December/January 2007

Fourth Circuit
Do bankruptcy courts have the power to re-characterize debt as equity?

The Fourth Circuit has held that bankruptcy courts have the power to recharacterize debt as equity under appropriate circumstances. In re Official Committee Of Unsecured For Dornier Aviation (North America), Inc, 453 F.3d 225, 2006 WL 1737620 (4th Cir. 2006).

Dornier Aviation (North America) (DANA) is a wholly-owned indirect subsidiary of Fairchild Dornier GMBH (GMBH), a German aircraft manufacturer. Parent corporation “loaned” aircraft parts to its subsidiary. Following the subsidiary’s bankruptcy filing, the parent filed a claim. The subsidiary’s unsecured creditors objected to the parent’s claim, arguing that the alleged debt owed to the parent should be recharacterized as an equity interest. The bankruptcy court and the district court ruled in favor of the committee, and the Fourth Circuit affirmed.

According to the Court, recharacterization is well within the broad powers afforded a bankruptcy court in § 105(a) and facilitates the application of the priority scheme laid out in § 726. The Code establishes a system in which contributions to capital receive a lower priority than loans because “the essential nature of a capital interest is a fund contributed to meet the obligations of a business and which is to be repaid only after all other obligations have been satisfied.” See Diasonics, Inc. v. Ingalls, 121 B.R. 626, 630 (Bankr.N.D.Fla.1990) (quoting Asa S. Herzog & Joel B. Zweibel, The Equitable Subordination of Claims in Bankruptcy, 15 Vand. L.Rev. 83, 94 (1961)). Thus, implementation of the Code’s priority scheme requires a determination of whether a particular obligation is debt or equity. Where the question is in dispute, the bankruptcy court must have the authority to make this determination in order to preserve the Code’s priority scheme. If the court were required to accept the representations of the claimant, as GMBH argued, then an equity investor could label its contribution a loan and guarantee itself higher priority--and a larger recovery--should the debtor file for bankruptcy. Thus, denying a bankruptcy court the ability to recharacterize a claim would have the effect of subverting the Code’s critical priority system by allowing equity investors to jump the line and reduce the recovery of true creditors.

The bankruptcy court found that equitable subordination was inappropriate because there was no evidence of GMBH engaging in inequitable conduct. This finding did not in any way affect the court’s conclusion that recharacterization was appropriate. While a bankruptcy court’s recharacterization decision rests on the substance of the transaction giving rise to the claimant’s demand, its equitable subordination decision rests on its assessment of the creditor’s behavior. As the Tenth Circuit has explained, when a claim is equitably subordinated, “[t]he funds in question are still considered outstanding corporate debt, but the courts seek to remedy some inequity or unfairness perpetrated against the bankrupt entity’s other creditors or investors by postponing the subordinated creditor’s right to repayment until others’ claims have been satisfied.” Sender v. Bronze Group, Ltd. (In re Hedged-Invs. Assocs., Inc.), 380 F.3d 1292, 1297 (10th Cir.2004); see also id. (“The doctrine of equitable subordination, by contrast, looks not to the substance of the transaction but to the behavior of the parties involved.”). Thus, although recharacterization and equitable subordination lead to a similar result, they “address distinct concerns” and require a bankruptcy court to conduct different inquiries. See Cohen v. KB Mezzanine Fund II, LP (In re SubMicron Sys. Corp.), 432 F.3d 448, 454 (3d Cir.2006).

Every other Circuit to address this issue has held that a Bankruptcy Court has this authority. In re SubMicron Systems Corp., 432 F.3d 448, 45 Bankr. Ct. Dec. (CRR) 232, Bankr. L. Rep. (CCH) P 80436 (3d Cir. 2006); In re Hedged-Investments Associates, Inc., 380 F.3d 1292, 1297, 43 Bankr. Ct. Dec. (CRR) 145, Bankr. L. Rep. (CCH) P 80151 (10th Cir. 2004); In re AutoStyle Plastics, Inc., 269 F.3d 726, 747-48, 45 U.C.C. Rep. Serv. 2d 964, 2001 FED App. 0378P (6th Cir. 2001).

Third Circuit
Is a claim secured by an interest in real property that includes the debtor’s principal residence as well as other income-producing rental property “a claim secured only by a security interest in real property that is the debtor’s principal residence.” under 11 U.S.C. § 1322(b)(2)?

