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									                                                STATE BAR OF TEXAS

                    BANKRUPTCY LAW SECTION
  Spring 2006                                                                                                       Vol. 4., No. 2

                          2006 ANNUAL MEETING

The State Bar of Texas Bankruptcy Law Section will              To attend the Annual Meeting, CLE Program and
hold its Annual Meeting on Friday June 16, 2006, in             Luncheon, you will need to register for the Bar
Austin. Professor Milton Regan, Jr. will be the                 Convention. Registration for the Bar Convention
Annual Meeting Luncheon Speaker.           Professor            for most of our members will be $95. All of the
Regan, from Georgetown Law Center, will discuss                 Bankruptcy Law Section CLE is included in that
his book, Eat What You Kill: The Fall of a Wall Street          price. A luncheon ticket is $35.
Lawyer, about the life of John Gellene. In late 1996,
John Gellene was a highly-regarded corporate
bankruptcy partner at the prestigious Wall Street law
firm of Milbank Tweed. Two years later, he had
                                                                      Inside in this Issue . . .
been convicted of bankruptcy fraud because of an
undisclosed conflict of interest.       Gellene was                    Call for Articles ............................. 2
disbarred and sentenced to fifteen months in federal
prison.                                                                An Idea Whose Time Has (Sort Of)
                                                                         Come: BAPCPA Provides Direct
You won’t want to miss Professor Regan’s                                Appeals From Bankruptcy Courts
presentation. Everyone attending the Luncheon will                      to Circuit Courts In Limited
receive a free autographed copy of Eat What You                          Situations ................................... 3
Kill: The Fall of a Wall Street Lawyer , courtesy of
Bridge and Associates, LLC, our luncheon sponsor.
                                                                       State Bar of Texas Bankruptcy
The Bankruptcy Law Section Annual Meeting and
                                                                         Law Section Annual Meeting
Luncheon will be held at the Austin Convention                          Schedule ...................................... 6
Center in conjunction with the State Bar of Texas
Bar Convention.                                                        The Honorable Stacey Jernigan ... 7
                                                                       Calendar of Events........................ 7
The Annual Meeting will include Section elections
and a very special CLE program, including                              The Other Shoe Drops on
presentations by Judge Harlin Hale, Judge Bill                         Pro-Snax........................................ 8
Parker, and Judge Jeff Bohm.
                                                                       Law Students Corner: A Debtor’s
There is still time to sign up for this exciting
                                                                       Absolute Right to Dismissal
program. You can register on-line. Go to the State
Bar website (http://www.texasbar.com/) and click
                                                                       Under Chapter 13 ........................ 11
on the box that says “Annual Meeting - Click here to
register.” A complete schedule for the Bankruptcy                      Troop Movements........................12
Law Section’s Annual Meeting and Luncheon is on
page 6 of this Newsletter.

                                                         - Page 1 -
 OFFICERS AND COUNCIL                                          CALL FOR ARTICLES AND
   MEMBERS OF THE                                                CALENDAR EVENTS
      Charles A. Beckham, Jr.              The STATE BAR OF TEXAS BANKRUPTCY LAW SECTION is dedicated to
       Haynes and Boone, LLP               providing Texas practitioners, judges, and academics with comprehensive,
                                           reliable, and practical coverage of the evolving field of bankruptcy law. We
       Deborah D. Williamson               are currently reviewing articles for upcoming publications. We welcome your
      Vice Chair/ Chairman-Elect           submissions for potential publication. In addition, please send us any
       Cox & Smith Incorporated
                                           information regarding upcoming bankruptcy-related meetings and/or CLE
             Mary Daffin                   events for inclusion in the newsletter calendar, as well as any items for our
                Secretary                  “Troop Movements” section.
Barrett, Burke, Wilson, Castle, Daffin &
             Frappier, LLP                 If you are interested in submitting an article to be considered for publication
            Shelby Jordan                  or to calendar an event, please either e-mail your submission to
              Treasurer                    kourtney.lyda@haynesboone.com or mail it to the following address:
  Jordan, Hyden, Womble & Culbreth
                                           Kourtney P. Lyda
             Tony Davis
 Vice-President Professional Education
                                           Haynes and Boone, L.L.P
           Baker Botts LLP                 1221 McKinney, Suite 2100
                                           Houston, Texas 77010
            Berry Spears                   Telephone: (713) 547-2590
  Vice-President Business Bankruptcy       Facsimile: (713) 236-5687
      Fulbright & Jaworski, LLP

            Merv Waage                     Please format your submission in Microsoft Word. Citations should
 Vice-President Consumer Bankruptcy        conform to the most recent version of the Bluebook, the Texas Rules of
        Waage & Waage, LLP                 Form, and the Manual on Usage, Style & Editing.
       Deborah Langehennig
   Vice-President Public Education         Should you have any questions, please visit our website at
    Chapter 13 Trustee, W.D. Tex.          http://txbankruptcylawsection.com. We look forward to reviewing your
                                           submissions for potential publication in the next STATE BAR OF TEXAS
         Elizabeth M. Guffy                BANKRUPTCY LAW SECTION NEWSLETTER.
  Vice-President Communications &
        Dewey Ballantine LLP

          Council Members

         William Greendyke
      Fulbright & Jaworski, LLP                                        EDITORS
             Roger Cox
            Sanders Baker
                                           Editor-in-Chief                                Co-Editor
            L.E. Creel, III
    Creel, Sussman & Moore, LLP            Elizabeth Guffy                                Kourtney P. Lyda
                                           Dewey Ballantine LLP                           Haynes and Boone, LLP
         Hon. Harlin D. Hale
    United States Bankruptcy Court         Frost Bank Tower                               One Houston Center
                                           401 Congress, Suite 3200                       1221 McKinney, Suite 2100
           Tom Howley                      Austin, Texas 78701                            Houston, Texas 77010
       Haynes and Boone, LLP               telephone: (512) 226-0450                      telephone: (713) 547-2590
        Honorable Bill Parker              facsimile: (512) 226-0333                      facsimile: (713) 236-5687
        U.S. Bankruptcy Court

         H. Christopher Mott
         Gordon & Mott, P.C.

        Clifton R. Jessup, Jr.
       Greenburg Traurig, LLP

            John Ventura
   Law Offices of John Ventura, P.C.

