Alabama Bankruptcy Lawyer Blog

A few months ago, I discussed the decision of a Delaware bankruptcy court in which a contractually created triangular setoff arrangement was found to be violative of Section 553's mutuality requirement. The case was In re Semcrude, L.P., Case No. 08-11525 (BLS), 2009 WL 68873 (Bankr. D. Del. January 9, 2009). In a relatively short opinion released April 30, 2010, the District Court affirmed, adopting without revision the Bankruptcy Court's rationale and conclusions. The citation to the District Court's decision is In re Semcrude, L.P., --- B.R. ---, 2010 WL 1737103 (D. Del. April 30, 2010).

For the typical practitioner, myself included, triangular setoff will rarely, if ever, be an issue. I just happen to have a case in which the issue is pivotal, and thought the affirming opinion by the District Court was well worth noting. We'll have to wait and see if it is appealed further.

This post involves a little bit of my creditor's counsel hat, and a little bit of my trustee's hat. Stated otherwise, I've done it to others, and, I've had it done to me.

Prior to the BAPCPA amendments in 2005, a trustee could file a complaint to recover a preference in the district in which the bankruptcy case was filed, notwithstanding the residence of the defendant. As a trustee in Chapter 7 cases, I can assure you that a perpetual home court advantage was an enormously powerful tool. Most creditors simply could not afford to come to Alabama Middle to litigate a small preference action.

Well, Congress in its infinite wisdom, and no doubt with the influence of a few lobbying dollars, changed all that in 2005. The law now reads as follows:

(b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $ 1,100 or a consumer debt of less than $ 16,425, or a debt (excluding a consumer debt) against a noninsider of less than $ 10,950, only in the district court for the district in which the defendant resides.

In a nutshell, if a trustee wants to seek recovery of a preference involving a consumer debt of less than $16,425, or, a non-consumer debt of less than $10,950, the action must be filed in the district where the defendant resides. Or, must it?

Back in 2008, in the case of In re Rosenberger, 400 B.R. 569 (Bankr. W.D. Mich. 2008), the court held that the venue limitations of 28 U.S.C. Section 1409(b) did not apply to preference actions. Here is the problem.

Section 1409(a) provides as follows: (a) Except as otherwise provided in [**3] subsections (b) and (d), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.

Section 1409(b) provides as follows: (b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $ 1,100 or a consumer debt of less than $ 16,425, or a debt (excluding a consumer debt) against a noninsider of less than $ 10,950, only in the district court for the district in which the defendant resides.

Note that in (a), the statute employs the terms "arising under" and "arising in or related to." But, subsection (b) uses only the terms "arising in or related to." Since a preference action is an action "arising under" the Bankruptcy Code, and since subsection (b)'s limitations apply to cases "arising in or related to", Congress must not have intended the limitations to apply to venue actions.

The Rosenberger decision is certainly not a new development. It was not appealed, however, nor has it been cited negatively by other courts. As of this writing, I haven't had occasion to raise the argument, nor has it been raised against me. I mention it only for the purpose of pointing out that the venue limitations of 28 U.S.C. Section 1409(b), believed by many to be a protection against small preference actions, may not be much protection.

This post doesn't deal directly with creditors rights in bankrutpcy. It is, however, an important decision for practitioners in this Circuit, and bears mention.

The Issue: debtor files bankruptcy, but does not disclose in his or her schedules an accrued claim or cause of action. Some time goes by, and debtor files suit is state or federal court on the claim.

The Argument: because the debtor, in one court proceeding, failed to disclose the claim or cause of action as an asset, he or she should be estopped to raise it in a subsequent proceeding. In part, the rule is intended to insure some degree of finality, and to prevent abusive use of the legal system.

The Decision: the case is Robinson v. Tyson Foods, Inc., . The plaintiff had filed a Chapter 13 case, but did not list an employment claim against Tyson. The debtor's plan was confirmed, she completed her payments, and received her discharge. She never, however, amended her schedules to reflect the claim against Tyson.

The Eleventh Circuit affirmed summary judgment for Tyson, holding that plaintiff was barred by the doctrine of judicial estoppel from pursuing her undisclosed claim. The court noted that while each case will be evaluated on its merits, there are typically three factors enumerated by the Supreme Court in New Hampshire v. Maine, 532 U.S. 742 (2001) which are controlling: (1) whether the present position is clearly inconsistent with the former position; (2) whether the party persuaded an earlier court to accept the position then asserted, indicating that the court was misled; and (3) whether the party advancing the inconsistent position would gain an unfair advantage. Essentially, the court in Robinson was satisfied that plaintiff had intentionally deceived the earlier court by not disclosing the employment law claim against Tyson, and also not disclosing a workers' compensation claim. Had the plaintiff amended fairly early on, and explained here omission as inadvertent, the result would surely have been different.

The Robinson case is, of course, applicable only in Federal court. The Alabama Supreme Court has been, shall we say, a little more tolerant of plaintiffs who have failed to disclose claims in their bankruptcy petitions. You will just need to look at your particular case on its merits, but certainly, the Robinsonposition should be persuasive.