, paralegals, and other employees of the firm must be very careful not to disclose—whether inadvertently or intentionally—confidential client information to anyone outside the firm, including family and friends. “Secret Agents: Your Responsibility to Protect Confidential Client Information,” http://www.texasals.org/Confidential.html. Navigating the troubled seas of bankruptcy court jurisdiction makes many lawyers feel like Coleridge’s Ancient Mariner, or in more modern times, Russell Crowe as Captain Jack Aubrey in Master and Commander: The Far Side of the World. These seas are awash with technical phrases (such as core, related to, abstention, remand and removal), interlocking and sometimes conflicting statutes and rule, and multiple judicial interpretations of how to properly navigate the waters. “Bankruptcy Jurisdiction—The Far Side of the World,” Bankruptcy Litigation: Pre-Trial Practice & Procedural Workshop (January 20-21, 2005). Summary judgment practice is a rifle shot, not a shotgun approach to disposing of issues. The KISS rule (keep it simple stupid) applies to summary judgment motions. The chances of success on a summary judgment motion raise as you make the case appear simple, they fall if you make it look more complex. “Drafting a Motion for Summary Judgment *Tips for Success*”, Bankruptcy Litigation: Advanced Pre-Trial Practice & Procedure Workshop (January 29-30, 2004). From these brief quotes, we can learn that Judge Mott is a fan of a well-turned analogy, that he likes movies and that he takes a practical approach to law. Honors Judge Mott served a term as Chair of the State Bar of Texas Bankruptcy Section. He said: My personal favorite has always been the Elliott Cup Bankruptcy Moot Court competition sponsored by the Section. It has expanded to include all law schools in the Fifth Circuit (including Texas). The talent level of the law students and their knowledge of bankruptcy law is astounding. Other honors and credentials he has earned include being a Fellow of the American College of Bankruptcy, Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization, a former Commissioner of the Texas Bankruptcy Certification Exam Commission, and being included as a Texas Super Lawyer as well as being named to Best Lawyers in America and Corporate Counsel—Top Lawyer. He is no relation to Christopher Mott, the actor who played Howard K. Stern in an episode of The Final 24 devoted to Anna Nicole Smith. Judge Mott in the Courtroom His courtroom demeanor is very calm. In an interview with the ABA Section of Litigation, he said: I just try to be myself, a plain, straight-speaking person. I do try to exercise more patience and display more even-handedness than I might in a private setting, such as with friends. In the same interview, he said that he wears a shirt and tie under his robe, but not a jacket. He said, “For some reason wearing a tie helps me to focus better.” He expressed admiration for his fellow judges, stating: There is great camaraderie among bankruptcy judges. It is like a 300-person fraternity. Bankruptcy judges seem to be cut from a different cloth; they take their jobs seriously, but not themselves. When asked about his biggest challenge on the bench, he said: One of the biggest challenges is to figure out what hearings /trials are actually going to go forward and be contested; and what will be settled or continued (often at the last minute). I try to prepare for hearings so I can rule from the bench when possible. There is not enough time in the day for me (and my law clerks) to prepare for every hearing that gets set so the educated guess on what matters are actually going to be contested and go forward is a challenge. Off the Bench Judge Mott keeps busy off the bench. I am kind of a workout nut, because my job is sedentary and exercise reduces stress. At this point, I mix it up a lot—run, mountain bike, swim (Barton Springs pool is awesome), rowing on Town Lake (new and fun for me), gym work. I have many hobbies that I enjoy, but am not particularly good at, such as golf, scuba diving, fly fishing, and mountain climbing. I also love watching football and reading, and most importantly, spending time with my wonderful wife of 30 years and my 20-year-old daughter and 23-year-old son. The final word from Judge Mott: "I may be stupid but I am not dumb." *--A bon mot is defined as a clever saying, phrase or witticism. Acknowledgement: Portions of this article were taken from “Interview with the Honorable H. Christopher Mott,” ABA Section of Litigation (July 14, 2011).