                                                          - Page 2 -
          An Idea Whose Time Has (sort of) Come: BAPCPA Provides Direct Appeals from
                    Bankruptcy Courts to Circuit Courts in Limited Situations
                                                       by David George*

For years, many in the bankruptcy community have sought              district court. The interim bankruptcy rules, which all
direct appeals from bankruptcy courts to circuit courts.1            of the Texas bankruptcy courts have adopted,13 provide
Direct-appeal proponents have argued that the system of              that while the case is pending in the bankruptcy court,
appeals by right from the bankruptcy court to the district           the certification request must be made in the
court2 and then to the circuit court is inefficient for two          bankruptcy court.14 After an appeal has been docketed
reasons.3 First, decisions of district judges are not binding        in the district court, or the district court has allowed an
precedent, so there is increased uncertainty regarding the           interlocutory appeal under 28 U.S.C. § 158(a), the
state of bankruptcy law.4 Second, the two appeals by right           certification request must be made in the district
add delay and expense to the bankruptcy system.5                     court.15

The Bankruptcy Abuse Prevention and Consumer                         A request for direct-appeal certification must be made
Protection Act of 2005 (“BAPCPA”)6 added direct review               within sixty days after the judgment or order is
of bankruptcy court orders by circuit courts, but only in            entered.16 Direct appeals do not stay the proceedings
limited circumstances. Instead of abolishing district court          in the lower court unless the lower court or the circuit
review, BAPCPA allows a bankruptcy court (or district                court stays the proceedings pending appeal.17
court handling a bankruptcy appeal) to certify an appeal
directly to the circuit court.7 The circuit court can then           II. Circuit court can then authorize direct appeal.
decide whether to accept the direct appeal.8 Absent a
certification by the lower court and acceptance of the direct        The process is two-fold and requires approval from
appeal by the circuit court, the appeal still goes through the       both the lower court and the circuit court. If the lower
traditional process.                                                 court certifies a direct appeal, then the parties file a
                                                                     notice of appeal with the lower court18 and a petition
This article explains BAPCPA’s direct-appeal provisions              with the circuit court requesting permission to appeal.19
and discusses the procedures that the courts are developing          The circuit court then would have to grant the petition
for direct appeals. Because direct appeals are only a few            before a direct appeal is allowed.20 BAPCPA provides
months old, the procedures are still developing.                     temporary direct-appeal procedures that are in effect
Practitioners should therefore consult the most-current              until the Federal Rules of Appellate Procedure are
procedures when pursuing direct appeals.                             amended.21 Under the temporary rules, a party must
                                                                     file the petition requesting permission to appeal within
I. Lower court can certify direct appeal.                            ten days of the lower court’s certification.22 That could
                                                                     change under the amended Federal Rules of Appellate
There are two ways for the lower court9 to certify a direct          Procedure, so caution should be used. Until the federal
appeal. The lower court, acting on its own motion10 or a             rules are amended, current Federal Rule of Appellate
party’s request, can certify that:                                   Procedure 5—which governs appeals by permission in
• The judgment or order involves a question of law as to             general—applies to BAPCPA direct appeals.23
which there is no controlling authority from that circuit
court or the Supreme Court;                                          BAPCPA does not provide any standards for the
• The judgment or order involves a matter or public                  circuit court to use when deciding whether to authorize
importance;                                                          a direct appeal, but the legislative history states that the
• The judgment or order involves a question of law                   circuit courts “are encouraged to authorize direct
requiring resolution of conflicting decisions; or                    appeals” when the above-mentioned factors are met.24
• An immediate appeal from the judgment or order may                 The standards will presumably become more defined as
materially advance the case’s progress.11                            the caselaw develops.

In addition, if both a majority of the appellants and a              III. Procedures for certification request and
majority of the appellees request the lower court to certify a       petition for direct appeal.
direct appeals, and they represent that the above-listed
standards are met, then the lower court must certify the             Both the certification request to the lower court and
direct appeal.12                                                     the petition for direct appeal to the circuit court should
                                                                     include enough information to allow the court to
    BAPCPA does not make clear whether the certification             determine whether to allow the direct appeal. The
    request should be made in the bankruptcy court or the            request and petition must include:

