Benchnotes Mar 2001

Attorney Fees, Expenses "Substantial Contribution"

In In re Celotex Corp., 227 F.3d 1336 (11th Cir. 2000), in
a case of first impression, the Eleventh Circuit considered whether a creditor's
attorney may recover fees and expenses for a "substantial contribution" pursuant to
§503(b)(3)(D) where the creditor client has an adverse interest in the debtor.
The Eleventh Circuit adopted the Fifth Circuit's holding in In re DP Partners
Ltd., 106 F.3d 667 (5th Cir. 1997), that "...a creditor's motive
in taking actions that benefit the estate has little relevance in the determination
whether the creditor has...ma[de] a substantial contribution to a case." The plain
language of the statute does not require a "self-deprecating, altruistic intent as a
prerequisite to recovery..." The Eleventh Circuit ruled that the creditor's attorney
was entitled to fees and expenses for a substantial contribution and remanded the case
for a determination of the appropriate hourly rate. The dissent would remand the case
to the bankruptcy court "...to determine whether the services for which [the
attorneys] seek to be compensated constitute a substantial contribution under 11
U.S.C. §503(b)(3) and (4), under the correct legal standards. Assuming
that the court correctly holds that the bankruptcy court applied the wrong legal
principle in examining the facts, that court should make the final factual determination
without that legal error, not this court."

Appeal Procedural Requirements Still Mandatory

The courts continue to remind us that procedural requirements for appeal are
mandatory, and the failure to remember this can have serious adverse consequences. In
In re Starcher, 255 B.R. 292 (S.D. W.Va.), the court held that the
10-day time limit for filing a notice of appeal from an order of the bankruptcy
court is jurisdictional and must be strictly construed. The Tenth Circuit held in In
re Key Energy Resources Inc., 230 F.3d 1197 (10th Cir. 2000),
that a party waives appellate review by failing to file timely objections to a
magistrate judge's report and recommendation. It also noted that the only way around
such a waiver is to satisfy application of the "interest of justice exception" to the
waiver rule.

Doctrine of Issue Preclusion

In Adair v. Sherman, 230 F.3d 890 (7th Cir. 2000), confirmation
of a chapter 13 bankruptcy plan operated under the doctrine of issue preclusion to
bar the debtor from bringing a subsequent suit under the Fair Debt Collection
Practices Act, alleging that the claim had been overvalued. There was no objection
to the valuation of the claim prior to the confirmation of the chapter 13 plan,
and the claim was allowed as fully secured by the terms of the plan itself. Thus,
the claim was definitively determined as to both status and amount. As such,
imposition of the doctrine of issue preclusion was appropriate.

Substantive Consolidation Order Is Final and Appealable

In In re Bonham, 229 F.3d 750 (9th Cir. 2000), the Ninth
Circuit made a number of first-impression rulings in reference to issues involving
substantive consolidation of cases. The chapter 7 trustee moved to substantively
consolidate a debtor's estate with the non-debtor estates of her two closely held
corporations. The Ninth Circuit held that the bankruptcy court's order substantively
consolidating the entities is a final and appealable order. The district court had
dismissed the appeal for lack of finality, having held (erroneously, as it turns
out) that the bankruptcy court's order lacked finality. With reference to the
substantive nature of the appeal, the Ninth Circuit held that bankruptcy courts have
the power to substantively consolidate entities (not just different debtor estates)
pursuant to their general equity powers and that, in this case, the bankruptcy court
had not erred in ordering substantive consolidation of the debtor's estate and those
of her two closely held corporations. The Ninth Circuit also held that the
bankruptcy court did not err in ordering the substantive consolidation nunc pro tunc
as of the date of filing of the initial involuntary chapter 7 petition. The facts
showed that the debtor operated a Ponzi investment scheme and had used the corporations
to further the scheme. The Ninth Circuit also concluded that the bankruptcy court
did not err in its ruling, which preserved the trustee's avoidance powers.

Miscellaneous

• Securities and Exchange Commission v. Brennan, 230 F.3d 65 (2nd
  Cir. 2000) (the district court's repatriation order obtained by the SEC was
  found to be an effort to enforce a money judgment and thus fell within the
  "governmental unit" exception to the automatic stay and violated the stay);
• In re McAlpin, 254 B.R. 449 (Bankr. D. Minn. 2000) (prior
  order in the chapter 13 bankruptcy case that disallowed as excessive the collection
  costs as part of proof of claim qualified as a final judgment on the merits that
  could be given collateral estoppel effect);
• In re Frank, 254 B.R. 368 (Bankr. S.D. Tex. 2000)
  (automatic stay terminates immediately upon entry of an order dismissing the case);
• In re Keeney, 227 F.3d 679 (6th Cir. 2000) (the Sixth
  Circuit joins the Fifth Circuit and others in adopting the use of the Doctrine of
  Continuing Concealment under objections to discharge pursuant to §727(a)(2)(A).
  See, also, Thibodeaux v. Olivier, (In re Olivier), 819 F.2d 550 (5th
  Cir. 1987));
• In re PWS Holding Corp., 228 F.3d 224 (3rd Cir. 2000)
  (court approved a plan provision granting broad immunity to debtors, reorganized
  debtors, creditor representative envisioned by the plan, the creditors' committee or any
  of their respective members, officers, directors, employees, advisors, professionals
  or agents "...except for willful misconduct or gross negligence...," as the relief
  granted follows the standard of liability contained in §1103(c));
• In re Lapes, 254 B.R. 501 (Bankr. S.D. Fla. 2000)
  (Florida homestead exemption is not available to one who acquires the homestead with
  traceable proceeds of fraudulent transfers);
• In re Hoekstra, 255 B.R. 285 (E.D. Va. 2000) (chapter 7
  debtors' attempt to avoid junior liens held by the IRS and the homeowner's
  association was a prohibited "strip down" under §506(d));
• In re Tennohio Transp. Co., 255 B.R. 307 (Bankr. S.D. Ohio
  2000) (post-petition advances of new value may not be applied to offset
  preferential transfers);
• In re GWI PCS 1 Inc., 230 F.3d 788 (5th Cir. 2000)
  (for purposes of constructive fraudulent transfer avoidance action, the "transfer"
  occurred when the debtors executed promissory notes for the remainder of the purchase
  price under a winning bid at the government auction, not when the bid was
  submitted);
• In re Berg, 230 F.3d 1165 (9th Cir. 2000) (in a case of
  first impression, the Ninth Circuit holds that sanctions imposed against a debtor
  attorney for unprofessional conduct in litigation falls within the government regulatory
  exemption and is not subject to the automatic stay);
• In re Carrozzella & Richardson, 255 B.R. 267 (Bankr. D. Conn.
  2000) (the bankruptcy court is not bound by stare decisis to follow decisions
  of district courts or a bankruptcy appellate panel);
• Constructivist Foundation Inc. v. Bonner, 254 B.R. 863 (Bankr.
  D. Md. 2000) (debtor's appeal of an order lifting stay became moot once the
  foreclosure sale by the mortgagee was completed); and
• In re Beverage Canners Intern. Corp., 255 B.R. 89 (Bankr.
  S.D. Fla. 2000) (creditor seeking allowance of administrative expense claim
  satisfied the burden of demonstrating actual "benefit" to the chapter 11 estate by
  showing that debtor's post-petition use of licensed trademarks benefited the estate).