Back to School in the Ninth Circuit

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    10 Sep Back to School in the Ninth Circuit

    Posted at 17:30h in Bankruptcy by

    This summer was a very busy one for the Ninth Circuit’s bankruptcy appellate docket:

    In Quin v. County of Kauai Department of Transportation, the Ninth Circuit reviewed the effect of a debtor’s failure to list a pending lawsuit in its schedules.  The rule in such cases is that claims not listed are lost:  “Conceal your claims; get rid of your creditors on the cheap, and start over with a bundle of rights.  This is a palpable fraud that the court will not tolerate, even passively.”  As an application of the doctrine of “judicial estoppel” (the doctrine that litigants shouldn’t be able to switch positions when doing so would be prejudicial to another litigant), the rule is designed to ensure the integrity of the judicial process.

    But what happens when the failure to list claims is accidental (i.e., due to simple “inadvertence” or “mistake”)?  “Consider, for example, a litigant who is not represented by counsel or who speaks English as a second language and fails to include a claim on her bankruptcy schedule because she does not understand that she was required to do so.”

    Seal of the United States Court of Appeals for...

    Seal of the United States Court of Appeals for the Ninth Circuit. (Photo credit: Wikipedia)

    Other circuits have addressed this question with yet another simple rule:  If the debtor knew of the existence of a claim, but didn’t list it, an intent to fraudulently conceal the claim is automatically inferred.

    But a three-judge panel in Quin declined to follow this rule.  Emphasizing the “discretionary” nature of judicial estoppel, the Ninth Circuit panel instead noted that while the circumstances indicating “inadvertence” or “mistake” have never, in fact, been delineated in this Circuit, “[a] key factor is that Plaintiff reopened her bankruptcy proceedings and filed amended bankruptcy schedules that properly listed this claim as an asset.”

    A number of other decisions focused on non-dischargeability:

    Willms v. Sanderson.  A bankruptcy court erred by (i) sua sponte extending the time in which to file a non-dischargeability complaint after the deadline had already passed; and (ii) doing so without either a showing or a finding of cause.  On appeal, the District Court affirmed the bankruptcy court.  But the Ninth Circuit panel remanded with instructions to dismiss.

    In re Perle.  The Ninth Circuit panel affirmed the Bankruptcy Appellate Panel’s ruling that an arbitration debt was nondischargeable in bankruptcy under 11 U.S.C. §§ 523(a)(3) and 523(a)(6). The panel held that the creditor’s challenge to the dischargeability of the debt was not filed within 60 days of the first date set for the creditors meeting but nonetheless was timely because the chapter 7 debtor did not adequately identify the debt on his Schedule E, and the creditor did not have notice or actual knowledge of the bankruptcy. The panel held that the creditor’s lawyer’s knowledge could not be imputed to the creditor on an agency theory when the lawyer learned of the bankruptcy during his representation of another client and after the completion of his representation of the creditor in relation to the debt.

    Carpenters Pension Trust Fund v. Moxley. Distinguishing Stern v. Marshall, 131 S. Ct. 2594 (2011), a Ninth Circuit panel held that the bankruptcy court had jurisdiction to adjudicate the dischargeability of the pension fund’s claim against the contractor because a dischargeability determination is central to federal bankruptcy proceedings and therefore constitutes a public rights dispute that a bankruptcy court may decide.   The contractor was subject to withdrawal liability under the Employee Retirement Income Security Act because he continued doing work covered by the collective bargaining agreement after it expired.  The panel held that this debt was dischargeable because it did not qualify as a debt created via defalcation by a fiduciary under 11 U.S.C. § 523(a)(4).  The panel concluded that the contractor was not a fiduciary of the fund pursuant to ERISA because he had nothing to do with the fund’s administration or investment policy and did not exercise control respecting disposition of its assets.  The panel held that the fund’s assets did not include the unpaid withdrawal liability.  It reasoned that the withdrawal liability was a statutory obligation, and was different from unpaid contributions arising from contractual obligations under the collective bargaining agreement.  The panel held that the contractor’s failure to challenge the withdrawal liability amount in arbitration did not act as a waiver of his right to discharge the debt.

    Finally, a decision released today regarding post-confirmation jurisdiction over tax disputes:

    In re Wilshire Courtyard.  The Ninth Circuit panel held that the bankruptcy court had jurisdiction to reopen a bankruptcy proceeding to consider the tax consequences of the reorganization, pursuant to a chapter 11 plan, of the debtor, a general partnership that owned two commercial buildings in Los Angeles, into a limited liability company with a 1% ownership interest in the property.  As part of the bankruptcy, over $200 million of partnership debt was forgiven, and the individual partners reported cancellation of debt income on their tax returns.  The California Franchise Tax Board sought to assess $13 million in unpaid income taxes on the partners, characterizing the transaction as a disguised sale and the reported cancellation of debt income as capital gains.  The reorganized LLC asked the bankruptcy court to reopen the case.  The panel agreed with the BAP that the bankruptcy court had neither “arising under” nor “arising in” subject matter jurisdiction over the dispute.  But it disagreed with the BAP’s holding that the bankruptcy court lacked post-confirmation “related to” jurisdiction.  The panel reaffirmed that a “close nexus” exists between a post-confirmation matter and a closed bankruptcy proceeding sufficient to support jurisdiction when that matter affects the “interpretation, implementation, consummation, execution, or administration of the confirmed plan.”  The panel concluded that the ultimate merits question of the sale/non-sale attributes of the transaction depended in part on interpretation of the confirmed plan and confirmation order.  In addition, the parties disputed the distinctly federal question of whether 11 U.S.C. § 346 (preempting state tax law) applies to non-debtor general partners of a debtor partnership that was dissolved as part of the reorganization.  The panel also concluded that post-confirmation jurisdiction was consistent with the equitable objectives of the Bankruptcy Code.  Holding that the character of the core transaction of the debtor’s bankruptcy was an issue that the bankruptcy court had jurisdiction to decide, the panel remanded the case to the BAP to determine in the first instance whether the bankruptcy court’s answer to this question gave due consideration to the “economic realities” of the transaction as structured under the plan and confirmation order.
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