continued from page 3                                                   the conjunctive “and” when referring to the appeal
                                                                        materially advancing the case’s ultimate termination.35
• The facts necessary to understand the question presented;             This means that under the permissive-interlocutory-
• The question itself;                                                  appeal statute, the court must determine both (1) that
• The relief sought;                                                    there is a substantial difference of opinion about a
• The reasons why the direct appeal should be allowed and               controlling legal issue and (2) resolving that difference
is authorized by a statute or rule; and                                 may materially advance the case’s ultimate
• A copy of the order complained of and any related                     termination.36 Under BAPCPA, a direct appeal is
opinion.25                                                              allowed if any one of the factors listed in section I
                                                                        above is met.
The other parties can oppose the request or petition or file
their own requests or petitions. These are due in the lower             VI. Conclusion
court within ten days of the original request and in the
circuit court within seven days of the original petition.26             Congress addressed the bankruptcy bench and bar’s
                                                                        request when it allowed limited bankruptcy direct
IV. Direct appeals of interlocutory orders.                             appeals to the circuit court in BAPCPA, although it did
                                                                        not go as far as many hoped. Under BAPCPA, direct
While generally only final orders can be appealed as of right,          appeals are not allowed in every case, but there are
interlocutory appeals of bankruptcy orders are allowed with             many situations in which they are allowed.
the district court’s permission.27 If an appellant is seeking a
direct appeal of an interlocutory order, it does not need to            It is too soon to tell how effective the new procedures
obtain separate permission for the interlocutory appeal.                will be in practice, but it appears that BAPCPA’s direct-
Instead, the interim bankruptcy rules provide that the circuit          appeals provision may make bankruptcy appeals more
court’s acceptance of a direct appeal also acts as permission           efficient and less expensive, while at the same time
for the interlocutory appeal.28                                         clarifying bankruptcy law by providing more circuit-
                                                                        court precedent.
V. Relationship between direct appeals to circuit court
and 28 U.S.C. § 1292(b) permissive interlocutory                             *David George is of counsel to Connelly • Baker • Maston
appeals.                                                                 • Wotring • Jackson LLP in Houston, Texas, where he
                                                                         focuses his practice on appellate law and commercial
Federal law allows appeals by permission in several other                litigation. He is board certified in civil appellate law by the
                                                                         Texas Board of Legal Specialization and is a former law clerk
contexts. Under 28 U.S.C. § 1292(b), a district court can
                                                                         to Judge Harold R. DeMoss, Jr. of the United States Court of
certify an issue for interlocutory appeal when there is “a               Appeals for the Fifth Circuit and Judge Joe J. Fisher of the
controlling question of law as to which there is substantial             United States District Court for the Eastern District of Texas
ground for difference of opinion and . . . an immediate                  in Beaumont. He graduated with honors from Baylor Law
appeal from the order may materially advance the ultimate                School and received his B.A. from Baylor University.
termination of the litigation.”29 The circuit court can then             1REPORT     OF THE NATIONAL BANKRUPTCY REVIEW
choose whether to allow the § 1292(b) interlocutory                      COMMISSION § 3.1.3 (1997),
appeal.30 In bankruptcy cases, district courts can allow                 http://govinfo.library.unt.edu/nbrc/report/17bjuris.htm;
interlocutory appeals from bankruptcy courts under 28                    Letter from M.O. Sigal, Jr., Chair of the Business Bankruptcy
                                                                         Committee of the American Bar Association Business Law
U.S.C.§ 158(a). That statute does not provide standards for
                                                                         Section, to Orrin Hatch, Chairman of Senate Judiciary
determining whether to allow interlocutory appeals, so                   Committee (Sept. 10, 1999) (recommending direct appeals);
district courts often use the 28 U.S.C. § 1292(b) standards as           Letter from Fifth Circuit Judge Edith H. Jones to Justice
a guide.31                                                               Byron R. White, Chair of the Commission
                                                                         on Structural Alternatives for the Federal Courts of Appeals
There are similarities between BAPCPA’s direct-appeal                    (Nov. 6, 1998),
provision and the 28 U.S.C. § 1292(b) permissive-                        http://www.library.unt.edu/gpo/csafca/report/comments/jo
                                                                         nes.htm (noting that the National Bankruptcy Review
interlocutory-appeal provision, but BAPCPA’s direct-appeal
provision is much broader.32 For example:                             Commission’s recommendation of direct appeals was “strongly
                                                                      supported by every group in the bankruptcy community,”
     • BAPCPA direct appeals are not limited to cases
                                                                      including “judges, lawyers, academics, creditors, and consumer
     where there is a disputed “controlling” legal issue, while       groups.”);
     permissive interlocutory appeals are.33                          http://www.abanet.org/poladv/congletters/106th/bk91099.ht
     • A BAPCPA direct appeal is allowed when it may                  ml (supporting direct appeals from bankruptcy courts to circuit
     materially advance a case’s “progress,” while a                  courts); Honorable Barbara B. Crabb, In Defense of Direct Appeals:
     permissive interlocutory appeal is not allowed unless            A Further Reply to Professor Chemerinsky, 71 AM. BANKR. L.J. 137,
     the appeal may materially advance the case’s “ultimate           141-47 (1997).
                                                                      2In the First, Sixth, Eighth, Ninth, and Tenth Circuits,
     • BAPCPA uses the disjunctive “or” when referring to             bankruptcy appeals can go to Bankruptcy Appellate Panels
                                                                      (“BAPs”) instead of district courts. 6 COLLIER BANKRUPTCY
     the appeal materially advancing the case’s progress,
                                                                      PRACTICE GUIDE ¶ 117.02[2] n.24. Because the Fifth Circuit
     while the permissive-interlocutory-appeal statute uses

does not have BAPs, and because under the new direct appeal                    19 BAPCPA § 1233(b)(4)(A).
statute BAPs are treated the same as district courts handling                  20 28 U.S.C. § 158(d)(2)(A).
bankruptcy appeals, this article will only refer to district courts            21 BAPCPA § 1233(b)(1). The Federal Rules of Appellate

instead of to both district courts and BAPs.                                   Procedure apply to bankruptcy appeals to the circuit court. 6
3 Letter from Judge Jones to Justice White, supra at note 3                    COLLIER BANKRUPTCY PRACTICE GUIDE ¶ 117.02[3].
(“These problems involve the lack of stare decisis in                          22 Id. § 1233(b)(4)(A).

bankruptcy, which leads to confusing and chaotic                               23 Id. § 1233(b)(3).

interpretations of the relevant law, and the high cost and delay               24 H.R. REP. 109-31(I) (2005) as reprinted in 2005 U.S.C.C.A.N.

imposed by multiple layers of bankruptcy appeals.”).                           88, 206.
4 Fairchild Aircraft, Inc. v. Campbell (In re Fairchild Aircraft Corp.),       25 INTERIM FED. R. BANKR. P. 8001(f)(3)(C) (requirements for

220 B.R. 909, 917 (Bankr. W.D. Tex. 1998) (“A district court's                 certification request); FED. R. APP. P. 5(b)(1) (requirements
ruling on a bankruptcy appeal enjoys little more precedential                  for direct-appeal petition). The direct-appeal petition to the
weight than does the original bankruptcy decision itself.”);                   circuit court must also contain a copy of the lower court’s
JUDITH A. MCKENNA & ELIZABETH C. WIGGINS, FED. JUDICIAL                        direct-appeal certification. FED. R. APP. P. 5(b)(1)
CTR., ALTERNATIVE STRUCTURES FOR BANKRUPTCY APPEALS                            26 INTERIM FED. R. BANKR. P. 8001(f)(3)(D) (certification

28-39                                                           (2000),        request); FED. R. APP. P. 5(b)(2) (direct-appeal petition).
http://www.fjc.gov/public/pdf.nsf/lookup/BankrApp.pdf/$fil                     27 28 U.S.C. § 158(a).

e/BankrApp.pdf; Paul M. Baisier & David G. Epstein, Resolving                  28 INTERIM FED. R. BANKR. P. 8003(d).