In an interesting ruling that has more to do with trust law than bankruptcy, the Fifth Circuit has ruled that a bankruptcy court incorrectly held that a trust was not property of the estate. Roberts v. McConnell, No. 10-50462 (5th Cir. 6/15/11). You can find the opinion here.Mary McConnell ("Mary") created a trust for her grandson Terry Hoff ("Terry"). The trust listed her as the Settlor. She contributed $100 to the trust. Terry's mom, Peggy McConnell ("Peggy"), on the other hand, contributed $70,000. The Trust provided that once the Settlor died, Terry would have the right to withdraw increasing amounts from the trust at age 30, age 35 and age 40.Terry filed for chapter 7 bankruptcy when he was 37. Mary was deceased at this time, but Peggy was not. The critical question was whether Terry had the right to withdraw funds from the trust. If Mary was the sole settlor, then Terry would have the right to withdraw funds. On the other hand, if Peggy (who actually contributed 99% of the money to the trust) was a settlor, then Terry could not.The Bankruptcy Court quite sensibly ruled that because Peggy had contributed funds to the trust and because she was not deceased that the trust funds were not property of the estate. I wrote about the Bankruptcy Court's opinion here. The Fifth Circuit relied on both the language of the trust and the version of the Texas Trust Code then in effect to hold that Mary was the sole settlor of the trust. The Court shrugged off cases such as In re Bradley, 501 F.3d 421 (5th Cir. 2007) with the comment that they referred to self-settled trusts. Apparently persons other than the stated settlor can be settlors for a self-settled trust. The decision is of limited importance due to a change in the Texas Trust Code. Under the current version of the law, a settlor is "a person who creates a trust or contributes property to a trustee of a trust." Tex. Prop. Code Sec. 111.004(14). Unfortunately, this legislation was enacted after the debtor filed bankruptcy. As a result, it did not determine that Peggy was an additional settlor.Because the trust designated Mary as the settlor and because she was deceased at the time that Terry filed bankruptcy, Terry's trustee was entitled to 50% of the trust. The only real take-away from this case is that prior to 2007 when the law was changed, the definition of a settlor under a Texas trust depended on whether the trust was self-settled or not. However, under current law, anyone who contributes property to a trust is a settlor.

By EILENE ZIMMERMAN From 2009 to 2010, the commercial real estate market in the United States seemed bottomless. Whether seeking manufacturing, office or retail space, those looking to lease or buy were in the driver’s seat, said Fred Schmidt, president and chief operating officer for Coldwell Banker Commercial in Parsippany, N.J. After the supply of space hit a peak in the fourth quarter of 2010, he said, the market began a slow recovery — “but it’s definitely still a tenant’s and buyer’s market.”Many small businesses have taken advantage of the market to negotiate more favorable lease terms or lower rents or to move to better space. Some were able to buy a building, a pipe dream for many in the prerecession real estate market. Still, putting together a deal requires timing, cash and market savvy. The best deals take time and tenacity, so start looking long before your lease expires, said Brian Netzky, president of Interstate Tenant Advisors in Lincolnwood, Ill. “Don’t be reactive, because then no matter what the economy is like, you’re in the worst position.”Below are several examples of small-business owners who have taken advantage of one bright spot in a dark economy.PAYING CASH UPFRONT Tired of paying rent for office space, Andrew E. Samalin called a broker last year and started looking for a building to buy. At the time, Mr. Samalin, a principal in an investment firm, Samalin Investment Counsel, was paying a high $4,500 a month for 700 square feet in suburban Mount Kisco, N.Y. In March 2010, he found a building in nearby Chappaqua that had been built in 1865 and needed work. The previous time it had been up for sale — at the height of the market — the asking price was $1.3 million. This time, Mr. Samalin saw an opportunity.The seller would take only cash, so Mr. Samalin offered $600,000. After his offer was accepted, he put up $250,000 in cash for renovations. “I knew I could get the mortgage financing in place later,” he said, “but if I offered the cash upfront, I could get a really good price for the building.” The mortgage came after renovations were complete, because then it was less risky for the bank.Mr. Samalin’s mortgage payment is now $3,500 a month. But he had enough extra room to take in a tenant, who pays $2,400 a month, reducing Mr. Samalin’s portion to $1,100. Because of the Small Business Jobs Act of 2010, the entire