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Grant, Konvalinka & Harrison, P.C. v. Still (In re McKenzie)

Grant, Konvalinka & Harrison, P.C. v. Still (In re Bowers), Nos. 12-6374/6375 (6th Cir. Dec. 17, 2013)
The decision of the district court was affirmed. (1) Though the bankruptcy court's order extending the automatic stay referred to Section 362(e)(1), no preliminary hearing was required because Section 362(e)(2) applies to a case in which the debtor is an individual, and it does not require a preliminary hearing. Further, the bankruptcy court did not abuse its discretion in granting an extension of the automatic stay. (2) The bankruptcy court properly required the law firm to establish the validity of its security interest. Section 362(g) requires the movant to bear the burden of proof on the issue of the "debtor's equity in the property," which includes proof of the validity of the movant's security interest, and the movant is in the best position to show that its interest is valid. (3) The undated consent to the pledge signed by the debtor's business partner did not satisfy the operating agreement's requirement of "prior written consent." (4) Adopting the majority view, the trustee was entitled to use his avoidance powers defensively without regard to the two-year statute of limitations under § 546(a)(1)(A). (5) The issue of equitable tolling was mooted by the prior holding, though the court quoted the bankruptcy court's findings regarding the law firm's misleading conduct.
Procedural context:
Appeal to the United States Court of Appeals for the Sixth Circuit, from the United States District Court for the Eastern District of Tennessee at Chattanooga.
Several weeks prior to his individual bankruptcy filing, the debtor executed a promissory note in favor of a law firm for fees owed to the firm. To secure the note, the debtor also executed a pledge agreement in favor of the law firm listing two dozen entities in which the debtor held an ownership interest. The operating agreement for those entities required the debtor's business partner's prior written consent to any transfer of equity, and the operating agreement stated that any invalid transfer of equity would be "null and void." After the petition date, the trustee sued the law firm, and the law firm sued the trustee and the trustee's attorneys for malicious prosecution. In the bankruptcy case, the law firm moved for stay relief as to the pledged equity interests. The trustee opposed the stay relief motion on the ground that the pledge of equity interests constituted preferential transfers. Due to the conflict created by the malicious prosecution lawsuit, the trustee sought new counsel for the stay relief motion. To give the trustee time to find counsel and prepare for the stay relief hearing, the bankruptcy court continued the hearing and extended the automatic stay. In its order extending the stay, the bankruptcy court referenced the "preliminary hearing required by 11 U.S.C. § 362(e)(1)," despite not conducting such a hearing. Thereafter, the bankruptcy court held an evidentiary hearing, after which it entered an order denying the motion. The bankruptcy court held that the law firm failed to carry its burden of showing that it possessed a valid security interest, that the trustee could assert avoidance powers defensively, notwithstanding the expiration of the two-year statue of limitations for commencing avoidance actions, and, in the alternative, that the statute of limitations was equitably tolled due to the law firm's misleading conduct during the bankruptcy case. The district court affirmed the bankruptcy court, and the law firm timely appealed to the court of appeals. On appeal, the law firm argued that the bankruptcy court erred in (1) extending the automatic stay, (2) requiring the law firm to establish the validity of its security interest, (3) concluding that the security interest was invalid, (4) allowing the trustee to use his hypothetical lien-creditor status and avoidance powers defensively despite the expiration of the statute of limitations, and (5) equitably tolling the statute of limitations.
Boggs, Clay, and Gilman

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