Still Unresolved Issues of Bankruptcy Law: A Fence or An Ambulance,            29 28 U.S.C. § 1292(b) states that:

69 AM. BANKR. L.J. 525, 528-29 & nn.17-19 (1995).
5 Fairchild Aircraft, 220 B.R. at 918 (appeals by right to district                 When a district judge, in making in a civil action an
court and then to circuit court “serve[] no practical purpose, and                  order not otherwise appealable under this section, shall
may actually be a detriment to the efficient administration of                      be of the opinion that such order involves a controlling
bankruptcy”).                                                                       question of law as to which there is substantial ground
6 BAPCPA § 1233 (codified at 28 U.S.C. § 158(d)(2)).                                for difference of opinion and that an immediate appeal
7 28 U.S.C. § 158(d)(2)(A).                                                         from the order may materially advance the ultimate
8 Id.                                                                               termination of the litigation, he shall so state in writing
9 Because direct appeals in bankruptcy matters can come from                        in such order. The Court of Appeals which would have
bankruptcy courts, district courts, or BAPs, the legislative                        jurisdiction of an appeal of such action may thereupon,
history uses the term “lower court” to refer to all three of those                  in its discretion, permit an appeal to be taken from such
courts. H.R. REP. 109-31(I) (2005) as reprinted in 2005                             order, if application is made to it within ten days after
U.S.C.C.A.N. 88, 206.                                                               the entry of the order: Provided, however, That
10 In one of the first direct-appeal cases, the court sua sponte                    application for an appeal hereunder shall not stay
certified a direct appeal of its order, but the parties never                       proceedings in the district court unless the district judge
appealed the order. See In re Virissimo, 332 B.R. 208, 209 (Bankr.                  or the Court of Appeals or a judge thereof shall so
D. Nev. 2005) (certifying direct appeal); Posting of David                          order.
Rosendorf            to         ABI’s         BAPCPA              Blog,        30 Id.
http://bapcpa.blogspot.com/ (Nov. 28, 2005, 15:07 EST)                         31  6 COLLIER BANKRUPTCY PRACTICE GUIDE ¶ 117.04;
(noting that no appeal was filed).                                             Escondido Mission Village L.P. v. Best Products Co., 137 B.R. 114,
1128 U.S.C. § 158(d)(2)(A).          The statute says that if the              116 (S.D.N.Y. 1992) (“When determining whether to grant an
requirements are met, the lower court “shall” certify the appeal,              interlocutory appeal from a decision of the bankruptcy court,
so it appears that the lower court does not have discretion to                 this Court generally applies the standard governing
deny certification if the requirements are met. That is in                     interlocutory appeals from the district courts to the courts of
keeping with the legislative history, which states that if the                 appeals."); American Freight System, Inc. v. W.A. Walker &
requirements are met, the “certification must be issued by the                 Assocs., Inc. (In re American Freight System, Inc.), 153 B.R. 316,
lower court.” H.R. REP. 109-31(I) (2005) as reprinted in 2005                  321 (D. Kan. 1993) (“[n]either Section 158(a) nor the
U.S.C.C.A.N. 88, 206.                                                          Bankruptcy Rules specify the standards for granting leave, so
12 28 U.S.C. § 158(d)(2)(B).                                                   the courts have borrowed those from 28 U.S.C. § 1292(b)”).
13 In re Adoption of Interim Bankruptcy Rules, General Order No.               32 For a discussion of the differences between the bankruptcy

2005-6        (Bankr.       S.D.      Tex.     Oct.      5,      2005),        direct-appeal statute and the permissive-interlocutory-appeal
http://www.txs.uscourts.gov/bkforms/national_rules.pdf;                        statute in 28 U.S.C. § 1292(b), see Posting of David
Adoption of Interim Bankruptcy Rules, General Order No. 05-2                   Rosendorf           to       ABI’s          BAPCPA            Blog,
(Bankr. E.D. Tex. Sept. 22, 2005);                                             http://bapcpa.blogspot.com/ (Nov. 4, 2005, 16:58 EST).
http://www.txeb.uscourts.gov/general%20orders/g.o.05-2.pdf;                    33 28 U.S.C. § 1292(b); Marlbrough v. Crown Equip. Corp., 392

Standing Order Adopting Interim Bankruptcy Rules (Bankr. W.D. Tex.             F.3d 135, 136 (5th Cir. 2004) (circuit court’s “appellate
Oct. 21, 2005),                                                                jurisdiction under § 1292(b) extends only to interlocutory
   http://www.txwb.uscourts.gov/pdf/standing_order_interim                     orders involving a ‘controlling question of law’”).
   _rules.pdf; In re Adoption of Interim Bankruptcy Rules, General             34 Compare 28 U.S.C. § 158(d)(2)(A)(iii) with 28 U.S.C. §

   Order No. 2005-04 (Bankr. N.D. Tex. Oct. 13, 2005),                         1292(b).
   http://www.txnb.uscourts.gov/orders/2005-04.pdf.                            35 Compare 28 U.S.C. § 158(d)(2)(A) with 28 U.S.C. § 1292(b).
   14 INTERIM FED. R. BANKR. P. 8001(f)(2).                                    36 Clark-Dietz & Associates-Engineers, Inc. v. Basic Const. Co., 702
   15 Id. 8001(f)(2).                                                          F.2d 67, 69 (5th Cir. 1983) (Section 1292(b) appeals “are
   16 28 U.S.C. § 158(d)(2)(E).                                                permitted only when there is a substantial difference of
   17 Id. § 158(d)(2)(D).                                                      opinion about a controlling question of law and the
   18 FED. R. BANKR. P. 8001(a); INTERIM FED. R. BANKR. P.                     resolution of that question will materially advance, not retard,
   8001(f)(1).                                                                 ultimate termination of the litigation.”).