cost of the renovations was tax deductible. Mr. Samalin said he feels pride in owning a restored historical building, and his staff and clients love the space. “I consider this one of the greatest deals of my life,” he said.NEGOTIATING AGGRESSIVELY Mark Censits, owner of an upscale wine, beer and spirits shop, CoolVines, wanted to move his Princeton, N.J., location — 350 square feet on the outskirts of town — to a bigger, better location. In 2007, when the market was still strong, he found 1,500 square feet in the center of town. The building’s opening was delayed for three years and by the time it was ready for tenants last fall, the market was tanking. “I was able to reopen discussions twice, each time negotiating more aggressively,” he said.Because there were few creditworthy tenants bidding, Mr. Censits used CoolVines’ record of success — and the expectation that it would bring foot traffic — to persuade the landlord to lower the price from about $41 a square foot to $35.The soft market also prompted Mr. Censits to move another location, this one in Westfield, N.J. “I knew if we were ever going to expand, this was the time to do it,” he said. The original Westfield store was 750 square feet and cost about $54 a square foot. Mr. Censits found a new location that offered 2,400 square feet downtown with parking, and is located between Williams-Sonoma and Banana Republic stores.Feeling confident after the success of his Princeton negotiations, Mr. Censits started with a lowball offer of $33 a square foot; he got the space for $37, and the landlord agreed to freeze the rent for three years. After that, increases are limited to 2 percent annually for the seven years. “I also got him to do a significant amount of demolition to the place — probably $50,000 worth — so we could build it out the way we wanted,” Mr. Censits said.PAYING LESS FOR MORE Three years ago, when the lease on his manufacturing facility was ending, Scott Pievac thought he was ready to buy new space for the Sam Pievac Company, which makes retail displays and fixtures and was founded by Mr. Pievac’s father. At the time, however, prices were high and inventory low, so he continued to rent in Santa Fe Springs, Calif.This year, when he started shopping around again, he found few people wanted to sell in the middle of a downturn. But with the help of a broker, he located an old Firestone tire storage plant for sale in Chino, about 25 miles away. The price was $65 a square foot, a great deal, he said. “That building would have been $100 a square foot five years ago. It had been on the market a week, and they had five offers.”Several factors converged in Mr. Pievac’s favor. His broker introduced him to the broker representing the sellers, and they found they had mutual friends. The Sam Pievac Company had been in business 50 years and was financially stable, making it an attractive candidate.In addition, the Small Business Administration increased its lending limit on loans for the acquisition of fixed assets in 2011 to $5 million, which helped Mr. Pievac arrange the financing he needed. The total cost of the building with improvements was $7.2 million. The company moved into the new warehouse space in April, and the office space will be ready this week.Mr. Pievac’s rent used to be $42,000 a month; now, he has more space, owns the building and pays $40,000 a month.FINDING COMFORTABLE SPACE In early 2010, the employees of M. Studio, a design and branding agency, were spilling out of their northern New Jersey offices. Jenna Zilincar, a founder and creative director, said four people were crammed into 800 square feet that they called “the hamster cage.”Ms. Zilincar wanted to move closer to her clients and was able to find several affordable options in Asbury Park that had not been available a year earlier. One space was triple the size of M Studio’s previous office. The space needed modifying, Ms. Zilincar said, but she got the landlord to put up walls and take out doors, creating offices and a conference room. Ms. Zilincar was also able to sublease two small offices she did not need, substantially reducing her monthly costs.Now, M Studio has five people working full-time in an open space. The office has a waiting area, a conference room and a kitchen. Ms. Zilincar also got the landlord to put in hardwood floors, outside lighting, air-conditioning and baseboard heating. She and her broker negotiated a slightly lower rent than the asking price, no increases for a year and a half and a $50 increase for the 18 months after that. If she renews for another three years, the increase will be 5 percent.Ms. Zilincar believes the new space has helped her close deals. “People’s level of comfort went up because this space is more legitimate,” she said. “We don’t have to meet clients in coffee shops anymore.”Copyright 2011 The New York Times Company. All rights reserved.

