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Eleventh Circuit Issues Ruling Approving Judge’s Issuance of Bar Order in Bankruptcy Case

Legal News GavelFor many businesses considering filing Chapter 11 bankruptcy, the option exists to consider multiple different locations as the place where the bankruptcy case will be filed. Part of this decision-making process means analyzing the state of the law in each available venue. A recent decision by the 11th Circuit Court of Appeals regarding the power of courts to enter certain injunctions in bankruptcy cases provides a clear signal that, as a debtor, considering the states within the 11th Circuit, including Florida, may be a beneficial move. Before you decide where you will file your Chapter 11 case, it is helpful to consult with an experienced Florida bankruptcy attorney.

The case recently addressed by the 11th Circuit court involved the viability of what’s called bar orders, or permanent injunctions entered by the bankruptcy court that prevent entities from bringing certain other legal actions. The underlying case involved a business that owed a chain of nursing homes. The business experienced some problems, however, in the form of resident deaths. In anticipation of litigation and high-dollar negative outcomes in those cases, the business took preemptive action. It established two new corporate entities. It sent the company’s assets to a holding company and then transferred ownership of the now-assetless corporation to the other newly formed entity. This meant that the latter entity took on all of the business’ liabilities, including patient wrongful death lawsuit awards in excess of $100 million, but none of the assets.

After discovering the maneuver, the estates of the deceased residents filed an involuntary Chapter 7 case in Tampa and also launched an adversary proceeding. The goal was to invalidate as fraudulent the transfers that had sent the assets into a holding company while sending the liabilities, including the estates’ judgments, into a judgment-proof shell company.

Along the way, the estates settled with all of the opponents (for $24 million) except one. They sought to pursue a real estate investor whom they claimed was a key cog in the bust-out scheme. The bankruptcy court not only did not allow this pursuit, but also it issued a permanent injunction stopping them from pursuing the investor in federal or state court.

The estates appealed, arguing that the bankruptcy judge didn’t have jurisdiction to stop them from litigating against the investor in state court. The 11th Circuit disagreed and upheld that injunction. That court concluded that bankruptcy judges have wide leeway in the sort of “bar orders” they can enter to accomplish the goals of bankruptcy. “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate,” the court explained.

Applying that rule led the court in this case to conclude that a bankruptcy court has the jurisdiction and the legal authority to “enjoin any civil action ‘if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action’ or ‘in any way impacts upon the handling and administration of the bankrupt estate.’” This aspect of the ruling is extremely important for both debtors and creditors in Chapter 11 cases. While the nursing home entity’s case was a Chapter 7 one, the 11th Circuit ruling establishes the (broad) authority a bankruptcy judge has in issuing a bar order, including in a Chapter 11 case.

Whether you are a debtor in (or considering) Chapter 11, or a creditor of such a debtor, it is vitally important to make sure you have legal counsel who is up to date on the latest developments in the law. Consult the knowledgeable South Florida bankruptcy attorneys at Stok Folk + Kon. Our team has been providing insightful and effective representation to our bankruptcy clients for many years.

Contact us online or by calling (305) 935-4440 to schedule your consultation and find out how this firm can help you.

More blog posts:

Penalties for a Bad Faith Chapter 11 Bankruptcy Filing in Florida, Florida Business Lawyers Blog, Aug. 9, 2017

U.S. Supreme Court to Rule on Structured Dismissal in Chapter 11 Case, Florida Business Lawyers Blog, March 31, 2017