Benchnotes Nov 2001
Claims Against Trustee for Estate Administration Mishandling
In In re Richman v. Batt, 265 B.R. 416 (E.D. Pa. 2001), District Judge Buckwalter addressed the intersection of claims brought against the chapter 7 trustee for the mishandling of the administration of the estate and claims filed against the bankruptcy trustee based on acts committed for the purpose of operating the debtor's business. The court noted that the Barton doctrine, which arose out of Barton v. Barbour, 104 U.S. 126, 129 (1881), precludes a party from bringing suit against a court-appointed bankruptcy trustee for acts done in an administrative capacity without first obtaining leave from the court that appointed the trustee. The court noted that there is a narrow exception to this rule under 28 U.S.C. §959(a), which authorizes suit in a non-appointing court without leave from the appointing court where the suits were based on acts of the trustee committed for the purpose of operating a debtor's business. The court noted that the exception would be appropriate in situations where, for example, a plaintiff brings a negligence case against a trustee operating a debtor's retail store in which the plaintiff was injured. The court noted that under the facts of this case, where the cause of action was asserted for a breach of the trustee's duties while serving as the trustee of the bankruptcy estate (although "faintly sounding" in breach of fiduciary duty and fraud), appear to be wholly unrelated to carrying on the debtor's business and therefore do not fit within the statutory exception. As the claims do not fit within the statutory exception, the plaintiff is required to seek leave of the appointing court, and failure to obtain leave of the appointing court left the court with only one recourse, which was to dismiss the case.
Arbitration Award Claims
In re Robinson, 265 B.R. 722 (6th Cir. BAP 2001), addresses the increasingly interesting intersection between arbitration and bankruptcy. In this case, the issue on appeal was (a) whether the bankruptcy court abused its discretion or otherwise erred when it decided there were no grounds warranting revocation of an arbitration award and (b) whether the bankruptcy court erred when it ruled that res judicata barred the debtor's objection to the claim. Pre-petition, the debtor/farmer entered into contracts obligating him to deliver a certain amount of grain to Landmark, whose contracts contained an arbitration clause and that further provided that the decision and award shall be "final and binding." Prior to the filing of the bankruptcy petition, Landmark had cancelled the contract, the debtor responded with a claim for damages, and the action was ultimately referred to arbitration. The arbitrators found that the debtor had breached the contracts and awarded Landmark in excess of $219,000. The debtor did not file a motion to vacate the award, and Landmark did not file a judicial action to confirm the award. Subsequently, the debtor filed chapter 12, Landmark filed a claim based on the arbitration award, and the debtor objected. The bankruptcy court held that the debtor had failed to allege or prove any specific facts warranting a revocation of the arbitration award and also found that res judicata precluded the bankruptcy court from addressing the merits of the debtor's objection to the claim. The BAP examined each of the debtor's arguments challenging the arbitration award. It initially noted that the bankruptcy court was without subject-matter jurisdiction to review the decision of the state court, as the debtor in Landmark had "signed contractual documents" and that "reasonable minds cannot differ on the question of whether the arbitration clause is included in the contracts." Pursuant to the Rooker-Feldman doctrine, a state court decision that refers contractual disputes to arbitration is beyond collateral attack in the bankruptcy court. Additionally, any complaint that the debtor was forced into arbitration rather than judicial proceedings was also held to be beyond bankruptcy court or BAP jurisdiction, regardless of the debtor's arguments that the arbitration clause was allegedly hidden or that he was not otherwise fully informed. The court then reviewed the debtor's argument that the arbitration was flawed because of an inherent bias, noting that pursuant to 9 U.S.C. §10(a)(2), in order to establish bias, there must be a showing of "evidence partiality." Relying on Sixth Circuit precedent, the court found that the debtor did not satisfy his burden to show that "a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration." The court then addressed whether the arbitrators had exceeded their authority. The Sixth Circuit has previously stated that such an argument must be grounded in the Federal Arbitration Act and that a federal court may set aside an arbitration award only upon a finding that certain statutory or judicial grounds are present. Merely arguing that the arbitrators misinterpreted the contracts at issue or that the arbitrators made a mistake, either of fact or of law, fails. The court also held that the absence of pre-bankruptcy judicial confirmation of an arbitration award is "not significant." Judicial confirmation may be important for collection purposes under the FAA, but it is not required for purposes of recognizing the arbitration award.
