FYI: 8th Cir BAP Holds Owners of Debtor Estopped from Contradicting Debtor's BK Filings

The U.S. Bankruptcy Appellate Panel for the Eighth Circuit recently held managing members of a limited liability that filed a Chapter 11 bankruptcy were equitably estopped from asserting ownership of equipment where the members previously verified documents in the bankruptcy showing ownership of the equipment by the company.

 

A copy of the opinion is available at:  Link to Opinion

 

A family farm organized as an LLC, where the husband and wife farmers (Farmers) where members and guarantors of the LLC, filed a Chapter 11 bankruptcy petition in January 2015.  An agricultural lender was a secured creditor of the farm.  The farmers, as managing members of the farm, represented that the farm owned the machinery and equipment at issue in the monthly operating reports which were part of the bankruptcy filings.

 

In November 2016, the lender's attorney sent an email to the farm's attorneys stating that lender would need signed and verified balance sheets from the guarantors before it would consider dismissing litigation against them.

 

On December 10, 2016, the guarantor Farmers signed an individual balance sheet itemizing their fixed assets which did not include the machinery and equipment that is at issue in this appeal.

 

On December 16, 2016, the Third Amended Plan was filed in the bankruptcy. The farm's post-petition tax returns tax returns, signed by one of the Farmers, claimed ownership of many pieces of the machinery and equipment at issue.

 

In January 2017, lender dismissed its pending state court action against the Farmers without prejudice.

 

In February 2017, the farm confirmed its Third Amended Chapter 11 bankruptcy plan with an addendum which required liquidation of substantially all the farm's assets including substantially all the farm's equipment, in cooperation with lender. No list of equipment was attached to the Plan.

 

Post-confirmation litigation ensued concerning ownership of machinery and equipment.

 

In August 2018 the bankruptcy court granted lender's request to compel the farm to sell (or deliver to lender) machinery and equipment owned by the farm on the confirmation date, conditioned on lender's timely filing of a list of machinery and equipment with evidence that the farm owned the machinery and equipment at confirmation. The farm failed to comply and lender filed a motion for civil contempt and sanctions and writ of execution which the court granted.

 

The farmers filed a motion to amend the Civil Contempt and Sanctions Order (Motion to Amend), to which lender objected.

 

The bankruptcy court held two hearings on the Motion to Amend. At the first hearing, the bankruptcy court recounted that it had determined at the earlier hearing on lender's motion to direct compliance with the Plan that the farm owned the property listed on the Writ of Execution. The Farmers now claimed that while the farm did own the property at one point, it was transferred to the Farmers in 2012. However, the list of the equipment in the farm's annual balance sheet submitted to the lender at the end of 2012 included the same equipment the Farmers.

 

After a second hearing, the bankruptcy court determined the Farmers were equitably estopped from asserting ownership to the equipment at issue. The court also denied the relief they requested in their motion to amend or for a new trial.  The Farmers eventually appealed to the Eighth Circuit. 

 

The Eighth Circuit BAP noted equitable estoppel under Nebraska law requires lender to prove six elements:

 

"(1) conduct which amounts to a false representation or concealment of material facts or, at least, which is calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) the intention, or at least the expectation, that such conduct shall be acted upon by, or influence, the other party or other persons; (3) knowledge, actual or constructive, of the real facts; (4) lack of knowledge and of the means of knowledge of the truth as to the facts in question; (5) reliance, in good faith, upon the conduct or statements of the party to be estopped; and (6) action or inaction based thereon of such a character as to change the position or status of the party claiming the estoppel."

 

Woodard v. City of Lincoln, 588 N.W.2d 831, 836 (Neb. 1999) (citation omitted).

 

The Court examined each element, beginning its analysis by noting that the Farmers did not dispute the first element or third elements.

 

As to the second element, the Farmers argued the lender's evidence showed carelessness or mistake, but not intent. The Court disagreed, noting that the Farmers, both in their individual and corporate representative capacities on multiple occasions and in multiple contexts, made misrepresentations about ownership of the machinery and equipment.

 

As to the fourth element, the Eighth Circuit BAP rejected the Farmers' argument that fact that the farm's schedules state that some of the machinery and equipment was acquired before the farm's formation should have required lender to inquire further. The Court responded that a lender is not required to take the multiple steps proposed to verify the accuracy of a borrower's schedules which were signed under penalty of perjury.

 

As to the fifth element, the Court noted that the lender relied on the representations made by the Farmers and the farm when the lender agreed to a stipulated plan for the farm and dismiss the litigation against Farmers as guarantors. The Court added that the entitlement to rely on representations made in a Debtor's schedules and statements is clear. Mertz v. Rott, 955 F.2d 596, 598 (8th Cir. 1992) ("[T]he petition, including schedules and statements, must be accurate and reliable, without the necessity of digging out and conducting independent examinations to get the facts.") (citation and internal quotation marks omitted); Bauer v. Iannacone (In re Bauer), 298 B.R. 353, 357 (B.A.P. 8th Cir. 2003).

