Supreme Court to Resolve Circuit Split on Interpretation of Discharge Exception

In Supreme Court Grants Cert to Consider Actual Fraud Bar in Section 523(a)(2)(A), Katherine Doorley reported that the Supreme Court granted a petition for a writ of certiorari in Husky International Electronics, Inc. v. Daniel Lee Ritz, Jr. to resolve a circuit split over the discharge exception in section 523(a)(2)(A) of the Bankruptcy Code for debts obtained through false pretenses or actual fraud.  The First and Seventh Circuits have held that the “actual fraud” bar is satisfied when an individual debtor has deliberately obtained money through a scheme actually intended to cheat creditors, but without a specific misrepresentation.  The Fifth Circuit, however, held that as a matter of law there can be no “actual fraud” unless the debtor made a false representation to the creditor.  Oral argument in this case has not yet been scheduled.  We continue to monitor this case and will update our readers when the Supreme Court renders a decision.

Section 365(d)(3) Is Limited to Obligations of the Debtor

As Abigail Lerner made clear in Think Holding a Guaranty Will Give You Priority Over Other Creditors? Think Again!a debtor’s personal guaranty for the payment of rent of a third party is not an obligation of the debtor that requires treatment as administrative rent under section 365(d)(3) of the Bankruptcy Code.  The language of section 365(d)(3) is limited to circumstances where the debtor is the obligor under a lease of nonresidential real property and cannot be stretched to include a debtor’s personal guaranty of the debt of another.  In support of its holding, the court pointed out that the purpose of granting administrative expense claim status is to encourage third parties to provide debtors with necessary goods and services.

What Constitutes Excusable Neglect?  Law Firm Fails to Meet Deadline for Filing Final Fee Application

In You’re Excused! Court Grants Final Fee Application Despite Late Filing, Abigail Lerner focused on whether a law firm’s failure to file its final fee application by the deadline set forth in the plan was the result of excusable neglect under Bankruptcy Rule 9006(b)(1).  The court explained that determining whether a party’s conduct in failing to meet a deadline resulted from excusable neglect requires an analysis of all of the relevant circumstances surrounding such failure.  This includes:  the danger of prejudice to the adverse parties, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, and whether the party acted in good faith.  Here, the debtors’ attorneys’ final fee application was filed no more than 20 days after the date required under the plan and the law firm agreed to discount its fees to ensure that all claims were paid their full distribution.  Concluding that there was no prejudice to adverse parties and that the firm acted in good faith, the court granted the application, subject to the limitation that all other claims recover the full distribution to which they were entitled under the plan.

The Automatic Stay:  Burden Shifting and Interplay with State Law

Doron Kenter’s post, In Considering Motions to Sever, District Courts Might Effectively Shift the Burden to Plaintiffs to Show Why the Automatic Stay Should Not Be Extended to Nondebtor Defendants, discussedAbrams v. Integrated Pro Services, LLC.  In this case, the court effectively extended the automatic stay to nondebtor defendants by (i) denying the plaintiffs’ motion to sever claims against the debtor from the claims against other nondebtor defendants and (ii) granting the defendants’ motion to decline severance.  Significantly, it was the plaintiffs who bore the burden of demonstrating why the claims should be severed – i.e., why the stay should not be extended to the nondebtor defendants – precisely the reverse of the burden that would otherwise be imposed with respect to the applicability of the automatic stay vis-à-vis nondebtor defendants.  As Doron pointed out, this case demonstrates that the form and manner of the relief being sought and the forum in which the parties proceed may have a significant effect on the parties’ burdens and procedural hurdles – and even, perhaps, on the outcome.

Adam Lavine examined the interplay between the automatic stay and state law proceedings against the debtor in Court Jester: Tenth Circuit BAP Not Amused By Jester’s Attempt to Reopen Case.   Jester v. Wells Fargo Bank, N.A. (In re Jester) stands for proposition that, although the automatic stay requires creditors to refrain from any activity that would advance a prepetition action, it does not require such an action to be dismissed.  The Tenth Circuit BAP found that the secured creditor had no affirmative duty to dismiss its prepetition foreclosure action upon learning that the debtor had filed for bankruptcy.  Therefore, the failure to dismiss the foreclosure action did not violate the stay. The court also held, unsurprisingly, that neither the post-bankruptcy negotiation of the forbearance agreement, nor the secured creditor’s attempts to collect debts accrued thereunder, violated the automatic stay because these events occurred after the debtor had received a discharge.

What Constitutes Implied Consent to Bankruptcy Court Jurisdiction?

In Be Careful — You Might Consent to Adjudication in Bankruptcy Court Even If You’ve Expressly Said You Don’t, Doron Kenter examined the issue of implied consent in the context of Stern claims.  The case involved a lawsuit filed by the debtor against Sleepy’s and a related counterclaim by Sleepy’s against the debtor.  Among the issues before the court was whether the filing of the counterclaim constituted implied consent by Sleepy’s to the bankruptcy court’s jurisdiction, despite the fact that Sleepy’s expressly withheld its consent.  Cutting to the heart of the issue, the bankruptcy court drew a distinction between counterclaims seeking to negate the debtor’s claim and counterclaims, like the one filed by Sleepy’s, seeking affirmative recoveries from the debtor.  Where the defendant is simply seeking to defeat the debtor’s claims (i.e., reduce them to $0, via setoff or otherwise), its argument that it has not consented to adjudication in the bankruptcy court has merit.  But where the defendant seeks a net recovery from the debtor, its counterclaims are tantamount to filing a proof of claim against the debtor, which therefore constitutes knowing and voluntary (implied) consent to adjudication in the bankruptcy court.  The bankruptcy court concluded, “[t]he mere possibility that Sleepy’s might receive a distribution on its untimely claim is sufficient to submit the claim to this Court’s adjudication.”