Rooker-Feldman Doctrine and Res Judicata
In In re Brazelton Cedar Rapids Group LC, 264 B.R. 195 (Bankr. N.D. Iowa 2001), the creditor obtained a pre-petition state court default judgment. Subsequent to the filing of the chapter 11 case, the debtor objected to the allowance of the creditor's claim. The bankruptcy court proceeded under two separate theories. First, looking at the Rooker-Feldman doctrine, the court concluded that the debtor had had an opportunity to present its defense in the state court case but failed to do so. The bankruptcy court held that by objecting to the creditor's claim, the debtor was now attempting to convince the bankruptcy court that the state court was wrong in finding that the debt exists. Thus, a finding in favor of the debtor on its objection to the creditor's claim necessarily would entail overturning the state court judgment and, thus, violates the tenets of the Rooker-Feldman doctrine. Thus, the court found that it did not have subject-matter jurisdiction to hear and consider the debtor's objection to the amount of the claim. The court then went on to consider the question of claim preclusion. The Rooker-Feldman doctrine and claim preclusion are closely related legal concepts. However, claim preclusion is a narrower doctrine because it requires a finding of res judicata and thus a finding that there was a final judgment on the merits. In re Ferren, 227 B.R. 279 (8th Cir. BAP 1998), aff'd., 203 F.3d 559 (8th Cir. 2000) (per curiam). "Additionally, res judicata requires an examination of the law of the state in which the judgment was entered to determine whether that state would give that judgment preclusive effect against the claims asserted in the federal action, while Rooker-Feldman is based solely on federal law. Id. Furthermore, the court must find that the party against whom the defense is raised had a full and fair opportunity to pursue its claim in the previous state court proceeding. Id. In contrast, Rooker-Feldman does not concern itself with whether procedural due process existed in the state court proceedings. Id. Finally, claim preclusion is an affirmative defense, whereas Rooker-Feldman is a jurisdictional rule and cannot be waived by the waiving party. Id." The court went on to hold that under applicable state law, the debtor would be precluded from disputing the default judgment, and thus, that the debtor was precluded from attempting to assert defenses in the bankruptcy court by way of its claims objection.
- In re Cooper, 263 B.R. 835 (Bankr. S.D. Ohio 2001) (pre-petition personal injury attorney who had knowledge of debtor's chapter 7 filing, but settled claim without ever seeking the approval of the bankruptcy court or chapter 7 trustee, was jointly and severally liable to the estate for the full amount of settlement proceeds);
- Patton v. Shade, 263 B.R. 861 (C.D. Ill. 2001) (fleeting embarrassment as a result of violation of the automatic stay does not allow for compensatory damages but may nevertheless entitle individual debtor's entitlement to attorney fees and punitive damages under §362(h));
- In re Hartz Foods Inc., 264 B.R. 33 (Bankr. D. Minn. 2001) (fact that seller did not follow its demand for reclamation by commencing adversary proceeding to reclaim goods did not extinguish its rights under state law or reclamation provision of the Bankruptcy Code);
- In re Carlson, 265 B.R. 346 (Bankr. D. R.I. 2001) (filing of the 2004 notice against the chapter 7 individual debtor in a related chapter 7 does not violate the automatic stay since the 2004 is not an act against the debtor, but is merely a discovery proceeding in the corporate bankruptcy case of the company of which the debtor was the majority shareholder and president and who was an appropriate person to be examined under Rule 2004 in the corporate case);
- Sears, Roebuck & Co. v. Spivey, 265 B.R. 357 (E.D.N.Y. 2001) (while consensual redemption agreements do not require bankruptcy court approval, the bankruptcy court has the power in appropriate circumstances to require judicial approval of even consensual redemption agreements; however, an order rejecting such a consensual redemption agreement solely on grounds that no motion for approval has been filed was an abuse of discretion);
- In re Singer Furniture Acquisition Corp., 265 B.R. 458 (Bankr. M.D. Fla. 2001) (Rule 9011 sanctions are not imposed on the corporate debtor's president where the president relied on the advice of counsel, did not provide attorneys with any false information and was not shown to be motivated by ill will or malice. However, sanctions were imposed on the law firm representing the debtor as the interpretation of the purpose of chapter 11 and the legitimacy of filing of a petition was purely a legal matter that even a sophisticated businessman was not expected to know and reliance on counsel was justified);
- In re Merlo, 265 B.R. 502 (Bankr. S.D. Fla. 2001) (proposed debtor who did not hold resident alien status and who is not entitled to obtain a social security number could nevertheless file for chapter 13 relief even though there is no social security number to disclose);
- In re Lernout & Hauspie Speech Products N.V., 264 B.R. 336 (Bankr. D. Del. 2001) (§510(b), which provides for mandatory subordination of claims arising from the purchase and sale of securities of the debtor or debtor's affiliates, may be subject of a subordination action even where the claim has not yet been allowed and the appropriate procedural vehicle for such a subordination issue is a contested matter rather than an adversary proceeding);
- In re Parffrey, 264 B.R. 409 (Bankr. S.D. Tex. 2001) (once the debtor has completed his payments under a confirmed chapter 13 plan, the court has no discretion other than to grant discharge, notwithstanding failure of debtor to pay post-petition taxes); and
- In re O'Connor, 258 F.3d 392 (5th Cir. 2001) (under Louisiana law, a partnership agreement was not assumable absent the partner's consent; the agreement passed through bankruptcy unaffected to the debtor and not the trustee).