These days, defendants are getting more aggressive about repelling suits from bankruptcy estates. From jurisdictional squabbles based on Stern v. Marshall to judicial estoppel to failure to preserve a cause of action in a plan, the plaintiff’s road to judgment is just more difficult than it used to be. However, two recent decisions are examples of suits which avoided being detonated by clever challenges. In Matter of Texas Wyoming Drilling, Inc., No. 10-10717 (5th Cir. 7/21/11), a chapter 7 trustee prevailed against a claim that the former debtor in possession had failed to failed to make a “specific and unequivocal” reservation of claims and defeated a judicial estoppel claim. In Crescent Resources Litigation Trust v. Burr, No. 11-1013 (Bankr. W.D. Tex. 7/22/11), a litigation trust created by a plan defeated a defense that claims had not been adequately preserved. (There was another very interesting decision released in the Crescent case the same day about turnover of files from the debtors’ former attorneys. Because that case does not retention language under a plan, I will save that one for another day). You can find the opinions here and here. The Disclosure Statement Wins Out The Debtor in Texas Wyoming filed for chapter 11 relief and confirmed a plan. The plan provided for preservation of “Estate Claims.” The Disclosure Statement defined “Estate Claims” as claims arising under Chapter 5 of the Bankruptcy Code and included a chart listing potential claims, including “Various pre-petition shareholders of the Debtor” who might be sued for “fraudulent transfer and recovery of dividends paid to shareholders.” The Debtor then sued its former shareholders to recover dividends paid under a fraudulent conveyance theory. The defendants sought to dismiss the action claiming that: (a) the Plan did not include a “specific and unequivocal” reservation of claims, (b) the disclosure statement did not name the parties who could be sued; and (c) the Debtor did not disclose the claims in its schedules. Under Fifth Circuit precedent, a plan must “specifically and unequivocally” retain a cause of action. In re United Operating Company, 540 F.3d 352 (5th Cir. 2008). If the claim is not adequately reserved, then the post-confirmation debtor lacks standing to pursue it. When the plan failed, the case was converted and the chapter 7 trustee pursued the claims. The Bankruptcy Court denied the defendants’ motion, but certified a direct appeal to the Fifth Circuit. The Fifth Circuit, in an opinion authored by Edith Brown Clement, made short work of the defendants’ claims. The Fifth Circuit found that it was permissible to consult the disclosure statement to see whether claims had been adequately disclosed. The Court stated: We observe that the disclosure statement is the primary notice mechanism informing a creditor’s vote for or against a plan. See 11 U.S.C. § 1125. Considering the disclosure statement to determine whether a post-confirmation debtor has standing is consistent with the purpose of In re United Operating’s requirement: placing creditors on notice of the claims the post-confirmation debtor intends to pursue. (citation omitted). In light of the role served by the disclosure statement, the purpose behind the rule in In re United Operating, and the fact that, in similar contexts, courts routinely consider the disclosure statement to determine whether a claim is preserved, we hold that courts may consult the disclosure statement in addition to the plan to determine whether a post-confirmation debtor has standing. Opinion, pp. 6-7. While the language in the Plan was generic, the language in the Disclosure Statement identified claims arising under Chapter 5 and stated that pre-petition shareholders were at risk for being sued for recovery of dividends. That was enough to satisfy the “specific and unequivocal” requirement under prior Fifth Circuit precedent. The Fifth Circuit also rejected the argument that failure to list the claims in the schedules would bar the claims under the doctrine of judicial estoppel. The Court noted that there was no inconsistent position taken since the Disclosure Statement specifically identified the claims. The defendant’s argument founders on the first requirement because TWD did not take clearly inconsistent positions. As explained above, TWD’s plan and disclosure statement retained the right to pursue the Avoidance Actions. Because TWD explicitly retained the same claims against the defendants that the trustee is now pursuing, there is no inconsistency in its position. Opinion, p. 9. This holding is a victory for common sense interpretation versus the magical view that any failure to disclose evaporates the claim. The take away from Texas Wyoming is that careful drafting at the disclosure statement stage may avoid creditor heartaches down the road. Court Chooses the Categorical Approach The Crescent Resources case involved 122 related debtors who filed a chapter 11 bankruptcy in Austin in 2009. On December 20, 2010, the Court confirmed the Debtors’ Revised Second Amended Plan of Reorganization. A major feature of the plan was creation of a Litigation Trust. One claim pursued by the Trust was against Edward Burr, a former insider of the Debtors. The claims involved two transactions: 1. Payment of $1.925 million to Burr in April 2007 to cover his personal tax liabilities; and 2. Payment of $4.5 million in cash plus forgiveness of $71 million in debt owed to Crescent in November 2007 in return for termination of his employment and conveyance of a 20% interest in one of the debtors. The Trustee alleged that the transfers