Mooting a Circuit Split

Hon. Judith K. Fitzgerald (Ret.)

JFitzgerald@tuckerlaw.com

Tucker Arensberg, P.C.

www.TuckerLaw.com

A case of interest to those who sell or purchase property in bankruptcy came down recently.  In Trinity 83 Development LLC v. ColFin Midwest Funding LLC, 2019 WL 987902 (7th Cir. March 1, 2019), the Court of Appeals for the Seventh Circuit overturned prior precedent by ruling that 11 U.S.C. § 363(m) does not moot appeals from sale orders.  A panel of the Court had previously decided In re Sax, 796 F.2d 994 (7th Cir. 1986), which stood for the proposition that any dispute that fell within the scope of § 363(m) was moot.  More recently in In re River West Plaza-Chicago, LLC, 664 F.3d 668 (7th Cir. 2011), § 363(m) was determined to prevent efforts to set aside the sale and, relying on Sax, to prohibit the court from putting the sale proceeds back into the estate.  Because Trinity 83 Development LLC was also a panel decision, its author, Judge Easterbrook, circulated the opinion to all active circuit judges but none asked for en banc review. 

Trinity 83 Development LLC involved a situation where, prepetition, a mortgagee erroneously satisfied a mortgage and when the mistake came to light, was corrected.  The Court of Appeals described the facts as follows:  In 2006 Trinity 83 Development borrowed about $2 million from a bank, giving in return a note and a mortgage on certain real property. In 2011 the bank sold the note and mortgage to ColFin Midwest Funding. ColFin relied on Midland Loan Services to collect the payments. In 2013 Midland recorded a document (captioned “satisfaction”) stating that the loan had been paid and the mortgage released. But the loan was still outstanding, and Trinity continued paying. In 2015 ColFin realized Midland's mistake and recorded a document cancelling the satisfaction. Soon afterward Trinity stopped paying, and ColFin filed a foreclosure action in state court.

Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, No. 18-2117, 2019 WL 987902, at *1 (7th Cir. Mar. 1, 2019)

Trinity filed bankruptcy, which stopped the foreclosure.  After Trinity filed its bankruptcy, it sued ColFin, arguing that the release extinguished the debt and security interest.  The Bankruptcy Judge, later affirmed by the District Court, disagreed, and ruled that the release was a unilateral error that could be rectified unilaterally—and, as no one else had recorded a security interest between those two events, ColFin retained its original rights.  ColFin appealed but before the appeal was heard, the property was sold under the bankruptcy court's auspices.  ColFin contended that § 363(m) mooted the appeal.

The Seventh Circuit decided, inter alia, that the appeal was not constitutionally moot.  Section 363(m), deals with sales orders that have not been stayed and, as there is a live controversy regarding who should get the sales process, does not concern mootness at all.  Moreover, § 363(m) “does not say one word about the disposition of the proceeds of a sale or lease. The text is straight-forward: ‘The reversal or modification on appeal of an authorization ... of a sale or lease of property does not affect the validity of a sale or lease ... to an entity that purchased or leased such property in good faith’. What should be done with the proceeds is a subject within the control of the bankruptcy court.”   Trinity 83 Dev., LLC, supra, 2019 WL 987902, at *2.  Thus, the appellate court decided, a bankruptcy court is not prevented from deciding what to do with sales proceeds when its sale order has not been stayed.  This ruling brings the Seventh Circuit into line with other courts that have addressed this issue including, as noted by Judge Easterbrook, In re Hope 7 Monroe Street L.P., 743 F.3d 867, 872–73 (D.C. Cir. 2014); In re ICL Holding Co., 802 F.3d 547, 554 (3d Cir. 2015); and In re Brown, 851 F.3d 619, 623 (6th Cir. 2017).

Creating a Circuit Split Regarding the Fair Debt Collection Practices Act: Rotkiske v. Klemm, --- F.3d ----, 2018 WL 2209120 (3d Cir. May 15, 2018)

By Hon. Judith K. Fitzgerald (Ret.)

Tucker Arensberg, P.C.

www.tuckerlaw.com

jfitzgerald@tuckerlaw.com

The United States Court of Appeals for the Third Circuit issued its opinion in Rotkiske v. Klemm, a unanimous, en banc decision yesterday that creates a clear split with the Fourth and Ninth Circuits.  The Third Circuit ruled that the statute of limitations for FDCPA violations is one year from the date of violation, not from the date of discovery.