The Third Circuit addressed a question of first impression in the Third Circuit: whether a claim secured by an interest in real property that includes the debtor’s principal residence as well as other income-producing rental property is “a claim secured only by a security interest in real property that is the debtor’s principal residence.” under 11 U.S.C. § 1322(b)(2). Based on the plain language of § 1322(b)(2), the court concluded that a creditor does not receive anti-modification protection for a claim secured by real property that includes both the debtor’s principal residence and other rental property that is not the debtor’s principal residence. In re Scarborough, --- F.3d ----, 2006 WL 2466859, Bankr. L. Rep. P 80,696 (3rd Cir.(Pa.), 2006) (NO. 04-4298).

The debtor Scarborough”s Property is a two-story semi-detached residence that was converted to a multi-unit dwelling prior to Scarborough’s purchase, with one apartment on the first floor and one apartment on the second floor. Scarborough lives on the first floor of the Property and rents the second floor apartment to a tenant pursuant to a lease agreement. She purchased the Property with the intent of living in one unit and renting the other. Scarborough informed the bank she was buying the Property, in part, as an investment.

The normal rule in bankruptcy is that a claim that is secured by a lien on property is treated as a secured claim “only to the extent of the value of the property on which the lien is fixed.” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 239, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). To the extent that the amount of the claim is greater than the value of the property, it is considered unsecured. 11 U.S.C. § 506(a)(1). “Thus, a claim that is not fully collateralized can be modified, and the creditor said to be ‘crammed down’ to the value of the collateral.” In re Ferandos, 402 F.3d 147, 151 (3d Cir.2005).

Section 1322(b)(2) of the Bankruptcy Code carves out an exception to this general rule. That provision permits a debtor in a Chapter 13 case to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.” 11 U.S.C. § 1322(b)(2) (emphasis added). The purpose of § 1322(b)(2) is “to encourage the flow of capital into the home lending market” by affording anti-modification protection to home mortgage lenders. Nobelman v. Am. Sav. Bank, 508 U.S. 324, 331, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (Stevens, J., concurring); see also Ferandos, 402 F.3d at 151 (“The legislative history of § 1322(b)(2) ‘indicates that it was designed to protect and promote the increased production of homes and to encourage private individual ownership of homes ....’ “ (quoting In re Davis, 989 F.2d 208, 210 (6th Cir.1993)).

According to the court, where the anti-modification protection of § 1322(b)(2) is at issue, the sole concerns are (1) whether the claim is secured only by real property, and (2) whether the real property is the debtor’s principal residence. Just as a creditor who takes any interest in personal property forfeits the benefit of § 1322(b)(2), so does a creditor whose claim is secured by any real property that is not the debtor’s principal residence. If a mortgage includes language that is effective to grant an interest in such collateral, the mortgagee is at its peril in not deleting it.

Second Circuit
When debtors propose a plan that validates a mortgage that is subject to challenge, and a chapter 13 trustee fails to object, are both bound by the res judicata effect of the plan?

Second Circuit holds that when debtors propose a plan that validates a mortgage that is otherwise clearly subject to challenge, and a chapter 13 trustee fails to object, both are bound by the res judicata effect of the plan. In re Layo, 460 F.3d 289, Bankr. L. Rep. P 80,688 (2nd Cir.(N.Y.) 2006) (NO. 04-0369 BK).

After chapter 13 bankruptcy plan that addressed mortgage lien was confirmed, mortgagee moved to lift the automatic stay and foreclose on the property. Debtor and bankruptcy trustee filed complaint seeking to avoid mortgage on ground that it was discharged and to receive satisfaction and discharge of second mortgage. The Court of Appeals held that chapter 13 confirmation order was res judicata as to post-confirmation attempt to avoid confirmed, recorded lien.

The Trustee argued that there is no identity of causes of action because the facts supporting the claim that the mortgage lien was invalid were not known to the Trustee prior to confirmation of the chapter 13 plan. As a result, argued the Trustee, she was unaware at the time of the confirmation proceedings that she should have challenged recorded mortgage interests. As the district court properly noted, checking the county records is the most basic type of due diligence. Inspection would have uncovered the history of discharged and undischarged mortgage liens on the property. That is, the facts that form the basis for the Trustee’s challenge to the mortgages were available in the county clerk’s office for anyone to see. The Trustee had clear opportunities to object to the validity of the mortgage lien listed in the confirmed chapter 13 plan--when the creditor filed its claim and when the debtor consented to and included that claim in his final chapter 13 plan.

Sixth Circuit
Does assignee of note and mortgage who files assignment after the bankruptcy filing violate the automatic stay?