constituted fraudulent conveyances under state and bankruptcy law. The Defendant sought to dismiss the claims, asserting that the plan had not “specifically and unequivocally” reserved the claims and asserting failure to plead fraud with specificity. The Defendant raised two arguments with regard to retention of claims: 1) that the plan failed to disclose that the Trust would pursue claims against him personally; and 2) that if the overall description was sufficient, that the plan failed to preserve claims for turnover pursuant to 11 U.S.C. §542. The Plan provided that: The Litigation Trust Assets shall include, but are not limited to, those Causes of Action arising under Chapter 5 of the Bankruptcy Code including those actions which could be brought by the Debtors under §§ 544, 547, 548, 549, 550, and 551 against any Person or Entity other than the Litigation Trust Excluded Parties. Causes of Action was defined to mean “any and all Claims, Avoidance Actions, and rights of the Debtor, including claims of a Debtor against another Debtor or other affiliate.” It is clear that neither the Plan, the Trust Agreement or the Disclosure Statement specifically referred to Mr. Burr or referred to claims for turnover under 11 U.S.C. §542. The opinion contains an excellent discussion of the cases interpreting United Operating. At the conclusion of its discussion, the Court summarized as follows: (W)hile the Fifth Circuit has not defined what “specific and unequivocal” means, cases have interpreted different plan language on case-by-case bases which this Court can use as guideposts with which to judge the plan language at issue here. Courts have held that listing causes of action by code section is sufficiently “specific and unequivocal.” (citations omitted). The courts have also held that a generic blanket reservation is insufficient. (citations omitted). The cases in the Fifth Circuit all cited United Operating. United Operating, in making its holding, also discussed that one of the purposes of bankruptcy is to “secure prompt, effective administration and settlement of all debtor‟s assets and liabilities within a limited time.”(citation omitted). In order to facilitate this resolution of the estate, “a debtor must put its creditors on notice of any claim it wishes to pursue after confirmation.” (citation omitted). It is for this reason—notice to creditors—that the Fifth Circuit determined that the retention language needed to be “specific and unequivocal.” (citation omitted). This Court agrees with the reasoning behind those cases applying what has been referred to as the “Categorical Approach,” and adopts the test established in Texas Wyoming Drilling to determine if the plan language meets the “specific and unequivocal” requirement. (citation omitted). That test, again, was to make a determination “whether the language in the [p]lan was sufficient to put creditors on notice that [the debtor] anticipated pursuing the [c]laims after confirmation.” (citation omitted). If so, the language meets the “specific and unequivocal” requirement. Opinion, pp. 21-22. The Court found that the reference to “state fraudulent transfer law claims” was not specific and unequivocal because it did not refer to a specific code cite. The Court went on to find that a reference to “Causes of Action arising under chapter 5 of the Bankruptcy Code, including those actions which could be brought by the Debtor under §§544, 547, 548, 549, 550, and 551” was sufficiently detailed so that “a creditor could not feign surprise that the Trust would pursue a claim under Section 542.” Conclusion Taken together, Texas Wyoming and Crescent Resources set a fairly low bar for preserving claims and causes of action under a plan. Both cases take a pragmatic attitude, essentially relying on a surprise standard. From a policy standpoint, it is about fairness. If a creditor is being asked to vote on a plan, it should be clear whether that person runs the risk of being sued. In Texas Wyoming, the Disclosure Statement clearly signaled that the Debtor intended to sue former shareholders who had received dividends. In Crescent Resources, the language could have been stronger, but it wasn’t really surprising that an insider who had received large transfers prior to bankruptcy would be sued. While the Court found that the Crescent language was sufficient, it would have been stronger if it had referred to “Causes of Action arising under chapter 5 of the Bankruptcy Code, including those actions which could be brought by the Debtor under §§542, 543, 544, 545, 547, 548, 549, 550, 551, 552 and 553 which may be brought against any entity receiving a transfer from any of the Debtors during the four years prior to bankruptcy, including but not limited to insiders, employees, officers, and equity holders of the Debtors.”