                                     FRIDAY, JUNE 16, 2006
                                  AUSTIN CONVENTION CENTER
                                      8:00 A.M. – 1:30 P.M.


                                    ANNUAL MEETING

                                    .75 hrs. CLE (pending approval)


                                  CONSUMER CLE SESSION
                                    1.5 hrs. CLE (pending approval)



                                   BUSINESS CLE SESSION
                                    1.5 hrs. CLE (pending approval)


                       ROBIN E. PHELAN – READ THE FREAKIN’ STATUTE


                                  with Professor Milton Regan


 This program is part of the 2006 State Bar of Texas Annual Meeting. Admission to CLE is free to Annual
Meeting Registrants. Luncheon is a ticketed event. For additional information go to www.TexasBarCLE.com.

        The Honorable                                  2006 BANKRUPTCY
     Stacey G.C. Jernigan                             SECTION CALENDAR
                                                           OF EVENTS
On May 12, 2006, the Honorable Stacey
G.C Jernigan was sworn in as United States          June
Bankruptcy Judge for the Northern District
of Texas, Dallas Division. Judge Jernigan’s           State Bar of Texas Bankruptcy Law Section
formal Investiture Ceremony is scheduled               Annual Meeting
for Tuesday, June 15, 2006 at 2:00 p.m.               •   Austin Convention Center
                                                      •   Friday, June 16, 2006
                                                      •   8:00 A.M. – 1:30 P.M.
Becoming a judge has been Judge Jernigan’s
ultimate dream since her days at the                  2nd Annual Consumer Bankruptcy Practice
University of Texas School of Law in the              •   Moody Gardens Hotel
                                                      •   Galveston, Texas
late eighties. Judge Jernigan has said, “I            •   June 22-23, 2006
have enjoyed being a lawyer, but I thought            •   www.utcle.org
I’d love being involved with the law even
more if I could achieve being a judge.”
Judge Jernigan is board certified in Business
                                                      Nuts and Bolts of Business Bankruptcy
Bankruptcy Law by the American Board of               2006 (video)
Certification and is a Fellow of the                  •    Cityplace Conference Center
American College of Bankruptcy in both                •    Dallas, Texas
the Texas Bar Foundation and the Dallas               •    July 19, 2006
Bar Foundation.                                       •    www.texasbarCLE.com

                                                      24th Annual Advanced Business
Judge Jernigan is a mother of two children            Bankruptcy Course 2006 (video)
ages 12 and 8. Her husband is a school                •    Cityplace Conference Center
teacher and high school football coach.               •    Dallas, Texas
                                                      •    July 20-21, 2006
“We both have a public service bug in us,             •    www.texasbarCLE.com
and so he totally understands having the
desire in your heart to become a public
servant─even if it’s not the most lucrative         September
thing you could be doing.”
                                                      Consumer Bankruptcy Boot Camp 2006
Before being sworn in as Bankruptcy Judge,            •     Houston, Texas
Judge Jernigan was a partner with the Dallas          •     September 20, 2006
office of Haynes and Boone, LLP and co-               •     Call 800-204-2222 (x1574) to Register
head of the Bankruptcy Practice Group.
                                                      Advanced Consumer Bankruptcy Course
Judge Jernigan formerly represented                   2006 (live)
debtors, committees, secured lenders,                 •   Houston, Texas
purchasers, and other parties. She leaves             •   September 21-22, 2006
behind professional friends and firm                  •   Call 800-204-2222 (x1574) to Register
colleagues who will miss practicing
bankruptcy law with her.

                               THE OTHER SHOE DROPS ON PRO-SNAX
                                                         by Stephen Sather
When the Fifth Circuit decided Matter of Pro-Snax                    These holdings are problematic because they appear to
Distributors, Inc.,1 the court devoted most of its analysis to       contradict the language of 11 U.S.C. §330(a). The statute
the issue of whether debtor’s counsel could be                       provides that courts shall not allow compensation for
compensated from the estate after appointment of a                   “services that were not . . . reasonably likely to benefit the
chapter 11 trustee. The Fifth Circuit ruled that the                 debtor’s estate or . . . necessary to the administration of
statutory language of 11 U.S.C. §330(a) prohibited such              the estate.”7 Because Congress prohibited payment for
compensation, and the Supreme Court subsequently                     services not “reasonably likely to benefit the debtor’s
adopted the same position.2 However, the Fifth Circuit               estate,” it seems that it approved payment for services that
also addressed the broader issue of the proper standard to           were reasonably likely to benefit the estate. However, the
be used in awarding compensation. In a few short                     Pro-Snax holding would effectively amend the statute to
paragraphs, the Fifth Circuit rejected a standard of                 require that the services rendered an actual, material
objective reasonableness and required that legal services            benefit as judged in hindsight. Congress also stated that
result in “an identifiable, tangible and material benefit to         courts should consider “whether the services were
the bankruptcy estate.”3 Courts are only just now starting           necessary to the administration of, or beneficial at the
to focus on the meaning of this second holding.                      time at which the service was rendered toward the
                                                                     completion of a case under this title.”8 How can Pro-Snax
The Pro-Snax Holding                                                 be reconciled with a requirement to look at whether
                                                                     services necessary or beneficial at the time at which they
In addressing the proper standard for awarding                       were rendered?
compensation, the court stated:
                                                                     The Pro-Snax ruling is also difficult because it fails to
  The other task to which this appeal commends                       address services that are necessary to the administration of
  us it deciding which standard we must apply to                     the case but do not result in an identifiable, tangible and
  A&K’s        services    rendered     before   the                 material benefit. For example, the bankruptcy estate does
  appointment of the trustee. A&K argues that a                      not receive a direct benefit from filing schedules,
  reasonableness test is appropriate—whether the                     attending the first meeting of creditors or filing monthly
  services were objectively beneficial toward the                    operating report. However, each of these functions is
  completion of the case at the time they were                       required by Title 11. While these services do not render a
  performed.         The Petitioning Creditors, by                   direct benefit, they avoid a direct detriment─that is,
  contrast, advocate a more stringent test—                          having the case dismissed or converted.
  whether A&K’s services resulted in an
  identifiable, tangible and material benefit to the                 Applying Pro-Snax in Chapter 11
  bankruptcy estate. We determine today that the
  stricter test is the appropriate measure.4                         While the Pro-Snax material benefit standard has been
                                                                     rejected by some courts in other circuits,9 it has been
The court went on to state that “we are disinclined to               applied in a handful of cases within the Fifth Circuit.10
hold that any service performed at any time need only be             The most extensive discussion is found in the recent case
reasonable to be compensable”5 and added that “we                    from the Western District of Texas, In re Weaver.11 Weaver
believe it is important to stress that any work performed            involved representation of an individual in a failed chapter
by legal counsel on behalf of a debtor must be of material           11 case described by the judge as “one of the most
benefit to the estate.”6                                             contentious cases that the Court has involved with since
                                                                     being licensed as a lawyer in 1969.”12 The case was
Thus, the court appears to have held that:                           precarious for debtor’s counsel due to the nastiness of the
                                                                     case, the ultimate conversion to chapter 7, and the
1.      Services must result in an identifiable, tangible,           inherent conflict present in representing an individual as
and material benefit to the estate to be compensable; and            both debtor and debtor-in-possession.13