Sixth Circuit holds that assignee of note and mortgage who files assignment after the bankruptcy filing does not violate the automatic stay and has a perfected security interest that cannot be avoided by the Chapter 7 trustee under section 544(a) of the Bankruptcy Code. In re Cook, 2006 FED App. 0284P, 2006 WL 2266257 (6th Cir. 2006).

This case illustrates problems that arise when mortgages are sold in the secondary market. One of the main problems involves issues having to do with perfection. The regular practice of selling mortgages in the secondary market creates other problems for the bankruptcy bourts, including one that arises in motions for relief from stay when no one can demonstrate how much is owed or who actually owns the paper at any given time.

The holding was that (1) the assignee Bank One had physical possession of the promissory note, (2) this possession endowed Bank One with a perfected interest in the debtor Cooks’ property, and (3) Bank One did not violate the automatic stay placed on proceedings against the Cooks’ property by recording its interest in the promissory note and the mortgage. However, getting to this holding was involved. The court held that secured lender did not violate the automatic stay when, postpetition, it recorded the assignment of a note secured by the debtor’s home. Applying state law, the court rejected the trustee’s argument that perfection of the security interest turned on the recording of the assignment. The court then held that when the lender recorded the assignment it was not transferring legal title in the debtors’ property but was only recording an equitable interest in the property. Since the equitable interest did not belong to the debtors, no violation of the automatic stay occurred. See 2006 No. 10 Norton Bankr. L. Adviser 5 (October 2006).

Sixth Circuit
May unsecured creditors recover postpetition interest at the default rate contained in their contracts with a solvent debtor and recover attorney’s fees and expenses if provided for in their contracts?

The Sixth Circuit held that in a plan unsecured creditors may recover postpetition interest at the default rate contained in their contracts with a solvent debtor and may recover attorney’s fees and expenses if provided for in their contracts and applicable non-bankruptcy law. In re Dow Corning Corp., 456 F.3d 668, 46 Bankr.Ct.Dec. 222, Bankr. L. Rep. P 80,664, 2006 Fed.App. 0260P (6th Cir.(Mich.) 2006) (NO. 04-1608, 04-1721, 04-1643, 04-1722, 04-1720).

During years of negotiations and settlements, Dow Corning a solvent company continued its business and did not make any payments on its more than $1 billion in unsecured debt. When a reorganization plan was finally proposed in 1999, it included provisions for payment of the principal amount of all of the unsecured debt, along with post-petition interest at the “federal judgment rate” of 6.28%, compounded annually. The majority of the unsecured commercial debt contracts would have required a default rate higher than the federal judgment rate. The unsecured commercial debt holders (“Class 4 creditors”) voted overwhelmingly against the plan. These creditors are the appellants in this case.

A plan is deemed fair and equitable as to a dissenting class of unsecured creditors only if it does not violate the absolute priority rule-i.e., the allowed value of the claims held by that class is to be paid in full, or “the holder of any claim junior to the claims of such class will not receive or retain under the plan on account of such junior claim any property.” Bank of Am. Nat’l. Trust & Sav. Ass’n v. 203 North LaSalle Street P’ship, 526 U.S. 434, 441-42, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999) (citing § 1129(b)(2)(B)(ii)). Class 4 argued that by interpreting the amended plan as not requiring the payment of default interest, the bankruptcy court caused the amended plan to run afoul of the absolute priority rule, because Dow Corning’s shareholders, undisputedly junior interest holders, will retain millions of dollars, while Class 4 claim holders will not receive the full benefit of their bargain with the debtor.

Courts in solvent debtor cases have overwhelmingly concluded that there is a presumption that the default interest rate should be allowed. 456 F.3d 668, 680. The Court remanded this matter to the district court, with instructions to remand it to the bankruptcy court, for proceedings consistent with this decision, including the consideration of any equitable factors affecting the interest rate.

Debtor also argued that it was only logical to conclude, upon a reading of section 506(b) of the Bankruptcy Code, that Congress intended that only secured creditors be awarded the fees, costs, or charges provided for under the agreement. However, the Court chose to join the body of cases holding that unsecured creditors may recover their attorneys’ fees, costs and expenses from the estate of a solvent debtor where they are permitted to do so by the terms of their contract and applicable non-bankruptcy law. 456 F.3d 668, 683. In so holding, the Court discussed and distinguished prior decisions in the Circuit, In re Martin, 761 F.2d 1163, 12 Collier Bankr. Cas. 2d (MB) 1129, Bankr. L. Rep. (CCH) P 70542 (6th Cir. 1985) and CPT Holdings, Inc. v. Industrial & Allied Employees Union Pension Plan, Local 73, 162 F.3d 405, 33 Bankr. Ct. Dec. (CRR) 711, 22 Employee Benefits Cas. (BNA) 2073, Bankr. L. Rep. (CCH) P 77868, 1998 FED App. 0355P (6th Cir. 1998).