Here at Shenwick & Associates, we have been following last month's passage by the New York Legislature and signing into law by Governor Cuomo of the Marriage Equality Act ("the Act"), which became effective on July 24, 2011. This law formally recognizes otherwise-valid marriages without regard to whether the parties to the marriage are of the same or different sex. Besides simply allowing same-sex couples to marry, we are studying the impact of the Act on our twin practices of real estate and bankruptcy: 1. Under New York law, married couples are allowed to own real property as tenants by the entirety. Tenants by the entirety is a special type of joint tenancy with rights of survivorship (which means that when one owner dies, then the surviving owner or owners will continue to own the asset and the estate and heirs of the deceased owner will receive nothing). Real property owned as tenants by the entirety receives extra protection from creditors. As a leading case describes it: "[t]he law in New York clearly permits a [spouse]'s interest in a tenancy by the entirety to be sold under execution upon a judgment against him [or her]. The purchaser at such sale becomes a tenant in common with the debtor's [spouse], subject to [his or] her right of survivorship and is entitled to share in the rents and profits, but not the occupancy." In re Weiss, 4 B.R. 327, 330 (S.D.N.Y. 1980) (citations omitted). So a creditor can execute a judgment against a debtor spouse's interest in real property, but cannot foreclose on or take occupancy of that debtor spouse's interest. Presumably same-sex couples who wed in New York (or who have already entered into same-sex marriages in other states that allow it) after the Act becomes effective and take ownership to property will be able to take ownership as tenants by the entirety rather than as tenants in common. Also, same-sex couples who had acquired property as tenants in common could then convey the property to each other as tenants by the entirety after their marriage. Although there is no specific language to this effect, Section 2 of the Act clearly states: "It is the intent of the legislature that the marriages of same-sex and different-sex couples be treated equally in all respects under the law. The omission from this act of changes to other provisions of law shall not be construed as a legislative intent to preserve any legal distinction between same-sex couples and different-sex couples with respect to marriage." 2. Under federal bankruptcy law and the New York Civil Practice Law and Rules and Debtor and Creditor Law, married debtors can file a joint bankruptcy petition. Section 302(a) of the Bankruptcy Code provides that "[a} joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse." And although New York law does not specifically mention joint debts, all exemptions in personal bankruptcy and from money judgments are "per person." However, the federal Defense of Marriage Act ("DOMA"), enacted in 1996, defines marriage as a legal union between one man and one woman. Section 3 of DOMA prevents the federal government from recognizing the validity of same-sex marriages. Although the constitutionality of DOMA is being challenged in federal court and President Obama is supporting a bill to repeal DOMA, for now it is still valid law. But last month, in In re Balas, the Bankruptcy Court for the Central District of California denied the United States Trustee ("UST")'s motion to dismiss the joint Chapter 13 petition of two males who were lawfully married under California law when they filed their joint petition. In denying the UST's motion to dismiss, the Court stated "[i]n this court's judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple." Although this holding is specific to the parties to the case, it's significant that the House Bipartisan Legal Advisory Group, which is leading Congressional efforts to defend DOMA, stated that they would not appeal the ruling to the 9th Circuit Court of Appeals. While it cannot be used as mandatory authority by same-sex couples who are lawfully wed under state law and seeking to file joint bankruptcy petitions, it can certainly be used as persuasive authority to do so. For more information about the complex intersection of bankruptcy, real estate and same-sex marriage rights, please contact Jim Shenwick.

Congressman Ruben Hinojosa was one of many representatives who voted for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. As a chapter 11 debtor, he will now be tested to see whether must follow the same rules he voted for, as well as those previously in place. In re Ruben Hinojosa, Case No. 10-70900, pending in the United States Bankruptcy Court for the Southern District of Texas.Special Treatment?Congressman Hinojosa has represented Texas's 15th Congressional District since 1996. On December 18, 2010, he filed a petition for chapter 11 relief after receiving an unfavorable arbitration award in a proceeding brought by Wells Fargo Bank. His bankruptcy case initially raised concerns about preferential treatment when the United States Trustee signed an agreed order exempting the Congressman from closing his pre-petition bank accounts and providing that he did not need to include the notation "Debtor-in-Possession" on his checks. When he inadvertently included copies of his 2009 federal tax return and his financial disclosure statement on his petition and amended petition, he filed a motion to seal those documents. Bankruptcy lawyer and blogger Alexander Wathen unsuccessfully opposed this motion and has filed an appeal. Wathen v. Hinojosa, No. 7:11cv141, pending in the United States District Court for the Southern District of Texas. You can read about it on Alex's blog here, here and here.The Plan and Disclosure Statement Make for Interesting ReadingOn July 15, 2011, debtor-in-possession Hinojosa filed his plan and disclosure statement which appear to contain flagrant violations of the Bankruptcy Code and at least one violation of BAPCPA. The Congressman's Disclosure Statement is largely a puff piece for his service in Congress. Most of the 67 pages discuss his Congressional career, while nearly all of the substantive material that would normally be contained in a disclosure statement is buried in exhibits. To put it charitably, the information contained in the disclosure statement is confusing and contradictory. According to the liquidation analysis, creditors