 

Judge Hardiman, writing for the full court, stated: 

This appeal requires us to determine when the statute of limitations begins to run under the Fair Debt Collection Practices Act (FDCPA or Act), 91 Stat. 874, 15 U.S.C. § 1692 et seq. The Act states that “[a]n action to enforce any liability created by this subchapter may be brought in any appropriate United States district court ... within one year from the date on which the violation occurs.” 15 U.S.C. § 1692k(d). The United States Courts of Appeals for the Fourth and Ninth Circuits have held that the time begins to run not when the violation occurs, but when it is discovered. See Lembach v. Bierman, 528 Fed.Appx. 297 (4th Cir. 2013) (per curiam); Mangum v. Action Collection Serv., Inc., 575 F.3d 935 (9th Cir. 2009). We respectfully disagree. In our view, the Act says what it means and means what it says: the statute of limitations runs from “the date on which the violation occurs.” 15 U.S.C. § 1692k(d).

Rotkiske v. Klemm, No. 16-1668, 2018 WL 2209120, at *1 (3d Cir. May 15, 2018)

PRE-PETITION “NEW VALUE” COUNTS TOWARD THE PREFERENCE DEFENSE; POST-PETITION “NEW VALUE” DOES NOT

By:  Hon. Judith K. Fitzgerald (Ret.)

Tucker Arensberg, P.C.

1500 One PPG Place

Pittsburgh, PA  15222

jfitzgerald@tuckerlaw.com

In an opinion that is informative although not precedential, In re AE Liquidation, Inc., No. 17-1794 (May 4, 2018)(which can be found here), the Court of Appeals for the Third Circuit considered both the ordinary course and the new value defenses to a preference action.  Regarding the ordinary course issue, the appellate court detailed facts of record that established that collection actions taken during the preference period were unilateral pressure tactics that derailed the defense. 

No Monkeying Around With This Opinion - Naruto v. Slater, No. 16-15469, 2018 WL 1902414 (9th Cir. Apr. 23, 2018)

By Hon. Judith K. Fitzgerald (Ret).

Tucker Arensberg, P.C.

                          

In case you are curious about the extent of animal rights under the law, take a look at this new decision in the Ninth Circuit, Naruto v. Slater, 2018 WL 1902414 (9th Cir. Apr. 23, 2018).  Naruto, an Indonesian macaque, picked up a camera that was left unattended in a reserve by David Slater, a photographer, and took some selfies back in 2011.  The pictures were apparently worthy of publication, so Mr. Slater published them in 2014.  The monkey sued.  Well, actually, the People for the Ethical Treatment of Animals, Inc. (“PETA”) sued as Naruto’s Next Friend, for copyright infringement.  The case worked its way to the Court of Appeals for the Ninth Circuit, where the court framed the issue this way:

We must determine whether a monkey may sue humans, corporations, and companies for damages and injunctive relief arising from claims of copyright infringement. Our court's precedent requires us to conclude that the monkey's claim has standing under Article III of the United States Constitution. Nonetheless, we conclude that this monkey—and all animals, since they are not human—lacks statutory standing under the Copyright Act. We therefore affirm the judgment of the district court.

 Naruto v. Slater, No. 16-15469, 2018 WL 1902414 (9th Cir. Apr. 23, 2018) (footnote omitted).

SOMETHING AMAZING – A UNANIMOUS OPINION BY THE UNITED STATES SUPREME COURT IN A BANKRUPTCY CASE, AFFIRMING AND REMANDING TO THE SEVENTH CIRCUIT REGARDING THE SAFE HARBOR OF 11 U.S.C. § 546(e): MERIT MANAGEMENT GROUP, LP v. FTI CONSULTING, INC.

Hon. Judith K. Fitzgerald (Ret.)
Tucker Arensberg, P.C.
Professor in Practice, University of Pittsburgh School of Law

Once in a while, a Supreme Court opinion crosses my desk that I cannot ignore. Such was the case today. The United States Supreme Court issued its opinion in Merit Management, LP v. FTI Consulting, Inc., a unanimous opinion made more exciting by the fact that it affirmed the Seventh Circuit’s decision regarding the scope of the safe harbor provisions of 11 U.S.C. § 546(e) in a case that arose from a failed harness racing endeavor. (The opinion can be found here). Perhaps even more surprising, the Court interpreted a section of the Bankruptcy Code that led to a split in the circuits using a “plain meaning” approach.

Secured Lenders Take Note! In re Sunnyslope is something you want to know about

Hon. Judith K. Fitzgerald (Ret.)

jfitzgerald@tuckerlaw.com

412-594-3933

In re Sunnyslope Hous. Ltd. P’ship, 859 F.3d 637 (9th Cir. 2017), as amended (June 23, 2017)(“Sunnyslope”), is a noteworthy case for secured lenders.  The case involves confirmation of the cram down plan proposed by Sunnyslope Housing Limited Partnership (the “Debtor” or “Sunnyslope”) in its Chapter 11 bankruptcy case. The dispute now in the courts concerns what a debtor must pay under a plan if the debtor proposes to keep real property over the objection of a secured lender.