Eleventh Circuit
Does Failure to raise state law claims in a chapter 11 case bar creditor from bringing claims against co-creditor in a subsequent state court action?

Orders that were entered in debtor-borrower’s chapter 11 case did not preclude subordinated creditor, under principles of res judicata, from pursuing its removed state court fraud claim. In re Atlanta Retail, Inc., 456 F.3d 1277, 46 Bankr.Ct.Dec. 223, 19 Fla. L. Weekly Fed. C 803 (11th Cir.(Ga.), 2006) (NO. 05-12327).

Defendant-appellant Kodak appealed the decision of the United States District Court, which affirmed an order of the Bankruptcy Court. That order enjoined Kodak from continuing to seek relief against Wachovia Bank in the United States District Court for violations of state law. The bankruptcy court held, and the district court affirmed, that Kodak was precluded from bringing the New York action by the doctrine of res judicata as a result of orders issued by the bankruptcy court in a bankruptcy filed by Atlanta Retail, Inc. f/k/a Wolf Camera.

The Circuit Court held that res judicata does not bar the New York action because Kodak could not have received a full remedy in the contested Wolf bankruptcy proceedings and because the same nucleus of operative fact was not presented in the two actions. Moreover, res judicata does not require a creditor to raise an independent state law claim against a co-creditor in an adversary bankruptcy proceeding unless the resolution of that claim explicitly becomes an essential part of the bankruptcy plan. Here, Kodak’s claim against Wachovia in no way impacted on the confirmation of the Wolf bankruptcy plan. Accordingly, the judgment of the district court was reversed and the injunction vacated.
Seventh Circuit
Does judicial estoppel preclude claims which debtor conceals until after her bankruptcy ended?

The Court of Appeals held that judicial estoppel precluded claims which debtor had concealed until after her bankruptcy ended. Cannon-Stokes v. Potter, 453 F.3d 446, Bankr. L. Rep. P 80,644, 18 A.D. Cases 201 (7th Cir.(Ill.), 2006) (NO. 05-4605). Affirmed.

Cannon-Stokes contended that the Postal Service, which hired her as a letter carrier, violated the Rehabilitation Act, 29 U.S.C. § 791, by not accommodating her mental aversion to making residential deliveries and by retaliating against her for asserting her statutory rights. At the same time as Cannon-Stokes was pursuing an administrative claim for $300,000 from the Postal Service, she filed a chapter 7 bankruptcy petition asserting that she had no assets; her petition expressly denied that she had any valuable legal claims (“contingent and unliquidated claims of every nature”, the schedule calls them). The bankruptcy court believed that assertion and discharged all of her approximately $98,000 in unsecured debts.

After the bankruptcy was over, Cannon-Stokes filed this suit. The Postal Service contended that judicial estoppel forecloses the action. Cannon-Stokes had represented that she had no claim against the Postal Service (or anyone else); that representation had prevailed; she had obtained a valuable benefit in the discharge of her debts. That satisfies the requirements of judicial estoppel. See, e.g., New Hampshire v. Maine, 532 U.S. 742, 749, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001); Astor Chauffeured Limousine Co. v. Runnfeldt Investment Corp., 910 F.2d 1540, 1547-48 (7th Cir.1990). Cannon-Stokes blamed the false statement on her bankruptcy lawyer; accepting this explanation, the district court declined to dismiss the proceeding but later granted summary judgment to the Postal Service on the merits--which on appeal defends its judgment by relying, once again, on judicial estoppel.