in a chapter 7 liquidation would receive $560,613.56, which would yield a distribution of 20%. The liquidation analysis represents that creditors would receive at least 20% on their claims under the Plan. However, this is NOT what the Plan provides. The Plan states that unsecured creditors will receive sixty payments totaling 0.00009% of their claims. The Congressman's projections indicate that he intends to pay his unsecured creditors (who total nearly $3 million) $250.00 per month. Meanwhile, the Congressman will be spending $3,000.00 a month on rent, $2,244.75 on insurance, $1,154.58 on "college fund and school expenses" and $500.00 per month for "vehicle replacement expense." As a chapter 11 debtor owing primarily business debts, the Congressman is not subject to the means test applicable to consumer debtors in chapters 7 and 13. However, if he were, he clearly would not be allowed to save for his children's college education and for a new vehicle at the expense of his creditors. The Plan also provides for "sale of all or a portion of the non-exempt assets of the Estate which sums amount to an unknown percentage of the Allowed Unsecured Claims." Under the Means for Implementation section of the Plan, it states that the Congressman will liquidate his real estate holdings. However, going back to the liquidation analysis, the Congressman has only one real estate holding--a property valued at approximately $72,000. Neither the Plan nor the Disclosure Statement say when or how the Congressman will liquidate "some or all" of his non-exempt assets so that the promise of liquidation is so vague as to be unenforceable. Another outrageous feature of the Plan concerns the discharge. Under BAPCPA, which Rep. Hinojosa voted for, individual chapter 11 debtors do not receive a discharge until they complete their plan payments. 11 U.S.C. Sec. 1141(d)(5). However, Congressman Hinojosa's Plan states:IT IS THE INTENTION OF THIS PLAN THAT ONCE CONFIRMATION OCCURS, THE DEBTOR WILL BE FULLY, FINALLY AND COMPLETELY DISCHARGED FROM ALL LIABILITIES INCLUDING CLAIMS AND DEBTS AND SHALL BE REVESTED WITH ALL PROPERTY OF THE ESTATE AS HEREIN PROVIDED.It seems like the Congressman was not paying attention the day he voted on BAPCPA. Otherwise, he never would have allowed his lawyers to insert this provision into the Plan. A Final QuestionAt a minimum, it appears that this Plan violates the chapter 7 liquidation test and the absolute priority rule and probably is not proposed in good faith. Creditors will probably not find much to like about this Plan. However, the big question is what will the U.S. Trustee do? In the Western District of Texas, which has the same U.S. Trustee as the Southern District of Texas, the U.S. Trustee nitpicks every minor detail of a plan. Will the same standard apply to Rep. Hinojosa? I hope that the U.S. Trustee will fulfill its role as a watchdog rather than being a lapdog.

Despite clear cut abuse by a mortgage lender, the Fifth Circuit has found that a bankruptcy court lacked authority to enter a broad remedial injunction requiring Wells Fargo to conduct an extensive audit of claims filed in the Eastern District of Louisiana. Matter of Stewart, No. 09-30832 (5th Cir. 7/22/11). You can find the opinion here.Lack of Cooperation, Evasion and Inflated ClaimsThe Fifth Circuit succinctly stated the facts of the case as follows: When elderly widow Dorothy Chase Stewart filed for bankruptcy in 2007, Wells Fargo Bank filed a proof of claim with the bankruptcy court reciting debts owed from an outstanding mortgage on Ms. Stewart’s house. From her limited funds, Ms. Stewart hired a lawyer to request a full accounting of Wells Fargo’s charges.Wells Fargo did not cooperate. It provided a list of charges by type, but without the amount, date, or payee for each charge, and without invoices or proofs of payment for the third-party fees it charged to Ms. Stewart. At a hearing convened by the bankruptcy court, Wells Fargo sent lawyers unfamiliar with her case and unable to provide further information or documentation. As the hearing went on, “errors in billing became evident.” Two further hearings and four months of research passed before the bankruptcy court was able to unravel Wells Fargo’s accounting. After Ms. Stewart’s attorney “painstakingly identified the additional information needed, or explanations required” to review the claim, Wells Fargo finally produced a full reconciliation of Ms. Stewart’s mortgage account. Inspecting those records, the bankruptcy court concluded Wells Fargo’s proof of claim was rife with errors, including: * Calculations that were “wholly incorrect” under the terms of the mortgage contract; * Late fees generated through questionable accounting and imposed without notice to the debtor; * Charges for drive-by inspection reports that were plainly erroneous, with some reports describing a wood-frame house and others describing a house with a brick exterior; * Charges for broker price opinions (BP Os) that Wells Fargo was unable to document, several with duplicative charges, and charges for a BPO that could not have been generated on its stated date because Ms. Stewart’s parish was then under a mandatory evacuation order for Hurricane Katrina; * Attorneys’ fees and cost invoices that were invalid or inadequately documented. The bankruptcy court found that these errors caused Wells Fargo to overstate its claim by more than $10,000. Opinion, pp. 2-3.The Court also referred to another case involving Wells Fargo in which the Court described a proof of claim as:such a tangled mess that neither Debtor, who is a certified public