 

The Eighth Circuit BAP agreed with the bankruptcy court's determination that the farm's confirmed Plan, which was reached after lengthy negotiations of the parties and which included the farm's promise to sell its machinery and equipment, is evidence that the lender actually relied on those representations.

 

As to the sixth element, the Court found no merit in the Farmer's argument that the lender would not be harmed by a ruling that the Farmers owned the machinery and equipment at issue because the lender did not perfect a security interest in it.

 

The Farmers also appealed the bankruptcy court's order on their Rule 59 Motion in which they asked the bankruptcy court to amend its ruling on their Motion to Amend to deny relief under equitable estoppel to the lender or, in the alternative, hold a new trial to allow them to present evidence regarding the lender's equitable estoppel claim.

 

As you may recall, "[m]otions under Rule 59(e) 'serve the limited function of correcting manifest errors of law or fact or to present newly discovered evidence' and 'cannot be used to introduce new evidence, tender new legal theories, or raise arguments which could have been offered or raised prior to entry of judgment.' " Ryan, 889 F.3d at 507 (quoting United States v. Metro. St. Louis Sewer Dist., 440 F.3d 930, 933 (8th Cir. 2006)). "A motion for new trial will be granted when a miscarriage of justice occurred in the first trial." Larson, 211 F.3d at 1095.

 

Other than the prior arguments, the Farmers did not state specifically how the bankruptcy court erred in denying their Rule 59 Motion. The Eighth Circuit BAP's own review showed that the bankruptcy court carefully considered the arguments in the Rule 59 Motion and, as supported by the record, exercised its discretion to deny the requested relief.

 

Accordingly, the Eighth Circuit BAP affirmed the ruling of the bankruptcy court.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Confirms Chapter 13 Debtor Cannot Proceed "In Forma Pauperis" on Appeal

The U.S. Court of Appeals for the Seventh Circuit recently held that absent unforeseen extraordinary circumstances, debtors in Chapter 13 cases cannot proceed on appeal in forma pauperis.

 

A copy of the opinion is available at:  Link to Opinion

 

A debtor filed a second Chapter 13 bankruptcy less than a year after her first bankruptcy was dismissed. As you may recall, the bankruptcy code treats this timing as creating a presumption that the new filing is not in good faith, and thus, the automatic stay ends 30 days after the new proceeding begins.

 

The debtor then sought to stay foreclosure proceedings then pending in state court. The debtor's request was denied by a bankruptcy judge and then by the trial court.

 

Debtor appealed, seeking to block the ongoing state proceedings. However, Debtor did not pay the filing fee for an appeal but sought leave to proceed in forma pauperis under 28 U.S.C. § 1915.

 

As you may recall, in forma pauperis allows qualified debtors to proceed without payment of filing fees and other costs.

 

One of Debtor's creditors opposed the motion, contending that 28 U.S.C. § 1930 forbids in forma pauperis status in Chapter 13 appeals because § 1930 specifies fees for filing bankruptcy cases, and limits the circumstances under which appellate fees may be excused for Chapter 7 debtors, but provides no such circumstances for Chapter 13 debtors.

 

The Seventh Circuit began its analysis noting Chapter 13 is designed for people who can pay most if not all of their debts and "to qualify for relief under Chapter 13, a person must have an income that enables her to pay most debts within five years and still have something left for living expenses."

 

The Court noted "it is hard to see how someone eligible for relief under Chapter 13 could be unable to pay filing fees".  This lead the Seventh Circuit to conclude that "debtors in Chapter 13 cases cannot proceed on appeal in forma pauperis under § 1915, in the absence of extraordinary circumstances that we do not foresee."

Furthermore, the Seventh Circuit opined that seeking to proceed in forma pauperis under 28 U.S.C. § 1915 in a Chapter 13 filing "was not just in presumptive bad faith under 362(c)(3)(C)(i)(II) but in actual bad faith," as the debtor is talking out of both sides of her mouth by telling the court that she is destitute by in forma pauperis status but also somehow would have enough income or assets to qualify for a Chapter 13 bankruptcy.

 

Accordingly, the motion for leave to proceed on appeal in forma pauperis was denied, and the ruling of the trial court affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Cal App Ct (1st Dist) Holds Homeowner's Quiet Title Action Against Lienholder Was Not Time-Barred

The Court of Appeal of the State of California, First Appellate District, recently reversed entry of summary judgment in favor of a lienholder in an action to quiet title brought by homeowners that was rejected by the trial court as time-barred.