In Sunnyslope, the United States Court of Appeals for the Ninth Circuit, sitting en banc, created a split with the Seventh Circuit and other lower courts in finding that Associates Commercial Corp. v. Rash, 520 U.S. 953, 965, 117 S.Ct. 1879, 1886, 138 L.Ed.2d 148 (1997) (“Rash”), mandated the application of the replacement-value standard. The Supreme Court defined that standard as the amount a willing buyer would pay on the open market for like property.

Sunnyslope involved a low income housing project.   So long as the Debtor owned it, it could only be used for that purpose.  However, if the lender foreclosed, it would be free to dispose of the property as it wished.  Thus, the case posed the paradox of a property worth less as a going concern than in a liquidation.

The Sunnyslope Decision. In Sunnyslope, the secured lender, First Southern National Bank (“FSNB”), argued that the foreclosure value of the property should have been used to determine the amount of its secured claim under §506(a)(1). Before the bankruptcy was filed a state court receiver had obtained a purchase offer that was much higher than the value that the debtor attributed to the property in its plan. The key difference for valuation was that Sunnyslope proposed to continue using the property for low-income housing and valued it that way. FSNB objected, contending that the use restrictions would be divested through foreclosure, thereby enabling the property to be used for a higher and better purpose. The valuation difference was significant. Without use restrictions, the purchase offer was $7.65 million. In its bankruptcy, Sunnyslope proposed a value of $3.9 million because of the use restrictions. The bankruptcy court confirmed the debtor’s plan that proposed to pay the secured lender only $3.9 million, with interest at 4% (a lower rate than in the original loan), over 40 years, with a balloon at the end. Through this plan, the lender would recover significantly less that the $7.65 million foreclosure value.

The Split on the Correct Test for Value. Whether a bankruptcy court is required to apply only replacement value is open to debate and academics and judges strongly disagree. Some feel that Rash is limited to Chapter 13 cram down cases and/or to personal property valuation.  Rash involved a chapter 13 plan and the proposed retention of a truck, so foreclosure value was significantly lower than replacement value. But other courts have not conceded that Rash applies in Chapter 11 cases or in cases involving real property. For example, in United Air Lines, Inc. v. Reg’l Airports Imp. Corp., 564 F.3d 873 (7th Cir. 2009), in valuing airline terminal gates that the debtor had improved, the Court of Appeals for the Seventh Circuit determined that foreclosure value operates to set a floor on the secured creditor’s recovery. That court stated: “[i]f the Lender foreclosed and took over the space, it could rent the gates to United or some other airline at more than $17 a square foot- at perhaps four times that much, to go by prices at the airport’s one terminal that leases fully built-out gates.” Id. at 876-77.

The Third Circuit Court of Appeals has articulated a somewhat different standard.  In In re Heritage Highgate, Inc., 679 F.3d 132 (3d Cir. 2012), the court adopted the replacement value standard identified in Rash, and applied it in a case that involved real property. However, that court equated replacement value with the asset’s fair market value, as “most respectful of a property’s anticipated use.” Id. at 142.

The variation in approaches leads to a lack of uniformity in the bankruptcy process and calls into question what valuation standard applies to confirmation of a cram down plan.  When a debtor chooses to retain the collateral rather than to return it to the secured creditor, the Bankruptcy Code requires the plan to provide the creditor “deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property.” § 1129(b)(2)(A)(i)(II). Does Rash mandate the use of replacement value even when that valuation method returns less to the secured creditor than it could obtain on its own using its state law rights? Until the Supreme Court decides the issue, debtors and secured creditors are in limbo.

Supreme Court Review. In an effort to have uniformity added to asset valuation in cram downs, as an amicus party, I initiated a brief that has been filed  with the United States Supreme Court, asking that Court to accept a writ of certiorari to the Ninth Circuit and decide the question.  I have been joined by several academics who specialize in bankruptcy law and other retired bankruptcy judges.  The amici take no position on the merits of this question but join together in an effort to have the Supreme Court clarify whether Rash applies to Chapter 11 cases where real property is retained by the debtor.

A copy of our brief can be accessed here Amicus Brief

The amici are represented by Beverly Weiss Manne, Richard Tucker III, and Matthew Burne of Tucker Arensberg, P.C. with offices in Pittsburgh, Harrisburg and Manhattan.