Liggett v. Schwartz (In re Schwartz)

Liggett v. Schwartz, Case Nos. 14-1433, 14-1435, and 14-1436 (6th Cir. July 21, 2015).
The Sixth Circuit Court of Appeals affirmed rulings by the Bankruptcy and District Courts of the Eastern District of Michigan, finding that (i) because a property settlement contained in a judgment of divorce grants contract rights as opposed to property rights, debtor's failure to comply with the property settlement was not conversion; and (ii) the bankruptcy court did not clearly err in determining the amount of the creditor's claim. The Court of Appeals disagreed with the finding by the bankruptcy court that the creditor's claim was unimpaired; because the debtor's chapter 11 plan provided for payments over time but without interest, the claim was impaired. However, due to payment of the claim in full during the pendency of the appeal, both parties were directed to submit supplemental briefs on the issue of whether the plan confirmation issue should be remanded or the appeal dismissed as moot.
Procedural context:
On appeal of an order of the District Court for the Eastern District of Michigan affirming orders entered by the Bankruptcy Court for the Eastern District of Michigan in a section 523 adversary proceeding and an individual chapter 11 bankruptcy case that had been converted from a chapter 13 case due to eligibility issues.
In 2000, Liggett and Schwartz divorced. The judgment of divorce included a section entitled "property settlement" that required all Schwartz's IRAs to be equally split between Liggett and Schwartz. In 2010, Liggett learned that Schwartz had not complied with the property settlement as to one IRA. Schwartz then filed a chapter 13 bankruptcy petition, listing an unspecified debt to Liggett and conceding that the debt would be nondischargeable. Liggett filed an adversary proceeding under sections 523(a)(2), (4), and (5) of the Bankruptcy Code alleging statutory and common law conversion and seeking treble damages and attorney's fees. The bankruptcy court granted summary judgment in Schwartz's favor ruling that the property settlement created only a contractual right to the proceeds of the IRA. Without something more than a contractual argument, the bankruptcy court ruled that Liggett could not succeed on her claims of embezzlement, breach of fiduciary duty, or failure to pay a domestic support obligation. The bankruptcy court also held that Liggett failed to adequately allege the material misrepresentation and reliance required under 523(a)(2). The bankruptcy court held subsequent proceedings to determine the amount of Liggett's claim. The court rejected Liggett's claims for conversion and treble damages, holding that Liggett held only a contractual claim and never had ownership or property rights in the IRA, and issued an opinion in favor of Schwartz's estimate of the claim amount. The bankruptcy court also confirmed Schwartz's chapter 13 plan over Liggett's objections. On appeal, the district court agreed with Liggett that Schwartz's plan violated the unsecured debt limit under chapter 13 and vacated the confirmation order. The district court then dismissed Liggett's other appeals as moot due to Schwartz's inability to continue his chapter 13 proceedings. On remand, Schwartz's case was converted to chapter 11. Schwartz then filed a chapter 11 plan proposing to pay Liggett the full amount of the debt, as determined by the bankruptcy court, over five years and without interest. Liggett was listed as an unimpaired creditor. Liggett filed a new proof of claim and another adversary proceeding, seeking to relitigate the issues previously decided in Schwartz's chapter 13 case. The bankruptcy court ruled that Liggett was precluded from relitigating these issues, reaffirmed the amount of Liggett's claim, and confirmed Schwartz's chapter 11 plan. On appeal to the district court, the district court refused to apply res judicata to the case, but affirmed the bankruptcy court on the merits of its decisions. Liggett appealed these rulings to the Sixth Circuit.
GIBBONS and COOK, Circuit Judges; GWIN, District Judge, sitting by designation.

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