2.        Services that were objectively reasonable at the           The Court followed Pro-Snax despite an argument that it
time they were performed, but did not result in an                   was contrary to clear statutory authority.14 The court
identifiable, tangible, and material benefit are not                 separately analyzed each project undertaken by the
                                                                                                                 continued on page 9

continued from page 8                                                        connection with the motion to lift stay to allow the
                                                                             divorce to go forward and allowed reduced fees for
 debtor’s counsel and special counsel to see whether the                     matters relating to coordination between the divorce and
 services rendered were compensable.15 The court divided                     bankruptcy.
the fee requests into four general categories: those that
represented mandatory duties for Debtor’s counsel, which                     These rulings, while true to Pro-Snax, raise difficult
would be allowed subject to reasonableness; those that                       practical problems. If debtor must have counsel for a
were for the benefit of the individual debtor, which would                   dispute, but is not allowed to pay counsel out of the
not be allowed; those that were not mandatory and did                        estate, how will debtor obtain qualified counsel? The
not benefit the estate, for which no compensation would                      choices are limited. A debtor can liquidate exempt
be allowed; and those that were not mandatory but did                        property, can use funds that are not property of the estate,
benefit the estate, for which compensation would be                          or can borrow funds from outside the estate. However,
allowed based on reasonableness and the results obtained.                    under the Bankruptcy Abuse Prevention and Consumer
                                                                             Protection Act of 2005, the debtor’s post-petition
Mandatory Services                                                           earnings in a chapter 11 case are now property of the
                                                                             estate.20 Therefore, these funds are no longer available to
The court found that benefit must be presumed on those                       pay counsel for matters that can’t be paid out of the
matters “necessary to the administration of the case.”16                     estate.
As Judge Monroe stated, “The Court believes that is the
only exception to the Pro-Snax pronouncement that all                        Non-Mandatory Services Without Benefit
services rendered by persons representing the estate have
the ability to show the identifiable, tangible and material                  This category resulted in denial of a substantial amount of
benefit that has come from their efforts. With regard to                     fees. A non-mandatory service is one that debtor’s
‘mandatory’ work, the benefit must be presumed and the                       counsel is not required to perform under the Code.
inquiry is one of the reasonableness of the fees charged on                  debtor’s counsel does not have to propose a plan or
such mandatory matters.”17 Mandatory services were                           respond to a motion to dismiss or convert the case. As a
found to include such items as preparing the initial filing,                 practical matter, counsel must perform these duties if the
matters related to case administration such as filing                        debtor is to emerge from bankruptcy with a confirmed
schedules and attending the creditors’ meeting,18 and                        plan. However, these are areas that might not be
“investigating whether property of the estate has value.”19                  appropriate in a specific case. As a result, counsel is
There were also a number of small items that arguably fell                   subject to being second-guessed at fee application time.
into this category.
                                                                             The two main areas where the court denied fees for this
Services for Debtor’s Benefit                                                reason related to the plan and the motion to convert. The
                                                                             court found that the facts relating to the plan were very
This category amply illustrates the perils of representing                   close to those of Pro Snax in that the debtor was
an individual debtor. While the debtor was in chapter 11,                    attempting to propose a plan over the vehement objection
he was a party to a pending divorce action and was sued                      of his main creditors. However, Judge Monroe also stated
by several creditors to determine dischargeability of debts.                 that he could not understand why the creditors would
These are both areas where the debtor required counsel                       prefer trying to seek a non-dischargeable judgment in
and that could impact the success of the reorganization                      chapter 7 to the debtor’s plan. 21 Thus, even though the
case. For example, the divorce action could create new                       debtor was objectively trying to benefit his creditors, the
obligations for maintenance or support that would limit                      fact that they did not want the offered benefit meant that
the funds available to pay creditors, or it could attempt to                 these services were not compensable.22 With regard to the
divide or dispose of property of the estate. Similarly, it                   motion to convert, the court found that the debtor’s
would be difficult to negotiate the terms of a plan with a                   resistance was simply an attempt to keep the debtor in
creditor without addressing the dischargeability of that                     control at a point where the case had become hopeless.23
creditor’s claim.
                                                                             Non-Mandatory Services With Benefit
However, the court denied or substantially reduced fees in
this area, reasoning that they were for the benefit of the                   In an unsuccessful case, this category is likely to be slim.
individual debtor and not the estate.            The court                   However, in the Weaver case, the debtor’s counsel pursued
completely denied fees with regard to the dischargeability                   a preference claim against the major creditor in the case
actions but was more generous with regard to the divorce                     that the trustee successfully settled later for a large sum.
action. The court allowed a small portion of the special                     The court allowed these fees after noting that it had to
counsel’s fees incurred in bringing an asset into the estate,                prod the debtor to pursue the action in the first place.
which asset was later bought back from the chapter 7
trustee by the individual debtor. The court also allowed                                                              continued on page 10
bankruptcy counsel to recover for fees incurred in