All six appellate courts that have considered this question hold that a debtor in bankruptcy who denies owning an asset, including a chose in action or other legal claim, cannot realize on that concealed asset after the bankruptcy ends. See Payless Wholesale Distributors, Inc. v. Alberto Culver (P.R.) Inc., 989 F.2d 570 (1st Cir.1993); Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. General Motors Corp., 337 F.3d 314 (3d Cir.2003); Jethroe v. Omnova Solutions, Inc., 412 F.3d 598 (5th Cir.2005); United States ex rel. Gebert v. Transport Administrative Services, 260 F.3d 909, 917-19 (8th Cir.2001); Hamilton v. State Farm Fire & Casualty Co., 270 F.3d 778 (9th Cir.2001); Barger v. Cartersville, 348 F.3d 1289, 1293-97 (11th Cir.2003). The Seventh Circuit reserved that question in Biesek v. Soo Line R.R., 440 F.3d 410 (7th Cir.2006), while holding that judicial estoppel has a proviso: bankruptcy fraud designed to hide an asset from creditors does not prevent the creditors themselves from realizing on the claim after its discovery.

Eleventh Circuit
Are government crop loss payments that were not legislatively authorized prior to filing the bankruptcy petition property of the estate?

Eleventh Circuit joins other Circuits in holding that government crop loss payments that were not legislatively authorized prior to filing the bankruptcy petition are not property of the estate. The Court held that:
(1) crop disaster payment was not included in “property of the estate,” as being legal or equitable property interest held by debtor, and
(2) payment was not included in “property of the estate” as being “proceeds” of existing crops. Affirmed. In re Bracewell, 454 F.3d 1234, Bankr. L. Rep. P 80,642, 19 Fla. L. Weekly Fed. C 721 (11th Cir.(Ga.), 2006) (NO. 05-11951).

Bracewell planted wheat in November 2000 and cotton in May 2001. A drought in 2001 reduced Bracewell’s crop yields. Bracewell filed a chapter 12 bankruptcy petition on May 29, 2002, and he converted it to a chapter 7 case on January 2, 2003.
In July 2002, while Bracewell’s bankruptcy petition was pending, the Emergency Farmer and Rancher Assistance Act of 2002 was introduced in the House of Representatives. H.R. 5310, 107th Cong. (2002). The Act was signed into law on February 20, 2003. Agricultural Assistance Act of 2003, Pub.L. No. 108-7, div. N, tit. II, 117 Stat. 538 (2003). It provided for monetary assistance to farmers who had suffered losses to their 2001 or 2002 crops due to weather-related disasters or emergency conditions. Id. § 202(a), 117 Stat. at 538. Under the Act farmers who had suffered losses to both their 2001 and 2002 crops could receive assistance for only one year’s loss, the year to be selected by each farmer. On January 30, 2004, Bracewell applied to the Department of Agriculture’s Farm Service Agency for a payment as a result of the losses he had suffered to his 2001 wheat and cotton crops. He received that payment on February 19, 2004, while his chapter 7 case was still pending in the bankruptcy court.

Section 541(a)(1) defines property of the bankruptcy estate as “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The plain language of that provision is clear, and it makes the commencement of the bankruptcy case the key date for property definition purposes. According to to majority, that means the property of the debtor’s estate is property the debtor had when the bankruptcy case commences, not property he acquires thereafter. The Court’s most closely analogous decision, as well as the only two courts of appeals decisions that are directly on point, confirm that the clear temporal limitation which is so plain on the face of the statutory language controls. The two federal appeals court decisions directly on point are Drewes v. Vote (In re Vote), 276 F.3d 1024 (8th Cir.2002), and Burgess v. Sikes (In re Burgess), 438 F.3d 493 (5th Cir.2006) (en banc).

The next question the Court addressed was whether anything in § 541(a)(6) expands the definition of property enough to encompass the disaster relief payment Bracewell received. That provision extends the definition of property of the estate to include “[p]roceeds, product, offspring, rents, or profits of or from property of the estate ....” 11 U.S.C. § 541(a)(6). The key language for present purposes is that the proceeds must be “of or from property of the estate.” See id. If the property of the estate does not include a potential future payment that the debtor is not legally entitled to receive at the time of filing, nothing in § 541(a)(6) pushes the later-acquired legal or equitable interest back into the estate. The Court stated that Bracewell did not have a cognizable interest in his hoped for relief payment until the Agriculture Assistance Act of 2003 came into being, and that occurred after he had already filed his petition. Thus, the property of his estate did not include an interest that could generate proceeds.

Pryor, Circuit Judge, filed a lengthly dissenting opinion. The dissent said that the majority opinion would give farmers more incentives to time their bankruptcy cases, watching congressional activity on crop disaster payments, which is quite routinely given, so as to exclude crop payments from property of the estate. There is some support in the decisions of bankruptcy courts for the position that crop disaster payments to which a debtor becomes entitled after filing or conversion are proceeds under § 541(a)(6). See FarmPro Servs., Inc. v. Brown (In re FarmPro Servs., Inc.), 276 B.R. 620 (D.N.D.2002); Lemos v. Rakozy (In re Lemos), 243 B.R. 96 (Bankr.D.Idaho 1999); White v. United States (In re White), No. BRL88-00971C, 1989 WL 146417 (Bankr.N.D.Iowa Oct.27, 1989).