 

In so ruling, the Appellate Court held that the lienholder's notice of sale pursuant to deeds of trust upon the property which secured loans to its prior owners did not start the running of the three-year statute of limitations period under California Code of Civil Procedure § 38(d), because the sale did not take place as scheduled, and the homeowners maintained undisturbed possession of the land at all relevant times.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2000, prior owners ("Prior Owners") of a property ("Property") obtained a home equity line of credit ("First HELOC") secured by a first position deed of trust on the Property ("First HELOC DOT").  In 2003, the Prior Owners obtained a home loan that was also secured by a deed of trust on the Property.  The First HELOC DOT lender agreed to subordinate the First HELOC DOT to the deed of trust that secured the new loan. 

 

In December 2013, the Former Owners took out another HELOC ("Second HELOC") secured by a short form deed of trust against the Property ("Second HELOC DOT").  In 2004, the Prior Owners refinanced all three loans with a new lender resulting in a single new loan secured by a deed of trust to pay off the prior loan and First and Second HELOC.  

 

The First and Second HELOC were closed, but reopened in December 2004 upon the Prior Owners' Request.  The lender on the First and Second HELOC ("Lienholder") never issued any reconveyance of the respective First and Second HELOC DOTs which secured their balances.  The Former Owners continued to draw upon both the First and Second HELOCs, whose balances totaled over $224,000 by February 2006. In 2007, they refinanced yet again, and eventually defaulted on the latest refinanced loan, resulting in foreclosure.

 

The Property was sold at foreclosure auction in November 2008.  The next month, the Lienholder recorded a notice of default and election to sell the Property under the power of sale in the First HELOC DOT.  New buyers ("Purchasers") purchased the Property from the purchaser at foreclosure in February 2009, and were issued a policy of title insurance at the time of purchase. 

 

On August 24, 2009, the Lienholder recorded its notice of trustee's sale at auction to the highest bidder, which the Purchasers received when it was posted on the door of the Property that month.  The Purchasers forwarded the document to their title insurer ("Title Insurer"), who advised that it would investigate and contact the Lienholder.

 

After nearly five years went by, with the Purchasers having assumed that the matter had been resolved, in May 2014, the Lienholder again threatened to foreclose under its two claimed deeds of trust secured by the Property.  The Purchasers sued the Lienholder to quiet title to the property in September 2014, asserting causes of action for quiet title, declaratory relief, and breach of duty to discharge a secured obligation under Civil Code section 2941.

 

In June 2017, the trial court granted the Lienholder's motion for summary judgment, concluding all three causes of action were time-barred under California's three-year statute of limitations in Code of Civil Procedure §338(d). The Purchasers' appealed, and the appellate court stayed a nonjudicial foreclosure sale of the Property that was scheduled for November 2018.

 

On appeal, the parties did not dispute that the three-year statute of limitations period under California Code of Civil Procedure § 338(d) applied, but disputed when the Purchasers' quiet title claim accrued and the statute of limitations began to run.  The Lienholder argued the Purchasers' cause of action was barred because the limitations period began no later than August 2009 when the notice of sale was posted on the Property's front door, and providing Purchasers notice of a hostile claim against their title to the Property, despite the fact that the sale did not go forward.

 

Under California law, "[Q]uiet title actions have special rules for when the limitations period begins to run." Salazar v. Thomas (2015) 236 Cal.App.4th 467, 477.  "'[A]s a general rule, the statute of limitations [for a quiet title action] does not run against one in possession of land.'" Id. (internal citation omitted).  Even when a party in possession knows there is a potential adverse claim, "there is no reason to put him to the expense and inconvenience of litigation until such a claim is pressed against him." Muktarian v. Barmby (1965), 63 Cal.2d at pp. 560–561.  "Thus, mere notice of an adverse claim is not enough to commence the owner's statute of limitations." Salazar at 478.

 

Although the cases uniformly hold that more than a threat to one's title is required to commence the running of the limitations period against an owner in possession, whether a statute of limitations bars an action to quiet title may turn on whether the plaintiff is in undisturbed possession of the land.  Salazar at 477.

 

Here, it was undisputed that the Purchasers maintained exclusive possession of the Property at all times, and they argue that their possession was always undisturbed.  The Appellate Court found the Fourth District's holding in Salazar as instructive on this issue. 

 

In Salazar, the homeowners received a notice of default and election to sell under a deed of trust they believed was forged by their son, and made payments until eventually entering a forbearance agreement before filing suit to quiet title over seven years after receiving the notice.  After the trial court held that the Salazars claims were time-barred based on the date of the initial notice of default, the Fourth District reversed, holding that the notice of default informed the Salazars of an adverse claim or cloud on their title, but did not dispute the Salazars' possession.  Salazar at 481.

 

Similarly here, the Lienholder's notice of trustee's sale did not call into question or disturb the Purchaser's possession of the Property, only that their ownership would require them to pay the amount in default. 