                                                                - Page 9 -
continued from page 9                                                          13Representation of an individual chapter 11 debtor

                                                                               requires counsel to represent a single individual who is
Applying Pro-Snax Beyond Chapter 11 Debtor’s                                   both the individual debtor and the representative of the
Counsel                                                                        estate. Some matters, such as exemption disputes, place
                                                                               counsel in a conflict between duties to the debtor and to
Nearly all of the cases applying Pro-Snax have involved                        the estate. Other areas, such as objections to discharge
compensation of debtor’s counsel in a chapter 11 case.                         and determination of dischargeability, benefit the debtor
However, the statute being interpreted, 11 U.S.C. §330(a),                     without affecting the estate. The state disciplinary rules
also applies to compensation of a chapter 11 trustee, an                       require counsel to zealously represent both interests. This
ombudsman, an examiner, and counsel for a trustee. If                          is less of a problem in chapter 12 and 13 cases because the
the identifiable, tangible, and material benefit standard is                   statute allows compensation for services reasonably
part of the statute, then it must apply to these parties as                    benefiting the debtor. 11 U.S.C. §330(a)(4)(B).
well. How exactly does an examiner benefit the estate? If                      14 “Applicant Borsheim argues that Pro-Snax is at odds

an examiner is appointed to investigate the debtor’s                           with the statute and misinterprets it since the statute
transactions with insiders and concludes that no                               plainly authorizes fees ‘for actual, necessary services”
wrongdoing occurred, should compensation be denied on                          (citation omitted) as well as services that are ‘reasonably
the basis that no benefit was received? If trustee’s counsel                   likely to benefit the debtor’s estate.” (citation omitted).
investigates a hundred potential preference actions,                           Even if such be true, this Court is constrained to follow
chooses to pursue ten, and is successful on five, should                       the 5th Circuit’s interpretation.” 336 B.R. at 119.
compensation be limited to the time spent on the five                          15 The Local Rules of the Western District require that fee

successful actions or should compensation be allowed for                       applications contain a description of the categories of
the entire project on the theory that it was necessary to                      services rendered stating the nature and purpose of each
wade through ninety-five potential claims to find the five                     category and the results obtained. W. D. Tex. Local
meritorious ones?                                                              Bankr. R. 2016(a)(1).
                                                                               16336      B.R. at 122, n.2 (citing 11 U.S.C.
The second Pro-Snax holding is difficult to reconcile with                     §330(a)(4)(A)(ii)(II)).
the statute it sought to interpret. Perhaps the Fifth Circuit                  17 336 B/R/ at 122.

was reacting to the specific facts before it and would not                     18 The Condit court approached this area somewhat

apply the same standard to a consumer privacy                                  differently, finding that items such as preparation of
ombudsman (a position that did not exist at the time of                        schedules and attendance at the first meeting of creditors
the opinion) or an examiner. It also may be that the Fifth                     “inures to the estate’s benefit” and “may confer an actual
Circuit, like Judge Monroe, would find an exception for                        benefit on the estate” and were therefore compensable.
“mandatory” services, which would mitigate the potential                       In re Condit, at 8
harshness of its ruling. In the alternative, all professionals                 19 “(I)t is mandatory that counsel should spend some time

employed by bankruptcy estates may find themselves                             investigating whether property of the estate has value.
under a one-sided contingent fee arrangement24 and                             He should not be required to simply roll over.” 336 B.R.
should negotiate their fees accordingly.                                       at 123.
______________________                                                         2011 U.S.C. §1115.
1157 F.3d 414 (5th Cir. 1998).                                                 21Other courts have fudged on this issue and have allowed
2 Lamie v. United States Trustee, 540 U.S. 526, 124 S.Ct.                      partial compensation for unsuccessful attempts to
1023, 157 L.Ed.2d 1024 (2004).                                                 propose a plan.         In re Condit, supra (50% of requested
3157 F.3d at 426.                                                              fees allowed); In re Needham, supra (20 hours out of 98.25
4Id.                                                                           allowed).
5Id.                                                                           22 In contrast, the court allowed fees for resisting a motion
6Id.                                                                           to appoint trustee that was “wholly without merit.” 336
711 U.S.C. § 330(a)(4)(A).                                                     B.R. at 123. It is unclear whether this was allowed as a
811 U.S.C. §330(a)(3)(C).                                                      mandatory item or whether preventing something bad
9 In re Ames Department Stores, Inc., 76 F.3d 66 (2nd Cir.                     from happening counts as an identifiable, tangible and
1996)(while this opinion pre-dates Pro-Snax, it adopts the                     material benefit.
position rejected by the Fifth Circuit); In re Mednet, 251                     24 Id.

B.R. 103 (9th Cir. BAP 2000).                                                  24 A one-sided contingent fee arrangement is one where
10In re Condit, 2003 Bankr. LEXIS 601 (Bankr. N.D. Tex.                        the hourly rate is paid if counsel is successful and no
2003); In re Needham, 279 B.R. 519 (Bankr. W.D. La. 2001).                     compensation is paid if counsel is unsuccessful. It lacks
11In re Weaver, 336 B.R. 115 (Bankr. W.D. Tex. 2005);                          the upside potential of a traditional contingent fee
12 336 B.R. at 118.