Bankruptcy Court
Does filing of bankruptcy petition by debtor who is ineligible to be debtor based on failure to comply with prepetition credit counseling requirement give rise to automatic stay?
Bankruptcy Court held that filing of bankruptcy petition under chapter 13 by debtor who is ineligible to be debtor based on his or her failure to comply with prepetition credit counseling requirement, with or without a certification requesting a waiver of this credit counseling requirement, commences a case and thus gives rise to automatic stay. In re Brown, 342 B.R. 248, Bankr. L. Rep. P 80,637 (Bankr.D.Md., 2006) (NO. 06-10534-DK).

This matter came before the court on the court’s own Order To Show Cause Why Foreclosure Sale Should Not Be Found Void As A Violation Of The Automatic Stay. The specific issue for decision is the validity of a foreclosure sale that was conducted after the petition date and before dismissal, where the debtor was subsequently found to be ineligible for bankruptcy relief pursuant to Section 109(h) of the Bankruptcy Code, as enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub.L. No. 109-8, 11 Stat. 23, which became effective October 17, 2005.

Subsequent to the BAPCPA amendments, which include new subsection (h) to Section 109, courts have addressed the issue of the effect of the filing of a petition by a debtor that is ineligible under this new subsection. As with the pre-BAPCPA cases, the courts’ decisions have varied. In In re Rios, 336 B.R. 177 (Bankr.S.D.N.Y.2005) and In re Hubbard, 333 B.R. 377 (Bankr.S.D.Tex.2005), the courts found that a petition by an ineligible debtor must be stricken, rather than dismissed, so as to void the filing ab initio. However, other courts have disagreed and held that dismissal was the proper remedy upon determination that the credit counseling requirement had not been satisfied and that the exigency certification was deficient, as opposed to the petitions being stricken, ab initio. E.g., In re Tomco, 339 B.R. 145 (Bankr.W.D.Pa.2006); In re Ross, 338 B.R. 134 (Bankr.N.D.Ga.2006). See also In re Salazar, 339 B.R. 622 (Bankr. S.D. Tex. 2006) (case is a nullity, no automatic stay arose, and foreclosure was not in violation of such stay) and In re Hawkins, 340 B.R. 642 (Bankr. D. D.C. 2006) (until case is dismissed, automatic stay is in effect).

The Bankruptcy Court in this case agreed with the reasoning in Hawkins and held the decision in Salazar was unpersuasive. The court held that all of the actions of the substitute trustee under the deed of trust to foreclose on the Debtor’s home after the date of the Debtor’s petition, were a violation of the automatic stay. Consequently, the sale is void. Further, certain conduct by the trustee taken in connection with the foreclosure warrants imposition of sanctions on the trustee pursuant to Section 362(k)(1).

Sixth Circuit
Does Barton doctrine apply to prevent wife of debtor from pursuing libel and other claims against bankruptcy trustee’s counsel in state court?

According to this Sixth Circuit decision, it is well-settled that leave of the bankruptcy forum must be obtained by any party wishing to institute an action in a state forum against a trustee, for acts done in the trustee’s official capacity and within the trustee’s authority as an officer of the court. This doctrine, known as the Barton doctrine, applies to trustees’ counsel as well as to trustees themselves, and its purpose is to enable the bankruptcy court to maintain better control over the administration of the estate. In re Lowenbraun, 453 F.3d 314, Bankr. L. Rep. P 80,650, 2006 Fed.App. 0230P (6th Cir.(Ky.), Jul 06, 2006) (NO. 05-6032).

The Barton doctrine takes its name from Barton v. Barbour, 104 U.S. 126, 127, 26 L. Ed. 672, 1881 WL 19839 (1881), in which the Supreme Court ruled that, before suit can be brought against a court-appointed receiver, “leave of the court by which he was appointed must be obtained.” The Court held that if leave of court were not obtained, then the other forum lacked subject matter jurisdiction over the suit. Barton, 104 U.S. 126, 127. Part of the rationale underlying Barton is that the Court appointing the receiver has in rem subject matter jurisdiction over the receivership property.

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