 

Moreover, the Appellate Court reasoned that any challenge to the Purchasers' dominion was eliminated when they took action by transmitting the document to their Title Insurer.  After the trustee's sale did not go forward as scheduled in September 2009 and the Title Insurer sent periodic updates, the Purchasers heard nothing about the Lienholder's claims from July 2010 through May 2014 and continued to reside undisturbed in the Property.

 

Because the "imminent sale" never happened and the Purchasers remained in exclusive possession of the house for several years before the Lienholder renewed its threat to foreclose, the Appellate Court concluded that notice of trustee's sale did not disturb the Purchasers' possession and commence the running of the limitations period.

 

Accordingly, the trial court's entry of summary judgment in the Lienholder's favor was reversed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 9th Cir Holds Appeal by Putative Class Representative from Individual Settlement Was Moot

The U.S. Court of Appeals for the Ninth Circuit recently dismissed as moot an employee's appeal of a trial court's ruling denying class certification after he reached an individual settlement with his employer as to his claims for workplace meal break violations. 

 

Because the Employee's individual settlement expressly resolved his claims to attorneys' fees and did not provide for entitlement to any class representative enhancement award, the Ninth Circuit concluded that he did not retain any financial stake in the outcome of the class, thereby rendering both his class claims and the appeal moot.

 

A copy of the opinion is available at:  Link to Opinion

 

An employee ("Employee") sued his employer individually and on behalf of a putative class for alleged violations of Washington's meal break laws.  After his motion for class certification was denied, the Employee settled his individual claims, including "claims to costs or attorneys' fees" for $5,000. 

 

The settlement agreement was "not intended to settle or resolve [the Employee's] Class Claims," but it also did not provide any financial reward due to the Employee if the class claims were ultimately successful. 

 

Upon stipulation of the parties that the Employee's individual claims, including attorneys' fees were resolved, the trial court entered final judgment.  This appeal of the class certification rulings followed.

 

On appeal, the Ninth Circuit analyzed whether the Employee's settlement of his individual claims rendered the putative class claims as moot. 

 

As you may recall, "[t]he test for whether an appeal is moot after the putative class representative voluntarily settles his individual claims is whether the class representative retains a personal stake in the case." Campion v. Old Republic Prot. Co., 775 F.3d 1144, 1146 (9th Cir. 2014). That "personal stake" must be "concrete" and "financial," id., a question that "turns on the language of [the] settlement agreement," Evon v. Law Offices of Sidney Mickell, 688 F.3d 1015, 1021 (9th Cir. 2012).

 

The Ninth Circuit first examined this issue in Narouz v. Charter Communications, LLC, 591 F.3d 1261 (9th Cir. 2010), in which it held that the class representative maintained "a continued financial interest in the advancement of the class claims" where the settlement agreement expressly provided that the class representative would receive an "award enhancement fee" if a class were certified, and did not release claims for attorneys' fees and costs.  Narouz, 591 F.3d at 1264-65. 

 

The issue was subsequently addressed in Evon where the class representative's individual claims were resolved upon acceptance of a Rule 68 offer of judgment that was silent as to class claims, and therefore, those claims were not rendered moot by waiver or disclaimer.  Evon, 688 F. 3d at 1020-1023. However, the Evon Court did not directly address whether the class representative maintained a "continued financial interest," Narouz, 591 F.3d at 1265, in the class claims.  Evon, 688 F.3d at 1021. 

 

This issue was clarified by the Ninth Circuit in Campion, where the settlement agreement at issue  resolved the class representative's individual claims explicitly did not resolve his class claims.  Campion, 775 F.3d at 1145.  The Court explained that "a more concrete interest" — that is, a "financial interest" — was required to avoid mootness, and that the Court did not address that requirement in Evon because that class representative maintained such an interest in the potential to receive a higher attorneys' fees award.  Id. at 1146-47.  However, because the Campion representative's settlement agreement did not provide additional compensation for resolution of class claims beyond the individual settlement, his class claims were moot.  Id.

 

Here, the Employee argued that he could still receive a class representative enhancement award.  However, the Ninth Circuit was required to consider the language of the settlement agreement, and the settlement agreement did not indicate that he could or would receive any such enhancement award.  Moreover, the possibility of additional compensation for an award of attorneys' fees did not exist, as those were settled by agreement.   Thus, although the Employee did not expressly resolve his class claims, those claims were rendered moot because he did not retain a financial stake in them, as in Campion. 

 

In sum, the Ninth Circuit held that "when a class representative voluntarily settles his individual claims, he must do more than expressly leave class claims unresolved to avoid mootness. A class representative must also retain — as evidenced by an agreement — a financial stake in the outcome of the class claims. Absent such a stake, a class representative's voluntary settlement of individual claims renders class claims moot."

 

Accordingly, the Employee's appeal of the class certification rulings was dismissed as moot.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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