                                                                 - Page 10 -
                          A Debtor’s Absolute Right to Dismissal Under Chapter 13
                                                     by Neel Natarajan*

The language of Section 1307(b)              Additionally, courts have used          circumstances” analysis on a case-by-
seems to suggest that a debtor under        Section 1307(a) to restrict debtors’     case basis.13 Although a “brick is not a
Chapter 13 of the Bankruptcy Code           “absolute right” of dismissal. A         wall,” if there is sufficient indicia of
has an “absolute right” to dismiss her      debtor does not have to make a           fraud on the part of the debtor then a
own case. Although subsection (b)           request for a conversion under §         court will likely deny a motion to
states that “[o]n request of the debtor     1307(a).8 On the other hand, a           dismiss by the debtor. Second, if a
at any time…the court shall dismiss a       debtor must file a motion to             motion for conversion is filed after a
case under this chapter,”1 many             dismiss her case under § 1307(b).9       debtor files a motion for dismissal
courts, including Texas Bankruptcy          The requirement that the debtor          under § 1307(b), then the courts will
Courts, have rejected the notion of an      request a dismissal creates a            often conduct a hearing on both
“absolute     right”    of     dismissal.   precondition that must be met            motions.14 The debtor is not absolved
Unquestionably, an attorney practicing      before such dismissal may be             by mere virtue of being the first to act
in Texas should understand the              granted, thus rejecting the notion       if fraud or bad faith is alleged in the
reasoning courts have used in rejecting     of     an     “absolute     right.”10    motion to convert.
the “absolute right” theory and how         Additionally, “[i]nasmuch as the
to argue effectively for, or respond to,    statute requires the [d]ebtor to         A Chapter 13 debtor does have the
an assertion of an absolute right of        ‘request’ dismissal, the [c]ourt         right to dismiss his bankruptcy case,
dismissal by the debtor.                    imposes a duty on the [d]ebtor that      but as shown in the case law cited in
                                            the [d]ebtor’s request not be made       this article this right is not absolute.
Generally, under the Code a debtor          in bad faith.”11 If a debtor files a
does have the right to dismiss his own      request for dismissal in bad faith,      * Neel Natarajan is a second year law student at
Chapter 13 case. However, that right        then the court is under no               the University of Oklahoma. He clerked for the
                                                                                     United States Bankruptcy Court for the Northern
has been restricted when there is a         obligation to grant the request,         District of Texas in the Summer of 2005 and
pending motion to convert the               again rejecting the notion of an         served as an intern to Bankruptcy Judge Hale in
debtor’s bankruptcy case2 on the            “absolute right” to dismissal.           December 2005 and January 2006.
                                                                                     111 U.S.C. §1307(b) (2005) (emphasis added).
grounds of fraud or bad faith in filing                                              2 Often the motion to convert will be made by
the bankruptcy petition.3 In that           Finally,    some      courts     have    the trustee, but the court or any party in interest
situation, courts have held, despite the    approached           the         issue   may also make it. 11 U.S.C. § 1307(c) (2005).
language of § 1307(b), a debtor does        philosophically.       Courts have       3 In re Foster, 121 B.R. 961 (Bankr. N.D.Tex.

not have an absolute right to dismiss       concluded      even      given     the   1990), aff’d without opinion, 945 F.2d 400 (5th Cir.
                                                                                     1991), citing In re Graven, 101 B.R. 109
the case. Three lines of reasoning          grammatical differences between          (Bankr.W.D.Mo. 1989) (Although Fo1 In re Fonke,
have been used to justify this position.    “shall” and “may,” bankruptcy laws       310 B.R. 809, 813 (Bankr. S.D.Tex. 2004).
                                            “have always had as their intent the     4In re Fonke, 310 B.R. 809, 813 (Bankr. S.D.Tex.

First, courts have reasoned that when       protection and/or rehabilitation of      2004).
                                                                                     5Id. citing In re Gaudet, 132 B.R. 670, 676 (D.R.I.
§§ 1307(b) and 1307(c) are read in          honest debtors.”12 Simply stated,        1991).
concert, it is clear “Congress could        to grant a debtor an absolute right      6Id.

not have intended to give a debtor an       to dismiss in cases of bad faith or      7Id. at 816 citing Toles v. Powers, 1999 WL 1261453

absolute right to obtain dismissal of a     fraud would undermine the                (N.D.Tex., Dec. 28, 1999).
                                                                                     811 U.S.C. § 1307(a) (2005) (“The debtor may
Chapter 13 case.”4 If a court finds         essential purpose of the bankruptcy      convert a case under this chapter to a case under
cause for a case to be converted under      laws by rewarding a dishonest            chapter 7 of this title at any time.”)
§ 1307(c), then it would only serve to      debtor.                                  911 U.S.C. § 1307(b) (“On request of the debtor

circumvent the purpose of subsection                                                 at any time…”)
                                                                                     10In re Crowell, 292 B.R. 541, 543 (Bankr. E.D.Tex.
(c) to allow a debtor to dismiss their      Given the underlying concern of          2002)
case under § 1307(b).5 It would             the courts to protect the integrity      11Fonke, 310 B.R. at 814.

merely “encourage abuse of the              of the bankruptcy system, an             12Graven, 101 B.R. at 112.
                                                                                     13See Toles, 1999 WL 1261453; see also In re Chaffin,
bankruptcy systems by dishonest             attorney, either in advocating or
                                                                                     836 F.2d, 215 (5th Cir. 1988); Fonke, 310 B.R. at
individuals”6 if debtors were allowed       responding to a motion to dismiss        815-16; In re Nassar, 216 B.R. 606 (Bankr.
to dismiss their bankruptcy after a         by debtor, should be aware of two        S.D.Tex. 1998); In re Aichler, 182 B.R. 19 (Bankr.
showing of cause, particularly fraud or     legal considerations.   First, the       S.D.Tex. 1995).
                                                                                     14In re Cobb, 2000 WL 17840 at *3.ster is a Chapter
bad faith. Indeed, “[l]ack of good          motion for conversion should
                                                                                     12 case, its reasoning would apply in a Chapter
faith constitutes ‘cause’ for the           allege fraud or bad faith in the         13 scenario); see also In re Cobb, 2000 WL 17840
purposes of § 1307(c).”7                    debtor’s filing. To determine bad        (E.D.La., Jan. 11, 2000).
                                            faith, courts employ a “totality of

                                                             - Page 11 -
      TROOP MOVEMENTS                                               THE STATE BAR
                                                                       OF TEXAS
                                                              BANKRUPTCY LAW SECTION
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Worth, Texas 76102, (817) 332-2500.
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Cox Smith Matthews Incorporated located at                      for more information about
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