accountant, nor Wells Fargo's own representative could fully understand or explain the accounting offered.Opinion, p. 2, n. 2.Of these violations, my personal favorite is charging for a Broker's Price Opinion at a time when the Parish was under a mandatory evacuation order. Those brokers must have been awfully brave.The Court's ResponseCheating widows is not looked upon favorably in most quarters. The Bible says:Cursed be anyone who perverts the justice due to the sojourner, the fatherless, and the widow.Deut. 27:19.Judge Elizabeth Magner was not very happy either. She found Wells Fargo to have been "duplicitous and misleading." In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008). Judge Magner awarded damages in the amount of $10,000.00 and attorney's fees in the amount of $12,350.00. She further sanctioned Wells Fargo $2,500.00 for presenting a consent order which did not reflect the agreement of the parties and an additional $2,500.00 for filing "significantly erroneous proofs of claim."She also granted broad injunctive relief. In order to rectify this problem in the future, the Court orders Wells Fargo to audit every proof of claim it has filed in this District in any case pending on or filed after April 13, 2007, and to provide a complete loan history on every account. For every debtor with a case still pending in the District, the loan histories shall be filed into the claims register and Wells Fargo is ordered to amend, where necessary, the proofs of claim already on file to comply with the principles established in this case and Jones. For closed cases, Wells Fargo is ordered to deliver to Debtor, Debtor’s counsel and Trustee a copy of the accounting. The Court will enter an administrative order for the review of these accountings and proofs of claim. The Court reserves the right, if warranted after an initial review of the accountings, proofs of claim and any amended claims filed of record, to appoint experts, at Wells Fargo’s expense, to review each accounting and submit recommendations to the Court for further adjustments based on the principles set forth in this Memorandum Opinion and Jones.In re Stewart, supra.The Fifth Circuit RulingThe Fifth Circuit found that the Court lacked jurisdiction to grant the injunction. Relying on Supreme Court precedent, the Fifth Circuit found that past injury is not sufficient to grant an injunction unless there is a "real and immediate threat" that the person will suffer injury in the future. Because there was "no demonstrated likelihood that Ms. Stewart will ever again be subject to an incorrect proof of claim filed by Wells Fargo," she lacked standing to pursue an injunction (and indeed, she had not requested one). The Court also found that the injunction could not be justified based on "the inherent power of the court to protect its jurisdiction and judgments and to control its docket."While the deficiencies found in Wells Fargo's claim here do cast a shadow on its other claims, misdeeds in other cases can be addressed by the judges in those cases. If the case-by-case process, with the discipline of developed jurisprudence, is thought to be inadequate, there remains the rulemaking authorityOpinion, p. 7.In conclusion, the Court stated:We need not here undertake to draw bright boundaries to the well established power of a court to correct abuses of its process. We say only this: the injunction here was outside that boundary. The issued injunction ranges far beyond the dimensions of this case to police a range of cases untested here by the adversary process. Its specific commands are not for the benefit of Ms. Stewart, whose injuries are fully remedied without the injunction. Rather, the injunction is aimed at other cases in which Wells Fargo has appeared or might appear before the bankruptcy courts. While justification for the bankruptcy court’s frustration is plentiful, its injunction lacks jurisdictional legs. We must therefore vacate the injunction as exceeding the reach of the bankruptcy court in this case. (emphasis added).Opinion, p. 7.What It MeansThe problem of mortgage accounting in bankruptcy is a national scandal. Judge Magner recognized the seriousness of the issue and tried to do something about it. Unfortunately, her creative remedy "lack(ed) jurisdictional legs." This does not mean that there are not any remedies. The Debtor in this case got her mortgage cleaned up. The Fifth Circuit tacitly encouraged other debtors to challenge their mortgage accountings. The Court's reference to "the discipline of developed jurisprudence" appears to this author to be a warning to Wells Fargo that it has developed a record of negligence and will be subject to further scrutiny. However, that scrutiny will need to come in individual cases, class actions or the rule making process.While Judge Magner's order was reversed, thanks to Harrington & Myers, who represented the Debtor, Wells Fargo has received a polite but public scolding from the Fifth Circuit. That should count for something. This case also illustrates the need for the Consumer Financial Protection Bureau. Most debtor's attorneys will not have the tenacity of Harrington & Myers. Similarly, the U.S. Trustee's office does not have the resources to handle systemic problems such as this one. While I am generally not a fan of government regulation, this may a case where it is firmly warranted.Coming Attractions:Judge Magner will be speaking on the topic of Mortgage Accounting at the State Bar of Texas Advanced Consumer Bankruptcy Course in Houston, Texas on September 8-9, 2011. She is just one of the many excellent speakers we have lined up.